SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1999
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-13092
SPECTRASCIENCE, INC.
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(Name of small business issuer in its charter)
MINNESOTA 41-1448837
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(State of incorporation) (I.R.S. Employer Identification No.)
14405 21ST AVENUE N, SUITE 111, MINNEAPOLIS, MINNESOTA 55447
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (763) 745-4120
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Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.25 PAR VALUE
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(Title of Class)
---------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES __X__ NO _____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its fiscal year ended December 31, 1999 were: $0
As of March 17, 2000, the number of outstanding shares of the Registrant's
Common Stock, par value $.25 per share, was 6,457,038. The aggregate market
value of the voting stock held by non-affiliates of the registrant was
approximately $62,956,121 based on the last reported closing price of $9.75 on
March 17, 2000.
Transitional Small Business Disclosure Format (Check one): Yes _____ No __X__
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SPECTRASCIENCE, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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Page
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PART I 3
Item 1. Business................................................................ 3
Item 2. Description of Property.................................................16
Item 3. Legal Proceedings.......................................................17
Item 4. Submission of Matters to a Vote of Security Holders.....................17
PART II 17
Item 5. Market for Common Equity and Related Shareholder Matters................17
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................18
Item 7. Financial Statements and Supplemental Data..............................22
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................22
PART III 22
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.......................22
Item 10. Executive Compensation..................................................22
Item 11. Security Ownership of Certain Beneficial Owners and Management..........22
Item 12. Certain Relationships and Related Transactions..........................22
Item 13. Exhibits and Reports on Form 8-K........................................23
SIGNATURES 25
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SPECTRASCIENCE, INC.
FORM 10-KSB
For the fiscal year ended December 31, 1999
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of he Securities Exchange Act of 1934, as amended. When used in this
Annual Report, or in our future filings with the SEC, in our press releases and
in oral statements made with the approval of an authorized executive officer,
the words or phrases "anticipates," "estimates," "expects," "will likely
result," "projects," "believes," "intends," or similar expressions are intended
to identify such forward-looking statements, but are not the exclusive means of
identifying such statements. These forward-looking statements involve risks and
uncertainties that may cause our actual results to differ materially from the
results discussed in the forward-looking statements.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date made. We undertake no obligation to
revise any forward-looking statements in order to reflect events or
circumstances after the date of such statements. Readers are urged to carefully
review and consider the various disclosures made by us in this report and other
reports we file with the SEC that attempt to advise interested parties of the
risks and factors that may affect our business. Such forward-looking statements
are qualified in their entirety by the cautions and risk factors set forth under
the "Cautionary Statement" filed as exhibit 99.1 to our 1999 Annual Report on
Form 10-KSB.
PART I
ITEM 1. BUSINESS
GENERAL
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 document.
DEVELOPMENT OF THE BUSINESS
From incorporation until October 1992, we developed, manufactured and sold
laser-enhanced angioplasty catheter systems for the treatment of heart and blood
vessel disease. The two products developed during this time were the LASTAC(R)
system and the Laser Angiosurgery System. In 1992, due to changes in medical
practices and market conditions, we changed our name to SPECTRASCIENCE, Inc. and
refocused our development efforts on developing diagnostic products that use
spectroscopic techniques. Since 1996 we have focused on developing the Virtual
Biopsy(TM) System. The Virtual Biopsy(TM) System is an innovative, minimally
invasive "spectroscopic system" that facilitates real-time differentiation
between normal, and pre-cancerous or cancerous tissue.
PRODUCTS AND MARKETS
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
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1999. Colorectal cancer accounts for 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 the lymph nodes;
* less than 10% for those patients in whom the cancer has spread further
to the liver or other organs.
Early detection of colorectal cancer is essential to increase the patients'
chances for long-term survival. Unfortunately, only 37% of colorectal cancer is
currently detected early.
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 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.
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* 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.
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 their interpretation.
The console consists of a graphic user interface, a computer, a
spectrophotometer, a laser 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 them 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 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.
We believe that once the Virtual Biopsy(TM) System is commercialized, our
core technologies can be applied to other medical specialties to differentiate
between normal, and pre-cancerous or cancerous tissues in other areas of the
body such as the cervix. We are also conducting clinical feasibility studies
with the Virtual Biopsy(TM) System to determine the viability of our technology
as it applies to Barrett's esophagus and the changes that esophageal tissue
undergoes as it becomes a cancerous condition.
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We can provide no assurance that the Virtual Biopsy(TM) System will be
commercialized, that we will capture the market share we anticipate, or that we
will successfully adapt the Virtual Biopsy(TM) System for use in other medical
specialties.
CLINICAL STUDIES
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 complied and submitted a response, a
final approval is still necessary before we can commercialize the Virtual
Biopsy(TM) System. We expect our application 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.
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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.
PRODUCT 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.
There can be no assurance that we will receive FDA clearance to market the
Virtual Biopsy(TM) System, be successful in establishing third-party
reimbursement for the Virtual Biopsy(TM) System, or be able to develop other
applications for the Virtual Biopsy(TM) System.
GOVERNMENT REGULATIONS
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 civil * total or partial suspension of
penalties production
* recall or seizure of our products * inability to obtain pre-market
* criminal prosecution clearance/approval for our devices
* a recommendation that we not be * withdrawal of marketing approvals
allowed to contract with the
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
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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. We received 510(k) clearance
from the FDA for our 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.
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 relevant bench * laboratory and animal studies
tests * a complete description of the
* pre-clinical and human clinical device and its components
trial data * proposed labeling
* a detailed description of the * advertising literature
methods, facilities and 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
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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
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 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 complied and
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 or
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 our business, financial condition or results
of operations.
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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) 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.
DISTRIBUTION, MARKETING AND CUSTOMERS
At this time, we have limited marketing and sales capabilities.
SPECTRASCIENCE's objective is to become a leader in the development and
commercialization of advanced diagnostic products with the capability to
differentiate in real time between healthy, and pre-cancerous or cancerous
tissue. 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 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 FDA approval,
outcome-based trials demonstrating better clinical outcomes and the
acceptance of the Virtual Biopsy(TM)System by key
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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 identical to those
currently used by endoscopists in performing traditional tissue
biopsies. 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. We can provide no
assurance that we will be able to enter into such strategic
partnerships on favorable terms or at all.
THIRD-PARTY REIMBURSEMENT
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.
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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 we 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.
MANUFACTURING AND SOURCES OF SUPPLY
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
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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.
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 sole, 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.
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.
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* 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.
* 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
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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 resources * greater resources and expertise
* greater manufacturing resources in the areas of research and
* greater resources and expertise in development
testing products in clinical trials * greater expertise in obtaining
regulatory approvals
* greater resources for marketing
and sales activities
PATENTS
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 area 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
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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 Advanced Photodynamic Therapies, 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 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.
EMPLOYEES
As of March 17, 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.
ITEM 2. DESCRIPTION OF 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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ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of the security holders
during the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION
Our common stock 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 March 17,
2000, the last reported bid price of the common stock was $9.375. As of March
17, 2000, there were approximately 1,025 holders of record of the 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.
1999 Stock Prices (1) 1998 Stock Prices
--------------------------- -------------------------
QUARTER ENDED High Sales Low Sales High Sales Low Sales
-------------------- --------------------------- -------------------------
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
---------------------------------------------------------------------------
(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.
HOLDERS
On March 17, 2000, we had approximately 1,025 registered shareholders of
record of 6,457,038 shares of our Common Stock, excluding shareholders that are
registered in "street-names." We estimate that there are approximately 5,000
beneficial shareholders of our Common Stock.
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DIVIDENDS
To date, SPECTRASCIENCE 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.
OTHER SECURITIES
In 1999, SPECTRASCIENCE completed two private placements of common stock.
Each of the private placements were to accredited investors and were exempt
under Rule 506 of Regulation D of the Securities Act of 1933. 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. SPECTRASCIENCE received net
combined proceeds of $4,347,698 from the two placements; $1,157,500 from the
March placement and $3,190,198 from the December placement. 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.
In December 1999, SPECTRASCIENCE also issued a convertible demand note for
$600,005 with a related party. A member of our board of directors is also a
member of the board of directors of the payee. The annual interest rate on the
note is 6% and it is payable upon maturity, demand or conversion. The note
matures on June 30, 2000 however the payee can demand payment at any time after
March 31, 2000. The note may be converted either at the option of the holder at
any time, or automatically upon the approval of our common stock for listing on
the Nasdaq SmallCap Market. If the note is converted, it will convert into
171,430 shares of our common stock and warrants to purchase 85,715 shares of
common stock at $5.50 per share, expiring two years from the date of conversion.
A total of $408,710 was raised in fiscal 1999 through the exercise of stock
options for 131,200 shares of common stock.
STOCK OPTIONS
As of December 31, 1999, SPECTRASCIENCE 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. Current
employees hold 36.4% of the outstanding stock options.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis provides information that management
believes is relevant to assess and understand our results of operations and
financial condition. This discussion should be read in conjunction with the
financial statements and footnotes that follow.
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. As discussed in the clinical trials
section, we are currently awaiting final determination of the FDA regarding our
pre-market
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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 document.
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
also 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 utilized 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
Page 19
<PAGE>
1998 required management to incur increased expenses in the areas of financial
management and investor relations consulting. The increased consulting expenses
were partially offset 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 SPECTRASCIENCE 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 (EXPENSE). 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
Page 20
<PAGE>
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.
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.
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. Management anticipates that it has sufficient
cash and cash equivalents to fund 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
Page 21
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Audited financial statements for each of the three years ended December 31,
1997, 1998 and 1999 are filed as part of this Form 10-KSB. See Index to
Financial Statements on Page F.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this item is incorporated by reference to the
information set forth in the Proxy Statement of SPECTRASCIENCE in connection
with its 2000 Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission on or prior to April 30, 2000.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
information set forth in the Proxy Statement of SPECTRASCIENCE in connection
with its 2000 Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission on or prior to April 30, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information set forth in the Proxy Statement of SPECTRASCIENCE in connection
with its 2000 Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission on or prior to April 30, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
information set forth in the Proxy Statement of SPECTRASCIENCE in connection
with its 2000 Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission on or prior to April 30, 2000.
Page 22
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
Audited financial statements for each of the three years ended December 31,
1997, 1998 and 1999 are filed as part of this Form 10-KSB. See Index to
Financial Statements on Page F.
REPORTS ON FORM 8-K.
None.
EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B:
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation, as amended. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB, Exhibit 3.1, for the year ended
December 31, 1996.)
3.2 Bylaws, as amended. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 3.2, for the year ended December 31,
1995.)
10.1 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 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 Form of Indemnification Agreement for all officers and directors.
(Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1986.)
10.10 Employment Agreement and Severance Agreement between the Company and
Brian T. McMahon dated September 30, 1992. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB, Exhibit 10.23, for the year
ended December 31, 1993.)
10.11 Severance (Change in Control) Agreement between the Company and Brian T.
McMahon dated November 26, 1996. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB, Exhibit 10.15, for the year
ended December 31, 1996.)
10.12 Severance (Change in Control) Agreement between the Company and
Ching-Meng Chew dated November 26, 1996. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB, Exhibit 10.16, for the year
ended December 31, 1996.)
Page 23
<PAGE>
10.13 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.)
10.14 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.)
10.15 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.)
10.16 Bridge Loan Agreement, including form of Promissory Note and form of
Warrant by and between the Company and Qualified Lenders, dated
September 30, 1994. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 10.28, for the year ended December 31,
1994.)
10.17 Form of Promissory Note that was issued in conjunction with the Bridge
Loan Agreement by and between the Company and Qualified Lenders, dated
September 30, 1994. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 10.28, page 45, for the year ended
December 31, 1994.)
10.18 Form of Promissory Note that was issued in conjunction with the Bridge
Loan Agreement by and between the Company and Qualified Lenders, dated
September 30, 1994. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 10.28, page 45, for the year ended
December 31, 1994.)
10.19 Form of Warrant. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 10.28, for the year ended December 31,
1994.)
10.20 List of Lenders in the Bridge Loans, and Investors in the Company's
Preferred Stock. (Incorporated by reference to the Company's Form S-3
Registration Statement under The Securities Act of 1933 as filed with
the Securities and Exchange Commission and declared effective on June 7,
1996, Commission File No. 333-1149.
10.21 Form of Subscription Agreement that was used in conjunction with the
private placements of the Company's Preferred Stock. (Incorporated by
reference to the Company's Annual Report on Form 10-KSB, Exhibit 10.20,
for the year ended December 31, 1995.)
10.22 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.)
10.23 Lease Agreement between the Company and Urologix, Inc. dated September
23, 1999, filed herewith.
23.1 Consent of Independent Auditors, filed herewith
99.1 Cautionary Statement Identifying Important Factors that Could Cause the
Company's Actual Results to Differ from Those Projected in
Forward-Looking Statements, filed herewith.
27 Financial Data Schedule, filed herewith.
Page 24
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SPECTRASCIENCE, INC.
--------------------
(Registrant)
Date: March 28, 2000 By: /s/ CHESTER E. SIEVERT, JR.
---------------------------
CHESTER E. SIEVERT, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ CHESTER E. SIEVERT, JR. March 28, 2000
- --------------------------------------
Chester E. Sievert, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
/s/ HENRY M. HOLTERMAN March 28, 2000
- --------------------------------------
Henry Holterman
Director
/s/ NATHANIEL S. THAYER March 28, 2000
- --------------------------------------
Nathaniel S. Thayer
Director
/s/ JOHAN A.P.M DEHOND March 28, 2000
- --------------------------------------
Johan A.P.M. De Hond
Director
Page 25
<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
Page 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
Page 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.
Page 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>
SEE ACCOMPANYING NOTES.
Page 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
Page 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
----------------------------------------------- ------------------------------
WEIGHTED
SHARES AVERAGE WEIGHTED WEIGHTED
OUTSTANDING AT REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE PRICE SHARES EXERCISE PRICE
EXERCISE PRICE 1999 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>
SpectraScience, Inc.
Notes to Financial Statements
December 31, 1999
EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B:
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.)
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 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 Form of Indemnification Agreement for all officers and directors.
(Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1986.)
10.10 Employment Agreement and Severance Agreement between the Company and
Brian T. McMahon dated September 30, 1992. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB, Exhibit 10.23, for the year
ended December 31, 1993.)
10.11 Severance (Change in Control) Agreement between the Company and Brian T.
McMahon dated November 26, 1996. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB, Exhibit 10.15, for the year
ended December 31, 1996.)
10.12 Severance (Change in Control) Agreement between the Company and
Ching-Meng Chew dated November 26, 1996. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB, Exhibit 10.16, for the year
ended December 31, 1996.)
10.13 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.)
10.14 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.)
10.15 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.)
<PAGE>
10.16 Bridge Loan Agreement, including form of Promissory Note and form of
Warrant by and between the Company and Qualified Lenders, dated
September 30, 1994. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 10.28, for the year ended December 31,
1994.)
10.17 Form of Promissory Note that was issued in conjunction with the Bridge
Loan Agreement by and between the Company and Qualified Lenders, dated
September 30, 1994. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 10.28, page 45, for the year ended
December 31, 1994.)
10.18 Form of Promissory Note that was issued in conjunction with the Bridge
Loan Agreement by and between the Company and Qualified Lenders, dated
September 30, 1994. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 10.28, page 45, for the year ended
December 31, 1994.)
10.19 Form of Warrant. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB, Exhibit 10.28, for the year ended December 31,
1994.)
10.20 List of Lenders in the Bridge Loans, and Investors in the Company's
Preferred Stock. (Incorporated by reference to the Company's Form S-3
Registration Statement under The Securities Act of 1933 as filed with
the Securities and Exchange Commission and declared effective on June 7,
1996, Commission File No. 333-1149.)
10.21 Form of Subscription Agreement that was used in conjunction with the
private placements of the Company's Preferred Stock. (Incorporated by
reference to the Company's Annual Report on Form 10-KSB, Exhibit 10.20,
for the year ended December 31, 1995.)
10.22 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.)
10.23 Lease Agreement between the Company and Urologix, Inc. dated September
23, 1999, filed herewith.
23.1 Consent of Independent Auditors, filed herewith.
99.1 Cautionary Statement Identifying Important Factors that Could Cause the
Company's Actual Results to Differ from Those Projected in
Forward-Looking Statements, filed herewith.
27 Financial Data Schedule, filed herewith.
EXHIBIT 10.23
EXHIBIT 10.23
CONSENT TO SUBLEASE
September 30, 1999
Urologix
14405 21st Avenue North
Suite 111
Plymouth, MN 55447
RE: Sublease Agreement dated September 23, 1999 ("Sublease") between
Urologix, Inc., a Minnesota corporation ("Tenant") and Spectra Science,
Inc., a Minnesota corporation ("Subtenant") Premises: Approximately
13,282 square feet located in Suite 111 of at Parkers Lake Pointe I,
14405 21st Avenue North, Plymouth, Minnesota 55447, a copy of which is
attached hereto as Exhibit 1.
Gentlemen:
Reference is hereby made to your request for consent to the subletting
contemplated by the Sublease.
Subject to and contingent upon your consent to the Sublease, we hereby consent
to such subletting subject to the following understandings, agreements and
conditions:
1. Neither this consent nor the terms of the Sublease modifies, amends,
waives or affects any of the terms, covenants, conditions, provisions or
agreements of the lease from the undersigned to Tenant dated January 20, 1992 as
amended on June 20, 1994, April 5, 1995, March 7, 1996, September 30, 1996,
November 15, 1996, October 31, 1997, March 12, 1998 and March 26, 1998 (as
amended, the "Lease"), a copy of which is attached hereto as Exhibit 2, which
Lease shall continue to apply to all the space covered by the Lease and the use
and occupancy thereof. The Sublease is subject and subordinate at all times to
this consent and to the Lease and all of its terms, covenants, conditions,
provisions and agreements.
2. This consent shall not be construed to create a landlord-tenant
relationship or privity of contract or estate between the undersigned and
Subtenant.
3. Nothing contained herein shall be construed as a consent to,
approval of, or ratification by the undersigned of any of the particular
provisions of the Sublease or as a representation or warranty by the undersigned
in respect thereof. The undersigned is not passing on the terms, covenants and
conditions of the Sublease and is not assuming any obligations under the
Sublease.
4. Neither the Sublease, nor this consent thereto shall be construed as
a consent by the undersigned to any further subletting either by Tenant or by
Subtenant.
5. If Tenant breaches any of the terms and provisions of the Lease, the
undersigned may elect to receive directly from Subtenant all sums due or payable
to Tenant by Subtenant pursuant to the Sublease, and upon written notice from
the undersigned, Subtenant shall thereafter pay to the undersigned any and all
sums becoming due or payable under the Sublease. Notwithstanding the foregoing,
neither the giving of such notice to Subtenant nor the receipt of such direct
payments from Subtenant shall cause the undersigned to assume any of Tenant's
obligations and/or liabilities under the Sublease, nor shall such event impose
upon the undersigned the obligation to honor the Sublease nor subsequently to
accept Subtenant's attornment.
6. This consent is not assignable, nor shall this consent be a consent
to any amendment, modification, extension or renewal of the Sublease, without
the undersigned's prior written consent.
<PAGE>
7. Tenant and Subtenant agree to reimburse the undersigned, upon
demand, for any and all costs and expenses (including, without limitation,
attorney's fees and disbursements) incurred by the undersigned in connection
with the Sublease and any failure to pay the same upon demand shall be a default
under the Lease.
8. Tenant and Subtenant covenant and agree that under no circumstances
shall the undersigned be liable for any brokerage commission or other charge or
expense in connection with the Sublease and both Tenant and Subtenant agree to
indemnify the undersigned, its directors, officers, agents, shareholders and
employees against same and against any cost or expense (including, without
limitation, attorney's fees and disbursements) incurred by the undersigned, its
directors, officers, agents, shareholders and employees in resisting any claim
for any such brokerage commission.
9. If for any reason the term of the Lease shall terminate, the
Sublease shall automatically be terminated, and on or prior to the date of such
termination of the Sublease, Subtenant shall quit and surrender the Premises to
the undersigned in accordance with all applicable provisions of the Lease.
10. Tenant shall be liable to the undersigned for any default under the
Lease, whether such default is caused by Tenant or Subtenant or anyone claiming
by or through either Tenant or Subtenant, but the foregoing shall not be deemed
to restrict or diminish any right which the undersigned may have against
Subtenant pursuant to the Lease, in law or in equity for violation of the Lease
or otherwise, including, without limitation, the right to enjoin or otherwise
restrain any violation of the Lease by Subtenant.
11. Subtenant agrees to promptly deliver a copy to the undersigned of
all notices of default and all other notices sent to Tenant under the Sublease,
and Tenant agrees to promptly deliver a copy to the undersigned of all such
notices sent to Subtenant under the Sublease. All copies of any such notices
shall be delivered personally or sent by United States registered or certified
mail, postage prepaid, return receipt requested, to Cheshire Realty Corp., 666
Fifth Avenue, New York, New York 10103, Attention: Christine C. Kurtz, or to
such other place or persons as the undersigned or its agent may from time to
time designate.
12. The execution of this consent by Tenant and Subtenant shall
indicate their joint and several confirmations of the foregoing conditions and
their agreement to be bound thereby.
Very truly yours,
PARKERS LAKE I REALTY CORP.
By: /s/ CHRISTINE C. KURTZ
Name:
Title:
CONFIRMED AND AGREED:
UROLOGIX, INC.
By: /s/ CHRIS GEYEN
Name:
Title:
SPECTRA SCIENCE, INC.
By: /s/ RUTH M. BRYAN
Name:
Title:
<PAGE>
EXHIBIT 10.23
SUBLEASE
THIS SUBLEASE, made and entered into this 23rd day of September 1999, between
Spectra Science, Inc., a Minnesota corporation ("Sublease") and Urologix, Inc.,
a Minnesota corporation ("Sublessor").
RECITALS:
A. A lease ("Prime Lease") dated January 20, 1992, as amended, was made
and entered into between Parkers Lake Pointe I Limited Partnership, as Landlord,
and Urologix, Inc., as Tenant, and whereas Parkers Lake I Realty Corporation has
succeeded to interest of the Landlord, pertaining to Premises described as 14405
- - 21st Avenue North, City of Plymouth, County of Hennepin, State of Minnesota
and which Prime Lease and all amendments are attached hereto as Exhibit A.
B. The parties hereto desire that the Sublessor sublet to the Sublessee
and that the Sublessee take from the Sublessor the portion of the Premises
leased under the Prime Lease containing approximately 13,282 square feet of
rentable area (hereinafter referred to as the "Sublet Area") as depicted on
Exhibit B, attached hereto and made a party hereof.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants hereinafter contained, but subject to the consent thereto by
Landlord, the Sublessor does hereby sublet to the Sublessee and the Sublessee
does hereby rent and take from Sublessor, the Sublet Area, subject to the
following terms and conditions:
1. The term of this Sublease shall commence October 1, 1999, and shall
terminate January 30, 2003.
2. The Sublessee shall pay to the Sublessor Minimum Rent for the Sublet
Area, according to the following schedule, due and payable on the first day of
each month during the entire term of this Sublease.
$7,759.00 per month from October 1, 1999 through September 30, 2000
$8,250.00 per month from October 1, 2000 through January 31, 2001
$8,502.00 per month from February 1, 2001 through January 30, 2003
Sublessee shall also be responsible for its proportionate share of Real
Estate Taxes and Operating Expenses pursuant to Article 6 of the Prime Lease
based on 13,282 rentable square feet for the term of this Sublease. Sublessee's
proportionate share of the Real Estate Taxes and aggregate Operating Expense is
33.51% and is determined by dividing 13,282 rentable square feet by 39,640
square feet located within the building. Sublessee shall initially pay estimated
1999 Real Estate Taxes and Operating Expenses in the amount of $4,183.83 per
month ($3.78 psf per year) subject to adjustment at the end of 1999 as provided
for in said Article 6 of the Prime Lease.
All rent shall be paid to the Sublessor at the address set forth in
Paragraph 8 hereof or at such other address and/or to such other party as the
Sublessor may from time to time elect by giving not less than ten (10) days
advance written notice thereof to the Sublessee.
3. The Sublessee may use the Sublet Area for general office, warehouse,
research and development and light manufacturing purposes and for no other
purposes whatsoever.
4. The Sublessee will not use the Sublet Area or permit the Sublet Area
or any part of the Building of which it is a part, to be used in violation of
any of the terms, covenants or conditions of the Prime Lease.
5. The Sublessor will keep and perform promptly, each of the terms,
covenants and conditions of the Prime Lease relating to the Sublet Area except
for those provisions thereof which, under the terms of this Sublease, the
Sublessee is to keep or perform. The terms and conditions of the Prime Lease are
incorporated herein by reference as if set out in full herein. Sublessee shall
be bound to Sublessor (in addition to Landlord) under the same terms and
conditions of the Prime Lease as if the Prime Lease had been an instrument
executed between Sublessor and Sublessee, but subject to the terms and
conditions of this Sublease.
6. Without the further act or deed of the Landlord or of either party
hereto the term of this Sublease shall terminate and be of no further force or
effect on the date set forth in Paragraph 1 hereof and upon such termination the
<PAGE>
Sublessee shall forthwith vacate the Sublet Area leaving it in the condition
which, under the terms of the Prime Lease, the Tenant thereunder is obligated to
leave the same.
7. The Sublessee will notify the Landlord forthwith in the event of any
default that occurs under the provisions of this Sublease which comes to the
attention of the Sublessee, such notice to be given to the Landlord by United
States Mail, registered or certified, postage prepaid, at the address provided
for Landlord in the preamble to the Prime Lease or as such other address as
Tenant shall be advised to use by Landlord.
8. Any notice provided for herein shall be deemed to be duly given if
made in writing and delivered in person to an office of such party or mailed by
first class registered or certified mail, postage prepaid, addressed as follows:
If to Sublessor: If to Sublessee:
Urologix, Inc. Spectra Science, Inc.
c/o President c/o Ruth Bryan
14405 - 21st Avenue North Suite __ 14405 - 21st Avenue North Suite __
Plymouth, MN 55447 Plymouth, MN 55447
or to such other address with respect to either party hereto as such
party shall notify the other party hereto in writing. Any notice so given, if
mailed as aforesaid, shall be deemed received the second (2nd) day after it is
deposited in the United States Mail.
9. Neither Sublessor or Landlord shall be liable to Sublessee, or those
claiming through or under Sublessee, for injury, death or property damage
occurring in, on or about the Sublet Area to Sublessee or an employee, customer
or invitee of the Sublessee and Sublessee shall indemnify Sublessor and Landlord
and hold them harmless from any claim or damage arising out of any injury, death
or property damage occurring in, on or about the Sublet Area to Sublessee or an
employee, customer or invitee of the Sublessee, excepting those claims arising
from gross negligence of the Sublessor or Landlord.
10. Without limiting the generality of paragraph 9 hereof, Sublessee
shall, at its expense, maintain public liability insurance during the term of
this Sublease as required by the Prime Lease (see Exhibit A, Article 11) in one
or more companies acceptable to Sublessor and Landlord, naming Sublessor and
Landlord as additional insureds, and Sublessee as insured, in form and substance
reasonably acceptable to Sublessor and Landlord (such insurance to insure
performance by Sublessee or its obligations under paragraph 9 hereof), such
insurance to be in those amounts as set forth under said Article of Prime Lease.
10.1 No policy of insurance obtained by the Sublessee under the
provisions of this paragraph 10 may be cancelled or terminated except upon not
less than ten (10) days written notice to Sublessor and Landlord and each policy
shall contain a provision to that effect that the rights of the Sublessor and
Landlord thereunder will not be affected by any defense which the insurer may
have against the Sublessee or any other party. True and correct copies of each
policy of insurance, and renewals thereof, obtained by the Sublessee under the
provisions of this paragraph 10, forthwith after issuance thereof, will be made
available upon request to Sublessor and to Landlord.
11. The Sublessor and Landlord, their authorized agents, or attorneys,
may at any reasonable time, with 24 hours notice, enter the Sublet Area to
inspect, make repairs, improvements and/or changes in the Sublet Area or other
premises in the Building of which the Sublet Area is a part. There shall be no
diminution of rent during this time, nor liability on the part of the Sublessor
or Landlord by reason of inconvenience, annoyance or injury to business.
12. If the Sublessee defaults in the observance or performance of any
of the Sublessee's covenants, agreements or obligations hereunder wherein the
default can be cured by the expenditure of money, either the Sublessor or
Landlord may, but without obligations and without limiting any other remedies
which they may have by reason of such default, after written notice to Sublessee
and a reasonable opportunity for Sublessee to cure the default, charge the cost
thereof to the Sublessee and the Sublessee shall pay the same forthwith upon
demand, together with interest thereon at the highest permissible rate of
interest allowed under the usury statues of the State of Minnesota or in case no
such maximum rate of interest is provided, at the rate of 12% per annum.
13. If the Sublessee shall default, as defined in Article 26 of the
Prime Lease, in the payment of any installment of rent or in the observance or
performance of any of the Sublessee's covenants, agreements or obligations
hereunder, or if any proceeding is commenced by or against the Sublessee for the
purpose of subjecting the assets of the Sublessee to any law relating to
bankruptcy or insolvency or for an appointment of a receiver of Sublessee or of
any of Sublessee's assets for the benefit of creditors, then, in any such event,
the Sublessor may, without process, re-enter
<PAGE>
immediately into the Sublet Area and remove all persons and property therefrom,
and at its option, nullify and cancel this Sublease with respect to all future
rights or the Sublessee and have, regain, repossess and enjoy the Sublet Area,
anything herein to the contrary notwithstanding. Sublessee hereby expressly
waives the service of any notice in writing of intention to re-enter as
aforesaid and also all right of restoration to possession of the Sublet Area
after re-entry or after judgment for possession thereof. In the case of any such
termination, the Sublessee will indemnify the Sublessor against all loss of
rents and other damages which it may incur by reason of such termination during
the residue of the term of this Sublease, and also against all attorney's fees
and expenses incurred in enforcing any of the terms of this Sublease.
14. Notwithstanding anything in this Sublease to the contrary, nothing
herein shall relieve any of the Sublessor's responsibilities to Landlord and
said responsibilities derived from the heretofore described Prime Lease.
Sublessee shall indemnify and hold Sublessor harmless from any and all
liability, cost, expense, action or claim of any nature (including defaults
under Prime Lease) arising out of or related to Sublessee's use and occupancy of
the Sublet Area, other than those covenants and conditions, if any, that can be
satisfied or performed only by Sublessor.
14.1 Sublessor shall indemnify and hold Sublessee harmless from any and
all liability, cost, expense, action or claim of any nature (including defaults
under Prime Lease) arising out of or related to Sublessor's prior use and
occupancy of the Sublet Area for acts or omissions that occurred or were omitted
prior to the effective date of this Sublease.
15. The Sublessee shall not have the right to assign this Sublease or
sublet all or any part of the Sublet Area without the prior written consent of
the Sublessor and of the Landlord which consent shall not be unreasonably
withheld.
16. Sublessee accepts the Sublet Area in its "as-is" condition, without
Sublessor providing or making any alterations, modifications or refurbishment
thereto, and with all built-in fixtures, with the exception of all work stations
that are built-in, cabinets, book shelves, appliances, and all other leasehold
improvements located thereon. All of such improvements owned by Sublessor shall
be and become the property of Sublessee subject to no liens, conditional sales
contracts, or other encumbrances except for such rights as the Landlord may have
in same as provided in the Prime Lease; and except if this Sublease expires
prior to the Prime Lease, then the ownership of all of such improvements shall
again revert to Sublessor upon redelivery of the Sublet Area to Sublessor.
17. Sublessee agrees to deposit with Sublessor, on the date hereof, a
Security Deposit in the amount of $20,000 which shall be held by Sublessor,
without interest, as security for the performance of Sublessee's covenants and
obligations under this Sublease. Upon the occurrence of any event of default by
Sublessee, Sublessor may, from time to time without prejudice to any other
remedy provided herein or provided by law, apply such Security Deposit to any
arrears of rent or other payments due Sublessor under this Sublease, and any
other damage, injury, expense or liability caused by such event of default
without waiving such event of default and Sublessee shall pay to Sublessor on
demand the amount so implied in order to restore the Security Deposit to its
original amount of $20,000. Although the Security Deposit shall be deemed the
property of the Sublessor, any remaining balance of such Security Deposit shall
be returned by Sublessor to Sublessee at such time after termination of this
Sublease, that all of Sublessee's obligations under this Sublease have been
fulfilled.
18. The Sublease is conditioned upon and shall not be effective until
and unless Landlord consents in writing to the terms and conditions of this
Sublease.
19. Sublessor must provide written notice to Sublessee, with two
business days of receiving notice from Landlord, regarding notices received
about matters affecting Sublet Area.
IN WITNESS WHEREOF, each of the parties hereto has caused their
presence to be duly executed as of the day and year first above written.
SUBLESSOR: SUBLESSEE:
UROLOGIX, INC. SPECTRA SCIENCE, INC.
By /s/ CHRIS GEYEN By /s/ STEPHEN M. BLINN
--------------- --------------------
Its /s/ V.P. FINANCE Its EXECUTIVE VICE PRESIDENT
---------------- ------------------------
Date 9/27/99 Date 9/23/99
--------------- ---------------
<PAGE>
EXHIBIT 10.23
LEASE AGREEMENT
THIS LEASE, made and entered into this 20th day of January, 1992, by
and between Parkers Lake Pointe I Limited Partnership, whose address is c/o
Caliber Development Corp., 14405 21st Ave., #118, Plymouth, MN, hereinafter
referred to as "Lessor" and Urologix, Inc., whose address is 2445 Xenium Lane,
Plymouth, MN, hereinafter referred to as "Lessee".
Lessor in consideration of the rents, terms, covenants, conditions and
agreements hereinafter provided and described on the part of the Lessee to be
paid, kept and performed, does lease and let unto the Lessee, and Lessee does
hereby take hire from Lessor and do hereby covenant, promise, and agree as
follows:
PROPERTY:
1. The parcel of real property known as Parkers Lake Pointe I 14405 21st Avenue,
Plymouth, MN and legally described as Lot 84 Block 1. Cimarron East Addition -
Hennepin County, MN, made a part hereof, together with the building and
improvements erected thereon ("Building") are hereinafter referred to as the
"Property".
LEASED PREMISES:
2. The "Leased Premises" shall consist of that portion of the Building erected
upon the real estate described as Property crosshatched on Exhibit "A" attached
hereto and made a part hereof, designated as suite #111 and consisting of
approximately 3,762 usable square feet of office and 3,814 square feet of
warehouse totaling 7,576 (1) square feet. In the event that the actual square
footage contained in the Leased Premises differs in amount with the amount set
forth herein, the actual square footage contained in the Leased Premises shall
be that which is used for all purposes under this Lease.
1) Per Exhibit B, identified as 'Core Area' plus 'Expansion South'
TERM:
3. The Term of this Lease shall commence on the 1st day of March, 1992
(Commencement Date), and shall continue thereafter to and including the 31st day
of August, 1997, (Expiration Date) unless earlier terminated as hereinafter
provided. Lessee agrees that neither this Lease nor a short form or memorandum
of this Lease will be recorded without the prior written consent of the Lessor.
At Lessor's request, Lessee agrees to execute for recording purposes a short
form or memorandum of this Lease, which short form or memorandum f this Lease
will set forth the Commencement Date, and the date of termination of the lease
term. If any option to renew is granted Lessee herein and such renewal option is
exercised, the word "term" shall also include the renewal period.
BASE RENT:
4. Lessee shall pay to Lessor at the address set forth below or at such other
place as Lessor may from time to time designate in writing, annual rent of
$51,780.00 payable in advance in successive monthly installments of $4,315.00,
on the first day of each and every calendar month during this Lease ("Base
Rent"). The first full months rent is included with this Lease as Check No.
_________, dated __________________, $_________ , issued by ___________________.
RENT PAYMENT: (2) December 1992 Base Rent of $3,328.00 to be prepaid.
5. The monthly Base Rent together with any additional rent payable hereunder
shall be paid in advance without demand on the first day of each month during
the Lease Term in lawful money of the United States to Lessor at its office, c/o
Caliber Development Corp., 14405 21st Ave. #118, Plymouth, MN. 55447, or at such
other place or places and to such other party or parties as Lessor may hereafter
designate in writing.
ADDITIONAL RENT:
6. This is a "Net" Lease and Lessee shall pay to Lessor throughout the term of
this Lease the following:
a. Lessee shall pay a sum equal to 19.1% of the Real Estate Taxes.
Lessee's pro rata share of real estate taxes shall be the ratio between the area
of the Leased Premises and the net rentable area of the Building, a determined
from time to time by the Lessor. The term "Real Estate Taxes" shall mean all
real estate taxes, an assessments, including interest thereon, and any taxes in
lieu thereof which may be levied upon or assessed against the Property of which
the Leased Premises are a part and which are due and payable in any year during
the term hereof. Lessee, in addition to all other payments to Lessor by Lessee
required hereunder shall pay to Lessor, in each year during the term of this
Lease and any extension or renewal thereof, Lessee's proportionate share of such
real estate taxes assessments. The payments to be made by Lessee shall be made
with respect to the Real Estate Taxes payable by Lessor during each such lease
year.
<PAGE>
Any tax year commencing during any lease year shall be deemed to
correspond to such lease year. In the event the taxing authorities include in
such real estate taxes and assessments the value of any improvements made by
Lessee, or of machinery,, equipment, fixture, inventory or other personal
property or assets of Lessee, the Lessee shall pay all the taxes attributable to
such items in addition to its proportionate share of said aforementioned real
estate taxes and assessments, unless Lessee shall be contesting such taxes.
b. A sum equal to 19.1% of the annual aggregate operating expenses
incurred by Lessor in the operation, maintenance and repair of the Property.
Lessee's pro rata share of operating expenses shall be the ratio between the
area of the leased Premises and the net rentable area of the Building, as
determined from time to time by the Lessor. The term "Operating Expenses" shall
include but not be limited to maintenance, repair, and replacement and care of
all common area lighting, common area plumbing, landscaped areas, parking,
including, but without limitation the costs of patching or seal coating
black-top or concrete surfaces, marking and striping parking spaces or
driveways, repair and replacement of signs identifying the Property, cleaning of
parking lot and driveways surfaces, repairing and painting the lighting
standards and fixtures, electric current and lamps for parking lot lights snow
removal, common area utility costs, insurance premiums, including any rent
insurance premiums paid by Lessor, management fee, cost of service contracts,
cost of any repairs or alterations required to comply with requirements of any
governmental or quasi-governmental authority expensed in the first year.
Prior to commencement of this Lease, and prior to the commencement
of each calendar year thereafter commencing during the term of this Lease or any
renewal or extension thereof, Lessor may estimate for each calendar year (I) the
total amount of Real Estate Taxes; (ii) the total amount of Operating Expenses;
(iii) Lessee's share or Real Estate Taxes for such calendar year; (iv) Lessee's
share of Operating Expenses for such calendar year and (v) the computation of
the annual and monthly rental payable during such calendar year as a result of
increases or decreases in Lessee's share of Real Estate Taxes and Operating
Expenses. Said estimates will be delivered by December 31, of each year.
The amount of Lessee's share of Real Estate Taxes and Operating
Expenses for each calendar year, so estimated, shall be payable as Additional
Rent, in equal monthly installments, in advance, on the first day of each month
during such calendar year at the option of Lessor. In the event that such
estimate is delivered to Lessee after the first day of January of such calendar
year, said amount, so estimated, shall be payable as Additional Rent in equal
monthly installments, in advance, on the first day of each month over the
balance of such calendar year, with the number of installments being equal to
the number of full calendar months remaining in such calendar year.
Upon completion of each calendar year during the term of this
Lease or any renewal or extension thereof, Lessor shall determine the actual
amount of the Real Estate Taxes and Operating Expenses payable in such calendar
year and Lessee's share thereof. If Lessee has underpaid its share of Real
Estate Taxes or Operating Expenses for such calendar year, the Lessee will be
billed its proportionate share. If Lessee has overpaid, Lessor shall credit such
excess against the most current monthly installment or installments due Lessor
for its estimate of Lessee's share of Real Estate Taxes and Operating Expenses
for the next following calendar year. A pro rata adjustment shall be made for a
fractional calendar year occurring during the term of this Lease or any renewal
or extension thereof based upon the number of three hundred sixty-five (365)
days and all additional sums payable by Lessee or credits due Lessee as a result
of the provisions of this Article 6 shall be adjusted accordingly.
c. The payment of the sums set forth in this Article 6 shall be in
addition to the Base Rent payable pursuant to Article 4 of this Lease. In the
event the lease term shall begin or expire at any time during the calendar year,
the Lessee shall be responsible for his pro rata share of Additional Rent under
subdivisions a. and b. during the Lease and/or occupancy time.
COVENANT TO PAY RENT:
7. The covenants of Lessee to pay the Base Rent and the Additional Rent are each
independent of any other covenant, condition, provision or agreement contained
in this Lease, and Lessee shall have no right of offset or deduction as a result
of any default by Lessor.
ACCEPTANCE OF PREMISES:
9. The leasehold improvements to be completed by Lessor are described in the
attached Exhibit B. The related building construction allowances are in the
attached Exhibit C. Lessee will have five days after taking possession of the
Leased Premises to inspect them and to report to Lessor any defects. Lessee will
be presumed to have accepted the condition of the Leased Premises except only
for defects noted during those first five days.
Lessee's obligation for construction costs in excess of Lessor's
construction allowances shall be paid 10 days from the date of billing.
<PAGE>
PERSONAL PROPERTY AT RISK OF LESSEE:
12. All personal property in the Property shall be at the risk of the Lessee
only. The Lessor shall not be or become liable for any injury or damage to
persons or property, or to the Leased Premises or any furniture, equipment,
improvements or other changes made by Lessee or to Lessee or any other persons
or property as a result of fire, explosion, water leakage, sewage, electric
failure, gas or odors, or for any damage whatsoever done or occasioned by or
from any plumbing, gas, water or other pipes or any fixtures, equipment, wiring
or appurtenances whatsoever, or for any damage arising from any act or neglect
of other Lessees, occupants or employees of the Building in which the Leased
Premises are situated or arising by reason of the use of wiring or appurtenances
therein, or by the act or neglect of any other person or caused in any manner
whatsoever, so long as damage is not the result of the negligence of Lessor or
its agents. Lessor shall not be liable for any latent defect in the Leased
Premises.
UTILITIES:
13. The Lessee is separately metered for gas and electricity and shall be liable
and agrees to pay the charges for all public utility services rendered or
furnished to the Leased Premises, including heat, water, gas, electricity,
refuse removal, telephone service, sewer, sewage treatment facilities and the
like which may be levied, imposed or assessed against the Leased Premises during
the Lease term.
In the event the Lessee uses water and sewer in substantial amounts or
for production purposes, the Lessor shall install at Lessee's expense a water
meter to sub-meter said water and sewer, and shall charge Lessee for said water
and sewer at rates as charged by the City.
Lessor shall not be liable to Lessee for any loss or damage of any kind
of destruction whatsoever caused or sustained by reason of failure of the
heating or ventilating and air conditioning system servicing the Leased Premises
or because of inability to obtain energy or utilities for any reason beyond
Lessor's control. Lessee can correct the problem and has the right of offset.
SUBLEASING OR ASSIGNMENT:
14. Lessee shall not assign, mortgage or encumber this Lease, nor sublet, nor
suffer or permit the Leased Premises or any part thereof to be used by others,
without the prior written consent of Lessor in each instance, which will not be
unreasonably withheld, provided, however, that if this Lease is assigned to any
person or entity pursuant to the provisions of the Bankruptcy Code, 11 U.S.C.
S101 et seq. (the "Bankruptcy Code"), any and all monies or other considerations
payable or otherwise to be delivered in connection with such assignment shall be
paid or delivered to Lessor, shall be and remain the exclusive property of
Lessor and shall not constitute property of Lessee or of the estate of Lessee
within the meaning of the Bankruptcy Code. Any and all monies or other
considerations constituting Lessor's property under the preceding sentence not
paid or delivered to Lessor shall be held in trust for the benefit of Lessor and
be promptly paid or delivered to Lessor.
REPAIRS AND MAINTENANCE:
15. The Lessee covenants and agrees at its sole expense to keep and maintain in
good order and first class condition and repair the interior and nonstructural
portions of the Leased Premises, visible plumbing, light bulbs, paint and
wallpaper on interior walls, ceiling tiles, and similar things used exclusively
for the Leased Premises, heating and air conditioning equipment, and further
agrees to replace any of said equipment when necessary. Such cost of HVAC will
not exceed $500.00 annually. Lessee shall keep the Leased Premises and the
Fixtures and equipment therein a clean, safe and sanitary condition. The Lessee
shall keep and maintain all portions of the Leased Premises and the sidewalk and
areas adjoining the same in a clean and orderly condition, free of accumulation
of dirt, rubbish, snow and ice.
Lessee shall conserve heat, air conditioning, water, and electricity
and shall use due care in the use of the Leased Premises and of the common areas
on the Property and without qualifying the foregoing, shall not neglect or
misuse water fixtures, electric lights and heating and air conditioning
apparatus. Lessee shall pay promptly to Lessor forthwith, upon demand, an amount
equal to any cost incurred by Lessor in repairing the Leased Premises or the
Building where such repair was made necessary by the negligence of, or misuse by
Lessee or an employee, customer or invitee of the Lessee, or by reason of any
open window in the Leased Premises. Lessee will maintain a minimum temperature
to prevent freeze-up.
Lessee, at its sole cost and expense shall maintain a regularly
scheduled preventative, maintenance/service contract with a maintenance
contractor for the service of all hot water, heating and air conditioning
systems and equipment within or servicing the Leased Premises. The maintenance
contractor and contract must be approved by Lessor and must include monthly
servicing, replacement of filters, replacement or adjustment of drive belts,
periodical lubrication and oil change and other services suggested by the
equipment manufacturer or by the contractor. Such cost or replacement shall not
exceed $500.00 annually.
ALTERATIONS, INSTRUCTIONS, FIXTURES:
16. The Lessee agrees not to make any alterations of or upon any part of the
Leased Premises except by and with the prior written consent of the Lessor. If
Lessor shall consent to any such alterations or additions to the Leased
Premises, Lessee warrants that they shall be made in accordance with all
applicable laws and shall remain for the benefit of, and at once become the
property of, the Lessor unless otherwise provided in said written consent and
shall be surrendered to Lessor upon termination of this Lease in good
<PAGE>
repair and condition provided, however, this clause shall not apply to movable
equipment or furniture in good repair and condition owned by Lessee which may be
removed by Lessee at the end of the term of this Lease if Lessee is not then in
default; and the Lessee further agrees, in the event of making such alterations
as herein provided, to indemnify and save harmless the Lessor from all expense,
liens, claims or damages due to persons or property on the Leased Premises out
of or resulting from the undertaking or making of said alterations or additions.
Construction of such alterations shall commence only upon Lessee obtaining and
exhibiting to Lessor the requisite, approvals, licenses, permits and
indemnification against liens.
In connection with any alterations, additions, improvements or changes,
Lessor reserves the right to require that prior to the commencement of such
alterations, Lessee shall furnish Lessor with assurances, including such bonds
as Lessor deems necessary, that the contemplated alterations, additions,
improvements or changes will be completed according to plan and will be paid
for. Lessor may, at its option, discharge any such lien, and the amount of the
lien, together with costs and reasonable attorney's fees, shall become
additional rent due immediately hereunder.
USE OF PREMISES:
17. The Leased Premises shall be used exclusively for office, warehouse purposes
and related office purposes or for such manufacturing purposes as Lessor may
expressly approve in writing. Lessee shall not store any goods or merchandise or
use the Leased Premises for any purpose which will in any way impair or violate
the requirements of any policies of insurance on the Leased premises or result
in a rating of the Leased Premises or an increase in the insurance premium on
account thereof. No part of the Leased Premises shall be used which will
interfere with the general safety, comfort and convenience of Lessor or other
Lessees of the building. Research, Development and light manufacturing of
medical devices.
The Lessee and its use of the Leased Premises will comply with all
laws, statues, ordinances, rules, orders regulations and requirements of all
federal, state, city and local governments, and with all rules, orders and
regulations relating to the use of the Leased Premises, and shall not keep,
store, dispose of, transport or generate on the Leased Premises any hazardous
substances or wastes or dangerous materials. Lessee shall indemnify and hold
Lessor and any mortgagee holding a mortgage on the Property harmless from any
and all costs, expenses, losses, actions, claims and liability in connection
with the breech by Lessee of any federal, state, or local law governing
hazardous wastes and substances and related environmental matters.
Lessor has made no representations as to any particular zoning or
permitted uses of the Leased Premises and Lessee is taking the Leased Premises
without reliance upon or any representation to Lessor as to the use to which
Lessee intends to use the Leased Premises.
SIGNS:
18. All signs require the written approval of Lessor. Any sign, lettering,
picture, notice or advertisement installed on or in any part of the Leased
Premises and visible from the exterior of the Building, or visible from the
exterior of the Leased Premises, shall, if approved by Lessor, be installed by
Lessor at Lessee's sole cost and expense. All sing are to be maintained by
Lessor at Lessee's expense. In the event of a violation of the foregoing by
Lessee. Lessor may remove the same without any liability and may charge the
expense incurred by such removal to Lessee. Lessee may not display any signs,
symbols or merchandise in windows.
SUBORDINATION:
19. The Lessor reserves the right and privilege to declare this Lease either
senior to or, at its sole option, subject and subordinate to the lien of any
mortgages or deeds of trust now or hereafter placed upon the Lessor's interest
in the Leased Premises, and to any and all advances to be made thereunder, and
all renewals, modifications, extensions, consolidations and replacements
thereof. The Lessee covenants and agrees to execute and deliver upon demand,
such further instrument or instruments subordinating this Lease on the foregoing
basis to the lien of any such mortgage or mortgages or deed of trust as shall be
desired by the Lessor or any present or future mortgage or holder of a deed of
trust. Lessee shall execute and deliver whatever instruments may be required for
the above purposes and, failing to do so within ten (10) days after demand in
writing, does hereby make, constitute and irrevocably appoint Lessor as its
attorney in fact and in its name, place and stead to do so.
CONDEMNATION OR EMINENT DOMAIN:
20. If the whole of the Leased Premises are taken by any public or quasi-public
authority under the power of eminent domain, or by private purchase in lieu
thereof, then this Lease shall automatically terminate upon the date possession
is surrendered, and rent shall be paid up to that day.
If any part constituting less than the whole of the Leased Premises
shall be acquired or condemned as aforesaid, and in the event that such partial
taking or condemnation shall materially affect the Leased Premises so as to
render the Leased Premises unsuitable for the business of the Lessee, in the
reasonable opinion of Lessor, then the term of this Lease shall cease and
terminate as of the date possession shall be taken by the condemning authority
and rent shall be paid to the date of such termination.
<PAGE>
In the event of a partial taking or condemnation of the Property which
shall not materially affect the Lease Premises so as to render the Leased
Premises unsuitable for the business of the Lessee, in the reasonable opinion of
Lessor, this Lease shall continue in full force and affect but with a
proportionate abatement of the Base Rent and Additional Rent based on the
portion if any of the Leased Premises taken. Lessor reserves the right at its
option to restore the Building and the Leased premises to substantially the same
condition as they were prior to such condemnation. In such event, Lessor shall
give written notice to Lessee, within 30 days following the date possession
shall be taken by the condemning authority, of Lessor's intention to restore.
Upon Lessor's notice of election to restore, Lessor shall commence restoration
and shall restore the Building and the Leased Premises with reasonable
promptness, subject to delays beyond Lessor's control and delays in the making
of condemnation of sale proceeds adjustments by Lessor; and Lessee shall have no
right to terminate this Lease except as herein provided. Upon completion of such
restoration, the rent shall be adjusted based upon the portion, if any, of the
Leased Premises restored.
All compensation awarded or paid upon such total or partial taking of
the Leased Premises shall belong to and be the property of the Lessor without
any participation by the Lessee, whether such damages shall be awarded and
compensation for diminution in value to the leasehold estate or to the fee
estate of the Leased Premises. Nothing contained herein shall be construed to
preclude the Lessee from prosecuting any claim directly against the condemning
authority in such proceedings for loss of business, damage to or cost of removal
of or for the value of the stock, trade fixtures, furniture, and other personal
property belonging to the Lessee; provided, however, that no such claim shall
diminish or otherwise adversely affect the Lessor's award or the award of any
fee mortgagee.
RIGHT TO INSPECT:
21. Lessor, its agents and representatives may at any and all reasonable times
during the day and night enter to view and inspect the Leased Premises, or to
make repairs, or to make such improvements or changes in the Leased Premises or
the Building as Lessor may deem proper. The right of entry reserved in the
immediately preceding sentence shall not be deemed to impose any greater
obligation of Lessor to maintain, repair or change the Leased Premises than is
specifically provided in this Lease. The Lessor, its agents or representatives
may, at any time in case of emergency, enter the Leased Premises or the
building. There shall be no diminution of rent or liability on the part of
Lessor by reason of inconvenience, annoyance, disturbance, loss of business, or
injury to business on account of any such entry or acts by Lessor, its agents or
representatives.
The Lessor may, during the progress of any work in the Leased Premises,
keep and store upon the Leased Premises all necessary materials, tools, and
equipment.
The Lessee agrees to allow the Lessor free access to the Leased
Premises to show the premises, and within seventy five (75) days of the
termination of this Lease, to place "for sale" or "for rent" signs on the Leased
Premises.
RULES AND REGULATIONS:
22. Lessee shall use the Leased Premises and the common areas in the Property in
accordance with such rules and regulations as set forth in Exhibit D and as may
from time to time be made by Lessor for the general safety, comfort,
cleanliness, and convenience of the owners, occupants and Lessees of the
Property, and shall cause Lessee's customers, employees and invitees to abide by
such rules and regulations.
DAMAGE AND DESTRUCTION
23. In the event that a significant portion of the Leased Premises or the
Building shall be substantially destroyed or so damaged by fire, explosion,
windstorm or other casualty as to be untenable, Lessor may restore the Leased
Premises within a reasonable time (after giving to Lessee the notice hereinafter
referred to) or may terminate this Lease and the term as of the date of the
destruction or damage, in either case by giving Lessee notice within one hundred
eight (180) days after the date of the destruction or damage. If, however, both
the Building and the Leased Premises shall be so slightly injured by any cause,
as not to be rendered unfit for occupancy, then the Lessor shall repair and
restore the same with reasonable promptness to as near as practicable its
preexisting condition; provided however, Lessor shall not be obligated to expend
any sums in excess of the amount of insurance proceeds which are received on
account of said casualty. Rent shall be pro rated on the basis of usable space
during such repairing or restoration. Lessee shall have no claim against Lessor
for the value of any unexpired term of this Lease.
Lessor shall not be liable to Lessee, its agents, employees,
representatives, customers or invitees for any inconvenience loss or damage or
for any injury to any person or property caused by or resulting from any
casualties, riots, strikes, picketing, accidents, breakdowns or any cause beyond
Lessor's reasonable control, or from any temporary failure or lack of such
services and Lessee shall indemnify Lessor and hold Lessor harmless from any
claim or damage because of such inconvenience, loss, damage or injury. No
variation, interruption or failure of such services incident to the making or
repairs, alterations or improvements or due to casualties, riots, strikes,
picketing, accidents, breakdowns or any cause beyond Lessor's reasonable control
or temporary failure or lack of such services shall be deemed an eviction of
Lessee or relieve Lessee from any of Lessee's obligations hereunder.
<PAGE>
HOLDING OVER:
24. At Lessor's Option, in the event Lessee remains in possession of the Leased
Premises after the Expiration Date of this Lease and without the execution of an
extension agreement or a new Lease, it shall be deemed to be occupying and
Leased Premises as a Lessee from month-to-month, subject to all the conditions,
provisions and obligations of this Lease insofar as the same can be applicable
to a month-to-month tenancy, provided, however, that the Base Rent required to
be paid by Lessee monthly during any holdover period shall be doubled and Lessee
shall also pay Additional Rent as set forth in Article 6 of this Lease. Sixty
(60) days prior to the expiration date of this Lease written notice to vacate
will be given by Lessee to Lessor.
SECURITY AND DAMAGE DEPOSIT:
25. Lessee contemporaneously with the execution of this Lease has deposited with
Lessor the sum of $5,000.00, made by Check No. __________, dated ______________,
issued by ________________________ receipt of which acknowledged hereby by
Lessor, which deposit is to be held by Lessor without liability for interest as
a security and damage deposit for the faithful performance by Lessee during the
term hereof or any extension hereof. Prior to the time when Lessee shall be
entitled to the return of this security deposit, Lessor may co-mingle such
deposit with Lessor's own funds and to use such security deposit for such
purpose as Lessor may determine. In the event of the failure of Lessee to keep
and perform any of the terms, covenants and conditions of this Lease to be kept
and performed by Lessee during the tem hereof or any extension hereof, then
Lessor, either with or without terminating this Lease, may (but shall not be
required to) apply such portion of said deposit as may be necessary to
compensate or repay Lessor for all losses or damages sustained or to be
sustained by Lessor due to such breach on the part of Lessee, including but not
limited to, overdue and unpaid rent, any other sum payable by Lessee to Lessor
pursuant to the provisions of this Lease, damages or deficiencies in the
reletting of Leased Premises, and reasonable attorneys' fees incurred by Lessor.
Should the entire deposit or any portion thereof, be appropriated and applied by
lessor, in accordance with the provisions of this article, Lessee upon written
demand by Lessor, shall remit forthwith to Lessor a sufficient amount of cash to
restore said security deposit to the original sum deposited, and Lessee's
failure to do so within five (5) days after receipt of such demand shall
constitute a breach of this Lease. Said security deposit shall be returned to
Lessee, less any depletion thereof as the result of the provisions of this
article, at the end of the term of this Lease or any renewal thereof, or upon
the earlier termination of this Lease, Lessee shall have no right to anticipate
return of said deposit by withholding an amount required to be paid pursuant to
the provision of this Lease or otherwise.
In the event Lessor shall sell the Property, or shall otherwise convey
or dispose of its interest in this Lease, such a conveyance or disposal shall
constitute an assignment by Lessor of said security deposit or any balance
thereof to Lessor's assignee, whereupon Lessor shall be released from all
liability for the return or repayment of such security deposit and Lessee shall
look solely to the said assignee for the return and repayment of said security
deposit. Said security deposit shall not be assigned or encumbered by Lessee
without the written consent of Lessor and an assignment or encumbrance without
such consent shall not bind Lessor. In the event of any rightful and permitted
assignment of this Lease by Lessee, said security deposit shall be deemed to be
held by Lessor as a deposit made by the assignee, and Lessor shall have no
further liability with respect to the return of said security deposit to the
Lessee.
ACTS OF DEFAULT:
26. Each of the following shall be deemed a default by the Lessee and a breach
of this Lease.
a. Failure to pay Base Rent or Additional Rent herein reserved, or any
part thereof, for a period of ten (10) days.
b. Failure to do, observe, keep and perform any of the other terms,
covenants, conditions, agreements and provisions of this Lease to be done,
observed, kept or performed by the Lessee for a period of thirty (30) days after
notice has been sent by Lessor.
c. The abandonment of the Leased Premises by the Lessee.
d. The Lessee or any guarantor of the Lessee's obligations hereunder
shall generally not pay its debts as they become due or shall admit in writing
its inability to pay its debts, or shall make a general assignment for the
benefit of creditors' or the Lessee or any such guarantor shall commence any
case, proceeding or other action seeking to have an order for relief entered on
its behalf as debtor or to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution or composition
of it or its debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its property; or the Lessee or any such guarantor shall take
any corporate action to authorize or in contemplation of any of the actions set
forth above in this paragraph.
LESSOR'S RIGHT TO REMEDY DEFAULT:
27. In the event of any such uncured default by Lessee after notice as aforesaid
if required, and at any time thereafter, Lessor may as it option and without
limiting Lessor in the exercise of any other right or remedy it may have on
account of such default, and without any further demand or notice:
<PAGE>
a. If Lessee defaults in the observance or performance of any of
Lessee's covenants, agreements or obligations hereunder wherein the default can
be cured by the expenditure of money, Lessor may, but without obligation, and
without limiting any of the remedies which it may have by reason of such
default, cure the default, charge the cost thereof to Lessee together with any
related expenses or costs, and Lessee shall pay the same forthwith upon demand.
In the event the same shall not be paid to Lessor within ten (10) days from the
date of billing, the same shall bear interest at the lower of the rate of twelve
percent 912%) per annum or the highest interest rate permitted by law. When any
sum of money hereunder becomes due to Lessor by Lessee, such shall be deemed to
be Additional Rent due hereunder.
b. Declare this Lease at an end, reenter the Leased Premises with or
without process of law, eject all parties in possession and repossess and enjoy
said Leased Premises together with all additions, alterations and improvements
thereto.
c. Reenter the Leased Premises with or without process of law, eject
all parties in possession thereof and without terminating this Lease, at any
time and from time to time, relet the Leased Premises or any part or parts
thereof, for the account of Lessee or otherwise, receive and collect the rents
therefor, applying the same first to the payment of such expenses as Lessor may
have paid, assumed or incurred in recovering possession of the Leased Premises,
including costs, expenses and attorneys' fees, and for placing the same in good
order and condition or preparing or altering the same for reletting and all
other expenses, commissions and charges paid, assumed or incurred by lessor in
reletting the Leased Premises, and then to the fulfillment of the covenants of
Lessee. Any such reletting as provided for herein may be for the remainder of
the Lease term of any renewal term of this Lease as originally granted or for a
longer or shorter period, and Lessor may execute any lease made pursuant to the
term hereof in its own name. Lessee shall pay to Lessor all such sums required
to be paid by lessee up to the time of reentry by Lessor, and thereafter Lessee
shall pay to Lessor until the end of their term or any renewal term of this
Lease the equivalent of the amount of all rent and other charges required to be
paid by Lessee under the terms of this Lease, less the avails of such reletting
during the initial or any renewal term, if any, after payment of the expenses of
Lessor as aforesaid, and the same shall be due and payable on the same days that
rent is due hereunder.
d. In addition to in lieu of the foregoing, Lessor may, with or without
termination of this Lease, declare this Lease to be in breach and further
declare that all unpaid Base Rent, Additional Rent, and all other monies which
would become payable with the passage of time, through the expiration of the
term reserved herein, including any attorney's fees incurred by Lessor in
connection with any such default by Lessee, to be immediately due and payable.
The foregoing right of Lessor shall be cumulative to all other rights
or remedies now or hereafter given to Lessor by law or by the terms of this
Lease. The remedies of Lessor as hereinabove provided are in addition to and not
exclusive of any remedy of Lessor herein given or which may be permitted by law.
LIENS:
29. Lessee shall not do or cause anything to be done whereby the Leased Premises
may be encumbered by any mechanic's or other liens. Whenever and as often as any
mechanic's or other lien is filed against said Leased Premises purporting to be
for labor or materials furnished or to be furnished to the Lessee, the Lessee
shall remove the lien of record by the payment or by bonding with a surety
company authorized to do business in the state in which the Property is located,
within twenty (20) days from the date of the filing of said mechanic's or other
lien. Should the Lessee fail to take the foregoing steps within said twenty 920)
day period, then the Lessor shall have the right, among other things, to pay
said lien without inquiring into the validity thereof, and the Lessee shall
forthwith reimburse the Lessor for the total expense incurred by it in
discharging said lien as Additional Rent hereunder.
WAIVER:
30. No waiver by Lessor of any breach of any covenant, condition or agreement
herein contained shall operate as a waiver of such covenant, condition or
agreement itself or of any subsequent breach thereof. No payment by Lessee or
receipt by Lessor of a lesser amount than the monthly installments of rent
herein stipulated or of Additional Rent due hereunder shall be deemed to be
other than an account of the earliest stipulated rent nor shall any endorsement
or statement on any check or letter accompanying the check for payment of rent
be deemed an accord and satisfaction, and Lessor may accept such check or
partial payment without prejudice to Lessor's right to recover the balance of
such rent or to pursue any other remedy provided in this Lease. This Lease
contains the entire agreement between the parties, superceding all previous oral
or written agreements and representations, and may not be amended or modified
except in writing.
Lessor shall not be responsible for and hereby disclaims any
representations or warranties communicated or made by any leasing agent or other
representative of Lessor used in connection with the negotiating or entering
into of this Lease and Lessee acknowledges it has not relied on any such
representations in executing this Lease.
QUIET ENJOYMENT:
31. Lessor warrants that it has full right to execute and to perform this Lease
and to grant the estate demised, and that Lessee, upon payment of the rents and
other amounts due and the performance of all the terms, conditions, covenants
and agreements on
<PAGE>
Lessee's part to be observed and performed under this Lease, may peaceably and
quietly enjoy the Leased Premises for the business uses permitted hereunder,
subject, nevertheless, to the terms and conditions of this Lease.
SURRENDER OF PREMISES:
32. On the Expiration Date or upon the termination hereof upon a day other than
the Expiration Date, Lessee shall peaceably surrender the Leased Premises
broom-clean in good order, condition and repair, reasonable wear and tear only
excepted. On or before the Expiration Date or upon termination of this Lease on
a day other than the Expiration Date, Lessee shall, at its expense, remove all
trade fixtures, personal property and equipment and signs from the Leased
Premises and any property not removed shall be deemed to have been abandoned.
Any damage caused in the removal of such items shall be repaired by Lessee and
at its expense. All alterations, additions, improvements and fixtures (other
than trade fixtures) which shall have been made or installed by Lessor or Lessee
upon the Leased Premises and all floor covering so installed shall remain upon
and be surrendered with the Leased Premises as a part thereof, without
disturbance, molestation or injury, and without charge, at the expiration or
termination of this Lease, subject to the provisions of Article 16 hereof. If
the Leased Premises are not surrendered on the Expiration Date or the date of
termination, Lessee shall indemnify Lessor against loss or liability claims,
without limitation made by any succeeding Lessee founded on such delay. Lessee
shall promptly surrender all keys for the Leased Premises to Lessor at the place
then fixed for payment of rent and shall inform Lessor of combinations of any
locks and safes on the Leased Premises.
SURRENDER INVALID UNLESS WRITTEN:
33. No agreement to accept a surrender of the Leased Premises shall be valid
unless in writing signed by the Lessor. The delivery of keys to any employee of
the Lessor or the Lessor's agents shall not operate as a termination of the
Lease or a surrender of the Leased Premises.
INTEREST:
34. All monies due under this Lease from Lessee to Lessor shall be due on
demand, unless otherwise specified and if not paid when due, shall bear interest
until paid at the lesser of the rate of 12% per annum or at the highest rate
then permitted by law. Lessor reserves the right to charge a late charge of $100
if monthly rent is not received by Lessor within Five (5) days of when due,
which late charge shall reimburse the Lessor for administrative expenses
resulting from the delay and shall be in addition to interest due from Lessee.
NOTICE:
35. Any and all notices or demand required or permitted to be given hereunder
shall be deemed to be properly served if sent by registered or certified mail,
postage prepaid, addressed to Lessor at the address to which rental payments are
to be sent, or at such other address or addresses as either party may hereafter
designate in writing to the other. Any notice or demand so mailed shall be
effective for all purposes at the time of deposit thereof in the United States
mail.
ESTOPPEL CERTIFICATES:
36. Either party to this Lease will, at any time from time to time, upon not
less than ten (10) days prior request by the other party, execute, acknowledge
and deliver to requesting party a statement in writing certifying that this
Lease is unmodified (or if modified then disclosure of such modification shall
be made) and in full force and effect on the date to which the rents and other
charges have been paid to the extent true and stating whether or not said party
has knowledge of any default hereunder on the part of the other party in the
performance of any covenant, agreement or condition contained herein and if so,
specifying each such default, it being intended that any such statement
delivered pursuant to this Article may be relied upon by any prospective
purchaser, mortgagee or holder of a deed of trust on the Leased Premises or any
assignee of any such party.
ATTORNMENT:
37. In the event of a sale or assignment of Lessor's interest in the Premises,
or the Building in which the Leased Premises are located, or if the Premises
come into custody or possession of a mortgagee or any other party whether
because of a mortgage foreclosure, or otherwise, Lessee shall attorn to such
assignee or other party and recognize such party as Lessor hereunder; provided,
however, Lessee's peaceable possession will not be disturbed so long as Lessee
faithfully performs its obligations under this Lease. Lessee shall execute, on
demand, any attornment agreement required by any such party to be executed,
containing such provisions and such other provisions as such party may require.
NOVATION IN THE EVENT OF SALE:
38. In the event of the sale of the property, Lessor shall be and hereby is
relieved of all of the covenants and obligations created hereby accruing from
and after the date of sale, and such sale shall result automatically in the
purchaser assuming and agreeing to carry out all of the covenants and
obligations of Lessor herein.
<PAGE>
The Lessee agrees at any time and from time to time upon not less than
ten (10) days prior written request to execute, acknowledge and deliver to the
Lessor a statement in writing certifying that this Lease is unmodified and in
full force and effect as modified and stating the modifications, and the dates
to which the base rent and other charges have been paid in advance, if any, it
being intended that any such statement delivered pursuant to this paragraph may
be relied upon by any prospective purchaser of the fee or mortgage or assignee
of any mortgage upon the fee of the Leased Premises.
SUCCESSORS AND ASSIGNS:
39. The terms, covenants and conditions hereof shall be binding upon and inure
to the successors and assigns of the parties hereto.
SUBSTITUTION:
40. Lessor reserves the right on thirty-(30) days' written notice to Lessee to
substitute other premises within the building for the Leased Premises described
above. The substitute premises shall contain at least the same square footage as
the Leased Premises, shall contain comparable leasehold improvements, and the
rental shall be at the then current rate for such space. Lessor will pay all
direct costs of move.
ABANDONMENT:
41. In the event Lessee shall remove its fixtures, equipment or machinery or
shall vacate the Leased Premises or any part thereof prior to the expiration
date of this Lease, or shall discontinue or suspend the operation of its
business conducted on the Leased Premises for a period of more than thirty (30)
consecutive days (except during any time when the Leased Premises may be
rendered untenantable by reason of fire or other casualty), then in an such
event Lessee shall be deemed to have abandoned the Leased Premises and Lessee
shall be in default under the terms of this Lease.
INTENT OF PARTIES:
42. Except as otherwise provided herein, the Lessee covenants and agrees that if
it shall at any time fail to pay any cost or expense required to be paid by
Lessee pursuant to this Lease, or fail to take out, pay for, maintain or deliver
any of the insurance policies above required, or fail to make any other payment
or perform any other act on its part to be made or performed as in this Lease
provided, then the Lessor may, but shall not be obligated so to do, and without
notice to or demand upon the Lessee and without waiving or releasing the Lessee
from any obligations of the Lessee in this Lease contained, pay any such cost or
expense, effect any such insurance coverage and pay premiums therefor, and may
make any other payment or perform any other act on the part of the Lessee to be
made and performed in this Lease provided, in such manner and to such extent as
the Lessor may deem desirable, and exercising any such right, to also pay all
necessary and incidental costs and expenses, employ counsel and incur and pay
reasonable attorneys' fees. All sums so paid by Lessor and all necessary and
incidental costs and expenses in connection with the performance of any such by
Lessor shall accrue interest thereon at the lesser of the rate of twelve percent
(12%) per annum, or the highest rate then permitted by law. Such expenditures by
Lessor, shall be deemed Additional Rent hereunder, and shall be payable for
Lessor on demand. Lessee covenants to pay any such sum or sums with interest as
aforesaid and the Lessor shall have the same rights and remedies in the event of
the non-payment thereof by Lessee as in the case of default by Lessee in the
payment of the Base Rent payable under this Lease.
EXPLANATORY PROVISIONS:
43. a. This Lease and the exhibits contain the entire understanding and
agreement between Lessor and Lessee and supersedes all prior understandings and
agreements and cannot be revised, adjusted or modified unless in writing and
executed in the same manner in which this Lease is executed.
b. This Lease shall be governed by and construed under the laws of
Minnesota.
c. In the event that any provision of this Lease shall be held invalid
or unenforceable, no other provisions of this Lease shall be affected by such
holding, and all of the remaining provisions of this Lease shall continue in
full force and effect pursuant to the terms hereof.
d. Article captions are inserted only for convenience and reference,
and are not intended, in any way, to define, limit or describe the scope, intent
and language of this Lease or its provisions.
e. Lessee, for itself and its successors and assigns, agrees that
Lessor shall not be personally liable for performance of any of Lessor's
covenants and agreements contained in this Lease and by accepting the Leased
Premises agrees to look solely to the Leased Premises for performance of
Lessor's covenants and agreements hereunder.
<PAGE>
INDEMNIFICATION:
44. Lessee and Lessor shall indemnify each other and defend the other party at
their own expense, against all claims, expenses and liabilities arising from (a)
failure of the indemnifying party to perform any covenant required to be
performed by the indemnifying party hereunder; (b) any accident, injury or
damage which shall happen in or about the property, or resulting from the
condition, maintenance or operation of the property; (c) failure to comply with
any requirements of any governmental authority; (d) any mechanic's liens or
security agreement filed against the property or any equipment or any material
therein; and (e) any act or negligence of the indemnifying party or its agents,
contractors, employees or licensees. This indemnification constitutes a
significant bargained for provision of this lease transaction and the amount of
rent paid reflects the existence of this provision.
EXHIBITS:
45. Reference is made to the following exhibits, which are attached hereto and
made a part hereof:
EXHIBIT DESCRIPTION
------- -----------
Exhibit A Description of the Leased Premises
Exhibit B Lessees Leasehold Improvements
Exhibit C Lessees Construction Allowances
Exhibit D Rules and Regulations
Exhibit E Addendum to Lease Agreement
Date: 01/24/92
---------------------
LESSEE LESSOR: Parkers Lake Pointe I Ltd. Partnership
Caliber Dev Corp. its G.P.
/s/ JOHN M. REID /s/ JOHN M. LAVANDER
- --------------------------- ------------------------------------
Its: President Its: President
<PAGE>
EXHIBIT D
RULES AND REGULATIONS
Attached to and forming a part of the Lease Agreement
With Lessee: Urologix, Inc. Dated: January 20, 1992
--------------------------- -----------------------
1. Lessor agrees to furnish Lessee two keys without charge. Additional
keys will be furnished at a nominal charge. Lessee shall not change
locks or install additional locks on doors without prior written
consent of Lessor. Lessee shall not make or cause to be made duplicates
of keys procured from Lessor without prior approval of Lessor. All keys
to Leased Premises shall be surrendered to Lessor upon termination of
this Lease.
2. Usual business hours as used herein shall mean the hours of 8 a.m. - 6
p.m.
3. Lessee will refer all contractors, contractor's representatives and
installation technicians rendering any service on or to the Leased
Premises for Lessee to Lessor for Lessor's approval before performance
of any contractual service. Lessee's contractors and installation
technicians shall comply with Lessor's rules and regulations pertaining
to construction and installation. This provision shall apply to all
work performed on or about the Leased Premises or Property, including
installation of telephones, telegraph equipment, electrical devices and
attachments and installations of any nature affecting floors, walls,
woodwork, trim, windows, ceilings and equipment or any other physical
portion of the Leased Premises or Property.
4. Lessee shall not at any time occupy any part of the Leased Premises or
Property as sleeping or lodging quarters.
5. Outside storage on the Property of any type of equipment, property or
materials owned or used on the premise by Lessee or its customers and
suppliers shall not be permitted.
6. Lessee shall not place, install or operate on the Leased Premises or in
any part of the building any engine, stove or machinery, or conduct
mechanical operations or cook therein, or place or use in or about the
Leased Premises or Property any explosives, gasoline, kerosene, oil,
acids, caustics, or any flammable explosive or hazardous material
without written consent of Lessor.
7. Lessor will not be responsible for lost or stolen personal property,
equipment, money or jewelry from the Leased Premises or Property
regardless of whether such loss occurs when the area is locked against
entry.
8. No dogs, cats, fowl, or other animals shall be brought into or kept in
or about the Leased Premises or Property.
9. Employees of Lessor shall not receive or carry messages for or to any
Lessee or other person or contract with or render free or paid services
to any Lessee or to any of Lessee's agents, employees or invitees.
10. None of the parking, lawn areas, entries, doors or stairways shall be
blocked or obstructed or any rubbish, litter, trash, or material of any
nature placed, emptied or thrown into these areas or such area used by
Lessee's agents, employees or invitees at any time for purposes
inconsistent with their designation by Lessor.
11. The water closets and other water fixtures shall not be used for any
other purpose other than those for which they were constructed, and any
damage resulting to them from misuse or by the defacing or injury of
any part of the building shall be borne by the person who shall
occasion it. No person shall waste water by interfering with the
faucets or otherwise.
12. No person shall disturb occupants of the building by the use of any
radios, record players, tape recorders, musical instruments, the making
of unseemly noises or any unreasonable use.
13. Nothing shall be thrown out of the windows of the Building or down the
stairways.
14. Lessee and its employees, agents and invitees shall park their vehicles
only in those parking areas designated by Lessor. Lessee shall furnish
Lessor with state automobile license numbers of Lessee's vehicles and
its employees' vehicles within five days after taking possession of the
Leased Premises and shall notify Lessor of any changes within five days
after such change occurs. Lessee shall not leave any vehicle in a state
of disrepair (including without limitation, flat tires, out of date
inspection sticker or license plates) on the Property. If Lessee or its
employees, agents or invitees park their vehicles in areas other than
the designated parking areas or leave any vehicle in a state of
disrepair, Lessor shall have the right to remove such vehicles at
Lessee's expense.
<PAGE>
15. Parking shall be in compliance with all parking rules and regulations
including any sticker or other identification system established by
Lessor. Failure to observe the rules and regulations shall terminate
Lessee's right to use the parking area and subject the vehicle in
violation of the parking rules and regulations to removal and
impoundment. No termination of parking privileges or removal or
impoundment shall create any liability on Lessor or be deemed to
interfere with Lessee's right to possession of the Leased Premises.
Vehicles must be parked entirely within the stall lines and all
directional signs, arrows and posted speed limits must be observed.
Parking is prohibited in areas not stripped for parking, in aisles
where "No Parking" signs are posted, on ramps, in cross-hatched areas,
and in other areas as may be designated by Lessor. Parking stickers or
other forms of identification supplied by Lessor shall remain the
property of Lessor and not the property of Lessee and are not
transferable. Every person is required to park and lock his vehicle.
All responsibility for damage to vehicles or persons is assumed by the
owner of the vehicle or its driver.
16. The Lessee is responsible for the cleaning of his own entry, bathrooms
and windows.
17. The Lessee will provide and keep in working order all necessary fire
extinguishers to provide adequate protection and meet all city, state
and federal requirements.
18. Lessee shall not lay floor covering within the Leased Premises without
written approval of the Lessor. The use of cement or other similar
adhesive materials not easily removed with water is expressly
prohibited.
19. Lessee agrees to cooperate and assist Lessor in the prevention of
canvassing, soliciting and peddling within the Building.
20. Lessor reserves the right to exclude from the Building between the
hours of 6:00 p.m. and 8:00 a.m. on weekdays and at all hours on
Saturday, Sunday and legal holidays, all persons who are not known to
the Building security personnel.
21. It is Lessor's desire to maintain the Property in the highest standard
of dignity and good taste consistent with comfort and convenience for
Lessees. Any action or condition not meeting this high standard should
be reported directly to Lessor. Your cooperation will be mutually
beneficial and sincerely appreciated. Lessor reserves the right to make
such other and further reasonable rules and regulations as in his
judgement may from time to time be necessary, for the safety, care and
cleanliness of the Leased Premises and for the preservation of good
order therein.
<PAGE>
EXHIBIT E
ADDENDUM TO LEASE AGREEMENT
With Lessee: Urologix, Inc. Dated: January 20, 1992
--------------------------- -----------------------
Lessor and Lessee hereby amend the following terms and conditions of the
attached Lease Agreement:
1. Lessor, at its cost, will complete the construction per the attached
Exhibit B, including the construction in 'Expansion South' with the
window blinds staying the property of the Lessor, and otherwise, the
suite will be taken in "as is" condition.
2. The base rent for the period March 1, 1992 - February 28, 1993 will be
$3,328.00 per month.
3. Lessee will allow Lessor to lease the warehouse are in "Expansion
South' until Lessee takes occupancy on the additional 1,000 sq. ft. of
office to be constructed by Lessor. Lessee to give Lessor sixty (60)
days notice to vacate and Lessor's occupancy will not be disruptive nor
interfere with Lessee's occupancy.
4. Lessor will pay Lessee's gas and electric bills (directly) and will
coordinate and pay directly once per week janitorial for the 'core
area' until August 31, 1995. Lessor will pay the utilities and
janitorial related to 'Expansion South' until August 31, 1995.
5. Lessee will receive January 1 - February 28, 1993 Base Rent free and a
'Prompt Pay' discount of July, 1993 and July, 1994 Base Rent free on
the 'Initial Leased Premises' if Lessee is not in default and all prior
rent payments have been received by the fifth of the current month.
6. On or before July 1, 1993 (if occupancy is September 1, 1993) with
sixty (60) days written notice by Lessee, Lessor will construct up to
1,000 square feet of additional finished office/warehouse space in
'Expansion South.' All construction to be at Lessor's cost and to
Lessor's construction standards, with Lessee then paying $8.75 per sq.
ft. Base Rent for this additional finished area and $4.45 per sq. ft.
for the remainder of 'Expansion South.' Lessor will pay the utilities
and janitorial related to 'Expansion South' until August 31, 1995.
7. Provided Lessee has occupied 'Expansion South' optional 1,000 sq. ft.
of finished area, Lessee can give one hundred eighty (180) days written
notice to expand into either 'Expansion West' or 'Expansion East' with
Lessee paying $8.75 per sq. ft. for office area and $4.45 per sq. ft.
for warehouse area for Base Rent. Lessee will also pay the utilities
and janitorial for any 'Expansion West' and 'Expansion East' commencing
September 1, 1995. This Lease automatically expires on August 31, 1995
if Lessee has not given the aforementioned notice to expand into either
'Expansion West' and 'Expansion East' by March 1, 1995.
8. Lessee acknowledges the sharing of the common areas of the bathroom and
a portion of the warehouse space and will pay $8.75 per sq. ft. for
office space and $4.45 per sq. ft. for warehouse space rent plus the
applicable additional rent anytime it occupies the entire space and it
is no longer a common area with another tenant.
9. Any Base Rent free concessions and 'Prompt Pay' discounts used by
Lessee will become immediately due and payable upon the occurrence of
an event of default by Lessee.
Except as provided for in the above-described amendments, the terms and
conditions on the attached Lease Agreement are unchanged and remain in full
force and effect.
Date: 01/24/92
---------------------
LESSEE LESSOR: Parkers Lake Pointe I Ltd. Partnership
Caliber Dev Corp. its G.P.
/s/ JOHN M. REID /s/ JOHN M. LAVANDER
- --------------------------- ------------------------------------
Its: President Its: President
<PAGE>
EXHIBIT F
ADDENDUM TO LEASE AGREEMENT
With Lessee: Urologix, Inc. Dated: June 20, 1994
--------------------------- -----------------------
All terms and conditions of the original Lease Agreement dated January 20, 1992
remain unchanged and in full force and effect with the exception of the
following modifications:
1. As provided in Exhibit E - Paragraph 7, Lessee will expand into
'Expansion East', Suite #109 consisting of 1590 sq. ft. of office space
at a rate of $8.75 per sq. ft. Base Rent or $13,912 annually. The
expansion will occur upon the move out of Anchor Insurance Agency, but
not later than September 19, 1994. Lessor will complete the remodeling
at its cost and to its standards per the attached Exhibit G and will
touch up paint the entire suite.
2. In addition, as provided in Exhibit E - Paragraphs 3 and 6, Lessee will
begin full occupancy on July 1, 1994 of the entire 'Expansion South.'
Lessor will construct the clean room, inspection room and production
room per the attached Exhibit at Lessor' cost and to it's standards,
with Lessee then paying $8.75 per sq. ft. Base Rent for fin-shed space
of 1000 sq. ft. adding $4300 annually in Base Rent. The remodeling is
per the attached Exhibit G.
3. The Leased Premises now totals 9166 sq. ft. (7576 sq. ft. initially
plus 1590 sq. ft. in 'Expansion East').
4. The Lease expiration date remains August 31, 1997.
5. As provided in Exhibit E - Paragraph 8, Lessee will pay rent for all
common areas due to no longer sharing them with other tenants adding
$1,000 annually Base Rent.
6. In total, annual Base Rent is increased by $19,212 to $70,992 annually
and $5,916 monthly.
7. Additional Rent, as defined in Paragraph, 6a and 6b of the original
Lease, becomes 23.1%.
8. The automatic lease cancellation date stipulated in Exhibit E -
paragraph 7, is no longer effective due to Lessee's expansion and
Lessee is responsible for the Lease until August 31, 1997.
9. Regarding Paragraph 4 of Exhibit E, effective July 1, 1994 Lessee will
pay the separately metered utilities applicable to it's entire suite
and Lessee will also contract and pay for it's own janitorial services
and Lessor will construct the bathroom and expanded breakroom at it's
cost and to it's typical office standards.
10. The rent concession of July 1994 Base Rent free stipulated in Exhibit
E, Paragraph 5 is not available on the expansion space and the $4315.00
rent concession is delayed until August 1994.
11. Lessee Will earn a Prompt Pay discount of August 1997 Base Rent free if
all prior rent payments have been received by the third of the current
month.
12. To provide for Lessee's future expansion, Lessor agrees that Expansion
West now occupied by Syscom International, will be available for
expansion on March 31, 1995. Lessee must give sixty days prior written
notice of it's intent to expand or not take the space.
Date: 27 JUNE 1994
-----------------
LESSEE LESSOR:
Urologix, Inc. Parkers Lake Pointe I Ltd. Partnership
/s/ W. ALLEN PUTNAM Caliber Dev Corp. its G.P.
- ---------------------------
Its: Vice President of Operations /s/ JOHN M. LAVANDER
------------------------------------
Its: President
<PAGE>
EXHIBIT H
ADDENDUM TO LEASE AGREEMENT
With Lessee: Urologix, Inc. Dated: April 5, 1995
--------------------------- -----------------------
All terms and conditions of the original Lease Agreement dated January 20, 1992
and amended in Exhibit F dated June 20, 1994 remain unchanged and in full force
and effect with the exception of the following modifications:
1. As provided in Exhibit F - Paragraph 12, effective April 1, 1995 Lessee
has expanded into 'Expansion West', Suite #114 consisting of 1729 sq.
ft. of space at a Base Rent of $9,768 annually and $814.00 monthly. The
total Base Rent is therefore $80,760 annually and $6,730 monthly.
2. The Leased Premises now totals 10, 895 sq. ft.
3. The Lease Expiration Date is extended to March 31, 1998.
4. Additional Rent, as defined in Paragraphs, 6a and 6b of the original
Lease, becomes 27.5%.
5. The "Prompt Pay" discount specified in Exhibit F is not applicable on
this expansion area.
6. Suite 114 will be taken in "as is" condition with any remodeling to be
completed by Lessee at Lessee's cost. Caliber Development will perform
space planning and construction coordination services at no charge to
Lessee.
7. Lessor will make available for Lessee's expansion the adjoining suites
104 consisting of 2,076 sq. ft., suite 101 of 1.092 sq. ft. and suite
102 consisting of 1,404 sq. ft. (per attached Exhibit H) on January 31,
1997. Lessee will give Lessor 120 days prior written notice of it's
intention to occupy or not occupy these suites with Lessee required to
Lease suite 104 on or before suites 101 and 102. Lessee will pay
monthly Base Rent of $1,062.00 for suite #104, $400.00 for suite 101
and $1,035.00 for suite 102 (plus the Base Rent increase referenced
later) and it's proportionate share of Additional Rent based on the
square footage occupied. Lessee will take suites in "as is" condition
and any remodeling will be completed at Lessee's cost. If Lessee
occupies any of the suites, the Lease will be automatically extended
for the period of three years from such occupancy. On the day of
occupancy Lessee's Base Rent for its' entire suite after this expansion
will be adjusted to the square footage rates for office and warehouse
of Caliber Development's most recent lease transactions for similar
space in Plymouth, but not to be less than Lessee's current Base Rent.
However, after January 31, 1998, and with ninety days prior written
notice by Lessee to Lessor, the remaining term of the Lease can be
bought out or $5,000.00 if Lessor cannot provide Lessee's expansion
needs. Such expansion space will be contiguous space and in sufficient
size and configuration to meet Lessee's needs.
Date: 4/14/95
-------
LESSEE LESSOR:
Urologix, Inc. Parkers Lake Pointe I Ltd. Partnership
/s/ Caliber Dev Corp. its G.P.
- ---------------------------------
Its: Vice President of R&D /s/ JOHN M. LAVANDER
--------------------------------------
Its: President
<PAGE>
EXHIBIT I
ADDENDUM TO LEASE AGREEMENT
With Lessee: Urologix, Inc. Dated: March 7, 1996
--------------------------- -----------------------
All terms and conditions of the original Lease Agreement dated January 20, 1992
and amended in Exhibit F dated June 20, 1994, and Exhibit H dated April 5, 1995
remain unchanged and in full force and effect with the exception of the
following modifications:
1. As provided in Exhibit H, Paragraph 7, effective on or before October
1, 1996, Lessee will expand into suite #104 consisting of 2,076 sq. ft.
of which 900 sq. ft. are office and 1,176 are warehouse.
2. Base Rent increased by $13,728.00 annually and $1,144.00 monthly based
on rates of $9.12 per sq. ft. for office and $4.70 per sq. ft. for
warehouse. The total Base Rent of therefore $94,488.00 annually and
$7,874.00 monthly.
3. Including the suite #104 expansion, the Leased Premises will total
12,971 sq. ft. and Additional Rent, as provided in paragraphs 6a and 6b
of the original Lease Agreement, will become 32.7%.
4. Lessor, on or before January 1, 1997, will endeavor to move the present
tenants and make available for Lessee's leasing and occupancy, suite
#116 and #117 totaling 3,935 sq. ft. of which 2, 045 are office and
1,840 sq. ft. are warehouse.
5. Base Rent increases by $27,528.00 annually and $2,294.00 monthly based
on rates of $9.12 per sq. ft. for office and $4.70 per sq. ft. for
warehouse.
6. As provided in Exhibit E paragraph 8, when Lessee leases suite #116 the
common area of 327 sq. ft. of warehouse becomes part of Lessee's suite
for which Lessee pays $128.00 per month and $1,536.00 annual Base Rent
plus its' proportionate share of Additional Rent, as provided in
paragraphs 6a and 6b o the original Lease Agreement.
7. Upon Lessee's occupancy of the suite #116 and #117 expansion and the
common area, the Leased Premises will total 17,233 sq. ft. The Base
Rent will total $123,552.00 annually, $10,296.00 monthly and Additional
Rent, as provided in paragraphs 6a and 6b of the original Lease
Agreement, will become 43.5%.
8. The Lease Expiration Date is extended to January 31, 2000.
9. As provided in Exhibit H, paragraph 7, all expansion area will be taken
in "as is" condition with any remodeling to be completed by Lessee at
Lessee's cost except Lessor will, at its cost minimally 2.25 per sq.
ft. on finished office space and to its standards, repaint and recarpet
all expansion areas which are finished as office area. Lessor will also
construct the warehouse wall in suite #116. In addition, Caliber
Development will perform space planning and construction coordination
services at no charge to Lessee.
10. The "Prompt Pay" discount of $5,916.00 in August 1997 specified in
Exhibit F, paragraph 11 is still applicable, but not on any expansion
areas.
11. Lessee maintains its' option to expand into suites #101 and #102 on
January 31, 1997, on the terms and consiti9ons specified in Exhibit H,
paragraph 7, and this option is modified to also be available on
December 431, 1997 on the same terms and conditions. Upon Lessee's
occupancy of suite #101 and #102 the lease term will be expanded to
have at least a three-year term from the date of occupancy.
12. Referencing Exhibit H, paragraph 7, the earliest date of the buyout is
changed to July 31, 1998, and the amount of the buyout is increased to
$10,000.00, and the buyout remains only available to Lessee if Lessor
cannot provide Lessee's expansion needs. Such expansion space will be
contiguous space and in sufficient size and configuration to meet
Lessee's needs. The new rates for the February 1, 1998, Base Rent
adjustment will not be less than $9.12 per sq. ft. for finished office
area and $4.70 per sq. ft. for warehouse area. Lessor acknowledges that
these areas where the Lessee has finished office and production area at
Lessee's cost, on which it is presently paying warehouse rates, that
future rates shall remain based on warehouse rates.
13. After Lessee has expanded into suites 101 and 102 as described in
paragraph 2 above on June 30, 1997, and each succeeding June 30th, with
120 days prior written notice to Lessor, Lessee has the option to
expand into and lease suite #118. The Base Rental rates will be those
in effect on the Leased Premises at the time of the expansion into
suite #118 with Lessee also paying its proportionate share of
Additional Rent. The suite will be taken in "as-is" condition. Upon
Lessee's occupancy of suite #118, the will be extended to have at least
a three year term from the date of occupancy.
<PAGE>
14. With reference to paragraph 4 of this Exhibit I Lessor has sixty days
from the signing of this Exhibit, to commit to providing suites #116
and #117 on or before January 1, 1997. If Lessor does not, the buyout
provided in paragraph 12 of this Exhibit is reduced to $5,000 and the
date of the buyout can be exercised more quickly on January 31, 1998.
In addition, Lessee at it's option and with ninety days prior written
notice to Lessor, can Lease suites #116 and #117 on January 31, 1999.
Date: 4/2/96
------
LESSEE LESSOR:
Urologix, Inc. Parkers Lake Pointe I Ltd. Partnership
/s/ Caliber Dev Corp. its G.P.
- --------------------------------
Its: Vice President of R&D /s/ JOHN M. LAVANDER
--------------------------------------
Its: President
<PAGE>
EXHIBIT J
ADDENDUM TO LEASE AGREEMENT
With Lessee: Urologix, Inc. Dated: September 30, 1996
--------------------------- -----------------------
All terms and conditions of the original Lease Agreement dated January 20, 1992
and amended in Exhibit F dated June 20, 1994, and Exhibit H dated April 5, 1995
and Exhibit I dated March 7, 1996, remain unchanged and in full force and effect
with the exception of the following modifications:
1. Lessor and Lessee agree that Lessee will expand into suite #104 on
October 5, 1996, or when the existing tenant vacates the premises, as
specified in Exhibit I, paragraphs 1,2 and 3. The Base Rent is
increased $13,728.00 annually and $1,144.00 monthly based on rates of
$9.12 per sq. ft. for office and $4.70 per sq. ft. for warehouse. The
total is therefore $94,488.00 annually and $7,874.00 monthly.
2. Including the suite #104 expansion, the Leased Premises will total
12,971 sq. ft. and Additional Rent, as provided in paragraphs 6a and 6b
of the original Lease Agreement, will become 32.7%.
3. Lessor and Lessee agree that Lessee will not expand into suites #116
and #117 as was provided in exhibit I, paragraphs 4, 5, 7 and 14.
However, regarding Exhibit I, paragraph 6, for the remaining common
area of 327 sq. ft. of warehouse space, Lessee does agree to pay 50% of
the Base Rent of $128.00 monthly or $64.00 monthly $768.00 annually
plus 50% of it's share of Additional Rent, as provided in paragraph 6a
and 6b of the original Lease Agreement. Further, Lessee will reimburse
Lessor up to 50% but not to exceed $3,000 for leasing commission
incurred to replace Protocol Printing in Northwest Business Centre but
not including any build-out costs for the new tenant's suite in the
Northwest Business Centre.
4. The expansion options into suites #101, #102 and #118 provided in
Exhibit I, paragraphs 11 and 13 are terminated.
Date: 9/30/96
-------
LESSEE LESSOR:
Urologix, Inc. Parkers Lake Pointe I Ltd. Partnership
/s/ Caliber Dev Corp. its G.P.
- --------------------------------
Its: Vice President of R&D /s/ JOHN M. LAVANDER
--------------------------------------
Its: President
<PAGE>
EXHIBIT K
ADDENDUM TO LEASE AGREEMENT
With Lessee: Urologix, Inc. Dated: November 15, 1996
--------------------------- -----------------------
All terms and conditions of the original Lease Agreement dated January 20, 1992
and amended in Exhibit F dated June 20, 1994, and Exhibit H dated April 5, 1995
and Exhibit I dated March 7, 1996, and Exhibit J dated September 30, 1996,
remain unchanged and in full force and effect with the exception of the
following modifications:
1. Lessor and Lessee agree that Lessee will expand into suite #102,
consisting of 1,404-sq. ft. of office space, on November 15, 1996.
2. In addition, Lessee will expand into Suite #101 consisting of 1,092-sq.
ft. of warehouse space on December 1, 1996.
3. The Base Rent is increased $17,940.00 annually and $1,495.00 monthly
based on rates of $9.12 per sq. ft. for office and $4.70 per sq. ft.
for warehouse. The total Base Rent is therefore $112,428 annually and
$9,369 monthly.
4. Including the suites #101 and #102 expansions, the Leased Premises will
total 15,467 sq. ft. and Additional Rent, as provided in paragraphs 6a
and 6b of the original Lease Agreement, will become 39.02%.
5. Both suites will be taken in "as is" condition except Lessor will pay
for new carpeting in the 1,404-sq. ft. of office area. Any remodeling
performed by Lessee or at its direction will occur after Lessor's
written approval of Lessee's plans and specifications with all
remodeling completed to applicable building codes and Lessor's
construction standards. Lessee agrees, at Lessor's option, to restore,
at its cost and to Lessor's construction standards, any agreed upon
walls or any remodeling to that which they are at present per the
attached Exhibit L.
6. Lessor, on or before June 1, 1997, will endeavor to move the present
tenants and make available for Lessee's leasing and occupancy, suites
#116 and #117 totaling 3,935 sq. ft. of which 2,045 are office and
1,890 sq. ft. are warehouse. Upon the previous tenants move-out, Base
Rent will increase by $27,528.00 annually and $2,294.00 monthly based
on rates of $9.12 per sq. ft. for office and $4.70 per sq. ft. for
warehouse.
7. However, as provided in Exhibit H, paragraph 7, on the date of
occupancy of the expansion spaces and on February 1, 1998, the entire
suite's Base Rent will be adjusted to the square footage rates for
office and warehouse of Caliber Development's most recent lease
transactions for similar space in Plymouth. This is $100.00 per month
on Suites #116 and #117.
8. As provided in Exhibit E, paragraph 8, when the Lessee leases suites
#116 and #117, the common area of 327 sq. ft. of warehouse becomes part
of Lessee's suite for which Lessee will pay the final 50% of the $128.
Per month and $1,536. Annual Base Rent plus it's proportionate share of
Additional Rent as provided in paragraph's 6a and 6b of the original
Lease Agreement. The first 50% was committed in Exhibit J, paragraph 3.
9. Upon Lessee's leasing of suites #116 and #117 for expansion and the
additional 327 sq. ft. of common area, the Leased Premises will total
19,729 sq. ft. The Base Rent will total $141,492.00 annually and
$11,791.00 monthly and Additional Rent, as provided in paragraphs 6a
and 6b of the original Lease Agreement, will become 49.8%.
10. The present Lease Expiration Date is January 31, 2000. However, upon
Lessee's leasing of suites #116 and #117, the Lease Expiration Date
will be extended to three years from that date of occupancy.
11. Suites #116 and #117 will be taken in "as is" condition with any
remodeling to be completed by Lessee at Lessee's cost except Lessor
will, at its cost and to its standards, recarpet the 2,045 sq. ft.
office area. Remodeling to be substantially equivalent according to the
approved plans attached as Exhibit L.
12. The "Prompt Pay" discount of $5,916.00 in August 1997 specified in
Exhibit F, paragraph 11, is no longer applicable.
13. Referencing Exhibit I, paragraph 12, the date of the buyout remains
July 31, 1998, and the amount of the buyout remains $10,000. However,
Lessee shall give Lessor at least one hundred eighty days prior notice
of such buyout and the buyout is payable at the time of notice. The
buyout remains only available to Lessee if Lessor cannot provide
Lessee's expansion needs. Such expansion space will be contiguous space
and in sufficient size and configuration to meet Lessee's' needs.
14. Lessee shall immediately increase the amount of the security deposit by
$8,000.00 and Lessor will reimburse Lessee $8,000.00 of remodeling
costs per the attached Exhibit M.
<PAGE>
EXCEPT AS PROVIDED FOR IN THE ABOVE-DESCRIBED AMENDMENTS, THE TERMS AND
CONDITIONS ON THE ATTACHED LEASE AGREEMENT ARE UNCHANGED AND REMAIN IN FULL
FORCE AND EFFECT.
Date: 5/5/97
------
LESSEE LESSOR:
Urologix, Inc. Parkers Lake Pointe I Ltd. Partnership
/s/ Caliber Dev Corp. its G.P.
- -------------------------------
Its: Vice President /s/ JOHN M. LAVANDER
--------------------------------------
Its: President
<PAGE>
EXHIBIT M
ADDENDUM TO LEASE AGREEMENT
With Lessee: Urologix, Inc. Dated: October 31, 1997
--------------------------- -----------------------
All terms and conditions of the original Lease Agreement dated January 20, 1992
and amended in Exhibit F dated June 20, 1994, and Exhibit H dated April 5, 1995
and Exhibit I dated March 7, 1996, and Exhibit J dated September 30, 1996, and
Exhibits K and L dated November 15, 1996, remain unchanged and in full force and
effect with the exception of the following modifications:
1. Lessor and Lessee agree that Lessee will expand into suite #118 as
shown in the attached Exhibit N, totaling 3,935 sq. ft. now consisting
of 2,612 sq. ft. of office space and 1/323 sq. ft. of warehouse space,
on December 1, 1997. Lessee's Leased Premises will then total 23,664
sq. ft.
2. At the time of occupancy, the Base Rent will be increased $31,356.00
annually and $2,613.00 monthly based on rates of $9.50 per sq. ft. for
office and $4.95 per sq. ft. for warehouse. The total Base Rent will
then be $174,048.00 annually and $14,504.00 monthly.
3. Additional Rent, as provided in paragraphs 6a and 6b of the original
Lease Agreement, will become 59.7%.
4. The suite will be taken in "as is" condition except Lessor will pay for
new carpeting in the 2,612-sq. ft. of office area. Any remodeling
performed by Lessee or at it's direction, will occur after Lessor's
written approval of Lessee's plans and specifications with all
remodeling completed to applicable building codes and Lessor's
construction standards.
5. Lessee acknowledges that the Lease Expiration Date has been extended
from January 31, 2000 to May 31, 2000 as provided in Exhibit K,
paragraph 10. Further, upon Lessee's leasing of suite #118, the Lease
Expiration Date will be extended to January 31, 2003. On December 1,
2001, the Base Rent will be increased by the lesser of 10% or the
Mpls/St. Paul Consumer Price Index.
6. Exhibit K, paragraph 13, is still applicable except the date of the
buyout is extended to June 30, 1999 from July 31, 1998, with any notice
the last day of the given month. The amount of the buyout remains
$10,000 and Lessee shall give Lessor at least ten months prior notice
of such buyout with the buyout payable at the time of notice.
7. Exhibit K, paragraph 7 is still applicable regarding the adjustment of
Base Rent of February 1, 1998.
8. Lessee will pay Sonus Acoustics $7,500.00 on December 1, 1997, as
reimbursement for moving costs.
EXCEPT AS PROVIDED FOR IN THE ABOVE-DESCRIBED AMENDMENTS, THE TERMS AND
CONDITIONS ON THE ATTACHED LEASE AGREEMENT ARE UNCHANGED AND REMAIN IN FULL
FORCE AND EFFECT.
Date: 10/31/97
--------
LESSEE LESSOR:
Urologix, Inc. Parkers Lake Pointe I Ltd. Partnership
/s/ Caliber Dev Corp. its G.P.
- ------------------------------
Its: Vice President /s/ JOHN M. LAVANDER
--------------------------------------
Its: President
<PAGE>
EXHIBIT N
ADDENDUM TO LEASE
THIS AMENDMENT TO LEASE ("Amendment"), made this 12th day of March, 1998 between
Parkers Lake I Realty Corp, as Lessor and Urologix, Inc., as Lessee;
WITNESSETH:
WHEREAS, Lessor's predecessor-in-interest and Lessee entered into a lease dated
January 20, 1992, as amended on June 20, 1994 April 5, 1995, March 7, 1996,
September 30, 1996, November 15, 1996, and October 31, 1997 (as amended, the
"Lease"), covering premises known and numbered as Suites
#111/#109/#114/#104/#102/#101/#116/#117/#118 (the "Existing Premises"), Parkers
Lake Point I ("Building"), 14405 21st Avenue, Plymouth, MN 55447 ("Premises");
WHEREAS, Lessor and Lessee desire to enter into this Amendment to provide for an
expansion of the Existing Premises into Suite #120 containing approximately
5,770 square feet of office space plus approximately 5,060 square feet of
warehouse space ("Expansion Premises") and to further amend the lease;
NOW THEREFORE, in consideration of the premises and the mutual covenants herein
contained, Lessor and Lessee hereby agree to amend the Lease, effective March 1,
1998, as follows:
1. The Leased Premises shall include Suite #120 and shall contain
approximately 19,919 square feet of office space plus 14,575 square
feet of warehouse space for a total of 34,494 square feet; it being the
intention of the parties hereto that the Existing Premises and the
Expansion Premises, both as hereinbefore defined, shall from and after
March 1, 1998, collectively be referred to as the "Leased Premises".
2. Lessor and Lessee hereby agree that Lessee's Additional Rent shall be
87.02%.
3. Lessee agrees to pay to Lessor, without prior demand being made
therefore and without offset or deduction of any kind, as Base Rent for
the Leased Premises, the following sums:
(i) For the period commencing on March 1, 1998 and expiring on
November 30, 2001, the sum of $261,376.75 per annum, payable
in equal monthly installments, in advance, of $21,781.40 per
month.
(ii) For the period commencing on December 1, 2001 and expiring on
January 31, 2003, the Base Rent due hereunder shall be the
amount due from Lessee during the prior twelve-month period,
as increased by the same percentage of increase as the
percentage of increase in the Mpls./St. Paul CP(I between the
month of November, 2001 and the month of February, 1998.
Notwithstanding anything to the contrary set forth
hereinabove, in no event shall the Base Rent increase by more
than 10% over the amount due from Lessee during the prior
twelve-month period.
4. Lessor shall, at its sole cost and expense, provide new carpeting to
the office area of the Expansion Premises which contains approximately
5,770 square feet. Except as expressly set forth herein, Lessee hereby
agrees to accept the Expansion Premises in "as is" condition and Lessee
further agrees that any and all improvements to the Leased Premises
shall be performed by Lessee: (I) at its sole cost and expense; (ii) in
accordance with plans and specifications previously approved by Lessor
in writing; (iii) in full compliance with all applicable laws,
ordinances, rules and regulations of any governmental authority having
jurisdiction thereover; (iv) in a good and workmanlike manner; (v) in
such a manner as to insure the least possible interference with all
aspects of the operation of the office building, including cooperating
fully with Lessor's requests regarding such items as the location of
construction equipment and the times and manner in which construction
will be performed, and (vi) in a prompt and diligent manner.
5. Except as expressly amended hereby, the Lease and all of the terms,
covenants and conditions of the Lease are hereby reaffirmed in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment the day and
year first written above.
<PAGE>
LESSOR: Parkers Lake I Realty Corp.
By: /s/ CHRISTINE C. KURTZ
----------------------
Title: /s/ VICE PRESIDENT
LESSEE: Urologix, Inc.
By:
Title: /s/ VICE PRESIDENT,
OPERATIONS
3/6/98
<PAGE>
EXHIBIT 0
ADDENDUM TO LEASE
THIS AMENDMENT TO LEASE ("Amendment"), made this ____ day of March, 1998 between
Parkers Lake I Realty Corp, as Lessor and Urologix, Inc., as Lessee;
WITNESSETH:
WHEREAS, Lessor's predecessor-in-interest and Lessee entered into a lease dated
January 20, 1992, as amended on June 20, 1994 April 5, 1995, March 7, 1996,
September 30, 1996, November 15, 1996, and October 31, 1997 and March 12, 1998
(as amended, the "Lease"), covering premises known and numbered as Suites
#111/#109/#114/#104/#102/#101/#116/#117/#118/#120 (the "Existing Premises"),
Parkers Lake Point I ("Building"), 14405 21st Avenue, Plymouth, MN 55447
("Premises");
WHEREAS, Lessor and Lessee desire to enter into this Amendment to provide for an
expansion of the Existing Premises into Suite #130 containing approximately
1,498 square feet of office space plus approximately 970 square feet of
warehouse space (collectively the "Expansion Premises") and to further amend the
lease;
NOW THEREFORE, in consideration of the premises and the mutual covenants herein
contained, Lessor and Lessee hereby agree to amend the Lease, effective March
26, 1998, as follows:
1. The Leased Premises shall include Suite #130 and shall contain
approximately 21,417 square feet of office space plus 15,545 square feet of
warehouse space for a total of 36,962 square feet; it being the intention of the
parties hereto that the Existing Premises and the Expansion Premises, both as
hereinbefore defined, shall from and after March 26, 1998, collectively be
referred to as the "Leased Premises".
2. Lessor and Lessee hereby agree that Lessee's Additional Rent shall
be 93.24%.
3. Lessee agrees to pay to Lessor, without prior demand being made
therefore and without offset or deduction of any kind, as Base Rent for the
Leased Premises, the following sums:
4. For the period commencing on March 26, 1998 and expiring on November
30, 2001, the sum of $280,409.25 per annum, payable in equal monthly
installments, in advance, of $23,367.44 per month.
(i) For the period commencing on December 1, 2001 and expiring on
January 31, 2003, the Base Rent due hereunder shall be the amount due from
Lessee during the prior twelve-month period, as increased by the same percentage
of increase as the percentage of increase in the Mpls./St. Paul CP(I between the
month of November, 2001 and the month of February, 1998. Notwithstanding
anything to the contrary set forth hereinabove, in no event shall the Base Rent
increase by more than 10% over the amount due from Lessee during the prior
twelve-month period.
(ii) Lessor shall, at its sole cost and expense, provide new carpeting
to the office area of the Expansion Premises which contains approximately 1,498
square feet. Except as expressly set forth herein, Lessee hereby agrees to
accept the Expansion Premises in "as is" condition and Lessee further agrees
that any and all improvements to the Leased Premises shall be performed by
Lessee: (I) at its sole cost and expense; (ii) in accordance with plans and
specifications previously approved by Lessor in writing; (iii) in full
compliance with all applicable laws, ordinances, rules and regulations of any
governmental authority having jurisdiction thereover; (iv) in a good and
workmanlike manner; (v) in such a manner as to insure the least possible
interference with all aspects of the operation of the office building, including
cooperating fully with Lessor's requests regarding such items as the location of
construction equipment and the times and manner in which construction will be
performed, and (vi) in a prompt and diligent manner.
5. Except as expressly amended hereby, the Lease and all of the terms,
covenants and conditions of the Lease are hereby reaffirmed in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment the day and
year first written above.
LESSOR: Parkers Lake I Realty Corp. LESSEE: Urologix, Inc.
By: /s/ CHRISTINE C. KURTZ By:
----------------------
Title: /s/ VICE PRESIDENT Title: /s/ VICE PRESIDENT, OPERATIONS
Exhibit 23.1
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration Statements
(Form SB-2 No. 333-59395) pertaining to 2,875,000 shares of common stock, (Form
S-3 No. 333-1149) pertaining to 2,264,006 shares of common stock issuable upon
conversion of preferred stock and exercise of warrants, (Form S-3 No. 33-57116)
pertaining to 1,083,333 shares of common stock and 50,000 shares of common stock
issuable upon exercise of warrants, (Form S-8 No. 33-45536) pertaining to
1,810,000 shares of common stock, (Form S-8 No. 33-63047) pertaining to the 1991
Stock Option Plan, (Form S-8 Nos. 33-45523 and 333-49919) pertaining to the 1991
Stock Plan, (Form S-8 No. 33-36385) pertaining to the 1990 Restricted Stock
Plan, (Form S-8 No. 33-22052) pertaining to the 1988 Employee Incentive Stock
Plan and (Form S-8 No. 2-93693-C) pertaining to the 1983 Employee Stock Option
Plan of GV Medical, Inc., of our report dated February 11, 2000 with respect to
the financial statements of SpectraScience, Inc., included in this Annual Report
(Form 10-KSB) for the year ended December 31, 1999.
Minneapolis, Minnesota /s/ ERNST & YOUNG LLP
March 24, 2000
EXHIBIT 99.1
SPECTRASCIENCE, INC.
EXHIBIT 99: FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE THE
COMPANY'S ACTUAL RESULTS TO DIFFER FROM THOSE PROJECTED IN FORWARD-LOOKING
STATEMENTS.
SPECTRASCIENCE, Inc. (the "Company") desires to take advantage of the
"safe harbor" provisions contained in the Private Securities Litigation Reform
Act of 1995 (the "Act"). Contained in this Form 10-KSB are statements which are
intended as "forward-looking statements" within the meaning of the Act. When
used in this Form 10-KSB, in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in any other
written or oral statements made by the Company, words or phrases such as "may,"
"expects," "will continue," "is anticipated," "management believes," "estimate,"
"projects," "hope" or expressions of a similar nature are intended to identify
forward-looking statements within the meaning of the Act. These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results or from those results presently
anticipated or projected. These risks and uncertainties include, but are not
limited to, the factors listed under the caption "Risk Factors" below. The
Company wishes to caution readers not to place undue reliance on forward-looking
statements. Readers are advised that the factors listed below may have affected
the Company's performance in the past and could affect future performance. These
factors are in addition to any other cautionary statements, written or oral,
which may be made or referred to in connection with any forward-looking
statements or contained in any subsequent filings by the Company with the
Securities and Exchange Commission. New factors may emerge from time to time,
and it is not possible for the Company to predict all of such factors, nor can
the Company assess the impact of each factor on the business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. The
forward-looking statements contained in this exhibit are made as of the date of
this Form 10-KSB, and the Company assumes no obligation to update such
forward-looking statements or to update the reasons why actual results could
differ materially from those anticipated in such forward-looking statements.
RISK FACTORS
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 WILL BE DEPENDENT ON THE
AVAILABILITY OF ADEQUATE REIMBURSEMENT FROM THIRD PARTY PAYORS. Managed care
organizations and medical 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, and may not ever be approved for
reimbursement by third party payors. Even if they are eligible, the level of
reimbursement may not be adequate. If we fail to obtain adequate third-party
reimbursement it will negatively affect our ability to sell the Virtual
Biopsy(TM) System and our business.
Page E-1
<PAGE>
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
we will probably be required to modify our operations from time to time to stay
in compliance. 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.
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 to remain in strict compliance.
Our failure or inability to comply with applicable laws and governmental
regulations may materially and adversely affect our business.
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 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 complied and
submitted a response, a final approval is still necessary before we can
commercialize the Virtual Biopsy(TM) System. We expect our application to
receive FDA approval in the first half of 2000 with a requirement by the FDA to
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.
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 non-U.S. 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.
Page E-2
<PAGE>
OUR FUTURE IS HIGHLY DEPENDENT ON OUR ABILITY TO SUCCESSFULLY DEVELOP
AND COMMERCIALIZE THE VIRTUAL BIOPSY(TM) SYSTEM, OUR ONLY FULLY DEVELOPED
PRODUCT. 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.
THE ENDOSCOPY MARKET MAY NOT ACCEPT OUR PRODUCT. We believe that
physician acceptance of procedures performed using the Virtual Biopsy(TM) System
will be essential for it's 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.
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.
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.
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 the interest of the other party in the specific product(s)
involved. It will also depend on their ability and willingness to perform in the
role we contemplate for them. We may have limited or no 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 that we can
enter into strategic partner or distributor relationships with. 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.
WE PURCHASE SOME RAW MATERIALS AND KEY COMPONENTS OF OUR PRODUCTS FROM
SOLE, SINGLE OR LIMITED SOURCES OF SUPPLY. For some of these 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
Page E-3
<PAGE>
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
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.
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.
Our inability to establish and maintain large-scale manufacturing capabilities
could have a material adverse effect on our business and financial condition.
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.
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,
how quickly 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.
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.
Page E-4
<PAGE>
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 or 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, 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.
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 which
have substantial resources. We could also incur substantial expense in defending
ourselves against third parties with respect to patent or other intellectual
property right infringement claims. There can be no assurances that we could
successfully defend ourselves against these claims. If unsuccessful, we may have
to modify or refrain from selling our products, or enter into royalty
agreements. 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 arrangement with The
Massachusetts General Hospital giving us an exclusive license to certain cancer
detection patents and an exclusive license to an issued patent for the Virtual
Biopsy(TM) System forceps and fiber. This license is exclusive through the life
of the licensed patents and has customary diligence requirements for
commercially reasonable best efforts to introduce products. Both of the
licensing agreements are 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, our business could be adversely affected.
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.
Page E-5
<PAGE>
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;
* 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 needed. 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 that are
beyond our control and unrelated to our operating performance. Factors that may
have a significant adverse effect on the market price of our securities include,
but are not limited to:
* fluctuations in our operating results;
* announcements of technological innovations or new diagnostic
or therapeutic products by SPECTRASCIENCE or 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. Accredited investors are generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 individually or
$300,000 jointly with their spouse. For transactions covered by the rule, the
broker-dealer must make a special suitability determination for 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
shareholders to sell their shares in the secondary market may be adversely
affected.
Page E-6
<PAGE>
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. Certain provisions of Minnesota law are intended to provide
management flexibility to enhance the likelihood of continuity and stability in
the composition of our Board of Directors, in the policies formulated by the
Board, 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 to acquire us, and not
allow you to sell your shares of common stock at prices that might be higher
than prevailing market prices.
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.
Page E-7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS SUBMITTED IN THIS QUARTERLY REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,362,120
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 143,660
<CURRENT-ASSETS> 4,634,358
<PP&E> 860,520
<DEPRECIATION> 566,774
<TOTAL-ASSETS> 4,928,104
<CURRENT-LIABILITIES> 1,116,222
<BONDS> 0
0
0
<COMMON> 1,605,176
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,928,104
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,151,207
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,626
<INCOME-PRETAX> (2,179,833)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,179,833)
<EPS-BASIC> (0.41)
<EPS-DILUTED> 0
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