As filed with the Securities and Exchange Commission on July 17, 1998
Registration No. 333-_______
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SPECTRASCIENCE, INC.
(Name of small business issuer in its charter)
--------------------
<TABLE>
<CAPTION>
<S> <C> <C>
MINNESOTA 3845 41-1448837
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
3650 ANNAPOLIS LANE, SUITE 101
MINNEAPOLIS, MINNESOTA 55447-5434
(612) 509-9999
(Address and telephone number of principal executive offices)
BRIAN T. MCMAHON
SPECTRASCIENCE, INC.
3650 ANNAPOLIS LANE, SUITE 101
MINNEAPOLIS, MINNESOTA 55447-5434
(612) 509-9999
(Name, address and telephone number of agent for service)
--------------------
COPIES TO:
KENNETH L. CUTLER, ESQ. RUBI FINKELSTEIN, ESQ.
DORSEY & WHITNEY LLP ORRICK, HERRINGTON & SUTCLIFFE LLP
PILLSBURY CENTER SOUTH 30 ROCKEFELLER PLAZA
220 SOUTH SIXTH STREET NEW YORK, NEW YORK 10112
MINNEAPOLIS, MINNESOTA 55402-1498 (212) 506-5000
(612) 340-2600
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
--------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================
Proposed Proposed
Title of each maximum maximum Amount of
class of securities Amount to be offering price aggregate registration
to be registered registered(1) per share(2) offering price(2) fee
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.25 par value . . . .2,875,000 shares $4.625 $13,296,875 $3,923
=========================================================================================================
</TABLE>
(1) Including shares of Common Stock which the Underwriters have the option to
purchase solely to cover over-allotments, if any.
(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
--------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 17, 1998
PROSPECTUS
2,500,000 SHARES
SPECTRASCIENCE, INC.
COMMON STOCK
SPECTRASCIENCE, Inc., a Minnesota corporation (the "Company"), hereby
offers (the "Offering") 2,500,000 shares of common stock, par value $0.25 per
share (the "Common Stock"). The Common Stock is quoted on the Nasdaq SmallCap
Market ("Nasdaq") under the symbol "SPSI." On July 15, 1998, the last reported
bid price of the Common Stock on Nasdaq was $4.50 per share.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
- --------------------------------------------------------------------------------
Per Share....... $ $ $
- --------------------------------------------------------------------------------
Total (3)....... $ $ $
================================================================================
(1) Excludes compensation payable to Josephthal & Co. Inc., as representative
(the "Representative") of the several Underwriters, in the form of a
nonaccountable expense allowance and a financial advisor's fee. The Company
has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting" for a description of the foregoing and certain other
arrangements between the Company and the Underwriters.
(2) Before deducting estimated expenses payable by the Company of $__________
(including the nonaccountable expense allowance and financial advisor's fee
described in note (1) above).
(3) The Company has granted the Underwriters a 45-day option to purchase up to
an additional 375,000 shares of Common Stock upon the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $_______ , $_______ and $_______,
respectively. See "Underwriting."
----------------------------------
The shares of Common Stock offered hereby are offered by the
Underwriters subject to prior sale when, as, and if delivered to and accepted by
the Underwriters and subject to approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify the Offering and to reject any order in whole or in
part. It is anticipated that delivery of the certificates for the shares of
Common Stock offered hereby will be made against payment at the offices of
Josephthal & Co. Inc., New York, New York, on or about _______, 1998.
----------------------------------
JOSEPHTHAL & CO. INC.
The date of this Prospectus is __________, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[Insert photographs of Optical Biopsy System]
The following trademarks of the Company are used in this Prospectus:
SPECTRASCIENCE(TM), Optical Biopsy(TM) System and Spectroscopic Guidewire(TM)
System. This Prospectus also includes trade names, trademarks and registered
trademarks of companies other than the Company.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING PURCHASE OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN
THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
- 2 -
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE
READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING FINANCIAL
INFORMATION, SHARE AND PER SHARE DATA ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND NO EXERCISE OF THE WARRANTS TO BE ISSUED BY THE
COMPANY TO THE REPRESENTATIVE TO PURCHASE UP TO 250,000 SHARES OF COMMON STOCK
(THE "REPRESENTATIVE'S WARRANTS"). SEE "UNDERWRITING." THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION
SET FORTH UNDER THE HEADING "RISK FACTORS--FORWARD LOOKING STATEMENTS."
THE COMPANY
SPECTRASCIENCE, Inc. (the "Company") develops and manufactures
innovative, minimally-invasive "spectroscopic systems" to facilitate real-time
differentiation and diagnosis of cancerous and diseased tissue. The Company's
systems allow the physician performing an endoscopic procedure to determine
immediately whether tissue is healthy or cancerous by directing light at the
tissue through an optical fiber and obtaining an instant spectral analysis. Use
of the Company's systems can significantly improve the endoscopist's diagnostic
accuracy, thereby enabling him to determine the best course of treatment for the
patient, reducing the need for additional procedures, minimizing the number of
biopsies taken and permitting the physician to combine a diagnostic and
therapeutic procedure in one visit. In addition, because the Company's systems
are compatible with existing endoscopes and incorporate accessory instrument
designs currently used by endoscopists, physicians can be easily trained to use
these systems.
The Company believes that its principal product, the Optical Biopsy
System (the "OBS"), will enable the Company to be the first to market an optical
biopsy system for the detection of colorectal cancer. The OBS is an endoscopic
biopsy forceps system employing proprietary flourescence spectroscopy technology
used for the differentiation and diagnosis between healthy and cancerous tissues
in the gastrointestinal tract. The Company believes that the OBS will facilitate
earlier detection of cancer, which can lead to earlier, more effective
treatment, improved patient quality of life and survival rates and reduced
patient care costs. It is estimated that approximately 7.5 million colon
endoscopies and 3.0 million upper gastrointestinal endoscopies are currently
performed each year, and the Company believes that these procedures have been
growing at a rate of approximately 9% per year. Outside of the United States,
the Company has estimated, based on available information, that the number of
colon endoscopies currently performed is comparable to the number performed in
the United States and has been growing at a similar rate.
The Company is conducting multi-center clinical trials using the OBS
for detection of colorectal cancer at the Mayo Clinic in Rochester, Minnesota,
Massachusetts General Hospital in Boston, Massachusetts, Hennepin County Medical
Center in Minneapolis, Minnesota and Minnesota Gastroenterology P.A. in
Minneapolis, Minnesota. The Company is also conducting a multi-center clinical
trial for the detection of esophageal cancer at the Mayo Clinic and the Hennepin
County Medical Center. During the third quarter of 1998, the Company expects to
file a pre-market application ("PMA") with the Food and Drug Administration (the
"FDA") relating to the use of the OBS in the detection of colorectal cancer. The
Company has also developed the Spectroscopic Guidewire System, which uses
similar technology for cardiovascular applications, including coronary artery
disease and stroke.
The Company's objective is to become a leader in the development and
commercialization of advanced diagnostic products to differentiate in real time
between healthy and cancerous tissues. The Company intends to achieve this
objective using the following strategy: (i) commercializing the OBS to become
the first to market an endoscopic optical biopsy system for colorectal
applications,
- 3 -
<PAGE>
(ii) demonstrating to third party payors and managed care companies the clinical
utility and efficacy of the OBS and resulting improved patient outcomes, (iii)
demonstrating to physicians the ease of use of the OBS, (iv) collaborating with
strategic partners to market and distribute the OBS, and (v) leveraging the
Company's core technologies into other medical specialties, including the
detection of cancer in the lungs, urinary tract, prostate, cervix and other
minimally-invasive endoscopic and laparascopic applications.
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 maintains a web-site at
http://www.spectrascience.com. The information contained on the Company's web
site shall not be deemed to be a part of this Prospectus.
THE OFFERING
Common Stock offered by the
Company.......................... 2,500,000 shares
Common Stock to be outstanding
after the Offering............... 7,124,338 shares (1)
Use of proceeds ................. Continued development and testing of the
OBS; capital expenditures, including
primarily the development of manufacturing
and marketing activities relating thereto;
research and development; and working
capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq SmallCap Market symbol .. SPSI
- --------------
(1) Excludes, as of March 31, 1998, (i) 1,254,144 shares of Common Stock
issuable upon exercise of outstanding stock options at a weighted average
exercise price of $4.27 per share, (ii) 145,120 shares of Common Stock
reserved for future issuance under the Company's 1991 Stock Option Plan and
(iii) 635,952 shares of Common Stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $6.47 per share. See
"Management--Executive Compensation" and "Description of Securities."
- 4 -
<PAGE>
SUMMARY FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus. The statement of operations data set forth for the years ended
December 31, 1996 and 1997 and the balance sheet data at December 31, 1996 and
1997 are derived from the financial statements audited by Ernst & Young LLP
included elsewhere in this Prospectus. The statement of operations data as of
and for the three months ended March 31, 1997 and 1998 have been derived from
unaudited financial statements of the Company which, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair representation of such data. The results of operations for
the three months ended March 31, 1998 are not necessarily indicative of the
results of operations to be expected for the entire year ending December 31,
1998.
<TABLE>
<CAPTION>
Three
Year Ended Months Ended
December 31, March 31
-------------------------- --------------------------
1996 1997 1997 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ..................................$ -- $ -- $ -- $ --
Costs and expenses:
Research and development ................ 998,137 1,095,281 264,058 337,929
General and administrative .............. 723,825 679,809 223,837 219,140
----------- ------------ ----------- ------------
Loss from operations ...................... (1,721,962) (1,775,090) (487,895) (557,069)
Net interest income ....................... 176,043 131,299 38,765 19,210
----------- ------------ ----------- ------------
Net loss .................................. (1,545,919) (1,643,791) (449,130) (537,859)
=========== ============ =========== ===========
Net loss per share (1) .................... $ (0.47) $ (0.37) $ (0.10) $ (0.12)
=========== ============ =========== ===========
Shares used to compute net
loss per share (1) ...................... 3,276,193 4,467,233 4,408,972 4,521,843
</TABLE>
March 31, 1998
---------------------------------------
Actual As Adjusted(2)
-------------- --------------
BALANCE SHEET DATA:
Working capital.................... $ 1,500,424 $11,662,768
Total assets....................... 1,982,700 12,145,044
Total liabilities.................. 335,303 335,303
Deficit accumulated during the
development stage (3)......... (44,675,087) (44,675,087)
Total shareholders' equity......... 1,647,397 11,809,740
- ------------------------
(1) See Note 1 of Notes to the Financial Statements for an explanation of the
method used to determine the number of shares to compute net loss per share.
(2) As adjusted to reflect the sale of 2,500,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom, assuming
a price of $4.625 per share after deducting the underwriting discount, the
non-accountable expense allowance, the financial advisor's fee and other
estimated offering expenses. See "Use of Proceeds" and "Capitalization."
(3) Includes an accumulated deficit of $34,638,007 incurred prior to October 1,
1992, which is the first day of the quarter in which the Company began
development of its current products and changed its name to "SPECTRASCIENCE,
Inc." See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."
- 5 -
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FORM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS. SEE "--FORWARD-LOOKING STATEMENTS."
LIMITED OPERATING HISTORY; SIGNIFICANT AND CONTINUING LOSSES
The Company has generated minimal revenues to date and no revenues on
the OBS and has sustained significant operating losses each year since its
inception. To date, the Company has engaged primarily in researching,
developing, testing and obtaining regulatory clearances for its products. Net
losses for the years ended December 31, 1996 and 1997 and in the three months
ended March 31, 1998 were approximately $1.55 million, $1.64 million and $0.45
million, respectively. As of March 31, 1998, the Company had an accumulated
deficit of approximately $44.7 million. Of this amount, approximately $10.0
million has been incurred by the Company since October 1992 when the Company
began the development of its current products and changed its name. The Company
expects its operating losses to continue through at least the end of calendar
year 2000 as it continues to expend substantial funds for clinical trials in
support of regulatory approvals, expansion of research and development
activities, establishment of commercial-scale manufacturing capabilities and
expansion of sales and marketing activities. The Company's ability to achieve
profitable operations will be dependent in large part on regulatory approval of
the OBS and the Company's ability to successfully commercialize the OBS. Any
commercialization of the Company's products will require substantial
development, clinical, regulatory, manufacturing, sales and marketing and other
expenditures. There can be no assurance that any of the Company's potential
products will be successfully commercialized, that the Company will achieve
significant revenues or that the Company will achieve or sustain profitability.
UNCERTAINTY OF HEALTH CARE REIMBURSEMENT
The Company plans to market and sell its OBS and other products
primarily through hospitals and clinics. In the United States, the purchasers of
medical devices generally rely on Medicare, Medicaid, private health insurance
plans, health maintenance organizations and other sources of third party
reimbursement for health care costs to reimburse all or part of the cost of the
procedure in which the medical device is used. Sales of the OBS and other
proposed products will be substantially dependent on the availability of
adequate reimbursement from third-party payors of procedures carried out through
use of the Company's products.
The OBS is not currently approved for reimbursement by third party
payors, and there can be no assurance that the OBS will be approved for any
third party reimbursement, even if it proves to play a significant role in the
early detection and subsequent treatment of colorectal cancer. Third-party
payors are increasingly challenging the pricing of medical products and
procedures. Even if a procedure is eligible for reimbursement, the level of
reimbursement may not be adequate. Additionally, payors may deny reimbursement
if they determine that the device used in a treatment was unnecessary,
inappropriate or not cost-effective, experimental or used for a non-approved
indication. Any failure to obtain third-party reimbursement for diagnostic
procedures using the Company's products or treatment procedures that rely on the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Third-Party Reimbursement."
The Company is unable to predict what additional legislation or
regulation, if any, relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future, or what effect such legislation
or regulation would have on the Company. Reforms may include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private health
- 6 -
<PAGE>
insurance premiums and Medicare and Medicaid spending, greater reliance on
prospective payment systems, the creation of large insurance purchasing groups
and fundamental changes to the health care delivery system. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative health care delivery systems and payment mechanisms. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when such proposals may be adopted or what
impact they may have on the Company. See "Business--Government Regulation" and
"--Third-Party Reimbursement."
NO ASSURANCE OF TIMELY REGULATORY APPROVAL; GOVERNMENT REGULATION
The design, manufacture, labeling, distribution and marketing of the
Company's products are subject to extensive and rigorous government regulation
in the United States and internationally, and the process of obtaining required
regulatory approvals is lengthy, expensive and uncertain. The FDA classifies
medical devices into one of three classes, Class I, Class II or Class III. This
classification is based on the controls deemed necessary by the FDA to ensure
the safety and efficacy of the device. Class I devices are those whose safety
and efficacy can reasonably be ensured through the use of general controls, such
as labeling, adherence to the FDA's Quality System Regulations ("QSR")
requirements and the 510(k) process of marketing pre-notification. Class II
devices are those whose safety and efficacy can reasonably be ensured through
implementation of general and special controls, such as performance standards,
post-market surveillance, patient registries and FDA guidelines. Class III
devices are those devices that must receive PMA approval to ensure their safety
and efficacy. They are generally life-sustaining, life-supporting or implantable
devices, and also include devices that are not substantially equivalent to a
legally marketed Class I or Class II device or to a Class III device first
marketed prior to May 28, 1976 for which a PMA has not yet been requested by the
FDA. The OBS is a Class III device that requires PMA approval prior to
commercialization.
Securing FDA approval requires the submission to the FDA o extensive
clinical data and supporting information. The process of obtaining FDA and other
required regulatory approvals is lengthy, expensive and uncertain and typically
requires from 180 days to several years from the date of FDA filing, if
premarket approval is obtained at all. The OBS has been the subject of ongoing
clinical studies at the Mayo Clinic, Massachusetts General Hospital, Hennepin
County Medical Center and Minnesota Gastroenterology P.A. Although initial
clinical testing has indicated that the OBS is safe and effective, the FDA, in a
pre-submission meeting with the Company in April 1998, requested clinical data
on additional patients in order to demonstrate the reproducibility of its
clinical results prior to submitting a PMA application. The Company expects to
obtain sufficient clinical data to support a PMA for the OBS by August 1998 and
expects to submit a PMA application in the third quarter of 1998. There can be
no assurance, however, that the Company's clinical trials will be satisfactorily
completed during the third quarter, that the PMA application will be approved by
the FDA or that the FDA will not request additional data or otherwise require
that the Company conduct further clinical trials, thereby causing the Company
additional delay and expense. In addition, further clinical trials may identify
significant technical or other obstacles to be overcome prior to obtaining
necessary regulatory approvals. Other risks attendant to the clinical trials
include the unpredictability of the time frame for completion due to possible
patient unavailability, potential changes in hospital procedures and policies,
and potential changes in the principal investigators leading such clinical
trials. Even if such obstacles are identified and overcome, regulatory approval
for, and resulting commercialization of, the OBS may be delayed. If the OBS does
not prove to be safe and effective in clinical trials, or if the Company is
otherwise unable to obtain regulatory approval or commercialize the OBS
successfully, the Company's business, financial condition and results of
operations will be materially adversely affected. See "Business--Clinical
Trials" and "--Government Regulation."
In order to obtain regulatory approval, the Company will be required to
adhere to the FDA's QSR requirements, the successor to the current Good
Manufacturing Practices formerly required by the FDA, and similar regulations in
other countries, including ISO 9001 standards in the European Union, which
include
- 7 -
<PAGE>
testing, control, and documentation requirements. Ongoing compliance with QSR,
ISO 9001 and other applicable regulatory requirements will be monitored through
periodic inspections by federal and state agencies in the United States and by
comparable agencies in other countries. Any failure of the Company to comply
with QSR or ISO 9001 standards may result in the Company being required to take
corrective actions, such as modification of its manufacturing policies and
procedures. In addition, the Company may be required to cease all or part of its
operations for some period of time until it can demonstrate that appropriate
steps have been takento comply with QSR or ISO 9001 regulations. There can be no
assurance that the Company will be found in compliance with QSR or ISO 9001
standards in future audits by regulatory authorities or that the Company will
not experience difficulties in the course of developing its manufacturing
capability. A failure to complywith QSR or ISO 9001, or to develop its
manufacturing capability in compliance with such standards, would prohibit the
Company from manufacturing and distributing its products and therefore could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Sales of medical devices outside the United States are subject to
regulatory requirements that vary from country to country with respect to the
time typically required for approval and the degree of investigation. The
European Union has adopted a new Medical Device Directive, which was implemented
in all countries of the European Union in July 1998. The Company is required to
obtain ISO 9001 certifications necessary to enable the Company to affix the
required CE mark to its products. The CE mark is an international symbol of
adherence to certain quality assurance standards and compliance with applicable
European medical device directives which, once affixed, enables a product to be
sold in member countries of the European Union. The Company has not obtained
such certifications and there can be no assurance it will be able to do so in a
timely manner. There can be no assurance that the Company will obtain regulatory
approvals in such countries on a timely basis or at all or that it will not be
required to incur significant costs in obtaining or maintaining its non-U.S.
regulatory approvals. Delays in receipt of or failure to receive such approvals,
the loss of previously obtained approvals, or failure to comply with existing or
future regulatory requirements would have a material adverse effect on the
Company's business, financial condition and results of operation. See
"Business--Government Regulation."
Regulatory approvals, even if granted, may include significant
limitations on the indicated uses for which the product may be marketed. In
addition, the FDA and certain foreign regulatory authorities may impose numerous
other requirements with which medical device manufacturers must comply. Product
approvals could be withdrawn for failure to comply with regulatory standards or
the occurrence of unforeseen problems following the initial marketing. Failure
to comply with applicable regulatory requirements, including the marketing of
products for unapproved uses, could result in, among other things, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal by a government to grant premarket approval
for devices, withdrawal of approvals and criminal prosecution. Any such failure
to receive regulatory approval for the OBS or the Company's other products would
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE ON PRINCIPAL PRODUCT
The Company, which has not yet commercialized any of its products,
anticipates that for the foreseeable future it will be solely dependent on the
successful development and commercialization of the OBS. The OBS will require
further clinical testing as well as regulatory approval before it can be
marketed in the United States or internationally. There can be no assurance that
the Company's development efforts will be successful or that the OBS will be
shown to be safe or effective, approved by regulatory authorities, be capable of
being manufactured in commercial quantities at acceptable costs or be
successfully marketed. In addition, there can be no assurance that demand for
the OBS will be sufficient to allow profitable operations. Even though the
Company is in the process of developing new products in addition to the OBS,
there can be no assurance that such development efforts will be successful or
that any resulting products will achieve market commercialization. Failure of
the OBS to be successfully commercialized would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
- 8 -
<PAGE>
Operations," "Business--The SPECTRASCIENCE Solution," "--Sales and Marketing,"
"--Manufacturing" and "--Clinical Trials."
UNCERTAINTY OF MARKET ACCEPTANCE
There can be no assurance that the OBS or other products will gain any
significant degree of market acceptance among physicians, patients and health
care payors, even if clinical trials demonstrate safety and efficacy and
necessary regulatory and reimbursement approvals are obtained. The Company
believes that physicians' acceptance of procedures performed using the Company's
products will be essential for market acceptance of the OBS. The Company
believes that physicians will not recommend that procedures be performed using
the OBS until such time, if at all, as clinical data or other factors
demonstrate the efficacy of such systems as compared to traditional diagnostic
and treatment methodologies. Even if the clinical efficacy and safety of the OBS
is established, endoscopists and other physicians may elect not to recommend the
procedures. Although the OBS is designed to be similar to the biopsy forceps
currently used by endoscopists, broad use of the OBS may require some additional
training of physicians, and the time required to provide such widespread
training could adversely affect market acceptance. Failure of any of the
Company's products to achieve market acceptance could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Business--The SPECTRASCIENCE Solution," "--Sales and Marketing" and
"--Clinical Trials."
UNCERTAIN ABILITY TO MANAGE GROWTH
In order to complete clinical trials in progress, prepare additional
products for clinical trials, and develop future products, the Company believes
that it will be required to expand its operations, particularly in the areas of
research and development, manufacturing, quality assurance and sales and
marketing. Whether the Company can successfully manage the transition to a
larger-scale commercial enterprise will depend upon a number of factors,
including obtaining additional regulatory approvals and increasing its
commercial manufacturing, sales and marketing capabilities, as well as
establishing relationships with distributors in the United States and
internationally. The Company's inability to establish such capabilities and
relationships would have a material adverse effect on its business, financial
condition and results of operations. See "--Lack of Sales and Marketing
Experience; Reliance on Distributors and Corporate Partners," "--Limited
Manufacturing Experience; Scale-Up Risk," "Business--Sales and Marketing" and
"Business--Manufacturing."
As the Company expands its operations, such expansion will likely
result in new and increased responsibilities for management personnel. To
accommodate any such growth and compete effectively, the Company will be
required to implement and improve information systems, procedures and controls,
and to expand, train, motivate and manage its work force. There can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's future operations or that its capabilities,
procedures or controls will be designed, implemented or improved in a timely and
cost-effective manner. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train, motivate or
manage employees as required by future growth, if any, would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Dependence on Key Personnel" and "Business--Employees" and
"Management."
LACK OF SALES AND MARKETING EXPERIENCE; RELIANCE ON DISTRIBUTORS AND CORPORATE
PARTNERS
At present, the Company has limited marketing and sales capability.
Although the Company intends to establish a small in-house marketing and
business development group to assist in the commercialization of the Company's
products worldwide and to provide clinical education to physicians, nurses and
laboratory technicians, the Company's future success will depend, in part, on
its ability to enter into and successfully develop strategic partnerships and
relationships with distributors to market and distribute its products. The
Company intends to sell its products in the United States and outside the United
States through strategic partners and international distributors, and the
Company is currently seeking to enter into relationships with such strategic
partners and international distributors. The
- 9 -
<PAGE>
prospects for relationships with strategic partners and distributors will depend
on the other parties' interests in the specific products involved and their
willingness and ability to perform the role contemplated by the Company. The
Company may have limited or no control over the resources that any particular
strategic partner or distributor devotes to its relationship with the Company.
Moreover, there can be no assurance that the Company will be successful in
locating qualified parties with which to enter into additional strategic partner
or distributor relationships or that any such relationships can be maintained or
will ultimately prove beneficial to the Company. In the event the Company is not
successful in developing such additional relationships, or if such relationships
do not prove successful, the Company's business, financial condition and results
of operations could be materially adversely affected. See "Business--Sales and
Marketing."
DEPENDENCE ON SOLE OR LIMITED SOURCES OF SUPPLY
The Company purchases raw materials and certain key components of its
products, including the Optical Biopsy Forceps (the "Forceps") and certain
components of the Optical Biopsy System Console (the "Console"), from sole,
single or limited sources of supply. For certain of these components, there are
relatively few alternative sources of supply. The Company currently has an
agreement with a leading manufacturer of medical forceps in the United States.
Under this agreement, the contract manufacturer has agreed to supply the Company
with such quantity of Forceps as the Company requires. This agreement expires in
June 2000 but may be renewed by the contract manufacturer for an additional two
years upon six months' notice. However, there can be no assurance that such
agreement will be renewed, and establishing additional or replacement suppliers
for the Forceps or for the laser light source and spectrophotometer used in the
Console may not be accomplished quickly and could involve significant additional
costs. The inability of any of the Company's suppliers to provide an adequate
supply of components in a timely manner, or the inability of the Company to
locate qualified alternative suppliers for materials and components at
reasonable expense, could adversely affect the Company's business, financial
condition and results of operations. Any delays or shortages, particularly as
the Company scales up its manufacturing activities in support of sales, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Manufacturing."
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK
To date, the Company has no experience in manufacturing its products
in commercial quantities. For the Company to be financially successful, it must
manufacture its products in accordance with regulatory requirements, in
commercial quantities, at appropriate quality levels and at acceptable costs.
The Company has no experience manufacturing its products in the volumes that
will be necessary for the Company to achieve significant commercial sales, and
there can be no assurance that reliable, high-volume manufacturing capacity can
be established or maintained at commercially reasonable costs. If the Company
receives FDA or foreign approval for its products, it will need to expend
significant capital resources and develop the necessary expertise to establish
large-scale manufacturing capabilities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control, component supply shortages, lack
of qualified personnel, compliance with applicable regulations, and the need for
further regulatory approval of new manufacturing processes. The Company believes
that its current facility will be adequate to support its commercial assembly
and manufacturing activities in the near term but that additional space may be
required within the next two years in order to commercialize the OBS. Any
inability of the Company to establish and maintain large-scale manufacturing
capabilities could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Manufacturing."
HIGHLY COMPETITIVE INDUSTRY
The medical device industry is highly competitive. Although the Company
is not aware of any direct competitors using an endoscopic optical biopsy system
to detect and differentiate between healthy and cancerous tissues in the
gastrointestinal tract, there can be no assurance that the Company will be the
first to market such a system or to market such a system effectively. The
Company's principal competitor in
- 10 -
<PAGE>
applying spectroscopy to the detection of cancer is Xillix Technologies Corp.
("Xillix"), a company which has obtained FDA approval for its LIFE-Lung
fluorescence system that utilizes light-based spectroscopy for the detection and
localization of lung cancer. Xillix is beginning development of a system for the
detection of gastrointestinal cancers of the esophagus, stomach, intestines and
colon. Other competitors in the field of spectroscopy include Mediscience
Technology Corp., LifeSpex, Inc., Medispectra Inc., Fonet Medical Technologies,
Inc. and SpectRx, Inc. The Company believes that these other competitors are
primarily development stage companies that are in the process of developing
spectroscopic technology for early cancer detection. Many of the Company's
competitors and potential competitors have substantially greater capital
resources than does the Company and also have greater resources and expertise in
the areas of research and development, obtaining regulatory approvals,
manufacturing and marketing. There can be no assurance that the Company's
competitors and potential competitors will not succeed in developing, marketing
and distributing technologies and products that are more effective than those
developed and marketed by the Company or that would render the Company's
technology and products obsolete or noncompetitive. Additionally, there can be
no assurance that the Company will be able to compete effectively against such
competitors and potential competitors in terms of manufacturing, marketing and
sales. See "Business--Competition."
NEED FOR CONTINUOUS PRODUCT DEVELOPMENT; RISK OF RAPID TECHNOLOGICAL CHANGE
The medical device industry is characterized by rapid innovation and
technological change. Any product developed by the Company that gains regulatory
clearance or approval will have to compete for market acceptance and market
share. Since the medical device industry is subject to rapid technological
innovation, the life cycle of any particular product is short and, as a result,
an important factor in such competition may be the timing of market introduction
of competitive products. Accordingly, the relative speed with which the Company
can develop products, gain regulatory approval and reimbursement acceptance and
supply commercial quantities of the product to the market are expected to be
important competitive factors. There can be no assurance that alternative
diagnostic systems or other discoveries and developments with respect to
diagnostic and treatment of cancer and other human diseases will not render the
Company's products obsolete. See "Business--Competition."
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trade secret
and contractual provisions to protect its proprietary rights. The Company
currently has a number of allowed and pending patents covering different aspects
of the OBS. For the OBS, the Company currently owns exclusive rights to a total
of five issued, allowed and pending U.S. patents and applications, and two
pending international patent applications. One issued U.S. patent, three pending
U.S. patent applications and one pending international patent application are
owned by the Company. The Company is the exclusive licensee of one allowed U.S.
application and the other international patent application. For the Company's
Spectroscopic Guidewire System (the "SGS"), the Company currently has three
issued U.S. patents and ten issued foreign patents. See "Business--Patents and
Proprietary Rights."
The Company's success depends and will continue to depend in part on
its ability to maintain patent protection for its products and processes, to
preserve its trade secrets and to operate without infringing upon the
proprietary rights of third parties. The patent and trade secret positions of
medical device companies, including those of the Company, are uncertain and
involve complex and evolving legal and factual questions. The protection sought
in a patent application can be denied or significantly reduced before or after
the patent is issued. Further, even if granted, there can be no assurance that
these patents will provide the Company with any protection from competitors or
that, if they do provide a meaningful level of protection, that the Company will
have the financial resources necessary to enforce its patent rights.
Consequently, there can be no assurance that any patents will issue from any
pending application or from any future patent application, that the scope of the
patent protection will exclude competitors or provide competitive advantages to
the Company, that competitors will not be able to design around any issued
patents, that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held by the Company.
- 11 -
<PAGE>
Further, the Company would be responsible for defending against charges of
infringement of third party patents and other intellectual property rights by
the Company's products and activities. There can be no assurance that third
parties will not assert intellectual property infringement claims against the
Company in the future with respect to current or future products or activities,
or that any such assertion may not require the Company to refrain from the sale
of products, to modify its products, enter into royalty agreements or undertake
costly litigation.
Since United States patent applications are secret until patents are
issued, or corresponding foreign applications are published in other countries,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, the Company cannot be certain that it was
the first to file patent applications for or the first to invent such
inventions. In addition, there can be no assurance that competitors, many of
which have substantial resources, will not seek or have not sought to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets. Furthermore, the laws of certain foreign countries do not
protect the Company's intellectual property rights to the same extent as do the
laws of the United States.
The Company also relies upon unpatented proprietary technology, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to or
disclose the Company's proprietary technology or that the Company can
meaningfully protect its rights in such unpatented proprietary technology. The
Company's policy is to require each of its employees, consultants and advisors
to execute a confidentiality agreement upon the commencement of an employment or
consulting relationship with the Company. These agreements generally provide
that all inventions conceived by the individual during the term of the
relationship shall be the exclusive property of the Company and shall be kept
confidential and not be disclosed to third parties except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's proprietary information in the
event of unauthorized use or disclosure of such information or that, if they do
provide a meaningful level of protection, that the Company will have the
financial resources necessary to enforce its proprietary rights. See
"Business--Patents and Proprietary Rights."
RISK OF INTELLECTUAL PROPERTY LITIGATION
The medical device industry in general has been characterized by
substantial litigation. The Company could incur substantial expense in defending
itself in suits brought against it with respect to patent or other intellectual
property rights owned by third parties or in suits in which the Company's
patents or other intellectual property rights may be asserted by it against
another party. Litigation, which could also result in substantial diversion of
effort by the Company, may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company, to defend
the Company against claimed infringement of the rights of others or to determine
the ownership, scope or validity of the proprietary rights of the Company and
others. An adverse determination in any such litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties and could prevent the Company from
manufacturing, selling or using its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON LICENSE AGREEMENTS
The Company has acquired certain proprietary rights under license
agreements. The Company currently has an exclusive licensing agreement with the
Massachusetts Institute of Technology for seventeen issued and pending U.S.
patents and applications and a number of corresponding foreign patents and
applications relating to vascular and cardiovascular applications of diagnostic
laser catheters and also has a licensing arrangement with the Massachusetts
General Hospital's Wellman Laboratories of Photomedicine which gives the Company
an exclusive license to certain cancer detection patents and an exclusive
license to an allowed patent application to the OBS. There can be no assurance
that these license agreements will continue or will provide the proprietary
rights
- 12 -
<PAGE>
that the Company requires in order to develop and commercialize its products. In
order to manufacture and market certain products, the Company may be required to
obtain additional licenses to patents or other proprietary rights of third
parties. There can be no assurance that the Company will be able to license such
technology under terms acceptable to the Company, if at all. If the Company does
not obtain such licenses, or if a default under or termination of existing
license agreements were to occur, the Company could encounter delays in
introducing products while it attempts to design around such patents or license
agreements. There can be no assurance that the Company would be able to design
around such patents or license agreements or, even if successful, the Company
could find that the development, manufacture or sale of such products could be
adversely affected. See "Business--Patents and Proprietary Rights."
DEPENDENCE ON KEY PERSONNEL
The Company's success is highly dependent on the retention of principal
members of its management and scientific staff and the recruitment of additional
qualified personnel. Key employees of the Company include Brian T. McMahon, its
Chairman and Chief Executive Officer and Chester E. Sievert, Jr., its President
and Chief Operating Officer. There is intense competition from other companies,
research and academic institutions and other organizations for qualified
personnel with skills required by the Company. There can be no assurance that
the Company will be successful in hiring or retaining such qualified personnel.
The loss of key personnel or the inability to hire or retain qualified personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not currently maintain any
key man life insurance.
NEED FOR CHIEF FINANCIAL OFFICER
The Company's Chief Financial Officer announced his resignation in July
1998. Although the Company is actively searching for a new Chief Financial
Officer, the competition for qualified candidates is intense. There can be no
assurance that the Company will be successful in retaining a qualified
individual before the closing of this Offering. See "--Dependence on Key
Personnel."
NEED FOR ADDITIONAL CAPITAL; UNCERTAINTY OF ADDITIONAL FINANCING
The development of the Company's products will require the commitment
of substantial funds to conduct clinical studies, conduct research and
development, to establish commercial scale manufacturing capabilities, and to
market its products. The Company's future capital requirements will depend on
many factors, including the progress of the Company's research and development,
the scope and results of clinical trials, the extent to which the OBS and other
products gain market acceptance, actions relating to regulatory and
reimbursement matters, the effect of competitive products, the cost and effect
of future marketing programs, the resources the Company devotes to manufacturing
and developing its products, general economic conditions and various other
factors. The timing and amount of such capital requirements cannot adequately be
predicted. Consequently, although the Company believes that it has adequate
resources to fund its operations through the end of 1998 and that the net
proceeds from the Offering will provide adequate funding for its capital
requirements for at least 12 months after the Offering, there can be no
assurance that the Company will not require additional funding or that such
additional funding, if needed, will be available on terms satisfactory to the
Company, if at all. The Company may be required to seek additional funds through
debt or equity financing, arrangements with corporate partners or from other
sources. Issuances of additional equity securities could result in substantial
dilution in ownership and control to the then-existing shareholders. If the
Company is unable to obtain additional financing when needed, the Company may be
required to curtail its operations significantly or to obtain funds through
strategic partners that may require the Company to relinquish significant rights
to its technology or potential markets.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of securities of high technology medical device
companies has historically been highly volatile, and the market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. Factors such as
- 13 -
<PAGE>
fluctuations in the Company's operating results, announcements of technological
innovations or new diagnostic or therapeutic products by the Company or its
competitors, government regulations, developments in patent or other proprietary
rights, public concern as to the safety of products developed by the Company or
others and general market conditions may have a significant adverse effect on
the market price of the Common Stock. In addition, the Company's Common Stock is
currently thinly-traded and, as a result, trades in a small number of shares of
the Company's Common Stock, whether on the buying side or the selling side, may
result in significant price movements.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE
The Company faces an inherent business risk of exposure to product
liability claims in the event a patient is adversely affected by any of its
products. Clinical trials or marketing of any of the Company's products may
expose the Company to liability claims resulting from the use of such products.
These claims might be made directly by consumers, health care providers or by
others selling the products. The Company currently maintains a product liability
insurance policy with an aggregate and per occurrence limit of $2,000,000. There
can be no assurance that such limits would be sufficient to protect the Company
in the event of litigation. Moreover, there can be no assurance that the Company
will be able to maintain such insurance. An inability to maintain insurance
under terms acceptable to the Company could prevent or inhibit the clinical
testing or commercialization of products developed by the Company. In addition,
there can be no assurance, regardless of the availability of product liability
insurance, that the Company will be adequately protected from claims that might
be brought against it. A product liability claim or recall could have a material
adverse effect on the Company's business, financial condition and results of
operations. Even if a product liability claim is not successful, the time and
expense of defending against such a claim may adversely affect the Company's
business, financial condition and results of operations.
EFFECT OF ANTI-TAKEOVER PROVISIONS
Certain provisions of Minnesota law could have an anti-takeover effect.
These provisions are intended to provide management flexibility to enhance the
likelihood of continuity and stability in the composition of the Company's Board
of Directors and in the policies formulated by the Board and to discourage an
unsolicited takeover of the Company, if the Board determines that such a
takeover is not in the best interests of the Company and its shareholders.
However, these provisions could have the effect of discouraging certain attempts
to acquire the Company which could deprive the Company's shareholders of
opportunities to sell their shares of Common Stock at prices higher than
prevailing market prices. See "Description of Securities--Minnesota Business
Corporation Act."
The Company's Board of Directors has the authority to issue up to
20,000,000 shares of undesignated preferred stock and to determine the price,
rights, preferences and privileges of those shares without any further vote or
action by the shareholders. The rights of holders of Common Stock will be
subject to, and may be adversely affected by, the rights of holders of any
preferred stock that may be issued in the future. There are presently no shares
of preferred stock outstanding. Although the Company has no present intention to
issue shares of preferred stock after consummation of the Offering, any issuance
of undesignated preferred stock, while potentially providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company.
BROAD DISCRETION AS TO USE OF PROCEEDS
Assuming an offering price of $4.625 per share, of the approximately
$10.1 million of net proceeds from the Offering ($11.7 million if the
Underwriters' over-allotment option is exercised in full), approximately $3.5
million, or 35% ($5.1 million, or 43%, if the Underwriters' over-allotment
option is exercised in full), has not currently been allocated for specific uses
by the Company. Further, the Company's estimate of the use of the proceeds from
the Offering is based upon its current business plans and projections in light
of anticipated costs and expenditures and demand for the Company's products. The
amounts and timing of the Company's actual expenditures for the purposes
described above
- 14 -
<PAGE>
will depend upon a number of factors, including the progress of the Company's
clinical trials, actions relating to regulatory and reimbursement matters, the
rate of market acceptance of the Company's products, the level of resources
devoted to expanding the Company's marketing activities and manufacturing
capabilities, and the Company's research and development activities. As a
result, the Company's management will retain broad discretion in the allocation
of the net proceeds. See "Use of Proceeds."
NO DIVIDENDS
The Company has never paid or declared a dividend on its capital stock.
The Company intends to retain any earnings to fund development of its business
and does not intend to pay any cash dividends in the foreseeable future. See
"Dividend Policy."
FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus, including, but not limited
to, those relating to development and commercialization of the Company's
products; the future development of sales and marketing capabilities; the
uncertainty of health care reimbursement; the need for regulatory approval; the
development of relationships with distributors and strategic partners; the
ability to produce its products in commercial quantities; the development of
additional patents and proprietary rights; future marketing results; the effect
of litigation; future operating expenses; future margins; future stock
issuances; future dividend plans; retention of employees or management;
availability of facilities; use of offering proceeds; ability to continue growth
and implement growth and business strategy; the ability of expected sources of
liquidity to support working capital and capital expenditure requirements; and
any other statements regarding future growth, future cash needs, future
operations, business plans and future financial results; and any other
statements which are not historical facts are forward-looking statements. When
used in this document, the words "anticipate," "estimate," "expect," "may,"
"plans," "project," "potential," and similar expressions are intended to be
among the statements that identify forward-looking statements. Such statements
involve risks and uncertainties, including, but not limited to, those relating
to the Company's dependence on its ability to attract and retain skilled
employees and other personnel; the intense competition within the medical device
industry; the development of demand for the OBS and the Company's other
products; the uncertainty of the Company's ability to manage and continue its
growth and implement its business strategy; the Company's dependence on the
availability of certain manufacturers and suppliers; the effects of government
regulation and regulatory compliance; the results of litigation; general
economic conditions; the Company's potential exposure to product liability
claims; the Company's future financial and operating results, cash needs and
demand for its services; failure of information systems, including as a result
of Year 2000 problems; and the Company's ability to maintain and comply with
customs regulations and other government regulations, permits and licenses; as
well as other factors detailed in "Risk Factors" and elsewhere in this
Prospectus and in the Company's others filings with the Securities and Exchange
Commission. Should one more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
- 15 -
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares
of Common Stock offered hereby are estimated to be approximately $10,075,000
($11,650,000 if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $4.625 per share and after deducting the
underwriting discount, the non-accountable expense allowance, the financial
advisor's fee and other estimated offering expenses payable by the Company.
The Company anticipates that it will use approximately $4.0 million of
the net proceeds of the Offering for funding research and development,
approximately $1.5 million to establish sales and marketing capabilities and
approximately $1.1 million for capital expenditures. The Company will use the
balance of the net proceeds, approximately $3.5 million, and any additional
proceeds from the exercise of the Underwriters' over-allotment option, for
working capital and general corporate purposes. Pending such uses, the Company
intends to invest the net proceeds of the Offering in short-term,
interest-bearing investment-grade securities.
The Company's estimate of the use of the proceeds from the Offering
is based upon its current business plans and projections in light of anticipated
costs and expenditures and demand for the Company's products. The amounts and
timing of the Company's actual expenditures for the purposes described above
will depend upon a number of factors, including the progress of the Company's
clinical trials, actions relating to regulatory and reimbursement matters, the
rate of market acceptance of the Company's products, the level of resources
devoted to expanding the Company's marketing activities and manufacturing
capabilities and the Company's research and development activities. The proceeds
from the Offering, together with currently available funds, are expected to
enable the Company to maintain its current and planned operations for at least
12 months. See "Risk Factors--Need for Additional Capital; Uncertainty of
Additional Financing," "--Broad Discretion as to Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
- 16 -
<PAGE>
CAPITALIZATION
The following table sets forth at March 31, 1998 the (i) actual
capitalization of the Company and (ii) pro forma capitalization of the Company
as adjusted to give effect to the sale by the Company of 2,500,000 shares of
Common Stock in the Offering (assuming a public offering price of $4.625 per
share, after deducting the underwriting discount, the non-accountable expense
allowance, the financial advisor's fee and other estimated expenses payable by
the Company) as if such transaction had occurred as of March 31, 1998. The
information should be read in conjunction with the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1998
---------------------------
As
Actual Adjusted
----------- ----------
<S> <C> <C>
Long-term liabilities..................................... $ -- $ --
Shareholders' equity:
Undesignated preferred stock, $1.00 par value:
20,000,000 shares authorized, no shares issued
and outstanding.................................... -- --
Common stock, $.25 par value: 10,000,000 shares
authorized, 4,624,338 shares issued and outstanding
and 7,124,338 shares issued and outstanding as
adjusted (1)....................................... 1,156,085 1,781,084
Additional paid-in capital........................... 45,166,399 54,703,743
Accumulated deficit (2).............................. (44,675,087) (44,675,087)
------------ ------------
Total shareholders' equity........................... 1,647,397 11,809,740
------------ ------------
Total capitalization................................ $ 1,647,397 $ 11,809,740
============ ============
</TABLE>
- ------------------
(1) Based on the number of shares of Common Stock outstanding on March 31,
1998. Excludes (i) 1,254,144 shares of Common Stock issuable upon
exercise of outstanding stock options at a weighted average exercise
price of $4.27 per share, (ii) 145,120 shares of Common Stock reserved
for future issuance under the Company's 1991 Stock Option Plan and
(iii) 635,952 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $6.47 per
share. See "Management--Executive Compensation" and "Description of
Securities."
(2) Includes an accumulated deficit of $34,638,007 incurred prior to
October 1, 1992, which is the first day of the quarter in which the
Company began development of its current products and changed its name
to "SPECTRASCIENCE, Inc." See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General."
DIVIDEND POLICY
To date, the Company has not declared or paid cash dividends on the
Common Stock. The current policy of the Board of Directors is to retain any
earnings to fund development of its business. Consequently, no cash dividends
are expected to be paid on the Common Stock in the foreseeable future.
- 17 -
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock commenced trading on Nasdaq under the symbol "SPSI" on
May 15, 1996. The Common Stock traded on the National Association of Securities
Dealers Automated Quotation System from November 13, 1984 under the symbol
"GVMI." In September 1992, the stock symbol was changed form "GVMI" to "SPSC."
The stock symbol was subsequently changed to 'SPSI" in June 1994. On July 15,
1998, the last reported bid price of the Common Stock was $4.50. As of July 15,
1998, there were approximately 4,200 holders of record of the Common Stock. The
following table sets forth the high and low bid prices for the Common Stock as
reported by Nasdaq during the periods indicated:
1996 High Low
---- ----------- -----------
First Quarter.............................. $ 9.125 $ 6.750
Second Quarter............................. 10.625 6.375
Third Quarter.............................. 7.750 4.250
Fourth Quarter............................. 6.000 4.375
1997
----
First Quarter.............................. $ 5.125 3.625
Second Quarter............................. 4.500 2.4375
Third Quarter.............................. 4.750 3.625
Fourth Quarter............................. 9.125 4.5625
1998
----
First Quarter.............................. $ 7.125 3.875
Second Quarter............................. 7.250 5.250
Third Quarter (through July 15, 1998)..... 5.500 4.500
- 18 -
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus. The statement of operations data set forth for the years ended
December 31, 1996 and 1997 and the balance sheet data at December 31, 1996 and
1997 are derived from the financial statements audited by Ernst & Young LLP
included elsewhere in this Prospectus. The selected financial data as of and for
the three months ended March 31, 1997 and 1998 have been derived from unaudited
financial statements of the Company which, in the opinion of management, include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair representation of such data. The results of operations for the three months
ended March 31, 1998 are not necessarily indicative of the results of operations
to be expected for the entire year ending December 31, 1998.
<TABLE>
<CAPTION>
Three
Year Ended Months Ended
December 31, March 31,
------------------------------ ---------------------------
1996 1997 1997 1998
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ....................................... $ -- $ -- $ -- $ --
Costs and expenses:
Research and development ..................... 998,137 1,095,281 264,058 337,929
General and administrative ................... 723,825 679,809 223,837 219,140
-------------- ----------- ----------- -----------
Loss from operations ........................... (1,721,962) (1,775,090) (487,895) (557,069)
Net interest income ............................ 176,043 131,299 38,765 19,210
-------------- ----------- ----------- -----------
Net loss ....................................... (1,545,919) (1,643,791) (449,130) (537,859)
============== ============ ============ ============
Net loss per share (1) ......................... $ (0.47) $ (0.37) $ (0.10) $ (0.12)
============== ============ ============ ============
Shares used to compute net
loss per share (1) ........................... 3,276,193 4,467,233 4,408,972 4,521,843
At December 31, At March 31,
------------------------------ ---------------------------
1996 1997 1997 1998
-------------- ----------- ----------- -----------
BALANCE SHEET DATA:
Working capital ................................ $ 2,950,452 $ 1,454,649 $ 2,516,250 $ 1,500,424
Total assets ................................... 3,550,589 2,072,112 3,140,850 1,982,700
Total liabilities .............................. 392,617 462,417 432,008 335,303
Deficit accumulated during the
development stage (2) ........................ (42,493,437) (44,137,228) (42,942,567) (44,675,087)
Total shareholders' equity ..................... 3,157,972 1,609,695 2,708,842 1,647,397
- ------------
</TABLE>
(1) See Note 1 of Notes to the Financial Statements for an explanation of the
method used to determine the number of shares to compute net loss per share.
(2) Includes an accumulated deficit of $34,638,007 incurred prior to October 1,
1992, which is the first day of the quarter in which the Company began
development of its current products and changed its name to "SPECTRASCIENCE,
Inc." See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."
- 19 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this Prospectus.
See "Risk Factors--Forward Looking Statements."
GENERAL
The Company develops and manufactures innovative, minimally-invasive
"spectroscopic systems" to facilitate real-time differentiation and diagnosis of
cancerous and diseased tissue. The Company's systems allow the physician
performing an endoscopic procedure to determine immediately whether tissue is
healthy or cancerous by directing light at the tissue through an optical fiber
and obtaining an instant spectral analysis. Use of the Company's systems can
significantly improve the endoscopist's diagnostic accuracy, thereby enabling
him to determine the best course of treatment for the patient, reducing the need
for additional procedures, minimizing the number of biopsies taken and
permitting the physician to combine a diagnostic and therapeutic procedure in
one visit. In addition, because the Company's systems are compatible with
existing endoscopes and incorporate accessory instrument designs currently used
by endoscopists, physicians can be easily trained to use these systems.
The Company believes that its principal product, the Optical Biopsy
System (the "OBS"), will enable the Company to be the first to market an optical
biopsy system for the detection of colorectal cancer. The OBS is an endoscopic
biopsy forceps system employing proprietary flourescence spectroscopy technology
used for the differentiation and diagnosis between healthy and cancerous tissues
in the gastrointestinal tract. The Company believes that the OBS will facilitate
earlier detection of cancer, which can lead to earlier, more effective
treatment, improved patient quality of life and survival rates and reduced
patient care costs. It is estimated that approximately 7.5 million colon
endoscopies and 3.0 million upper gastrointestinal endoscopies are currently
performed each year, and the Company believes that these procedures have been
growing at a rate of approximately 9% per year. Outside of the United States,
the Company has estimated, based on available information, that the number of
colon endoscopies currently performed is comparable to the number performed
in the United States and has been growing at a similar rate.
The Company was incorporated in the State of Minnesota on May 4, 1983
as GV Medical, Inc. In October 1992, the Company discontinued its prior business
and refocused its development efforts on diagnostic products utilizing
spectroscopic techniques and changed its name to SPECTRASCIENCE, Inc.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET REVENUES. The Company recorded no revenue for the three months
ended March 31, 1998 and March 31, 1997. Although the Company has received
510(k) clearance from the FDA for the disposable Optical Biopsy Forceps and the
reusable Optical Biopsy Forceps (collectively, the "Forceps"), the Company has
decided to commercialize the Forceps only as part of the OBS. Consequently, the
Company does not expect to generate any significant revenue unless and until FDA
clearance has been obtained for the OBS.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the three months ended March 31, 1998 were $337,929 compared to $264,058 for
the same period in 1997. The increase of 28% for the three months ended March
31, 1998 was primarily due to increases in expenses associated with the
Company's multi-center clinical studies for the early detection of colorectal
cancer utilizing the OBS,
- 20 -
<PAGE>
higher regulatory consulting expenses, and the hiring of two additional research
and development personnel. The Company anticipates that research and development
expenses will increase through fiscal year 1999 due to further patient testing
of the safety and efficacy of the OBS, the preparation and filing of a PMA
application for its OBS, the subsequent development of modifications to the OBS
for other medical specialties and the potential development of other products
and technologies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 1998 were $219,140
compared to $223,837 for the same period in 1997. The decrease of 2.1% for the
three months ended March 31, 1998 was primarily due to the elimination of a
receptionist but was partially offset by an increase in investor relations
expenses and related expenses as a result of the hiring of an investor relations
consultant in the third quarter of 1997. The Company anticipates that selling,
general and administrative expenses will increase through fiscal year 1999 as
the Company develops a sales and marketing group and hires additional personnel
to support the commercialization of the OBS.
NET INTEREST INCOME. Net interest income for the three months ended
March 31, 1998 was $19,210 compared to $38,765 for the same period in 1997. The
decrease of 50.4% was primarily due to lower balances in cash and cash
equivalents.
NET LOSS. As a result of the above factors, the net loss for the three
months ended March 31, 1998 was $537,859 compared to a net loss of $449,130 for
the same period in 1997, representing an increase of 19.8% in net loss compared
to the same period in 1997. The net loss per share for the three months ended
March 31, 1998 was $.12 compared to $.10 for the same period in 1997. The
Company anticipates that net loss will increase at least through fiscal year
1999 as the Company commercializes the OBS, increases its research and
development efforts to develop applications for the OBS in other medical
specialties and investigates potential opportunities for the Company's other
products and technologies.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
REVENUE. The Company recorded no revenue for the fiscal years ended
December 31, 1997 and 1996. The Company does not expect to generate any
significant revenue unless and until FDA clearance has been obtained for the
OBS.
RESEARCH AND DEVELOPMENT EXPENSES. 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, representing an increase of $97,144 or 9.7%.
The increase was primarily due to increased expenses related to the human
multi-center clinical trials of the OBS which commenced in July 1997; two
additional personnel hired for product development and documentation; increased
legal fees associated with intellectual property protection; and regulatory
filing expenses and increased consulting costs for system development and data
analysis.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1997 totaled $679,809
compared with $723,825 for the year ended December 31, 1996, representing a
decrease of $44,016 or 6.1%. The decrease was primarily due to elimination of an
office administrator and other cost reduction measures.
NET INTEREST INCOME. Net interest income was $131,299 for the year
ended December 31, 1997 compared to $176,043 for the year ended December 31,
1996, representing a decrease of $44,744 or 25.4%. The decrease was due to the
lower average cash balances during 1997 compared with 1996.
NET LOSS. 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, representing an increase of $97,872 or
6.3% due primarily 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
- 21 -
<PAGE>
loss per share of $.47 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 Company's
outstanding preferred stock into an equivalent number of shares of Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since 1992 principally through
private placements of its Common Stock and Preferred Stock. From October 1992,
when the Company began development of its current products and changed its name,
until March 31, 1998, the Company had obtained funds aggregating approximately
$10.4 million in net proceeds from the issuance of Common Stock and Preferred
Stock. As of March 31, 1998, the Company had cash and cash equivalents of
$1,357,221 and working capital of $1,500,424.
In 1995, the Company completed two private placements of Convertible
Preferred Stock. In June 1995, the Company completed a private placement of
674,998 shares of Series A Convertible Preferred Stock at $3.00 per share (the
"Series A Preferred"). In December 1995, the Company completed a private
placement of 792,500 shares of Series B Convertible Preferred Stock at $5.00 per
share (the "Series B Preferred"). All of the shares of Series A Preferred and
Series B Preferred have been converted into Common Stock. Investors in Series A
Preferred and Series B Preferred were also granted three-year warrants to
acquire Common Stock. See "Description of Securities--Warrants."
Net cash used in operating activities was approximately $1.38 million,
$1.49 million and $850,000 for the years ended December 31, 1996 and 1997 and
for the three months ended March 31, 1998, respectively. For such periods, net
cash used in operating activities resulted primarily from net losses. Net cash
used in investing activities was $10,936, $12,192 and $6,373 for the years ended
December 31, 1996 and 1997 and for the three months ended March 31, 1998,
respectively. The net cash used in investing activities was primarily
attributable to the purchase of equipment. Net cash provided by financing
activities was $314,290, $95,514 and $575,561 for the years ended December 31,
1996 and 1997 and for the three months ended March 31, 1998, respectively. The
net cash provided by financing activities was primarily attributable to the
exercise of warrants and stock options.
The Company expects to incur significant additional operating losses
through at least 1999 and expects cumulative losses to increase significantly as
the Company continues to expand its research and development, clinical trials
and marketing efforts. The Company anticipates that it has adequate resources to
fund its operations through the end of 1998 and that the proceeds of the
Offering and interest thereon, together with existing cash and cash equivalents,
will be sufficient to fund its operations, including increased working capital
expenditures, for at least the next 12 months.
The Company's future liquidity and capital requirements will depend
upon a number of factors, including the progress and expense of clinical trials,
the potential requirements and related costs for product modifications, the
timing and expense of various U.S. and foreign regulatory filings, the timing of
receipt of various U.S. and foreign government approvals, the timing and extent
to which the Company's products gain market acceptance, the timing and expense
of product introduction, and the expense of developing marketing and
distribution capabilities, if regulatory approvals are obtained. The Company may
be required to seek additional funds through debt or equity financing,
arrangements with corporate partners or from other sources. Issuance of
additional equity securities could result in substantial dilution in ownership
and control to the then-existing shareholders. There can be no assurance that
any such funds will be available on terms acceptable to the Company, or at all.
The Company's inability to fund its capital requirements would have a material
adverse effect on its business, financial condition and results of operations.
YEAR 2000 ISSUE
The Company has analyzed its internal systems and software for the
potential impact of the Year 2000 problem. 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,
the Company believes that it its systems and software are Year 2000 compliant.
- 22 -
<PAGE>
BUSINESS
GENERAL
The Company develops and manufactures innovative, minimally-invasive
"spectroscopic systems" to facilitate real-time differentiation and diagnosis of
cancerous and diseased tissue. The Company's systems allow the physician
performing an endoscopic procedure to determine immediately whether tissue is
healthy or cancerous by directing light at the tissue through an optical fiber
and obtaining an instant spectral analysis. Use of the Company's systems can
significantly improve the endoscopist's diagnostic accuracy, thereby enabling
him to determine the best course of treatment for the patient, reducing the need
for additional procedures, minimizing the number of biopsies taken and
permitting the physician to combine a diagnostic and therapeutic procedure in
one visit. In addition, because the Company's systems are compatible with
existing endoscopes and incorporate accessory instrument designs currently used
by endoscopists, physicians can be easily trained to use these systems.
The Company believes that its principal product, the Optical Biopsy
System (the "OBS"), will enable the Company to be the first to market an optical
biopsy system for the detection of colorectal cancer. The OBS is an endoscopic
biopsy forceps system employing proprietary flourescence spectroscopy technology
used for the differentiation and diagnosis between healthy and cancerous tissues
in the gastrointestinal tract. The Company believes that the OBS will facilitate
earlier detection of cancer, which can lead to earlier, more effective
treatment, improved patient quality of life and survival rates and reduced
patient care costs. It is estimated that approximately 7.5 million colon
endoscopies and 3.0 million upper gastrointestinal endoscopies are currently
performed each year, and the Company believes that these procedures have been
growing at a rate of approximately 9% per year. Outside of the United States,
the Company has estimated, based on available information, that the number of
colon endoscopies currently performed is comparable to the number performed
in the United States and has been growing at a similar rate.
INDUSTRY OVERVIEW
COLORECTAL AND ESOPHAGEAL CANCER
According to the American Cancer Society, an estimated 131,600 new
cases of colorectal cancer are detected annually in the United States.
Colorectal cancer is one of the most common cancer diagnoses in the United
States. With an estimated 56,500 deaths in 1998, colorectal cancer accounts for
approximately 10% of cancer deaths and is second only to lung cancer as the most
frequent cause of cancer deaths in the United States. The five-year survival
rate for colorectal cancer is 92% if such cancer is detected and treated at an
early stage before it has spread to other organs of the body. However, only 37%
of colorectal cancer is found at that early stage. Once the cancer has spread to
nearby organs or lymph nodes, the five-year survival rate decreases to 64%. For
people whose colorectal cancer has spread to distant parts of the body such as
the liver or lungs, the five-year survival rate is 7%. Early detection is
therefore critical to long-term survival rates.
COLORECTAL BIOPSIES
The primary method of detection of colorectal cancer is through a
biopsy, which entails the insertion of an endoscope with a biopsy forceps to
harvest tissue samples for analysis in a pathology laboratory. In the United
States, an estimated 7.5 million colon endoscopies are currently performed each
year, and the Company believes that the number of these procedures has been
increasing at a rate of approximately 9% per year. Outside of the United
States, the Company has estimated, based on available information, that the
number of colon endoscopies currently performed is comparable to the number
performed in the United States and has been growing at a similar rate.
Although a biopsy is the principal means to detect colorectal cancer,
the excisional biopsy process is often unreliable because it is dependent on the
skill of the endoscopist in making an accurate visual determination through an
endoscope as to the size, texture, color and location of the polyp and in
determining which tissue to biopsy, and the skill of the pathologist in
analyzing the tissue samples. In
- 23 -
<PAGE>
addition, excisional biopsies involve certain risks to patients, including
bleeding or perforation of the colon wall. Furthermore, the waiting period for
obtaining biopsy results typically ranges from one to two weeks.
DETECTION OF COLORECTAL CANCER
Colorectal cancer is often diagnosed through the detection and analysis
of polyps. Colon polyps are small masses of tissues in the colon that may be
either benign or malignant. Since most polyps are asymptomatic, they are usually
found incidentally during a preliminary endoscopic examination. Current
management guidelines officially endorsed by the American Society for
Gastrointestinal Endoscopy and the American Gastroenterological Association
provide that the size of the polyp is the most important factor in determining
appropriate therapy. Large polyps are usually removed by a polypectomy, whereas
small polyps require individual analysis and treatment.
The endoscopist first subjectively evaluates the polyp by sight to
determine the size, texture, color, texture and thus the potential pathology of
a polyp. The endoscopist typically visually determines without measurement
whether the polyp is large (greater than 1.0 cm) or small (less than 0.5 cm). If
the polyp is considered to be large, it is immediately removed. If a polyp is
considered to be small, the endoscopist must make a further subjective
determination as to whether it is benign or potentially malignant. If a polyp is
deemed to be benign, no further colonoscopy or therapy is indicated, but if it
is deemed to be potentially malignant, a colonoscopy and subsequent removal is
indicated.
Human error can occur as the endoscopist visually determines whether a
polyp is large enough to be removed. Furthermore, the Company's clinical studies
have indicated that the endoscopist's accuracy in visually assessing small
polyps as either benign or malignant is approximately 72%. Certain medical
literature reports that such accuracy rates can range from 50% to 82% depending
on the skill of the endoscopist. Accurate characterization is critical as recent
data has shown that 40-60% of small polyps are potentially malignant.
With such important consequences resulting from the evaluation of a
polyp as benign or malignant, the endoscopist may perform a tissue biopsy to be
cautious, even if such a procedure might otherwise appear to be unnecessary. If
guidelines for biopsy of multiple small polyps are followed, the endoscopist
would take a random representative sample for histology and pathologic
interpretation. Since the endoscopist must still rely on a subjective judgment
of where and which polyps to sample, however, the potential for human error
still exists.
Compared to traditional biopsies, optical biopsies are intended to
improve diagnostic accuracy by providing quantitative information together with
the endoscopist's interpretation to improve diagnostic accuracy. Quantitative
information should facilitate better comparison of results and patient outcomes
between investigators, and the real-time analysis provided by optical biopsies
eliminates the time patients must wait for pathology results and eliminates the
need for rescheduling a secondary procedure.
THE SPECTRASCIENCE SOLUTION
The Company has developed the Optical Biopsy System to provide a
minimally invasive and cost-effective diagnostic tool that will improve
physicians' ability to detect and differentiate between healthy and cancerous
tissue.
OPTICAL BIOPSY SYSTEM
The OBS is an endoscopic biopsy forceps system that allows the
physician performing an endoscopic procedure to distinguish in real time whether
tissue is healthy or cancerous by directing light at tissue through an optical
fiber and obtaining an instant spectral analysis. Use of the Company's systems
can significantly improve the endoscopist's diagnostic accuracy, thereby
enabling him to determine the best course of treatment for the patient, reducing
the need for additional procedures, minimizing the number of biopsies taken and
permitting the physician to combine a diagnostic and therapeutic procedure in
one visit.
- 24 -
<PAGE>
The OBS is composed of three components: a spectro-photometric console
which houses the light source and a computer subassembly (the "Console"), a
biopsy forceps which incorporates an optical probe that transmits and collects
light energy when connected to the Console (the "Forceps") and proprietary
tissue recognition algorithm software that manages system operations and
provides data analysis and interpretation of the collected data (the
"Software"). The OBS operates by transmitting low level monochromatic light
energy from the Console through the optical fiber in the Forceps to the tissue
being analyzed. The light is absorbed by the tissue in direct contact with the
optical fiber in the Forceps, and the resulting tissue autofluorescence is
collected by the same optical fiber and transmitted back to a spectrophotometer
within the Console for analysis. The results are then immediately displayed on
the monitor.
[DIAGRAM OF THE COMPONENTS OF THE OBS]
The Console consists of a user interface, a computer subassembly, an
optical subassembly and a power supply subassembly, all of which are
incorporated into a mobile rack system on lockable wheels for safe and easy
movement and setup. The Forceps component, which can be reusable or disposable,
is essentially a standard non-electrical biopsy forceps that includes a central
lumen that allows the optical fiber to be more easily positioned during the
procedure and makes it more convenient to collect biopsy specimens. The optical
fiber, when connected to the Forceps, serves as an optical conduit between the
Console and the tissue being examined. The Forceps also allows the endoscopist
the opportunity to collect a physical biopsy without having to remove the
optical fiber and replacing it with a standard biopsy forceps. The Software also
includes diagnostic modules to check the system for intrinsic faults or errors
that could affect system performance or results, and these diagnostic modules
provide the user with specific information that allows the user either to
resolve the problem or contact the Company for support and service.
ADVANTAGES OF THE OPTICAL BIOPSY SYSTEM
The Company believes that the OBS offers significant advantages over
currently available methods to diagnose and facilitate the treatment of
colorectal cancer options, including the following:
* SIGNIFICANTLY INCREASES DIAGNOSTIC ACCURACY AND REDUCES THE
NUMBER OF BIOPSIES-- Traditional tissue biopsies involve
subjective visual determination by the endoscopist of which
tissues to biopsy, and submission of the tissue sample to a
pathology laboratory for analysis. This process introduces the
risks of human error in obtaining viable tissue samples,
determining which tissues to biopsy, accurately reading the
pathology slides and potential mislabeling or mishandling of
the tissue samples as they are transferred to the external
pathology laboratory. In contrast, the OBS can assist the
physician in determining in real time during the endoscopic
procedure which tissues are potentially cancerous, thereby
reducing the number of tissues to be biopsied and reducing the
human error in selection of such tissues. The Company believes
that its multi-center clinical trials have demonstrated that
the OBS significantly increases the diagnostic accuracy of the
endoscopist in correctly identifying colorectal cancer.
* REAL-TIME FEEDBACK -- As opposed to traditional tissue
biopsies, in which results may not be available for one to two
weeks following the biopsy procedure, the OBS offers real-time
feedback to treating physicians and patients. This reduces the
number of biopsies collected by the physician and enables the
physician to immediately select a course of treatment for the
patient.
* REDUCTION OF REDUNDANT PROCEDURES -- The ability to receive
immediate diagnostic confirmation whether the tissue is
healthy or cancerous through use of the OBS can enable the
physician to treat the patient appropriately without the need
to reschedule a second appointment or procedure. The
endoscopist can combine a diagnostic and therapeutic procedure
in one visit without the need to wait for the pathologist's
report.
- 25 -
<PAGE>
* EASE OF USE -- The OBS is designed to be easily handled and
used by physicians. Because the Forceps are virtually
identical to traditional biopsy forceps used by endoscopists,
the Company believes that physicians who have previously
performed only traditional tissue biopsies can be easily
trained to use the OBS.
* COST EFFECTIVE -- The OBS offers a less costly alternative
to traditional biopsies because it reduces the number of
colonoscopy and biopsy procedures that must be performed per
patient, thereby minimizing the cost per patient while
maximizing the efficiency of the endoscopist's time.
STRATEGY
The Company's objective is to become a leader in the development and
commercialization of advanced diagnostic products to differentiate in real time
between healthy and cancerous tissues. The Company believes that the OBS will
facilitate earlier detection of cancer which can lead to earlier, more effective
treatment, improved survival rates and reduced patient care costs. The Company's
strategy is to:
* COMMERCIALIZE THE COMPANY'S OPTICAL BIOPSY SYSTEM. The Company
believes that the results of the Company's clinical trials
will lead to FDA approval of the OBS and that such approval,
when combined with the technical innovations and proprietary
software employed in the OBS, will enable the Company to be
the first to introduce and market an endoscopic optical biopsy
system that will provide real-time diagnosis for patients who
have colorectal cancer.
* DEMONSTRATE TO THIRD PARTY PAYORS AND MANAGED CARE COMPANIES
THE CLINICAL UTILITY AND EFFICACY OF THE OBS. The Company
intends to demonstrate to third party payors and managed care
companies through its rigorous clinical studies that the use
of the OBS will improve patient outcomes through earlier
detection and decreased patient care costs. The Company plans
to demonstrate the clinical utility and efficacy of the OBS to
key physician opinion leaders targeted by the Company,
including those practicing at major cancer centers throughout
the United States. The Company believes that successful
completion of clinical trials, PMA approval, the demonstration
of better clinical outcomes and the acceptance of the OBS by
key opinion leaders in the health care industry will be
critical elements in gaining market acceptance and third party
reimbursement for the OBS.
* DEMONSTRATE TO PHYSICIANS AND OTHER HEALTH CARE PROVIDERS THE
EASE OF USE OF THE OBS. The Company intends to demonstrate to
endoscopists and other health care providers that the OBS
employs familiar medical technology and equipment, such as the
Forceps, that are virtually identical to those currently used
by endoscopists in performing traditional tissue biopsies. The
Company believes that demonstration of the ease of use of the
OBS, together with demonstration of better clinical outcomes,
will aid in gaining market acceptance of the OBS. The Company
will conduct training seminars as necessary to educate
endoscopists and other health care providers regarding the
proper use of the OBS.
* COLLABORATE WITH STRATEGIC PARTNERS AND OTHER MARKET LEADERS.
The Company intends to utilize the capabilities of strategic
partners to provide marketing and distribution for its
products, both in the United States and internationally. The
Company will seek to establish strategic partnerships with
leading distributors in each of its target markets. These
strategic partners typically will have significant resources
and strong franchises which, when coupled with the Company's
technology, increase the likelihood of commercial success.
- 26 -
<PAGE>
* LEVERAGE THE COMPANY'S CORE TECHNOLOGIES INTO OTHER MEDICAL
SPECIALTIES. The Company believes that its spectroscopic
systems and proprietary diagnostic software can be expanded to
differentiate between healthy and cancerous tissues in other
areas of the body, including the lungs, urinary tract,
prostate, cervix and for other minimally-invasive endoscopic
and laparascopic applications. The Company intends to leverage
its core technologies to expand its product offerings into
other medical specialties in which the real-time diagnosis of
healthy and cancerous tissues would enhance medical treatment.
The Company also intends to leverage its spectroscopic
expertise into other medical imaging technologies, such as
optical coherent tomography.
OTHER PRODUCTS
Although the OBS is the Company's principal product and remains the
focus of its development and commercialization efforts, the Company has also
developed certain other products that utilize spectroscopic technology and is
evaluating other technologies to determine their potential viability as a
diagnostic tool in detecting cancer.
SPECTROSCOPIC GUIDEWIRE SYSTEM
In addition to the OBS, the Company has developed the Spectroscopic
Guidewire System ("SGS") for the detection of intra-coronary thrombus and
differentiation of atherosclerotic plaque. Like the OBS, the SGS is composed of
three components: the spectrophotometric console ("SGS Console"), a disposable
optical core spectroscopic guidewire ("SGS Guidewire") and proprietary tissue
recognition algorithm software ("SGS Software"). The SGS Console is virtually
identical to the Console. The SGS Console provides laser excitation light,
collects light from the SGS Guidewire, detects and analyzes the light, and
provides the computer storage, data display and human interface functions. The
SGS 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. After the data is collected, the SGS Software analyzes the
data and provides feedback to the treating physician.
The SGS is designed to be used during interventional procedures, such
as angioplasty. The SGS has characteristics similar to conventional coronary
guidewires while providing unique spectroscopic diagnostic capabilities. The
Company believes that the SGS will enhance the effectiveness of the diagnosis
and treatment of cardiovascular disease by aiding cardiologists in identifying
diseased arteries, selecting a course of treatment, positioning the therapeutic
device, treating diseased arterial sites and assessing the results of treatment.
Although the Company believes that the patients who need angioplasty
procedures are potential candidates for diagnosis using the SGS, due to the
current competitive environment and cost containment measures, reimbursement
amounts available for angioplasty procedures are often capped. See "--Third
Party Reimbursement." Therefore, the profit relating to the entire angioplasty
procedure would be reduced to the extent the physician performs additional
procedures such as spectroscopic diagnosis. In addition, in the last two years,
stents have revolutionized the entire angioplasty procedure after it was
demonstrated that the use of a stent improves the restenosis rate. As a result,
other procedures have rapidly decreased in popularity. This trend has affected
the Company's strategy of positioning the SGS as a diagnostic tool to assist in
angioplasty procedures and may delay the Company's introduction and
commercialization of the SGS. However, if the reimbursement cap for angioplasty
procedures is increased and adequate manufacturing sources are obtained, the
Company may seek to accelerate clinical studies to gain FDA clearance to market
the SGS.
OPTICAL COHERENT TOMOGRAPHY
Optical coherent tomography ("OCT") is an imaging technology that
provides images of certain organs in the body. OCT is especially useful in
providing high resolution images of denser organs, such as the liver and
pancreas, which may not be sufficiently analyzed using traditional ultrasound
technology.
- 27 -
<PAGE>
OCT utilizes an optical fiber catheter to illuminate human body tissue in order
to generate reflected radiation. An interferometer apparatus then analyzes the
reflected radiation and diagnoses the tissue mass. OCT is sometimes referred to
as "light ultrasound," but it can provide images with a resolution ten times
greater than that available under traditional ultrasound technology. Although
the feasibility of products based on OCT technology has not yet been determined
and, to the Company's knowledge, products based on OCT have not yet been
commercialized, the Company believes that if it can develop appropriate computer
algorithms, OCT could enable the Company to incorporate its technology into
real-time imaging of denser organs, thereby permitting OCT to be used as a
diagnostic tool. The Company currently owns certain patents and technologies
that utilize OCT. If OCT proves to be a viable technology for analyzing and
diagnosing tissues in denser organs of the body, the Company may pursue
opportunities for developing and commercializing products based on OCT
technology. See "--Patents and Proprietary Rights."
RESEARCH AND DEVELOPMENT
To date, the Company's research and development efforts have been
focused on designing the OBS, conducting and monitoring clinical trials and
advising on key aspects on the development of the OBS and other products
developed by the Company. Research and development activities are performed by
employees and consultants of the Company.
The Company's current research and development efforts are focused on
(i) completing clinical trials necessary to obtain PMA approval for the OBS for
detection of colorectal cancer, (ii) conducting post-FDA approval market
surveillance studies to evaluate the ongoing safety and efficacy of the OBS and
(iii) continuing to conduct clinical studies for diagnosing esophageal cancer.
In the future, the Company intends to leverage its core technologies to
establish the OBS as the preferred means for the differentiation and diagnosis
of healthy and cancerous tissue in other medical applications, including the
detection of cancer in the lungs, urinary tract, prostate, cervix and other
minimally-invasive endoscopic and laparascopic applications. See "--Clinical
Trials" below. The Company may also develop products for special imaging
systems, such as optical coherent tomography.
Research and development expenses for the years ended December 31, 1996
and 1997 and for the three months ended March 31, 1998 were approximately
$1,000,000, $1,100,000 and $330,000, respectively. The Company intends to
continue to make significant investments in research and development.
CLINICAL TRIALS
Since July, 1997, the Company has been conducting ongoing multi-center
clinical studies using the OBS for detection of colorectal cancer at three major
medical centers and one clinic: the Mayo Clinic in Rochester, Minnesota,
Massachusetts General Hospital in Boston, Massachusetts, and Hennepin County
Medical Center in Minneapolis, Minnesota and Minnesota Gastroenterology PA in
Minneapolis, Minnesota. In April 1998, the Company had a pre-PMA submission
meeting with the Gastroenterology/Urology branch of the FDA to review data,
clinical protocols and clinical results collected on 306 patients during its
multi-center clinical trials on the OBS. In this multi-center study, the Company
has attempted to show that the OBS is a valuable tool for use during endoscopy
of the colon to improve the ability to identify healthy and cancerous tissue
during a colon examination. The Company's initial clinical study results, which
were presented to the FDA, demonstrated that the use of the OBS improves the
diagnostic accuracy of the endoscopist in accurately detecting colorectal
cancer. The FDA requested that the Company obtain additional patient data to
demonstrate the reproducibility of the algorithm's accuracy prior to filing its
PMA application. The Company expects to complete the additional clinical trials
by August 1998 and anticipates submitting a PMA application in the third quarter
of 1998; however, there can be no assurance that the clinical trials will be
satisfactorily completed during the third quarter, that the PMA application will
be approved or that the FDA will not request additional data or otherwise
require that the Company conduct further clinical trials. See "--Government
Regulation" below. In addition, even if the Company receives FDA approval on its
PMA application, the Company plans to conduct post-approval studies to evaluate
the ongoing safety and efficacy of the OBS and to develop further modifications
and enhancements to the OBS.
- 28 -
<PAGE>
The Company also commenced a multi-center clinical trial for the
detection of esophageal cancer at the Mayo Clinic and the Hennepin County
Medical Center in February 1998. In general, Barrett's esophagus is a known risk
factor for esophageal cancer. The Company is currently conducting clinical
trials on the viability of using spectroscopic techniques to identify esophageal
cancer in Barrett's patients. Current esophageal cancer studies are being
conducted to develop the product and demonstrate feasibility. The Company has
received approval for the trials at the Mayo Clinic and Hennepin County Medical
Center and plans to expand its clinical trials in early 1999 following the PMA
submission on the OBS.
There can be no assurance that the Company's products will prove to be
safe and effective in clinical trials under applicable regulatory guidelines or
that the Company will not encounter other problems in clinical testing which
will cause the Company to delay commercialization of the OBS. If the OBS does
not prove to be safe and effective in clinical trials, or if the Company is
otherwise unable to commercialize the OBS successfully, the Company's business,
financial condition and results of operations would be materially adversely
affected.
SALES AND MARKETING
At present, the Company has limited marketing and sales capability. If
the FDA approves the OBS, the Company plans to focus its marketing efforts on
major cancer centers in the United States, and on leading endoscopists and other
physicians at those institutions. Through this effort, the Company initially
intends to identify well-respected clinical supporters of the OBS and to
leverage their reputation in the clinical community to generate demand for the
OBS. The Company also plans to conduct physician training seminars as necessary
to educate physicians about the OBS. The Company plans to market the OBS to
medical centers and physicians using strategic partners and a small in-house
marketing and business development group.
Although the Company intends to establish a small in-house marketing
and business development group to assist in the commercialization of the
Company's products and to provide clinical education to physicians, the
Company's future success will depend, in part, on its ability to enter into and
successfully develop strategic partnerships and relationships with distributors
to market and distribute the Company's products. The Company intends to sell its
products in the United States directly and outside the United States through
international distributors and corporate partners. The Company is currently
seeking to enter into strategic partnerships and distributor relationships with
respect to the marketing and distribution of its products.
The Company has engaged in preliminary discussions with potential
strategic partners that have strong market niches in the United States or
internationally in the field of gastrointestinal medicine. The Company believes
that distributing its products through strategic partners will be more
cost-effective and less time-consuming than establishing an in-house sales group
in these areas and will enable the Company to capitalize on the marketing
expertise of such strategic partners. The Company also believes that
distribution or marketing agreements with strategic partners that have
established reputations with prospective purchasers of diagnostic products and
proven selling, marketing and distribution capabilities may enable the Company
to leverage its market position in its products into other market niches. There
can be no assurance, however, that the Company will be able to enter into such
distribution or marketing agreements on favorable terms, or at all.
MANUFACTURING
To date, the Company has not yet commercialized any of its products,
and its manufacturing activities have consisted of assembling a limited number
of OBS systems for use in pre-clinical and clinical trials. The Company does not
have experience in manufacturing its products in commercial quantities.
In the near term, the Company will focus its manufacturing resources on
producing the OBS. Currently, the basic assembly of the Console is completed
in-house, and the Software is developed in-house
- 29 -
<PAGE>
in conjunction with outside consultants. The Forceps are produced by a contract
manufacturer that is the primary manufacturer of medical forceps in the United
States. The Company assembles the components, many of which are widely
available, and inspects and tests the completed systems at the Company's
facilities. The Company has no experience manufacturing its products in the
volumes or with the yields that will be necessary for the Company to achieve
significant commercial sales. There can be no assurance that the Company can
establish high-volume manufacturing capacity or, if established, that the
Company will be able to assemble or manufacture the OBS in high volumes and with
commercially acceptable yields.
Any of the Company's products requiring FDA clearance or approval must
be manufactured in accordance with current Quality System Regulations ("QSR")
requirements, which impose certain procedural and documentation requirements
upon the Company with respect to manufacturing and quality assurance activities.
The Company will also be required to comply with ISO 9001 standards in order to
sell its products in the European Union. See "--Government Regulation." In
addition, the Company contracts with third parties to perform certain
manufacturing processes. All suppliers of such components also must be in
compliance with applicable QSR or ISO 9001 regulations.
The Company generally purchases raw materials and certain components of
its products, including the Forceps, from sole, single or limited source
suppliers. The Company currently has an agreement in place with a leading
manufacturer of medical forceps in the United States. Under this agreement, the
contract manufacturer has agreed to supply the Company with such quantity of
Forceps as the Company requires. This agreement expires in June 2000 but may be
renewed by the contract manufacturer for an additional two years upon six
months' notice. While the performance of the suppliers of the Forceps and other
components of the OBS, including the laser light source and spectrophotometer
used in the Console, has generally been satisfactory, 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 inability of these
contract manufacturers to meet the Company's requirements for quality, quantity
or regulatory conformity, could severely impact the Company's ability to test
and sell its products. Although most of the components that the Company
purchases are available from more than one vendor, the process of qualification
of additional or replacement vendors for certain components or services is
time-consuming, especially in the heavily regulated medical device industry. As
a result, any supply interruption would have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
The medical device industry is highly competitive. The Company believes
that its success will depend primarily upon its ability to create and deliver
innovative, minimally-invasive spectroscopic diagnostic products and systems on
a timely basis and at a competitive price, effectively create market awareness
and acceptance of its products and maintain the proprietary nature of its
technologies and processes. The Company believes that it has few direct
competitors in applying spectroscopy to the detection of colorectal cancer, but
there is a growing interest in the application of spectroscopic diagnostics to
the detection of colorectal cancer and to other medical specialties.
The Company's primary competitor in applying spectroscopy to the
detection of cancer is Xillix Technologies Corp., a company which has obtained
FDA approval for its LIFE-Lung fluorescence system that utilizes light-based
spectroscopy for the detection and localization of lung cancer. Xillix is
beginning development of a system for detection of gastrointestinal cancers of
the esophagus, stomach, intestines and colon. Xillix has entered into a
distribution and joint development agreement with Olympus Optical Co.
("Olympus") of Tokyo, Japan, which is the world's leading supplier of endoscopes
and accessories. Under this development agreement, Olympus is contributing up to
$3 million toward the development of the Xillix LIFE-GI Flourescence Endoscopy
System. Xillix's partnership with Olympus may give Xillix a competitive edge in
developing a product to compete successfully with the OBS.
Other competitors in the field of spectroscopy include Mediscience
Technology Corp. ("Mediscience"), Lifespex, Inc. ("Lifespex") and Medispectra,
Inc. ("Medispectra"). Mediscience is currently focused on clinical studies on
oral leukoplakia, a pre-cancerous condition of the mouth, and
- 30 -
<PAGE>
possibly on pre-cancerous gastrointestinal conditions. LifeSpex is a development
stage company which utilizes spectroscopic diagnostic techniques for the
identification of cancerous tissues, primarily focusing on breast and cervical
cancer. Medispectra is currently evaluating an optical biopsy system to detect a
variety of potentially cancerous conditions, including cervical abnormalities
and pre-cancerous bladder lesions. The Company may also compete on a limited
basis with companies such as Fonet Medical Technologies, Inc., which is
developing a reflectance spectroscopy system, and SpectRx, Inc., which is
developing a bloodless personal glucose monitor and a non-invasive diabetes
screening device.
Many of the Company's competitors and potential competitors have
substantially greater capital resources than does the Company and also have
greater resources and expertise in the areas of research and development,
testing products in clinical trials, obtaining regulatory approvals, and
manufacturing and marketing of medical devices. There can be no assurance that
the Company's competitors and potential competitors will not succeed in
developing, marketing and distributing technologies and products that are more
effective than those developed and marketed by the Company or that would render
the Company's technology and products obsolete or noncompetitive. Additionally,
there can be no assurance that the Company will be able to compete effectively
against such competitors and potential competitors in terms of manufacturing,
marketing and sales.
Any product developed by the Company that gains regulatory clearance or
approval will have to compete for market acceptance and market share. An
important factor in such competition may be the timing of market introduction of
competitive products. Accordingly, the relative speed with which the Company can
develop products, gain regulatory approval and reimbursement acceptance and
supply commercial quantities of the product to the market are expected to be
important competitive factors. In addition, the Company believes that the
primary competitive factors for products such as the OBS include safety,
efficacy, ease of use, reliability, service and price. The Company also believes
that physician relationships, especially relationships with leaders in the field
of endoscopy and colorectal cancer, are important competitive factors. Even if
the Company is the first to have an FDA-approved product for the detection and
differentiation between healthy and cancerous tissues in the colorectal and
gastrointestinal tracts, there can be no assurance that the Company will be
first to market such a system or to market such a system effectively.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its products, to preserve its trade secrets and
to operate without infringing the proprietary rights of third parties. The
Company's strategy regarding the protection of its proprietary rights and
innovations is to seek patents on those portions of its technology that it
believes are patentable and to protect as trade secrets other confidential
information and proprietary know-how.
For the OBS, the Company currently owns exclusive rights to a total of
five issued, allowed and pending U.S. patents and applications, and two pending
international patent applications which are described herein. The Company has
one issued U.S. patent and a related pending U.S. patent application for the
OBS, and the Company is the exclusive licensee through the Massachusetts General
Hospital's Wellman Laboratories of Photomedicine ("Wellman Lab") of another U.S.
patent application for the OBS which has been allowed by the U.S. Patent and
Trademark Office (the "PTO") and which is expected to issue as a patent shortly.
The issued patent and pending patent applications are directed to types of
forceps having an optical fiber and biopsy jaws which are positioned to take
samples for biopsy from the precise area of view of the optical fiber, and
methods of tissue diagnosis using these forceps. Two international patent
applications based on two of these U.S. applications have been filed and are
currently pending. Each of these international applications designate twenty
countries for patent protection. The Company owns two additional pending U.S.
patent applications pertaining to various improvements in the OBS, apparatus and
method for diagnosing tissue using the OBS, and providing the physician with
additional information regarding whether it is necessary to take a biopsy
sample.
- 31 -
<PAGE>
The Company currently owns three issued U.S. patents and ten issued
foreign patents related to the SGS. The SGS patents relate to its system,
apparatus and method for diagnosing tissue using the SGS Guidewire catheter for
diagnostic imaging. Applications for the SGS Guidewire include the minimally
invasive diagnosis of tissue masses within a human blood vessel. These patents
also relate in part to OCT guidewire catheter systems for diagnostic imaging.
In addition to the patents and patent applications described above, the
Company currently has an exclusive licensing agreement with Massachusetts
Institute of Technology for seventeen issued and pending U.S. patents and
applications and a number of corresponding foreign patents and applications
relating to vascular and cardiovascular applications of diagnostic laser
catheters. This licensing agreement runs for the life of the patents and
includes technology developed under National Institute of Health funding.
Further, even if granted, there can be no assurance that these patents will
provide the Company with any protection from competitors or that, if they do
provide a meaningful level of protection, that the Company will have the
financial resources necessary to enforce its patent rights. The Company also has
a licensing arrangement with Wellman Lab, which provides that any patents
resulting from the Wellman Lab's research on cancer detection will be licensed
exclusively to the Company.
The Company believes that its patent rights and licenses may provide a
competitive advantage to the Company. However, there can be no assurance that
the Company's issued patents, or any patents which may be issued as a result of
the Company's applications, will offer any degree of protection. Moreover, there
can be no assurance that any of the Company's patents, patent applications or
licensed patents or applications will not be challenged, invalidated or
circumvented in the future. In addition, there can be no assurance that
competitors, many of whom have substantial resources and have made significant
investments in competing technologies, will not apply for and obtain patents
that will prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the United States or internationally.
Some of the technology used in, and that is important to, the Company's
products is not covered by any patent or patent application of the Company.
Therefore, the Company also relies on trade secrets and proprietary know-how,
which it seeks to protect, in part, through proprietary information agreements
with employees, consultants and other parties. The Company typically obtains
confidentiality and invention assignment agreements in connection with
employment, consulting and advisory relationships. There can be no assurance,
however, that these agreements will not be breached or that the Company will
have adequate remedies for any breach. Furthermore, no assurance can be given
that competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
proprietary technology, or that the Company can meaningfully protect its rights
in unpatented proprietary technology. Moreover, litigation associated with the
enforcement by the Company of its trade secrets and proprietary know-how can be
lengthy and prohibitively costly, with no guarantee of success.
The patent and trade secret positions of medical device companies,
including the Company, are uncertain and involve complex and evolving legal and
factual questions. The coverage sought in a patent application can be denied or
significantly reduced before or after the patent is issued. Further, there is no
guarantee that any patent applications filed will in fact issue. Consequently,
there can be no assurance that any patents from pending patent applications or
from any future patent application will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents will be held valid if subsequently
challenged or that others
- 32 -
<PAGE>
will not claim rights in or ownership of the patents and other proprietary
rights held by the Company. Further, the Company would be responsible for
defending against charges of infringement of third party patents and other
intellectual property rights by the Company's products and activities. There can
be no assurance that third parties will not assert intellectual property
infringement claims against the Company in the future with respect to current or
future products or activities, or that any such assertion may not require the
Company to refrain from the sale of products, to modify its products, enter into
royalty agreements or undertake costly litigation.
Since United States patent applications are secret until patents are
issued or corresponding foreign applications are published in other countries,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, the Company cannot be certain that it was
the first to invent the inventions covered by each of its pending patent
applications, or that it was the first to file patent applications for such
inventions. In addition, there can be no assurance that competitors, many of
which have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets. Further, the
laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United States.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. There can be no
assurance that the Company will not become subject to patent infringement claims
or other intellectual property litigation in a court of law, or interference
proceedings declared by the PTO to determine the priority of inventions, or an
opposition to a patent grant in a foreign jurisdiction. Litigation or regulatory
proceedings, which could result in substantial cost and uncertainty to the
Company, may also be necessary to enforce patent or other intellectual property
rights of the Company or to determine the scope and validity of other parties'
proprietary rights. There can be no assurance that the Company will have the
financial resources to defend its patents from infringement or claims of
invalidity or to successfully defend itself against intellectual property
infringement claims by third parties.
To date, no claims have been brought against the Company alleging that
its technology or products infringe intellectual rights of others. However,
there can be no assurance that such claims will not be brought against the
Company in the future or that any such claims will not be successful. An adverse
determination in any litigation could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from or pay
royalties to third parties or prevent the Company from manufacturing, marketing
or distributing its proposed products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
GOVERNMENT REGULATION
UNITED STATES
The design, manufacture, labeling, distribution and marketing of the
Company's products are subject to extensive and rigorous government regulation
in the United States and internationally, particularly regarding product safety
and effectiveness. In the United States, medical devices are subject to review
and clearance by the Food and Drug Administration (the "FDA"). The FDA regulates
the clinical testing, manufacture, labeling, distribution and promotion of
medical devices. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or pre-market approval for devices, withdrawal of
marketing approvals, a recommendation by the FDA that the Company not be
permitted to enter into government contracts and criminal prosecution. The Food,
Drug, and Cosmetic Act, the Public Health Service Act, and Safe Medical Devices
Act of 1990 and other federal statutes and regulations also govern or influence
the testing, manufacture, safety, labeling, storage, recordkeeping, clearance,
advertising and promotion of such products.
- 33 -
<PAGE>
In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and efficacy. Under FDA regulations,
Class I devices are subject to general controls (for example, labeling,
pre-market notification and adherence to current Quality System Regulations
("QSR") (which is the successor to the FDA's former Good Manufacturing
Practices), and Class II devices are subject to general and special controls
(for example, performance standards, patient registries, and FDA guidelines).
Generally, Class III devices are those that must receive pre-market approval by
the FDA after evaluation of their safety and efficacy (for example,
life-sustaining, life-supporting and implantable devices, or new devices that
have not been found to be substantially equivalent to legally marketed devices).
The OBS is a Class III device that will require pre-market approval ("PMA") by
the FDA prior to commercialization.
FDA approval to distribute a new device can be obtained in one of two
ways. If a new or significantly modified 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. The Company
received 510(k) clearance from the FDA for its disposable and reusable Forceps
in December 1996.
A second, more comprehensive approval process applies to a Class III
device that is not substantially equivalent to an existing product. First, the
applicant must conduct 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 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.
A PMA application must be supported by valid scientific evidence which
typically includes extensive data, including preclinical and human clinical
trial data to demonstrate safety and efficacy of the device. Although certain
devices require filing an Investigation Device Exemption ("IDE") application, an
endoscopic device such as the OBS is considered an "non-significant risk" device
and therefore does not require an IDE application.
The PMA application must also contain the results of all relevant bench
tests, laboratory and animal studies, a complete description of the device and
its components, and a detailed description of the methods, facilities and
controls used to manufacture the device. In addition, the submission must
include the proposed labeling, advertising literature and training methods (if
required). Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA application is
sufficiently complete to permit a substantive review, the FDA will accept the
application for filing and begin an in-depth review of the PMA. An FDA review of
a PMA application can take from six months to two years from the date the PMA
application is accepted for filing, but may take significantly longer. The
review time is often significantly extended by the FDA asking for more
information or clarification of information previously submitted. During the
review period, an advisory committee, primarily composed of clinicians, will
likely be convened to review and evaluate the application and provide
recommendations to the FDA as to whether the device should be approved. The FDA
is not bound by those recommendations. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with the applicable QSR
requirements.
If the FDA's evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either issue an approval
letter or an "approvable letter" containing a number of conditions which must be
satisfied in order to secure the final approval of the PMA. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue a PMA approval letter,
- 34 -
<PAGE>
authorizing commercial marketing of the device for certain indications. If the
FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a "not
approvable letter." The FDA may also determine that additional clinical trials
are necessary, in which case PMA approval could be delayed for several years
while additional clinical trials are conducted and submitted in an amendment to
the PMA. The PMA process can be expensive, uncertain and lengthy, and a number
of devices for which FDA approval has been sought by other companies have never
been approved for marketing.
In April 1998, the Company had a pre-submission meeting with the
Gastroenterology/Urology branch of the FDA to review data, clinical protocols
and clinical results collected during its multi-center clinical trials on the
OBS. The clinical study design and statistical methods were considered
"appropriate" by the FDA, but the FDA requested that the Company obtain
additional patient data to demonstrate the reproducibility of the algorithm's
accuracy prior to filing its PMA application. The Company expects to obtain
sufficient clinical data to support a PMA for its OBS by August 1998 and expects
to submit a PMA application in the third quarter of 1998. There can be no
assurance, however, that the Company's clinical trials will be satisfactorily
completed during the third quarter, that the PMA application will be approved by
the FDA or that the FDA will not request additional data or otherwise require
that the Company conduct further clinical trials, thereby causing the Company
additional delay and expense.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and certain
state agencies, and are subject to periodic inspections by the FDA and certain
state agencies. The FDA Act also requires devices to be manufactured in
accordance with QSR regulations, which impose certain procedural and
documentation requirements upon the Company and any of its contract
manufacturers with respect to manufacturing and quality assurance activities.
The QSR regulations also require design controls and maintenance of service
records.
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations now or in the future or that such laws or regulations will not have
a material adverse effect upon the Company's ability to do business.
Changes in existing requirements or adoption or new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition or
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in the
future or that laws and regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operations.
EUROPEAN UNION, JAPAN AND OTHER COUNTRIES
The primary regulatory environment in Europe is that of the European
Union, which consists of 15 countries encompassing most of the major countries
in Europe, including the Company's principal anticipated markets. Certain other
countries, such as Switzerland, have voluntarily adopted laws and regulations
that mirror those of the European Union with respect to medical devices. The
European Union has adopted numerous directives and standards regulating the
design, manufacture, clinical trial, labeling, and adverse event reporting for
medical devices. The principal directive prescribing the laws and regulations
pertaining to medical devices in the European Union is the Medical Devices
Directive, 93/42/EEC.
- 35 -
<PAGE>
Devices that comply with the requirements of the Medical Devices
Directive will be entitled to bear the CE mark, indicating that the device
conforms with the essential requirements of the applicable directive and,
accordingly, can be commercially distributed throughout the European Union.
Beginning in July 1998, in order to sell a medical device in the European Union,
companies must have ISO certification, and all products must have the CE mark,
which requires ISO 9001 certification. The Company is currently seeking ISO 9001
certification and CE marks for the OBS. There can be no assurance that the
Company will receive ISO certification or a CE mark for any of its products or
product components in a timely manner or at all.
While no additional pre-market approvals or individual European Union
countries are required, prior to the marketing of a device bearing the CE Mark,
practical complications with respect to market introduction may occur. For
example, differences among countries have arisen with regard to labeling
requirements.
The Company also plans to distribute the OBS in Japan. In June 1995,
Japan revised its domestic regulatory review process to more closely align its
process with the existing FDA categorization system and attempted to adopt
standards similar to the FDA. Although gradual implementation of these changes
began in July 1995, the classification of medical devices consistent with FDA
categorization is still being implemented. As a result, the Company could still
be subject to satisfying certain regulatory requirements in Japan which could
vary significantly from the regulatory systems in the United States and Europe.
Other countries in which the Company intends to market its products may
adopt regulations in the future that could prevent the Company from marketing
its products in those countries. In addition, the Company may be required to
spend significant amounts of capital in order to comply with such regulations.
THIRD-PARTY REIMBURSEMENT
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third-party
payors for medical procedures in which the Company's products are used.
Third-party payors may deny reimbursement if a prescribed device has not
received appropriate regulatory clearances or approvals, is not used in
accordance with cost-effective treatment methods as determined by the payor, or
is experimental, unnecessary or inappropriate. If FDA clearance or approval is
received, third-party reimbursement would also depend upon decisions by the
Health Care Financing Administration ("HCFA") for Medicare, as well as by
individual health maintenance organizations, private insurers and other payors.
Government agencies, private insurers and other payors determine whether to
provide coverage for a particular procedure and reimburse health care providers
for medical treatment at a fixed rate based on the diagnosis-related group
("DRG") established by the United States HCFA. The fixed rate of reimbursement
is based on the procedure performed and is unrelated to the specific type or
number of devices used in a procedure. If a procedure is not covered by a DRG,
payors may deny reimbursement. If reimbursement for a particular procedure is
approved, third party payors will reimburse health care providers for medical
treatment based on a variety of methods, including a lump sum prospective
payment system based on a DRG or per diem, a blend between the health care
provider's reported costs and a fee schedule, a payment for all or a portion of
charges deemed reasonable and customary, or a negotiated per capita fixed
payment. Third party payors are increasingly challenging the pricing of medical
products and procedures. Even if a procedure is eligible for reimbursement, the
level of reimbursement may not be adequate. Additionally, payors may deny
reimbursement if they determine that the device used in the treatment was
unnecessary, inappropriate or not cost-effective, experimental or used for a
non-approved indication.
- 36 -
<PAGE>
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 currently available. However, DRG reimbursement for endoscopic
procedures, such as flexible sigmoidoscopy, colonoscopy and polypectomy,
including fees for biopsies, have been established. The Company anticipates that
if the OBS receives FDA clearance and proves clinical utility with better
outcomes, reimbursement for procedures utilizing the OBS would eventually be
available. However, there can be no certainty that such third-party
reimbursement will be available in the future or within a time-frame that would
benefit the Company.
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 payors' 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 that such funding could lead to greater awareness of colorectal
cancer among the general population, larger budgets for screening, higher
reimbursement levels and potentially the establishment of new reimbursement
codes for new technologies like the OBS. However, there can be no assurance that
any such increase in funding would lead to third party reimbursement for the
OBS.
The Company expects that there will be continued pressure on
cost-containment throughout the United States health care system. Cost
reduction, cost containment, managed care, capitation pricing (i.e., pricing
based on a fixed price per procedure, rather than on 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 reimbursements leading to cuts in
reimbursements for new procedures or experimental procedures would affect the
ability of smaller companies with new technologies, like the Company, to compete
with larger established firms. The emphasis on cost containment and cost
reduction has led to increased participation in managed care environments by
companies that seek to reduce their cost of providing health care benefits to
employees.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drugs, surgery
and other treatments. The Company anticipates, but there can be no assurance,
that hospital administrators and physicians would justify the use of the
Company's products by the attendant cost and time savings and clinical benefits
that the Company believes would be derived from the use of its products.
Accordingly, reimbursement for the Company's products may not be available in
the United States or in international markets under either government or private
reimbursement systems, and physicians may not advocate reimbursement for
procedures using the Company's products. Failure by hospitals and other users of
the Company's products to obtain reimbursement from third-party payors, or
changes in government and private third-party payors' policies toward
reimbursement for procedures employing the Company's products, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company is unable to predict what
additional legislation or regulation, if any, relating to
- 37 -
<PAGE>
the health care industry or third-party coverage and reimbursement may be
enacted in the future, or what effect such legislation or regulation would have
on the Company.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products and devices
entail significant risk of product liability claims and product failure claims.
The Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury or death. Clinical trials or marketing of any of the Company's products
may expose the Company to liability claims resulting from the use of such
products. The Company has conducted only limited clinical trials and does not
yet have, and will not have for a number of years, significant clinical data to
allow the Company to measure the risk of such claims with respect to its
products. The Company also faces the possibility that defects in the design or
manufacture of its products might necessitate a product recall. There can be no
assurance the Company will not experience losses due to product liability claims
or recalls in the future. The Company currently maintains a product liability
insurance policy with an aggregate and per occurrence limit of $2,000,000. There
can be no assurance that the coverage limits of the Company's insurance policies
will be adequate. In addition, the Company will require increased product
liability coverage if any of the Company's products are successfully
commercialized. An inability to maintain insurance under terms acceptable to the
Company could prevent or inhibit the clinical testing or commercialization of
products developed by the Company. In addition, there can be no assurance,
regardless of the availability of product liability insurance, that the Company
will be adequately protected from claims that might be brought against it. A
product liability claim or recall could have a material adverse effect on the
Company's business, financial condition and results of operations. Even if a
product liability claim is not successful, the time and expense of defending
against such a claim may adversely affect the Company's business, financial
condition and results of operations.
EMPLOYEES
As of June 30, 1998, the Company had 12 full-time employees, nine of
whom were engaged in product engineering design and development, manufacturing,
and regulatory affairs, and three of whom were engaged in administration. The
Company is not subject to any collective bargaining agreement and believes that
its employee relations are generally satisfactory.
The Company 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.
PROPERTY
The Company leases its principal executive offices at 3650 Annapolis
Lane, Suite 101, Minneapolis, Minnesota. This facility consists of approximately
5,530 square feet of office, laboratory, quality testing, and warehouse space.
The lease provides for monthly rental payments of $4,436 for the first 36
months, and $4,566 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 believes that
it maintains appropriate levels of standard property and casualty insurance
coverage on its property. The Company believes that this facility is adequate
for its immediate needs but that additional space may be required within the
next two years in order to commercialize the OBS.
- 38 -
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The names, ages and positions of the executive officers, key management
personnel and directors of the Company are listed below.
NAME AGE POSITION
- ---- --- --------
Brian T. McMahon..............44 Chairman of the Board and Chief Executive
Officer
Chester E. Sievert, Jr. ......46 President and Chief Operating Officer
Henry M. Holterman(1) (2).....43 Director
Nathaniel S. Thayer(1) (2)....73 Director
- -------------------
(1) Member of the Audit Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of Directors
BRIAN T. MCMAHON has served as Chairman of the Board and Chief
Executive Officer of the Company since March 1998. Mr. McMahon was elected
Director, President and Chief Executive Officer in May 1993, and assumed the
position of Chairman of the Board in May 1997. Mr. McMahon joined the Company in
the capacity of Executive Vice President and Chief Operating Officer in July
1992 and, prior to that, served as an independent consultant to the Company from
May 1992 to July 1992. Prior to joining the Company, Mr. McMahon held various
marketing, business development and sales management positions with SCIMED Life
Systems, Inc., a wholly owned subsidiary of Boston Scientific Corporation,
culminating in the position of Director of Marketing and Business Development.
CHESTER E. SIEVERT, JR. has served as President and Chief Operating
Officer of the Company since March 1998. He previously served as the Executive
Vice President of Development and Operations, beginning in July 1997. He joined
the Company in June 1996 as a consultant, and began serving as Vice President of
Development in November 1996. Prior to joining the Company, Mr. Sievert founded
and worked at two medical product companies, ReTech, Inc. from 1980 to 1986, and
FlexMedics Corporation from 1986 to 1995. As a former academic scientist on
staff at the University of Minnesota College of Medicine and the Veterans
Administration Medical Center, Mr. Sievert published extensively in the fields
of gastroenterology, urology and fiber optics. Mr. Sievert has a Bachelor of
Science Degree in Comparative Physiology from the University of Minnesota.
HENRY M. HOLTERMAN has served as a director of the Company since March
1992. Since 1991, he has been the Managing Director of Reggeborgh Beheer BV, a
company located in the Netherlands that invests in companies and owns property
projects generally located in the Netherlands. Mr. Holterman is a chartered
accountant and, from 1987 to 1991, was group controller for Transport
Development Group PLC and
- 39 -
<PAGE>
the Dutch Holding Company ETOM NV. From 1984 to 1988, Mr. Holterman was the
President of the Board of Directors of LETO Recycling, a Swedish-Dutch company
involved in recycling chemical waste.
NATHANIEL S. THAYER has served as a director of the Company since May
1993. He has been a partner in the law firm of Blais Cunningham & Crowe Chester,
located in Pawtucket, Rhode Island, since 1969.
The Company's Bylaws authorize the Board of Directors to fix the number
of directors from time to time, and the number is currently set at five
directors. There are currently two vacancies on the Board. All directors hold
office until the next annual meeting of the shareholders or until their
successors have been elected and qualified. Officers serve at the discretion of
the Board of Directors. There are no family relationships between any of the
directors or executive officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
The functions of the Audit Committee are (i) to review the internal and
external financial reporting of the Company; (ii) to review the scope of the
independent audit; and (iii) to consider comments by the auditors regarding
internal controls and accounting procedures and management's response to any
such comments.
COMPENSATION COMMITTEE
The functions of the Compensation Committee are (i) to recommend the
compensation for those officers who are also directors and for senior
management; (ii) to review senior management's objectives; and (iii) to make
recommendations to the Board of Directors regarding the administration of, and
the grant of options under, the Company's 1991 Stock Plan.
MEDICAL AND SCIENTIFIC ADVISORY BOARD
The Company maintains a Medical and Scientific Advisory Board composed
of individuals with expertise in various medical specialties. Members of the
Company's management and scientific and technical staff consult with members of
the Medical and Scientific Advisory Board from time to time with respect to its
scientific research and development programs. The Company also consults with
members of the Medical and Scientific Advisory Board with respect to the
Company's development of its products and systems, the design of its clinical
trials and advice on regulatory strategies and reimbursement issues. A list of
the current members of the Medical and Scientific Advisory Board with brief
biographies is set forth below.
JOHN I. ALLEN, M.D. is an Associate Professor of Medicine at the
University of Minnesota and a gastroenterologist at Minnesota Gastroenterology
P.A. He is the co-director of research and co-chair of the Clinical Practice
Committee at Minnesota Gastroenterology P.A. and Clinical Director of the
Minneapolis Specialty Physicians. Dr. Allen received his M.D. degree from the
University of New Mexico in 1977 and has been associated with the University of
Minnesota and Minnesota Gastroenterology P.A. since 1981.
OLIVER CASS, M.D. is the Director of the Gastroenterology Laboratory at
the Hennepin County Medical Center and an Assistant Professor of Medicine at the
University of Minnesota. He is a member of the Computer Committee of the
American Society for Gastrointestinal Endoscopy and a member of the Diagnostic
and Therapeutic Technology Assessment Panel of the American Medical Association.
Dr. Cass
- 40 -
<PAGE>
received his M.D. degree from the University of Minnesota in 1978 and has been
employed as a physician at the Hennepin County Medical Center and as an
Assistant Professor at the University of Minnesota since 1984.
DOUGLAS M. HAWKINS, PH.D. is a Professor of Statistics and the Chairman
of the Department of Applied Statistics at the University of Minnesota. He is a
member of the International Statistical Institute, a fellow of the American
Statistical Association and a senior member of the American Society for Quality.
He is also an associate editor of the Journal for the American Statistical
Association. Dr. Hawkins received his Ph.D. degree from the Witwatersrand
University, Johannesburg, South Africa, in 1969.
JOSE JESSURUN, M.D. is an Associate Professor of Pathology at the
University of Minnesota and is the Director of Surgical Pathology, Department of
Laboratory Medicine and Pathology, at the University of Minnesota. He is a
member of the Latin American Society of Pathology, the United States and
Canadian Academy of Pathology and the Minnesota Society of Clinical Pathology.
Dr. Jessurun received his M.D. degree from the National Autonomous University of
Mexico in Mexico City in 1977, was the chief resident in surgical pathology at
Massachusetts General Hospital from 1983-84 and has been an Associate Professor
at the University of Minnesota since 1991.
NORMAN NISHIOKA, M.D. is an Assistant Professor of Medicine at Harvard
Medical School and an Assistant Professor, Division of Health Sciences and
Technology, at the Massachusetts Institute of Technology. He is also an
Associate Physician at the Massachusetts General Hospital, where he acts as the
Clinical Director of the Laser Center. He also serves on the Endoscopy Committee
at Massachusetts General Hospital and is the Chairman of the Committee on
Research for the Harvard Medical School Laser Center. Dr. Nishioka received his
M.D. degree from the University of California, Los Angeles in 1981 and has been
employed in various academic capacities with Harvard Medical School and
Massachusetts General Hospital since 1987.
DELWIN K. OHRT, M.D. is the Vice President of Clinical Resources and
Medical Affairs for Volunteer Hospitals of American Upper Midwest, Inc. in
Minneapolis, Minnesota. He was formerly the Medical Director and Chairman of the
Medical Technology Assessment Committee of Blue Cross and Blue Shield of
Minnesota and the Senior Vice President of Blue Plus. He is a member of the
Uniform Clinical Data Advisory Panel of the American Hospital Association, the
Minnesota Medical Association Practice and Planning Committee and the Health
Technology Advisory Committee of the Minnesota Health Care Commission. Dr. Ohrt
received his M.D. degree from the University of Nebraska in 1965.
PHILLIP H. STOLTENBERG, M.D. is a gastroenterologist at Minnesota
Gastroenterology P.A. He has served as an Assistant Professor of Medicine,
Division of Gastroenterology, at the University of Minnesota and an Assistant
Professor of Medicine at the Texas A&M University Health Science Center. He is
the Chairman of the United Hospital Gastrointestinal Subcommittee and a member
of the United Hospital Quality Management Committee. Dr. Stoltenberg received
his M.D. degree from the University of Minnesota in 1976 and has been a
physician at Minnesota Gastroenterology since 1995.
KENNETH K. WANG, M.D. is an Assistant Professor at the Mayo Medical
School in Rochester, Minnesota. He is a member of the Gastroenterology Research
Committee at the Mayo Clinic and the Director of the Laser Photodynamics
Laboratory. He is also serving on the American Society for Gastrointestinal
Endoscopy Informatics Committee and the Education and Technology Subcommittee of
the American Gastroenterology Association. Dr. Wang received his M.D. degree
from Wayne State University in Detroit, Michigan and has been an Assistant
Professor at the Mayo Medical School since 1989.
- 41 -
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company pays each non-employee director $500 for each Board of
Directors' meeting and committee meeting attended and reimburses each such
director for reasonable travel and out-of-pocket expenses for attendance at
these meetings.
Pursuant to the Company's 1991 Stock Plan, each non-employee director
is entitled to receive an option to purchase 10,000 shares of Common Stock when
first elected to the Board of Directors. Prior to October 1996, non-employee
directors were entitled to receive an initial option grant of 25,000 shares of
Common Stock. Additionally, each non-employee director is entitled to receive an
automatic grant of options to purchase 5,000 shares of Common Stock upon
re-election to the Board each year the 1991 Stock Plan is in effect. The
exercise price of the option is based on the greater of (a) the prevailing
market price (defined as the closing bid price) of the Common Stock on the date
of grant or (b) the average of the closing bid prices of the Common Stock for
the ten trading days immediately prior to the date of grant.
The options granted to non-employee directors under the Company's 1991
Stock Plan expire ten years from the date of grant (subject to earlier
termination in the event of death), are not transferable (except by will or the
laws of descent and distribution), and become fully exercisable one year after
the date of grant.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal year ending December 31, 1997,
compensation awarded, paid to, or earned by the Company's Chief Executive
Officer and to all executive officers whose salary and bonuses exceeded $100,000
for that year (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Annual Compensation Awards Payouts
------------------------------------- ----------------------- -------------------
Other Securities
Annual Restricted Underlying All Other
Name and Compen- Stock Option/s LTIP Compen-
Principal Position Year Salary Bonus sation(1) Award(s) SARs Payouts sation(8)
- ---------------------- ---- -------- -------- --------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brian T. McMahon 1997 $137,496 $ -- $ 6,307 -- 289,065(2) -- $ 3,094
Chairman of the 1996 137,496 34,374 8,279 -- 50,000(3) -- 2,062
Board, Chief 1995 146,490 27,500 8,580 -- 150,000(4) -- 1,317
Executive Officer
and Director
Chester E. Sievert, Jr 1997 92,500 15,000 6,000 -- 85,000(2) -- 1,712
President and Chief 1996 11,987 -- 1,000 -- 17,079(5) -- --
Operating Officer 1995 -- -- -- -- -- -- --
Ching-Meng Chew(9) 1997 95,000 14,250 6,575 -- 25,000(2) -- 2,850
Vice President of 1996 82,500 16,500 6,585 -- 15,000(6) -- 1,157
Finance and 1995 25,385 3,822 1,869 -- 45,000(7) -- --
Administration, Chief
Financial Officer,
Treasurer and Secretary
</TABLE>
- ------------------
(1) Other Annual Compensation primarily involves a car allowance of $500
per month for each of the Named Executive Officers beginning April 1,
1996. Prior to such date, the car allowance was $450 per month. In
addition, Mr. McMahon received $2,129 and $2,838 in medical benefits in
1996 and 1995, respectively. Mr. McMahon received no medical benefits
in 1997.
(2) Details of these option grants are provided in the following table
entitled "Option Grants in Last Fiscal Year."
(3) Represents a ten-year stock option for 50,000 shares of Common Stock,
vesting one-third per year over three years, at an exercise price of
$7.00 per share. On February 28, 1998, Mr. McMahon held total stock
options for 739,065 shares of Common Stock.
(4) Represents a ten-year stock option for 150,000 shares of Common Stock,
vesting one-third per year over three years, at an exercise price of
$3.00 per share.
(5) Includes a ten-year stock option for 15,000 shares of Common Stock,
vesting one-third per year over three years, at an exercise price of
$4.9875 per share, and for 2,079 shares at $7.75 per share, which
vested while Mr. Sievert served as a
- 42 -
<PAGE>
consultant to the Company. On February 28, 1998, Mr. Sievert held total
stock options for 147,079 shares of Common Stock. Mr. Sievert joined
the Company in June 1996 as consultant, and assumed the position of
Vice President of Development in November 1996. He later assumed the
position of Executive Vice President of Development and Operations in
July 1997 and President and Chief Operating Officer on March 9, 1998
(6) Represents a ten-year stock option for 15,000 shares of Common
Stock, vesting one-third per year over three years, at an exercise
price of $7.00 per share.
(7) Represents a five-year stock option for 45,000 shares of Common Stock,
vesting one-third per year over three years, at an exercise price of
$3.9375 per share. On February 28, 1998, Mr. Chew held total stock
options for 122,500 shares of Common Stock.
(8) All Other Compensation includes amounts contributed to the
SPECTRASCIENCE Savings and Retirement Plan, which qualifies as a 401(k)
Plan under the Internal Revenue Code of 1986, as amended.
(9) Mr. Chew announced his resignation from the Company in July 1998.
OPTION GRANTS
The following table sets forth information concerning individual grants
of stock options made to the Named Executive Officers named in the Summary
Compensation Table. No stock appreciation rights ("SARs") were granted or
exercised for the year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------------------- Value at Assumed Annual
Number of % of Total Rates of Stock Price
Securities Options Exercise Appreciation
Underlying Granted to or Base for Option Term(5)
Options Employees in Price Expiration -------------------------
Name Granted(1)(2) Fiscal Year ($/Sh) Date 5% 10%
- ---- -------------- ------------ -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Brian T. McMahon 50,000(3) 64.1% $4.7625 1/31/2007 $ 717,670 $ 1,818,718
50,000(3) 3.7625 4/14/2007
189,065(3) 3.7813 9/16/2007
Chester E. Sievert, Jr. 35,000 18.8 3.9125 9/2/2007 209,147 530,019
50,000(4) 3.9125 9/2/2007
Ching-Meng Chew(6) 25,000 5.5 4.7625 1/31/2007 74,878 189,755
</TABLE>
- ------------------
(1) These ten-year stock options were granted pursuant to the 1991 Stock
Plan. One third of the shares under such options vest on each
anniversary date from the date of grant, so that all the shares are
vested by the third anniversary date of the date of grant.
(2) The exercise price was determined based on the greater of (a) the
prevailing market price (defined as the closing bid price) of the
Common Stock on the date of grant or (b) the average of the closing bid
prices of the Common Stock for the ten trading days immediately prior
to the date of grant.
(3) Mr. McMahon previously held fully-vested stock options as follows:
(a) a five-year option for 50,000 shares exercisable at $2.50 per
share, which expired unexercised on February 4, 1997; and (b) a
five-year option for 150,000 shares at $3.00 per share, which expired
unexercised on September 30, 1997. During 1997, Mr. McMahon was granted
new options as follows: (a) a ten-year option for 50,000 shares at
$3.7625 per share, vesting one-third per year over three years, with
all of the shares vesting by April 14, 2000, and (b) a ten-year option
for 189,065 shares at $3.7813 per share, vesting one-third per year
over three years, with all the shares vesting by September 16, 2000.
(4) Mr. Sievert was granted a ten-year stock option for 50,000 shares
which will vest in its entirety upon the successful completion of the
clinical studies on the OBS, the filing with the FDA of a PMA
application and final FDA product approval.
(5) Potential realizable value is net of exercise price, but before taxes
associated with exercise. Potential realizable value is based on an
assumption that the market price of the stock appreciates at the stated
rate, compounded annually, from the date of grant until the end of the
ten-year option term, multiplied by the number of options granted.
These values are calculated based on regulations promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price appreciation. There is no assurance that
the actual stock price appreciation over the ten-year option term will
be at the assumed 5% or 10% levels, or at any other defined level.
(6) Mr. Chew announced his resignation from the Company in July 1998.
- 43 -
<PAGE>
OPTION VALUES
The following table sets forth certain information concerning
individual exercises of stock options during the year ended December 31, 1997
and the value of unexercised stock options as of December 31, 1997 for the Named
Executive Officers. No shares were acquired through the exercise of options by
the Named Executive Officers during 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of unexercised
Shares Underlying Unexercised In-the-Money
acquired on Value Options/SARs Options/SARs
Name exercise(1) realized at FY-end at FY-end(1) (2)
----------- -------- ---------------------------- -------------------------
Unexercis- Unexercis-
Exercisable able Exercisable able
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Brian T. McMahon(3) -- -- 316,666 322,399 $ 487,500 $ 202,639
Chester E. Sievert, Jr.(4) -- -- 7,079 95,000 -- 60,563
Ching-Meng Chew(5) -- -- 35,000 50,000 20,625 10,313
</TABLE>
- ------------------
(1) Upon the exercise of an option, the optionee must pay the exercise
price in cash or stock. Stock options are "in-the-money" if the closing
bid price for the Common Stock is greater than the exercise price of
the stock options. The closing bid price for the Common Stock on
December 31, 1997 was $4.625 per share. The value of the options is
calculated by taking the difference between the exercise price and the
closing bid price on December 31, 1997, and multiplying this difference
by the number of option shares. When the exercise price was higher than
the market value of the Common Stock, the option was not
"in-the-money."
(2) Does not include the number or value of unexercisable options granted
subsequent to December 31, 1997. No SARs were held by any of the Named
Executive Officers on December 31, 1997.
(3) "In-the-money" options include 300,000 shares which are exercisable and
239,065 shares which are unexercisable.
(4) "In-the-money" options include no shares which are exercisable and
85,000 shares which are unexercisable.
(5) "In-the-money" options include 30,000 shares which are exercisable and
15,000 shares which are unexercisable. Mr. Chew announced his
resignation from the Company in July 1998.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS
Except as described below, the Company does not have employment
agreements with its executive officers.
The Company entered into a Severance Agreement with each of Messrs.
McMahon and Chew on November 26, 1996 and with Mr. Sievert on May 21, 1997
(each, a "Severance Agreement") providing for severance pay in the event of a
"Change in Control" (as defined in each Severance Agreement). The Severance
Agreements provide for severance pay to each of the Named Executive Officers if
such officer's employment is terminated, either voluntarily or involuntarily,
during the three-year period following a Change in Control. The severance
payment shall be equal to full compensation for two years (in the case of Mr.
McMahon) and full compensation for one year (in the case of Mr. Sievert and Mr.
Chew), and payment will be made in a lump sum upon termination. In addition to
the severance payment, each of the Named Executive Officers will be entitled to
the following benefits upon a Change in Control: (i) 18 months of life, accident
and health and dental insurance benefits; (ii) 12 months of out-placement
services; (iii) complete coverage for fiduciary liability and directors' and
officers' insurance for a period of six years after a Change in Control; (iv)
indemnification for any losses that might result from actions taken in good
faith before the "Date of Termination" (as defined in each Severance Agreement);
(v) reimbursement for all legal
- 44 -
<PAGE>
fees and expenses incurred as a result of termination, except to the extent such
payment would constitute a "parachute payment" within the meaning of Section
280G(b)(2) of the Code; (vi) all benefits under the Company's Savings and
Retirement Plan, or any successor to such plan and any other plan or arrangement
relating to retirement benefits; (vii) all benefits and rights 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 reduced by, any other amounts payable to any of the Named
Executive Officers under each officer's Severance Agreement; and (viii)
immediate vesting of all outstanding but unvested options. If there had been a
Change in Control for the fiscal year ended December 31, 1997, and the
employment of Messrs. McMahon, Chew and Sievert were immediately terminated,
Messrs. McMahon, Chew and Sievert would have been entitled to receive, pursuant
to the terms of the respective Severance Agreement, lump sum payments upon
termination of $396,989, $136,000 and $136,000, respectively.
All stock option agreements outstanding under the Company's 1991 Stock
Plan provide for the acceleration of exercisability of options immediately prior
to a Change in Control (except in certain cases where the optionee is terminated
for "cause" or resigns without "good reason").
1991 STOCK PLAN
In 1991, the Company adopted the 1991 Stock Plan (the "Plan"), under
which 1,624,000 shares of Common Stock were initially reserved for issuance upon
exercise of options granted to selected employees and non-employees of the
Company. After the Company's one-for-five reverse stock split on July 1, 1994,
there were 325,000 shares of Common Stock reserved for issuance upon exercise of
options. The Plan provides for the grant of both stock options intended to
qualify as incentive stock options as defined in the Internal Revenue Code of
1986, as amended (the "Code"), and nonqualified stock options.
Subject to the limitations set forth in the Plan, the Compensation
Committee of the Board of Director has the authority to select the persons to
whom grants are to be made, to designate the number of shares to be covered by
each option, to determine whether an option is to be an incentive stock option
or a nonqualified stock option, to establish vesting schedules and, subject to
certain restrictions, to specify other terms of the options. The maximum term of
options granted under the Plan is ten years. Options granted under the Plan
generally are nontransferable and expire two years after the termination of an
optionee's employment or consultantcy with the Company. In general, if an
optionee dies, such person's options may be exercised up to two years after his
or her death.
The exercise price of options granted under the Plan is determined by
the Board of Directors (or the Compensation Committee) based on the greater of
(a) the prevailing market price (defined as the closing price) of the Common
Stock on the date of grant or (b) the average of the closing bid price of the
Common Stock for the ten trading days immediately prior to the date of grant.
The exercise price of stock options must equal 85% of the fair market value of
the Common Stock on the date of grant or, in the case of incentive stock
options, must equal 100% of fair market value of the Common Stock on the date of
grant. As of May 31, 1998, the Company had outstanding options to purchase an
aggregate of 1,202,711 shares held by 23 persons at a weighted average exercise
price of $4.45 per share. As of May 31, 1998, a total of 293,169 options granted
pursuant to the Plan had been exercised.
CERTAIN TRANSACTIONS
There are no material transactions between the Company and its
directors or executive officers.
- 45 -
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of May 31, 1998, by: (a) each
director of the Company; (b) each Named Executive Officer; (c) each person or
entity known by the Company to own beneficially more than five percent of the
Common Stock; and (d) all the directors and executive officers of the Company as
a group.
<TABLE>
<CAPTION>
Name and Address of Shares Beneficially Percent Beneficially Owned
Beneficial Owner Owned Before Offering After Offering
- ------------------------------------ ------------------- --------------- --------------
<S> <C> <C> <C>
Perkins Capital Management, Inc. and 607,467 12.4% 8.2%
The Perkins Opportunity Fund(1)
Nathaniel S. Thayer(2) 492,438 10.4 6.8
Brian T. McMahon(3) 401,665 7.9 5.3
Reggeborgh Beheer BV(4) 280,333 6.0 3.9
Ching-Meng Chew(5) 59,233 1.2 0.8
Chester E. Sievert, Jr.(6) 24,745 0.5 0.3
Henry M. Holterman(7) 16,000 0.3 0.2
Officers and Directors as a Group(8) 994,081 19.1 12.9
(5 persons)
</TABLE>
- ------------------
(1) Includes (a) 234,134 shares owned by Perkins Capital Management, Inc.
("PCM") and (b) 200,000 shares owned by The Perkins Opportunity Fund
(collectively with PCM, "Perkins"). The shares beneficially owned by
PCM also include 173,333 shares issuable upon exercise of warrants held
by Perkins or their clients. The address of Perkins is 730 East Lake
Street, Wayzata, MN 55391-1769.
(2) Includes (a) 454,238 shares owned by Mr. Thayer, (b) 38,000 shares
issuable upon exercise of options that are exercisable within 60 days
of May 31, 1998 and (c) 200 shares held in a joint account in which Mr.
Thayer has a 50% beneficial interest. Mr. Thayer, a non-employee
director of the Company, is a partner of the law firm of Blais
Cunningham & Crowe Chester, and his address is 150 Main Street, P.O.
Box 1325, Pawtucket, RI 02862.
(3) Includes (a) 58,333 shares owned by Mr. McMahon, and (b) 343,332 shares
issuable upon exercise of options that are exercisable within 60 days
of May 31, 1998. Mr. McMahon is Chairman of the Board and Chief
Executive Officer of the Company, and his address is 3650 Annapolis
Lane, Suite 101, Minneapolis, MN 55447-5434.
(4) Includes 96,333 shares held by Mr. Dik Wessels, a controlling
shareholder of Reggeborgh Beheer BV, that are exercisable within 60
days of May 31, 1998. The address of Reggeborgh Beheer BV is Postbox
319, Industrieweg 12, 7460 AH Rijssen, The Netherlands.
(5) Includes 59,233 shares issuable upon exercise of options that are
exercisable within 60 days of May 31, 1998. Mr. Chew is the Vice
President-Finance and Administration, Chief Financial Officer,
Treasurer and Secretary of the Company, and his address is 3650
Annapolis Lane, Suite 101, Minneapolis, Minnesota 55447-5434. Mr. Chew
announced his resignation from the Company in July 1998.
- 46 -
<PAGE>
(6) Includes 24,745 shares issuable upon exercise of options that ar
exercisable within 60 days of May 31, 1998. Excludes 50,000 shares
issuable upon exercise of options that will vest upon the successful
completion of the clinical studies on the OBS, the filing of a PMA
application with the FDA and final FDA product approval. Mr. Sievert is
the President and Chief Operating Officer of the Company, and his
address is 3650 Annapolis Lane, Suite 101, Minneapolis, Minnesota
55447-5434.
(7) Includes 16,000 shares issuable upon exercise of options that are
exercisable within 60 days of May 31, 1998. Mr. Holterman is a
non-employee director of the Company, and his address is the same as
the address of Reggeborgh Beheer BV (included in footnote (4) above),
where he is the Managing Director.
(8) Includes 512,771 shares and 481,310 shares issuable upon exercise of
options held by all directors and executive officers (5 persons) that
are exercisable within 60 days of May 31, 1998. Excludes 50,000 shares
issuable upon exercise of an option held by Mr. Sievert upon the
successful completion of the clinical studies on the OBS described in
footnote (6) above.
- 47 -
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.25 par value per share and 20,000,000 shares of undesignated
preferred stock, $1.00 par value per share (the "Preferred Stock"). As of March
31, 1998, there were issued and outstanding 4,624,338 shares of Common Stock,
which were held by approximately 4,200 shareholders of record, and 1,890,096
shares of Common Stock were reserved for issuance upon exercise of outstanding
options and warrants. As of March 31, 1998, there were no issued and outstanding
shares of Preferred Stock of the Company.
The following summary of the terms and provision of the Company's
securities does not purport to be complete and is qualified in its entirety by
reference to the Company's Articles of Incorporation and Bylaws and applicable
law.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. There is no
cumulative voting for the election of directors, which means that the holders of
more than 50% of the outstanding Common Stock voting for the election of
directors can elect all of the directors of the Company to be elected, if they
so choose. Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor and are entitled to share ratably in all assets of the
Company available for distribution to holders of the Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company. Holders of
Common Stock have no preemptive, subscription or conversion rights, and there
are no redemption or sinking fund provisions applicable thereto. The outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby will
be, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized, without further
shareholder action, to issue preferred stock in one or more series and to fix
the voting rights, liquidation preferences, dividend rights, repurchase rights,
conversion rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences, of the Preferred Stock.
Although there is no current intention to do so, the Board of Directors may,
without shareholder approval, issue shares of a class or series of Preferred
Stock with voting and conversion rights which could adversely affect the voting
power or dividend rights of the holders of Common Stock and may have the effect
or delaying, deferring or preventing a change in control of the Company.
WARRANTS
As of June 30, 1998 the Company had the following outstanding warrants:
warrants to purchase 184,998 shares of Common Stock at $3.00 per share, expiring
September 1999 through June 2000, issued in connection with bridge loans;
warrants to purchase 264,175 shares of Common Stock at $9.50 per share, expiring
December 1998, issued in connection with a private placement of the Company;
warrants to purchase 79,250 shares of Common Stock at $5.00 per share, expiring
December 2000, issued in connection with a private placement of the Company; and
conditional warrants to purchase 26,418 shares of Common Stock at $9.50 per
share, expiring December 1998, issued in connection with a private placement of
the Company. The conditional warrants were granted to a selling agent and will
only be issued if the other warrants issued at $9.50 per share are exercised.
REGISTRATION RIGHTS
The Representative of the Underwriters, as holder of the
Representative's Warrants, has "piggyback" rights to include the shares
underlying the Representative's Warrants in any registration statement filed by
the Company during the period ending six years from the closing of the Offering
and also
- 48 -
<PAGE>
has "demand" rights during the period ending five years from the closing of the
Offering to require, by action of not less than the holders of a majority of the
Representative's Warrants, up to one "demand" registration by the Company, of
the shares underlying the Representative's Warrants. In addition, any holder of
the Representative's Warrants has "demand" rights during the period ending five
years from the closing of the Offering to require one "demand" registration of
the shares underlying such holder's warrants, solely at the expense of such
holder. To the Company's knowledge, no other holders of the Company's securities
have registration rights.
MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its shareholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company which could deprive the
Company's shareholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Business Corporations Act applies,
with certain exceptions, to any acquisition of voting stock of the Company (from
a person other than the Company, and other than in connection with certain
mergers and exchanges to which the Company is a party) resulting in the
beneficial ownership of 20% or more of the voting stock then outstanding.
Section 302A.671 requires approval of any such acquisitions by a majority vote
of the shareholders of the Company prior to its consummation. In general, shares
acquired in the absence of such approval are denied voting rights and are
redeemable at their then fair market value by the Company within 30 days after
the acquiring person has failed to give a timely information statement to the
Company or the date the shareholders voted not to grant voting rights to the
acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act restricts
certain transactions between the Company and certain shareholders who become the
beneficial holders of 10% or more of the Company's outstanding voting stock
("interested shareholders") unless a majority of the disinterested directors of
the Company has approved, prior to the date on which the interested shareholders
acquire a 10% interest, either the business combination transaction suggested by
such shareholders or the acquisition of shares that made such shareholders
interested shareholders. If such prior approval is not obtained, the statute
imposes a four-year prohibition from the interested shareholders' share
acquisition date on mergers, sales of substantial assets, loans, substantial
issuances of stock, and various other transactions involving the Company and the
statutory interested shareholder or its affiliates.
In the event of certain tender offers for stock of the Company, Section
302A.675 of the Minnesota Business Corporation Act precludes the tender offeror
from acquiring additional shares of stock (including acquisitions pursuant to
mergers, consolidations or statutory share exchanges) within two years following
the completion of such an offer unless the selling shareholders are given the
opportunity to sell the shares on terms that are substantially equivalent to
those contained in the earlier tender offer. Section 302A.675 does not apply if
a committee of the Board of Directors consisting of all of its disinterested
directors (excluding present and former officers of the corporation) approves
the subsequent acquisition before shares are acquired pursuant to the earlier
tender offer.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar with respect to the Common Stock is
Norwest Bank Minnesota, N.A.
- 49 -
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Josephthal
& Co. Inc. is acting as the Representative (the "Representative"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the "Underwriting Agreement"), to purchase from the Company, and the
Company has agreed to sell to the Underwriters on a firm commitment basis, the
respective numbers of shares of Common Stock set forth opposite their names
below.
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Josephthal & Co. Inc......................
----------------
Total ............................
================
The Underwriters are committed to purchase all the shares of Common
Stock offered hereby, if any of such shares are purchased. The Underwriting
Agreement provides that the obligations of the several Underwriters are subject
to the conditions precedent specified therein.
The Company has been advised by the Representative that the
Underwriters initially propose to offer the Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession of not in excess of $_______ per
share of Common Stock. Such dealers may re-allow a concession not in excess of
$_______ per share of Common Stock to other dealers. After the initial
distribution of the shares of Common Stock offered hereby has been completed,
the public offering price, concession and reallowance may be changed by the
Representative. No such change, however, will change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
The Representative has advised the Company that it does not anticipate
sales to discretionary accounts by the Underwriters to exceed five percent of
the total number of shares of Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in connection with the
Offering. The Company has also agreed to pay the Representative an expense
allowance on a non-accountable basis equal to one percent of the gross proceeds
of the Offering and a financial advisor's fee equal to one percent of the gross
proceeds of the Offering, no portion of which has been paid to date.
The Underwriters have been granted an option by the Company,
exercisable within 45 days of the date of this Prospectus, to purchase up to an
additional 375,000 shares of Common Stock at the public offering price per share
of Common Stock offered hereby, less underwriting discounts, the non-accountable
expense allowance and the financial advisor's fee described above (the
"Over-Allotment Option"). Such option may be exercised solely for the purpose of
covering over-allotments, if any, incurred in the sale of the shares of Common
Stock offered hereby. To the extent such option is exercised, in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional shares of Common Stock
proportionate to its initial commitment.
All of the Company's officers and directors holding shares of Common
Stock or securities exercisable or exchangeable for or convertible into shares
of Common Stock issued and outstanding at the effective date of the Offering
have agreed not to offer to sell, sell, transfer, hypothecate or otherwise
encumber or dispose of any such beneficial interest in any such securities
whether or not beneficially owned by them, without the prior written consent of
the Representative, for a period of six months from the effective date of the
Offering. An appropriate legend shall be marked on the face of the certificates
representing all such securities.
- 50 -
<PAGE>
Upon consummation of the Offering, the Company has agreed to sell to
the Representative, for nominal consideration, the Representative's Warrants to
purchase from the Company 250,000 shares of Common Stock. The Representative's
Warrants are initially exercisable at a price per share equal to 120% of the
public offering price for a period of four years commencing one year after the
date of this Prospectus and are restricted from sale, transfer, assignment or
hypothecation for a period of twelve months from the date hereof, except to
officers of the Representative. The Representative's Warrants also provide for
adjustment in the number of shares of Common Stock issuable upon the exercise
thereof as a result of certain subdivisions and combinations of the Common
Stock. The Representative's Warrants grant to the holders thereof certain
registration rights for the securities issuable upon exercise thereof. See
"Description of Securities-Registration Rights."
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for, or purchase, the Common Stock at a market price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed the greater of 30% of its average daily trading
volume in the Common Stock during a specified two month prior period, or 200
shares. A passive market maker must identify passive market making bids as such
on the Nasdaq electronic inter-dealer reporting system. Passive market making
may stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters and dealers are not required to engage in
passive market making and may end passive market making activities at any time.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M. The Underwriters also may create a short position
for the account of the Underwriters by selling more Common Stock in connection
with the Offering than they are committed to purchase from the Company, and in
such case may purchase Common Stock in the open market following completion of
the Offering to cover all or a portion of such short position. The Underwriters
may also cover all or a portion of such short position, up to 375,000 shares of
Common Stock, by exercising the Over-Allotment Option. In addition, the
Representative may impose "penalty bids" under contractual arrangements with the
Underwriters, whereby it may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to the
copies of such agreements which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Orrick, Herrington
& Sutcliffe LLP, New York, New York, has acted as counsel to the Underwriters in
connection with the Offering.
- 51 -
<PAGE>
EXPERTS
The financial statements of the Company at December 31, 1996 and 1997,
and for the years then ended included in this Prospectus, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and such financial
statements are included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). This
Registration Statement, including exhibits thereto, and such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at certain of the Commission's regional offices located at 7
World Trade Center, New York, New York 10048; and Citicorp Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
"http://www.sec.gov."
The Company has filed with the Commission a Registration Statement on
Form SB-2 (the "Registration Statement") under the Securities Act with respect
to shares of Common Stock being offered hereby. This Prospectus, which
constitutes part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Statements made in this
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete. With respect to each document filed with the Commission as
an exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description, and each such statement shall be deemed qualified in
its entirety by such reference.
- 52 -
<PAGE>
SpectraScience, Inc.
Audited Financial Statements
Years ended December 31, 1996 and 1997
and at March 31, 1998 (unaudited)
CONTENTS
Report of Independent Auditors...............................................F-2
Audited Financial Statements
Balance Sheets...............................................................F-3
Statements of Operations.....................................................F-4
Statement of Changes in Stockholders' Equity.................................F-5
Statements of Cash Flows.....................................................F-6
Notes to Financial Statements................................................F-7
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
SpectraScience, Inc.
We have audited the accompanying balance sheets of SpectraScience, Inc. as of
December 31, 1996 and 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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, 1996 and 1997, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
February 13, 1998, except for Note 9,
as to which the date is March 26, 1998
F-2
<PAGE>
SpectraScience, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December MARCH 31,
1996 1997 1998
----------------------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,047,182 $ 1,638,173 $ 1,357,221
Inventory 192,151 180,474 406,905
Other current assets 103,736 98,419 71,601
------------ ------------ ------------
Total current assets 3,343,069 1,917,066 1,835,727
Fixed assets:
Office furniture and equipment 239,915 249,935 256,308
Machinery and equipment 558,029 560,201 560,201
------------ ------------ ------------
797,944 810,136 816,509
Less accumulated depreciation (590,424) (655,090) (669,536)
------------ ------------ ------------
207,520 155,046 146,973
------------ ------------ ------------
Total assets $ 3,550,589 $ 2,072,112 $ 1,982,700
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 107,866 $ 140,809 $ 124,953
Accrued compensation and taxes 97,735 100,690 62,179
Accrued expenses 37,216 61,019 61,161
Accrued clinical research fees 149,800 159,899 87,010
------------ ------------ ------------
Total current liabilities 392,617 462,417 335,303
Commitments
Stockholders' equity:
Undesignated preferred stock, $1.00 par value:
Authorized shares--20,000,000
Issued and outstanding shares--none -- -- --
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--3,621,212 in 1996, 4,506,559 in
1997 and 4,624,338 at March 31, 1998 905,303 1,126,640 1,156,085
Additional paid-in capital 43,886,939 44,620,283 45,166,399
Accumulated deficit (42,493,437) (44,137,228) (44,675,087)
------------ ------------ ------------
Total stockholders' equity 3,157,972 1,609,695 1,647,397
------------ ------------ ------------
Total liabilities and stockholders' equity $ 3,550,589 $ 2,072,112 $ 1,982,700
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
SPECTRASCIENCE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
1996 1997 1997 1998
-------------------------- --------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES
Product revenues $ -- $ -- $ -- $ --
Cost of products sold -- -- -- --
----------- ----------- ----------- -----------
-- -- -- --
EXPENSES
Research and development 998,137 1,095,281 264,058 337,929
Selling, general and administrative 723,825 679,809 223,837 219,140
Interest and other income (176,043) (131,299) (38,765) (19,210)
Total expenses 1,545,919 1,643,791 449,130 537,859
----------- ----------- ----------- -----------
Net loss $(1,545,919) $(1,643,791) $ (449,130) $ (537,859)
=========== =========== =========== ===========
Net loss per common share $ (.47) $ (.37) $ (.10) $ (.12)
Weighted average common shares
outstanding 3,276,193 4,467,233 4,408,972 4,521,843
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
SpectraScience, Inc.
Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
---------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 2,933,348 $ 733,337 674,998 $ 674,998 792,500 $ 792,500
Conversion of Series A preferred
stock into common shares 608,331 152,083 (608,331) (608,331) -- --
Exercise of Series A preferred
stock detachable warrants into
common shares 33,333 8,333 -- -- -- --
Exercise of stock options 46,200 11,550 -- -- -- --
Net loss -- -- -- -- -- --
--------- ---------- --------- ----------- -------- -----------
Balance December 31, 1996 3,621,212 905,303 66,667 66,667 792,500 792,500
Conversion of Series A preferred
stock into common shares 66,667 16,667 (66,667) (66,667) -- --
Conversion of Series B preferred
stock into common shares 792,500 198,125 -- -- (792,500) (792,500)
Exercise of Series A preferred stock
detachable warrants into common shares 16,111 4,028 -- -- -- --
Exercise of stock options 10,069 2,517 -- -- -- --
Net loss -- -- -- -- -- --
--------- ---------- --------- ----------- -------- -----------
Balance December 31, 1997 4,506,559 1,126,640 -- -- -- --
Exercise of stock options 6,667 1,667 -- -- -- --
Exercise of Series A preferred stock
detachable warrants into common shares 11,112 27,778 -- -- -- --
Net Loss -- -- -- -- --
--------- ---------- --------- ----------- -------- -----------
Balance March 31, 1998 (unaudited) 4,624,338 $1,156,085 -- $ -- -- $ --
========= ========== ========= =========== ======== ===========
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
----------- ------------ ------------
<S> <C> <C> <C>
Balance December 31, 1995 $43,136,284 $(40,947,518) $ 4,389,601
Conversion of Series A preferred
stock into common shares 456,248 --
Exercise of Series A preferred
stock detachable warrants into
common shares 158,332 -- 166,665
Exercise of stock options 136,075 -- 147,625
Net loss -- (1,545,919) (1,545,919)
----------- ------------ ------------
Balance December 31, 1996 43,886,939 (42,493,437) 3,157,972
Conversion of Series A preferred
stock into common shares 50,000 --
Conversion of Series B preferred
stock into common shares 594,375 --
Exercise of Series A preferred stock
detachable warrants into common shares 56,527 -- 60,555
Exercise of stock options 32,442 -- 34,959
Net loss -- (1,643,791) (1,643,791)
----------- ------------ ------------
Balance December 31, 1997 44,620,283 (44,137,228) 1,609,695
Exercise of stock options 18,334 -- 20,001
Exercise of Series A preferred stock
detachable warrants into common shares 527,782 -- 555,560
Net Loss -- (537,859) (537,859)
----------- ------------ ------------
Balance March 31, 1998 (unaudited) $45,166,339 $(44,675,087) $ 1,647,397
=========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
F-5
<PAGE>
SPECTRASCIENCE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
1996 1997 1997 1998
--------------------------- ---------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,545,919) $(1,643,791) $ (449,130) $ (537,859)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 72,418 64,666 17,864 14,446
Non-cash interest expense -- -- -- --
Gain on sale of fixed assets (387) -- -- --
Changes in operating assets and liabilities:
Accounts receivable 100,641 -- -- --
Inventory (120,665) 11,677 4,232 (226,431)
Other current assets (23,539) 5,317 9,554 26,818
Accounts payable and accrued
expenses 137,953 69,800 39,391 (127,114)
----------- ----------- ----------- -----------
Net cash used in operating activities (1,379,498) (1,492,331) (378,089) (850,140)
INVESTING ACTIVITIES
Purchase of fixed assets (13,418) (12,192) (2,936) (6,373)
Proceeds from sale of fixed assets 2,482 -- -- --
----------- ----------- ----------- -----------
Net cash used in investing activities (10,936) (12,192) (2,936) (6,373)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- -- -- --
Proceeds from issuance of common stock 314,290 95,514 -- 575,561
Proceeds from issuance of preferred stock -- -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities 314,290 95,514 -- 575,561
----------- ----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (1,076,144) (1,409,009) (381,025) (280,952)
Cash and cash equivalents at beginning
of period 4,123,326 3,047,182 3,047,182 1,638,173
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 3,047,182 $ 1,638,173 $ 2,666,157 $ 1,357,221
=========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Notes payable converted into preferred stock $ -- $ -- $ -- $ --
Series A preferred stock converted into
common stock 608,331 66,667 66,667 --
Series B preferred stock converted into
common stock -- 792,500 792,500 --
Transfer of inventory to equipment 110,385 -- -- --
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<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.
F-7
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of March 31, 1998 and for the
three-month periods ended March 31, 1997 and 1998 are unaudited. In the opinion
of the management of the Company, these consolidated financial statements
reflect all adjustments, consisting only of normal and recurring adjustments
necessary for a fair presentation of the consolidated financial statements. The
results of operations for the three-month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1998.
3. CAPITAL STOCK AND WARRANTS
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
F-8
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1997
3. CAPITAL STOCK AND WARRANTS (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
Shares Stock Options Weighted Average
Available Outstanding Under Exercise
for Grant the Plans Price Per Share
---------- ----------------- ----------------
<S> <C> <C> <C>
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
========= ==========
</TABLE>
The weighted average fair value of options granted in 1996 and 1997 was $4.92
and $2.84, 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:
F-9
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1997
4. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
Shares Outstanding Shares Exercisable
------------------------------------------------ ----------------------------
Weighted
Shares Average Weighted Weighted
Outstanding at Remaining Average Number of Average
Range of December 31, Contractual Exercise Price Shares Exercise Price
Exercise Price 1997 Life per Share Exercisable Per Share
- ---------------- -------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$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
========= =======
</TABLE>
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 1996 and 1997, 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 .904 and .851, 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:
F-10
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1997
4. STOCK OPTIONS (CONTINUED)
1996 1997
-----------------------------
Pro forma net loss $(1,846,282) $(2,258,579)
Pro forma net loss per share $(.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 $45,000 and $67,000 for
the years ended December 31, 1996 and 1997, respectively.
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.
6. ACCRUED CLINICAL RESEARCH FEES
The Company is conducting ongoing multi-center clinical studies using the
Optical Biopsy(TM) System (OBS system) in an attempt to show that the OBS system
is an adjunctive tool for use during endoscopy of the colon to improve the
ability to identify pre-cancerous, cancerous, and other diseased tissues during
a colon examination. During 1996 and 1997, the Company entered into various
clinical testing agreements with domestic hospitals to conduct research using
the OBS system. Under the terms of these one-year
F-11
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1997
6. ACCRUED CLINICAL RESEARCH FEES (CONTINUED)
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 continues in 1998. As of December 31, 1996
and 1997, the Company had accrued for $149,800 and $159,899 of these clinical
research fees, respectively.
7. INCOME TAXES
The tax effect of the Company's deferred tax assets is as follows:
DECEMBER 31
1996 1997
------------------------------------
Net operating loss carryforward $ 15,345,000 $ 15,955,000
Accrued liabilities 93,000 101,000
Inventory reserve 28,000 39,000
Tax credits 770,000 788,000
------------ -------------
16,236,000 16,883,000
Valuation allowance (16,236,000) (16,883,000)
------------ -------------
$ -- $ --
============ =============
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.
8. 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 $5,000 and
$17,000 for 1996 and 1997, respectively.
9. SUBSEQUENT EVENT
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.
F-12
<PAGE>
- ------------------------------------------- --------------------------------
- ------------------------------------------- --------------------------------
No dealer, salesperson or other person is
authorized to give any information or to
make any representation in connection with
this Offering other than those contained in
this Prospectus, if given or made, such
information or representations must not be
relied upon as having been authorized by the 2,500,000 Shares
Company or any of the Underwriters. This
Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy
any of the securities offered hereby by
anyone in any jurisdiction in which such
offer or solicitation is not authorized or SPECTRASCIENCE, INC.
in which the person making such offer or
solicitation is not qualified to do so or to
anyone to whom it is unlawful to make such
an offer or solicitation. Neither the
delivery of this Prospectus nor any sale
made hereunder shall, under any
circumstances, create any implication that
the information herein is correct as of any
time subsequent to the date of this
Prospectus. Common Stock
--------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 16 ---------------------
Capitalization............................ 17
Dividend Policy........................... 17 PROSPECTUS
Price Range of Common Stock............... 18
Selected Financial Data................... 19 ---------------------
Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................... 20
Business.................................. 23
Management................................ 39
Certain Transactions...................... 45 Josephthal & Co. Inc.
Principal Shareholders ................... 46
Description of Securities................. 48
Underwriting.............................. 50
Legal Matters............................. 51
Experts................................... 52
Additional Information.................... 52
Index to Financial Statements.............F-1
--------------------
, 1998
- ------------------------------------------- --------------------------------
- ------------------------------------------- --------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Minnesota Statutes Section 302A.521 provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefor by another
organization or employee benefit plan; (2) acted in good faith; (3) received no
improper personal benefit and Section 302A.255 (with respect to director
conflicts of interest), if applicable, has been satisfied; (4) in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful; and (5) reasonably believed that the conduct was in the best interests
of the corporation in the case of acts or omissions in such person's official
capacity for the corporation or reasonably believed that the conduct was not
opposed to the best interests of the corporation in the case of acts or
omissions in such person's official capacity for other affiliated organizations.
Article IX of the Company's Bylaws incorporates the indemnification provisions
set forth in Section 302A.521 of the Minnesota Statutes.
Provisions regarding indemnification of officers and directors of the
Company are contained in the Company's Articles of Incorporation, as amended
(Exhibit 3.1 to this Registration Statement) and the Company's Bylaws, as
amended (Exhibit 3.2 to this Registration Statement), each of which are
incorporated herein by reference.
Under the Underwriting Agreement filed as Exhibit 1.1 hereto, the
Underwriters agreed to indemnify, under certain conditions, the Company, its
directors, certain of its officers and persons who control the Company within
the meaning of the Securities Act of 1933, as amended, against certain
liabilities.
The Company maintains a directors and officers insurance policy.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following fees and expenses will be paid by the Company in connection
with the issuance and distribution of the securities registered hereby and do
not include underwriting commissions and discounts. All such expenses, except
for the SEC, NASD and Nasdaq fees, are estimated.
SEC registration fee............................ $ 3,923
NASD filing fee................................. 1,830
Nasdaq Stock Market listing fee................. 7,500
Legal fees and expenses......................... 200,000
Accounting fees and expenses.................... 100,000
Blue Sky fees and expenses...................... 40,000
Transfer Agent's and Registrar's fees........... 2,500
Printing and engraving expenses................. 75,000
Miscellaneous................................... 15,000
------------
Total................................ $ 445,753
============
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1, 1995, the Company has issued and sold the following
securities, which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"):
On June 29, 1995, the Company completed a private placement with
qualified investors of 674,998 shares of Series A Convertible Preferred
Stock ("Preferred A"), par value $1.00, at $3.00 per share. Holders of
Preferred A were issued three-year warrants to purchase a total of
225,000 shares of Common Stock at an exercise price of $5.00 per share.
A net amount of $1,965,000 was raised. The Company paid $59,994 to the
selling agent, Miller, Johnson & Kuehn, Incorporated, in connection
with the offering. In addition, the selling agent was issued a
three-year warrant exercisable at $5.00 per share for 6,667 shares of
Common Stock and a five-year warrant exercisable at $3.00 per share for
20,000 shares of Common Stock. The shares of Preferred A issued were
non-voting, did not yield dividends or interest, and were convertible
to an equivalent number of shares of Common Stock after March 31, 1996.
In the first quarter of 1997, all the outstanding shares of Preferred A
were converted into Common Stock.
On December 28, 1995, the Company completed a private placement with
qualified investors of 792,500 shares of Series B Convertible Preferred
Stock ("Preferred B"), par value $1.00, at $5.00 per share. Holders of
Preferred B were issued three-year warrants to purchase a total of
264,175 shares of Common Stock exercisable at $9.50 per share. A net
amount of $3,526,625 was raised. The Company paid $435,875 to the
selling agent, Miller, Johnson & Kuehn, Incorporated, in connection
with the offering. In addition, the selling agent was issued a
three-year conditional warrant exercisable at $9.50 per share for
26,418 shares of Common Stock and a five-year warrant exercisable at
$5.00 per share for 79,250 shares of Common Stock. The shares of
Preferred B issued were non-voting, did not yield dividends, and were
convertible into an equivalent number of shares of Common Stock on or
after December 28, 1996. In the first quarter of 1997, all the
outstanding shares of Preferred B were converted into Common Stock.
The sale of securities above was made in reliance upon Section 4(2) and
Regulation D of the Securities Act, which provide exemption for transactions not
involving a public offering. The purchasers of securities described above
represented that they acquired such securities for their own account and not
with a view to any distribution thereof to the public. The Company made
inquiries of purchasers of securities in these transactions and obtained
representations from such purchasers to establish that such issuances qualified
for an exemption from the registration requirements.
ITEM 27. EXHIBITS
Number Description
------ -----------
1.1 Form of Underwriting Agreement (filed herewith)
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.)
4.1 Specimen Form of the Common Stock Certificate (filed herewith)
4.2 Form of Representative's Warrant Agreement and Certificate
(filed herewith)
5.1 Opinion of Dorsey & Whitney LLP (filed herewith)
<PAGE>
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 (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
<PAGE>
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.)
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. (Incorporated
by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.)
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 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.)
<PAGE>
10.25 Form of Promissory Note that was issued inconjunction 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, 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, for the year ended December 31, 1994.)
10.27 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.)
10.28 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.)
10.29 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 Ernst & Young LLP (filed herewith)
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (set forth on the Signature Page hereof)
27 Financial Data Schedule (filed herewith).
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(b) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against
<PAGE>
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(c) That (1) for determining any liability under the Securities Act,
the Registrant will treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act as part of this Registration Statement
as of the time the Commission declared it effective, and (2) for determining any
liability under the Securities Act, the Registrant will treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in such registration
statement, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on July 17, 1998.
SPECTRASCIENCE, INC.
By: /s/ Brian T. McMahon
---------------------------------------------
Brian T. McMahon
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature to this registration statement appears
below hereby constitutes and appoints Brian T. McMahon and Chester E. Sievert,
Jr., and each of them, as his or her true and lawful attorney-in-fact and agent,
with full power of substitution, to sign on his behalf individually and in the
capacity stated below and to perform any acts necessary to be done in order to
file all amendments and post-effective amendments to this registration
statement, and any and all instruments or documents filed as part of or in
connection with this registration statement or the amendments thereto, and each
of the undersigned does hereby ratify and confirm that said attorney-in-fact and
agent, or his substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement on Form SB-2 has been signed by the following persons in the
capacities indicated on July 17, 1998.
SIGNATURE TITLE
--------- -----
/s/ Brian T. McMahon Chairman, Chief Executive Officer and Director
- ----------------------------- (principal executive officer and principal
Brian T. McMahon financial and accounting officer)
/s/ Chester E. Sievert, Jr. President and Chief Operating Officer
- -----------------------------
Chester E. Sievert, Jr.
Director
- -----------------------------
Henry M. Holterman
/s/ Nathaniel S. Thayer Director
- -----------------------------
Nathaniel S. Thayer
<PAGE>
EXHIBIT INDEX
Number Description
1.1 Form of Underwriting Agreement (filed herewith)
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.)
4.1 Specimen Form of the Common Stock Certificate (filed herewith)
4.2 Form of Representative's Warrant Agreement and Certificate (filed
herewith)
5.1 Opinion of Dorsey & Whitney LLP (filed herewith)
10.3 Incentive Stock Option Plan adopted by the Company's Board ofDirectors
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
<PAGE>
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
(Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
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.)
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. (Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 1997.)
<PAGE>
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 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.)
10.25 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, 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, for the year ended December 31,
1994.)
10.27 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.)
10.28 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.)
10.29 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 Ernst & Young LLP (filed herewith)
<PAGE>
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (set forth on the Signature Page hereof)
27 Financial Data Schedule (filed herewith).
EXHIBIT 1.1
OH&S DRAFT 7/17/98
[FORM OF UNDERWRITING AGREEMENT]
[SUBJECT TO ADDITIONAL REVIEW]
2,500,000 SHARES OF COMMON STOCK
SPECTRASCIENCE, INC.
UNDERWRITING AGREEMENT
New York, New York
____________, 1998
JOSEPHTHAL & CO. INC.
As Representative of the Several
Underwriters listed on Schedule A hereto
c/o Josephthal & Co. Inc.
200 Park Avenue
25th Floor
New York, New York 10166
Ladies and Gentlemen:
SPECTRASCIENCE, Inc., a Minnesota corporation (the "Company"), confirms its
agreement with Josephthal & Co. Inc. ("Josephthal") and each of the underwriters
named in Schedule A hereto (collectively, the "Underwriters," which term shall
also include any underwriter substituted as hereinafter provided in Section 11),
for whom Josephthal is acting as representative (the "Representative"), with
respect to the sale by the Company and the purchase by the Underwriters, acting
severally and not jointly, of the respective numbers of shares of the Company's
common stock, $0.25 par value per share ("Common Stock"), set forth in Schedule
A hereto. Such shares of Common Stock are hereinafter referred to as the "Firm
Shares."
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also sell to the Underwriters, acting severally and not jointly,
up to an additional 375,000 shares of Common Stock for the purpose of covering
over-allotments, if any (the "Option Shares"). The Firm Shares and the Option
Shares are sometimes hereinafter referred to as the "Shares." The Company also
proposes to issue and sell to Josephthal warrants (the "Representative's
Warrants") pursuant to the Representative's Warrant Agreement (the "
Representative's Warrant Agreement") for the purchase of an additional 250,000
shares of Common Stock. The shares of Common Stock issuable upon exercise of the
Representative's Warrants are hereinafter referred to as the " Representative's
Shares." The Firm Shares, the Option Shares, the Representative's
<PAGE>
Warrants and the Representative's Shares (collectively, hereinafter referred to
as the "Securities") are more fully described in the Registration Statement and
the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, each of the Underwriters as of the date
hereof, and as of the Closing Date (hereinafter defined) and the Option Closing
Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. 333-______), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Firm Shares and the Option Shares under the Securities Act of 1933, as
amended (the "Act"), which registration statement and amendment or amendments
have been prepared by the Company in conformity with the requirements of the
Act, and the rules and regulations (the "Regulations") of the Commission under
the Act. The Company will promptly file a further amendment to said registration
statement in the form heretofore delivered to the Underwriters, and will not
file any other amendment thereto to which the Underwriters shall have objected
in writing after having been furnished with a copy thereof. Except as the
context may otherwise require, such registration statement, as amended, on file
with the Commission at the time the registration statement becomes effective
(including the prospectus, financial statements, schedules, exhibits and all
other documents filed as a part thereof or incorporated therein (including, but
not limited to those documents or information incorporated by reference therein)
and all information deemed to be a part thereof as of such time pursuant to
paragraph (b) of Rule 430(A) of the Regulations)), is hereinafter called the
"Registration Statement", and the form of prospectus in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations, is hereinafter
called the "Prospectus." For purposes hereof, "Rules and Regulations" mean the
rules and regulations adopted by the Commission under either the Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or the Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or to the Company's knowledge, threatened. Each of the Preliminary Prospectus,
Registration Statement and Prospectus at the time of filing thereof conformed
with the requirements of the Act and the Rules and Regulations, and none of the
Preliminary Prospectus, Registration Statement or Prospectus at the time of
filing thereof contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein and necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided, however, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company with respect to the
Underwriters by or on behalf of the Underwriters expressly for use in such
Preliminary Prospectus, Registration Statement or Prospectus.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date and each Option Closing Date, if any,
and during such
<PAGE>
longer period as the Prospectus may be required to be delivered in connection
with sales by the Underwriters or a dealer, the Registration Statement and the
Prospectus will contain all statements which are required to be stated therein
in accordance with the Act and the Rules and Regulations, and will conform to
the requirements of the Act and the Rules and Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided, however, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
conformity with information furnished to the Company in writing by or on behalf
of any Underwriter expressly for use in the Preliminary Prospectus, Registration
Statement or Prospectus or any amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its incorporation.
The Company does not own an interest in any corporation, partnership, trust,
joint venture or other business entity. The Company is duly qualified and
licensed and in good standing as a foreign corporation in each jurisdiction in
which its ownership or leasing of any properties or the character of its
operations requires such qualification or licensing. The Company has all
requisite corporate power and authority, and the Company has obtained any and
all necessary authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory officials and
bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and conduct
its business as described in the Prospectus; the Company is and has been doing
business in compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits and all federal, state and local
laws, rules and regulations; the Company has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the condition,
financial or otherwise, or the earnings, position, prospects, value, operation,
properties, business or results of operations of the Company; the Company is in
compliance with all Federal Food and Drug Administration ("FDA") regulatory
requirements relating to its products and proposed products and, except as
disclosed in the Prospectus, has received all regulatory clearances relating to
its products and proposed products under the Federal Food Drug and Cosmetics
Act, as amended (the "FDCA"), and the Safe Medical Devised Act of 1990, as
amended ("SMDA"), and the regulations promulgated thereunder, respectively. The
disclosures in the Registration Statement concerning the effects of federal,
state and local laws, rules and regulations on the Company's business as
currently conducted and as contemplated are correct in all material respects and
do not omit to state a material fact necessary to make the statements contained
therein not misleading in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Capital Stock" and will have the adjusted capitalization set
forth therein on the Closing Date and the Option Closing Date, if any, based
upon the assumptions set forth therein, and the Company is not a party to or
bound by any instrument, agreement or other arrangement providing for it to
issue any capital stock, rights, warrants, options or other securities, except
for this Agreement, the
<PAGE>
Representative's Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all respects to all statements
with respect thereto contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of the Company have been duly authorized
and validly issued and are fully paid and non-assessable and the holders thereof
have no rights of rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none of such securities
were issued in violation of the preemptive rights of any holders of any security
of the Company or similar contractual rights granted by the Company. The
Securities are not and will not be subject to any preemptive or other similar
rights of any stockholder, have been duly authorized and, when issued, paid for
and delivered in accordance with the terms hereof, will be validly issued, fully
paid and non-assessable and will conform to the description thereof contained in
the Prospectus; the holders thereof will not be subject to any liability solely
by reason of being such holders; all corporate action required to be taken for
the authorization, issue and sale of the Securities has been duly and validly
taken; and the certificates representing the Securities will be in due and
proper form. Upon the issuance and delivery pursuant to the terms hereof of the
Securities to be sold by the Company hereunder, the Underwriters or the
Representative, as the case may be, will acquire good and marketable title to
such Securities free and clear of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever.
(f) The financial statements, including the related notes and
schedules thereto, included in the Registration Statement, each Preliminary
Prospectus and the Prospectus fairly present the financial position, income,
changes in cash flow, changes in stockholders' equity, and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply and the pro forma financial information included in the
Registration Statement and Prospectus presents fairly, on a basis consistent
with that of the audited financial statements included therein, what the
Company's pro forma capitalization would have been for the respective periods
and as of the respective dates to which they apply after giving effect to the
adjustments described therein. Such financial statements have been prepared in
conformity with generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved. There has
been no adverse change or development involving a material prospective change in
the condition, financial or otherwise, or in the earnings, position, prospects,
value, operation, properties, business, or results of operations of the Company
whether or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus,
and the outstanding debt, the property, both tangible and intangible, and the
business of the Company conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus. Financial
information set forth in the Prospectus under the headings "Summary Financial
Data," "Selected Financial Data," "Capitalization," and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," fairly present,
on the basis stated in the Prospectus, the information set forth therein, have
been derived from or compiled on a basis consistent with that of the audited
financial statements included in the Prospectus.
(g) The Company (i) has paid all federal, state, local, and foreign
taxes for which it is liable and for which payment is due, including, but not
limited to, withholding taxes and amounts payable under Chapters 21 through 24
of the Internal Revenue Code of 1986 (the
<PAGE>
"Code"), and has furnished all information returns it is required to furnish
pursuant to the Code, (ii) has established adequate reserves for such taxes
which are not due and payable, and (iii) does not have any tax deficiency or
claims outstanding, proposed or assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Securities to be
sold by the Company hereunder and the purchase by Josephthal of the
Representative's Warrants from the Company, (iii) the consummation by the
Company of any of its obligations under this Agreement or the Representative's
Warrant Agreement, or (iv) resales of the Shares in connection with the
distribution contemplated hereby.
(i) The Company maintains insurance policies, including, but not
limited to, general liability, product liability and property insurance, which
insures the Company and its employees, against such losses and risks generally
insured against by comparable businesses. The Company (A) has not failed to give
notice or present any insurance claim with respect to any matter, including but
not limited to the Company's business, property or employees, under the
insurance policy or surety bond in a due and timely manner, (B) does not have
any disputes or claims against any underwriter of such insurance policies or
surety bonds or has not failed to pay any premiums due and payable thereunder,
or (C) has not failed to comply with all conditions contained in such insurance
policies and surety bonds. There are no facts or circumstances under any such
insurance policy or surety bond which would relieve any insurer of its
obligation to satisfy in full any valid claim of the Company.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those brought by or before the FDA and involving environmental or
similar matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the properties or
business of, the Company which (i) questions the validity of the capital stock
of the Company, this Agreement or the Representative's Warrant Agreement or of
any action taken or to be taken by the Company pursuant to or in connection with
this Agreement or the Representative's Warrant Agreement, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are accurately
summarized in all material respects), or (iii) might materially and adversely
affect the condition, financial or otherwise, or the earnings, position,
prospects, stockholders' equity, value, operation, properties, business or
results of operations of the Company.
(k) The Company has full legal right, corporate power and authority to
authorize, issue, deliver and sell the Securities, enter into this Agreement and
the Representative's Warrant Agreement and to consummate the transactions
provided for in such agreements; and this Agreement and the Representative's
Warrant Agreement have each been duly and properly authorized, executed and
delivered by the Company. Each of this Agreement and the Representative's
Warrant Agreement constitutes a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, except (i)
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification or
contribution provisions may be limited under applicable laws or the
<PAGE>
public policies underlying such laws and (iii) that the remedies of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceedings may be brought. None of the Company's issue and sale of the
Securities, execution or delivery of this Agreement or the Representative's
Warrant Agreement, its performance hereunder and thereunder, its consummation of
the transactions contemplated herein and therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and any amendments
or supplements thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon, any property
or assets (tangible or intangible) of the Company pursuant to the terms of, (i)
the articles of incorporation or by-laws of the Company, (ii) any license,
contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which it is or may be bound or
to which any of its properties or assets (tangible or intangible) is or may be
subject, or any indebtedness, or (iii) any statute, judgment, decree, order,
rule or regulation applicable to the Company of any arbitrator, court,
regulatory body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the Company or
any of its activities or properties.
(l) Except as described in the Prospectus, no consent, approval,
authorization or order of, and no filing with, any court, regulatory body,
government agency or other body, domestic or foreign, is required for the
issuance of the Shares pursuant to the Prospectus and the Registration
Statement, the issuance of the Representative's Warrants, the performance of
this Agreement and the Representative's Warrant Agreement and the transactions
contemplated hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person may have for
the issue and/or sale of any of the Shares or the Representative's Warrants,
except such as have been or may be obtained under the Act or may be required
under state securities or Blue Sky laws in connection with the Underwriters'
purchase and distribution of the Shares, and the Representative's Warrants to be
sold by the Company hereunder and under the Representative's Warrant Agreement.
(m) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which any of its assets, properties or business may be subject have
been duly and validly authorized, executed and delivered by the Company, and
constitute the legal, valid and binding agreements of the Company, enforceable
against the Company, in accordance with their respective terms. The descriptions
in the Registration Statement of agreements, contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown with respect thereto on Form SB-2, and there are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are in
all material respects complete and correct copies of the documents of which they
purport to be copies.
<PAGE>
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any change in the capital stock, or any material change in the debt
(long or short term) or liabilities or material adverse change in or affecting
the general affairs, management, financial operations, stockholders' equity or
results of operations of the Company.
(o) No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust agreement,
stockholders agreement, partnership agreement, note, loan or credit agreement,
purchase order, or any other agreement or instrument evidencing an obligation
for borrowed money, or any other material agreement or instrument to which the
Company is a party or by which the Company may be bound or to which the property
or assets (tangible or intangible) of the Company is subject or affected.
(p) The Company has generally enjoyed a satisfactory employer-employee
relationship with its employees and is in compliance with all federal, state,
local, and foreign laws and regulations respecting employment and employment
practices, terms and conditions of employment and wages and hours. There are no
pending investigations involving the Company by the U.S. Department of Labor, or
any other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company or any predecessor
entity, and none has ever occurred. No representation question exists respecting
the employees of the Company, and no collective bargaining agreement or
modification thereof is currently being negotiated by the Company. No grievance
or arbitration proceeding is pending under any expired or existing collective
bargaining agreements of the Company. No labor dispute with the employees of the
Company exists, or, is imminent.
(q) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or
at any time previously, to a defined benefit plan, as defined in Section 3(35)
of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, which could subject the Company to any tax penalty on
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all reporting, disclosure and other requirements of
the Code and ERISA as they relate to any such ERISA Plan. Determination letters
have been received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a), stating that such
ERISA Plan and the
<PAGE>
attendant trust are qualified thereunder. The Company has never completely or
partially withdrawn from a "multiemployer plan."
(r) Neither the Company nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, service names, trade
names and copyrights, and none of the licenses and rights to the foregoing
presently owned or held by the Company are in dispute or are in any conflict
with the right of any other person or entity. Except as otherwise disclosed in
the Prospectus, the Company (i) owns or has the right to use, free and clear of
all liens, charges, claims, encumbrances, pledges, security interests, defects
or other restrictions or equities of any kind whatsoever, all patents, patent
applications, trademarks, service marks, service names, trade names and
copyrights, technology and licenses and rights with respect to the foregoing,
used in the conduct of its business as now conducted or proposed to be conducted
without infringing upon or otherwise acting adversely to the right or claimed
right of any person, corporation or other entity under or with respect to any of
the foregoing and (ii) is not obligated or under any liability whatsoever to
make any payment by way of royalties, fees or otherwise to any owner or licensee
of, or other claimant to, any patent, patent application, trademark, service
mark, service name, trade name, copyright, know-how, technology or other
intangible asset, with respect to the use thereof or in connection with the
conduct of its business or otherwise.
(t) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental or other proceeding, domestic or
foreign, pending or threatened (or circumstances that may give rise to the same)
against the Company which challenges the exclusive rights of the Company with
respect to any trademarks, trade names, service marks, service names,
copyrights, patents, patent applications or licenses or rights to the foregoing
used in the conduct of its business, or which challenge the right of the Company
to use any technology presently used or contemplated to be used in the conduct
of its business.
(u) The Company owns and has the unrestricted right to use all trade
secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
technology, designs, processes, works of authorship, computer programs and
technical data and information (collectively herein "intellectual property")
that are material to the development, manufacture, operation and sale of all
products and services sold or proposed to be sold by the Company, free and clear
of and without violating any right, lien, or claim of others, including without
limitation, former employers of its employees; provided, however, that the
possibility exists that other persons or entities, completely independently of
the Company, or its employees or agents, could have developed trade secrets or
items of technical information similar or identical to those of the Company. The
Company is not aware of any such development of similar or identical trade
secrets or technical information by others.
<PAGE>
(v) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus, to be owned or leased by it free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus, taxes, lessor's interests and liens for taxes not yet due and
payable.
(w) Ernst & Young LLP ("E&Y") whose report is filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
(x) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which all officers and directors of the
Company holding shares of the Common Stock or securities exercisable or
exchangeable for or convertible into shares of Common Stock issued and
outstanding agreed not to offer to sell, sell, transfer, hypothecate or
otherwise encumber or dispose of any such securities (either pursuant to Rule
144 of the Rules and Regulations or otherwise) for a period of not less than six
(6) months following the effective date of the Registration Statement without
the prior written consent of Josephthal. The Company will cause the Transfer
Agent, as defined below, to mark an appropriate legend on the face of stock
certificates representing all of such securities and to place "stop transfer"
orders on the Company's stock ledgers. During the six (6) month period
commencing on the effective date of the Registration Statement, the Company
shall not, without the prior written consent of the Representative, sell,
contract or offer to sell, issue, transfer, assign, pledge, distribute, or
otherwise dispose of, directly or indirectly, any shares of Common Stock or any
options, rights or warrants with respect to any shares of Common Stock, except
up to (i) 1,254,444 shares of Common Stock issuable upon exercise of outstanding
stock options, (ii) 145,120 shares of Common Stock reserved for future issuance
under the Company's 1991 Stock Option Plan and (iii) 635,952 shares of Common
Stock issuable upon exercise of outstanding warrants.
(y) Except as described in the Prospectus under "Underwriting," there
are no claims, payments, issuances, arrangements or understandings, whether oral
or written, for services in the nature of a finder's or origination fee with
respect to the sale of the Securities hereunder or any other arrangements,
agreements, understandings, payments or issuance with respect to the Company or
any of its officers, directors, stockholders, partners, employees or affiliates
that may affect the Underwriters' compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD").
(z) The Common Stock has been approved for quotation on the Nasdaq
SmallCap Market ("Nasdaq").
(aa) Neither the Company nor any of its officers, employees, agents,
or any other person acting on behalf of the Company, has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
or employee of any governmental agency (domestic or foreign) or instrumentality
of any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which
<PAGE>
(a) might subject the Company, or any other such person to any damage or penalty
in any civil, criminal or governmental litigation or proceeding (domestic or
foreign), (b) if not given in the past, might have had a materially adverse
effect on the assets, business or operations of the Company, or (c) if not
continued in the future, might adversely affect the assets, business, operations
or prospects of the Company. The Company's internal accounting controls are
sufficient to cause the Company to comply with the Foreign Corrupt Practices Act
of 1977, as amended.
(bb) Except as set forth in the Prospectus, no officer, director or
stockholder of the Company, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 promulgated under the Rules and Regulations) of any of
the foregoing persons or entities has or has had, either directly or indirectly,
(i) an interest in any person or entity which (A) furnishes or sells services or
products which are furnished or sold or are proposed to be furnished or sold by
the Company, or (B) purchases from or sells or furnishes to the Company any
goods or services, or (ii) a beneficial interest in any contract or agreement to
which the Company is a party or by which it may be bound or affected. Except as
set forth in the Prospectus under "Certain Transactions," there are no existing
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company and any officer, director, or Principal Shareholder (as such term is
defined in the Prospectus) of the Company or any partner, affiliate or associate
of any of the foregoing persons or entities.
(cc) Any certificate signed by any officer of the Company, and
delivered to the Underwriters or to Underwriters' Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(dd) The minute books of the Company have been made available to the
Underwriters and contains a complete summary of all meetings and actions of the
directors, stockholders, audit committee, compensation committee and any other
committee of the Board of Directors of the Company, respectively, since the time
of its incorporation, and reflects all transactions referred to in such minutes
accurately in all material respects.
(ee) Except and to the extent described in the Prospectus, no holders
of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
(ff) The Company has made all filings on a timely basis as required
under the Exchange Act.
2. Purchase, Sale and Delivery of the Securities and Representative's
Warrants.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase
<PAGE>
from the Company at a price of $______ [93% of the initial public offering
price] per share of Common Stock, that number of Firm Shares set forth in
Schedule A opposite the name of such Underwriter, plus any additional number of
Firm Shares which such Underwriter may become obligated to purchase pursuant to
the provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of the
Option Shares. The option granted hereby will expire 45 days after (i) the date
the Registration Statement becomes effective, if the Company has elected not to
rely on Rule 430A under the Rules and Regulations, or (ii) the date of this
Agreement if the Company has elected to rely upon Rule 430A under the Rules and
Regulations, and may be exercised in whole or in part from time to time only for
the purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Firm Shares upon notice by the Representative
to the Company setting forth the number of Option Shares as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for any such Option Shares. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Representative, but shall not
be later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Date, as hereinafter defined, unless otherwise
agreed upon by the Representative and the Company. Nothing herein contained
shall obligate the Underwriters to make any over-allotments. No Option Shares
shall be delivered unless the Firm Shares shall be simultaneously delivered or
shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares shall be made at the offices of Josephthal & Co. Inc. at
200 Park Avenue, 25th Floor, New York, New York 10166, or at such other place as
shall be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 10:00 a.m. (New York City time) on _______________,
1998 or at such other time and date as shall be agreed upon by the
Representative and the Company, but not less than three (3) nor more than seven
(7) full business days after the effective date of the Registration Statement
(such time and date of payment and delivery being herein called "Closing Date").
In addition, in the event that any or all of the Option Shares are purchased by
the Underwriters, payment of the purchase price for, and delivery of
certificates for, such Option Shares shall be made at the above mentioned office
of the Representative or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates for
the Firm Shares and the Option Shares, if any, shall be made to the Underwriters
against payment by the Underwriters, severally and not jointly, of the purchase
price for the Firm Shares and the Option Shares, if any, to the order of the
Company for the Firm Shares and the Option Shares, if any, by New York Clearing
House funds. In the event such option is exercised, each of the Underwriters,
acting severally and not jointly, shall purchase that proportion of the total
number of Option Shares then being purchased which the number of Firm Shares set
forth in Schedule A hereto opposite the name of such Underwriter bears to the
total number of Firm Shares, subject in each case to such adjustments as the
Representative in its discretion shall make to eliminate any sales or purchases
of fractional shares. Certificates for the Firm Shares and the Option Shares, if
any, shall be in definitive, fully registered form, shall bear no restrictive
legends and shall be in such denominations and
<PAGE>
registered in such names as the Underwriters may request in writing at least two
(2) business days prior to the Closing Date or the relevant Option Closing Date,
as the case may be. The certificates for the Firm Shares and the Option Shares,
if any, shall be made available to the Representative at such office or such
other place as the Representative may designate for inspection, checking and
packaging no later than 9:30 a.m. on the last business day prior to Closing Date
or the relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to
Josephthal, Representative's Warrants at a purchase price of $.0001 per warrant,
which warrants shall entitle the holders thereof to purchase an aggregate of
250,000 shares of Common Stock. The Representative's Warrants shall be
exercisable for a period of four years commencing one year from the effective
date of the Registration Statement at a price equaling one hundred twenty
percent (120%) of the initial public offering price of the shares of Common
Stock. The Representative's Warrant Agreement and form of Warrant Certificate
shall be substantially in the form filed as Exhibit 4.2 to the Registration
Statement. Payment for the Representative's Warrants shall be made on the
Closing Date.
3. Public Offering of the Shares. As soon after the Registration Statement
becomes effective as the Representative deems advisable, the Underwriters shall
make a public offering of the Shares (other than to residents of or in any
jurisdiction in which qualification of the Shares is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Representative may from time to time increase or decrease the public
offering price after distribution of the Shares has been completed to such
extent as the Representative, in its discretion deem advisable. The Underwriters
may enter into one of more agreements as the Underwriters, in each of their sole
discretion, deem advisable with one or more broker-dealers who shall act as
dealers in connection with such public offering.
4. Covenants and Agreements of the Company.
The Company covenants and agrees with each of the Underwriters as
follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Shares by the Underwriters of
which the Representative shall not previously have been advised and furnished
with a copy, or to which the Representative shall have objected or which is not
in compliance with the Act, the Exchange Act and the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative and confirm the notice in writing,
(i) when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement
<PAGE>
or any order preventing or suspending the use of the Preliminary Prospectus or
the Prospectus, or any amendment or supplement thereto, or the institution of
proceedings for that purpose, (iii) of the issuance by the Commission or by any
state securities commission of any proceedings for the suspension of the
qualification of any of the Securities for offering or sale in any jurisdiction
or of the initiation, or the threatening, of any proceeding for that purpose,
(iv) of the receipt of any comments from the Commission; and (v) of any request
by the Commission for any amendment to the Registration Statement
<PAGE>
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission authority shall enter a
stop order or suspend such qualification at any time, the Company will make
every effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifteenth business day after the effective date of
the Registration Statement.
(d) The Company will give the Representative notice of its intention
to file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representative with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such prospectus to which the
Representative or Orrick, Herrington & Sutcliffe LLP ("Underwriters' Counsel"),
shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales
<PAGE>
of or dealings in the Securities in accordance with the provisions hereof and
the Prospectus, or any amendments or supplements thereto. If at any time when a
prospectus relating to the Securities is required to be delivered under the Act,
any event shall have occurred as a result of which, in the opinion of counsel
for the Company or Underwriters' Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act, the Company will notify the Representative promptly and
prepare and file with the Commission an appropriate amendment or supplement in
accordance with Section 10 of the Act, each such amendment or supplement to be
satisfactory to Underwriters' Counsel, and the Company will furnish to the
Underwriters copies of such amendment or supplement as soon as available and in
such quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Representative, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the effective date of
the Registration Statement.
(h) During a period of seven years after the date hereof, the Company
will furnish to its stockholders annual reports (including financial statements
audited by independent public accountants) and will deliver to the
Representative:
(i) concurrently with furnishing such quarterly reports to
its stockholders, statements of income of the Company for each quarter
in the form furnished to the Company's stockholders and certified by
the Company's principal financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the report thereon of independent
certified public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports
and financial statements furnished to or filed with the Commission,
the NASD or any securities exchange;
<PAGE>
(v) every press release and every material news item or
article of interest to the financial community in respect of the
Company, or its affairs which was released or prepared by or on behalf
of the Company; and
(vi) any additional information of a public nature
concerning the Company (and any future subsidiary) or its businesses
which the Representative may request.
During such five (5)-year period, if the Company has an active
subsidiary, the foregoing financial statements will be on a consolidated basis
to the extent that the accounts of the Company and its subsidiary are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(i) The Company will maintain a Transfer Agent and, if necessary under
the jurisdiction of incorporation of the Company, a Registrar (which may be the
same entity as the Transfer Agent) for its Common Stock.
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representatives may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as reasonably available and in such quantities as the Representative may
request.
(k) On or before the effective date of the Registration Statement, the
Company shall provide the Representative with true copies of duly executed,
legally binding and enforceable agreements pursuant to which for a period of not
less than six (6) months from the effective date of the Registration Statement
all officers and directors of the Company holding shares of the Common Stock or
securities exercisable or exchangeable for or convertible into shares of Common
Stock issued and outstanding will not offer to sell, sell, transfer, hypothecate
or otherwise encumber or dispose of any such securities (either pursuant to Rule
144 of the Rules and Regulations or otherwise) without the prior written consent
of Josephthal (collectively, the "Lock-up Agreements"). On or before the Closing
Date, the Company shall deliver instructions to the Transfer Agent authorizing
it to place appropriate legends on the certificates representing the securities
subject to the Lock-up Agreements and to place appropriate stop transfer orders
on the Company's ledgers. During the six (6) month period commencing with the
effective date of the Registration Statement, the Company shall not, without the
prior written consent of the Representative, sell, contract or offer to sell,
issue, transfer, assign, pledge, hypothecate, distribute, or otherwise dispose
of, directly or indirectly, any shares of Common Stock or any options, rights or
warrants with respect to any shares of Common Stock, except up to (i) 1,254,444
shares of Common Stock issuable upon exercise of outstanding stock options, (ii)
145,120 shares of Common Stock reserved for future issuance under the Company's
1991 Stock Option Plan and (iii) 635,952 shares of Common Stock issuable upon
exercise of outstanding warrants. During the six (6) month period commencing
with the effective date of the Registration Statement, the Company shall not
file any registration statement with the Securities and Exchange Commission on
Form S-8 without the prior written consent of the Representative.
<PAGE>
(l) Neither the Company, nor any of its officers, directors,
stockholders, nor any of their respective affiliates (within the meaning of the
Rules and Regulations) will take, directly or indirectly, any action designed
to, or which might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. Except as described in the Prospectus, no portion
of the net proceeds will be used, directly or indirectly, to acquire any
securities issued by the Company.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
(o) The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in their letter to be
furnished pursuant to Section 6(j) hereof.
(p) The Company shall cause the Common Stock to be quoted on Nasdaq or
a National Securities exchange and for a period of seven (7) years from the date
hereof, and use its best efforts to maintain the Nasdaq quotation or exchange
listing of the Common Stock to the extent outstanding.
(q) For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representative at the Representative's request and at the
Company's sole expense, (i) daily consolidated transfer sheets relating to the
Common Stock, (ii) the list of holders of all of the Company's securities and
(iii) a Blue Sky "Trading Survey" for secondary sales of the Company's
securities prepared by counsel to the Company.
(r) As soon as practicable, but in no event more than 30 days from the
effective date of the Registration Statement, take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions and
Moody's OTC Manual and to continue such inclusion for a period of not less than
seven (7) years.
(s) The Company hereby agrees that it will not for a period of
thirteen (13) months from the effective date of the Registration Statement,
adopt, propose to adopt or otherwise permit to exist any employee, officer,
director, consultant or compensation plan or arrangement permitting the grant,
issue or sale of any shares of Common Stock or other securities of the Company
(i) in an amount greater than an aggregate of __________ shares of
<PAGE>
Common Stock, (ii) at an exercise or sale price per share less than the fair
market value of the Common Stock on the date of grant or sale, (iii) to any
direct or indirect beneficial holder on the date hereof of more than 10% of the
issued and outstanding shares of Common Stock, (iv) with the payment for such
securities with any form of consideration other than cash, (v) upon payment of
less than the full purchase or exercise price for such shares of Common Stock or
other securities of the Company.
(t) Until the completion of the distribution of the Shares, and for 25
days thereafter, the Company shall not without the prior written consent of the
Representative and Underwriters' Counsel, issue, directly or indirectly, any
press release or other communication or hold any press conference with respect
to the Company or its activities or the offering contemplated hereby.
(u) For a period equal to the lesser of (i) seven (7) years from the
date hereof, and (ii) the sale to the public of the Representative's Shares, the
Company will not take any action or actions which may prevent or disqualify the
Company's use of Form SB-2 (or other appropriate form) for the registration
under the Act of the Representative's Shares.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date and
the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement and the Representative's Warrant Agreement, including,
without limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreements, and related documents, including
the cost of all copies thereof and of the Preliminary Prospectuses and of the
Prospectus and any amendments thereof or supplements thereto supplied to the
Underwriters and such dealers as the Underwriters may request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of the
Securities including, but not limited to, (x) the purchase by the Underwriters
of the Shares and the purchase by Josephthal of the Representative's Warrants
from the Company, (y) the consummation by the Company of any of its obligations
under this Agreement and the Representative's Warrant Agreement, and (z) resale
of the Shares by the Underwriters in connection with the distribution
contemplated hereby, (iv) the qualification of the Securities under state or
foreign securities or "Blue Sky" laws and determination of the status of such
securities under legal investment laws, including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith, (v) costs and expenses in connection with
due diligence investigations, including but not limited to the fees of any
independent counsel or consultant retained, (vi) fees and expenses of the
transfer agent and registrar, (vii) applications for assignments of a rating of
the Securities by qualified rating agencies, (viii) the fees payable to the
Commission and the NASD, and (ix) the fees and
<PAGE>
expenses incurred in connection with the quotation of the Securities on Nasdaq
and any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 or Section 12, the Company shall reimburse and
indemnify the Representative for all of their actual out-of-pocket expenses,
including the fees and disbursements of Underwriters' Counsel, less any amounts
already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to one
percent (1%), and a financial advisory fee equal to one percent (1%), of the
gross proceeds received by the Company from the sale of the Firm Shares. In the
event the Representative elects to exercise the over-allotment option described
in Section 2(b) hereof, the Company agrees to pay to the Representative on the
Option Closing Date (by certified or bank cashier's check, or at the
Representative's election, by deduction from the proceeds of the Option Shares)
a non-accountable expense allowance equal to one and one-half percent (1%), and
a financial advisory fee equal to one percent (1%), of the gross proceeds
received by the Company from the sale of the Option Shares.
6. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, with respect to the
Company as if it had been made on and as of the Closing Date or each Option
Closing Date, as the case may be; the accuracy on and as of the Closing Date or
Option Closing Date, if any, of the statements of the officers of the Company
made pursuant to the provisions hereof; and the performance by the Company on
and as of the Closing Date and each Option Closing Date, if any, of their
respective covenants and obligations hereunder and to the following further
conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 Noon, New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Representative, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Representative of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
<PAGE>
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representative shall have
received from Underwriters' Counsel, such opinion or opinions with respect to
the organization of the Company, the validity of the Securities, the
Representative's Warrants, the Registration Statement, the Prospectus and other
related matters as the Representative requests and Underwriters' Counsel shall
have received such papers and information as they request to enable them to pass
upon such matters.
(d) At the Closing Date, the Underwriters shall have received the
favorable opinion of Dorsey & Whitney LLP, counsel to the Company, dated the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of organization, (B) is duly qualified and licensed and
in good standing as a foreign corporation in each jurisdiction in
which its ownership or leasing of any properties or the character of
its operations requires such qualification or licensing, and (C) has
all requisite corporate power and authority; and the Company has
obtained any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or similar
matters), to own or lease its properties and conduct its business as
described in the Prospectus; the Company is and has been doing
business in material compliance with all such authorizations,
approvals, orders, licenses, certificates, franchises and permits and
all federal, state and local laws, rules and regulations; the Company
has not received any notice of proceedings relating to the revocation
or modification of any such authorization, approval, order, license,
certificate, franchise, or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
materially adversely affect the business, operations, condition,
financial or otherwise, or the earnings, business affairs, position,
prospects, value, operation, properties, business or results of
operations of the Company. The disclosures in the Registration
Statement concerning the effects of federal, state and local laws,
rules and regulations on the Company's business as currently conducted
and as contemplated are correct in all material respects and do not
omit to state a fact necessary to make the statements contained
therein not misleading in light of the circumstances in which they
were made;
<PAGE>
(ii) to the best of such counsel's knowledge, the Company
does not own an interest in any other corporation, partnership, joint
venture, trust or other business entity;
(iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any
amendment or supplement thereto, under "Capitalization" and
"Description of Securities," and is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue
any capital stock, rights, warrants, options or other securities,
except for this Agreement, the Representative's Warrant Agreement and
as described in the Prospectus. The Securities, and all other
securities issued or issuable by the Company conform in all material
respects to all statements with respect thereto contained in the
Registration Statement and the Prospectus. All issued and outstanding
securities of the Company have been duly authorized and validly issued
and are fully paid and non-assessable; the holders thereof have no
rights of rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any
holders of any security of the Company. The Shares, the
Representative's Warrants and the Representative's Shares to be sold
by the Company hereunder and under the Representative's Warrant
Agreement are not and will not be subject to any preemptive or other
similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof,
will be validly issued, fully paid and non-assessable and conform to
the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders;
all corporate action required to be taken for the authorization, issue
and sale of the Shares, the Representative's Warrants and the
Representative's Shares has been duly and validly taken, and the
certificates representing the Shares and the Representative's Warrants
are in due and proper form. The Representative's Warrants constitute
valid and binding obligations of the Company to issue and sell, upon
exercise thereof and payment therefor, the number and type of
securities of the Company called for thereby. Upon the issuance and
delivery pursuant to this Agreement and the Representative's Warrant
Agreement of the Shares and the Representative's Warrants,
respectively, to be sold by the Company, the Underwriters and the
Representative, respectively, will acquire good and marketable title
to the Shares and the Representative's Warrants free and clear of any
pledge, lien, charge, claim, encumbrance, pledge, security interest,
or other restriction or equity of any kind whatsoever. No transfer tax
is payable by or on behalf of the Underwriters in connection with (A)
the issuance by the Company of the Shares, (B) the purchase by the
Underwriters and the Representative of the Shares and the
Representative's Warrants, respectively, from the Company, (C) the
consummation by the Company of any of its obligations under this
Agreement or the Representative's Warrant Agreement, or (D) resales of
the Shares in connection with the distribution contemplated hereby;
(iv) the Registration Statement is effective under the Act,
and, if applicable, filing of all pricing information has been timely
made in the appropriate form under Rule 430A, and no stop order
suspending the use of the Preliminary
<PAGE>
Prospectus, the Registration Statement or Prospectus or any part of
any thereof or suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have
been instituted or are pending or, to the best of such counsel's
knowledge threatened or contemplated under the Act;
(v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements
thereto (other than the financial statements and other financial and
statistical data included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations;
(vi) to the best of such counsel's knowledge, (A) there are
no agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed
as exhibits to the Registration Statement other than those described
in the Registration Statement (or required to be filed under the
Exchange Act if upon such filing they would be incorporated, in whole
or in part, by reference therein) and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are correct
copies of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any
supplement or amendment thereto of contracts and other documents to
which the Company is a party or by which it is bound, including any
document to which the Company is a party or by which it is bound,
incorporated by reference into the Prospectus and any supplement or
amendment thereto, are accurate in all material respects and fairly
represent the information required to be shown by Form SB-2; (C) there
is not pending or threatened against the Company any action,
arbitration, suit, proceeding, inquiry, investigation, litigation,
governmental or other proceeding (including, without limitation, those
brought by or before the FDA and involving environmental or similar
matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the
properties or business of the Company which (x) is required to be
disclosed in the Registration Statement which is not so disclosed,
(and such proceedings as are summarized in the Registration Statement
are accurately summarized in all material respects), (y) questions the
validity of the capital stock of the Company or this Agreement or the
Representative's Warrant Agreement, or of any action taken or to be
taken by the Company pursuant to or in connection with any of the
foregoing; (D) no statute or regulation or legal or governmental
proceeding required to be described in the Prospectus is not described
as required; (E) there is no action, suit or proceeding pending, or
threatened, against or affecting the Company before any court or
arbitrator or governmental body, agency or official (or any basis
thereof known to such counsel) in which there is a reasonable
possibility of an adverse decision which may result in a material
adverse change in the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company, which
could adversely affect the present or prospective ability of the
Company to perform its obligations under this Agreement or the
Representative's Warrant Agreement or which in any manner draws into
question the validity or enforceability of this Agreement or the
Representative's Warrant Agreement; and (F) the Company is in
compliance with all FDA regulatory
<PAGE>
requirements relating to its products and proposed products and,
except as disclosed in the Prospectus, has received all regulatory
clearances relating to its products under the FDCA and the SMDA, and
the regulations promulgated thereunder, respectively
(vii) the Company has full legal right, power and authority
to enter into each of this Agreement and the Representative's Warrant
Agreement and to consummate the transactions provided for herein and
therein; and each of this Agreement and the Representative's Warrant
Agreement has been duly authorized, executed and delivered by the
Company. Each of this Agreement and the Representative's Warrant
Agreement, assuming due authorization, execution and delivery by each
other party thereto constitutes a legal, valid and binding agreement
of the Company enforceable against the Company in accordance with its
terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution
may be limited by applicable law), and none of the Company's execution
or delivery of this Agreement and the Representative's Warrant
Agreement, its performance hereunder or thereunder, its consummation
of the transactions contemplated herein or therein, or the conduct of
its business as described in the Registration Statement, the
Prospectus and any amendments or supplements thereto, conflicts with
or will conflict with or results or will result in any breach or
violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of
any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company pursuant to
the terms of, (A) the articles of incorporation or by-laws of the
Company, (B) any license, contract, indenture, mortgage, deed of
trust, voting trust agreement, stockholders agreement, note, loan or
credit agreement or any other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which any
of its respective properties or assets (tangible or intangible) is or
may be subject, or any indebtedness, or (C) any statute, judgement,
decree, order, rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic
or foreign, having jurisdiction over the Company or any of its
activities or properties;
<PAGE>
(viii) except as described in the Prospectus, no consent,
approval, authorization or order of, and no filing with, any court,
regulatory body, government agency or other body (other than such as
may be required under Blue Sky laws, as to which no opinion need be
rendered) is required in connection with the issuance of the Shares
pursuant to the Prospectus, the issuance of the Representative's
Warrants, the performance of this Agreement and the Representative's
Warrant Agreement and the transactions contemplated hereby and
thereby;
(ix) the properties and business of the Company conform in
all material respects to the description thereof contained in the
Registration Statement and the
Prospectus; and the Company has good and marketable title to, or valid
and enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus to be owned or leased by it, in each
case free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or equities
of any kind whatsoever, other than those referred to in the
Prospectus, and liens for taxes not yet due and payable;
(x) to the best knowledge of such counsel, the Company is
not in breach of, or in default under, any term or provision of any
license, contract, indenture, mortgage, installment sale agreement,
deed of trust, lease, voting trust agreement, stockholders' agreement,
partnership agreement, note, loan or credit agreement or any other
agreement or instrument evidencing an obligation for borrowed money,
or any other agreement or instrument to which the Company is a party
or by which the Company may be bound or to which the property or
assets (tangible or intangible) of the Company is subject or affected;
and the Company is not in violation of any term or provision of its
certificate of incorporation by-laws, or in violation of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation;
(xi) the statements in the Prospectus under "BUSINESS,"
"MANAGEMENT," "PRINCIPAL SHAREHOLDERS," "CERTAIN TRANSACTIONS," and
"DESCRIPTION OF SECURITIES" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are correct in
all material respects; (xii) the Shares have been accepted for
quotation on Nasdaq;
(xiii) the persons listed under the caption "PRINCIPAL
SHAREHOLDERS" in the Prospectus are the respective "beneficial owners"
(as such phrase is defined in regulation 13d-3 under the Exchange Act)
of the securities set forth opposite their respective names thereunder
as and to the extent set forth therein;
(xiv) except as described in the Prospectus, no person,
corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
(xv) except as described in the Prospectus, there are no
claims, payments, issuances, arrangements or understandings for
services in the nature of a finder's or origination fee with respect
to the sale of the Securities hereunder or financial consulting
arrangement or any other arrangements, agreements, understandings,
payments or issuances that may affect the Underwriters' compensation,
as determined by the NASD;
(xvi) assuming due execution by the parties thereto other
than the Company, the Lock-up Agreements are legal, valid and binding
obligations of parties thereto, enforceable against the party and any
subsequent holder of the securities
<PAGE>
subject thereto in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable,
and except as rights to indemnity or contribution may be limited by
applicable law); and
(xvii) except as described in the Prospectus, the Company
does not (A) maintain, sponsor or contribute to any ERISA Plans, (B)
maintain or contribute, now or at any time previously, to a defined
benefit plan, as defined in Section 3(35) of ERISA, and (C) has never
completely or partially withdrawn from a "multiemployer plan".
Such counsel shall state that such counsel has participated in conferences
with officers and other representatives of the Company and representatives of
the independent public accountants for the Company at which conferences such
counsel made inquiries of such officers, representatives and accountants and
discussed the contents of the Preliminary Prospectus, the Registration
Statement, the Prospectus, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus).
Such opinion shall not state that it is to be governed or qualified by,
or that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991), or any comparable
State bar accord.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company, and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Representative and they are
justified in relying thereon. Such opinion shall also state that Underwriters'
Counsel is entitled to rely thereon.
<PAGE>
At each Option Closing Date, if any, the Underwriters shall have received
the favorable opinion of Dorsey & Whitney LLP, counsel to the Company, dated the
Option Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel confirming as of the Option Closing Date
the statements made by Dorsey & Whitney in its opinion delivered on the Closing
Date.
(e) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(f) Prior to each of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects, stockholders' equity or the business activities of the Company,
whether or not in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement and Prospectus;
(ii) there shall have been no transaction, not in the ordinary course of
business, entered into by the Company, from the latest date as of which the
financial condition of the Company is set forth in the Registration Statement
and Prospectus which is materially adverse to the Company; (iii) the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness; (iv) the Company shall not have issued any securities
(other than the Securities); the Company shall not have declared or paid any
dividend or made any distribution in respect of its capital stock of any class;
and there has not been any change in the capital stock of the Company, or any
material change in the debt (long or short term) or liabilities or obligations
of the Company (contingent or otherwise); (v) no material amount of the assets
of the Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vi) no action, suit or proceeding, at
law or in equity, shall have been pending or threatened (or circumstances giving
rise to same) against the Company, or affecting any of its properties or
business before or by any court or federal, state or foreign commission, board
or other administrative agency wherein an unfavorable decision, ruling or
finding may adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus; and (vii) no stop order shall have been issued under
the Act and no proceedings therefor shall have been initiated, threatened or
contemplated by the Commission.
(g) At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties of the Company in
this Agreement are true and correct as if made on and as of the
Closing Date or the Option Closing Date, as the case may be, and the
Company has complied with all agreements and covenants and satisfied
all conditions contained in this Agreement on its part to be
<PAGE>
performed or satisfied at or prior to such Closing Date or Option
Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or,
to the best of each of such person's knowledge, after due inquiry are
contemplated or threatened under the Act;
(iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto, contain all
statements and information required to be included therein, and none
of the Registration Statement, the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material fact or
omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and neither
the Preliminary Prospectus nor any supplement thereto included any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
(a) the Company has not incurred up to and including the Closing Date
or the Option Closing Date, as the case may be, other than in the
ordinary course of its business, any material liabilities or
obligations, direct or contingent; (b) the Company has not paid or
declared any dividends or other distributions on its capital stock;
(c) the Company has not entered into any transactions not in the
ordinary course of business; (d) there has not been any change in the
capital stock of the Company or any material change in the debt (long
or short-term) of the Company; (e) the Company has not sustained any
material loss or damage to its property or assets, whether or not
insured; (g) there is no litigation which is pending or threatened (or
circumstances giving rise to same) against the Company, or any
affiliated party of any of the foregoing which is required to be set
forth in an amended or supplemented Prospectus which has not been set
forth; and (h) there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Underwriters will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
(i) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from E&Y.
<PAGE>
(i) confirming that they are independent public accountants with
respect to the Company within the meaning of the Act and the applicable Rules
and Regulations;
(ii) stating that it is their opinion that the financial statements
and supporting schedules of the Company included in the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations thereunder and that the
Representative may rely upon the opinion of E&Y with respect to such financial
statements and supporting schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited review which included a
reading of the latest available unaudited interim financial statements of the
Company, a reading of the latest available minutes of the stockholders and board
of directors and the various committees of the board of directors of the
Company, consultations with officers and other employees of the Company
responsible for financial and accounting matters and other specified procedures
and inquiries, nothing has come to their attention which would lead them to
believe that (A) the unaudited financial statements and supporting schedules of
the Company included in the Registration Statement do not comply as to form in
all material respects with the applicable accounting requirements of the Act and
the Rules and Regulations or are not fairly presented in conformity with
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the Company included
in the Registration Statement, or (B) at a specified date not more than five (5)
days prior to the effective date of the Registration Statement, there has been
any change in the capital stock of the Company, any change in the long-term debt
of the Company, or any decrease in the stockholders' equity of the Company or
any decrease in the net current assets or net assets of the Company as compared
with amounts shown in the March 31, 1998 balance sheet included in the
Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease, setting forth
the amount of such change or decrease, and (C) during the period from March 31,
1998 to a specified date not more than five (5) days prior to the effective date
of the Registration Statement, there was any decrease in net revenues or net
earnings of the Company or increase in net earnings per common share of the
Company, in each case as compared with the corresponding period beginning March
31, 1998 other than as set forth in or contemplated by the Registration
Statement, or, if there was any such decrease, setting forth the amount of such
decrease;
(iv) setting forth, at a date not later than five (5) days
prior to the date of the Registration Statement, the amount of
liabilities of the Company (including a break-down of commercial paper
and notes payable to the banks);
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth in
the Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be
<PAGE>
derived from the general accounting records, including work sheets, of
the Company and excluding any questions requiring an interpretation by
legal counsel, with the results obtained from the application of
specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in the letter and
found them to be in agreement; and
(vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may request.
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from E&Y a letter, dated as of the Closing Date
or the Option Closing Date, as the case may be, to the effect that they reaffirm
the statements made in the letter furnished pursuant to subsection (i) of this
Section 6 except that the specified date referred to shall be a date not more
than five (5) days prior to the Closing Date or the Option Closing Date, as the
case may be, and, if the Company has elected to rely on Rule 430A of the Rules
and Regulations, to the further effect that they have carried out procedures as
specified in clause (vi) of subsection (i) of this Section 6 with respect to
certain amounts, percentages and financial information as specified by the
Representative and deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) and have found such amounts, percentages and financial information
to be in agreement with the records specified in such clause (vi).
(k) The Company shall have delivered to the Representative a letter
from E&Y addressed to the Company stating that they have not during the
immediately preceding two year period brought to the attention of the Company's
management any "weakness" as defined in Statement of Auditing Standards No. 60
"Communication of Internal Control Structure Related Matters Noted in an Audit,"
in any of the Company's internal controls.
(l) On each of the Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Shares.
(m) No order suspending the sale of the Securities in any jurisdiction
designated by the Representative pursuant to subsection (e) of Section 4 hereof
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(n) On or before the Closing Date, the Underwriters shall have
received the favorable opinion of Schwegman Lundberg Woessner PA, special patent
counsel to the Company, dated the Closing Date, addressed to the Underwriters,
in form and substance satisfactory to Underwriters' counsel, and in
substantially the form of Exhibit A attached hereto.
(o) At each Option Closing date, if any, the Underwriters shall have
received the favorable opinion of Schwegman Lundberg Woessner PA, dated the
relevant Option Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriter's Counsel confirming, as of the Option
Closing Date, the statements made by Schwegman Lundberg Woessner PA, in its
opinion delivered on the Closing Date.
<PAGE>
(p) On or before the Closing Date, the Company shall have executed and
delivered to Josephthal, (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit 4.2 to the Registration Statement in
final form and substance satisfactory to Josephthal, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
(q) On or before the Closing Date, the Shares shall have been duly
approved for quotation on Nasdaq, subject to official notice of issuance.
(r) On or before the Closing Date, there shall have been delivered to
the Representative all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
(s) On or before the Closing Date, there shall have been delivered to
the Representative agreements waiving registration rights of the Company's
security holders for a period of six months from the effective date of the
Registration Statement, in form and substance satisfactory to Underwriters'
Counsel.
If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Representative may terminate this Agreement or,
if the Representative so elects, it may waive any such conditions which have not
been fulfilled or extend the time for their fulfillment.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, and suits in respect thereof),
whatsoever (including but not limited to any and all costs and expenses
whatsoever reasonably incurred in investigating, preparing or defending against
such action, proceeding, investigation, inquiry or suit, commenced or
threatened, or any claim whatsoever), as such are incurred, to which the
Underwriter or such controlling person may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon (A) any untrue statement
or alleged untrue statement of a material fact contained (i) in any Preliminary
Prospectus, the Registration Statement or the Prospectus (as from time to time
amended and supplemented); (ii) in any post-effective amendment or amendments or
any new registration statement and prospectus in which is included securities of
the Company issued or issuable upon exercise of the Securities; or (iii) in any
application or other document or written communication (in this Section 7
collectively called "application") executed by the Company or based upon written
information furnished by the Company filed, delivered or used in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
Nasdaq or any other securities exchange, (B) the omission or alleged omission
therefrom
<PAGE>
of a material fact required to be stated therein or necessary to make the
statements therein not misleading (in the case of the Prospectus, in the light
of the circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or any Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriters expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus.
The indemnity agreement in this subsection (b) shall be in addition to
any liability which the Underwriters may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action, investigation,
inquiry, suit or proceeding is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have
<PAGE>
the right to employ its or their own counsel in any such case but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by the indemnifying parties in connection with the defense of such
action at the expense of the indemnifying party, (ii) the indemnifying parties
shall not have employed counsel reasonably satisfactory to such indemnified
party to have charge of the defense of such action within a reasonable time
after notice of commencement of the action, or (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to one or
all of the indemnifying parties (in which case the indemnifying parties shall
not have the right to direct the defense of such action, investigation, inquiry,
suit or proceeding on behalf of the indemnified party or parties), in any of
which events such fees and expenses of one additional counsel shall be borne by
the indemnifying parties. In no event shall the indemnifying parties be liable
for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action, investigation, inquiry, suit or proceeding or
separate but similar or related actions, investigations, inquiries, suits or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances. Anything in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or action
effected without its written consent; provided, however, that such consent was
not unreasonably withheld. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action,
investigation, inquiry, suit or proceeding in respect of which indemnification
or contribution may be sought hereunder (whether or not the indemnified parties
are actual or potential parties to such claim or action), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such claim, action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions, investigations, inquiries, suits or proceedings in respect thereof) (A)
in such proportion as is appropriate to reflect the relative benefits received
by each of the contributing parties, on the
<PAGE>
one hand, and the party to be indemnified on the other hand, from the offering
of the Securities or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where the Company is
the contributing party and the Underwriters are the indemnified party, the
relative benefits received by the Company, on the one hand, and the
Underwriters, on the other, shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Securities (before deducting
expenses) bear to the total underwriting discounts received by the Underwriters
hereunder, in each case as set forth in the table on the Cover Page of the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, or by the Underwriters, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities (or
actions, investigations, inquiries, suits or proceedings in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action, claim, investigation, inquiry,
suit or proceeding. Notwithstanding the provisions of this subdivision (d) the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Securities purchased by the Underwriters
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person, if any, who controls the Company within the meaning of
the Act, each officer of the Company who has signed the Registration Statement,
and each director of the Company shall have the same rights to contribution as
the Company, subject in each case to this subparagraph (d). Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit, inquiry, investigation or proceeding against such party in respect
to which a claim for contribution may be made against another party or parties
under this subparagraph (d), notify such party or parties from whom contribution
may be sought, but the omission so to notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
obligation it or they may have hereunder or otherwise than under this
subparagraph (d), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
8. Representations and Agreements to Survive Delivery. All representations,
warranties and agreements contained in this Agreement or contained in
certificates of officers of the Company submitted pursuant hereto, shall be
deemed to be representations, warranties and agreements at the Closing Date and
the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter, the
Company, any controlling person of any Underwriter, the Company, and shall
survive termination of this Agreement or the issuance, sale and delivery of the
Securities to the Underwriters and the Representative, as the case may be.
9. Effective Date.
This Agreement shall become effective at 10:00 a.m., New York City
time, on the next full business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities
<PAGE>
for sale to the public; provided, however, that the provisions of Sections 5, 7
and 10 of this Agreement shall at all times be effective. For purposes of this
Section 9, the Shares to be purchased hereunder shall be deemed to have been so
released upon the earlier of dispatch by the Representative of telegrams to
securities dealers releasing such shares for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Shares.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the Representative
shall have the right to terminate this Agreement, after the date hereof, (i) if
any domestic or international event or act or occurrence has materially
disrupted, or in the Representative' opinion will in the immediate future
materially adversely disrupt the financial markets; or (ii) any material adverse
change in the financial markets shall have occurred; or (iii) if trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Boston Stock Exchange, the
Commission or any other government authority having jurisdiction; or (iv) if
trading of any of the securities of the Company shall have been suspended, or
any of the securities of the Company shall have been delisted, on any exchange
or in any over-the-counter market; or (v) if the United States shall have become
involved in a war or major hostilities, or if there shall have been an
escalation in an existing war or major hostilities or a national emergency shall
have been declared in the United States; or (vi) if a banking moratorium has
been declared by a state or federal authority; or (vii) if a moratorium in
foreign exchange trading has been declared; or (viii) if the Company shall have
sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in the
Representative's opinion, make it inadvisable to proceed with the delivery of
the Securities; or (viii) if there shall have occurred any outbreak or
escalation of hostilities or any calamity or crisis or there shall have been
such a material adverse change in the conditions or prospects of the Company, or
such material adverse change in the general market, political or economic
conditions, in the United States or elsewhere as in the Representative's
judgment would make it inadvisable to proceed with the offering, sale and/or
delivery of the Securities or (ix) if Brian T. McMahon, Chester E. Sievert, Jr.
or Ching-Meng Chew shall no longer serve the Company in their present capacity.
(b) If this Agreement is terminated by the Representatives in
accordance with the provisions of Section 10(a) the Company shall promptly
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters
(less amounts previously paid pursuant to Section 5(c) above). Notwithstanding
any contrary provision contained in this Agreement, if this Agreement shall not
be carried out within the time specified herein, or any extension thereof
granted to the Representative, by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied (including, without limitation, pursuant to
Section 6 or Section 12) then, the Company shall promptly reimburse and
indemnify the Representative for all of their actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to Section 5(c) above). In addition, the
Company shall remain liable for all Blue Sky counsel fees
<PAGE>
and expenses and filing fees. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof),
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Substitution of the Underwriters. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
(i) if the number of Defaulted Securities does not exceed
10% of the total number of Firm Shares to be purchased on such date,
the non-defaulting Underwriters shall be obligated to purchase the
full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of
the total number of Firm Shares, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the Closing Date
or at any Option Closing Date, as applicable, to sell and deliver the number of
Shares which it is obligated to sell hereunder on such date, then this Agreement
shall terminate (or, if such default shall occur with respect to any Option
Shares to be purchased on an Option Closing Date, the Underwriters may at the
Representative's option, by notice from the Representative to the Company,
terminate the Underwriters' obligation to purchase Option Shares from the
Company on such date) without any liability on the part of any non-defaulting
party other than pursuant to Section 5, Section 7 and Section 10 hereof. No
action taken pursuant to this Section shall relieve the Company from liability,
if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed
<PAGE>
or transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representative c/o Josephthal & Co. Inc.
at 200 Park Avenue, 25th Floor, New York, New York 10166, Attention: Dan Purjes,
with a copy to Orrick, Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York,
New York 10103, Attention: Rubi Finkelstein, Esq. Notices to the Company shall
be directed to the Company at 3650 Annapolis Lane, Suite 101, Minneapolis,
Minnesota, 55447-5434, Attention: Brian T. McMahon, Chief Executive Officer,
with a copy to Dorsey & Whitney LLP, Pillsbury Center South, 220 South Sixth
Street, Minneapolis, Minnesota, 55402, Attention: Kenneth Cutler, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and shall
be binding upon, the Underwriters, the Company, and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement and the Representative's
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may not be amended
except in a writing, signed by the Representative and the Company.
<PAGE>
If the foregoing correctly sets forth the understanding
between the Underwriters and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
SPECTRASCIENCE, INC.
By:_____________________________
Brian T. McMahon
Chairman and Chief Executive Officer
Confirmed and accepted as of
the date first above written.
JOSEPHTHAL & CO. INC
FOR ITSELF AND AS REPRESENTATIVE
OF THE SEVERAL UNDERWRITERS NAMED
IN SCHEDULE A HERETO
By:_____________________________
Name:
Title:
<PAGE>
SCHEDULE A
NUMBER OF
UNDERWRITER SHARES
- -----------------------------------------------------------------------
Josephthal & Co. Inc. 2,500,000
TOTAL 2,500,000
=========
<PAGE>
Exhibit A
[FORM OF INTELLECTUAL PROPERTY OPINION]
___________________, 1998
JOSEPHTHAL & CO. INC.
As Representative of the Several
Underwriters listed on Schedule A hereto
c/o Josephthal & Co. Inc.
200 Park Avenue, 25th Floor
New York, New York 10166
Re: Public Offering of SPECTRASCIENCE, Inc.
Gentlemen:
We have acted as special counsel to SPECTRASCIENCE, Inc., a Minnesota
corporation (the "Company"), in connection with the entering into by the Company
of that certain Underwriting Agreement by and between Josephthal & Co. Inc.
("Josephthal"), as representative of the several underwriters named in Schedule
A thereto, and the Company, dated _______________, 1998 (the "Underwriting
Agreement"). This opinion is provided to you pursuant to Section 6(n) of the
Underwriting Agreement.
For the purpose of rendering the opinions set forth below we have reviewed the
following (collectively, the "Documents"):
(i) the Underwriting Agreement;
(ii) that certain Registration Statement originally filed
July ___, 1998, together with any and all amendments thereof exhibits
thereto (collectively, the "Registration Statement");
(iii) the company's Prospectus dated _____________, 1998
(the "Prospectus");
(iv) a search of the United States Patent and Trademark
Office records relevant to ownership of any and all:
patents and patent applications (including, without
limitation, the patents and patent applications listed on
Schedule A annexed hereto and hereby incorporated by
reference herein (collectively, the "Patents")), and
trademarks, trademark applications, service marks and
service mark applications (collectively, the "Marks")
(including, without limitation, the Marks listed on Schedule
B annexed hereto and hereby incorporated by reference herein
(collectively, the "Trademarks")),
<PAGE>
owned, purportedly owned or licensed by the Company
(including, those patents, patent applications and Marks
licensed, without limitation, pursuant to the licenses
listed on Schedule C annexed hereto and hereby incorporated
by reference herein (collectively, the "Licenses")),
conducted by ________________________ and certified as true
and correct as of _______________________, 1998 (no earlier
than 5 days prior to the date of the Closing (as defined in
the Underwriting Agreement));
(v) a search of the United States Copyright Office records
relevant to ownership of any and all copyrighted material (including,
without limitation, the copyright in, or license permitting the
Company's actual use of, the material licensed or otherwise
distributed by the Company and listed on Schedule D annexed hereto and
hereby incorporated by reference herein (collectively, the
"Copyrighted Material")), owned, purportedly owned or licensed by the
Company conducted by _____________________ and certified as true and
correct as of __________________, 1998 (no earlier than 5 days prior
to the date of the Closing);
(vi) an intellectual property litigation search with respect
to all Patents, Trademarks, Licenses and Copyrighted Material, listed
on Schedules A, B, C and D, respectively;
(vii) a search of the Uniform Commercial Code ("UCC")
recordation offices, in the following jurisdictions --
[________________, _____________ and _______], with respect to the
following two categories of general intangibles:
(a) the intellectual property general intangibles of
the Company, including, without limitation, the
Company's patents, patent applications,
inventions, know how, trademarks, service marks,
copyrights, service and trade names, intellectual
property licenses and other rights, and
(b) the intellectual property general intangibles
licensed to the Company, including, without
limitation, the patents, patent applications,
inventions, know how, trademarks, service marks,
copyrights, service and trade names and other
intellectual property rights licensed to the
Company pursuant to the Licenses (listed on
Schedule C),
said search certified to us as complete and accurate by
________________ and current through
________________________, 1998 (no earlier than 5 days prior
to the date of the Closing) and said jurisdictions being the
only jurisdictions in which filing of UCC financing
statements or other documents may be filed to effectively
evidence a security or other interest in said general
intangibles; and
(viii) any and all records, documents, instruments and
agreements in our possession or under our control relating to the
Company.
<PAGE>
We have also examined such corporate records,
documents, instruments and agreements, and
inquired into such other matters, as we have
deemed necessary or appropriate as a basis for the
opinions set forth herein. Whenever our opinion
herein is qualified by the phrase "to the best of
our knowledge" or "to the best of our knowledge,
after due inquiry," such language means that,
based upon (i) our inquiries of officers of the
Company, (ii) our review of the Documents, and
(iii) our review of such other corporate records,
documents, instruments and agreements described in
the first sentence of this paragraph, we believe
that such opinions are factually correct.
To the best of our knowledge, as to all matters of fact represented to you by
the Company, we advise you that nothing has come to our attention that would
cause us to believe that such facts are incorrect, incomplete or misleading or
that reliance thereon is not warranted under the circumstances. We call to your
attention that our opinion is limited to such facts as they exist on the date
hereof and do not take into account any change of circumstances, fact or law
subsequent thereto.
Based upon and subject to the foregoing, we are of the opinion that:
1. To the best of our knowledge, after due inquiry, except as described in
the Registration Statement, the Company owns or has the right to use, free and
clear of all liens, encumbrances, pledges, security interests, defects or other
restrictions or equities of any kind whatsoever,
(i) all patents and patent applications (including, without
limitation, the Patents),
(ii) all trademarks and service marks (including, without
limitation, the Trademarks),
(iii) all copyrights (including, without limitation, the
Copyrighted Material),
(iv) all service and trade names,
(v) all intellectual property licenses (including, without
limitation, the Licenses), and
(vi) all technology used in, contemplated to be used in or
required for, the conduct of the Company's business.
2. To the best of our knowledge, after due inquiry, the Company possesses
all material intellectual property licenses or rights used in, or required for,
the conduct of its business (including, the Licenses and without limitation, any
such licenses or rights described in the Registration Statement as being owned,
possessed or licensed by the Company, as the case may be), such licenses and
rights are in full force and effect, and the Company's products, methods and
services do not infringe any unlicensed intellectual property of any third
parties.
<PAGE>
3. To the best of our knowledge, after due inquiry, there is no claim or
action, pending, threatened or potential, which affects or could affect the
rights of the Company with respect to any trademarks, service marks, copyrights,
service names, trade names, patents, patent applications or licenses used in, or
required for, the conduct of the Company's business and all trademarks, service
marks, copyrights, trade names, and patents owned or licensed to the Company are
valid.
4. To the best of our knowledge, after due inquiry, there is no
intellectual property based claim or action, pending, threatened or potential,
which affects or could affect the rights of the Company with respect to any
products, services, processes or licenses, including, without limitation, the
Licenses used in the conduct of the Company's business.
5. To the best of our knowledge, after due inquiry, except as described in
the Registration Statement, the Company is not under any obligation to pay
royalties or fees to any third party with respect to any material, technology or
intellectual properties developed, employed, licensed or used by the Company.
6. To the best of our knowledge, after due inquiry, the statements in the
Registration Statement under the headings, "Risk Factors - Patents, Trademarks
and Proprietary Information" and "Business - Patents, Trademarks and Proprietary
Information", are accurate in all material respects, fairly represent the
information disclosed therein and do not omit to state any fact necessary to
make the statements made therein complete and accurate.
7. To the best of our knowledge, after due inquiry, the statements in the
Registration Statement and the Prospectus do not contain any untrue statement of
a material fact with respect to the intellectual property position of the
Company, or omit to state any material fact relating to the intellectual
property position of the Company which is required to be stated in the
Registration Statement and the Prospectus or is necessary to make the statements
therein not misleading.
We call your attention to the fact that the members of this firm are licensed to
practice law in the State of ______________ and before the United States Patent
and Trademark Office as Registered Patent Attorneys. Accordingly, we express no
opinion with respect to the laws, rules and regulations of any jurisdictions
other than the State of ___________ and the United States of America.
The opinions expressed herein are for the sole benefit of, and may be relied
upon only by, the several Underwriters named in Schedule A to the Underwriting
Agreement and Orrick, Herrington & Sutcliffe LLP.
Very truly yours,
EXHIBIT 4.1
COMMON SHARES COMMON SHARES
NUMBER SPECTRA SCIENCE SHARES
2919
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 894760E 202
THIS CERTIFIES THAT
SPECIMEN
IS THE OWNER AND REGISTRAR HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE PAR VALUE OF TWENTY
FIVE CENTS ($.25) EACH OF
SPECTRASCIENCE, INC
TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR
BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS
CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER AGENT AND
REGISTRAR.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS.
Dated:
/s/ Brian T. McMahon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
(MINNEAPOLIS, MINNESOTA) TRANSFER AGENT AND REGISTRAR
BY AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be constituted as though they were written out in full
according to applicable laws of regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
SC TEN - as joint tenants with right of
survivorship and not as tenants in
common
UNIF GIFT MIN ACT - _____________Custodian____________
(Cust) (Minor)
under Uniform Transfers to Minors
Act ________ _____________________
(State)
UNIF TRF MIN ACT - _________Custodian (until age ___)
(Cust)
___________under Uniform Transfers
to Minors Act_____________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED ________HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
________________________________________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________SHARES
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT
________________________________________________________________________ATTORNEY
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN-NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES:
DATED ___________________________________
___________________________________
NOTICE: THE SIGNATURE(S) TO THE ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED
By______________________________________________________
EXHIBIT 4.2
OH&S DRAFT
7/17/98
[FORM OF REPRESENTATIVE'S WARRANT AGREEMENT]
[SUBJECT TO ADDITIONAL REVIEW]
- --------------------------------------------------------------------------------
SPECTRASCIENCE, INC.
AND
JOSEPHTHAL & CO. INC.
REPRESENTATIVE'S
WARRANT AGREEMENT
DATED AS OF ______________, 1998
- --------------------------------------------------------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of ______________, 1998 by and
between SPECTRASCIENCE, INC., a Minnesota corporation (the "Company"), and
JOSEPHTHAL & CO. INC. (hereinafter referred to as the "Holder" or the
"Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative or its
designees warrants ("Warrants") to purchase up to an aggregate 250,000 shares of
common stock, par value $0.25 per share, of the Company ("Common Stock"); and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between
Josephthal & Co. Inc., as the Representative of the several Underwriters named
in Schedule A thereto, and the Company to act as the Representative in
connection with the Company's proposed public offering of up to 2,500,000 shares
of Common Stock at a public offering price of $[______] per share of Common
Stock (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate of twenty dollars ($25.00), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
<PAGE>
SECTION 1. Grant. The Representative is hereby granted the right to
purchase, at any time from ___________, 1999 [one year from the date hereof],
until 5:30 P.M., New York time, on ______________, 2003 [five years from the
effective date of the registration statement], up to an aggregate of 250,000
shares of Common Stock (the "Shares") at an initial exercise price (subject to
adjustment as provided in Section 8 hereof) of $[_____] per share [120% of the
public offering price per share] of Common Stock subject to the terms and
conditions of this Agreement. Except as set forth herein, the Shares issuable
upon exercise of the Warrants are in all respects identical to the shares of
Common Stock being purchased by the Underwriters for resale to the public
pursuant to the terms and provisions of the Underwriting Agreement.
SECTION 2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
SECTION 3. Exercise of Warrant.
Section 3.1 Method of Exercise. The Warrants initially are exercisable
at an aggregate initial exercise price (subject to adjustment as provided in
Section 8 hereof) per share of Common Stock set forth in Section 6 hereof
payable by certified or official bank check in New York Clearing House funds.
Upon surrender of a Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with payment of the Exercise Price (as
hereinafter defined) for the shares of Common Stock purchased at the Company's
principal offices in Minneapolis, Minnesota (presently located at 3650 Annapolis
Lane, Suite 101, Minneapolis, Minnesota 55447) the registered holder of a
Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a
certificate or certificates for the shares of Common Stock so purchased. The
purchase rights represented by each Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to fractional
shares of the Common
<PAGE>
Stock underlying the Warrants). Warrants may be exercised to purchase all or
part of the shares of Common Stock represented thereby. In the case of the
purchase of less than all the shares of Common Stock purchasable under any
Warrant Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the shares of Common Stock purchasable thereunder.
Section 3.2 Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, the Holders of the Warrants shall have the right at any
time and from time to time to exercise the Warrants in full or in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1 in
exchange for the number of Shares equal to the product of (x) the number of
Shares as to which the Warrants are being exercised multiplied by (y) a
fraction, the numerator of which is the Market Price (as defined in Section 3.3
below) of the Shares less the Exercise Price and the denominator of which is
such Market Price. Solely for the purposes of this paragraph, Market Price shall
be calculated either (i) on the date which the form of election attached hereto
is deemed to have been sent to the Company pursuant to Section 13 hereof
("Notice Date") or (ii) as the average of the Market Prices for each of the five
trading days preceding the Notice Date, whichever of (i) or (ii) is greater.
Section 3.3 Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be the last reported sale price,
or, in case no such reported sale takes place on such day, the average of the
last reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or by the Nasdaq National Market or
Nasdaq SmallCap market (as the case may be "Nasdaq"), or, if the Common Stock is
not listed or admitted to trading on any national securities exchange or quoted
by Nasdaq, the average closing bid price as furnished by the NASD through Nasdaq
or similar organization if Nasdaq is no longer reporting such information, or if
the Common Stock is not quoted on Nasdaq, as
<PAGE>
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it.
SECTION 4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock and/or other securities,
properties or rights underlying such Warrants, shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the
Holders thereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to the
provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holders thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holders, and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificates and the certificates representing the Shares
underlying the Warrants (and/or other securities, property or rights issuable
upon the exercise of the Warrants) shall be executed on behalf of the Company by
the manual or facsimile signature of the then Chairman or Vice Chairman of the
Board of Directors or President or Vice President of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.
SECTION 5. Restriction On Transfer of Warrants. The Holders of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representative.
<PAGE>
SECTION 6. Exercise Price.
Section 6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant shall
be $[____] per share [120% of the public offering price per share] of Common
Stock. The adjusted exercise price shall be the price which shall result from
time to time from any and all adjustments of the initial exercise price in
accordance with the provisions of Section 8 hereof.
Section 6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
SECTION 7. Registration Rights.
Section 7.1 Registration Under the Securities Act of 1933. None of the
Warrants, the Shares, and any other securities issuable upon exercise of the
Warrants have been registered under the Securities Act of 1933, as amended (the
"Act"), pursuant to the Company's Registration Statement on Form SB-2
(Registration No. _________) (the "Registration Statement"). All of the
representations and warranties of the Company contained in the Underwriting
Agreement relating to the Registration Statement, the Preliminary Prospectus and
Prospectus (as such terms are defined in the Underwriting Agreement) and made as
of the dates provided therein, are hereby incorporated by reference.
Accordingly, the Warrants, certificates representing the Shares underlying the
Warrants, and any of the other securities issuable upon exercise of the Warrants
(collectively, the "Warrant Securities") shall bear the following legend:
The securities represented by this certificate have not
been registered under the Securities Act of 1933, as
amended ("Act"), and may not be offered or sold except
pursuant to (i) an effective registration statement
under the Act, (ii) to the extent applicable, Rule 144
under the Act (or any similar rule under such Act
relating to the disposition of securities), or (iii) an
opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to
<PAGE>
the issuer, that an exemption from registration under
such Act is available.
Section 7.2 Piggyback Registration. If, at any time commencing after
the date hereof and expiring six (6) years from the date hereof, the Company
proposes to register any of its securities under the Act (other than in
connection with a merger or pursuant to Forms S-4 or S-8) it will give written
notice by registered mail, at least thirty (30) days prior to the filing of each
such registration statement, to the Representative and to all other Holders of
the Warrants and/or the Warrant Securities of its intention to do so. If the
Representative or other Holders of the Warrants and/or Warrant Securities notify
the Company within twenty (20) days after receipt of any such notice of its or
their desire to include any such securities in such proposed registration
statement, the Company shall afford the Representative and such Holders of the
Warrants and/or Warrant Securities the opportunity to have any such Warrant
Securities registered under such registration statement (sometimes referred to
herein as the "Piggyback Registration").
Notwithstanding the provisions of this Section 7.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 7.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
Section 7.3 Demand Registration.
(a) At any time commencing after the date hereof and expiring five (5)
years from the effective date of the Public Offering, the Holders of the
Warrants and/or Warrant Securities representing a "Majority" (as hereinafter
defined) of such securities (assuming the exercise of all of the Warrants) shall
have the right (which right is in addition to the registration rights under
Section 7.2 hereof), exercisable by written notice to the Company, to have the
Company prepare and file with the Securities and Exchange Commission (the
"Commission"),
<PAGE>
on one occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the Company
and counsel for the Representative and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of their
respective Warrant Securities for nine (9) consecutive months by such Holders
and any other Holders of the Warrants and/or Warrant Securities who notify the
Company within ten (10) days after receiving notice from the Company of such
request.
(b) In addition to the registration rights under Section 7.2 hereof
and subsection (a) of this Section 7.3, at any time commencing after the date
hereof and expiring five (5) years after the effective date of the Public
Offering, any Holder of Warrants and/or Warrant Securities shall have the right,
exercisable by written request to the Company, to have the Company prepare and
file, on one occasion, with the Commission a registration statement so as to
permit a public offering and sale for nine (9) consecutive months by any such
Holder of its Warrant Securities, provided, however, that the provisions of
Section 7.4(b) hereof shall not apply to any such registration request and
registration and all costs incident thereto shall be at the expense of the
Holder or Holders making such request.
(c) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
Section 7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within forty-five (45) days of receipt of any demand therefor, shall
use its best efforts to have any registration statements declared effective at
the earliest possible time, and shall
<PAGE>
furnish each Holder desiring to sell Warrant Securities such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holders' counsel, filing fees and any underwriting or selling commissions), fees
and expenses in connection with all registration statements filed pursuant to
Section 7.2 and 7.3(a) hereof including, without limitation, the Company's legal
and accounting fees, printing expenses and blue sky fees and expenses. The
Holders shall pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.3(b) hereof. If the Company
shall fail to comply with the provisions of Section 7.4, the Company shall, in
addition to any other equitable or other relief available to the Holders, be
liable for any or all incidental or special damages sustained by the Holders
requesting registration of their Warrant Securities.
(c) The Company will take all necessary action which may be required
in qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holders, provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holders of the Warrant Securities
to be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has
<PAGE>
agreed to indemnify each of the Underwriters contained in Section 7 of the
Underwriting Agreement.
(e) The Holders of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 7 of the Underwriting
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holders to exercise their Warrants prior to the initial filing of
any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Warrant Securities to be included in any registration statement filed
pursuant to Section 7.3 hereof, or permit any other registration statement to be
or remain effective during the effectiveness of a registration statement filed
pursuant to Section 7.3 hereof, without the prior written consent of the Holders
of the Warrants and Warrant Securities representing a Majority of such
securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such
<PAGE>
registration statement (and, if such registration includes an underwritten
public offering, an opinion dated the date of the closing under the underwriting
agreement), and (ii) a "cold comfort" letter dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, a letter dated the date of the closing under the underwriting
agreement) signed by the independent public accountants who have issued a report
on the Company's financial statements included in such registration statement,
in each case covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the case of
such accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(i) The Company shall, as soon as practicable after the effective date
of the registration statement, and in any event within 15 months thereafter,
make "generally available to its security holders" (within the meaning of Rule
158 under the Act) an earnings statement (which need not be audited) complying
with Section 11(a) of the Act and covering a period of at least 12 consecutive
months beginning after the effective date of the registration statement. The
Company shall deliver promptly to each Holder participating in the offering
requesting the correspondence described below and to the managing underwriters,
copies of all correspondence between the Commission and the Company, its counsel
or auditors with respect to the registration statement and permit each Holder
and underwriter to do such investigation, upon reasonable advance notice, with
respect to information contained in or omitted from the registration statement
as it deems reasonably necessary to comply with applicable securities laws or
rules of the National Association of Securities Dealers, Inc. ("NASD"). Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
and as often as any such Holder or underwriter shall reasonably request.
<PAGE>
(j) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested to be included in such
underwriting, which may be the Representative. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriter(s), and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter(s). The Holders shall be parties
to any underwriting agreement relating to an underwritten sale of their Warrant
Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such underwriter(s) shall also be made to and for the benefit of such
Holders. Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriter(s) except as are
customarily made by selling securityholders in underwritten offerings.
(k) In addition to the Warrant Securities, upon the written request
therefor by any Holders, the Company shall include in the registration statement
any other securities of the Company held by such Holders as of the date of
filing of such registration statement, including without limitation restricted
shares of Common Stock, options, warrants or any other securities convertible
into shares of Common Stock.
(l) For purposes of this Agreement, the term "Majority" in reference
to the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
percent (50%) of the then outstanding Warrants or Warrant Securities that (i)
are not held by the Company, an affiliate, officer, creditor, employee or agent
thereof or any of their respective affiliates, members of their family, persons
acting as nominees or in conjunction therewith and (ii) have not been resold to
the public pursuant to a registration statement filed with the Commission under
the Act.
<PAGE>
SECTION 8. Adjustments to Exercise Price and Number of Securities.
Section 8.1 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
Section 8.2 Stock Dividends and Distributions. In case the Company
shall pay a dividend in, or make a distribution of, shares of Common Stock or of
the Company's capital stock convertible into Common Stock, the Exercise Price
shall forthwith be proportionately decreased. An adjustment made pursuant to
this Section 8.2 shall be made as of the record date for the subject stock
dividend or distribution.
Section 8.3 Adjustment in Number of Securities. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Section 8, the number
of Warrant Securities issuable upon the exercise at the adjusted exercise price
of each Warrant shall be adjusted to the nearest whole number by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
Section 8.4 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Articles of Incorporation of the Company as may be
amended as of the date hereof, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value.
<PAGE>
Section 8.5 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holders a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such Warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in this Section 8. The above provision of
this subsection shall similarly apply to successive consolidations or mergers.
Section 8.6 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made:
Upon the issuance or sale of the Warrants or the shares of
Common Stock issuable upon the exercise of the Warrants;
If the amount of said adjustment shall be less than two
cents (2(cent)) per Warrant Security, provided, however, that in such
case any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together
with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least two cents
(2(cent)) per Warrant Security.
SECTION 9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
<PAGE>
registered Holders at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holders thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
SECTION 10. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
SECTION 11. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject to
the preemptive rights of any stockholder. As long as the Warrants shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Warrants to be
<PAGE>
listed (subject to official notice of issuance) on all securities exchanges on
which the Common Stock issued to the public in connection herewith may then be
listed and/or quoted.
SECTION 12. Notices to Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(i) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on
the books of the Company; or
(ii) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor; or
(iii) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall
be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution,
<PAGE>
convertible or exchangeable securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such notice
shall specify such record date or the date of closing the transfer books, as the
case may be. Failure to give such notice or any defect therein shall not affect
the validity of any action taken in connection with the declaration or payment
of any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
SECTION 13. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
(i) If to the registered Holders of the Warrants, to the address of
such Holders as shown on the books of the Company; or
(ii) If to the Company, to the address set forth in Section 3 hereof
or to such other address as the Company may designate by notice to the
Holders.
SECTION 14. Supplements and Amendments. The Company and the Representative
may from time to time supplement or amend this Agreement without the approval of
any Holders of Warrant Certificates (other than the Representative) in order to
cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Representative may deem necessary or desirable and which the
Company and the Representative deem shall not adversely affect the interests of
the Holders of Warrant Certificates.
<PAGE>
SECTION 15. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
SECTION 16. Termination. This Agreement shall terminate at the close of
business on ______________, 2004. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until the
close of business on ______________, 2010.
SECTION 17. Governing Law; Submission to Jurisdiction. This Agreement and
each Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The Company, the Representative and the Holders hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representative and the Holders hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the Representative
and the Holders (at the option of the party bringing such action, proceeding or
claim) may be served by transmitting a copy thereof, by registered or certified
mail, return receipt requested, postage prepaid, addressed to it at the address
set forth in Section 13 hereof. Such mailing shall be deemed personal service
and shall be legal and binding upon the party so served in any action,
proceeding or claim. The Company, the Representative and the Holders agree that
the prevailing party(ies) in any such action or proceeding shall be entitled to
recover from the other party(ies)
<PAGE>
all of its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.
SECTION 18. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
SECTION 19. Severability. If any provision of this Agreement shall be held
to be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
SECTION 20. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
SECTION 21. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holders of the Warrant Certificates or
Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
the Representative and any other registered Holders of Warrant Certificates or
Warrant Securities.
SECTION 22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
SPECTRASCIENCE, INC.
By: ________________________________
Name:
Title:
Attest:___________________________
JOSEPHTHAL & CO. INC.
By: ________________________________
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ______________, 2003
No. W-___ Warrants to Purchase ____ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that , or registered assigns, is the
registered holder of ________Warrants to purchase initially, at any time from
___________, 1999 [one year from the effective date of the Registration
Statement] until 5:30 p.m. New York time on ____________, 2003 [five years from
the effective date of the Registration Statement] ("Expiration Date"), up to
__________ fully-paid and non-assessable shares of common stock, ("Common
Stock") of SPECTRASCIENCE, INC., a Minnesota corporation (the "Company"), (one
share of Common Stock referred to individually as a "Security" and collectively
as the "Securities") at the initial exercise price, subject to adjustment in
certain events (the "Exercise Price"), of $____ per share [120% of the initial
public offering price per share] of Common Stock upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of ______________, 1998 between the Company and JOSEPHTHAL &
CO. INC. (the "Warrant Agreement"). Payment of the Exercise Price shall be made
by certified or official bank check in New York Clearing House funds payable to
the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
Holders (the words "holder" or "Holders" meaning the registered holder or
registered Holders) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered Holders hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the Holders hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of ___________, 1998
SPECTRASCIENCE, INC.
By: ________________________________
Name:
Title:
[SEAL]
Attest:___________________________
Secretary
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
_______ shares of Common Stock;
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of SpectraSCIENCE,
Inc. in the amount of $____, all in accordance with the terms of Section 3.1 of
the Representative's Warrant Agreement dated as of ______________, 1998 between
SpectraSCIENCE, Inc. and Josephthal & Co. Inc. The undersigned requests that a
certificate for such securities be registered in the name of _________ whose
address is ________ and that such Certificate be delivered to _________ whose
address is _________.
Dated:
Signature_______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
__________ shares of Common Stock;
and herewith tenders in payment for such securities ________ Warrants all in
accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of ___________, 1998 between SpectraSCIENCE, Inc. and
Josephthal & Co. Inc. The undersigned requests that a certificate for such
securities be registered in the name of __________whose address is __________
and that such Certificate be delivered to _________ whose address is
________________.
Dated:
Signature_______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________ hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________________ Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated:_____________________
Signature_______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
EXHIBIT 5.1
[LETTERHEAD OF DORSEY AND WHITNEY LLP]
SpectraSCIENCE, Inc.
3650 Annapolis Lane, Suite 101
Minneapolis, Minnesota 55447-5434
Re: SpectraSCIENCE, Inc.
Registration Statement on Form SB-2
Ladies and Gentlemen:
We have acted as counsel to SpectraSCIENCE, Inc. (the "Company"), a
Minnesota corporation, in connection with a Registration Statement on Form SB-2
(the "Registration Statement") relating to the issuance and sale of 2,875,000
shares of Common Stock of the Company, $.25 par value (including 375,000 shares
to be subject to the Underwriters' over-allotment option) (the "Shares"). The
Shares will be issued pursuant to an Underwriting Agreement (the "Underwriting
Agreement") between the Company and Josephthal & Co. Inc., as representative of
the several Underwriters.
We have examined such documents and have reviewed such questions of law
as we have considered necessary and appropriate for the purposes of our opinion
set forth below. In rendering our opinion, we have assumed the authenticity of
all documents submitted to us as originals, the genuineness of all signatures
and the conformity to authentic originals of all documents submitted to us as
copies. We have also assumed the legal capacity for all purposes relevant hereto
of all natural persons and, with respect to all parties to agreements or
instruments relevant hereto, that such parties had the requisite power and
authority (corporate or otherwise) to execute, deliver and perform such
agreements or instruments, that such agreements or instruments have been duly
authorized by all requisite action (corporate or otherwise), executed and
delivered by such parties and that such agreements or instruments are the valid,
binding and enforceable obligations of such parties. As to questions of fact
material to our opinion, we have relied upon certificate of officers of the
Company and of public officials. We have also assumed that the Shares will be
issued and sold as described in the Registration Statement.
Based on the foregoing, we are of the opinion that the Shares being
sold by the Company have been duly authorized by all requisite corporate action
and, upon issuance, delivery and payment therefor as described in the
Underwriting Agreement, will be legally issued, fully paid and nonassessable.
<PAGE>
SpectraSCIENCE, Inc.
July 17, 1998
Page 2
The opinion set forth above is subject to the following qualifications
and exceptions:
(a) Our opinion is subject to the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar law
of general application affecting creditors' rights.
(b) Our opinion is subject to the effect of general principles
of equity, including (without limitation) concepts of materiality,
reasonableness, good faith and fair dealing, and other similar
doctrines affecting the enforceability of agreements generally
(regardless of whether considered in a proceeding in equity or at law).
Our opinion expressed above is limited to the laws of the State of
Minnesota.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the caption
"Legal Matters" in the Prospectus constituting part of the Registration
Statement.
Dated: July 17, 1998
Very truly yours,
/s/ Dorsey & Whitney LLP
KLC
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary Financial
Data", "Selected Financial Data" and "Experts" and to the use of our report
dated February 13, 1998, except for Note 9, as to which the date is March 26,
1998 in the Registration Statement (Form SB-2) and related Prospectus of
SpectraScience, Inc. for the registration of 2,875,000 shares of its Common
Stock.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 17, 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-QSB FOR THE
QUARTER ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,357,221
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 406,905
<CURRENT-ASSETS> 1,835,727
<PP&E> 816,509
<DEPRECIATION> 669,536
<TOTAL-ASSETS> 1,982,700
<CURRENT-LIABILITIES> 335,303
<BONDS> 0
0
0
<COMMON> 1,156,085
<OTHER-SE> 491,392
<TOTAL-LIABILITY-AND-EQUITY> 1,982,700
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 557,069
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (19,210)
<INCOME-PRETAX> (537,859)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (537,859)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> 0
</TABLE>
