<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1997
REGISTRATION NO. 333-14541
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PHOTOELECTRON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 3845 04-3035323
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
5 FORBES ROAD
OF INCORPORATION) CLASSIFICATION CODE
NUMBER)
LEXINGTON, MASSACHUSETTS 02173
(617) 861-2069
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
PETER E. OETTINGER, PH.D.
VICE PRESIDENT AND CHIEF OPERATING OFFICER
PHOTOELECTRON CORPORATION
5 FORBES ROAD
LEXINGTON, MASSACHUSETTS 02173
(617) 861-2069
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES OF COMMUNICATIONS TO:
LESTER J. FAGEN, ESQUIRE EDWIN L. MILLER JR., ESQUIRE
DANIEL R. AVERY, ESQUIRE TESTA, HURWITZ & THIBEAULT, LLP
GOULSTON & STORRS, P.C. HIGH STREET TOWER
400 ATLANTIC AVENUE 125 HIGH STREET
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02110
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH AMOUNT MAXIMUM MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value.................. 2,300,000 Shares $13.00 $29,900,000 $10,310
</TABLE>
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(1) Includes 300,000 shares which the Underwriters have the option to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 16, 1997
PROSPECTUS
2,000,000 Shares
LOGO
Common Stock
-----------
All of the 2,000,000 shares of Common Stock offered hereby are being sold by
Photoelectron Corporation ("Photoelectron" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be
between $11.00 and $13.00 per share. See "Underwriting" for a discussion of
factors to be considered in determining the initial public offering price. The
Common Stock has been approved for listing on the Nasdaq Stock Market's
National Market under the symbol "PECX".
-----------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------
Following the completion of this offering, PYC Corporation and Mr. Peter M.
Nomikos, an existing stockholder, Chairman of the Board, President, Chief
Executive Officer and Treasurer of the Company, will have the ability to
significantly influence all matters requiring stockholder approval. See "Risk
Factors--Control by Peter M. Nomikos, His Affiliates and Other Existing
Stockholders," and "Securities Ownership of Management and Certain Beneficial
Owners."
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
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Total (3).............................. $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting estimated expenses of $855,000 payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise such option in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively. See
"Underwriting."
-----------
The shares of Common Stock offered by this Prospectus are being offered by
the several Underwriters named herein, subject to prior sale, when, as and if
delivered to and accepted by them and subject to the right of the Underwriters
to reject orders in whole or in part. It is expected that delivery of the
shares of Common Stock offered hereby will be made in New York, New York on or
about , 1997.
-----------
Needham & Company, Inc. Dain Bosworth
Incorporated
The date of this Prospectus is , 1997.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
DESCRIPTION OF FRONT COVER PAGE GRAPHICS:
The graphics on the front cover page consist of one drawing, with
corresponding description, located within the top half of the page, and a
series of four smaller drawings, each with description, located within the
bottom half of the page.
A caption at the top of the page reads as follows: "The Photon Radiosurgery
System (PRS)--A Therapeutic X-Ray System for Treating. . ."
The drawing within the top half of the page measures approximately 4 inches
(width) by 4 inches (length) (based on an 8 1/2 inch by 11 inch page) and is
centered roughly within the left-hand side of the page. The drawing shows a
partially cross-sectioned view of a human head, with the PRS probe directed
downward, at approximately a 45 degree angle, into the brain. The cross-
sectioned portion of the head shows the tip of the probe inserted into a
representation of a cancerous mass. An italicized description to the right of
the drawing reads "Brain Tumors. The tip of the x-ray probe is guided
stereotactically to the center of the tumor. The tumor is then treated from
the inside out with the radiation substantially confined to the cancerous
tissue."
The four drawings within the bottom half of the page each represent a
spherical tumor, of approximately 1 1/4 inches in diameter, in a series
running roughly horizontally across the page. The series of drawings show the
stages of destruction of the tumor, the second drawing in the series shows the
insertion of the PRS probe into the tumor. A general caption is located above
and to the right of the series of drawings, and reads, in italics, as follows:
"Irradiation and destruction of a tumor using the Photon Radiosurgery System."
The four drawings in the series have the following four non-italicized
captions: (i) "Before treatment" (this drawing also sets forth labels showing
the "healthy tissue," and the "tumor," respectively; (ii) "Low energy x-rays
are absorbed by the tumor in a single-dose treatment typically lasting less
than 30 minutes; (this drawing also sets forth labels showing the "x-rays,"
and the "PRS probe," respectively) (iii) "Tumor destruction proceeds from
center;" and (iv) "Zone of destruction matched to tumor."
The phrase "(continued on inside back cover)" is located at the bottom of
the page.
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PHOTOELECTRON'S PHOTON RADIOSURGERY SYSTEM IS UNDER DEVELOPMENT AND HAS NOT
BEEN APPROVED OR CLEARED FOR COMMERCIAL SALE OR USE IN THE U.S. OR IN ANY
FOREIGN COUNTRY. REGULATORY APPROVAL COULD TAKE SEVERAL YEARS AND THERE CAN BE
NO ASSURANCE THAT SUCH APPROVAL WILL EVER BE OBTAINED OR, IF OBTAINED, THAT
THE COMPANY'S PHOTON RADIOSURGERY SYSTEM WILL ACHIEVE MARKET ACCEPTANCE. SEE
"RISK FACTORS--PRODUCT DEVELOPMENT RISKS; UNCERTAINTIES RELATING TO CLINICAL
TRIALS" AND "--ABSENCE OF REGULATORY CLEARANCES; UNCERTAINTY OF OBTAINING
SECTION 510(K) CLEARANCE."
ALL TRADENAMES AND TRADEMARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY
OF THEIR RESPECTIVE HOLDERS.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise specified, the information contained in
this Prospectus has been adjusted to give effect to a one-for-two reverse stock
split of the Common Stock and the Preferred Stock to be effective prior to the
closing of this offering and the conversion of each outstanding share of
Preferred Stock into Common Stock upon such closing. Unless otherwise
specified, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. As used herein, unless the context
requires otherwise, the term "Company" includes Photoelectron Corporation and
its subsidiary, Photoelectron (Europe) Ltd. The Common Stock offered hereby
involves a high degree of risk. Prospective investors should carefully consider
the risks set forth under the heading "Risk Factors."
THE COMPANY
The Company is engaged in the design, development and commercialization of
the Photon Radiosurgery System ("PRS"), a proprietary, therapeutic device for
the treatment of cancerous tumors through the application of x-ray radiation
directly to the tumor site. The PRS delivers in a single treatment a high dose
of radiation through a thin, minimally invasive, needle-like probe, which emits
from its tip precisely controlled low energy x-rays that irradiate the tumor
from the inside out. The limited penetration of low energy x-rays in tissue
substantially confines the radiation to the tumor site.
The Company believes that the PRS offers a number of advantages over
conventional radiation therapies by allowing higher radiation doses with
shorter patient treatment times. Substantial confinement of the radiation to
the tumor boundaries significantly reduces the risk of radiation exposure to
the surrounding healthy tissue and important organs or critical structures.
Cancerous tumors are expected to account for 90% of the approximately 1.3
million new U.S. cancer cases anticipated in 1996. Such tumors are most often
treated through invasive surgery, the destruction of cancerous cells by
exposure to radiation, or a combination of the two.
The most common form of treatment of cancerous tumors is by invasive surgery.
The Company believes that the PRS provides an attractive, minimally invasive
alternative to surgery, resulting in significantly less patient trauma, shorter
hospital stays and lower treatment costs than surgery. The PRS can be applied
after performing a biopsy and, when desirable, use of the PRS can be coupled
with surgical procedures.
Next to surgery, radiation therapy is the most common modality of treating
cancer. Approximately 50% of all cancer patients in the U.S. receive radiation
therapy at some point during the course of their disease. Radiation can be
administered to a tumor by external beams or interstitially by inserting a
radiative source into the patient. With external beams, radiation must pass
through, and may potentially damage, healthy tissue before reaching the tumor,
whereas the PRS delivers radiation directly to the tumor site.
An established form of treatment, called brachytherapy, delivers radiation
directly to a tumor site by the insertion of radioactive isotopes. In
comparison to this form of treatment, the Company believes that the PRS offers
a greater ability to control and localize low energy radiation doses, and
avoids the costs and risks associated with the storage, handling and disposal
of radioactive materials. The Company believes that the PRS also offers
significant advantages over other forms of therapy, such as the destruction of
cancerous cells by heating, cooling or the use of laser light.
To date, the Company has focused its clinical efforts primarily on the
treatment of metastatic brain tumors. However, the PRS is being developed for a
variety of applications, including the treatment of primary brain tumors as
well as breast, prostate, bladder, skin and other cancers. The method of
treatment will depend on the
3
<PAGE>
application. The Company expects that the three basic PRS treatment methods
will be: (i) the "interstitial" irradiation of localized tumors from the inside
out; (ii) the "intracavitary" irradiation of body cavities; and (iii) the
"intraoperative" irradiation of tumors during surgery or of the beds of
surgically removed tumors in order to destroy remaining cancerous cells.
Because of the particularly sensitive nature of the brain and its surrounding
organs and critical structures, such as the optic nerves, damage from external
radiation and surgical procedures can severely harm the patient. Accordingly,
aggressive treatment of brain cancers has historically been limited. The PRS,
however, has been used to treat metastatic brain tumors in 57 patients in its
clinical trials. Although the studies are not yet complete, in the Company's
opinion, based primarily on two autopsies, the PRS has destroyed all cancerous
tissue which has been targeted with an adequate dose of radiation. Based on
these results, the Company believes that the PRS can be applied to treat
primary brain tumors and other cancerous tumors throughout the body, with
reduced risk of damage to surrounding tissue. Phase II clinical trials for the
treatment of metastatic brain tumors are currently ongoing with respect to this
application. On December 11, 1996, the Company submitted an application under
Section 510(k) of the Federal Food, Drug and Cosmetic Act, as amended (the "FDC
Act") to the U.S. Food and Drug Administration ("FDA") seeking clearance to
commercialize the current model of the PRS for treatment of metastatic brain
tumors. Locally approved clinical trials for the treatment of brain tumors are
also being performed at sites in Europe and Japan. The Company currently
anticipates that the first clinical trials to determine the safety of the PRS
for treatment of breast cancer will begin in early 1997. A protocol for human
clinical trials of the PRS to treat prostate tumors has been approved by the
ethics committee of a London hospital and animal trials relating to the use of
the PRS in treating bladder tumors are currently underway in the U.S. The
Company will consider the use of the PRS for other potential applications on an
ongoing basis.
The Company's strategy is to (i) utilize its core technology for the
treatment of metastatic brain tumors and additional applications, (ii) build
relationships with medical professionals and institutions, (iii) obtain
regulatory clearance for the PRS in the U.S. and internationally, initially for
treatment of metastatic brain tumors and subsequently for other forms of
cancer, (iv) pursue commercial acceptance of the PRS in the U.S. and
internationally by relying on internal resources and collaborative
relationships to create sales and distribution capabilities, and (v) protect
its intellectual property rights.
The Company and Toshiba Medical Systems Company, Ltd. ("Toshiba") have
entered into agreements relating to performance of clinical trials, and to
future product distribution arrangements in Japan.
The Company holds nine U.S. patents and four U.S. patent applications
relating to the PRS or its constituent or ancillary components. The Company has
also obtained or filed patent applications in other selected foreign countries.
The Company was formed in 1989 as a joint venture between Thermo Electron
Corporation ("Thermo Electron") and an investment entity organized by Peter M.
Nomikos, the Company's President and Chief Executive Officer. Mr. Nomikos co-
founded Thermo Electron with George N. Hatsopoulos, Ph.D., a director of the
Company.
The Company was incorporated in Massachusetts in 1989. The Company's
principal executive offices are located at 5 Forbes Road, Lexington,
Massachusetts 02173, and its telephone number is (617) 861-2069.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 2,000,000 shares (1)
Common Stock to be outstanding after the offering.. 6,484,666 shares (2)
Use of proceeds.................................... To fund research and
development and clinical
trials, for manufacturing
and marketing purposes and
for working capital and
other general corporate
purposes. See "Use of
Proceeds."
Nasdaq Stock Market's National Market Symbol....... PECX
</TABLE>
- --------
(1) Assumes that the Underwriters' over-allotment option is not exercised.
(2) Based upon the number of shares outstanding at December 3, 1996. Excludes
1,417,334 shares of Common Stock issuable upon exercise of warrants
outstanding at December 3, 1996 with an exercise price of $3.00 per share
and 881,249 shares of Common Stock issuable upon conversion of the
Company's 8% convertible debt outstanding at September 28, 1996 with a
weighted average conversion price of $2.28. Also excludes 812,975 shares of
Common Stock issuable upon exercise of options outstanding at December 3,
1996 with a weighted average exercise price of $4.70 per share. See Notes
6, 7, 8 and 9 of Notes to Consolidated Financial Statements, "Description
of Capital Stock," "Management--Officers and Directors," and "--Executive
Compensation" and "Certain Transactions."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED (1)
------------------------------------------------------------ ---------------------------
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1991 1993 1994 1994 1995 1995 1996
------------ ---------- ---------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Research and development
expenses............... $ 784 $ 1,227 $ 1,727 $ 2,086 $ 3,226 $ 1,721 $ 2,263
General and
administrative
expenses............... 116 192 251 505 866 543 1,168
Net loss................ $ (974) $ (1,586) $ (2,267) $ (2,672) $ (4,117) $ (2,331) $ (3,319)
Net loss per share...... $ (0.90) $ (1.25) $ (1.55) $ (1.60) $ (2.85) $ (1.61) $ (1.73)
Pro forma net loss per
share (2).............. $ -- $ -- $ -- $ -- $ (1.02) $ -- $ (0.74)
Weighted average common
and common equivalent
shares outstanding..... 1,087 1,266 1,466 1,669 1,447 1,446 1,919
Pro forma weighted
average common and
common equivalent
shares outstanding
(2).................... -- -- -- -- 4,032 -- 4,503
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 28, 1996 (1)
-----------------------------
PRO FORMA (3) AS ADJUSTED (4)
------------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 4,005 $ 25,470
Total assets............ 6,037 27,502
Total long-term debt,
including current
portion................ 2,013 2,013
Deficit accumulated
during development
stage.................. (15,744) (15,744)
Total shareholders'
equity................. 3,803 25,268
</TABLE>
- --------
(1) Derived from unaudited financial statements.
(2) Includes 2,583,295 shares of Common Stock to be issued upon the conversion
of all of the outstanding preferred stock. The remaining 309,017 shares of
Common Stock to be issued upon the conversion of all outstanding preferred
stock is included in historical loss per share for all periods pursuant to
certain Securities and Exchange Commission requirements.
(3) Gives effect to the conversion of all of the outstanding Preferred Stock
into 2,892,312 shares of Common Stock, which will automatically occur on
the closing of this offering. The Company's Preferred Stock consists of
three separate series; 1,282,005 shares of Series A Convertible Preferred
Stock, 500,000 shares of Series B Convertible Preferred Stock, and
1,110,307 shares of Series C Convertible Preferred Stock were outstanding
as of September 28, 1996. Each share of Preferred Stock is convertible into
one share of Common Stock. See Notes 6, 7, 8 and 9 of Notes to Consolidated
Financial Statements, "Description of Capital Stock," "Management--Officers
and Directors," "--Executive Compensation" and "Certain Transactions."
(4) Adjusted to give effect to the sale of the 2,000,000 shares of Common Stock
offered hereby, at an assumed initial public offering price of $12.00 per
share after deducting the estimated underwriting discounts and commissions
and offering expenses payable by the Company. See "Use of Proceeds" and
"Capitalization."
This Prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all forward-looking statements wherever
they appear in this Prospectus. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include those discussed in "Risk Factors," as well as those
discussed elsewhere in this Prospectus.
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information in this Prospectus,
the following factors should be considered carefully in evaluating an
investment in the shares.
EARLY STAGE OF THE COMPANY AND ITS PRODUCTS
The PRS, is still in development and no revenues have been generated from
product sales of the PRS to date, nor has the PRS been approved for commercial
use in the U.S. or elsewhere. The PRS and its related accessories and
components are currently the Company's only products. No assurance can be
given that the Company's development efforts will be successfully completed,
that required regulatory approvals will be obtained, or that the PRS, if
introduced to the commercial market, will be marketed successfully. See
"Business--Clinical Trials," "--Products and Product Development" and "--
Marketing and Sales; Collaborative Relationships."
HISTORY OF SIGNIFICANT OPERATING LOSSES; EXPECTATION OF FUTURE SUBSTANTIAL
LOSSES
The Company has experienced significant operating losses in each year since
its inception, due primarily to substantial research and development
expenditures, and as of September 28, 1996 the Company had an accumulated
deficit of approximately $15.7 million. The continued development and
commercialization of the PRS will likely result in substantial losses through
at least the middle of 1998. There can be no assurance that the PRS will ever
gain commercial acceptance, or that the Company will ever generate revenues or
achieve profitability. The Company's ability to achieve profitable operations
will be dependent in large part on whether it can successfully develop and
commercialize the PRS and/or any other products and make the transition to a
manufacturing and marketing company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
PRODUCT DEVELOPMENT RISKS; UNCERTAINTIES RELATING TO CLINICAL TRIALS
The PRS is new and, accordingly, its safety and efficacy have not yet been
fully established, and further development will be required to use the PRS in
the full range of intended applications. The PRS is still in the clinical
testing stage and such clinical testing has focused on only one application of
the PRS, the treatment of metastatic brain tumors.
Results from Phase I trials of the PRS as a treatment for metastatic brain
tumors may not be predictive of results obtained in subsequent clinical trials
or of results obtained in clinical trials for other specific applications. It
is not uncommon for medical device companies to suffer significant setbacks in
Phase II or other clinical trials, even after obtaining promising results in
Phase I or other prior trials. In addition, clinical trials of the PRS are
likely to be conducted with patients in advanced stages of cancer. These
patients could die or suffer adverse effects for reasons unrelated to the PRS,
but such events could nevertheless negatively impact clinical trial results or
regulatory approvals.
The Company has relied and will continue to rely on unaffiliated medical
institutions to perform its clinical trials in accordance with the approval
process of the FDA. There can be no assurances that the work carried out at
the institutions currently performing Phase I or II clinical trials, or that
the work carried out at any institutions performing clinical trials in the
future, will be satisfactory, or that those institutions will not cancel,
suspend or delay such trials.
Clinical trials may be delayed for a variety of reasons, including the
inability to ensure sufficient numbers of enrolled patients to meet the
clinical trial protocols. This inability can be influenced or caused by, among
other things, the rigidity of the protocols, the size of the overall patient
population, and the locations of clinical sites. The number of patients that
have completed the Company's clinical trials has been limited by a number of
factors, including the reluctance of patients or physicians to participate in
experimental clinical trials. In addition, the Company's collection of
randomized data has been made difficult by the defection from the clinical
trials of patients that wanted to receive the PRS treatment but were assigned
to the trials' non-PRS control groups. Any delays in or termination of the
Company's clinical trials could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that clinical trials will be
7
<PAGE>
successful, that clinical trials will not be delayed, or that the PRS or any
other product will be safe or effective or capable of being successfully
developed for all intended applications. See "Business--Clinical Trials," "--
Products and Product Development" and "--Government Regulation."
ABSENCE OF REGULATORY CLEARANCES; UNCERTAINTY OF OBTAINING SECTION 510(K)
CLEARANCE
The PRS has not been approved or cleared for commercial use in the U.S. or
in any foreign country. The PRS is subject to extensive regulation in the U.S.
by the FDA and, in many instances, by comparable agencies in foreign countries
where the PRS is to be manufactured or distributed. Under the FDC Act and the
Safe Medical Devices Act of 1990 (the "SMDA"), manufacturers of medical
devices must comply with applicable provisions of the FDC Act and the SMDA and
certain associated regulations governing the safety, design, testing,
manufacturing, labeling, marketing and distribution of medical devices and the
reporting of certain information regarding the safety of medical devices. Both
the FDC Act and the SMDA require certain clearances from the FDA before
medical devices, such as the PRS, can be marketed.
Sales of medical devices outside the U.S. are subject to regulatory
requirements that vary widely from country to country. The length of time
needed to obtain approval for the sale of a particular medical device in a
foreign country may be longer, and the requirements may be more burdensome or
expensive, than that required for FDA approval. Furthermore, the export of
products manufactured by the Company will be subject to receipt of export
licenses from the U.S. Government. Such licenses are required for equipment
use in foreign clinical trials. The Company has requested and been granted
export licenses and corresponding foreign import licenses for clinical trials
in England, Japan, Australia and Germany.
On December 11, 1996 the Company filed an application under Section 510(k)
of the FDC Act with respect to the PRS for the treatment of metastatic brain
tumors. If the FDA determines that Section 510(k) procedures are not available
to the Company and the application is denied, the Company would be required to
seek FDA approval of the PRS through the submission of a Premarket Approval
("PMA"). In addition, the 510(k) clearance being sought by the Company relates
to the current version of the PRS (the "Model 3"). If such clearance is
obtained, the Company will need to request the FDA to extend such clearance to
the version of the PRS now under development (the "Model 4"). The Company
expects that the Model 4 will be the first version of the PRS to be made
commercially available, and there can be no assurances that any such
clearance, if obtained, would be so extended. In addition, even if the Company
were to obtain all Section 510(k) clearances with respect to the use of the
PRS in the treatment of metastatic brain tumors, there can be no assurances
that the Section 510(k) procedures would be applicable to any other treatment
modality. The PMA process can be expensive, lengthy and uncertain, often
requiring several years of effort. Moreover, there can be no assurances that
the Company would be successful in obtaining FDA approval through the PMA
process. The inability of the Company to obtain clearance under Section 510(k)
with respect to any particular treatment modality would have a material
adverse effect on the Company's business, financial condition and results of
operations.
There can be no assurances that regulatory clearances will be granted for
the PRS or any other future products, that the length of time for clearance
will not be extensive, or that the cost of attempting to obtain any such
clearances will not be prohibitive. Failure to obtain or maintain requisite
governmental approvals could delay or preclude the Company from further
developing and marketing the PRS and other products. Such delays could impair
the Company's ability to generate funds from operations, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Government Regulation."
EXTENSIVE ONGOING GOVERNMENT REGULATION
Even if regulatory clearances are obtained, such clearances may include
significant limitations on particular uses, and the FDA strictly prohibits the
marketing or sale of approved medical devices for unapproved uses. In
addition, there can be no assurance that the FDA will not impose strict
labeling requirements that limit the use of the PRS, burdensome training
requirements or other requirements as a condition of its Section 510(k)
clearance
8
<PAGE>
or PMA, under the FDC Act, any of which could limit the Company's ability to
market the PRS. Further, in order to change or modify a product following FDA
clearance, additional clearances may be required from the FDA. In addition,
any FDA clearances may be withdrawn or limited for non-compliance with
regulatory standards or the occurrence of unforeseen problems following the
initial clearance, either of which could result in restrictions, including
withdrawal of the product from the market or sanctions or fines being imposed
on the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Manufacturers of medical devices are subject to strict federal regulations
regarding quality of manufacturing, including periodic FDA inspections of
manufacturing facilities to determine compliance with Good Manufacturing
Practice ("GMP") regulations, but the Company has not to date undergone such
an inspection. These regulations include design, testing, production, control,
documentation and other requirements. The FDA has publicly stated that recent
proposed changes to the GMP regulations are intended to reduce potential
design-related problems with medical devices. In addition, in order to obtain
a Communaute Europeenne Mark (a "CE Mark") for the PRS, which is required to
market the PRS within the European Union, the Company will need to comply with
standards administered by the International Standards Organization ("ISO").
There can be no assurance that the Company will be able to attain or maintain
compliance with GMP or ISO standards, or that the Company will be able to
identify and retain manufacturers on commercially acceptable terms, or at all,
or that such manufacturers, if identified, will be adequate for the Company's
long-term needs, or that they will be able to meet all relevant regulatory
requirements. Moreover, changes in methods of manufacture may require the
performance of new clinical studies under certain circumstances. Failure of
the Company to comply with, and maintain continuing compliance with, these
regulations could result in restrictions, including withdrawal of any given
product from the market or sanctions or fines being imposed on the Company,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
RAPID, UNPREDICTABLE AND SIGNIFICANT TECHNOLOGICAL CHANGE; HIGHLY COMPETITIVE
INDUSTRY
The medical device industry is subject to rapid, unpredictable and
significant technological change. The Company is subject to competition in the
U.S. and abroad from a variety of sources, including universities, research
institutions and medical device, chemical and biotechnology companies, many of
which have substantially greater technical, financial, and regulatory
resources than the Company and are better equipped to develop, manufacture and
market their products. These companies may develop and introduce products and
processes competitive with or superior to those of the Company. See
"Business--Background," "--Specific Applications of the PRS" and "--
Competition."
DEPENDENCE ON ONE PRODUCT
The Company expects to derive substantially all of its future revenues from
the PRS. The PRS and its related accessories and components are currently the
Company's only products. The PRS and any other products will require further
development, study and regulatory approvals before they can be marketed in the
U.S. or internationally. The Company has never commercially sold any products,
and there can be no assurance that the Company's efforts will be successful or
that the PRS and its related accessories or any other product developed by the
Company will be safe or effective, approved by regulatory authorities, capable
of being manufactured in commercial quantities at acceptable costs, or
successfully introduced to the marketplace. Although the Company expects to
use its core technology to develop products in addition to the PRS and its
related accessories and components, all of such additional products are in
early stages of development, and there can be no assurance that the Company
will be able to continue as a going concern if it is forced to rely on sales
of such other additional products as its primary source of revenues. See
"Business--Specific Applications of the PRS," "--Competition," "--Products and
Product Development," "--Clinical Trials" and "--Government Regulation."
ADVERSE EFFECT OF PATIENT LIFE EXPECTANCIES ON MARKETS FOR SPECIFIC PRODUCT
APPLICATIONS
To date, the Company has focused its efforts on one specific application of
the PRS, the treatment of metastatic brain tumors. Patients with metastatic
brain tumors already suffer from primary cancer which is
9
<PAGE>
separate from the metastatic brain tumors themselves. The average life
expectancy of patients with metastatic brain tumors is very short. Although
the PRS has been designed to provide either curative or palliative cancer
treatment, health care providers and third party payors may be reluctant to
undertake or authorize, or provide reimbursement for, PRS treatment of
patients whose anticipated life expectancies are below certain levels. While
the Company believes that the PRS can be used for a variety of other
applications, such as breast, prostate, bladder or skin cancer, where patient
life expectancies are higher than those for patients with metastatic brain
tumors, the Company has not yet begun human clinical trials for any of those
other applications. See "Business--Clinical Trials".
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively in the marketplace will depend,
in part, on its ability to maintain the proprietary nature of its technology.
The Company will rely on patents, trade secrets and know-how to establish and
maintain a competitive position in the marketplace. The enforceability of
medical device patents can be highly uncertain, and relevant federal court
decisions establishing the legal standards for determining the validity and
scope of patent protection are currently in transition. In a case now pending
before the United States Supreme Court, the Court has been requested to
consider whether to alter or replace the traditional standards for determining
patent infringement under the "doctrine of equivalents." There can be no
assurance that the historical legal standards applied to questions of validity
and scope of patent protection will continue to be applied or that current
defenses (as to issued patents in the field) will offer protection in the
future. Any limitation or reduction in the Company's rights to obtain or
enforce its patents could have a material adverse effect on the Company's
ability to maintain the proprietary nature of its technology.
The Company has been issued nine U.S. patents covering the PRS and ancillary
test and calibration devices and holds four U.S. patent applications. The
Company has filed foreign patent applications in selected foreign countries
which correspond to certain of its U.S. patent applications. There can be no
assurance, however, that any applications will result in issued patents, or
that once issued, the U.S. Patent and Trademark Office or a court would
resolve issues relating to the validity and scope of the patents in a manner
favorable to the Company. Also, there can be no assurance that any current or
future patents, trade secrets or know-how will afford protection against
competitors with similar technologies or processes or that any patents issued
to the Company will not be infringed upon or designed around by others, nor
can there be any assurance that others will not independently develop
proprietary technologies or processes which are the same as or substantially
equivalent to those of the Company. In addition, there can be no assurance
that the Company will not become subject to patent infringement claims or
litigation initiated by third parties. The defense and prosecution of
intellectual property suits, and related legal and administrative proceedings,
are very costly and time-consuming, and any such litigation or proceeding
would result in substantial expense to the Company and a significant diversion
of effort by the Company's technical and management personnel. Further, any
adverse determination in such litigation or proceeding could subject the
Company to significant liabilities to the third party claimants and could
prevent the Company from manufacturing or marketing its products. See
"Business--Patents and Proprietary Rights."
The Company has been notified that an individual and his employer believe
that they have certain rights with regard to their understanding of the
Company's planned use of the PRS for treatment of tumors in body cavities. See
"Business--Legal Proceedings".
UNCERTAINTY OF REIMBURSEMENT BY THIRD PARTY PAYORS
The extent to which reimbursement levels for the cost of the Company's
products and related treatment are obtained from third party payors will have
a significant impact on the Company's ability to commercialize its products.
These third party payors include private insurance companies, self-insured
employers, health maintenance organizations, federal and state sources of
payment under the Medicare and Medicaid programs, and other sources. There is
no uniform policy on reimbursement among third party payors, nor are there any
assurances that the PRS or any other Company product will qualify for
reimbursement from third party payors. Foreign countries also have their own
health care reimbursement systems, and there can be no assurance that third
party reimbursement will be made available with respect to the Company's
products under any foreign reimbursement system.
10
<PAGE>
In addition, the Company's business, financial condition and results of
operations could be adversely affected by the continuing efforts of many third
party payors to reduce the costs of health care by decreasing reimbursement
rates, or limiting or prohibiting reimbursement for certain services or
devices or through other means. Furthermore, legislative proposals to reform
government health care insurance programs, including the Medicare and Medicaid
programs, could significantly impact the purchase of health care services and
products and could result in lower prices and reduced demand for the Company's
products. The Company is unable to predict whether such proposals will be
enacted, whether other health care legislation or regulation affecting the
Company's business, financial condition and results of operations may be
proposed or enacted in the future, or what effect any such legislation or
regulation would have on the Company's business, financial condition and
results of operations. See "Business--Third Party Reimbursement."
CONTROL BY PETER M. NOMIKOS, HIS AFFILIATES AND OTHER EXISTING STOCKHOLDERS
After completion of this offering, Mr. Peter M. Nomikos, Chairman of the
Board, President, Chief Executive Officer and Treasurer of the Company will
beneficially own 51.6% of the outstanding shares of Common Stock, and the
Company's principal stockholders and certain of their affiliates (including
Mr. Nomikos) will beneficially own in the aggregate 69.8% of the outstanding
shares of Common Stock. Certain principal stockholders serve as directors or
have representatives who serve as directors of the Company. As a result of Mr.
Nomikos' ownership of Common Stock coupled with the positions he holds in the
Company, Mr. Nomikos, alone or with the other principal stockholders, will
have the ability to significantly influence all matters requiring approval by
the stockholders of the Company, including the election of all directors,
acquisitions or sales of all or substantially all of the Company's stock or
assets and other extraordinary transactions. See "Management" and "Securities
Ownership of Management and Certain Beneficial Owners."
LIKELIHOOD OF SIGNIFICANT FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL
FUNDING
The Company has expended and will continue to expend substantial funds to
continue the research and development of the PRS and other potential products,
conduct clinical trials, pursue regulatory approvals, establish commercial
scale manufacturing in its own facilities or in the facilities of others, and
market the PRS or other products.
The Company's future capital requirements will depend on a variety of
factors, including the time and costs involved in obtaining FDA and other
regulatory approvals, the results of the Company's ongoing clinical trials,
the market acceptance of the PRS and any other Company products, the expense
and results of the Company's continued scientific research and development
programs, the time and costs expended in filing, prosecuting and enforcing
patent claims, and the development of competing technologies. No assurance can
be given that the necessary funds will be available to the Company on
acceptable terms, if at all. Insufficient funds may cause the Company to
delay, scale back or eliminate some or all of its research and development,
clinical marketing and manufacturing programs or to cease operations entirely.
In addition, any additional equity financings may be dilutive to the Company's
stockholders, including investors in this offering. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITED MANUFACTURING EXPERIENCE
To achieve profitability, the Company's product or products must be
manufactured in commercial quantities, in compliance with all applicable
regulatory requirements, and at acceptable costs. Production of the PRS or
other products in commercial quantities may create technical challenges for
the Company. The Company does not have and has no immediate plans to construct
a commercial scale manufacturing facility. In order to manufacture its
products in commercial quantities, the Company would have to build or gain
access to adequate facilities or would be required to enter into agreements
with other manufacturers at significant cost. The Company intends to continue
its practice of sub-contracting the fabrication of most of its electrical and
mechanical components, while maintaining internal responsibility for unit
assembly and for manufacture of certain proprietary components. To date, the
Company's manufacturing activities have consisted only of
11
<PAGE>
manufacturing investigational devices and prototype devices for use in
clinical trials. As a result, the Company has no experience manufacturing its
products in the volumes that will be necessary for the Company to achieve
significant commercial sales, and there can be no assurance that reliable,
high-volume manufacturing can be established or maintained at commercially
reasonable costs, or that the Company will be able to make the transition to
commercial production successfully. See "Business--Manufacturing."
LIMITED MARKETING EXPERIENCE
The Company currently has no marketing or sales staff, and significant
additional expenditures, management resources and time would be required to
develop such a sales staff, or to make arrangements for sale or lease of the
Company's products through third parties. As a result, the Company's current
marketing and sales strategy will rely substantially on unaffiliated third
parties to effect the sales of its products. There can be no assurance that
the Company will be able to establish a sales force or make adequate third
party arrangements for product leasing or sales or that the Company will not
have to incur significant additional expenditures, which may include the
employment of sales personnel, in order to effect the sales of its products.
See "Business--Marketing and Sales; Collaborative Relationships."
HIGH DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on its scientific personnel and senior
management. The loss of any key personnel could significantly and adversely
impact the Company's research and development efforts or strategic objectives.
Competition among medical device companies for highly skilled scientific and
management personnel is increasingly intense. In order to achieve and maintain
the Company's commercialization of the PRS, the Company will need to attract
and retain additional key personnel, and there can be no assurance that the
Company will be able to do so. The Company has no employment agreements with
any of its employees, nor has it purchased insurance on the lives of any of
its key employees. See "Business--Employees" and "Management".
POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON LIMITED SOURCES OF SUPPLY
The Company expects that it will manufacture its products based on
anticipated product orders. The different lead times for the supply and
delivery of materials and components ordered by the Company for its products
can vary significantly, and the relative availability and cost of those
materials and components can fluctuate. The Company has built up and maintains
an inventory of certain components for the PRS, and seeks, where feasible, to
identify multiple suppliers of materials and components. However, the Company
acquires certain supplies over time from the same vendors. While the Company
intends to negotiate, where appropriate, supply contracts with certain of its
key suppliers in the future, the Company currently procures its supplies
through open purchase orders, and there can be no assurance that the Company's
vendors will continue to provide such supplies on terms acceptable to the
Company, if at all. In addition, if forecasted product orders prove to be
different than actual product orders, the Company may have excess or
inadequate inventory. There can be no assurance that alternative suppliers for
components can be found on a timely basis, or at all, in the event that such
alternative suppliers are needed. Any significant delay or interruption in the
Company's ability to acquire product components and materials could have a
material adverse effect on the Company's ability to manufacture its products
and therefore on its business, financial condition and results of operations.
See "Business--Manufacturing."
PRODUCT LIABILITY EXPOSURE; POTENTIAL UNAVAILABILITY OF INSURANCE
Use of the PRS or other products, whether for commercial applications or
during clinical trials, exposes the Company to risk of medical product
liability claims in the event that such products cause injury or result in
adverse effects. There can be no assurance that the Company would have
sufficient resources to satisfy any liability resulting from these claims.
Although the Company has obtained medical product liability insurance with
respect to the clinical testing of the PRS, there can be no assurance that the
level or breadth of such insurance coverage will be sufficient to fully cover
potential claims. Such insurance is expensive, and there can be no assurance
that it will continue to be available at an acceptable cost, if at all, or
that a medical product liability
12
<PAGE>
claim would not adversely affect the financial condition of the Company. Prior
to commercial sale of its products, the Company will be required to obtain
product liability insurance covering the commercial use of its products,
however, there can be no assurance that the Company will be able to obtain
commercially reasonable product liability insurance for the commercial sale or
use of any product.
ANTI-TAKOVER PROVISIONS; EFFECTS OF ISSUANCE OF PREFERRED STOCK
Certain provisions of the Company's Articles of Organization and By-Laws are
intended to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to delay or prevent a change in control of the Company if the
Board determines that such a change in control is not in the best interest of
the Company. These provisions could have the effect of discouraging certain
attempts to acquire the Company or to remove incumbent management even if some
or a majority of the Company's stockholders deem such an attempt to be in the
Company's best interest. As a result, these provisions could limit the price
that investors might be willing to pay in the future for shares of Common
Stock, thereby depriving stockholders of certain opportunities to sell their
stock at temporarily higher prices.
In addition, the Company will be covered by the provisions of Chapter 110F
of the Massachusetts General Laws, the Business Combination Statute. This
statute would prohibit the Company from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the business combination is approved in a manner prescribed by the statute. A
"business combination" includes a merger, a stock or asset sale, and other
transactions resulting in a financial benefit to the interested stockholder.
The application of this statute could have the effect of delaying or
preventing a change of control of the Company.
The Board of Directors of the Company is authorized, subject to certain
limitations, to cause the Company to issue one or more series of Preferred
Stock and, to the extent permitted by Massachusetts law, to designate
variations in the relative rights and preferences between different series. In
the event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change of
control of the Company. The Company has no current plans to issue any shares
of Preferred Stock; however, there can be no assurance that the Company's
Board of Directors will not do so at some time in the future. See "Description
of Capital Stock."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for the Company's
Common Stock, and there can be no assurance that a regular trading market will
develop and continue after this offering. The initial public offering price
will be determined through negotiations between the Company and the
Underwriters, and may not be indicative of the market price of the Common
Stock following this offering. The market price of the Common Stock following
this offering may be highly volatile. Factors such as variations in the
Company's financial performance, announcements of technological innovations by
the Company, its competitors or providers of alternative products, and changes
in the economy generally, the financial markets or the health care industry,
could cause the market price of the Common Stock to fluctuate substantially.
In addition, the stock markets have experienced price and volume fluctuations
that have particularly affected medical device companies, resulting in changes
in the market prices of the stocks of many companies which may not have been
directly related to the operating performance of those companies. Such broad
market fluctuations may adversely affect the market price of the Common Stock
following this offering. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the offering made hereby could have an adverse effect on the price of the
Common Stock, and future sales of Common Stock by existing stockholders could
also have an adverse effect on such price and on the Company's ability to
raise capital. Beginning 180 days after the date of this Prospectus, 3,773,702
shares of Common Stock will be eligible for sale in the public market upon the
expiration of lock-up agreements between the Company's stockholders and the
Underwriters, subject in some cases to the volume and other restrictions of
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act").
Additionally, 812,975 shares of Common Stock were subject to
13
<PAGE>
outstanding options, 1,417,334 shares of Common Stock were subject to
outstanding warrants, 881,249 shares of Common Stock were issuable upon
conversion of outstanding convertible debt and an additional 175,025 shares of
Common Stock were reserved for issuance under the Company's stock option plan.
Approximately 180 days after the date of this Prospectus, the Company intends
to register the shares subject to outstanding options and reserved for
issuance under the Company's stock plan, which shares would then be eligible
for sale in the public market, although all of these shares and all shares
acquired under employee benefit plans by employees are subject to agreements
not to sell until 180 days after the date of this Prospectus. Holders of
1,611,557 shares of Common Stock will have the right, under certain
conditions, to participate in future Company registrations. See "Shares
Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution of the net tangible book value of the Common Stock from
the initial public offering price and present shareholders will receive a
substantial increase in the book value of their shares of Common Stock. Such
immediate dilution to new investors is expected to be in the amount of $8.10
per share, assuming a public offering price of $12.00 per share. In addition,
purchasers in this offering will incur additional dilution to the extent
outstanding stock options and warrants are exercised or convertible notes are
converted into capital stock. See "Dilution."
ABSENCE OF DIVIDENDS
The Company has never paid any dividends on its capital stock, including its
Common Stock, and it is currently anticipated that no cash dividends will be
paid to the holders of the Common Stock in the foreseeable future. See
"Dividend Policy."
DISCRETION OF MANAGEMENT REGARDING APPLICATION OF PROCEEDS
The Company has proposed a tentative allocation of the net proceeds expected
to be generated from this offering. This allocation is based on expenditure
estimates and approximations and does not represent a firm commitment of the
Company to distribute the proceeds strictly in compliance with such
allocation. Accordingly, the Company's management will retain broad discretion
to change the allocation of the net proceeds generated from this offering,
based on or in response to, among other things, changes in the Company's
business plans, results of research and development programs, the status of
the Company's clinical trials, the impact of laws and regulations applicable
to the Company, the Company's assessment of competing or developing
technologies, general conditions in the healthcare and cancer treatment
industries, economic trends and the Company's specific financial condition.
There can be no assurance as to whether any such anticipated proceeds will be
generated by this offering and whether such amounts will be sufficient to meet
the Company's needs. See "Use of Proceeds."
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<PAGE>
USE OF PROCEEDS
The Company estimates that the net proceeds to be received by the Company
from the sale of Common Stock pursuant to this offering are approximately
$21.5 million ($24.8 million if the Underwriters' over-allotment option is
exercised in full) after deducting estimated underwriting discounts and
commissions and offering expenses. This estimate assumes an initial public
offering price of $12.00 per share.
Based on the $21.5 million figure, the net proceeds of this offering have
been tentatively allocated by the Company to be used to: (i) increase the
Company's research and development efforts in a number of cancer treatment
applications ($2.2 million); (ii) continue to expand clinical trials for the
PRS ($1.7 million); (iii) obtain regulatory approvals for the PRS ($3.2
million); (iv) enhance manufacturing and marketing capabilities ($6.7
million); and (v) provide working capital, as well as for general corporate
purposes ($7.7 million). Pending such anticipated uses, the Company plans to
invest such proceeds in interest-bearing investment grade instruments. The
Company's management will retain broad discretion to change the allocation of
the net proceeds generated from this Offering. See "Risk Factors--Discretion
of Management Regarding Application of Proceeds."
The Company believes that proceeds of this offering, together with its cash
and cash equivalents, will be sufficient to meet the capital requirements of
its existing business for at least the next two years. The Company anticipates
that additional financing will be required after the net proceeds of this
offering have been expended. There can be no assurance that such additional
financing will be available when needed or on terms acceptable to the Company,
and the Company currently has no commitments to obtain any such financing. See
"Risk Factors--Likelihood of Significant Future Capital Needs; Uncertainty of
Additional Funding" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DIVIDEND POLICY
The Company has never paid any dividends on its capital stock, including its
Common Stock. The current policy of the Company's Board of Directors is to
retain any earnings to finance the operation of the Company's business, and,
accordingly, it is anticipated that no cash dividends will be paid to the
holders of the Common Stock for the foreseeable future. See "Risk Factors--
Absence of Dividends."
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<PAGE>
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
to reflect the conversion of all Preferred Stock into Common Stock as of
December 3, 1996, and such capitalization as adjusted to reflect receipt of
the estimated net proceeds from the sale of 2,000,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $12.00 per
share. This capitalization table should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 28, 1996 (1) (3)
------------------------------
PRO FORMA AS ADJUSTED
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt............ $ 448 $ 448
============= =============
Long-term debt, net of current portion....... $ 1,565 $ 1,565
Shareholders' equity:
Common stock, $0.01 par value, 15,000,000
shares authorized (2),
4,484,666 shares pro forma and 6,484,666
shares as adjusted (3)..................... 45 65
Capital in excess of par value--common
stock...................................... 19,560 41,005
Subscriptions receivable.................... (58) (58)
Deficit accumulated during development
stage...................................... (15,744) (15,744)
------------- -------------
Total shareholders' equity................. 3,803 25,268
------------- -------------
Total capitalization..................... $ 5,816 $ 27,281
============= =============
</TABLE>
- --------
(1) Derived from unaudited financial statements.
(2) Reflects increase in authorized shares to be effected prior to the closing
of the offering. See "Description of Capital Stock."
(3) Excludes 1,417,334 shares of Common Stock issuable upon exercise of
warrants outstanding at December 3, 1996 with an exercise price of $3.00
per share and 881,249 shares of Common Stock issuable upon conversion of
the Company's 8% convertible debt outstanding at September 28, 1996. Also
excludes 812,975 shares of Common Stock issuable upon exercise of options
outstanding at December 3, 1996 with a weighted average exercise price of
$4.70 per share. See Notes 6, 7, 8 and 9 of Notes to Consolidated
Financial Statements, "Description of Capital Stock," "Management--
Officers and Directors," "--Executive Compensation," "Certain
Transactions" and "Use of Proceeds."
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<PAGE>
DILUTION
The net tangible book value of the Company at September 28, 1996 was $3.7
million or $0.82 per share of Common Stock on a pro forma basis. Pro forma net
tangible book value represents the amount of total tangible assets of the
Company less total liabilities, divided by the number of shares of Common Stock
outstanding on a pro forma basis. After giving effect to the sale of Common
Stock offered hereby (after deducting estimated underwriting discounts and
commissions and offering expenses), assuming the sale of 2,000,000 shares of
Common Stock at an assumed initial public offering price of $12.00 per share,
the adjusted net tangible book value of the Company at September 28, 1996 would
have been $25.3 million, or $3.90 per share. This represents an immediate
increase in net tangible book value of $3.08 per share to existing stockholders
and an immediate dilution of $8.10 per share to new investors purchasing shares
in this offering. Dilution to new investors is determined by subtracting the
net tangible book value per share after the sale of Common Stock offered hereby
from the initial public offering price per share. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed public offering price per share (1)................... $12.00
Pro forma net tangible book value per share as of September
28, 1996................................................... $0.82
Increase per share attributable to the offering............. 3.08
-----
Adjusted net tangible book value per share after the offering
(2)(3)....................................................... 3.90
------
Dilution per share to new investors (2)(3).................... $ 8.10
======
</TABLE>
- --------
(1) Assumed initial public offering price before deduction of estimated
underwriting discounts and commissions and expenses of the offering to be
paid by the Company.
(2) If the Underwriters' over-allotment option were exercised in full, the
adjusted net tangible book value per share after the offering would be
$4.22, resulting in an immediate dilution of $7.78 per share to investors
purchasing shares in this offering.
(3) If all outstanding options and warrants at September 28, 1996 to purchase
812,975 and 1,417,334 shares of Common Stock, respectively, were exercised,
in addition to the Underwriters' exercise of its over-allotment option, the
adjusted net tangible book value per share after the offering would be
$4.07, resulting in an immediate dilution of $7.93 per share to investors
purchasing in this offering.
The following table sets forth, as of September 28, 1996, on the pro forma
basis described above, the number of shares of Common Stock purchased from the
Company and the total cash consideration paid and the average price per share
paid by existing stockholders of the Company, and by investors in this
offering, based upon an assumed initial public offering price of $12.00 per
share:
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION AVERAGE
----------------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders... 4,484,666 69.2% $19,604,489 45.0% $ 4.37
New Investors........... 2,000,000 30.8 24,000,000 55.0 $12.00
------------ -------- ----------- -----
Total................. 6,484,666 100.0% $43,604,489 100.0%
============ ======== =========== =====
</TABLE>
- --------
(1) Gives effect to the conversion of the outstanding Preferred Stock into
2,892,312 shares of Common Stock, which will automatically occur on the
closing of this offering. See Note 7 of Notes to Consolidated Financial
Statements, "Description of Capital Stock" and "Certain Transactions."
The foregoing tables do not assume the exercise of outstanding options or
warrants, or the conversion of convertible debt. At September 28, 1996,
warrants to purchase 1,417,334 shares of Common Stock were outstanding, at an
exercise price of $3.00 per share. As of September 28, 1996, there was a total
of $2,013,277 of convertible debt outstanding, with a weighted average
conversion price of $2.28 per share. At September 28, 1996, there were 812,975
shares of Common Stock issuable upon exercise of all outstanding options; of
these, 422,500 shares were then exercisable. The weighted average exercise
price of all outstanding options at September 28, 1996 was $4.70. To the extent
that these options or warrants are exercised, or this convertible debt is
converted into Common Stock, there will be further dilution to new investors.
See "Management--Officers and Directors," "--Executive Compensation,"
"Description of Capital Stock" and Notes 6, 7, 8 and 9 of Notes to Consolidated
Financial Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data and consolidated
balance sheet data presented below as of December 31, 1994, December 30, 1995,
and the consolidated statement of operations data presented below as of
January 1, 1994, are derived from the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus, which have
been audited by Arthur Andersen LLP, independent public accountants. The
selected consolidated statement of operations data and consolidated balance
sheet data presented below as of December 28, 1991, January 2, 1993, and the
consolidated balance sheet data presented below as of January 1, 1994, are
derived from the Company's Consolidated Financial Statements and Notes thereto
not included in this Prospectus, which have been audited by Arthur Andersen
LLP, independent public accountants. The selected consolidated financial data
for the nine-month periods ended September 30, 1995 and September 28, 1996 are
derived from the Company's unaudited Consolidated Financial Statements. The
financial data for the nine-month periods ended September 30, 1995 and
September 28, 1996 include all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and the results of operations for those periods.
Operating results for the six months ended September 28, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ended December 31, 1996. The selected consolidated financial data set forth
below should be read in conjunction with the Consolidated Financial Statements
and Notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
-------------------------------------------------------------------------- ---------------------------
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
CONSOLIDATED STATEMENT OF 1991 1993 1994 1994 1995 1995 1996
OPERATIONS DATA: ------------ ------------ ------------ ------------- ------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating expenses:
Research and development
expenses............... $ 784 $ 1,227 $ 1,727 $ 2,086 $ 3,226 $ 1,721 $ 2,263
General and
administrative
expenses............... 116 192 251 505 866 543 1,168
------- ------------ ------------ ------------ -------- -------- --------
Total operating
expenses............... 900 1,419 1,978 2,591 4,092 2,264 3,431
------- ------------ ------------ ------------ -------- -------- --------
Operating loss........... (900) (1,419) (1,978) (2,591) (4,092) (2,264) (3,431)
Interest income
(expense), net.......... (74) (167) (289) (81) (25) (67) 112
------- ------------ ------------ ------------ -------- -------- --------
Net loss................. $ (974) $ (1,586) $ (2,267) $ (2,672) $ (4,117) $ (2,331) $ (3,319)
======= ============ ============ ============ ======== ======== ========
Net loss per share....... $ (0.90) $ (1.25) $ (1.55) $ (1.60) $ (2.85) $ (1.61) $ (1.73)
======= ============ ============ ============ ======== ======== ========
Pro forma net loss per
share (1)............... -- -- -- -- $ (1.02) -- $ (0.74)
======== ========
Weighted average common
and common equivalent
shares outstanding...... 1,087 1,266 1,466 1,669 1,447 1,446 1,919
Pro forma weighted
average common and
common equivalent shares
outstanding (1)......... -- -- -- -- 4,032 -- 4,503
<CAPTION>
SEPTEMBER 28, SEPTEMBER 28,
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, 1996 1996
CONSOLIDATED BALANCE 1991 1993 1994 1994 1995 ACTUAL PRO FORMA (2)
SHEET DATA: ------------ ------------ ------------ ------------- ------------ ------------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 22 $ 210 $ 68 $ 1,778 $ 7,191 $ 4,005 $ 4,005
Total assets............. 133 425 526 2,949 8,703 6,037 6,037
Total long-term debt,
including current
portion................. 1,417 3,133 1,296 2,115 1,940 2,013 2,013
Deficit accumulated
during development
stage................... (1,782) (3,368) (5,636) (8,307) (12,425) (15,744) (15,744)
Total shareholders'
equity.................. (1,483) (2,798) (1,054) 575 6,493 3,803 3,803
</TABLE>
- -------
(1) Includes 2,583,295 shares of Common Stock to be issued upon the conversion
of all of the outstanding preferred stock. The remaining 309,017 shares of
Common Stock to be issued upon the conversion of all of the outstanding
preferred stock is included in historical loss per share for all periods
pursuant to certain Securities and Exchange Commission requirements.
(2) Gives effect to the conversion of all outstanding preferred stock into
2,892,312 shares of Common Stock, which will occur simultaneously with the
closing of this offering. The Company's preferred stock consists of three
separate series; 1,282,005 shares of Series A Convertible Preferred Stock,
500,000 shares of Series B Convertible Preferred Stock, and 1,110,307
shares of Series C Convertible Preferred Stock were outstanding as of
September 28, 1996. Each share of preferred stock is convertible into one
share of Common Stock.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the design, development and commercialization of
the PRS, a proprietary, therapeutic device for the treatment of cancerous
tumors through the application of radiation directly into a tumor. To date,
the Company has not received any revenue from the sale of its products and
does not anticipate receiving any significant revenue at least until the
middle of 1998. The Company has an accumulated deficit totaling approximately
$15.7 million since its inception and expects to continue to incur losses
until such time as its commercialization efforts yield offsetting revenues.
The Company anticipates that its research and development, general and
administrative and manufacturing expenses will significantly increase during
the balance of 1996 and 1997 as it pursues the commercialization of the PRS.
Before medical devices such as the PRS can be marketed in the U.S., FDA
approval is required. Phase II clinical trials for the treatment of metastatic
brain tumors are currently being performed. Based on the results obtained in
these ongoing Phase II trials, on December 11, 1996 the Company submitted a
Section 510(k) application to the FDA seeking clearance to commercialize the
current model of the PRS for treatment of metastatic brain tumors. If the
Company receives such Section 510(k) clearance, the Company will request the
FDA to extend such clearance to the version of the PRS now under development
(the "Model 4"), which the Company expects will be the first version of the
PRS to be made commercially available. Locally approved clinical trials for
the treatment of brain tumors are also being performed at sites in Europe and
Japan. The Company currently anticipates that clinical trials to determine the
safety of the PRS for treatment of breast cancer will begin in the U.K. in
early 1997. Based upon those trials, the Company will submit an application to
the FDA to begin human clinical trials in the U.S. The possibility of treating
topical tumors of the skin and mouth with the PRS is also being explored. A
program has begun at a U.S. hospital which the Company expects to lead to
human clinical trials with the PRS in treating Kaposi's sarcomas and other
skin malignancies. Upon obtaining all necessary regulatory approvals, the
Company intends to begin commercial sales of the PRS. The Company will
consider the use of the PRS for other potential applications on an ongoing
basis. In order to support such commercialization, the Company will experience
significant working capital and other financing needs.
If all regulatory clearances are obtained, the Company intends to market
and distribute its products through a combination of collaborative
relationships and in-house sales and marketing resources. The Company has
developed and will continue to develop strategic alliances with companies that
have established distribution channels in domestic and international markets.
As part of the manufacturing process, the Company intends to sub-contract the
fabrication of most of its electrical and mechanical components. The Company
is actively pursuing full functional compliance with ISO 9001 and the FDA's
GMP standards that govern quality assurance, personnel training, process
control, customer service, design control, supply management and facility and
equipment maintenance.
In the fourth quarter of 1996, the Company extended the terms of certain
options issued to four employees of the Company. These options, by their
terms, would expire but for such extension during the 180-day "lock-up period"
following the date of this Prospectus. These options were extended to a date
which is two months after the expiration of the lock-up agreements. See
"Shares Eligible for Future Sale." These options are exercisable into an
aggregate of 23,500 shares of Common Stock, and none of said employees is an
officer or director of the Company. The Company recorded compensation expense
of $272,600 pursuant to Accounting Principals Board Opinion No. 25 in the
fourth quarter as a result of this extension.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
Research and development expenses. Research and development expenses
increased by $542,370 from $1.7 million in the first nine months of 1995 to
$2.3 million in the first nine months of 1996. These changes reflect
significant increases in activity in the Company's clinical trial efforts and
bladder and breast cancer research and development programs. A portion of the
increase in research and development expenses is attributable to pre-clinical
animal trials for the bladder application in 1996. The principal costs in
research and development were the
19
<PAGE>
Phase II clinical trials. Other factors contributing to the increase in
research and development expenses were as a result of discussions with
physicians in the U.K. to initiate clinical trials in breast tumors. Costs
were incurred in formulating the breast cancer research and trial protocol and
developing accessory equipment for the trials.
General and administrative expenses. General and administrative expenses
increased by $624,396 from $543,215 in the first nine months of 1995 to $1.2
million in the first nine months of 1996. The increase is attributable to a
growth in personnel from 16 to 25 employees and related costs. Additional
increases related to legal and professional fees related to general corporate
representation and the protection of intellectual property rights.
Interest income. Interest income increased by $179,462 from $22,633 in the
first nine months of 1995 to $202,095 in the first nine months of 1996. The
change resulted from investing the proceeds of a private placement in the
fourth quarter of 1995.
FISCAL YEAR ENDED DECEMBER 30, 1995 AND DECEMBER 31, 1994
Research and development expenses. Research and development expenses
increased by $1.1 million from $2.1 million in 1994 to $3.2 million in 1995.
In 1995, the Company extended the term of stock options to purchase 100,000
shares of Common Stock at an exercise price of $0.40 per share from seven to
twelve years. This extension resulted in the Company recording $860,000 of
compensation expense based upon an estimated fair value of $9.00 per share.
This compensation expense was allocated between research and development
expenses and general and administrative expenses. In 1995, the Company began
to increase the number of clinical sites which were conducting Phase II
clinical trials. The Company also expanded its activities outside the U.S. to
a second European site in Germany and a new site in Japan. The
commercialization of the PRS in Germany will be subject to the European
Union's Medical Devices Directive, and to the jurisdiction of the Ministry of
Health and Welfare (under the Pharmaceutical Affairs Law) in Japan. Delays in
the Company's efforts to conduct clinical trials and obtain regulatory
approvals in these countries could adversely affect the Company's financial
position and results of operations. The Company anticipates that sales of the
PRS will primarily be denominated in U.S. dollars, and recognizes that the
value of the U.S. dollar in relation to foreign currencies could have an
adverse impact on PRS sales to foreign customers. While the Company currently
has insignificant foreign currency exposure, the Company intends to regularly
monitor its foreign currency risks in connection with the commercialization of
the PRS and to take measures, including the possible purchase of foreign
currency exchange contracts, which it considers appropriate to reduce the
impact of foreign exchange fluctuations on the Company's results of
operations.
The Company and Toshiba have also entered into a Clinical Trial Agreement
dated as of December 13, 1995. Under this agreement, Toshiba has agreed to
purchase two PRS systems for use in clinical trials in Japan. Toshiba has also
agreed, subject to certain conditions and limitations, to bear overall
responsibility for the performance of the Japanese clinical trials and for
obtaining regulatory approvals in Japan. Under this agreement, Toshiba is
obligated "to bear the full cost to be incurred for any legal procedures for
conducting the Clinical Trials in Japan and for obtaining" regulatory
approvals in Japan. The Company has agreed to make available certain training
and installation services, and to provide technical information and PRS spare
parts.
Under an International Distributor Sales and Service Agreement (the "Toshiba
Agreement") between the Company and Toshiba dated December 13, 1995, the
Company has granted to Toshiba an exclusive right to sell and service the PRS
in Japan during the term of the Toshiba Agreement. Pursuant to the Toshiba
Agreement, Toshiba has agreed to provide certain training services to PRS
customers and to perform certain PRS repairs (to the extent such repairs are
not then covered by the Company warranty on the PRS). Subject to certain
termination rights, the Toshiba Agreement expires three years after all
necessary legal, regulatory or administrative approvals to import, market,
sell and use the PRS in Japan are first obtained.
20
<PAGE>
The two agreements with Toshiba described above are material to the Company,
its future financial conditions and results of operations.
General and administrative expenses. General and administrative expenses
increased by $361,672 from $505,061 in 1994 to $866,733 in 1995. The increase
is attributable to a growth in personnel from 13 in 1994 to 21 in 1995 and
related costs. The additional increases in 1995 are a function of the
allocation of the compensation expense from the stock option extension and
legal and professional fees related to general corporate representation and
the protection of intellectual property rights.
Interest income (expense). Interest expense decreased by $33,016 from
$143,661 in 1994 to $110,645 in 1995. This decrease is attributable to the
prior period conversion of debt. Interest income increased by $22,277 from
$63,473 in 1994 to $85,750 in 1995. This increase is attributable to the
receipt of offering proceeds from a private placement in the fourth quarter of
1995.
FISCAL YEAR ENDED DECEMBER 31, 1994 AND JANUARY 1, 1994
Research and development expenses. Research and development expenses
increased by $359,490 from $1.7 million in 1993 to $2.1 million in 1994. This
change is attributable to the submission to the FDA for Phase II clinical
trials. The Company also expanded its efforts to complete a new model of the
PRS by increasing acquisitions of raw materials. In addition, the Company
began installing the PRS at hospitals in the U.S. to begin the process of
qualifying the device for clinical trials.
General and administrative expenses. General and administrative expenses
increased by $254,296 from $250,765 in 1993 to $505,061 in 1994. The increase
is attributable to a growth in personnel from nine in 1993 to thirteen in 1994
and related costs. Part of the personnel increase was to start developing
manufacturing operations. Additional increases in 1994 were due to legal and
professional fees relating to general corporate representation and the
protection of intellectual property rights, and patent expenses for foreign
coverage of issued patents.
Interest income (expense). Interest expense decreased by $149,353 from
$293,014 in 1993 to $143,661 in 1994 due to the conversion of approximately
$3.6 million principal amount of convertible notes into equity on December 31,
1993. Interest income increased by $60,245 from $3,228 in 1993 to $63,473 in
1994 resulting from the investment of the net proceeds from a private
placement.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through the
issuance of convertible debt and Preferred and Common Stock in a series of
private placements totalling approximately $19.6 million. Consolidated working
capital was $4.1 million at September 28, 1996, compared with $7.6 million at
December 30, 1995. Included in working capital are cash and cash equivalents
of $4.0 million at September 28, 1996, compared with $7.2 million at December
30, 1995. During the first nine months of 1996, $3.1 million of cash was used
for operating activities. Prepaid expenses increased in 1996 due to costs
associated with the Company"s proposed initial public offering.
The Company used $685,463 of cash in the first nine months of 1996 for fixed
assets and leasehold improvements associated with its move to a new facility.
The Company received $629,323 of cash in the first nine months of 1996 from
the sale of Common and Preferred Stock.
The Company maintains medical product liability insurance policies with
respect to its clinical trials which the Company believes contain reasonable
deductibles and other ordinary and customary provisions. The Company believes
that these policies cover such risks in such amounts as are reasonable and
prudent under the circumstances, and the Company does not anticipate that
claims under these policies, if any, will have a material adverse impact on
the Company's liquidity or capital resources. Prior to commercial sale of its
products, the Company will be required to obtain product liability insurance
covering the commercial use of its products, however, there can be no
assurance that the Company will be able to obtain commercially reasonable
product liability insurance for the commercial sale or use of any product.
21
<PAGE>
The Company is currently involved in settlement discussions with a physician
and his employer. The Company understands that such physician believes that he
made certain contributions concerning use of the PRS to treat bladder cancer,
and that such physician believes that he is entitled to compensation for those
claimed contributions. The Company understands that such physician's employer
believes that it is entitled to a percentage interest in any amounts paid to
such physician. The position of the Company's management is that the Company
is not using any proprietary information of such physician in any device
currently under development or being sold by it. The Company's management also
believes that the outcome of this matter will not have a material effect on
the Company's financial position or results of operations.
The Company's capital requirements may change depending upon the progress of
the Company's research and development activities, progress of the clinical
trials, progress on new applications for treatment with the PRS and costs
involved with procuring and defending patents. The Company believes that
proceeds from this offering, together with its current cash and cash
equivalents, will be sufficient to meet the capital requirements of its
existing business for at least the next 24 months.
The Company's business plan calls for various applications of the PRS,
including the treatment of metastatic brain tumors, primary brain tumors, and
tumors in the breast, prostate, bladder and skin. The Company expects that the
capital requirements to complete the commercialization of the PRS to treat
metastatic brain tumors will require approximately $6.5 million from the net
proceeds of this offering. Such proceeds are needed to complete the Section
510(k) clearance, ISO 9001 approval, purchase of capital equipment for
assembly and manufacturing of components for the PRS and to support a sales
and marketing structure. At this point, the Company is not able to estimate
the capital requirements of commericalizing all applications of the PRS.
22
<PAGE>
BUSINESS
The Company is engaged in the design, development and commercialization of
the Photon Radiosurgery System ("PRS"), a proprietary, therapeutic device for
the treatment of cancerous tumors through the application of x-ray radiation
directly to the tumor site. The PRS delivers in a single treatment a high dose
of radiation through a thin, minimally invasive, needle-like probe, which
emits from its tip precisely controlled low energy x-rays that irradiate the
tumor from the inside out. The limited penetration of low energy x-rays in
tissue substantially confines the radiation to the tumor site.
The Company believes that the PRS offers a number of advantages over
conventional radiation therapies by allowing higher radiation doses with
shorter patient treatment times. Substantial confinement of the radiation to
the tumor boundaries significantly reduces the risk of radiation exposure to
surrounding healthy tissue and important organs or critical structures.
The most common form of treatment of cancerous tumors is by invasive
surgery. The Company believes that the PRS provides an attractive, minimally
invasive alternative to surgery, resulting in significantly less patient
trauma, shorter hospital stays and lower treatment costs than surgery. The PRS
can be applied after performing a biopsy and when desirable, use of the PRS
can be coupled with surgical procedures.
Next to surgery, radiation therapy is the most common modality of treating
cancer. Approximately 50% of all cancer patients in the U.S. receive radiation
therapy at some point during the course of their disease. Radiation can be
administered to a tumor by external beams or interstitially by inserting a
radiative source into the patient. With external beams, radiation must pass
through, and may potentially damage, healthy tissue before reaching the tumor,
whereas the PRS delivers radiation directly to the tumor site.
An established form of treatment, called brachytherapy, delivers radiation
directly to a tumor site by the insertion of radioactive isotopes. In
comparison to this form of treatment, the Company believes that the PRS offers
a greater ability to control and localize low energy radiation doses, and
avoids the costs and risks associated with the storage, handling and disposal
of radioactive materials. The Company believes that the PRS also offers
significant advantages over other forms of therapy, such as the destruction of
cancerous cells by heating, cooling or the use of laser light.
To date, the Company has focused its clinical efforts primarily on the
treatment of metastatic brain tumors. However, the PRS is being developed for
a variety of applications, including the treatment of primary brain tumors as
well as breast, prostate, bladder, skin and other cancers. The method of
treatment will depend on the application. The Company expects that the three
basic PRS treatment methods will be (i) the "interstitial" irradiation of
localized tumors from the inside out; (ii) the "intracavitary" irradiation of
body cavities; and (iii) the "intraoperative" irradiation of tumors or of the
beds of surgically removed tumors in order to destroy remaining cancerous
cells.
The Company and Toshiba Medical Systems Company, Ltd. ("Toshiba") have
entered into agreements relating to performance of clinical trials, and to
future product distribution arrangements in Japan.
The Company holds nine U.S. patents and four U.S. patent applications
relating to the PRS or its constituent or ancillary components. The Company
has also obtained or filed patent applications in other selected foreign
countries.
The Company was formed in 1989 as a joint venture between Thermo Electron
Corporation ("Thermo Electron") and an investment entity organized by Peter M.
Nomikos, the Company's President and Chief Executive Officer. Mr. Nomikos co-
founded Thermo Electron with George N. Hatsopoulos, Ph.D., a director of the
Company.
23
<PAGE>
BACKGROUND
CANCER OVERVIEW
According to the American Cancer Society, the direct medical costs incurred
in the delivery of cancer care in the U.S. will be approximately $35 billion
in 1996. Cancer care expenditures have been increasing as the number of new
cancer cases in the U.S. has increased from 785,000 in 1980 to an estimated
1,350,000 in 1996. In 1992, 23.9% of deaths in the U.S. were due to cancer,
ranking it the second leading cause of death. The incidence rate is growing at
1.8% per year. Men have a one in two lifetime risk of developing cancer and
for women the risk is one in three. The increase in cancer cases is
attributable to a number of factors, including an aging population. According
to the National Cancer Institute, people over age 65 are 10 times more likely
to develop cancer than those under age 65. In addition, environmental factors,
such as tobacco use and exposure to industrial carcinogens, continue to be
viewed as contributing to the cancer incidence rate. Approximately 554,740
deaths annually, or over 1,500 deaths daily, are currently attributable to
cancer, and approximately one out of every four deaths in the U.S. is cancer-
related.
Changing technology, earlier diagnosis, and better treatment have increased
the five-year survival rate of cancer patients from approximately 33% in 1960,
to approximately 40% in 1996. This improvement in survival rates has also
increased the demand for cancer-related products and services.
Treatment of cancer is expensive, with an annual cost per case, including
diagnosis, hospital treatment and other facility stays, usually in excess of
$10,000. Cancer patients accounted in 1993 (the latest available reporting
period) for 6% of the total days of hospital care with an average length of
stay of approximately eight days. The delivery of cancer care, as in the
healthcare market in general, has been the subject of significant cost-
containment pressures from third party payors. These pressures have driven the
development of lower cost providers and have also driven the search for
better, more cost-effective cancer treatment tools and protocols.
MAJOR CANCER TREATMENT METHODS
Surgery, radiation and chemotherapy are the traditional means of treating
cancer. While surgery and radiation focus on localized solid tumors,
chemotherapy can provide adjunctive therapy as well as address disseminated
systemic diseases, such as leukemia. Solid tumor cancers are expected to
account for greater than 90% of new cancer cases in 1996.
SURGERY
Surgical excision of tumors has historically been the preferred method of
tumor treatment. However, surgery involves highly invasive and traumatic
procedures for patients. Surgery is not an optimal or practical option in a
number of cases, including cases where tumors are difficult or impossible to
access, where a patient's medical condition does not allow for a highly
invasive procedure to be performed, or in cancer of the breast or other
locations where cosmetic factors are of concern to the patient. In addition,
the procedure of removing tissue mass surgically may either leave some
malignant cells behind or disperse them through healthy tissue.
RADIATION
Next to surgery, radiation is the dominant method of treating cancer.
Approximately 50% of all cancer patients in the U.S. receive radiation therapy
at some point during the course of their disease. An important advantage of
radiation therapy is that the radiation acts with some selectivity on cancer
cells. The absorption of radiation by a cell affects its genetic composition
and inhibits the replication of the cell, leading to its gradual death.
Cancerous cells are fast replicating and thereby are disproportionately
damaged by the radiation absorbed.
24
<PAGE>
Conventional external radiation requires the radiation to have sufficient
energy to reach the targeted tissue. Therefore, radiation originating from a
source outside the body must pass through, and may potentially damage, healthy
tissue.
Currently, the most common type of radiotherapy uses x-rays delivered by
external beams and is administered using linear accelerators ("LINACS").
LINACS are conventionally used for multiple, or "fractionated," treatments of
a tumor in up to 30 radiation sessions, or, as used more recently in the
brain, to deliver a single high dose of radiation in a procedure referred to
as stereotactic radiosurgery ("SRS"). Single-fraction LINAC treatments of
brain tumors involve a risk of overradiating a critical structure, such as the
optic nerves within the beam's path, a factor which, the Company believes, has
restricted their medical acceptance. In spite of technological refinements,
external beam radiation therapy still requires that radiation pass through
surrounding healthy tissue, resulting in the risk of damage to that tissue.
Less common methods of external radiation therapy involve the use of focused
radiation from radioactive cobalt sources and the irradiation of tumors with
proton beams. Focused cobalt radiation is generated by the Gamma Knife
manufactured by Elekta Instrument AB of Sweden. As is the case with
traditional external beam radiation, the x-rays from this device must pass
through healthy tissue prior to reaching the tumor. The Company understands
that the Gamma Knife currently costs in excess of $3 million dollars and that
its cobalt source must be replaced periodically. Proton beam treatments, in
which protons, accelerated to high speeds in a cyclotron and focused into a
variable-sized beam, have been clinically evaluated for therapy at only a few
sites. These machines cost appreciably more than the Gamma Knife, and the
Company believes that it is doubtful that many cyclotrons will be built or be
widely accessible.
In addition to external radiation therapy, radioactive seeds, probes, wires
or ribbons are sometimes inserted into a tumor ("interstitially") or into a
body cavity ("intracavitary"). This modality, known as "brachytherapy," does
not require the radiation to pass through surrounding healthy tissue, with
radiation administered slowly at lower dose rates than those used in external
beam radiation. However, the radioactive material utilized in brachytherapy
begins to decay after being implanted in the body, and is difficult to
localize or control. In addition, various state and federal laws and
regulations exist relating to the handling, storage and disposal of the
radioactive materials used in brachytherapy which require the use of shielded
containers and facilities to store and handle the materials and protect
personnel.
OTHER TREATMENTS
One cancer treatment method involves the killing of cells by significantly
changing their temperature, either upward or downward. However, this method
does not selectively differentiate between cancerous and non-cancerous cells
and is difficult to control because blood vessels exacerbate the flow of heat
away from or toward the targeted lesion. These difficulties are compounded by
the need to keep surrounding healthy tissue either sufficiently cool or warm,
depending on the method used, in order to prevent that tissue from being
destroyed. In contrast, the x-ray penetration provided by the PRS is
unaffected by blood flow, and the dose received by cells can be more
accurately defined.
Other treatments include tumor targeting and destruction by genetically
engineered drugs, the use of laser light to initiate chemical reactions that
destroy cancer cells (photodynamic therapy or "PDT"), particle beam
bombardment of malignant tumors, and the use of a device which magnetically
steers a tiny, heated metallic pellet inside the lesion to kill the diseased
cells. PDT requires the introduction of a light-sensitive drug into the
patient which is intended to preferentially concentrate in the tumor.
Irradiation of the tumor by laser light chemically destroys the cells. In
contrast to x-rays, the penetration depth of laser beams into tissue is very
limited, thereby restricting the technology to treatment of near-surface
tumors intraoperatively. Moreover, there are certain side effects associated
with the PDT drugs, with some patients remaining very sensitive to light after
the procedure. None of these treatments has yet proven more reliable than
surgery and/or radiation treatments.
25
<PAGE>
THE PRS SOLUTION
The Company believes that the PRS offers therapeutic, operational and
economic advantages over current conventional treatments.
THERAPEUTIC ADVANTAGES
Unlike external radiation sources, such as the LINAC or the Gamma Knife,
which, in order to deliver x-rays to a tumor site, require that the x-ray
beams pass through a patient's healthy tissue, the PRS's x-ray source can
inject low energy photons directly into the tumor. In this manner, radiation
can be substantially confined within the tumor boundaries thereby
significantly reducing the exposure of surrounding healthy tissue and
important organs. Interstitial delivery allows higher doses of x-rays to be
delivered to the tumor, thereby shortening aggregate treatment time to
typically less than 30 minutes, shorter than that normally required for
external therapies. With the PRS, a stronger single dose of radiation, rather
than multiple fractionated doses as prescribed with conventional external beam
therapies, can be applied. Moreover, the interstitial x-ray source of the PRS
delivers a higher dose to the tumor's central core than to its periphery.
Since, generally, a tumor's hypoxic (radiation resistant) cells occupy this
inner region, the dose distribution of the PRS is appropriate for maximum cell
destruction. Furthermore, the x-ray output of the PRS can be maintained at a
constant level, unlike, for example, radioactive isotopic seeds, which decay
after being implanted into the body. The localization of PRS radiation can
also facilitate radiation therapy for children whose cells are more actively
replicating and who are more likely to suffer side effects from external
radiation.
The Company believes that in contrast to surgery, the PRS is minimally
invasive and, due to its needle-like probe, can allow access to tumors
otherwise difficult or impossible to access surgically. The Company believes
that the minimally invasive nature of the PRS will offer advantages when
patient condition or cosmetic considerations do not allow highly invasive or
traumatic surgical interventions. For example, the Company believes that the
PRS can be used to irradiate breast cancer tumors, immediately after biopsy
confirmation of breast cancer, thereby reducing treatment delays and offering
an alternative to lumpectomy. In addition to its use on a stand-alone basis,
the Company believes that the PRS can be used in conjunction with current
therapies, for example to irradiate the "bed" of a surgically removed tumor
and to destroy remaining cancerous cells. Although the Company anticipates
that the primary applications for the PRS will involve the treatment of solid
tumors, the PRS has also been designed for treatment of certain diffuse
tumors, such as those within the lining of the bladder or other body cavities.
OPERATIONAL ADVANTAGES
The Company believes that the design of the PRS will make it portable and
easier to use than conventional external beam radiation therapy equipment.
Because the PRS treatment focuses on the tumor and the immediately surrounding
tissue, the Company anticipates that treatment planning will be shorter and
simpler than with conventional radiation treatments. In addition, unlike
conventional brachytherapy or the Gamma Knife, the PRS's low photon energy x-
ray source contains no radioactive material, thereby eliminating problems
associated with the storage, handling and disposal of radioactive materials
and the need to shield personnel and facilities. The PRS has been designed for
use immediately after confirmatory biopsies. When used in neurosurgical
applications, such as the treatment of brain tumors, the PRS probe can be
affixed to the stereotactic frame used to position the biopsy needle and then
inserted through the track left by the biopsy needle. Finally, the PRS is
being developed for use in a variety of different applications, and the
various probes being developed by the Company for these different applications
are expected to be interchangeable components of the PRS.
ECONOMIC ADVANTAGES
The Company believes that the price of the PRS to the hospital, surgical
center or other purchaser will be significantly below that of the equipment
used for conventional external radiation therapy methods currently available.
The Company believes that the combination of a biopsy with a short, one-time
treatment with the PRS, and an anticipated hospital stay of, generally, no
more than one day, will provide an appealing, minimally
26
<PAGE>
invasive and economically feasible choice of therapy for the patient. It is
anticipated that the cost of treatment with the PRS will be substantially less
than surgery, and less than or comparable to, other inpatient therapies.
The Company believes that the anticipated lower acquisition costs of the PRS
will make it potentially attractive not only to major urban teaching
hospitals, but also to smaller, regional health care providers, which
otherwise may not have adequate capital resources to purchase alternative
equipment.
SPECIFIC APPLICATIONS OF THE PRS
The Company has to date focused its clinical efforts on the treatment of
metastatic brain tumors. In addition to metastatic brain tumors, the Company
currently intends to seek clearance to conduct clinical trials to determine
the safety and efficacy of the PRS in treating primary brain tumors and tumors
in the breast, prostate, bladder and skin. The use of the PRS for any such
additional treatments will require completion of additional clinical testing
and the procurement of regulatory clearances, and therefore the U.S.
commercialization of the PRS for such treatments cannot reasonably be expected
to occur for at least two to five years or more. Depending on the nature and
location of the cancerous tumor, these additional treatment applications may
require the use of separate components or accessories in connection with the
PRS, but the Company believes that the basic core technology of the PRS will
not need to be significantly modified. The Company will consider the use of
the PRS for other potential applications on an ongoing basis. See "--Clinical
Trials."
BRAIN TUMORS
Primary brain and central nervous system tumors will account for 17,900 new
cases of cancer in 1996. Metastatic brain tumors, or secondary tumors formed
in the brain from malignant cells dispersed from distant primary tumor sites
in the body, have a much higher incidence rate. In fact, the brain is the
leading site for metastases to form; one in three cancer patients will develop
one or more such tumors prior to dying. Estimates place the figure in the
range of 150,000 to 400,000 patients annually. Due to their advanced age or
stage of their primary disease most of these patients will not benefit
sufficiently from treatment. However, about 35,000 of these patients are
thought by the Company to be candidates for therapy. While the Company to date
has focused its development and clinical efforts on the treatment of
metastatic brain tumors, it intends to explore the possibility, from a market
and regulatory standpoint, of utilizing the PRS for treatment of primary brain
tumors as well.
Aggressive treatment of metastatic brain tumors traditionally has been
limited. Patients with these tumors typically have received a fractionated
series of external beam whole brain radiation, which, because of the
cumulative effect on healthy tissue through which it passes, cannot be used to
treat subsequent tumors which frequently reoccur. Because of the particularly
sensitive nature of the brain and its surrounding critical organs and
structures, such as the optic nerves, damage from external radiation can
severely harm the patient. The PRS is particularly well-suited for this
application because of its targeted, low-energy approach. In addition,
although external beam radiotherapy is not recommended for young children
whose brains are still developing, highly confined interstitial irradiation
with the PRS may reduce the risk of radiotherapy to maturing brains. Phase I
clinical trials for the use of the PRS in treating metastatic brain tumors
have been completed, and Phase II clinical trials are currently being
performed. See "--Clinical Trials."
BREAST TUMORS
Breast cancer is the second leading cause of cancer deaths in women in the
U.S. In 1996, 184,300 new invasive cases of breast cancer are expected to be
diagnosed among women in the U.S., with an estimated 44,300 deaths. Current
conventional treatment methods for breast cancer include lumpectomies,
mastectomies, radiation, chemotherapy and hormone therapies or, as often is
the case, a combination of several of these.
The Company believes that the PRS could provide treatment for breast cancer
both interstitially (directly into the tumor) and as a post-surgical "boost"
to the tumor bed after the tumor has been removed surgically, with the goal of
destroying any malignant cells remaining in the tumor bed. The Company
currently anticipates
27
<PAGE>
that two clinical trials to ascertain the safety of the PRS for treatment of
breast cancer will begin in early 1997 in England. In one trial the PRS will
be tested to irradiate tumors interstitially immediately after their diagnoses
by stereotactic biopsies. In the other trial the PRS will be tested to
irradiate the tumor bed immediately after surgical excision of the tumor. The
Company is developing, for this intraoperative study, treatment accessories
and fixturing. See "--Clinical Trials."
PROSTATE TUMORS
Prostate cancer is the second leading cause of cancer deaths in men in the
U.S. In 1996, 317,100 new cases of prostate cancer are expected to be
diagnosed in the U.S. with an estimated 41,400 deaths. Treatment is presently
implemented by surgery and radiation; hormones and chemotherapy are other
options.
According to the latest data available, in 1993, 250,000 transurethral and
53,000 radical prostectomies were performed. In 1992 the hospital stay for a
patient with prostate cancer was on average approximately six days with an
overall cost of $12,226.
A protocol for human prostate trials involving ultrasound-guided
transperineal insertion of the PRS into the prostate (using a longer PRS probe
developed for treating bladder cancer) to irradiate prostate lesions has been
approved by the ethics committee of a London hospital. The Company is
currently reviewing the efficacy of combining the PRS with external beam
therapy for this application. The former would treat the focal lesions of the
prostate, and the latter would provide treatment for the microscopic (isolated
tumor cell) disease. See "--Clinical Trials."
BLADDER TUMORS
In 1996, an estimated 52,900 new cases of bladder cancer are expected to
occur, with 11,700 deaths predicted. In 1992, hospitalization for a patient
with bladder cancer was on average approximately six days with an overall cost
of $12,936.
For bladder cancers, surgery alone or in combination with other treatments
is used in over 90% of cases. External beam irradiation is limited in
usefulness due to its damaging effects on the healthy tissue surrounding the
bladder. The Company has developed a means of delivering with the PRS
radiation only to the bladder lining by a noninvasive, transurethral method.
Although designed to treat diffuse malignancies extending over the entire
lining of the bladder, the apparatus is designed to be sufficiently versatile
to allow irradiation of localized bladder tumors as well. Initial animal
trials with this procedure are currently being conducted. If those trials are
successful, the Company will request, by the first half of 1997, FDA approval
of an Investigational Device Exemption ("IDE") to begin Phase I human trials.
See "--Clinical Trials."
SKIN TUMORS
In 1996, there are expected to be over 800,000 new cases of skin cancers.
Melanomas are expected to be diagnosed in 38,300 individuals. An additional
17,000 invasive nonmelanomas, mostly sarcomas such as Karposi's sarcoma (a
malignant skin tumor often suffered by AIDS patients), will occur. Currently
there are four primary methods of treatment utilized for skin cancers. Surgery
is the primary modality and used in 90% of cases. The others are radiation
therapy, electrodessication, in which tissue is destroyed by heat,
cryosurgery, in which tissue is destroyed by freezing, and laser therapy for
early skin cancer. The Company believes a significant number of cases of skin
cancers are amenable to treatment with the PRS either as an alternative to
present radiation therapies or as an adjunct to surgery.
For non-interstitial treatments, the Company has developed an x-ray
"shielding cone," which is intended, when fitted onto the PRS's probe tip, to
restrict the area of x-ray exposure to the region of the tumor being treated.
The Company has established a research site at a New York City hospital, and
intends to submit an application to the FDA to begin human clinical trials for
Kaposi's sarcoma and possibly other types of skin tumors in late 1997.
28
<PAGE>
OTHER POTENTIAL APPLICATIONS
Application of the PRS to the treatment of various types of tumors is not
necessarily limited to those described above. For example, the Company is
considering the applicability of the PRS for intraoperative treatment of
gynecological tumors (cervical and uterine malignancies), as well as for
minimally invasive therapy for lung, colon, rectal, liver, pancreatic and
nasopharyngeal cancers. For these other cancers, fixturing devices will need
to be developed, or existing fixturing devices will need to be modified, for
compatibility with the PRS. The Company intends to design its own devices, as
well as pursue relationships with fixture device manufacturers in order to
develop or modify their devices, as it has with respect to stereotactic
systems used in treating brain and breast tumors. For applications where a
direct path to the tumor site is not possible, the Company is exploring a
flexible version of the probe which will permit indirect access to the tumor
site.
BUSINESS STRATEGY
The Company's goal is to establish the PRS as the preferred means for the
treatment of cancerous tumors by utilizing its therapeutic, operational and
economic advantages over competing cancer treatment methods. In order to
achieve its objectives, the Company intends to pursue the following business
strategy:
UTILIZE CORE TECHNOLOGY FOR THE TREATMENT OF METASTATIC BRAIN TUMORS AND
ADDITIONAL APPLICATIONS. The PRS has been used to treat metastatic brain
tumors in 57 patients, and Phase II clinical trials for the treatment of these
brain tumors are currently ongoing. While the Company has focused its efforts
to date on the development of the PRS to treat metastatic brain tumors, the
Company intends to utilize and further develop its core PRS technology for
multiple applications based on specific market opportunities. The Company
expects these applications to include the treatment of primary brain tumors as
well as breast, prostate, bladder, skin and other cancers.
BUILD RELATIONSHIPS WITH MEDICAL PROFESSIONALS AND INSTITUTIONS. The
Company has developed strong relationships with prominent medical
professionals and institutions worldwide who have been involved in the
clinical testing of the PRS. The Company believes that the medical community's
acceptance of the PRS as a viable cancer treatment tool will significantly
impact the Company's ability to market the PRS. Therefore, the Company intends
to continue to foster and expand these important relationships, and to
leverage the relationships to gain market acceptance of the PRS. For example,
the Company has established a Medical Advisory Board, which will advise and
consult with the Company's Board of Directors and senior management. The
Company also plans to attend and provide presentations at conferences and
seminars, to seek and promote publication in scientific and industry journals
of articles or clinical studies relating to the PRS, and to initiate
consultations with members of the medical community regarding the PRS.
OBTAIN REGULATORY CLEARANCE FOR THE PRS IN THE U.S. AND INTERNATIONALLY.
The Company intends to seek regulatory clearances for the PRS in the U.S. and
abroad. On the basis of results of its ongoing human clinical trials, the
Company filed a Section 510(k) application with the FDA on December 11, 1996,
seeking limited clearance from the FDA to commercialize the PRS for treatment
of metastatic brain tumors. In addition, the Company has initiated, and
intends to continue, the process of seeking a CE Mark for the PRS. In
furtherance of its goal to obtain such a CE Mark, the Company has retained a
third party, TUV-Essen, to assist the Company with certain aspects of the
process, and the Company currently anticipates receiving a CE Mark for the PRS
by mid-1997. The Company intends to pursue regulatory clearance in other
countries as needed, and expects that it will initially introduce the PRS in
selected foreign countries where governmental regulatory approval procedures
are less burdensome and expensive than in the U.S. In addition, the Company
intends to initiate human clinical trials for applications other than brain
tumor treatment such as breast, prostate and bladder tumor treatments, and to
seek regulatory approvals for the commercialization of those applications if
the results of the underlying clinical trials so warrant.
PURSUE COMMERCIAL ACCEPTANCE OF THE PRS IN THE U.S. AND INTERNATIONALLY.
The Company intends to pursue the rapid commercialization of the PRS in the
U.S. and abroad. The Company anticipates that it will
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<PAGE>
continue to pursue collaborative relationships with companies that have
established distribution channels in various domestic and international market
segments, as it has with Toshiba. The Company also intends to continue its
practice of developing strategic relationships with licensors or manufacturers
of equipment or technology which can be used in connection with the PRS, such
as treatment planning software and stereotactic frames, breast biopsy tables
or other fixturing devices.
PROTECT INTELLECTUAL PROPERTY RIGHTS. The Company holds nine U.S. patents
and four U.S. patent applications relating to the PRS or its constituent or
ancillary components. The Company has also obtained two patents in Australia,
and has filed patent applications in other selected foreign countries. The
Company intends to continue to pursue its patent filing strategy and to
vigorously protect its intellectual property rights against infringement. See
"Risk Factors--Patents and Proprietary Technology."
CLINICAL TRIALS
Before medical devices such as the PRS can be marketed in the U.S.,
successful completion of clinical trials, along with FDA approval, is
required. Phase I clinical trials for the use of the PRS in treating
metastatic brain tumors have been completed, and Phase II clinical trials are
currently being performed with respect to this application. Based on the
results obtained in these ongoing Phase II trials, on December 11, 1996 the
Company submitted a Section 510(k) application to the FDA seeking clearance to
commercialize the PRS for treatment of metastatic brain tumors. Locally
approved clinical trials for the treatment of brain tumors are also being
performed at sites in Europe and Japan. The Company currently anticipates that
clinical trials to determine the safety of the PRS for treatment of breast
cancer will begin in the U.K. in early 1997. Based upon those trials, the
Company will submit an application to the FDA to begin Phase I human clinical
trials. The possibility of curing topical tumors of the skin and mouth with
the PRS is also being explored. A program has begun at a U.S. hospital which
the Company expects to lead to human clinical trials with the PRS in treating
Kaposi's sarcomas and other skin malignancies. The Company will consider the
use of the PRS for other potential applications on an ongoing basis.
The following table summarizes by treatment application the status of
clinical trials in the U.S., Europe and Japan:
<TABLE>
<CAPTION>
APPLICATION STATUS
----------- ------
<S> <C> <C>
Brain tumors U.S.: Phase II in process
(interstitial and as Europe: Phase II and local trials in process
post-surgery Japan: Local trials in process
radiation "boost")
Breast tumors U.S.: Trial sites under investigation*
(interstitial and as Europe: Clinical trials planned to commence in
post-surgery early 1997*
radiation "boost")
Japan: Potential trial sites under evaluation*
Prostate tumors Europe: Protocols for trials approved in London;
clinical trials expected to commence mid-
1997*
Bladder tumors U.S.: Animal trials in process; clinical trials
expected to commence late 1997*
Skin tumors U.S.: Clinical trials expected to begin in late
1997*
</TABLE>
- --------
* FDA or local approvals are needed before commencing clinical trials.
Research studies for medical devices such as the PRS are often conducted in
a phased approach. Before any commercial sales in the U.S. of the PRS can
commence, successful completion of these clinical trials, along with FDA
approval, is required.
Phase I trials are used to demonstrate feasibility, to delineate an initial
safety profile and to identify technical, procedural and clinical factors
which may be material to the successful use of the device. Phase II
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<PAGE>
clinical trials normally are conducted on a larger population group in order
to identify possible adverse health and safety risks and to begin gathering
efficacy data. Each of the clinical trials is to be conducted pursuant to
certain standards under protocols setting forth the objectives of the study,
the parameters to be used to monitor safety during the trials, and the
efficacy criteria which are to be evaluated. In turn, each protocol must be
submitted to the FDA. The data obtained from these trials are then used to
support a Section 510(k) or other application to the FDA requesting
commercialization approval.
In 1992, the FDA granted an IDE to the Company to perform a limited number
of human clinical trials on brain tumors. Between December 1992 and April
1993, the Company completed a ten-patient Phase I clinical trial at a major
Boston teaching hospital. The results of these trials indicated that the PRS
was capable of destroying cancerous tissue in a focally defined area. Based on
these results, that hospital asked the Company to seek FDA approval to conduct
an additional series of trials in order to treat more patients while awaiting
approval of a Phase II study. As a result, four more patients were treated
with similar results.
Based on the Phase I results, the Company sought permission from the FDA to
begin Phase II trials to treat brain tumors, and such permission was granted
in March 1994. These trials are required to establish the efficacy of the PRS
relative to currently acceptable treatment methods. The Company is performing
Phase II clinical trials on the PRS at certain institutions and their
affiliated medical facilities in Boston and London. In addition, locally
approved clinical trials are being performed in Germany, London and Tokyo.
These trials enable the treatment of patients who are not eligible for the
current Phase II trials and allow the use of treatment methods and evaluation
techniques which are different than those defined in the FDA-approved IDE
protocol for this application.
To date, 57 patients have been treated with the PRS at various hospitals.
Although the studies are not yet complete, in the Company's opinion, based
primarily on pathological evidence from the only two patients autopsied to
date with multiple brain tumors, the PRS has destroyed all cancerous tissue
which has been targeted with an adequate dose of radiation. Specifically,
these autopsies indicated that the PRS-treated tumors were entirely dead while
other tumors which had undergone external beam radiation contained viable
cancer cells. While MRIs can be utilized, with certain limitations, for
determining whether tumors have been destroyed, tissue analyses from autopsies
or surgical excisions provide the most accurate means of detecting the extent
of malignant cell destruction. However, both the hospital costs and the
reluctance of the patients' relatives to provide consent limit the number of
autopsies performed. Complications that have occurred to date, such as edema,
have generally been of the type experienced by patients undergoing brain
biopsies without PRS treatment. Edema may result from mechanical, radiative or
other trauma to tissue and is generally controllable using steroids or other
conventional methods. While the Company has been encouraged by the results of
the brain tumor trials so far, these results may not be predictive of future
results in these or any other clinical trials or of results obtained in
clinical trials for other specific applications.
Based on the results of the Phase II trials, on December 11, 1996 the
Company filed an application with the FDA under Section 510(k), seeking
clearance to commercialize the Company's current version of the PRS (the
"Model 3") for similar treatments of patients with metastatic brain tumors.
See "--Government Regulation." If clearance is received from the FDA, the
Company intends to then request that such clearance be extended to cover
"Model 4" of the PRS, which the Company expects will be the first model of the
PRS to be made commercially available. If such extension of clearance were
obtained the Company would begin such commercialization of the PRS in the U.S.
If any such clearance is not obtained, the Company would have to seek approval
by submission of a PMA application in order to market the product. The PMA
process is significantly more complex, expensive and time consuming than the
Section 510(k) application process. The PMA process typically spans several
years and may never result in approval. See "Risk Factors--Absence of
Regulatory Clearances; Uncertainty of Obtaining Section 510(k) Clearance."
With respect to other potential PRS applications, the Company anticipates
that human clinical trials to ascertain the safety of the PRS for treatment of
breast cancer will begin in early 1997, and approval of those trials from the
ethics committee at the hospital at which the trials are to be conducted has
been obtained.
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<PAGE>
A protocol for human prostate trials involving ultrasound-guided transperineal
insertion of the PRS into the prostate (using a longer PRS probe developed for
treating bladder cancer) to treat prostate lesions has been approved by the
ethics committee of a hospital in London. The Company is currently reviewing
the efficacy of combining the PRS with external beam therapy for this
application. Initial animal trials for use of the PRS in treatment of bladder
cancer are currently being conducted. If those trials are successful, the
Company will request FDA approval of an IDE to begin Phase I human trials for
diffuse, superficial bladder wall cancers, although any such approval is not
likely to be requested until late 1997. The Company has established a research
site in New York City, and expects to submit an application to the FDA to
begin human clinical trials for use of the PRS to treat Karposi's sarcoma and
other skin malignancies by late 1997.
PRODUCTS AND PRODUCT DEVELOPMENT
A complete PRS consists of (i) equipment for clinical use in treating
patients, principally consisting of the x-ray emitting probe, its electronic
control box and a standard computer-based treatment system, (ii) clinical
quality assurance equipment for use in the operating room to verify the
accuracy of the treatment, and (iii) custom equipment for use in the
laboratory to calibrate the output of the probe.
The PRS is intended to be a turn-key system. However, the Company believes
that certain PRS components or accessories will have other uses for which they
may be marketed separately. For example, the Company believes that the CCD-
microdensitometer, which is part of the PRS and which allows for testing of
radiation dosage and distribution prior to patient exposure, could be used
with conventional x-ray sources as well as with the PRS. Several prototype
units are under evaluation in the U.S. and Europe and the Company may seek
clearance to market it on a separate basis. In addition, the Company has also
designed, in support of its proprietary x-ray technology, an automated
dosimetry water tank, which provides a rapid computer-based means of measuring
the spatially distributed x-ray dose around the probe tip. While the tank was
originally designed by the Company to facilitate periodic calibration of PRS
units by hospitals, the tank can also be used to measure the dose delivered by
radioactive seeds, and the Company intends to explore further the market
potential for sales of tanks for this purpose.
The Company believes that masking the outside of the tip of the PRS probe
with a sculpted thin layer of an appropriate metal can vary the dose
distribution to conform the radiative field to more closely match the
configuration of a nonspherical tumor. The Company is investigating the
development of a "library" of masks that can be slipped over the tip of the
probe, with each mask tailored to produce a differently shaped dose
distribution. The Company is also currently considering the feasibility (from
a design, cost and market standpoint) of a PRS x-ray source which would rely
on a flexible probe in order to address endoscopically approachable body
tumors, or those "hidden" behind critical structures.
MARKETING AND SALES; COLLABORATIVE RELATIONSHIPS
The Company believes that the acceptance of the PRS by health care providers
as a viable, cost-effective alternative to conventional cancer treatment
methods will be critical to the successful commercialization of the PRS. The
Company intends to target such health care providers as hospitals, out-patient
providers, women's health centers, and small regional facilities, both within
the U.S. and abroad, as potential customers. The Company intends to market and
distribute its products through a combination of collaborative relationships
and in-house sales and marketing resources. The Company has heavily relied,
and intends to continue to heavily rely, on the pursuit of strategic alliances
with companies that have established distribution channels in domestic and
international markets.
The Company and Toshiba have entered into agreements relating to the conduct
of clinical trials in Japan, and to future product distribution arrangements
in that country. Those agreements provide that Toshiba will conduct and pay a
portion of the cost of the PRS clinical trial program in Japan, be responsible
for obtaining approval under Japan's Pharmaceutical Affairs Law to import,
market, sell and use the PRS and, once regulatory approvals are obtained,
serve as exclusive distributor for the PRS in Japan. Toshiba is purchasing
from the
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<PAGE>
Company at a discounted price two PRS units for use in the clinical trials.
The Company has agreed to upgrade those units at no additional cost to Toshiba
once approvals are obtained to sell the PRS in Japan. Toshiba is one of the
leading medical device manufacturers and distributors in the world, and the
Company believes that Toshiba's support for the PRS will be a significant
factor in gaining acceptance for the device in the medical marketplace in
Japan. Upon entering into the clinical trial and distribution arrangement,
Toshiba purchased an equity interest in the Company which represents 4.9% of
the issued and outstanding capital stock of the Company before the
consummation of this offering.
The Company also has entered into, and plans to continue entering into,
strategic relationships with manufacturers or designers of components and
accessories relating to, or to be used in conjunction with, the PRS. The
Company believes that such relationships will enable the Company to focus its
development efforts and devote its economic resources to its core
technologies, while simultaneously providing access to those parties'
customers and distribution channels. For example, two manufacturers of
stereotactic frames, Radionics Incorporated ("Radionics") and Medical High
Tech GmbH, have adapted their frames to be compatible with the PRS, and a
third frame manufacturer has submitted designs to the Company indicating a
similar intention. In addition, a Radionics subsidiary, Radionics Software
Applications ("RSA"), has developed a version of its three-dimensional patient
treatment planning program specifically tailored for use with the PRS in
conjunction with its stereotactic frame. The Company hopes to leverage its
relationships with these third parties in order to increase market
opportunities. See "Risk Factors--Limited Marketing Experience."
MEDICAL ADVISORY BOARD
The Company has recently formed a Medical Advisory Board, which will advise
and consult with the Company's Board of Directors and senior management at
such times as the Board of Directors shall request. This advice and
consultation will relate generally to the Company's business and products,
including the PRS, as the Board of Directors deems appropriate. The Medical
Advisory Board members may be employed on a full-time basis by employers other
than the Company, and these members may have commitments to, or consulting,
advisory or other contractual relationships with, other third parties. These
third party commitments and relationships may limit the availability of the
Medical Advisory Board members to the Company, and may potentially result in
conflicts of interest. The Board of Directors has not yet convened a meeting
of the Medical Advisory Board. The following individuals have agreed to serve
as members of the Medical Advisory Board:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<C> <S>
Nicholas T. Zervas, M.D. (Chair- Higgins Professor of Neurosurgery
man)............................ Chief of the Neurosurgical Service
Massachusetts General Hospital, Boston, Massachusetts
Michael Baum, ChM. FRCS.......... Professor of Surgery
The Institute of Surgical Studies, University College
London Medical School, London, England
Basil S. Hilaris, M.D., FACR..... Professor and Chairman of the Department of Radiation Medicine
Our Lady of Mercy Medical Center
New York Medical College, New York, New York
Christoph B. Ostertag, M.D....... Professor and Director of Department of Stereotactic
Neurosurgery
Neurosurgical University Clinic
Albert-Ludwigs University, Freiburg, Germany
Kintomo Takakura, M.D., Ph.D..... Director of Neurological Institute
Professor and Chairman of Neurosurgery
Tokyo Women's Medical College, Tokyo, Japan
</TABLE>
The Company is proposing that each member of the Medical Advisory Board,
with the exception of Dr. Zervas, be issued options to purchase 1,000 shares
of the Company's Common Stock for each full year that
33
<PAGE>
such member serves on the Medical Advisory Board. The exercise price per share
for the options issued with respect to the member's first year of service on
the Medical Advisory Board is to be equal to the initial public offering price
hereunder, and the exercise price per share for the options issued with
respect to any subsequent year of service on the Medical Advisory Board is to
be the fair market value of such share (as determined by the Company's Board
of Directors) on the first day of such year of service. Each member would also
receive a fee of $1,000 per regular or special Medical Advisory Board meeting
attended in person (together with reimbursement of reasonable travel
expenses), and a fee of $500 per each such Medical Advisory Board meeting
participated in by means of conference telephone arrangements. The Company is
proposing to pay Dr. Zervas, the current Chairman of the Medical Advisory
Board, a stipend of $10,000 for each year that he serves on the Medical
Advisory Board.
PATENTS AND PROPRIETARY RIGHTS
A U.S. patent directed to the base PRS technology was issued to the Company
in October 1992. Two patents were issued to the Company in 1995 directed to
shaped radiation patterns and electron beam steering, respectively. From 1994
through 1996, three U.S. patents directed to use of the PRS to treat brain
tumors were issued to the Company. A U.S. patent, directed to a flexible probe
PRS for endoscopic purposes, was also issued to the Company in 1995. Another
U.S. patent was issued to the Company in 1996 for an apparatus for use in x-
ray dosimetry for the PRS. One U.S. patent, issued in 1996, and two pending
U.S. patent applications are directed to use of the PRS to deliver x-rays to
internal surfaces and adjoining regions of body cavities, such as the bladder,
esophagus, anal region, nasal orifice and gynecological area. One pending
application has been allowed by the Patent Office and grant of patent is
expected shortly in that application. The Company owns two other pending
patent applications relating to use of the PRS, and to the Company's CCD
microdensitometer. The Company has foreign patent applications in selected
foreign countries which correspond to certain of its U.S. patent applications.
To date, two patents corresponding to the Company's initial patent have issued
in Australia; the other foreign applications are pending. See "Risk Factors--
Patents and Proprietary Technology" and "--Rapid, Unpredictable and
Significant Technological Change; Highly Competitive Industry."
MANUFACTURING
The Company intends to continue its practice of sub-contracting the
fabrication of most of its electrical and mechanical components while
maintaining in-house responsibility for unit assembly and for manufacture of
certain proprietary components. The Company believes that this strategy can
serve to reduce administrative costs, facilitate supplier partnership, and
reduce inventory requirements. In general, the Company's procurement strategy
is to keep the number of its suppliers low while identifying as many multiple
sources as possible. Given the Company's current, limited supply needs,
however, the Company acquires certain supplies, over time, from the same
vendors. While the Company intends to negotiate, where appropriate, supply
contracts with certain of its key suppliers in the future, the Company
currently procures its supplies through open purchase orders, and there can be
no assurances that the Company's vendors will continue to provide such
supplies on terms acceptable to the Company, if at all.
The Company intends to implement the necessary operational systems to
support the successful commercial production of the PRS and any other
products. Specifically, the Company intends to continue to pursue full
functional compliance with ISO 9001 and the FDA's GMP standards that govern,
among other things, quality assurance, personnel training, process control,
customer service, design control, supply management and facility and equipment
maintenance. See "Risk Factors--Limited Manufacturing Experience" and "--
Potential Component Shortages; Dependence on Limited Sources of Supply."
COMPETITION
The medical device industry is highly competitive. The Company believes that
there are numerous universities, research institutions and medical device,
chemical and biotechnology companies that are engaged in the development of
cancer treatment therapies. Many of these entities have substantially greater
technical,
34
<PAGE>
financial and regulatory resources than the Company and may be better equipped
to develop, manufacture, and market their products.
For example, in order to achieve successful commercialization, the PRS will
need to compete with the LINACS and the Gamma Knife, each of which is an
established and well-known cancer therapy within the medical community, and,
as well, with lesser known radiation therapies such as proton beam treatment
and
brachytherapy. In addition, the Company is aware of various other cancer tumor
treatment methods currently under development; any of these methods, if
successfully developed, could have a different approach or means of
accomplishing the intended purposes of the Company's product which might
render the Company's technology uncompetitive. While the Company believes that
the PRS offers certain therapeutic, operational and economic advantages over
the cancer treatment methods likely to compete with the PRS, there can be no
assurance that the Company will be able to compete successfully within this
highly competitive market.
The Company believes that its ability to compete in the marketplace will
depend on its technological advantages and the strength of its patent
position, its ability to complete clinical trials and to obtain regulatory
approvals for its products in a timely fashion, its competence in developing
and maintaining collaborative relationships, its transition to commercial
manufacturing and marketing, and its ability to achieve and maintain a
superior cost structure relative to other competitive treatments. See "Risk
Factors--Rapid, Unpredictable and Significant Technological Change; Highly
Competitive Industry."
GOVERNMENT REGULATION
U.S.
The PRS is subject to regulation in the U.S. by the FDA and, in many
instances, by comparable agencies in foreign countries where the PRS is to be
manufactured or distributed. Under the FDC Act and the SMDA, manufacturers of
medical devices must comply with applicable provisions of the FDC Act and the
SMDA and certain associated regulations governing the safety, design testing,
manufacturing, labeling, marketing and distribution of medical devices and the
reporting of certain information regarding the safety of medical devices. Both
the FDC Act and the SMDA require certain clearances from the FDA before
medical devices, such as the PRS, can be marketed. The Company intends to
pursue a strategy intended to result in marketing clearance of as many PRS
components as possible as quickly as possible in order to maximize flexibility
in the marketing of the PRS and its components.
FDA permission to distribute a new device can be obtained in either of two
ways. The first process (which is the more comprehensive of the two) applies
to a new device that is not substantially equivalent to an existing, legally
marketed product, and requires generally that the Company establish the safety
and effectiveness of the device through specific procedures. A PMA application
must be submitted to the FDA that contains, among other things, the results of
clinical trials performed pursuant to FDA-approved protocols. The PMA
application also contains other information required under the FDC Act such as
a full description of the device and its components, a full description of the
methods, facilities and controls used for manufacturing and proposed labeling.
Finally, the manufacturing site for the device subject to the PMA must pass an
FDA preapproval inspection. The PMA process can be expensive, uncertain and
lengthy, often requiring several years to complete.
The second of the two FDA processes is available for a new or significantly
modified device which is "substantially equivalent" to an existing legally
marketed device. Such a new device may be commercially introduced when, after
submission of a premarket notification to the FDA under Section 510(k), the
FDA issues an order permitting commercial distribution. The FDA has recently
been requiring a more rigorous demonstration of substantial equivalence than
in the past. As between the two sets of procedures (the PMA approval procedure
and the Section 510(k) clearance procedure), the PMA procedures are normally
more complex and time consuming than Section 510(k) procedures, since the PMA
procedures are for products that are not comparable to any other product in
the market. However, even the Section 510(k) procedures are time-consuming and
expensive.
35
<PAGE>
On December 11, 1996, the Company filed a Section 510(k) application with
respect to the current model of the PRS for the treatment of metastatic brain
tumors. Under the Section 510(k) procedures, the Company will be required to
prove that the PRS is substantially equivalent to legally marketed products.
The Company has contended in its Section 510(k) application that for purposes
of Section 510(k), the PRS may be considered "substantially equivalent" to, as
a predicate device, a specific isotope after-loader used in brachytherapy, the
interstitial insertion of radioactive seeds, probes, wires or ribbons into a
tumor or body cavity. The product acceptance period for a Section 510(k)
application is normally about four to twelve months from the date the
application is deemed complete by the FDA, although there can be no assurance
that the review period will not extend beyond such period. Even if the FDA
grants Section 510(k) clearance for the current model of the PRS, known as
"Model 3," the Company will need to request that the FDA extend Section 510(k)
clearance to "Model 4" of the PRS, which is the version of the PRS which the
Company expects to commercialize. There can be no assurance that the FDA will
so extend such clearance, if obtained.
If the Company is unable to avail itself of the Section 510(k) procedures
(whether because it is unable to prove that the PRS is substantially
equivalent to existing products as described above or otherwise), it will need
to seek FDA approval under the PMA procedure. As discussed above, the
preparation of a PMA application is significantly more complex, expensive and
time consuming than the Section 510(k) procedure. Even if the Company were
able to proceed to seek PMA approval, it would need to do so based on
additional clinical tests conforming to FDA approved protocols, and such
approval would likely not be obtained, if at all, until at least 1999.
The Section 510(k) application filed by the Company includes all PRS
treatment components and associated laboratory equipment for calibration and
dose verification. Treatment planning software developed by a third party
manufacturer, which has not been used in clinical PRS treatments to date, will
require separate FDA clearance or approval prior to marketing in the U.S.
In addition to the clearance and approval procedures described above, the
FDA also imposes various requirements on manufacturers and sellers of medical
devices under its jurisdiction, such as labeling, manufacturing practices,
record keeping and reporting requirements. The FDA may also require the
ongoing monitoring of products which have been cleared for commercialization
under the those procedures.
The PRS has not been cleared or approved for commercial use in the U.S. or
in any foreign country. There can be no assurances that the Company's clinical
trials of the PRS will be successful, or that clearances will be granted for
the PRS or any other future products, if any, or that the length of time for
clearance will not be extensive, that the cost of attempting to obtain any
such clearances will not be prohibitive, or that the Company will have
sufficient funds to pursue such clearance. Failure to obtain or maintain
requisite governmental approvals could delay or preclude the Company from
further developing and marketing the PRS and other products. Such delays could
impair the Company's ability to generate funds from operations, which in turn
would have a material adverse effect on the Company's business, financial
condition and results of operations, even after regulatory clearance is
obtained.
Even if regulatory approvals are obtained, such approvals may include
significant limitations on particular uses. In addition, those approvals may
be withdrawn or limited for non-compliance with regulatory standards or the
occurrence of unforeseen problems following the initial approval (either of
which could result in restrictions, including withdrawal of the product from
the market or sanctions or fines being imposed on the Company).
In addition, the export of products manufactured by the Company will be
subject to receipt of export licenses from the U.S. Government. Such licenses
are required for equipment use in foreign clinical trials. The Company has
requested and been granted export licenses and corresponding foreign import
licenses for clinical trials in England, Japan, Australia and Germany. See
"Risk Factors--Absence of Regulatory Approvals; Uncertainty of Obtaining
Section 510(k) Clearance" and "--Extensive Ongoing Governmental Regulation;
36
<PAGE>
FOREIGN COUNTRIES
The regulatory climate relating to the marketing of medical devices within
the European Union is currently in transition while the European Union's
Medical Device Directive is being implemented. The Medical Device Directive
(June 1993) stipulates the regulatory requirements adopted by the European
Union, pursuant to which "National Competent Authorities" approve European
commercialization of new medical products through a procedure whereby both the
products and the manufacturing facilities must conform to well defined
specifications.
The transition period for the Medical Device Directive will end in June
1998; after the expiration of this transition period, all medical devices to
be marketed in any European Union country must first obtain a CE Mark. The CE
Mark is an international symbol of adherence to quality assurance standards.
Obtaining a CE Mark with respect to a particular medical device requires the
submission of information that is similar in certain respects to that which is
submitted to the FDA in connection with a Section 510(k) notification. In
order for the Company to sell its products in Europe, it must comply with
European Union directives relating to manufacturing and quality assurance
documentation under the ISO 9000 series standards and to the performance,
safety, and manufacture (and quality assurance) of the particular device.
In order to have the capacity to examine a large number of new products, the
National Competent Authorities have mandated Notified Bodies (nongovernmental
organizations) to act as their agents and qualify equipment in accordance with
EC standards. In October 1995, the Company engaged TUV-Essen, one of these
Notified Bodies, to act as its agent in qualifying the equipment to obtain a
CE Mark. TUV-Essen is in the process of performing a design review of the
equipment and will, after the appropriate modifications are made, test for
final approval of the system.
Sales of medical devices within other jurisdictions outside the U.S. and
Europe are subject to regulatory requirements that vary widely from country to
country. The time required to obtain approval for sale in a foreign country
may be longer or shorter than that required for FDA approval, and the
requirements may differ. There can be no assurance that the Company will be
able to obtain the necessary regulatory approvals or clearance in any given
country on a timely basis or at all, and delays in receipt of or failure to
receive such approvals could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Risk Factors--
Absence of Regulatory Approvals; Uncertainty of Obtaining Section 510(k)
Clearance" and "--Extensive Ongoing Governmental Regulation."
THIRD PARTY REIMBURSEMENT
If regulatory approvals are obtained for commercial use of the PRS, the
potential revenues derived from marketing of the PRS will depend in large part
upon whether the PRS will qualify for reimbursement from third party payors,
including private insurance companies, self-insured employers, health
maintenance organizations and federal and state sources of payment under the
Medicare and Medicaid programs, and other sources. As a general matter, each
third party payor has developed independent criteria for determining whether a
particular device or treatment modality should be reimbursable and the Company
cannot predict whether or to what extent the PRS will gain acceptance for
reimbursement with any third party payors. However, the Company believes that
the reduced capital and operation costs of the PRS when compared to competing
modalities, together with the expected lower hospitalization costs, will
encourage third party payors to provide reimbursement for PRS-based
procedures.
In addition, many third party payors in the U.S., including the federal
Medicare program and many state Medicaid programs, are planning to shift or
have shifted to partially or fully capitated systems. Under such systems
providers receive either a fixed payment amount per diagnosis or general
treatment approach regardless of the specific treatment modality, or a fixed
payment amount to provide for all the care needs of a patient over time
regardless of illness. To the extent that the PRS is comparatively more cost
effective than existing treatment modalities, providers subject to partial or
fully capitated systems will have an incentive to utilize the PRS.
37
<PAGE>
The levels of revenues and profitability of sales of medical devices may be
affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of health care through various means and the
initiatives of third party payors with respect to the availability of
reimbursement. For example, in the U.S. there have been, and the Company
expects that there will continue to be, a number of federal and state
proposals to subject pricing or profitability of medical devices to
governmental control. Although the Company cannot predict what legislative
reforms may be proposed or adopted or what actions federal, state or private
payors for health care products may take in response to any health care reform
proposals or legislation, the existence and pendency of such proposals could
have a material adverse effect on the Company in general.
With respect to health care reimbursement in the European Union (the "EU"),
there are presently no EU-wide reimbursement procedures; the majority of the
EU member nations each have a dominant national health service with distinct
and unique reimbursement policies and procedures. In addition, private
insurers within the EU offer a great variety of benefits. It is anticipated
that by June 1998, when the Medical Devices Directive becomes mandatory in the
EU, the principal prerequisite for reimbursing a procedure involving new
medical equipment will be obtaining a CE Mark as described in more detail
above. See "Business--Government Regulation."
Other foreign countries also have their own health care reimbursement
systems, and there can be no assurance that third party reimbursement will be
made available to the Company under any foreign reimbursement system. See
"Risk Factors--Adverse Effect of Patient Life Expectancies on Markets for
Specific Product Applications" and "--Uncertainty of Reimbursement by Third
Party Payors."
EMPLOYEES
The Company presently has 25 employees, including a Director of Clinical
Research and Regulatory Affairs, and Production and Engineering Managers. None
of the Company's employees is covered by a collective bargaining agreement,
and the Company believes that its relationship with its employees is good. See
"Risk Factors--High Dependence on Key Personnel."
PROPERTIES
The Company currently occupies approximately 15,000 square feet of space in
a building located in Lexington, Massachusetts under a lease expiring in 2002,
and is negotiating for an additional 2,600 square feet of space in the same
building. This facility is suitable for research and development, corporate
administration and assembly of the PRS, and the Company believes that it will
be adequate to meet its foreseeable requirements through at least 1999. The
Company has an option commencing in 1999 to lease additional space in the same
building.
LEGAL PROCEEDINGS
The Company has been notified that an individual and his employer believe
that they have certain rights with regard to their understanding of the
Company's planned use of the PRS for treatment of tumors in body cavities. No
formal legal proceedings have been initiated and the Company is in discussions
with such parties. In the opinion of management, the resolution of this matter
will not have a material adverse effect upon the Company's business, financial
condition or results of operations.
There can be no assurance that future claims against the Company will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
38
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Peter M. Nomikos................. 64 Chairman of the Board, President,
Chief Executive Officer and Treasurer
Peter E. Oettinger, Ph.D. (1).... 59 Vice President, Chief Operating Officer
and Director
John J. Crowley.................. 40 Director of Finance and Controller
William O. Flannery.............. 50 Clerk
George N. Hatsopoulos, Ph.D.
(1)............................. 69 Director
Roger D. Wellington (1).......... 69 Director
</TABLE>
- --------
(1) Members of the Audit Committee
PETER M. NOMIKOS has served as Chairman of the Board, President, Chief
Executive Officer and Treasurer of the Company since its founding in 1989. Mr.
Nomikos was a co-founder of Thermo Electron Corporation ("Thermo Electron")
where he was a director until 1976. For the past 30 years, Mr. Nomikos has
resided in London and has been involved in maritime shipping as Managing
Director of Nomikos (London) Ltd. He devotes on average approximately 150
hours per month (or roughly two-thirds of his professional time) to directing
the overall business activities of the Company in the U.S. and abroad.
Approximately one-third of Mr. Nomikos' professional time is devoted to his
other professional activities, including those relating to PYC Corporation.
PETER E. OETTINGER, PH.D. has served as Vice President, Chief Operating
Officer and a Director of the Company since its founding in 1989. From 1978 to
1988, Dr. Oettinger was Manager of Research and Development of Thermo
Electron's Direct Energy Conversion Operation, and Thermo Electron's Laser
Laboratory. Dr. Oettinger has a B.S. from Cornell University, an M.S. from the
California Institute of Technology and a Ph.D. from Stanford University.
JOHN J. CROWLEY has served as the Controller of the Company since 1991.
Prior to joining the Company, Mr. Crowley was the Controller of Applications
Systems Corporation, a software company. Mr. Crowley has a B.S. in accounting
from Bentley College.
GEORGE N. HATSOPOULOS, PH.D., has served as a Director of the Company since
its founding in 1989. Dr. Hatsopoulos has been Chairman of the Board and Chief
Executive Officer of Thermo Electron and has served as a Director of Thermo
Electron since 1956. Dr. Hatsopoulos is also a Director of BBN Corporation,
Thermedics Inc., Thermo Ecotek Corporation, Thermo Fibertek Inc., Thermo
Instrument Systems Inc., Thermo Optek Inc., ThermoQuest Corporation and
ThermoTrex Corporation.
ROGER D. WELLINGTON has served as a Director of the Company since its
founding in 1989. Mr. Wellington serves as President and Chief Executive
Officer of Wellington Consultants, Inc. and Wellington Associates, Inc.,
international business consulting firms he founded in 1994 and 1989,
respectively. Prior to 1989, Mr. Wellington served for more than five years as
Chairman of the Board of Augat Inc., a manufacturer of electromechanical
components. Prior to 1988, he also held the positions of President and Chief
Executive Officer of Augat Inc. Mr. Wellington is also a Director of BBN
Corporation and Thermo Electron.
WILLIAM O. FLANNERY has served as the Clerk and General Counsel of the
Company since 1992. Mr. Flannery is engaged in the private practice of law in
Framingham, Massachusetts and serves Of Counsel to the law firm of Goulston &
Storrs, P.C., Boston, Massachusetts. Mr. Flannery served as General Counsel
for Thermo Electron from 1985 to 1992 and as its Corporate Vice President for
Administration from 1989 to 1992.
39
<PAGE>
The Company intends to expand its Board of Directors by adding two or three
outside directors. The Company also intends to seek to hire a new employee, or
promote an existing employee, to serve as the Company's Chief Financial
Officer and to hire a new employee to oversee the Company's marketing efforts.
COMMITTEES OF THE BOARD OF DIRECTORS; COMPENSATION OF DIRECTORS
The Board of Directors has appointed an Audit Committee, which has general
responsibility for supervision of financial controls as well as accounting and
audit activities of the Company. The Audit Committee has the responsibility to
annually review the qualifications of the Company's independent certified
public accountants, make recommendations to the Board of Directors concerning
the selection of the accountants and review the planning, fees and results of
the accountants' audit. The current members of the Audit Committee are Messrs.
Hatsopoulos, Oettinger and Wellington.
Outside Directors of the Company currently receive an annual stipend of
$2,000, a fee of $1,000 per regular or special Directors meeting attended in
person (together with reimbursement of reasonable travel expenses), a fee of
$500 per each such Directors meeting participated in by means of conference
telephone arrangements and a fee of $500 per any regular or special meeting of
any Committee of the Board of Directors, whether attended in person or
participated in by conference telephone arrangements (together, in the event
not coincident with a Directors meeting, with reimbursement of reasonable
travel expenses). Directors who are employees of the Company receive no
compensation as members of the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation paid by the Company to Mr. Nomikos, the Company's Chairman of the
Board, President, Chief Executive Officer and Treasurer, and Dr. Oettinger,
the Company's Vice President and Chief Operating Officer, for the fiscal year
ended December 28, 1996. No other officers or employees of the Company
received salary and bonus in excess of $100,000 for all services rendered to
the Company during the year then ended.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------
OTHER
NAME AND PRINCIPAL ANNUAL LONG-TERM ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION COMPENSATION
- ------------------ ---- -------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Peter M. Nomikos
Chairman of the Board,
President, Chief
Executive Officer
and Treasurer (1)..... 1996 -- -- -- -- $50,000 (2)
Peter E. Oettinger,
Ph.D.
Vice President, Chief
Operating Officer and
a Director............ 1996 $116,742 -- -- -- --
</TABLE>
- --------
(1) Although Mr. Nomikos devotes substantial time to the business of the
Company, he is also engaged in other business activities through a London-
based company.
(2) Mr. Nomikos' compensation was awarded prior to this offering in shares of
Common Stock based upon the fair market value of the Common Stock at the
beginning of the fiscal year. For fiscal 1996, Mr. Nomikos received 5,556
shares of Common Stock at an $9.00 per share value.
40
<PAGE>
The following table sets forth certain information relating to grants of
stock options made during the fiscal year ended December 30, 1996 to each of
Mr. Nomikos and Dr. Oettinger.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ---------- -------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter M. Nomikos........ 12,500 6.0% $ 9.00 March 18, 2003 $ 45,799 $106,730
12,500 6.0% 12.00 July 17, 2003 61,065 142,308
------ ---- ----------- -----------
25,000 12.0% $ 106,864 $ 249,038
Peter E. Oettinger,
Ph.D................... 12,500 6.0% $ 9.00 March 18, 2003 $ 45,799 $106,730
12,500 6.0% 12.00 July 17, 2003 61,065 142,308
------ ---- ----------- -----------
25,00 12.0% $ 106,864 $ 249,038
</TABLE>
The following table sets forth certain information regarding stock option
exercises during the fiscal year ended December 30, 1996 and stock options
held at such year end by Mr. Nomikos and Dr. Oettinger.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR END YEAR END (1)
------------------------- -----------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE RECEIVED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE (1)
- ---- --------------- -------- ----------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Peter M. Nomikos........ 0 -- 23,500 36,500 $ 219,000 $103,500
Peter E. Oettinger,
Ph.D. ................. 0 -- 129,500 43,000 1,400,500 162,000
</TABLE>
- --------
(1) Based on the assumed initial public offering price of the Common Stock
($12.00 per share), less the option exercise price.
COMPENSATION AND INSIDER PARTICIPATION
The entire Board of Directors was responsible for determining the
compensation of executive officers during fiscal 1996. Mr. Nomikos and Dr.
Oettinger, the Company's President and Chief Executive Officer, and Vice
President and Chief Operating Officer, respectively, are Directors and,
although they did not participate in deliberations relating to their own
compensation, each participated in deliberations relating to the compensation
of the other.
STOCK PLANS
1989 STOCK OPTION PLAN
The Company, effective January 20, 1989, adopted a non-qualified stock
option plan (the "Stock Option Plan") for persons selected by the Board of
Directors of the Company, including key employees, officers, directors and
consultants of the Company and its affiliates. The Stock Option Plan is
administered by the Company's Board of Directors, which determines the terms
of options granted under the plan, including the number of shares subject to
each option and the option price. In general, options which have been granted
under the plan expire no later than seven, ten or twelve years after the date
of grant and vest over a period of 45 months or five or seven years from the
date of grant. When an optionee ceases to be a director, employee or
consultant of the Company or a subsidiary, an option terminates either upon or
shortly after termination.
41
<PAGE>
Shares purchased upon the exercise of an option are subject to transfer
restrictions, which in general preclude the holder from transferring them
without the Company's consent, except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order. These
transfer restrictions are to lapse 90 days after the initial public offering
of Common Stock by the Company.
The Company's Board of Directors voted on July 17, 1996 to terminate the
Stock Option Plan, and no further options may be issued under the plan after
that date. The Company has outstanding under the Stock Option Plan non-
qualified stock options to purchase a total of 824,975 shares of Common Stock
at exercise prices ranging from $0.40 to $9.00 per share.
EMPLOYEE STOCK PURCHASE PLAN
An Employee Stock Purchase Plan (the "Stock Purchase Plan") was adopted by
the Board of Directors on March 18, 1994. In 1994, the Company issued 121,000
shares of Common Stock to employees of the Company pursuant to the Stock
Purchase Plan at a price of $3.00 per share. A total of 85,500 of these shares
are fully paid and non-assessable. Consideration for the remaining 35,500
shares was in the form of promissory notes executed by the employees in favor
of the Company. These promissory notes, with an aggregate face amount of
$106,500, are being repaid by the employees through automatic bi-weekly
payroll deductions. As of September 28, 1996 $57,931 was owed under the notes,
which are scheduled to be repaid in full by April 2, 1999.
The Company's Board of Directors voted on July 17, 1996 to terminate the
Stock Purchase Plan, and no further shares may be issued under the plan after
that date.
1996 EQUITY INCENTIVE PLAN
On July 17, 1996, the Board of Directors of the Company adopted the 1996
Equity Incentive Plan (the "1996 Plan") for employees, officers, directors and
consultants of the Company and its subsidiaries, and recommended approval of
the plan by the stockholders. The 1996 Plan provides for grants of incentive
stock options to employees (including officers) of the Company, and for grants
of non-qualified stock options to such employees as well as to directors and
consultants of the Company and its subsidiaries. In addition, persons eligible
to receive non-qualified stock options can be awarded shares of Common Stock
and given the opportunity to purchase shares of Common Stock. A total of
266,775 shares of Common Stock may be issued under the 1996 Plan. To date,
91,750 stock options have been granted under the 1996 Plan.
The 1996 Plan is administered by the Board of Directors of the Company,
which may delegate any or all of its responsibilities to a Committee of two or
more Board members who, if the Company registers any class of any equity
security pursuant to Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act"), must qualify as non-employee directors within the meaning of
Rule 16b-3 adopted pursuant to the Exchange Act. The plan administrator
determines the recipients and terms of all stock rights granted under the
plan, including in the case of all options, the option price. Except in the
case of some incentive stock options, as described below, the term of all
options granted under the plan may not exceed ten years.
Special rules apply to incentive stock options. The exercise price of all
incentive stock options granted under the 1996 Plan must be at least equal to
the fair market value of the Common Stock of the Company on the date of grant.
If an incentive stock option is granted to an optionee who owns stock
representing more than 10% of the voting power of the Company's outstanding
capital stock, the exercise price of the option must equal at least 110% of
the fair market value of the Common Stock on the date of grant and the maximum
term of the option cannot exceed five years. No incentive stock option may be
transferred by the optionee other than by will or the laws of descent and
distribution, and should the holder of an incentive stock option cease to be
employed by the Company and any of its subsidiaries, he or she (or his or her
estate, personal representative or beneficiary in the event of death) will no
longer be able to exercise the option to the extent of the shares not
exercisable upon termination of employment, and will have a limited period of
time after termination of employment within which to exercise the option (in
general, three months in the case of termination other than by reason of
disability or death, one year in the event of disability, and 180 days in the
event of death, unless the option expires earlier by its terms).
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<PAGE>
At the request of an optionee, the plan administrator can take whatever
action is necessary to convert such optionee's incentive stock options into
non-qualified options. Also, an optionee's rights with respect to options and
other rights granted under the 1996 Plan are to be appropriately adjusted when
certain events occur, such as a stock dividend or split, a recapitalization,
or a merger or sale of assets.
The Board of Directors of the Company has the authority to amend or
terminate the 1996 Plan provided that, in general, no amendment may alter or
impair the rights of a grantee under any option previously granted without
that grantee's consent and shareholder approval must be obtained within 12
months before or after the Board adopts a resolution authorizing certain
actions, including the extension of the expiration date of the 1996 Plan or
the increase in the number of shares reserved for issuance under the 1996
Plan. Unless sooner terminated, the 1996 Plan will terminate on July 16, 2006.
401(K) PLAN
On April 1, 1995, the Company terminated its Simplified Employee Pension
Plan and adopted the Photoelectron Corporation 401(k) Retirement Plan, a
standardized prototype plan which is intended to qualify under Sections 401(a)
and 501 of the Code (the "401(k) Plan"). All employees who have completed
three months of service with the Company and who have attained age 21 are
eligible to participate in the 401(k) Plan, except that all employees on the
effective date of the 401(k) Plan immediately became eligible to participate.
The 401(k) Plan provides that each participant may contribute from 2% up to
15% of his or her compensation. The Company may also make discretionary
matching contributions equal to no more than 6% of each participant's
compensation. The 401(k) Plan is intended to qualify under Section 401(a) of
the Code so that contributions to the Plan, and income earned on Plan
contributions, are not taxable to participants until withdrawn from the 401(k)
Plan, and so that any contributions by the Company will be deductible by the
Company when made. Discretionary Company contributions and the investment
earnings thereon vest at the rate of 20% a year after one year of service and
become fully vested in any event at normal retirement age (age 65).
EXTENSION OF CERTAIN OPTIONS
In the fourth quarter of 1996, the Company extended the terms of certain
options issued to four employees of the Company. These options, by their
terms, would expire but for such extension during the 180-day "lock-up period"
following the date of this Prospectus. These options were extended to a date
which is two months after the expiration of the lock-up agreements. These
options are exercisable into an aggregate of 23,500 shares of Common Stock,
and none of said employees is an officer or director of the Company. The
Company recorded compensation expense of $272,600 pursuant to Accounting
Principals Board Opinion No. 25 in the fourth quarter as a result of this
extension for its fiscal quarter ending December 28, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and "Shares Eligible for Future Sale."
43
<PAGE>
CERTAIN TRANSACTIONS
The Company utilizes certain administrative resources of Thermo Electron on
an as-needed basis without a formal contract and is charged at actual cost for
such services. The Company paid $3,120, $7,715 and $4,322 in 1993, 1994 and
1995, respectively, for these services. George N. Hatsopoulos, Ph.D., a
director of the Company, is Chairman of the Board and Chief Executive Officer
of Thermo Electron.
The Company is provided with certain services by Thermo Power Corporation, a
majority-owned subsidiary of Thermo Electron. These services include data
processing services, administrative services and machine shop services, which
are charged to the Company at actual cost. The Company paid $36,734, $267,582
and $313,942 in 1993, 1994 and 1995, respectively, for these services. As of
December 31, 1994 and December 30, 1995, $42,460 and $19,113, respectively,
was payable to Thermo Power Corporation and was included in accounts payable
in the accompanying consolidated balance sheets.
The Company entered into a Convertible Note and Warrant Purchase Agreement
dated as of May 13, 1992, as amended (the "1992 Debt Agreement"), pursuant to
which the Company sold a $4,252,000 8% Convertible Demand Note (the "1992
Note") to Peter M. Nomikos, Chairman of the Board, President, Chief Executive
Officer and Treasurer of the Company. The principal amount of the 1992 Note,
and all interest accrued thereon, is due and payable on demand. The principal
amount of the 1992 Note is convertible into Common Stock at $3.00 per share.
Currently, the aggregate principal amount outstanding under the 1992 Note is
$705,000.
In 1993, 1,282,005 shares of Common Stock were issued upon the conversion of
$3,846,015 of principal and accrued interest under the 1992 Notes. On March
18, 1994, the Company's Board of Directors approved the issuance of 1,282,005
shares of Series A Convertible Preferred Stock to Mr. Nomikos in exchange for
these shares of Common Stock. The Series A Convertible Preferred Stock will be
converted into Common Stock on a one-for-one basis upon the closing of this
offering.
The warrant purchase rights under the 1992 Debt Agreement entitle Mr.
Nomikos to acquire warrants for $0.20, pursuant to which he may purchase
shares of Common Stock at $3.00 per share. Mr. Nomikos (or his assignee)
acquired warrants to purchase 575,000 shares of Common Stock in 1993, and
warrants to purchase 235,000 shares in 1995. Mr. Nomikos did not acquire any
such warrants in 1994. At September 28, 1996, warrants to purchase an
aggregate of 1,417,334 shares of Common Stock were outstanding. All warrants
issued to date are now held by PYC Corporation.
In 1994, the Company sold an aggregate of 121,000 shares of Common Stock to
Dr. Peter Oettinger, John Crowley and other employees of the Company for $3.00
per share pursuant to the Company's Employee Stock Purchase Plan. Dr.
Oettinger, a director and officer of the Company, purchased 50,000 shares, all
of which are fully paid and nonassessable. Mr. Crowley, Controller of the
Company, purchased 10,000 shares, 5,000 of which are fully paid and non-
assessable and 5,000 of which are being paid for through bi-weekly payroll
deductions, in accordance with the terms of the Employee Stock Purchase Plan.
In 1994, the Company completed the issuance of 500,000 shares of Series B
Convertible Preferred Stock to Thermo Electron, Petronome Corporation and
other private investors at a purchase price of $8.00 per share. Thermo
Electron, a holder of more than 5% of the Company's Common Stock, purchased
43,750 shares. Petronome Corporation ("Petronome"), a corporation in which
Peter M. Nomikos has investment and voting power, purchased 55,250 shares. The
Series B Convertible Preferred Stock will be converted into Common Stock on a
one-for-one basis upon the closing of this offering.
In 1996, the Company issued 1,110,307 shares of Series C Convertible
Preferred Stock to Petronome and other private investors. The purchase price
for 27,173 of the shares acquired by Petronome and 663,943 of the shares
acquired by such other private investors was $9.00 per share, and the purchase
price for 98,222 of the shares acquired by Petronome and 320,969 of the shares
acquired by such other investors was $8.10 per share. The latter discounted
price was paid by those stockholders that had acquired the right to such
discount in connection with their purchase of Series B Preferred Stock. The
Series C Convertible Preferred Stock will be converted into Common Stock on a
one-for-one basis upon the closing of this offering.
44
<PAGE>
SECURITIES OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 3, 1996 and as adjusted
to reflect the sale by the Company of the shares of Common Stock offered
hereby (assuming no exercise of the Underwriters over-allotment option), by
(i) each person (or group of affiliated persons) known by the Company to be
the beneficial owner of more than 5% of the outstanding Common Stock (assuming
conversion of all outstanding warrants and convertible debt, and conversion of
all Preferred Stock), (ii) each of the Company's directors, (iii) each of the
Company's executive officers who received salary and bonus in excess of
$100,000 for all services rendered during the fiscal year ended December 30,
1995, and (iv) all of the Company's executive officers and directors as a
group. Except as otherwise indicated in the footnotes to this table, the
Company believes that the persons named in this table have voting and
investment power with respect to all the shares of Common Stock indicated. The
following table also includes shares of Common Stock that the following
persons have the right to acquire within sixty (60) days.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PERCENT OF
PRIOR TO OFFERING (1) COMMON STOCK
------------------------- ------------------------------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS NUMBER BEFORE OFFERING AFTER OFFERING
- --------------------------------------- ------------------------- --------------- --------------
<S> <C> <C> <C>
Peter M. Nomikos....................... 4,461,097 (2) 67.2% 51.6%
Peter E. Oettinger, Ph.D. ............. 179,500 (3) 3.9 2.7
George N. Hatsopoulos, Ph.D. .......... 16,000 (4) * *
Roger D. Wellington.................... 16,000 (5) * *
Sociedad Internacional De Finanzas SA.. 371,597 8.3 5.7
Montevideo, Uruguay
Thermo Electron Corporation............ 833,334 (6) 17.9 12.5
81 Wyman Street
Waltham, Massachusetts 02254
PYC Corporation........................ 3,723,734 (7) 63.1 47.1
c/o Aegeus Shipping Co., Ltd.
TANPY Building
17-19 Akti Miaouli
Piraeus 185 35 Greece
All directors and executive officers as
a group (5 persons)................... 4,693,096 68.9 53.3
</TABLE>
- --------
* Less than 1%.
(1) Includes the number of shares and percentage ownership represented by such
shares determined to be beneficially owned by a person in accordance with
the rules of the Securities and Exchange Commission. Such shares, however,
are not deemed outstanding for the purposes of computing the percentage
ownership of each other person. The number of shares beneficially owned by
a person includes shares of Common Stock subject to options held by that
person that are currently exercisable or exercisable within 60 days of
December 3, 1996. Such exercisable options are shown in the footnotes to
this table for each such person. The persons named in this table have
voting and investment power with respect to all shares of Common Stock
shown as owned by them, subject to community property laws where
applicable and except as indicated in the other footnotes to this table.
(2) Includes 23,500 shares subject to vested options granted by the Company,
and 713,863 shares issuable upon conversion of convertible debt. Also
includes 1,417,334 shares issuable upon exercise of outstanding warrants
owned by PYC Corporation, of which Mr. Nomikos is the President. Mr.
Nomikos has been granted investment power and the authority to vote such
shares by PYC Corporation.
(3) Includes 129,500 shares subject to options granted by the Company. Also
includes 44,444 shares anticipated to be transferred to the Oettinger
Children Irrevocable Trust by the end of 1996.
(4) Includes 16,000 shares subject to options granted by the Company. Does not
include any shares owned by Thermo Electron, as to which Dr. Hatsopoulos
disclaims beneficial ownership.
(5) Includes 16,000 shares subject to options granted by the Company.
(6) Includes 170,730 shares issuable upon conversion of convertible debt owned
by Thermo Electron.
(7) Includes 1,417,334 shares issuable upon exercise of outstanding warrants.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is restating its Articles of Organization (as so restated, the
"Articles") and By-Laws (as so restated, the "By-Laws") to be effective prior
to the consummation of this offering. Upon such restatement, the authorized
capital stock of the Company will consist of 15,000,000 shares of Common
Stock, $0.0l par value, and 7,500,000 shares of Preferred Stock, $0.0l par
value.
COMMON STOCK
As of December 3, 1996, there were 4,484,666 shares of Common Stock issued
and outstanding and held of record by 37 stockholders, after giving effect to
the conversion of all outstanding shares of Preferred Stock which will occur
upon the consummation of the offering. The holders of the Company's Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor, subject to the
prior rights of holders of Preferred Stock of the Company. Upon any
liquidation of the Company, after payment of all indebtedness, the assets of
the Company will be distributed pro rata to the holders of the Common Stock
subject to such rights as may have been granted to the holders of any
outstanding Preferred Stock. Holders of the Common Stock have no preemptive,
subscription, redemption or conversion rights and are entitled to one vote for
each share held of record on each matter submitted to a vote of stockholders.
All but 35,500 of the outstanding shares of Common Stock are, and the shares
of Common Stock being sold in this offering will be, upon payment of the full
consideration therefor, fully paid and nonassessable. The remaining 35,500
shares were issued in 1994 to employees pursuant to the Employee Stock
Purchase Plan and are being paid for in installments.
PREFERRED STOCK
Upon the consummation of this offering, the Board of Directors will be
authorized, subject to certain limitations, to cause the Company to issue
Preferred Stock. The Preferred Stock is so-called "blank check" preferred
stock, which authorizes the Board of Directors of the Company from time to
time to establish one or more series of Preferred Stock and, to the extent
permitted by Massachusetts law, to designate variations in the relative rights
and preferences between different series, including (i) the number of shares
to constitute each series and the distinguishing designations thereof, (ii)
the dividend rate on the shares of each series and the preferences, if any,
and the special and relative rights of the shares of each series as to
dividends, (iii) whether the shares of each series shall be redeemable and, if
redeemable, the price, terms and manner of redemption, (iv) the preferences,
if any, and the special and relative rights of the shares of each series upon
liquidation of the Company, (v) whether the shares of each series shall be
convertible into shares of any other class or series of capital stock of the
Company and, if so, the conversion price or ratio and other conversion rights,
(vi) the conditions under which the shares of each series shall have separate
voting rights or no voting rights and (vii) such other designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of each series to the full extent
permitted by the laws of Massachusetts. The Company has no present plans to
issue any shares of Preferred Stock. See "Risk Factors--Anti-Takeover
Provisions; Effects of Issuance of Preferred Stock."
All Preferred Stock issued and outstanding prior to the closing of this
offering will be converted to Common Stock upon such closing.
CONVERTIBLE DEBT AND WARRANTS
The Company entered into a Subordinated Convertible Note Purchase Agreement
dated as of May 22, 1990, as amended (the "1990 Debt Agreement"), pursuant to
which the Company sold $300,000 of its 8% Subordinated Notes (the "1990
Notes"). The principal amount of the 1990 Notes, and all interest accrued
thereon, are due and payable on May 31, 1997. Upon maturity, the principal
amount of the 1990 Notes is convertible into Common Stock at $0.80 per share.
The Company entered into a Subordinated Convertible Note Purchase Agreement
dated as of July 11, 1991, as amended (the "1991 Debt Agreement"), pursuant to
which the Company sold $500,000 of its 8% Convertible
46
<PAGE>
Notes (the "1991 Notes"). The principal amount of the 1991 Notes, and all
interest accrued thereon, are due and payable on July 31, 1998. Upon maturity,
the principal amount of the 1991 Notes is convertible into Common Stock at
$3.00 per share.
The Company entered into a $4,500,000 Convertible Note and Warrant Purchase
Agreement dated as of May 13, 1992, as amended (the "1992 Debt Agreement"),
pursuant to which the Company sold a $4,252,000 8% Convertible Demand Note
(the "1992 Note"). As of June 29, 1996, a principal balance of $705,000
remains outstanding under the 1992 Note. The principal amount of the 1992
Note, and all interest accrued thereon, is due and payable on demand. The
principal amount of the 1992 Note is convertible into Common Stock at $3.00
per share.
The debt evidenced by the 1990, 1991 and 1992 Notes is subordinated to
certain senior debt, which includes all indebtedness of the Company for
borrowed money, which is not by its terms subordinate and junior to or on a
parity with the 1990, 1991 and 1992 Notes. The conversion price applicable to
the principal amount of the debt is subject to weighted average anti-dilution
protection in the event of the issuance or sale of Common Stock or other
securities of the Company at a price per share less than the applicable
conversion value under such note(s). Pursuant to the 1990, 1991 and 1992 Debt
Agreements (the "Debt Agreements"), accrued and unpaid interest is convertible
into Common Stock at a conversion value equal to the fair market value of the
Company's Common Stock on the first day of the fiscal quarter in which the
interest accrued. Prior to the effective date of this offering, fair market
value is determined based upon the most recent sale price of capital stock.
After the effective date of the offering, fair market value is based upon the
average market price over the first ten trading days of the quarter in which
the interest accrues. All accrued and unpaid interest under any of the Debt
Agreements is convertible at the option of the holder at any time, and is
automatically converted upon the conversion of any outstanding principal.
As of September 28, 1996, outstanding principal and accrued interest on the
1990, 1991 and 1992 Notes were convertible to 881,249 shares of Common Stock.
CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company's Articles and By-Laws contain certain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to delay or prevent a change in control of the Company if the
Board determines that such a change in control is not in the best interest of
the Company and its stockholders. These provisions could have the effect of
discouraging certain attempts to acquire the Company or remove incumbent
management even if some or a majority of the Company's stockholders deem such
an attempt to be in the Company's best interest.
Consistent with Massachusetts law, the By-Laws provide that stockholders may
take action without a meeting only if all shareholders entitled to vote on the
action consent to the action in writing. The written consents must be filed
with the records of the meetings of stockholders. This provision may
discourage any other person from making a tender offer for Common Stock,
because such person or entity, even if it acquired a majority of the
outstanding voting securities of the Company, would be able to take action as
a stockholder (such as electing new directors or approving a merger) only at a
duly called stockholders meeting and not by written consent.
The Board of Directors is permitted pursuant to the Articles to consider
special factors, such as employee welfare and the future prospects of the
Company, in determining what the Directors reasonably believe to be in the
best interests of the Company when evaluating proposed tender or exchange
offers or business combinations.
The Articles provide that no director of the Company shall be liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty, except to the extent such exculpation from liability is not permitted
under Massachusetts law. This provision does not prevent stockholders from
obtaining injunctive or other equitable relief against directors nor does it
shield directors from liability under federal or state securities laws. The
By-Laws provide that the Company shall indemnify its directors and officers to
the full extent permitted by law.
The Articles provide that a majority vote of each class of stock entitled to
vote will be required for amendments to the Articles or a merger or
consolidation of the Company.
47
<PAGE>
MASSACHUSETTS ANTI-TAKEOVER LAWS
The Company will be covered by the provisions of Chapter 110F of the
Massachusetts General Laws, the Business Combination Statute. Under Chapter
110F, a Massachusetts corporation with more than 200 stockholders may not
engage in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless (i) the interested stockholder
obtains the approval of the Board of Directors for the proposed business
combination prior to becoming an interested stockholder, (ii) the interested
stockholder acquires 90% of the outstanding voting stock of the corporation
(excluding shares held by certain affiliates of the corporation) at the time
it becomes an interested stockholder or (iii) the business combination is
approved at the time it is proposed by both the Board of Directors and the
holders of two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder). An "interested
stockholder" is a person who, together with affiliates and associates, owns
(or at anytime within the prior three years did own) 5% or more of the
outstanding voting stock of the corporation. A "business combination" includes
a merger, a stock or asset sale, and other transactions resulting in a
financial benefit to the interested stockholder.
The By-Laws provide that the provisions of Chapter 110D of the Massachusetts
General Laws, the Control Share Statute, will not apply to the Company. The
Control Share Statute, however, provides that the Company may in the future
become prospectively subject to the statute by vote of its Board of Directors.
In general, if this statute were applicable, it would provide that any person
or entity that acquired 20% or more of the Company's outstanding voting stock
could not vote such stock unless the other stockholders of the Company were to
so authorize.
Chapter 156B, Section 50A, of the Massachusetts General Laws, states that a
publicly-held Massachusetts corporation must, unless electing not to be
covered by the statute, have a classified board of directors consisting of
three classes as nearly equal in size as possible, unless the corporation
elects not to be covered by Section 50A. In addition, under this statute,
directors can be removed only for cause (as defined in the statute) by the
affirmative vote of the holders of a majority of the outstanding shares of
capital stock of the Company generally entitled to vote in the election of
directors. The Company has elected not to have the provisions of this statute
apply to it. See "Risk Factors--Anti-Takeover Provisions; Effects of Issuance
of Preferred Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer and Trust Company.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 6,484,666 shares of
Common Stock outstanding (assuming no exercise or conversion of outstanding
options, warrants or convertible debt after October 31, 1996). Of these
shares, the 2,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act of 1933,
as amended (the "Securities Act"), except that any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
under the Securities Act ("Affiliates"), may generally only be sold in
compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 4,484,666 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. 3,359,359 Restricted Shares will be eligible for sale
in the public market in accordance with Rule 144 under the Act beginning 90
days after the date of this Prospectus (subject to compliance with the volume
and other limitations of Rule 144 described below); substantially all of these
shares are subject to the Lock-up Agreements described below. The remaining
1,125,307 outstanding Restricted Shares will not be eligible for resale under
Rule 144 until after the expiration of a two-year holding period from the date
such Restricted Shares were acquired from the Company or an Affiliate, and may
be resold in the public market only in compliance with the registration
requirements of the Act or pursuant to a valid exemption therefrom;
substantially all of these shares are subject to Lock-up Agreements. In
addition, certain securityholders have the right to have their Restricted
Shares registered by the Company under the Securities Act as described below.
The Company, its executive officers and certain other securityholders of the
Company have agreed pursuant to certain agreements (the "Lock-up Agreements")
that they will not without the prior written consent of the underwriters,
offer, sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exerciseable for any shares of
Common Stock for a period of 180 days from the date of this Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater
of (i) one percent of the then outstanding shares of Common Stock
(approximately 64,800 shares immediately after this offering) or (ii) the
average weekly trading volume in the Common Stock in the over-the-counter
market during the four calendar weeks preceding the date on which notice of
such sale is filed. In addition, under Rule 144(k), a person who is not an
Affiliate and has not been an Affiliate for at least three months prior to the
sale and who has beneficially owned Restricted Shares for at least three years
may resell such shares without compliance with the foregoing requirements. In
meeting the two and three year holding periods described above, a holder of
Restricted Shares can include the holding periods of a prior owner who was not
an Affiliate.
The Securities and Exchange Commission has recently proposed amendments to
Rule 144 and Rule 144(k) that would permit resales of Restricted Shares under
Rule 144 after a one-year, rather than a two-year holding period, subject to
compliance with the other provisions of Rule 144, and would permit resale of
Restricted Shares by non-Affiliates under Rule 144(k) after a two-year, rather
than a three-year holding period. Assuming adoption of such amendments,
approximately 472,000 Restricted Shares will be eligible for sale in the
public market immediately after this offering pursuant to Rule 144(k),
substantially all of which shares are subject to the Lock-up Agreements, and
approximately 4,483,416 Restricted Shares will become eligible for sale in the
public market pursuant to Rule 144 beginning 90 days after the date of this
Prospectus (subject to compliance with the volume and other limitations of
Rule 144), substantially all of which shares are subject to the Lock-up
Agreements. Additional Restricted Shares will become eligible for sale under
Rule 144 from time to time.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register up to 1,000,000 shares of Common Stock
subject to outstanding stock options and Common Stock issued or issuable
pursuant to the Company's stock option plans and stock purchase plan. The
Company plans to file
49
<PAGE>
these registration statements within 180 days following the closing of this
offering, and such registration statements are expected to become effective
upon filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, subject to the Lock-up Agreements, to
the extent applicable.
OPTIONS
As of December 3, 1996, options to purchase a total of 812,975 shares of
Common Stock were outstanding at a weighted average exercise price $4.70 per
share; 690,100 of the shares issuable pursuant to such options are subject to
Lock-up Agreements. An additional 175,025 shares of Common Stock are available
for future grants under the Company's stock option plan. See "Management--
Stock Plans."
WARRANTS
As of December 3, 1996, warrants to purchase 1,417,334 shares of Common
Stock were outstanding, at an exercise price of $3.00 per share; all of the
shares issuable pursuant to such warrants are subject to Lock-up Agreements.
CONVERTIBLE DEBT
As of September 28, 1996, there was $2,013,277 of convertible debt
outstanding. This debt is convertible into 881,249 shares of Common Stock with
a weighted average conversion price of $2.28 per share. All such shares
issuable pursuant to the conversion of such debt are eligible for sale
pursuant to Rule 144 beginning 90 days after the date of this Prospectus
(subject to compliance with the volume and other limitations of Rule 144). All
of such shares are subject to Lock-up Agreements.
REGISTRATION RIGHTS
In the event the Company proposes to register any of its securities under
the Securities Act after the completion of this offering, certain
securityholders of the Company (the "Rightsholders") will, subject to certain
exceptions, be entitled to include shares of Common Stock held by them in such
registration. However, the managing underwriter of any such offering may
exclude for marketing reasons some or all of such Registrable Shares from such
registration. The Company is generally required to bear the expenses of all
such registrations, except underwriting discounts and commissions.
50
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below, for whom Needham & Company, Inc. and Dain
Bosworth Incorporated are acting as representatives (the "Representatives"),
have severally agreed to purchase from the Company, and the Company has agreed
to sell to each Underwriter, the aggregate number of shares of Common Stock
set forth opposite their respective names below. The Underwriting Agreement
provides that the obligations of the Underwriters to pay for and accept
delivery of the shares of Common Stock are subject to certain conditions
precedent, and that the Underwriters are committed to purchase and pay for all
of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Needham & Company, Inc. .............................................
Dain Bosworth Incorporated...........................................
---------
Total............................................................ 2,000,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall change the amount
of proceeds to be received by the Company as set forth on the cover page of
this Prospectus. The Representatives have advised the Company that the
Underwriters do not intend to confirm sales of shares of the Common Stock to
any accounts over which they exercise discretionary authority.
The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of
the 2,000,000 shares offered hereby. If purchased, such additional shares will
be sold by the Underwriters on the same terms as those on which the 2,000,000
shares are being sold.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent of Needham & Company, Inc., except for the
shares of Common Stock offered hereby and except that the Company may issue
securities pursuant to the Company's stock option plans and upon the exercise
of outstanding options. The Company's officers and certain other
securityholders have agreed that they will not, directly or indirectly, offer
to sell, sell, or otherwise dispose of shares of Common Stock or any
securities convertible or exchangeable therefor, for a
51
<PAGE>
period of 180 days after the date of this Prospectus, without the prior
written consent of Needham & Company, Inc. Needham & Company, Inc. may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to the lock-up agreements. See "Shares Eligible for
Future Sale."
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject any order for the purchase of shares in whole or in part.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined
by negotiations between the Company and the Representatives. The material
factors considered in such negotiations were prevailing market and economic
conditions, market valuations of other companies engaged in activities similar
to the Company, the history of and prospects for the industry in which the
Company competes, estimates of the business potential and prospects of the
Company, the present state of the Company's business operations and the
Company's management. See "Risk Factors--No Prior Public Market; Potential
Volatility of Stock Price."
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Goulston & Storrs, P.C., Boston, Massachusetts. Certain legal
matters will be passed upon for the Underwriters by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549 (the "Commission"), a Registration Statement on Form S-
1 under the Securities Act of 1933, as amended, with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in that Registration Statement and the exhibits and schedules
thereto. For further information with respect to the Company and such Common
Stock, reference is hereby made to the Registration Statement including the
exhibits and the schedules thereto. Statements contained in this Prospectus
and the description of any contract or other document referred to herein are
not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
also maintains a Web site that contains reports, proxy statements and
information statements and other information regarding registrants that file
electronically with the Commission, including the Company. The address of such
Web site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements certified by its independent
auditors and quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial information.
52
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants, Arthur Andersen LLP ..... F-2
Consolidated Balance Sheets as of September 28, 1996, December 30,
1995 and December 31, 1994........................................ F-3
Consolidated Statements of Operations for the years ended December
30, 1995, December 31, 1994 and January 1, 1994, the nine months
ended September 28, 1996 and September 30, 1995 and from inception
to September 28, 1996............................................. F-4
Consolidated Statements of Cash Flows for the years ended December
30, 1995, December 31, 1994 and January 1, 1994, the nine months
ended September 28, 1996 and September 30, 1995 and from inception
to September 28, 1996............................................. F-5
Consolidated Statements of Shareholders' (Deficit) Equity at Sep-
tember 28, 1996, December 30, 1995, December 31, 1994, January 1,
1994, January 2, 1993, December 28, 1991, December 29, 1990, De-
cember 28, 1989 and at initial issuance........................... F-6
Notes to Consolidated Financial Statements......................... F-7 to F-14
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Photoelectron Corporation and
Subsidiary:
We have audited the accompanying consolidated balance sheets of
Photoelectron Corporation and subsidiary (a Massachusetts corporation in the
development stage) as of December 31, 1994 and December 30, 1995, and the
related consolidated statements of operations, shareholders' (deficit) equity
and cash flows for each of the three years ended December 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Photoelectron Corporation and subsidiary as of December 31, 1994 and December
30, 1995, and the results of their operations and their cash flows for each of
the three years ended December 30, 1995, in conformity with generally accepted
accounting principles.
Boston, Massachusetts /s/ Arthur Anderson LLP
March 20, 1996 (except with respect
to the matters discussed
in Note 9 as to which the
date is December 11, 1996)
F-2
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, SEPT. 28, PRO FORMA
1994 1995 1996 SEPT. 28, 1996
------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equiva-
lents................. $ 1,778,181 $ 7,191,268 $ 4,005,254 $ 4,005,254
Inventories............ 625,520 495,590 353,290 353,290
Prepaid expenses....... 68,649 121,936 334,319 334,319
Other current assets... 4,040 70,274 31,790 31,790
----------- ------------ ------------ ------------
Total current assets.. 2,476,390 7,879,068 4,724,653 4,724,653
----------- ------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment..... 211,442 255,091 287,309 287,309
Lab and production
equipment............. 196,702 288,181 420,218 420,218
Clinical site equip-
ment.................. 169,531 611,813 674,935 674,935
Furniture and fix-
tures................. 59,910 65,333 91,677 91,677
Leasehold improve-
ments................. 119,048 175,203 606,945 606,945
----------- ------------ ------------ ------------
756,633 1,395,621 2,081,084 2,081,084
Less--Accumulated de-
preciation and amorti-
zation................ 283,772 572,188 768,387 768,387
----------- ------------ ------------ ------------
472,861 823,433 1,312,697 1,312,697
----------- ------------ ------------ ------------
Total assets.......... $ 2,949,251 $ 8,702,501 $ 6,037,350 $ 6,037,350
=========== ============ ============ ============
LIABILITIES AND
SHAREHOLDERS'
(DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable....... $ 151,747 $ 204,023 $ 128,657 $ 128,657
Accrued expenses....... 81,844 51,085 15,771 15,771
Accrued payroll and
benefits.............. 25,358 14,524 76,854 76,854
Current portion of con-
vertible subordinated
notes................. 181,000 -- 448,230 448,230
Current portion of ob-
ligation under capital
leases................ 9,208 -- -- --
----------- ------------ ------------ ------------
Total current liabili-
ties................. 449,157 269,632 669,512 669,512
----------- ------------ ------------ ------------
LONG-TERM DEBT:
Convertible subordi-
nated notes and other
advances, net of cur-
rent portion.......... 1,925,169 1,940,230 1,565,047 1,565,047
----------- ------------ ------------ ------------
SHAREHOLDERS' EQUITY
(NOTES 2, 3 AND 8):
Preferred stock, $0.01
par value--
Authorized--7,500,000
shares
Issued and outstand-
ing--1,782,005,
2,881,201, 2,892,312
and none at December
31, 1994, December 30,
1995, September 28,
1996 and pro forma,
respectively.......... 17,820 28,812 28,923 --
Common stock, $0.01 par
value--
Authorized--15,000,000
shares
Issued and outstand-
ing--1,105,950,
1,583,554, 1,592,354
and 4,484,666 at De-
cember 31, 1994, De-
cember 30, 1995, Sep-
tember 28, 1996 and
pro forma, respective-
ly.................... 11,059 15,837 15,923 44,848
Capital in excess of
par value--common
stock................. 1,184,394 2,343,018 2,357,180 19,559,641
Capital in excess of
par value--preferred
stock................. 7,763,966 17,102,574 17,202,463 --
Subscription receiv-
able.................. (94,874) (573,004) (57,931) (57,931)
Deficit accumulated
during development
stage................. (8,307,440) (12,424,598) (15,743,767) (15,743,767)
----------- ------------ ------------ ------------
Total shareholders'
equity............... 574,925 6,492,639 3,802,791 3,802,791
----------- ------------ ------------ ------------
Total liabilities and
shareholders' equi-
ty................... $ 2,949,251 $ 8,702,501 $ 6,037,350 $ 6,037,350
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
--------------------------------------- -------------------------
PERIOD FROM
INCEPTION
JANUARY 1, DECEMBER 31, DECEMBER 30, SEPT. 30, SEPT. 28, (JANUARY 4, 1989)
1994 1994 1995 1995 1996 TO JUNE 29, 1996
----------- ------------ ------------ ----------- ------------ -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating Expenses:
Research and
development expenses.. $ 1,726,909 $ 2,086,399 $ 3,225,530 $ 1,720,946 $ 2,263,316 $ 11,936,983
General and
administrative
expenses.............. 250,765 505,061 866,733 543,215 1,167,611 3,278,672
----------- ----------- ------------ ----------- ------------ ------------
Total operating ex-
penses................ 1,977,674 2,591,460 4,092,263 2,264,161 3,430,927 15,215,655
----------- ----------- ------------ ----------- ------------ ------------
Operating loss......... (1,977,674) (2,591,460) (4,092,263) (2,264,161) (3,430,927) (15,215,655)
----------- ----------- ------------ ----------- ------------ ------------
Interest income......... 3,228 63,473 85,750 22,633 202,095 399,691
Interest expense........ (293,014) (143,661) (110,645) (89,805) (90,337) (927,803)
----------- ----------- ------------ ----------- ------------ ------------
Interest (expense)
income, net........... (289,786) (80,188) (24,895) (67,172) 111,758 (528,112)
----------- ----------- ------------ ----------- ------------ ------------
Net loss............... $(2,267,460) $(2,671,648) $ (4,117,158) $(2,331,333) $ (3,319,169) $(15,743,767)
=========== =========== ============ =========== ============ ============
Net loss per common and
common equivalent
share................. $ (1.55) $ (1.60) $ (2.85) $ (1.61) $ (1.73)
=========== =========== ============ =========== ============
Pro forma net loss per
share................. $ -- $ -- $ (1.02) $ -- $ (0.74)
=========== =========== ============ =========== ============
Weighted average common
and common equivalent
shares outstanding..... 1,466,323 1,668,815 1,447,133 1,445,824 1,919,052
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR ENDED NINE MONTHS ENDED INCEPTION
--------------------------------------- --------------------------- (JANUARY 4, 1989)
JANUARY 1, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28, TO SEPTEMBER 28,
1994 1994 1995 1995 1996 1996
----------- ------------ ------------ ------------- ------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net loss............... $(2,267,460) $(2,671,648) $(4,117,158) $(2,331,333) $(3,319,169) $(15,743,767)
Adjustments to recon-
cile net loss to net
cash used in operating
activities--
Depreciation and amor-
tization.............. 71,773 146,806 288,416 177,881 196,199 776,978
Noncash interest con-
verted to subordinated
notes................. 283,710 130,853 109,331 93,831 73,045 840,493
Noncash salary con-
verted to common
stock................. 50,000 50,000 50,000 -- -- 200,000
Noncash research and
development expense
converted to subordi-
nated notes........... -- 9,000 -- -- -- 9,000
Noncash salary stock
options extension..... -- -- 860,000 -- -- 860,000
Changes in current ac-
counts--
Inventories............ (171,372) (454,148) 129,930 66,906 142,300 (353,020)
Prepaid expenses....... 19,565 (38,804) (53,287) (363,311) (212,383) (334,319)
Other current assets... (17,542) 14,920 (66,234) (57,412) 38,484 (31,790)
Accounts payable....... 31,984 52,380 52,276 130,870 (75,366) 128,657
Accrued expenses....... 162,747 (77,590) (43,341) (2,868) 27,016 199,877
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in oper-
ating activities...... (1,836,595) (2,838,231) (2,790,067) (2,285,436) (3,129,874) (13,447,891)
----------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchases of equipment
and leasehold
improvements.......... (133,141) (389,600) (638,988) (392,874) (685,463) (2,056,238)
Proceeds from sale of
equipment and
leasehold
improvements.......... -- 9,845 -- -- -- 9,845
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in in-
vesting activities.... (133,141) (379,755) (638,988) (392,874) (685,463) (2,046,393)
----------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Proceeds from issuance
of common stock....... -- 268,127 -- -- 18,073 585,200
Proceeds from issuance
of preferred stock.... -- 3,935,771 8,849,600 4,809,851 611,250 13,396,620
Proceeds from issuance
of subordinated
convertible notes..... 1,725,000 737,000 -- -- -- 5,322,000
Proceeds from issuance
of warrants........... 115,000 -- -- -- -- 236,453
Payments under capital
lease obligations..... (11,528) (13,120) (7,458) (6,343) -- (40,735)
----------- ----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities............ 1,828,472 4,927,778 8,842,142 4,803,508 629,323 19,499,538
----------- ----------- ----------- ----------- ----------- ------------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............ (141,264) 1,709,792 5,413,087 2,125,198 (3,186,014) 4,005,254
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 209,653 68,389 1,778,181 1,778,181 7,191,268 --
----------- ----------- ----------- ----------- ----------- ------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 68,389 $ 1,778,181 $ 7,191,268 $ 3,903,379 $ 4,005,254 $ 4,005,254
=========== =========== =========== =========== =========== ============
CASH PAID FOR:
Interest............... $ -- $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== =========== ============
CASH FLOWS FROM NONCASH
FINANCING ACTIVITIES:
Conversion of salary
expense to common
stock................. $ 50,000 $ 50,000 $ 50,000 $ -- $ -- $ 250,000
=========== =========== =========== =========== =========== ============
Conversion of
convertible
subordinated notes to
common stock.......... $ 3,846,015 $ -- $ 253,402 $ -- $ -- $ 4,027,015
=========== =========== =========== =========== =========== ============
Conversion of common
stock to preferred
stock................. $ -- $ 3,846,015 $ -- $ -- -- $ 3,846,015
=========== =========== =========== =========== =========== ============
Capital lease obliga-
tion incurred for
equipment............. $ 11,661 $ -- $ -- $ -- $ -- $ 40,783
=========== =========== =========== =========== =========== ============
Conversion of
convertible
subordinated notes to
warrants.............. $ -- $ 47,000 $ -- $ -- $ -- $ 47,000
=========== =========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON PREFERRED DEFICIT
STOCK STOCK ACCUMULATED
PREFERRED COMMON CAPITAL IN CAPITAL IN DURING
STOCK, $0.01 STOCK, $0.01 EXCESS OF EXCESS SUBSCRIPTION DEVELOPMENT
PAR VALUE PAR VALUE PAR VALUE OF PAR VALUE RECEIVABLE STAGE
------------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL ISSUANCE OF
COMMON STOCK........... $ -- $ 7,475 $ 291,525 $ -- $ -- $ --
Net loss............... -- -- -- -- -- (414,045)
------- -------- ---------- ----------- -------- ------------
BALANCE, DECEMBER 28,
1989................... -- 7,475 291,525 -- -- (414,045)
Net loss............... -- -- -- -- -- (394,275)
------- -------- ---------- ----------- -------- ------------
BALANCE, DECEMBER 29,
1990................... -- 7,475 291,525 -- -- (808,320)
Net loss............... -- -- -- -- -- (973,773)
------- -------- ---------- ----------- -------- ------------
BALANCE, DECEMBER 28,
1991................... -- 7,475 291,525 -- -- (1,782,093)
Issuance of common
stock................. -- 2,042 147,958 -- -- --
Issuance of warrants... -- -- 121,453 -- -- --
Net loss............... -- -- -- -- -- (1,586,239)
------- -------- ---------- ----------- -------- ------------
BALANCE, JANUARY 2,
1993................... -- 9,517 560,936 -- -- (3,368,332)
Issuance of common
stock................. -- 166 49,833 -- -- --
Conversion of convert-
ible subordinated
notes and related ac-
crued interest into
common stock.......... -- 12,820 3,833,195 -- -- --
Issuance of warrants... -- -- 115,000 -- -- --
Net loss............... -- -- -- -- -- (2,267,460)
------- -------- ---------- ----------- -------- ------------
BALANCE, JANUARY 1,
1994................... -- 22,503 4,558,964 -- -- (5,635,792)
Issuance of common
stock................. -- 1,376 411,625 -- (94,874) --
Conversion of common
stock into preferred
stock, Series A....... 12,820 (12,820) (3,833,195) 3,833,195 -- --
Issuance of preferred
stock, Series B....... 5,000 -- -- 3,930,771 -- --
Issuance of warrants... -- -- 47,000 -- -- --
Net loss............... -- -- -- -- -- (2,671,648)
------- -------- ---------- ----------- -------- ------------
BALANCE, DECEMBER 31,
1994................... 17,820 11,059 1,184,394 7,763,966 (94,874) (8,307,440)
Issuance of common
stock................. -- 64 49,938 -- 21,870 --
Conversion of convert-
ible subordinated
notes and related ac-
crued interest into
common stock.......... -- 4,714 248,686 -- -- --
Issuance of preferred
stock, Series C....... 10,992 -- -- 9,338,608 (500,000) --
Extension of stock op-
tions................. -- -- 860,000 -- -- --
Net loss............... -- -- -- -- -- (4,117,158)
------- -------- ---------- ----------- -------- ------------
BALANCE, DECEMBER 30,
1995................... 28,812 15,837 2,343,018 17,102,574 (573,004) (12,424,598)
------- -------- ---------- ----------- -------- ------------
Issuance of Common
Stock................. -- 86 14,162 -- 15,073 --
Proceeds from issuance
of Series C preferred
stock................. 111 -- -- 99,889 500,000 --
Net loss............... -- -- -- -- -- (3,319,169)
------- -------- ---------- ----------- -------- ------------
BALANCE SEPTEMBER 28,
1996................... $28,923 $ 15,923 $2,357,180 $17,202,463 $(57,931) $(15,743,767)
======= ======== ========== =========== ======== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and Relationship to Principal Shareholders
On January 4, 1989, Photoelectron Corporation (the "Company") was founded as
a joint financing by PYC Corporation ("PYC") and Thermo Electron Corporation
("Thermo Electron"). Since inception, the majority of the Company's time and
effort has been focused on the design, development and commercialization of
the Photon Radiosurgery System ("PRS"), a proprietary, therapeutic device for
the treatment of cancerous tumors through the application of radiation
directly into a tumor. The PRS delivers radiation through a thin, minimally
invasive, needle-like probe, which emits from its tip precisely regulated x-
ray photons.
The Company is in the development stage and has yet to generate any revenues
and has no assurance of future revenues. To management's knowledge, no company
has yet marketed a salable product using technology similar to the PRS that
has been developed by the Company. Even if marketing efforts are successful,
substantial time will pass before significant revenues will be realized, and
the Company may require additional funds during this period, which may not be
available to it.
The Company completed its 14-patient Investigative Device Exemption ("IDE")
Phase I trials as required by the U.S. Food and Drug Administration ("FDA")
and received approval for the next phase of FDA review. The Company began
conducting Phase II clinical trials at U.S. hospitals in December 1994 and
enrolling Phase II clinical trial patients during 1994 and 1995. Based on the
results of the Phase II trials to date, the Company intends to submit certain
data from these trials in support of a Section 510(k) application to the FDA.
The Company expects that this Section 510(k) application would seek clearance
from the FDA to commercialize the PRS for similar treatments of patients with
metastatic brain tumors. The Company expects to submit such a Section 510(k)
application before the end of 1996. If clearance is received from the FDA, the
Company would begin such commercialization of the PRS in the U.S. If such
clearance is not obtained, the Company would have to seek approval by
submission of a Premarket Approval ("PMA") application in order to market the
product. The PMA process is significantly more complex, expensive and time
consuming than the Section 510(k) application process. The PMA process
typically spans several years and may never result in approval. Upon clearance
by the FDA of the Company's Section 510(k) or PMA application, the Company
will begin to manufacture and market the device on a commercial basis in the
U.S. Simultaneously, the Company is pursuing a CE Mark for the device, which
will allow commercialization in Europe.
On December 13, 1995, the Company and Toshiba Medical Systems Company Ltd.
("Toshiba") entered into an agreement pursuant to which Toshiba will help to
develop and then support the clinical trials of the PRS in Japan. The
development and support of the clinical trials will include purchasing two
complete systems of the PRS for use in the clinical trials, installing and
maintaining the PRS systems and providing assistance to the physicians and
hospitals conducting the trials, including collection and analysis of clinical
data. The costs of Toshiba's support of the clinical trials will be borne by
Toshiba, and accordingly will not be reflected in the Company's financial
statements. Once regulatory approvals for the PRS are obtained, Toshiba will
serve as its exclusive distributor in Japan. Toshiba has also invested
approximately $2 million in the Company's Series C Preferred Stock offering.
Toshiba is not obligated to purchase additional shares of the Company's common
or preferred stock. (See Note 7).
Mr. Peter M. Nomikos was a co-founder of Thermo Electron in 1956. His family
maintains a beneficial ownership in Thermo Electron and its subsidiaries. As
of December 30, 1995, Mr. Peter M. Nomikos is the majority beneficial owner of
the Company. Thermo Electron and PYC are the only shareholders holding in
excess of 10% of the Company's outstanding stock. The remainder is being held
by company employees and outside investors.
F-7
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fiscal Years
The Company has adopted a fiscal year ending on the Saturday nearest
December 31. References to 1995, 1994 and 1993 are for the fiscal years ended
December 30, 1995, December 31, 1994 and January 1, 1994, respectively.
Inventory
Inventories are stated at the lower of cost (first-in, first-out basis) or
market and include materials, labor and overhead. The Company has parts,
supplies and manufactured parts in inventory which are intended to be used and
capitalized as part of the Company's PRS that will be used in the Phase II
clinical trials.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses and income during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
The cost of additions and improvements are capitalized while maintenance and
repairs are charged to expense as incurred. The Company provides for
depreciation and amortization on the straight-line method over the estimated
useful lives of the property as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Machinery and equip-
ment................... 5 Years
Clinical site equip-
ment................... The shorter of three years or the life of agreement
Furniture and fixtures.. 3-5 Years
Leasehold improvements.. The shorter of the term of the lease or the life of the asset
</TABLE>
Management believes that the useful lives selected result in net book values
which approximate net realizable values based upon alternate future uses.
Periodically, management reviews specific assets to verify this assertion.
Cash and Cash Equivalents
Cash and cash equivalents include the Company's operating accounts and
holdings of a money market mutual fund.
Income Taxes
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109, Accounting for Income Taxes, as of the beginning of 1989. Under SFAS No.
109, deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. The amount of deferred tax asset or liability is
based on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to be reflected in the tax return.
F-8
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research and Development Expenses
Costs classified as research and development expenses in the accompanying
consolidated statements of operations are costs incurred in connection with
programs funded by the initial investment of Thermo Electron and PYC in
addition to amounts advanced under the convertible subordinated debenture
agreement and the private placements that occurred in 1994 and 1995. Research
and development expenses include the portion of indirect costs allocable to
research and development efforts based on actual labor hours incurred.
In connection with the Phase II FDA clinical trials, as well as the efforts
to obtain the CE Mark, PRS units have been provided to certain hospitals to
conduct the clinical trials. The cost of these units and the related
accumulated depreciation is included in property and equipment in the
accompanying consolidated balance sheets. The cost of the units is charged to
research and development expenses over the term of the agreements with the
hospitals.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Photoelectron (Europe) Ltd. All
material intercompany accounts and transactions have been eliminated.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiary are
translated at year-end exchange rates, and revenues and expenses are
translated at average exchange rates for the year in accordance with SFAS No.
52, Foreign Currency Translation. Resulting translation adjustments are
reflected as a separate component of shareholders' deficit titled Cumulative
Translation Adjustment. Foreign currency transaction gains and losses included
in the accompanying consolidated statements of operations are not material for
the three years presented.
Loss Per Share
Pursuant to Securities and Exchange Commission requirements, loss per share
has been presented for all periods. Weighted average common and common
equivalent shares outstanding include the weighted average common shares
outstanding for the period and for all periods include the effect of the
assumed exercise of stock options as well as the assumed conversion of Series
C Preferred Stock issued within one year prior to the Company's proposed
initial public offering.
Fair Value of Financial Instruments
The fair value of the Company's cash and cash equivalents approximates the
recorded amounts. The fair value of the Company's convertible subordinated
notes is primarily determined by the ability to convert those notes into
common stock. The fair value of the convertible subordinated notes is
approximately $10,600,000 and approximately $7,800,000 at December 31, 1994
and 1995 based upon the estimated fair value of the underlying Common Stock.
Unaudited Interim Financial Period
The consolidated financial statements for the nine months ended September
28, 1996 and September 30, 1995 are unaudited. The statements have been
prepared by the Company on the same basis as the audited
F-9
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
statements and include all adjustments which are, in the opinion of
management, of a normal and recurring nature and necessary for the fair
presentation of the results of operations and cash flows pursuant to the rules
and regulations of the Securities and Exchange Commission. Results of interim
periods are not necessarily indicative of results for the entire year.
(2) INCOME TAXES
The components of the deferred tax asset at December 31, 1994 and December
30, 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Deferred tax asset--
Federal tax loss carryforwards........................ $ 2,484 $ 3,349
Federal tax credit carryforwards...................... 435 612
State tax loss carryforwards.......................... 660 944
State tax credit carryforwards........................ 410 573
Other, net............................................ 152 304
------- -------
4,141 5,782
Valuation allowance................................... (4,141) (5,782)
------- -------
Deferred tax asset.................................. $ -- $ --
======= =======
</TABLE>
As of December 30, 1995, the Company had federal net operating loss
carryforwards of approximately $9,800,000, state net operating loss
carryforwards of approximately $9,500,000, federal tax credit carryforwards of
approximately $612,000, and state tax credit carryforwards of approximately
$573,000. Due to the fact that the Company has sustained cumulative losses,
the potential future benefit of these attributes, which expire in the years
2004 through 2010, is fully reserved by means of a valuation allowance because
their realization is uncertain.
Certain stock transactions may result in a change of control under Sections
382 and 383 of the Internal Revenue Code of 1986, as amended; and as a result,
the net operating loss and tax credit carryforwards available to be utilized
in any given year may be limited, and certain amounts of the net operating
loss carryforwards may expire unutilized due to such limitations.
(3) EMPLOYEE BENEFIT PLAN
In April 1995, the Company terminated its Simplified Employee Pension Plan
("SEPP") and adopted a 401(k) Plan. No obligations arose from the termination
of he SEPP. The impact of the SEPP was not material to the operating results
prior to termination. The Company contributes 25% up to the first 6% of annual
earnings for each employee with at least three months of service. During 1995,
the Company contributed approximately $9,000.
(4) RELATED PARTY TRANSACTIONS
Thermo Electron Corporation
On January 4, 1989, the Company entered into a corporate service agreement
with Thermo Electron. Under this agreement, Thermo Electron provided certain
administrative services, including legal advice and services, certain employee
benefit administration, tax advice and preparation, space allocation and
utilities. This agreement terminated on December 31, 1989. The Company has
continued to utilize Thermo Electron's resources since that
F-10
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
date on an as-needed basis without a formal contract and is charged at actual
cost for such services. The Company paid $3,120, $7,715, and $4,322 in 1993,
1994 and 1995, respectively, for these services.
Thermo Power Corporation
The Company is provided with certain services by Thermo Power Corporation, a
60%-owned subsidiary of Thermo Electron. These services include data
processing services, administrative services and machine shop services, which
are charged to the Company at actual cost. The Company paid $36,734, $267,582
and $313,942 in 1993, 1994 and 1995, respectively, for these services. As of
December 31, 1994 and December 30, 1995, $42,460 and $19,113, respectively,
was payable to Thermo Power Corporation and was included in accounts payable
in the accompanying consolidated balance sheets.
Management believes that the fees charged by Thermo Electron and Thermo
Power Corporation are reasonable and such fees are representative of the
expenses the Company would have incurred on a stand-alone basis.
(5) COMMITMENTS AND CONTINGENCIES
Litigation
The Company is party to legal matters which arise in the normal course of
business. Management, after reviewing these matters with legal counsel, is of
the opinion that the resolution of these matters will not have a material
effect on the financial condition or results of operations.
Leases
The Company subleases office and research facilities under an agreement that
expires on April 1, 1997. The accompanying consolidated statements of
operations include expenses for this operating lease of $79,170, $81,028 and
$162,867 for 1993, 1994 and 1995, respectively. Future minimum payments due
under this lease are $174,183 in 1996 and $43,546 in 1997.
(6) CONVERTIBLE SUBORDINATED NOTES
On January 4, 1989, the Company issued and sold $181,000 of 8% subordinated
convertible debenture to Thermo Electron, due in 1995. The debentures are
convertible into shares of the Company's Common Stock at a conversion price of
$0.30. On December 30, 1995, Thermo Electron elected to convert its $181,000
subordinated convertible debenture and accrued interest into 471,354 shares of
Common Stock. On May 22, 1990, the Company issued and sold $125,000 and
$175,000 principal amounts of 8% subordinated convertible debentures to Thermo
Electron and Mr. Peter M. Nomikos, respectively, due in 1997. The debentures
are convertible into shares of the Company's Common Stock at a conversion
price of $0.80 Also in 1990, the Company issued and sold $52,000 principal
amount of 8% subordinated convertible debentures to Mr. Peter M. Nomikos, due
in 1997. The note is convertible into shares of the Company's Common Stock at
a conversion price of $3.00. In 1991, the Company issued and sold $448,000
principal amount of 8% subordinated convertible debentures to Mr. Peter M.
Nomikos. The debentures are convertible into shares of the Company's Common
Stock at a conversion price of $3.00. All of these debentures provide for the
conversion of accrued interest into Common Stock at the option of the holder.
The accrued interest is convertible into Common Stock at a conversion price
equal to the fair market value of the Company's common stock on the first day
of the fiscal quarter in which the interest to be converted accrued.
F-11
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On May 13, 1992, the Company entered into a $4,500,000 8% convertible
subordinated demand note and warrant purchase agreement with Mr. Peter M.
Nomikos. These notes are convertible into Common Stock at a conversion price
of $3.00 at the option of the holder, which expires seven years from the dates
of issuance. The Company has borrowed $4,252,000 in the form of a demand loan
with detachable warrant purchase rights under this agreement. The warrant
purchase rights entitle the holder to purchase warrants for $0.20. Each
warrant is exercisable upon issuance and allows the holder to purchase one
share of Common Stock at $3.00. At December 31, 1995, warrants to purchase
1,417,334 shares of the Company's Common Stock were outstanding. These
warrants expire seven years from the issuance date. All warrants purchased by
Mr. Nomikos have been accounted for as Common Stock capital in excess of par
value. All earned but unpaid interest on the subordinated convertible
debentures and demand loans are convertible into Common Stock at a conversion
price equal to the fair market value of the Company's Common Stock on the
first day of the fiscal quarter in which the interest to be converted accrued.
In 1993, 1,282,005 shares of Common Stock were issued upon the conversion of
$3,547,000 principal amount of subordinated convertible debentures and
$299,015 of related accrued interest. In 1994, these shares of Common Stock
were converted into Series A Convertible Preferred Stock (See Note 7).
(7) COMMON AND PREFERRED STOCK
On January 4, 1989, the Company authorized 6,000,000 shares of $0.01 par
value Common Stock and issued 147,488 shares to Thermo Electron and 600,000
shares to PIC at $0.40 per share. The Company authorized an additional
9,000,000 shares of Common Stock in 1994 to accommodate possible stock
issuance as a result of stock splits, note conversions and options issued
under the stock option plan and potential future stock offerings. In 1992, Mr.
Peter M. Nomikos was granted stock in lieu of compensation for 1990, 1991 and
1992 in the cumulative amount of 204,167 common shares. In 1993, 1994 and
1995, Mr. Peter M. Nomikos was granted stock in lieu of compensation in the
amount of 16,667, 16,667 and 6,250 shares of Common Stock, respectively. All
such shares were recorded as compensation expense at the estimated fair value
per share on the date that such shares were granted to Mr. Nomikos. In fiscal
1993, 1,709,340 shares of Common Stock were issued upon the conversion of
$3,846,015 of subordinated convertible debentures and accrued interest (See
Note 6).
The Company has authorized 7,500,000 shares of $0.01 par value preferred. On
March 18, 1994, the Board of Directors approved the conversion of 1,282,005
shares of Common Stock held by Mr. Peter M. Nomikos into Series A Convertible
Preferred Stock on a one-for-one basis. These shares permit the holder to
convert his or her holdings into Common Stock on a one-for-one basis. The
Series A Convertible Preferred Stock has a liquidation preference of $3.00 per
share (See Note 6).
The Company sold 500,000 shares of Series B Convertible Preferred Stock at
$8.00 per share in 1994. These shares permit the holder to convert his or her
holdings into Common Stock on a one-for-one basis. The Series B Convertible
Preferred Stock has a liquidation preference of $8.00 per share, which is
senior to the Company's Common Stock and junior to the Series A Convertible
Preferred Stock. The purchase of the Series B shares also entitled the
purchaser to rights to participate in the Company's next offering of preferred
stock at a 10% discount. The rights entitle the purchaser to this discount on
an amount of shares equal to the purchaser's pro rata participation in the
Series B offering.
The Company sold 680,005 shares of Series C Convertible Preferred Stock at
$9.00 per share in 1995. The Company also sold 419,191 additional shares of
Series C Convertible Preferred Stock in exchange for $8.10 per share. This
latter, discounted price was paid by those stockholders who acquired such
right in the Series B offering as described above. These shares permit the
holder to convert his or her holdings into Common Stock
F-12
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on a one-for-one basis. The Series C Convertible Preferred Stock has a
liquidation preference of $9.00 per share, which is senior to the Company's
Common Stock and junior to the Series A and B Convertible Preferred Stock.
All of the Company's convertible preferred stock automatically converts to
Common Stock upon the closing of an initial public offering. In compliance
with certain Securities and Exchange Commission requirements a pro forma
balance sheet has been presented.
In 1994, the Company sold 121,000 shares of Common Stock to employees of the
Company for $3.00 per share pursuant to a one-time employee stock purchase
offering. A total of 85,500 of those shares were paid for at the time of the
offering. Consideration for the remaining 35,500 shares was in the form of
promissory notes executed by employees in favor of the Company. These notes
were in an initial aggregate amount of $106,500.
(8) STOCK OPTION PLAN
The Company has a nonqualified stock option plan for key employees,
directors and consultants, which was adopted in 1989. The stock option plan
requires that options may be granted at any price determined by the Board of
Directors. Options granted under the plan expire seven to twelve years after
the date of grant and in general vest at 20% per year. When an optionee ceases
to be an employee, director or consultant of the Company, their options
terminate either upon or shortly after termination of employment. In 1994, the
Board of Directors reserved 1,250,000 common shares for employee stock
options.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding, January 2, 1993....................... 352,750 $0.40-$3.00
Granted.......................................... 122,000 $3.00
------- -----------
Outstanding, January 1, 1994....................... 474,750 $0.40-$3.00
Granted.......................................... 121,750 $3.00-$8.00
------- -----------
Outstanding, December 31, 1994..................... 596,500 $0.40-$8.00
Granted.......................................... 21,000 $8.00-$9.00
------- -----------
Outstanding, December 30, 1995..................... 617,500 $0.40-$9.00
Exercisable, December 30, 1995..................... 399,250 $0.40-$8.00
======= ===========
</TABLE>
The Company accounts for stock options under Accounting Principles Board
Opinion No. 25 (APB No. 25). All stock options granted to date have been at an
exercise price equal to or greater than the fair value of the Company's Common
Stock on the date of grant. In 1995, the Company extended the term of options
to purchase 100,000 shares of Common Stock at $0.40 per share from seven to
twelve years. This extension resulted in a new measurement date under APB No.
25, and accordingly, based upon a current fair value of $9.00 per share the
Company recorded $860,000 of compensation expense. Upon exercise of options,
net proceeds, including the tax benefit realized, are credited to equity.
In December 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock
Based Compensation", which is to become effective for fiscal years beginning
after December 15, 1995. SFAS 123 requires that stock-based compensation be
recorded or disclosed at its fair value. The Company expects to continue to
account for stock-based compensation under APB 25 and accordingly will
disclose the pro forma effects on earnings per share as if SFAS 123 had been
adopted.
F-13
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) SUBSEQUENT EVENT
In 1996, the Company entered into a new operating lease for its office and
research facilities expiring in 2002. The minimum lease payments under the new
agreement are $148,420 in 1996, $222,630 in 1997, $222,630 in 1998, $222,630
in 1999, $222,630 in 2000 and $352,500 thereafter.
On December 3, 1996, the stockholders of the Company approved a one-for-two
reverse stock split of the Company's Common Stock and Preferred Stock. All
share and per share information have been retroactively restated to reflect
this reverse stock split.
Also during the period from December 30, 1995 to September 28, 1996, options
to purchase 207,475 shares of Common Stock were granted at exercise prices
ranging from $9.00 to $12.00.
On July 17, 1996, the Board of Directors of the Company adopted the 1996
Equity Incentive Plan (the "1996 Plan") for employees, officers, directors and
consultants of the Company and its subsidiaries, and recommended approval of
the plan by the stockholders. The 1996 Plan provides for grants of incentive
stock options to employees (including officers) of the Company, and for grants
of non-qualified stock options to such employees as well as to directors and
consultants of the Company and its subsidiaries. In addition, persons eligible
to receive non-qualified stock options can be awarded shares of Common Stock
and given the opportunity to purchase shares of Common Stock. A total of
266,775 shares of Common Stock may be issued under the 1996 Plan. Of the
207,475 options to purchase shares of Common Stock granted in 1996, options to
purchase 91,750 shares of Common Stock have been granted under the 1996 plan.
In the fourth quarter of 1996, the Company extended the terms of certain
options issued to four employees of the Company. These options, by their
terms, would expire but for such extension during the 180-day "lock-up period"
following the date of the Company's Prospectus. These options were extended to
a date which is two months after the expiration of the lock-up agreements.
These options are exercisable into an aggregate of 23,500 shares of Common
Stock, and none of said employees is an officer or director of the Company. As
a result of the extension the Company recorded compensation expense of
$272,600.
On December 11, 1996 the Company submitted a Section 510(k) application to
the FDA with respect to the current version of the PRS for the treatment of
metastatic brain tumors.
F-14
<PAGE>
DESCRIPTION OF BACK COVER PAGE GRAPHICS:
The back cover page graphics consist of one photograph and two drawings,
each with a descriptive caption. The single photograph is located in the upper
left-hand corner of the page and measures approximately 2 3/4 inches (length)
by 3 3/4 inches (width) (based on a 8 1/2 inch by 11 inch page). Above the
photograph is the following caption: "The Photon Radiosurgery System (PRS)-A
Therapeutic X-Ray System for Treating. . ." The photograph shows two surgeons,
one of whom is holding the PRS. The patient to which the surgeons are adjacent
is shielded and not visible within the photograph. To the right of the
photograph is the italicized caption: "Neurosurgeons preparing to treat a
brain tumor."
The first of the two drawings is centered approximately halfway down the
length of the page along the right hand side of the page. The drawing, which
is approximately 5 inches (length) by 1 inch (width) shows the PRS with its
probe directed upwards and parallel to the margin of the page. Approximately
80% of the length of the probe is shown to lie through a tube labeled
"Urethra," with the tip of the probe within a cross sectional view of the
bladder. The various layers of the bladder representation are labeled "Bladder
Wall Cancer," "Muscle," and "Mucosa," and the cavity-conforming device shown
within the bladder is labeled as such. An italicized caption directly below
the drawing reads: "Treatment of bladder wall cancer." Directly to the left of
the drawing is the italicized "bullet" caption "Bladder Tumors."
The second of the two drawings is located within the lower left-hand corner
of the page and measures approximately 3 1/2 inches (width) by 5 inches
(length). The drawing shows the upper torso of a woman lying horizontally on a
table, with the PRS probe, attached to a fixturing device located beneath the
table, directed towards her breast. The drawing also shows the arms of an
operator adjusting the fixturing device. To the right of the drawing, near the
lower right hand corner of the picture, is the following italicized caption:
"Treatment of a breast tumor following biopsy." Directly above the drawing is
the italicized "bullet" caption "Breast Tumors."
- -------------------------------------------------------------------------------
PHOTOELECTRON'S PHOTON RADIOSURGERY SYSTEM IS UNDER DEVELOPMENT AND HAS NOT
BEEN APPROVED OR CLEARED FOR COMMERCIAL SALE OR USE IN THE U.S. OR IN ANY
FOREIGN COUNTRY. REGULATORY APPROVAL COULD TAKE SEVERAL YEARS AND THERE CAN BE
NO ASSURANCE THAT SUCH APPROVAL WILL EVER BE OBTAINED OR, IF OBTAINED, THAT
THE COMPANY'S PHOTON RADIOSURGERY SYSTEM WILL ACHIEVE MARKET ACCEPTANCE. SEE
"RISK FACTORS--PRODUCT DEVELOPMENT RISKS; UNCERTAINTIES RELATING TO CLINICAL
TRIALS" AND "--ABSENCE OF REGULATORY CLEARANCES; UNCERTAINTY OF OBTAINING
SECTION 510(K) CLEARANCE."
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 23
Management............................................................... 39
Certain Transactions..................................................... 44
Securities Ownership of Management and Certain Beneficial Owners......... 45
Description of Capital Stock............................................. 46
Shares Eligible for Future Sale.......................................... 49
Underwriting............................................................. 51
Legal Matters............................................................ 52
Experts.................................................................. 52
Additional Information................................................... 52
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTIC-
IPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,000,000 Shares
LOGO
Common Stock
---------------
PROSPECTUS
---------------
Needham & Company, Inc.
Dain Bosworth
Incorporated
---------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated fees and expenses incurred in connection with the offering
will be borne by the Company and are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 10,310
NASD filing fee.................................................... 3,490
Nasdaq National Market listing fee................................. 50,000
Printing and engraving............................................. 175,000
Legal fees and expenses (other than Blue Sky fees and expenses).... 325,000
Accounting fees and expenses....................................... 110,000
Transfer Agent and Registrar fee................................... 3,500
Blue Sky fees and expenses......................................... 15,000
Miscellaneous...................................................... 162,700
--------
Total............................................................ $855,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Organization provide that the Company's
Directors shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent that exculpation from liabilities is not permitted under the
Massachusetts Business Corporation Law as in effect at the time such liability
is determined. The By-laws provide that the Registrant shall indemnify its
directors and officers to the full extent permitted by the laws of The
Commonwealth of Massachusetts.
The Underwriting Agreement (a form of which appears as Exhibit 1.1 hereto)
provides for indemnification of the Registrant's directors and officers in
certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding the number of
shares of capital stock sold, the number of options granted by the Company,
and the amount of debt securities issued by the Company since July, 1993, the
consideration received by the Company for such shares, options and debt
instruments and information relating to the section of the Securities Act of
1933, as amended (the "Securities Act"), or rule of the Securities and
Exchange Commission under which exemption from registration is claimed. None
of these securities were registered under the Act. No sale of securities
involved the use of an underwriter and no commissions were paid in connection
with the sales of any securities.
1. On December 31, 1993, the Company issued 1,282,005 shares of Common
Stock to Peter M. Nomikos in exchange for the cancellation by Mr. Nomikos
of obligations of the Company totaling $3,846,015, which amount represented
the principal amount of advances previously made by Mr. Nomikos and accrued
interest on such advances as of such date. On March 18, 1994, all of these
common shares were converted by Mr. Nomikos into 1,282,005 shares of Series
A Convertible Preferred Stock. These preferred shares are convertible into
1,282,005 shares of Common Stock. The Company claims exemption from
registration for these transactions under Section 4(2) of the Securities
Act.
2. In 1994, the Company issued 121,000 shares of Common Stock to
employees of the Company for $3.00 per share pursuant to a one-time
employee stock purchase offering. A total of 85,500 of those shares are
fully paid and non-assessable. Consideration for the remaining 35,500
shares was in the form of promissory notes executed by employees in favor
of the Company, in an aggregate amount of $106,500. As of June 29, 1996
$73,409 was owed under those notes. The notes are scheduled to be repaid in
full by April 2, 1999 through automatic bi-weekly deductions. The
securities were sold pursuant to Regulation D under the Securities Act.
II-1
<PAGE>
3. In June, 1994, the Company completed the issuance of 500,000 shares of
Series B Convertible Preferred Stock to private investors at a purchase
price of $9.00 per share. These shares are convertible into 500,000 shares
of Common Stock under certain circumstances. The securities were sold
pursuant to Regulation D under the Securities Act.
4. As of June 29, 1996, the Company issued 1,110,307 shares of Series C
Convertible Preferred Stock to private investors. These shares are
convertible into 1,110,307 shares of Common Stock. The purchase price for
691,116 of these shares was $9.00 per share, and the purchase price for
419,191 of these shares was $8.10 per share. The latter, discounted price
was paid by certain stockholders that had acquired the right to such
discount in connection with their purchase of Series B Preferred Stock. The
securities were sold pursuant to Regulation D and Regulation S under the
Securities Act.
5. During the past three years, pursuant to the terms of a Convertible
Note and Warrant Purchase Agreement dated as of May 13, 1992, the Company
sold to Peter M. Nomikos the following Warrants to purchase Common Stock.
The purchase price for each warrant was $0.20 per share. The exercise price
for each warrant is $3.00 per share:
<TABLE>
<CAPTION>
DATE ISSUED SHARES
----------- -------
<S> <C>
September 29, 1993 575,000
January 27, 1995 235,000
</TABLE>
Exemption from registration for these transactions is claimed under Section
4(2) of the Securities Act.
6. During the past three years, the Company has granted the following
aggregate number of options to purchase Common Stock to employees,
directors and consultants of the Company pursuant to the Company's 1989
Stock Option Plan, or, with respect to the issuance on July 17, 1996, under
the Company's 1996 Equity Incentive Plan:
<TABLE>
<CAPTION>
GRANT DATE SHARES EXERCISE PRICE
---------- ------ --------------
<S> <C> <C>
December 1, 1993 82,500 $3.00 per share
March 18, 1994 2,500 $3.00 per share
March 21, 1994 2,500 $3.00 per share
October 25, 1994 1,250 $8.00 per share
December 28, 1994 115,500 $8.00 per share
April 28, 1995 10,000 $8.00 per share
May 26, 1995 2,000 $8.00 per share
June 1, 1995 1,500 $8.00 per share
November 27, 1995 7,500 $9.00 per share
March 18, 1996 115,725 $9.00 per share
July 17, 1996 91,750 $9.00-12.00 per share
</TABLE>
Exemption from registration for these transactions is claimed under Section
4(2) of the Securities Act.
7. During the past three years the Company has issued the following
shares of Common Stock to Peter M. Nomikos in payment of salary for such
years:
<TABLE>
<CAPTION>
DATE ISSUED SHARES YEAR CONSIDERATION RECEIVED BY COMPANY
----------- ------ ---- ---------------------------------
<S> <C> <C> <C>
January 7, 1994 16,667 1993 $50,000
January 27, 1995 16,667 1994 $50,000
October 31, 1995 6,250 1995 $50,000
</TABLE>
Exemption from registration for these transactions is claimed under Section
4(2) of the Securities Act.
8. On July 17, 1996, the Company issued Reza Esfandiari 1,250 shares of
Common Stock in exchange for consulting services valued at $11,250.
Exemption from registration for this transaction is claimed under Section
4(2) of the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) See the Exhibit Index included immediately preceding the exhibits to
this Registration Statement.
(b) Financial Data Schedule is included as Exhibit 27 to this Registration
Statement. All other schedules are not required under the instructions
relating to the applicable accounting regulations of the Securities and
Exchange Commission or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closings specified in the Underwriting Agreement
certificates in such denominations and registered in such names as are
required by the Underwriters to permit delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, HEREUNTO DULY AUTHORIZED, IN LEXINGTON,
MASSACHUSETTS ON JANUARY 15, 1997.
Photoelectron Corporation
Peter M. Nomikos
By: _________________________________
PETER M. NOMIKOS, CHAIRMAN OF THE
BOARD, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND
TREASURER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
Peter M. Nomikos Director, President,
- ------------------------------------- Treasurer and Chief January 15,
PETER M. NOMIKOS Executive Officer 1997
(Principal
Executive Officer)
Peter E. Oettinger Director, Vice-
- ------------------------------------- President, and January 15,
PETER E. OETTINGER Chief Operating 1997
Officer
John J. Crowley Controller
- ------------------------------------- (Principal January 15,
JOHN J. CROWLEY Financial Officer) 1997
George N. Hatsopoulos Director
- ------------------------------------- January 15,
GEORGE N. HATSOPOULOS, 1997
BY PETER E. OETTINGER,
HIS ATTORNEY-IN-FACT
Roger D. Wellington Director
- ------------------------------------- January 15,
ROGER D. WELLINGTON, 1997
BY PETER E. OETTINGER,
HIS ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
***1.1 --Form of Underwriting Agreement.
*3.1 --Articles of Organization of Registrant, as amended.
***3.2 --Forms of Articles of Amendment of Registrant.
****3.3 --By-Laws of Registrant, as amended.
***4.1 --Specimen Certificate representing the Registrant's Common
Stock.
*4.2 --Subordinated Convertible Note Purchase Agreement among
Registrant, Thermo Electron Corporation and Photoelectron
Investments Corporation of Liberia dated as of May 22,
1990, and Exhibits thereto.
*4.3 --Amendment and Waiver of Subordinated Convertible Note
Purchase Agreement among Registrant, Thermo Electron
Corporation and Photoelectron Investments Corporation of
Liberia dated as of August 1, 1996, and Exhibits thereto.
*4.4 --Amended and Restated 8% Subordinated Note Due 1997 from
Registrant to Thermo Electron Corporation in the principal
amount of $125,000 dated as of August 1, 1996.
*4.5 --Amended and Restated 8% Subordinated Note Due 1997 from
Registrant to Peter M. Nomikos in the principal amount of
$175,000 dated as of August 1, 1996.
*4.6 --Amended and Restated Convertible Note Purchase Agreement
originally dated as of July 11, 1991, among Registrant,
PYC Corporation (formerly known as Photoelectron
Investments Corporation of Liberia) and Peter M. Nomikos,
and Exhibits thereto.
*4.7 --8% Subordinated Convertible Note Due 1998 from Registrant
to Peter M. Nomikos in the principal amount of $500,000
dated as of August 8, 1996.
*4.8 --Convertible Note and Warrant Purchase Agreement between
Registrant and Peter Nomikos dated as of May 13, 1992, and
Exhibits thereto.
*4.9 --Amendment and Waiver of Convertible Note and Warrant
Purchase Agreement dated as of May 13, 1992 between
Registrant and Peter M. Nomikos, dated as of August 1,
1996 and Exhibits thereto.
*4.10 --Amended and Restated 8% Subordinated Convertible Note Due
on Demand from Registrant to Peter M. Nomikos in the
principal amount of $705,000 dated as of August 1, 1996.
***5.1 --Opinion of Goulston & Storrs--A Professional Corporation.
*10.1 --Lease Agreement dated June 12, 1996 between Lexington
Development Company Trust and Registrant.
*10.2 --Cash or Deferred Profit Sharing Plan and Trust dated
April 1, 1995, as amended, of Registrant.
*10.3 --Employee Stock Purchase Plan of Registrant and form of
Subscription Agreement.
*10.4 --1989 Employee Stock Option Plan of Registrant and forms
of Stock Option Agreements.
*10.5 --1996 Equity Incentive Plan of Registrant.
*10.6 --Form of Stock Purchase Warrant issued to certain security
holders of Registrant and Schedule of Substantially
Identical Documents from Exhibits.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
*10.7 --Stock Option Agreements variously dated between certain
directors and officers of the Registrant and the
Registrant.
*10.8 --Form of Subscription Agreement between Registrant and
purchasers of Series B Preferred Stock.
*10.9 --Form of Subscription Agreement between Registrant and
purchasers of Series C Preferred Stock.
*10.10 --Series B Subscription Agreement dated 1994 between
Registrant and Thermo Electron Corporation.
*10.11 --Series C Subscription Agreement dated December 16, 1995
between Registrant and Toshiba Medical Systems Co., Ltd.
*10.12 --Form of Registration Rights Agreement between Registrant
and holders of Series C Preferred Stock.
*10.13 --Registration Rights Agreement dated December 22, 1995
between Registrant and Toshiba Medical Systems Co., Ltd.
*10.14 --Technology Cross License Agreement dated as of January 4,
1989 between Registrant and Thermo Electron Corporation.
*10.15 --International Distributor Sales and Service Agreement
dated December 13, 1995, as amended, between Registrant
and Toshiba Medical Systems Co., Ltd.
**10.16 --Agreement dated as of February 1, 1991, as amended,
between Registrant and The General Hospital Corporation.
**10.17 --Clinical Trial Agreement dated as of August 1, 1992, as
amended, between The General Hospital Corporation,
Nicholas T. Zervas, M.D. and Registrant.
**10.18 --Investigational Treatment Agreement dated as of September
1, 1994 between The General Hospital Corporation, Rees G.
Cosgrove, M.D. and Registrant.
**10.19 --Clinical Research Agreement dated as of April 1, 1995
between The Brigham and Women's Hospital Corporation,
Peter Black, M.D. and Registrant.
**10.20 --Clinical Trial Agreement dated as of January 1, 1995
between The Tokyo Women's Medical College, Kintomo
Takakura, M.D. and Registrant.
[*]**10.21 --Clinical Trial Agreement dated December 13, 1995, as
amended, between Registrant and Toshiba Medical Systems
Co., Ltd.
**10.22 --Clinical Research Agreement dated as of November 1, 1995
between The Royal Free Hampstead (NHS), Felix Senanayake,
M.D. and Registrant.
*10.23 --Form of Lock-Up Letter with certain security holders of
Registrant.
*10.24 --Forms of Medical Advisory Board Agreements between
Registrant and members of its Medical Advisory Board.
***11.1 --Computation of net loss per share.
*21.1 --Subsidiaries of Registrant.
***23.1 --Consent of Arthur Andersen LLP.
***23.2 --Consent of Goulston & Storrs--A Professional Corporation,
counsel to Registrant (included in Exhibit 5.1).
*24.1 --Power of Attorney (included in signature page to this
Registration Statement).
**27.1 --Financial Data Schedule
</TABLE>
- --------
* Previously filed with the Commission on October 21, 1996.
** Previously filed with the Commission on December 5, 1996.
*** Filed herewith.
**** As amended December 3, 1996. These By-laws supersede those previously
filed with the Commission on October 21, 1996.
[*] Confidential Treatment Requested. The confidential portions have been
omitted and filed separately with the Commission as part of an
application to the Commission for confidential treatment thereof. The
omitted portions are identified by astericks appearing within the text
of the Exhibits.
<PAGE>
Exhibit 1.1
[Draft as of 1/15/97]
2,000,000 Shares
PHOTOELECTRON CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
January __, 1997
Needham & Company, Inc.
Dain Bosworth Incorporated
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
Photoelectron Corporation, a Massachusetts corporation (the "Company"),
proposes to issue and sell an aggregate of 2,000,000 shares (the "Firm Shares")
of the Company's Common Stock, $.01 par value per share (the "Common Stock"), to
you and to the several other Underwriters named in Schedule I hereto
(collectively, the "Underwriters"), for whom you are acting as representatives
(the "Representatives"). The Company has also agreed to grant to you and the
other Underwriters an option (the "Option") to purchase up to an additional
300,000 shares of Common Stock, on the terms and for the purposes set forth in
Section 1(b) (the "Option Shares"). The Firm Shares and the Option Shares are
referred to collectively herein as the "Shares."
The Company confirms as follows its agreement with the Representatives and
the several other Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and agreements of the
Company herein contained and subject to all the terms and conditions of this
Agreement, (i) the Company agrees to issue and sell the Firm Shares to the
several Underwriters and (ii) each of the Underwriters, severally and not
jointly, agrees to purchase from the Company the respective number of Firm
Shares set forth opposite that Underwriter's name in Schedule I hereto, at the
purchase price of [$12] for each Firm Share.
(b) Subject to all the terms and conditions of this Agreement, the
Company grants the Option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 300,000 Option Shares at the same price per
share as the Underwriters shall pay for the Firm Shares. The Option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 30th day after the date of this Agreement upon
written or telegraphic notice (the "Option Shares Notice") by the
Representatives to the Company no later than 12:00 noon, New York City time, at
least two and no
- --------------------------
* Plus an option purchase up to additional 300,000 shares to cover
over-allotments.
1
<PAGE>
more than five business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date"), setting forth the aggregate number of
Option Shares to be purchased and the time and date for such purchase. On the
Option Closing Date, the Company will issue and sell to the Underwriters the
number of Option Shares set forth in the Option Shares Notice, and each
Underwriter will purchase such percentage of the Option Shares as is equal to
the percentage of Firm Shares that such Underwriter is purchasing, as adjusted
by the Representatives in such manner as they deem advisable to avoid fractional
shares.
2. Delivery and Payment. Delivery of the Firm Shares shall be made to the
Representatives for the accounts of the Underwriters against payment of the
purchase price by certified or official bank checks or by wire transfer payable
in same-day funds to the order of the Company at the office of Needham &
Company, Inc., 445 Park Avenue, New York, New York 10022, at 10:00 a.m., New
York City time, on the third (or, if the purchase price set forth in Section
1(b) hereof is determined after 4:30 p.m., Washington D.C. time, the fourth)
business day following the commencement of the offering contemplated by this
Agreement, or at such time on such other date, not later than seven business
days after the date of this Agreement, as may be agreed upon by the Company and
the Representatives (such date is hereinafter referred to as the "Closing
Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and shall be
registered in such names and in such denominations as the Representatives shall
request at least two business days prior to the Closing Date or the Option
Closing Date, as the case may be, by written notice to the Company. For the
purpose of expediting the checking and packaging of certificates for the Shares,
the Company agrees to make such certificates available for inspection at least
24 hours prior to the Closing Date or the Option Closing Date, as the case may
be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and Option Shares by the Company to the
respective Underwriters shall be borne by the Company. The Company will pay and
save each Underwriter and any subsequent holder of the Shares harmless from any
and all liabilities with respect to or resulting from any failure or delay in
paying Federal and state stamp and other transfer taxes, if any, which may be
payable or determined to be payable in connection with the original issuance or
sale to such Underwriter of the Shares.
3. Representations and Warranties of the Company. The Company represents,
warrants and covenants to each Underwriter that:
(a) A registration statement (Registration No. 333-14541) on Form S-1
relating to the Shares, including a preliminary prospectus and any amendments to
such registration statement, has been prepared by the Company under the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations (collectively referred to as the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has been
filed with the Commission. The term "preliminary prospectus" as used herein
means a preliminary prospectus as contemplated by Rule 430 or Rule 430A of the
Rules and Regulations included at any time as part of the registration
statement. Copies of such registration statement and amendments and of each
related preliminary prospectus have been delivered to the Representatives. If
such registration statement has not become effective, a further amendment to
such registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly by
the Company with the Commission. If such registration statement has become
effective, a final prospectus containing information permitted to be omitted at
the time of effectiveness by Rule 430A of the Rules and Regulations will be
filed promptly by the Company with the Commission in accordance with Rule 424(b)
of the Rules and Regulations. The term "Registration Statement" means the
registration statement as amended at the time it becomes or became effective
(the "Effective Date"), including financial statements and all exhibits and any
information deemed to be included by Rule 430A and includes any registration
statement relating to the offering contemplated by this Agreement and filed
pursuant to Rule 462(b) of the Rules and Regulations. The term "Prospectus"
means the prospectus as first filed with the Commission pursuant to Rule 424(b)
of the Rules and
2
<PAGE>
Regulations or, if no such filing is required, the form of final prospectus
included in the Registration Statement at the Effective Date.
(b) No order preventing or suspending the use of the preliminary
prospectus of the Company has been issued by the Commission. On the Effective
Date, the date the Prospectus is first filed with the Commission pursuant to
Rule 424(b) (if required), at all times subsequent thereto to and including the
Closing Date and, if later, the Option Closing Date and when any post-effective
amendment to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, the Registration
Statement and the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment or supplement thereto), including
the financial statements included in the Prospectus, did and will comply with
all applicable provisions of the Act and the Rules and Regulations and will
contain all statements required to be stated therein in accordance with the Act
and the Rules and Regulations. On the Effective Date and when any post-effective
amendment to the Registration Statement becomes effective, no part of the
Registration Statement, the Prospectus or any such amendment or supplement did
or will contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not and will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. The Company acknowledges that
the statements set forth under the heading "Underwriting" in the Prospectus and
"Underwriting Discounts and Commissions" on the cover page of the Prospectus or
any amendment or supplement thereto constitute the only information relating to
any Underwriter furnished in writing to the Company by the Representatives
specifically for inclusion in the Registration Statement.
(c) The Company does not own, and at the Closing Date and, if later, the
Option Closing Date, will not own, directly or indirectly, any shares of stock
or any other equity or long-term debt securities of any corporation or have any
equity interest in any corporation, firm, partnership, joint venture,
association or other entity, other than the subsidiaries listed in Exhibit 21 to
the Registration Statement (the "Subsidiaries"). The Company and each of its
Subsidiaries is, and at the Closing Date and, if later, the Option Closing Date,
will be, a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation. The Company and each of its
Subsidiaries has, and at the Closing Date and, if later, the Option Closing
Date, will have, full power and authority to conduct all the activities
conducted by it, to own or lease all the assets owned or leased by it and to
conduct its business as described in the Registration Statement and the
Prospectus. The Company and each of its Subsidiaries is, and at the Closing Date
and, if later, the Option Closing Date, will be, duly licensed or qualified to
do business and in good standing as a foreign corporation in all jurisdictions
in which the nature of the activities conducted by it or the character of the
assets owned or leased by it makes such license or qualification necessary,
except to the extent that the failure to be so qualified or be in good standing
would not materially and adversely affect the Company or its business,
properties, business prospects, condition (financial or other) or results of
operations. All of the outstanding shares of capital stock of each Subsidiary
have been duly authorized and validly issued and are fully paid and
nonassessable, and owned by the Company free and clear of all claims, liens,
charges and encumbrances; there are no securities outstanding that are
convertible into or exercisable or exchangeable for capital stock of any
Subsidiary. The Company is not, and at the Closing Date and, if later, the
Option Closing Date, will not be, engaged in any discussions or a party to any
agreement or understanding, written or oral, regarding the acquisition of an
interest in any corporation, firm, partnership, joint venture, association or
other entity where such discussions, agreements or understandings would require
amendment to the Registration Statement pursuant to applicable securities laws.
Complete and correct copies of the Articles of Organization and of the By-laws
of the Company and each of its Subsidiaries and all amendments thereto have been
delivered to the Representatives, and no changes therein will be made subsequent
to the date hereof and prior to the Closing Date or, if later, the Option
Closing Date.
3
<PAGE>
(d) All of the outstanding shares of capital stock of the Company have
been duly authorized, validly issued and (except as otherwise described in Item
15 of the Registration Statement) are fully paid and nonassessable and were
issued in compliance with all applicable state and federal securities laws; the
Shares have been duly authorized and when issued and paid for as contemplated
herein will be validly issued, fully paid and nonassessable; no preemptive or
similar rights exist with respect to any of the Shares or the issue and sale
thereof. The description of the capital stock of the Company in the Registration
Statement and the Prospectus is, and at the Closing Date and, if later, the
Option Closing Date, will be, complete and accurate in all material respects.
Except as set forth in the Prospectus, the Company does not have outstanding,
and at the Closing Date and, if later, the Option Closing Date, will not have
outstanding, any options to purchase, or any rights or warrants to subscribe
for, or any securities or obligations convertible into, or any contracts or
commitments to issue or sell, any shares of capital stock, or any such warrants,
convertible securities or obligations. No further approval or authority of
stockholders or the Board of Directors of the Company will be required for the
issuance and sale of the Shares as contemplated herein.
(e) The financial statements and schedules included in the Registration
Statement or the Prospectus present fairly in all material respects the
financial condition of the Company and its consolidated Subsidiaries as of the
respective dates thereof and the results of operations and cash flows of the
Company and its consolidated Subsidiaries for the respective periods covered
thereby, all in conformity with generally accepted accounting principles applied
on a consistent basis throughout the entire period involved, except as otherwise
disclosed in the Prospectus. No other financial statements or schedules of the
Company are required by the Act or the Rules and Regulations to be included in
the Registration Statement or the Prospectus. Arthur Andersen LLP (the
"Accountants"), who have reported on such financial statements and schedules,
are independent accountants with respect to the Company as required by the Act
and the Rules and Regulations. The summary consolidated financial and
statistical data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with the
financial statements presented therein.
(f) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus and prior to the Closing Date and,
if later, the Option Closing Date, except as set forth in or contemplated by the
Registration Statement and the Prospectus, (i) there has not been and will not
have been any change in the capitalization of the Company (other than in
connection with (a) the exercise of options to purchase the Company's Common
Stock granted pursuant to the Company's stock option plan from the shares
reserved therefor as described in the Registration Statement) or (b) the
exercise of the warrants or the convertible debt described in the Registration
Statement), or any material adverse change in the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company or any of its Subsidiaries, taken as a whole, arising for any reason
whatsoever; (ii) the Company has not incurred nor will it incur, except in the
ordinary course of business as described in the Prospectus, any liabilities or
obligations, direct or contingent that are material to the Company and its
Subsidiaries taken as a whole, nor has the Company or any of its Subsidiaries
entered into nor will it enter into, except in the ordinary course of business
as described in the Prospectus, any transactions other than pursuant to this
Agreement and the transactions referred to herein that are material to the
Company and its Subsidiaries taken as a whole; and (iii) the Company has not and
will not have paid or declared any dividends or other distributions of any kind
on any class of its capital stock.
(g) The Company is not, will not become as a result of the transactions
contemplated hereby, and does not intend to conduct its business in a manner
that would cause it to become, an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
(h) Except as set forth in the Registration Statement and the Prospectus,
there are no actions, suits or proceedings pending or, to the knowledge of the
Company, threatened against the Company, any of its Subsidiaries or any of its
or their officers in their capacity as such, before or by any Federal or state
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, wherein an unfavorable ruling, decision or finding
would reasonably be expected to materially and adversely affect the Company, any
of its Subsidiaries or the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company or any of its
Subsidiaries taken as a whole.
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(i) The Company and each Subsidiary has, and at the Closing Date and, if
later, the Option Closing Date, will have, performed all the obligations
required to be performed by it, and is not, and at the Closing Date, and, if
later, the Option Closing Date, will not be, in default, under any contract or
other instrument to which it is a party or by which its property is bound or
affected, which default would reasonably be expected to materially and adversely
affect the Company or the business, properties, business prospects, condition
(financial or other) or results of operations of the Company or any of its
Subsidiaries taken as a whole. To the best knowledge of the Company, no other
party under any contract or other instrument to which it or any of its
Subsidiaries is a party is in default in any respect thereunder, which default
would reasonably be expected to materially and adversely affect the Company, any
of its Subsidiaries or the business, properties, business prospects, condition
(financial or other) or results of operations of the Company or any of its
Subsidiaries taken as a whole. The Company is not, and at the Closing Date and,
if later, the Option Closing Date, will not be, in violation of any provision of
its Articles of Incorporation or By-laws.
(j) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Company of the transactions on its part contemplated herein,
except such as have been obtained under the Act or the Rules and Regulations and
such as may be required under state securities or Blue Sky laws or the by-laws
and rules of the National Association of Securities Dealers, Inc. (the "NASD")
in connection with the purchase and distribution by the Underwriters of the
Shares.
(k) The Company has full corporate power and authority to enter into this
Agreement. This Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with the terms hereof. The
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company pursuant to the
terms or provisions of, or result in any material respect in a breach or
violation of any of the terms or provisions of, or constitute a default in any
material respect under, or give any party a right to terminate any of its
obligations under, or result in the acceleration of any obligation under, the
certificate or Articles of Organization or by-laws of the Company or any of its
Subsidiaries, any indenture, mortgage, deed of trust, voting trust agreement,
loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company, any of
its Subsidiaries or any of its or their properties is bound or affected, or
violate or conflict in any material respect with any judgment, ruling, decree,
order, statute, rule or regulation of any court or other governmental agency or
body applicable to the business or properties of the Company or any of its
Subsidiaries taken as a whole.
(l) The Company has good and marketable title to all properties and assets
described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are described in the
Prospectus or are not material to the business of the Company or its
Subsidiaries taken as a whole. The Company has valid, subsisting and enforceable
leases for the properties described in the Prospectus as leased by it. The
Company owns or leases all such properties as are necessary to its operations as
now conducted or as proposed to be conducted through and including calendar year
1999, except where the failure to so own or lease would not materially and
adversely affect the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company.
(m) There is no document or contract of a character required by the Act to
be described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company is a party which were filed as
Exhibits to the Registration Statement have been duly authorized, executed and
delivered by the Company, constitute valid and binding agreements of the Company
and are enforceable against and by the Company in accordance with the terms
thereof.
(n) No statement, representation, warranty or covenant made by the Company
in this Agreement or made in any certificate or document required by Section 4
of this Agreement to be delivered to the Representatives was or will be, when
made, inaccurate, untrue or incorrect.
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(o) Neither the Company nor to its knowledge any of its directors,
officers or controlling persons has taken, directly or indirectly, any action
designed, or which might reasonably be expected, to cause or result, under the
Act or otherwise, in, or which has constituted, stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Shares.
(p) No holder of securities of the Company has rights to the registration
of any securities of the Company because of the filing of the Registration
Statement, which rights have not been waived by the holder thereof as of the
date hereof.
(q) The Company has filed a registration statement pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
to register the Common Stock, has filed an application to list the Shares on the
Nasdaq National Stock Market ("NNM"), and has received notification that the
listing has been approved, subject to notice of issuance of the Shares.
(r) Except as disclosed in or specifically contemplated by the Prospectus
(i) the Company owns or possesses all trademarks, trade names, patent rights,
mask works, copyrights, licenses, approvals and governmental authorizations as
described in the Prospectus and necessary to conduct its business as now
conducted, (ii) the Company has no knowledge of any infringement by it or any of
its Subsidiaries of trademarks, trade name rights, patent rights, mask work
rights, copyrights, licenses, trade secrets or other similar rights of others,
where such infringement would reasonably be expected to have a material and
adverse effect on the Company or the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company, and
(iii) no claim has been made against the Company, or to the best of the
Company's knowledge, any employee of the Company, regarding trademark, trade
name, patent, mask work, copyright, license, trade secret or other infringement
which would reasonably be expected to have a material and adverse effect on the
Company or the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company.
(s) The Company and each of its Subsidiaries has filed all federal, state,
local and foreign income tax returns which have been required to be filed and
has paid all taxes shown as due on such returns and has paid all assessments
received by it to the extent that such taxes or assessments have become due,
except where the failure to file such return, pay such taxes, or assessment
would not be reasonably expected to have a material adverse effect on the
Company or its Subsidiaries taken as a whole. Neither the Company nor any of its
Subsidiaries has any tax deficiency which has been or, to the best knowledge of
the Company, might be asserted or threatened against it which would reasonably
be expected to have a material and adverse effect on the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company or its Subsidiaries taken as a whole.
(t) The pro forma financial information set forth on pages 16 and 18 in
the Registration Statement accurately reflects, subject to the limitations set
forth in the Registration Statement as to such pro forma financial information,
that such statements present fairly the information purported to be shown
therein at the respective dates or for the respective periods therein specified.
(u) Except as disclosed in the Prospectus, the Company owns or possesses
all authorizations, approvals, orders, licenses, registrations, other
certificates and permits of and from all governmental regulatory officials and
bodies, necessary under applicable law to conduct its business as contemplated
in the Prospectus, except where the failure to own or possess all such
authorizations, approvals, orders, licenses, registrations, other certificates
and permits would not materially and adversely affect the Company or the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company. Except as disclosed in the Prospectus,
there is no proceeding pending or threatened (or any basis therefor known to the
Company) which would reasonably be expected to cause any such authorization,
approval, order, license, registration, certificate or permit to be revoked,
withdrawn, canceled, suspended or not renewed; and the Company is conducting its
business in compliance with all laws, rules and regulations applicable thereto
(including, without limitation, all applicable federal, state and local
environmental laws and regulations) except where such noncompliance would not
materially and adversely affect the Company or the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company or any of its Subsidiaries taken as a whole.
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(v) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its business, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect.
(w) Neither the Company nor any of its Subsidiaries has nor, to the
Company's knowledge, any of its or their respective employees or agents at any
time during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
4. Agreements of the Company. The Company covenants and agrees with the
several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or thereafter
during such period as the Prospectus is required by law to be delivered in
connection with sales of the Shares by an Underwriter or dealer, file any
amendment or supplement to the Registration Statement or the Prospectus, unless
a copy thereof shall first have been submitted to the Representatives within a
reasonable period of time prior to the proposed filing date
thereof and the Representatives shall not have objected thereto in good
faith prior to such proposed filing date.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, and
will confirm such advice in writing, (i) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose or the threat thereof, and (iv) of the happening of any event
during the period mentioned in the second sentence of Section 4(e) that in the
judgment of the Company makes any statement made in the Registration Statement
or the Prospectus untrue or that requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in the light of the circumstances in which they are made, not
misleading. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement required pursuant to Rule 430A of the Rules and
Regulations, the Company will comply with the provisions of and make all
requisite filings with the Commission pursuant to said Rule 430A and notify the
Representatives promptly of all such filings.
(c) The Company will furnish to each Representative, without charge, one
signed copy of each of the Registration Statement and of any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto and will furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the Company
will deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representatives may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the judgment of the Company or counsel to
the Underwriters should be set forth in the Prospectus in order to make any
statement
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<PAGE>
therein, in the light of the circumstances under which it was made, not
misleading, or if it is necessary to supplement or amend the Prospectus to
comply with law, the Company will forthwith prepare and duly file with the
Commission an appropriate supplement or amendment thereto, and will deliver to
each of the Underwriters, without charge, such number of copies of such
supplement or amendment to the Prospectus as the Representatives may reasonably
request.
(f) Prior to any public offering of the Shares, the Company will cooperate
with the Representatives and counsel to the Underwriters in connection with the
registration, qualification, or exemption of the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as the Representatives may
request; provided, that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any jurisdiction
where it is not now so subject.
(g) The Company will, so long as required under the Rules and Regulations,
furnish to its stockholders as soon as practicable after the end of each fiscal
year an annual report (including a balance sheet and statements of income,
stockholders' equity and cash flow of the Company and its consolidated
Subsidiaries, if any, certified by independent public accountants) and, as soon
as practicable after the end of each of the first three quarters of each fiscal
year (beginning with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial information of the
Company and its Subsidiaries, if any, for such quarter in reasonable detail.
(h) During the period of five years commencing on the Effective Date, the
Company will furnish to the Representatives and each other Underwriter who may
so request copies of such financial statements and other periodic and special
reports as the Company may from time to time distribute generally to the holders
of any class of its capital stock, and will furnish to the Representatives and
each other Underwriter who may so request a copy of each annual or other report
it shall be required to file with the Commission.
(i) The Company will make generally available to holders of its securities
as soon as may be practicable but in no event later than the last day of the
fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for a period of 12 months ended commencing after the
Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(j) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay or reimburse
if paid by the Representatives all costs and expenses arising from the
performance of the obligations of the Company under this Agreement and in
connection with the transactions contemplated hereby, including but not limited
to costs and expenses of or relating to (i) the preparation, printing and filing
of the Registration Statement and exhibits to it, each preliminary prospectus,
Prospectus and any amendment or supplement to the Registration Statement or
Prospectus, (ii) the preparation and delivery of certificates representing the
Shares, (iii) the printing of this Agreement, the Agreement Among Underwriters,
any Selected Dealer Agreements, any Underwriters' Questionnaires, any
Underwriters' Powers of Attorney, and any invitation letters to prospective
Underwriters, (iv) furnishing (including costs of shipping and mailing) such
copies of the Registration Statement, the Prospectus and any preliminary
prospectus, and all amendments and supplements thereto, as may be requested for
use in connection with the offering and sale of the Shares by the Underwriters
or by dealers to whom Shares may be sold, (v) the listing of the Shares on the
NNM, (vi) any filings required to be made by the Underwriters with the NASD, and
the fees, disbursements and other charges of counsel for the Underwriters in
connection therewith, (vii) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions
designated pursuant to Section 4(f), including the fees, disbursements and other
charges of counsel to the Underwriters in connection therewith, and the
preparation and printing of preliminary, supplemental and final Blue Sky
memoranda, (viii) fees, disbursements and other charges of counsel to the
Company (but not those of counsel for the Underwriters, except as otherwise
provided herein) and (ix) the transfer agent for the Shares.
(k) The Company will not at any time, directly or indirectly, take any
action designed or which might reasonably be expected to cause or result in, or
which will constitute, stabilization of the price of the shares of Common Stock
to facilitate the sale or resale of any of the Shares.
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<PAGE>
(l) The Company will apply the net proceeds from the offering and sale of
the Shares to be sold by the Company in the manner set forth in the Prospectus
under "Use of Proceeds" and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.
(m) During the period beginning from the date hereof and continuing to and
including the date 180 days after the date of the Prospectus, without the prior
written consent of Needham & Company, Inc., the Company will not offer, sell,
contract to sell, grant options to purchase or otherwise dispose of any of the
Company's equity securities of the Company or any other securities convertible
into or exchangeable with its Common Stock or other equity security (other than
pursuant to employee stock option plans or the conversion of convertible
securities or the exercise of warrants or convertible debt outstanding on the
date of this Agreement).
(n) During the period of 180 days after the date of the Prospectus, the
Company will not, without the prior written consent of Needham & Company, Inc.,
grant options to purchase shares of Common Stock at a price less than the
initial public offering price. During the period of 180 days after the date of
the Prospectus, the Company will not file with the Commission or cause to become
effective any registration statement relating to any securities of the Company
without the prior written consent of Needham & Company, Inc., except as
contemplated by Paragraph 4(p).
(o) The Company will cause each of its officers, directors and certain
stockholders designated by the Representatives to enter into lock-up agreements
with the Representatives to the effect that they will not, without the prior
written consent of Needham & Company, Inc., sell, contract to sell or otherwise
dispose of any shares of Common Stock or rights to acquire such shares
according to the terms of an agreement to be substantially similar to the
terms set forth in Schedule II hereto.
(p) The Company will not file with the Commission any registration
statement on Form S-8 relating to shares of its Common Stock prior to 90 days
after the effective date of the Registration Statement.
5. Conditions of the Obligations of the Underwriters. The obligations of
each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Representatives not later than 5:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification, registration,
or exemption of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the Commission
or such authorities and (iv) after the date hereof no amendment or supplement to
the Registration Statement or the Prospectus shall have been filed unless a copy
thereof was first submitted to the Representatives and the Representatives do
not object thereto within a reasonable period of time in good faith, and
the Representatives shall have received certificates, dated the Closing Date
and, if later, the Option Closing Date and signed by the Chief Executive Officer
and the Chief Financial Officer of the Company (who may, as to proceedings
threatened, rely upon the best of their information and belief), to the effect
of clauses (i), (ii) and (iii) of this paragraph.
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company or any of its Subsidiaries taken as a whole, whether
or not arising from transactions in the ordinary course of business, in each
case
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other than as described in or contemplated by the Registration Statement and the
Prospectus, and (ii) the Company shall not have sustained any material loss or
interference with its business or properties, taken as a whole, from fire,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or any court or legislative or other governmental action,
order or decree, which is not described in the Registration Statement and the
Prospectus, which in the judgment of the Representatives any such development
makes it impracticable or inadvisable to consummate the sale and delivery of the
Shares by the Underwriters at the initial public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company, any of its Subsidiaries, or
any of its or their officers or directors in their capacities as such, before or
by any Federal, state or local court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, in which
litigation or proceeding an unfavorable ruling, decision or finding would, in
the judgment of the Representatives, materially and adversely affect the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company or any of its Subsidiaries taken as a
whole.
(e) Each of the representations and warranties of the Company contained
herein shall be true and correct in all material respects at the Closing Date
and, with respect to the Option Shares, at the Option Closing Date, and all
covenants and agreements contained herein to be performed on the part of the
Company and all conditions contained herein to be fulfilled or complied with by
the Company at or prior to the Closing Date and, with respect to the Option
Shares, at or prior to the Option Closing Date, shall have been duly performed,
fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to the Representatives and counsel for
the Underwriters from Goulston & Storrs, P.C., counsel to the Company, or
other counsel to the Company, with respect to the following matters,
subject to such limitations and qualifications as are agreed upon under the
circumstances, or as otherwise waived by the Underwriters:
(i) The Company and each of its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation; has full corporate power and authority to
conduct all the activities conducted by it, to own or lease all the assets
owed or leased by it and to conduct its business as described in the
Registration Statement and Prospectus; and is duly licensed or qualified to
do business and is in good standing as a foreign corporation in all
jurisdictions in which the nature of the activities conducted by it or the
character of the assets owned or leased by it makes such license or
qualification necessary and where the failure to be licensed or qualified
would have a material and adverse effect on the business or financial
condition of the Company.
(ii) All of the outstanding shares of capital stock of the Company
issued prior to the effective date of the Registration Statement have been
duly authorized, validly issued and are fully paid and nonassessable,
except as disclosed in the Registration Statement and were not issued in
violation of or subject to any preemptive or, to such counsel's knowledge,
similar rights. All of the Firm Shares have been duly authorized, validly
issued and are fully paid and non-assessable, and the Option Shares, if
purchased by the Underwriters will, when so issued and sold, be duly
authorized, validly issued and fully paid and non assessable.
(iii) The specimen certificate evidencing the Common Stock filed as an
exhibit to the Registration Statement is in due and proper form under the
law of the Commonwealth of Massachusetts law, the Shares have been duly
authorized and, when issued and paid for as contemplated by this Agreement,
will be validly issued, fully paid and nonassessable; and no preemptive or
similar rights exist with respect to any of the Shares or the issue and
sale thereof.
(iv) To such counsel's knowledge, the Company does not own or
control, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation or have any equity interest in
any corporation, firm, partnership, joint venture, association or other
entity. All of the outstanding shares of capital stock of each Subsidiary
have been duly authorized and validly issued
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and are fully paid and nonassessable, and owned by the Company free and
clear of all claims, liens, charges and encumbrances; to such counsel's
knowledge, there are no securities outstanding that are convertible into or
exercisable or exchangeable for capital stock of any Subsidiary.
(v) The authorized and outstanding capital stock of the Company is
as set forth in the Registration Statement and the Prospectus in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances or forfeitures, if any, pursuant to this Agreement or pursuant to
reservations, agreements, employee benefit plans or the exercise of
convertible securities or indebtedness, options or warrants referred to in
the Prospectus). To such counsel's knowledge, except as disclosed in or
specifically contemplated by the Prospectus, there are no outstanding
options, warrants of other rights calling for the issuance of, and no
commitments, plans or arrangements to issue, any shares of capital stock of
the Company or any security convertible into or exchangeable or exercisable
for capital stock of the Company. The description of the capital stock of
the Company in the Registration Statement and the Prospectus conforms in all
material respects to the terms thereof.
(vi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened to which the Company or any of its
Subsidiaries is a party or to which any of their respective properties is
subject that are required to be described in the Registration Statement or
the Prospectus but are not so described.
(vii) No consent, approval, authorization or order of, or any filing
or declaration with, any court or governmental agency or body is required
for the consummation by the Company of the transactions on its part
contemplated under this Agreement except such as have been obtained or made
under the Act or the Rules and Regulations and such as may be required under
state securities or Blue Sky laws or the by-laws and rules of the NASD in
connection with the purchase and distribution by the Underwriters of the
Shares.
(viii) The Company has full corporate power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The execution and delivery of this Agreement by the Company, the
compliance by the Company with all of the terms hereof and the consummation
of the transactions contemplated hereby does not contravene any provision of
applicable law or the Articles of Organization or By-Laws of the Company or
any of its Subsidiaries, and to the best of such counsel's knowledge will
not result in the creation or imposition of any lien, charge or encumbrance
upon any of the assets of the Company pursuant to the terms and provisions
of, result in a breach or violation of any of the terms or provisions of, or
constitute a default under, or give any party a right to terminate any of
its obligations under, or result in the acceleration of any obligation
under, any indenture, mortgage, deed of trust, voting trust agreement, loan
agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument known to such
counsel to which the Company or any of its Subsidiaries is a party or by
which the Company, any of its Subsidiaries, or any of their respective
properties is bound or affected, or violate or conflict with (i) any
judgment, ruling, decree or order known to such counsel or (ii) any statute,
rule or regulation of any court or other governmental agency or body,
applicable to the business or properties of the Company or any of its
Subsidiaries.
(x) To such counsel's knowledge, there is no document or contract of
a character required by the Act to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement which is not described or filed as required, and each description
of such contracts and documents that is contained in the Registration
Statement and Prospectus fairly presents in all material respects the
information required under the Act and the Rules and Regulations.
(xi) The statements under the captions "Risk Factors -- Shares
Eligible for Future Sale," "Risk Factors -- Anti-Takeover Provisions Effects
of Issuance of Preferred Stock;" "Management --
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<PAGE>
Company Stock Option Plans," "Certain Transactions," "Description of Capital
Stock," and "Shares Eligible for Future Sale" in the Prospectus, insofar as
the statements constitute a summary of documents referred to therein or
matters of law, are accurate summaries and fairly and correctly present, in
all material respects, the information called for with respect to such
documents and matters (provided, however, that such counsel may rely on
representations of the Company with respect to the factual matters contained
in such statements, and provided further that such counsel shall state that
nothing has come to the attention of such counsel which leads them to
believe that such representations are not true and correct in all material
respects).
(xii) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940,
as amended.
(xiii) To such counsel's knowledge, no holder of securities of the
Company has rights, which have not been waived or satisfied, to require the
registration with the Commission shares of Common Stock or other securities,
as part of the offering contemplated hereby.
(xiv) The Registration Statement has become effective under the Act,
and to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or is pending, threatened or
contemplated.
(xv) The Registration Statement and the Prospectus comply as to form
in all material respects with the requirement of the Act and the Rules and
Regulations (other than the financial statements, schedules and other
financial data contained in the Registration Statement or the Prospectus, as
to which such counsel need express no opinion).
(xvi) Such counsel has participated in the preparation of the
Registration Statement and Prospectus and has no reason to believe that, as
of the Effective Date the Registration Statement, or any amendment or
supplement thereto, (other than the financial statements, schedules and
other financial data contained therein, as to which such counsel need
express no opinion) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus, or any
amendment or supplement thereto, as of its date and the Closing Date and, if
later, the Option Closing Date, contained or contains any untrue statement
of a material fact or omitted or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading (other than the financial statements and
notes thereto, and the schedules and other financial data contained therein,
as to which such counsel need express no opinion).
In rendering such opinion, such counsel shall be limited to the laws of the
United States and the Commonwealth of Massachusetts.
(g) You shall have received on the Closing Date, an opinion of Lappin &
Kusmer, patent counsel for the Company, dated the Closing Date and addressed to
you, as Representatives of the several Underwriters substantially to the effect
that:
(i) Such counsel is generally familiar with the Company's
technology, as reflected in the United States and foreign patents and patent
applications listed on Schedule A to such opinion (the "Patent Portfolio"),
and in particular, with the Company's [technology], used by the Company in
its business and the manner of their use. Such counsel has read the portions
of the Registration Statement and the Prospectus entitled "Risk Factors --
Patents Proprietary Technology" and "Business -- Patents and Proprietary
Rights" (collectively, the "Intellectual Property Portions").
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<PAGE>
(ii) The statements set forth in the Intellectual Property Portions
referred to in (i) above with respect to the Company's patent applications,
issued and allowed patents, and patents licensed to it are, to the best of
such counsel's knowledge, accurate in all material respects to the extent
reflected in the Patent Portfolio;
(iii) To such counsel's best knowledge, the patent applications listed
in the Patent Portfolio (the "Applications") have been properly prepared and
filed on behalf of the Company and are being diligently pursued by the
Company, the inventions described in the applications are assigned or
licensed to the Company and no other entity or individual has any rights or
claim in any of the inventions, Applications or any patents to be issued
therefrom.
(iv) To such counsel's best knowledge, there is no pending judicial
or governmental proceedings relating to any of the patents or patent
applications in the Patent Portfolio or any other proprietary information to
which the Company or any Subsidiary is a party of which any property (such
term "property" specifically to include rights pursuant to licenses or
options or other rights to acquire licenses) of the Company or any
Subsidiary is subject, and to such counsel's best knowledge no such
proceedings are threatened or contemplated by governmental authorities or
others, and such counsel is not aware of any pending or threatened action,
suit, or claim by others that the Company is infringing or otherwise
violating any patent rights of others, nor is such counsel aware of any
rights of third parties to, or infringement of, any of the Company's
inventions described in the Applications, issued, approved, or licensed
patents or any trademarks, trade secrets, know-how, or other proprietary
rights of the Company which might have a material adverse effect on the
ability of the Company to conduct its business as described in the
Prospectus.
(v) Except as disclosed in the Prospectus, to such counsel's
knowledge, there is no pending or threatened proceeding or claim that the
manufacture, use or sale of any products, device, instrument, or other
material made or used according to the patents or patent applications of the
Patent Portfolio is an infringement of any valid United States or foreign
patent held by another or a violation of any trade secret rights of another,
nor has such counsel in the course of representing the Company has not
concluded that any patent or trade secret of any third party would be
infringed or violated by such acts;
(vi) The statements contained in the Registration Statement and the
Prospectus, insofar as such statements constitute a summary of the Company's
patents, foreign patents, applications, and foreign applications and
proprietary technology, are in all material respects accurate summaries and
fairly summarize in all material respects the legal matters, documents, and
proceedings relating thereto;
(vii) Such counsel does not know of any contracts or other documents
relating to patents or proprietary information of a character required to be
filed as exhibits to the Registration Statement or the Prospectus or
required to the described in the Registration Statement or the Prospectus
that are not filed or described as required.
(h) The Representatives shall have received an opinion, dated the Closing
Date and the Option Closing Date, from Testa, Hurwitz & Thibeault, LLP, counsel
to the Underwriters, with respect to the Registration Statement, the Prospectus
and this Agreement, which opinion shall be satisfactory in all respects to the
Representatives.
(i) Concurrently with the execution and delivery of this Agreement, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company and its Subsidiaries as required by the
Act and the Rules and Regulations and with respect to certain financial and
other statistical and numerical information contained in the Registration
Statement. At the Closing Date and, as to the Option Shares, the Option Closing
Date, the Accountants shall have furnished to the Representatives a letter,
dated the date of its delivery, which shall confirm, on the basis of a review in
accordance with the procedures set forth in the letter from the Accountants,
that nothing has come to their attention during the period from the date of the
letter referred to in the
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<PAGE>
prior sentence to a date (specified in the letter) not more than five days prior
to the Closing Date and the Option Closing Date, as the case may be, which would
require any change in their letter dated the date hereof if it were required to
be dated and delivered at the Closing Date and the Option Closing Date.
(j) Concurrently with the execution and delivery of this Agreement and at
the Closing Date and, as to the Option Shares, the Option Closing Date, there
shall be furnished to the Representatives a certificate, dated the date of its
delivery, signed by each of the Chief Executive Officer and the Chief Financial
Officer of the Company, in form and substance satisfactory to the
Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, such documents are true and correct in all material respects
and do not omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not untrue or misleading
and (B) in the case of the certificate delivered at the Closing Date and
the Option Closing Date, since the Effective Date no event has occurred as
a result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein not untrue or misleading.
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct.
(iii) Each of the covenants required to be performed by the Company
herein on or prior to the date of such certificate has been duly, timely
and fully performed and each condition herein required to be satisfied or
fulfilled on or prior to the date of such certificate has been duly, timely
and fully satisfied or fulfilled.
(k) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 4(o).
(l) The Shares shall be qualified for sale in such jurisdictions as the
Representatives may reasonably request and each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
or the Option Closing Date.
(m) Prior to the Closing Date, the Shares shall have been duly authorized
for listing on the NNM upon official notice of issuance.
(n) The Company shall have furnished to the Representatives such
certificates, in addition to those specifically mentioned herein, as the
Representatives may have reasonably requested as to the accuracy and
completeness at the Closing Date and the Option Closing Date of any statement in
the Registration Statement or the Prospectus, as to the accuracy at the Closing
Date and the Option Closing Date of the representations and warranties of the
Company herein, as to the performance by the Company of its obligations
hereunder, or as to the fulfillment of the conditions concurrent and precedent
to the obligations hereunder of the Representatives.
6. Indemnification.
(a) The Company will indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each person,
if any, who controls each Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, from and against any and all losses,
claims, liabilities, expenses and damages (including any and all investigative,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted), to
which they, or any of them, may become subject under the Act, the Exchange Act
or other Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, liabilities, expenses or damages
arise out of or are based on any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus, or the
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<PAGE>
omission or alleged omission to state in such document a material fact required
to be stated in it or necessary to make the statements in it not misleading in
the light of the circumstances in which they were made, or arise out of or are
based in whole or in part on any inaccuracy in the representations and
warranties of the Company contained herein or any failure of the Company to
perform its obligations hereunder or under law in connection with the
transactions contemplated hereby; provided, however, that (i) the Company will
not be liable to the extent that such loss, claim, liability, expense or damage
arises out of or is based upon the sale of the Shares in the public offering to
any person by an Underwriter and arises out of or is based on an untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives, on behalf of any Underwriter,
expressly for inclusion in the Registration Statement, the preliminary
prospectus or the Prospectus, or any amendment or supplement thereto, and (ii)
the Company will not be liable to any Underwriter, the directors, officers,
employees or agents of such Underwriter or any person controlling such
Underwriter with respect to any loss, claim, liability, expense, or damage
arising out of or based on any untrue statement or omission or alleged untrue
statement or omission or alleged omission to state a material fact in the
preliminary prospectus which is corrected in the Prospectus if the person
asserting any such loss, claim, liability, charge or damage purchased Shares
from such Underwriter but was not sent or given a copy of the Prospectus at or
prior to the written confirmation of the sale of such Shares to such person. The
Company acknowledges that the statements set forth under the heading
"Underwriting" and "Underwriting Discounts and Commissions" in the preliminary
prospectus and the Prospectus, or any amendment or supplement thereto,
constitute the only information relating to any Underwriter furnished in writing
to the Company by the Representatives on behalf of the Underwriters expressly
for inclusion in the Registration Statement, the preliminary prospectus or the
Prospectus. This indemnity agreement will be in addition to any liability that
the Company might otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who signs the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to each Underwriter, as set forth in
Section 6(a), but only insofar as losses, claims, liabilities, expenses or
damages arise out of or are based on any untrue statement or omission or alleged
untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives, on behalf of such Underwriter, expressly for use in the
Registration Statement, the preliminary prospectus or the Prospectus, or any
amendment or supplement thereto. The Company acknowledges that the statements
set forth under the heading "Underwriting" in the preliminary prospectus and the
Prospectus, or any amendment or supplement thereto, constitute the only
information relating to any Underwriter furnished in writing to the Company by
the Representatives on behalf of the Underwriters expressly for inclusion in the
Registration Statement, the preliminary prospectus or the Prospectus, or any
amendment or supplement thereto. This indemnity will be in addition to any
liability that each Underwriter might otherwise have.
(c) Any party that proposes to assert the right to be indemnified under
this Section 6 shall, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 6, notify each such
indemnifying party in writing of the commencement of such action, enclosing with
such notice a copy of all papers served, but the omission so to notify such
indemnifying party will not relieve it from any liability that it may have to
any indemnified party under the foregoing provisions of this Section 6 unless,
and only to the extent that, such omission results in the loss of substantive
rights or defenses by the indemnifying party. If any such action is brought
against any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and, to
the extent that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly notified,
to assume the defense of the action, with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense, the indemnifying party will not be
liable to the indemnified party for any legal or other expenses except as
provided below and except for the reasonable costs of investigation subsequently
incurred by the indemnified party in connection with the defense. The
indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (i) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (ii)
the indemnified party has reasonably concluded (based on
15
<PAGE>
advice of counsel) that there may be legal defenses available to it or other
indemnified parties that are different from or in addition to those available to
the indemnifying party, (iii) a conflict or potential conflict exists (based on
advice of counsel to the indemnified party) between the indemnified party and
the indemnifying party (in which case the indemnifying party will not have the
right to direct the defense of such action on behalf of the indemnified party)
or (iv) the indemnifying party has not in fact employed counsel to assume the
defense of such action within a reasonable time after receiving notice of the
commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. All such
fees, disbursements and other charges will be reimbursed by the indemnifying
party promptly as they are incurred. Any indemnifying party will not be liable
for any settlement of any action or claim effected without its written consent
(which consent will not be unreasonably withheld).
(d) If the indemnification provided for in this Section 6 is applicable in
accordance with its terms but for any reason is held to be unavailable to or
insufficient to hold harmless an indemnified party under paragraphs (a), (b) and
(c) of this Section 6 in respect of any losses, claims, liabilities, expenses
and damages referred to therein, then each applicable indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted, but after deducting any contribution
received by the Company from persons other than the Underwriters, such as
persons who control the Company within the meaning of the Act, officers of the
Company who signed the Registration Statement and directors of the Company, who
also may be liable for contribution) by such indemnified party as a result of
such losses, claims, liabilities, expenses and damages in such proportion as
shall be appropriate to reflect the relative benefits received by the Company,
on the one hand, and the Underwriters, on the other hand. The relative benefits
received by the Company, on the one hand, and the Underwriters, on the other
hand, shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. If,
but only if, the allocation provided by the foregoing sentence is not permitted
by applicable law, the allocation of contribution shall be made in such
proportion as is appropriate to reflect not only the relative benefits referred
to in the foregoing sentence but also the relative fault of the Company, on the
one hand, and the Underwriters, on the other hand, with respect to the
statements or omissions which resulted in such loss, claim, liability, expense
or damage, or action in respect thereof, as well as any other relevant equitable
considerations with respect to such offering. Such relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Representatives on behalf of the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 6(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 6(d)
shall be deemed to include, for purposes of this Section 6(d), any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6(d), no Underwriter shall be required to contribute
any amount in excess of the underwriting discounts received by it and no person
found guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute as provided in this Section 6(d) are several in proportion to their
respective underwriting obligations and not joint. For purposes of this Section
6(d), any person who controls a party to this Agreement within the meaning of
the Act will have the same rights to contribution as that party, and each
officer of the Company who signed the Registration Statement will have the same
rights to contribution as the Company, subject in each case to the provisions
hereof. Any party entitled to contribution, promptly after receipt of notice of
commencement of any action against any such party in respect of which a claim
for contribution may be made under this Section 6(d), will notify any such party
or parties from whom contribution may be sought, but the omission
16
<PAGE>
so to notify will not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have under this Section 6(d). No
party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent will not be unreasonably
withheld).
(e) The indemnity and contribution agreements contained in this Section 6
and the representations and warranties of the Company contained in this
Agreement shall remain operative and in full force and effect regardless of (i)
any investigation made by or on behalf of the Underwriters, (ii) acceptance of
any of the Shares and payment therefor or (iii) any termination of this
Agreement.
7. Reimbursement of Certain Expenses. In addition to its other obligations
under Section 6(a) of this Agreement, the Company hereby agrees to reimburse on
a quarterly basis the Underwriters for all reasonable legal and other expenses
incurred in connection with investigating or defending any claim, action,
investigation, inquiry or other proceeding arising out of or based upon, in
whole or in part, any statement or omission or alleged statement or omission, or
any inaccuracy in the representations and warranties of the Company contained
herein or failure of the Company to perform its or their respective obligations
hereunder or under law, all as described in Section 6(a), notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section 7 and the possibility that such payment might
later be held to be improper; provided, however, that, to the extent any such
payment is ultimately held to be improper, the persons receiving such payments
shall promptly refund them.
8. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time on or prior to the Closing Date (or,
with respect to the Option Shares, on or prior to the Option Closing Date), by
notice to the Company from the Representatives, without liability on the part of
any Underwriter to the Company if, prior to delivery and payment for the Firm
Shares or Option Shares, as the case may be, in the reasonable judgment
of the Representatives, (i) trading in any of the equity securities of the
Company shall have been suspended by the Commission or by The Nasdaq National
Stock Market, (ii) trading in securities generally on The Nasdaq National Stock
Market shall have been suspended or limited or minimum or maximum prices shall
have been generally established on such exchange, or additional material
governmental restrictions, not in force on the date of this Agreement, shall
have been imposed upon trading in securities generally by such exchange or by
order of the Commission or any court or other governmental authority, (iii) a
general banking moratorium shall have been declared by either Federal or New
York State authorities or (iv) any material adverse change in the financial or
securities markets in the United States or in political, financial or economic
conditions in the United States or any outbreak or material escalation of
hostilities or other calamity or crisis shall have occurred, the effect of which
is such as to make it, in the sole judgment of the Representatives,
impracticable or inadvisable to proceed with completion of the public offering
or the delivery of and payment for the Shares.
If this Agreement is terminated pursuant to Section 9 hereof, the Company
shall have no liability to any Underwriter except as provided in Sections 4(j),
7 and 8 hereof; but, if for any other reason the purchase of the Shares by the
Underwriters is not consummated or if for any reason the Company shall be unable
to perform its obligations hereunder, the Company will reimburse the several
Underwriters for all out-of-pocket expenses (including the fees, disbursements
and other charges of counsel to the Underwriters) incurred by them in connection
with the offering of the Shares.
9. Substitution of Underwriters. If any one or more of the Underwriters
shall fail or refuse to purchase any of the Firm Shares which it or they have
agreed to purchase hereunder, and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate number of Firm Shares, the other
Underwriters shall be obligated, severally, to purchase the Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase, in the proportions which the number of Firm Shares which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
number of Firm Shares which all such non-defaulting Underwriters have so agreed
to purchase, or in such other proportions as the Representatives may specify;
provided that in no event shall the maximum number of Firm Shares which any
Underwriter has become obligated to purchase pursuant to Section 1 be increased
pursuant to this Section 10 by more than one-ninth of such number of Firm Shares
without the prior written consent of such Underwriter. If any
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<PAGE>
Underwriter or Underwriters shall fail or refuse to purchase any Firm Shares and
the aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase exceeds one-tenth of the
aggregate number of the Firm Shares and arrangements satisfactory to the
Representatives and the Company for the purchase of such Firm Shares are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter and the Company for the
purchase or sale of any Shares under this Agreement. In any such case either the
Representatives or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Any action taken pursuant to
this Section 10 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
10. Miscellaneous. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the office of the Company, Photoelectron
Corporation, 5 Forbes Road, Lexington, Massachusetts 02173, Attention: Chief
Executive Officer, with a copy to Daniel Avery, Esquire, Goulston & Storrs,
P.C., 400 Atlantic Avenue, Boston, Massachusetts 02110, or (b) if to the
Underwriters, to the Representatives at the offices of Needham & Company, Inc.,
445 Park Avenue, New York, New York 10022, Attention: Corporate Finance
Department, with a copy to Edwin L. Miller, Jr., Esquire, Testa, Hurwitz &
Thibeault, LLP, 125 High Street, Boston, Massachusetts 02110. Any such notice
shall be effective only upon receipt. Any notice under such Section 8 or 9 may
be made by telex or telephone, but if so made shall be subsequently confirmed in
writing.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, and the controlling persons, directors and officers
referred to in Section 6, and their respective successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" as used in this Agreement shall
not include a purchaser, as such purchaser, of Shares from any of the several
Underwriters.
Any action required or permitted to be made by the Representatives under
this Agreement may be taken by them jointly or by Needham & Company, Inc.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and to be performed
entirely within such State.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby waive any right they may have
to a trial by jury in respect of any claim based upon or arising out of this
Agreement or the transactions contemplated hereby.
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Please confirm that the foregoing correctly sets forth the agreement among
the Company and the several Underwriters.
Very truly yours,
Photoelectron Corporation
By:
----------------------------
Title:
Confirmed as of the date first
above mentioned:
Needham & Company, Inc.
Dain Bosworth Incorporated
Acting on behalf of themselves
and as the Representatives of
the other several Underwriters
named in Schedule I hereto.
By: NEEDHAM & COMPANY, INC.
By:
---------------------------
Title:
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SCHEDULE I
UNDERWRITERS
Number of
Firm
Shares
Underwriters to be Purchased
- ------------ ---------------
Needham & Company, Inc..............................
Dain Bosworth Incorporated..........................
________
Total.........................................
========
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SCHEDULE II
FORM OF LOCK-UP AGREEMENT
[AND DIRECTORS, OFFICERS AND STOCKHOLDERS
OF THE COMPANY WHO SHALL SIGN SUCH AGREEMENT]
The undersigned is a holder of securities of [Issuer Name], a ______
corporation (the "Company"), and wishes to facilitate the public offering of
shares of the Common Stock (the "Common Stock") of the Company (the "Offering").
The undersigned recognizes that such Offering will be of benefit to the
undersigned.
In consideration of the foregoing and in order to induce you to act as
underwriters in connection with the Offering, the undersigned hereby agrees that
he, she or it will not, without the prior written approval of Needham & Company,
Inc., acting on its own behalf and/or on behalf of other representatives of the
underwriters, directly or indirectly, sell, contract to sell, make any short
sale, pledge, or otherwise dispose of, or enter into any hedging transaction
that is likely to result in a transfer of, any shares of Common Stock, options
to acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock of the Company which he, she or it may own,
[exclusive of any shares of Common Stock purchased in connection with the
Company's public offering [or purchased in the public trading market]], for a
period commencing as of the date hereof and ending on the date which is [one
hundred eighty (180)] days after the date of the final Prospectus relating to
the Offering[; provided, however, that the foregoing shall not prohibit any
distribution by a partnership to its partners so long as such partners agree to
be bound by the terms of this Agreement]. The undersigned confirms that he, she
or it understands that the underwriters and the Company will rely upon the
representations set forth in this Agreement in proceeding with the Offering.
The undersigned further confirms that the agreements of the undersigned are
irrevocable and shall be binding upon the undersigned's heirs, legal
representatives, successors and assigns. The undersigned agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent
against the transfer of securities held by the undersigned except in compliance
with this Agreement.
This Agreement shall be binding on the undersigned and his, her or its
respective successors, heirs, personal representatives and assigns.
___________________________
21
<PAGE>
<TABLE>
Exhibit 3.2
[To be filed on or about
the effective date of the
Registration Statement.]
<S> <C>
FEDERAL IDENTIFICATION
NO. 04-3035323
-----------------
- -------- THE COMMONWEALTH OF MASSACHUSETTS
Examiner William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
- -------- (General Laws, Chapter 156B, Section 72)
Name
Approved
We, Peter Oettinger , *Vice President,
---------------------------------------------------------------------
and William O. Flannery ,*Clerk
---------------------------------------------------------------------
of Photoelectron Corporation
--------------------------------------------------------------------------------------------
(Exact name of corporation)
located at 5 Forbes Road, Lexington, MA 02173
-------------------------------------------------------------------------------------
(Street address if corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
III
-----------------------------------------------------------------------------------------------
(Number those articles 1, 2, 3, 4, 5 and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held on, December 3, 1996, by vote of:
---------- ----
Common Stock and Preferred Stock,
6,885,791 shares of voting together as a single class* of 8,969,332 shares outstanding.
------------------- ---------------------------------- -------------------
(type, class & series, if any)
_____________ shares of _______________________ of _________________shares outstanding, and
(type, class & series, if any)
_____________ shares of _______________________ of ____________________shares outstanding.
(type, class & series, if any)
C [_]
P [_]
M [_] /1**/being at least a majority of each type, class or series outstanding and entitled to vote thereon:
R.A. [_]
*Preferred Stock and Common Stock votes together as a single class per Articles of the Corporation.
*Delete the inapplicable words. **Delete the inapplicable clause.
/1/For amendments adopted pursuant to Chapter 156B, Section 70.
/2/For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any article or item on this form is insufficient, additions shall be set
forth on one side only of separate 8 1/2 x 11 sheets of paper with a left margin of at least 1 inch.
Additions to more than one article may be made on a single sheet so long as each article requiring each
- -------- addition is clearly indicated.
P.C.
</TABLE>
-1-
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Common 7,500,000 $.01
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Preferred: Preferred: 3,750,000 $.01
- ------------------------------------------------------------------------------------------------------------------------------
(1,282,005 Series A)
( 750,000 Series B)
(1,111,111 Series C)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Common 15,000,000 $.01
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Preferred: Preferred: 7,500,000 $.01
- ------------------------------------------------------------------------------------------------------------------------------
(2,564,010 Series A)
(1,500,000 Series B)
(2,222,222 Series C)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Attachment.
-2-
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date: .
-----------------------------------------
SIGNED UNDER THE PENALTIES OF PERJURY, this _____ day of January, 1997.
,*Vice President,
- --------------------------------------------
Peter E. Oettinger
, *Clerk
- --------------------------------------------
William O. Flannery
*Delete the inapplicable words.
-3-
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General laws, Chapter 156B, Section 72)
==========================================================================
I hereby approve the within Articles of Amendment, and the filing fee in
the amount of $_________ having been paid, said article is deemed to have
been filed with me this _____ day of __________________________, 19 ______.
Effective date:
--------------------------------------------------
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Goulston & Storrs, P.C.
--------------------------------------
400 Atlantic Avenue
--------------------------------------
Boston, Massachusetts 02110-3333
--------------------------------------
Attention: Lisa Perusse (Telephone 617-482-1776)
-4-
<PAGE>
ATTACHMENT TO ARTICLES OF AMENDMENT
OF
PHOTOELECTRON CORPORATION
DATED JANUARY ___, 1997
VOTED: That Article III and IV of the Articles of Organization of the
Corporation be, and hereby is, amended as follows:
"The total number of shares which the corporation is authorized to issue
is 22,500,000 shares, 15,000,000 of which are classified and designated
as Common Stock, $.01 par value per share, and 7,500,000 of which are
designated as Preferred Stock, $.01 par value per share, of which
Preferred Stock 2,564,010 shares are designated as Series A Convertible
Preferred Stock, 1,500,000 shares are designated as Series B Convertible
Preferred Stock and 2,222,222 shares are designated as Series C
Convertible Preferred Stock."
-5-
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3035323
-----------------
- -------- THE COMMONWEALTH OF MASSACHUSETTS
Examiner William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
- -------- (General Laws, Chapter 156B, Section 72)
Name
Approved
We, Peter Oettinger , *Vice President,
-----------------------------------------------
and William O. Flannery ,*Clerk
-----------------------------------------------
of Photoelectron Corporation
------------------------------------------------------------------
(Exact name of corporation)
located at 5 Forbes Road, Lexington, MA 02173
----------------------------------------------------------
(Street address if corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
III and VI
---------------------------------------------------------------------
(Number those articles 1, 2, 3, 4, 5 and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held
on, December 3, 1996, by vote of:
---------- --
<TABLE>
<CAPTION>
Common Stock and Preferred Stock,
<S> <C> <C>
6,885,791 shares of voting together as a single class* of 8,969,332 shares outstanding.
----------- ---------------------------------- -------------
(type, class & series, if any)
___________ shares of ____________________________ of _________________shares outstanding, and
(type, class & series, if any)
___________ shares of ____________________________ of ____________________shares outstanding.
(type, class & series, if any)
</TABLE>
C [_]
P [_]
M [_] /1/**being at least a majority of each type, class or series
R.A.[_] outstanding and entitled to vote thereon:
*Preferred Stock and Common Stock votes together as a single class
per Articles of the Corporation.
*Delete the inapplicable words. **Delete the inapplicable clause.
/1/For amendments adopted pursuant to Chapter 156B, Section 70.
/2/For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any article or item on this form
is insufficient, additions shall be set forth on one side only of
separate 8 1/2 x 11 sheets of paper with a left margin of at least
1 inch. Additions to more than one article may be made on a single
sheet so long as each article requiring each addition is clearly
- -------- indicated.
P.C.
-1-
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ---------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF PAR
SHARES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Common 15,000,000 $.01
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Preferred: Preferred: 7,500,000 $.01
- ---------------------------------------------------------------------------------
(2,564,010 Series A)
(1,500,000 Series B)
(2,222,222 Series C)
- ---------------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ---------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF PAR
SHARES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Common 7,500,000 $.01
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Preferred: Preferred: 3,750,000 $.01
- ---------------------------------------------------------------------------------
(1,282,005 Series A)
( 750,000 Series B)
(1,111,111 Series C)
- ---------------------------------------------------------------------------------
</TABLE>
See Attachment.
-2-
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date: .
-----------------------------------------
SIGNED UNDER THE PENALTIES OF PERJURY, this _____ day of January, 1997.
, *Vice President,
- --------------------------------------------
Peter E. Oettinger
, *Clerk
- --------------------------------------------
William O. Flannery
*Delete the inapplicable words.
-3-
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General laws, Chapter 156B, Section 72)
================================================================================
I hereby approve the within Articles of Amendment, and the filing fee in
the amount of $_________ having been paid, said article is deemed to have
been filed with me this _____ day of ________________________, 19 ______.
Effective date:
----------------------------------------------------------
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Goulston & Storrs, P.C.
------------------------------------
400 Atlantic Avenue
------------------------------------
Boston, Massachusetts 02110-3333
------------------------------------
Attention: Lisa Perusse (Telephone 617-482-1776)
-4-
<PAGE>
ATTACHMENT TO ARTICLES OF AMENDMENT
OF
PHOTOELECTRON CORPORATION
DATED JANUARY ___, 1997
VOTED: That Article III and IV of the Articles of Organization of the
Corporation be, and hereby is, amended as follows:
"The total number of shares which the corporation is authorized to issue
is 11,250,000 shares, 7,500,000 of which are classified and designated
as Common Stock, $.01 par value per share, and 3,750,000 of which are
designated as Preferred Stock, $.01 par value per share, of which
Preferred Stock 1,282,005 shares are designated as Series A Convertible
Preferred Stock, 750,000 shares are designated as Series B Convertible
Preferred Stock, and 1,111,111 shares are designated as Series C
Convertible Preferred Stock."
"The foregoing recapitalization is for the purpose of effecting a
1-for-2 reverse stock split of such Common Stock and Preferred Stock."
"The section entitled 'Liquidation Preference' of the corporation's
Series A Convertible Preferred Stock Terms is deleted in its entirety
and the following is inserted in lieu thereof:
'In the event of the liquidation or winding up of the
Company, the holders of the Series A Preferred, in
preference to the holders of Common Stock, will be
entitled to receive an amount equal to $3.00 per share
of Series A Preferred, plus accrued and unpaid dividends,
if any. Any remaining assets will be distributed on a
pro rata basis to the holders of the Series A Preferred
and the Common Stock on an as converted basis.'"
"The existing text of the Section entitled 'Conversion' of the
corporation's Series A Convertible Preferred Stock Terms shall apply to
the period prior to the filing of the Articles of Amendment effecting
this amendment of the Articles
-5-
<PAGE>
of Organization of the Corporation and the following text shall apply
thereafter:
'Each holder of the Series A Preferred will have the
right to convert the Series A Preferred, at the option
of the holder, at any time, into such number of shares
of Common Stock as is obtained by multiplying the number
of shares of Series A Preferred to be converted by the
Series A conversion rate then in effect. The Series A
conversion rate shall be the quotient obtained by
dividing $3.00 by the Series A conversion value then in
effect. The Series A conversion value shall initially
be $3.00 and shall be subject to adjustment as provided
in the section entitled "Antidilution," below.'"
"The section entitled 'Liquidation Preference' of the corporation's
Series B Convertible Preferred Stock Terms is deleted in its entirety
and the following is inserted in lieu thereof:
'In the event of the liquidation or winding up of the
Company, after payment by the Company to the holders
of its Series A Convertible Preferred Stock of the
liquidation preference to which such holders are
entitled, but in preference to the holders of the
Company's Common Stock, the holders of the Series B
Preferred will be entitled to receive an amount equal
to $8.00 per share of the Series B Preferred, plus
accrued and unpaid dividends, if any. Any remaining
assets will be distributed on a pro rata basis to the
holders of the Series A Preferred, the Series B
Preferred and the Common Stock on an as converted
bases.'"
"The existing text of the section entitled 'Conversion' of the corpor-
ation's Series B
-6-
<PAGE>
Convertible Preferred Stock Terms shall apply to the period prior to the
filing of the Articles of Amendment effecting this amendment of the
Articles of Organization of the Corporation and the following text shall
apply thereafter:
'The holders of the Series B Preferred will have the
right to convert the Series B Preferred, at the option
of the holder, at any time, into such number of shares
of Common Stock as is obtained by multiplying the
number of shares of Series B Preferred to be converted
by the Series B conversion rate then in effect. The
Series B conversion rate shall be the quotient obtained
by dividing $8.00 by the Series B conversion value then
in effect. The Series B Conversion value shall
initially be $8.00 and shall be subject to adjustment
as provided in the section entitled "Antidilution,"
below. The Series B Preferred will be automatically
converted into Common Stock, at the then applicable
conversion rate of the Series B Preferred, in the event
of an initial public offering by the Company of shares
of its Common Stock involving gross proceeds of not
less than $5,000,000 and a price per share of Common
Stock of not less than $5.00.'"
"The section entitled 'Liquidation Preference' of the corporation's
Series C Convertible Preferred Stock Terms is deleted in its entirety
and the following is inserted in lieu thereof:
'In the event of the liquidation or winding up of the
Company, the holders of the Series C Preferred, after
payment by the Corporation to the holders of its
Series A Convertible Preferred Stock ("Series A
Preferred") and its Series B Convertible Preferred
Stock ("Series B Preferred") of the liquidation
-7-
<PAGE>
preference to which such holders are entitled, but in
preference to the holders of the Corporation's Common
Stock, will be entitled to receive an amount equal to
$9.00 per share of Series C Preferred, plus accrued
and unpaid dividends, if any. Any remaining assets
will be distributed on a pro rata basis to the holders
of the Common Stock and to holders of the Series A
Preferred, the Series B Preferred and the Series C
Preferred on an as converted basis.'"
"The existing text of the section entitled 'Conversion' of the
corporation's Series C Convertible Preferred Stock Terms shall apply to
the period prior to the filing of the Articles of Amendment effecting
this amendment of the Articles of Organization of the Corporation and
the following text shall apply thereafter:
'The holders of the Series C Preferred will have the
right to convert the Series C Preferred, at the option
of the holder, at any time, into such number of shares
of Common Stock as is obtained by multiplying the
number of shares of Series C Preferred to be converted
by $9.00 and dividing the result by the conversion
price of $9.00 per share or, in case an adjustment of
such price has taken place as provided in the section
entitled "Antidilution," below, at the conversion price
in effect on the date such shares of Series C Preferred
are surrendered for conversion. The Series C Preferred
will be automatically converted into Common Stock, at
the then applicable conversion rate of the Series C
Preferred, in the event of an initial public offering
by the Company of shares of its Common Stock involving
gross proceeds of not less than $5,000,000 and
-8-
<PAGE>
a price per share of Common Stock of not less than
$5.00'"
"The existing text of the section entitled 'Antidilution' of the
corporation's Series C Convertible Preferred Stock Terms shall apply to
the period prior to the filing of the Articles of Amendment effecting
this amendment of the Articles of Organization of the Corporation and
the following text shall apply thereafter:
'The conversion price of the Series C Preferred is
subject to adjustment if, after the original issuance
date of the Series C Preferred, (a) the Company sells
any shares of Common Stock at a price less than the
conversion price in effect immediately prior to the
sale of such Common Stock (which conversion price
shall initially be $9.00), or (b) the Company issues
or sells any options for the purchase of Common Stock
or any securities convertible into or exchangeable for
Common Stock at a price less than the conversion price
in effect immediately prior to such issuance or sale,
or (c) the Company engages in a stock split, recombin-
ation, reorganization or reclassification of its
capital stock. Concurrently with any issuance, stock
split, recombination, reorganization or reclassifi-
cation described in the preceding sentence (a "Dilutive
Event"), the conversion price in effect immediately
prior to such Dilutive Event shall be reduced to a
price (calculated to the nearest cent) determined by
multiplying such conversion price by a fraction,
(i) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior
to such Dilutive Event, plus the number of shares of
Common Stock which the aggregate consideration
received by the
-9-
<PAGE>
Company for the total number of additional shares of
Common Stock so issued in connection with such
Dilutive Event would purchase at such conversion
price, and (ii) the denominator of which shall be
the number of shares of Common Stock outstanding
immediately prior to such Dilutive Event, plus the
number of additional shares of Common Stock so
issued in connection with such Dilutive Event,
provided that the conversion price shall not be
reduced at any time to an amount less than $.01.'"
VOTED: That Article VI (Other Lawful Provisions) of the Articles of
Organization of the Corporation be, and hereby is, amended as follows:
"Paragraph (d) is deleted in its entirety and the following is inserted
in lieu thereof:
(d) The By-laws may provide for the indemnification, to the extent
legally permissible, of directors, officers, employees and other agents
of the corporation and any other person serving the corporation, of
persons who serve at the corporation's request as directors, officers,
employees or other agents of another organization or any other person
who serves such organization at the corporation's request, and of any
person who so serves at the corporation's request in any capacity with
respect to an employee benefit plan."
"New paragraphs (i), (j) and (k) are hereby added as follows:
(i) Except as otherwise provided by law, no stockholder shall have any
right to examine any property or any books, accounts or other writings
of the corporation if there is reasonable ground for belief that such
examination will for any reason be adverse to the interests of the
corporation, and a vote of the directors refusing permission to make
such examination and setting forth that in the opinion of the directors
such examination would be adverse to the interests of the corporation
shall be prima facie evidence that
----- -----
-10-
<PAGE>
such examination would be adverse to the interests of the corporation.
Every such examination shall be subject to such reasonable regulations
as the directors may establish in regard thereto."
"(j) In determining what he reasonably believes to be in the best
interests of the corporation in the performance of his duties as a
director, a director may consider, both in the consideration of tender
and exchange offers, mergers, consolidations and sales of all or
substantially all of the corporation's assets and otherwise, such
factors as the Board of Directors determines to be relevant, including
without limitation:
(i) the long-term and short-term interest of the corporation and
its stockholder, including the possibility that these interests may be
best served by the continued independence of the corporation;
(ii) whether the proposed transaction might violate federal or
state laws;
(iii) if applicable, not only the consideration being offered in a
proposed transaction, in relation to the then current market price for
the outstanding capital stock of the corporation, but also to the market
price for the capital stock of the corporation over a period of years,
the estimated price that might be achieved in a negotiated sale of the
corporation as a whole or in part or through orderly liquidation, the
premiums over market price for the securities or other corporations in
similar transactions, current political, economic and other factors
bearing on securities prices and the corporation's financial condition
and future prospects; and
(iv) the interests of the corporation's employees, suppliers,
creditors and customers, the economy of the state, region and nation,
and community and societal considerations.
-11-
<PAGE>
In connection with any such evaluation, the Board of Directors is
authorized to conduct such investigations and to engage in such legal
proceedings as the Board of Directors may determine."
"(k) The Board of Directors of the corporation is authorized from time
to time to enact by resolution, without additional authorization by the
stockholders of the corporation, By-laws of the corporation, in such
form and with such additional terms as the Board of Directors may
determine, with respect to the matters or corporate proceedings set
forth below:
(a) Regulation of business to be conducted at meetings of stockholders,
including requirements that only such business shall be conducted and
only such proposals shall be acted upon as are directed by the Board of
Directors or as are made by a stockholder who has submitted notice
thereof to the clerk or other designated officer or agent of the
corporation at least that number of days before the meeting of
stockholders at which such proposal is to be made as is specified in
such By-law setting forth such proposal, the reasons therefor, the
identity of the stockholder or stockholders making such proposal, the
number of shares of capital stock which are beneficially owned by them
and any financial interest of such stockholders in such proposal as
specified in such By-law. The presiding officer of the meeting shall, if
the facts warrant, determine and declare to the meeting that proposed
business or a proposal was not made in accordance with the provisions
prescribed by this paragraph or any By-law adopted pursuant hereto, and
if he so determines, he shall so declare to the meeting, and any such
business shall not be transacted or any such proposal shall be
disregarded.
(b) Regulation of the order of business and conduct of stockholder
meetings and the authority of the presiding officer and of the
attendance at annual or special meetings of the stockholders of
-12-
<PAGE>
the corporation, including the limitation of attendance through a ticket
procedure pursuant to which persons who wish to attend such meetings
would be required to provide written notice to the clerk or other
designated officer or agent of the corporation at least that number of
days prior to the date of such meeting specified in such By-law (but not
more than 30 days before such meeting) of their intent to attend in
person, and the clerk or other designated officer or agent of the
corporation would issue a single admission ticket to each holder of
shares of the stock of the corporation entitled to vote at such meeting
and to such other persons as the Board of Directors may direct, and
admission to such meeting would be limited to holders of such tickets
and officers and directors of, counsel to, and the auditors of, the
corporation and, to the extent authorized by the Board of Directors, the
presiding officer at such meeting, employees or other agents of the
corporation. Application of any such By-law, if adopted, in any
particular case would be permitted to be waived by the presiding officer
at such meeting.
In the event that any such By-law is adopted pursuant to this paragraph,
such By-law may only be amended or repealed upon the affirmative vote of
two-thirds of the total number of votes then outstanding represented by
shares of capital stock of the corporation entitled to vote generally in
the election of directors, voting together as a single class, at any
regular or special meeting of the stockholders, but only if notice of
the proposed amendment or repeal was contained in the notice of such
meeting."
-13-
<PAGE>
Exhibit 3.3
PHOTOELECTRON CORPORATION
BY-LAWS
TABLE OF CONTENTS
Title Page
Article I - General........................................ 1
Section 1.1. Offices................................. 1
Section 1.2. Seal.................................... 1
Section 1.3. Fiscal Year............................. 1
Article II - Stockholders.................................. 1
Section 2.1. Place of Meeting........................ 1
Section 2.2. Annual Meetings......................... 1
Section 2.3. Special Meetings........................ 2
Section 2.4. Notice of Meetings...................... 2
Section 2.5. Quorum.................................. 2
Section 2.6. Voting.................................. 3
Section 2.7. Inspectors of Election.................. 4
Section 2.8. Action Without Meeting.................. 4
Section 2.9 Business at Stockholder
Meetings................................ 4
Article III - Directors.................................... 5
Section 3.1. Powers.................................. 5
Section 3.2. Number, Election and Term
of Office............................... 5
Section 3.3. Place of Meetings....................... 6
Section 3.4. Annual Meetings......................... 6
Section 3.5. Regular Meetings........................ 6
Section 3.6. Special Meetings........................ 6
Section 3.7. Notice of Meetings...................... 6
Section 3.8. Quorum.................................. 7
Section 3.9. Voting.................................. 7
Section 3.10. Action Without Meeting.................. 7
Section 3.11. Meetings by Telephone Conference
Calls................................... 7
Section 3.12. Resignations............................ 7
Section 3.13. Removal................................. 7
Section 3.14. Vacancies............................... 8
Section 3.15. Compensation of Directors............... 8
Section 3.16. Committees.............................. 8
Section 3.17. Issuance of Stock....................... 8
<PAGE>
-2-
TABLE OF CONTENTS
(continued)
Title Page
Article IV - Officers........................................ 9
Section 4.1. Officers................................. 9
Section 4.2. Election and Term of Office.............. 9
Section 4.3. President................................ 9
Section 4.4. Vice Presidents.......................... 9
Section 4.5. Treasurer and Assistant..................
Treasurer................................ 10
Section 4.6. Clerk and Assistant Clerk................ 10
Section 4.7. Secretary and Assistant..................
Secretary................................ 10
Section 4.8. Resignation.............................. 11
Section 4.9. Removal.................................. 11
Section 4.10. Vacancies................................ 11
Section 4.11. Subordinate Officers..................... 11
Section 4.12. Compensation............................. 11
Article V - Stock............................................ 11
Section 5.1. Stock Certificates....................... 11
Section 5.2. Transfer of Stock........................ 12
Section 5.3. Fixing Date for Determination
of Stockholders' Rights................ 12
Section 5.4. Lost, Mutilated or Destroyed
Certificates........................... 13
Article VI - Miscellaneous Management Provisions............. 13
Section 6.1. Execution of Instruments................. 13
Section 6.2. Corporate Records........................ 14
Section 6.3. Voting of Securities owned
by this Corporation...................... 14
Section 6.4. Conflict of Interest..................... 14
Section 6.5. Indemnification.......................... 15
Article VII - Amendments..................................... 16
Section 7.1. General.................................. 16
Section 7.2. Date of Annual Meeting of
Stockholders........................... 16
Article VIII - [Reserved].................................... 16
<PAGE>
-3-
TABLE OF CONTENTS
(continued)
Title Page
Article IX - Control Share Acquisitions......................... 16
<PAGE>
PHOTOELECTRON CORPORATION
B Y - L A W S
-------------
Article I - General
-------------------
Section 1.1. Offices. The principal office of the corporation shall be
------- --- -------
in Lexington, Massachusetts. The corporation may also have offices at such other
place or places within or without Massachusetts as the Board of Directors may
from time to time determine or the business of the corporation may require.
Section 1.2. Seal. The seal of the corporation shall be in the form of
------- --- ----
a circle inscribed with the name of the corporation, the year of its
incorporation and the word "Massachusetts". When authorized by the Board of
Directors and to the extent not prohibited by law, a facsimile of the corporate
seal may be affixed or reproduced.
Section 1.3. Fiscal Year. The fiscal year of the corporation shall be
------- --- ------ ----
the twelve months ending the Saturday nearest December 31 in each year.
Article II - Stockholders,
-------------------------
Section 2.1. Place of Meeting. Meetings of stockholders shall be held
------- --- ----- -- -------
at the principal office of the. corporation or, to the extent permitted by the
Articles of Organization, at such other place within the United States as the
Board of Directors may from time to time designate.
Section 2.2. Annual Meetings. The annual meetings of stockholders shall
------- --- ----- --------
be held at 10:00 a.m., or at such other hour as may from time to time be
designated by the Board of Directors, on the third Wednesday in May of each
year, beginning in 1989, or, if a legal holiday, on the next succeeding full
business day, for the purpose of electing a Board of Directors and transacting
such other business as may properly be brought before such meeting. At the
annual meeting any business may be transacted whether or not the notice of such
meeting shall have contained a reference thereto, except where such a reference
is required by law, the Articles of Organization or these By-laws. If the annual
meeting is not held on the date determined in accordance with this Section, a
special meeting in lieu of
<PAGE>
-2-
the annual meeting may be held with all the force and effect of an annual
meeting.
Section 2.3. Special Meetings. Special meetings of stockholders may be
------- --- ------- --------
called by the President or by the Board of Directors, and shall be called by the
Clerk or, in case of death, absence, incapacity or refusal of the Clerk, by any
other officer, upon written application of one or more stockholders who hold at
least 40% in interest of the capital stock entitled to vote at the meeting.
Application to a court pursuant to Section 34(b) of Chapter 156B of the
Massachusetts General Laws requesting the call of a special meeting of
stockholders because none of the officers is able and willing to call such
meeting may be made only by stockholders who hold at least 40% in interest of
the capital stock entitled to vote thereat. Each call of a meeting shall state
the place, date, hour and purpose of the meeting.
Section 2.4. Notice of Meetings. Written or printed notice of each
------- --- ------ -- --------
meeting of stockholders, stating the place, date and hour and the purposes of
the meeting shall be given by the Clerk or other officer calling the meeting at
least seven days, but not more than sixty days, before the meeting to each
stockholder entitled to vote at the meeting or entitled to such notice by
leaving such notice with him at his residence or usual place of business or by
mailing it, postage prepaid, and addressed to the stockholder at his address as
it appears in the records of the corporation. No notice need be given to any
stockholder if he, or his authorized attorney, waives such notice by a writing
executed before or after the meeting and filed with the records of the meeting
or by his presence, in person or by proxy, at the meeting. Any person authorized
to give notice of any such meeting may make affidavit of such notice, which, as
to the facts therein stated, shall be conclusive. It shall be the duty of every
stockholder to furnish to the Clerk of the corporation or to the transfer agent,
if any, of the class of stock owned by him, his current post office address.
Section 2.5. Quorum. At all meetings of stockholders the holders of a
------- --- ------
majority in interest of all capital stock entitled to vote at such meeting or,
if two or more classes of stock are issued, outstanding and entitled to vote as
separate classes, a majority in interest of each class, present in person or
represented by proxy, shall constitute a quorum, except when a larger quorum is
required by law, by the Articles of Organization or by these By-laws. The
<PAGE>
-3-
announcement of a quorum by the officer presiding at the meeting shall
constitute a conclusive determination that a quorum is present. The absence of
such an announcement shall have no significance. Shares of its own stock held by
the corporation or held for its use and benefit shall not be counted in
determining the total number of shares outstanding at any particular time. If a
quorum is not present or represented, the stockholders present or represented
and entitled to vote at such meeting, by a majority vote, may adjourn the
meeting from, time to time, without notice other than announcement at the
meeting until a quorum is present or represented. At any adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted if the meeting had been held as originally
called. The stockholders present at a duly organized meeting may continue to
transact business until adjournment notwithstanding the withdrawal of one or
more stockholders so as to leave less than a quorum.
Section 2.6. Voting. Except as otherwise provided by law or the Articles
------- --- ------
of Organization, at all meetings of stockholders each stockholder shall have one
vote for each share of stock entitled to vote and registered in his name and a
proportionate vote for a fractional share. Any stockholder may vote in person or
by proxy dated not more than six months prior to the meeting and filed with the
Clerk of the meeting. Every proxy shall be in writing, subscribed by a
stockholder or his authorized attorney-in-fact, and dated. A proxy with respect
to stock held in the name of two or more persons shall be valid if executed by
any one of them unless at or prior to exercise of the proxy the corporation
receives a specific written notice to the contrary from any one of them. No
proxy shall be valid after the final adjournment of the meeting. Voting on all
matters, including the election of directors, shall be by voice vote unless
voting by ballot is requested by any stockholder. At all meetings of
stockholders, any matter put to a vote of stockholders shall be determined by a
vote of a majority of the shares voting on such matter, or, if two or more
classes of stock are entitled to vote as separate classes on such matter, a vote
of a majority of the shares voting of each class, present in person or
represented by proxy, except (i) where a larger vote is required by law, the
Articles of Organization or these By-laws or (ii) in the case of elections of
directors by stockholders, which shall be decided by a vote of a plurality of
shares so voting. The corporation shall not, directly or indirectly vote shares
of its own stock.
<PAGE>
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Section 2.7. Inspectors of Election. Two inspectors may be appointed
------- --- ---------- -- --------
by the Board of Directors before or at each meeting of stockholders, or, if no
such appointment shall have been made, the presiding officer may make such
appointment at the meeting. At the meeting for which they are appointed, such
inspectors shall open and close the polls, receive and take charge of the
proxies and ballots, and decide all questions touching on the qualifications of
voters, the validity of proxies and the acceptance and rejection of votes. If
any inspector previously-appointed shall fail to attend or refuse or be unable
to serve, the presiding officer shall appoint an inspector in his place.
Section 2.8. Action Without Meeting. Any action which may be taken by
------- --- ------ ------- -------
stockholders may be taken without a meeting if all stockholders entitled to vote
on the matter consent to the action in writing and the written consents are
filed with the records of the meetings of stockholders. Such consents shall be
treated for all purposes as a vote at a meeting.
Section 2.9. Business at Stockholder Meetings. Unless otherwise
------- --- -------- -- ----------- --------
determined by the Board of Directors prior to a meeting of the stockholders, the
officer presiding at such meeting, determined in accordance with these By-laws,
shall determine the order of business and shall have the authority in his
discretion to regulate and conduct of such meeting, including, without
limitation, to impose restrictions on the persons (other than stockholders of
the corporation or their duly appointed proxies) who may attend such meeting, to
regulate and restrict the making of statements or asking of questions at such
meeting and to cause the removal from such meeting of any person who has
disrupted or appears likely to disrupt the proceedings at such meeting. At a
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before a
meeting of stockholders, business must be (a) specified in the notice (or any
supplement thereto) given as provided in these By-laws, (b) otherwise properly
brought before the meeting by or at the direction of a majority of the Board of
Directors then in office or (c) otherwise properly brought before the meeting by
a stockholder. For business to be properly brought before a meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Clerk of the corporation and the stockholder must be a stockholder of record
at the time such notice is given. Except as may otherwise be required by law, to
be timely, a stockholder's
<PAGE>
-5-
notice must be delivered to or mailed and received at the principal executive
offices of the corporation, not fewer than 60 days nor more than 90 days prior
to the meeting; provided, however, that in the event that the date of the
-------- -------
meeting is not publicly announced by the corporation by mail, press release or
otherwise more than 70 days prior to the meeting, notice by the stockholder to
be timely must be delivered to the Clerk of the corporation not later than the
close of business on the tenth day following the day on which such announcement
of the date of the meeting was made. A stockholder's notice to the Clerk shall
set forth as to each matter such stockholder purposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
meeting and the reasons for conducting such business at the meeting, (b) the
name and address, as they appear on the corporation's books, of such stockholder
proposing such business, (c) the class and number of shares of the corporation
which are beneficially owned by such stockholder and (d) any material financial
interest of the stockholder in such business. Notwithstanding anything in the
By-laws to the contrary, no business shall be conducted at any meeting except in
accordance with the procedures set forth in this Section. The chairman of the
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting and in accordance with the
provisions of this Section, and if he should so determine, he shall so declare
to the meeting and any such business not properly brought before the meeting
shall not be transacted. Notwithstanding the foregoing provisions of this
Section, a stockholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Section.
Article III - Directors
-----------------------
Section 3.1. Powers. Except as otherwise provided by law, the Articles
------- --- ------
of Organization or these By-laws, the business of the corporation shall be
managed by a Board of Directors who may exercise all the powers of the
corporation.
Section 3.2. Number, Election and Term of Office. The Board of
------- --- ------ -------- --- ---- -- ------
Directors shall consist of not less than one nor more than seven directors.
Within the limits specified, the number of directors shall be determined (a) by
a vote of the stockholders at the annual meeting, or (b) by a vote of the
stockholders at a special meeting called for the purpose by
<PAGE>
-6-
the Board of Directors, or (c) by vote of the Board of Directors. Except for the
initial directors and except as provided in Section 3.14, the directors shall be
elected at the annual meeting of the stockholders or at a special meeting. All
directors shall hold office until the following annual meeting or special
meeting in lieu of the annual meeting and until their successors are chosen and
qualified.
Section 3.3. Place of Meetings. Meetings of the Board of Directors may
------- --- ----- -- --------
be held at any place within or without the Commonwealth of Massachusetts.
Section 3.4. Annual Meetings. A meeting of the Board of Directors for
------- --- ------ --------
the election of officers and the transaction of general business shall be held
each year beginning in 1988, at the place of and immediately after the final
adjournment of the annual meeting of stockholders or the special meeting in lieu
of the annual meeting. No notice of such annual meeting need be given.
Section 3.5. Regular Meetings. Regular meetings of the Board of
------- --- ----- -- -------
Directors may be held, without notice, at such time and place as the Board of
Directors may determine. Any director not present at the time of the
determination shall be advised, in writing, of any such determination.
Section 3.6. Special Meetings. Special meetings of the Board of
------- --- ------- --------
Directors, including meetings in lieu of the annual or regular meetings, may be
held upon notice at any time upon the call of the President and shall be called
by the President or the clerk or, in case of the death, absence, incapacity or
refusal of the Clerk, by any other officer, upon written application, signed by
any two directors, stating the purpose of the meeting.
Section 3.7. Notice of Meetings. Wherever notice of any meetings of the
------- --- ------ -- --------
Board of Directors is required by these By-laws or by vote of the Board of
Directors, such notice shall state the place, date and hour of the meeting and
shall be given to each director by the President, Clerk or other officer calling
the meeting at least two days prior to such meeting if given in person by
telephone or by telecopy or at least four days prior to meeting if given by
mail. Notice shall be deemed to have been duly given, if by mail, by depositing
the notice in the post office as a first class letter, postage prepaid, or, if
by telecopy, by completing the telecopier transmission and receiving an answer
back, the letter or telecopy being addressed to the director at
<PAGE>
-7-
his last known mailing address as it appears on the books of the corporation. No
notice need be given to any director who by a writing executed before or after
the meeting and filed with the records of the meeting or by his attendance at
the meeting without protesting at or before the commencement of the meeting the
lack of notice to him. No notice of adjourned meetings of the Board of Directors
need be given.
Section 3.8. Quorum. At all meetings of the Board of Directors, a
------- --- ------
majority of the directors then in office shall constitute a quorum. If a quorum
is not present, those present may adjourn the meeting from time to time until a
quorum is obtained. At any adjourned meeting at which a quorum shall be present,
any business may be transacted which might have been transacted if the meeting
had been held as originally called.
Section 3.9. Voting. At any meeting of the Board of Directors, the vote
------- --- ------
of a majority of those present shall decide any matter except as otherwise
provided by law, the Articles of Organization or these By-laws.
Section 3.10. Action Without Meeting. Any action which may be taken at
------- ---- ------ ------- -------
any meeting of the Board of Directors may be taken without a meeting if all the
directors consent to the action in writing and the written consents are filed
with the records of the meetings of the Board of Directors. Such consents shall
be treated for all purposes as a vote at a meeting.
Section 3.11. Meetings by Telephone Conference Calls. Directors or
------- ---- -------- -- --------- ---------- -----
members of any committee designated by the Board of Directors may participate in
a meeting of the Board of Directors or such committee by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other at the same time and
participation by such means shall constitute presence in person at a meeting.
Section 3.12. Resignations. Any director may resign by giving written
------- ---- ------------
notice to the President or Clerk. Such resignation shall take effect at the time
or upon the event specified therein, or, if none is specified, upon receipt.
Unless otherwise specified in the resignation, its acceptance shall not be
necessary to make it effective.
Section 3.13. Removal. A director may be removed from office with or
------- ---- -------
without cause by vote of the holders of
<PAGE>
-8-
a majority interest of the stock entitled to vote in the election of such
director and may be removed from office with cause by a vote of a majority of
the directors then in office. A director may be removed for cause only after
reasonable notice and opportunity to be heard before the body proposing to
remove him.
Section 3.14. Vacancies. In the event of a vacancy in the Board of
------- ---- ---------
Directors, by reason of an enlargement of the Board of Directors or otherwise,
the remaining directors, by majority vote, may elect a director to fill such
vacancy and may exercise the powers of the full Board of Directors until the
vacancy is filled.
Section 3.15. Compensation of Directors. Directors may be paid such
------- ---- ------------ -- ---------
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
Section 3.16. Committees. The Board of Directors may, by vote of a
------- ---- ----------
majority of the directors then in office, appoint from their number one or more
committees and delegate to such committees some or all of their powers to the
extent permitted by law, the Articles of Organization or these By-laws. Except
as the Board of Directors may otherwise determine, any such committee shall be
governed in the conduct of its business by the rules governing the conduct of
the business of the Board of Directors contained in these By-laws and may, by
majority vote of the entire committee, make other rules for the conduct of its
business. The Board of Directors shall have power at any time to fill vacancies
in any such committees, to change its membership or to discharge the committee.
Section 3.17. Issuance of Stock. The Board of Directors shall have
------- ---- -------- -- -----
power to issue and sell or otherwise dispose of such shares of the corporation's
authorized but unissued capital stock to such persons and at such times and for
such consideration, cash, property, services, expenses, or otherwise, and upon
such terms as it shall determine from time to time.
<PAGE>
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Article IV - Officers
---------------------
Section 4.1. Officers. The officers of the corporation shall consist
------- --- --------
of a President, a Treasurer, a Clerk, and such other officers with such other
titles as the Board of Directors may determine including a Chairman of the
Board of Directors, more Vice Presidents, Assistant Treasurers and Assistant
Clerks, and Assistant Secretaries. Any number of offices may be held by the
same person. Any officer may be required to give a bond for the faithful
performance of his duties in such form and with such sureties as the Board of
Directors may determine.
Section 4.2. Election and Term of Office. Except for the initial
------- --- -------- --- ---- -- ------
officers and except as provided in Section 4. 10, the President, Treasurer and
Clerk shall be elected by the Board of Directors at its annual meeting or at the
special meeting held in lieu of the annual meeting and shall hold office until
the following annual meeting of the Board of Directors or the special meeting in
lieu of said annual meeting and until their successors are chosen and qualified.
Other officers may be chosen by the Board of Directors at the annual meeting or
any other meeting and shall hold office for such period as the Board of
Directors may prescribe.
Section 4.3. President. Unless the Board of Directors otherwise
------- --- ---------
determines, the President shall be the chief executive officer of the
corporation. He shall have the general control and management of the
corporation's business and affairs. He need not be a director. Unless there is a
Chairman of the Board, the President shall preside at all meetings of the Board
of Directors and of the stockholders.
Section 4.4. Vice Presidents. The Vice President, or if there be more
------- --- ---------------
than one, the Vice Presidents, shall perform such of the duties of the President
on behalf of the corporation as may be respectively assigned to him or them from
time to time by the Board of Directors or the President. The Board of Directors
may designate a Vice President as the Executive Vice President, and in the
absence or inability of the President to act, such Executive Vice President
shall have and possess all of the powers and discharge all of the duties of the
President, subject to the control of the Board of Directors.
<PAGE>
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Section 4.5. Treasurer and Assistant Treasurer. The Treasurer shall be
------- --- --------- --- --------- ---------
the principal financial officer of the corporation. He shall have custody and
control over all funds and securities of the corporation, maintain full and
adequate accounts of all moneys received and paid by him on account of the
corporation and, subject to the control of the Board of Directors, discharge all
duties incident to the office of Treasurer. Any Assistant Treasurer shall
perform such of the duties of the Treasurer and such other duties as the Board
of Directors, the President or the Treasurer may designate. The Treasurer shall
have authority, in connection with the normal business of the corporation, to
sign contracts, bids, bonds, powers of attorney and other documents when
required.
Section 4.6. Clerk and Assistant Clerk. The Clerk shall be the
------- --- ----- --- --------- -----
principal recording officer of the corporation. He shall record all proceedings
of the stockholders and discharge all duties incident to the office of Clerk.
Unless a Secretary is appointed by the Board of Directors to perform such
duties, the Clerk shall record all proceedings of the Board of Directors and of
any committees appointed by the Board of Directors. Any Assistant Clerk shall
perform such of the duties of the Clerk and such other duties as the Board of
Directors, the President or the Clerk may designate. In the absence of the Clerk
or any Assistant Clerk from any meeting of stockholders, the Board of Directors
or any committee appointed by the Board of Directors, a Temporary Clerk
designated by the person presiding at the meeting shall perform the duties of
the Clerk. The Clerk shall be a resident of the Commonwealth of Massachusetts
unless a resident agent has been appointed by the corporation pursuant to law to
accept service of process.
Section 4.7. Secretary and Assistant Secretary. If appointed by the
------- --- --------- --- --------- ---------
Board of Directors, the Secretary shall record all proceedings of the Board of
Directors and discharge all duties incident to the office of Secretary. Any
Assistant Secretary shall perform such of the duties of the Secretary and such
other duties as the Board of Directors, President or Secretary may designate.
The Board of Directors and any committee appointed by the Board of Directors may
appoint a Secretary and one or more Assistant Secretaries to perform the
functions of the Secretary and Assistant Secretary for such committee.
<PAGE>
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Section 4.8. Resignation. Any officer may resign by giving written
------- --- -----------
notice to the President or Clerk. Such resignation shall take effect at the time
or upon the event specified therein, or, if none is specified, upon receipt.
Unless otherwise specified in the resignation, its acceptance shall not be
necessary to make it effective.
Section 4.9. Removal. An officer may be removed from office with cause,
------- --- -------
after reasonable notice and opportunity to be heard, or without cause, in either
case, by vote of a majority of the directors then in office.
Section 4.10. Vacancies. The Board of Directors may fill any vacancy
------- ---- ---------
occurring in any office for any reason and may, in its discretion, leave
unfilled for such period as it may determine any offices other than those of
President, Treasurer and Clerk.
Section 4.11. Subordinate Officers. The Board of Directors may, from
------- ---- ----------- --------
time to time, authorize any officer to appoint and remove subordinate officers
and to prescribe their powers and duties. The term "subordinate officers" shall
in no event include the President, Treasurer and Clerk.
Section 4.12. Compensation. The Board of Directors may fix the
------------
compensation of all officers of the corporation and may authorize any officer
upon whom the power of appointing subordinate officers may have been conferred
to fix the compensation of such subordinate officers.
Article V - Stock
-----------------
Section 5.1. Stock Certificates. Each stockholder shall be entitled
------- --- ----- ------------
to a certificate or certificates of stock of the corporation in such form as the
Board of Directors may from time to time prescribe. Each certificate shall be
duly numbered and entered in the books of the corporation as it is issued, shall
state the holder's name and the number and the class and the designation of the
series, if any, of his shares, shall be signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer and may, but need not,
be sealed with the seal of the corporation. If any stock certificate is signed
by a transfer agent, or by a registrar, other than a director, officer or
employee of the corporation, the signatures thereon of the officers may be
facsimiles. In case any officer who has signed or whose facsimile signature has
been placed on any certificate shall have ceased to be such
<PAGE>
-12-
officer before such certificate is issued it may nevertheless be issued by the
corporation and delivered with the same effect as if he were such officer at the
time of its issue. Every certificate of stock which is subject to any
restriction on transfer pursuant to the Articles of Organization, the By-laws or
any agreement to which the corporation is a party, shall have the restrictions
noted conspicuously on the certificate and shall also set forth on the face or
back of the certificate either (i) the full text of the restriction, or (ii) a
statement of the existence of such restriction and a statement that the
corporation will furnish a copy thereof to the holder of such certificate upon
written request and without charge. Every certificate issued at a time when the
corporation is authorized to issue more than one class or series of stock shall
set forth upon the face or back of the certificate either (i) the full text of
the preferences, voting powers, qualifications and special and relative rights
of the shares of each class and series, if any, authorized to be issued, as set
forth in the Articles of organization or (ii) a statement of the existence of
such preferences, powers, qualifications and rights, and a statement that the
corporation will furnish a copy thereof to the holder of such certificate upon
written request and without charge.
Section 5.2. Transfer of Stock. Subject to any transfer restrictions
------- --- -------- -- -----
then in force, the shares of stock of the corporation shall be transferable only
upon its books by the holders thereof in person or by their duly authorized
attorneys or legal representatives. Such transfer shall be effected by delivery
of the old certificate, together with a duly executed assignment and power to
transfer endorsed thereon or attached thereto and with such proof of the
authenticity of the signature and such proof of authority to make the transfer
as the corporation or its agents may reasonably require, to the person in charge
of the stock and transfer books and ledgers or to such other person as the Board
of Directors may designate, who shall thereupon cancel the old certificate and
issue a new certificate. The corporation may treat the holder of record of any
share or shares of stock as the owner of such stock, and shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person, whether or not it shall have notice thereof, express or
otherwise.
Section 5.3. Fixing Date for Determination of Stockholders' Rights.
------- --- ------ ---- --- ------------- -- ------------ ------
The Board of Directors may fix in advance a time, not exceeding sixty days
preceding the date
<PAGE>
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of any meeting of stockholders, or the date for the payment of any dividend or
the making of any distribution to stockholders, or the date for the allotment of
rights, or the date when any change or conversion or exchange of capital stock
shall go into effect, or the last date on which the consent or dissent of
stockholders may be effectively expressed for any purpose, as the record date
for determining the stockholders entitled to notice of, and to vote at, such
meeting and any adjournment thereof, to receive such dividend or distribution,
to receive such allotment of rights, or to exercise the rights in respect of any
such change, conversion or exchange of capital stock, or to express such consent
or dissent. In such case only stockholders of record on the date so fixed shall
have such right, notwithstanding any transfer of stock on the books of the
corporation after the record date. In lieu of fixing such record date, the Board
of Directors may close the stock transfer books for all or any part of such
period. In any case in which the Board of Directors does not fix a record date
or provide for the closing of the transfer books, the record date shall be the
thirtieth day next preceding the date of such meeting, the dividend payment or
distribution date, the date for allotment of rights, the date for exercising of
rights in respect of any such change, conversion or exchange of capital stock,
or the date for expressing such consent or dissent, as the case may be.
Section 5.4. Lost, Mutilated or Destroyed Certificates. No certificates
------- --- ---- --------- -- --------- ------------
for shares of stock of the corporation shall be issued in place of any
certificate alleged to have been lost, mutilated or destroyed, except upon
production of such evidence of the loss, mutilation or destruction and upon
indemnification of the corporation and its agents to such extent and in such
manner as the Board of Directors may prescribe and as required by law.
Article VI - Miscellaneous Management Provisions
------------------------------------------------
Section 6.1. Execution of Instruments. Except as otherwise provided in
------- --- --------- -- -----------
these By-laws or as the Board of Directors may generally or in particular cases
authorize the execution thereof in some other manner, all instruments,
documents, deeds, leases, transfers, contracts, bonds, notes, checks, drafts and
other obligations made, accepted or endorsed by the corporation shall be signed
by the President or a Vice President, or by the Treasurer or an Assistant
Treasurer, or by the Clerk. Facsimile signatures may be used in the manner and
to the extent authorized generally or in particular cases by the Board of
Directors.
<PAGE>
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Section 6.2. Corporate Records. The original, or attested copies, of
------- --- --------- -------
the Articles of Organization, By-laws, and records of all meetings of
incorporators and stockholders, and the stock and transfer records, which shall
contain the names of all stockholders and the record address and the amount of
stock held by each, shall be kept in the Commonwealth of Massachusetts at the
principal office of the corporation, or at an office of its Clerk, its resident
agent or its transfer agent. The copies and records need not all be kept in the
same office. They shall be available at all reasonable times for inspection by
any stockholder for any proper purpose. They shall not be available for
inspection to secure a list of stockholders or other information for the purpose
of selling such list or information or copies thereof or of using the same for a
purpose other than in the interest of the applicant, as a stockholder, relative
to the affairs of the corporation.
Section 6.3. Voting of Securities owned by this Corporation. Subject
------- --- ------ -- ---------- ----- -- ---- -----------
always to the specific directions of the Board of Directors, (a) any shares or
other securities issued by any other corporation and owned or controlled by this
corporation may be voted in person at any meeting of security holders of such
other corporation by the President of this corporation if he is present at such
meeting, or in his absence by the Treasurer of this corporation if he is present
at such meeting, and (b) whenever, in the judgment of the President, it is
desirable for this corporation to execute a proxy or written consent in respect
to any shares or other securities issued by any other corporation and owned by
this corporation, such proxy or consent shall be executed in the name of this
corporation by the President, without the necessity of any authorization by the
Board of Directors, affixation of corporate seal or countersignature or
attestation by another officer, provided that if the President is unable to
execute such proxy or consent by reason of sickness, absence from the United
States or other similar cause, the Treasurer may execute such proxy or consent.
Any person or persons designated in the manner above stated as the proxy or
proxies of this corporation shall have full right, power and authority to vote
the shares or other securities issued by such other corporation and owned by
this corporation the same as such shares or other securities might be voted by
this corporation.
Section 6.4. Conflict of Interest. No contract or other transaction
------- --- -------- -- --------
of the corporation shall, in the absence
<PAGE>
-15-
of fraud, be affected or invalidated by the fact that any stockholder, director
or officer of the corporation or any corporation, firm or association of which
he may be a director, officer, stockholder or member may be a party to or may
have an interest, pecuniary or otherwise, in, any such contract or other
transaction, provided that the nature and extent of his interest was disclosed
to, or known by, the entire Board of Directors before acting on such contract or
other transaction. Except in the case of any contract or other transaction
between the corporation and any other corporation controlling, controlled by or
under common control with the corporation, any director of the corporation who
is also a director, officer, stockholder or member of any corporation, firm or
association with which the corporation proposes to contract or transact any
business, or who has an interest, pecuniary or otherwise, in any such contract
or other transaction, may not be counted in determining the existence of a
quorum at any meeting of the Board of Directors which shall authorize any such
contract or such transaction, and such director shall not participate in the
vote to authorize any such contract or transaction. Any such contract or
transaction may be authorized or approved by a majority of the directors then in
office and not disqualified by this Section 6.4 to vote on such matters, even
though the disinterested directors do not constitute a quorum.
Section 6.5. Indemnification. The corporation shall indemnify each
------- --- ---------------
director and officer against all judgments, fines, settlement payments and
expenses, including reasonable attorneys' fees, paid or incurred in connection
with any claim, action, suit or proceeding, civil or criminal, to which he may
be made a party or with which he may be threatened by reason of his being or
having been a director or officer of the corporation, or, at its request, a
director, officer, stockholder or member of any other corporation, firm or
association of which the corporation is a stockholder or creditor and by which
he is not so indemnified, or by reason of any action or omission by him in such
capacity, whether or not he continues to be a director or officer at the time of
incurring such expenses or at the time the indemnification is made. No
indemnification shall be made hereunder (a) with respect to payments and
expenses incurred in relation to matters as to which he shall be finally
adjudged in such action, suit or proceeding not to have acted in good faith and
in the reasonable belief that his action was in the best interests of the
corporation, or (b) otherwise prohibited by law. The
<PAGE>
-16-
foregoing right of indemnification shall not be exclusive of other rights to
which any director or officer may otherwise be entitled and shall inure to the
benefit of the executor or administrator of such director or officer.
Article VII - Amendments
------------------------
Section 7.1. General. These By-laws may be amended, added to or
------- --- -------
repealed, in whole or in part, (a) by vote of the stockholders at a meeting,
where the substance of the proposed amendment is stated in the notice of the
meeting, or (b) by vote of a majority of the directors then in office, except
that no amendment may be made by the Board of Directors on matters reserved to
the stockholders by law or the Articles of Organization or which changes the
provisions of these By-laws relating to meetings of stockholders, to the removal
of directors or to the requirements for amendment of these By-laws. Notice of
any amendment, addition or repeal of any By-law by the Board of Directors
stating the substance of such action shall be given to all stockholders not
later than the time when notice is given of the meeting of stockholders next
following such action by the Board of Directors. Any By-law adopted by the Board
of Directors may be amended or repealed by the stockholders.
Section 7.2. Date of Annual Meeting of Stockholders. No amendment of
------- --- ---- -- ------ ------- -- ------------
these By-laws changing the date of the annual meeting of stockholders may be
made within sixty days before the date fixed in these By-laws for such meeting.
Notice of such change shall be given to all stockholders at least twenty days
before the new date fixed for the meeting.
Article VIII - [Reserved]
-------------------------
Article IX - Control Share Acquisitions
---------------------------------------
The provisions of Chapter 110D of the Massachusetts General Laws
shall not apply to control share acquisitions (as defined in such Chapter) of
the corporation.
GS1-78908
<PAGE>
Exhibit 4.1
COMMON STOCK
SHARES
NUMBER
PC [LOGO OF PHOTOELECTRON CORPORATION APPEARS HERE]
CUSIP 719320 10 3
SEE REVERSE FOR
CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
is the owner of
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF THE
PAR VALUE OF $.01 EACH OF
---------------------- -----------------------
- -------------------------- PHOTOELECTRON CORPORATION ---------------------------
---------------------- -----------------------
(herein called the "Corporation"), transferable on the books of the Corporation
by the holder hereof in person or by duly authorized attorney upon surrender of
this Certificate properly endorsed. This Certificate and the shares represented
hereby are subject to the laws of the Commonwealth of Massachusetts and to the
Amended and Restated Articles of Organization and the Amended and Restated By-
Laws of the Corporation as from time to time amended. This Certificate is not
valid unless countersigned by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[CORPATE SEAL /s/[SIGNATURE APPEARS HERE] /s/[SIGNATURE APPEARS HERE]
APPEARS HERE]
CHIEF EXECUTIVE OFFICER CLERK
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ..............Custodian................
(Cust) (Minor)
under Uniform Gifts to Minors
Act ...................................
(State)
Additional abbreviations may also be used though not in the above list.
For value received, _________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------------
--------------------------------------------
__________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING ZIP CODE, OF ASSIGNEE)
__________________________________________________________________________
__________________________________________________________________________
___________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________
- -------------------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
- -------------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 5.1
[Letterhead of Goulston & Storrs, P.C.]
January ___, 1997
Photoelectron Corporation
5 Forbes Road
Lexington, MA 02173
Ladies and Gentlemen:
This opinion is furnished to you in connection with a registration
statement on Form S-1 (the "Registration Statement"), filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, for the registration of 2,000,000 shares of Common Stock, $.01 par
value (the "Shares"), of Photoelectron Corporation, a Massachusetts corporation
(the "Company"). The Shares are to be sold pursuant to an underwriting agreement
(the "Underwriting Agreement") to be entered into among the Company, on the one
hand, and Needham & Company, Inc. and Dain Bosworth Incorporated, as
representatives of the several underwriters named in Schedule I to the
Underwriting Agreement, on the other hand.
We have reviewed the corporate proceedings taken by the Board of
Directors of the Company with respect to the authorization and issuance of the
Shares. We have also examined and relied upon originals or copies, certified or
otherwise authenticated to our satisfaction, of all corporate records,
documents, agreements or other instruments of the Company and have made all
investigations of law and have discussed with the Company's officers all
questions of fact that we have deemed necessary or appropriate in connection
with this opinion letter.
We express no opinion as to the applicability of compliance with or
effect of Federal law or the law of any jurisdiction other than the
Commonwealth of Massachusetts. Based upon the foregoing, we are of the opinion
that upon the filing with the Secretary of State of the Commonwealth of
Massachusetts of the Company's Articles of Amendment to the Company's Articles
of Organization in the form approved by the Company's Stockholders on December
3, 1996 the Shares will have been duly authorized and, when issued and sold by
the Company in accordance with the terms of the Underwriting Agreement, will be
validly issued, fully paid and nonassessable.
It is understood that this opinion is to be used only in connection
with the offer and sale of the Shares while the Registration Statement is in
effect.
-1-
<PAGE>
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm in the Prospectus
contained in the Registration Statement under the caption "Legal Matters."
Very truly yours,
DRA/HWW/DMK
-2-
<PAGE>
EXHIBIT 11.1
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A Development Stage Company)
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1995
<S> <C> <C> <C> <C> <C> <C>
Proforma
Computation of Primary Loss Per Share
Net loss ($973,773) ($1,586,239) ($2,267,460) ($2,671,648) ($4,117,158) ($4,117,158)
Shares
Weighted average shares outstanding 747,500 926,146 1,126,500 1,328,992 1,107,310 1,107,310
Add: Shares issuable from assumed exercise
of stock options and warrants and conversion
of other common stock equivalents issued
within one year prior to the filing of this
registration statement 339,823 339,823 339,823 339,823 339,823 339,823
Add: Shares issuable from assumed conversion
of the preferred stock upon closing of
the offering 2,584,545
----------- ------------- ------------- ------------- ------------- -------------
Weighted average common and common
equivalents shares outstanding 1,087,323 1,265,969 1,466,323 1,668,815 1,447,133 4,031,678
----------- ------------- ------------- ------------- ------------- -------------
Loss per share:
Net loss ($.90) ($1.25) ($1.55) ($1.60) ($2.85) ($1.02)
----------- ------------- ------------- ------------- ------------- ------------
Computation of Fully Diluted Loss Per Share
Net loss ($973,773) ($1,586,239) ($2,267,460) ($2,671,648) ($4,117,158) ($4,117,158)
Shares:
Weighted average shares outstanding 747,500 926,146 1,126,500 1,328,992 1,107,310 1,107,310
Add: Shares issuable from assumed exercise
of stock options and warrants and
conversion of other common stock
equivalents 339,823 339,823 339,823 339,823 339,823 339,823
Add: Shares issuable from assumed conversion
of the preferred stock upon closing of
the offering 2,584,545
----------- ------------- ------------- ------------- ------------- ------------
Weighted average common and common
equivalents shares outstanding 1,087,323 1,265,969 1,466,323 1,668,815 1,447,133 4,031,678
----------- ------------- ------------- ------------- ------------- ------------
Loss per share:
Net loss ($.90) ($1.25) ($1.55) ($1.60) ($2.85) ($1.02)
----------- ------------- ------------- ------------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended
September 28, 1996
Nine Months Ended Pro Forma
-------------------------------------- -----------------
September 30, 1995 September 28, 1996
<S> <C> <C> <C>
Computation of Primary Loss Per Share
Net loss ($2,331,333) ($3,319,169) ($3,319,169)
Shares
Weighted average shares outstanding 1,106,001 1,579,506 1,579,506
Add: Shares issuable from assumed exercise
of stock options and warrants and conversion
of other common stock equivalents issued
within one year prior to the filing of this
registration statement 339,823 339,823 339,823
Add: Shares issuable from assumed conversion
of the preferred stock upon closing of
the offering 2,583,295
-------------- -------------- --------------
Weighted average common and common
equivalents shares outstanding 1,445,824 1,919,329 4,502,624
-------------- -------------- --------------
Loss per share:
Net loss ($1.61) ($1.73) ($.74)
-------------- -------------- --------------
Computation of Fully Diluted Loss Per Share
Net loss ($2,331,333) ($3,319,169) ($3,319,169)
Shares:
Weighted average shares outstanding 1,106,001 1,579,506 1,579,506
Add: Shares issuable from assumed exercise
of stock options and warrants and
conversion of other common stock
equivalents 339,823 339,823 339,823
Add: Shares issuable from assumed conversion
of the preferred stock upon closing of the
offering 2,583,295
-------------- -------------- --------------
Weighted average common and common
equivalents shares outstanding 1,445,824 1,919,329 4,502,624
-------------- -------------- --------------
Loss per share:
Net loss ($1.61) ($1.73) ($.74)
-------------- -------------- --------------
$0.00 $0.00 $0.00
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and all references to our Firm included in or made a part of
Photoelectron Corporation's Registration Statement on Form S-1.
/s/ Arthur Andersen LLP
-----------------------------
Arthur Andersen LLP
Boston, Massachusetts
January 14, 1997
