As filed with the Securities and Exchange Commission on October 7, 1998
Registration No. 333-59395
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SPECTRASCIENCE, INC.
(Name of small business issuer in its charter)
MINNESOTA 3845 41-1448837
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
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: [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================
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(3)
=======================================================================================================
</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.
(3) Previously paid upon the initial filing of the Company's Registration
Statement on Form SB-2 on July 17, 1998.
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 OCTOBER 7, 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 October 2, 1998, the last reported
bid price of the Common Stock on Nasdaq was $4.75 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 also agreed to sell to the Representative, for nominal
consideration, a warrant (the "Representative's Warrant") to purchase up
to 250,000 shares of Common Stock exercisable at a per share price equal
to 120% of the per share Price to Public during a four-year period
commencing at the beginning of the second year after issuance. 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,
except that no financial advisor's fee will be charged on such additional
shares. 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(R), 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 OR THE REPRESENTATIVE'S WARRANT. 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 fluorescence 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 3.5 million
gastrointestinal endoscopic procedures are currently performed in the United
States each year, and the number of these procedures has been growing at a rate
of approximately 5.5% per year.
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. In September 1998, the Company received FDA approval to
file a modular premarket 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 submitted its first module with the FDA in
September 1998 and expects to file the remaining modules for its PMA application
by the end of 1998. 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, (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 laparoscopic applications.
The Company's net losses for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1998 were approximately $1.5 million, $1.6
million and $1.3 million, respectively, and the Company's accumulated
- 3 -
<PAGE>
deficit was approximately $45.5 million as of June 30, 1998, of which
approximately $10.8 million has been incurred by the Company since October 1992,
when the Company began the development of its current products. 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 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.
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................................ 7,214,104 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 June 30, 1998, (i) 1,202,711 shares of Common Stock
issuable upon exercise of outstanding stock options at a weighted average
exercise price of $4.46 per share, (ii) 144,120 shares of Common Stock
reserved for future issuance under the Company's 1991 Stock Option Plan
and (iii) 554,841 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $6.69 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 six months ended June 30, 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 six months ended June 30, 1998 are not necessarily indicative of the results
of operations to be expected for the entire year ending December 31, 1998.
<TABLE>
<CAPTION>
Six
Year Ended Months Ended
December 31, June 30,
----------------------------- -----------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .......................... $ -- $ -- $ -- $ --
Costs and expenses:
Research and development ... 998,137 1,095,281 490,075 942,907
General and administrative . 723,825 679,809 412,146 439,922
------------ ------------ ------------ ------------
Loss from operations .............. (1,721,962) (1,775,090) (902,221) (1,382,829)
Net interest income ............... 176,043 131,299 73,359 37,729
------------ ------------ ------------ ------------
Net loss .......................... (1,545,919) (1,643,791) (828,862) (1,345,100)
============ ============ ============ ============
Net loss per share (1) ............ $ (0.47) $ (0.37) $ (0.19) $ (0.29)
============ ============ ============ ============
Shares used to compute net
loss per share (1) ......... 3,276,193 4,467,233 4,444,873 4,603,063
<CAPTION>
June 30, 1998
-------------------------------
Actual As Adjusted(2)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital ..................................................... $ 1,150,717 $ 11,313,060
Total assets ........................................................ 1,574,835 11,737,179
Total liabilities ................................................... 382,184 382,184
Deficit accumulated during the
development stage (3) ........................................ (45,482,328) (45,482,328)
Total shareholders' equity .......................................... 1,192,651 11,354,995
</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) 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 six months
ended June 30, 1998 were approximately $1.55 million, $1.64 million and $1.35
million, respectively. As of June 30, 1998, the Company had an accumulated
deficit of approximately $45.5 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 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."
- 6 -
<PAGE>
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 of 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 prospective
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 completed
the additional clinical data in August 1998 and was granted approval by the FDA
to file a modular PMA submission in September 1998. The Company filed its first
module with the FDA in September 1998 and plans to submit the remaining modules
to the FDA by the end of calendar year 1998. See "Business--Government
Regulation." The Company expects to receive PMA approval by the FDA to market
the OBS by the end of the first quarter of 1999. There can be no assurance,
however, 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 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 taken to comply with QSR or ISO 9001 regulations.
The Company intends to seek ISO 9001 certification, which is necessary for
obtaining CE mark registration, and has registered with a notified body to begin
the ISO 9001 certification process. 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 comply with
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.
- 7 -
<PAGE>
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. Although the Company currently
expects to receive PMA approval from the FDA in the first quarter of 1999 and
expects to begin commercialization of the OBS in the second or third quarter of
1999, 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 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
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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. The Company expects to finance its expansion of operations and any
necessary improvements of its information systems through a combination of sales
of the OBS and equity contributions by potential distributors and corporate
partners. 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. Although the Company has participated
in preliminary discussions with certain potential strategic partners and
international distributors, the Company has not yet entered into any definitive
agreements with such potential strategic partners and distributors. The
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
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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 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,
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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. 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."
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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. Although patent and intellectual property disputes in the medical device
area have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance that necessary licenses from
others would be available to the Company on satisfactory terms, if at all. An
adverse determination in any intellectual property 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. In addition, there can be no assurance that the Company will have
the financial resources to protect and defend its intellectual property.
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 ("MIT") 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 is exclusive through at least April
2000 plus the period of time a licensed product is pending FDA approval; after
the expiration of such period, the license is nonexclusive for the life of the
patents. The license with MIT is subject to termination for failure to pay fees
or other material breach. The Company also has a licensing arrangement with The
Massachusetts General Hospital which gives the Company an exclusive license to
certain cancer detection patents and an exclusive license to an allowed patent
application to the OBS. This license is exclusive through the life of the
licensed patents, subject to customary diligence requirements for commercially
reasonable best efforts to introduce products in the United States, Europe and
Japan within three years, or such revised period as may reasonably be needed
due to technical difficulties or delays in clinical studies or regulatory
processes. The license is subject to termination after the patents expire, a
year after the Company discontinues selling licensed products in a country, or
for failure to pay fees or other material breach.
There can be no assurance that these license agreements will continue or
will provide the proprietary rights 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.
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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 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.
MAINTENANCE CRITERIA FOR NASDAQ SECURITIES; PENNY STOCK RISKS
The National Association of Securities Dealers, Inc. (the "NASD"), which
administers Nasdaq, has adopted certain criteria for continued eligibility on
Nasdaq. In order to continue to be included on Nasdaq, the Company must maintain
$4 million in total assets, a public float of 750,000 shares and a $200,000
market value of its public float. In addition, continued inclusion requires two
market-makers, at least 400 holders of the Common Stock and a minimum bid price
of the Common Stock of $1 per share. There can be no assurance as to whether
these or other maintenance standards will be enacted. The Company's failure in
the future to meet these maintenance criteria, as now in effect or as may be
hereafter amended, may result in the discontinuance of the inclusion of its
securities on Nasdaq. In such event, trading, if any, in the securities may then
continue to be conducted in the non-Nasdaq over-the-counter market in less
orderly markets commonly referred to as the electronic bulletin board and the
"pink sheets." As a result, an investor may find it more difficult to dispose of
or to obtain accurate quotations as to the market value of the securities. In
addition, the Company would be subject to a rule promulgated by the Securities
and Exchange Commission that, if the Company fails to meet criteria set forth in
such rule, imposes various sales practice requirements on broker-dealers who
sell securities governed by the rule to persons other than established customers
and accredited investors. For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transactions prior to sale.
Consequently, the rule may have an adverse
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effect on the ability of broker-dealers to sell the Company's securities, which
may affect the ability of purchasers in this Offering to sell the Company's
Common Stock in the secondary market.
If the Company fails to maintain its qualification for Common Stock to
trade on Nasdaq and is trading below $5.00 per share, the Common Stock will be
subject to the rules of the Securities Exchange Act of 1934, as amended,
relating to penny stock. In that event, the Company's securities will be subject
to the disclosure rules for transactions involving penny stocks which require
broker dealers, among other things, to (i) determine the suitability of
purchasers of the securities, and obtain the written consent of purchasers to
purchase such securities, and (ii) disclose the best (inside) bid and offer
prices for such securities and the price at which the broker-dealers last
purchased or sold the securities. The additional burdens imposed upon
broker-dealers may discourage them from effecting transactions in penny stock,
which could reduce the liquidity of the Common Stock.
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
will depend upon a number of factors, including the progress of the Company's
clinical trials, actions
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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. 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."
YEAR 2000 RISK FACTOR
Although the Company believes that its computer and software products are
fully Year 2000 compatible, it is possible that certain computer systems or
software products of the Company's suppliers and contractors may not accept
input of, store, manipulate and output dates prior to the Year 2000 or
thereafter without error of interruption. The Company is requesting assurances
from all vendors from which it has purchased or from which it may purchase
software that such software will correctly process all date information at all
times. Furthermore, the Company is querying its suppliers and contractors as to
their progress in identifying and addressing problems that their computer
systems will face in correctly processing date information as the Year 2000
approaches. However, there can be no assurance that the Company will identify
all date-handling problems of its suppliers and contractors in advance of their
occurrence, or that the Company will be able to successfully remedy problems
that are discovered. The expense of the Company's efforts to identify and
address such problems, or the expenses or liabilities to which the Company may
become subject as a result of such problems, could have a material adverse
effect on the Company.
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 the net proceeds of the Offering
for the following purposes:
Amount of Percentage
Net of Net
Application Proceeds Proceeds
----------- -------- --------
Research and development $4,000,000 40%
Sales and marketing $1,500,000 15%
Capital expenditures $1,100,000 11%
Working capital and general corporate purposes: $3,500,000 34%
----------- ---
Total $10,100,000 100%
=========== ====
Pending the uses outlined above, 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 June 30, 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 June 30, 1998. The
information should be read in conjunction with the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 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, 4,714,104 shares issued and outstanding
and 7,214,104 shares issued and outstanding as
adjusted(1) ........................................ 1,178,526 1,803,526
Additional paid-in capital ............................ 45,496,453 55,033,796
Accumulated deficit(2) ................................ (45,482,328) (45,482,328)
------------- -------------
Total shareholders' equity ............................ 1,192,651 11,354,994
------------- -------------
Total capitalization .................................. $ 1,192,651 $ 11,354,994
============= =============
</TABLE>
- ------------------
(1) Based on the number of shares of Common Stock outstanding on June 30,
1998. Excludes (i) 1,202,711 shares of Common Stock issuable upon exercise
of outstanding stock options at a weighted average exercise price of $4.46
per share, (ii) 144,120 shares of Common Stock reserved for future
issuance under the Company's 1991 Stock Option Plan and (iii) 554,841
shares of Common Stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $6.69 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 from "GVMI" to "SPSC."
The stock symbol was subsequently changed to "SPSI" in June 1994. On October 2,
1998, the last reported bid price of the Common Stock was $4.75. As of September
30, 1998, there were approximately 1,000 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:
High Low
--------- ---------
1996
- ----
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 .................... $ 8.000 $ 3.6875
Second Quarter ................... 7.625 4.000
Third Quarter .................... 5.500 2.875
- 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 six months ended June 30, 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 six months
ended June 30, 1998 are not necessarily indicative of the results of operations
to be expected for the entire year ending December 31, 1998.
<TABLE>
<CAPTION>
Six
Year Ended Months Ended
December 31, June 30,
----------------------------- -----------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................... $ -- $ -- $ -- $ --
Costs and expenses:
Research and development ... 998,137 1,095,281 490,075 942,907
General and administrative . 723,825 679,809 412,146 439,922
------------ ------------ ------------ ------------
Loss from operations ................... (1,721,962) (1,775,090) (902,221) (1,382,829)
Net interest income .................... 176,043 131,299 73,359 37,729
------------ ------------ ------------ ------------
Net loss ............................... (1,545,919) (1,643,791) (828,862) (1,345,100)
============ ============ ============ ============
Net loss per share (1) ................. $ (0.47) $ (0.37) $ (0.19) $ (0.29)
============ ============ ============ ============
Shares used to compute net
loss per share (1) ......... 3,276,193 4,467,233 4,444,873 4,603,063
<CAPTION>
At December 31, At June 30,
----------------------------- -----------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital ........................ $ 2,950,452 $ 1,454,649 $ 2,327,247 $ 1,550,717
Total assets ........................... 3,550,589 2,072,112 2,761,111 1,574,835
Total liabilities ...................... 392,617 462,417 432,001 382,184
Deficit accumulated during the
development stage (2) .............. (42,493,437) (44,137,228) (43,322,299) (45,482,328)
Total shareholder equity ............... 3,157,972 1,609,695 2,329,110 1,192,651
</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 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 fluorescence 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 3.5 million gastrointestinal endoscopic procedures
are currently performed in the United States each year, and the number of these
procedures has been growing at a rate of approximately 5.5% per year.
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
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET REVENUES. The Company recorded no revenue for the six months ended
June 30, 1998 and June 30, 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 six months ended June 30, 1998 were $942,907 compared to $490,075 for the
same period in 1997. The increase of 92.4% for the six months ended June 30,
1998 was primarily due to an increase in salary expense related to engineering
documentation personnel not with the Company during the same period in 1997,
increased consulting and travel expense related in part due to the PMA
pre-submission meeting with the FDA, and an inventory revaluation due to the
replacement of the SGS Console with second generation technology currently
utilized in the OBS. 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 six months ended June 30, 1998 were $439,922
compared to $412,146 for the same period in 1997. The increase of 6.7% for the
- 20 -
<PAGE>
six months ended June 30, 1998 was primarily due to 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 and, to a lesser extent,
increased legal expenses. The increase was partially offset by decreased
expenses for the annual shareholders' meeting and wages. 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 six months ended June 30,
1998 was $37,729 compared to $73,359 for the same period in 1997. The decrease
of 51.4% 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 six
months ended June 30, 1998 was $1,345,100 compared to a net loss of $828,862 for
the same period in 1997, representing an increase of 61.6% in net loss compared
to the same period in 1997. The net loss per share for the six months ended June
30, 1998 was $.29 compared to $.19 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 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.
21
<PAGE>
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 June 30, 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 June 30, 1998, the Company had cash and cash equivalents of
$1,136,522 and working capital of $1,150,717.
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"). The Company used the proceeds from these
private placements to (i) accelerate product development, (ii) finalize IDE
clinical studies required to obtain FDA approval in the United States, (iii)
conduct clinical feasibility studies targeting additional medical applications
of its spectroscopic technology and (iv) finance general corporate purposes,
including working capital. 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 $1,416,467 for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 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 $13,240 for the years ended
December 31, 1996 and 1997 and for the six months ended June 30, 1998,
respectively. The net cash used in investing activities was primarily
attributable to the purchase of property and equipment. Net cash provided by
financing activities was $314,290, $95,514 and $928,056 for the years ended
December 31, 1996 and 1997 and for the six months ended June 30, 1998,
respectively. The net cash provided by financing activities was primarily
attributable to the exercise of warrants and stock options.
In connection with the Company's ongoing multi-center clinical trials on
the OBS, the Company entered into various clinical testing agreements with
domestic hospitals to conduct research using the OBS. Under the terms of these
one-year agreements, the Company has a maximum commitment of $173,000 for the
related project costs.
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.
22
<PAGE>
YEAR 2000 ISSUE
Many existing computer programs and microprocessors use only two digits to
identify a year in the date field. Because these programs and microprocessors
assume that the first two digits of the year always are "19," they are unable to
process dates that fall after December 31, 1999. Unless corrected, this
inability could adversely affect the performance of the systems that depend on
these programs and microprocessors and could leave a business vulnerable to
operational and other failures.
Concern has been expressed in recent hearings, reports, articles and
statements of officials that certain government agencies will not be Year 2000
compliant. Disruptions in government systems could create serious problems for
the Company. For example, Year 2000 problems with the Medicare or Medicaid
systems could cause paperwork to back up, patients' access to health care to be
limited or denied, and electronic payments to be severely delayed. Any such
disruptions caused by government systems, especially delays in payments by
government agencies, could materially affect the Company's future financial
results.
The Company has analyzed its internal systems and software for the
potential impact of the Year 2000 problem. The Company does not have any
significant non-information technology equipment or systems; therefore, this
program has focused primarily on the modification and replacement of portions of
the Company's hardware and software. Although computer hardware and software 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 has completed any necessary upgrades to its computer hardware
and software to ensure Year 2000 compliance.
The Company has also initiated a program to assess the readiness of the
Company's vendors, suppliers and other third parties with which the Company has
material business relationships to address the Year 2000 problem. Upon
completion of this assessment, the Company intends to develop, implement and
test solutions to the problems identified by such vendors, suppliers and other
third parties and to establish a contingency plan for dealing with unanticipated
failures. Although no assurances can be given, particularly because the Company
is dependent upon such vendors, suppliers and other third parties, the Year 2000
compliance process is not expected to have a material adverse effect on the
Company's business, results of operations and financial condition.
- 23 -
<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 fluorescence 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 3.5 million
gastrointestinal endoscopic procedures are currently performed in the United
States each year, and the number of these procedures has been growing at a rate
of approximately 5.5% per year.
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.
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%. Studies indicate that
screening can prevent 20-40% of potential colorectal cancers and up to 30-50% of
colorectal cancer deaths. Recent government studies indicate that the cost per
year of life saved by colorectal cancer screening is about $15,000-$20,000 --
compared to the $40,000 average cost of cancer care per patient. 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 3.5 million gastrointestinal endoscopic procedures are currently
performed in the United States each year, and the number of these procedures has
been growing at a rate of approximately 5.5% per year.
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 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.
- 24 -
<PAGE>
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, location and thus the potential pathology of
a polyp. The endoscopist typically visually determines without physical
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 of the endoscopist can occur at two stages during
a colon exam: (i) in visually determining the size of a polyp and (ii) in
visually assessing whether the polyp is benign or malignant. Certain medical
literature reports that accuracy rates in determining the potential malignancy
of polyps can range from 6% - 80%, and accuracy rates in determining the
potential malignancy of polyps can range from 50% - 80%, in each case depending
on the skill of the endoscopist. The Company's clinical studies also have
confirmed that the endoscopist's accuracy in visually assessing small polyps as
either benign or malignant is approximately 72%. Accurate characterization is
critical as recent data has shown that 40%-60% of small polyps are either
malignant or 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 visual interpretation to improve diagnostic accuracy. Quantitative
information should facilitate better comparison of results and patient outcomes
between endoscopists, 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.
REIMBURSEMENT FOR COLORECTAL CANCER SCREENING
In connection with the Balanced Budget Act of 1997, Congress approved
regular colorectal cancer screening tests for the 37.3 million Americans covered
by Medicare. Beginning in 1998, Medicare now covers annual fecal occult blood
tests, screening flexible sigmoidoscopies every four years and colonoscopies for
high risk individuals every two years for those individuals over the age of 50.
Since an estimated 6% of all Americans are considered at-risk for developing
colorectal cancer because they are over 50 years old, have a family history of
the disease, or have a personal history of polyps or inflammatory bowel disease,
the Company believes that this increase in Medicare reimbursement for colorectal
cancer screening will enhance the market for the OBS. In addition, studies have
indicated that screening can prevent 20-40% of potential colorectal cancers and
up to 30-50% of colorectal cancer deaths. The Company believes that the OBS
could play a significant role in detecting colorectal cancer and reducing the
number of colorectal cancer deaths in the United States.
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
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obtaining an instant spectral analysis. Use of the Company's systems can
significantly improve the endoscopist's diagnostic accuracy, thereby enabling
the endoscopist 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.
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. Use of the OBS can enable the endoscopist
to combine a diagnostic and therapeutic procedure in one visit
without the need to wait for the pathologist's report.
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* 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.
* 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 laparoscopic 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.
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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 OBS 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. 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.
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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 laparoscopic 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 six months ended June 30, 1998 were approximately
$1,000,000, $1,100,000 and $950,000, 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 completed the additional clinical trials in August
1998 and submitted a the first module of its modular approach PMA application in
September 1998. The Company expects to submit all of the remaining modules in
support of its PMA application by the end of calendar year 1998 and expects to
receive FDA approval for the OBS in the first quarter of 1999; however, there
can be no assurance 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.
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
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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, but has not yet
entered into any definitive agreement with such strategic partners. 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 in conjunction with outside
consultants. The Forceps are produced by a contract manufacturer that is the
leading 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
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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 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
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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 ("Mass General") 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 patents relating to the SBS expire
between November 2012 and February 2014, and the issued and allowed patents
relating to the OBS expire in May 2016. 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 designates 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.
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 ("MIT") for seventeen issued and pending U.S. patents
and applications 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. This
licensing agreement is exclusive through at least April 2000 plus the period of
time a licensed product is pending FDA approval; after the expiration of such
period, the license is nonexclusive for the life of the patents. The license
with MIT is subject to termination for failure to pay fees or other material
breach. The Company also has a licensing arrangement with Mass General, which
provides that any patents resulting from Mass General's research on cancer
detection will be licensed exclusively to the Company. The Mass General license
is exclusive through the life of the licensed patents, subject to customary
diligence requirements for commercially reasonable best efforts to introduce
products in the United States, Europe and Japan within three years, or such
revised period as may reasonably be needed due to technical difficulties or
delays in clinical studies or regulatory processes.
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. Further, even
if granted, there can be no assurance that these patents will provide the
Company with any protection from competitors. 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.
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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 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. Although
patent and intellectual property disputes in the medical device industry have
often been settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses from other
parties would be availabel to the Company on satisfactory terms, if at all.
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. In addition, there can be no assurance that the Company will have
the financial resources to protect and defend its intellectual property.
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
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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.
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 a "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.
In the past year, the FDA has attempted to streamline the PMA review
process to increase efficiency and effectiveness through the adoption of a
"modular approach to PMA review." The essence of the new modular approach is to
break the contents of a PMA into well-delineated components and to have reports
of each component submitted as soon as the applicant has performed the testing
and analysis, with the applicant compiling a complete PMA filing over time. In
other words, a PMA application can be viewed as a compilation of sections, or
"modules," that together become a complete application. The FDA then assigns a
stable team to the project and reviews each module report as soon as
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it is received, building a complete record of review. This process allows more
rapid closure when the last components are submitted because much of the work
will already have been completed. Ideally, the FDA and the applicant will
develop a complete "shell" format for the filing, which would include all of the
agreed-to pieces of the PMA, at the beginning stages of the process. The
applicant can submit the PMA, including the agreed-upon shell, with appropriate
incorporation by reference to previously submitted modules. The final submission
will usually consist of a final clinical data report, revised proposed labeling
and a draft Summary of Safety and Effectiveness Data as the final modules. In
general, final manufacturing information and notice of an inspection-ready
facility is acceptable as a "late" module so long as it arrives within 90 days
of the complete PMA filing.
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 a
conditional approval 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, 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 obtained its
additional patient data by August 1998 and subsequently received FDA approval
for the submission of its PMA application through the FDA's modular approach to
PMA review in September 1998. The Company submitted its first module in support
of its PMA filing in September 1998 and expects to file the remaining modules by
the end of calendar year 1998. The Company believes that its will obtain FDA
approval of its PMA application in the first quarter of 1999. There can be no
assurance, however, 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. The Company
will also be subject to certain additional federal, state and local
environmental laws when the Company begins commercial development and production
of the OBS. Although the Company is not aware of any manufacturing methods for
the OBS that will require extensive or costly compliance with environmental
regulations, there can ben no guarantee that the Company will not be required to
incur substantial costs to comply with such laws.
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.
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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.
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.
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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 Medicare coverage for preventive colorectal
cancer screening tests as part of the Balanced Budget Act of 1997, and this new
benefit went into effect in January 1998 for the 37.3 million Americans covered
by Medicare. Because studies have shown that colorectal cancer screening can
prevent 20%-40% of potential colorectal cancers and 30%-50% of colorectal cancer
deaths, the Company believes that such funding should 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 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.
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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 isadequate for
its immediate needs but that additional space may be required within the next
two years in order to commercialize the OBS.
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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 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.
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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 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.
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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.
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. Employee directors are not entitled to any compensation for
attendance at Board of Directors' and committee 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.
- 41 -
<PAGE>
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 Principal Compen- Stock Option/s LTIP Compen-
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 Board, 1996 137,496 34,374 8,279 -- 50,000(3) 2,062
Chief Executive Officer 1995 146,490 27,500 8,580 -- 150,000(4) -- 1,317
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 92,500 14,250 6,575 -- 25,000(2) -- 2,850
Vice President of Finance 1996 82,500 16,500 6,585 -- 15,000(6) -- 1,157
and Administration, Chief 1995 25,385 3,822 1,869 -- 45,000(7) -- --
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 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
$3.9375 per share. On February 28, 1998, Mr. Chew held total stock options
for 122,500 shares of Common Stock.
(8) All Other Compensation includes amounts contributed to the SPECTRASCIENCE
Savings and Retirement Plan, which qualifies as a 401(k) Plan under the
Internal Revenue Code of 1986, as amended.
(9) Mr. Chew announced his resignation from the Company in July 1998.
- 42 -
<PAGE>
OPTION GRANTS
The following table sets forth information concerning individual grants of
stock options made to the Named Executive Officers named in the Summary
Compensation Table. No stock appreciation rights ("SARs") were granted or
exercised for the year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
--------------------------------------------------- Value at Assumed Annual
Number of % of Total Rates of Stock Price
Securities Options Exercise Appreciation
Underlying Granted to or Base for Option Term(5)
Options Employees in Price Expiration -----------------------
Granted(1)(2) Fiscal Year ($/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>
Value of unexercised
Shares Number of Securities In-the-Money
acquired on Value Underlying Unexercised Options/SARs
exercise(1) realized Options/SARs 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 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
- 44 -
<PAGE>
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 June 30, 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 $4.46 per share. As of June 30, 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. All future transactions, including loans, between the
Company and its officers, directors, principal shareholders and their affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested outside directors, and will continue to be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
- 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 Share 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) 401,655 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) 27,745 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.
(6) Includes 24,745 shares issuable upon exercise of options that are
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.
- 46 -
<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 June
30, 1998, there were issued and outstanding 4,714,104 shares of Common Stock,
which were held by approximately 1,000 shareholders of record, and 1,901,672
shares of Common Stock were reserved for issuance upon exercise of outstanding
options and warrants. As of June 30, 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 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
- 47 -
<PAGE>
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.
- 48 -
<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 the underwriting discount and the non-accountable
expense allowance 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.
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.
- 49 -
<PAGE>
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.
- 50 -
<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.
- 51 -
<PAGE>
SpectraScience, Inc.
Audited Financial Statements
Years ended December 31, 1996 and 1997
and at June 30, 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.
/s/ Ernst & Young LLP
February 13, 1998, except for Note 10,
as to which the date is March 26, 1998
Minneapolis, Minnesota
F-2
<PAGE>
SPECTRASCIENCE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 3,047,182 $ 1,638,173 $ 1,136,522
Inventory 192,151 180,474 301,295
Other current assets 103,736 98,419 95,084
------------ ------------ ------------
Total current assets 3,343,069 1,917,066 1,532,901
Fixed assets:
Office furniture and equipment 239,915 249,935 260,672
Machinery and equipment 558,029 560,201 562,704
------------ ------------ ------------
797,944 810,136 823,376
Less accumulated depreciation (590,424) (655,090) (781,442)
------------ ------------ ------------
207,520 155,046 41,934
------------ ------------ ------------
Total assets $ 3,550,589 $ 2,072,112 $ 1,574,835
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 107,866 $ 140,809 $ 121,965
Accrued compensation and taxes 97,735 100,690 83,903
Accrured expenses 37,216 61,019 106,306
Accrued clinical research fees 149,800 159,899 70,010
------------ ------------ ------------
Total current liabilities 392,617 462,417 382,184
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 4,714,104 at June 30, 1998 905,303 1,126,640 1,178,526
Additional paid-in capital 43,886,939 40,620,283 45,496,453
Accumulated deficit (42,493,437) (44,137,228) (45,482,328)
------------ ------------ ------------
Total stockholders' equity 3,157,972 1,609,695 1,192,651
------------ ------------ ------------
Total liabilities and stockholders' equity $ 3,550,589 $ 2,072,112 $ 1,574,835
============ ============ ============
</TABLE>
F-3
SEE ACCOMPANYING NOTES.
<PAGE>
SPECTRASCIENCE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31 June 30
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES
Product revenues $ -- $ -- $ -- $ --
Cost of products sold -- -- -- --
----------- ----------- ----------- -----------
-- -- -- --
OPERATING EXPENSES
Research and development 998,137 1,095,281 490,075 942,907
Selling, general and administrative 723,825 679,809 412,146 439,922
----------- ----------- ----------- -----------
Net loss from operations (1,721,962) (1,775,090) (902,221) (1,382,829)
OTHER (INCOME) EXPENSE
Interest and other (income) expense (176,043) (131,299) 73,359 37,729
----------- ----------- ----------- -----------
Net loss $(1,545,919) $(1,643,791) $ (828,862) $(1,345,100)
=========== =========== =========== ===========
Net loss per common share $ (.47) $ (.37) $ (.19) $ (.29)
Weighted average common shares
outstanding 3,276,193 4,467,233 4,444,873 4,603,063
</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 59,100 14,775 -- -- -- --
Exercise of Series A preferred stock
detachable warrants into
common shares 148,445 37,111 -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance June 30, 1998 (unaudited) 4,714,104 $ 1,178,526 -- $ -- -- $ --
=========== =========== =========== =========== =========== ===========
</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 171,056 -- 185,831
Exercise of Series A preferred stock
detachable warrants into
common shares 705,114 -- 742,225
Net loss -- (1,345,100) (1,345,100)
----------- ----------- -----------
Balance June 30, 1998 (unaudited) $45,496,453 $(45,482,328)$ 1,192,651
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
SPECTRASCIENCE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31 June 30
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,545,919) $(1,643,791) $ (828,862) $(1,345,100)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 72,418 64,666 34,900 126,352
Gain on sale of fixed assets (387) -- -- --
Changes in operating assets and liabilities:
Accounts receivable 100,641 -- -- --
Inventory (120,665) 11,677 9,232 (120,821)
Other current assets (23,539) 5,317 32,106 3,335
Accounts payable and accrued expenses 137,953 69,800 39,384 (80,233)
----------- ----------- ----------- -----------
Net cash used in operating activities (1,379,498) (1,492,331) (713,240) (1,416,467)
INVESTING ACTIVITIES
Purchase of fixed assets (13,418) (12,192) (6,695) (13,240)
Proceeds from sale of fixed assets 2,482 -- -- --
----------- ----------- ----------- -----------
Net cash used in investing activities (10,936) (12,192) (6,695) (13,240)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- -- -- --
Proceeds from issuance of common stock 314,290 95,514 -- 928,056
Proceeds from issuance of preferred stock -- -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities 314,290 95,514 -- 928,056
----------- ----------- ----------- -----------
Net decrease increase in cash and cash equivalents (1,076,144) (1,409,009) (719,935) (501,651)
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 $ 2,327,247 $ 1,136,522
=========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
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 (Continued)
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 June 30, 1998 and for the six-month
periods ended June 30, 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 six-month period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1998.
3. INVENTORIES
Inventories consist of the following:
December 31 June 30
1996 1997 1998
---------- ---------- ----------
(UNAUDITED)
Raw materials $ 71,655 $ 17,560 $ 193,953
Finished goods 120,496 162,914 107,342
---------- ---------- ----------
$ 192,151 $ 180,474 $ 301,295
========== ========== ==========
F-8
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements (Continued)
4. 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 areexercisable 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.
5. 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.
F-9
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements (Continued)
The following table summarizes the stock option activity for the plan:
<TABLE>
<CAPTION>
Weighted
Stock Options Average
Shares Available Outstanding Exercise Price
for Grant Under the Plans 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:
<TABLE>
<CAPTION>
Shares Outstanding Shares Exercisable
------------------------------------------------------ -------------------------------
Shares
Outstanding at Weighted Average Weighted Number of Weighted
Range of Exercise December 31, Remaining Average Exercise Shares Average Exercise
Price 1997 Contractual Life Price per Share Exercisable Price 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
------------- ----------
1,026,644 6.75 years $ 4.19 475,243 $ 3.94
Total
============= ==========
</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
F-10
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements (Continued)
5. STOCK OPTIONS (CONTINUED)
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:
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.
6. 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.
F-11
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements (Continued)
6. COMMITMENTS (CONTINUED)
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.
7. 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 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.
8. 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.
9. 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.
F-12
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements (Continued)
10. SUBSEQUENT EVENTS
In February 1998, an option holder exercised its option to purchase 6,667 shares
of common stock at $3.00 per share. This resulted in net proceeds to the Company
of $20,001.
In March 1998, various warrant holders exercised their warrants to purchase
111,112 shares of common stock at $5.00 per share. This resulted in net proceeds
to the Company of $555,560.
11. SUBSEQUENT EVENTS (UNAUDITED)
In April 1998, various warrant holders exercised their warrants to purchase
37,333 shares of common stock at $5.00 per share. This resulted in net proceeds
to the Company of $186,665.
In May 1998, various option holders exercised their options to purchase 43,333
and 9,100 shares of common stock at $3.00 and $3.94 per share, respectively. Of
the 43,333 shares of common stock, 10,000 shares were sold in the open market to
cover the cost of the option exercises.
F-13
<PAGE>
================================================================================
No dealer, salesperson or other person is autho-rized 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 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 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.
--------------------
TABLE OF CONTENTS
Page
Prospectus Summary .............................................. 3
Risk Factors .................................................... 6
Use of Proceeds ................................................. 16
Capitalization .................................................. 17
Dividend Policy ................................................. 17
Price Range of Common Stock ..................................... 18
Selected Financial Data ......................................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................................. 20
Business ........................................................ 24
Management ...................................................... 39
Certain Transactions ............................................ 45
Principal Shareholders ......................................... 46
Description of Securities ....................................... 47
Underwriting .................................................... 49
Legal Matters ................................................... 50
Experts ......................................................... 51
Additional Information .......................................... 51
Index to Financial Statements ...................................F-1
--------------------
================================================================================
2,500,000 Shares
SPECTRASCIENCE, INC.
Common Stock
--------------------
PROSPECTUS
--------------------
Josephthal & Co. Inc.
, 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
=========
II-1
<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 (previously filed)
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
(previously filed)
4.2 Form of Representative's Warrant Agreement and
Certificate (previously filed)
5.1 Opinion of Dorsey & Whitney LLP (previously filed)
10.1 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.)
II-2
<PAGE>
10.2 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.)
10.3 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.)
10.4 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.)
10.5 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.)
10.6 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.)
10.7 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.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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).
10.12 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).
10.13 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.)
10.14 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.)
II-3
<PAGE>
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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).
10.21 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.)
10.22 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.)
10.23 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.)
10.24 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.)
10.25 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.)
10.26 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.)
10.27 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.)
10.28 Manufacturing and Sales Agreement, dated June 23, 1997,
between Portlyn Corporation and the Company (filed
herewith)
23.1 Consent of Ernst & Young LLP (filed herewith)
II-4
<PAGE>
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit
5.1)
24.1 Power of Attorney (previously filed)
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 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.
II-5
<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 October 7, 1998.
SPECTRASCIENCE, INC.
By: /s/ Brian T. McMahon
---------------------------------
Brian T. McMahon
Chairman and Chief Executive Officer
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 October 7, 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)
* President and Chief Operating Officer
- ------------------------------
Chester E. Sievert, Jr.
* Director
- ------------------------------
Henry M. Holterman
* Director
- ------------------------------
Nathaniel S. Thayer
*By /s/ Brian T. McMahon
--------------------------
Brian T. McMahon
Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
1.1 Form of Underwriting Agreement (previously filed)
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
(previously filed)
4.2 Form of Representative's Warrant Agreement and
Certificate (previously filed)
5.1 Opinion of Dorsey & Whitney LLP (previously filed)
10.1 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.)
10.2 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.)
10.3 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.)
10.4 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.)
10.5 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.)
10.6 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.)
10.7 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.)
10.8 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.)
<PAGE>
10.9 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.)
10.10 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.)
10.11 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).
10.12 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).
10.13 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.)
10.14 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.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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).
10.21 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.)
10.22 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
<PAGE>
by reference to the Company's Annual Report on Form
10-KSB, Exhibit 10.28, for the year ended December 31,
1994.)
10.23 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.)
10.24 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.)
10.25 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.)
10.26 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.)
10.27 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.)
10.28 Manufacturing and Sales Agreement, dated June 23, 1997,
between Portlyn Corporation and the Company (filed
herewith)
23.1 Consent of Ernst & Young LLP (filed herewith)
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit
5.1)
24.1 Power of Attorney (previously filed)
27 Financial Data Schedule (filed herewith).
EXHIBIT 10.28
PORTLYN CORPORATION
MANUFACTURING AND SALES AGREEMENT
This agreement dated June 23, 1997 is between Portlyn Corporation (the
"Company"), a New Hampshire corporation with an address of RFD 1, Box 451, Route
25, Moultonboro, NH 03254 and SpectraScience, Inc. (the "Purchaser"), a
Minnesota corporation with an address of 3650 Annapolis Lane, Suite 101,
Minneapolis, Minnesota 55447.
The parties agree as follows:
1. Definitions: The following terms shall be defined as provided below
for purposes of this agreement.
1.1 Products. "Product" means a flexible biopsy forceps with
one or more lumens, or holes, which are designed to accommodate optical
componentry that will assist in the identification of tissue types. The parties
agree to develop a more specific description of the Product which will be set
forth on Exhibit A. The specifications on Exhibit A may be altered by the
Purchaser, subject to the terms of this agreement, including without limitation,
subsections 3.2(a) and 3.4.
1.2 Nonoptic Product. "Nonoptic Product" means biopsy forceps
with one or more lumens, or holes, which is designed to accommodate elements,
instruments, or devices (such as needles, scopes, or fluids) other than optical
componentry.
1.3 Purchaser Proprietary Assets. "Purchaser Proprietary
Assets" means the development and design of a biopsy forceps with a one or more
lumens designed to accommodate various elements, instruments, or devices,
including fiber optic cables, needles, fluids and other devices, all as
described in U.S. Patent Applications numbered 08/643,912 and 08/644,080 both
dated May 7, 1996, filed in the U.S. Patent Office, and related patent
application(s) filed within six months from the date of this agreement, trade
secrets, trademarks, documents, information, and ideas.
1.4 Company Proprietary Assets. "Company Proprietary Assets"
means the development and design of the Company's biopsy forceps, and all
related patents (including, without limitation, U.S. Patent #5,571,129), trade
secrets, trademarks, documents, information and ideas.
1.5 Six Month Purchase Period. "Six Month Purchase Period"
means the first period of six consecutive calendar months for which the
Purchaser issues purchase orders for Products under subsection 3.2 and each
successive
<PAGE>
period of six consecutive calendar months thereafter during the term of this
agreement.
1.6 Binding Date. "Binding Date" means the last day of the
fourth calendar month in any Six Month Purchase Period.
1.7 "Grace Period" means the first six months following the
date of this agreement.
2. Agreement to Manufacture and Purchase; Licenses.
2.1 Purchase and Sale. During the term of this agreement and
subject to its terms and conditions, the Company agrees to manufacture and
provide Products to Purchaser pursuant to purchase orders placed with the
Company as provided in Section 3, and Purchaser agrees to purchase from the
Company all of its requirements for Products. The Purchase hereby grants the
Company a non-exclusive royalty free license for the term of this agreement (as
it may be extended) to use the Purchaser's Proprietary Assets to manufacture the
Products for sale hereunder to the Purchaser.
2.2 License for Nonoptic Sales by the Company. Upon the
Company's request, the Purchaser hereby agrees to grant the Company a
non-exclusive world-wide license to use the Purchaser's Proprietary Assets to
manufacture, market and sell Nonoptic Products to end-users of the Nonoptic
Products and to businesses or entities for resale to others. Under such license,
the Company shall pay a royalty to the Purchaser of no less than 3% and no more
than 5% of the gross revenues (after discounts, allowances, and returns)
actually received by the Company from such purchasers of Nonoptic Products. The
parties agree to work together in good faith to generate a license agreement
between them providing for such license at the Company's request.
2.3 Nonissuance of Patent. If the Purchaser does not obtain
U.S. patent protection for the design of the lumens in Purchaser Proprietary
Assets within two years from the date of this agreement, then the Company may
manufacture and sell Nonoptic Products to any person or entity without the
necessity of any approval or license from the Purchaser, although the Company
agrees that, in that event, the Company will not sell Products to any purchaser
which, to the Company's knowledge, intends to insert a fiber optic cable into
the Product. The Purchaser reserves the right to inform the Company in writing
immediately in the event that the Purchaser discovers that certain companies are
using Nonoptic Products manufactured by the Company or its agents in the optical
field. Upon receipt of such notice, Company shall have ninety (90) days to
disengage from manufacturing Nonoptic Products for such companies in the optical
field only.
2
<PAGE>
3. Purchaser Orders.
3.1 Purchase Orders During Grace Period. From time to time
during the Grace Period, the Purchaser shall place binding purchase orders for
its requirements for Products. The pricing and delivery times for Products
ordered under these Purchase Orders shall be subject to the mutual agreement of
the parties.
3.2 Purchase Orders for Six Month Purchase Periods. After the
Grace Period, the Purchaser shall purchase Products from the Company by issuing
binding purchase orders for the Purchaser's requirements for Products over Six
Month Purchase Periods as described in this section. The first Six Month
Purchase Period shall begin with the first calendar month in which the Purchaser
chooses to issue a purchase order for Products after the Grace Period. With this
first purchase order the Purchaser must submit binding purchaser orders for its
requirements for Products for the entire first Six Month Purchase Period. The
ship date for any purchase order issued for the first Six Month Purchase Period
shall not be earlier than sixty (60) days after the date the purchase orders for
the first Six Month Purchase Period are received by the Company. The Purchaser
shall issue binding purchase orders for its requirements for Products for each
Six Month Purchase Period following the first one, on or before the Binding Date
in the immediately preceding Six Month Purchase Period. Once the Purchaser has
issued purchase orders for any Six Month Purchase Period as described above, the
Purchaser shall be bound to purchase the Products ordered in such Purchaser
Orders, subject only to the following:
(a) the Purchaser may vary specifications for the Products
ordered so long as the Purchaser and the Company can agree on revisions to the
delivery date of such Products, failing which agreement the original purchase
orders shall stand;
(b) the Purchaser may change the number of Products ordered
for any given month within the Six Month Purchase Period so long as the gross
number of Products ordered in the Six Month Purchase Period stays the same and
so long as the Company and the Purchaser can agree on revisions to the delivery
dates for the Products affected, failing which agreement the original purchase
orders shall stand;
(c) the Purchaser may increase the number of Products ordered
in any Six Month Purchase Period by up to 20% so long as the Purchaser provides
written notice to the Company of such increase no later than ninety (90) days
before the delivery date for the additional Products; and
3
<PAGE>
(d) the Purchaser may increase the number of Products ordered
in any Six Month Purchase Period by up to 50%, so long as the Purchaser provides
written notice to the Company of such increase no later than one hundred twenty
(120) days before the delivery date for the additional Products.
3.3 Terms of Purchases. All Products ordered by Purchaser
under this agreement shall be delivered F.O.B. Seller's factory, Moultonboro,
New Hampshire, U.S.A. All costs of transportation shall be borne by the
Purchaser and all risk of loss shall pass to the Purchaser when the Products are
delivered to the carrier. To the extent they are not inconsistent with this
agreement, the terms of the Company's sales orders, invoices and related
documents shall govern the sale of Products to the Purchaser. Any additional or
conflicting terms in the Purchaser's purchase orders or other related documents
shall be inapplicable.
3.4 Price and Payments. During the Grace Period, the parties
shall develop a price for the Products that may be ordered during the Six Month
Purchase Periods and such pricing shall be set forth on Exhibit B, provided that
if the Purchaser changes the specifications for Products from those shown on
Exhibit A, the price shown on Exhibit B may be adjusted by the Company for those
Products. In addition, the price may be increased by the Company as of any
anniversary date of this agreement by giving written notice of such increase to
the Purchaser within the ninety days preceding each anniversary date, provided
that each increase in price may not exceed 5% of the price in effect just prior
to the change. The Purchaser shall make all payments for Products within thirty
(30) days after the date of the Company's invoice for such Products.
3.5 Failure by Company to Fill Orders.
(a) Beginning with the first day of the first Six Month
Purchase Period, if, during any period of three consecutive calendar months, the
Company fails to ship at least 80% of the Products due to be shipped during such
period pursuant to binding purchase orders, then the Purchaser may, as its sole
recourse, obtain up to 50% of its requirements for Products after such three
month period from other sources. The Purchaser shall provide written notice to
the Company of its intent to obtain Products from other sources at least ten
(10) days prior to placing its first purchase order from such other sources, and
shall, promptly after ordering Products from other sources, inform the Company
in writing of the number of Products ordered from other sources and the
scheduled ship dates.
(b) Beginning with the first day of the first Six Month
Purchase Period, if, during any period of three consecutive calendar months, the
Company fails to ship at least 50% of the Products due to be shipped during such
period pursuant to binding purchase orders, then the Purchaser may, as its sole
4
<PAGE>
recourse, either obtain the balance of its requirements for Products after such
three month period from other sources (with the same notice and information as
provided in section (a) above) or terminate this agreement by giving thirty (30)
days prior written notice to the Company.
4. Warranty and Related Matters.
4.1 Warranty. The Company warrants to the Purchaser that the
Products will be free from defects in workmanship and materials.
4.2 Term. The term of this warranty begins on the date of
invoice to the Purchaser and continues for a period of ninety (90) days. Parts
used for replacement are warranted for the remainder of the original warranty
period.
4.3 Remedy. The Purchaser's exclusive remedy for any defects
covered by this warranty is repair or replacement of the defective Product or
parts. All Products or parts claimed to be defective must be shipped to the
Company at the Purchaser's cost within a reasonable period of time. The Company
or its authorized agent will, at the Company's option, repair or replace the
Product or part within a reasonable period of time, and reship it to the
Purchaser at the Purchaser's expense. The Company's acceptance of any returned
Product or part is not an admission by the Company that the Product or part is
defective.
4.4 Exclusions. This warranty does not apply to problems not
caused by defects in workmanship or materials, including but not limited to
problems caused in whole or in part by:
(a) Use, handling, operation, maintenance or storage that is
not in accordance with either the Company's instructions for use or standard
industry practice;
(b) Alteration;
(c) Negligence;
(d) Repair or modifications performed by anyone other than the
Company or a party authorized in writing by the Company;
(e) Use in any manner or procedure other than that for which
it is labeled; and
(f) Use by any person other than trained medical personnel
under order of a physician.
5
<PAGE>
4.5 DISCLAIMERS. THE WARRANTY PRINTED ABOVE IS THE ONLY
WARRANTY APPLICABLE TO THIS PURCHASE. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, ARE DISCLAIMED. THE COMPANY WILL UNDER NO
CIRCUMSTANCES BE LIABLE FOR ANY PUNITIVE, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL
DAMAGES, INCLUDING, BUT NOT LIMITED TO, PERSONAL INJURY AND PROPERTY DAMAGE,
EQUIPMENT DAMAGE, LOSS OF PROFITS OR REVENUES OR BUSINESS, COST OF CAPITAL, COST
OF PURCHASE OR COST OF REPLACEMENT GOODS.
5. Indemnity.
5.1 Injuries and Damages. The Purchaser will defend, indemnify
and hold the Company harmless from and against any and all losses, damages,
expenses (including reasonable attorneys' fees and court costs), fines, suits,
proceedings, claims, demands, or actions of any kind or nature arising form any
charge, complaint or assertion that any Product, or any medical device of which
the Product is a component, sold by the Purchaser is responsible for any injury
to person or damage to property unless such injury is caused by a negligent act
on the part of the Company. The Company will provide reasonable assistance to
the Purchaser at the Purchaser's expense, in the defense of any such claim or
lawsuit.
5.2 Infringement. The Purchaser will defend, indemnify and
hold the Company harmless from and against any and all losses, damages, expenses
(including reasonable attorneys' fees and court costs), fines, suits,
proceedings, claims, demands, or actions of any kind or nature arising from any
charge, complaint or assertion that any Product, or any medical device of which
the Product is a component, sold by the Purchaser infringes or wrongly uses any
patent, trademark, copyright, or other intellectual property of any third party.
The Company will provide reasonable assistance to the Purchaser at the
Purchaser's expense, in the defense of any such claim or lawsuit.
6. Confidentiality. The parties have previously signed Evaluation and
Non-Disclosure Agreements dated January 7, 1997 and January 16, 1997, provided
by the Company, and a Confidentiality Agreement dated January 15, 1997, provided
by the Purchaser, in which certain Confidential Information was disclosed by the
Purchaser to the Company. The parties further agree that during the course of
this agreement confidential and proprietary information may be exchanged. The
information which the Company or the Purchaser deems confidential and
proprietary will be marked "CONFIDENTIAL" ("Confidential Information"). Each
will provide to the other only such Confidential Information
6
<PAGE>
as is required by the other to perform under this agreement. Neither will
disclose such Confidential Information to any third party, or use any such
Confidential Information other than for the purposes of this agreement for a
period of five (5) years after the expiration or termination for any reason of
this agreement, unless or until:
(a) Confidential Information shall become publicly known
through no fault of the receiving party, or
(b) Confidential Information was already in the receiving
party's possession, as evidenced in writing, prior to the disclosure of
Confidential Information, or
(c) Confidential Information shall be subsequently disclosed
to the receiving party by a third party who is not under any obligation of
confidentiality to the disclosing party, or
(d) the receiving party can establish by written documentation
its independent development of such Confidential Information.
7. Proprietary Matters.
7.1 The Company. The parties agree that the Company
Proprietary Assets and any improvements thereto developed by either party during
the term of this agreement are the sole property of the Company.
7.2 The Purchaser. The parties agree that the Purchaser
Proprietary Assets and any improvements thereto developed by either party during
the term of this agreement are the sole property of the Purchaser.
7.3 Further Assurances. Each party (the "Inventing Party")
agrees to disclose promptly to the other party (the "Owning Party") any
improvements developed by the Inventing Party that are the property of the
Owning Party under subsection 7.1 or 7.2, as the case may be. The Inventing
Party shall promptly transfer and assign all rights to such improvements to the
Owning Party. In addition, the Inventing Party agrees to provide the Owning
Party, at the Owning Party's expense, with such assistance and cooperation as
reasonably requested by the Owning Party to enable the Owning Party to perfect
ownership in, protect and use the properties belonging to the Owning Party as
provided in subsections 7.1 and 7.2 above.
8. Term and Termination.
8.1 Expiration and Renewal. This agreement shall be in full
force and effect from the date hereof through the date three years from the
first day of
7
<PAGE>
the first calendar month in the first Six Month Purchase Period, unless sooner
terminated as provided in subsection 8.2 below. The term of this agreement may
be renewed by the Company for a period not to exceed two years from the
expiration date so long as the Company is in substantial compliance with the
terms and conditions of this agreement at such time. Such renewal shall be
effected by written notice from the Company to the Purchaser at least six (6)
months prior to the expiration date, specifying the length of the renewal term.
8.2 Early Termination. This agreement may be terminated prior
to its expiration (including any renewal term) as follows:
(a) each party shall have the option upon three (3) months
prior written notice to terminate this agreement if any proceeding, suit or
action relating to bankruptcy, reorganization, arrangement of debt, insolvency,
adjustment of debt, receivership, liquidation or dissolution under law or
statute shall be filed by or against the other party, if such action, proceeding
or suit is not terminated within such three (3) month period;
(b) each party shall have the option to terminate this
agreement, upon three (3) months written notice to the other, for material
breach of any material provision of this agreement by the other which breach is
not corrected within such three (3) month period;
(c) the Company shall have the option to terminate this
agreement upon ten (10) days prior written notice to the Purchaser, if the
Purchaser fails to pay any invoice from the Seller within sixty (60) days after
the date of the invoice; and
(d) the Purchaser may terminate this agreement pursuant to
subsection 3.5(b).
8.3 Effect of Expiration or Termination; Survival. Upon
expiration or termination of this agreement for whatever reason, each party
shall return to the other all data, drawings, materials and Confidential
Information belonging to the other. No termination of this agreement shall
affect the right of the Company to continue to receive payments due and owing to
it for all Products subject to Purchase Orders which have been issued pursuant
to section 3. In addition, the provisions of sections 1, 2.2, 2.3, 4, 5, 6, 7,
9, and 10 shall survive the termination or expiration of this agreement.
9. Arbitration. All controversies, disputes or claims arising between
the parties and which are not resolved within thirty (30) days after either
party notifies the other in writing of such controversy, dispute or claim, may
be submitted for arbitration on demand of either party. Such arbitration
proceedings shall be
8
<PAGE>
conducted before a single arbitrator in the City of Boston, Massachusetts, in
accordance with the then current Commercial Rules of the American Arbitration
Association; the award and decision of the arbitrator shall be conclusive and
binding upon both parties; shall be non-appealable; and judgment upon the award
may be entered in any court of competent jurisdiction.
10. Miscellaneous.
10.1 Force Majeure. Neither party shall be responsible for the
fulfillment of any obligation or any losses resulting if the fulfillment of any
term of this agreement is hindered, delayed or prevented by revolutions or other
civil disorders, wars, governmental prescription, acts of enemies, strikes,
labor disputes, fires, explosions, floods, natural catastrophe, delays from
suppliers or subcontractors, or by any other similar cause not within the
control of the party whose performance is interfered with, and which, by the
exercise of reasonable diligence, such party is unable to prevent, provided that
any such event was not reasonably foreseeable as of the date of this agreement.
The performance of the party hindered, delayed or prevented shall be resumed at
a reasonable time after cessation of the event if reasonably possible. Any party
claiming the benefit of this section shall give notice of the commencement and
cessation of any such event if reasonably possible.
10.2 Notice. All notices, requests, demands, consents or other
communications given hereunder or in connection herewith shall be in writing and
sent by hand delivery, overnight courier, or certified or registered mail,
return receipt requested, postage prepaid, addressed to the parties at the
addresses shown in the first paragraph of this agreement or such other address
as one party may notify the other in accordance with the foregoing.
10.3 Successors and Assigns. This agreement shall be binding
upon and enure to the benefit of the respective representatives, successors, and
assigns of the Purchaser and the Company. The rights under this agreement may
not be assigned by either party without the prior written consent of the other
party.
10.4 Entire Agreement. This agreement constitutes the entire
agreement among the parties concerning the subject matter hereof and supersedes
all other prior agreements and understandings relating to the subject matter
hereof. No amendment or modification hereof will be effective, unless it is in
writing and signed by both parties.
10.5 Headings. The headings for the Sections of this agreement
have been inserted for convenience of reference only and shall in no way effect
the construction or interpretation of this agreement.
9
<PAGE>
10.6 Governing Law. This agreement shall in all respects be
construed and interpreted in accordance with and governed by the laws of the
State of New Hampshire, U.S.A.
10.7 Representations. Each party represents that his agreement
has been duly authorized by it by all necessary corporate or other entity
action, that his agreement is a valid and binding obligation of such party,
enforceable against such party in accordance with its terms, that the execution,
delivery and performance of this agreement does not violate or conflict with any
law or regulation applicable to such party and that no approval of any
governmental authority or agency is required for the execution, delivery and
performance of this agreement by such part.
10.8 Cumulative Remedies; Waivers in Writing. All rights and
remedies of the parties are cumulative and not exclusive of any other rights and
remedies. No waiver of any right or remedy of a party shall be effective unless
it is in writing an designed by such party.
IN WITNESS WHEREOF, the parties have executed this document as of the
date first written above.
PORTLYN CORPORATION
By: /s/ DAVID PORTER
------------------------------
Its: President
Duly Authorized
SPECTRASCIENCE, INC.
By: /s/ BRIAN T. MCMAHON
------------------------------
Its: President and CEO
Duly Authorized
10
<PAGE>
EXHIBIT A
Products
The Product description will be determined jointly by the parties as
provided in subsection 1.1.
11
<PAGE>
EXHIBIT B
Pricing for Products
The pricing for the Products will be determined during the Grace Period
and finalized before the first Six Month Purchase Period as provided in
subsection 3.4.
12
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 Amendment No. 1 to the Registration Statement (Form SB-2 No. 333-59395)
and related Prospectus of SpectraScience, Inc. for the registration of 2,875,000
shares of its Common Stock.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 7, 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 JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,136,522
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 301,295
<CURRENT-ASSETS> 1,532,901
<PP&E> 823,376
<DEPRECIATION> 781,442
<TOTAL-ASSETS> 1,574,835
<CURRENT-LIABILITIES> 382,184
<BONDS> 0
1,178,526
0
<COMMON> 0
<OTHER-SE> 14,125
<TOTAL-LIABILITY-AND-EQUITY> 1,574,835
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,382,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37,729)
<INCOME-PRETAX> (1,345,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,345,100)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> 0
</TABLE>
