As filed with the Securities and Exchange Commission on April 14, 2000
Registration No. 333-84213
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM S-3 ON
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 (I.R.S. Employer
incorporation or organization) Industrial Classification Identification
Code Number) Number)
14405 21ST AVENUE N, SUITE 111
MINNEAPOLIS, MINNESOTA 55447
(763) 745-4120
(Address and telephone number of principal executive offices)
CHESTER E. SIEVERT, JR.
SPECTRASCIENCE, INC.
14405 21ST AVENUE N, SUITE 111
MINNEAPOLIS, MINNESOTA 55447
(763) 745-4120
(Name, address and telephone number of agent for service)
COPIES TO:
DAVID E. DRYER, ESQ.
CHAPPELL WHITE LLP
268 SUMMER STREET
BOSTON, MASSACHUSETTS 02210
(617) 279-3000
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
===========================================================================================================
Title of each Proposed maximum Proposed maximum Amount of
class of securities Amount to be offering price aggregate registration
to be registered registered per share(1) offering price(1) fee(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.25 par value ..... 2,790,037 shares $7.375 $20,576,523 $4,516
===========================================================================================================
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(c) on the basis of the average of the last reported
bid and asked prices of the common stock in the over-the-counter market, as
reported by the National Quotation Bureau, on April 14, 2000.
(2) $966.00 was previously paid upon the filing of the Company's Registration
Statement on Form S-3 on July 30, 1999.
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.
================================================================================
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SUBJECT TO COMPLETION, DATED APRIL 14, 2000
PROSPECTUS
SPECTRASCIENCE, INC.
Common Stock
2,790,037 Shares
This prospectus covers the registration of shares of common stock of
SPECTRASCIENCE, Inc. for sale by selling shareholders as follows:
* 1,389,703 shares of outstanding common stock;
* 171,430 units issuable, upon the conversion of an outstanding
convertible demand note by the holder, into 171,430 shares of
common stock and warrants to purchase 85,715 shares of common
stock;
* 826,189 shares of common stock issuable upon the exercise of
outstanding warrants; and
* 317,000 shares of common stock issuable upon the exercise of
stock options issued to employees outside of the 1991 Stock
Plan.
The selling shareholders may sell shares either directly to purchasers
or through brokers, dealers or agents. We will receive no proceeds from the sale
of shares by the selling shareholders, but could receive up to $6,788,341 if all
the warrants and stock options were exercised.
Shares of our common stock are traded in the over-the-counter market
under the symbol "SPSI." On April 14, 2000, the average of the last reported bid
and asked prices of our common stock in the over-the-counter market, as quoted
by the National Quotation Bureau, was $7.375 per share.
Investment in our common stock involves substantial risks, and
investors should not invest any funds in this offering unless they can afford to
lose their entire investment. SEE "RISK FACTORS" BEGINNING ON PAGE 7. In making
an investment decision investors must rely on their own examination of the
issuer and the terms of the offering, including the merits and risks involved.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed.
Our selling shareholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities, and it is not a
solicitation for an offer to buy these securities in any state where the offer
or sale of these securities is not permitted.
--------------------
The date of this prospectus is April 14, 2000
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--------------------
TABLE OF CONTENTS
--------------------
PAGE
NO.
---
PROSPECTUS SUMMARY............................................................4
SUMMARY FINANCIAL DATA........................................................6
RISK FACTORS..................................................................7
USE OF PROCEEDS..............................................................13
CAPITALIZATION...............................................................13
SELLING SECURITY HOLDERS.....................................................14
PLAN OF DISTRIBUTION.........................................................19
LEGAL PROCEEDINGS............................................................19
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES..............................20
EXECUTIVE COMPENSATION.......................................................22
CERTAIN TRANSACTIONS.........................................................25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............26
DESCRIPTION OF BUSINESS......................................................27
MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................41
PROPERTY.....................................................................43
PRICE RANGE OF COMMON STOCK..................................................43
DIVIDEND POLICY..............................................................44
DESCRIPTION OF SECURITIES....................................................44
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION.........................46
FOR SECURITITES ACT LIABILITIES..............................................46
LEGAL MATTERS................................................................46
EXPERTS......................................................................47
ADDITIONAL INFORMATION.......................................................47
INFORMATION NOT REQUIRED IN PROSPECTUS.......................................49
AUDITED FINANCIAL STATEMENTS..................................................F
--------------------
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PROSPECTUS SUMMARY
THE FOLLOWING IS ONLY A SUMMARY. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD READ
THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON
STOCK DISCUSSED UNDER "RISK FACTORS." OUR ACTUAL RESULTS MAY DIFFER GREATLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
SPECTRASCIENCE, Inc. designs, develops, manufactures and plans to
market, innovative Laser Induced Fluorescence spectrophotometric systems.
Management believes that our principal product, the Virtual Biopsy(TM) System,
will enable us to be the first to market an optical biopsy system that aids in
the differentiation between healthy and pre-cancerous or cancerous tissues. In
addition, management believes the technology is a platform that can also be used
to detect other cancers found in the body, such as in the cervix.
This prospectus covers the registration of 2,790,037 shares of common
stock issued in connection with private placements of our common stock or
through the exercise of options or warrants to acquire our common stock. Also
included are shares of common stock issuable upon the conversion of a
convertible demand note.
We conducted multi-center clinical trials using the Virtual Biopsy(TM)
System for the detection of colorectal cancer. Based upon the clinical trial
results, management believes the SPECTRASCIENCE Virtual Biopsy(TM) System aids
and improves the physician's accuracy in determining whether tissue is normal,
as opposed to pre-cancerous or cancerous. The benefits of increased accuracy
should:
* enable the physician to immediately determine the best course
of treatment for the patient;
* reduce the need for additional procedures;
* minimize the number of biopsies taken; and
* permit the physician to combine a diagnostic and therapeutic
procedure in one visit.
Management believes that the Virtual Biopsy(TM) System will facilitate
earlier detection of cancer. Early detection increases the patient's chances for
long-term survival. Earlier detection should lead to:
* earlier, more effective treatment;
* improved patient quality of life;
* improved patient survival rates; and
* reduced patient care costs.
The data from the above-mentioned clinical trials was used to support a
pre-market approval application for the Virtual Biopsy(TM) System. On November
19, 1999 an FDA Medical Device Panel recommended the application for approval.
The recommendation includes a required post-approval clinical study. Typically,
the FDA renders a decision concerning final approval of the pre-market approval
application and clearance to market within several months following a favorable
recommendation. As of the date of this prospectus, management is responding to a
request from the FDA received in February 2000. After submitting the response,
SPECTRASCIENCE may have to wait several more months for the FDA's final
determination as to the status of its pre-market approval application and
clearance to market the Virtual Biopsy(TM) System.
SPECTRASCIENCE wants to become a leader in developing and
commercializing advanced, spectrophotometric diagnostic products that
differentiate, in real time, between healthy and pre-cancerous or cancerous
tissues. We intend to accomplish this with the following strategy:
* commercialize the Virtual Biopsy(TM)System by becoming the
first to market an endoscopic optical biopsy system for
colorectal applications;
* demonstrate to third party payors and managed care companies
the usefulness and effectiveness of our system by improving
patient outcomes;
* demonstrate to physicians how easy the Virtual Biopsy(TM)
System is to use;
* collaborate with strategic partners to market and distribute
the Virtual Biopsy(TM) System; and
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* use our core technologies and the Virtual Biopsy(TM) System
platform for the detection of cancers in other areas of the
body.
Our net loss for the year ended December 31, 1999 was approximately
$2.2 million. Management expects operating losses to continue through at least
the end of calendar year 2000 as we bring the Virtual Biopsy(TM) System to
market, expand research and development activities, and expand sales and
marketing activities.
SPECTRASCIENCE was incorporated in the State of Minnesota on May 4,
1983 as GV Medical, Inc. In October 1992, GV Medical discontinued its prior
business, refocused its development efforts and changed its name to
SPECTRASCIENCE, Inc. Our principal executive offices are located at 14405 21st
Avenue N, Suite 111, Minneapolis, Minnesota 55447. You can reach us by telephone
at (763) 745-4120; by fax at (763) 745-4126; or by email at
[email protected]. We have a web-site at http://www.spectrascience.com.
The information contained on our web site is not deemed to be a part of this
prospectus.
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<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial information should be read along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, including the notes, included in this
prospectus. Ernst & Young LLP audited the financial statements upon which the
data marked as "audited" are based.
Year Ended
December 31,
(Audited)
---------------------------
1999 1998
----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues .............................. $ -- $ --
Costs and expenses:
Research and development ...... 1,356,986 1,719,171
General and administrative .... 794,221 746,593
----------- -----------
Loss from operations .................. (2,151,207) (2,466,124)
Interest and other (expense) income ... (28,626) 51,982
----------- -----------
Net loss .............................. (2,179,833) (2,414,142)
=========== ===========
Net loss per share(1) ................. $ (0.41) $ (0.52)
=========== ===========
Shares used to compute net
loss per share(1) ............. 5,288,974 4,663,559
December 31, 1999
-----------------------------
Actual As Adjusted(2)
(Audited) (Unaudited)(3)
------------ ------------
BALANCE SHEET DATA:
Working capital ....................... $ 3,518,136 $ 4,154,272
Total assets .......................... 4,928,104 5,564,240
Total liabilities ..................... 1,161,882 1,161,882
Accumulated deficit(4) ................ (48,731,203) (48,731,203)
Total shareholders' equity ............ $ 3,766,222 $ 4,402,358
- -----------------------
(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 13,000 shares of common stock in
January 2000. See "Use of Proceeds" and "Capitalization."
(3) As adjusted to reflect the exercise of 143,020 stock options during the
period January 1 - March 30, 2000.
(4) Includes an accumulated deficit of $34,638,007 incurred prior to
October 1, 1992. This is the quarter in which G.V. Medical started to
develop its current products and changed its name to "SPECTRASCIENCE,
Inc."
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RISK FACTORS
ALONG WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE PURCHASING SHARES OF
COMMON STOCK OFFERED BY THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SEE
"--FORWARD-LOOKING STATEMENTS."
WE HAVE INCURRED SIGNIFICANT OPERATING LOSSES EACH YEAR SINCE OUR
INCEPTION. Our net loss for the year ended December 31, 1998 was $2,414,142. The
net loss for the year ended December 31, 1999 was $2,179,833. Our accumulated
deficit at December 31, 1999 was approximately $48.7 million. Approximately
$14.1 million of the deficit has been incurred since October 1992 when our focus
changed. We expect our operating losses to continue through calendar year 2000.
We must receive regulatory approval for our Virtual Biopsy(TM) System and then
successfully commercialize it if we hope to achieve profitable operations in
2001. If we fail to obtain the necessary regulatory approvals or are not
successful in commercializing the Virtual Biopsy(TM) System, we will continue to
have operating losses until we are able to commercialize a product.
SALES OF THE VIRTUAL BIOPSY(TM) SYSTEM TO MANAGED CARE ORGANIZATIONS
AND MEDICAL FACILITIES WILL BE DEPENDENT ON THE AVAILABILITY OF ADEQUATE
REIMBURSEMENT TO THEM FROM THIRD PARTIES. These organizations and facilities
will seek reimbursement from various governmental programs and private insurance
carriers for charges associated with providing Virtual Biopsy(TM) System related
healthcare services. Procedures using the Virtual Biopsy(TM) System are not now,
and may not ever be approved for reimbursement by these government programs and
private insurance carriers. Even if the procedures become eligible, the level of
reimbursement may not be adequate. If we fail to obtain adequate third-party
reimbursement, it will negatively affect our business and ability to sell the
Virtual Biopsy(TM) System. See "Business--Third-Party Reimbursement."
OUR INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. The
healthcare industry in general, and the medical device sector in particular, is
heavily regulated in the areas of licensing, operations, facilities,
environmental protection, and pricing and reimbursement policies. Management
believes we are currently operating in compliance with applicable regulations.
Management also believes that the healthcare industry is constantly changing and
that we will probably be required to modify our operations from time to time to
stay in compliance with the applicable regulations. We cannot predict what
effect new or additional legislation or regulation would have on us. Subsequent
adoption of laws or interpretations of existing laws could restrict or otherwise
adversely affect our business. See "Business--Government Regulation" and
"Third-Party Reimbursement."
THE BUSINESS WE OPERATE IS SUBJECT TO EXTENSIVE FEDERAL, STATE, AND
LOCAL REGULATION. Many federal and state government agencies extensively
regulate the manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products. The broad language used in the laws that
regulate our business often makes it difficult for us to remain in strict
compliance. Our failure or inability to comply with applicable laws and
governmental regulations may materially and adversely affect our business. See
"Business -- Government Regulation."
WE MAY NOT RECEIVE GOVERNMENTAL APPROVALS FOR OUR PROPOSED PRODUCTS ON
A TIMELY BASIS, OR AT ALL. The design, manufacture, labeling, distribution and
marketing of our products is subject to extensive government regulation in the
United States and internationally. The process of obtaining required regulatory
approvals is lengthy, expensive and uncertain.
In the United States, medical devices are assigned to one of three
classes depending on the controls the FDA deems necessary to ensure the safety
and effectiveness of the device. The Virtual Biopsy(TM) System is a Class III
device. In addition to adhering to general controls to which all medical devices
are subject, and special controls such as performance standards, post-market
surveillance and patient registries, a Class III device must receive
pre-marketing approval to ensure its safety and effectiveness. Our pre-market
approval application for the Virtual Biopsy(TM) System received a positive FDA
Medical Device Panel Review in November 1999. In February 2000, the FDA
requested that we address queries raised by their advisory panel and the Office
of Device Evaluation's reviewing staff regarding our application. We must
address these queries by re-analyzing our statistical results to ensure the
Virtual Biopsy(TM) System can be appropriately labeled. Once we have submitted
our response to these queries, a final approval is still necessary before we can
commercialize the Virtual Biopsy(TM) System. We expect that following the
submission of our response to the queries, our application will receive FDA
approval in the first half of 2000
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with a requirement by the FDA that we conduct a post-approval clinical study. It
is still possible however, that the FDA could request additional clinical data
or otherwise disapprove our application, requiring us to start over. This would
delay us in commercializing our product. The delay and additional expense would
adversely affect our business and could materially affect our financial
condition. See "Business--Clinical Trials" and "--Government Regulation."
REGULATORY REQUIREMENTS COULD DELAY THE INTRODUCTION OF OUR PRODUCT
INTO FOREIGN MARKETS OR LIMIT OUR MARKETING SCOPE. Sales of medical devices are
subject to regulatory requirements that vary from country to country. We may not
be able to obtain necessary foreign regulatory approvals. It may also be very
costly to obtain or maintain foreign regulatory approvals. Because of the nature
of our product, we must obtain ISO 9001 certification if we want to sell
products in the European Union. SPECTRASCIENCE is currently in the process of
trying to achieve ISO 9001 certification. We may not be able to achieve ISO 9001
certification on a timely basis or at all. If we do not get ISO 9001 certified
or do not obtain necessary foreign regulatory approvals it may negatively affect
our ability to market our product in foreign markets and could adversely affect
our business. See "Business--Government Regulation."
THE VIRTUAL BIOPSY(TM) SYSTEM IS OUR ONLY FULLY DEVELOPED PRODUCT AND
OUR FUTURE IS HIGHLY DEPENDENT ON OUR ABILITY TO SUCCESSFULLY DEVELOP AND
COMMERCIALIZE IT. Even though we are developing new products in addition to the
Virtual Biopsy(TM) System, it is possible our efforts may not be successful or
that we may not be able to commercialize products we succeed in developing. In
order to achieve profitable operations in 2001, we must receive final FDA
clearance to market and successfully commercialize the Virtual Biopsy(TM) System
in the near term. If we do not receive final clearance or are unable to
successfully commercialize our only fully developed product, we may not be able
to raise additional funds in the future and it may have a material adverse
effect on our 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."
PHYSICIANS MAY NOT ACCEPT THE USE OF OUR PRODUCT. We believe that
physician acceptance of procedures performed using the Virtual Biopsy(TM) System
will be essential for its market acceptance. There can be no assurance that
physicians, medical providers or the medical community in general will accept
and utilize our product even though it may be safe and effective. Failure of any
of our products to achieve market acceptance could have a material adverse
effect on our business and financial condition. See "Business--The
SPECTRASCIENCE Solution," "--Sales and Marketing" and "--Clinical Trials."
WE MAY HAVE PROBLEMS MANAGING GROWTH AS WE EXPAND OUR OPERATIONS. As we
commercialize the Virtual Biopsy(TM) System and develop additional products, we
expect to expand operations in all areas. We will have to implement or improve
operational, financial and management systems, as well as expand and manage our
workforce. If we fail to manage the growth properly, our systems, personnel,
procedures or controls may not be designed, implemented or improved in a timely
and cost-effective manner. If our resources cannot support future operations,
growth may be limited and there may be a material adverse effect on our
business, financial condition and results of operations. See " "--Limited
Manufacturing Experience; Scale-Up Risk," "Business--Manufacturing,"
"--Dependence on Key Personnel" and "Business--Employees" and "Management."
OUR LIMITED SALES AND MARKETING RESOURCES COULD PREVENT US FROM
EFFECTIVELY MARKETING OUR PRODUCTS. We have very limited internal marketing and
sales resources and personnel. In order to market the Virtual Biopsy(TM) System
and any other products we may develop, we will have to develop distribution
capabilities and a marketing and sales force with technical expertise. We may
not be able to establish sales and distribution capabilities, obtain
distribution agreements on commercially reasonable terms, or gain market
acceptance for our products. We may also have difficulty in recruiting and
retaining skilled marketing and sales personnel. Our marketing and sales efforts
may not be successful. If we cannot effectively market our products it will have
a material adverse effect on our business. See "Business--Sales and Marketing."
WE WILL NEED TO ENTER INTO STRATEGIC PARTNERSHIPS AND RELATIONSHIPS
WITH DISTRIBUTORS TO MARKET AND DISTRIBUTE OUR PRODUCTS. We intend to sell our
products through strategic partners and distributors. Our future success will
depend, in part, on our ability to enter into agreements that will be beneficial
to us. The prospects for relationships with strategic partners and distributors
will depend on their interest in our product(s). It will also depend on their
ability and willingness to perform in the roles we contemplate for them. We may
have limited control or no
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control over the resources that any particular strategic partner or distributor
devotes to its relationship with us. We may not be able to locate qualified
parties with whom we can enter into strategic partner or distributor
relationships. If we are not successful in developing these types of
relationships, or if the relationships do not prove successful, our business,
financial condition and results of operations could be materially adversely
affected. See "Business--Sales and Marketing."
WE PURCHASE SOME RAW MATERIALS AND KEY COMPONENTS OF OUR PRODUCTS FROM
SOLE OR LIMITED SOURCES OF supply. For some of these raw materials and key
components, there are few alternative sources of supply. We may not be able to
renew the existing agreement under which we purchase our Optical Biopsy Forceps.
If we need to establish additional or replacement suppliers for the Forceps,
laser light source or spectrophotometer used in the Virtual Biopsy(TM) System,
it could be costly and time consuming. If any of our suppliers fail to provide
an adequate supply of components in a timely manner or if we cannot locate
qualified alternative suppliers for materials and components at reasonable
expense, it could adversely affect our business and financial condition. Any
delays or shortages could have a material adverse effect on our business and
financial condition, especially as we scale up our manufacturing activities in
support of sales. See "Business--Manufacturing."
WE HAVE NO EXPERIENCE IN MANUFACTURING OUR PRODUCTS IN COMMERCIAL
QUANTITIES. To be financially successful we must manufacture our product in
accordance with regulatory requirements, in commercial quantities, at
appropriate quality levels, and at acceptable costs. We may not be able to
establish or maintain reliable, high-volume manufacturing capacity at
commercially reasonable costs. If we receive FDA or foreign approval for our
products, we 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. We believe our current facility is adequate to support
our commercial assembly and manufacturing activities for the next several years.
If we are unable to establish and maintain large-scale manufacturing
capabilities, it could have a material adverse effect on our business and
financial condition. See "Business--Manufacturing."
THE MEDICAL DEVICE INDUSTRY IS HIGHLY COMPETITIVE. We are not aware of
any direct competitors using an endoscopic optical biopsy system to detect and
differentiate between healthy and pre-cancerous or cancerous tissues in the
gastrointestinal tract. However, there can be no assurance that we will be the
first to market such a system or to market such a system effectively. We believe
that our competitors are primarily development stage companies in the process of
developing spectroscopic technology for early cancer detection. However, many of
our competitors and potential competitors are larger and have greater financial,
personnel, manufacturing, distribution, marketing and other resources than we
do. Competition from these companies may materially and adversely affect our
business. See "Business--Competition."
OUR BUSINESS IS DEPENDENT UPON THE DEVELOPMENT OF NEW PRODUCTS. Rapid
innovation and technological change characterize the medical device industry.
Because of this, the life cycle of any particular product is short. Therefore,
the speed with which we can develop products, gain regulatory approval and
reimbursement acceptance and supply commercial quantities of the product to the
market are important competitive factors. New discoveries and developments with
respect to the diagnostic treatment of cancer, or alternative diagnostic systems
could render our products obsolete. See "Business--Competition."
WE RELY ON PATENTS, COPYRIGHTS, TRADE SECRETS AND CONTRACTS TO PROTECT
OUR PROPRIETARY RIGHTS. Our success depends partly on our ability to maintain
patent protection for our products and processes, to preserve our trade secrets
and to operate without infringing on the proprietary rights of third parties.
The patent and trade secret positions of medical device companies often involve
complex and evolving legal and factual questions. The laws of some foreign
countries do not protect our intellectual property rights to the same extent
that the laws of the United States do. We have several allowed and pending
patents covering different aspects of the Virtual Biopsy(TM) System. We can
provide no assurances that any patent we apply for will be issued. Furthermore,
there are no assurances that any issued patents will not be challenged,
invalidated, or circumvented, or that the rights granted will provide any
competitive advantage. For the Virtual Biopsy(TM) System, we currently own
exclusive rights to a total of five issued, allowed and pending U.S. patents and
applications, and two pending international patent applications. We are the
exclusive licensee of one allowed U.S. application and one other international
patent application. See "Business--Patents and Proprietary Rights."
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We also rely on proprietary technology that is not patented. There can
be no assurances that others will not independently develop substantially
equivalent proprietary information and techniques, or gain access to or disclose
our proprietary technology. We may not be able to protect our rights in the
unpatented proprietary technology. SPECTRASCIENCE policy requires each employee,
consultant and advisor to execute a confidentiality agreement upon the
commencement of a business relationship with us. These agreements generally
provide that all inventions conceived by the individual during the term of the
relationship are the exclusive property of SPECTRASCIENCE and shall be kept
confidential. There can be no assurance that these agreements will protect our
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
we will have the financial resources necessary to enforce our proprietary
rights. Any loss of patent protection or know-how for our products could
adversely affect our business. See "Business--Patents and Proprietary Rights."
THERE IS A HIGH RISK OF INTELLECTUAL PROPERTY LITIGATION WITHIN THE
MEDICAL DEVICE INDUSTRY. We could incur substantial expense in defending or
enforcing our intellectual property rights. In addition to being costly, the
litigation process is time consuming and would divert our limited resources.
There can be no assurances that we will have the financial or other resources
necessary to enforce our patent rights against our competitors, many of whom
have substantial resources. We could also incur substantial expense in defending
ourselves against third parties' infringement claims with respect to patent or
other intellectual property rights. There can be no assurances that we could
successfully defend ourselves against these claims. If unsuccessful, we may have
to modify our products, refrain from selling them, or enter into royalty
agreements that would allow us to continue selling them. It is common to settle
infringement claims through licensing or similar arrangements, but the
associated costs could be substantial and could include ongoing royalties. We
may not be able to obtain necessary licenses on satisfactory terms or at all. An
adverse determination in any intellectual property litigation could have a
material adverse effect on our business and financial condition.
WE HAVE A LICENSING AGREEMENT, WHICH IF TERMINATED WOULD ADVERSELY
AFFECT OUR BUSINESS. We currently have a licensing agreement with The
Massachusetts General Hospital giving us an exclusive license to certain cancer
detection patents. The agreement provides that any patents licensed under it,
are exclusive through the life of the licensed patents. The agreement also
requires us to use our commercially reasonable best efforts to introduce
products. Under this agreement we have an exclusive license to an issued patent
for the Virtual Biopsy(TM) System forceps and fiber. The license agreement is
subject to termination for failure to pay fees or othEr material breach.
We can provide no assurance that these license agreements will remain
in force or provide the proprietary rights that we require to develop and
commercialize our products. We could encounter significant delays in product
introduction if we had to design around the proprietary rights granted in these
licensing agreements, and we can provide no assurance that we would even be able
to design around them. Even if we were able to design around their proprietary
rights, doing so could adversely affect our business. See "Business--Patents and
Proprietary Rights."
OUR SUCCESS IS HIGHLY DEPENDENT ON THE RETENTION OF PRINCIPAL MEMBERS
OF OUR MANAGEMENT AND SCIENTIFIC STAFF AND THE RECRUITMENT OF ADDITIONAL
QUALIFIED PERSONNEL. We are dependent to a significant extent on the services of
our Chairman and Chief Executive Officer, Chester E. Sievert, Jr., and other key
employees. There is intense competition from other companies, research and
academic institutions and other organizations for qualified personnel with the
same skills we require. There can be no assurance that we will be successful in
hiring or retaining qualified personnel. The loss of key personnel or the
inability to hire or retain qualified personnel could have a material adverse
effect on our business and financial condition. We do not currently maintain key
man life insurance on Mr. Sievert.
WE MAY NEED ADDITIONAL CAPITAL RESOURCES. We cannot adequately predict
the timing and amount of such capital requirements. When we may need additional
financing, and our ability to raise additional financing depends on many
factors. Some of these factors are:
* the progress of our research and development;
* the scope and results of any clinical trials;
* the extent to which the Virtual Biopsy(TM) System and other
products gain market acceptance;
* actions relating to regulatory and reimbursement matters;
* the effect of competitive products;
10
<PAGE>
* the cost and effect of future marketing programs;
* the resources we devote to manufacturing and developing our
products; and
* general economic conditions and various other factors.
We can provide no assurances that we will not require additional
funding or that if we do, it will be available on terms satisfactory to us or at
all. We may be required to seek additional funds through debt or equity
financing, arrangements with corporate partners or from other sources. We do not
have sufficient shares of common stock available in our treasury to raise
capital through the placement of common stock. Shareholder approval is required
to make additional shares of common stock available. Our shareholders may not
approve an increase in our authorized shares of common stock. Your control and
ownership could be substantially diluted if we issue additional equity
securities. We may have to cut back operations or give significant technology or
market rights to strategic partners if we cannot obtain additional financing
when we need it. If we need financing and fail to obtain it on terms
satisfactory to us, it could have a material adverse effect on our business and
financial condition.
OUR STOCK IS VOLATILE. The market price of our common stock has from
time to time experienced significant price and volume fluctuations were beyond
our control and unrelated to our operating performance. Factors that may have a
significant adverse effect on the market price of our securities in the future
include, but are not limited to:
* fluctuations in our operating results;
* announcements of technological innovations or new diagnostic
or therapeutic products by SPECTRASCIENCE or by our
competitors;
* government regulations;
* developments in patent or other proprietary rights;
* public concern as to the safety of products developed by
SPECTRASCIENCE or others; and
* general market or economic conditions.
Additionally, our common stock is thinly traded and trading in a small number of
shares of our securities, whether on the buy or sell side, may result in
significant price movements.
OUR STOCK IS SUBJECT TO RULES THAT LIMIT YOUR ABILITY TO SELL THE
SHARES OF OUR COMMON STOCK THAT YOU OWN. Our common stock is covered by a
Commission rule that imposes additional sales practice requirements on
broker-dealers who sell these securities to persons other than established
customers and accredited investors. An accredited investor is generally an
institution with assets in excess of $5,000,000 or an individual with a net
worth in excess of $1,000,000 or an annual income exceeding $200,000
individually or $300,000 jointly with his or her spouse. For transactions
covered by the rule, the broker-dealer must make a special suitability
determination with respect to the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the ability of
broker-dealers to sell our securities or of our shareholders to sell their
shares in the secondary market may be adversely affected.
WE FACE AN INHERENT BUSINESS RISK OF EXPOSURE TO PRODUCT LIABILITY
CLAIMS, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR BUSINESS. Clinical trials or
marketing of any of our products may expose us to liability claims resulting
from the use of our products. These claims might be made directly by consumers,
health care providers or by others selling the products. We currently maintain a
product liability insurance policy with an aggregate and per occurrence limit of
$2,000,000. We can provide no assurance that such limits are sufficient to
protect us in the event of litigation. Moreover, there can be no assurance that
we will be able to maintain such insurance. If we are unable to maintain
insurance under terms acceptable to us, it could prevent or inhibit the clinical
testing or commercialization of products developed by us. Even if a product
liability claim is not successful, the time and expense of defending against
such a claim may adversely affect our business and results of operations.
ANTI-TAKEOVER PROVISIONS AVAILABLE TO US COULD DEPRIVE YOU OF AN
OPPORTUNITY TO SELL YOUR SHARES OF COMMON STOCK AT PRICES HIGHER THAN PREVAILING
MARKET PRICES. There are certain provisions of Minnesota law that are intended
to provide management flexibility to enhance the likelihood of continuity and
stability in the composition of our Board of Directors and in the policies that
they formulate, and to discourage an unsolicited takeover if the Board
determines that the takeover is not in the best interests of SPECTRASCIENCE and
its shareholders. These provisions could discourage attempts by other Companies
to acquire us, and could prevent you from selling your shares of common stock at
prices that might be higher than prevailing market prices.
11
<PAGE>
Our Board of Directors can issue up to 20,000,000 shares of
undesignated preferred stock and determine the price, rights, preferences and
privileges of those shares without any further vote or action by our
shareholders. The rights of holders of any preferred stock that we may issue in
the future may adversely affect your rights as a holder of common stock. At this
time we do not intend to issue any preferred stock, however, if we issued
preferred stock in connection with an acquisition or for other corporate
purposes, it could make it more difficult for a third party to acquire a
majority of our outstanding voting stock. See "Description of
Securities--Minnesota Business Corporation Act."
THE COMMON STOCK AND WARRANTS WERE PART OF A DIRECT PARTICIPATION
OFFERING. We did not retain an underwriter in connection with the issuance of
the outstanding common stock and warrants covered by this prospectus and as a
result, there may be less due diligence performed in relation to its
preparation. One of the functions of an underwriter, along with its counsel, is
to perform a due diligence review of the company whose securities it is
underwriting. Without an underwriter, an investor does not have the benefit of
the comprehensive disclosure that results from a thorough due diligence review.
YOU WILL NOT HAVE THE ABILITY TO DIRECT HOW THE FUNDS YOU INVEST IN US
WILL BE USED. The net proceeds from this offering will be used for the purposes
described under "Use of Proceeds." We reserve the right to use the funds
obtained from this offering for other purposes not presently contemplated which
we deem to be in the best interest of SPECTRASCIENCE and our shareholders. This
may vary from the purposes described under "Use of Proceeds" in order to address
current circumstances and opportunities. As a result, our success will be highly
dependent upon the discretion and judgment of management with respect to the
application and allocation of the net proceeds of the offering. Investors
purchasing the shares offered hereby will be entrusting their funds to our
management, with only limited information concerning management's specific
intentions. See "Use of Proceeds."
WE HAVE NEVER PAID OR DECLARED A DIVIDEND ON OUR CAPITAL STOCK. We
intend to retain any earnings to fund development of our business and do not
intend to pay any cash dividends in the foreseeable future. See "Dividend
Policy."
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. Forward-looking
statements are not historical facts. They are statements of our current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words like "anticipate," "estimate," "expect," "may," "plans,"
"believes," "potential," and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and other factors.
Some of the risks, uncertainties and factors are beyond our control, are
difficult to predict and could cause our actual results to differ materially
from those expressed or forecasted in the forward-looking statements.
We caution you not to place undue reliance on these forward-looking
statements. They reflect management's view only as of the date of this
prospectus. We may not update these statements or publicly release any revisions
to the forward-looking statements that we may make to reflect events or
circumstances after the date of this prospectus, or to reflect the occurrence of
unanticipated events.
12
<PAGE>
USE OF PROCEEDS
The shares covered by this prospectus are being offered by certain of
our selling shareholders and not by us. Consequently, we will not receive any
proceeds from the sale of these shares. In the event the warrants and stock
options covered by this prospectus to purchase 1,228,904 shares of our common
stock are exercised we will receive up to $6,788,341 in additional proceeds.
These proceeds, if received, will be used for working capital purposes.
CAPITALIZATION
The following table sets forth at December 31, 1999 the actual
capitalization and the pro forma capitalization of SPECTRASCIENCE as adjusted
for the sale of shares of common stock in this prospectus after the balance
sheet date, as if such transaction had occurred as of December 31, 1999. The
information should be read in conjunction with the Financial Statements and
Notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------
As
Actual Adjusted
------------ ------------
(Unaudited)
<S> <C> <C>
Long-term liabilities .................................................... $ 45,660 $ 45,660
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, 6,420,705 shares issued and outstanding
and 6,576,725 shares issued and outstanding as adjusted (1).......... 1,605,176 1,644,181
Additional paid-in capital .................................. 50,892,249 51,489,381
Accumulated deficit (2) ..................................... (48,731,203) (48,731,203)
------------ ------------
Total shareholders' equity .................................. 3,766,222 4,402,359
------------ ------------
Total capitalization ........................................ $ 3,811,882 $ 4,448,019
============ ============
</TABLE>
- ------------------
(1) Based on the number of shares of common stock outstanding on December
31, 1999, as adjusted for the sale of 13,000 shares of common stock in
January related to the December 1999 Private Placement, and issuance of
143,020 shares of common stock pursuant to stock option exercises
between January 1, 2000 and March 30, 2000. Excludes (i) 1,048,911
shares of common stock issuable upon exercise of outstanding stock
options under the Company's 1991 Stock Plan at a weighted average
exercise price of $4.74 per share, (ii) 317,000 shares of common stock
issuable upon exercise of outstanding stock options at a weighted
average exercise price of $5.90 per share, and (iii) 915,439 shares of
common stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $5.35 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."
13
<PAGE>
SELLING SECURITY HOLDERS
Our selling shareholders acquired their shares in connection with
private placements of our common stock or through the exercise of options and
warrants to acquire our common stock. The 2,790,037 shares of common stock that
may be sold by our selling shareholders pursuant to this prospectus were
acquired in the following transactions.
* Investors in our Series B Convertible Preferred Stock
exercised warrants to purchase 87,668 shares of common stock
at $6.00 per share. The warrants, which were originally
scheduled to expire in December 1998, were amended. The
amendment extended the expiration date to January 26, 1999,
and reduced the exercise price from $9.50 per share to $6.00
per share. To induce investors to exercise the amended
warrants, we granted them new conditional warrants on January
26, 1999. If the investor exercised the amended warrant prior
to its expiration, they would receive an equivalent number of
new warrants at an exercise price of $6.00 per share. Under
this prospectus, we are registering the 87,668 shares that the
investors acquired, and the 87,668 shares of common stock
issuable upon the exercise of the conditional warrants. The
conditional warrants originally expired December 28, 1999 but
were amended to expire June 28, 2000.
* Until March 12, 1999, lenders from a 1994 bridge loan
financing transaction were holding 174,998 outstanding,
"in-the-money" warrants. In March 1999, to induce these
lenders to exercise their warrants early, we issued them
additional warrants to purchase shares of common stock at an
exercise price of $5.00, expiring in March 2002. Under this
prospectus, we are registering the 87,503 shares of common
stock issuable upon the exercise of these warrants.
* In our March 1999 Private Placement of common stock we issued
293,750 units consisting of one whole share of common stock,
at $4.00 per share, together with a warrant expiring in March
2001, to purchase one-half of a share of common stock, at
$5.00 per share. Under this prospectus, we are registering the
293,750 shares of common stock purchased and the 146,875
shares issuable upon the exercise of the warrants.
* In our December 1999 Private Placement of common stock we
issued 1,008,285 units consisting of one whole share of common
stock, at $3.50 per share, and a warrant expiring in December
2001, to purchase one-half of a share of common stock at $5.50
per share. Under this prospectus, we are registering the
1,008,285 shares of common stock purchased and the 504,143
shares issuable upon the exercise of the warrants.
* We are party to a convertible demand note, the terms of which
could require us to issue 171,430 units. A unit consists of
one share of common stock at $3.50 per share, and a two-year
warrant to purchase one-half share of common stock at $5.50
per share. Under this prospectus, we are registering the
171,430 shares of common stock immediately issuable upon
conversion of the note, and the 85,715 shares of common stock
underlying the warrant to be granted upon conversion of the
note.
* We granted to certain employees, 26,667 stock options at $4.50
per share of common stock and 290,333 stock options at $6.0688
per share of common stock. These options were granted outside
of the 1991 Stock Plan and the holders were given registration
rights. Under this prospectus, we are registering the 317,000
shares of common stock issuable upon the employees' exercise
of these options.
We granted registration rights to the selling shareholders covering the
resale of common stock and common stock issuable upon the exercise of warrants
and stock options for all of the transactions above. The shares are being
registered to permit public secondary trading of the shares. The selling
shareholders may offer their common stock for resale from time to time. See
"Plan of Distribution." The following table lists the selling shareholders and
information regarding the beneficial ownership of common stock of each selling
shareholder as well as the number of shares each selling shareholder may sell
pursuant to this prospectus.
14
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Maximum Number of
Beneficially Owned Shares to be Sold Number of Shares
Prior to this Pursuant to this Beneficially Owned
Name Offering Prospectus After this Offering(1)
- ---- -------- ---------- -------------------
<S> <C> <C> <C>
Edward Adamek, Jr. & Eleanore Adamek Trust * 3,334 (2) *
Warren F. Ache * 15,000 (5) *
Elyane Aiple Living Trust
Elyane Aiple TTEE u/a dtd 11/12/98 * 15,000 (5) *
Jay C. Anderson * 45,000 (5) *
Scott G. Anderson * 290,333 (14) *
Thomas Dennis Auger and Mary Joanne Auger JT T * 15,000 (5) *
Craig C. Avery 150,000 (6) 15,000 (5) *
Avery Family Limited Partnership 37,500 (6) 37,500 (4)(5) *
William H. Baxter * 7,500 (4) *
William H. Baxter Rev. Trust
William H. Baxter TTEE u/a dtd 7/3/96 * 9,000 (5) *
Kenneth G. Benson
c/o Benson-Orth Assoc. Inc. * 7,500 (5) *
Max Benton and Judith Benton TTEES
Benton Family Rev Trust u/a/ dtd 4/25/92 * 22,500 (5) *
Herbert J. Bernick * 3,334 (2) *
Dr. Merrill Biel * 15,000 (5) *
Charles A. Bird * 7,500 (5) *
Michael W. Bird * 7,500 (5) *
Daniel D. and Constance A. Bonk * 7,500 (5) *
John H. Burton * 30,000 (5) *
James W. Cabela * 15,000 (5) *
Eugene College 105,820 (7) 6,666 (2) 52,075
Eugene B. College & June E. College JT Ten 89,154 (7) 47,079 (5) 42,075
Rodney L. Cooperman * 30,000 (5) *
Frederick Coudert III c/o Ethel Blake * 22,500 (5) *
Craig C. Avery Co Money Purchase Pension Plan
Craig C. Avery Trustee u/a dtd 1/1/84 45,000 (6) 45,000 (5) *
Craig C. Avery Company Profit Sharing Trust 52,500 (6) 52,500 (4)(5)
Richard L. Danielson * 3,334 (2) *
James P. Deanovic 141,424 (8) 8,000 (2) 103,424
James A. Ehrich * 15,000 (5) *
Ellis Limited Partnership * 6,666 (2) *
Mustafa K. Eren, MD * 15,000 (5) *
Stephen J. Esser and Clara Linda Esser, Joint Tenants * 3,334 (2) *
Dr. Larry L. Estebo IRA, First Trust Natl Assoc TTEE * 22,500 (5) *
Laura S. Estebo * 15,225 (4)(5) *
John E. Feltl * 15,000 (5) *
Robert J. Finley * 15,000 (5) *
George B. Frank * 22,500 (5) *
George B. Frank IRA, First Trust Natl Assoc. TTEE * 7,500 (5) *
Janet E. Frank * 4,000 (2) *
R. Joseph Garry and Patricia J. Garry * 30,000 (5) *
Norman Grant & Teena Grant TTEES
Grant Family Trust u/a dtd 10/221/98 * 7,500 (5) *
David H. Greenwood IRA
First Trust Natl. Assoc. TTEE * 15,000 (5) *
Doyle Gustafson and Dorothy Gustafson JT Ten * 24,039 (5) *
Sandra J. Hale * 2,666 (2) *
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Maximum Number of
Beneficially Owned Shares to be Sold Number of Shares
Prior to this Pursuant to this Beneficially Owned
Name Offering Prospectus After this Offering
- ---- -------- ---------- -------------------
<S> <C> <C> <C>
Clifford Haugen * 15,000 (5) *
William F. Hoefer and Julia A. Hoefer, Joint Tenants * 3,334 (2) *
Industricorp & Co. FBO T C Carpenters 94,444 16,667 (3) 77,777
Don H. Iverson & Maryann Iverson JT TEN * 45,000 (5) *
Neal T. Jansen * 6,666 (2) *
Mark D. Johnson * 3,334 (2) *
Robert A. Johnson * 6,666 (2) *
Dr. Gregory C. Jones & Pamela Jones JT Ten * 15,000 (5) *
Marla C. Kennedy * 3,334 (2) *
William R. Kennedy * 4,167 (3) *
John Kerian * 15,000 (5) *
Mary Kingsley * 15,000 (5) *
Larry D. Kraning * 26,625 (4)(5) *
Anita H. Kunin * 3,334 (2) *
William C. Laird & Peggy E. Laird JT Ten * 15,000 (5) *
Dennis Lamott 75,297 (9) 11,418 (5) 300
Dennis Lamott IRA First Trust N.A. Trustee 63,879 (9) 63,579 (5) 300
James F. Lyons * 5,501 (2)(3) *
Michael R. Marston * 3,334 (2) *
Metropolitan Endodontics Pension * 3,332 (2) *
Harold E. Miller and Shirley R. Miller JT Ten * 12,855 (5) *
Gary A. Moore IRA, First Trust National Assoc TTEE * 30,000 (5) *
Dennis E. Nielsen and Susan J. Nielsen JT * 4,500 (5) *
John G. Ordway III * 3,334 (2) *
James N. Owens Revocable Trust
James N. Owens Trustee dtd 9/10/70 * 30,000 (5) *
Kenneth R. Parker * 13,334 (2) *
Penn Dental Center * 6,666 (2) *
Daniel S. and Patrice M. Perkins * 4,167 (3) *
Perkins and Partners, Inc.
Profit Sharing Plan and Trust * 8,334 (3) *
Peter Andrea Company * (8) 30,000 (5) *
Berton Allen Plaskett & Janet Louise Plaskett JT T * 30,000 (5) *
Eldon H. Preston & Elaine C. Preston * 32,483 (5) *
Pyramid Partners L.P. 103,667 (10) 41,667 (3) 62,000
Quest Venture Partners * 10,000 (2) *
Reggeborgh Beheer BV 816,145 (11) 632,145 (4)(6) 184,000
Richard J. Reynolds * 15,000 (5) *
Richard J. Reynolds IRA, First Trust Natl Assoc TTEE * 15,000 (5) *
Thomas Reynolds and Gail Reynolds JT TEN * 15,000 (5) *
David E. Riviere * 3,750 (5) *
Harold Roitenberg IRA * 6,666 (2) *
Steve Romanek * 6,666 (2) *
John F. Rooney * 4,167 (3) *
Edward Rosenberger IRA First Trust Natl Assoc TTEE * 15,000 (5) *
Ernest R. Schmid * 15,000 (5) *
Wilbert Seefeldt c/o Roy Stueve * 7,500 (5) *
Ronald Kronenberg and Wilma Seelye JT Ten * 7,500 (5) *
Chester E. Sievert, Jr. 250,745 26,667 (14) 250,745
Stephen D. Skinner * 30,000 (5) *
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Maximum Number of
Beneficially Owned Shares to be Sold Number of Shares
Prior to this Pursuant to this Beneficially Owned
Name Offering Prospectus After this Offering
- ---- -------- ---------- -------------------
<S> <C> <C> <C>
Shepard A. Spunt * 4,500 (5) *
Gregory Steiner * 15,000 (5) *
Gregory P. Steiner IRA First Trust Natl Assoc TTEE * 6,750 (5) *
Edward E. Strickland * 4,167 (3) *
Strickland Family Ltd. Partnership * 3,334 (2) *
Thomas Tsatsos IRA First Trust Natl Assoc TTEE * 3,750 (5) *
Robert and Harriet Terharr JT TEN * 7,500 (5) *
William Treacy 107,466 (12) 41,666 (2)(5) 5,800
William Treacy Roth IRA First Trust Natl Assoc TTEE * (12) 60,000 (5) *
John D. and Sally C. Turrittin * 19,500 (5) *
Ronald Van Gilder & Holly Van Gilder JT Ten * 15,000 (5) *
Alfred J. Vigen * 22,500 (5) *
James L. Vigen and Barbara A. Vigen * 30,000 (5) *
Michael Vigen and Kimberly Vigen Jt Ten * 30,000 (5) *
Thomas A. Volpe and Linda C. Volpe Joint Tenants * 6,666 (2) *
S.L. Wallack Revocable Trust * 2,666 (2) *
Thomas B. Wartman * 3,334 (2) *
Kimberly K. Washburn * 3,334 (2) *
Paul Weaver and Christina Weaver JT Ten * 15,000 (5) *
Wallace S. Wells 168,004 (13) 69,668 (2)(5) 98,336
Western Trust Company, Attn: Gary Hoffman * 22,500 (5) *
Douglas W. Woog * 15,000 (5) *
Carolyn Young * 30,000 (5) *
James J. Young * 15,000 (5) *
</TABLE>
- --------------------
* Represents less than 1% of our outstanding common stock as of March 30,
2000.
(1) Assumes the sale of the shares offered by this prospectus.
(2) Represents 87,668 shares of common stock acquired through warrants
exercised by the investors in our Series B Convertible Preferred Stock and
87,668 shares of common stock issuable upon their exercise of additional
warrants.
(3) Represents common stock issuable upon the exercise of 87,503 warrants
issued in March 1999.
(4) Represents 293,750 shares of common stock acquired and 146,875 shares
issuable upon the exercise of warrants related to our March 1999 Private
Placement.
(5) Represents 1,008,285 shares of common stock acquired and 504,143 shares
issuable upon the exercise of warrants related to our December 1999 Private
Placement.
(6) The shares beneficially owned by Craig C. Avery include 5,000 shares of
common stock issuable upon the exercise of warrants and 10,000 shares of
common stock, and (i) 5,000 shares of common stock issuable upon the
exercise of warrants and 10,000 shares of common stock owned by the Avery
Family Limited Partnership, (ii) 17,500 shares of common stock issuable
upon the exercise of warrants and 35,000 shares of common stock owned by
the Craig C. Avery Company Profit Sharing Trust, and (iii) 15,000 shares of
common stock issuable upon the exercise of warrants and 30,000 shares of
common stock owned by the Craig C. Avery Co Money Purchase Pension Plan.
The shares beneficially owned by the Avery Family Limited Partnership
exclude shares of common stock issuable upon the exercise of warrants or
shares owned, by Craig C. Avery, the Craig C. Avery Company Profit Sharing
Trust or the Craig C. Avery Co Money Purchase Pension Plan. The shares
beneficially owned by the Craig C. Avery Co Money Purchase Pension Plan
exclude shares of common stock issuable upon the exercise of warrants or
shares owned, by Craig C. Avery, the Avery Family Limited Partnership or
the Craig C. Avery Company Profit Sharing Trust. The shares beneficially
owned by the Craig C. Avery Company Profit Sharing Trust exclude shares of
common stock issuable upon the exercise of warrants or shares owned, by
Craig C. Avery, the Avery Family Limited Partnership or the Craig C. Avery
Co Money Purchase Pension Plan.
17
<PAGE>
(7) The shares beneficially owned by Eugene College include 3,333 shares of
common stock issuable upon the exercise of warrants and 13,333 shares of
common stock owned by Mr. College, as well as 15,693 shares of common stock
issuable upon the exercise of warrants and 73,461 shares of common stock he
owns in joint tenancy with June E. College.
(8) The shares beneficially owned by James P. Deanovic include 4,000 shares of
common stock issuable upon the exercise of warrants and 107,424 shares of
common stock, as well as 10,000 shares of common stock issuable upon the
exercise of warrants and 20,000 shares of common stock owned by Peter
Andrea Company. The shares beneficially owned by the Peter Andrea Company
exclude 4,000 shares of common stock issuable upon the exercise of
warrants and 107,424 shares of common stock owned by James P. Deanovic.
(9) The shares beneficially owned by Dennis Lamott include 3,806 shares of
common stock issuable upon the exercise of warrants and 7,612 shares of
common stock owned by Dennis Lamott, as well as 21,193 shares of common
stock issuable upon the exercise of warrants and 42,686 shares owned by the
Dennis Lamott IRA. The shares beneficially owned by the Dennis Lamott IRA
exclude 3,806 shares of common stock issuable upon the exercise of warrants
and 7,612 shares of common stock owned by Dennis Lamott.
(10) The shares owned by Pyramid Partners L.P. are deemed to be beneficially
owned by Perkins Capital Management, Inc., which collectively owns
approximately 9.0% of our common stock.
(11) Henry M. Holterman, a director of SPECTRASCIENCE since 1992, has been the
Managing Director of Reggeborgh Beheer BV since 1991.
(12) The shares beneficially owned by William Treacy include 18,333 shares
issuable upon the exercise of warrants and 29,133 shares, as well as 20,000
shares of common stock issuable upon the exercise of warrants and 40,000
shares owned by the William Treacy Roth IRA. The shares beneficially owned
by the William Treacy Roth IRA exclude 18,333 shares issuable upon the
exercise of warrants and 29,133 shares owned by William Treacy.
(13) The shares owned by Wallace S. Wells include 24,334 shares of common
stock issuable upon the exercise of warrants and 143,670 shares of common
stock.
(14) Represents common stock issuable upon the exercise of 317,000 stock options
issued to certain employees in January and February 2000. None of the stock
options being granted to the employees will vest prior to December 31,
2000.
18
<PAGE>
PLAN OF DISTRIBUTION
We are registering the shares on behalf of the selling shareholders.
Selling shareholders include donees and pledgees of those who are named in this
prospectus under the heading "Selling Shareholders," who will sell shares of
common stock that they received from those parties. The selling shareholders
will offer and sell the shares of common stock registered under this prospectus
for their own accounts. We will receive no proceeds from the sale of the common
stock but will receive gross proceeds of $6,788,341 if all of the warrants and
stock options registered under this prospectus are exercised. We will bear all
of the expenses and fees of the registration of the shares.
The selling shareholders may offer and sell the shares from time to
time at prices relating to prevailing market prices or at negotiated prices in:
* the over-the-counter market in regular brokerage transactions;
* transactions directly with market makers;
* privately negotiated transactions;
* through put or call options transactions;
* through short sales; or
* a combination of such methods of sales.
Sales may be made to or through brokers or dealers who may receive compensation
in the form of discounts, concessions or commissions from the selling
shareholders or the purchasers of the shares. As of the date of this prospectus,
we are not aware of any agreement, arrangement or understanding between any
broker or dealer and the selling shareholders. There is no assurance that the
selling shareholders will sell any or all of the shares of common stock that
they offer.
The selling shareholders and any brokers or dealers who participate in
the sale of the common stock may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended. If so, any commissions
received by them and any profits realized by them on the resale of the shares
may be deemed to be underwriting discounts or commissions. Because selling
shareholders may be deemed to be "underwriters," they will be subject to the
prospectus delivery requirements of the Securities Act.
Selling shareholders may also resell all or a portion of the common
stock in open market transactions, relying upon Rule 144 under the Securities
Act, provided that they meet the criteria and conform to the requirements of
Rule 144.
LEGAL PROCEEDINGS
On or about September 4, 1998, SPECTRASCIENCE was served with a
Complaint in the case of Paul Gibson v. SpectraScience, Inc. (Minn. 4th Jud.
Dist.), claiming that the plaintiff, who was at one time a financial consultant
to SPECTRASCIENCE, had a contract that entitled him to receive options for
50,000 shares of common stock at an exercise price of $2.50 per share. On
November 3, 1999, the court issued an order holding that Mr. Gibson was entitled
to enforce the contract relating to such options. On March 13, 2000 a trial was
held. Mr. Gibson is seeking the issuance of common stock in connection with the
option grant and/or in lieu thereof, monetary damages. No final judgment or
order has been entered in the case.
19
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The names, ages and positions of the executive officers, key management
personnel and directors of SPECTRASCIENCE are listed below.
NAME AGE POSITION
---- --- --------
Chester E. Sievert, Jr..................48 Chairman of the Board, President
and Chief Executive Officer
Scott G. Anderson.......................45 Vice President Marketing & Sales
Henry M. Holterman(1)(2)................44 Director
Nathaniel S. Thayer(1)(2)...............75 Director
Johan A.P.M. de Hond....................46 Director
- -------------------
(1) Member of the Audit Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of Directors
CHESTER E. SIEVERT, JR. has served as Chairman of the Board since June
18, 1999. He has held the title of President and Chief Executive Officer since
January 5, 1999. He joined SPECTRASCIENCE as a consultant in June 1996, and has
held various executive positions since November 1996. Prior to joining
SPECTRASCIENCE, Mr. Sievert was a founder of 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.
SCOTT G. ANDERSON joined SPECTRASCIENCE on February 7, 2000 as Vice
President Marketing & Sales. Mr. Anderson has over 22 years of sales and
marketing experience within the Medical Devices Industry. From 1995 until
joining SpectraScience he was Manager of Business Development for Olympus
America, Inc., the worldwide leader in endoscopic and imaging devices in
gastroenterology. During his 20-year career at Olympus Mr. Anderson held senior
management positions in business development, operations and sales.
HENRY M. HOLTERMAN has served as a director of SPECTRASCIENCE 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.
NATHANIEL S. THAYER has served as a director of SPECTRASCIENCE since
May 1993. He has been a partner in the law firm of Blais Cunningham & Crowe
Chester, located in Pawtucket, Rhode Island, since 1969.
JOHAN A.P.M. DE HOND, M.D. has served as a director of SPECTRASCIENCE
since June 18, 1999. He has been with Hospital Sophia in Zwolle, and Hospital
Diaconesse in Meppel, The Netherlands, since 1992 as a Senior Urologist. Dr. de
Hond completed his medical education in 1979 at the University of Utrecht, also
in The Netherlands. Dr. de Hond's background includes specialty training in
surgery as well as urology. Dr. de Hond has a clinical interest in photodynamic
therapy.
SPECTRASCIENCE'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 is currently one vacancy 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 SPECTRASCIENCE.
20
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
The functions of the Audit Committee are (1) to review the internal and
external financial reporting of the Company; (2) to review the scope of the
independent audit; and (3) 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 (1) to recommend the
compensation for those officers who are also directors and for senior
management; (2) to review senior management's objectives; and (3) 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
Management and staff consult on different aspects of our scientific
research and development programs, with members of SPECTRASCIENCE's Medical and
Scientific Advisory Board. The Board is composed of individuals with expertise
in various medical specialties who are able to provide advice regarding the
development of our products and systems, the design of our clinical trials,
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.
MERRILL A. BIEL, M.D., Ph.D. is President and Staff Physician at Ear,
Nose & Throat SpecialtyCare of Minnesota in Minneapolis, Minnesota. He is an
Associate Professor in the Departments of Otolaryngology, Head and Neck Surgery,
and Family Practice at the University of Minnesota and is Clinical Professor at
the University of Minnesota School of Veterinary Medicine. He is the Director of
Photodynamic Therapy at Abbott Northwestern Hospital and is President of Advance
Photodynamic Technologies in Minneapolis. He is a Fellow of the Society of
Surgical Oncology, American Society of Head and Neck Surgery, American Society
of Clinical Oncology, and the Triologic Society. Dr. Biel received his M.D.
degree from the University of Illinois in Chicago, Illinois and his Ph.D. degree
from the University of Minnesota in Minneapolis, Minnesota.
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.
21
<PAGE>
NORMAN NISHIOKA, M.D. is an Assistant Professor of Medicine at Harvard
Medical School and an Assistant Professor, Division of Health Sciences and
Technology, at the Massachusetts Institute of Technology. He is also an
Associate Physician at the Massachusetts General Hospital, where he acts as the
Clinical Director of the Laser Center. He also serves on the Endoscopy Committee
at Massachusetts General Hospital and is the Chairman of the Committee on
Research for the Harvard Medical School Laser Center. Dr. Nishioka received his
M.D. degree from the University of California, Los Angeles in 1981 and has been
employed in various academic capacities with Harvard Medical School and
Massachusetts General Hospital since 1987.
DELWIN K. OHRT, M.D. is the Vice President of Clinical Resources and
Medical Affairs for Volunteer Hospitals of American Upper Midwest, Inc. in
Minneapolis, Minnesota. He was formerly the Medical Director and Chairman of the
Medical Technology Assessment Committee of Blue Cross and Blue Shield of
Minnesota and the Senior Vice President of Blue Plus. He is a member of the
Uniform Clinical Data Advisory Panel of the American Hospital Association, the
Minnesota Medical Association Practice and Planning Committee and the Health
Technology Advisory Committee of the Minnesota Health Care Commission. Dr. Ohrt
received his M.D. degree from the University of Nebraska in 1965.
PHILLIP H. STOLTENBERG, M.D. is a gastroenterologist at Minnesota
Gastroenterology P.A. He has served as an Assistant Professor of Medicine,
Division of Gastroenterology, at the University of Minnesota and an Assistant
Professor of Medicine at the Texas A&M University Health Science Center. He is
the Chairman of the United Hospital Gastrointestinal Subcommittee and a member
of the United Hospital Quality Management Committee. Dr. Stoltenberg received
his M.D. degree from the University of Minnesota in 1976 and has been a
physician at Minnesota Gastroenterology since 1995.
KENNETH K. WANG, M.D. is an Assistant Professor at the Mayo Medical
School in Rochester, Minnesota. He is a member of the Gastroenterology Research
Committee at the Mayo Clinic and the Director of the Laser Photodynamics
Laboratory. He is also serving on the American Society for Gastrointestinal
Endoscopy Informatics Committee and the Education and Technology Subcommittee of
the American Gastroenterology Association. Dr. Wang received his M.D. degree
from Wayne State University in Detroit, Michigan and has been an Assistant
Professor at the Mayo Medical School since 1989.
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, as amended, 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.
22
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the past three fiscal years, 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 the fiscal
year ended December 31, 1999 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Annual Compensation Awards Payouts
------------------------------------- ------------------------- --------
Other Securities
Annual Restricted Underlying All Other
Compen- Stock Option/s LTIP Compen-
Name and Principal Position Year Salary Bonus sation(1) Award(s) SARs Payouts sation (5)
- --------------------------- ------ -------- ---------- --------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chester E. Sievert, Jr. 1999 $135,000 $44,000 $6,000 -- 100,000 (2) -- $5,300
President and Chief 1998 110,000 -- 6,000 -- 145,000 (3) -- 3,300
Operating Officer 1997 92,500 15,000 6,000 -- 185,000 (4) -- 1,712
</TABLE>
- --------------
(1) Other Annual Compensation consists of a car allowance of $500 per month.
(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 with an exercise price of $4.0833 per
share for 45,000 shares of common stock, granted pursuant to the 1991 Stock
Plan. Six thousand of these shares vest immediately, with the remainder
vesting one-third per year over three years. Mr. Sievert was also granted
two ten-year stock options, each for 50,000 shares of common stock, both of
which are vested. One stock option grant vested upon the successful filing
with the FDA of a pre-market approval application, and the other option
vested on November 19, 1999, when SPECTRASCIENCE received a recommendation
for approval of its pre-market approval application by an FDA medical
device panel. Both options have an exercise price of $4.4141 per share.
(4) Includes a ten-year stock option for 50,000 shares of common stock which
will vest in its entirety upon the successful completion of the clinical
studies on the Virtual Biopsy(TM) System and the filing with the FDA of a
pre-market notification package and final FDA product approval; and a
ten-year option for 35,000 shares, vesting one-third per year over three
years. Both options have an exercise price of $3.9125.
(5) All Other Compensation includes amounts contributed to the SPECTRASCIENCE
Savings and Retirement Plan, which qualifies as a 401(k) Plan under the
Internal Revenue Code of 1986, as amended.
OPTION GRANTS
The following table sets forth information concerning individual grants
of stock options made to the Named Executive Officers named in the Summary
Compensation Table. No stock appreciation rights ("SARs") were granted or
exercised for the year ended December 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------
Number of % of Total Potential Realizable Value
Securities Options Granted Exercise or at Assumed Annual Rates of
Underlying to Employees in Base Price Expiration Stock Price Appreciation
Options Granted Fiscal Year ($/Sh) (3) Date for Option Term (4)
-----------------------------
5% 10%
----------------- ----------------- ------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Chester E. Sievert, Jr. 50,000 (1) 41.5% $4.2000 4/19/2009 $132,068 $334,686
50,000 (2) $4.0063 8/25/2009 $125,977 $319,251
</TABLE>
- -----------------
(1) Ten-year stock option for 50,000 shares of common stock with an exercise
price of $4.20 per share, vesting one-third per year over three years,
granted pursuant to the 1991 Stock Plan. All shares will be vested by April
19, 2002.
(2) Ten-year stock option for 50,000 shares of common stock with an exercise
price of $4.0063 per share, vesting immediately, granted pursuant to the
1991 Stock Plan.
(3) The exercise price was determined 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 prices of the common
stock for the ten trading days immediately prior to the date of grant.
23
<PAGE>
(4) 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.
OPTION VALUES
The following table sets forth certain information concerning
individual exercises of stock options during the year ended December 31, 1999
and the value of unexercised stock options as of December 31, 1999 for the Named
Executive Officer. No shares were acquired through the exercise of options by
the Named Executive Officer during 1999.
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 realized Options/SARs at FY-end at FY-end (1)(2)
------------- --------- ---------------------------- ---------------- ----------------
Exercisable Unexercisable Exercisable Unexercisable
------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Chester E. Sievert, Jr. (3) -- -- 159,412 187,667 $2,042 $4,375
</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, 1999
was $4.00 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, 1999, 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, 1999. No SARs were held by any of the Named
Executive Officers on December 31, 1999.
(3) "In-the-money" options include 23,333 shares which are exercisable and
50,000 shares which are unexercisable. The unexerciseable shares become
exerciseable upon final FDA approval of the Virtual Biopsy(TM) System. The
exercise price for both options is $3.9125.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS
Except as described below, SPECTRASCIENCE does not have employment
agreements with its executive officers.
SPECTRASCIENCE entered into a Severance Agreement with Mr. Sievert on
May 21, 1997, providing for severance pay in the event of a "Change in Control"
(as defined in the Severance Agreement). The Severance Agreement provide for
severance pay if his 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 one year and payment
will be made in a lump sum upon termination. In addition to the severance
payment, Mr. Sievert 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 the 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 under the 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, 1999, and the
employment of Mr. Sievert was immediately terminated, Mr. Sievert would have
been entitled to receive, pursuant to the terms of his Severance Agreement, a
lump sum payment upon termination of $216,000.
24
<PAGE>
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, SPECTRASCIENCE adopted the 1991 Stock 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. Subsequently, the plan was amended to reserve a total of 1,640,000
shares 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, and nonqualified stock options.
Subject to the limitations set forth in the 1991 Stock Plan, the
Compensation Committee of the Board of Directors 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 death, termination of employment or consulting
relationship with the Company.
The exercise price of options granted under the 1991 Stock 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 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 December 31, 1999, the Company had outstanding options to
purchase an aggregate of 1,042,931 shares held by 24 persons at a weighted
average exercise price of $4.68 per share. As of December 31, 1999, a total of
448,069 options granted pursuant to the 1991 Stock Plan had been exercised.
As of March 30, 2000 SPECTRASCIENCE had outstanding options to purchase
an aggregate of 1,048,911 shares of common stock under the 1991 Stock Plan, and
a total of 591,089 options granted pursuant to the 1991 Stock Plan had been
exercised. As of March 30, 2000 SPECTRASCIENCE had issued and outstanding
317,000 stock options outside of the 1991 Stock Plan.
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.
25
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the SPECTRASCIENCE common stock as of March 24, 2000,
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>
Amount and Percent of
Nature of Class
Beneficial Beneficially
Name and Address of Beneficial Owner Title of Class Ownership Owned (8)
<S> <C> <C> <C>
Reggeborgh Beheer BV
Postbox 319,7460 AH Rijssen, The Netherlands Common Stock 816,145 (1) 11.7%
Perkins Capital Management, Inc. and
The Perkins Opportunity Fund
730 East Lake Street, Wayzata, MN 55391-1769 Common Stock 600,372 (2) 9.0%
Nathaniel S. Thayer
150 Main Street, P.O. Box 1325, Pawtucket, RI 02862 Common Stock 437,778 (3) 6.6%
Chester E. Sievert, Jr.
14405 21st Avenue N, Suite 111
Minneapolis, MN 55447 Common Stock 250,745 (4) 3.7%
Henry M. Holterman Common Stock 26,000 (5) 0.4%
Johan A.P.M. De Hond
Van Hambroeckmarke 1, 8016 KM Zwolle
The Netherlands Common Stock 0 (6) 0.0%
Officers and Directors as a Group (4 persons) Common Stock 734,483 (7) 10.4%
</TABLE>
- -----------------
(1) Includes (a) 434,000 shares held by Reggeborgh Beheer BV, (b) 125,000
shares issuable upon the exercise of warrants that are exercisable
within 60 days of March 24, 2000, and (c) 171,430 shares and 85,715
shares issuable upon the exercise of warrants that can be acquired
within 60 days of March 24, 2000 under the terms of a convertible
demand note.
(2) Includes (a) 427,372 shares owned by Perkins Capital Management, Inc.
and (b) 175,000 shares owned by The Perkins Opportunity Fund
(collectively "Perkins"). The shares beneficially owned by Perkins also
include 105,836 shares issuable upon exercise of warrants held by
Perkins or their clients within 60 days of March 24, 2000.
(3) Includes (a) 389,578 shares owned by Mr. Thayer, (b) 48,000 shares
issuable upon exercise of options that are exercisable within 60 days
of March 24, 2000 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.
(4) Includes 250,745 shares issuable upon exercise of options that are
exercisable within 60 days of March 24, 2000. Excludes 50,000 shares
issuable upon exercise of options that will vest upon final FDA
approval for the Virtual Biopsy(TM) System. Mr. Sievert is Chairman,
President and Chief Executive Officer of SPECTRASCIENCE.
(5) Includes 26,000 shares issuable upon exercise of options that are
exercisable within 60 days of March 24, 2000. Mr. Holterman is a
non-employee director of the Company, and is the Managing Director of
Reggeborgh Beheer BV (see footnote 1).
(6) Mr. De Hond is a non-employee director. Currently none of the options
he beneficially owns will vest within 60 days of March 24, 2000.
(7) Includes 389,778 shares and 324,745 shares issuable upon exercise of
options held by all directors and executive officers (4 persons) that
are exercisable within 60 days of March 24, 2000. Excludes 50,000
shares issuable upon exercise of options by Mr. Sievert upon the
successful completion of a performance milestone.
(8) Based upon 6,576,725 shares of common stock outstanding on March 24,
2000.
26
<PAGE>
DESCRIPTION OF BUSINESS
GENERAL
The following discussion contains forward-looking statements that
involve risks and uncertainties. SPECTRASCIENCE's actual results could differ
materially from the results discussed. Factors that could cause or contribute to
such differences are noted in the risk factors section.
SPECTRASCIENCE was incorporated in the state of Minnesota in 1983 as GV
Medical, Inc. In 1992, we discontinued the cardiovascular business of GV Medical
and redirected our development efforts on diagnostic products utilizing
spectroscopic techniques. With our shift in business, we decided that a name
change was appropriate and subsequently changed our name to SPECTRASCIENCE, Inc.
SPECTRASCIENCE, Inc. develops and manufactures innovative, minimally
invasive "spectroscopic systems" to facilitate real-time differentiation between
normal, and pre-cancerous or cancerous tissue. For the past three years
SPECTRASCIENCE has been focused on the design, development, clinical testing,
and regulatory approval of the Virtual Biopsy(TM) System as an adjunct tool
during endoscopy of the colon. Our Virtual Biopsy(TM) System aids endoscopists
performing endoscopic procedures of the colon in the determination of whether
tissue is normal, as opposed to pre-cancerous or cancerous, by directing light
at the tissue through an optical fiber and obtaining an instant spectral
analysis. Use of our system can significantly improve the endoscopist's
diagnostic accuracy. This will (i) facilitate the determination as to the best
course of treatment for the patient; (ii) reduce the need for additional
procedures, (iii) minimize the number of biopsies taken; (iv) eliminate waiting
time for pathology results, and (v) in some cases permit the user to combine a
diagnostic and therapeutic procedure in one visit. In addition, endoscopists can
be easily trained to use these systems because they are compatible with existing
endoscopes, need no special interpretative skills, and incorporate accessory
instrument designs currently being used by the endoscopists.
We believe that our principal product, the Virtual Biopsy(TM) System,
will enable us to be the "first to market" with an optical biopsy system
employing proprietary fluorescence spectroscopy that aids the endoscopist in the
differentiation of healthy, and pre-cancerous or cancerous tissues in the colon.
We believe that the Virtual Biopsy(TM) System will facilitate more accurate and
earlier detection of pre-cancerous or cancerous tissue in the colon, which can
lead to earlier, more effective treatment, which results in increased survival
rates, improved patient quality of life, and reduced patient care costs. It is
estimated that approximately 4.5 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% per year.
RESEARCH AND DEVELOPMENT
Our research and development expenditures for the year ended December
31, 1999 were $1,356,986 and $1,719,171 for the year ended December 31, 1998.
Management intends to continue to make significant investments in research and
development. Research and development activities are performed by our employees
and outside consultants.
Our research and development efforts during the past three years have
been focused primarily on (i) designing and developing our biopsy forceps, (ii)
designing and developing the Virtual Biopsy(TM) System to aid the endoscopist in
differentiating between normal and pre-cancerous or cancerous tissue in the
colon, and (iii) conducting and monitoring clinical trials at multiple sites. In
addition, clinical feasibility studies to detect esophageal cancer have begun at
two sites.
Upon FDA approval, we expect that our research and development efforts
will focus on conducting post-FDA clearance outcome-based clinical studies. The
purpose of these studies would be to market the Virtual Biopsy(TM) System to
HMOs, as well as support and establish reimbursement codes for the Virtual
Biopsy(TM) System. In addition, we plan to expand the gastrointestinal
applications for the Virtual Biopsy(TM) System to patients with Barrett's
esophagus.
INDUSTRY OVERVIEW
COLORECTAL CANCER
The American Cancer Society estimates that 129,400 new cases of
colorectal cancer are detected in the United States annually, and that more than
56,500 people died of colorectal cancer in the United States in 1999. Colorectal
cancer accounts for
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approximately 10% of cancer deaths and is second only to lung cancer as the
leading cause of cancer deaths in the United States. Because of age or other
factors, 80 to 90 million people are considered at risk for colorectal cancer.
Using current techniques to detect and treat colorectal cancer, the
five-year survival rate is as follows:
* 91% if detected and treated at an early stage;
* 35 to 66% if the cancer spreads outside the colon to nearby
organs or the lymph nodes;
* less than 10% for those patients in whom the cancer has spread
further to the liver or other organs.
Unfortunately, only 37% of colorectal cancer is currently found at the
early stage. Studies indicate that screening can prevent 20-40% of potential
colorectal cancers and up to 30-50% of colorectal cancer deaths. Additionally,
recent government studies show that the cost per year of life saved by
colorectal cancer screening is about $15,000-$20,000 -- compared to the $40,000
average yearly cost of care per patient who develops cancer. Early detection is
therefore critical to long-term survival rates.
COLORECTAL BIOPSIES
The gold standard method for detecting colorectal cancer is through an
excisional biopsy during a colon endoscopy. However, 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 which tissue samples to harvest for analysis in a pathology laboratory. The
endoscopist's visual interpretation as to the size, texture, color and location
of the polyp is what determines which, if any, tissue to biopsy. In addition,
excisional biopsies involve certain risks to patients, including bleeding or
perforation of the colon wall. Furthermore, the waiting period for obtaining
excisional biopsy results typically ranges from several days to several weeks.
DETECTION OF COLORECTAL CANCER
Colorectal cancer is primarily 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 screening examination
called a flexible sigmoidoscopy. 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.
During a flexible sigmoidoscopy, the endoscopist first makes a
subjective, visual assessment of the polyp to evaluate it for size, texture,
color, location and thus the potential pathology. The endoscopist determines
whether the polyp is large (greater than 1.0 cm) or small (less than 0.5 cm), by
visual assessment, without physical measurement. If the polyp is considered to
be large, the patient will be referred on for a full colonoscopy where the polyp
will be removed and the entire colon will be examined for additional polyps. If
a polyp is considered to be small, the endoscopist must make a further
subjective visual determination as to whether it is benign or potentially
malignant. Based on the determination, the endoscopist may refer the patient on
for a full colonoscopy, perform a biopsy (if the examining endoscopist performs
biopsies), or place the patient under surveillance. Generally, if a polyp is
deemed to be benign, no further colonoscopy or therapy is indicated and
surveillance may be recommended. If it is deemed to be malignant or potentially
malignant, a colonoscopy and subsequent removal is indicated.
Human error on the part of the endoscopist can occur at various stages
during a colon cancer screening examination: (i) in visually determining the
size of a polyp, (ii) in visually assessing whether a small polyp is benign or
malignant, and (iii) if a biopsy is indicated, which polyps should be sampled
and where to sample them. Medical literature reports that accuracy rates among
general endoscopists in visually determining polyp size can range from 6%-80%;
and accuracy rates in determining the potential malignancy of polyps can range
from 50%-80%. In both cases, the accuracy is dependent on the interpretive
skills of the endoscopist. SpectraScience's clinical studies confirm the
accuracy of the endoscopist in visually assessing polyps as either benign or
malignant is approximately 88%. Accurate characterization of a polyp is critical
because 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 or
refer the patient on to full colonoscopy, even if such a procedure might
otherwise appear to be unnecessary. Typical clinical management guidelines for
biopsy of multiple small polyps are that the endoscopist would take a
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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, the potential for human error still exists.
Compared to traditional biopsies, optical biopsies are intended to
improve diagnostic accuracy by providing objective, quantitative analysis in
combination 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 the need to reschedule a secondary procedure.
BARRETT'S ESOPHAGUS
Barrett's esophagus is considered a pre-cancerous condition that is
normally found in the lower esophagus. Barrett's patients suffer from chronic
acid reflux, which causes stomach cells to eventually migrate into the lower
esophagus. The cells that line the esophagus have a distinctly different
appearance from those that line the stomach, and therefore can easily be
identified during an endoscopic examination. Biopsies are taken during the
examination, and are examined for abnormal changes in size, appearance or
cancerous cell growth. These tissue changes are considered to be the precursor
of cancer of the lower esophagus.
THE SPECTRASCIENCE SOLUTION
We have developed the Virtual Biopsy(TM) System to provide a minimally
invasive and cost-effective adjunctive tool that will aid the endoscopist in
determining whether small polyps are normal, as opposed to potentially cancerous
or cancerous, without removing tissue from the body or waiting for pathology
results.
VIRTUAL BIOPSY(TM) SYSTEM
The Virtual Biopsy(TM) System allows the endoscopist to distinguish in
real time whether colon tissue is normal, as opposed to pre-cancerous or
cancerous, by directing light at tissue through an optical fiber and obtaining
an instant spectral analysis. Use of our system can significantly improve the
endoscopist's diagnostic accuracy; enabling the endoscopist to immediately
determine the best course of treatment for the patient, reducing the need for
additional procedures, minimizing the number of biopsies taken and, in some
cases, permitting the physician to combine a diagnostic and therapeutic
procedure in one visit.
The Virtual Biopsy(TM) System is composed of three components:
* a console which houses the laser, spectrophotometer, and a
computer
* a virtual biopsy forceps which incorporates an optical probe
that transmits and collects light energy when connected to the
console, and
* a proprietary tissue recognition algorithm software that
manages system operations and provides data analysis and
interpretation of the collected data.
The Virtual Biopsy(TM) System operates by transmitting low level
monochromatic light from the console through the optical fiber and thereby
directly to the tissue being analyzed. The tissue in contact with the optical
fiber absorbs the light, and the resulting tissue autofluorescence is collected
by the same optical fiber and transmitted back to a spectrophotometer within the
console for analysis. The result of the analysis is then immediately displayed
on the monitor for the endoscopist's use in making his or her interpretation.
The console consists of a graphic user interface, a computer, a
spectrophotometer, a laser light source and a power supply, all of which are
incorporated into a mobile rack system on lockable wheels for safe and easy
movement and setup. The software includes diagnostic modules that check the
system for intrinsic faults or errors that could affect system performance or
results. The modules provide the user with specific information allowing him or
her to either resolve the problem or contact us for support and service. The
proprietary forceps component, which can be reusable or disposable, is
essentially a standard non-electrical biopsy forceps. The forceps includes a
central lumen that allows the optical fiber to be more easily positioned during
the procedure and makes it more convenient to collect physical biopsy specimens.
The optical fiber, when connected to the forceps, serves as an optical conduit
between the console and the tissue being examined. The
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forceps affords the endoscopist the added capability to collect a physical
biopsy or do a complete polyp removal without having to remove the optical fiber
and replace it with a standard biopsy forceps.
ADVANTAGES OF THE VIRTUAL BIOPSY(TM) SYSTEM
Management believes that the Virtual Biopsy(TM) System offers
significant advantages over currently available methods to diagnose and
facilitate the treatment of colorectal cancer. Specific advantages include:
* REDUCTION OF OPPORTUNITY FOR ERROR-- Traditional tissue
biopsies involve subjective visual determination by the
endoscopist of which tissues to biopsy, and the submission of
that tissue sample to a pathology laboratory for analysis.
This process introduces the risks of human error in obtaining
viable or appropriate 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 Virtual Biopsy(TM) System can assist the
physician in determining in real time during the endoscopic
procedure, which tissues are normal as opposed to potentially
cancerous or cancerous, thereby reducing the number of tissues
to be biopsied and reducing the human error in selection of
such tissues.
* SIGNIFICANTLY INCREASES THE ENDOSCOPIST'S DIAGNOSTIC
ACCURACY-- Management believes that the results of our
clinical trials demonstrated that the use of the Virtual
Biopsy(TM)System technology significantly increased the
endoscopist's diagnostic accuracy in correctly identifying
normal, as opposed to pre-cancerous or cancerous polyps. Our
clinical trials revealed the diagnostic accuracy of
endoscopists in correctly identifying pre-cancerous or
cancerous polyps, through traditional methods, to be
approximately 88.9%. Clinical use of the Virtual
Biopsy(TM)System increased the diagnostic accuracy of the
endoscopist to differentiate pre-cancerous or cancerous polyps
to 97.2%.
* REAL-TIME FEEDBACK -- The results of traditional tissue
biopsies may not be available for several days or even weeks
following the biopsy procedure, whereas the Virtual Biopsy(TM)
System offers real-time feedback to treating physicians and
patients. This also enables the physician to appropriately
select an immediate best course of treatment for the patient
without rescheduling the patient.
* REDUCTION OF REDUNDANT PROCEDURES -- The ability to receive
immediate diagnostic confirmation as to whether the tissue is
normal, as opposed to pre-cancerous or cancerous, through use
of the Virtual Biopsy(TM) System, can enable the physician to
diagnose and treat the patient appropriately without the need
to reschedule a second appointment or procedure. Use of the
Virtual Biopsy(TM) System can enable the endoscopist to
combine a diagnostic and therapeutic procedure in one visit,
with the same instrument and without the need to wait for the
pathologist's report.
* EASE OF USE -- The Virtual Biopsy(TM) System is designed to be
familiar and easy to use by physicians. Because the Virtual
Biopsy(TM) System forceps are virtually identical to
traditional biopsy forceps used by endoscopists, management
believes that physicians who have previously performed
traditional tissue biopsies and polypectomies can be easily
trained to use our system. Additionally, results of the
real-time optical analysis are displayed such that no special
interpretive skills are necessary.
* COST EFFECTIVENESS -- The Virtual Biopsy(TM) System offers a
less costly alternative to current endoscopic colon cancer
screening methods because it may reduce the number of
excisional biopsy procedures and additional colonoscopy
procedures performed per patient. This will minimize the cost
per patient while maximizing the efficiency of the
endoscopist's time. Better patient outcomes by earlier
detection and treatment will result in saved lives and
dollars.
* LIKELIHOOD OF PATIENT ACCEPTANCE -- Management believes the
idea that a revolutionary colon cancer screening technique is
available, using "cool laser light" to provide a "virtual
biopsy," will be embraced and quickly gain acceptance by the
two million people being screened by flexible sigmoidoscopy in
the U.S. every year. This is a population of consumers that
for the most part are without any symptoms. They are simply
"at risk" because the are over 50 years old or have a family
history of colon cancer.
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These people are generally self-motivated to be screened and
will seek information and the most advanced techniques
available.
DISTRIBUTION, MARKETING AND CUSTOMERS
At this time, we have limited marketing and sales capabilities. The
target market for the Virtual Biopsy(TM) System will be medical centers and
physicians. We plan to use strategic partners and a small in-house marketing and
business development group to commercialize our products. We plan to:
* focus our marketing efforts on major cancer and endoscopy
centers in the United States, and the leading premier
endoscopists and other physicians at those institutions;
* identify well-respected clinical supporters of the Virtual
Biopsy(TM) System and leverage their reputation in the
clinical community to generate demand for the Virtual
Biopsy(TM) System; and
* conduct physician training seminars as necessary.
Although management intends to establish an in-house marketing and
business development group, our success may depend in part on our ability to
enter into and successfully develop strategic partnerships and relationships
with distributors to market and distribute our products. We intend to sell our
products in the United States directly, and outside the United States through
international distributors and corporate partners. We are currently exploring
strategic partnerships and distributor relationships with respect to marketing
and distributing our products. In the interim, we plan to do the initial
pre-marketing, outcome-based clinic studies and utilize high profile clinical
partners to establish markets for our products.
Management will seek potential strategic partners having strong market
niches in the field of gastrointestinal medicine. We believe distributing our
products through strategic partners:
* may be more cost-effective and less time-consuming than
establishing an in-house sales group in these areas;
* will allow us to capitalize on the marketing expertise of the
strategic partner; and
* enable us to leverage the market position of our products into
other market niches if the strategic partner has an
established reputation with prospective purchasers of
diagnostic products and proven selling, marketing and
distribution capabilities.
SPECTRASCIENCE's objective is to become a leader in the development and
commercialization of advanced spectrophotometric diagnostic products with the
capability to differentiate in real time between healthy and pre-cancerous or
cancerous tissues. In order to accomplish this we will need to strengthen our
marketing capabilities and, pending FDA clearance to market for the Virtual
Biopsy(TM) System, we plan to focus our initial marketing efforts on the
following areas:
* BE "FIRST TO MARKET" WITH A VIRTUAL BIOPSY(TM) SYSTEM.
Management believes that SPECTRASCIENCE will be the first to
introduce and market an endoscopic virtual biopsy system for
colorectal cancer that will improve the endoscopist's
diagnostic accuracy by providing objective, real-time feedback
as to the pathology of suspect tissue.
* DEMONSTRATE TO THIRD PARTY PAYORS (MEDICARE, BLUECROSS AND
BLUESHIELD ETC.) THE CLINICAL UTILITY AND EFFICACY OF THE
VIRTUAL BIOPSY(TM)SYSTEM. SPECTRASCIENCE intends to
demonstrate to third partY payors through outcome-based
clinical studies that the use of the Virtual Biopsy(TM)System
wilL improve patient outcomes through earlier detection and
decreased patient care costs. SPECTRASCIENCE plans to
demonstrate the clinical utility and efficacy of the Virtual
Biopsy(TM) System to key physician opinion leaders targeted by
management, including those practicing at major cancer centers
throughout the United States. Management believes that
successful outcome-based trials demonstrating better clinical
outcomes and the acceptance of the Virtual Biopsy(TM)System by
key opinion leaders in the health care industry will be
critical elements in gaining market acceptance and third party
reimbursement for the Virtual Biopsy(TM)System.
* DEMONSTRATE TO PHYSICIANS AND OTHER HEALTH CARE PROVIDERS THE
EASE OF USE OF THE VIRTUAL BIOPSY(TM) System. SPECTRASCIENCE
intends to demonstrate to endoscopists and other health care
providers that the Virtual Biopsy(TM)System employs familiar
medical technology and equipment, such as the forceps, that
are virtually
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identical to those currently used by endoscopists in
performing traditional tissue biopsies. The Virtual
Biopsy(TM)System does not require any special interpretive
skills to obtain results. Management believes that
demonstration of the ease of use of the Virtual
Biopsy(TM)System, together with demonstration of better
clinical outcomes, will aid in gaining market acceptance of
the Virtual Biopsy(TM)System. Training seminars will be
conducted as necessary to educate endoscopists and other
health care providers regarding the proper use of the Virtual
Biopsy(TM)System.
* SEEK TO ESTABLISH STRONG SALES DISTRIBUTION. SPECTRASCIENCE
will seek out leading distributors in its target markets both
domestically and internationally. These distributors will
typically have significant resources and strong franchises
which, when coupled with our technology, will increase the
likelihood of commercial success. We will also develop an
in-house sales and marketing staff for two purposes: (i) to
manage and optimize our distribution networks, and (ii) to
develop and implement marketing strategies.
CLINICAL TRIALS
SPECTRASCIENCE conducted clinical studies using the Virtual Biopsy(TM)
System to aid endoscopists in the detection of colorectal cancer at three major
medical centers and one group practice:
* The Mayo Clinic in Rochester, Minnesota;
* Massachusetts General Hospital in Boston, Massachusetts;
* Hennepin County Medical Center in Minneapolis, Minnesota; and
* Minnesota Gastroenterology PA, which has 48
gastroenterologists practicing at multiple sites in both
Minneapolis and St. Paul, Minnesota and surrounding areas
In April 1998, we had a meeting with the Gastroenterology/Urology
branch of the Food and Drug Administration ("FDA") prior to submitting our
Pre-Market Approval application, to review our Phase I data, clinical protocols
and clinical results collected on 306 patients during our multi-center clinical
trials with the Virtual Biopsy(TM) System. In this multi-center study, we
attempted to show that the Virtual Biopsy(TM) System is a valuable tool for use
during endoscopy of the colon to improve the ability of the endoscopist to
identify and distinguish between normal, and pre-cancerous or cancerous tissue
during a colon examination.
The initial results of our clinical study, which were presented to the
FDA, demonstrated that use of the Virtual Biopsy(TM) System improves the
diagnostic accuracy of the endoscopist in accurately detecting pre-cancerous and
cancerous polyps. The FDA requested that we obtain additional patient data to
demonstrate the reproducibility of the algorithm's accuracy prior to filing our
Pre-Market Approval application. The collection of this additional patient data
was completed in August 1998 and we proceeded to submit our modular approach
Pre-Market Approval application in September 1998.
The Gastroenterology and Urology Devices Panel of the Medical Devices
Advisory Committee for the FDA reviewed our Pre-Market Approval submission for
the Virtual Biopsy(TM) System on November 19, 1999. The role of the panel
regarding our Pre-Market Approval submission was to provide a recommendation to
the agency on FDA regulatory issues pertaining to the submission. All aspects of
our Pre-Market Approval submission were discussed by the panel, which was
composed of several physician specialists in Gastroenterology, Urology, and
Surgery as well as non-voting representatives from Nursing and Industry. After a
full day meeting, the panel voted to recommend FDA clearance for SPECTRASCIENCE
to market its Virtual Biopsy(TM) System for use in colonoscopy and
flexible-sigmoidoscopy. The recommendation included a mandated post-approval
study that SPECTRASCIENCE had already planned to conduct to secure third party
reimbursement, strengthen key physician relationships and to develop further
modifications and enhancements to the Virtual Biopsy(TM) System. A panel meeting
is usually the last significant regulatory hurdle prior to final FDA clearance
to market a medical device. A positive recommendation by a FDA Device Panel is
typically followed within a few months by FDA final clearance to market a
device.
In February 2000, the FDA requested management to address queries
raised by their advisory panel and the Office of Device Evaluation's reviewing
staff regarding the pre-market approval application. These queries are to be
addressed by re-analyzing our statistical results to ensure the Virtual
Biopsy(TM) System can be appropriately labeled. Once we have submitted a
response, a final approval is still necessary before we can commercialize the
Virtual Biopsy(TM) System. We expect our application
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to receive FDA approval in the first half of 2000 with a requirement by the FDA
to conduct a post-approval clinical study using the Virtual Biopsy(TM) System as
an adjunct tool during flexible sigmoidoscopies. It is still possible however,
that the FDA could request additional clinical data or otherwise disapprove our
application, requiring us to start over.
We are also conducting a multi-center clinical feasibility trial for
the detection of esophageal cancer at the Mayo Clinic and the University of
California at San Francisco (UCSF). In general, Barrett's Esophagus is a known
risk factor for esophageal cancer. This clinical trial is designed to determine
the viability of using spectroscopic techniques to detect esophageal cancer in
Barrett's patients, and to develop and demonstrate the feasibility of the
Virtual Biopsy(TM) System. We plan to expand these clinical trials in 2000.
COMPETITION
The medical device industry is highly competitive. We believe we have
few direct competitors in applying spectroscopy for the differentiation of
normal and cancerous tissues in the colon; however, the development of products
using spectroscopic diagnostics for various medical specialties is rapidly
growing. To the best of our knowledge, no other competitors have completed FDA
clinical studies or submitted a pre-market approval application to the FDA for
the detection of colorectal cancer. The companies that are listed below have
developed or are in the process of developing products that use spectroscopic
technology that could potentially compete with our products or technologies.
* Xillix Technologies (Richmond, British Columbia, Canada) has
an approved product for detection of cancer in the lungs, the
LIFE-Lung system, which it began to commercialize in 1998.
This product uses light-based spectroscopy to detect and
localize lung cancer and costs approximately $200,000 per
system. Xillix was also developing the LIFE-GI system to
detect gastrointestinal cancers of the esophagus, stomach,
intestines and colon. Under the terms of an agreement, Olympus
Optical Co. of Japan agreed to help finance Xillix's
development work in exchange for rights to market the
LIFE-Lung and LIFE-GI systems worldwide. The LIFE-GI system
was about to enter the final stages of clinical testing when
Xillix filed charges against Olympus. The charges state that
Olympus obtained trade secrets from Xillix and used the trade
secrets for their own benefit. As a result, Xillix has
suspended development and distribution of its products and in
order to conserve capital for prosecution of its claims,
Xillix permanently laid-off 80% of its work force in August
1999. Xillix's legal advisors believe the arbitration
proceedings will be completed before the end of 2000.
* SpectRx (Norcross, GA) is focused on the development and
manufacture of painless and bloodless spectrophotometry based
alternatives to currently available medical diagnostic and
monitoring procedures. Their first fully developed product,
BiliCheck, is for the monitoring of infant jaundice and began
to be commercialized in 1999. They are developing other
spectroscopy systems that offer less invasive and painless
alternatives to blood tests currently used for glucose
monitoring, and diabetes screening which are in various stages
of development. In December 1999, they expanded their
agreement with Abbott Laboratories to include joint
development of a continuous glucose monitor for diabetes.
Under the terms of the expanded agreement, Abbott, in exchange
for a $5.25 million equity investment, has exclusive worldwide
marketing rights to continuous monitoring as well as
single-use monitoring applications of the technology. SpectRx
is also developing non-invasive cervical and skin cancer
detection systems in partnership with Welch Allyn. FluorRx, a
sister company to SpectRx, is also developing spectroscopy
systems for other clinical chemistry diagnostics.
* MediSpectra, Inc. (Lexington, MA) has been focused on
developing a system that improves on the current standards for
cervical cancer detection. The system they are developing is
an in-vivo, non-contact device that simultaneously uses UV
fluorescence and white light to scan the cervix in a single
measurement. It then uses the measurement to localize sites
for biopsy, the goal being to detect high-grade precursors to
cervical cancer. In November 1999, MediSpectra announced that
preliminary data they collected using their second generation
research device, correctly identified pre-cancerous cervical
lesions with an accuracy superior to the current diagnostic
standard of care. They plan to initiate clinical studies in
mid-2000.
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* Mediscience Technology (Cherry Hill, New Jersey) has conducted
feasibility clinical studies for oral leukopakia, a
pre-cancerous condition of the mouth, with a prototype product
called CD SCAN. They also plan to conduct clinical studies in
the areas of breast cancer and Barrett's Esophagus with
products using spectroscopic technology.
* Lasertec International, Inc. (Stamford, Connecticut) expects
to have results from ongoing human trials of its Photo
Therapic Resonancy System in several months. Their technology
is currently focused on the diagnosis and treatment of bladder
cancer, but they plan to expand their technology to the
diagnosis of laryngeal cancer. Their product differs from
other cancer diagnostic products because it is designed to
eliminate the cancer by causing the cancer cell to destroy
itself.
* Lifespex (Kirkland, Washington) is a development stage company
that has successfully completed clinical studies with its
cervical cancer detection device called CERVISCAN. Lifespex is
also conducting initial testing for its skin cancer detection
device.
* Polartechnics, Inc (Sidney, Australia) is developing a tissue
auto-fluorescence probe for cervical cancer detection called
the TruScan. The company has initiated clinical trials in
Europe for the detection of cervical cancer. Polartechnics has
a strategic alliance with Ethicon, a wholly owned subsidiary
of Johnson & Johnson, under which Polartechnics could receive
up to $18 million in the form of milestone payments, and
Ethicon has certain distribution and marketing rights for the
TruScan. Polartechnics has received several milestone
payments. Additionally, on February 2, 2000 Polartechnics
announced a successful placement of its shares, raising $13.2
million, which they plan to use to accelerate
commercialization of the TruScan. The company has obtained ISO
9001 Certification and projects a 2000 European launch for
TruScan. Polartechnics' second product, SkinPolarprobe, a
melanoma detection device, has been placed in clinics in
Australia for testing and development. Polartechnics plans to
expand placement of the Skin Polarprobe to clinics in the U.S.
in 2000.
Many of them have substantially greater resources than we do, either
internally or in combination with strategic partners. These resources may allow
them to develop, market and distribute technologies or products that could be
more effective than those developed or marketed by us, or that would render our
technologies and products obsolete. The resource advantages they may have are:
* greater capital * greater resources and
resources expertise in the areas
of research and
* greater manufacturing development
resources
* greater expertise in
* greater resources and obtaining regulatory
expertise in testing approvals
products in clinical
trials * greater resources for
marketing and sales
activities
MANUFACTURING
To date, SPECTRASCIENCE has not yet commercialized any of its products.
Our manufacturing activities have consisted of assembling a limited number of
Virtual Biopsy(TM) Systems for use in pre-clinical and clinical trials. We do
not have experience in manufacturing our products in commercial quantities or
with the yields that will be necessary for us to achieve significant commercial
sales. Currently, we complete the basic assembly of the Virtual Biopsy(TM)
System console in-house. The software is developed in-house in conjunction with
outside consultants, and the forceps are produced by a leading, U.S. contract
manufacturer of medical forceps. We assemble the components, many of which are
widely available, and inspect and test the completed systems at our facilities.
Our Virtual Biopsy(TM) System will have to be manufactured in
accordance with current Quality System Regulations requirements in order for us
to sell our products in the U.S., and ISO 9001 standards in order for us to sell
our products in the European Union. These requirements impose certain procedural
and documentation requirements upon us with respect to manufacturing and quality
assurance activities, as well as upon those third parties with whom we contract
to perform certain manufacturing processes.
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Many of the raw materials or components used in the manufacture of our
products are "off the shelf" items and are available from more than one vendor.
We do have certain components needed for the manufacture of our product, such as
the laser light source, spectrophotometer and Optical Biopsy Forceps, that are
available only from single or limited source suppliers. The process of
qualifying additional or replacement vendors for certain components or services
can be time-consuming and expensive, especially in the medical device industry.
We currently have an agreement with a leading contract manufacturer of
medical forceps in the United States, under which they have agreed to supply us
with the quantities of forceps that we require. This agreement expires no
earlier than March 2003 but may be renewed by the contract manufacturer for an
additional two years upon six months' notice. Even though the performance of the
suppliers of the forceps and other components and raw materials has generally
been satisfactory, they may not continue to perform up to our standards, meet
government regulations or handle labor unrest, if any.
PATENTS AND PROPRIETARY RIGHTS
Our ability to obtain and maintain patent protection for our products,
preserve our trade secrets and operate without infringing on the proprietary
rights of others will directly affect how successful our operations will be.
There are certain technological aspects of our products that are not covered by
any patents or patent applications. Our strategy regarding the protection of our
proprietary rights and innovations is to seek patents on those portions of our
technology that we believe are patentable, and to protect as trade secrets other
confidential information and proprietary know-how. We seek to protect our trade
secrets and proprietary know-how by obtaining confidentiality and invention
assignment agreements in connection with employment, consulting and advisory
relationships.
We currently own exclusive rights to a total of five issued, allowed
and pending U.S. patents and applications, and four pending international patent
applications. SPECTRASCIENCE has one issued U.S. patent entitled "Optical Biopsy
Forceps" (U.S. Patent 5,763,424), one related allowed and two related pending
U.S. patent applications. SPECTRASCIENCE is the exclusive licensee through The
Massachusetts General Hospital of U.S. Patent 5,843,000 entitled "Optical Biopsy
Forceps and Method of Diagnosing Tissue" and a pending international patent
application. The patents expire between November 2012 and 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 are of view of the optical fiber, and methods of tissue
diagnosis using these forceps. Each of the international applications designates
twenty countries for patent protection. SPECTRASCIENCE owns three additional
pending U.S. patent applications pertaining to various apparatus and methods for
diagnosing tissue; and providing the physician with additional information
regarding whether it is necessary to take a biopsy sample.
In addition to the patents and patent applications described above,
SPECTRASCIENCE currently has an exclusive licensing agreement with the
Massachusetts Institute of Technology for seventeen issued patents and pending
applications, and a number of corresponding foreign patents and applications
relating to vascular and cardiovascular applications of diagnostic laser
catheters. This licensing agreement runs for the life of the patents and
includes certain technology rights 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 April 2000,
the license is nonexclusive for the life of the patents. The license with the
Massachusetts Institute of Technology is subject to termination for failure to
pay fees or other material breach. SPECTRASCIENCE also has a licensing
arrangement with Massachusetts General Hospital's Wellman Laboratories of
Photomedicine. The arrangement provides that certain patents that result from
the Wellman Lab's research on cancer detection will be licensed exclusively to
us. The Massachusetts General Hospital 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. SPECTRASCIENCE has also signed an exclusive license agreement with
Advance Photodynamic Technologies, Dr. Merrill Biel, for the rights to certain
proprietary spectrophotometric technology.
The patent and trade secret positions of medical device companies like
SPECTRASCIENCE, are uncertain and involve complex and evolving legal and factual
questions. To date, no claims have been brought against SPECTRASCIENCE alleging
that our technology or products infringe intellectual property rights of others.
Often, patent and intellectual property disputes in the medical device industry
are settled through licensing or similar arrangements. However, there can be no
assurance that
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necessary licenses from other parties would be available to us on satisfactory
terms, if at all. The costs associated with such arrangements may be substantial
and could include ongoing royalties.
United States patent applications are secret until patents are issued
or corresponding foreign applications are published in other countries. Since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, management cannot be certain that SPECTRASCIENCE 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, the laws of some foreign countries do not provide the
same degree of intellectual property right protection as do the laws of the
United States. Litigation associated with patent or intellectual property
infringement or protection can be lengthy and prohibitively costly. There can be
no assurance that SPECTRASCIENCE would 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.
GOVERNMENT REGULATION
UNITED STATES
Extensive government regulation, both in the United States and
internationally, controls the design, manufacture, labeling, distribution and
marketing of our products, particularly regarding product safety and
effectiveness. In the United States, medical devices are subject to review and
clearance by the FDA. The FDA regulates the clinical testing, manufacture,
labeling, distribution and promotion of medical devices. If we fail to comply
with applicable requirements we could face:
* fines, injunctions, or * total or partial
civil penalties suspension of
production
* recall or seizure of
our products * inability to obtain
pre-market clearance/
* criminal prosecution approval for our
devices
* a recommendation that
we not be allowed to * withdrawal of
contract with the marketing approvals
government
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 assigned to one of three
classes depending on the controls the FDA deems necessary to ensure the safety
and effectiveness of the device. The Virtual Biopsy(TM) System is a Class III
device. In addition to adhering to general controls to which all medical devices
are subject, and special controls such as performance standards, post-market
surveillance and patient registries, a Class III device must receive
pre-marketing approval to ensure its safety and effectiveness 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 Optical
Biopsy 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 at each participating research
institution. These boards oversee and approve all clinical studies at their
institutions. Second, a pre-market approval application must be submitted to the
FDA describing (i) the clinical trial results; (ii) the device and its
components; (iii) the methods, facilities and controls used for manufacture of
the device; (iv) proposed labeling, and (v) the demonstration that the product
is safe and effective. Finally, the manufacturing site for the product subject
to the pre-market approval must pass an FDA pre-approval inspection.
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A pre-market approval application, also referred to as a PMA
application, must be supported by valid scientific evidence to demonstrate
safety and efficacy of the device, and, if applicable, must contain:
* results of all * laboratory and animal
relevant bench tests studies
* pre-clinical and human * a complete description
clinical trial data of the device and
its components
* a detailed description * proposed labeling
of the methods,
facilities and * advertising literature
controls used to
manufacture the device
* training methods, if
required
Certain devices require an Investigation Device Exemption application
to be filed. The Virtual Biopsy(TM) System is considered a "non-significant
risk" device and therefore does not require an IDE application.
If the FDA determines, upon receipt of the pre-market approval
application, that the application is sufficiently complete to permit a
substantive review, they will accept the application for filing. They then begin
an in-depth review of the application. This review typically can take from six
months to two years from the date the application is accepted for filing; but
could be 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, a panel primarily composed of
clinicians and acting as an advisory committee, will likely be convened to
review and evaluate the application. The panel will provide recommendations to
the FDA as to whether the device should be approved; but the FDA is not bound by
those recommendations. Toward the end of the application 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 Quality System
Regulations requirements.
The FDA has attempted to streamline the pre-market approval review
process to increase efficiency and effectiveness by adopting a "modular approach
to PMA review." The essence of this relatively new modular approach is to break
the contents of a pre-market approval application into well-delineated
components, and to have reports of each component submitted as soon as the
applicant has performed the testing and analysis. The application is viewed as a
compilation of sections, or "modules," that together become a complete
application. The FDA assigns a stable team to the project and reviews each
module report as soon as 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. The final modules
submitted will usually consist of a final clinical data report, revised proposed
labeling and a draft Summary of Safety and Effectiveness Data. 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 pre-market approval application filing.
If FDA evaluations of both the pre-market approval application and the
manufacturing facilities are favorable, the FDA will issue either an approval
letter or a conditional approval letter which contains a number of conditions
that must be satisfied in order to secure final approval of the pre-market
approval application. When and if those conditions are fulfilled to the
satisfaction of the FDA, they will issue a pre-market approval letter,
authorizing commercial marketing of the device for certain indications. If the
FDA's evaluation of the pre-market approval application or manufacturing
facilities is not favorable, the FDA will deny approval of the application or
issue a "not approvable letter." The FDA may also determine that additional
clinical trials are necessary, in which case pre-market approval could be
delayed for several years while additional clinical trials are conducted and
submitted in an amendment to the pre-market approval application. The pre-market
approval 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, SPECTRASCIENCE 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 using the
Virtual Biopsy(TM) System. The clinical study design and statistical methods
were considered "appropriate" by the FDA, but they requested we obtain
additional patient data to demonstrate the reproducibility of the algorithm's
accuracy prior to filing our pre-market approval application. We obtained this
additional patient data by August 1998 and subsequently received FDA approval
for the submission of our pre-market approval application through the FDA's
modular approach to pre-market approval review in September 1998. SPECTRASCIENCE
submitted modules in support of its pre-market approval filing beginning in
September 1998. On November 19, 1999, the Gastroenterology and Urology Devices
Panel of the Medical Devices Advisory Committee for the FDA reviewed our
submission for the Virtual Biopsy(TM) System. All aspects of the submission were
discussed by tHE panel, which was composed of several physician specialists in
Gastroenterology, Urology, and Surgery as well as non-voting representatives
from Nursing and Industry. After a full day meeting, the panel voted to
recommend FDA clearance for
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SPECTRASCIENCE to market its Virtual Biopsy(TM) System for use in colonoscopy
and flexible-sigmoidoscopy. The recommendation included a mandated post-approval
study. In February 2000, the FDA requested us to address queries raised by their
advisory panel and the Office of Device Evaluation's reviewing staff regarding
our application. These queries are to be addressed by re-analyzing our
statistical results to ensure the Virtual Biopsy(TM) System can be appropriately
labeled. Once we have submitted a response, we will have to await final FDA
determination and final clearance to market for the Virtual Biopsy(TM) System.
Management anticipates that SPECTRASCIENCE will obtain FDA approval of its
pre-market approval application in the first half of 2000. There can be no
assurance that the application will be approved by the FDA or that the FDA will
not request additional data or otherwise require us to conduct further clinical
trials, thereby causing SpectraScience additional delay and expense.
Any products manufactured or distributed 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 when
using the product. 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 Food Drug and Cosmetic Act requires devices to be manufactured in accordance
with Quality System Requirements regulations, which impose procedural and
documentation requirements upon a manufacturer and any of its contract
manufacturers with respect to manufacturing and quality assurance activities.
Quality System Requirements regulations also require design controls and
maintenance of service records. Changes in existing requirements or adoption of
new requirements or policies could adversely affect our ability 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.
SPECTRASCIENCE 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. SPECTRASCIENCE will be subject to
additional federal, state and local environmental laws when commercial
development and production of the Virtual Biopsy(TM) System begins. Management
is not aware of any manufacturing methods for the Virtual Biopsy(TM) System that
will require extensive or costly compliance with environmental regulations.
However, since laws change over time there can be no assurance that (i)
SPECTRASCIENCE will not be required to incur significant costs to comply with
all applicable laws and regulations in the future, or (ii) that the impact of
changes in those laws or regulations or adoption of new laws and regulations
will not have a material adverse effect upon SPECTRASCIENCE's ability to do
business.
EUROPEAN UNION AND OTHER COUNTRIES
The primary regulatory environment in Europe is that of the European
Union. The European Union consists of 15 countries encompassing most of the
major countries in Europe, including SPECTRASCIENCE's principal anticipated
international markets. 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
complies with the essential requirements of the applicable directive. In order
to sell a medical device in the European Union, the product must have the CE
mark. Generally, companies go through the ISO certification process in order to
obtain the CE mark. SPECTRASCIENCE is currently seeking ISO 9001 certification
and CE marks for the Virtual Biopsy(TM) System. There can be no assurance that
we will receive ISO certification or a CE mark for any of our products or
product components in a timely manner or at all. Furthermore, even though a
device bears the CE Mark, practical complications have arisen with respect to
market introduction because of differences among countries in areas such as
labeling requirements. SPECTRASCIENCE may be required to spend significant
amounts of capital in order to comply with the various regulatory requirements
of foreign countries.
THIRD PARTY REIMBURSEMENT
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. Medicare now covers, for individuals over the age of 50, annual
fecal occult blood tests, screening flexible sigmoidoscopies every three to five
years and colonoscopies for high-risk individuals every two years. An estimated
80-90 million Americans are considered at-risk because they are over 50 years
old, have a family history of colorectal
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cancer, or have a personal history of polyps or inflammatory bowel disease.
Management believes that this increase in Medicare reimbursement for colorectal
cancer screening will increase the incidence of flexible sigmoidoscopies and
enhance the market opportunity for the Virtual Biopsy(TM) System.
We plan to market and sell the Virtual Biopsy(TM) System 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 Virtual
Biopsy(TM) System and other proposed products will be substantially dependent on
the availability of adequate reimbursement from these third party payors for
procedures carried out using our products. Regardless of the type of
reimbursement system, management believes that physician advocacy of our
products will be required to obtain reimbursement. We believe that less invasive
procedures generally provide less costly overall therapies as compared to
conventional drugs, surgery and other treatments. We anticipate that hospital
administrators and physicians would justify the use of our products by the cost
and time savings recognized, and clinical benefits that we believe would be
derived from the use of our products.
Third party 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 established by the United
States Health Care Financing Administration. 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
diagnosis-related group, 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 diagnosis-related group 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.
Virtual biopsies are not currently approved for reimbursement by
third-party payors, and there can be no assurance that the Virtual Biopsy(TM)
System will be approved for any third party reimbursement, even if it proves to
play a significant role in improving the endoscopist's ability to accurately
differentiate among polyps in the colon, thereby leading to early detection and
subsequent treatment of colorectal cancer. However, diagnosis-related group
reimbursement for endoscopic procedures such as flexible sigmoidoscopy,
colonoscopy and polypectomy, including fees for biopsies, has been established.
Medical equipment capital costs incurred by hospitals are reimbursed
separately from diagnosis-related group payments. Changes in federal
legislation, or policies of the government or third-party payors that reduce
reimbursements under capital cost pass through systems, could adversely affect
the market for our products.
Funding for Medicare and Medicaid is subject to limits set by Congress.
In 1997, as part of the Balance Budget Act of 1997, Congress approved Medicare
coverage for preventive colorectal cancer screening tests. Because studies have
shown that colorectal cancer screening can prevent 20%-40% of potential
colorectal cancers and 30%-50% of colorectal cancer deaths, management believes
that such funding should lead to (i) greater awareness of colorectal cancer
among the general population, (ii) larger budgets for screening, (iii) higher
reimbursement levels, and (iv) potentially the establishment of new
reimbursement codes for new technologies like the Virtual Biopsy(TM) System.
This does not however, provide any assurances that the increased funding will
lead to third party reimbursement for the Virtual Biopsy(TM) System.
Management 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 (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 that lead to cuts in reimbursements
for new or experimental procedures would affect the ability of smaller companies
with new technologies, to compete with larger established firms.
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 SPECTRASCIENCE's
products will depend on the availability and level of reimbursement in
international markets we target. There can be no assurance that the
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Company will obtain reimbursement in any country within a particular time, for a
particular time, for a particular amount, or at all.
We are unable to predict what additional legislation or regulation
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, if any, or what effect it might have on us.
Reforms may include (i) mandated basic health care benefits, (ii) controls on
health care spending through limitations on the growth of private health
insurance premiums and Medicare and Medicaid spending, (iii) greater reliance on
prospective payment systems, (iv) the creation of large insurance purchasing
groups, and (v) fundamental changes to the health care delivery system.
Management 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, we cannot predict which
reform proposals, if any, will be adopted, when they may be adopted or what
impact they may have on SPECTRASCIENCE. Failure by hospitals and other users of
our products to obtain reimbursement from third-party payors, or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing our products, could have a material adverse effect on our
business, financial condition and results of operations.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products and devices
entail significant risk of product liability and product failure claims. We face
an inherent business risk of financial exposure to product liability claims in
the event that the use of our products results in personal injury or death.
Clinical trials or marketing of any of our products may expose us to liability
claims resulting from the use of such products. SPECTRASCIENCE 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 management to measure the
risk of product liability claims with respect to its products. SPECTRASCIENCE
also faces the possibility that defects in the design or manufacture of its
products might necessitate a product recall. There can be no assurance
SPECTRASCIENCE will not experience losses due to product liability claims or
recalls in the future, or that any claims or recalls would not have a material
adverse effect on our business, financial condition and results of operations.
Even if a product liability claim is unsuccessful, the time and expense of
defending ourselves may adversely affect our business, financial condition and
results of operations. We currently maintain 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 our insurance policies will be adequate to
protect us against claims that might be brought against us. An inability to
maintain insurance under terms acceptable to SPECTRASCIENCE could prevent or
inhibit clinical testing of or commercialization of products we develop.
EMPLOYEES
As of March 30, 2000, SPECTRASCIENCE 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 sales
and marketing, and finance and administration. SPECTRASCIENCE is not subject to
any collective bargaining agreement and management believes that employee
relations are generally satisfactory.
SPECTRASCIENCE relies heavily on external consultants in the financial,
regulatory, software development and design engineering areas. Management has
been successful in attracting and retaining qualified technical personnel. There
can be no assurance, however, that we will be able to continue to attract or
retain the skilled employees we require for profitable operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
PLAN OF OPERATION
For the past three years SPECTRASCIENCE has been focused on the design,
development, clinical testing, and regulatory approval of the Virtual Biopsy(TM)
System as an adjunct tool during endoscopy of the colon. As discussed in the
clinical trials section, we are currently awaiting final determination of the
FDA regarding our pre-market approval application, and final clearance to market
in the United States for the Virtual Biopsy(TM) System. During the next year
management intends to:
* commercialize the Virtual Biopsy(TM) System after FDA approval
is received;
* develop the market for our product;
* establish manufacturing processes and/or relationships for our
products;
* obtain ISO 9001 certification and the CE mark for our
products;
* conduct outcome-based clinical trials to collect clinical data
to support and establish reimbursement; and
* expand the applications for our products.
SPECTRASCIENCE raised $3.5 million through a December 1999 Private
Placement of its common stock. The cash position of SPECTRASCIENCE on December
31, 1999 was $4,362,120. Management believes this amount of cash is sufficient
to fund operations for at least the next fifteen months, based upon the current
business plan and projections, in light of anticipated costs and expenditures
and demand for our products. We believe we will be able to implement the above
strategies without the need to purchase or lease significant pieces of equipment
or additional plant space. We believe we will need to hire additional employees
in 2000 to support manufacturing after we receive FDA clearance to market for
the Virtual Biopsy(TM) System, as well as additional administrative and in-house
marketing and research and development personnel.
RESULTS OF OPERATIONS
The following discussion of SPECTRASCIENCE's financial condition and
results of operations should be read in conjunction with the Financial
Statements and the notes thereto included in this prospectus.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998
REVENUE. We recorded no revenue for the years ended December 31, 1999
and 1998. We do not expect to begin generating revenue until after FDA clearance
has been obtained for the Virtual Biopsy(TM) System.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
year ended December 31, 1999 totaled $1,356,986, compared to $1,719,171 for the
year ended December 31, 1998. This represented a decrease of $362,185, or 21.1%.
The lower costs can be primarily attributed to the fact that a majority of the
design and development costs of the Virtual Biopsy(TM) System were incurred in
1998, as well as a substantial portion of the related clinical trial expenses.
During 1999 the product was moved through the clinical trial phase towards the
production phase. This phase of our products' development is more labor
intensive than the initial design and development phase.
Therefore, our salary expense and tools and supplies expense was higher
in 1999, but was more than offset by lower expenses in the areas of consulting,
design engineering, purchased services and contract payments. We had
substantially lower legal expenses related to intellectual property filings, and
increased facilities expenses due to our relocation into a larger facility. We
had expenses related to an inventory revaluation in 1998 that we did not have in
1999. The inventory revaluation was due to the replacement of the SGS console
with second generation technology currently used in our Virtual Biopsy(TM)
System.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1999 totaled $794,221,
compared to $746,953 for the year ended December 31, 1998. This represented an
increase of $47,268, or 6.3%. The resignation of Mr. Chew, our former CFO, in
July 1998, coupled with the untimely death of Mr. McMahon, our former President
and CEO, in December 1998 required management to incur increased expenses in the
areas of financial management and investor relations consulting. The increased
consulting expenses were partially offset
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by lower salary expenses and lower travel expenses. We had increased legal
expenses due to fund raising activities and our delisting from the Nasdaq
SmallCap Market. We had increased shareholder relations expenses due to our fund
raising activities and increased costs for our annual meeting.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income for the
year ended December 31, 1999 totaled ($28,626), compared to $51,982 for the year
ended December 31, 1998. This represented a decrease of $80,608, or 155.1%. We
had higher interest income due to higher cash balances throughout 1999 compared
to 1998. However, the interest income was completely offset by other expenses.
NET LOSSES. As a result of the above factors, we reported a net loss of
$2,179,833 for the year ended December 31, 1999, compared to a net loss of
$2,414,142 for the year ended December 31, 1998. This represented a decrease of
$234,309, or 9.7%, and was primarily due to decreased research and development
costs. The net loss was $.41 per share for the year ended December 31, 1999,
compared to a net loss of $.52 per share for the year ended December 31, 1998.
We anticipate that our net loss will increase at least through fiscal year 2000
as we begin to commercialize the Virtual Biopsy(TM) System, continue our
research and development efforts to develop applications for the Virtual
Biopsy(TM) System in other medical specialties and investigate other potential
opportunities for our technologies.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
REVENUE. We recorded no revenue for the years ended December 31, 1998
and 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
year ended December 31, 1998 totaled $1,719,171, compared to $1,095,281 for the
year ended December 31, 1997. This represented an increase of $623,890, or
57.0%. The increase was primarily due to (a) increased salary expense related to
the hiring of two additional personnel during the first half of 1998, (b)
increased expenses related to the multi-center clinical trials on the OBS for
colorectal cancer and feasibility studies for esophageal cancer, (c) an
inventory revaluation associated with a change in product design, (d) increased
consulting and product testing expenses relating to the submission of the
Modular PMA application to the FDA, and (e) increased design engineering
expenses.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1998 totaled $746,953,
compared to $679,809 for the year ended December 31, 1997. This represented an
increase of $67,144, or 9.9%. This increase was primarily due to increased
investor relations expenses and legal expenses. We used the services of our
investor relations consultant for the entire year in 1998 compared to only four
months in 1997 to assist in the process of informing brokers and analysts
throughout the United States about the Company and its technologies. We also
incurred increased legal and other professional service expenses in connection
with the filing of a registration statement relating to a public offering of our
common stock, which was later discontinued due to unfavorable market conditions.
INTEREST AND OTHER INCOME. Interest and other income for the year ended
December 31, 1998 totaled $51,982, compared to $131,299 for the year ended
December 31, 1997. This represented a decrease of $79,317, or 60.4%, and was due
to lower average cash balances during 1998 compared to 1997.
NET LOSSES. As a result of the above factors, we reported a net loss of
$2,414,142 for the year ended December 31, 1998, compared to a net loss of
$1,643,791 for the year ended December 31, 1997. This represented an increase of
$770,351, or 46.9%, and was primarily due to increased research and development
costs and lower interest and other income. The net loss was $.52 per share for
the year ended December 31, 1998, compared to a net loss of $.37 per share for
the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
SPECTRASCIENCE has financed its operations since 1992 principally
through private placements of its common and preferred stock. From October 1992,
when we began development of our current products and changed our name, until
December 31, 1999, we had obtained funds aggregating approximately $16.2 million
in net proceeds from the issuance of common stock and preferred stock. As of
December 31, 1999, SPECTRASCIENCE had cash and cash equivalents of $4,362,120
and working capital of $3,518,136.
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In 1999, SPECTRASCIENCE completed two private placements of common
stock. In March 1999, a private placement of 293,750 shares of its common stock
at $4.00 per share was completed. In December 1999, multiple closings placed
995,285 shares of common stock at $3.50 per share. The private placement was
completed in January 2000 after placing an additional 13,000 shares of common
stock at $3.50 per share. A total of 1,008,285 shares of common stock were
issued in connection with the December 1999 Private Placement of common stock.
Management plans to use these funds (i) to commercialize the Virtual Biopsy(TM)
System, (ii) to continue development of new applications for the Virtual
Biopsy(TM) System, and (iii) for general corporate purposes, including working
capital. See "Description of Securities--Warrants."
Net cash used in operating activities was approximately $2.14 million
for the year ended December 31, 1999, and $2.34 million for the year ended
December 31, 1998. The net cash used in operating activities resulted primarily
from net losses. Net cash used in investing activities was $126,927 for the year
ended December 31, 1999, and $19,183 for the year ended December 31, 1998. The
net cash used in investing activities was primarily attributable to the purchase
of tools and equipment for research and development and manufacturing, and
capital assets associated with our move to a new facility. Net cash provided by
financing activities was $6,326,320 for the year ended December 31, 1999, and
$1,024,187 for the year ended December 31, 1998. The net cash provided by
financing activities was primarily attributable to the two placements of our
common stock during 1999, and the exercise of warrants.
SPECTRASCIENCE expects to incur significant additional operating losses
through at least 2000, as research and development activities continue, new
clinical trials are started and marketing efforts to commercialize the Virtual
Biopsy(TM) System are undertaken. The Company anticipates that it has sufficient
cash and cash equivalents to fund its operations, including increased working
capital expenditures, for at least the next 15 months.
SPECTRASCIENCE's future liquidity and capital requirements will depend
upon a number of factors, including the progress and expense of developing new
applications for the Virtual Biopsy(TM) System, 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
SPECTRASCIENCE'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.
YEAR 2000 ISSUE
SPECTRASCIENCE completed the transition from calendar year 1999 to 2000
with no material difficulties. We will continue to evaluate Year 2000 related
exposures at our vendors, suppliers and other third parties. We will also
continue to monitor our systems, facilities and products to ensure no Year 2000
problems occur over the next few months. Our costs associated with Year 2000
compliance to date have been within budgeted amounts. We have not incurred any
significant expenditures after December 31, 1999 in connection with Year 2000
compliance issues. Management believes there will not be a material adverse
impact on SPECTRASCIENCE's financial condition or results of operation due to
Year 2000 compliance issues.
PROPERTY
SPECTRASCIENCE leases its principal executive offices at 14405 21st
Avenue North, Suite 111, Minneapolis, Minnesota. This facility consists of
approximately 13,282 square feet of office, research and development,
manufacturing, quality testing, and warehouse space. The lease provides for
monthly rental payments of $7,759 for the first 12 months, $8,250 for the next 4
months, and $8,502 for the next 24 months. The current rent including a pro rata
share of operating expenses and real estate taxes is approximately $11,943 per
month. The lease expires at the end of January 2003. Management believes this
facility provides the necessary space needed for anticipated manufacturing and
ramp-up activities for the commercialization of the Virtual Biopsy(TM) System,
and has no present plans to perform any improvements to the facility. Management
believes that appropriate levels of standard property and casualty insurance
coverage on its property are being maintained.
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PRICE RANGE OF COMMON STOCK
Our common stock, $ .25 par value, traded on the Nasdaq SmallCap Market
during 1998 but was delisted at the close of business on March 17, 1999. Since
March 18, 1999, our common stock has been trading on the Over-The-Counter
Bulletin Board under the symbol "SPSI." 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 April 3, 2000, the last reported bid price of the common stock was
$8.625. As of April 3, 2000, there were approximately 1,025 holders of record of
our common stock. The following table sets forth, for the periods indicated, the
high and low sales prices as reported by NASDAQ and OTC Bulletin Board. To the
best of our knowledge, we believe that the information obtained from these
sources is accurate.
<TABLE>
<CAPTION>
1999 Stock Prices (1) 1998 Stock Prices
------------------------------- --------------------------------
QUARTER ENDED High Sales Low Sales High Sales Low Sales
---------------------------- ------------------------------- --------------------------------
<S> <C> <C> <C> <C>
March 31 $6.500 $3.500 $8.000 $3.690
June 30 $5.500 $3.250 $7.625 $4.000
September 30 $5.875 $3.063 $5.500 $2.875
December 31 $8.500 $3.813 $8.000 $3.625
---------------------------------------------------------------------------------------------
</TABLE>
(1) The prices of the our common stock stock reflect inter-dealer
prices and do not necessarily reflect the prices of actual
transactions. The sales prices reflect prices without retail
mark-up, mark-down or commission and may not represent actual
transactions.
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.
DESCRIPTION OF SECURITIES
GENERAL
SPECTRASCIENCE'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. There were 6,576,725 shares of
common stock issued and outstanding as of March 30, 2000, held by approximately
1,025 shareholders of record. There were 2,538,495 shares of common stock
reserved for issuance of common stock upon the exercise of outstanding options,
warrants and a convertible demand note. As of March 30, 2000, SPECTRASCIENCE had
no issued and outstanding shares of preferred stock.
The following is only a summary of the terms and provisions of our
securities. For complete terms and provisions we refer you to SPECTRASCIENCE's
Articles of Incorporation and Bylaws and applicable law.
COMMON STOCK
Each common stock shareholder is 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. Shareholders of more than 50%
of the outstanding common stock voting for the election of directors can elect
all of the directors, if they so choose. Except for applicable preferences of
any outstanding preferred stock, common stock shareholders are entitled, on an
equal basis, to receive dividends declared by the Board of Directors out of
funds legally available, and share in all assets available for distribution to
common stock shareholders upon liquidation, dissolution or winding up of the
affairs of SPECTRASCIENCE.
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Common stock shareholders have no preemptive, subscription or conversion rights,
and there are no applicable redemption or sinking fund provisions. The
outstanding shares of common stock are, and the shares of common stock offered
under this prospectus will be, fully paid and nonassessable.
PREFERRED STOCK
SPECTRASCIENCE'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 could
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 could have the effect of delaying, deferring or
preventing a change in control of SPECTRASCIENCE.
WARRANTS
All outstanding warrants of SPECTRASCIENCE provide for automatic
adjustment of the number of shares issuable upon exercise, and the exercise
price, upon the occurrence of events such as (i) stock dividends or stock
splits; (ii) distributions of common stock; (iii) reorganizations,
reclassifications, or subdivisions and combinations of the common stock, and
(iv) the merger, consolidation or sale of substantially all SPECTRASCIENCE
assets. As of March 30, 2000 SPECTRASCIENCE had the following outstanding
warrants:
* warrants to purchase 10,000 shares of common stock at $3.00
per share, expiring June 2000, issued to R.J. Steichen & Co.,
the placement agent for our Series A Preferred Stock Private
Placement;
* warrants to purchase 87,668 shares of common stock at $6.00
per share, expiring June 2000, as amended, issued to investors
in our Series B Convertible Preferred Stock;
* warrants to purchase 146,875 shares of common stock at $5.00
per share, expiring March 2000, issued to investors in our
March 1999 Private Placement of common stock;
* warrants to purchase 79,250 shares of common stock at $5.00
per share, expiring December 2000, issued to Miller, Johnson &
Kuehn Inc., the placement agent for our Series B Preferred
Stock Private Placement;
* warrants to purchase 87,503 shares of common stock at $5.00
per share, expiring March 2002, issued to lenders who
participated in a 1994 bridge loan transaction; and
* warrants to purchase 504,143 shares of common stock at $5.50
per share, expiring December 2001, issued to investors in our
December 1999 Private Placement of common stock.
REGISTRATION RIGHTS
Holders of the warrants have "piggyback" rights to include the shares
underlying their warrants in any registration statement filed by us during the
period ending five years from the closing of the offering. The holders of the
warrants also have "demand" rights. The holders of the 87,668 warrants expiring
June 2000 may require, during the period ending five years from the closing of
the offering, by action of not less than the holders of a majority of the
warrants, up to one "demand" registration by SPECTRASCIENCE, of the shares
underlying the warrants. The holders of the 146,875 warrants expiring in March
2000, and the holders of the 504,143 warrants expiring in December 2001 may
require, during the period ending two years from the closing of the offering, by
action of not less than the holders of a majority of the warrants, up to one
"demand" registration by SPECTRASCIENCE, of the shares underlying the warrants.
In addition, any holder of the warrants has "demand" rights during the period
ending five years from the closing of the offering to require one "demand"
registration of the shares underlying such holder's warrants, solely at the
expense of such holder. We also granted "piggyback" rights to those employees
holding stock options that were granted outside of the 1991 Stock Plan. To our
knowledge, no other holders of our 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
45
<PAGE>
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 by the acquiring party 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 increased such shareholders'
beneficial ownership to 10% or more of the outstanding voting stock. 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.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITITES ACT LIABILITIES
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.
46
<PAGE>
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.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Chappell White LLP, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999, as set forth in their report. We've included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority 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.
47
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================================================================================
No dealer, salesperson or other person is authorized to give any information or
to make any representation in connection with this Offering other than those
contained in this Prospectus, if given or made, such information or
representations must not be relied upon as having been authorized by the 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.............................. 4
Summary Financial Data.......................... 6
Risk Factors.................................... 7
Use of Proceeds................................. 13
Capitalization.................................. 13
Selling Security Holders........................ 14
Plan of Distribution............................ 19
Legal Proceedings............................... 19
Directors, Executive Officers and Key Employees. 20
Certain Transactions............................ 25
Principal Shareholders.......................... 26
Description of Business......................... 27
Management's Discussion and Analysis of
Financial Condition and Results of Operations 41
Property........................................ 43
Price Range of Common Stock..................... 43
Dividend Policy................................. 44
Description of Securities....................... 44
Legal Matters................................... 46
Experts......................................... 47
Additional Information.......................... 47
--------------------
================================================================================
2,790,037 Shares
SPECTRASCIENCE, INC.
Common Stock
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
, 2000
================================================================================
<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.
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 ................... $ 5,939
Legal fees and expenses................. 10,000
Accounting fees and expenses ........... 5,000
Blue Sky fees and expenses.............. 10,000
Transfer Agent's and Registrar's fees... 500
Printing and engraving expenses......... 5,000
Miscellaneous .......................... 1,000
-------------
Total........................ $ 37,439
=============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1997, the Company has issued and sold the following
securities, which were not registered under the Securities Act of 1933, as
amended:
During 1994 and 1995, the Company granted warrants to the participants
in the bridge financing agreements it had entered into to purchase 174,
998 shares of the Company's common stock at $3.00 per share. The
Company received net proceeds of $525,000 when these warrants were
exercised in March 1999. Upon exercising the warrants, the holders
received additional warrants to purchase 87,503 shares of common stock
at $5.00 per share. The shares of common stock issuable upon exercise
of these warrants is being registered under this prospectus.
<PAGE>
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 warrants to purchase a total of 264,175 shares
of common stock exercisable at $9.50 per share. The warrants originally
expired in December 1998. In December 1998, the Company extended the
exercise period to January 1999 and repriced the warrants to $6.00 per
share. Contingent upon exercising, the holders would also receive
additional warrants to purchase an equal number of shares of common
stock at $6.00 per share. In January 1999, warrants to purchase 87,668
shares of common stock were exercised at $5.00 per share, resulting in
net proceeds to the company of $485,407. The company paid $40,601 to
Miller, Johnson & Kuehn, Incorporated, in connection with the exercise
of the warrants. The 87,668 shares of common stock purchased in 1999
are being registered under this prospectus rather than amending the
Form S-3 Registration Statement filed by the company in May 1996. The
shares of common stock issuable upon exercise of the warrants issued in
January 1999 to purchase 87,668 shares of common stock are being
registered under this prospectus.
On March 12, 1999, the Company completed a private placement with
qualified investors of 293,750 shares of common stock, par value $.25,
at $4.00 per share. Holders of this common stock were issued warrants
to purchase 146,875 shares of common stock exercisable at $5.00 per
share. Net proceeds to the Company were $1,175,000 after related costs
of $17,500.
During December 1999 and January 2000, the Company had multiple
closings with qualified investors which placed 1,008,285 shares of
common stock, par value $.25, at $3.50 per share. Holders of this
common stock were issued warrants to purchase 504,143 shares of common
stock exercisable at $5.50 per share. Net proceeds to the Company were
$3,190,198. The company paid $334,300 to Miller, Johnson & Kuehn,
Incorporated in connection with the placement of the shares.
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
Exhibit
Number Description
- ------ ---------------------------
3.1 Articles of Incorporation, as amended. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB, Exhibit 3.1, for the
year ended December 31, 1996.)
3.2 Bylaws, as amended. (Incorporated by reference to the Company's
Annual Report on Form 10-KSB, Exhibit 3.2, for the year ended
December 31, 1995.)
4.1 Specimen Form of the Common Stock Certificate (previously filed)
5.1 Opinion of Chappell White LLP (filed herewith)
10.1 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.)
10.2 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.)
10.3 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.)
10.4 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>
10.5 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.)
10.6 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.)
10.7 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 of Form
10-K for the year ended December 31, 1997.)
10.8 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.)
10.9 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 of Form 10-K for the year
ended December 31, 1997.)
10.10 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.)
10.11 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.)
10.12 Manufacturing and Sales Agreement, dated June 23, 1997, between
Portlyn Corporation and the Company. (Incorporated by reference to
Exhibit 10.28 to Amendment No. 1 to the Company's Registration
Statement on Form SB-2, dated October 7, 1998, Commission File No.
333-59395.)
10.13 Lease Agreement between the Company and Urologix, Inc. dated
September 23, 1999 (Incorporated by reference to the Company's
Annual Report on Form 10-KSB, Exhibit 10.23, for the year ended
December 31, 1999.)
10.14 Form of Warrant, as amended, exercised in January 1999 by investors
who participated in the Company's private placement of Convertible B
Preferred Stock filed herewith.
10.15 Form of Warrant issued to investors who exercised their amended
warrants in January 1999, filed herewith.
10.16 Form of Warrant issued to Qualified Lenders who exercised their
warrants in March 1999, filed herewith.
10.17 Form of Warrant issued to investors in the March 1999 private
placement of the Company's common stock, filed herewith.
10.18 Form of Warrant issued to investors in the December 1999 private
placement of the Company's common stock, filed herewith.
23.1 Consent of Independent Auditors, filed herewith.
23.2 Consent of Chappell White LLP (included in Exhibit 5.1)
24.1 Powers of Attorney, filed herewith.
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
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.
<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 April 14, 2000.
SPECTRASCIENCE, INC.
By: /s/ Chester E. Sievert, Jr.
-------------------------------------
Chester E. Sievert, Jr.
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 April 10, 2000.
SIGNATURE TITLE
--------- -----
/s/ Chester E. Sievert, Jr. Chairman, Chief Executive Officer
- ----------------------------------------- and Director (principal executive
Chester E. Sievert, Jr., Attorney-in-fact officer and principal financial and
accounting officer)
* Vice President Marketing and Sales
- -----------------------------------------
Scott G. Anderson
* Director
- -----------------------------------------
Henry M. Holterman
* Director
- -----------------------------------------
Nathaniel S. Thayer
* Director
- -----------------------------------------
Johan A.P.M. de Hond
*By /s/ Chester E. Sievert, Jr.
------------------------------
Chester E. Sievert, Jr.
Attorney-in-fact
<PAGE>
SpectraScience, Inc.
AUDITED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1998 and 1999
CONTENTS
Report of Independent Auditors..............................................F-1
Audited Financial Statements
Balance Sheets...............................................................F-2
Statements of Operations.....................................................F-3
Statement of Changes in Stockholders' Equity.................................F-4
Statements of Cash Flows.....................................................F-5
Notes to Financial Statements................................................F-6
F
<PAGE>
Report of Independent Auditors
Board of Directors
SpectraScience, Inc.
We have audited the accompanying balance sheets of SpectraScience, Inc. as of
December 31, 1998 and 1999, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 11, 2000
F-1
<PAGE>
SpectraScience, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 301,970 $ 4,362,120
Inventory 185,625 143,660
Interest receivable -- 13,314
Note receivable from related party 24,030 --
Prepaid expenses 50,638 83,756
Other current assets 10,585 31,508
-----------------------------
Total current assets 572,848 4,634,358
Fixed assets:
Office furniture and equipment 266,400 288,665
Machinery and equipment 562,919 560,669
Leasehold improvements -- 11,186
-----------------------------
829,319 860,520
Less accumulated depreciation (581,788) (566,774)
-----------------------------
Total assets $ 820,379 $ 4,928,104
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 236,769 $ 150,094
Note payable - trade creditors 45,217 66,109
Note payable to related party -- 600,005
Accrued compensation and taxes 99,263 162,457
Accrued expenses 56,990 90,158
Accrued clinical research fees 162,400 47,399
-----------------------------
Total current liabilities 600,639 1,116,222
Long-term portion of lease commitment -- 45,660
Stockholders' equity:
Common stock, $.25 par value:
Authorized shares--10,000,000
Issued and outstanding shares--4,737,804 in 1998
and 6,420,705 in 1999 1,184,451 1,605,176
Additional paid-in capital 45,586,659 50,892,249
Accumulated deficit (46,551,370) (48,731,203)
-----------------------------
Total stockholders' equity 219,740 3,766,222
-----------------------------
Total liabilities and stockholders' equity $ 820,379 $ 4,928,104
=============================
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
SpectraScience, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
-------------------------------------------
<S> <C> <C> <C>
EXPENSES
Research and development $ 1,095,281 $ 1,719,171 $ 1,356,986
Selling, general and administrative 679,809 746,953 794,221
-------------------------------------------
Net loss from operations (1,775,090) (2,466,124) (2,151,207)
OTHER (INCOME) EXPENSE
Interest and other (income) expense (131,299) (51,982) 28,626
-------------------------------------------
Net loss $(1,643,791) $(2,414,142) $(2,179,833)
===========================================
Net loss per share $ (.37) $ (.52) $ (.41)
Weighted average common shares outstanding 4,467,233 4,663,559 5,288,974
</TABLE>
F-3
<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, 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 stock 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 Series A preferred stock
detachable warrants into common stock 148,445 37,111 -- -- -- --
Exercise of stock options 82,800 20,700 -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------
Balance December 31, 1998 4,737,804 1,184,451 -- -- -- --
Exercise of warrants into common stock 174,998 43,749 -- -- -- --
Exercise of Series B preferred stock -- -- -- --
detachable warrants into common stock 87,668 21,917 -- -- -- --
Exercise of stock options 131,200 32,800 -- -- -- --
Private placement of common stock 1,289,035 322,259 -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------
Balance December 31, 1999 6,420,705 $1,605,176 -- $ -- -- $ --
================================================================
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------------------------------------
<S> <C> <C> <C>
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 stock 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 Series A preferred stock
detachable warrants into common stock 705,114 -- 742,225
Exercise of stock options 261,262 -- 281,962
Net loss -- (2,414,142) (2,414,142)
---------------------------------------
Balance December 31, 1998 45,586,659 (46,551,370) 219,740
Exercise of warrants into common stock 481,251 -- 525,000
Exercise of Series B preferred stock
detachable warrants into common stock 463,490 -- 485,407
Exercise of stock options 375,910 -- 408,710
Private placement of common stock 3,984,939 -- 4,307,198
Net loss -- (2,179,833) (2,179,833)
---------------------------------------
Balance December 31, 1999 $50,892,249 $(48,731,203) $ 3,766,222
=======================================
</TABLE>
SEE ACCOMPANYING NOTES
F-4
<PAGE>
SpectraScience, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
-------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,643,791) $(2,414,142) $(2,179,833)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 64,666 141,083 79,566
Loss on disposal of fixed assets -- -- 1,146
Changes in operating assets and liabilities:
Interest receivable -- -- (13,314)
Inventory 11,677 (219,536) 41,965
Note receivable from related party -- (24,030) 24,030
Prepaid expenses 10,470 7,297 (33,118)
Other current assets (5,153) 29,899 (20,923)
Accounts payable and accrued expenses 69,800 138,222 (38,762)
-------------------------------------------
Net cash used in operating activities (1,492,331) (2,341,207) (2,139,243)
INVESTING ACTIVITIES
Purchases of fixed assets (12,192) (19,183) (126,927)
-------------------------------------------
Net cash used in investing activities (12,192) (19,183) (126,927)
FINANCING ACTIVITIES
Note payable to related party -- -- 600,005
Proceeds from issuance of common stock 95,514 1,024,187 5,726,315
-------------------------------------------
Net cash provided by financing activities 95,514 1,024,187 6,326,320
-------------------------------------------
Net decrease in cash and cash equivalents (1,409,009) (1,336,203) 4,060,150
Cash and cash equivalents at beginning of year 3,047,182 1,638,173 301,970
-------------------------------------------
Cash and cash equivalents at end of year $ 1,638,173 $ 301,970 $ 4,362,120
===========================================
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Series A preferred stock converted into common stock $ 66,667 $ -- $ --
Series B preferred stock converted into common stock 792,500 -- --
Transfer of inventory to equipment -- 214,385 --
</TABLE>
SEE ACCOMPANYING NOTES.
Page F-5
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
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 on the
development and manufacturing of innovative, minimally-invasive spectroscopic
systems to facilitate real-time differentiation and diagnosis of cancerous and
diseased tissue by utilizing advanced spectroscopy, fiber optics, computer
hardware and software.
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. Cash equivalents are carried at
cost which approximates market value.
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. Leasehold improvements are depreciated over the related lease term or
estimated useful life, whichever is shorter.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis. The majority of the inventories consists of purchased
components.
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.
Page F-6
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amount of assets and liabilities and their respective tax bases.
NET LOSS PER SHARE
Basic earnings per share is based on weighted average shares outstanding and
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share for the Company is the same as basic earnings per
share because the effect of options and warrants is anti-dilutive.
3. INVENTORY
Inventory consists of the following:
DECEMBER 31
1998 1999
----------------------------------
Raw materials $176,625 $143,660
Finished goods 9,000 --
----------------------------------
$185,625 $143,660
==================================
4. CAPITAL STOCK AND WARRANTS
During 1994 and 1995, the Company granted warrants to the participants in the
bridge financing agreements it had entered into to purchase 174,998 shares of
the Company's common stock at $3.00 per share. The warrants were exercised in
March 1999 at $3.00 per share, resulting in net proceeds to the Company of
$525,000. Upon exercising the warrants, the holders received additional warrants
to purchase 87,503 shares of common stock at $5.00 per share. These warrants
expire in March 2002.
From March 1995 to June 1995, the Company sold 500,000 shares of Series A
convertible preferred stock 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 the
Series A convertible preferred stock, bridge loans of $525,000 were converted
into 174,998 shares of Series A convertible preferred stock at a price of $3.00
per share. In addition, the Company issued warrants to the investors to purchase
225,000 shares of the Company's common stock at $5.00 per share. In March 1996,
the nondividend yielding shares of Series A convertible preferred stock were
converted into an equivalent number of shares of common stock. All warrants
related to the Series A convertible preferred stock were exercisable for three
years from the date of grant. During 1996 through 1998, 184,556 warrants were
exercised at $5.00 per share. The remaining 40,444 warrants expired in 1998.
During 1995, the Company issued warrants to the placement agent to purchase
20,000 shares of the Company's common stock at $3.00 per share. In 1997, 10,000
warrants were exercised at $3.00 per share. The remaining warrants are
outstanding and expire five years from the date of the grant. In 1995, the
Page F-7
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
4. CAPITAL STOCK AND WARRANTS (CONTINUED)
Company also issued additional warrants to the placement agent to purchase 6,667
shares of the Company's common stock at $5.00 per share. In 1997, 3,333 warrants
were exercised at $5.00 per share. The remaining warrants expired in 1998.
In December 1995, the Company sold 792,500 shares of Series B convertible
preferred stock at $5.00 per share in a private placement for $3,962,500 less
related costs of $435,875. Holders of shares of the Series B convertible
preferred stock also received warrants to purchase 264,175 shares of the
Company's common stock at $9.50 per share. The warrants originally expired in
December 1998. In December 1998, the Company extended the exercise period to
January 1999 and repriced the warrants to $6.00 per share. Contingent upon
exercising, the holders would also receive additional warrants to purchase an
equal number of shares of common stock at $6.00 per share. In January 1999,
warrants to purchase 87,668 shares of common stock were exercised at $6.00 per
share, resulting in net proceeds to the Company of $485,407. The remaining
176,507 warrants expired in January 1999. An additional 87,668 warrants at $6.00
per share were issued to the holders that exercised. These additional warrants
originally expired in December 1999, but the Company extended the exercise
period to June 2000.
In December 1995, the Company also issued warrants to the placement agent to
purchase 79,250 shares of the Company's common stock at $5.00 per share. The
warrants remain outstanding and are exercisable for five years from the date of
grant. The Company issued additional warrants to the placement agent to purchase
26,418 shares of the Company's common stock at $9.50 per share, conditional upon
the exercise of the previous warrants issued to the placement agent. The
conditional warrants were not exercised and expired in 1998.
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.
During February through December 1999, options were exercised to purchase
131,200 shares of common stock at prices ranging from $3.00 to $4.7625 per
share. This resulted in net proceeds to the Company of $408,710.
In March 1999, the Company sold 293,750 shares of common stock in a private
placement for $1,175,000 less related costs of $17,500. Holders of the common
stock also received warrants to purchase 146,875 shares of common stock for
$5.00 per share. All warrants remain outstanding and expire in March 2001.
In December 1999, the Company sold 995,285 shares of common stock for $3,483,498
less related costs of $338,800. Holders of the common stock also received
warrants to purchase 497,643 shares of common stock for $5.50 per share. All
warrants remain outstanding and expire in December 2001.
In January 2000, the Company also sold 13,000 shares of common stock for
$45,500. Holders of the common stock also received warrants to purchase 6,500
shares of common stock for $5.50 per share. All warrants remain outstanding and
expire in January 2002.
Also in January 2000, options were exercised to purchase 5,333 shares of common
stock at $4.7625 per share. This resulted in net proceeds to the Company of
$25,398.
Page F-8
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
5. STOCK OPTIONS
The Company has one stock option plan, the 1991 Stock 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 the higher of the
fair market value of the Company's common stock or a ten-day rolling average of
the fair market value of the common stock as of the date of grant.
The following table summarizes the stock option activity for the plan:
<TABLE>
<CAPTION>
STOCK OPTIONS WEIGHTED AVERAGE
SHARES AVAILABLE OUTSTANDING UNDER EXERCISE
FOR GRANT THE PLAN PRICE PER SHARE
----------------------------------------------------------------
<S> <C> <C> <C>
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
Amendment to Plan 140,000 -- --
Options granted (508,167) 508,167 4.53
Options exercised -- (82,800) 3.41
Options canceled 499,580 (499,580) 3.94
-------------------------------------------
Balance December 31, 1998 370,700 952,431 4.54
Options granted (251,000) 251,000 4.26
Options exercised -- (131,200) 3.12
Options canceled 29,300 (29,300) 3.00
-------------------------------------------
Balance December 31, 1999 149,000 1,042,931 $4.68
===========================================
</TABLE>
The weighted average fair value of options granted in 1997, 1998 and 1999 was
$2.84, $3.79 and $2.62, respectively. The exercise price of options outstanding
at December 31, 1999 ranged from $3.00 to $11.25 per share, as summarized in the
following table:
<TABLE>
<CAPTION>
SHARES OUTSTANDING SHARES EXERCISABLE
-------------------------------------------------- ---------------------------------
SHARES WEIGHTED WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF DECEMBER 31, REMAINING EXERCISE PRICE SHARES EXERCISE PRICE
EXERCISE PRICE 1999 CONTRACTUAL LIFE PER SHARE EXERCISABLE PER SHARE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.00 to $ 5.00 802,686 8.8 years $ 4.15 511,851 $ 4.15
5.01 to 8.00 212,745 8.0 years 5.99 211,078 6.00
8.01 to 11.25 27,500 3.0 years 10.35 27,500 10.35
------------------- -----------------
Total 1,042,931 750,429
=================== =================
</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.
Page F-9
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
5. STOCK OPTIONS (CONTINUED)
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.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1998 and 1999, respectively: risk-free interest rates
ranging from 5.38% to 6.30%; volatility factors of the expected market price of
the Company's common stock ranging from .774 to .851 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:
1997 1998 1999
----------------------------------------------
Pro forma net loss $(2,258,579) $(3,079,739) $(2,964,845)
Pro forma net loss per share $(.51) $(.66) $(.56)
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 moved to a new location in Minneapolis in October 1999 and entered
into a new building lease agreement that has a term extending through January
2003. This lease requires annual base rents of $94,581, $101,772, $102,024 and
$8,502, plus a sharing of certain expenses, for the years 2000, 2001, 2002 and
2003, respectively.
The Company was unable to terminate the existing lease agreement for the
previous facility and is under obligation for this facility through October
2001. Since the previous facility has no future benefit to the Company and there
is no actual or probable sublease income to offset the rent expense, the Company
has recognized an expense of $95,886 in the current year related to payments for
the remaining term of the lease. The portion payable in 2001 is recorded as
long-term lease commitment. The Company also expensed all leasehold improvements
related to this facility in the current year.
Various other equipment operating leases have been entered into and expire
during future years.
Page F-10
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
6. COMMITMENTS (CONTINUED)
Future lease commitments are as follows:
2000 $104,164
2001 110,537
2002 104,000
2003 8,502
-------------------
Total $327,203
===================
The Company incurred total lease and rental expenses of $67,000, $74,000 and
$106,600 for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company has 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 30 days. Under the
terms of this agreement, the Company paid $50,000 annually in 1997 through 1999.
7. ACCRUED CLINICAL RESEARCH FEES
The Company is conducting ongoing multi-center clinical studies using the
Virtual Biopsy(TM) System (VBS) in an attempt to show that the VBS is a
minimally-invasive diagnostic tool used to detect and differentiate among
normal, pre-cancerous and cancerous tissues without physically removing tissue
from the body. During 1995 through 1998, the Company entered into various
clinical testing agreements with domestic hospitals to conduct research using
the VBS. Under the terms of these agreements, the Company had a maximum
commitment of $374,000 for clinical research testing related project costs as of
December 31, 1999. Some of these costs have already been paid by the Company and
will continue to be paid. As of December 31, 1998 and 1999, the Company had
accrued for $162,400 and $47,399 of these clinical research fees, respectively.
8. INCOME TAXES
The tax effect of the Company's deferred tax assets is as follows:
DECEMBER 31
1998 1999
--------------------------------------
Net operating loss carryforward $16,761,000 $17,567,000
Accrued liabilities 106,000 108,000
Inventory reserve -- 3,000
Tax credits 872,000 903,000
--------------------------------------
17,739,000 18,581,000
Valuation allowance (17,739,000) (18,581,000)
--------------------------------------
$ -- $ --
======================================
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $48,798,000 that expire at various times through the year 2019. In
addition, the Company has research and
Page F-11
<PAGE>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
8. INCOME TAXES (CONTINUED)
development tax credits that expire at various times through 2014. As a result
of previous stock transactions, the Company's ability to utilize its net
operating loss carryforwards to offset future taxable income is subject to
certain limitations under Section 382 of the Internal Revenue Code due to
changes in equity ownership of the Company.
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 $17,000,
$21,000 and $14,300 for 1997, 1998 and 1999, respectively.
10. NOTE PAYABLE TO RELATED PARTY
The Company issued a convertible demand note for $600,005 on December 30, 1999
with a related party. A member of the board of directors of the Company is also
a member of the board of directors of the payee. The note bears an annual
interest rate of 6%, which is payable upon maturity, demand or conversion. The
note is payable upon the demand of the payee at any time after March 31, 2000
and matures on June 30, 2000. The note may be converted at the option of the
holder at any time or will automatically be converted upon the approval of the
Company's common stock for listing on the NASDAQ. The note will be converted
into 171,430 shares of the Company's common stock with warrants to purchase
85,715 shares of common stock at $5.50 per share. These warrants are exercisable
at any time and expire two years from the date of conversion.
11. LITIGATION
In September 1998, the Company was served with a lawsuit from a former
consultant of the Company. The lawsuit claims that the plaintiff was entitled to
receive options for 50,000 shares of the Company's common stock at an exercise
price of $2.50 per share, for the successful completion of a proposed private
placement financing. The Company has contended that the proposed financing did
not occur. The Company is unable at this time to evaluate the likelihood of an
unfavorable outcome or to estimate any amount of liability associated with the
proceedings.
12. SUBSEQUENT EVENTS
In January through March 17, 2000, option holders exercised their options to
purchase 23,333 shares of common stock at prices ranging from $4.00 to $7.05 per
share. This resulted in net proceeds to the Company of $132,838.
Page F-12
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.3 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.)
3.4 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)
5.1 Opinion of Chappell White LLP (filed herewith)
10.1 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.)
10.2 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.)
10.3 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.)
10.4 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.)
10.5 Amendment to 1991 Stock Plan adopted by the Company's shareholders
on March 28, 1996. (Incorporated by
<PAGE>
reference to the Company's Registration Statement on Form S-8,
Commission File No. 333-4393, as filed on May 23, 1996.)
10.6 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.)
10.7 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 of Form
10-K for the year ended December 31, 1997.)
10.8 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.)
10.9 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 of Form 10-K for the year
ended December 31, 1997.)
10.10 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.)
10.11 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.)
10.12 Manufacturing and Sales Agreement, dated June 23, 1997, between
Portlyn Corporation and the Company. (Incorporated by reference to
Exhibit 10.28 to Amendment No. 1 to the Company's Registration
Statement on Form SB-2, dated October 7, 1998, Commission File No.
333-59395.)
10.13 Lease Agreement between the Company and Urologix, Inc. dated
September 23, 1999 (Incorporated by reference to the Company's
Annual Report on Form 10-KSB, Exhibit 10.23, for the year ended
December 31, 1999.)
10.14 Form of Warrant, as amended, exercised in January 1999 by investors
who participated in the Company's private placement of Convertible B
Preferred Stock filed herewith.
10.15 Form of Warrant issued to investors who exercised their amended
warrants in January 1999, filed herewith.
10.16 Form of Warrant issued to Qualified Lenders who exercised their
warrants in March 1999, filed herewith.
10.17 Form of Warrant issued to investors in the March 1999 private
placement of the Company's common stock, filed herewith.
10.18 Form of Warrant issued to investors in the March 1999 private
placement of the Company's common stock, filed herewith.
23.1 Consent of Independent Auditors, filed herewith.
23.3 Consent of Chappell White LLP (included in Exhibit 5.1)
24.1 Powers of Attorney, filed herewith.
CHAPPELL WHITE LLP
COUNSELLORS AT LAW
268 SUMMER STREET
BOSTON, MASSACHUSETTS 02210
TELEPHONE (617) 279-3000
FACSIMILE (617) 279-3001
E-MAIL: [email protected]
April 13, 2000
Board of Directors, SPECTRAScience, Inc.
14405 Avenue N, Suite 111
Minneapolis, MN 55447
Re: SPECTRAScience, Inc. - Registration Statement on Form SB-2, File
No. 333-84213
Gentlemen:
We have acted as counsel for SPECTRAScience, Inc., a Minnesota
corporation (the "Company"), in connection with the preparation and filing by
the Company of a registration statement (the "Registration Statement") on Form
SB-2, File No. 333-84213, under the Securities Act of 1933, relating to the
registration of 2,790,037 shares of the Company's Common Stock, par value $.25
per share (the "Common Stock") of which 1,389,703 shares currently are
outstanding (the "Outstanding Registrable Shares"), and 1,400,334 shares
currently are issuable upon the exercise or conversion, as the case may be, of
outstanding warrants, options and a convertible demand note (the "Issuable
Registrable Shares").
We have examined the Certificate of Incorporation and the By-Laws of
the Company, the Registration Statement, the minutes of the various meetings and
consents of the Board of Directors of the Company relating to the offering of
the Common Stock, and such other documents, certificates, records,
authorizations, proceedings, statutes and decisions as we have deemed necessary
to form the basis of the opinion expressed below. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to originals of all documents
submitted to us as copies thereof. As to various questions of fact material to
such opinion, we have relied upon statements and certificates of officers and
representatives of the Company and others. Finally, we assume that the Issuable
Registrable Shares will be issued pursuant to the due exercise or conversion, as
the case may be, of the underlying warrants, options or convertible demand note
in accordance with their respective terms.
The opinions expressed herein are based solely upon our review of the
documents and other materials expressly referred to above. We have not reviewed
any other documents in rendering such opinions. Such opinions are therefore
qualified by the scope of that document examination.
Based on the foregoing, we are of the opinion that the Outstanding
Registrable Shares are, and when issued upon the exercise or conversion of the
underlying warrants, options or convertible demand note, as the case may be, the
Issuable Registrable Shares will be, duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock.
We hereby consent to be named in the Registration Statement and the
Prospectus as attorneys who have passed upon legal matters in connection with
the offering of the securities offered thereby under the caption "Legal
Matters." We further consent to your filing a copy of this opinion as an exhibit
to the Registration Statement.
Very truly yours,
/s/ CHAPPELL WHITE LLP
CHAPPELL WHITE LLP
Exhibit 10.14
SPECTRASCIENCE, INC.
(A MINNESOTA CORPORATION)
WARRANT TO PURCHASE __________ SHARES
OF
COMMON STOCK*
VOID AFTER MIDNIGHT, MINNEAPOLIS, MINNESOTA
TIME, ON DECEMBER 28, 1998.
No. PB122895-_____
This is the certify that, for value received, _________________________
(the "Holder") is entitled to purchase, subject to the provisions of this
Warrant, from SPECTRASCIENCE, INC., a Minnesota corporation (the "Company"), at
any time from and after the date hereof and prior to December 28, 1998, (the
"Exercise Period:), up to _________________________________ fully paid the
nonassessable shares of the Common Stock, twenty five cent par value, of the
Company ("Common Stock") , exercisable at the purchase price per share of $9.50
subject to the provisions of this Warrant. The number of shares of Common Stock
to be received upon the exercise of this Warrant and the price to be paid for a
share of Common Stock may be adjusted from time to time as hereinafter set
forth. The shares of Common Stock deliverable upon such exercise, and as
adjusted from time to time, are hereinafter sometimes referred to as "Warrant
Stock" and the exercise price of a share of Common Stock in effect at any time
and as adjusted from time to time hereinafter sometimes referred to as the
"Exercise Price." This Warrant is one of a series of Warrants identical in form
which may be issued by the Company to purchase shares of Common Stock of the
Company and the term "Warrants" as used herein means all such warrants
(including this Warrant).
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part at any
time or from time to time during the Exercise Period, but not later than
Midnight, Minnesota Time, on December 28, 1998, or if December 28, 1998 is a day
on which banking institutions are authorized by law to close, then on the next
succeeding day which shall not be such a day, by presentation and surrender
hereof to the Company or at the office of its stock transfer agent, if any, with
the Exercise Form annexed hereto duly executed and accompanied by payment of the
Exercise Price for the number of shares specified in such form, together with
all Federal and state taxes applicable upon such exercise. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office or agency of the Company,
in proper form for exercise, the Holder shall be deemed to be the Holder of
record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to the Holder.
- --------------------------------------------------------------------------------
*THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH AT THE
BOTTOM OF THE LAST PAGE HEREOF.
<PAGE>
2. RESERVATION OF SHARES. The Company hereby agrees that at all times there
shall be reserved for issuance and/or delivery upon exercise of this Warrant
such number of shares of Common Stock as shall be required for issuance or
delivery upon the exercise of this Warrant.
3. FRACTIONAL SHARES. No fractional shares or scrip representing fractional
shares shall be issued upon the exercise of this Warrant. With respect to any
fraction of a share called for upon any exercise hereof, the Company shall pay
to the Holder an amount in cash equal to such fraction multiplied by the current
market value of such fractional share, determined as follows:
3.1 If the Common Stock is listed on national securities exchange
or admitted to unlisted trading privileges on such exchange,
the current value shall be the last reported sale price of the
Common Stock on such exchange on the last business day prior
to the date of exercise of this Warrant or if no such sale is
made on such day, the average of the closing bid and asked
prices for such day on such exchange; or
3.2 If the Common Stock is not so listed or admitted to unlisted
trading privileges, current value shall be the mean of the
last reported bid and asked prices reported by bid and asked
prices reported by the National Association of Securities
Dealers Quotation System (or, if not so quoted on NASDAQ, by
the National Quotation Bureau, Inc.) on the last business day
prior to the date of the exercise of this Warrant; or
3.3 If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so
reported, the current value shall be an amount, not less than
book value, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company, such
determination to be final and binding on the Holder.
4. EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. Subject to Section 7, this Warrant
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company for other Warrants of different
denominations entitling the Holder thereof to purchase in the aggregate the same
number of shares of Common Stock purchasable hereunder. Any such assignment
shall be made by surrender of this Warrant with the Assignment Form annexed
hereto duly executed and funds sufficient to pay any transfer tax, whereupon the
Company shall, without change, execute and deliver a new Warrant in the name of
the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled. This Warrant may be divided or combined with other
Warrants which carry the same rights upon presentation hereof at the office of
the Company or at the office of its stock transfer agent, if any, together with
a written notice specifying the names and denominations in which new Warrants
are to be issued and signed by the Holder hereof The term "Warrant" issued
herein includes any Warrants issued in substitution for or replacement of this
Warrant, or into which this Warrant may be divided or exchanged. Upon receipt by
the Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Warrant, if mutilated, the Company will execute and deliver a new Warrant
of like tenor and date. Any such new Warrant executed and delivered shall
constitute an additional
2
<PAGE>
contractual obligation on the part of the Company, whether or not this Warrant
so lost, stolen, destroyed or mutilated shall be at any time enforceable by
anyone.
5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to
any rights of a shareholder in the Company, either at law or equity, and the
rights of the Holder are limited to those expressed in the Warrant and are not
enforceable against the Company, either at law or equity, except to the extent
set forth herein..
6. STOCK SPLITS, REORGANIZATION, MERGER, SALES OF ALL ASSETS.
6.1 In case the Company shall declare any dividend or other
distribution upon its outstanding capital stock payable in
capital stock or shall subdivide its outstanding shares of
capital stock into a greater number of shares, then the number
of shares of capital stock which may thereafter be purchased
upon the exercise of the rights represented hereby shall be
increased in proportion to the increase through such dividend
or subdivision and the purchase price per share shall be
decreased in such proportion. In case the Company shall at any
time combine the outstanding shares of its capital stock into
a smaller number of shares, the number of shares of capital
stock which may thereafter be purchased upon the exercise of
the rights represented hereby shall be decreased in proportion
to the increase through such combination and the purchase
price per share shall be increased in such proportion.
6.2 In case of any reclassification, capital reorganization or
other change of outstanding shares of Common Stock of the
Company (other than a change in par value, or from without par
value to par value, or from par value to without par value, or
as a result of an issuance of Common Stock by way of dividend
or other distribution or of a subdivision or combination), or
in case of any consolidation or merger of the Company with or
into another corporation (other than a merger with a
subsidiary in which merger the Company is the continuing
corporation and which does not result in any reclassification,
capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or
substantially as an entirety, the Company shall cause an
effective provision to be made so that the Holder shall have
the right thereafter, by excising this Warrant, to purchase
the kind and amount of shares of stock and other securities
and property receivable upon such reclassification, capital
reorganization or other change, consolidation, merger, sale or
conveyance, if any, which the Holder would have received had
the Warrants been exercised immediately prior to such event.
The Company shall not effect any such consolidation, merger,
or sale, unless prior to or simultaneously with the
consummation thereof the successor corporation (if other than
the Company) resulting from such consolidation or merger or
the corporation purchasing such assets shall assume by written
instrument executed and mailed or delivered to the Holder at
the last address of such Holder appearing on the books of the
Company, the obligation to deliver to such Holder such shares
of stock, securities or assets as, in accordance with the
foregoing provisions, such Holder may be entitled to purchase.
3
<PAGE>
7. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
7.1 This Warrant or the Warrant Stock or any other security issued
or issuable upon exercise of this Warrant may not be offered
or sold except in conformity with the Securities Act of 1933,
as amended, and then only against receipt of an agreement of
such person to whom such offer of sale is made to comply with
the provisions of this Section 7.1 with respect to any resale
or other disposition of such securities.
7.2 The Company may cause the following legend to be set forth on
each Warrant and certificate representing Warrant Stock or any
other security issued or issuable upon exercise of this
Warrant not theretofore distributed to the public or sold to
underwriters for distribution to the public unless counsel for
the Company is of the opinion as to any such certificate that
such legend is unnecessary:
The securities represented by this certificate may
not be offered for sale, sold or otherwise
transferred exceptpursuant to an effective
registration statement made under the Securities Act
of 1933 ("the Act"), or pursuant to an exemption from
registration under the Act.
8. REGISTRATION RIGHTS.
(a) If the Company proposes to claim an exemption under
Section 3(b) for a public offering of any of its securities or to
register under the Securities Act of 1933 (except by a claim of
exemption or registration statement on a form that does not permit the
inclusion of shares by its security holders) any of its securities, it
will give written notice to all registered holders of Warrants, and all
registered holders of shares of common stock acquired upon the exercise
of Warrants, of its intention to do so and, on the written request of
any such registered holders given within twenty (20) days after receipt
of any such notice (which request must be made within five (5) years
from the date of this Warrant), the Company will use its best efforts
to cause all such shares, the registered holders of which shall have
requested the registration or qualification thereof, to be included in
such notification or registration statement proposed to be filed by the
Company; provided, however, that nothing herein shall prevent the
Company from, at any time, abandoning or delaying any such registration
initiated by it. If any such registration shall be underwritten in
whole or in part, the Company may require that the shares requested for
inclusion pursuant to this section be included in the underwriting on
the same terms and conditions as the securities otherwise being sold
through the underwriters. In the event that, in the good faith judgment
of the managing underwriter of such public offering, the inclusion of
all of the shares originally covered by a request for registration
would reduce the number of shares to be offered by the Company or
interfere with the successful marketing of the shares of stock offered
by the Company, the number of shares otherwise to be included pursuant
to this Section in the underwritten public offering may be reduced.
Those shares which are thus excluded from the underwritten public
offering shall be withheld from the market for a period, not to exceed
90 days, which the managing underwriter reasonably determines is
necessary in order to effect the underwritten public offering. All
expenses of such offering, except the fees of special counsel to such
holders and brokers' commissions or underwriting discounts payable by
such holders, shall be borne by the Company.
4
<PAGE>
(b) Further, on one occasion only, commencing one year from
the date hereof, upon request by the holders of Warrants and/or the
holders of shares issued upon the exercise of the Warrants who
collectively (i) have the right to purchase at least 50% of the shares
subject to the Warrants, (ii) hold directly at least 50% of the shares
purchased hereunder, or (iii) have the right to purchase or hold
directly an aggregate of at least 50% of the shares purchasable or
purchased hereunder, the Company will promptly take all necessary
steps, at the option of such holders, to register or qualify the sale
of the Warrants or such shares by the holders thereof, or to register
the issuance by the Company of shares upon the exercise of Warrants,
under the Securities Act of 1933 (and, upon the request of such
holders, under Rule 415 thereunder) and such state laws as such holders
may reasonably request; provided that (i) such request must be made by
December 28, 2005, and (ii) the Company may delay the filing of any
registration statement requested pursuant to this section to a date not
more than ninety (90) days following the date of such request if in the
opinion of the Company's principal investment banker at the time of
such request such a delay is necessary in order not to adversely affect
financing efforts then underway at the Company or if in the opinion of
the Company such a delay is necessary or advisable to avoid disclosure
of material nonpublic information. The costs and expenses directly
related to any registration requested pursuant to this section,
including but not limited to legal fees of the Company's counsel, audit
fees, printing expense, filing fees and fees and expenses relating to
qualifications under state securities or blue sky laws incurred by the
Company shall be borne entirely by the Company; provided, however, that
the persons for whose account the securities covered by such
registration are sold shall bear the expenses of underwriting
commissions applicable to their shares and fees of their legal counsel.
If the holders of Warrants and the holders of shares of Common Stock
underlying the Warrants are the only persons whose shares are included
in the registration pursuant to this section, such holders shall bear
the expense of inclusion of audited financial statements in the
registration statement which are not dated as of the Company's normal
fiscal year or are not otherwise prepared by the Company for its own
business purposes. The Company shall keep effective and maintain any
registration, qualification, notification or approval specified in this
paragraph for such period as may be necessary for the holders of the
Warrants and such common stock to dispose thereof, and from time to
time shall amend or supplement, at the holder's expense, the prospectus
or offering circular used in connection therewith to the extent
necessary in order to comply with applicable law, provided that the
Company shall not be obligated to maintain any registration for a
period of more than nine (9) months.
If, at the time any written request for registration is
received by the Company pursuant to this Section 8(b), the Company has
determined to proceed with the actual preparation and filing of a
registration statement under the Securities Act in connection with the
proposed offer and sale for cash of any of its securities by it or any
of its security holders, such written request shall be deemed to have
been given pursuant to Section 8(a) hereof rather than this Section
8(b), and the rights of the holders of Warrants and or shares issued
upon the exercise of the Warrants covered by such written request shall
be governed by Section 8(a) hereof.
The managing underwriter of an offering registered pursuant to
this Section 8(b), if any, shall be selected by the holders of a
majority of the Warrants and/or shares issued upon the exercise of the
Warrants for which registration has been requested and shall be
reasonably acceptable to the Company. Without the written consent of
the holders of a
5
<PAGE>
majority of the Warrants and/or shares issued upon exercise of the
Warrants for which registration has been requested pursuant to this
Section 8(b), neither the Company nor any other holder of securities of
the Company may include securities in such registration if in the good
faith judgment of the managing underwriter of such public offering the
inclusion of such securities would interfere with the successful
marketing of the Warrants and/or shares issued upon the exercise of the
Warrants or require the exclusion of any portion of the Warrants and/or
shares issued upon the exercise of the Warrants to be registered.
Subject to the preceding sentence, shares to be excluded from an
underwritten public offering shall be selected in the manner provided
in Section 8(a) hereof.
(c) If and whenever the Company is required by the provisions
of Section 8(a) or 8(b) hereof to effect the registration of Warrants
and/or shares issued upon the exercise of the Warrants under the
Securities Act, the Company will:
(i) prepare and file with the Commission a
registration statement with respect to such securities, and
use its best efforts to cause such registration statement to
become and remain effective for such period as may be
reasonably necessary to effect the sale of such securities;
(ii) prepare and file with the Commission such
amendments to such registration statement and supplements to
the prospectus contained therein as may be necessary to keep
such registration statement effective for such period as may be
reasonably necessary to effect the sale of such securities;
(iii) furnish to the security holders participating
in such registration and to the underwriters of the securities
being registered such reasonable number of copies of the
registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may
reasonably request in order to facilitate the public offering
of such securities;
(iv) use its best efforts to register or qualify the
securities covered by such registration statement under such
state securities or blue sky laws of such jurisdictions as
such participating holders may reasonably request in writing
within 30 days following the original filing of such
registration statement, except that the Company shall not for
any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so
qualified;
(v) notify the security holders participating in such
registration, promptly after it shall receive notice thereof,
of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of
such registration statement has been filed;
(vi) notify such holders promptly of any request by
the Commission for the amending or supplementing of such
registration statement or prospectus or for additional
information;
(vii) prepare and file with the Commission, promptly
upon the request of any such holders, any amendments or
supplements to such registration statement or
6
<PAGE>
prospectus which, in the opinion of counsel for such holders
(and concurred in by counsel for the Company), is required
under the Securities Act or the rules and regulations
thereunder in connection with the distribution of the Warrants
or shares by such holder;
(viii) prepare and promptly file with the Commission
and promptly notify such holders of the filing of such
amendment or supplement to such registration statement or
prospectus as may be necessary to correct any statements or
omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities
Act, any event shall have occurred as the result of which any
such prospectus or any other prospectus as then in effect
would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements
therein, in the light of the circumstances in which they were
made, not misleading;
(ix) advise such holders, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of
any stop order by the Commission suspending the effectiveness
of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly
use its best efforts to prevent the issuance of any stop order
or to obtain its withdrawal if such stop order should be
issued;
(x) not file any amendment or supplement to such
registration statement or prospectus to which a majority in
interest of such holders shall have reasonably objected on the
grounds that such amendment or supplement does not comply in
all material respects with the requirements of the Securities
Act or the rules and regulations thereunder, after having been
furnished with a copy thereof at least five business days
prior to the filing thereof, unless in the opinion of counsel
for the Company the filing of such amendment or supplement is
reasonably necessary to protect the Company from any
liabilities under any applicable federal or state law and such
filing will not violate applicable law; and
(xi) at the request of any such holder, furnish on
the effective date of the registration statement and, if such
registration includes an underwritten public offering, at the
closing provided for in the underwriting agreement: (i)
opinions, dated such respective dates, of the counsel
representing the Company for the purposes of such
registration, addressed to the underwriters, if any, and to
the holder or holders making such request, covering such
matters as such underwriters and holder or holders may
reasonably request; and (ii) letters, dated such respective
dates, from the independent certified public accountants of
the Company, addressed to the underwriters, if any, and to the
holder or holders making such request, covering such matters
as such underwriters and holder or holders may reasonably
request, in which letter such accountants shall state (without
limiting the generality of the foregoing) that they are
independent certified public accountants with the meaning of
the Securities Act and that in the opinion of such accountants
the financial statements and other financial data of the
Company included in the registration statement or the
prospectus or any amendment or supplement thereto comply in
all material respects with the applicable accounting
requirements of the Securities Act.
7
<PAGE>
(d) The Company hereby indemnifies the holder of this Warrant
and of any common stock issued or issuable hereunder, its officers and
director, and any person who controls such Warrant holder or such
holder of common stock within the meaning of Section 15 of the
Securities Act of 1933, against all losses, claims, damages and
liabilities caused by any untrue statement of a material fact contained
in any registration statement, prospectus, notification or offering
circular (and as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary
prospectus or caused by any omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading except insofar as such losses, claims, damages
or liabilities are caused by any untrue statement or omission contained
in information furnished in writing to the Company by such Warrant
holder or such holder of common stock expressly for use therein, and
each such holder by its acceptance hereof severally agrees that it will
indemnify and hold harmless the Company and each of its officers who
signs such registration statement and each of its directors and each
person, if any, who controls the Company within the meaning of Section
15 of the Securities Act of 1933 with respect to losses, claims,
damages or liabilities which are caused by any untrue statement or
omission contained in information furnished in writing to the Company
by such holder expressly for use therein.
9. APPLICABLE LAW. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Minnesota.
DATED: _________________________
SPECTRASCIENCE, INC.,
By:
------------------------------------
Brian T. McMahon
Its: President & CEO
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE
COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
8
<PAGE>
AMENDMENT TO WARRANT
This Amendment to Warrant ("Amendment"), dated December 28, 1998,
amends that certain warrant, No. PB122895-_____ dated December 28, 1995, issued
by SPECTRASCIENCE, Inc. ("the Company") to ____________ (the "Holder") that
entitles the Holder to the right to purchase _______ shares of common stock, par
value $0.25, of the Company ("Common Stock"), at an exercise price of $9.50 per
share, prior to midnight, Minneapolis, Minnesota time on December 28, 1998 (the
"Warrant"), subject to all the provisions of the Warrant.
WHEREAS, the Company deems it in the best interest of the Company to
modify the terms of the Warrant to encourage the exercise of the Wararnts;
NOW, THEREFORE, in consideration of the above, the Warrant is amended
as follows:
* The first sentence of the first paragraph of the Warrant shall
read as follows:
This is to certify that, for value received, _______________
(the "Holder") is entitled to purchase, subject to provisions of this
Warrant, from SPECTRASCIENCE, Inc., a Minnesota corporation (the
"Company"), at any time from and after the date hereof and prior to
January 25, 1999, (the "Exercise Period"), up to ________________ fully
paid non-assessable shares of the Common Stock, twenty-five cent par
value, of the Company ("Common Stock"), exercisable at the purchase
price per share of $6.00, subject to provisions of this Warrant.
* All other references to December 28, 1998 throughout the
Warrant will be modified to read January 25, 1999.
* All other provisions of the Warrant remain unchanged.
This Amendment must be attached to the front of the Warrant and becomes
an integral part of the Warrant. The Warrant together with this
Amendment must be submitted to the Company if and when it is exercised.
IN WITNESS WHEREOF, this Amendment was executed the day and year first
above written.
SPECTRASCIENCE, Inc.
-------------------------
Chester E. Sievert, Jr.
President
Exhibt 10.15
SPECTRASCIENCE, INC.
WARRANT TO PURCHASE SHARES OF COMMON STOCK*
Void After Midnight, Central Standard Time, December 28, 1999
No. PB122898-_____
This is to certify that, for value received, _________________________
(the "Holder") is entitled to purchase, subject to the provisions of this
Warrant, from SPECTRASCIENCE, Inc., a Minnesota corporation (the "Company"), at
any time from and after the date hereof and prior to December 28, 1999, (the
"Exercise Period"), fully paid non-assessable shares of the Common Stock,
twenty-five cent par value, of the Company ("Common Stock"), exercisable at the
purchase price per share of $6.00, subject to the provisions of this Warrant.
The number of shares subject to exercise under this warrant shall be equivalent
to the number of shares of Common Stock purchased by exercising that certain
warrant, PB122895-____, dated December 28, 1995, as amended December 28, 1998.
The number of shares of Common Stock to be received upon the exercise of this
Warrant and the price to be paid for a share of Common Stock may be adjusted
from time to time as hereinafter set forth. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Stock" and the exercise price of a
share of Common Stock in effect at any time and as adjusted from time to time,
is hereinafter sometimes referred to as the "Exercise Price." This Warrant is
one of a series of Warrants, identical in form, which may be issued by the
Company to purchase shares of Common Stock of the Company; and the term
"Warrants" as used herein means all such warrants (including this Warrant).
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part, at
any time or from time to time, during the Exercise Period, but not later than
Midnight, Central Standard Time, on December 28, 1999, by presentation and
surrender to the Company or its stock transfer agent, if any, together with the
Exercise Form attached hereto, duly executed, and payment of the Exercise Price
for the number of shares specified in such form along with all federal and state
taxes applicable upon such exercise. If December 28, 1999 is a day on which
banking institutions are authorized by law to close, this Warrant may then be
exercised on the first day thereafter which shall not be such a day. If this
Warrant should be exercised in part only, the Company shall, upon surrender of
this Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares purchasable hereunder.
Upon receipt by the Company of this Warrant at the office or agency of the
Company, in proper form for exercise, the Holder shall be deemed to be the
Holder of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to the Holder.
- --------------------------------------------------------------------------------
*THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH AT THE
BOTTOM OF THE LAST PAGE HEREOF.
<PAGE>
2. RESERVATION OF SHARES. The Company hereby agrees that at all times there
shall be reserved for issuance and/or delivery upon exercise of this Warrant
such number of shares of Common Stock as shall be required for issuance or
delivery upon the exercise of this Warrant.
3. FRACTIONAL SHARES. No fractional shares or scrip representing fractional
shares shall be issued upon the exercise of this Warrant. With respect to any
fraction of a share called for upon any exercise hereof, the Company shall pay
to the Holder an amount in cash equal to such fraction multiplied by the current
market value of such fractional share, determined as follows:
3.1 If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange, the current value
shall be the last reported sale price of the Common Stock on such exchange
on the last business day prior to the date of exercise of this Warrant. If
no sale is made on such day, the current value shall be the average of the
closing bid and asked prices for such day on such exchange; or
3.2 If the Common Stock is not listed on a national securities exchange or
admitted to unlisted trading privileges, the current value shall be the
mean of the last reported bid and asked prices reported by the National
Association of Securities Dealers Quotation System (or, if not so quoted on
NASDAQ, by the National Quotation Bureau, Inc.) on the last business day
prior to the date of the exercise of this Warrant; or
3.3 If the Common Stock is not listed on a national securities exchange or
admitted to unlisted trading privileges, and bid and asked prices are not
so reported, the current value shall be an amount, not less than book
value, determined in such reasonable manner as may be prescribed by the
Board of Directors of the Company. Such determination will be final and
binding on the Holder.
4. EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. Subject to Section 7, this Warrant
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company, for other Warrants of different
denominations entitling the Holder thereof to purchase in the aggregate, the
same number of shares of Common Stock purchasable hereunder. Any such assignment
shall be made by surrender of this Warrant together with the Assignment Form
attached hereto, duly executed, and funds sufficient to pay any transfer tax.
The Company shall, without change, execute and deliver a new Warrant in the name
of the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled. This Warrant may be divided or combined with other
Warrants which carry the same rights, upon surrender hereof of all affected
Warrants, at the office of the Company or its stock transfer agent, if any,
together with a written notice, signed by the Holder of such affected Warrants,
specifying the names and denominations in which new Warrants are to be issued.
The term "Warrant" as used herein includes any Warrants issued in substitution
for or replacement of this Warrant, or into which this Warrant may be divided or
exchanged. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and of reasonably
satisfactory indemnification in the case of loss, theft or destruction, or upon
surrender and cancellation of this Warrant if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not
Page 2 of 8
<PAGE>
this Warrant is lost, stolen, destroyed or mutilated, and shall be enforceable
at any time by anyone.
5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to
any rights of a shareholder in the Company, either at law or equity, and the
rights of the Holder are limited to those expressed in the Warrant and are not
enforceable against the Company, either at law or equity, except to the extent
set forth herein.
6. STOCK SPLITS, REORGANIZATION, MERGER, SALE OF ALL ASSETS.
6.1 In case the Company shall declare any dividend or other distribution
upon its outstanding common stock payable in common stock, or shall
subdivide its outstanding shares of common stock into a greater number of
shares, then the number of shares of common stock which may thereafter be
purchased upon the exercise of the rights represented hereby, shall be
increased in proportion to the increase through such dividend or
subdivision and the purchase price per share shall be decreased in such
proportion. In case the Company shall at any time combine the outstanding
shares of its common stock into a smaller number of shares, the number of
shares of common stock which may thereafter be purchased upon the exercise
of the rights represented hereby, shall be decreased in proportion to the
decrease through such combination and the purchase price per share shall be
increased in such proportion.
6.2 In case of any reclassification, capital reorganization or other change
of outstanding shares of Common Stock of the Company (other than a change
in par value, or from without par value to par value, or from par value to
without par value, or as a result of an issuance of Common Stock by way of
dividend or other distribution or of a subdivision or combination), or in
case of any consolidation or merger of the Company with or into another
corporation (other than a merger with a subsidiary in which merger the
Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise of this Warrant)
or in case of any sale or conveyance to another corporation of the property
of the Company as an entirety or substantially as an entirety, the Company
shall cause an effective provision to be made so that the Holder shall have
the right thereafter, by exercising this Warrant, to purchase the kind and
amount of shares of stock and other securities and property receivable upon
such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance, if any, which the Holder would
have received had the Warrants been exercised immediately prior to such
event.
The Company shall not effect any such consolidation, merger, or
sale, unless prior to or simultaneously with the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument executed and mailed or delivered to the Holder
at the last address of such Holder appearing on the books of the Company,
the obligation to deliver to such Holder such shares of stock, securities
or assets as, in accordance with the foregoing provisions, such Holder may
be entitled to purchase.
Page 3 of 8
<PAGE>
7. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933
7.1 This Warrant or the Warrant Stock or any other security issued or
issuable upon exercise of this Warrant may not be offered or sold except in
conformity with the Securities Act of 1933, as amended, and then, only
against receipt of an agreement from the person to whom such offer of sale
is made to comply with the provisions of this Section 7.1 with respect to
any resale or other disposition of such securities.
7.2 The Company may cause the following legend to be set forth on each
Warrant and certificate representing Warrant Stock or any other security
issued or issuable upon exercise of this Warrant not theretofore
distributed to the public or sold to underwriters for distribution to the
public unless counsel for the Company is of the opinion as to any such
certificate that such legend is unnecessary:
The securities represented by this certificate may not be
offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement made under the
Securities Act of 1933 ("the Act"), or pursuant to an
exemption from registration under the Act.
8. REGISTRATION RIGHTS
8.1 If the Company proposes to claim an exemption under Section 3(b) for a
public offering of any of its securities or to register under the
Securities Act of 1933 (except by a claim of exemption or registration
statement on a form that does not permit the inclusion of shares by its
security holders) any of its securities, it will give written notice to all
registered holders of Warrants, and all registered holders of shares of
common stock acquired upon the exercise of Warrants, of its intention to do
so and, on the written request of any such registered holders given within
twenty (20) days after receipt of any such notice (which request must be
made within five (5) years from the date of this Warrant), the Company will
use its best efforts to cause all such shares, the registered holders of
which shall have requested the registration or qualification thereof, to be
included in such notification or registration statement proposed to be
filed by the Company; provided, however, that nothing herein shall prevent
the Company from, at any time, abandoning or delaying any such registration
initiated by it. If any such registration shall be underwritten in whole or
in part, the Company may require that the shares requested for inclusion
pursuant to this section be included in the underwriting on the same terms
and conditions as the securities otherwise being sold through the
underwriters. In the event that, in the good faith judgment of the managing
underwriter of such public offering, the inclusion of all of the shares
originally covered by a request for registration would reduce the number of
shares to be offered by the Company or interfere with the successful
marketing of the shares of stock offered by the Company, the number of
shares otherwise to be included pursuant to this Section in the
underwritten public offering may be reduced. Those shares which are thus
excluded from the underwritten public offering shall be withheld from the
market for a period, not to exceed 90 days, which the managing underwriter
reasonably determines is necessary in order to effect the underwritten
public offering. All expenses of such offering, except the fees of special
counsel to such holders and brokers' commissions or underwriting discounts
payable by such holders, shall be borne by the Company.
Page 4 of 8
<PAGE>
8.2 Further, on one occasion only, commencing one year from the date
hereof, upon request by the holders of Warrants and/or the holders of
shares issued upon the exercise of the Warrants who collectively (i) have
the right to purchase at least 50% of the shares subject to the Warrants,
(ii) hold directly at least 50% of the shares purchased hereunder, or (iii)
have the right to purchase or hold directly an aggregate of at least 50% of
the shares purchasable or purchased hereunder, the Company will promptly
take all necessary steps, at the option of such holders, to register or
qualify the sale of the Warrants or such shares by the holders thereof, or
to register the issuance by the Company of shares upon the exercise of
Warrants, under the Securities Act of 1933 (and, upon the request of such
holders, under Rule 415 thereunder) and such state laws as such holders may
reasonably request; provided that (i) such request must be made by December
28, 2003, and (ii) the Company may delay the filing of any registration
statement requested pursuant to this section to a date not more than ninety
(90) days following the date of such request if in the opinion of the
Company's principal investment banker at the time of such request such a
delay is necessary in order not to adversely affect financing efforts then
underway at the Company or if in the opinion of the Company such a delay is
necessary or advisable to avoid disclosure of material nonpublic
information. The costs and expenses directly related to any registration
requested pursuant to this section, including but not limited to legal fees
of the Company's counsel, audit fees, printing expense, filing fees and
fees and expenses relating to qualifications under state securities or blue
sky laws incurred by the Company shall be borne entirely by the Company;
provided, however, that the persons for whose account the securities
covered by such registration are sold shall bear the expenses of
underwriting commissions applicable to their shares and fees of their legal
counsel. If the holders of Warrants and the holders of shares of Common
Stock underlying the Warrants are the only persons whose shares are
included in the registration pursuant to this section, such holders shall
bear the expense of inclusion of audited financial statements in the
registration statement which are not dated as of the Company's normal
fiscal year or are not otherwise prepared by the Company for its own
business purposes. The Company shall keep effective and maintain any
registration, qualification, notification or approval specified in this
paragraph for such period as may be necessary for the holders of the
Warrants and such common stock to dispose thereof, and from time to time
shall amend or supplement, at the holder's expense, the prospectus or
offering circular used in connection therewith to the extent necessary in
order to comply with applicable law, provided that the Company shall not be
obligated to maintain any registration for a period of more than nine (9)
months.
If, at the time any written request for registration is received
by the Company pursuant to this Section 8.2, the Company has determined to
proceed with the actual preparation and filing of a registration statement
under the Securities Act in connection with the proposed offer and sale for
cash of any of its securities by it or any of its security holders, such
written request shall be deemed to have been given pursuant to Section 8.1
hereof rather than this Section 8.2, and the rights of the holders of
Warrants and or shares issued upon the exercise of the Warrants covered by
such written request shall be governed by Section 8.1 hereof.
The managing underwriter of an offering registered pursuant to
this Section 8.2, if any, shall be selected by the holders of a majority of
the Warrants and/or shares issued upon
Page 5 of 8
<PAGE>
the exercise of the Warrants for which registration has been requested and
shall be reasonably acceptable to the Company. Without the written consent
of the holders of a majority of the Warrants and/or shares issued upon
exercise of the Warrants for which registration has been requested
pursuant to this Section 8.2, neither the Company nor any other holder of
securities of the Company may include securities in such registration if
in the good faith judgment of the managing underwriter of such public
offering the inclusion of such securities would interfere with the
successful marketing of the Warrants and/or shares issued upon the
exercise of the Warrants or require the exclusion of any portion of the
Warrants and/or shares issued upon the exercise of the Warrants to be
registered. Subject to the preceding sentence, shares to be excluded from
an underwritten public offering shall be selected in the manner provided
in Section 8.1 hereof.
8.3 If and whenever the Company is required by the provisions of Sections
8.1 or 8.2 hereof to effect the registration of Warrants and/or shares
issued upon the exercise of the Warrants under the Securities Act, the
Company will:
(i) prepare and file with the Commission a registration
statement with respect to such securities, and use its best
efforts to cause such registration statement to become and remain
effective for such period as may be reasonably necessary to effect
the sale of such securities;
(ii) prepare and file with the Commission such amendments
to such registration statement and supplements to the prospectus
contained therein as may be necessary to keep such registration
statement effective for such period as may be reasonably necessary
to effect the sale of such securities;
(iii) furnish to the security holders participating in
such registration and to the underwriters of the securities being
registered such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus and such other
documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(iv) use its best efforts to register or qualify the
securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as such
participating holders may reasonably request in writing within 30
days following the original filing of such registration statement,
except that the Company shall not for any purpose be required to
execute a general consent to service of process or to qualify to
do business as a foreign corporation in any jurisdiction wherein
it is not so qualified;
(v) notify the security holders participating in such
registration, promptly after it shall receive notice thereof, of
the time when such registration statement has become effective or
a supplement to any prospectus forming a part of such registration
statement has been filed;
Page 6 of 8
<PAGE>
(vi) notify such holders promptly of any request by the
Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) prepare and file with the Commission, promptly upon the
request of any such holders, any amendments or supplements to such
registration statement or prospectus which, in the opinion of
counsel for such holders (and concurred in by counsel for the
Company), is required under the Securities Act or the rules and
regulations thereunder in connection with the distribution of the
Warrants or shares by such holder;
(viii) prepare and promptly file with the Commission and
promptly notify such holders of the filing of such amendment or
supplement to such registration statement or prospectus as may be
necessary to correct any statements or omissions if, at the time
when a prospectus relating to such securities is required to be
delivered under the Securities Act, any event shall have occurred as
the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances in which they were made,
not misleading;
(ix) advise such holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop
order by the Commission suspending the effectiveness of such
registration statement or the initiation or threatening of any
proceeding for that purpose and promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal
if such stop order should be issued;
(x) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such
holders shall have reasonably objected on the grounds that such
amendment or supplement does not comply in all material respects
with the requirements of the Securities Act or the rules and
regulations thereunder, after having been furnished with a copy
thereof at least five business days prior to the filing thereof,
unless in the opinion of counsel for the Company the filing of such
amendment or supplement is reasonably necessary to protect the
Company from any liabilities under any applicable federal or state
law and such filing will not violate applicable law; and
(xi) at the request of any such holder, furnish on the
effective date of the registration statement and, if such
registration includes an underwritten public offering, at the
closing provided for in the underwriting agreement: (i) opinions,
dated such respective dates, of the counsel representing the Company
for the purposes of such registration, addressed to the
underwriters, if any, and to the holder or holders making such
request, covering such matters as such underwriters and holder or
holders may reasonably request; and (ii) letters, dated such
respective dates, from the independent certified public accountants
of the Company, addressed to the underwriters, if any, and to the
holder or holders making such request, covering such matters as such
underwriters and holder or holders may reasonably request, in which
Page 7 of 8
<PAGE>
letter such accountants shall state (without limiting the generality
of the foregoing) that they are independent certified public
accountants with the meaning of the Securities Act and that in the
opinion of such accountants the financial statements and other
financial data of the Company included in the registration statement
or the prospectus or any amendment or supplement thereto comply in
all material respects with the applicable accounting requirements of
the Securities Act.
8.4 The Company hereby indemnifies the holder of this Warrant and of any
common stock issued or issuable hereunder, its officers and directors, and
any person who controls such Warrant holder or such holder of common stock
within the meaning of Section 15 of the Securities Act of 1933, against all
losses, claims, damages and liabilities caused by any untrue statement of a
material fact contained in any registration statement, prospectus,
notification or offering circular (and as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus or caused by any omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading except insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or omission
contained in information furnished in writing to the Company by such
Warrant holder or such holder of common stock expressly for use therein,
and each such holder by its acceptance hereof severally agrees that it will
indemnify and hold harmless the Company and each of its officers who signs
such registration statement and each of its directors and each person, if
any, who controls the Company within the meaning of Section 15 of the
Securities Act of 1933 with respect to losses, claims, damages or
liabilities which are caused by any untrue statement or omission contained
in information furnished in writing to the Company by such holder expressly
for use therein.
9. APPLICABLE LAW. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Minnesota.
DATED: December 28, 1998
SPECTRASCIENCE, INC.
------------------------------
Chester E. Sievert, Jr.
President and CEO
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE
COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Page 8 of 8
<PAGE>
AMENDMENT TO WARRANT
This Amendment to Warrant ("Amendment"), dated December 21, 1999, amends
that certain warrant, No. PB122898-____ dated December 28, 1998, issued by
SPECTRASCIENCE, Inc. ("the Company") to _______________ (the "Holder") that
entitles the Holder to the right to purchase _______________ shares of common
stock, par value $0.25, of the Company ("Common Stock"), at an exercise price of
$6.00 per share, prior to midnight, Minneapolis, Minnesota time on December 28,
1999 (the "Warrant"), subject to all the provisions of the Warrant.
WHEREAS, the Company deems it in the best interest of the Company to
modify the terms of the Warrants;
NOW, THEREFORE, in consideration of the above, the Warrant is amended as
follows:
* The first sentence of the first paragraph of the Warrant shall read
as follows:
This is to certify that, for value received, ___________ (the
"Holder") is entitled to purchase, subject to provisions of this
Warrant, from SPECTRASCIENCE, Inc., a Minnesota corporation (the
"Company"), at any time from and after the date hereof and prior to
June 28, 2000, (the "Exercise Period"), fully paid non-assessable
shares of the Common Stock, twenty-five cent par value, of the
Company ("Common Stock"), exercisable at the purchase price per
share of $6.00, subject to provisions of this Warrant.
* All other references to December 28, 1999 throughout the Warrant
will be modified to read June 28, 2000.
* All other provisions of the Warrant remain unchanged.
This Amendment must be attached to the front of the Warrant and becomes an
integral part of the Warrant. The Warrant together with this Amendment
must be submitted to the Company if and when it is exercised.
IN WITNESS WHEREOF, this Amendment was executed the day and year first
above written.
SPECTRASCIENCE, Inc.
-----------------------------
Chester E. Sievert, Jr.
President
Exhibit 10.16
SPECTRASCIENCE, INC.
WARRANT TO PURCHASE SHARES OF COMMON STOCK*
Void After Midnight, Central Standard Time, March 12, 2002
No. 0399-____
This is to certify that, for value received, ______________________(the
"Holder") is entitled to purchase, subject to the provisions of this Warrant,
from SPECTRASCIENCE, Inc., a Minnesota corporation (the "Company"), at any time
from and after the date hereof and prior to March 12, 2002, (the "Exercise
Period"), up to ________________ fully paid non-assessable shares of the Common
Stock, twenty-five cent par value, of the Company ("Common Stock"), exercisable
at the purchase price per share of $5.00, subject to the provisions of this
Warrant. The number of shares of Common Stock to be received upon the exercise
of this Warrant and the price to be paid for a share of Common Stock may be
adjusted from time to time as hereinafter set forth. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Stock" and the exercise price of a
share of Common Stock in effect at any time and as adjusted from time to time,
is hereinafter sometimes referred to as the "Exercise Price." This Warrant is
one of a series of Warrants, identical in form, which may be issued by the
Company to purchase shares of Common Stock of the Company; and the term
"Warrants" as used herein means all such warrants (including this Warrant).
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part, at
any time or from time to time, during the Exercise Period, but not later than
Midnight, Central Standard Time, on March 12, 2002, by presentation and
surrender to the Company or its stock transfer agent, if any, together with the
Exercise Form attached hereto, duly executed, and payment of the Exercise Price
for the number of shares specified in such form along with all federal and state
taxes applicable upon such exercise. If March 12, 2002 is a day on which banking
institutions are authorized by law to close, this Warrant may then be exercised
on the first day thereafter which shall not be such a day. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office or agency of the Company,
in proper form for exercise, the Holder shall be deemed to be the Holder of
record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to the Holder.
- --------------------------------------------------------------------------------
*THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH AT THE
BOTTOM OF THE LAST PAGE HEREOF.
Page 1 of 8
<PAGE>
2. RESERVATION OF SHARES. The Company hereby agrees that at all times there
shall be reserved for issuance and/or delivery upon exercise of this Warrant
such number of shares of Common Stock as shall be required for issuance or
delivery upon the exercise of this Warrant.
3. FRACTIONAL SHARES. No fractional shares or scrip representing fractional
shares shall be issued upon the exercise of this Warrant. With respect to any
fraction of a share called for upon any exercise hereof, the Company shall pay
to the Holder an amount in cash equal to such fraction multiplied by the current
market value of such fractional share, determined as follows:
3.1 If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange, the current value
shall be the last reported sale price of the Common Stock on such exchange
on the last business day prior to the date of exercise of this Warrant. If
no sale is made on such day, the current value shall be the average of the
closing bid and asked prices for such day on such exchange; or
3.2 If the Common Stock is not listed on a national securities exchange or
admitted to unlisted trading privileges, the current value shall be the
mean of the last reported bid and asked prices reported by the National
Association of Securities Dealers Quotation System (or, if not so quoted on
NASDAQ, by the National Quotation Bureau, Inc.) on the last business day
prior to the date of the exercise of this Warrant; or
3.3 If the Common Stock is not listed on a national securities exchange or
admitted to unlisted trading privileges, and bid and asked prices are not
so reported, the current value shall be an amount, not less than book
value, determined in such reasonable manner as may be prescribed by the
Board of Directors of the Company. Such determination will be final and
binding on the Holder.
4. EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. Subject to Section 7, this Warrant
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company, for other Warrants of different
denominations entitling the Holder thereof to purchase in the aggregate, the
same number of shares of Common Stock purchasable hereunder. Any such assignment
shall be made by surrender of this Warrant together with the Assignment Form
attached hereto, duly executed, and funds sufficient to pay any transfer tax.
The Company shall, without change, execute and deliver a new Warrant in the name
of the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled. This Warrant may be divided or combined with other
Warrants which carry the same rights, upon surrender hereof of all affected
Warrants, at the office of the Company or its stock transfer agent, if any,
together with a written notice, signed by the Holder of such affected Warrants,
specifying the names and denominations in which new Warrants are to be issued.
The term "Warrant" as used herein includes any Warrants issued in substitution
for or replacement of this Warrant, or into which this Warrant may be divided or
exchanged. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and of reasonably
satisfactory indemnification in the case of loss, theft or destruction, or upon
surrender and cancellation of this Warrant if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not
Page 2 of 8
<PAGE>
this Warrant is lost, stolen, destroyed or mutilated, and shall be enforceable
at any time by anyone.
5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to
any rights of a shareholder in the Company, either at law or equity, and the
rights of the Holder are limited to those expressed in the Warrant and are not
enforceable against the Company, either at law or equity, except to the extent
set forth herein.
6. STOCK SPLITS, REORGANIZATION, MERGER, SALE OF ALL ASSETS.
6.1 In case the Company shall declare any dividend or other distribution
upon its outstanding common stock payable in common stock, or shall
subdivide its outstanding shares of common stock into a greater number of
shares, then the number of shares of common stock which may thereafter be
purchased upon the exercise of the rights represented hereby, shall be
increased in proportion to the increase through such dividend or
subdivision and the purchase price per share shall be decreased in such
proportion. In case the Company shall at any time combine the outstanding
shares of its common stock into a smaller number of shares, the number of
shares of common stock which may thereafter be purchased upon the exercise
of the rights represented hereby, shall be decreased in proportion to the
decrease through such combination and the purchase price per share shall be
increased in such proportion.
6.2 In case of any reclassification, capital reorganization or other change
of outstanding shares of Common Stock of the Company (other than a change
in par value, or from without par value to par value, or from par value to
without par value, or as a result of an issuance of Common Stock by way of
dividend or other distribution or of a subdivision or combination), or in
case of any consolidation or merger of the Company with or into another
corporation (other than a merger with a subsidiary in which merger the
Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise of this Warrant)
or in case of any sale or conveyance to another corporation of the property
of the Company as an entirety or substantially as an entirety, the Company
shall cause an effective provision to be made so that the Holder shall have
the right thereafter, by exercising this Warrant, to purchase the kind and
amount of shares of stock and other securities and property receivable upon
such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance, if any, which the Holder would
have received had the Warrants been exercised immediately prior to such
event.
The Company shall not effect any such consolidation, merger, or
sale, unless prior to or simultaneously with the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument executed and mailed or delivered to the Holder
at the last address of such Holder appearing on the books of the Company,
the obligation to deliver to such Holder such shares of stock, securities
or assets as, in accordance with the foregoing provisions, such Holder may
be entitled to purchase.
Page 3 of 8
<PAGE>
7. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933
7.1 This Warrant or the Warrant Stock or any other security issued or
issuable upon exercise of this Warrant may not be offered or sold except in
conformity with the Securities Act of 1933, as amended, and then, only
against receipt of an agreement from the person to whom such offer of sale
is made to comply with the provisions of this Section 7.1 with respect to
any resale or other disposition of such securities.
7.2 The Company may cause the following legend to be set forth on each
Warrant and certificate representing Warrant Stock or any other security
issued or issuable upon exercise of this Warrant not theretofore
distributed to the public or sold to underwriters for distribution to the
public unless counsel for the Company is of the opinion as to any such
certificate that such legend is unnecessary:
The securities represented by this certificate may not be
offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement made under the
Securities Act of 1933 ("the Act"), or pursuant to an
exemption from registration under the Act.
8. REGISTRATION RIGHTS
8.1 If the Company proposes to claim an exemption under Section 3(b) for a
public offering of any of its securities or to register under the
Securities Act of 1933 (except by a claim of exemption or registration
statement on a form that does not permit the inclusion of shares by its
security holders) any of its securities, it will give written notice to all
registered holders of Warrants, and all registered holders of shares of
common stock acquired upon the exercise of Warrants, of its intention to do
so and, on the written request of any such registered holders given within
twenty (20) days after receipt of any such notice (which request must be
made within five (5) years from the date of this Warrant), the Company will
use its best efforts to cause all such shares, the registered holders of
which shall have requested the registration or qualification thereof, to be
included in such notification or registration statement proposed to be
filed by the Company; provided, however, that nothing herein shall prevent
the Company from, at any time, abandoning or delaying any such registration
initiated by it. If any such registration shall be underwritten in whole or
in part, the Company may require that the shares requested for inclusion
pursuant to this section be included in the underwriting on the same terms
and conditions as the securities otherwise being sold through the
underwriters. In the event that, in the good faith judgment of the managing
underwriter of such public offering, the inclusion of all of the shares
originally covered by a request for registration would reduce the number of
shares to be offered by the Company or interfere with the successful
marketing of the shares of stock offered by the Company, the number of
shares otherwise to be included pursuant to this Section in the
underwritten public offering may be reduced. Those shares which are thus
excluded from the underwritten public offering shall be withheld from the
market for a period, not to exceed 90 days, which the managing underwriter
reasonably determines is necessary in order to effect the underwritten
public offering. All expenses of such offering, except the fees of special
counsel to such holders and brokers' commissions or underwriting discounts
payable by such holders, shall be borne by the Company.
Page 4 of 8
<PAGE>
8.2 Further, on one occasion only, commencing one year from the date
hereof, upon request by the holders of Warrants and/or the holders of
shares issued upon the exercise of the Warrants who collectively (i) have
the right to purchase at least 50% of the shares subject to the Warrants,
(ii) hold directly at least 50% of the shares purchased hereunder, or (iii)
have the right to purchase or hold directly an aggregate of at least 50% of
the shares purchasable or purchased hereunder, the Company will promptly
take all necessary steps, at the option of such holders, to register or
qualify the sale of the Warrants or such shares by the holders thereof, or
to register the issuance by the Company of shares upon the exercise of
Warrants, under the Securities Act of 1933 (and, upon the request of such
holders, under Rule 415 thereunder) and such state laws as such holders may
reasonably request; provided that (i) such request must be made by March
10, 2001, and (ii) the Company may delay the filing of any registration
statement requested pursuant to this section to a date not more than ninety
(90) days following the date of such request if in the opinion of the
Company's principal investment banker at the time of such request such a
delay is necessary in order not to adversely affect financing efforts then
underway at the Company or if in the opinion of the Company such a delay is
necessary or advisable to avoid disclosure of material nonpublic
information. The costs and expenses directly related to any registration
requested pursuant to this section, including but not limited to legal fees
of the Company's counsel, audit fees, printing expense, filing fees and
fees and expenses relating to qualifications under state securities or blue
sky laws incurred by the Company shall be borne entirely by the Company;
provided, however, that the persons for whose account the securities
covered by such registration are sold shall bear the expenses of
underwriting commissions applicable to their shares and fees of their legal
counsel. If the holders of Warrants and the holders of shares of Common
Stock underlying the Warrants are the only persons whose shares are
included in the registration pursuant to this section, such holders shall
bear the expense of inclusion of audited financial statements in the
registration statement which are not dated as of the Company's normal
fiscal year or are not otherwise prepared by the Company for its own
business purposes. The Company shall keep effective and maintain any
registration, qualification, notification or approval specified in this
paragraph for such period as may be necessary for the holders of the
Warrants and such common stock to dispose thereof, and from time to time
shall amend or supplement, at the holder's expense, the prospectus or
offering circular used in connection therewith to the extent necessary in
order to comply with applicable law, provided that the Company shall not be
obligated to maintain any registration for a period of more than nine (9)
months.
If, at the time any written request for registration is received
by the Company pursuant to this Section 8.2, the Company has determined to
proceed with the actual preparation and filing of a registration statement
under the Securities Act in connection with the proposed offer and sale for
cash of any of its securities by it or any of its security holders, such
written request shall be deemed to have been given pursuant to Section 8.1
hereof rather than this Section 8.2, and the rights of the holders of
Warrants and or shares issued upon the exercise of the Warrants covered by
such written request shall be governed by Section 8.1 hereof.
The managing underwriter of an offering registered pursuant to
this Section 8.2, if any, shall be selected by the holders of a majority of
the Warrants and/or shares issued upon
Page 5 of 8
<PAGE>
the exercise of the Warrants for which registration has been requested and
shall be reasonably acceptable to the Company. Without the written consent
of the holders of a majority of the Warrants and/or shares issued upon
exercise of the Warrants for which registration has been requested pursuant
to this Section 8.2, neither the Company nor any other holder of securities
of the Company may include securities in such registration if in the good
faith judgment of the managing underwriter of such public offering the
inclusion of such securities would interfere with the successful marketing
of the Warrants and/or shares issued upon the exercise of the Warrants or
require the exclusion of any portion of the Warrants and/or shares issued
upon the exercise of the Warrants to be registered. Subject to the
preceding sentence, shares to be excluded from an underwritten public
offering shall be selected in the manner provided in Section 8.1 hereof.
8.3 If and whenever the Company is required by the provisions of Sections
8.1 or 8.2 hereof to effect the registration of Warrants and/or shares
issued upon the exercise of the Warrants under the Securities Act, the
Company will:
(i) prepare and file with the Commission a registration
statement with respect to such securities, and use its best
efforts to cause such registration statement to become and remain
effective for such period as may be reasonably necessary to effect
the sale of such securities;
(ii) prepare and file with the Commission such amendments
to such registration statement and supplements to the prospectus
contained therein as may be necessary to keep such registration
statement effective for such period as may be reasonably necessary
to effect the sale of such securities;
(iii) furnish to the security holders participating in
such registration and to the underwriters of the securities being
registered such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus and such other
documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(iv) use its best efforts to register or qualify the
securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as such
participating holders may reasonably request in writing within 30
days following the original filing of such registration statement,
except that the Company shall not for any purpose be required to
execute a general consent to service of process or to qualify to
do business as a foreign corporation in any jurisdiction wherein
it is not so qualified;
(v) notify the security holders participating in such
registration, promptly after it shall receive notice thereof, of
the time when such registration statement has become effective or
a supplement to any prospectus forming a part of such registration
statement has been filed;
Page 6 of 8
<PAGE>
(vi) notify such holders promptly of any request by the
Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) prepare and file with the Commission, promptly upon
the request of any such holders, any amendments or supplements to
such registration statement or prospectus which, in the opinion of
counsel for such holders (and concurred in by counsel for the
Company), is required under the Securities Act or the rules and
regulations thereunder in connection with the distribution of the
Warrants or shares by such holder;
(viii) prepare and promptly file with the Commission and
promptly notify such holders of the filing of such amendment or
supplement to such registration statement or prospectus as may be
necessary to correct any statements or omissions if, at the time
when a prospectus relating to such securities is required to be
delivered under the Securities Act, any event shall have occurred
as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which
they were made, not misleading;
(ix) advise such holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop
order by the Commission suspending the effectiveness of such
registration statement or the initiation or threatening of any
proceeding for that purpose and promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal
if such stop order should be issued;
(x) not file any amendment or supplement to such
registration statement or prospectus to which a majority in
interest of such holders shall have reasonably objected on the
grounds that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or
the rules and regulations thereunder, after having been furnished
with a copy thereof at least five business days prior to the
filing thereof, unless in the opinion of counsel for the Company
the filing of such amendment or supplement is reasonably necessary
to protect the Company from any liabilities under any applicable
federal or state law and such filing will not violate applicable
law; and
(xi) at the request of any such holder, furnish on the
effective date of the registration statement and, if such
registration includes an underwritten public offering, at the
closing provided for in the underwriting agreement: (i) opinions,
dated such respective dates, of the counsel representing the
Company for the purposes of such registration, addressed to the
underwriters, if any, and to the holder or holders making such
request, covering such matters as such underwriters and holder or
holders may reasonably request; and (ii) letters, dated such
respective dates, from the independent certified public
accountants of the Company, addressed to the underwriters, if any,
and to the holder or holders making such request, covering such
matters as such underwriters and holder or holders may reasonably
request, in which
Page 7 of 8
<PAGE>
letter such accountants shall state (without limiting the
generality of the foregoing) that they are independent certified
public accountants with the meaning of the Securities Act and that
in the opinion of such accountants the financial statements and
other financial data of the Company included in the registration
statement or the prospectus or any amendment or supplement thereto
comply in all material respects with the applicable accounting
requirements of the Securities Act.
8.4 The Company hereby indemnifies the holder of this Warrant and of any
common stock issued or issuable hereunder, its officers and directors, and
any person who controls such Warrant holder or such holder of common stock
within the meaning of Section 15 of the Securities Act of 1933, against all
losses, claims, damages and liabilities caused by any untrue statement of a
material fact contained in any registration statement, prospectus,
notification or offering circular (and as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus or caused by any omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading except insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or omission
contained in information furnished in writing to the Company by such
Warrant holder or such holder of common stock expressly for use therein,
and each such holder by its acceptance hereof severally agrees that it will
indemnify and hold harmless the Company and each of its officers who signs
such registration statement and each of its directors and each person, if
any, who controls the Company within the meaning of Section 15 of the
Securities Act of 1933 with respect to losses, claims, damages or
liabilities which are caused by any untrue statement or omission contained
in information furnished in writing to the Company by such holder expressly
for use therein.
9. APPLICABLE LAW. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Minnesota.
DATED:_______________, 1999
SPECTRASCIENCE, INC.
------------------------------
Chester E. Sievert, Jr.
President and CEO
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE
COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Page 8 of 8
Exhibit 10.17
SPECTRASCIENCE, INC.
WARRANT TO PURCHASE SHARES OF COMMON STOCK*
Void After Midnight, Central Standard Time, March___, 2001
No. 0399-______
This is to certify that, for value received, _____________________ (the
"Holder") is entitled to purchase, subject to the provisions of this Warrant,
from SPECTRASCIENCE, Inc., a Minnesota corporation (the "Company"), at any time
from and after the date hereof and prior to March__, 2001, (the "Exercise
Period"), up to ________________ fully paid non-assessable shares of the Common
Stock, twenty-five cent par value, of the Company ("Common Stock"), exercisable
at the purchase price per share of $5.00, subject to the provisions of this
Warrant. The number of shares of Common Stock to be received upon the exercise
of this Warrant and the price to be paid for a share of Common Stock may be
adjusted from time to time as hereinafter set forth. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Stock" and the exercise price of a
share of Common Stock in effect at any time and as adjusted from time to time,
is hereinafter sometimes referred to as the "Exercise Price." This Warrant is
one of a series of Warrants, identical in form, which may be issued by the
Company to purchase shares of Common Stock of the Company; and the term
"Warrants" as used herein means all such warrants (including this Warrant).
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part, at
any time or from time to time, during the Exercise Period, but not later than
Midnight, Central Standard Time, on March __, 2001, by presentation and
surrender to the Company or its stock transfer agent, if any, together with the
Exercise Form attached hereto, duly executed, and payment of the Exercise Price
for the number of shares specified in such form along with all federal and state
taxes applicable upon such exercise. If March __, 2001 is a day on which banking
institutions are authorized by law to close, this Warrant may then be exercised
on the first day thereafter which shall not be such a day. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office or agency of the Company,
in proper form for exercise, the Holder shall be deemed to be the Holder of
record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to the Holder.
2. RESERVATION OF SHARES. The Company hereby agrees that at all times there
shall be reserved for issuance and/or delivery upon exercise of this Warrant
such number of shares of Common Stock as shall be required for issuance or
delivery upon the exercise of this Warrant.
- --------------------------------------------------------------------------------
*THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH AT THE
BOTTOM OF THE LAST PAGE HEREOF.
Page 1 of 8
<PAGE>
3. FRACTIONAL SHARES. No fractional shares or scrip representing fractional
shares shall be issued upon the exercise of this Warrant. With respect to any
fraction of a share called for upon any exercise hereof, the Company shall pay
to the Holder an amount in cash equal to such fraction multiplied by the current
market value of such fractional share, determined as follows:
3.1 If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange, the current value
shall be the last reported sale price of the Common Stock on such exchange
on the last business day prior to the date of exercise of this Warrant. If
no sale is made on such day, the current value shall be the average of the
closing bid and asked prices for such day on such exchange; or
3.2 If the Common Stock is not listed on a national securities exchange or
admitted to unlisted trading privileges, the current value shall be the
mean of the last reported bid and asked prices reported by the National
Association of Securities Dealers Quotation System (or, if not so quoted on
NASDAQ, by the National Quotation Bureau, Inc.) on the last business day
prior to the date of the exercise of this Warrant; or
3.3 If the Common Stock is not listed on a national securities exchange or
admitted to unlisted trading privileges, and bid and asked prices are not
so reported, the current value shall be an amount, not less than book
value, determined in such reasonable manner as may be prescribed by the
Board of Directors of the Company. Such determination will be final and
binding on the Holder.
4. EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. Subject to Section 7, this Warrant
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company, for other Warrants of different
denominations entitling the Holder thereof to purchase in the aggregate, the
same number of shares of Common Stock purchasable hereunder. Any such assignment
shall be made by surrender of this Warrant together with the Assignment Form
attached hereto, duly executed, and funds sufficient to pay any transfer tax.
The Company shall, without change, execute and deliver a new Warrant in the name
of the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled. This Warrant may be divided or combined with other
Warrants which carry the same rights, upon surrender hereof of all affected
Warrants, at the office of the Company or its stock transfer agent, if any,
together with a written notice, signed by the Holder of such affected Warrants,
specifying the names and denominations in which new Warrants are to be issued.
The term "Warrant" as used herein includes any Warrants issued in substitution
for or replacement of this Warrant, or into which this Warrant may be divided or
exchanged. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and of reasonably
satisfactory indemnification in the case of loss, theft or destruction, or upon
surrender and cancellation of this Warrant if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Warrant is lost, stolen, destroyed
or mutilated, and shall be enforceable at any time by anyone.
5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to
any rights of a shareholder in the Company, either at law or equity, and the
rights of the Holder are
Page 2 of 8
<PAGE>
limited to those expressed in the Warrant and are not enforceable against the
Company, either at law or equity, except to the extent set forth herein.
6. STOCK SPLITS, REORGANIZATION, MERGER, SALE OF ALL ASSETS.
6.1 In case the Company shall declare any dividend or other distribution
upon its outstanding common stock payable in common stock, or shall
subdivide its outstanding shares of common stock into a greater number of
shares, then the number of shares of common stock which may thereafter be
purchased upon the exercise of the rights represented hereby, shall be
increased in proportion to the increase through such dividend or
subdivision and the purchase price per share shall be decreased in such
proportion. In case the Company shall at any time combine the outstanding
shares of its common stock into a smaller number of shares, the number of
shares of common stock which may thereafter be purchased upon the exercise
of the rights represented hereby, shall be decreased in proportion to the
decrease through such combination and the purchase price per share shall be
increased in such proportion.
6.2 In case of any reclassification, capital reorganization or other change
of outstanding shares of Common Stock of the Company (other than a change
in par value, or from without par value to par value, or from par value to
without par value, or as a result of an issuance of Common Stock by way of
dividend or other distribution or of a subdivision or combination), or in
case of any consolidation or merger of the Company with or into another
corporation (other than a merger with a subsidiary in which merger the
Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise of this Warrant)
or in case of any sale or conveyance to another corporation of the property
of the Company as an entirety or substantially as an entirety, the Company
shall cause an effective provision to be made so that the Holder shall have
the right thereafter, by exercising this Warrant, to purchase the kind and
amount of shares of stock and other securities and property receivable upon
such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance, if any, which the Holder would
have received had the Warrants been exercised immediately prior to such
event.
The Company shall not effect any such consolidation, merger, or
sale, unless prior to or simultaneously with the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument executed and mailed or delivered to the Holder
at the last address of such Holder appearing on the books of the Company,
the obligation to deliver to such Holder such shares of stock, securities
or assets as, in accordance with the foregoing provisions, such Holder may
be entitled to purchase.
7. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933
7.1 This Warrant or the Warrant Stock or any other security issued or
issuable upon exercise of this Warrant may not be offered or sold except in
conformity with the Securities Act of 1933, as amended, and then, only
against receipt of an agreement from the person to
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<PAGE>
whom such offer of sale is made to comply with the provisions of this Section
7.1 with respect to any resale or other disposition of such securities.
7.2 The Company may cause the following legend to be set forth on each
Warrant and certificate representing Warrant Stock or any other security
issued or issuable upon exercise of this Warrant not theretofore
distributed to the public or sold to underwriters for distribution to the
public unless counsel for the Company is of the opinion as to any such
certificate that such legend is unnecessary:
The securities represented by this certificate may not be
offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement made under the
Securities Act of 1933 ("the Act"), or pursuant to an
exemption from registration under the Act.
8. REGISTRATION RIGHTS
8.1 If the Company proposes to claim an exemption under Section 3(b) for a
public offering of any of its securities or to register under the
Securities Act of 1933 (except by a claim of exemption or registration
statement on a form that does not permit the inclusion of shares by its
security holders) any of its securities, it will give written notice to all
registered holders of Warrants, and all registered holders of shares of
common stock acquired upon the exercise of Warrants, of its intention to do
so and, on the written request of any such registered holders given within
twenty (20) days after receipt of any such notice (which request must be
made within five (5) years from the date of this Warrant), the Company will
use its best efforts to cause all such shares, the registered holders of
which shall have requested the registration or qualification thereof, to be
included in such notification or registration statement proposed to be
filed by the Company; provided, however, that nothing herein shall prevent
the Company from, at any time, abandoning or delaying any such registration
initiated by it. If any such registration shall be underwritten in whole or
in part, the Company may require that the shares requested for inclusion
pursuant to this section be included in the underwriting on the same terms
and conditions as the securities otherwise being sold through the
underwriters. In the event that, in the good faith judgment of the managing
underwriter of such public offering, the inclusion of all of the shares
originally covered by a request for registration would reduce the number of
shares to be offered by the Company or interfere with the successful
marketing of the shares of stock offered by the Company, the number of
shares otherwise to be included pursuant to this Section in the
underwritten public offering may be reduced. Those shares which are thus
excluded from the underwritten public offering shall be withheld from the
market for a period, not to exceed 90 days, which the managing underwriter
reasonably determines is necessary in order to effect the underwritten
public offering. All expenses of such offering, except the fees of special
counsel to such holders and brokers' commissions or underwriting discounts
payable by such holders, shall be borne by the Company.
8.2 Further, on one occasion only, commencing one year from the date
hereof, upon request by the holders of Warrants and/or the holders of
shares issued upon the exercise of the Warrants who collectively (i) have
the right to purchase at least 50% of the shares subject to the Warrants,
(ii) hold directly at least 50% of the shares purchased hereunder, or (iii)
Page 4 of 8
<PAGE>
have the right to purchase or hold directly an aggregate of at least 50% of
the shares purchasable or purchased hereunder, the Company will promptly
take all necessary steps, at the option of such holders, to register or
qualify the sale of the Warrants or such shares by the holders thereof, or
to register the issuance by the Company of shares upon the exercise of
Warrants, under the Securities Act of 1933 (and, upon the request of such
holders, under Rule 415 thereunder) and such state laws as such holders may
reasonably request; provided that (i) such request must be made by March
10, 2001, and (ii) the Company may delay the filing of any registration
statement requested pursuant to this section to a date not more than ninety
(90) days following the date of such request if in the opinion of the
Company's principal investment banker at the time of such request such a
delay is necessary in order not to adversely affect financing efforts then
underway at the Company or if in the opinion of the Company such a delay is
necessary or advisable to avoid disclosure of material nonpublic
information. The costs and expenses directly related to any registration
requested pursuant to this section, including but not limited to legal fees
of the Company's counsel, audit fees, printing expense, filing fees and
fees and expenses relating to qualifications under state securities or blue
sky laws incurred by the Company shall be borne entirely by the Company;
provided, however, that the persons for whose account the securities
covered by such registration are sold shall bear the expenses of
underwriting commissions applicable to their shares and fees of their legal
counsel. If the holders of Warrants and the holders of shares of Common
Stock underlying the Warrants are the only persons whose shares are
included in the registration pursuant to this section, such holders shall
bear the expense of inclusion of audited financial statements in the
registration statement which are not dated as of the Company's normal
fiscal year or are not otherwise prepared by the Company for its own
business purposes. The Company shall keep effective and maintain any
registration, qualification, notification or approval specified in this
paragraph for such period as may be necessary for the holders of the
Warrants and such common stock to dispose thereof, and from time to time
shall amend or supplement, at the holder's expense, the prospectus or
offering circular used in connection therewith to the extent necessary in
order to comply with applicable law, provided that the Company shall not be
obligated to maintain any registration for a period of more than nine (9)
months.
If, at the time any written request for registration is received
by the Company pursuant to this Section 8.2, the Company has determined to
proceed with the actual preparation and filing of a registration statement
under the Securities Act in connection with the proposed offer and sale for
cash of any of its securities by it or any of its security holders, such
written request shall be deemed to have been given pursuant to Section 8.1
hereof rather than this Section 8.2, and the rights of the holders of
Warrants and or shares issued upon the exercise of the Warrants covered by
such written request shall be governed by Section 8.1 hereof.
The managing underwriter of an offering registered pursuant to
this Section 8.2, if any, shall be selected by the holders of a majority of
the Warrants and/or shares issued upon the exercise of the Warrants for
which registration has been requested and shall be reasonably acceptable to
the Company. Without the written consent of the holders of a majority of
the Warrants and/or shares issued upon exercise of the Warrants for which
registration has been requested pursuant to this Section 8.2, neither the
Company nor any other holder of securities of the Company may include
securities in such registration if in the
Page 5 of 8
<PAGE>
good faith judgment of the managing underwriter of such public offering the
inclusion of such securities would interfere with the successful marketing
of the Warrants and/or shares issued upon the exercise of the Warrants or
require the exclusion of any portion of the Warrants and/or shares issued
upon the exercise of the Warrants to be registered. Subject to the
preceding sentence, shares to be excluded from an underwritten public
offering shall be selected in the manner provided in Section 8.1 hereof.
8.3 If and whenever the Company is required by the provisions of Sections
8.1 or 8.2 hereof to effect the registration of Warrants and/or shares
issued upon the exercise of the Warrants under the Securities Act, the
Company will:
(i) prepare and file with the Commission a registration
statement with respect to such securities, and use its best
efforts to cause such registration statement to become and remain
effective for such period as may be reasonably necessary to effect
the sale of such securities;
(ii) prepare and file with the Commission such amendments
to such registration statement and supplements to the prospectus
contained therein as may be necessary to keep such registration
statement effective for such period as may be reasonably necessary
to effect the sale of such securities;
(iii) furnish to the security holders participating in
such registration and to the underwriters of the securities being
registered such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus and such other
documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(iv) use its best efforts to register or qualify the
securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as such
participating holders may reasonably request in writing within 30
days following the original filing of such registration statement,
except that the Company shall not for any purpose be required to
execute a general consent to service of process or to qualify to
do business as a foreign corporation in any jurisdiction wherein
it is not so qualified;
(v) notify the security holders participating in such
registration, promptly after it shall receive notice thereof, of
the time when such registration statement has become effective or
a supplement to any prospectus forming a part of such registration
statement has been filed;
(vi) notify such holders promptly of any request by the
Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) prepare and file with the Commission, promptly upon
the request of any such holders, any amendments or supplements to
such registration statement or prospectus which, in the opinion of
counsel for such holders (and concurred in by
Page 6 of 8
<PAGE>
counsel for the Company), is required under the Securities Act or
the rules and regulations thereunder in connection with the
distribution of the Warrants or shares by such holder;
(viii) prepare and promptly file with the Commission and
promptly notify such holders of the filing of such amendment or
supplement to such registration statement or prospectus as may be
necessary to correct any statements or omissions if, at the time
when a prospectus relating to such securities is required to be
delivered under the Securities Act, any event shall have occurred
as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which
they were made, not misleading;
(ix) advise such holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop
order by the Commission suspending the effectiveness of such
registration statement or the initiation or threatening of any
proceeding for that purpose and promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal
if such stop order should be issued;
(x) not file any amendment or supplement to such
registration statement or prospectus to which a majority in
interest of such holders shall have reasonably objected on the
grounds that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or
the rules and regulations thereunder, after having been furnished
with a copy thereof at least five business days prior to the
filing thereof, unless in the opinion of counsel for the Company
the filing of such amendment or supplement is reasonably necessary
to protect the Company from any liabilities under any applicable
federal or state law and such filing will not violate applicable
law; and
(xi) at the request of any such holder, furnish on the
effective date of the registration statement and, if such
registration includes an underwritten public offering, at the
closing provided for in the underwriting agreement: (i) opinions,
dated such respective dates, of the counsel representing the
Company for the purposes of such registration, addressed to the
underwriters, if any, and to the holder or holders making such
request, covering such matters as such underwriters and holder or
holders may reasonably request; and (ii) letters, dated such
respective dates, from the independent certified public
accountants of the Company, addressed to the underwriters, if any,
and to the holder or holders making such request, covering such
matters as such underwriters and holder or holders may reasonably
request, in which letter such accountants shall state (without
limiting the generality of the foregoing) that they are
independent certified public accountants with the meaning of the
Securities Act and that in the opinion of such accountants the
financial statements and other financial data of the Company
included in the registration statement or the prospectus or any
amendment or supplement thereto comply in all material respects
with the applicable accounting requirements of the Securities Act.
Page 7 of 8
<PAGE>
8.4 The Company hereby indemnifies the holder of this Warrant and of any
common stock issued or issuable hereunder, its officers and directors, and
any person who controls such Warrant holder or such holder of common stock
within the meaning of Section 15 of the Securities Act of 1933, against all
losses, claims, damages and liabilities caused by any untrue statement of a
material fact contained in any registration statement, prospectus,
notification or offering circular (and as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus or caused by any omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading except insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or omission
contained in information furnished in writing to the Company by such
Warrant holder or such holder of common stock expressly for use therein,
and each such holder by its acceptance hereof severally agrees that it will
indemnify and hold harmless the Company and each of its officers who signs
such registration statement and each of its directors and each person, if
any, who controls the Company within the meaning of Section 15 of the
Securities Act of 1933 with respect to losses, claims, damages or
liabilities which are caused by any untrue statement or omission contained
in information furnished in writing to the Company by such holder expressly
for use therein.
9. APPLICABLE LAW. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Minnesota.
DATED:_______________, 1999
SPECTRASCIENCE, INC.
------------------------------
Chester E. Sievert, Jr.
President and CEO
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE
COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Page 8 of 8
Exhibit 10.18
SPECTRASCIENCE, INC.
WARRANT TO PURCHASE SHARES OF COMMON STOCK*
Void After Midnight, Central Standard Time, December , 2001
No. 1299-_____
This is to certify that, for value received, _____________________ (the
"Holder") is entitled to purchase, subject to the provisions of this Warrant,
from SPECTRASCIENCE, Inc., a Minnesota corporation (the "Company"), at any time
from and after the date hereof and prior to December __, 2001, (the "Exercise
Period"), up to _________________ fully paid non-assessable shares of the Common
Stock, twenty-five cent par value, of the Company ("Common Stock"), exercisable
at the purchase price per share of $5.50, subject to the provisions of this
Warrant. The number of shares of Common Stock to be received upon the exercise
of this Warrant and the price to be paid for a share of Common Stock may be
adjusted from time to time as hereinafter set forth. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Stock" and the exercise price of a
share of Common Stock in effect at any time and as adjusted from time to time,
is hereinafter sometimes referred to as the "Exercise Price." This Warrant is
one of a series of Warrants, identical in form, which may be issued by the
Company to purchase shares of Common Stock of the Company; and the term
"Warrants" as used herein means all such warrants (including this Warrant).
1. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part, at
any time or from time to time, during the Exercise Period, but not later than
Midnight, Central Standard Time, on December __, 2001, by presentation and
surrender to the Company or its stock transfer agent, if any, together with the
Exercise Form attached hereto, duly executed, and payment of the Exercise Price
for the number of shares specified in such form along with all federal and state
taxes applicable upon such exercise. If December __, 2001 is a day on which
banking institutions are authorized by law to close, this Warrant may then be
exercised on the first day thereafter which shall not be such a day. If this
Warrant should be exercised in part only, the Company shall, upon surrender of
this Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares purchasable hereunder.
Upon receipt by the Company of this Warrant at the office or agency of the
Company, in proper form for exercise, the Holder shall be deemed to be the
Holder of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to the Holder.
2. RESERVATION OF SHARES. The Company hereby agrees that at all times there
shall be reserved for issuance and/or delivery upon exercise of this Warrant
such number of shares of Common Stock as shall be required for issuance or
delivery upon the exercise of this Warrant.
3. FRACTIONAL SHARES. No fractional shares or scrip representing fractional
shares shall be issued upon the exercise of this Warrant. With respect to any
fraction of a share called for upon any exercise hereof, the Company shall pay
to the Holder an amount in cash equal to such fraction multiplied by the current
market value of such fractional share, determined as follows:
- --------------------------------------------------------------------------------
*THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH AT THE
BOTTOM OF THE LAST PAGE HEREOF.
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<PAGE>
3.1 If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange, the current
value shall be the last reported sale price of the Common Stock on such
exchange on the last business day prior to the date of exercise of this
Warrant. If no sale is made on such day, the current value shall be the
average of the closing bid and asked prices for such day on such
exchange; or
3.2 If the Common Stock is not listed on a national securities exchange
or admitted to unlisted trading privileges, the current value shall be
the mean of the last reported bid and asked prices reported by the
National Association of Securities Dealers Quotation System (or, if not
so quoted on NASDAQ, by the National Quotation Bureau, Inc.) on the
last business day prior to the date of the exercise of this Warrant; or
3.3 If the Common Stock is not listed on a national securities exchange
or admitted to unlisted trading privileges, and bid and asked prices
are not so reported, the current value shall be an amount, not less
than book value, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company. Such determination
will be final and binding on the Holder.
4. EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. Subject to Section 7, this Warrant
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company, for other Warrants of different
denominations entitling the Holder thereof to purchase in the aggregate, the
same number of shares of Common Stock purchasable hereunder. Any such assignment
shall be made by surrender of this Warrant together with the Assignment Form
attached hereto, duly executed, and funds sufficient to pay any transfer tax.
The Company shall, without change, execute and deliver a new Warrant in the name
of the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled. This Warrant may be divided or combined with other
Warrants which carry the same rights, upon surrender hereof of all affected
Warrants, at the office of the Company or its stock transfer agent, if any,
together with a written notice, signed by the Holder of such affected Warrants,
specifying the names and denominations in which new Warrants are to be issued.
The term "Warrant" as used herein includes any Warrants issued in substitution
for or replacement of this Warrant, or into which this Warrant may be divided or
exchanged. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and of reasonably
satisfactory indemnification in the case of loss, theft or destruction, or upon
surrender and cancellation of this Warrant if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Warrant is lost, stolen, destroyed
or mutilated, and shall be enforceable at any time by anyone.
5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to
any rights of a shareholder in the Company, either at law or equity, and the
rights of the Holder are limited to those expressed in the Warrant and are not
enforceable against the Company, either at law or equity, except to the extent
set forth herein.
6. STOCK SPLITS, REORGANIZATION, MERGER, SALE OF ALL ASSETS.
6.1 In case the Company shall declare any dividend or other
distribution upon its outstanding common stock payable in common stock, or shall
subdivide its outstanding shares of common stock into a greater number of
shares, then the number of shares of common stock which may thereafter be
purchased upon the exercise of the rights represented hereby, shall be increased
in proportion to the increase through such dividend or subdivision and the
purchase price per share shall be decreased in such proportion. In case the
Company shall at any time combine the outstanding shares of its common stock
into a smaller number of shares, the number of shares of common stock which may
thereafter be purchased upon the
Page 2 of 7
<PAGE>
exercise of the rights represented hereby, shall be decreased in proportion to
the decrease through such combination and the purchase price per share shall be
increased in such proportion.
6.2 In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock of the Company (other than a change
in par value, or from without par value to par value, or from par value to
without par value, or as a result of an issuance of Common Stock by way of
dividend or other distribution or of a subdivision or combination), or in case
of any consolidation or merger of the Company with or into another corporation
(other than a merger with a subsidiary in which merger the Company is the
continuing corporation and which does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock of
the class issuable upon exercise of this Warrant) or in case of any sale or
conveyance to another corporation of the property of the Company as an entirety
or substantially as an entirety, the Company shall cause an effective provision
to be made so that the Holder shall have the right thereafter, by exercising
this Warrant, to purchase the kind and amount of shares of stock and other
securities and property receivable upon such reclassification, capital
reorganization or other change, consolidation, merger, sale or conveyance, if
any, which the Holder would have received had the Warrants been exercised
immediately prior to such event.
The Company shall not effect any such consolidation, merger, or sale,
unless prior to or simultaneously with the consummation thereof, the successor
corporation (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing such assets shall assume by written
instrument executed and mailed or delivered to the Holder at the last address of
such Holder appearing on the books of the Company, the obligation to deliver to
such Holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such Holder may be entitled to purchase.
7. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933
7.1 This Warrant or the Warrant Stock or any other security issued or
issuable upon exercise of this Warrant may not be offered or sold except in
conformity with the Securities Act of 1933, as amended, and then, only against
receipt of an agreement from the person to whom such offer of sale is made to
comply with the provisions of this Section 7.1 with respect to any resale or
other disposition of such securities.
7.2 The Company may cause the following legend to be set forth on each
Warrant and certificate representing Warrant Stock or any other security issued
or issuable upon exercise of this Warrant not theretofore distributed to the
public or sold to underwriters for distribution to the public unless counsel for
the Company is of the opinion as to any such certificate that such legend is
unnecessary:
The securities represented by this certificate may not be offered for
sale, sold or otherwise transferred except pursuant to an effective
registration statement made under the Securities Act of 1933 ("the
Act"), or pursuant to an exemption from registration under the Act.
8. REGISTRATION RIGHTS
8.1 If the Company proposes to claim an exemption under Section 3(b)
for a public offering of any of its securities or to register under the
Securities Act of 1933 (except by a claim of exemption or registration statement
on a form that does not permit the inclusion of shares by its security holders)
any of its securities, it will give written notice to all registered holders of
Warrants, and all registered holders of shares of common stock acquired upon the
exercise of Warrants, of its intention to do so and, on the written request of
any such registered holders given within twenty (20) days after receipt of any
such
Page 3 of 7
<PAGE>
notice (which request must be made within five (5) years from the date of
this Warrant), the Company will use its best efforts to cause all such shares,
the registered holders of which shall have requested the registration or
qualification thereof, to be included in such notification or registration
statement proposed to be filed by the Company; provided, however, that nothing
herein shall prevent the Company from, at any time, abandoning or delaying any
such registration initiated by it. If any such registration shall be
underwritten in whole or in part, the Company may require that the shares
requested for inclusion pursuant to this section be included in the underwriting
on the same terms and conditions as the securities otherwise being sold through
the underwriters. In the event that, in the good faith judgment of the managing
underwriter of such public offering, the inclusion of all of the shares
originally covered by a request for registration would reduce the number of
shares to be offered by the Company or interfere with the successful marketing
of the shares of stock offered by the Company, the number of shares otherwise to
be included pursuant to this Section in the underwritten public offering may be
reduced. Those shares which are thus excluded from the underwritten public
offering shall be withheld from the market for a period, not to exceed 90 days,
which the managing underwriter reasonably determines is necessary in order to
effect the underwritten public offering. All expenses of such offering, except
the fees of special counsel to such holders and brokers' commissions or
underwriting discounts payable by such holders, shall be borne by the Company.
8.2 Further, on one occasion only, commencing one year from the date
hereof, upon request by the holders of Warrants and/or the holders of shares
issued upon the exercise of the Warrants who collectively (i) have the right to
purchase at least 50% of the shares subject to the Warrants, (ii) hold directly
at least 50% of the shares purchased hereunder, or (iii) have the right to
purchase or hold directly an aggregate of at least 50% of the shares purchasable
or purchased hereunder, the Company will promptly take all necessary steps, at
the option of such holders, to register or qualify the sale of the Warrants or
such shares by the holders thereof, or to register the issuance by the Company
of shares upon the exercise of Warrants, under the Securities Act of 1933 (and,
upon the request of such holders, under Rule 415 thereunder) and such state laws
as such holders may reasonably request; provided that (i) such request must be
made by December ____, 2001, and (ii) the Company may delay the filing of any
registration statement requested pursuant to this section to a date not more
than ninety (90) days following the date of such request if in the opinion of
the Company's principal investment banker at the time of such request such a
delay is necessary in order not to adversely affect financing efforts then
underway at the Company or if in the opinion of the Company such a delay is
necessary or advisable to avoid disclosure of material nonpublic information.
The costs and expenses directly related to any registration requested pursuant
to this section, including but not limited to legal fees of the Company's
counsel, audit fees, printing expense, filing fees and fees and expenses
relating to qualifications under state securities or blue sky laws incurred by
the Company shall be borne entirely by the Company; provided, however, that the
persons for whose account the securities covered by such registration are sold
shall bear the expenses of underwriting commissions applicable to their shares
and fees of their legal counsel. If the holders of Warrants and the holders of
shares of Common Stock underlying the Warrants are the only persons whose shares
are included in the registration pursuant to this section, such holders shall
bear the expense of inclusion of audited financial statements in the
registration statement which are not dated as of the Company's normal fiscal
year or are not otherwise prepared by the Company for its own business purposes.
The Company shall keep effective and maintain any registration, qualification,
notification or approval specified in this paragraph for such period as may be
necessary for the holders of the Warrants and such common stock to dispose
thereof, and from time to time shall amend or supplement, at the holder's
expense, the prospectus or offering circular used in connection therewith to the
extent necessary in order to comply with applicable law, provided that the
Company shall not be obligated to maintain any registration for a period of more
than nine (9) months.
If, at the time any written request for registration is
received by the Company pursuant to this Section 8.2, the Company has determined
to proceed with the actual preparation and filing of a registration statement
under the Securities Act in connection with the proposed offer and sale for cash
of
Page 4 of 7
<PAGE>
any of its securities by it or any of its security holders, such written request
shall be deemed to have been given pursuant to Section 8.1 hereof rather than
this Section 8.2, and the rights of the holders of Warrants and or shares issued
upon the exercise of the Warrants covered by such written request shall be
governed by Section 8.1 hereof.
The managing underwriter of an offering registered pursuant to
this Section 8.2, if any, shall be selected by the holders of a majority of the
Warrants and/or shares issued upon the exercise of the Warrants for which
registration has been requested and shall be reasonably acceptable to the
Company. Without the written consent of the holders of a majority of the
Warrants and/or shares issued upon exercise of the Warrants for which
registration has been requested pursuant to this Section 8.2, neither the
Company nor any other holder of securities of the Company may include securities
in such registration if in the good faith judgment of the managing underwriter
of such public offering the inclusion of such securities would interfere with
the successful marketing of the Warrants and/or shares issued upon the exercise
of the Warrants or require the exclusion of any portion of the Warrants and/or
shares issued upon the exercise of the Warrants to be registered. Subject to the
preceding sentence, shares to be excluded from an underwritten public offering
shall be selected in the manner provided in Section 8.1 hereof.
8.3 If and whenever the Company is required by the provisions of
Sections 8.1 or 8.2 hereof to effect the registration of Warrants and/or shares
issued upon the exercise of the Warrants under the Securities Act, the Company
will:
(i) prepare and file with the Commission a registration
statement with respect to such securities, and use its best efforts to
cause such registration statement to become and remain effective for
such period as may be reasonably necessary to effect the sale of such
securities;
(ii) prepare and file with the Commission such amendments to
such registration statement and supplements to the prospectus contained
therein as may be necessary to keep such registration statement
effective for such period as may be reasonably necessary to effect the
sale of such securities;
(iii) furnish to the security holders participating in such
registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as
such underwriters may reasonably request in order to facilitate the
public offering of such securities;
(iv) use its best efforts to register or qualify the
securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as such participating
holders may reasonably request in writing within 30 days following the
original filing of such registration statement, except that the Company
shall not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(v) notify the security holders participating in such
registration, promptly after it shall receive notice thereof, of the
time when such registration statement has become effective or a
supplement to any prospectus forming a part of such registration
statement has been filed;
(vi) notify such holders promptly of any request by the
Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) prepare and file with the Commission, promptly upon the
request of any such holders, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel
for such holders (and concurred in by counsel for the Company), is
Page 5 of 7
<PAGE>
required under the Securities Act or the rules and regulations
thereunder in connection with the distribution of the Warrants or
shares by such holder;
(viii) prepare and promptly file with the Commission and
promptly notify such holders of the filing of such amendment or
supplement to such registration statement or prospectus as may be
necessary to correct any statements or omissions if, at the time when a
prospectus relating to such securities is required to be delivered
under the Securities Act, any event shall have occurred as the result
of which any such prospectus or any other prospectus as then in effect
would include an untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading;
(ix) advise such holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order
by the Commission suspending the effectiveness of such registration
statement or the initiation or threatening of any proceeding for that
purpose and promptly use its best efforts to prevent the issuance of
any stop order or to obtain its withdrawal if such stop order should be
issued;
(x) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders
shall have reasonably objected on the grounds that such amendment or
supplement does not comply in all material respects with the
requirements of the Securities Act or the rules and regulations
thereunder, after having been furnished with a copy thereof at least
five business days prior to the filing thereof, unless in the opinion
of counsel for the Company the filing of such amendment or supplement
is reasonably necessary to protect the Company from any liabilities
under any applicable federal or state law and such filing will not
violate applicable law; and
(xi) at the request of any such holder, furnish on the
effective date of the registration statement and, if such registration
includes an underwritten public offering, at the closing provided for
in the underwriting agreement: (i) opinions, dated such respective
dates, of the counsel representing the Company for the purposes of such
registration, addressed to the underwriters, if any, and to the holder
or holders making such request, covering such matters as such
underwriters and holder or holders may reasonably request; and (ii)
letters, dated such respective dates, from the independent certified
public accountants of the Company, addressed to the underwriters, if
any, and to the holder or holders making such request, covering such
matters as such underwriters and holder or holders may reasonably
request, in which letter such accountants shall state (without limiting
the generality of the foregoing) that they are independent certified
public accountants with the meaning of the Securities Act and that in
the opinion of such accountants the financial statements and other
financial data of the Company included in the registration statement or
the prospectus or any amendment or supplement thereto comply in all
material respects with the applicable accounting requirements of the
Securities Act.
8.4 The Company hereby indemnifies the holder of this Warrant and of
any common stock issued or issuable hereunder, its officers and directors, and
any person who controls such Warrant holder or such holder of common stock
within the meaning of Section 15 of the Securities Act of 1933, against all
losses, claims, damages and liabilities caused by any untrue statement of a
material fact contained in any registration statement, prospectus, notification
or offering circular (and as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary prospectus
or caused by any omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading except
insofar as such losses, claims, damages or liabilities are caused by any untrue
statement or omission contained in information furnished in writing to the
Company by such Warrant holder or such holder of common stock expressly for use
therein, and each such holder by its acceptance hereof severally agrees that it
will indemnify and hold harmless the
Page 6 of 7
<PAGE>
Company and each of its officers who signs such registration statement and each
of its directors and each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act of 1933 with respect to losses,
claims, damages or liabilities which are caused by any untrue statement or
omission contained in information furnished in writing to the Company by such
holder expressly for use therein.
9. APPLICABLE LAW. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Minnesota.
DATED:_______________, 1999
SPECTRASCIENCE, INC.
------------------------------
Chester E. Sievert, Jr.
President and CEO
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE
COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Page 7 of 7
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Summary Financial
Data" and "Experts" and to the use of our report dated February 11, 2000 in
Amendment No. 1 to Form S-3 on the Registration Statement (Form SB-2) and
related Prospectus of SpectraScience, Inc. for the registration of 2,790,037
shares of its Common Stock.
Minneapolis, Minnesota
April 13, 2000
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints each of Chester E. Sievert, Jr.
and Ruth M. Bryan, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities to sign a Registration
Statement on Form SB-2 of SpectraScience, Inc. (the "Company") and any and all
amendments thereto, including post-effective amendments, for the sale of shares
of the Company by certain selling shareholders, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and with such state securities commissions
and other agencies as necessary; granting unto said attorney-in-fact and agent,
full power and authority to do so and perform to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent, or the substitutes for such attorney-in-fact
and agent, may lawfully do or cause to be done by virtue hereof.
Name Title Date
---- ----- ----
/s/ CHESTER E. SIEVERT, JR. Chairman, President and April 7, 2000
- --------------------------- Chief Executive Officer
Chester E. Sievert, Jr. (Principal Accounting Officer)
/s/ SCOTT G. ANDERSON Vice President Marketing April 7, 2000
- --------------------------- and Sales
Scott G. Anderson
Director April __, 2000
- ---------------------------
Henry M. Holterman
/s/ NATHANIEL S. THAYER Director April 7, 2000
- ---------------------------
Nathaniel S. Thayer
/s/ JOHAN A.P.M. DE HOND Director April 7, 2000
- ---------------------------
Johan A.P.M. de Hond
