SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 1997
|_| 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.
(Name of small business issuer in its charter)
Minnesota 41-1448837
(State of incorporation) (I.R.S. Employer
Identification No.)
3650 Annapolis Lane, Suite 101,
Minneapolis, Minnesota 55447-5434
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number: (612) 509-9999
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.25 Par Value
(Title of Class)
----------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES |X| NO |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
Issuer's revenues for its fiscal year ended December 31, 1997 were: $0
As of March 26, 1998, the number of outstanding shares of the Registrant's
Common Stock, par value $.25 per share, was 4,624,338. The aggregate market
value of the voting stock held by non-affiliates of the registrant was
approximately $28,902,113 based on the last reported closing price of $6.25 on
March 26, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or prior
to April 20, 1998, are incorporated herein by reference in Part III, as
specified.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
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SpectraSCIENCE, Inc.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Table of Contents
Page
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PART I 3
Item 1. DESCRIPTION OF BUSINESS 3
Item 2. DESCRIPTION OF PROPERTY. 10
Item 3. LEGAL PROCEEDINGS. 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 10
PART II 10
Item 5. MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS. 10
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 12
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 15
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. 15
PART III 16
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT. 16
Item 10. EXECUTIVE COMPENSATION. 16
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. 16
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 16
Item 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K. 16
SIGNATURES 19
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SpectraSCIENCE, Inc.
FORM 10-KSB
For the fiscal year ended December 31, 1997
- --------------------------------------------------------------------------------
This Annual Report on Form 10-KSB contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Words or
phrases such as "may," "expects," "will continue," "is anticipated," "management
believes," "estimate," "projects," "hope" or expressions of a similar nature are
intended to identify forward-looking statements within the meaning of the Act.
The Company wishes to caution readers not to place undue reliance on
forward-looking statements. Please refer to Exhibit 99 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996, for certain
important cautionary factors, risks and uncertainties related to forward-looking
statements.
- --------------------------------------------------------------------------------
PART I
Item 1. DESCRIPTION OF BUSINESS
(a) Business Development
General
SpectraSCIENCE, Inc. (the "Company" or "SpectraSCIENCE") develops
innovative, minimally-invasive medical delivery systems to facilitate the
diagnosis and treatment of a broad range of human diseases by utilizing advanced
spectroscopy, fiber optics, computer hardware and software.
The Company was incorporated in the state of Minnesota on May 4, 1983 as GV
Medical, Inc. The Company changed its name to SpectraSCIENCE, Inc. on October
16, 1992 and the name change was approved by the Company's shareholders on May
13, 1993.
The Company's common stock, par value $.25 per share, is traded on the
NASDAQ Small-Cap Market under the symbol SPSI.
The Company's corporate offices are located at 3650 Annapolis Lane, Suite
101, Minneapolis, Minnesota 55447-5434. The Company's telephone number is
612/509-9999, its fax number is 612/509-9805, and its e-mail address is
[email protected]. The Company also has a web-site which can be accessed
at http://www.spectrascience.com.
(b) Business of the Company
From 1983 until 1992, the Company pursued the development, manufacture and
sale of laser-enhanced angioplasty catheter systems for the treatment of heart
and blood vessel disease by focusing on its LASTAC(R) system, and subsequently,
the Laser Angiosurgery System, in conjunction with the Massachusetts Institute
of Technology and the Cleveland Clinic Foundation. Since 1992, the Company has
re-focused its development efforts on diagnostic products utilizing
spectroscopic techniques and changed its name to SpectraSCIENCE, Inc. in 1992.
Two products based on spectroscopic techniques and technology currently under
development are the Optical Biopsy(TM) System and the Spectroscopic
Guidewire(TM) System, which are described below.
Products and Markets
Optical Biopsy(TM) System
The Optical Biopsy(TM) System ("OBS") is composed of three components: a
spectro-photometric console ("OBS Console"), a biopsy forceps incorporating an
optical probe ("Optical Biopsy Forceps" or "Forceps") and proprietary tissue
recognition algorithm software ("Software"). The Forceps can be disposable or
reusable. The reusable Forceps incorporates a disposable optical probe. The
Company has obtained 510(k) clearance from the United States Food and Drug
Administration ("FDA") for the disposable Biopsy Forceps on December 2, 1996 and
the reusable Biopsy Forceps on December 2, 1997 (see Governmental Regulations
below).
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The OBS is currently targeted for use in the detection and differentiation
of cancerous, pre-cancerous and healthy tissues. The Company intends to
initially focus on the detection and differentiation of cancer in the
gastrointestinal tract using minimally-invasive endoscopic techniques.
There are approximately 165,000 new cases of gastrointestinal cancer
detected annually, of which an estimated 131,200 are cancer of the colon and
rectum. Colorectal cancer is one of the most frequent cancer diagnoses in the
United States and it is the number two contributor to cancer deaths in the
United States, with an estimated 54,900 deaths per year (1997 estimate). The
largest cause of cancer deaths in the United States is lung cancer, with an
estimated 160,400 deaths in 1997.
The current method of detection of colorectal cancer is through biopsies,
which entails the insertion of an endoscope with a biopsy forceps to harvest
tissue samples for analysis in the pathology laboratory. The waiting period for
obtaining biopsy results can be as long as two weeks. The OBS, on the other
hand, could offer immediate feedback to the physician, thereby reducing the
number and cost of biopsies, eliminating waiting time and preventing the need
for an additional endoscopy. In the United States, it is estimated that about
7.5 million colon endoscopies and three million in upper gastrointestinal
endoscopies are currently performed each year. These procedures are growing at a
rate of approximately 15-20% per year. Outside of the United States, the number
of colon endoscopies currently performed is estimated to be about 14 million,
and is also growing at a rate of approximately 15-20% per year.
The Company believes that once commercialized, the OBS could be expanded
into other medical applications, including the detection of cancer in the lungs,
urinary tract, bladder, prostate, cervix and other minimally-invasive endoscopic
and laparascopic applications. These medical applications could potentially
represent large market opportunities for the Company. However, there can be no
assurance that the OBS will be commercialized or that the Company will be
successful in adapting the OBS for other medical specialties.
Spectroscopic Guidewire(TM) System
Like the OBS, the Spectroscopic Guidewire(TM) System ("SGS") is also
composed of three components: the spectrophotometric console ("SGS Console"), a
disposable optical core spectroscopic guidewire ("Guidewire") and proprietary
tissue recognition algorithm software ("Software"). The SGS Console is virtually
identical to the OBS Console. The Guidewire functions both mechanically as a
conventional coronary guidewire and optically in the transmission and collection
of light energy when connected to the SGS Console.
The SGS is targeted for the detection of intra-coronary thrombus and
differentiation of atherosclerotic plaque, hospitals with cardiovascular
programs, both in the United States and overseas, are the primary market for the
SGS. Currently there are different methods to treat blockages of the arteries of
the heart, including surgery, drugs and angioplasty. There are different
modalities of angioplasty, including balloon angioplasty or percutaneous
transluminal coronary angioplasty ("PTCA"), laser angioplasty, and atherectomy
using shaving or drilling devices.
The market size for all PTCA procedures worldwide is estimated to be about
1.1 million procedures, or $1.5 billion. Slightly more than half of these
procedures are performed at about 1,000 centers in the United States, 200 of
which perform about 65% of the total procedures in the United States. The number
of PTCA procedures is growing rapidly with the introduction of intra-coronary
stents that have been found to reduce the rate of restenosis (i.e.
re-establishment of blockage) in PTCA procedures.
Due to the current competitive environment and cost containment measures,
reimbursement for angioplasty procedures are capped. In addition, in the last
two years, stents have revolutionized the entire angioplasty procedure once it
was shown that the use of a stent improves the restenosis rate. As such, other
modalities and new procedures, including atherectomy and intra-vascular
ultra-sound, have rapidly decreased in popularity. This trend has obviously
affected the Company's strategy of positioning the SGS as a diagnostic modality
to assist in PTCA procedures.
Distribution, Marketing and Customers
The Company is currently engaged in ongoing discussions with potential
strategic partners with strong market niches which are dominant players in the
United states and/or internationally in the field of gastrointestinal medicine.
The Company believes that such strategic partners will be able to leverage their
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dominance in their respective niches with the Company's products, especially the
Optical Biopsy(TM) System. The Company is also evaluating options to market and
distribute the Optical Biopsy System directly to managed-care organizations. The
Company intends to build a small in-house marketing and business development
department to assist in the commercialization of the Company's products
worldwide and to provide clinical education to physicians, nurses, and
laboratory technicians.
While the Company signed a three-year exclusive international distribution
agreement with SCIMED Life Systems, Inc. ("SCIMED"), a wholly-owned subsidiary
of Boston Scientific Corporation (Natick, Massachusetts) in August 1994 to
distribute the SGS for cardiovascular applications in international markets,
sales through SCIMED were very modest at the beginning of the agreement and
failed to meet expectations. The SCIMED agreement expired in 1997.
On August 14, 1995, the Company received the European Community Certificate
of Conformity, which allows the Company to put the Conformite Europeane ("CE")
mark on the Console, indicating that it was in compliance with the
electromagnetic compatibility (EMC) standard EN 60601-1-2(1993). However, the
products will have to be re-certified with the CE mark under the new Medical
Device Directive of the European Union (see Government Regulations below). In
order to receive a CE mark of the entire system, ISO 9001 Certification must be
accomplished. Under the new Medical Device Directive, products must be approved
with the CE mark before it can be distributed or sold in the countries of the
European Union.
Competition
Spectroscopy
While the use of spectroscopy for scientific research is common, the
Company believes it is one of the pioneers in utilizing spectroscopy for cancer
detection. Several prominent universities and medical institutions have basic
research projects involving "in-vivo" spectroscopic diagnostics. There is a
growing interest in the application of spectroscopic diagnostics for other
medical specialties, though few products have been commercialized.
Xillix Technologies (Richmond, British Columbia, Canada), obtained
marketing clearance from the United States Food and Drug Administration ("FDA")
for its LIFE-Lung fluorescence system that utilizes light-based spectroscopy for
the detection and localization of lung cancer. Xillix is currently developing a
system for detection of gastrointestinal cancers of the esophagus, stomach,
intestines and colon. However, its system is large and cost approximately
$200,000 per system. Xillix has a strategic alliance with Olympus (Japan).
Olympus supplies endoscopic equipment to endoscopists throughout the world,
having an estimated 70% of the market. The second largest endoscopic equipment
supplier to endoscopists is Pentax (Japan) with about 25% of the market.
Mediscience Technology (Cherry Hill, New Jersey) is evaluating a product
called CD Scan which uses scanning fluorescence technology for noninvasive,
early cancer detection. The device optically scans the surface of suspect tissue
with a fiberoptic probe. The resulting fluorescence spectrum is then compared to
a similar scan of healthy tissue. Currently, Mediscience is focused on clinical
studies on oral leukopakia, a precancerous condition of the mouth, and possibly
on precancerous gastrointestinal conditions.
Lifespex (Kirkland, Washington) is a development stage company utilizing
spectroscopic diagnostic techniques for the identification of cancerous tissues.
Medispectra (Cambridge, Massachusetts) is evaluating an optical biopsy
system to detect a variety of potentially cancerous conditions, including
cervical abnormalities, precancerous bladder lesions, and suspicious polyps in
the colon.
Biopsy Forceps
For standard (non-light transmitting) biopsy forceps, the market is divided
into disposable and reusable segments. In the disposable segment, representing
30% of the market, the leader is Microvasive (a division of Boston Scientific
Corporation, Natick, Massachusetts) which has 70% of the market segment,
followed by CR Bard (Murray Hill, New Jersey) and Wilson-Cook (Winston-Salem,
North Carolina). In the re-usable segment, representing 75% of the market, the
leader is Olympus, followed by Wilson-Cook and CR
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Bard. Until recently, the market was moving towards reusables but now is moving
back towards disposables again because of the fear of transmission of HIV and
Hepatitis C virus and the lowering of disposable costs.
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Cardiovascular Applications
In cardiovascular applications, the Company has no direct competitors using
spectroscopy for the detection and diagnosis of atherosclerotic plaque. While
there are no similar products, the competing technologies presently in the
cardiovascular market are intra-vascular ultrasound imaging ("IVUS") and
angioscopy. Companies currently marketing products utilizing IVUS technology are
Cardiovascular Imaging Systems/CVIS (Sunnyvale, California), a wholly-owned
subsidiary of Boston Scientific Corporation, Endosonics (Pleasanton, California)
and Hewlett-Packard (Milpitas, California). Companies marketing products based
on angioscopy technology are Baxter-Edwards (Irvine, California), Olympus
(Japan) and A.D. Krauth (Germany).
Many of these competitors are better capitalized and have greater access to
financial, technical and other resources than the Company.
Manufacturing and Sources of Supply
Currently, the basic assembly of the OBS Console is completed in-house. The
SGS Console was assembled by an outside contractor. The Software is developed
in-house in conjunction with outside consultants. The Guidewire and Forceps are
produced by other contract manufacturers that are experienced and specialized in
the manufacture of medical guidewires or forceps. The Company then assembles the
components, many of which are available "off-the-shelf", inspects and tests the
completed systems at the Company's facilities.
There are risks involved in having sole sources of supply for the
manufacturing of the Guidewire and Forceps. While the performance of these
manufacturers has been satisfactory to-date, with the exception of one
manufacturer of Guidewires in the past, there can be no assurance that they will
continue to perform up to the Company's standards, meet government regulations
and handle labor unrest, if any. Any shortfalls in the ability of these contract
manufacturers to meet standards and regulations could severely impact the
Company's ability to test and sell its products.
The Company purchases many components from various suppliers that are
either standard components or are built to the Company's proprietary
specifications. In addition, the Company contracts with third parties to perform
certain manufacturing processes. Most of the purchased components and processes
are available from more than one vendor. The process of qualification of
additional or replacement vendors for certain components or services is a
time-consuming process, especially in the heavily regulated medical device
industry, and any supply interruption would have a material adverse effect on
the Company's business, financial condition and results of operations.
Patents
The Company was issued a patent by the United States Patent and Trademark
Office on February 11, 1997 entitled "System for Diagnosing Tissue with
Guidewire" (Patent No. 5,601,087). The Company was also issued a European Patent
entitled "Apparatus for Diagnostic Imaging" (European Patent No. 0669820)
covering eleven countries on April 16, 1997. The Company was informed by the
United States Patent and Trademark Office on November 25, 1997 that claims under
its patent application entitled "Optical Biopsy Forceps" (Application No.
08/644,080) are allowed. This patent is expected to be issued sometime in 1998.
The Company was issued two new patents in the United States in 1995, entitled
"Guidewire Catheter and Apparatus for Diagnostic Imaging" (Patent No. 5,383,467)
and "Method of Diagnosing Tissue with Guidewire" (Patent No. 5,439,000). These
patents augment the Company's current intellectual property portfolio.
The Company expects to file additional patent applications in 1998. Two
additional patents were filed in March 1998. As of March, 1998, there were five
patents pending in the United States, and two patents pending in various foreign
countries. There can be no assurance whether any additional patents will be
filed or issued, or if issued, that such patents will afford the Company any
competitive advantage.
In addition to the above, the Company also has an exclusive licensing
agreement with Massachusetts Institute of Technology for thirty-one issued
patents and pending applications, relative to the use of spectroscopy for the
diagnosis of atherosclerotic cardiovascular disease. This licensing agreement
runs for the life of the patents and includes technology developed under
National Institute of Health funding.
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The Company also has a licensing arrangement with the Massachusetts General
Hospital's Wellman Laboratories of Photomedicine ("Wellman Lab"). Any patents
that result from the Wellman Lab's research on cancer detection will be licensed
exclusively to the Company.
The Company believes its patents, in addition to the patents that the
Company has licensed, will continue to strengthen its intellectual property
position while assisting the Company's present and future research, development
and marketing efforts.
Industry Economics
In the United States, the market for the Company's products is primarily
medical institutions. The health care services such institutions provide to
their patients are paid by various third-party payers, such as Medicare,
Medicaid, other government programs and private insurance plans. Medicare and
Medicaid determine whether a particular procedure should be covered. Hospitals
are reimbursed for medical procedures at a fixed rate according to Diagnosis
Related Groups ("DRGs") established by the Health Care Financing Administration
("HCFA"), a federal government body. The fixed rate of reimbursement is based on
the procedure performed and is typically unrelated to the specific devices used
in that procedure. If a procedure is not covered by a DRG, payers may deny
reimbursement. In addition, payers may deny reimbursement if they determine that
the device used in a treatment was unnecessary, inappropriate, experimental,
used for a non-approved indication, or not cost-effective.
Currently, there are no established DRGs covering spectroscopic diagnostic
procedures for either cancer detection or cardiovascular applications. As such,
reimbursement for procedures using the Company's products is not available at
this point. However, DRG reimbursement for endoscopic procedures, such as
flexible sigmoidoscopy, colonoscopy and polypectomy, are already established,
including fees for biopsies. Since the OBS should provide clinical utility and
reduces cost and time, the Company anticipates that once FDA clearance is
obtained, reimbursement for procedures utilizing the OBS would eventually be
available. However, there can be no certainty that this will happen in the
future or within a time-frame that would benefit the Company.
Although reimbursement for PTCA procedures is covered under a DRG, the
amount of reimbursement is fixed. Therefore, the profit relating to the entire
PTCA procedure would be reduced to the extent the physician performs additional
procedures such as spectroscopic diagnostics. Nevertheless, the additional
information provided by the SGS may help physicians select the appropriate
treatment method, potentially reducing the number of therapeutic catheters used
during a PTCA procedure which would produce a more effective result.
Accordingly, physicians must determine that the clinical benefits of the SGS
justify the additional cost.
Governmental prospective reimbursement programs, which provide fixed
reimbursement based on DRGs, provide economic incentives for health care
institutions to reduce operating costs by being more efficient and productive.
For every illness to be treated or procedure to be performed, only an average
rate will be reimbursed. Therefore, the more cases that can be treated below the
designated rate with less major surgery and shorter hospital stays, the higher
the level of profitability.
Capital costs for medical equipment purchased by hospitals are reimbursed
separately from DRG payments. Therefore, the market for the Company's products
could be adversely affected by changes in governmental and private third-party
payers' policies or by federal legislation that reduces reimbursements under the
capital cost pass through systems for capital equipment.
The funding for Medicare and Medicaid is also subject to limits set by
Congress. In 1997 Congress approved an increase in funding to HCFA of $2.2
billion over five years for preventive colorectal cancer screening tests. The
Company believes such funding could lead to greater awareness of the disease
among the general populace, larger budgets for screening, higher reimbursement
levels and potentially the establishment of new reimbursement codes for new
technologies like the Optical Biopsy(TM) System.
This does not mean that cost is not an issue in the healthcare market. On
the contrary, cost reduction, cost containment, managed care, capitation pricing
(i.e. fixed price per procedure, rather than the number of disposable products
or hospital supplies used), and consignment sales are becoming more and more
common, not only in the United States but also in many European countries and
Japan. Limits on third-party
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reimbursements leading to cuts in reimbursements for new procedures or
experimental procedures is becoming a reality. This would affect the ability of
smaller companies with new technologies, like SpectraSCIENCE, to compete with
larger established firms. The emphasis on cost containment and cost reduction
has led to an increase in participants in managed care environments when
companies seek to reduce their cost of providing health care benefits to
employees.
With the strong emphasis on cost containment, many vendors have merged or
acquired other suppliers in order to achieve economies of scale and to be the
dominant vendors for a range of products which would lend themselves to
"bundling" of products or product lines together and be price competitive.
The FDA continues to place a heavy emphasis on economic utility in addition
to being a watchdog for clinical utility and safety of products, in considering
approvals of medical devices. Companies will need to prove economic advantages
up-front, which places a greater burden on companies, especially if they are in
the start-up or development stages. This could potentially lead to less advances
in innovative technologies. Also, it is very unlikely for HCFA to approve a new
technology unless it receives prior clearance from the FDA.
Internationally, similar trends of cost containment and lower
reimbursements are also becoming very apparent. In addition, the countries of
the European Union have established other protectionist barriers such as import
tariffs, duties and taxes, and additional regulations such as requiring ISO
certification and CE marking before products can be sold in the European Union.
Such regulations and requirements could impact the Company's ability to compete
and enter those foreign markets.
Government Regulations
The Company's development, manufacturing and marketing activities are
subject to regulation by numerous governmental authorities in the United States
and other countries, particularly regarding product safety and effectiveness.
In the United States, medical devices are subject to review and clearance
by the Food and Drug Administration ("FDA"). The Food, Drug and Cosmetic Act, as
amended, the Public Health Service Act, the Safe Medical Devices Act of 1990
(the "SMDA") and other federal statutes and regulations, govern or influence the
testing, manufacture, safety, labeling, storage, record keeping, clearance,
advertising and promotion of such products.
FDA clearance to distribute a new device can be obtained in one of two
ways. If a new device is "substantially equivalent" to an existing legally
marketed device, the new device can be commercially introduced after filing a
510(k) pre-market notification with the FDA and the subsequent issuance by the
FDA of an order permitting commercial distribution. Changes to existing devices
that do not significantly affect safety or effectiveness may be made without an
additional 510(k) notification.
A second, more comprehensive approval process applies to a new device that
is not substantially equivalent to an existing product. First, the applicant
must conduct non-significant risk clinical trials in compliance with testing
protocols approved by the Institutional Review Board ("IRB") for the
participating research institution. The IRB is an internal board in each medical
institution that oversees and approves all clinical studies. Second, a
pre-market approval ("PMA") application must be submitted to the FDA that
describes the results of the clinical trials, the device and its components, the
methods, facilities and controls used for its manufacture, proposed labeling and
the demonstration that the product is safe and effective. Finally, the
manufacturing site for the product subject to the PMA must pass an FDA
pre-approval inspection.
In 1997,the FDA approved a significant number of PMA medical device
applications within 180 days of submission filing date. However, there is no
assurance if or when a PMA application would be approved. Furthermore, there can
be no assurance that FDA clearance for these products, any future products, or
any modification of an existing product will be granted, or the process will not
be unduly lengthy.
In connection with either a 510(k) notification or a PMA, clinical testing
of a "significant risk" device requires the submission of an investigational
device exemption ("IDE") application to the FDA. An IDE application is not
required for a "non-significant risk" ("NSR") device. The Optical Biopsy(TM)
System ("OBS") is considered an NSR device. While an IDE application is not
required in this case, the FDA, in its discretion, may still require the Company
to submit an IDE application. In such an event, the Company may
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be required to repeat all or part of the clinical testing conducted prior to
obtaining an IDE, which may delay approval of the OBS.
As a medical device manufacturer, the Company and/or its contract
manufacturers are required to register with the FDA and submit to periodic
inspections for compliance with the FDA's Good Manufacturing Practices ("GMP"),
Quality Systems regulations and various FDA requirements for labeling. These
regulations require the Company to manufacture its products and maintain its
documents for manufacturing, testing and control activities in a prescribed
manner. Failure to comply with these requirements could adversely affect the
results of operations, as well as the Company's business and financial
condition.
The Company believes that it complies in all material respects with such
applicable regulations. However, failure to comply could subject the Company to
fines and other enforcement actions.
The Company is also subject to other federal, state and local regulations
regarding environmental protection and hazardous substance controls. To-date,
the costs or effects of compliance with federal, state and local environmental
laws are routine and customary for a developing medical device company.
Clinical Studies
The Company is conducting ongoing multi-center clinical studies using the
Optical BiopsyTM System for detection of colorectal cancer at three medical
centers: the Mayo Clinic in Rochester, Minnesota, the Massachusetts General
Hospital in Boston, Massachusetts, the Hennepin County Medical Center and
Minnesota Gastroenterology PA, both of which are located in Minneapolis,
Minnesota. As of January 20, 1998, clinical data on a sufficient number of
patients has been obtained to support a PMA application to the FDA. The Company
expects to file a PMA application with the FDA in fiscal 1998.
In addition, a multi-center clinical trial for the detection of esophageal
cancer has also commenced at the Mayo Clinic and the Hennepin County Medical
Center.
Internationally, the European Union (the "EU") has adopted a new Medical
Device Directive, which will be implemented beginning July 1998 in all countries
of the European Union. In order to sell a medical device in the EU beginning
July 1998, companies must have ISO certification, and all products must have the
CE mark. In order to receive a CE mark for sales in Europe, the Company must
receive ISO 9001 certification first. The Company will be seeking ISO 9001
certification and CE marks for the Optical Biopsy(TM) System. There can be no
assurance that the Company will receive ISO certification or CE mark for any of
its products or product components, or if obtained, they will be obtained in a
timely manner.
Product Research and Development
During the years ended December 31, 1997, 1996 and 1995, the Company's
research and development expenditures were $1,095,281, $998,137 and $660,504
respectively. The Company's research and development efforts are focused
primarily on the Company's Optical BiopsyTM System and, to a lesser degree, the
Spectroscopic Guidewire(TM) System.
The Company obtained 510(k) clearance from the United States Food and Drug
Administration ("FDA") for the disposable Biopsy Forceps on December 2, 1996 and
the Reusable Biopsy Forceps on December 2, 1997. Current research and
development efforts are focused on (a) gathering additional data to continually
improve the accuracy of the tissue recognition algorithm software in regards to
colorectal cancer, (b) expanding clinical studies in esophageal cancer, (c)cost
reduction engineering and integration into existing endoscopy systems currently
utilized in endoscopy suites in hospitals. There can be no assurance that the
Company will be successful in its efforts or that clinical studies will yield
favorable results for the Company.
In 1995, the Company signed a two-year research and development agreement
with Wellman Lab, to commence clinical feasibility research studies on the
detection and differentiation of cancerous, pre-cancerous and healthy tissues.
This agreement called for the payment of approximately $50,000 per quarter to
Wellman Lab. The agreement expired in March 1997.
Additional plans to conduct research into other medical specialties may
take place in a cooperative effort with strategic partners, or when the Company
achieves profitability.
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Employees
The Company hired a Director of Product Development in June, 1997. There
were nine full-time employees at December 31,1996, and 11 full-time employees at
December 31, 1997. As of March 30, 1998, there were 11 full-time employees,
eight of whom were engaged in product engineering design and development,
manufacturing, and regulatory affairs.
The Company also relies heavily on external consultants in the regulatory,
software development and design engineering areas. The Company has been
successful in attracting and retaining qualified technical personnel. There can
be no assurance, however, that the Company will be able to continue to attract
or retain the skilled employees it requires for profitable operations. The
Company is not subject to any collective bargaining agreement and believes that
its employee relations are generally satisfactory.
Item 2. DESCRIPTION OF PROPERTY.
The Company moved its offices to a leased facility located at 3650
Annapolis Lane, Suite 101, Minneapolis, Minnesota 55447-5434 on November 1,
1996. This facility consists of approximately 5,530 square feet of office,
laboratory, quality testing, and warehouse space. The five-year lease provides
for monthly rental payments of $4,434 for the first 36 months, and $4,561 for
the next 24 months. The current rent including a pro rata share of operating
expenses and real estate taxes is approximately $6,115 per month. The lease
expires at the end of October 2001. The Company maintains levels of standard
property and casualty insurance coverage on its property that management of the
Company deems appropriate.
Item 3. LEGAL PROCEEDINGS.
There are no material ongoing or pending legal proceedings which involve
the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the security holders since the
1997 annual meeting.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) Market Information
The Common Stock of SpectraSCIENCE has traded on the NASDAQ Small-Cap
Market since May 15, 1996, under the symbol "SPSI". The Common Stock traded on
the National Association of Security Dealers Automated Quotation System
("NASDAQ") from November 13, 1984 under the symbol "GVMI". In September 1992,
the stock symbol was changed from "GVMI" to "SPSC". The stock symbol was
subsequently changed to "SPSI" in June 1994 when it was listed on the
over-the-counter ("OTC") market.
The following table sets forth, for the periods indicated, high and low
closing prices as reported by NASDAQ and OTC Bulletin Board and also prices that
the Company obtained from third party sources, such as MetroData Services and
the Wall Street Journal. To the best of its knowledge, the Company believes that
the information obtained from these sources is accurate.
1997 1996
STOCK PRICES (1) ------------------------ -----------------------
(in $ per share) High Low High Low
Quarter Ended Close Close Close Close
--------------------- ------------------------ -----------------------
March 31 5.125 3.625 9.125 6.75
June 30 4.5 2.4375 10.625 6.375
September 30 4.75 3.625 7.75 4.25
December 31 9.125 4.5625 6.00 4.375
--------------------- ------------------------ -----------------------
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<PAGE>
(1) The prices of the Company's stock reflect inter-dealer prices and do
not necessarily reflect the prices of actual transactions. The closing
prices reflect prices without retail mark-up, mark-down or commission
and may not represent actual transactions.
On March 26, 1998, the closing price quoted for the Common Stock was $6.25
per share.
(b) Holders
On March 26, 1998, there were 989 registered shareholders of record of
4,624,338 shares of the Common Stock, excluding shareholders that are registered
in "street-names." The Company estimates that there were a total of
approximately 5,000 beneficial shareholders.
(c) Dividends
Since its incorporation, the Company has not paid any dividends, and no
dividend payments are contemplated in the foreseeable future. The Company will
retain any earnings it may generate to provide for the operation and expansion
of its business.
(d) Other Securities
The Company did not raise any additional funds in 1997 through any public
or private offerings. A total of $95,514 was raised in fiscal 1997 through
exercise of stock options for 10,069 shares of Common Stock and exercise of
warrants for 16,111 shares of Common Stock.
Bridge Loans
On September 30, 1994, the Company raised a total of $300,000 in bridge
loans. Lenders were given five-year warrants to purchase 100,000 shares of
Common Stock exercisable at $3.00 per share. In the first fiscal quarter of
1995, the Company raised $225,000 in additional bridge loans with the same
terms. This group of lenders was given five-year warrants to purchase 74,998
shares of Common Stock exercisable at $3.00 per share. All of the bridge loans
were converted to preferred stock in the private placement which closed on June
29, 1995. The total number of warrants issued to lenders were 174,998, which if
exercised would raise an additional $524,994 for the Company.
Private Placements of Preferred Stock
Two private placements of convertible preferred stock with attached
warrants were completed in 1995. Neither the shares of preferred stock nor the
warrants are intended for trading on any official exchanges.
The first private placement, which closed on June 29, 1995, involved the
placement with qualified investors of 674,998 shares of Series A Preferred Stock
("Preferred A"), par value $1.00, at $3.00 per share. A net amount of $1,965,000
was raised. Of this amount, $525,000 was from the conversion of bridge loans on
March 31, 1995. Preferred A shares are non-voting, do not yield dividends or
interest, and are convertible to an equivalent number of shares of Common Stock,
after March 31, 1996, but generally one year from the date of receipt of funds.
Each Preferred A share was issued with a three-year warrant to buy one-third
share of Common Stock at a price of $5.00 per share. Warrants to purchase a
total of 225,000 shares of Common Stock were issued to investors in this private
placement, which if exercised would raise an additional $1,125,000 for the
Company. Warrants for 33,333 shares of Common Stock at $5.00 were exercised in
the third quarter of 1996, raising $166,665 for the Company.
The second private placement, which closed on December 28, 1995, involved
the placement with qualified investors of 792,500 shares of Series B Preferred
Stock ("Preferred B"), par value $1.00, at $5.00 per share. A net amount of
$3,526,625 was raised. Preferred B shares are non-voting, do not yield
dividends, unless the holders of Common Stock fail to authorize sufficient
additional shares of Common Stock for the conversion of the Preferred B, and are
convertible to an equivalent number of shares of Common Stock on or after
December 28, 1996. Each Preferred B share was issued with a three-year warrant
to buy one-third share of Common Stock at a price of $9.50 per share. Warrants
to purchase a total of 264,175 shares of Common Stock were issued to investors
in this private placement, which if exercised would raise an additional
$2,509,663 for the Company.
Page 12
<PAGE>
In addition, the selling agents for Preferred A and Preferred B received
warrants to purchase a total of 132,335 shares of Common Stock, at prices
ranging from $3.00 to $9.50, and having terms ranging from three to five years.
If all the warrants issued to the selling agents were exercised, it would raise
another $740,556 for the Company.
The total amount raised by the Company was therefore $5,491,625, including
the conversion of $525,000 bridge loans.
As of February 28, 1997, all of the issued and outstanding 1,467,498 shares
of Preferred A and Preferred B have been converted to an equivalent number of
shares of issued and outstanding Common Stock and warrants for 33,333 shares of
Common Stock were exercised. As such, as of February 28, 1997 there were no
preferred shares outstanding and there were warrants to purchase 763,175 shares
of Common Stock outstanding.
The table below summarizes the history of the funds raised since 1994:
<TABLE>
Preferred Issue Net Amount Exercise Term/
Date Shares Price Raised Warrants Price Years
---- ------ ----- ------ -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Bridge Loans (1) 9/30/94 $ 525,000 194,998(5) $3.00 5
3/31/95 6,667(6) $5.00 3
Preferred 3/31/95 674,998 $3.00 $ 1,440,000 225,000(7) $5.00 3
A (2,4) 6/29/95
Preferred 12/28/95 792,500 $5.00 $ 3,526,625 264,175 $9.50 3
B (3,4) 79,250 $5.00 5
26,418 $9.50 5
--------- ----------- -------
TOTAL 1,467,498 $ 5,491,625 796,508(8)
--------- ----------- -------
</TABLE>
1. Bridge Loans were later converted to Preferred A. Warrants for a total of
26,667 were issued to the selling agent.
2. Series A convertible preferred stock, par value $1.00 per share,
non-voting, non-dividend and non-interest yielding. The total amount of
$1,440,000 excludes the $525,000 raised through the bridge loans which were
later converted to Preferred A.
3. Series B convertible preferred stock, par value $1.00, non-voting,
non-dividend and non-interest yielding. Warrants for a total of 105,668
shares were issued to the selling agent.
4. All preferred stock was converted to common stock by the first quarter of
fiscal 1997.
5. 10,000 of these were exercised in the fourth quarter of fiscal 1997.
6. 3,333 of these were exercised in the fourth quarter of fiscal 1997.
7. 33,333 of these were exercised in the third quarter of fiscal 1996 and
2,778 of these were exercised in the fourth quarter of fiscal 1997.
8. As of February 27, 1998, the total number of shares under warrants is
747,064, which if completely exercised, will raise a total of $4,672,993
for the Company. There is no assurance that any of the warrants will be
exercised.
In March 1998 (as of March 26, 1998), warrants for 111,112 shares of Common
Stock were exercised at an exercise price of $5.00, raising $555,560 for the
Company. On February 2, 1998, stock options for 6,667 shares of Common Stock
were exercised at an exercise price of $3.00, raising $20,001 for the Company.
From January 1 through March 26, 1998, the total amount raised through the
exercise of warrants and options was $575,561.
Stock Options
As of March 26, 1998, there were 1,254,144 stock options outstanding, 90.7%
of which were held by employees.
Page 13
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the financial statements and footnotes which
follow.
Page 14
<PAGE>
Plan of Operation
The Company's cash position on December 31, 1997 was $1,638,171. The
Company intends to raise additional funds from various sources, including but
not limited to, strategic partners and private placements. The Company also
believes additional funds will be available from the exercise of warrants issued
to investors in previous private placements. The Company believes it will
require an additional $3 million to $5 million in order to implement the plan
described below.
The Company intends to utilize the additional funds to continue pursuing
the development of the Company's products through (1) the expansion of clinical
studies and clinical trials; (2) working with managed care organizations on
outcome based studies; and (3) expansion of the gastrointestinal applications of
the Company's products.
In addition, the Company also intends to utilize additional funding to
continue the development of a market for the Company's products and
strengthening the Company's ability to compete in the industry through: (1)
entering into strategic alliances for marketing and distribution of the
Company's products in market niches in the United States and internationally;
(2) establishing manufacturing processes or relationships for the Company's
products; (3) establishing a marketing and education organization for
monitoring, training and education of the Company's customers; (4) obtaining ISO
9001 certification for the OBS; and (5) continuing to strengthen the Company's
intellectual property position with additional patents and licensing.
If the Company is able to raise additional funds, the Company believes it
will be able to implement the above planning goals without the need to purchase
or lease any additional plant space or significant pieces of equipment. The
Company also believes it will be able to operate under the above described plan
without having to increase the number of employees significantly during fiscal
1998.
In the event the Company is unable to raise all or any of the additional
funds it believes it requires, the Company will likely be forced to adjust the
plan and potentially be required to move at a slower than anticipated pace and
possibly pursue other courses of action. While the Company believes it will be
able to raise the necessary funds for on-going operations and implementation of
its plan, there can be no assurance that the Company will be successful in
raising all or any of the funds it requires, or that the funds will be raised on
a timely basis.
Year 2000 issue
In regards to the Year 2000 issue, the Company has analyzed its internal
systems for the potential impact of Year 2000 compliance. Although computer
software and hardware are used in various operations within the Company,
including financial reporting, certain manufacturing and assembly functions, and
also in the OBS and SGS, the Company does not believe that the Year 2000 issue
will have a material impact on the Company.
Results of Operations
Years ended December 31, 1997 and 1996
Revenue
The Company recorded no revenue for the years ended December 31, 1997 and
1996. While the Company has received 510(k) clearance from the FDA for the
disposable Biopsy Forceps and the reusable Biopsy Forceps, the Company has
decided to commercialize the Forceps only as part of the Optical Biopsy(TM)
System. As such, the Company does not expect to generate any significant revenue
until FDA clearance has been obtained for the entire Optical Biopsy(TM) System.
Research and Development
Research and development expenses for the year ended December 31, 1997
totaled $1,095,281 compared to $998,137 for the year ended December 31, 1996.
This represented an increase of $97,144 or 9.7% and was primarily due to (a)
increased expenses related to the human multi-center clinical trials on the
Optical Biopsy(TM) System, (b) two additional personnel hired in the middle of
the year for product
Page 15
<PAGE>
development and documentation, (c) increased legal fees associated with
intellectual property protection and (d) filing and increased consulting costs
for system development, data analysis and regulatory filing..
Selling, General & Administrative Expenses
Selling, general and administrative ("SGA") expenses for the year ended
December 31, 1997 totaled $679,809 compared with $723,825 for the year ended
December 31, 1996. This represented a decrease of $44,016 or 6%. This reduction
in SGA expenses is primarily due to elimination of an office administrator and
many other cost reduction measures. The reduction in expenses was offset
partially by increase in expenses in investor relations related costs. In the
third quarter of 1997, the Company hired a consultant who assisted the Company
in investor relations with brokers and analysts in major cities in the United
States, in order to provide better and wider dissemination of knowledge
regarding the Company and its technology.
Interest and Other Income
Interest and other income was $131,299 for the year ended December 31, 1997
compared to $176,043 for the year ended December 31, 1996. This represented a
decrease of $44,744 or 25.4% and was due to the lower average cash balances
during 1997 compared with 1996. The lower average cash balance in 1997 was the
result of the lack of revenue.
Net Losses
As a result of the above factors, the Company reported a net loss of
$1,643,791 for the year ended December 31, 1997 compared to $1,545,919 for the
year ended December 31, 1996. This represented an increase of $97,872 or 6.3%,
primarily due to increased research and development costs and lower interest and
other income. The net loss per share was $.37 for the year ended December
31,1997 compared to a net loss per share of $.47 in for the year ended December
31, 1996, as a result of a higher weighted average shares outstanding in 1997.
The higher number of average shares outstanding was primarily due to the
conversion of all the outstanding preferred stock into an equivalent number of
shares of common stock.
Years ended December 31, 1996 and 1995
Revenue
Gross revenue for the year ended December 31, 1996 was $0 compared to
$134,652 for the year ended December 31, 1995. Revenue was unfavorable for the
year ended 1996 primarily due to the more intense competitive factors facing the
healthcare environment, and in particular, the cardiovascular business. As
discussed previously, the rapid acceptance of stents in the treatment of
cardiovascular diseases, limited reimbursements for such procedures plus the
emphasis on cost reduction have put intense pressures on other modalities of
diagnosis and treatments.
In addition, expectations of international sales through SCIMED, a
wholly-owned subsidiary of Boston Scientific Corporation, did not materialize.
The Company believes that this was primarily due to the fact that Boston
Scientific Corporation, was in an acquisition mode in the last two years which
required a lot of management time and resulted in many management changes. This
adversely affected the Company's sales.
Research and Development
Research and development expenses for the year ended December 31, 1996
totaled $998,137 compared to $660,504 for the year ended December 31, 1995. This
represented an increase of $337,633 or 51.1% and was primarily due to the
following factors: (a) increased expenses related to engineering development
costs, specialty equipment purchased for the development of the Company's
products, and higher depreciation expenses associated with other equipment; (b)
expenses related to ongoing research and development agreement with Wellman
Laboratories of Photomedicine which amounted to approximately $200,000 per year
including travel expenses; (c) increased expenses associated with the hiring of
the Vice President of Development and the Director of Regulatory Affairs and
Quality Assurance, plus associated recruitment expenses; (d) increased legal
fees associated with intellectual property protection and filing; and (e) higher
allocated costs associated with the research and development department, such as
space allocations,
Page 16
<PAGE>
phone usage and similar expenses, which were previously accounted for in the
selling, general and administrative expenses.
Selling, General & Administrative Expenses
Selling, general and administrative ("SGA") expenses for the year ended
December 31, 1996 totaled $723,825, compared with $711,753 for the year ended
December 31, 1995. This represented an increase of $12,072 or 1.7%. Increases in
SGA expenses included: (a) additional expenses associated with the filing of
additional registration statements and NASDAQ application in 1996; (b) insurance
expense; (c) expenses related to the moving of the Corporate offices; and (d)
the full impact of hiring of the Chief Financial Officer who joined the Company
on August 30, 1995. The increases were offset by decreases in the following
expenses:(a) travel expenses; (b) shareholder expenses; (c) human resource
consulting expenses; and (d) the elimination of the Purchasing/Maintenance
manager position in September 1996.
Interest and Other Income
Interest and other income was $176,043 for the year ended December 31, 1996
compared to $16,608 for the year ended December 31, 1995. This represented an
increase of $159,435 and was the result of increased interest income from higher
average cash balances during 1996 compared with 1995. The higher average cash
balance in 1996 was the result of the two private placements in 1995.
Net Losses
As a result of the above factors, the Company reported a net loss of
$1,545,919 for the year ended December 31, 1996 compared to $1,345,910 for the
year ended December 31, 1995. This represented an increase in net losses of
$200,009 or 14.9%. Even though the net loss was higher in 1996, the net loss per
share was similar in both 1996 and 1995 at $.47 due to higher average shares
outstanding in 1996.
Liquidity and Sources of Capital
On December 31, 1997, the working capital of the Company was $1,454,649
compared to $2,950,452 on December 31, 1996 and $4,231,371 on December 31, 1995.
The decrease in working capital from 1996 to 1997 was the result of the use of
cash to fund normal on-going operations of the Company. The large working
capital position in 1995 was the result of the private placements in 1995 and
the conversion of bridge loans outstanding.
Net cash used in operating activities was $1,492,331 in 1997 compared to
$1,379,498 in 1996 and $1,399,518 in 1995. The increase from 1996 to 1997 was
primarily due to the higher net loss which resulted from the higher research and
development costs.
Net cash provided by financing activities was $95,514 in 1997 compared to
$314,290 in 1996 and $5,571,625 in 1995. The net cash provided by financing
activities in 1997 and 1996 was primarily due to the exercise of warrants and
stock options. The increase in 1995 was provided primarily by private placements
and the exercise of stock options. The 1995 amount only included $225,000 of the
$525,000 bridge loans converted to Preferred A, since $300,000 of the bridge
loans were provided in 1994.
Cash and cash equivalents as of December 31 of the years 1997, 1996 and
1995 were $1,638,173, $3,047,182 and $4,123,326, respectively. In March 1998 (as
of March 26, 1998), warrants for 111,112 shares of Common Stock were exercised
at an exercise price of $5.00, raising $555,560 for the Company. On February 2,
1998, stock options for 6,667 shares of Common Stock were exercised at an
exercise price of $3.00, raising $20,001 for the Company. From January 1 through
March 26, 1998, the total amount raised through the exercise of warrants and
options was $575,561.
The Company estimates that this amount of cash and cash equivalents will be
sufficient to last until approximately the fourth quarter of fiscal 1998. The
Company anticipates that cash usage will increase in the first and second
quarters of fiscal 1998, primarily due to acceleration of clinical studies and
related expenses and higher inventory.
Page 17
<PAGE>
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Reference is made to the Report of Independent Auditors and Financial
Statements included in the Index to Financial Statements at Page F-1 of this
Annual Report on Form 10-KSB.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Page 18
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.
The information required by this item is incorporated by reference to the
information set forth under the similarly titled caption contained in the Proxy
Statement to be used by the Company in connection with its 1998 Annual Meeting
of Shareholders, to be filed with the Securities and Exchange Commission on or
prior to April 20, 1998.
Item 10. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
information set forth under the similarly titled caption contained in the Proxy
Statement to be used by the Company in connection with its 1998 Annual Meeting
of Shareholders, which will be filed with the Securities and Exchange Commission
on or prior to April 20, 1998.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information set forth under the similarly titled caption contained in the Proxy
Statement to be used by the Company in connection with its 1998 Annual Meeting
of Shareholders, which will be filed with the Securities and Exchange Commission
on or prior to April 20, 1998.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
information set forth under the similarly titled caption contained in the Proxy
Statement to be used by the Company in connection with its 1998 Annual Meeting
of Shareholders, which will be filed with the Securities and Exchange Commission
on or prior to April 20, 1998.
Item 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-KSB:
(1) Financial Statements.
Audited financial statements for each of the three years ended
December 31, 1997, 1996 and 1995 are filed as part of this Form 10-KSB. See
Index to financial Statements on Page F - 1.
(2) Reports on Form 8-K.
The Company filed a report on Form 8-K on December 17, 1997 in
conjunction with its press release on December 5, 1997, announcing that it
received 510(k) pre-market notification clearance from the FDA for its
fiberoptic reusable Biopsy Forceps.
Page 19
<PAGE>
(3) Exhibits required by Item 601 of Regulation S-B:
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation, as amended. (Incorporated by reference
to the Company's Annual Report on Form 10-KSB, Exhibit 3.1, for
the year ended December 31, 1996.)
3.2 Bylaws, as amended. (Incorporated by reference to the Company's
Annual Report on Form 10-KSB, Exhibit 3.2, for the year ended
December 31, 1995.)
10.3 Incentive Stock Option Plan adopted by the Company's Board of
Directors and shareholders on August 1, 1983, as amended March 5,
1987, and May 5, 1987. (Incorporated by reference to the
Company's Registration Statement on Form S-8, Commission File No.
2-93693-C, as filed on March 28, 1986, effective April 17, 1986,
as amended on June 2, 1987 and March 21, 1988.)
10.4 Incentive Stock Option Plan, as amended, as adopted by the
Company's Board of Directors and shareholders on March 10, 1988
(Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1988.)
10.5 1988 Stock Option Plan adopted by the Company's Board of
Directors on March 10, 1988 and shareholders on May 5, 1988.
(Incorporated by reference to the Company's Registration
Statement on Form S-8, Commission File No. 33-22052, as filed on
May 25, 1988, effective June 14, 1988.)
10.6 1990 Restricted Stock Plan adopted by the Company's Board of
Directors on March 15, 1990 and shareholders on May 17, 1990.
(Incorporated by reference to the Company's Registration
Statement on Form S-8, Commission File No. 33-36385, as filed on
August 15, 1990, effective August 15, 1990.)
10.7 1991 Stock Plan adopted by the Company's Board of Directors on
July 11, 1991 and shareholders on January 30, 1992. (Incorporated
by reference to the Company's Annual Report on Form 10-K, Exhibit
10.12, for the year ended December 31, 1991.)
10.8 Amendment to 1991 Stock Plan adopted by the Company's Board of
Directors on July 11, 1991 and shareholders on January 30, 1992.
(Incorporated by reference to the Company's Form 8-K Report filed
with the Securities and Exchange Commission on or about February
3, 1992.)
10.9 Amendment to 1991 Stock Plan adopted by the Company's
shareholders on June 28, 1995. (Incorporated by reference to the
Company's Registration Statement on Form S-8, Commission File No.
033-63047, as filed on September 28, 1995.)
10.10 Amendment to 1991 Stock Plan adopted by the Company's Board of
Directors on October 4, 1995. (Incorporated by reference to the
Company's definitive Proxy Statement for its 1996 Annual Meeting
of Shareholders.)
10.11 Amendment to 1991 Stock Plan adopted by the Company's
shareholders on March 28, 1996. (Incorporated by reference to the
Company's Registration Statement on Form S-8, Commission File No.
333-.4393, as filed on May 23, 1996.)
10.12 Amendment to 1991 Stock Plan as it pertains to Section 5(k) of
the Plan regarding Directors options, adopted by the Company's
Board of Directors on October 9, 1996. (Incorporated by reference
to the Company's Annual Report on Form 10-KSB, Exhibit 10.10, for
the year ended December 31, 1996.)
10.13 Amendment to 1991 Stock Plan as it pertains to Section 3 of the
Plan, adopted by the Company's Board of Directors on March 9,
1998, filed herein.
10.14 Self-Insurance Trust Agreement between the Company and Richfield
Bank and Trust Co., as trustee dated March 5, 1987. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1986.).
10.15 Form of Indemnification Agreement that the Company has provided
to all officers and directors. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 1986.)
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<PAGE>
10.16 Yurek Employment Agreement dated February 3, 1992 by and between
the Company and Mr. Daryl F. Yurek. (Incorporated by reference to
the Company's Form 8-K report filed with the Securities and
Exchange Commission on or about February 17, 1992.)
10.17 Employment Agreement and Severance Agreement between the Company
and Brian T. McMahon dated September 30, 1992. (Incorporated by
reference to the Company's Annual Report on Form 10-KSB, Exhibit
10.23, for the year ended December 31, 1993.)
10.18 Severance (Change in Control) Agreement between the Company and
Brian T. McMahon dated November 26, 1996. (Incorporated by
reference to the Company's Annual Report on Form 10-KSB, Exhibit
10.15, for the year ended December 31, 1996.)
10.19 Severance (Change in Control) Agreement between the Company and
Ching-Meng Chew dated November 26, 1996. (Incorporated by
reference to the Company's Annual Report on Form 10-KSB, Exhibit
10.16, for the year ended December 31, 1996.)
10.20 Severance (Change in Control) Agreement between the Company and
Chester E. Sievert, Jr. dated May 21, 1997, filed herein.
10.21 Five-Year Lease Agreement between the Company and St. Paul
Properties, Inc. dated October 10, 1996 (Incorporated by
reference to the Company's Annual Report on Form 10-KSB, Exhibit
10.17, for the year ended December 31, 1996.)
10.22 Distribution Agreement between SCIMED Life Systems, Inc. and the
Company dated August 19, 1994. (Incorporated by reference to
Annual Report on Form 10-KSB, Exhibit 10.29, for the year ended
December 31, 1994).
10.23 Clinical Research Agreement between The General Hospital
Corporation, doing business as Massachusetts General Hospital,
and the Company dated June 1, 1995. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB, Exhibit 10.15, for
the year ended December 31, 1995.)
10.24 Cautionary Statement Identifying Important Factors that Could
Cause the Company's Actual Results to Differ from Those Projected
in Forward-Looking Statements. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB, Exhibit 99, for the
quarter ended June 30, 1996.)
10.25 Bridge Loan Agreement, including form of Promissory Note and form
of Warrant by and between the Company and Qualified Lenders,
dated September 30, 1994. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB, Exhibit 10.28, for the
year ended December 31, 1994.)
10.26 Form of Promissory Note that was issued in conjunction with the
Bridge Loan Agreement by and between the Company and Qualified
Lenders, dated September 30, 1994. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB, Exhibit 10.28, page
45, for the year ended December 31, 1994.)
10.27 Form of Promissory Note that was issued in conjunction with the
Bridge Loan Agreement by and between the Company and Qualified
Lenders, dated September 30, 1994. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB, Exhibit 10.28, page
45, for the year ended December 31, 1994.)
10.28 Form of Warrant. (Incorporated by reference to the Company's
Annual Report on Form 10-KSB, Exhibit 10.28, for the year ended
December 31, 1994.)
10.29 List of Lenders in the Bridge Loans, and Investors in the
Company's Preferred Stock . (Incorporated by reference to the
Company's Form S-3 Registration Statement under The Securities
Act of 1933 as filed with the Securities and Exchange Commission
and declared effective on June 7, 1996, Commission File No.
333-1149.)
10.30 Form of Subscription Agreement that was used in conjunction with
the private placements of the Company's Preferred Stock.
(Incorporated by reference to the Company's Annual Report on Form
10-KSB, Exhibit 10.20, for the year ended December 31, 1995.)
23.1 Consent of Independent Auditors, filed herein.
27 Financial Data Schedule, filed herein.
Page 21
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SpectraSCIENCE, Inc.
(Registrant)
Date: March 30, 1998 By: /s/ Brian T. McMahon
---------------------
Brian T. McMahon
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Brian T. McMahon Chairman, Chief Executive March 30, 1998
- --------------------------- Officer and Director
Brian T. McMahon (Principal Executive Officer)
/s/ Chester E. Sievert, Jr. President and Chief Operating March 30, 1998
- --------------------------- Officer
Chester E. Sievert, Jr.
/s/ Ching-Meng Chew Vice President Finance and March 30, 1998
- --------------------------- Administration, Chief Financial
Ching-Meng Chew Officer, Treasurer, Secretary
(Principal Financial and Accounting
Officer)
/s/ Henry M. Holterman Director March 30, 1998
- ---------------------------
Henry Holterman
/s/ Nathaniel S. Thayer Director March 30, 1998
- ---------------------------
Nathaniel S. Thayer
Page 22
<PAGE>
SpectraSCIENCE, Inc.
Audited Financial Statements
Years ended December 31, 1997 and 1996
Contents
Report of Independent Auditors.............................................. F-1
Audited Financial Statements
Balance Sheets.............................................................. F-2
Statements of Operations.................................................... F-3
Statement of Changes in Stockholders' Equity................................ F-4
Statements of Cash Flows.................................................... F-5
Notes to Financial Statements............................................... F-6
<PAGE>
Report of Independent Auditors
Board of Directors
SpectraScience, Inc.
We have audited the accompanying balance sheets of SpectraScience, Inc. as of
December 31, 1997 and 1996, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 SpectraScience, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
February 13, 1998, except for Note 8,
as to which date is March 26, 1998
Page F-1
<PAGE>
SpectraSCIENCE, Inc.
Balance Sheets
December 31
1997 1996
----------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,638,173 $ 3,047,182
Inventory 180,474 192,151
Other current assets 98,419 103,736
----------------------------
Total current assets 1,917,066 3,343,069
Fixed assets:
Office furniture and equipment 249,935 239,915
Machinery and equipment 560,201 558,029
----------------------------
810,136 797,944
Less accumulated depreciation (655,090) (590,424)
----------------------------
155,046 207,520
----------------------------
Total assets $ 2,072,112 $ 3,550,589
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 140,809 $ 107,866
Accrued compensation and taxes 100,690 97,735
Accrued expenses 61,019 37,216
Accrued clinical research fees 159,899 149,800
----------------------------
Total current liabilities 462,417 392,617
Commitments
Stockholders' equity:
Convertible preferred stock, Series A,
par value $1.00 per share:
Authorized shares--5,000,000
Issued and outstanding
shares--66,667 in 1996 -- 66,667
Convertible preferred stock, Series B,
par value $1.00 per share:
Authorized shares--1,000,000
Issued and outstanding
shares--792,500 in 1996 -- 792,500
Common stock, $.25 par value:
Authorized shares--10,000,000
Issued and outstanding
shares--4,506,559 in 1997
and 3,621,212 in 1996 1,126,640 905,303
Additional paid-in capital 44,620,283 43,886,939
Accumulated deficit (44,137,228) (42,493,437)
----------------------------
Total stockholders' equity 1,609,695 3,157,972
----------------------------
Total liabilities and stockholders' equity $ 2,072,112 $ 3,550,589
============================
See accompanying notes.
Page F-2
<PAGE>
SpectraSCIENCE, Inc.
Statements of Operations
Year ended December 31
1997 1996 1995
-----------------------------------------
Net revenues
Product revenues $ -- $ -- $ 134,652
Cost of products sold -- -- 124,913
-----------------------------------------
-- -- 9,739
Expenses
Research and development 1,095,281 998,137 660,504
Selling, general and administrative 679,809 723,825 711,753
Interest and other income (131,299) (176,043) (16,608)
-----------------------------------------
Total expenses 1,643,791 1,545,919 1,355,649
-----------------------------------------
Net loss $(1,643,791) $(1,545,919) $(1,345,910)
=========================================
Net loss per share $ (.37) $ (.47) $ (.47)
Weighted average common
shares outstanding
4,467,233 3,276,193 2,857,738
See accompanying notes.
Page F-3
<PAGE>
<TABLE>
SpectraSCIENCE, Inc.
Statement of Changes in Stockholders' Equity
<CAPTION>
Series A Convertible Series B Convertible
Common Stock Preferred Stock Preferred Stock Additional
---------------------------------------------------------------- Paid-In Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 2,785,348 $ 696,337 -- $ -- $ -- $ 38,765,897 $(39,601,608) $ (139,374)
Exercise of stock options 148,000 37,000 -- -- -- -- 343,000 -- 380,000
Issuance of non-interest
bearing notes -- -- -- -- -- -- 3,260 -- 3,260
Issuance of Series A
convertible preferred
stock upon debt
conversion -- -- 174,998 174,998 -- -- 350,002 -- 525,000
Proceeds from issuance
of Series A convertible
preferred stock, net of
expenses of $60,000 -- -- 500,000 500,000 -- -- 940,000 -- 1,440,000
Proceeds from issuance
of Series B convertible
preferred stock, net of
expenses of $435,875 -- -- -- -- 792,500 792,500 2,734,125 -- 3,526,625
Net loss -- -- -- -- -- -- -- (1,345,910) (1,345,910)
---------------------------------------------------------------------------------------------------------
Balance December 31, 1995 2,933,348 733,337 674,998 674,998 792,500 792,500 43,136,284 (40,947,518) 4,389,601
Conversion of Series A
preferred stock into
common shares 608,331 152,083 (608,331) (608,331) -- -- 456,248 -- --
Exercise of Series A
preferred stock
detachable warrants
into common shares
33,333 8,333 -- -- -- -- 158,332 -- 166,665
Exercise of stock options 46,200 11,550 -- -- -- -- 136,075 -- 147,625
Net loss -- -- -- -- -- -- -- (1,545,919) (1,545,919)
---------------------------------------------------------------------------------------------------------
Balance December 31, 1996 3,621,212 905,303 66,667 66,667 792,500 792,500 43,886,939 (42,493,437) 3,157,972
Conversion of Series A
preferred stock into
common shares 66,667 16,667 (66,667) (66,667) -- -- 50,000 -- --
Conversion of Series B
preferred stock into
common shares 792,500 198,125 -- -- (792,500) (792,500) 594,375 -- --
Exercise of Series A
preferred stock
detachable warrants
into common stock 16,111 4,028 -- -- -- -- 56,527 -- 60,555
Exercise of stock options 10,069 2,517 -- -- -- -- 32,442 -- 34,959
Net loss -- -- -- -- -- -- -- (1,643,791) (1,643,791)
---------------------------------------------------------------------------------------------------------
Balance December 31, 1997 4,506,559 $1,126,640 -- $ -- -- $ -- $ 44,620,283 $(44,137,228) $ 1,609,695
=========================================================================================================
</TABLE>
See accompanying notes.
Page F-4
<PAGE>
<TABLE>
SpectraSCIENCE, Inc.
Statements of Cash Flows
<CAPTION>
Year ended December 31
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $(1,643,791) $(1,545,919) $(1,345,910)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 64,666 72,418 52,302
Non-cash interest expense -- -- 3,260
Gain on sale of fixed assets -- (387) --
Changes in operating assets and liabilities:
Accounts receivable -- 100,641 (99,860)
Inventory 11,677 (120,665) 18,597
Other current assets 5,317 (23,539) 35,492
Accounts payable and accrued expenses 69,800 137,953 (63,399)
--------------------------------------------------------
Net cash used in operating activities (1,492,331) (1,379,498) (1,399,518)
Investing activities
Purchases of fixed assets (12,192) (13,418) (107,379)
Proceeds from sale of fixed assets -- 2,482 300
--------------------------------------------------------
Net cash used in investing activities (12,192) (10,936) (107,079)
Financing activities
Proceeds from issuance of notes payable -- -- 225,000
Proceeds from issuance of common stock 95,514 314,290 380,000
Proceeds from issuance of preferred stock -- -- 4,966,625
--------------------------------------------------------
Net cash provided by financing activities 95,514 314,290 5,571,625
--------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,409,009) (1,076,144) 4,065,028
Cash and cash equivalents at beginning of year 3,047,182 4,123,326 58,298
--------------------------------------------------------
Cash and cash equivalents at end of year $ 1,638,173 $ 3,047,182 $ 4,123,326
========================================================
Supplemental schedule of noncash transactions
Notes payable converted into preferred stock $ -- $ -- $ 525,000
Series A preferred stock converted into common stock 66,667 608,331 --
Series B preferred stock converted into common stock 792,500 -- --
Transfer of inventory to equipment -- 110,385 --
</TABLE>
See accompanying notes.
Page F-5
<PAGE>
SpectraSCIENCE, Inc.
Notes to Financial Statements
December 31, 1997
1. Business
The Company was incorporated on May 4, 1983 as GV Medical, Inc. and was
engaged in the development of laser angioplasty catheter systems. Subsequently,
the Company changed its name to SpectraScience, Inc. on October 16, 1992, which
was approved by the shareholders on May 13, 1993. The Company is now focused
primarily on the design, development, manufacturing and marketing of medical
products for the diagnosis and facilitation of treatment of a broad range of
human diseases.
2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Fixed Assets
Fixed assets are stated at cost. The Company depreciates the cost of the
property over its estimated useful life of five years using the straight line
method.
Long-Lived Assets
Impairment losses are recorded on long-lived assets when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by the assets are less than the carrying amount of such assets.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123"). The Company adopted the disclosure only
provisions of Statement 123. Accordingly, the Company has made pro forma
disclosures of what net loss and loss per share would have been had the
provisions of Statement 123 been applied to the Company's stock options.
Page F-6
<PAGE>
SpectraSCIENCE, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes under the liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amount of assets and liabilities and their respective tax bases.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share (Statement 128). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous rules. All earnings per share amounts for all periods have been
presented and, where necessary, restated to conform to the Statement 128
requirements. Diluted earnings per share is not presented separately as the
effect of outstanding options and warrants is antidilutive.
3. Capital Stock and Warrants
During 1994, the Company granted warrants to the participants in the bridge
financing agreements it had entered into, to purchase 100,000 shares of the
Company's common stock at $3.00 per share. The warrants are exercisable for five
years from the date of the grant.
During 1995, the Company, in connection with additional bridge financing,
granted warrants to the participants to purchase 74,998 shares of the Company's
common stock at $3.00 per share. The warrants are exercisable for five years
from the date of grant.
From March 1995 to June 1995, the Company sold 500,000 shares of
convertible preferred stock, Series A at $3.00 per share in a private placement
for $1,500,000 less related costs of $60,000. Upon completion of the sale of
convertible preferred stock, bridge loans of $525,000 were converted into
174,998 shares of convertible preferred stock at a price of $3.00 per share. In
addition, the Company issued warrants to the investors to purchase 58,335 shares
of the Company's common stock at $5.00 per share. The warrants are exercisable
for three years from the date of grant. In March 1996, the nondividend yielding
shares of convertible preferred stock were converted into an equivalent number
of shares of common stock. Holders of the shares of the convertible preferred
stock also received warrants to purchase 166,665 shares of the Company's common
stock at $5.00 per share. The warrants are exercisable for three years from date
of grant. During 1996, Series A preferred stock detachable warrants to purchase
33,333 shares of common stock were exercised at $5.00 per share. In addition,
the Company issued warrants to the underwriter to purchase 20,000 shares of the
Company's common stock at $3.00 per share. The warrants are exercisable for five
years from the date of grant. The Company issued additional warrants to the
underwriter to purchase 6,667 shares of the Company's common stock at $5.00 per
share. The warrants are exercisable for three years from the date of grant.
During 1997, Series A preferred stock detachable warrants to purchase 6,111 and
10,000 shares of common stock were exercised at $5.00 and $3.00, respectively.
Page F-7
<PAGE>
SpectraSCIENCE, Inc.
Notes to Financial Statements (continued)
3. Capital Stock and Warrants (continued)
In December 1995, the Company sold 792,500 shares of convertible preferred
stock, Series B at $5.00 per share in a private placement for $3,962,500 less
related costs of $435,875. Holders of shares of the convertible preferred stock
also received warrants to purchase 264,175 shares of the Company's common stock
at $9.50 per share. The warrants are exercisable for three years from the date
of grant. In addition, the Company issued warrants to the underwriter to
purchase 79,250 shares of the Company's common stock at $5.00 per share. The
warrants are exercisable for five years from the date of grant. The Company
issued additional warrants to the underwriter to purchase 26,418 shares of the
Company's common stock at $9.50 per share, conditional upon exercise of the
previous warrant issued to the underwriter. The warrants are exercisable for
five years from the date of grant.
In January 1997, the Company converted all of its outstanding Series A and
Series B preferred stock into an equivalent number of shares of issued and
outstanding common stock.
4. Stock Options
The Company has one stock option plan under which selected employees and
non-employees may be granted incentive and non-qualified options to purchase
common stock of the Company. The options granted are exercisable over a period
of no longer than ten years and are granted at 100% of the fair market value of
the common stock as of the date of grant.
The following table summarizes the stock option activity for the plan:
Shares Available Stock Options Weighted Average
for Grant Outstanding Under Exercise
the Plans Price Per Share
-----------------------------------------------------
Balance December 31, 1994 (139,182) 600,272 $3.49
Amendment to plan 540,000
Options granted (320,000) 320,000 3.17
Options exercised -- (148,000) 2.57
Options forfeited 5,000 (5,000) 3.00
Options canceled 5,000 (5,000) 2.50
Option plans terminated (30,890) --
-------------------------------------
Balance December 31, 1995 59,928 762,272 3.37
Amendment to plan 500,000
Options exercised -- (46,200) 3.20
Options forfeited 35,493 (35,493) 5.00
Options granted (145,000) 145,000 6.73
-------------------------------------
Balance December 31, 1996 450,421 825,579 3.95
Options granted (461,065) 461,065 4.07
Options exercised -- (10,069) 3.47
Options canceled 249,931 (249,931) 3.13
-------------------------------------
Balance December 31, 1997 239,287 1,026,644 $4.19
=====================================
Page F-8
<PAGE>
SpectraSCIENCE, Inc.
Notes to Financial Statements (continued)
4. Stock Options (continued)
The weighted average fair value of options granted in 1997 and 1996 was
$2.84 and $4.92, respectively. The exercise price of options outstanding at
December 31, 1997 ranged from $3.00 to $11.25 per share, as summarized in the
following table:
Shares Outstanding Shares Exercisable
-------------------------------------- -------------------------
Weighted Weighted Weighted
Shares Average Average Average
Outstanding at Remaining Exercise Number of Exercise
Range of December 31, Contractual Price Shares Price
Exercise Price 1997 Life per Share Exercisable Per Share
- --------------- -------------------------------------- -------------------------
$3.00 to $ 5.00 879,065 6.52 years $ 3.65 397,333 $ 3.17
5.01 to 8.00 120,079 8.90 years 6.70 50,410 6.50
8.01 to 11.25 27,500 4.82 years 10.35 27,500 10.35
----------- ---------
Total 1,026,644 6.75 years $ 4.19 475,243 $ 3.94
=========== =========
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free interest rates ranging
from 5.65% to 6.3%; volatility factor of the expected market price of the
Company's common stock of .851 and .904, respectively, and a weighted-average
expected life of the option of five to seven years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which vest by one-third each year
from the date of the grant and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
Page F-9
<PAGE>
SpectraSCIENCE, Inc.
Notes to Financial Statements (continued)
4. Stock Options (continued)
1997 1996 1995
---------------------------------------------
Pro forma net loss $(2,258,579) $(1,846,282) $(1,453,448)
Pro forma net loss per share $(.51) $(.56) $(.51)
These pro forma amounts may not be indicative of future years' amounts
since the Statement provides for a phase-in of option values beginning with
those granted in 1995.
5. Commitments
The Company had an operating lease agreement for certain premises within a
building in Minneapolis, Minnesota that had a term which expired in October
1996. The Company moved to a new location in Minneapolis during 1996 and entered
into a new building lease agreement that has a term extending through October
2001. The new lease requires annual base rent of approximately $53,000 plus a
sharing of certain expenses. Various other equipment operating leases were also
entered into during 1996 expiring during future years.
Future lease commitments are as follows:
1998 $ 65,000
1999 62,000
2000 58,000
2001 49,000
2002 --
----------
Total $ 234,000
==========
The Company incurred total lease and rental expenses of $67,000, $45,000
and $36,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
In 1995, the Company entered into a clinical research agreement for up to
two years with a hospital. Under the terms of the agreement, the Company agreed
to pay approximately $400,000 for the study, of which $50,000 and $200,000 was
charged to expense in 1997 and 1996, respectively. In 1997, the Company
terminated the agreement.
The Company entered into three different clinical testing agreements during
1997 with domestic hospitals. Under the terms of these one-year agreements the
Company has a maximum commitment of $173,000 for the related project costs. Some
of these costs have already been paid by the Company and will continue to be
paid as testing goes into 1998.
The Company entered into a license agreement with Massachusetts Institute
of Technology (MIT) for the use of certain patents. Under terms of the
agreement, the Company has agreed to pay $50,000 a year through October 2003 and
$30,000 a year thereafter until the expiration of the patent rights. The
agreement can be terminated by MIT if the monthly payments are not made within
thirty days.
Page F-10
<PAGE>
SpectraSCIENCE, Inc.
Notes to Financial Statements (continued)
6. Income Taxes
The tax effect of the Company's deferred tax assets is as follows:
December 31
1997 1996
----------------------------------
Net operating loss carryforward $ 15,955,000 $ 15,345,000
Accrued liabilities 101,000 93,000
Inventory reserve 39,000 28,000
Tax credits 788,000 770,000
----------------------------------
16,883,000 16,236,000
Valuation allowance (16,883,000) (16,236,000)
----------------------------------
$ -- $ --
==================================
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $44,318,000 that expire at various times through the year 2012. In
addition, the Company has research and development tax credits that expire at
various times through 2012. As a result of previous stock transactions, the
Company is limited as to the amount of net operating loss and tax credit
carryforwards which may be utilized in any one year. The annual limitation is
approximately $1,000,000.
7. Employee Benefit Plan
The Company has a 401(k) profit sharing and savings plan covering
substantially all employees. The plan allows employees to defer up to 15% of
their annual earnings. The Company will match 50% of the first 6% of the
employee contributions. The contributions by the Company totaled approximately
$17,000, $5,000 and $4,000 for 1997, 1996 and 1995, respectively.
8. Subsequent Events
In February 1998, an option holder exercised its option to purchase 6,667
shares of common stock at $3.00 per share. This resulted in net proceeds to the
Company of $20,001.
In March 1998, various warrant holders exercised their warrants to purchase
111,112 shares of common stock at $5.00 per share. This resulted in net proceeds
to the Company of $555,560.
Page F-11
EXHIBIT 10.11 to Annual Report on Form 10-KSB
of SpectraSCIENCE, Inc. for the year ended December 31, 1997
SPECTRASCIENCE, INC.
1991 STOCK PLAN
(As Amended March 9, 1998)
SECTION 1. General Purpose of Plan; Definitions
The name of this plan is the SpectraScience, Inc. 1991 Stock Plan (the
"Plan"). The purpose of the Plan is to enable SpectraScience, Inc. (the
"Company") and its Subsidiaries to retain and attract executives, key employees
(whether full or part-time), consultants and non-employee directors who
contribute to the Company's success by their ability, ingenuity and industry,
and to enable such individuals to participate in the long-term success and
growth of the Company by giving them a proprietary interest in the Company.
For purposes of the Plan, the following terms shall be defined as set forth
below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means a felony conviction of a participant or the failure of a
participant to contest prosecution for a felony, or a participant's willful
misconduct or dishonesty, any of which is directly and materially harmful
to the business or reputation of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee referred to in Section 2 of the Plan. If at
any time no Committee shall be in office, then the functions of the
Committee specified in the Plan shall be exercised by the Board.
(e) "Company" means, SpectraScience, Inc., a corporation organized under the
laws of the State of Minnesota (or any successor corporation).
(f) "Disability" means permanent and total disability as determined by the
Committee.
(g) "Disinterested Person" shall have the meaning set forth in Rule 16b-3 as
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, or any successor definition adopted by the
Commission.
(h) "Early Retirement" means retirement, with consent of the Committee at the
time of retirement, from active employment with the Company and any
Subsidiary or Parent Corporation of the Company.
(i) "Fair Market Value" means the value of the Stock on a given date as
determined by the Committee in accordance with the applicable Treasury
Department regulations under Section 422A of the Code with respect to
"incentive stock options."
(j) "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section
422A of the Code.
(k) "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option, and is intended to be and is designated as a
"Non-Qualified Stock Option."
(1) "Non-Employee Director" means any member of the Board who is not an
employee of the Company, any Parent Corporation or Subsidiary.
(m) "Normal Retirement" means retirement from active employment with the
Company, any Subsidiary or Parent Corporation of the Company on or after
age 65.
(n) "Parent Corporation" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of the
corporations (other than the Company) owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in the chain.
(o) "Retirement" means Normal Retirement or Early Retirement.
(p) "Stock" means the Common Stock, $.25 par value per share, of the Company.
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(q) "Stock Appreciation Right" means the right pursuant to an award granted
under Section 6 below to surrender to the Company all or a portion of a
Stock Option in exchange for an amount equal to the difference between (i)
the Fair Market Value, as of the date such Stock Option or such portion
thereof is surrendered, of the shares of Stock covered by such Stock Option
or such portion thereof, and (ii) the aggregate exercise price of such
Stock Option or such portion thereof.
(r) "Stock Option" means any option to purchase shares of Stock granted
pursuant to Section 5 below.
(s) "Subsidiary" means any corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
SECTION 2. Administration
The Plan shall be administered by the Board of Directors or by a Committee
of not less than two directors, all of whom are Disinterested Persons, who shall
be appointed by the Board of Directors of the Company and who shall serve at the
pleasure of the Board.
The Committee shall have the power and authority to grant to eligible
persons, pursuant to the terms of the Plan: (A) Stock Options or (B) Stock
Appreciation Rights.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the Company or its
Subsidiaries, and consultants and other persons having a contractual
relationship with the Company or its Subsidiaries, to whom Stock Options and/or
Stock Appreciation Rights may from time to time be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options or Stock Appreciation Rights, or a combination of
the foregoing, are to be granted hereunder;
(iii) to determine the number of shares to be covered by each such award granted
hereunder;
(iv) to determine the terms and conditions, not inconsistent with the terms of
the Plan, of any award granted hereunder (including, but not limited to, any
restriction on any Stock Option or other award and/or the shares of Stock
relating thereto) and to amend such terms and conditions (including, but not
limited to, any amendment which accelerates the vesting of any award); and
(v) to determine whether, to what extent, and under what circumstances, Stock
Options may be exercised following termination of employment.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan. The Committee may
delegate its authority to the President and/or the Chief Executive Officer of
the Company for the purpose of selecting employees who are not officers of the
Company for purposes of (A) above.
All decisions made by the Committee pursuant to the provisions of the Plan
shall be final and binding on all persons, including the Company and Plan
participants.
SECTION 3. Stock Subject to Plan
The total number of shares of Stock reserved and available for distribution
under the Plan shall be 1,640,000 shares, subject to increase or decrease in the
event of any adjustment required in the paragraph below. Such shares may
consist, in whole or in part, of authorized and unissued shares. Subject to
paragraph (b)(iv) of Section 6 below, if any shares that have been optioned
cease to be subject to Options, are forfeited or such award otherwise terminates
without a payment being made to the participant, such shares shall again be
available for distribution in connection with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split (reverse or other), other change
in corporate structure affecting the Stock, or spin-off or other distribution of
assets to shareholders, such substitution or adjustment shall be made in the
aggregate number of shares reserved for issuance under the Plan and in the
number and option price of shares subject to outstanding options granted under
the Plan as may be determined to be appropriate by the Committee, in its sole
discretion, provided that the number of shares subject to any award shall always
be a whole number. Such adjusted option price shall also be used to determine
the amount payable by the Company upon the exercise of any Stock Appreciation
Right associated with any Option.
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SECTION 4. Eligibility
Officers, other key employees of the Company or its subsidiaries,
Non-Employee Directors and consultants and other persons having a contractual
relationship with the Company or its Subsidiaries who are responsible for or
contribute to the management, growth and/or profitability of the business of the
Company and its Subsidiaries are eligible to be granted Stock Option or Stock
Appreciation Right awards under the Plan. Except for Non-Employee Directors,
whose participation in the Plan shall be limited as provided in paragraph (k) of
Section 5, the optionees and participants under the Plan shall be selected from
time to time by the Committee, in its sole discretion, from among those
eligible, and the Committee shall determine, in its sole discretion, the number
of shares covered by each award.
SECTION 5. Stock Options
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
The Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options
shall be granted under the Plan after July 10, 2001.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Non-Qualified Stock options, or both types of options (in each
case with or without Stock Appreciation Rights). To the extent that any option
does not qualify as an Incentive Stock Option, it shall constitute a separate
Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this Plan
relating to Incentive Stock Options shall be interpreted, amended or altered,
nor shall any discretion or authority granted under the Plan be so exercised, so
as to disqualify either the Plan or any Incentive Stock Option under Section
422A of the Code. The preceding sentence shall not preclude any modification or
amendment to an outstanding Incentive Stock Option, whether or not such
modification or amendment results in disqualification of such option as an
Incentive Stock Option, provided the optionee consents in writing to the
modification or amendment.
Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) Option Price. The option price per share of Stock purchasable under a
Stock Option shall be determined by the Committee at the time of grant and may
not, except as provided in this paragraph or in paragraph (1) below, be less
than 85% of the Fair Market Value of the Stock on the date of the grant of the
Option unless the Option itself or such lower option price per share is approved
by the shareholders. In no event shall the option price per share of Stock
purchasable under an Incentive Stock Option be less than 100% of the Fair Market
Value of the Stock on the date of the grant of the option. If an employee owns
or is deemed to own (by reason of the attribution rules applicable under Section
425(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any Parent Corporation or subsidiary and an Incentive
Stock Option is granted to such employee, the option price shall be no less than
110% of the Fair Market Value of the Stock on the date the option is granted.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the option is granted. If an employee owns or is deemed to
own (by reason of the attribution rules of Section 425(d) of the Code) more than
10% of the combined voting power of all classes of stock of the Company or any
Parent Corporation or Subsidiary and an Incentive Stock Option is granted to
such employee, the term of such option shall be no more than five years from the
date of grant.
(c) Exercisability. Stock Options shall be exercisable at such time or
times as determined by the Committee at or after grant. If the Committee
provides, in its discretion, that any option is exercisable only in
installments, the Committee may waive such installment exercise provisions at
any time. Installment exercise restrictions may be based upon the lapse of time,
the attainment of specified performance goals, or a combination of each.
Notwithstanding the foregoing, unless the Stock Option Agreement provides
otherwise, any Stock Option granted under this Plan shall be exercisable in
full, without regard to any installment exercise provisions, upon the occurrence
of any of the following events: (i) dissolution or liquidation of the Company
other than in conjunction with a bankruptcy of the company or any similar
occurrence, (ii) any merger, consolidation, acquisition, separation,
reorganization, or similar occurrence, where the Company will not be the
surviving entity or (iii) the transfer of substantially all of the assets of the
Company or 75% or more of the outstanding Stock of the Company. In the event of
a transaction within (ii), the surviving entity shall issue comparable options
(i.e. having an equivalent spread between exercise price and stock fair market
value) to the holders of the Stock Options.
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(d) Method of Exercise. Stock Options may be exercised in whole or in part
at any time during the option period by giving written notice of exercise to the
Company specifying the number of shares to be purchased. Such notice shall be
accompanied by payment in full of the purchase price, either by certified or
bank check, or by any other form of legal consideration deemed sufficient by the
Committee and consistent with the Plan's purpose and applicable law, including
promissory notes or a properly executed exercise notice together with
irrevocable instructions to a broker acceptable to the Company to promptly
deliver to the Company the amount of sale or loan proceeds to pay the exercise
price. As determined by the Committee, in its sole discretion, payment in full
or in part may also be made in the form of unrestricted Stock already owned by
the optionee (based on the Fair Market Value of the Stock on the date the option
is exercised, as determined by the Committee); provided, however, that, in the
case of an Incentive Stock Option, the right to make a payment in the form of
already owned shares may be authorized only at the time the option is granted.
If the terms of an option so permit, or the Committee so provides, an optionee
may elect to pay all or part of the option exercise price by having the Company
withhold from the shares of Stock that would otherwise be issued upon exercise
that number of shares of Stock having a Fair Market Value equal to the aggregate
option exercise price for the shares with respect to which such election is
made. No shares of Stock shall be issued until full payment therefor has been
made. An optionee shall generally have the rights to dividends and other rights
of a shareholder with respect to shares subject to the option when the optionee
has given written notice of exercise, has paid in full for such shares, and, if
requested, has given the representation described in paragraph (a) of Section
10.
(e) Non-transferability Of Options. No Stock Option shall be transferable
by the optionee otherwise than by will or by the laws of descent and
distribution, and all Stock Options shall be exercisable, during the optionees
lifetime, only by the optionee.
(f) Termination by Death. If an optionees employment by the Company and any
Subsidiary or Parent Corporation terminates by reason of death, the Stock Option
may thereafter be immediately exercised, to the extent then exercisable (or on
such accelerated basis as the Committee shall determine at or after grant), by
the legal representative of the estate or by the legatee of the optionee under
the will of the optionee, for a period of two years (or such shorter period as
the committee shall specify at grant) from the date of such death or until the
expiration of the stated term of the option, whichever period is shorter.
(g) Termination by Reason of Disability. If an optionees employment by the
Company and any Subsidiary or Parent Corporation terminates by reason of
Disability, any Stock Option held by such optionee may thereafter be exercised,
to the extent it was exercisable at the time of termination due to Disability
(or on such accelerated basis as the Committee shall determine at or after
grant), but may not be exercised after two years (or such shorter period as the
Committee shall specify at grant) from the date of such termination of
employment or the expiration of the stated term of the option, whichever period
is the shorter. In the event of termination of employment by reason of
Disability, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422A of the Code, the
option will thereafter be treated as a Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. If an optionees employment by the
Company and any Subsidiary or Parent Corporation terminates by reason of
Retirement, any Stock Option held by such optionee may thereafter be exercised
to the extent it was exercisable at the time of such Retirement, but may not be
exercised after two years (or such shorter period as Committee shall specify at
grant) from the date of such termination of employment or the expiration of the
stated term of the option, whichever period is the shorter. In the event of
termination of employment by reason of Retirement, if an Incentive Stock Option
is exercised after the expiration of the exercise periods that apply for
purposes of Section 422A of the Code, the option will thereafter be treated as a
Non-Qualified Stock Option.
(i) Other Termination. Unless otherwise determined by the Committee or as
set forth in paragraph (1) below, if an optionees employment by the Company, any
Subsidiary or Parent Corporation terminates for any reason other than death,
Disability or Retirement, any Stock option held by such optionee may thereafter
be exercised to the extent it was exercisable at such termination, but may not
be exercised after two years (or such shorter period as the Committee shall
specify at grant) from the date of such termination of employment or the
expiration of the stated term of the option, whichever period is the shorter;
provided, however, that if the optionees employment is terminated for Cause, all
rights under the Stock Option shall terminate and expire upon such termination.
(j) Annual Limit on Incentive Stock Options. The aggregate Fair Market
Value (determined as of the time the Option is granted) of the Common Stock with
respect to which an Incentive Stock Option under this Plan or any other plan of
the Company, any subsidiary or Parent Corporation is exercisable for the first
time by an optionee during any calendar year shall not exceed $100,000.
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(k) Non-Employee Directors. Each Non-Employee Director serving as a
director on October 1, 1994 shall, on or before October 15, 1994, surrender for
cancellations all options held by such person to purchase shares of the
Company's Common Stock (pre-split) and shall be granted options to purchase the
same number of shares of the Company's Common Stock (post-split). Each
Non-Employee Director not serving as a director on October 1, 1994 elected as
director (whether by vote of shareholders or directors) shall, upon such
election, be granted an option to purchase 10,000 shares of the Company's Common
Stock (subject to adjustment pursuant to Section 3 above).
Each Non-Employee Director serving as a director on October 1, 1994 shall,
on or before October 15, 1995, be granted an option to purchase an additional
5,000 shares of the Company's Common Stock in lieu of any 1995 annual grant to
which such director would otherwise be entitled.
Each Non-Employee Director shall automatically be granted an option to
purchase 5,000 shares of the Company's Common Stock (subject to adjustment
pursuant to Section 3 above) annually during the period such director serves on
the Board and the Plan is in effect. The date of the automatic grant shall be
January 1 if the Non-Employee Director is serving on the Board on such date, and
the date on which the Non-Employee Director commences services on the Board if
the director is elected after January 1. If a Non-Employee Director commences
service on the Board after June 30 in any year in which the Plan is in effect
then, for such year, such director shall be granted an option to purchase 2,500
shares of the Company's Common Stock (subject to adjustment pursuant to Section
3 above).
All Non-Employee Director Stock Options shall be granted at a price per
share equal to 100% of the Fair Market Value of the Company's Common Stock on
the date of grant. The term of each Non-Employee Director Stock Option shall be
ten years from the date of grant.
All such Stock Options shall be designated as Non-Qualified Stock options
and shall be subject to the same terms and provisions as are then in effect with
respect to the grant of Non-Qualified Stock Options to salaried officers and key
employees of the Company, except that (i) the term of each such Stock Option
shall be equal to ten years; (ii) each Stock Option shall become exercisable as
to all or any part of the shares subject to the Stock Option beginning one year
after the date the Stock Option is granted; and (iii) no Stock Appreciation
Rights may be granted to Non-Employee Directors in conjunction with any Stock
Options granted under this paragraph (k) or in any other manner under this Plan.
Subject to the foregoing, all provisions of this Plan not inconsistent with the
foregoing shall apply to Stock Options granted to Non-Employee Directors. There
is no maximum in the number of shares as to which Stock Options may be granted
to any individuals/Non-Employee Director under this Plan. The maximum aggregate
number of shares as to which Stock Options may be granted to Non-Employee
Directors under this Plan shall be 200,000 shares. The number of shares reflects
the June 30, 1994, 1-for-5 reverse stock split of the Company's Common Stock and
shall be further subject to adjustment pursuant to Section 3 above.
(l) Yurek and Seiler Options. The options to be granted to Daryl F. Yurek
(1,000,000 shares) and James L. Seiler (50,000 shares) at $.50 per share are
issued pursuant to that certain financing transaction to be approved by
shareholders on or about January 30, 1992. At the time of issue, Mr. Yurek was
an employee of the Company and Mr. Seiler was a consultant to the Company.
Paragraph (i) above notwithstanding, if the Company terminates Mr. Yurek's
employment other than for cause, disability or death, then all of the Option
shares shall vest for both Yurek and Seiler and the two optionees shall continue
to have the right to exercise the Options pursuant to the terms thereof as if
Mr. Yurek's employment had continued.
SECTION 6. Stock Appreciation Rights
(a) Grant and Exercise. Except as set forth in paragraph (k) of Section 5,
Stock Appreciation Rights may be granted in conjunction with all or part of any
Stock option granted under the Plan. In the case of a Non-Qualified Stock
Option, such rights may be granted either at or after the time of the grant of
such Option. In the case of an Incentive Stock Option, such rights may be
granted only at the time of the grant of the option.
A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock option, except that a
Stock Appreciation Right granted with respect to less than the full number of
shares covered by a related Stock Option shall not be reduced until the exercise
or termination of the related Stock Option exceeds the number of shares not
covered by the Stock Appreciation Right.
A Stock Appreciation Right may be exercised by an optionee, in accordance
with paragraph (b) of this Section 6, by surrendering the applicable portion of
the related Stock Option. Upon such exercise and surrender, the optionee shall
be entitled to receive an amount determined in the manner prescribed in
paragraph (b) of this Section 6. Stock Options which have been so surrendered,
in whole or in part, shall no longer be exercisable to the extent the related
Stock Appreciation Rights have been exercised.
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(b) Terms and Conditions. Stock Appreciation Rights shall be subject to
applicable regulations relating to the exercise of Stock Appreciation Rights by
optionees subject to reporting responsibilities under Section 16 of the
Securities and Exchange Act of 1934, and to such terms and conditions, not
inconsistent with the provisions of the Plan, as shall be determined from time
to time by the Committee, including the following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate shall be
exercisable in accordance with the provisions of Section 5 and this Section 6 of
the Plan.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be
entitled to receive up to, but not more than, an amount in cash or shares of
Stock equal in value to the excess of the Fair Market Value of one share of
Stock over the option price per share specified in the related option multiplied
by the number of shares in respect of which the Stock Appreciation Right shall
have been exercised, with the Committee having the right to determine the form
of payment.
(iii) Stock Appreciation Rights shall be transferable only when and to the
extent that the underlying Stock Option would be transferable under Section 5 of
the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or
part thereof to which such Stock Appreciation Right is related shall be deemed
to have been exercised for the purpose of the limitation set forth in Section 3
of the Plan on the number of shares of Stock to be issued under the Plan, but
only to the extent of the number of shares issued or issuable under the Stock
Appreciation Right at the time of exercise based on the value of the Stock
Appreciation Right at such time.
(v) A Stock Appreciation Right granted in connection with an Incentive
Stock Option may be exercised only if and when the market price of the Stock
subject to the Incentive Stock Option exceeds the exercise price of such Option.
SECTION 7. Transfer, Leave of Absence, Etc
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer of an employee from the Company to a Parent Corporation or
Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from
one Subsidiary to another;
(b) a leave of absence, approved in writing by the Committee, for military
service or sickness, or for any other purpose approved by the Company if the
period of such leave does not exceed ninety (90) days (or such longer period as
the Committee may approve, in its sole discretion); and
(c) a leave of absence in excess of ninety (90) days, approved in writing
by the Committee, but only if the employee's right to re-employment is
guaranteed either by a statute or by contract, and provided that, in the case of
any leave of absence, the employee returns to work within 30 days after the end
of such leave.
SECTION 8. Amendments and Termination
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made (i) which would impair the rights
of an optionee or participant under a Stock Option or Stock Appreciation Right
or other Stock-based award theretofore granted, without the optionees or
participant's consent, or (ii) which without the approval of the shareholders of
the Company would cause the Plan to no longer comply with rules promulgated by
the Securities and Exchange Commission under authority granted in Section 16 of
the Securities Exchange Act of 1934, as amended, Section 422A of the Code or any
other regulatory requirements.
The Committee may amend the terms of any award or option theretofore
granted, prospectively or retroactively, but, subject to Section 3 above, no
such amendment shall impair the rights of any holder without his consent. The
Committee may also substitute new Stock Options for previously granted options,
including previously granted options having higher option prices.
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SECTION 9. Unfunded Status of Plan
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder, provided, however, that the existence of such trusts or other
arrangements is consistent with the unfunded status of the Plan.
SECTION 10. General Provisions
(a) The Committee may require each person purchasing shares pursuant to a
Stock Option under the Plan to represent to and agree with the Company in
writing that the optionee is acquiring the shares without a view to distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan pursuant to
any Stock-based awards shall be subject to such stock transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the securities and Exchange commission, any stock
exchange upon which the Stock is then listed, and any applicable Federal or
state securities laws, and the Committee may cause a legend or legends to be put
on any such certificates to make appropriate reference to such restrictions.
(b) Subject to paragraph (d) below, recipients of Stock-based awards under
the Plan (other than Stock Options) are not required to make any payment or
provide consideration other than the rendering of services.
(c) Nothing contained in this Plan shall prevent the Board of Directors
from adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases. The adoption
of the Plan shall not confer upon any employee of the Company or any subsidiary
any right to continued employment with the Company or a Subsidiary, as the case
may be, nor shall it interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees at any time.
(d) Each participant shall, no later than the date as of which any part of
the value of an award first becomes includible as compensation in the gross
income of the participant for Federal income tax purposes, pay to the Company,
or make arrangements satisfactory to the Committee regarding payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements and the Company and Subsidiaries
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the participant. With respect to
any award under the Plan, if the written terms of such award so permit, a
participant may elect by written notice to the Company to satisfy part or all of
the withholding tax requirements associated with the award by (i) authorizing
the Company to retain from the number of shares of Stock that would otherwise be
deliverable to the participant, or (ii) delivering to the Company from shares of
Stock already owned by the participant, that number of shares having an
aggregate Fair Market Value equal to part or all of the tax payable by the
participant under this Section 10(d). Any such election shall be in accordance
with, and subject to, applicable tax and securities laws, regulations and
rulings.
(e) At the time of grant, the Committee may provide in connection with any
grant made under this Plan that the shares of Stock received as a result of such
grant shall be subject to a repurchase right in favor of the Company, pursuant
to which the participant shall be required to offer to the Company upon
termination of employment for any reason any shares that the participant
acquired under the Plan, with the price being the then Fair Market Value of the
Stock or, in the case of a termination for Cause, an amount equal to the cash
consideration paid for the Stock, subject to such other terms and conditions as
the Committee may specify at the time of grant. The Committee may, at the time
of the grant of an award under the Plan, provide the Company with the right to
repurchase shares of Stock acquired pursuant to the Plan by any participant who,
at any time within two years after termination of employment with the Company,
directly or indirectly competes with, or is employed by a competitor of the
Company.
SECTION 11. Effective Date of Plan
The Plan shall be effective on July 11, 1991 (the date of approval by the
Board of Directors), subject to approval by a vote of the holders of a majority
of the Stock present and entitled to vote at the next Annual or Special Meeting
of the Company's shareholders and shall expire (unless terminated earlier) as of
July 10,
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2001. Awards may be granted under the Plan prior to shareholder approval,
provided such awards are made subject to shareholder approval.
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EXHIBIT 10.18 to Annual Report on
Form 10-KSB of SpectraSCIENCE, Inc.
for the year ended December 31, 1997
SEVERANCE AGREEMENT
THIS AGREEMENT made as of the 21st day of May, 1997, by and between
SpectraScience, Inc., a Minnesota corporation with its principal offices at 3650
Annapolis Lane, Suite 101, Minneapolis, MN 55447-5434 (the "Company") and
Chester E. Sievert, Jr., residing at 103 Edgecombe Drive, Mahtomedi, MN 55115
(the "Executive").
WHEREAS, the Company considers the establishment and maintenance of a sound
and vital management to be essential to protecting and enhancing the best
interests of the Company and its shareholders; and
WHEREAS, the Executive has made and is expected to make, due to Executive's
intimate knowledge of the business and affairs of the Company, its policies,
methods, personnel and problems, a significant contribution to the
profitability, growth and financial strength of the Company; and
WHEREAS, the Company, as a publicly held corporation, recognizes that the
possibility of a Change in Control may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of the Executive in the performance of the Executive's
duties to the detriment of the Company and its shareholders; and
WHEREAS, Executive is willing to remain in the employ of the Company upon
the understanding that the Company will provide income security if the
Executive's employment is terminated under certain terms and conditions; and
WHEREAS, it is in the best interests of the Company and its shareholders to
reinforce and encourage the continued attention and dedication of management
personnel, including Executive, to their assigned duties without distraction and
to ensure the continued availability to the Company of the Executive in the
event of a Change in Control.
NOW, THEREFORE, in consideration of the foregoing and other respective
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until such time as the Company notifies the Executive
of termination of the Agreement. Notwithstanding the preceding sentence, if a
Change in Control occurs, this Agreement shall continue in effect for a period
of 36 months from the date of the occurrence of a Change in Control.
2. Change in Control. No benefits shall be payable hereunder unless there
shall have been a Change in Control. For purposes of this Agreement, a "Change
in Control" of the Company shall mean a change in control which would be
required to be reported in response to Item 5(f) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Company is then subject to such reporting
requirement including, without limitation, if:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) becomes a "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly
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or indirectly, of securities of the Company representing 40% or more of the
combined voting power of the Company's then outstanding securities;
provided however, that a certain merger with a company, cMore Inc.,
discussions of which is in progress, is specifically excluded from this
Agreement, provided the Company is the surviving entity of the resultant
merger;
(b) There ceases to be a majority of the Board of Directors comprised
of individuals described in (c) below:
(c) For purposes of this Section 2 "Board of Directors" shall mean:
(A) individuals who on the date hereof constituted the Board of the
Company, and (B) any new director who subsequently was elected or nominated
for election by a majority of the directors who held such office
immediately prior to a Change in Control.
(d) Approval by shareholders of the Company if required, or if not
required, the approval by the Board of Directors, of:
(i) a merger, consolidation, or reorganization involving the
Company where the company is not the surviving company;
(ii) a complete liquidation or dissolution of the Company;
(iii) an Agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any other party
(other than a transfer to a subsidiary of the Company);
in any such cases, which transaction is actually consummated.
(e) Notwithstanding anything contained in this Agreement to the
contrary, if the Executive's employment is terminated prior to a Change in
Control and the Executive reasonably demonstrates that such termination (i)
was at the request of a third party who has indicated an intention or taken
steps reasonably calculated to effect a Change in Control and who
effectuates a Change in Control (a "Third Party") or (ii) otherwise
occurred in connection with, or in anticipation of, a Change in Control, a
Change in Control with respect to the Executive shall mean the date
immediately prior to the date of such termination of the Executive's
employment.
3. Termination Following Change in Control. If a Change in Control shall
have occurred during the term of this Agreement, Executive shall be entitled to
the benefits provided in subsection 4(d) unless such termination is (A) because
of Executive's death or Retirement; (B) by the Company for Cause or Disability;
or (C) by Executive other than for Good Reason.
(a) Disability; Retirement. If, as a result of incapacity due to
physical or mental illness, the Executive shall have been absent from the
full-time performance of Executive's duties with the Company for six
consecutive months, and within 30 days after written Notice of Termination
is given the Executive shall not have returned to the full-time performance
of the Executive's duties, the Company may terminate Executive's employment
for "Disability". Any question as to the existence of Executive's
Disability upon which Executive and the Company cannot agree shall be
determined by a qualified independent physician selected by Executive (or,
if the Executive is unable to make such selection, it shall be made by any
adult member of the Executive's immediate family), and approved by the
Company. The determination of such physician made in writing to the Company
and to Executive shall be final and conclusive for all purposes of this
Agreement. Termination by the Company or Executive of Executive's
employment based on "Retirement" shall mean termination
A-2
<PAGE>
with a normal retirement pension in accordance with the SpectraScience,
Inc. Savings and Retirement Plan.
(b) Cause. Termination by the Company of Executive's employment for
"Cause" shall mean termination upon the conviction of the Executive by a
court of competent jurisdiction for felony criminal conduct.
(c) Good Reason. Executive shall be entitled to terminate his
employment for Good Reason. For purposes of this Agreement, "Good Reason"
shall mean, without Executive's express written consent, any of the
following:
(i) the assignment to Executive of any duties inconsistent with
Executive's status or position with the Company, or a substantial
alteration in the nature or status of Executive's responsibilities
from those in effect at any time within 6 months preceding the Change
in Control or at anytime thereafter;
(ii) a reduction by the Company in Executive's annual
compensation in effect at any time within 6 months preceding a Change
in Control or at anytime thereafter;
(iii) the relocation of the Company's principal executive offices
to a location more than fifty miles from Minneapolis, Minnesota or the
Company requiring Executive to be based anywhere other than the
Company's principal executive offices except for required travel on
the Company's business to an extent substantially consistent with
Executive's prior business travel obligation;
(iv) the failure by the Company to continue to provide Executive
with benefits at least as favorable to those enjoyed by Executive
under any of the Company's pension, life insurance, medical, health
and accident, disability, deferred compensation, incentive awards,
stock options, or savings plans in which Executive was participating
at any time within 6 months preceding the Change in Control, the
taking of any action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive Executive of any
material fringe benefit enjoyed at the time of the Change in Control,
or the failure by the Company to provide Executive with the number of
paid vacation days to which Executive is entitled at the time of the
Change in Control; provided, however, that the Company may amend any
such plan or programs as long as such amendments do not reduce any
benefits to which Executive would be entitled upon termination;
(v) the failure of the Company to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement, as
contemplated in Section 6;
(vi) any purported termination of Executive's employment which is
not made pursuant to Notice of Termination satisfying the requirements
of subsection (e) below; for purposes of this Agreement, no such
purported termination shall be effective;
(vii) any material breach by the Company of any provision of this
Agreement;
(viii) the insolvency or the filing (by any party including the
Company) of a petition for bankruptcy of the Company, which petition
is not dismissed within 60 days;
(ix) any event or condition described in this Section 3(c)(i)
through (viii) that occurs prior to a Change in Control but which the
Executive reasonably demonstrates either was at the request of a Third
Party or otherwise arose in connection with, or in anticipation of,
A-3
<PAGE>
a Change in Control that actually occurs, shall constitute Good Reason
for purposes of this Agreement notwithstanding that it occurred prior
to the Change in Control.
(d) Voluntary Termination Deemed Good Reason. Not withstanding
anything herein to the contrary, if the Change in Control arises from a
transaction or series of transactions which are not authorized, recommended
or approved by formal action taken by the Board of Directors as defined in
Section 2(c) of this Agreement, Executive may voluntarily terminate his
employment for any reason following a Change in Control, and such
termination shall be deemed "Good Reason" for all purposes of this
Agreement.
(e) Notice of Termination. Any purported termination of Executive's
employment by the Company or by Executive shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section
8. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth the facts and circumstances
claimed to provide a basis for termination of Executive's employment.
(f) Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean:
(i) if Executive's employment is terminated for Disability, 30
days after Notice of Termination is given (provided that the Executive
shall not have returned to the full-time performance of the
Executive's duties during such 30 day period); and
(ii) if Executive's employment is terminated pursuant to
subsections (b), (c) or (d) above or for any other reason (other than
Disability), the date specified in the Notice of Termination (which,
in the case of a termination pursuant to subsection (b) above shall
not be less than 10 days, and in the case of a termination pursuant to
subsection (c) or (d) above shall not be less than 10 nor more than 30
days, respectively, from the date such Notice of Termination is
given).
(g) Dispute of Termination. If, within 10 days after any Notice of
Termination is given, the party receiving such Notice of Termination
notifies the other party that a dispute exists concerning the termination,
the Date of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, or by a
final judgment, order or decree of a court of competent jurisdiction (which
is not appealable or the time for appeal therefrom having expired and no
appeal having been perfected); provided, that the Date of Termination shall
be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such
dispute with reasonable diligence.
4. Compensation Upon Termination or During Disability. Following a Change
in Control of the Company, as defined in subsection 2(a), upon termination of
Executive's employment or during a period of Disability, Executive shall be
entitled to the following benefits:
(a) During any period that Executive fails to perform full-time duties
with the Company as a result of a Disability, the Company shall pay
Executive the full compensation of the Executive in effect at the
commencement of any such period, until such time as the Executive is
determined to be eligible for long term disability benefits in accordance
with the Company's insurance programs then in effect.
(b) If Executive's employment shall be terminated by the Company for
Cause or by Executive other than for Good Reason, Disability or Retirement,
the Company shall pay to Executive
A-4
<PAGE>
his full base salary through the Date of Termination at the Rate in effect
at the time Notice of Termination is given and the Company shall have no
further obligation to Executive under this Agreement.
(c) If Executive's employment shall be terminated by the Company or by
Executive for Disability or Retirement, or by reason of death, the Company
shall immediately commence payment to the Executive (or Executive's
designated beneficiaries or estate, if no beneficiary is designated) of any
and all benefits to which the Executive is entitled under the Company's
retirement and insurance programs then in effect.
(d) If Executive's employment shall be terminated (A) by the Company
other than for Cause, Retirement, or Disability; or (B) by Executive for
Good Reason; then Executive shall be entitled to the benefits provided
below:
(i) The Company shall pay Executive the Executive's full
compensation through the Date of Termination at the rate in effect at
the time the Notice of Termination is given.
(ii) In lieu of any further salary payments for periods
subsequent to the Date of Termination, the Company shall pay a
severance payment (the "Severance Payment") equal to one year of the
Executive's full compensation as defined below. For purposes of this
Section 4, compensation shall mean and include (A) every type and form
of compensation paid to Executive by the Company (or any corporation
("Affiliate") affiliated with the Company within the meaning of
section 1504 of the Internal Revenue Code of 1986, as may be amended
from time to time (the "Code")); (B) such compensation is includible
in Executive's gross income for federal income tax purposes, but
excluding compensation income recognized as a result of the grant of
restricted stock or other share grants, or the exercise of stock
options or sale of the stock so acquired and (C) the highest rate of
compensation in effect at any time within six months prior to the
Change in Control or within six months prior to the Date of
Termination. The Severance Payment shall be made in a single lump sum
within 30 days after the Date of Termination.
(iii) For a period of 18 months after the Date of Termination,
the Company shall arrange to provide at its sole expense Executive
with life, accident and health and dental insurance benefits
substantially similar to those which the Executive is receiving or
entitled to receive immediately prior to the Notice of Termination.
The cost of providing such benefits shall be in addition to (and shall
not reduce) the Severance Payment. Benefits otherwise receivable by
Executive pursuant to this paragraph (iii) shall be reduced to the
extent comparable benefits are actually received by Executive during
such period, and any such benefits actually received by Executive
shall be reported to the Company.
(iv) For a period ending on the earlier of twelve months from the
Executive's Date of Termination and the date on which the Executive
obtains subsequent full time employment, the Company shall make
available to the Executive such outplacement services that are
generally consistent with the Executive's status or position.
(v) The Company shall ensure that the Executive continues to have
complete coverage for fiduciary, liability insurance, and directors
and officers insurance for a period of six years after a Change in
Control; and will indemnify the Executive of any losses that might
result from actions taken in good faith before the Date of
Termination.
(vi) Except to the extent such payment would constitute a
"parachute payment" within the meaning of Section 280G(b) (2) of the
Code as determined under paragraph (v)
A-5
<PAGE>
below, the Company shall also pay to Executive all legal fees and
expenses incurred by Executive as a result of such termination
(including all such fees and expenses, if any, incurred in contesting
or disputing any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement).
(vii) The Severance Payment shall be reduced and offset by the
amount of any payment received or to be received by Executive in
connection with the termination of employment pursuant to the
provisions of any Company policy on severance or any successor to such
policy. If, in the opinion of tax counsel selected by the Company and
acceptable to Executive, the Severance Payment (in its full amount or
as partially reduced, as the case may be) plus all other payments or
benefits which constitute "parachute payments" within the meaning of
Section 280G(b) (2) of the Code exceeds the amount that is deductible
by the Company by reason of Section 280G, and in the opinion of such
tax counsel, the Severance Payment (in its full amount or as partially
reduced, as the case may be) plus all other payments or benefits which
constitute "parachute payments" within the meaning of Section 280G(b)
(3) of the Code are not reasonable compensation for services actually
rendered or to be rendered, within the meaning of Section 280G(b) (4)
of the Code, the Severance Payment shall be reduced by the excess of
the aggregate "parachute payments" to be paid to or for the Executive
over the aggregate "parachute payments" that would be paid to or for
the Executive without any portion of such "parachute payments" not
being deductible by reason of Section 280G of the Code. The value of
any non-cash benefit or any deferred cash payment shall be determined
by the Company in accordance with the principles of Sections 280G(d)
(3) and (4) of the Code.
(viii) If it is established pursuant to a final determination of
a court or an Internal Revenue Service proceeding that,
notwithstanding the good faith of Executive and the Company in
applying the terms of this subsection (d), the aggregate "parachute
payments" paid to or for Executive's benefit are in an amount that
would result in any portion of such "parachute payments" not being
deductible by the Company or its Affiliates by reason of Section 280G
of the Code, then Executive shall have an obligation to pay the
Company upon demand an amount equal to the sum of (A) the excess of
the aggregate "parachute payments" paid to or for the Executive's
benefit over the aggregate "parachute payments" that would have been
paid to or for the Executive's benefit without any portion of such
"parachute payments" not being deductible by reason of Section 280G of
the Code; and (B) interest on the amount set forth in clause (A) of
this sentence at the applicable federal rate (as defined in Section
1274(d) of the Code) from the date of Executive's receipt of such
excess until the date of such payment.
(e) Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Section 4 be reduced by any compensation earned by Executive as the
result of employment by another employer or by retirement benefits after
the Date of Termination, or otherwise except as specifically provided in
this Section 4.
(f) Executive shall be entitled to receive all benefits payable to the
Executive under the SpectraScience, Inc. Savings and Retirement Plan, or
any successor of such Plan and any other plan or agreement relating to
retirement benefits, which shall be in addition to, and not reduced by, any
other amounts payable to Executive under this Section 4.
(g) Executive shall be entitled to exercise all rights and to receive
all benefits accruing to Executive under any and all Company stock
purchase, restricted stock grant and stock option plans or programs, or any
successor to any such plans or programs, which shall be in addition to, and
not
A-6
<PAGE>
reduced by, any other amounts payable to Executive under this Section 4. In
addition, all of Executive's outstanding but unvested options shall vest
immediately prior to a Change in Control.
5. Funding of Payments. In order to assure the performance of the Company
or its successor of its obligations under this Agreement, the Company may
deposit in trust an amount equal to the maximum payment that will be due the
Executive under the terms hereof. Under a written trust instrument, the Trustee
shall be instructed to pay to the Executive (or the Executive's legal
representative, as the case may be) the amount to which the Executive shall be
entitled under the terms hereof, and the balance, if any, of the trust not so
paid or reserved for payment shall be repaid to the Company. If the Company
deposits funds in trust, payment shall be made no later than the occurrence of a
Change in Control. If and to the extent there are not amounts in trust
sufficient to pay Executive under this Agreement, the Company shall remain
liable for any and all payments due to Executive. In accordance with the terms
of such trust, at all times during the term of this Agreement, Executive shall
have no rights, other than as an unsecured general creditor of the Company, to
any amounts held in trust and all trust assets shall be general assets of the
Company and subject to the claims of creditors of the Company. Failure of the
Company to establish or fully fund such trust shall not be deemed a revocation
or termination of this Agreement by the Company.
6. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle Executive to
compensation from the Company in the same amount and on the same terms as
he would be entitled hereunder if he terminated his employment for Good
Reason following a Change in Control, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representative, successors, heirs, and
designated beneficiaries. If Executive should die while any amount would
still be payable to Executive hereunder if the Executive had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's designated
beneficiaries, or, if there is no such designated beneficiary, to the
Executive's estate.
7. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage pre-paid,
addressed to the last known residence address of the Executive or in the case of
the Company, to its principal office to the attention of each of the then
directors of the Company with a copy to its Secretary, or to such other address
as either party may have furnished the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
8. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the parties. No waiver by either party hereto at any time of any
breach by the other party to this Agreement of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or similar time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have
been
A-7
<PAGE>
made by either party which are not expressly set forth in this Agreement. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of Minnesota.
9. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
SpectraSCIENCE, Inc. AGREED TO AND ACCEPTED:
- ----------------------------- -----------------------------
Henry Holterman, Director Chester E. Sievert, Jr.
Vice President of Development
- -----------------------------
Nathaniel Thayer, Director
A-8
EXHIBIT 23.1 to Annual Report
on Form 10-KSB of SpectraSCIENCE, Inc.
for the year ended December 31, 1997
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-1149) pertaining to 2,264,006 shares of common stock issuable
upon conversion of preferred stock and exercise of warrants, (Form S-3 No.
33-57116) pertaining to 1,083,333 shares of common stock and 50,000 shares of
common stock issuable upon exercise of warrants, (Form S-3 No. 33-45536)
pertaining to 1,810,000 shares of common stock, (Form S-8 No. 33-63047)
pertaining to the 1991 Stock Option Plan (Form S-8 No. 33-45523) pertaining to
the 1991 Stock Plan, (Form S-8 No. 33-36385) pertaining to the 1990 Restricted
Stock Plan, (Form S-8 No. 33-22052) pertaining to the 1988 Employee Incentive
Stock Plan and (Form S-8 No. 2-93693-C) pertaining to the 1983 Employee Stock
Option Plan of GV Medical, Inc., of our report dated February 13, 1998, except
for Note 8, as to which date is March 26, 1998, with respect to the financial
statements of SpectraScience (formerly GV Medical, Inc.) included in this Annual
Report (Form 10-KSB) for the year ended December 31, 1997.
Ernst & Young LLP
Minneapolis, Minnesota
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS SUBMITTED IN THIS QUARTERLY REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> $1,638,173
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> $180,474
<CURRENT-ASSETS> $1,917,066
<PP&E> $810,136
<DEPRECIATION> $655,090
<TOTAL-ASSETS> $2,072,112
<CURRENT-LIABILITIES> $462,417
<BONDS> 0
<COMMON> $1,126,640
0
0
<OTHER-SE> $483,055
<TOTAL-LIABILITY-AND-EQUITY> $2,072,112
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
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<OTHER-EXPENSES> $1,775,090
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $(131,299)
<INCOME-PRETAX> $(1,643,791)
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<NET-INCOME> $(1,643,791)
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