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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 1, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21667
PHOTOELECTRON CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3035323
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5 FORBES ROAD, LEXINGTON, MASSACHUSETTS 02421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (781) 861-2069
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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<S> <C>
Common Stock, $.01 Par Value American Stock Exchange
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 16, 2000, there were 7,843,454 outstanding shares of common
stock. The aggregate market value of shares of Common Stock held by non-
affiliates of the registrant on that date, based on the last sale price for
such stock on that date as reported by the American Stock Exchange, was
$24,224,650.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders of
the Company on May 17, 2000 are incorporated by reference into Part III of
this Report.
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PHOTOELECTRON CORPORATION
1999 ANNUAL REPORT ON FORM 10-K
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Item Page
Number Number
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<S> <C> <C>
PART I
1. Business.............................................................................. 3
2. Properties............................................................................ 17
3. Legal Proceedings..................................................................... 17
4. Submission of Matters to a Vote of Security Holders................................... 17
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters................. 18
6. Selected Financial Data............................................................... 19
7. Management's Discussion and Analysis of Financial Condition and Results of Operation.. 19
8. Financial Statements and Supplementary Data........................................... 23
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 23
PART III
10. Directors and Executive Officers of the Registrant.................................... 23
11. Executive Compensation................................................................ 23
12. Security Ownership of Certain Beneficial Owners and Management........................ 23
13. Certain Relationships and Related Transactions........................................ 23
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 24
</TABLE>
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this report, including, without limitation,
statements containing the words "expects," "anticipates," "believes," and
words of similar import, constitute "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward
looking statements are subject to various risks and uncertainties, including,
without limitation, those referred to in this Report, that could cause actual
future results and events to differ materially from those currently
anticipated. Readers are cautioned not to place undue reliance on these
forward looking statements.
PART I
Item 1. Business.
Photoelectron Corporation (the "Company") does not expect to be able to
generate sufficient revenue in the near future for it to be able to continue
operations without raising additional capital. Accordingly, the Company is
currently considering alternatives by which to raise additional capital.
Should the necessary funds not be available to the Company on acceptable
terms, there is substantial doubt that the Company will be able to continue as
a going concern.
Overview
The Company was founded in 1989 and soon after focused its development
efforts on miniature x-ray technology. From this technology, the Company
developed its PRS(TM) system. The Company's latest commercial version of the
PRS system is the PRS400(TM) system. The key component of the PRS system is a
miniature x-ray source, designed to be placed inside a tumor or the residual
surgical cavity after tumor removal. The x-ray source generates x-rays at the
tip of a long, needle-like probe that can be placed directly into the target
area. The PRS system produces low energy photons that are rapidly absorbed in
the tissue immediately surrounding the probe, minimizing irradiation of
surrounding healthy body tissue. The PRS system is protected by thirteen U.S.
patents, with an additional nine patents pending. During 1999, the PRS400
system was integrated into new treatment systems designed to address an
expanding range of clinical applications. These new products, known as the
ACCUBEAM(TM) system and the INTRABEAM(TM) system, have been developed in
collaboration with Carl Zeiss Oberkochen ("Carl Zeiss"), the Company's
strategic partner.
In August 1999, the Company entered into a strategic alliance with Carl
Zeiss, an international technology leader whose medical systems division
specializes in high technology equipment such as surgical microscopes for
various medical disciplines and state-of-the-art image-guided surgery
equipment. The Company appointed Carl Zeiss as its exclusive distributor for
the PRS system throughout the world (except for Japan where Toshiba Medical
Systems is the Company's distributor of the PRS system) for intracranial
applications and spinal radiotherapy and as its non-exclusive distributor for
the PRS system in the same territory for all other clinical applications. In
addition, Carl Zeiss agreed to assist the Company in the development of new
intraoperative radiotherapy products and to provide service and support for
the Company's products. The alliance with Carl Zeiss gives the Company access
to a global sales force with an established record of sales of high technology
equipment within the medical field.
In November 1999, the Company announced the launch of two products jointly
developed with Carl Zeiss: (i) the ACCUBEAM system, a device for the treatment
of brain tumors that combines the Company's miniature x-ray source with Carl
Zeiss's stereotactic guided, motorized MKM(TM) surgical microscope system; and
(ii) the INTRABEAM system, a multi-purpose system for intraoperative
radiotherapy that combines the Company's miniature x-ray source with an
articulated support stand from Carl Zeiss.
In addition to establishing its strategic alliance with Carl Zeiss, the
Company joined the Surgical Navigation Network ("SNN"), a consortium of
medical equipment companies that has established a shared, open-standard,
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image-based software system to support their products. By participating in the
SNN consortium and utilizing its software system, the Company can integrate
its miniature x-ray source with the products of other SNN members, including
Philips, Agfa IMPAX, Aesculap and XLTEK. In addition, the SNN participants
agree to promote each other's products on a non-exclusive basis, thus
enhancing the Company's commercial visibility. The software used by SNN is
written and supported by Software Navigation Specialists ("SNS"). SNS is
currently working to integrate the Company's technology into the software
platform shared by the other SNN member companies.
The primary focus of the Company's initial clinical development was the
treatment of solid brain tumors using stereotactic guidance systems. Surgeons
at the Massachusetts General Hospital (the "MGH") gave assistance and advice
on clinical applications, and the first patient was treated at the MGH in
1992. From 1992 to 1998, approximately 300 patients were successfully treated
at hospitals in the United States, Europe and Japan. In 1998, the United
States Food and Drug Administration (the "FDA") approved the Company's
application for market clearance under Section 510(k) of the Federal Food,
Drug and Cosmetic Act, as amended (the "FDC Act") for intracranial treatment
of tumors, and in 1999, the Company received Section 510(k) market clearance
to use the PRS400 system for the treatment of tumors anywhere in the body. The
British Standards Institute has issued certification necessary to affix the CE
marks to the PRS400 system, which permits it to be distributed in the European
Union. In Japan, the clinical trial phase necessary for government approval
has been completed under the guidance of Toshiba Medical Systems and the
Company anticipates receiving full approval to market the PRS400 system in
fiscal 2000.
After completing the development of the PRS400 system, the Company's focus
turned toward the development of tools and mechanisms to expand the
established range of clinical applications. Treatments to date have included
brain, breast, colo-rectal, skin and gynecological tumors. More recently, the
Company, together with Carl Zeiss, has developed the ACCUBEAM system for
intraoperative radiotherapy in the brain, head and neck, and spine, and the
INTRABEAM system for intraoperative radiotherapy in other body sites. Both the
ACCUBEAM and INTRABEAM systems incorporate the Company's miniature x-ray
technology. The Company has also begun to explore applications of the
technology to treat non-malignant diseases, including the treatment of
ophthalmic diseases such as Age-Related Macular Degeneration.
In 1999, the Company completed its development program of a range of
applicators designed to ensure a uniform radiation dose when the miniature x-
ray source is used inside a tumor cavity after surgical resection of a tumor.
In September 1999, the Company received clearance under Section 510(k) of the
FDC Act for use of these applicators.
In November 1999, the Company entered into a loan agreement with PYC
Corporation, a Liberian corporation controlled and beneficially owned by Peter
M. Nomikos, the Company's Chairman and Chief Executive Officer. Under the
agreement, PYC Corporation established a $2.25 million line of credit to be
used by the Company for working capital purposes. Any amounts drawn under the
line of credit accrue interest at a rate equal to 8% per year. In addition,
the Company agreed to issue to PYC Corporation warrants to purchase one share
of the Company's Common Stock for each $5.00 drawn by the Company under the
line of credit. As of March 27, 2000, the Company had drawn down $2.0 million
under the line of credit and had issued to PYC Corporation warrants for the
purchase of 400,000 shares of the Company's Common Stock. The warrants were
issued to PYC Corporation in ten equal installments with an average exercise
price of approximately $3.24 per share.
Products
Photon Radiosurgery System
The first application of the Company's miniature x-ray source was the
treatment of brain tumors using radiosurgery. For this application, the
miniature x-ray source was attached to a "stereotactic frame,' a form of
guidance system commonly used by neurosurgeons. The system for delivery of
these stereotactically-guided radiosurgical treatments of brain tumors is the
PRS system, which enables the tip of the miniature x-ray source
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to be accurately inserted into the center of brain tumors to destroy the
tumors from the inside. Since its development for the PRS system, the
miniature x-ray source has also been used to deliver focused radiation therapy
at body sites other than the brain. In 1999, the FDA granted Section 510(k)
market clearance for the latest version of the PRS system, the PRS400, to be
used for the treatment of tumors anywhere in the body. The PRS400 also forms
the key element of the Company's new products, the ACCUBEAM and INTRABEAM
systems.
A complete PRS400 system consists of (i) equipment for clinical use in
treating patients, principally consisting of the miniature x-ray source, 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 core system is also sold
with various accessories, such as applicators, to irradiate, for example, body
cavities or surfaces, and fixturing devices to support the x-ray probe during
patient treatment.
THE ACCUBEAM and INTRABEAM SYSTEMS
The Company has developed the ACCUBEAM system in conjunction with Carl
Zeiss. The ACCUBEAM system was introduced at the Congress of Neurological
Surgeons meeting in October 1999 and the Company believes that it represents a
new concept in the treatment of brain tumors. In the ACCUBEAM system, the
Company's miniature x-ray source is integrated with Carl Zeiss's robotic, MKM
microscope system. The MKM microscope system enables neurosurgeons to use
medical images displayed on a computer to guide removal of a brain tumor.
Integration with the Company's x-ray source allows image-guided removal of a
brain tumor to be accompanied by precisely directed and controlled irradiation
of the tumor bed (the region surrounding a tumor). The goal is that the
combination of precision surgery with precision intraoperative radiotherapy
will reduce the likelihood of the tumor re-growing. The Company believes that
the combined system is the first ever integrated x-ray and surgical guidance
system for the treatment of brain tumors.
The Company has also developed the INTRABEAM system in conjunction with Carl
Zeiss. The INTRABEAM system was launched at the American Society for
Therapeutic Radiology and Oncology meeting in October 1999. The INTRABEAM
system is a multi-purpose system for intraoperative radiotherapy for the
treatment of many types of cancer. It consists of the Company's x-ray source
mounted on an articulated support stand from Carl Zeiss. For most treatments,
the point source of x-rays is enclosed in a treatment applicator, which is
placed inside a tumor cavity after surgical removal of the tumor, a concept
known as intraoperative radiotherapy. The combination of x-ray source and
applicators was first tested at the Middlesex Hospital in London, where they
were used to treat breast and rectal cancers. The INTRABEAM system
incorporates the treatment applicators which the FDA recently approved for
sale in the United States.
The PRS, ACCUBEAM and INTRABEAM systems can deliver a range of radiation
treatments that can be categorized as follows:
. Interstitial Treatments. Interstitial treatments are where the x-ray
source is inserted directly into a tumor. Examples include the brain
tumor treatments for which the x-ray source system was first designed,
and image guided radiotherapy of small breast tumors. The x-ray source
has also been used to treat other solid tumor targets, including
gynecological tumors. Treatment programs for the liver, kidney and
irresectable tumors of the pancreas are currently under development.
. Intraoperative Radiotherapy and Intracavity Radiotherapy
Treatments. Intraoperative treatments are where the x-ray source is
inserted into a tumor bed after removal of a tumor. Generally, these
treatments make use of the Company's range of applicators to fill out the
cavity and conform the target tissue to the radiation dose pattern.
Examples include the breast, after lumpectomy, and the brain and colo-
rectal tumors after tumor resection. Intracavity treatments are those
where the x-ray source is inserted into a body cavity and include
gynecological treatments.
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. Surface Radiotherapy. The Company has a range of applicators (currently
for investigational purposes only), designed to confine radiation
treatments to the surface of adjacent tissue. These were originally
designed for treatment of skin disorders, but have since been proposed
for intraoperative use where localized irradiation of small targets is
thought to be beneficial.
. Special Treatments. The Company's miniature x-ray source's geometry lends
itself to certain special treatments. One application currently under
investigation is the treatment of macular degeneration. A dedicated
micro-collimation device (not available commercially) has been developed
which, when placed on the miniature x-ray source, produces a forward
projecting radiation beam of between 0.8 and 3 millimeters in diameter.
Other Potential Product Applications
In 1998, the Company initiated animal studies in collaboration with
physicians at Johns Hopkins University School of Medicine in Baltimore,
Maryland to characterize treatment of kidney and liver tumors and to test
specialized accessory positioning equipment designed for use with the
miniature x-ray system. These pre-clinical studies were completed in 1999 and
the Company believes the results were encouraging. The Company intends to
promote future development of clinical systems for this application at one or
more of the Company's established treatment centers. During 1999, the Company
initiated animal studies in collaboration with physicians at the Massachusetts
Eye and Ear Hospital in Boston, Massachusetts to characterize the use of its
miniature x-ray system for the treatment of Age-Related Macular Degeneration.
The Company intends to continue to support pre-clinical and clinical activity
in this area.
The Company prioritizes the types of tumor applications it explores based on
several factors. Such factors include, among other things, potential market
size, physician interest in trials and available corporate resources.
Periodically, the Company reviews existing applications being pursued as well
as alternative applications. There can be no assurance that the applications
selected for study will lead to successful commercial applications of the x-
ray system.
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Medical Advisory Board
The Company's Medical Advisory Board consults with the Company's Board of
Directors and senior management from time to time as requested by the
Company's Board of Directors and as the schedules of the members of the
Medical Advisory Board permit. These consultations provide general advice to
the Company on its business and products, including the PRS system. The
members of the Medical Advisory Board are employed on a full-time basis by
employers other than the Company. In addition, the members have commitments
to, or consulting, advisory or other contractual relationships with other
third parties. These third party commitments and relationships limit the
availability of the Medical Advisory Board members to the Company, and may
potentially result in conflicts of interest.
The following individuals currently serve as members of the Medical Advisory
Board:
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Name Position
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Nicholas T. Zervas, M.D. (Chairman).. Distinguished Higgins Professor of
Neurosurgery, Harvard Medical School,
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 Neurosurgical Institute,
President and Professor of Neurosurgery,
Tokyo Women's Medical College, Tokyo,
Japan
Jay S. Loeffler, M.D. ............... Director of Northeast Proton Therapy
Center, Massachusetts General Hospital,
Boston, Massachusetts
</TABLE>
The Company grants to each member of the Medical Advisory Board, with the
exception of Dr. Zervas, options to purchase 1,000 shares of the Company's
Common Stock for each full year that such member serves on the Medical
Advisory Board. The exercise price per share for options granted to Medical
Advisory Board members is the lesser of the fair market value of such share on
August 1 and the subsequent July 31, or if the member joins after August 1,
the lesser of the fair market value of such share on the date the member joins
and the subsequent July 31. The Company is paying 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. Each member also receives 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.
Marketing and Sales
During 1999, the Company developed and implemented a new strategy for sales
and marketing. In May 1999, the Company downsized its sales force as part of a
general restructuring. In August 1999, the Company signed a distribution and
product development agreement with Carl Zeiss. Carl Zeiss now manages the
sales and distribution of a range of the Company's products, including the
PRS, ACCUBEAM and INTRABEAM systems. In addition to sales and distribution,
Carl Zeiss will also assist with service and support of the Company's
products, and participate in co-developments. The agreement is a worldwide
arrangement, with the exception of Japan where the Company has an arrangement
with Toshiba Medical Systems. Carl Zeiss is an international technology leader
whose medical systems division specializes in high technology equipment such
as surgical microscopes for various medical disciplines and its products
include state-of-the-art image-guided surgery equipment. The alliance with
Carl Zeiss gives the Company access to a global sales force with an
established
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record of sales of high technology equipment within the medical field. A large
proportion of the Carl Zeiss sales force received the training needed to sell
the Company's products and new sales and marketing materials were prepared
reflecting the involvement of Carl Zeiss. The Company's products were
represented by Carl Zeiss at a number of major trade shows, including the
Congress of Neurological Surgeons' meeting in Boston in November 1999.
In December 1999, the Company appointed Charles Vecoli as Vice President of
Marketing. Mr. Vecoli joined the Company in August 1999 as Product Manager.
Mr. Vecoli was previously employed by Radionics Inc., where he had served as
Product Manager of the radiation therapy product line. One of Mr. Vecoli's
primary tasks is to assist with the interface between the Company and Carl
Zeiss.
The Company intends to identify other distribution partners as the range of
its products and clinical applications develop.
Clinical Trials
Having obtained Section 510(k) market clearance from the FDA to market its
miniature x-ray source for use anywhere in the body, the Company has focused
its attention on the development of the tools and technology to expand the
range of accepted clinical applications. In general, these are technical
developments rather than clinical trials. There are, however, certain clinical
trials on-going using the technology that could markedly expand the range of
accepted uses of the system.
. Breast Cancer: Over recent years, the Company's intraoperative
radiotherapy product line has been used to provide an intraoperative
radiation boost dose, following lumpectomy. One further development of
this approach is being pioneered at the Middlesex Hospital (London, UK)
where Professor Michael Baum has initiated a clinical trial to evaluate
whether the INTRABEAM system can be used as the only radiation treatment
for breast cancer. If positive results are obtained, this study could
significantly change the established approach to treatment which uses a
fractionated course of radiation treatment spread over several weeks. The
time taken to complete this trial will depend on the rate of patient
accrual but will certainly take several years to assess. Several U.S.
hospitals have also expressed an interest in participating in similar
trials.
. Macular Degeneration: In 1999, the Company began funding pre-clinical
studies at the Massachusetts Eye and Ear Hospital (Boston, MA) to
evaluate the potential for its miniature x-ray source to be used in the
treatment of Age-Related Macular Degeneration. These pre-clinical studies
are expected to be completed during 2000, at which time patient
treatments may begin.
Patents and Proprietary Rights
A U.S. patent directed to the base the PRS400 system 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. From 1994
through 1996, three U.S. patents directed to use of the PRS system to treat
brain tumors were issued to the Company. A U.S. patent, directed to a flexible
probe PRS system 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 system. One U.S. patent issued in 1996,
one U.S. patent issued in 1997, and one pending U.S. patent application are
directed to use of the PRS system 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. The Company was issued two other
patents in 1997 relating to accessory equipment, including the Company's CCD
microdensitometer. The Company has three additional patents and nine additonal
pending U.S. patent applications, and has foreign patent applications in
selected foreign countries which correspond to certain of its U.S. patent
applications. As of January 1, 2000, two patents corresponding to the
Company's initial U.S. patents have been issued in Australia, Canada and
Russia and two patents directed to the treatment of brain tumors have been
issued in Japan. The Company has thirty-five other foreign applications
currently pending.
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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 partnerships, and
reduce inventory requirements. In general, the Company's procurement strategy
is to keep the number of its suppliers to a minimum while identifying as many
multiple sources as possible. Due to the Company's current limited supply
needs the Company acquires certain supplies, over time, from the same vendors.
While the Company intends to negotiate supply contracts, where appropriate,
with certain of its key suppliers, the Company currently procures its supplies
through open purchase orders. 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, the Company has sole-source suppliers for
some of the PRS400 system parts. If the sole-source suppliers are unwilling or
unable to provide such parts to the Company, it could have a material adverse
affect on the ability of the Company to manufacture its products.
The Company intends to implement the necessary operational systems to
support the successful commercial production of the PRS, ACCUBEAM and
INTRABEAM systems and any other products. Specifically, the Company intends to
continue to pursue full functional compliance with ISO 9001, EN46001, and the
FDA's current Good Manufacturing Practices ("cGMP") standards that govern,
among other things, quality assurance, personnel training, process control,
customer service, design control, supply management and facility and equipment
maintenance. The Company engaged British Standards Institution ("BSI"), a
registered Notified Body, to certify its compliance with BS EN ISO9001:1994
(ISO9001) standards for a quality management system. BSI issued to the Company
a Certificate of Registration signifying compliance with the requirements of
BS EN ISO9001:1994 on September 22, 1997. Subsequently, the Company engaged
BSI to assess its compliance to Annex II Section 3 of the Medical Device
Directive (93/42/EEC), the applicable regulations pertaining to the design
manufacture and other aspects of medical devices intended to be distributed in
the European Community. On May 13, 1998, BSI issued an EC-Certificate to the
Company signifying its compliance with requirements stipulated in Annex II
Section 3 of the Medical Device Directive.
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, financial and regulatory resources than the Company and may be
better equipped to develop, manufacture, and market their products.
In order to achieve successful commercialization, the PRS, ACCUBEAM and
INTRABEAM systems will need to compete with established radiation therapy
devices such as Linear Accelerators and the Gamma Knife(TM). In addition the
Company will need to compete with lesser known radiation therapies such as
proton beam treatment and brachytherapy. The Company is also aware of various
other cancer tumor treatment methods currently under development. Any of these
other treatment methods, if successfully developed, could have a different
approach or means of accomplishing the intended purposes of the Company's
product. As a result, one of these methods may render the Company's technology
non-competitive. While the Company believes that the PRS, ACCUBEAM and
INTRABEAM systems offer certain therapeutic, operational, and economic
advantages over the cancer treatment methods likely to compete with them,
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 success 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.
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Government Regulation
U.S.
The PRS, ACCUBEAM and INTRABEAM systems are subject to regulation in the
United States by the FDA. Manufacturers of medical devices must comply with
applicable provisions of the FDC Act, the Safe Medical Devices Act of 1990
(the "SMDA"), the Modernization Act of 1997, and certain associated
regulations governing the safety, effectiveness, design, testing,
manufacturing, labeling, marketing and distribution of medical devices and the
reporting of certain information after initiating distribution. Both the FDC
Act and the SMDA require certain clearances from the FDA before medical
devices, such as the PRS system, can be marketed. The Company intends to
continue to pursue a strategy intended to result in marketing clearance of as
many products and components as possible as quickly as possible in order to
maximize flexibility in marketing.
FDA authorization to commercially distribute a new device can be obtained in
either of two ways, depending on the device. 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 Premarket Approval ("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 pre-approval 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 pre-market notification to the FDA under Section 510(k) of the
FDC Act, 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, including in many instances the results of
clinical trials performed pursuant to FDA approved protocols. 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 510(k) Premarket Notification 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. The FDA may also require the ongoing monitoring of products which
have been cleared for commercialization under those procedures.
On February 9, 1998 the Company filed a Section 510(k) pre-market
notification with respect to the current model containing the Company's core
technology, the PRS400 system, for the treatment of intracranial tumors. On
July 27, 1998, the FDA granted Section 510(k) marketing clearance for the PRS
system for use in the irradiation of intracranial tumors. In September 1999,
the FDA granted Section 510(k) marketing clearance for the PRS system for
radiation treatments, without restriction to particular body sites, and also
received clearance to utilize a range of applicators for use with the PRS
system in intraoperative radiotherapy. The Company believes that the Section
510(k) market clearance for the PRS system can also be applied to the
Company's new products, the ACCUBEAM and INTRABEAM systems.
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. Prior to selling a product, a
company's manufacturing operations need to comply with the FDA's cGMP
standards. The Company believes that the combination of its ISO9001
registration and satisfaction of the prerequisites for use of the CE Mark will
be sufficient to comply with the FDA's cGMP standards.
10
<PAGE>
Even with key regulatory clearances and approvals obtained, such clearances
or approvals may be withdrawn or limited for non-compliance with regulatory
standards or the occurrence of unforeseen problems following the initial
clearance or 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 Company may need to obtain export licenses from the U.S.
government in order to export products manufactured by the Company. Such
licenses may be required for equipment used in foreign clinical trials. The
Company has already been granted export licenses and corresponding foreign
import licenses for clinical trials in England, Japan, Australia, Germany and
Italy.
Foreign Countries
The Medical Device Directive (June 1993) sets forth 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 ended in June 1998
after the expiration of a five year transition period. Currently, all new
medical devices to be marketed in any European Union country must first obtain
a CE Mark. Obtaining a CE Mark with respect to a particular medical device
requires the accumulation 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 EC Medical Device Directives relating to manufacturing, quality
assurance and documentation under the BS EN ISO 9001:1994 series standards and
relating to the design, manufacture, quality control, safety and performance
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" (non-
governmental organizations) to act as their agents and qualify manufacturers
equipment in accordance with EC standards. The Company is thereby able to
affix the CE Mark to its PRS products, including the ACCUBEAM and INTRABEAM
systems, and to freely distribute them within the European Community and
cooperating countries.
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 for obtaining such approvals may also be different.
Third Party Reimbursement
The Company's ability to generate revenues from the marketing of the PRS,
ACCUBEAM and INTRABEAM systems will depend in large part upon whether they
qualify for reimbursement from third party payors. Such third party payors
include, among other sources, private insurance companies, self-insured
employers, health maintenance organizations, and federal and state sources of
payment under the Medicare and Medicaid programs. 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, ACCUBEAM and INTRABEAM
systems will gain acceptance for reimbursement with any third party payors.
The Company believes, however, that the reduced capital and operation costs of
these systems, when compared to competing modalities together with the
expected lower hospitalization costs, will encourage third party payors to
provide reimbursement for PRS400-based procedures.
In addition, many third party payors in the U.S., including the federal
Medicare program and many state Medicaid programs, have shifted or are
planning to shift 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
11
<PAGE>
time regardless of illness. To the extent that the PRS, ACCUBEAM and INTRABEAM
systems are comparatively more cost effective than existing treatment
modalities, providers subject to partial or fully capitated systems will have
an incentive to utilize them. The Company will provide ongoing assistance for
all customers through a user's group information base and the general exchange
of coding, cost and general reimbursement information.
The level 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 Community (the
"EC"), the Company believes there are presently no EC-wide reimbursement
procedures. The majority of the EC member nations each have a dominant
national health service with distinct and unique reimbursement policies and
procedures. In addition, private insurers within the EC offer a great variety
of benefits. With the Medical Devices Directive becoming mandatory in the EC,
the principal prerequisite for reimbursing a procedure involving new medical
equipment is obtaining a CE Mark.
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.
Employees
As of January 1, 2000, the Company had 26 employees. None of the Company's
employees are covered by a collective bargaining agreement, and the Company
believes that its relationship with its employees is good.
Risk factors that may affect future results
The Company wishes to caution readers that in addition to the important
factors described elsewhere in this Report, the following important factors,
among others, sometimes have affected, and in the future could affect, the
Company's business, financial condition, or operating results. These factors
could cause the Company's future results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
The Company has significant capital needs and may not be able to raise
additional capital that would enable it to continue as a going concern.
The Company has expended, and will continue to expend, substantial funds on
the following:
. Research and development of the PRS, ACCUBEAM and INTRABEAM systems and
other potential products;
. Establishing commercial scale manufacturing in the Company's own
facilities or in the facilities of others; and
. Marketing the PRS, ACCUBEAM and INTRABEAM systems and other products.
The Company's future capital requirements will depend on a variety of
factors, including the following:
. Time and costs involved in obtaining further regulatory approvals;
. Market acceptance of the PRS, ACCUBEAM and INTRABEAM systems and any of
the Company's other products;
12
<PAGE>
. Expense and results of the Company's continued scientific research and
development programs;
. Time and costs expended in filing, prosecuting, and enforcing patent
claims; and
. Development of competing technologies.
The Company does not expect to be able to generate sufficient revenue in the
near future to continue operations without raising additional capital. If the
necessary funds are not available to the Company on acceptable terms, it is
likely that the Company will not be able to continue as a going concern. The
Company estimates that available cash and cash equivalents, together with
revenues from product sales, if any, will allow it to continue operations
through April 2000.
The Company is an early stage company and has a limited operating history.
The Company was incorporated in January of 1989 and has thus had a
relatively short operating history. The Company is still in the process of
commercializing treatment systems based on the PRS400 system, the Company's
core technology. The Company may not succeed in completing commercialization
of its product range. The Company has received regulatory approval from the
FDA and clearance from the European Union to market the PRS system in the
United States and Europe, respectively. The Company believes that these
approvals can be extended to the ACCUBEAM and INTRABEAM systems. However, the
Company's assessment of the scope of these approvals are subject to the review
of the FDA and the European Union. In addition, the Company is still waiting
for approval from other countries in which the Company may market the PRS,
ACCUBEAM and INTRABEAM systems. The Company cannot be sure that any other
countries will grant it regulatory approval to market the PRS, ACCUBEAM and
INTRABEAM systems. In addition, the Company has only sold 7 PRS systems and
may not be able to sell any more PRS systems even if the Company receives all
necessary regulatory approvals and completes the commercialization of the PRS,
ACCUBEAM and INTRABEAM systems.
The Company may not be reimbursed by third party payors.
The Company's ability to be reimbursed for the cost of its products and
related treatments from third party payors will have a significant impact on
the Company's ability to commercialize its products. Such third party payors
include, among others, private insurance companies, self-insured employers,
health maintenance organizations, and federal and state sources of payment
under the Medicare and Medicaid programs. There is no uniform policy on
reimbursement among third party payors, and the PRS, ACCUBEAM and INTRABEAM
systems or any of the Company's other products may not qualify for
reimbursement. In addition, foreign countries have their own health care
reimbursement systems, and the Company may not qualify for reimbursement from
such foreign third party payors.
In addition, 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, may have an adverse
effect on the Company's revenues. Furthermore, legislative proposals to reform
government health care insurance programs, including the Medicare and Medicaid
programs, could have a significant impact on 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 or whether other health care legislation or
regulation affecting the Company's business may be proposed in the future.
The Company has a history of significant operating losses and anticipates
further substantial losses.
The Company has experienced significant operating losses in each year since
its incorporation, primarily due to the cost of substantial research and
development of the PRS system. As of January 1, 2000, the Company had an
accumulated deficit of approximately $38.5 million and expects to continue to
incur losses until the Company generates revenues to offset the funds spent on
commercializing the PRS system. The Company's ability to achieve profitable
operations will depend, in large part, on whether the Company can successfully
commercialize the PRS, ACCUBEAM and INTRABEAM systems and/or any other
products, and whether the Company can effectively make the transition to a
manufacturing and marketing company. It is possible that the
13
<PAGE>
PRS, ACCUBEAM and INTRABEAM systems will never gain commercial acceptance, and
the Company may never generate significant revenues or achieve profitability.
For these reasons, the Company believes it will continue to incur substantial
operating losses for the foreseeable future, and that these losses may be
significantly higher than the Company's current losses.
The Company is still waiting for certain regulatory clearances in order to
market the PRS.
The PRS, ACCUBEAM and INTRABEAM systems have not been approved for
commercial use in countries outside the U.S. and Europe, including Japan. The
PRS, ACCUBEAM and INTRABEAM systems are subject to extensive regulation in the
U.S. by the FDA and, in many instances, by comparable agencies in foreign
countries where the Company plans on manufacturing and/or distributing the
PRS, ACCUBEAM and INTRABEAM systems. Sales of medical devices outside the
United States are subject to regulatory requirements that vary widely from
country to country. The PRS, ACCUBEAM and INTRABEAM systems may not meet the
regulatory standards of countries that have not yet approved the PRS, ACCUBEAM
and INTRABEAM systems for commercial use.
In addition, the length of time the Company will need to wait to obtain
approval for the sale of the PRS, ACCUBEAM and INTRABEAM systems in a foreign
country may be longer, and the requirements may be more burdensome or
expensive, than that required for FDA approval. The Company will also need to
obtain export licenses from the U.S. government in order to export its
products to certain countries. In addition, foreign countries may not grant
the Company any import licenses.
Furthermore, the Company may not receive any necessary regulatory approvals
if the Company develops any additional products in the future, the length of
time for such approvals may be extensive, and the cost of attempting to obtain
any such approvals may be prohibitive. In addition, the Company's inability to
obtain or maintain requisite governmental approvals could delay or preclude
the Company from further developing and marketing the PRS, ACCUBEAM and
INTRABEAM systems and other products. Consequently, such delays could impair
the Company's ability to generate revenues and continue as a going concern.
The Company's products are subject to extensive ongoing government regulation.
The Company may need to obtain additional approvals from the FDA if the
Company decides to change or modify the PRS400, ACCUBEAM and INTRABEAM
systems. In that case, the FDA may not grant any new approvals. In addition,
if the Company fails to comply with FDA regulatory standards, the FDA could
force the Company to withdraw its products from the market or impose sanctions
or fines, each of which could have a material adverse effect on the Company's
business, financial condition, and results of operations.
In addition, 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 FDA
regulations. Such regulations impose certain requirements on, among other
things, the design, testing, production, control, and documentation of
products. The Company may not be able to attain or maintain compliance with
cGMP standards or with ISO Standards. In addition, the Company may not be able
to identify and retain manufacturers on commercially acceptable terms, if at
all, and any manufacturers the Company does retain might not be able to meet
all relevant regulatory requirements. Any problems with the Company's ability
to meet regulatory standards could prevent the Company from marketing the PRS,
ACCUBEAM and INTRABEAM systems.
Rapid, unpredictable, and significant technological change; highly competitive
industry.
The medical device industry is subject to rapid, unpredictable, and
significant technological change. The Company's business 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 these potential competitors have
substantially greater technical, financial, and regulatory resources than the
Company and are accordingly better equipped to develop, manufacture, and
market their products. If these companies
14
<PAGE>
develop and introduce products and processes competitive with or superior to
the Company's products, the Company may not be able to compete successfully
against such competitors.
Risk of utilizing non-company distribution channels.
As the Company makes the transition from a company with products in
development but no product sales to a manufacturing and marketing company, the
Company substantially relies upon Carl Zeiss, its strategic partner, to sell
and distribute its products. If Carl Zeiss is unsuccessful in selling our
products or is unable to distribute our products in a satisfactory manner, it
could have a material adverse effect on our business, financial condition and
results of operations.
Uncertain protection of intellectual property.
The Company's ability to compete effectively in the marketplace will depend,
in part, on the Company's ability to protect its intellectual property rights.
The Company relies on patents, trade secrets, and know-how to establish and
maintain a competitive position in the marketplace. The enforceability of
medical device patents, however, can be highly uncertain. Any limitation or
reduction in the Company's rights to obtain or enforce the Company's patents
could have a material adverse effect on the Company's ability to maintain or
protect its intellectual property rights.
The Company holds thirteen U.S. patents and has nine U.S. patent
applications pending relating to the PRS system and associated technologies.
In addition, the Company has filed foreign patent applications in selected
foreign countries, which correspond, to certain of the Company's U.S. patents
and patent applications. Such applications may not result in issued patents,
and the Company cannot be sure that once issued, any issues relating to the
validity and scope of the patents will be resolved in the Company's favor. In
addition, the Company's current or future patents, trade secrets, or know-how
may not protect the Company against competitors with similar technologies or
processes. Also, others may infringe any patents issued to the Company and
other companies may independently develop proprietary technologies or
processes, which are the same as or substantially equivalent to the Company's
proprietary technologies or processes.
The Company may also become subject to patent infringement claims or
litigation initiated by third parties. The defense and prosecution of such
claims or suits are very costly and time-consuming, and any such proceeding
would result in substantial expense and a significant diversion of effort by
technical and management personnel of the Company. Further, any adverse
determination in such litigation or proceeding could subject the Company to
significant liability and could prevent the Company from manufacturing or
marketing its products.
Peter M. Nomikos has the ability to significantly influence all stockholder
votes.
As of March 16, 2000, Peter M. Nomikos, Chairman of the Board and Chief
Executive Officer of the Company beneficially owned approximately 47% of the
issued and outstanding shares of Common Stock, and the Company's principal
stockholders and certain affiliates of the Company (including Mr. Nomikos)
beneficially owned in the aggregate approximately 56% of the issued and
outstanding shares of Common Stock. Certain principal stockholders serve as
directors or have representatives who serve as directors of the Company. Due
to Mr. Nomikos's ownership of Common Stock coupled with the positions he holds
in the Company, Mr. Nomikos, either alone or with the other principal
stockholders, has the ability to significantly influence all matters requiring
approval by the stockholders of the Company, including the election of all
directors, acquisitions, sales of all or substantially all of the Company's
stock or assets, and other extraordinary transactions.
The Company depends on key personnel.
The Company depends on the continued services and performance of its
scientific personnel and senior management. If the Company loses any key
personnel, it could significantly and adversely impact the Company's research
and development efforts or its strategic objectives. In addition, competition
among medical device
15
<PAGE>
companies for highly skilled scientific and management personnel is
increasingly intense. In order to achieve and maintain the commercialization
of the PRS, ACCUBEAM and INTRABEAM systems, the Company will need to attract
and retain additional key personnel, and the Company cannot be sure that it
will be able to do so. The Company has no employment agreements with any of
its employees, nor has the Company purchased "key person" life insurance.
The Company may experience shortages of components for the PRS, ACCUBEAM and
INTRABEAM systems; the Company relies on a small number of suppliers.
The Company manufactures its products based on anticipated product orders.
The different lead times for the supply and delivery of materials and
components can vary significantly, as can the relative availability and cost
of those materials and components. As a result, the Company has built up and
maintains an inventory of certain components for the PRS, ACCUBEAM and
INTRABEAM systems. The Company also tries to identify, where feasible,
multiple suppliers of materials and components.
While the Company sometimes negotiates supply contracts with certain key
suppliers, the Company currently purchases its supplies through open purchase
orders. The Company's vendors may not continue to provide supplies on
acceptable terms, if at all. In addition, if the Company's forecasted product
orders prove to be different than actual product orders, the Company may have
excess or inadequate inventory.
In addition, the Company may not be able to find alternative suppliers for
the PRS, ACCUBEAM and INTRABEAM systems components on a timely basis, if at
all, in the event that the Company needs such alternative suppliers. Any
significant delay or interruption in the Company's ability to acquire product
components and materials could have an adverse effect on the manufacture of
the Company's products.
Product liability risks.
The Company will be exposed to the risk of medical product liability claims
if any of its products causes harm or injury. The Company might not have
sufficient resources to satisfy any liability resulting from such claims. The
level or scope of the Company's liability insurance with respect to the
clinical testing or use of the PRS, ACCUBEAM and INTRABEAM systems may not be
sufficient to cover potential claims. In addition, medical product liability
insurance may not continue to be available at an acceptable cost, if at all.
As a result, a medical product liability claim could cause the Company
significant financial harm.
Anti-takeover 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 even a majority of the Company's stockholders deem such an attempt to be in
the Company's best interest. As a result, the anti-takeover 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 provisions of Chapter 110F of the Massachusetts General Laws, the Business
Combination Statute, cover the Company. This statute prohibits the Company
from engaging in a merger, stock or asset sale, and other transactions with an
"interested stockholder" that would result in a financial benefit to the
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 set forth in the statute. The
application of this statute could have the effect of delaying or preventing a
change of control of the Company.
In addition, the Board of Directors 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 grant different
16
<PAGE>
classes of stock certain rights and preferences. In the event the Board issues
any Preferred Stock, it could be utilized, under certain circumstances, as a
method of discouraging, delaying, or preventing a change of control of the
Company. The Company currently has no current plans to issue any shares of
Preferred Stock but the Board of Directors may elect do so at some time in the
future.
Volatile stock price.
The trading price of the Company's common stock fluctuates significantly.
The Company's stock price may fluctuate as a result of various factors such as
variations in the Company's financial performance, announcements of
technological innovations by competitors or providers of alternative products,
and changes in the economy, the financial markets, or the health care
industry. In addition, stock market have experienced price and volume
fluctuations that have particularly affected medical device companies and has
often been unrelated to such companies' operating performance. Such broad
market fluctuations may adversely affect the market price of the Company's
common stock.
Absence of dividends.
The Company has never paid any dividends on its capital stock and does not
anticipate paying any cash dividends to holders of the Company's capital stock
in the foreseeable future.
Item 2. Properties.
The Company currently occupies approximately 30,000 square feet of space in
a building located in Lexington, Massachusetts under a lease expiring in July
2002. This facility is suitable for research and development, corporate
administration and assembly of the PRS400 system. The Company believes that
its facility will be adequate to meet its foreseeable requirements through at
least the year 2002. The Company also has the right to extend the current
lease for an additional five years.
Item 3. Legal Proceedings.
The Company is not currently involved in any material pending legal
proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security holders during
the last quarter of the fiscal year ended January 1, 2000.
17
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of January 4, 2000, there were 89 holders of record of the Company's
Common Stock. The Company believes that there are approximately 1,885
beneficial holders of its Common Stock. The Company has not declared or paid
any dividends on its Common Stock since its inception. The current policy of
the Company's Board of Directors is to retain any earnings to finance the
operation of the Company's business. Accordingly, it is anticipated that no
cash dividends will be paid to the holders of the Common Stock in the
foreseeable future.
Since December 1999, the Company's Common Stock has been listed on the
American Stock Exchange ("AMEX") under the symbol "PHX." Prior to its listing
on AMEX, the Company's Common Stock was listed on the Nasdaq National Market
under the symbol "PECX" from the time it started to trade publicly on January
29, 1997. The price ranges presented below represent the high and low sale
prices for each quarter, as reported by "The Nasdaq-AMEX Stock Market Summary
of Activity Report."
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
First Quarter 1998........................................... 9 7/8 5 3/4
Second Quarter 1998.......................................... 9 5 3/4
Third Quarter 1998........................................... 9 3/4 3 3/4
Fourth Quarter 1998.......................................... 7 1/2 2 1/4
First Quarter 1999........................................... 6 2 15/16
Second Quarter 1999.......................................... 4 1
Third Quarter 1999........................................... 6 3/8 2 1/4
Fourth Quarter 1999.......................................... 5 15/32 2 1/8
</TABLE>
Sales of Unregistered Securities:
On November 15, 1999, the Company and PYC Corporation entered into a six
month $2.25 million line of credit at an 8% annual interest rate. In
connection with the loan, the Company was required to issue to PYC Corporation
warrants to purchase up to 450,000 shares of the Company's Common Stock at the
rate of warrants to purchase one share for each $5.00 drawn by the Company.
The exercise price of the warrants is equal to the average closing price of
the Company's Common Stock for the ten trading days preceding the date of each
draw made under the line of credit. As of January 1, 2000, the Company had
drawn down $800,000 under the line of credit and had issued to PYC Corporation
warrants for the purchase of 160,000 shares of the Company's Common Stock. The
warrants were issued to PYC Corporation in four equal installments on November
18, 1999, November 30, 1999, December 14, 1999 and December 29, 1999 with
exercise prices of $3.76, $3.44, $2.94 and $2.74, respectively.
The warrants were issued to PYC Corporation pursuant to Section 4(2) under
the Securities Act of 1933.
18
<PAGE>
Item 6. Selected Consolidated Financial Data.
The selected consolidated statement of operations data and consolidated
balance sheet data presented below as of January 2, 1999 and January 1, 2000
and the consolidated statement of operations data presented below as of
January 3, 1998, are derived from the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-K, 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 30, 1995, and December 28, 1996 and
the consolidated balance sheet data presented below as of January 3, 1998, are
derived from the Company's Consolidated Financial Statements and Notes thereto
not included in this Form 10-K, which have been audited by Arthur Andersen
LLP, independent public accountants. 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 Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------
December 30, December 28, January 3, January 2, January 1,
1995 1996 1998 1999 2000
------------ ------------ ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $ -- $ -- $ 725 $ 678 $ 535
Cost of goods sold...... -- -- 361 278 267
-------- -------- -------- -------- --------
Gross margin............ -- -- 364 400 268
Operating expenses:
Research and
development
expenses............. 3,226 3,577 4,626 5,434 4,426
General and
administrative
expenses............. 866 1,512 2,306 3,107 3,426
-------- -------- -------- -------- --------
Total operating
expenses............. 4,092 5,089 6,933 8,541 7,852
-------- -------- -------- -------- --------
Operating loss.......... (4,092) (5,089) (6,569) (8,141) (7,584)
Interest income
(expense), net....... (25) 130 713 467 35
-------- -------- -------- -------- --------
Net loss................ $ (4,117) $ (4,959) $ (5,856) $ (7,674) $ (7,549)
======== ======== ======== ======== ========
Net loss per share...... $ (3.72) $ (3.12) $ (0.87) $ (1.02) $ (0.97)
======== ======== ======== ======== ========
Weighted average basic
and diluted shares..... 1,107 1,588 6,694 7,489 7,749
<CAPTION>
December 30, December 28, January 3, January 2, January 1,
1995 1996 1998 1999 2000
------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 7,191 $ 2,537 $ 2,287 $ 3,686 $ 134
Total assets............ 8,703 5,117 16,425 9,135 2,864
Total long-term debt,
including current
portion................ 1,940 2,043 1,686 719 1,566
Deficit accumulated
during development
stage.................. (12,425) (17,383) (23,239) (30,913) (38,462)
Total shareholders'
equity................. $ 6,493 $ 2,486 $ 14,012 $ 7,453 $ 247
</TABLE>
Item 7. 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 system, 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 significant revenue from the sale of
its current PRS400 system model.
The Company has experienced significant operating losses in each year since
its inception, due primarily to substantial research and development
expenditures. As of January 1, 2000, the Company had an accumulated
19
<PAGE>
deficit of approximately $38.5 million and expects to continue to incur losses
until such time as its commercialization efforts yield offsetting revenues.
There can be no assurance that the PRS400 system will ever gain commercial
acceptance, or that the Company will ever generate significant revenues or
achieve profitability. The Company's ability to achieve profitable operations
will be dependent in a large part on whether it can successfully commercialize
the PRS, ACCUBEAM and INTRABEAM systems and make the transition to a
manufacturing and marketing company. The Company anticipates that its sales
and marketing efforts with Carl Zeiss will begin to generate sales of the PRS,
ACCUBEAM and INTRABEAM systems in the upcoming year. The Company anticipates
that its research and development, sales and general and administrative
expenses will increase minimally during 2000.
The Company does not expect to be able to generate sufficient revenue in the
next year to support the continuing operations of the organization and will
need to raise the necessary capital to offset this short fall. Should the
necessary funds not be available to the Company on acceptable terms, there is
substantial doubt that the Company will be able to continue as a going
concern.
The Company obtained a Section 510(k) marketing clearance for the PRS400
system on July 21, 1998, which the Company developed for introduction as its
first commercial product. Simultaneous with completion of PRS400 system
product development, the Company completed the implementation of programs
designed to ensure compliance with the FDA's cGMP standards. The Company also
completed the process of seeking certification to the Medical Device Directive
Annex II, enabling self-certification of the European Community Mark (CE). On
December 18, 1998, the Company initiated commercial distribution of the PRS
system. In September 1999, the Company obtained a Section 510(k) marketing
clearance from the FDA to market the system for radiotherapy treatments,
regardless of treatment site.
In August 1999, the Company entered into a strategic alliance with Carl
Zeiss, an international technology leader whose medical systems division
specializes in high technology equipment such as surgical microscopes for
various medical disciplines and state-of-the-art image-guided surgery
equipment. The Company appointed Carl Zeiss as its exclusive distributor for
the PRS system throughout the world (except for Japan where Toshiba Medical
Systems is the Company's distributor of the PRS system) for intracranial
applications and spinal radiotherapy and as its non-exclusive distributor for
the PRS system in the same territory for all other clinical applications. In
addition, Carl Zeiss agreed to assist the Company in the development of new
intraoperative radiotherapy products and to provide service and support for
the Company's products. The alliance with Carl Zeiss gives the Company access
to a global sales force with an established record of sales of high technology
equipment within the medical field.
In November 1999, the Company announced the launch of two products jointly
developed with Carl Zeiss: (i) the ACCUBEAM system, a device for the treatment
of brain tumors that combines the Company's miniature x-ray source with Carl
Zeiss's stereotactic guided, motorized MKM surgical microscope system; and
(ii) the INTRABEAM system, a multi-purpose system for intraoperative
radiotherapy that combines the Company's miniature x-ray source with an
articulated support stand from Carl Zeiss.
In addition to establishing its strategic alliance with Carl Zeiss, the
Company joined the SNN, a consortium of medical equipment companies that has
established a shared, open-standard, image-based software system to support
their products. By participating in the SNN consortium and utilizing its
software system, the Company can integrate its miniature x-ray source with the
products of other SNN members, including Philips, Agfa IMPAX, Aesculap and
XLTEK. In addition, the SNN participants agree to promote each other's
products on a non-exclusive basis, thus enhancing the Company's distribution
capabilities. The software used by SNN is written and supported by SNS. SNS is
currently working to integrate the Company's technology into the software
platform shared by the other SNN member companies.
20
<PAGE>
On December 13, 1995, the Company and Toshiba entered into an agreement
pursuant to which Toshiba is helping to develop and support clinical trials of
the PRS400 system in Japan. The development and support of the clinical trials
included purchasing two complete systems of the PRS system for use in the
clinical trials, installing and maintaining the PRS system, and providing
assistance to the physicians and hospitals conducting the trials, including
collection and analysis of clinical data. The Company and Toshiba expect to
submit to the Japan Ministry of Health an application for product approval
(shonin) of the PRS system in the first quarter of fiscal 2000. The Company
and Toshiba expect to obtain product approval (shonin) in Japan for the PRS
system in the second half of 2000. Once regulatory approvals for the PRS
system are obtained in Japan, Toshiba will serve as the Company's exclusive
distributor in Japan.
Results of Operations
Fiscal Year Ended January 1, 2000 and January 2, 1999
Revenues: Revenues decreased by $143,366 from $678,000 in 1998 to $534,634
in 1999. The 1998 revenues reflect the initial sales of the PRS400 system. The
1999 revenues reflect the Company's continuing sales of the PRS400 system.
Cost of Goods Sold decreased by $11,598 from $278,251 in 1998 to $266,653 in
1999.
Research and development expenses: Research and development expenses
decreased by $1.0 million from approximately $5.4 million in 1998 to $4.4
million in 1999. The principal costs in research and development were
attributed to the development of the PRS400 system for commercialization, and
the development of the ACCUBEAM and INTRABEAM systems. The variation also
reflects the restructuring of the Company from the middle of the second
quarter of 1999. The Company still continues to support clinical trial efforts
in skin and breast cancer research and development programs, and the
development of applicators for the interstitial portion of the breast program
as well as macular degeneration. Finally, additional costs were incurred in
complying with regulatory agencies in the U.K. concerning breast cancer
research and trial protocol.
General and administrative expenses: General and administrative expenses
increased by $319,281 from approximately $3.1 million in 1998 to approximately
$3.4 million in 1999. A portion of this increase is attributable to expenses
incurred in connection with the Company entering into a distribution agreement
with Carl Zeiss. The remaining portion of this increase is related to legal
and professional fees associated with the Company's reporting requirements and
other obligations under the Securities Exchange Act of 1934, general corporate
representation, and the protection of intellectual property rights.
Interest income: Interest income decreased by $419,701 from $550,328 in 1998
to $130,627 in 1999. The change resulted from a reduction in amounts invested
as net proceeds from the Company's initial public offering were used for
research and development and general and administrative expenses and for
working capital.
Fiscal Year Ended January 2, 1999 and January 3, 1998
Revenues: Revenues decreased by $47,374 from $725,374 in 1997 to $678,000 in
1998. The 1997 revenues reflect the sale of two Model 3 PRS systems to
Toshiba. The 1998 revenues reflect the Company's initial sales of the PRS400
system. Cost of Goods Sold decreased by $83,285 from $361,536 in 1997 to
$278,251 in 1998.
Research and development expenses: Research and development expenses
increased by $807,081 from approximately $4.6 million in 1997 to $5.4 million
in 1998. The principal costs in research and development were the completion
of the development of the PRS400 system for commercialization. The variation
also reflects significant increases in expenses related to the Company's
clinical trial efforts in skin and breast cancer research and development
programs, and the development of applicators for the interstitial portion of
the breast program as well as macular degeneration. Finally, additional costs
were incurred in complying with regulatory agencies in the U.K. concerning
breast cancer research and trial protocol.
General and administrative expenses: General and administrative expenses
increased by $800,705 from approximately $2.3 million in 1997 to approximately
$3.1 million in 1998. The increase is attributable to a
21
<PAGE>
growth in personnel from 38 in 1997 to 48 employees in 1998 and related costs.
Additional increases related to legal and professional fees related to the
Company's reporting requirements and other obligations under the Securities
Exchange Act of 1934, general corporate representation, and the protection of
intellectual property rights.
Interest income: Interest income decreased by $269,347 from $819,675 in 1997
to $550,328 in 1998. The change resulted from a reduction in amounts invested
as net proceeds from the Company's initial public offering were used for
research and development and general and administrative expenses and for
working capital.
Liquidity and Capital Resources
The Company has expended substantial funds to research and develop the PRS,
ACCUBEAM and INTRABEAM systems 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,
ACCUBEAM and INTRABEAM systems. The Company anticipates it will continue to
expend substantial funds in the future on such activities as such funds become
available.
Since its inception, the Company has financed its operations through the
issuance of convertible debt and equity in a series of private placements
totaling approximately $20.8 million. On February 4, 1997, the Company
completed an initial public offering of 2,275,000 shares of Common Stock,
including the underwriters' overallotment option, at a price of $8.50 per
share. Net proceeds to the Company from the offering were approximately
$16,818,854.
Consolidated working capital was $(778,516) at January 1, 2000, compared
with approximately $6.2 million at January 2, 1999. Included in working
capital are cash and cash equivalents of $0.1 million at January 1, 2000,
compared with $3.7 million at January 2, 1999. During 1999, $6.3 million of
cash was used for operating activities.
The Company used $300,836 of cash in 1999 for fixed assets and leasehold
improvements associated with its facility.
The Company received $296,668 of cash in 1999 from the exercise of stock
options to purchase Common 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 obtained product liability insurance covering the
commercial use of its products.
During 1998, the Company concluded settlement discussions with a physician
and his employer. The Company had been notified that such physician and his
employer believed that they had certain rights with regard to their
understanding of the Company's planned use of the PRS system for treatment of
tumors in body cavities. No formal legal proceedings were initiated and the
Company reached an agreement with the parties as to settlement of the matter.
The settlement of the matter did not have a material effect on the Company's
financial position or results of operations.
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, ACCUBEAM and INTRABEAM systems 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
22
<PAGE>
technologies. As of January 1, 2000, the Company estimates that its available
cash and cash equivalents, bridge financing from PYC Corporation and together
with the start of revenues in early 2000, from product sales, will allow the
Company to continue operations for approximately three to four months, and
that it therefore will be necessary for the Company to raise additional
capital in the immediate future. Any additional equity financings will be
dilutive to the Company's stockholders. No assurance can be given that the
necessary funds will be available to the Company on acceptable terms, if at
all. Should the Company be unable to raise additional capital on acceptable
terms, there is substantial doubt that the Company will be able to continue as
a going concern.
Forward-Looking Statements:
Certain statements contained in this Report, including without limitations,
statements containing the words "expects," "anticipates," "believes" and words
of similar import, constitute "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These forward looking
statements are subject to various risks and uncertainties, including, without
limitation, those referred to herein, that could cause actual future results
and events to differ materially from those currently anticipated. Readers are
cautioned not to place undue reliance on these forward looking statements.
Item 8. Financial Statements and Supplementary Data.
The Company's financial statements begin on page F-3. Reference is made to
the Index to Financial Statements on page F-1 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of The Registrant.
The information required by this item is included in the Proxy Statement for
the Annual Meeting of Stockholders on May 17, 2000 to be filed with the
Commission on or about April 19, 2000 (the "Proxy Statement"), under "Director
and Executive Officers" and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item is included in the Company's Proxy
Statement under "Executive Compensation" and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is included in the Company's Proxy
Statement under "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is included in the Company's Proxy
Statement under "Certain Relationships and related Transactions" and is
incorporated herein by reference.
23
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) See the Exhibit Index included immediately preceding the exhibits to
this Form 10-K.
(b) Financial Data Schedule is included as Exhibit 27 to this Form 10-K. 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.
(c) Reports on Form 8-K
None.
24
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of January 2, 1999 and January 1, 2000..... F-3
Consolidated Statements of Operations for the years ended January 3, 1998,
January 2, 1999 and January 1, 2000...................................... F-4
Consolidated Statements of Cash Flows for the years ended January 3, 1998,
January 2, 1999 and January 1, 2000...................................... F-5
Consolidated Statements of Shareholders' (Deficit) Equity at January 3,
1998, January 2, 1999 and January 1, 2000................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</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 its subsidiary (a Massachusetts corporation in
the development stage) as of January 2, 1999 and January 1, 2000, and the
related consolidated statements of operations, shareholders' (deficit) equity
and cash flows for each of the three years in the period ended January 1, 2000
and for the period from inception (January 4, 1989) to January 1, 2000. 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 its subsidiary as of January 2, 1999 and January
1, 2000, and the results of their operations and their cash flows for each of
the three years in the period ended January 1, 2000 and for the period from
inception (January 4, 1989) to January 1, 2000, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses from
operations for the year in the period ended January 1, 2000 and from inception
(January 4, 1989) to January 1, 2000, and anticipates operating losses and
other cash requirements in the next 12 months in excess of available cash.
Therefore, the Company will need to obtain additional funding or alternative
means of support or both, in order to continue as a going concern. At the
present time, the Company has not entered into an arrangement for additional
funding or financial support. Consequently, there is substantial doubt
concerning the Company's ability to continue as a going concern. Management's
plans in regard to these matters are discussed in Note 1. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 18, 2000
F-2
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 2, January 1,
1999 2000
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 3,686,457 $ 134,104
Accounts receivable.............................. 260,000 87,500
Inventories...................................... 1,454,706 1,437,557
Prepaid expenses................................. 336,287 146,799
Held to maturity investments (Note 2)............ 1,993,056 --
Other current assets............................. 115,803 32,272
------------ ------------
Total current assets........................... 7,846,309 1,838,232
============ ============
Property and Equipment:
Computer equipment............................... 899,085 960,324
Laboratory and production equipment.............. 926,352 975,408
Clinical site equipment.......................... 801,965 978,898
Furniture and fixtures........................... 165,898 177,883
Leasehold improvements........................... 804,263 805,886
------------ ------------
Property and equipment........................... 3,597,563 3,898,399
Less--Accumulated depreciation and amortization.. 2,308,683 2,872,636
------------ ------------
Net property and equipment....................... 1,288,880 1,025,763
------------ ------------
Total assets................................... $ 9,135,189 $ 2,863,995
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 346,363 $ 256,982
Accrued expenses (Note 3) 561,650 630,495
Accrued payroll and benefits..................... 55,409 75,690
Deferred revenue................................. -- 87,500
Convertible subordinated notes (Note 8).......... 719,100 761,770
Convertible note payable (Note 9)................ -- 804,311
------------ ------------
Total current liabilities...................... 1,682,522 2,616,748
============ ============
Commitments and Contingencies (Note 7)
Shareholders' Equity (Notes 8 , 9 and 10):
Preferred stock, $0.01 par value--Authorized--
7,500,000 shares issued and outstanding--none
and none at January 2, 1999, and January 1,
2000, respectively.............................. -- --
Common stock, $0.01 par value--Authorized--
15,000,000 shares issued and outstanding--
7,704,254 and 7,768,754 at January 2, 1999, and
January 1, 2000, respectively................... 77,042 77,688
Capital in excess of par value--common stock..... 38,324,377 38,641,184
Deferred compensation............................ (29,913) (9,986)
Subscription receivable.......................... (5,842) --
Deficit accumulated during development stage..... (30,912,997) (38,461,639)
------------ ------------
Total shareholders' equity..................... 7,452,667 247,247
------------ ------------
Total liabilities and shareholders' equity..... $ 9,135,189 $ 2,863,995
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period
Year Ended from Inception
------------------------------------- (January 4, 1989)
January 3, January 2, January 1, To January 1,
1998 1999 2000 2000
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Revenues................ $ 725,374 $ 678,000 $ 534,634 $ 1,938,008
Cost of Goods Sold...... 361,536 278,251 266,653 906,440
----------- ----------- ----------- ------------
Gross Margin............ 363,838 399,749 267,981 1,031,568
Operating Expenses:
Research and
development
expenses............. 4,626,390 5,433,471 4,425,739 27,735,868
Selling, general and
administrative
expenses............. 2,306,341 3,107,046 3,426,327 12,463,050
----------- ----------- ----------- ------------
Total operating
expenses........... 6,932,731 8,540,517 7,852,066 40,198,918
----------- ----------- ----------- ------------
Operating loss...... (6,568,893) (8,140,768) (7,584,085) (39,167,350)
----------- ----------- ----------- ------------
Interest income......... 819,675 550,328 130,627 1,948,768
Interest expense........ (106,401) (83,569) (95,184) (1,243,057)
----------- ----------- ----------- ------------
Interest income, net.... 713,274 466,759 35,443 705,711
----------- ----------- ----------- ------------
Net loss................ $(5,855,619) $(7,674,009) $(7,548,642) $(38,461,639)
=========== =========== =========== ============
Basic and diluted net
loss per share (Note
12).................... $ (0.87) $ (1.02) $ (0.97)
=========== =========== ===========
Weighted average basic
and diluted shares
(Note 12).............. 6,693,689 7,489,038 7,749,040
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period
Year Ended from Inception
-------------------------------------- (January 4, 1989)
January 3, January 2, January 1, To January 1,
1998 1999 2000 2000
------------ ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $ (5,855,619) $(7,674,009) $(7,548,642) $(38,461,639)
Adjustments to
reconcile net loss to
net cash used in
operating
activities--
Depreciation and
amortization......... 733,834 676,722 563,953 2,881,227
Noncash interest
converted to notes... 106,401 83,562 46,981 1,107,539
Noncash salary
converted to common
stock................ -- -- -- 250,000
Noncash research and
development expense
converted to
subordinated notes... -- -- -- 9,000
Noncash compensation
expense.............. 1,562 45,653 12,764 1,192,579
Noncash interest
expense on bridge
financing............ -- -- 33,790 33,790
Changes in current
accounts--
Accounts receivable.. -- (260,000) 172,500 (87,500)
Inventories.......... (59,337) (1,071,655) 17,149 (1,437,287)
Prepaid expenses..... 105,699 77,420 189,488 161,401
Other current
assets.............. (240) (6,481) 83,531 47,939
Accounts payable..... (10,281) 48,849 (89,381) 256,982
Accrued expenses..... 150,073 186,902 89,126 505,237
Deferred revenue..... -- -- 87,500 87,500
------------ ----------- ----------- ------------
Net cash used in
operating
activities......... (4,827,908) (7,893,037) (6,341,239) (33,453,230)
------------ ----------- ----------- ------------
Cash flows from
investing activities:
(Purchases) Maturation
of held to maturity
investments.......... (11,889,356) 9,896,300 1,993,056 --
Purchases of equipment
and leasehold
improvements......... (842,023) (622,388) (300,836) (3,873,553)
Loan to officer....... (80,211) -- -- (80,211)
Proceeds from sale of
equipment and
leasehold
improvements......... -- -- -- 9,845
------------ ----------- ----------- ------------
Net cash (used in)
provided by
investing
activities......... (12,811,590) 9,273,912 1,692,220 (3,943,919)
------------ ----------- ----------- ------------
Cash flows from
financing activities:
Proceeds from issuance
of common stock...... 17,389,058 281,362 296,668 18,563,536
Proceeds from issuance
of preferred stock... -- -- -- 13,385,370
Proceeds from issuance
of convertible
notes................ -- -- 800,000 6,122,000
Proceeds from issuance
of warrants.......... -- -- -- 236,453
Offering expenses..... -- -- -- (473,006)
Payments under capital
lease obligations.... -- -- -- (40,735)
Payments of
subordinated notes... -- (262,363) -- (262,363)
------------ ----------- ----------- ------------
Net cash provided by
financing
activities......... 17,389,058 18,999 1,096,668 37,531,255
============ =========== =========== ============
Increase (decrease) in
cash and cash
equivalents........... (250,440) 1,399,874 (3,552,353) 134,104
------------ ----------- ----------- ------------
Cash and cash
equivalents, beginning
of period............. 2,537,023 2,286,583 3,686,457 --
------------ ----------- ----------- ------------
Cash and cash
equivalents, end of
period................ 2,286,583 3,686,457 134,104 134,104
============ =========== =========== ============
Cash paid for:
Interest.............. $ -- $ 262,363 $ 14,413 $ 276,776
============ =========== =========== ============
Noncash financing
activities:
Conversion of salary
expense to common
stock................ $ -- $ -- $ -- $ 250,000
============ =========== =========== ============
Conversion of
convertible
subordinated notes to
common stock......... $ 464,230 $ 787,647 $ -- $ 5,278,892
============ =========== =========== ============
Conversion of common
stock to preferred
stock................ $ -- $ -- $ -- $ 3,846,015
============ =========== =========== ============
Capital lease
obligation incurred
for equipment........ $ -- $ -- $ -- $ 40,383
============ =========== =========== ============
Conversion of
preferred stock to
common stock......... $ 28,923 $ -- $ -- $ 28,923
============ =========== =========== ============
Conversion of
convertible
subordinated notes to
warrants............. $ -- $ -- $ -- $ 47,000
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Common Deficit
Preferred Common Stock Preferred Accumulated
Stock, Stock, Capital in Stock Capital During
$0.01 $0.01 Excess of in Excess of Deferred Subscription Development
Par Value Par Value Par Value Par Value Compensation Receivable Stage
--------- --------- ----------- ------------- ------------ ------------ ------------
<S> <C> <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
convertible
subordinated notes and
related accrued
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
convertible
subordinated notes and
related accrued
interest into common
stock................. -- 4,714 248,686 -- -- -- --
Issuance of preferred
stock, Series C....... 10,992 -- 9,338,608 -- (500,000) --
Extension of stock
options............... -- -- 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................. -- 142 64,106 -- -- 15,073 --
Proceeds from issuance
of Series C Preferred
Stock................. 111 -- -- 99,889 -- 500,000 --
Extension of stock
options............... -- -- 272,600 -- -- -- --
Net Loss............... -- -- -- -- -- -- (4,958,771)
-------- -------- ----------- ----------- -------- --------- ------------
Balance, December 28,
1996................... 28,923 15,979 2,679,724 17,202,463 -- (57,931) (17,383,369)
Issuance of common
stock................. -- 22,750 16,796,104 -- -- -- --
Anti-dilution,
preferred stock,
Series C.............. -- 355 (355) -- -- -- --
Conversion of preferred
stock, Series A....... (12,820) 12,820 3,833,195 (3,833,195) -- -- --
Conversion of preferred
stock, Series B....... (5,000) 5,000 3,930,771 (3,930,771) -- -- --
Conversion of preferred
stock, Series C....... (11,103) 11,103 9,438,497 (9,438,497) -- -- --
Conversion of
convertible
subordinated notes and
related accrued
interest into common
stock................. -- 4,135 460,095 -- -- -- --
Exercise of stock
options............... -- 1,480 63,370 -- -- -- --
Recording of deferred
compensation.......... -- -- 18,743 -- (17,180) -- --
Payment of subscription
receivable............ -- -- -- -- 32,348 --
Net Loss............... -- -- -- -- -- -- (5,855,619)
-------- -------- ----------- ----------- -------- --------- ------------
Balance, January 3,
1998................... -- 73,622 37,220,144 -- (17,180) (25,583) (23,238,988)
Conversion of
convertible
subordinated notes and
related accrued
interest into common
stock................. -- 2,262 785,385 -- -- -- --
Exercise of stock
options............... -- 485 59,135 -- -- -- --
Exercise of warrants... -- 673 201,327 -- -- -- --
Recording of deferred
compensation.......... -- -- 58,386 -- (12,733) -- --
Payment of subscription
receivable............ -- -- -- -- -- 19,741 --
Net Loss............... -- -- -- -- -- -- (7,674,009)
-------- -------- ----------- ----------- -------- --------- ------------
Balance, January 2,
1999................... $ -- $ 77,042 $38,324,377 $ -- $(29,913) $ (5,842) $(30,912,997)
Exercise of stock
options............... -- 646 290,180 -- -- -- --
Recording of deferred
compensation.......... -- -- 26,627 -- 19,927 -- --
Payment of subscription
receivable............ -- -- -- -- -- 5,842 --
Net Loss............... -- -- -- -- -- -- (7,548,642)
-------- -------- ----------- ----------- -------- --------- ------------
Balance, January 1,
2000................... $ -- $ 77,688 $38,641,184 $ -- $ (9,986) $ -- $(38,461,639)
======== ======== =========== =========== ======== ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Relationship to Principal Shareholders
On January 4, 1989, Photoelectron Corporation (the "Company") was founded as
a joint financing by Thermo Electron Corporation ("Thermo Electron") and PYC
Corporation ("PYC"), which is owned by members of the immediate family of Mr.
Peter M. Nomikos. Since inception, the majority of the Company's time and
effort has been focused on the design, development and commercialization of a
miniature x-ray source which is a proprietary, therapeutic device for the
treatment of cancerous tumors through the application of radiation directly
into a tumor. The latest version of this x-ray system is the PRS400 system
which delivers radiation through a thin, minimally invasive, needle-like
probe. The probe emits from its tip precisely regulated x-ray photons. To
management's knowledge, no company has yet marketed a salable product using
technology similar to the PRS400 system 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. These funds may not be readily available
to the Company.
The Company has completed clinical studies of PRS treatment of brain tumors
under an Investigational Device Exemption (IDE) granted by the U.S. Food and
Drug Administration (FDA) and similar approvals in other countries. Based on
results of these clinical trials, the Company obtained a Section 510(k)
marketing clearance on July 21, 1998 for the PRS400 system for the treatment
of intra-cranial tumors, which the Company was developing for introduction as
its first commercial product. Simultaneous with completion of the PRS400
system product development, the Company was completing implementation of
programs to insure compliance with the FDA's cGMP standards. The Company also
completed the process of seeking certification to the Medical Device Directive
Annex II, enabling self-certification of the European Community Mark (CE). On
December 18, 1998, the Company initiated commercial distribution of the PRS400
system. In September 1999, the Company obtained a Section 510(k) marketing
clearance from the FDA to market the system for radiotherapy treatments,
regardless of treatment site.
In the first quarter of 2000, the Company and Toshiba expect to submit to
the Japan Ministry of Health an application for product approval (shonin) of
the PRS400 system. Contingent upon that submission being made in timely
fashion, the Company and Toshiba expect to obtain product approval (shonin) in
Japan for the PRS400 system in the second half of 2000. Once regulatory
approvals for the PRS system are obtained in Japan, Toshiba will serve as its
exclusive distributor in Japan. In 1995, Toshiba invested approximately $2
million in equity of the Company's Series C Preferred Stock offering, which
converted to common stock upon the closing of the Company's initial public
offering (See Note 10).
In August 1999, the Company entered into a strategic alliance with Carl
Zeiss, an international technology leader whose medical systems division
specializes in high technology equipment such as surgical microscopes for
various medical disciplines and state-of-the-art image-guided surgery
equipment. The Company appointed Carl Zeiss as its exclusive distributor for
the PRS400 system throughout the world (except for Japan where Toshiba Medical
Systems is the Company's distributor of the PRS400 system) for intracranial
applications and spinal radiotherapy and as its non-exclusive distributor for
the PRS400 system in the same territory for all other clinical applications.
In addition, Carl Zeiss agreed to assist the Company in the development of new
intraoperative radiotherapy products and to provide service and support for
the Company's products. The alliance with Carl Zeiss gives the Company access
to a global sales force with an established record of sales of high technology
equipment within the medical field.
F-7
<PAGE>
The Company has incurred a net loss for the year ended January 1, 2000, as
well as for the period since inception. The Company has funded these losses
principally through debt and equity financings. The Company is anticipating
operating losses and other cash requirements in the next 12 months in excess
of available cash. To sustain current operating costs, management will be
required to obtain additional funding or alternative means of financial
support, or both; however, there can be no assurances that such funding or
financial support will be available or adequate to allow the Company to
continue as a going concern. Management is currently pursuing various sources
of financial support including obtaining private funding. At the present time,
the Company has not entered into an arrangement for additional funding or
financial support. Consequently, there is substantial doubt concerning the
Company's ability to continue as a going concern.
Fiscal Years
The Company has adopted a fiscal year ending on the Saturday nearest
December 31. References to 1999 1998, and 1997 are for the fiscal years ended
January 1, 2000, January 2, 1999, and January 3, 1998, respectively. Fiscal
year 1997 included 53 weeks; 1999 and 1998 each included 52 weeks.
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 systems that will be used for
distribution and in 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
equipment.............. 5 Years
Clinical site
equipment.............. The shorter of three years or the life of the agreement
Furniture and fixtures.. 3-5 Years
Computer equipment &
software............... 2-5 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
As of January 1, 2000, cash and cash equivalents include the Company's
operating accounts and holdings of a money market mutual fund as well as
commercial paper which has an original maturity of three months or less.
Highly liquid investments with an original maturity of 3 months or less at the
date of the acquisition are considered to be cash equivalents. Similar
investments with original maturity beyond three months are classified
F-8
<PAGE>
as held to maturity investments. Cash equivalents are carried at cost, which
approximate market value. The Company did not own any commercial paper at
January 1, 2000.
Held to Maturity Investments
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the
Company classifies its investments in commercial paper as held to maturity and
measures the value of such investments at amortized cost if the Company has
the positive intent and ability to hold such investments to maturity. Interest
income, including amortization of premiums and discounts, is recorded in
earnings. Management reviews all reductions in fair value below book value to
determine if an impairment is other than temporary in nature; if this occurs,
the carrying value of the investment is written down to the appropriate level
by a charge to earnings. As of January 1, 2000, the Company had no held to
maturity investments.
Income Taxes
The Company adopted 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 in the tax returns. The amount of
deferred tax asset or liability is based on the difference between the
financial statement and tax basis 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.
Revenue Recognition
The Company generally recognizes revenue and provides a reserve for its
estimated warranty upon the acceptance of its product by the customer.
Research and Development Expenses
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 systems 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 not
material. Foreign currency transaction gains and losses included in the
accompanying consolidated statements of operations are not material for the
three years presented.
F-9
<PAGE>
Net Loss Per Share
During the fourth quarter of 1997, the Company adopted SFAS 128, "Earnings
per Share" (Note 12). As a result, all previously reported loss per share data
have been restated. Basic loss per share have been computed by dividing net
loss by the weighted average number of shares outstanding during the year.
Diluted loss per share has been computed by excluding the effect of exercising
the stock options which are all anti-dilutive given the operating losses of
the Company, and excluding the exercise of stock options and convertible
securities, which were deemed to be anti-dilutive.
Fair Value of Financial Instruments
The Company's financial instruments primarily consist of cash and cash
equivalents, held to maturity investments, accounts payable and convertible
subordinated notes. 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 $749,063, and approximately $761,770 at January 2, 1999 and
January 1, 2000, respectively, based upon the estimated fair value of the
underlying common stock. The fair value of the convertible note is
approximately $804,311 at January 1, 2000 based upon the estimated fair value
of the underlying common stock. The held to maturity investments are carried
at amortized cost on the accompanying balance sheet. See Note 2 for fair value
disclosure. The carrying amounts of the Company's remaining financial
instruments approximate fair value due to their short-term nature.
Stock Option Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans (Note 11). Accordingly, no accounting
recognition is given to stock options granted at fair market value until they
are exercised. Upon exercise, net proceeds including tax benefits realized, if
any, are credited to equity.
(2) Held to Maturity Investments
Investments in commercial paper are classified as held to maturity as of
January 1, 2000. The amortized cost and fair values as of January 2, 1999 and
January 1, 2000 are as follows:
<TABLE>
<CAPTION>
Commercial Paper
--------------------------------
Gross
Amortized Unrealized
Cost Loss Fair Value
---------- ---------- ----------
<S> <C> <C> <C>
January 2, 1999............................. $1,993,056 ($1,396) $1,991,660
January 1, 2000............................. $ -- $ -- $ --
</TABLE>
All the commercial paper has a contractual maturity due within one year.
(3) Accrued Liabilities
Accrued expenses in the accompanying balance sheet includes the following
balances:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Warranty Accrual.......................................... $204,000 $266,000
Annual Report Accrual..................................... 61,000 60,000
Other Accrued Expenses.................................... 296,650 304,495
-------- --------
$561,650 $630,495
======== ========
</TABLE>
F-10
<PAGE>
(4) Income Taxes
The components of the deferred tax asset at January 2, 1999 and January 1,
2000 are as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax asset--
Federal tax loss carryforwards................. $ 9,185,000 $ 11,846,000
Federal tax credit carryforwards............... 871,000 965,000
State tax loss carryforward.................... 2,070,000 2,602,000
State tax credit carryforward.................. 781,000 904,000
Other, net..................................... 728,000 694,000
------------ ------------
13,635,000 17,011,000
Valuation allowance.............................. (13,635,000) (17,011,000)
------------ ------------
Deferred tax asset............................. -- --
============ ============
</TABLE>
As of January 1, 2000, the Company had federal net operating loss
carryforwards of approximately $34,840,000, state net operating loss
carryforwards of approximately $27,383,000, federal tax credit carryforwards
of approximately $965,000, and state tax credit carryforwards of approximately
$904,000. Due to the fact that the Company has sustained cumulative losses,
the potential future benefit of these attributes, which expire in the years
2000 through 2014, 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.
(5) 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 the SEPP. The impact of the SEPP was not material to the operating results
prior to termination. The Company contributes 50% of the first 6% of annual
contributions by each employee with at least three months of service to the
401(k) Plan. During 1998 and 1999, the Company contributed approximately
$62,997 and $29,057, respectively.
(6) 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 date on an as-
needed basis without a formal contract and is charged at actual cost for such
services. The Company paid $3,253, $4,952 and $6,093 in 1997, 1998 and 1999,
respectively, for these services.
Thermo Power Corporation
The Company is provided with certain services by Thermo Power Corporation, a
wholly-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 $113,582,
$229,953, and $147,315 in 1997, 1998 and 1999, respectively, for these
services. As of January 2, 1999, and January 1, 2000, $534, and
F-11
<PAGE>
$7,284 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.
(7) 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
In 1996, the Company entered into a new operating lease for its office and
research facilities expiring in July, 2002. The minimum lease payments under
the new agreement are $587,820 in 2000, $599,689 in 2001 and $352,360 in 2002.
The total future minimum lease payments are $1,539,869. The accompanying
consolidated statements of operations include expenses for operating leases of
$307,975, $404,914, and $471,859 for 1997, 1998 and 1999, respectively.
(8) 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 were
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 1998. The debentures
were 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 1998. The note was 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, due in 1998. The note was convertible into shares of the Company's
Common Stock at a conversion price of $3.00. All of these debentures also
provide for the conversion of accrued interest into Common Stock at maturity.
The accrued interest is convertible into common stock at a conversion price
equal to the average fair market value of the Company's Common Stock on the
first ten days of trading of the fiscal quarter in which the interest to be
converted accrued.
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 on demand. The Company borrowed $4,252,000 in the form of a demand
loan with detachable warrant purchase rights under this agreement, of which
$705,000 is still outstanding. At January 1, 2000, the Company is not aware of
any intention by Mr. Peter M. Nomikos of converting these debentures into
shares of the Company's common stock. All earned but unpaid interest on the
subordinated demand loan 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.
The warrant purchase rights entitled 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 January 1, 2000, warrants to
purchase 810,000 shares of the Company's Common Stock were outstanding. These
remaining
F-12
<PAGE>
warrants expire as follows 575,000, and 235,000 on September 29, 2000, and
January 27, 2002, respectively. All warrants purchased by Mr. Nomikos have
been accounted for as Capital in excess of par value--common stock.
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 and, upon the closing
of the Company's initial public offering in 1997, converted again into stock.
(See Note 10).
In 1997, 171,257 and 242,334 shares of Common Stock were issued upon the
conversion of $125,000 principle amount and $65,210 of related accrued
interest and $175,000 principle amount and $99,020 accrued interest of
subordinated convertible debentures to Thermo Electron Corporation and Mr.
Peter M. Nomikos, respectively.
In 1998, 226,170 shares of Common Stock were issued upon conversion of
$500,000 principal amount and $287,647 accrued interest of subordinated
convertible debentures to Mr. Peter M. Nomikos. Also in 1998, 67,333 shares of
Common Stock were issued for warrants exercised of $202,000 to PYC
Corporation.
(9) Convertible Note Payable
On November 15, 1999, the Company and PYC Corporation entered into a six
month $2.25 million line of credit at an 8% interest rate. This note is
convertible into Common Stock at the holder's request within 30 days
subsequent to its maturity or upon full prepayment. The conversion price per
share will be equal to the average closing price of the stock for the ten
trading days prior to such conversion. As of January 1, 2000, the Company had
drawn down $800,000 under the line of credit and had issued to PYC Corporation
warrants to purchase an aggregate of 160,000 shares of the Company's Common
Stock with an exercise price equal to the average closing price of the
Company's Common Stock for the ten trading days preceding each draw made under
the line of credit. The warrants were issued in four equal installments on
November 18, 1999, November 30, 1999, December 14, 1999 and December 29, 1999,
with exercise prices of $3.76, $3.44, $2.94 and $2.74 respectively. The fair
value of the warrants issued, in the amount of $33,790, has been recognized as
non cash interest expense.
(10) 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 PYC Corporation 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 1994, 1995
and 1996, Mr. Peter M. Nomikos was granted stock in lieu of compensation in
the amount of 16,667, 6,250 and 5,556 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, 1,282,005 shares of Common Stock were issued upon the conversion
of $3,846,015 of subordinated convertible debentures and accrued interest (See
Note 8).
The Company has authorized 7,500,000 shares of $0.01 par value preferred
stock. 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, subject to certain anti-dilution provisions. The Series A Convertible
Preferred Stock had a liquidation preference of $3.00 per share (See Note 8).
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, subject to certain anti-
dilution provisions. The Series B Convertible Preferred Stock had 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
F-13
<PAGE>
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 on a one-for-one
basis, subject to certain anti-dilution provisions. 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 converted to
Common Stock upon the closing of the Company's Initial Public Offering.
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. The balance of
these notes is $25,583, $5,842 and $0 in 1997, 1998, and 1999 respectively,
and is described in the accompanying balance sheet as a subscription
receivable.
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 has been retroactively restated to reflect
this reverse stock split.
(11) Stock Option Plan
In 1989, the Company adopted the 1989 Stock Option Plan (the "1989 Plan").
The 1989 Plan provided that options may be granted at any price determined by
the Board of Directors for key employees, directors and consultants. The Board
of Directors granted 733,225 non-qualified stock options under the 1989 Plan.
Options granted under the 1989 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. The Company's Board of
Directors voted on July 17, 1996 to terminate the 1989 Plan, and no further
options may be issued under the 1989 Plan after that date.
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
others of the Company and its subsidiary, 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
others of the Company and its subsidiary. 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 541,775
shares of Common Stock may be issued under the 1996 Plan.
F-14
<PAGE>
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------- ------------------------ -------------------------
Number Number Number
of Range of Option of Range of Option of Range of Option
Shares Price per Share Shares Price per Share Shares Price per Share
-------- --------------- ------- --------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... 817,475 $0.40--$9.00 701,892 $0.40--$9.75 913,592 $0.40--$9.75
Granted................. 61,417 $7.00--$9.75 265,650 $5.38--$8.38 263,000 $2.13--$4.88
Exercised............... (148,000) $0.40--$0.80 (48,500) $0.40--$3.00 (64,500) $0.40--$3.00
Forfeited............... (29,000) $0.40--$9.00 (5,450) $0.80--$7.25 (199,875) $2.13--$9.75
Options outstanding, end
of year................ 701,892 $0.40--$9.75 913,592 $0.40--$9.75 912,217 $0.40--$9.00
Options exercisable..... 408,395 $0.40--$9.00 466,874 $0.40--$9.00 445,468 $0.40--$9.00
Options available for
grant.................. 130,608 145,408 82,283
Weighted average fair
value per share of
options granted during
the year............... $ 4.20 $ 7.24 $ 2.70
</TABLE>
As of January 1, 2000, the options outstanding had a weighted average
remaining contractual life of 7 years.
The Company accounts for stock options under 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. Upon exercise
of the options, the net proceeds, including the tax benefit realized, are
credited to equity.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation", which sets forth a fair value
based method of recognizing stock based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to
account for its stock based compensation plans. Had the compensation cost for
these plans been determined based on the fair value at the grant dates
consistent with the method set forth under SFAS 123, the Company's net loss
and basic and diluted net loss per share would have been the following pro
forma amounts:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net Loss
As Reported........................ $(5,855,619) $(7,674,009) $(7,548,642)
Pro Forma.......................... $(6,212,029) $(8,242,514) $(8,198,743)
Basic and Diluted Net Loss Per Share
As Reported........................ $ (0.87) $ (1.02) $ (.97)
Pro Forma.......................... $ (0.93) $ (1.10) $ (1.06)
</TABLE>
Pro forma compensation expense for options granted is reflected over the
vesting period, therefore future pro forma compensation expense may be greater
as additional options are granted. The fair value of each option grant is
estimated on the grant date using the Black-Scholes option-pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Volatility............................... 51% 105% 48%
Risk Free Interest Rate.................. 5.64% 5.00% 5.00%
Expected Life of Options................. 7.00 years 7.00 years 7.00 years
</TABLE>
Because the pro forma compensation cost under SFAS 123 has not been applied
to option grants prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years as it is reflected over the vesting period of the options.
F-15
<PAGE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded option which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
(12) Net Loss per Share
Basic and diluted net loss per share were calculated as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss.......................... $(5,855,619) $(7,674,009) $(7,548,642)
Weighted average shares........... 6,693,689 7,489,038 7,749,040
----------- ----------- -----------
Basic and Diluted net loss per
share............................ $ (0.87) $ (1.02) $ (0.97)
=========== =========== ===========
</TABLE>
The computation of diluted earnings per share for 1997, 1998 and 1999
excludes the effect of assuming the exercise of all outstanding stock options
and the conversion of convertible securities because the effect would be anti-
dilutive, due to the Company's net loss during these years.
F-16
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on March 31, 2000.
Photoelectron Corporation
/s/ Peter M. Nomikos
By: _________________________________
Peter M. Nomikos
Chairman of the Board and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Euan S. Thomson and Gerald J. Bojas, and
each of them, his true and lawful proxies, attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to (i) act on, sign and title with the
Securities and Exchange Commission any and all amendments to this Annual
Report on Form 10-K, together with all exhibits thereto, (ii) act, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, and (iii) take any and all
actions which may be necessary or appropriate in connection therewith,
granting unto such agents, proxies and attorneys-in-fact, and each of them and
his and their substitute or substitutes, full power and authority to do and
perform each and every act and thing necessary or appropriate to be done in
connection therewith, as fully for all intents and purposes as he might or
could do in person, hereby approving, ratifying and confirming all that such
agents, proxies and attorneys-in-fact, any of them or any of his or their
substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter M. Nomikos Chairman of the Board and March 31, 2000
______________________________________ Chief Executive Officer
(Peter M. Nomikos) (Principal Executive
Officer)
/s/ Euan S. Thomson President and Chief March 31, 2000
______________________________________ Operating Officer
(Euan S. Thomson)
/s/ Gerald J. Bojas Chief Financial Officer March 31, 2000
______________________________________ and Treasurer (Principal
(Gerald J. Bojas) Financial Officer and
Principal Accounting
Officer)
/s/ George N. Hatsopoulos Director March 31, 2000
______________________________________
(George N. Hatsopoulos)
/s/ Roger D. Wellington Director March 31, 2000
______________________________________
(Roger D. Wellington)
</TABLE>
F-17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*3.1 Articles of Organization of the Company, as amended.
*3.2 Forms of Articles of Amendment of the Company.
**3.3 By-Laws of the Company, as amended.
*4.1 Specimen Certificate representing the Company's Common Stock.
*4.2 Subordinated Convertible Note Purchase Agreement among the Company,
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 the Company, 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 the Company 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 the Company 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 the Company, 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 the Company 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 the Company
and Peter M. 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 the Company 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 the Company to Peter M. Nomikos in the principal amount of
$705,000 dated as of August 1, 1996.
***4.11 8% Promissory Note dated as of November 15, 1999 between the Company
and PYC Corporation in the principal amount of $2,250,000.
*10.1 Lease Agreement dated June 12, 1996 between Lexington Development
Company Trust and the Company.
*10.2 Cash or Deferred Profit Sharing Plan and Trust dated April 1, 1995, as
amended, of the Company.
*10.3 Employee Stock Purchase Plan of the Company and form of Subscription
Agreement.
*10.4 1989 Employee Stock Option Plan of the Company and forms of Stock
Option Agreements.
*10.5 1996 Equity Incentive Plan of the Company.
*10.6 Form of Stock Purchase Warrant issued to certain security holders of
the Company and Schedule of Substantially Identical Documents from
Exhibits.
*10.7 Stock Option Agreements variously dated between certain directors and
officers of the Company and the Company.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*10.12 Form of Registration Rights Agreement between the Company and holders
of Series C Preferred Stock.
*10.13 Registration Rights Agreement dated December 22, 1995 between the
Company and Toshiba Medical Systems Co., Ltd.
*10.14 Technology Cross License Agreement dated as of January 4, 1989
between the Company and Thermo Electron Corporation.
*10.15 International Distributor Sales and Service Agreement dated December
13, 1995, as amended, between the Company and Toshiba Medical Systems
Co., Ltd.
*10.16 Agreement dated as of February 1, 1991, as amended, between the
Company 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 the Company.
*10.18 Investigational Treatment Agreement dated as of September 1, 1994
between the General Hospital Corporation, Rees G. Cosgrove, M.D. and
the Company.
*10.19 Clinical Research Agreement dated as of April 1, 1995, as amended,
between the Brigham and Women's Hospital Corporation, Peter Black,
M.D. and the Company.
*10.20 Clinical Trial Agreement dated as of January 1, 1995 between the
Tokyo Women's Medical College, Kintomo Takakura, M.D. and the
Company.
*10.21 Clinical Trial Agreement dated December 13, 1995, as amended, between
the Company 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 the Company.
*10.24 Forms of Medical Advisory Board Agreements between the Company and
members of its Medical Advisory Board.
***10.25 Development and Distribution Agreement between the Company and Carl
Zeiss Oberkochen dated August 21, 1999 and exhibits thereto (portions
of Page 2 of Schedule 1 and Pages 1-8 of Schedule 4.3(a) of this
exhibit have been omitted pursuant to a request for confidential
treatment and have been filed separately with the Commission).
***10.26 SNN Member Agreement between the Company and Surgical Navigation
Specialists Inc. dated June 30, 1999 and exhibits thereto.
***10.27 Loan Agreement between the Company and PYC Corporation dated November
15, 1999 and exhibits thereto.
*21.1 Subsidiaries of the Company.
***23 Consent of independent accountants.
***24.1 Power of Attorney (including in signature page to this Form 10-K).
***27 Financial Data Schedule.
</TABLE>
- --------
* Filed as same numbered exhibit to the Company's Registration Statement on
Form S-1 (Reg. No. 333-14541) and incorporated herein by reference.
** Filed as same numbered exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 3, 1998 and incorporated herein by
reference.
*** Filed herewith.
2
<PAGE>
EXHIBIT 4.11
Photoelectron Corporation
Promissory Note
$2,250,000 November 15, 1999
Lexington, Massachusetts
For value received, the undersigned hereby promises to pay to PYC
Corporation, a Liberian corporation ("PYC"), or order, the principal amount of
Two Million Two Hundred and Fifty Thousand and no/100 Dollars $2,250,000) (or
such lesser amount as shall have been advanced and remain outstanding and
unpaid) on six months from the date hereof as described in the Agreement
referred to below, in immediately available funds, and to pay interest on the
unpaid principal amount hereof in like funds, for the period commencing on the
date hereof until paid in full, at the rate of 8% per annum.
Terms not otherwise defined herein shall be used as defined in such
Agreement.
Overdue payments of principal (whether at stated maturity, by acceleration
or otherwise), and, to the extent permitted by law, overdue interest, shall bear
interest, payable on demand in immediately available funds, at a rate per annum
equal to 4% above the rate provided in such Agreement.
The undersigned may request advances under this Note once every 30 days
during the period from the date of this Note until the maturity hereof, whether
stated maturity or accelerated maturity pursuant to the terms hereof. Each such
request shall be in writing, addressed to PYC at the address thereof in the
Agreement and may be in any amount, not exceeding $400,000 or such lesser amount
which, together with all amounts advanced previously under this Note and
remaining outstanding, does not exceed $2,250,000 in the aggregate, as the
undersigned may specify.
This Note is issued pursuant to, and entitled to the benefits of, and is
subject to, the provisions of a Loan Agreement dated November 15, 1999 by and
between the undersigned and PYC (herein, as the same may from time to time be
amended or extended, referred to as the "Agreement"), but neither this reference
to the Agreement nor any provision thereof shall affect or impair the absolute
and unconditional obligation of the undersigned maker of this Note to pay
principal of and interest on this Note as herein provided.
<PAGE>
-2-
In case any default in the terms hereof or of the Agreement shall occur, or
if the undersigned shall file for bankruptcy protection or become insolvent, the
aggregate unpaid principal of, plus accrued interest on, this Note shall become
or may be declared to be due and payable and no further advances pursuant to
this Note shall be required.
The undersigned may, at its option, prepay all or any part of the principal
of this Note before maturity and is obligated to prepay this Note upon receipt
by the undersigned of the proceeds of any future financings of the undersigned,
the net proceeds of which to the undersigned in the aggregate equal or exceed
$5,000,000.
Upon the maturity or entire prepayment of this Note, PYC shall have the
option, exercisable by written notice to the undersigned within 30 days
subsequent to such maturity or prepayment, to convert this Note into Common
Stock of the undersigned at a conversion price per share equal to the market
price per share of Common Stock as of the date of such conversion, determined
using the method set forth in the last sentence of (S)2 of the Agreement for
determining the exercise price per Warrant (as defined in the Agreement).
The undersigned hereby waives presentment, demand, notice of dishonor,
protest and all other demands and notices in connection with the delivery,
acceptance, performance and enforcement of this Note.
This instrument shall have the effect of an instrument executed under seal
and shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).
PHOTOELECTRON CORPORATION
By: /s/ Euan S. Thomson
------------------------------------------
Title: President and Chief Operating Officer
---------------------------------------
<PAGE>
EXHIBIT 10.25
DEVELOPMENT AND DISTRIBUTION AGREEMENT
This Development and Distribution Agreement is made as of the 21 day of
August, 1999 by and between Photoelectron Corporation, a Massachusetts
corporation ("Photoelectron"), and Carl Zeiss Oberkochen, a trust foundation
organized and existing under the laws of Germany ("Zeiss").
BACKGROUND
A. Photoelectron is a medical device company that has developed and
commercialized the Photon Radiosurgery System (as defined below), a
proprietary x-ray delivery system for the treatment of tumors and other
clinical conditions.
B. Zeiss is a medical device company which (i) using its proprietary technology
and know-how, has developed and will continue to develop, on its own or in
collaboration with third party vendors, medical devices, and (ii) has
developed and maintains a world-wide marketing and sales force for the
promotion, marketing, sales, distribution, installation and support of
medical devices.
C. Photoelectron desires to engage Zeiss (i) to develop certain products using
Photoelectron's proprietary technology, and (ii) to promote, market, sell,
distribute, install and support such products in the Territory (as defined
below), all in accordance with the terms and provisions of this Agreement,
and Zeiss desires to be so engaged.
In consideration of the mutual covenants, agreements and representations
set forth in this Agreement, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
Capitalized terms not otherwise defined herein shall have the following
meanings in this Agreement:
"Additional Products" means any medical device or system that incorporates
proprietary technology and/or products of Photoelectron, but excluding the
Photon Radiosurgery System, Product Two, Product Three and Product Four
(except to the extent any such Product is incorporated in any such
Additional Product).
"Affiliate" with respect to any Person shall mean any entity (including without
limitation any other Person) controlled by, controlling or under common
control with such Person, and any director, officer, agent or employee of
such person or such entity. For the purposes hereof, "control" shall mean
direct or indirect ownership of 20% or more of the voting stock or other
class of equity interest in any entity, or the power to elect or appoint a
majority of the board of directors or other governing body of such entity,
or the power to otherwise manage or direct the business affairs of such
entity.
-1-
<PAGE>
"Field" means intracranial ear, nose, throat and spinal radiotherapy.
"Intellectual Property" means all patents, copyrights, designs and drawings,
engineering and manufacturing documents, technical manuals, patterns,
processes, formulae, know-how, trade secrets, trademarks, service marks,
trade names, inventions and discoveries (whether patentable or not),
computer software, and other similar rights, and all applications therefor
and registrations thereof and all rights to sue for past, present and
future infringement or other violations of any of the foregoing.
"Marks" means any and all trademarks, service marks, names, and designs used by
Photoelectron in connection with the Photoelectron Product Line.
"Person" shall mean a natural person, corporation, association, trust,
(including a business trust), partnership, limited liability company, joint
stock company, organization, entity, company, foundation or proprietorship
or any similar entity.
"Photoelectron Component" means any device, component, part, accessory or
consumable in the Photoelectron Product Line.
"Photoelectron Intellectual Property" has the meaning set forth in Section 3.1.
"Photoelectron Product Line" means the Photoelectron proprietary x-ray delivery
system for the treatment of tumors and other clinical conditions as
described in Schedule 1 to this Agreement, any parts, accessories or
consumables for use with such system, and any improvements, redesigns,
successor models and other developments thereto.
"Photoelectron Limited Warranty" has the meaning set forth in Section 4.9(a).
"Price List" has the meaning set forth in Section 4.3(a).
"Photon Radiosurgery System" means those components of the Photoelectron Product
Line applied for use in intracranial radiosurgery, including without
limitation the PRS 400 device, and any improvements, redesigns, successor
models and other developments thereto.
"Product Two" means the proposed intraoperative radiotherapy system to be
comprised of the Photon Radiosurgery System and the Zeiss MKM Microscope
system, featuring an adapter system to enable the Photon Radiosurgery
System x-ray source to be mounted on the tool holder of the MKM, designed
for radiotherapy treatments of the brain, head and neck area, and any
improvements, redesigns, successor models and other developments thereto,
but excluding from such definition Product Four.
-2-
<PAGE>
"Product Three" means the proposed intraoperative radiotherapy system to be
comprised of the Photon Radiosurgery System and the Zeiss NC3X microscope
system or other similar Zeiss support stand, designed for general-purpose
intraoperative radiotherapy, and any improvements, redesigns, successor
models and other developments thereto, but excluding from such definition
Product Two and Product Four.
"Product Four" means an intraoperative radiotherapy system fully integrated into
the SNN platform. The parties hereto acknowledge that Product Four may
also include a fully integrated intraoperative radiotherapy system on the
basis of the SNN platform to be comprised of Product Two and /or Product
Three and the proposed image-enhanced system to be developed in
collaboration with SNS and SNN.
"Products" means the Photon Radiosurgery System, Product Two, Product Three
and/or Product Four together with any Additional Products as are expressly
made subject to this Agreement by agreement of the parties hereto.
"PRS Unit" means any medical device that contains as components parts the
control unit and x-ray source manufactured by Photoelectron as component
parts of the Photon Radiosurgery System.
"Sales Plan" has the meaning set forth in Section 4.1(b).
"Service Contract" has the meaning set forth in Section 4.10.
"SNN" means the Surgical Navigation Network, a voluntary organization in which
both Photoelectron and Zeiss are members that enables medical equipment
companies to provide their customers with a surgical navigation network
platform integrated with their own product lines.
"SNS" means Surgical Navigation Specialists, Inc., a corporation organised under
the laws of Ontario, Canada.
"Sublicensee" means a party other than Photoelectron, Zeiss or their respective
Affiliates that is licensed or subcontracted by Photoelectron or Zeiss to
develop, manufacture, use or sell one or more of the Products in a certain
country or countries during the Term.
"Term" shall have the meaning set forth in Section 9.1.
"Territory" means the world, excluding Japan, except as may otherwise be
specifically agreed upon in writing by the parties subsequent to the date
of this Agreement.
"Zeiss Intellectual Property" has the meaning set forth in Section 3.1(b).
-3-
<PAGE>
ARTICLE II. DEVELOPMENT
2.1 Development of Product Two. Photoelectron hereby engages Zeiss to
--------------------------
develop Product Two in accordance with a development plan (the "Product Two
Development Plan") to be mutually agreed upon by the parties hereto, and upon
completion thereof such Product Two Development Plan shall be automatically made
a part hereof as Schedule 2.1. The parties hereto acknowledge that time is of
------------
the essence with respect to the creation and implementation of the Product Two
Development Plan and shall exercise diligent efforts to assure such completion
and implementation in accordance with the timetable set forth in the Product Two
Development Plan. Each party shall bear its own expenses in connection with the
negotiation and development of the Product Two Development Plan. Photoelectron
shall provide Zeiss with all cooperation reasonably necessary in connection with
the development of Product Two; provided, however, that Zeiss (and not
Photoelectron) shall bear all costs of development pursuant to the Product Two
Development Plan and any future developments with respect to Product Two except
as may be expressly provided in this Agreement. From time to time during the
Term, the parties hereto may agree to produce additional development plans for
improvements, enhancements or successor models of Product Two, each of which
development plans automatically shall be made a part hereof.
2.2 Development of Product Three. Photoelectron hereby engages Zeiss to
----------------------------
develop Product Three in accordance with a development plan (the "Product Three
Development Plan") to be mutually agreed upon by the parties hereto, and upon
completion thereof such Product Three Development Plan automatically shall be
made a part hereof as Schedule 2.2. The parties hereto acknowledge that time is
------------
of the essence with respect to the creation and implementation of the Product
Three Development Plan and shall exercise diligent efforts to assure such
completion and implementation in accordance with the timetable set forth in the
Product Two Development Plan. Each party shall bear its own expenses in
connection with the negotiation and development of the Product Three Development
Plan. Photoelectron shall provide Zeiss with all cooperation reasonably
necessary in connection with the development of Product Three. provided,
however, that Zeiss (and not Photoelectron) shall bear all costs of development
pursuant to the Product Three Development Plan subject to partial reimbursement
by Photoelectron as follows: Photoelectron shall reimburse Zeiss for one
hundred percent (100%) of the aggregate documented development costs incurred by
Zeiss in connection with the development of Product Three up to a maximum of
$100,000, such reimbursement to be made at the rate of $5,000 for each PRS Unit
sold by Photoelectron to Zeiss or any other distributor or customer pursuant to
this Agreement. Zeiss shall deliver to Photoelectron and Photoelectron shall
retain, a prototype of Product Three; the actual component costs to Zeiss for
such prototype shall be reimbursed to Zeiss by Photoelectron.
2.3 Development of Product Four. The parties anticipate that the
---------------------------
development of Product Four will be achieved by SNS in cooperation with Zeiss
and Photoelectron. Each party shall provide SNS with all cooperation reasonably
necessary in connection
-4-
<PAGE>
with the development of Product Four. It is anticipated that all development
costs of Product Four for the integration into the SNN platform will be covered
by Photoelectron's and Zeiss' subscriptions to SNN, and that all other
development costs associated with Product Four shall be apportioned between
Photoelectron and Zeiss as they may agree in writing in the development plan for
Product Four.
2.4 Development of Additional Products. From time to time during the
----------------------------------
Term, the parties may agree to develop Additional Products. The terms of any
such development effort shall be negotiated in good faith by the parties.
2.5 Cooperation; Records. Photoelectron and Zeiss recognize that the
--------------------
successful development of Products Two, Three and Four, together with any
Additional Products, will require their full cooperation, and each party hereto
commits to provide such cooperation. With respect to any development activity
conducted pursuant to this Agreement, the parties hereto shall maintain accurate
and detailed records regarding all development activities and shall from time to
time and upon the reasonable request of either party, provide reports and other
information to such party regarding the progress of the applicable development
activity.
ARTICLE III. INTELLECTUAL PROPERTY
3.1 Intellectual Property.
---------------------
(a) Photoelectron Intellectual Property. Except to the extent
-----------------------------------
specifically provided in this Agreement, Photoelectron shall at all times own
and retain any and all rights in, to and under Intellectual Property associated
with the Photoelectron Product Line, whether created, developed or enhanced by
Photoelectron, or by Zeiss ("Photoelectron Intellectual Property"). To the
extent that Zeiss develops or enhances any Photoelectron Intellectual Property,
Zeiss hereby irrevocably and exclusively assigns, and hereby agrees to execute
and deliver any other documents Photoelectron may require in order to vest in
Photoelectron, all right, title and interest therein to Photoelectron, so that
all such Photoelectron Intellectual Property shall belong exclusively to
Photoelectron with Photoelectron having the right to obtain and hold in
Photoelectron's own name, all copyrights, registrations, patents, patent rights,
trademarks, servicemarks or such other protections as may be appropriate to the
subject matter, and any extensions or renewals thereof.
(b) Zeiss Intellectual Property. Zeiss shall at all times own and
---------------------------
retain any and all rights in, to and under Intellectual Property associated with
all Products subject to this Agreement (other than the Photoelectron
Radiosurgery System and any other Photoelectron Components) whether created,
developed or enhanced by Zeiss or Photoelectron ("Zeiss Intellectual Property").
To the extent that Photoelectron develops or enhances any Zeiss Intellectual
Property, Photoelectron hereby irrevocably and exclusively assigns, and hereby
agrees to execute and deliver any other documents Zeiss may require in order to
vest in Zeiss, all right, title and interest therein to Zeiss, so that all
-5-
<PAGE>
such Zeiss Intellectual Property shall belong exclusively to Zeiss with Zeiss
having the right to obtain and hold in Zeiss' own name, all copyrights,
registrations, patents, patent rights, trademarks, servicemarks or such other
protections as may be appropriate to the subject matter, and any extensions or
renewals thereof.
(c) Jointly Owned Intellectual Property. All copyrights,
-----------------------------------
registrations, patents, patent rights, trademarks, servicemarks or such other
protections as may be appropriate to the subject matter with respect to the
combination of a radiation therapy source with a stereotactically guided
microscope system (collectively, "System Rights") shall be owned jointly by
Zeiss and Photoelectron. Neither party shall have the right to commercialize or
otherwise sublicense any such System Rights with or to any third party that is a
direct or indirect competitor with the other party hereto without the prior
consent of the other which consent shall not be unreasonably withheld.
3.2 Licenses to Zeiss. Photoelectron hereby grants to Zeiss for the Term
-----------------
an exclusive, fully-paid, world-wide, royalty-free license to the Photoelectron
Intellectual Property solely for the following purposes: (i) to undertake the
development of Product Two, Product Three and Product Four in accordance with
this Agreement, (ii) to assemble Product Two, Product Three and Product Four for
distribution in accordance with this Agreement, and (iii) to market and
distribute the Products in accordance with this Agreement.
3.3 Trademarks and Service Marks. Without limitation of the foregoing
----------------------------
Section 3.2, Photoelectron hereby grants to Zeiss a non-exclusive right to
display the Marks in the Territory in connection with performing Zeiss'
obligations under this Agreement. The Marks may be used as part of the name
under which Zeiss' business is conducted only with the prior written approval of
Photoelectron. Zeiss will change or discontinue the use of any Mark upon the
written request of Photoelectron. Upon termination or expiration of the Term of
this Agreement, Zeiss will immediately discontinue or cause to be discontinued
at its expense, all use of Marks. Thereafter, Zeiss will not use, either
directly or indirectly, any Marks or any other confusingly similar marks in a
manner likely to cause confusion or mistake or to deceive the public.
3.4 Intellectual Property Covenants.
-------------------------------
(a) By Zeiss. Zeiss hereby covenants that Zeiss and its Affiliates
--------
and its Sublicensees will not at any time utilize, practice, publish or
otherwise use any of the Photoelectron Intellectual Property except as expressly
permitted under this Agreement.
(b) By Photoelectron. Photoelectron hereby covenants that
----------------
Photoelectron and its Affiliates and its Sublicensees will not at any time
utilize, practice, publish or otherwise use any of the Zeiss Intellectual
Property except as expressly permitted under this Agreement.
-6-
<PAGE>
ARTICLE IV. DISTRIBUTION
4.1 Appointment of Distributor.
--------------------------
(a) Grant of Distributorship.
------------------------
(i) Photoelectron hereby appoints Zeiss as (A) the exclusive
distributor of the Photon Radiosurgery System, Product Two, Product Three and
Product Four in the Territory for use in the Field, (B) the non-exclusive
distributor of the Photon Radiosurgery System, Product Two and Product Four in
the Territory outside the Field and (C) the exclusive distributor of Product
Three in the Territory outside the Field, provided that Zeiss may use a third-
party distributor for any such Product with the approval of Photoelectron, which
approval shall not be unreasonably withheld.
(ii) At Zeiss' election, the Territory may and shall be expanded
to include Japan, provided, however, that if and to the extent Photoelectron's
obligations under the exclusive distributorship arrangements now in effect with
a Japanese distributor prohibit such an expansion, the Territory shall be so
expanded only if, when and to the extent that Photoelectron is released from
such exclusive distributorship arrangement.
(iii) No rights or licenses with respect to the Products are
granted or deemed granted under this Agreement or in connection herewith, other
than those rights expressly granted in this Agreement.
(b) Sales Plan. No later than thirty (30) days following execution
----------
of this Agreement, Photoelectron will establish, after consultation with Zeiss,
specific objectives for sales (the "Sales Plan) of the Products in the Territory
for the period ending December 31, 2001, which Sales Plan shall include the sale
of not less than the direct and/or indirect sale of 80 PRS Units, and which
shall be attached to this Agreement and incorporated herein as Schedule
--------
4.1(b)(i). No later than thirty (30) days prior to the end of each calendar year
- ---------
during the Term commencing with the year 2000, Photoelectron will establish,
after consultation with Zeiss, the Sales Plan for the following calendar year.
The Sales Plan for each calendar year may only be modified during such calendar
year with the consent of both Photoelectron and Zeiss.
4.2 Sales to Distributor.
--------------------
(a) Processing of Zeiss' Orders. Each order for any Photoelectron
---------------------------
Component (whether for sale by Zeiss as the Photon Radiosurgery System or as a
component of any other Product) will be submitted by Zeiss in writing and will
be processed by Photoelectron in a timely fashion. In the event of any
conflict, the express terms of this Agreement shall supersede any contrary
provisions in any purchase order, invoice, agreement or other document used by
either party.
-7-
<PAGE>
(b) Sale of Parts, Accessories and Consumables to Zeiss.
---------------------------------------------------
(i) Photoelectron is the sole authorized source for new or
remanufactured parts, accessories and consumables for the Photoelectron Product
Line (whether for sale by Zeiss as the Photon Radiosurgery System or as a
component of any other Product) (hereinafter called "Parts, Accessories and
Consumables").
(ii) Orders for Parts, Accessories and Consumables will be
submitted by Zeiss in accordance with procedures to be mutually agreed upon.
(iii) The initial prices applicable to Parts, Accessories and
Consumables marketed by Photoelectron shall be those set forth on the Price
List. Such prices may be changed by Photoelectron only after reasonable notice
(not less than ninety days). Any such change will not apply to any order from
Zeiss accepted in writing by Photoelectron prior to the effective date of such
change.
(c) Shipment and Delivery.
---------------------
(i) Title to and risk of loss of any Photoelectron Component
shipped to Zeiss shall pass from Photoelectron to Zeiss when Zeiss' shipper
picks up such Photoelectron Component from Photoelectron's loading platform in
Lexington, Massachusetts. Zeiss shall use all reasonable efforts to accept
shipment on the fulfillment date of each order.
(ii) Photoelectron shall use all reasonable efforts to fulfill
each order for any Photoelectron Component submitted by Zeiss within 45 days of
Photoelectron's acceptance of the order from Zeiss.
(iii) Photoelectron shall, at Photoelectron's expense, pack each
ordered Photoelectron Component in accordance with Photoelectron's standard
packing procedure, which shall be suitable to permit shipment of the
Photoelectron Component to the location of the customer or Zeiss (as may be
indicated by Zeiss); provided, however, that if Zeiss requests a modification of
those procedures, Photoelectron shall make the requested modification and Zeiss
shall bear all reasonable expenses incurred by Photoelectron in complying with
such modified procedures which are in excess of the expenses which Photoelectron
would have incurred in following its standard packing procedures.
(iv) Upon installation of any Photoelectron Component by Zeiss,
Zeiss shall examine the Photoelectron Component to determine whether any item or
items included in the Photoelectron Component are in short supply, defective or
damaged. Within ten (10) business days of such installation, Zeiss shall notify
Photoelectron in writing of any shortages, defects or damage which Zeiss claims
existed at the time of such installation. Within ten (10) days of receipt of
such notice, Photoelectron will investigate the claim of shortage, defects or
damage, and inform Zeiss of its findings. If Photoelectron determines that a
shortage, defect or damages exists in
-8-
<PAGE>
such shipment, Photoelectron will promptly, in Photoelectron's sole discretion,
either (A) deliver to Zeiss a replacement for the Photoelectron Component or
(B) repair the Photoelectron Component. Unless notice is given as provided in
this Section 4.2(c)(iv), Zeiss shall be deemed to have accepted any delivered
Photoelectron Components and to have waived all claims for shortages, defects or
damage.
(d) Labeling. Zeiss shall not, without the prior written consent of
--------
Photoelectron, remove, deface, alter, cover, mask, shield or otherwise modify
any label or other information affixed, painted, inscribed or otherwise
appearing on any Photoelectron Component purchased from Photoelectron (including
as incorporated in any Product), nor shall Zeiss, without the prior written
consent of Photoelectron, affix, paint, inscribe or otherwise place any markings
upon any Photoelectron Component (including as incorporated in any Product).
Photoelectron shall not unreasonably withhold consent to any modifications to
information placed by Photoelectron on any Photoelectron Component, to the
extent such modification is required by applicable law regarding disclosure of
the identity of the distributor of such Photoelectron Component.
(e) Updates. Photoelectron further agrees to provide Zeiss with all
-------
current information of the kind which is generally made available by
manufacturers of medical devices to their sales and service personnel concerning
hardware and software modifications or upgrades to any Photoelectron Component.
(f) Discontinuance of and Changes in the Photon Radiosurgery System
---------------------------------------------------------------
and Other Photoelectron Components. If Photoelectron elects to discontinue any
- ----------------------------------
model or version of the Photon Radiosurgery System or any other Photoelectron
Component, Photoelectron shall notify Zeiss in writing ninety (90) days in
advance of such discontinuation. Photoelectron shall endeavor to continue to
supply service parts for the discontinued model or version for a reasonable
period of time from the date of discontinuation, unless such service parts
become unavailable from Photoelectron's suppliers.
4.3 Prices and Fees.
---------------
(a) Prices of Photoelectron Product Line and Related Services.
---------------------------------------------------------
The prices and other terms of sale applicable to the Photoelectron Product Line,
training, support, maintenance and repair services applicable thereto, and any
discounts applicable thereto, are set forth in the attached Schedule 4.3(a),
---------------
(the "Price List") which Price List may be changed by Photoelectron, following
good faith negotiations with Zeiss regarding market pressures and conditions and
only after reasonable notice (not less than ninety days) to Zeiss.
Photoelectron and Zeiss agree that the current Price List reflects U.S.
Distributor prices and that the parties will negotiate in good faith and with
all practicable speed a revised Price List reflecting prices applicable to
distribution which prices shall be incorporated into this Agreement . The terms
of sale applicable to the Photoelectron Product Line may only be changed by
agreement of the parties. Any changes in the price or terms of sale will not
apply to any orders from Zeiss accepted in writing by
-9-
<PAGE>
Photoelectron prior to the effective date of such change. All amounts under this
Agreement shall be calculated and paid in U.S. Dollars.
(b) Premium on Product Three. The parties anticipate that the end-
------------------------
user value of Product Three is expected to significantly exceed the cost of the
components thereof. Accordingly, the parties hereto shall negotiate in good
faith as to the allocation between them of the amount by which the "Net Sales
Price" (defined below) received by Zeiss for any Product Three exceeds the
"Total Costs" to Zeiss of all component parts and costs of sale associated with
such Product Three. For the purposes of the foregoing calculation, "Net Sales
Price" shall mean the actual sales price of the actual Product Three purchased
by a customer or distributor and paid to Zeiss less, to the extent applicable,
sales, use, value-added and excise taxes, fees and royalties, freight,
packaging, insurance and other delivery charges, and any returns, rebates,
refunds, allowances, and discounts. For the purpose of the foregoing
calculation, "Total Costs" to Zeiss shall mean all cost of goods incurred to
Zeiss including the transfer price for the Photon Radiosurgery System unit from
Photoelectron.
4.4 Sales and Sales Support Activities
----------------------------------
(a) By Zeiss. Throughout the Term Zeiss agrees to:
--------
(i) use its best efforts to sell the Products to customers in
the Territory consistent with the rights of Zeiss granted in
Section 4.1;
(ii) promote, through Zeiss' own advertising and sales promotion
activities, the purchase and use of the Products by customers
located in the Territory consistent with the rights of Zeiss
granted in Section 4.1; and
(iii) ensure representation of and sales support for the
Products at major neurosurgical and radiosurgical meetings and
conferences throughout the Territory, including without
limitation the CNS and AANS conferences. Zeiss will also provide
sales personnel to provide sales support to Photoelectron with
respect to the Products at other conferences from time to time
that address clinical activities other than neurosurgery and
radiosurgery. Each party shall bear its own expenses at such
conferences and meetings.
(b) By Photoelectron. In furtherance of the objectives of this
----------------
Agreement, Photoelectron agrees during the term of this Agreement as follows:
(i) Photoelectron shall provide formal training consisting of
two-day technical training sessions at Photoelectron's corporate
headquarters in Lexington, Massachusetts, U.S.A. (or such other
location as Photoelectron shall designate) for such
representatives
-10-
<PAGE>
of Zeiss or its designee(s) as Photoelectron and Zeiss shall
agree, in order for them to become proficient in the use,
maintenance and repair of the Photoelectron Components sold
pursuant to this Agreement. Zeiss shall be responsible for all
out of pocket travel expenses (meals, airfare, hotel, local
transportation, etc.) incurred by the representatives of Zeiss in
connection with any training provided by Photoelectron in
accordance with this Section 4.4(b).
(ii) Photoelectron shall provide technical back-up for the Zeiss
sales process by making available senior Photoelectron staff with
demonstration equipment at reasonable times at Photoelectron's
location in Lexington, Massachusetts. Upon Zeiss' reasonable
request, Photoelectron shall provide additional back-up
demonstrations at locations and times to be agreed by Zeiss and
Photoelectron.
(iii) Photoelectron shall provide sales personnel to provide
sales support to Zeiss with respect to the Products at major
neurosurgical and radiosurgical meetings and conferences,
including the CNS and AANS conferences. Photoelectron will also
represent the Products at other conferences from time to time
that address clinical activities other than neurosurgery and
radiosurgery. Each party shall bear its own expenses at such
conferences and meetings.
4.5 Marketing Literature/Customer Training Material/Promotional Material.
--------------------------------------------------------------------
Photoelectron shall provide Zeiss with a reasonable amount of sales brochures,
catalogs, videotapes and other sales and promotional material and customer
training material prepared from time to time by Photoelectron respecting the
Photoelectron Product Line. Zeiss shall prepare promotional material and
training material for use with Products Two, Three and Four. A copy of all
marketing and promotional material and customer training material prepared by
Zeiss in connection with the marketing of any Product shall be furnished to
Photoelectron for approval, which shall not be unreasonably withheld, prior to
its first commercial use. Any translation of marketing materials or customer
training materials into any language other than English shall be the
responsibility of Zeiss. Photoelectron shall provide all the necessary
documentation in an electronic format to Zeiss. It is agreed that Zeiss may
affix its own name, logos and trademarks on sales materials and customer
training materials, identifying Zeiss as an authorized distributor, and, where
applicable, the exclusive distributor of the Products in the Territory.
4.6 Customer Training. Zeiss shall market customer training services as
-----------------
part of marketing for the Products. Customer training regarding appropriate
techniques and procedures for use and customer maintenance of the Products shall
be provided in accordance with the following provisions:
-11-
<PAGE>
(a) Zeiss shall be responsible for and shall conduct all necessary
customer training with respect to the Zeiss Intellectual Property
components of the Products; and
(b) Photoelectron shall be responsible for (A) providing Zeiss with
printed customer training materials as set forth in Section 4.5 and (B)
providing customer training with respect to any Photoelectron Components
sold pursuant to this Agreement consisting of a two-day course for two
members of a customer's clinical team, at a location to be determined by
Photoelectron.
4.7 Installation. From and after June 30, 2000, Zeiss shall be
------------
responsible for and shall conduct all necessary on-site installation services in
connection with the Products. Prior to June 30, 2000 and upon Zeiss' reasonable
request thereafter, Photoelectron shall provide on-site installation services
(and supervision and training in installation procedures for Zeiss
representatives both on-site and at Photoelectron's headquarters), as requested
from time to time by Zeiss, in exchange for a fee per installation (or per hour
of training) payable to Photoelectron as set forth in the Price List.
4.8 Maintenance and Support.
-----------------------
(a) Photoelectron Call Center. Photoelectron shall conduct real-time
-------------------------
support of any Photoelectron Component (including any Photoelectron Components
incorporated in any other Product, application support and any aspect of the
installation or service of any Photoelectron Component) through a telephone call
center (and eventually through an Internet-based support center), staffed by
qualified Photoelectron technologists during the normal business hours of all
locations in which Products have been sold pursuant to this Agreement.
(b) Service Capability of Zeiss. Within nine (9) months following
---------------------------
the date of this Agreement, Zeiss shall, at Zeiss' expense, engage and maintain
a service and parts handling organization in the Territory, staffed with such
experienced personnel as are necessary to enable Zeiss to perform its
obligations under this Agreement. Zeiss shall, at its expense, maintain
facilities and personnel in the Territory that will enable it promptly and
satisfactorily to perform, at a reasonable fee, all inspection, maintenance and
other necessary servicing of Products sold by Zeiss. Photoelectron shall
maintain an adequate supply of consumables and spare parts of critical
components for Photoelectron Components sold to Zeiss pursuant to this Agreement
at a location suitable to deliver consumables and replacement parts on loan to
Zeiss customers within two business days following notice by Zeiss. Zeiss
agrees to store at no charge to Photoelectron any Photoelectron Component to be
provided to a Zeiss customer as a loan pending service or repair of any other
Photoelectron Component.
(c) Repairs and Service. Repair and service to any Photoelectron
-------------------
Component (including as any such Photoelectron Component incorporated in any
other Product) shall be conducted as follows:
-12-
<PAGE>
(i) Zeiss agrees to provide prompt, efficient, courteous,
workmanlike and quality service to all customers who purchase
Products from Zeiss. To the extent any Photoelectron Component
is then subject to the Photoelectron Limited Warranty, the costs
of any service provided by Zeiss to such Photoelectron Component
shall be reimbursed by Photoelectron to Zeiss at the rate of
eighty percent (80%) of the applicable rate that would otherwise
be charged to the customer therefor by Zeiss.
(ii) If Zeiss is required to replace any defective Photoelectron
Component, Photoelectron will provide such Photoelectron
Component, to be sent via U.S. airmail or UPS Expedited or
equivalent reputable service, to Zeiss at no expense to Zeiss if
the Photoelectron Component is subject to either the
Photoelectron Limited Warranty or a Service Contract and
otherwise at the rates set forth therefor on the Price List plus
actual shipping costs incurred.
(iii) Any factory repair by Photoelectron shall be conducted at
no expense to Zeiss if the Photoelectron Component is subject to
either the Photoelectron Limited Warranty or a Service Contract
and otherwise at the rates set forth therefor on the Price List.
(iv) Zeiss shall provide each customer for whom repairs or
adjustments are performed a copy of the repair order reflecting
all services performed. A copy of all such repair orders shall
be sent to Photoelectron on a monthly basis.
(v) If, after reasonable effort and consultation with
Photoelectron, Zeiss is unable to repair any Photoelectron
Component, Photoelectron will send a technical representative to
the customer site to effect the repairs. If the Photoelectron
Component is under either the Photoelectron Limited Warranty or a
Service Contract, Photoelectron shall be responsible for the
expenses related to the service call by the Photoelectron
technical representative. If the Photoelectron Component is not
under either the Photoelectron Limited Warranty or a Service
Contract, Zeiss shall bear the full expense of the service call,
including payment to Photoelectron for the technician's time in
accordance with the Price List and for any replacement parts in
accordance with the prices set forth on the Price List.
(d) Operator and Service Manuals. Photoelectron shall provide two
----------------------------
sets of operator and service manuals per Photon Radiosurgery System sold to
Zeiss.
-13-
<PAGE>
(e) Field Service Problem Reports. Zeiss shall provide field service
-----------------------------
problem reports to Photoelectron and Photoelectron shall respond to these
reports in writing and in a timely manner.
(f) Mandatory Upgrades. Photoelectron shall provide to Zeiss all
------------------
required parts for mandatory upgrades at no charge to Zeiss. Zeiss shall
provide labor for installation, and Photoelectron shall reimburse Zeis therefor
at a rate equal to eighty percent (80%) of the standard Zeiss customer service
rate applicable to the location of service delivery, unless such service may be
provided in connection with a regularly scheduled service call in which case
such rate shall be equal sixty percent (60%) of such standard customer service
rate.
(g) Sales and Service Records and Estimates. It is the
---------------------------------------
responsibility of Zeiss to maintain complete and up-to-date records covering
sales and service of any Photoelectron Component. Such records will be
retained for at least five (5) years.
4.9 Warranty.
--------
(a) WARRANTY. Photoelectron warrants each Photoelectron Component
------------
(excluding consumables such as sheaths and other limited use components) sold to
Zeiss and sold by Zeiss to any customer of Zeiss (whether as a stand-alone
Product or as incorporated in any other Product) as set forth on Schedule 4.9(a)
---------------
to this Agreement (such warranty is hereinafter referred to as the
"Photoelectron Limited Warranty").
(b) Warranty Limitation. THE WARRANTY OBLIGATIONS SET FORTH IN THIS
-------------------
SECTION 4.9 ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES WITH RESPECT TO
THE PHOTOELECTRON COMPONENTS, EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO
THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
ANY IMPLIED WARRANTY ARISING OUT OF A COURSE OF DEALING OR OF PERFORMANCE,
CUSTOM OR USAGE IN THE TRADE. ZEISS' EXCLUSIVE REMEDY FOR A DEFECT IN ANY
PRODUCT OR PHOTOELECTRON COMPONENT SHALL BE THAT AS STATED IN SECTION 4.9(A).
4.10 Post-Warranty Period Service Contract. At any time, Zeiss may
-------------------------------------
purchase a service contract covering a specific Core Photon Radiosurgery System
and all Photoelectron Components purchased in connection therewith (a "Service
Contract") at the price set forth on the Price List, which Service Contract
shall (i) become effective one (1) year after installation of the applicable
Core Photon Radiosurgery System and (ii) will include the services set forth on
Schedule 4.10.
- -------------
4.11 Legal Compliance. Photoelectron shall be responsible for obtaining,
----------------
at its own expense, any authorization necessary for importation to and sale in
the Territory of any Photoelectron Component to be sold by Zeiss as a part of
any of the Products and Photoelectron agrees to use Photoelectron's reasonable
efforts to obtain any
-14-
<PAGE>
such regulatory or other governmental approvals and clearances in a timely
manner. Except as expressly provided in the foregoing sentence, Zeiss shall be
responsible for obtaining, at its own expense, any authorization necessary for
importation to and sale in the Territory of the Products and Zeiss agrees to use
Zeiss' reasonable efforts to obtain any such regulatory or other governmental
approvals and clearances in a timely manner. Without limitation of the
foregoing, Photoelectron and Zeiss shall mutually cooperate in a manner
consistent with their respective resources to ensure that the Products comply
with all local laws, standards and regulations applicable to sale or use of the
Products in the Territory. Photoelectron shall provide to Zeiss all
documentation and assistance which is reasonably necessary for Zeiss in
connection with the foregoing. Zeiss shall use best efforts to ensure that all
permits, approvals, licenses and other rights necessary to permit the
importation, sale, use and reimbursement of the Photon Radiosurgery System in
the Territory shall be in the name of and shall be owned by (or assigned by
Zeiss to) Photoelectron or Photoelectron's designee.
ARTICLE V. ADDITIONAL TERMS AND CONDITIONS
5.1 Sales Incentives.
----------------
(a) Upon the completion of each sale by Zeiss of a PRS Unit and
transmittal by Zeiss to Photoelectron of full payment for such PRS Unit,
Photoelectron shall issue to Zeiss a warrant for the acquisition of [1,000]
shares of Common Stock of Photoelectron at a price per share equal to ninety
percent (90%) of the closing market price per share on the day full payment for
the PRS Unit is received by Photoelectron and otherwise in accordance with the
form of warrant attached hereto as Schedule 5.1.
(b) Upon the completion by Zeiss of the sale of 80 PRS Units and
transmittal by Zeiss to Photoelectron of full payment for such PRS Units,
Photoelectron shall issue to Zeiss a warrant for the acquisition of [100,000]
shares of Common Stock of Photoelectron at a price per share equal to ninety
percent (90%) of the closing market price per share on the day full payment for
all 80 PRS Units is received by Photoelectron, and otherwise in accordance with
the form of warrant attached hereto as Schedule 5.1.
(c) Any warrant issued in accordance with the foregoing 5.1(a) or
5.1(b) shall be transferable to employees and agents of Zeiss as part of an
incentive program tied to sales of the Products, subject to applicable
securities laws.
5.2 Discount for Luminary Sites. Both parties shall use best efforts and
---------------------------
good faith to agree on pricing of the Photon Radiosurgery System for Zeiss' so-
called "luminary sites."
5.3 Nonsolicitation. During the Term and for three (2) years after the
---------------
termination or expiration of this Agreement, neither party nor any of their
Affiliates will offer employment to or hire any employee of the other party or
its Affiliates without the prior written consent of the employing party. For
purposes of the preceding sentence, the terms , "employment" and "employee"
shall include any form of employment,
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<PAGE>
consulting, contract relationship, or other arrangement pursuant to which such
individual will, directly or indirectly, perform services for the other party
5.4 Confidentiality and Non-Disclosure.
----------------------------------
(a) Except as expressly provided in this Agreement, neither party,
without the prior written consent of the other, shall disclose to any third
party (i) any information regarding the terms of this Agreement or exchanged in
connection with the negotiation of this Agreement or regarding the transactions
contemplated hereby (such information the "Agreement-Specific Information"), or
(ii) any information regarding the actual or anticipated business or technology
of the other party, in either case to the extent disclosed by the other party in
connection with the transactions contemplated hereby or the performance by the
other party of such party' obligations hereunder, including, without limitation,
information regarding or which includes customers, business practices, business
prospects, financial condition, pricing policies, processes, technical data or
specifications, source code or any other proprietary information (such
information is, the "Proprietary Information").
(b) Notwithstanding the foregoing, each party may (i) disclose the
Proprietary Information of the other party to such party's employees, directors,
advisers, consultants, and representatives with a "need to know" and who agree
to be subject to the confidentiality restrictions set forth in this Section 5.4
disclose all or such portion of the Agreement-Specific Information or the
Proprietary Information of the other party as such party shall be ordered to
disclose to a judicial or administrative agency of competent jurisdiction,
provided that such party shall give the disclosing party reasonable notice of
such order and a timely opportunity to attempt to preclude or limit such
production, (iii) disclose the terms hereof to the extent necessary to comply
with any applicable securities laws; and (iv) disclose the existence, general
terms and the length of term of this Agreement with such party's current and
prospective business partners and investors.
(c) The obligations in this Section 5.4 shall not apply to any
information disclosed by either party to the other party hereunder to the extent
that, and after such time as, such information (i) becomes publicly available
other than by a breach of this Agreement, (ii) is rightfully received by the
non-disclosing party from a third party who is not under an obligation of
confidentiality with respect thereto, (iii) can be demonstrated to have been
independently developed by the non-disclosing party without access to or use of
any of the Proprietary Information of the other party, or (iv) is known to the
non-disclosing at the time of disclosure, provided that the non-disclosing party
shall have promptly delivered to the other party written notice of such prior
knowledge.
(d) Each party agrees (except to the extent the such party has rights
to such Proprietary Information in accordance with this Agreement) to (i) cease
using the Proprietary Information of the other party upon the expiration or
termination of this Agreement and (ii) promptly return to the other party all
materials embodying the Proprietary Information of the other party upon the
expiration or termination of this Agreement and, at any time prior thereto,
promptly upon the written request of the other
-16-
<PAGE>
party (except to the extent the non-disclosing party has rights to such
Proprietary Information in accordance with this Agreement).
5.5 SNN Membership. Concurrently with the execution of this Agreement,
--------------
Photoelectron shall become a member of SNN and in connection therewith shall pay
50% of the applicable membership fee in two equal payments (i) one payable
currently and (ii) one payable on or before January 1, 2000. The remaining 50%
of such membership fee will be due and payable by Zeiss if and when the parties
hereto reach agreement regarding commercialization of Product Four.
5.6 Announcements. Public announcements regarding this Agreement and/or
-------------
the transactions contemplated hereby, including any use, reproduction,
distribution or display of the respective trademarks, tradenames, servicemarks
or logos of the other party, shall not be made by either party to this Agreement
without the prior written approval of the other, unless otherwise required by
applicable law or the rules of the Nasdaq Stock Market. In addition, neither
party shall use the trademarks, tradenames, servicemarks or logos of the other
party in any public advertising or promotional materials or campaigns without
the prior written approval of the other.
5.7 Cooperation and Reasonableness. The parties hereto acknowledge and
------------------------------
agree that this Agreement is intended to address a complex series of rights and
relationships, and that in the course of activity pursuant to this Agreement
many matters may arise that require further clarification or memorialization and
the parties hereto agree to negotiate in good faith with respect to such matters
and to execute and deliver any and all documents and instruments reasonably
necessary to effectuate such good faith negotiation.
ARTICLE VI. REPRESENTATIONS AND WARRANTIES
6.1 Representations and Warranties by Photoelectron.
-----------------------------------------------
(a) General. Photoelectron represents and warrants to Zeiss that:
-------
(i) Photoelectron is a corporation duly organized and validly existing under the
laws of the Commonwealth of Massachusetts; (ii) Photoelectron has the requisite
corporate power and authority to execute and deliver, and to perform
Photoelectron's obligations under, this Agreement; (iii) neither the execution
and delivery of this Agreement by Photoelectron nor the performance by
Photoelectron of Photoelectron's obligations hereunder will violate or conflict
with (A) the provisions of any agreement to which Photoelectron is a party, or
(B) the provisions of any law, statute, rule, regulation, judgment, order, or
decree of any domestic or foreign governmental, administrative, or judicial
authority which, if violated, would have a material adverse effect on the
ability of Photoelectron to perform Photoelectron's obligations hereunder and
(iv) there are now outstanding no products liability claims or actions against
Photoelectron.
-17-
<PAGE>
(b) Regarding Photoelectron Intellectual Property. Photoelectron
---------------------------------------------
represents and warrants that each element of the Photoelectron Intellectual
Property does not and will not (with Photoelectron's knowledge): (a) violate any
law or regulation, including without limitation, the laws and regulations
governing export control, (b) be defamatory or trade libelous; (c) production,
distribution, modification, exhibition and exploitation of the Photoelectron
Intellectual Property in connection with the sale and distribution of the
Products will not violate any copyright, patents, trade secrets or other
intellectual or proprietary rights of any third party.
6.2 Representations and Warranties by Zeiss.
---------------------------------------
(a) General. Zeiss represents and warrants to Photoelectron that:
-------
(i) Zeiss is a trust foundation duly organized and validly existing under the
laws of Germany; (ii) Zeiss has the requisite corporate power and authority to
execute and deliver, and to perform Zeiss' obligations under, this Agreement;
and (iii) neither the execution and delivery of this Agreement by Zeiss nor the
performance by Zeiss of Zeiss' obligations hereunder will violate or conflict
with (A) the provisions of any agreement to which Zeiss is a party, or (B) the
provisions of any law, statute, rule, regulation, judgment, order, or decree of
any domestic or foreign governmental, administrative, or judicial authority
which, if violated, would have a material adverse effect on the ability of Zeiss
to perform Zeiss' obligations hereunder.
(b) Regarding Zeiss Intellectual Property. Zeiss represents and
-------------------------------------
warrants that each element of the Zeiss Intellectual Property, does not and will
not (with Zeiss' knowledge): (a) violate any law or regulation, including
without limitation, the laws and regulations governing export control, (b) be
defamatory or trade libelous; (c) production, distribution, modification,
exhibition and exploitation of the Zeiss Intellectual Property in connection
with the sale and distribution of the Products will not violate any copyright,
patents, trade secrets or other intellectual or proprietary rights of any third
party.
ARTICLE VII. NON-COMPETITION
7.1 By Zeiss. For good and valuable consideration, the receipt and
--------
sufficiency of which is hereby acknowledged, Zeiss hereby covenants that neither
Zeiss nor any of its Affiliates will, during the Term and for a period of six
months following the termination or expiration of the Term, develop, distribute,
license, sell, lease or otherwise represent in any form any product or
technology that competes directly or indirectly with the Photoelectron Product
Line.
7.2 By Photoelectron. For good and valuable consideration, the receipt
----------------
and sufficiency of which is hereby acknowledged, Photoelectron hereby covenants
that neither Photoelectron nor any of its Affiliates will, during the Term and
for a period of six months following the termination or expiration of the Term,
within the Territory develop, distribute, license, sell, lease or otherwise
represent in any form any product or technology that competes directly or
indirectly with any Product other than the Photoelectron Product Line including
without limitation, the Photon Radiosurgery System.
-18-
<PAGE>
ARTICLE VIII. INDEMNIFICATION
8.1 Indemnification.
---------------
(a) Indemnification by Photoelectron.
--------------------------------
(i) Photoelectron agrees to indemnify, hold harmless and defend
Zeiss and its Affiliates and Sublicensees, and their respective agents,
representatives, employees and direct customers (the "Zeiss Group") from and
against any and all claims, demands, suits, actions, or proceedings
(hereinafter, collectively "Claims") brought by any third party (i) arising out
of personal injury, death and/or property damage in connection with the use of
any Photoelectron Component (excluding any uses of the Photoelectron Component
for purposes other than those approved by Photoelectron), or (ii) which is based
on any claim that any part of any Photoelectron Component or the sale or use
thereof by Zeiss under this Agreement infringes any patent, any copyright, trade
secret, any trade name, any trademark or intellectual property of any third
party, or (iii) arising out of a violation by Photoelectron of any of the
provisions of this Agreement (including, without limitation, breach of any of
Photoelectron's representations or warranties in Article VI hereof), and all
damages, costs, and expenses (including, without limitation, reasonable
attorneys' fees and settlement costs, as applicable) sustained or incurred by
the Zeiss Group in relation thereto, provided, in each case, that Photoelectron
shall have no liability hereunder unless the applicable member of the Zeiss
Group shall give Photoelectron prompt written notice upon discovery of each
Claim and except to the extent such Claim occurs as a result of the negligent or
willful acts or omissions of any member of Zeiss Group.
(ii) Notwithstanding the foregoing, Photoelectron shall have no
liability under this Section 8.1 for any claim by a third party that the
manufacture, sale or use of any Photoelectron Component (whether or not
incorporated in any other Product) caused personal injury, death or property
damage or infringes any patent, copyright, trade secret or other intellectual
property right in any of the following circumstances: (A) such Photoelectron
Component was altered or modified by any member of the Zeiss Group or any third
party without prior written authorization of Photoelectron and such alteration
or modification resulted in or is the basis for the third party claim; (B) any
member of the Zeiss Group failed to use the most current version of such
Photoelectron Component when and if available and offered to Zeiss by
Photoelectron if the use of such current model would have avoided such claim,
except in the case in which the Photoelectron Component at issue had been
already installed at the customer's site; (C) any member of the Zeiss Group or
any third party used such Photoelectron Component in combination with any
consumables, component, apparatus or software not furnished or authorized by
Photoelectron pursuant to this Agreement and such combination resulted in or is
the basis for the third party claim; (D) such Photoelectron Component was used
in a manner for
-19-
<PAGE>
which it was not designed or specified; or (E) any member of the Zeiss Group
owns an intellectual property right or has a license which precludes it from
being held responsible for the claim of infringement.
(b) Indemnification by Zeiss. Zeiss agrees to indemnify and defend
------------------------
Photoelectron and its Affiliates, and their respective agents, representatives,
employees and direct customers (the "Photoelectron Group") from and against any
and all claims, demands, suits, actions, or proceedings (hereinafter,
collectively "Claims") brought by any third party (i) arising out of personal
injury, death and/or property damage in connection with the use of any Product
(other than the Photon Radiosurgery System) (excluding any uses of Products for
purposes other than those approved), or (ii) which is based on any claim that
any part of any Product (other than the Photon Radiosurgery System as a stand-
alone device) infringes any patent, any copyright, trade secret, any trade name,
any trademark or intellectual property of any third party, or (iii) arising out
of a violation by Zeiss of any of the provisions of this Agreement (including,
without limitation, breach of any of Zeiss' representations or warranties in
Article VI hereof), and all damages, costs, and expenses (including, without
limitation, reasonable attorneys' fees and settlement costs, as applicable)
sustained or incurred by the Photoelectron Group in relation thereto, provided,
in each case, that Zeiss shall have no liability hereunder unless Photoelectron
shall have given Zeiss prompt written notice upon discovery of each Claim and
except to the extent such Claim occurs as a result of the negligent or willful
acts or omissions of any member of Photoelectron Group.
8.2 Claim Procedure. Any party (in any case, an "Indemnitee") entitled or
---------------
potentially entitled to indemnification under this Article VII shall give notice
to the indemnitor of a claim or other circumstances likely to give rise to a
request for indemnification, promptly after such Indemnitee becomes aware of the
same. Any applicable indemnitor shall be afforded the opportunity to undertake
the defense of and to settle by compromise or otherwise any claim for which
indemnification is available under this Article VII, with legal counsel approved
by the Indemnitee (which approval shall not unreasonably be withheld). If an
indemnitor so assumes the defense of any claim, the Indemnitee may participate
in such defense with legal counsel of the Indemnitee's selection and at the
expense of the Indemnitee. If the indemnitor, prior to the expiration of
fifteen (15) days after the giving of notice of a claim by the Indemnitee under
this Section 8.2, has not assumed the defense thereof, the Indemnitee may
thereupon undertake the defense thereof on behalf of, and at the risk and
expense of, the indemnitor, with all reasonable costs and expenses of such
defense to be paid by the indemnitor. No compromise or settlement of any such
claim shall be made without the prior consent in writing of the Indemnitee.
8.3 Insurance.
---------
(a) Policies. Each party shall procure and maintain, at its own
--------
expense, in full force and effect at all times during which Products are being
sold pursuant to this Agreement, product liability insurance with respect to the
Products written by a responsible insurance carrier, Best Rated A, with a
combined single limit of not less than Five Million Dollars ($5,000,000) with a
maximum deductible or self-
-20-
<PAGE>
insurance retention amount of $5,000 per occurrence and $100,000 in the
aggregate. Such insurance policy shall name both parties hereto as additional
insureds and will provide for at least thirty (30) days prior written notice to
the other party of the cancellation or substantial adverse modification thereof.
Each party hereto shall deliver a certificate of such insurance to the other
party promptly upon issuance of the policy and shall, from time to time as
reasonably requested by such other party, furnish such other party with evidence
of the maintenance thereof. If any of the insurance policies described in this
of this Section 5.2 are written on a claims made basis, the applicable party
maintaining such insurance agrees either to (i) continue to purchase such
coverage or (ii) purchase an extended reporting period endorsement ("tail"
insurance), in either instance for the entire Term of this Agreement (and any
extensions of such Term), and for a period of five (5) years after the end of
such Term.
(b) Waiver. Each party hereby waives any claims against the other
------
(whether founded upon the indemnification provisions contained in this Agreement
or otherwise) to the extent any such claim is covered by, and loss proceeds are
paid to and received by such waiving party, from the insurance either carried by
or for the benefit of such waiving party, and provided such waiver: (i) is not
in violation of the policies of insurance under which such loss proceeds are so
paid; (ii) does not invalidate such insurance; and (iii) does not
disproportionately increase the premiums thereof.
ARTICLE IX. TERMINATION
9.1. Termination of Agreement. The initial term of this Agreement shall be
------------------------
for the period commencing on the date of this Agreement and ending on the third
anniversary of the date hereof (such initial term, together with any extensions
or renewals thereof is, the "Term"). This Agreement will automatically renew for
two consecutive one (1) year terms thereafter unless either party gives written
notice to the other party of its intention not to renew this Agreement at least
ninety (90) days prior to the expiration of the initial or any renewal term
hereof. This Agreement may also be canceled at any time by either party upon
thirty (30) days prior written notice upon breach of any material term or
condition of this Agreement, and this Agreement shall be deemed terminated at
the end of such thirty (30) day period if such breach is not cured before such
date. This Agreement may also be terminated for cause on or after December 31,
2000, upon 90 days notice, if Zeiss fails to meet the sales objectives set forth
in its then current Sales Plan. This Agreement may be terminated by Zeiss upon
(i) the filing by or with respect to Photoelectron, either voluntarily or
involuntarily, of any Chapter 7 bankruptcy petition, or Chapter 13
reorganization, in either case in accordance with the U.S. Bankruptcy Code,
provided, however, that Zeiss may not so terminate this Agreement upon such an
involuntary filing if Photoelectron successfully contests any such involuntary
filing within ninety (90) days following such filing; or (ii) a change in
"control" of Photoelectron, meaning a change in the direct or indirect ownership
of more than 50% of the voting stock of Photoelectron or the power to elect or
appoint a majority of the Board of Directors of Photoelectron but only if such
voting stock or such power is acquired by a direct or indirect competitor of
Zeiss in the Field. Prior to any termination of this
-21-
<PAGE>
Agreement pursuant to this Section 9.1, the parties hereto shall exercise
commercially reasonable efforts to negotiate in good faith acceptable terms for
continuing this Agreement without such termination.
9.2 Survival. Termination of this Agreement will not release Zeiss or
--------
Photoelectron from the obligation to pay any amounts owing the other, nor
release Zeiss from the obligation to pay for orders accepted by Photoelectron
prior to the effective date of termination, nor Photoelectron's obligation to
deliver the Product whose order has been accepted prior to the date of such
termination. In addition, and without limiting the foregoing, both parties
agree to negotiate in good faith with respect to how to maintain the Products
delivered to locations in the Territory (or orders for which have been accepted
by Photoelectron) prior to the date of such termination. Without limitation of
the foregoing, the provisions of Sections 3.1, 3.4, 3.5, 4.8, 4.9, 4.10, 5.3,
5.4, 7.1, 7.2, 8.1, 8.2, 8.3, 9.2, 11.3, 11.8 and 11.12 any expiration or
termination of this Agreement.
ARTICLE X. DISPUTE RESOLUTION
10.1 In the event of any dispute with respect to any provision of this
Agreement, either party hereto may give written notice to other of such dispute
(a "Dispute Notice") and the parties shall thereafter proceed as follows:
(i) Photoelectron Product Manager on behalf of Photoelectron and the
Zeiss Product Manager on behalf of Zeiss, or such other
representatives as may be designated by each party from time to time
shall negotiate in good faith with respect to such dispute and shall
be authorized to bind the respective parties with respect to the
resolution of such dispute.
(ii) If the dispute is not resolved in accordance with the foregoing
(i) within ten (10) days following the transmission of the Dispute
Notice, a representative from senior management of each party shall
negotiate in good faith with respect to such dispute.
(iii) If the dispute is not resolved in accordance with the foregoing
(i) or (ii) within twenty (20) days following the transmission of the
Dispute Notice, the parties shall in god faith attempt to identify an
individual (a "Conciliator") to be appointed for the purpose of
resolving the dispute by determining the course of action in the best
interest of the parties. Any conciliation conducted pursuant to this
subsection (iii) shall be conducted in accordance with such
procedures as may be agreed upon by the parties or as may be
established by the Conciliator. A decision of the Conciliator shall
have the same force and effect as an arbitral award rendered pursuant
to Section 10.2 hereof.
(iv) If the dispute is not resolved in accordance with the foregoing
(i), (ii) or (iv) within forty (40) days following the transmission
of the Dispute Notice, the shall be settled by binding arbitration in
accordance the following Section 10.2.
-22-
<PAGE>
10.2 Arbitration.
-----------
(a) The party desiring to invoke the process set forth herein (the
"Initiating Party") shall initiate the proceedings for such determination by
notice to the other party (the "Responding Party") and by designating the name
and address of an arbitrator willing to act. Within ten (10) days after receipt
by the Responding Party of such notice, the Responding Party shall, by notice to
the Initiating Party, designate the name and address of another arbitrator
willing so to act. If the Responding Party does not designate such an
arbitrator within said ten (10) day period, the arbitrator designated by the
Initiating Party shall alone conduct the arbitration. Any arbitrator designated
by either party hereto must have significant experience in the medical device
industry.
(b) If two arbitrators have been designated as aforesaid, such
arbitrators shall appoint an additional arbitrator (the "Additional Arbitrator")
who is willing so to act, and notice of such designation shall be given to the
Initiating Party and to the Responding Party. If the two arbitrators appointed
do not, within a period of ten (10) days after the appointment of the latter of
them, agree upon and designate an Additional Arbitrator willing so to act,
either arbitrator may request the American Arbitration Association ("AAA") to
designate a third arbitrator willing so to act, or, in the absence of such
designation by the AAA after an additional ten (l0) day period, a court of
competent jurisdiction, and an arbitrator so appointed shall, for all purposes,
have the same standing and powers as though seasonably appointed by the
arbitrators first appointed. Each arbitrator appointed hereunder shall have
significant experience in the medical device industry.
(c) In case of the inability or refusal to serve of any person
designated as an arbitrator or in case any arbitrator for any reason ceases to
be such, an arbitrator to fill such vacancy shall be appointed by the Initiating
Party, Responding Party, Additional Arbitrator, AAA or court of competent
jurisdiction, as the case may be, whichever made the original appointment, and
any arbitrator so appointed to fill such vacancy shall have the same standing
and powers as though originally appointed.
(d) The arbitrators shall, forthwith upon their appointment, (a) hear
the Initiating Party and Responding Party and their witnesses, (b) examine such
documents and records as may, in their judgment, be necessary and (c) render a
written award resolving the dispute.
(e) Any resolution by the sole arbitrator, if there be only one, or
by a majority of the arbitrators, shall be final and binding upon the parties
or, if a majority of the arbitrators are unable to agree, the average of the two
closest arbitrators shall be final and binding upon the parties. Judgment may be
entered on the arbitrators award in any court of competent jurisdiction in
accordance with the laws of the Commonwealth of Massachusetts governing the
enforcement of arbitration awards.
-23-
<PAGE>
(f) Each party shall be entitled to reasonable notice of the time and
place of hearings to be held by the arbitrators (but only such hearings held for
the purpose of hearing the parties and witnesses), to be present at such
hearings and to be represented by counsel at such hearings. However, if a party
shall fail, refuse or neglect to appear at a hearing, having been afforded such
notice, the arbitrators may act in the absence of such party at such hearing.
Further, the arbitrators shall permit and facilitate discovery by the parties as
the arbitrators shall deem appropriate, taking into account the needs of the
parties and the desirability of making discovery expenditures cost effective.
The arbitrators shall also issue orders to protect the confidentiality of trade
secrets and other sensitive or confidential information.
10.3 Implementation.
--------------
(a) The parties hereto agree to cooperate with one another in causing
an conciliation or arbitration to be held in as efficient and expeditious a
manner as practicable and in that connection to furnish such documents and make
available such of their respective personnel as the Conciliator or arbitrator
may request.
(b) The costs, other than counsel fees, of any dispute resolution,
conciliation or arbitration pursuant to this Article X shall be borne equally by
the parties hereto.
(c) The parties hereto agree to take whatever steps may be necessary
to implement the decision of any Conciliator, pursuant to Section 10.1, or
arbitrator or arbitrators, pursuant to Section 10.2. Unless such failure is
waived in writing by the other party, any party's failure to cooperate with or
abide by a Conciliator's or arbitrator's decision pursuant to this Article X
shall be deemed to be a default under this Agreement by such party.
ARTICLE XI. MISCELLANEOUS
11.1 No Agent or Legal Representative Status. This Agreement does not
---------------------------------------
make either party the agent or legal representative of the other for any purpose
whatsoever, nor does it grant either party any authority to assume or to create
any obligation on behalf of or in the name of the other. Neither party owes the
other any fiduciary obligation. The parties expressly acknowledge that no
franchise, partnership or joint venture relationship exists or is intended to
exist between the parties hereto during the term of this Agreement.
11.2. Parties' Responsibility for Their Own Operations. Except as
------------------------------------------------
provided otherwise in this Agreement, each of the parties hereto shall have no
liability in connection with the establishment or conduct of the other party
hereto, including without limitation with respect to expenditures, liabilities
and obligations incurred or assumed by such other party in connection with such
other party's responsibilities under this Agreement.
-24-
<PAGE>
11.3 Taxes. Each party hereto shall pay all applicable taxes and will
-----
file required tax returns related to such party's operations and activities
pursuant to this Agreement and will hold the other party hereto harmless from
any claims or demands made by any taxing authority with respect thereto.
11.4 Excused Performance. Neither party shall be liable for, or be
-------------------
considered to be in breach of or default on account of, any delay or failure to
perform as a result of any cause or condition beyond such party's reasonable
control (including, but not limited to: fire, casualty, storms, flood and acts
of God or the elements; court orders; acts, delays and failures to act by civil,
military or other governmental authority; strikes, lockouts, labor disputes,
riots, insurrections, sabotage and war; breakdown or destruction of, or damage
or casualty to, any equipment, facilities or other property; unavailability of
materials, supplies, parts, equipment personnel or other necessary items;
interruption, suspension, curtailment or other disruption of utilities and/or
network or similar facilities; and acts or omissions of persons or entities
other than the parties hereto, as applicable).
11.5 Entire Agreement; Modification. This Agreement constitutes the
------------------------------
entire agreement of the parties hereto, and supersedes any and all prior or
contemporaneous documents, correspondence, proposals, representations, and
agreements, written or oral, between the parties hereto with regard to the
matters addressed herein. No amendment, modification or waiver of any of the
provisions of this Agreement shall be valid unless set forth in a written
instrument signed by the party or parties to be bound thereby.
11.6 Assignment of Rights or Delegation of Duties. Neither this
--------------------------------------------
Agreement, nor the rights or obligation of either party hereunder, may be sold,
assigned or otherwise transferred without the prior written approval of the
other party.
11.7 No Third Party Beneficiaries. The provisions of this Agreement are
----------------------------
for the sole and exclusive benefit of the parties hereto, their respective
successors and permitted assigns, in each case as their respective interests may
appear. No provision of this Agreement shall be deemed for the benefit of any
other person or entity, including, without limitation, any third party.
11.8 Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed sufficiently given (a) the
following business day after having been timely sent by reputable overnight
courier service for priority, next day delivery, (b) upon confirmation of
receipt by the recipient after having been sent by electronic mail or fax, in
each case to the applicable party's street address, e-mail address, or fax
number as set forth below (as the same may be amended by such party upon written
notice to the other), or by such other means as the parties may hereafter agree
in writing, and shall only be effective if delivered to all addressees indicated
as follows:
If to Photoelectron: If to Zeiss:
-25-
<PAGE>
5 Forbes Road Carl Zeiss
Lexington, Massachusetts USA 02173 D - 73446 Oberkochen, Germany
Attention: President Attn: Vice President Surgical Products
Facsimile Number: 781-861-0129 Division
Facsimile Number: ++49 (73 64)20-2117
11.9 Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York, U.S.A., applicable to
contracts made, accepted and performed wholly within such state, without
application of principles of conflicts of laws.
11.10 Official Language. The official language of this Agreement shall be
-----------------
English.
11.11 No Waiver. No waiver by either party to this Agreement of any
---------
provision hereof, and no failure by either party to exercise any of such party's
rights or remedies hereunder, shall be deemed to constitute a waiver of such
provision, right, or remedy in the future, or of any other provision, right, or
remedy hereunder, unless such waiver shall be set forth in a written instrument
signed by the party against whom such waiver is sought to be enforced.
11.12 Headings. The headings used in this Agreement are for convenience
--------
only and shall in no way affect the scope or construction of any provision
hereof.
11.13 Severability. If any provision of this Agreement shall be held by a
------------
court of competent jurisdiction to be invalid, void, or unenforceable, such
provisions shall be construed in all respects as if such invalid or
unenforceable provision were replaced with a valid and unenforceable provision
as similar as possible to the one replaced, and the remainder of this Agreement
shall continue in full force and effect and shall not be invalidated impaired or
otherwise affected.
11.14 Remedies Cumulative. The rights and remedies of the parties set
-------------------
forth herein are in addition to and not in lieu of any other right or remedy
afforded to the parties under any other provision of this Agreement, by law, or
otherwise.
11.15 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto through their respective duly authorized
representatives have executed and delivered the Agreement as of the date first
above written.
PHOTOELECTRON CORPORATION CARL ZEISS OBERKOCHEN
By: /s/ Euan S. Thomson By: /s/ Michael Kaschke
-------------------------- -----------------------------
Title: President and Chief Title: Vice President Surgical
Operating Officer Products Division
duly authorized hereunto duly authorized hereunto
By: /s/ Ulrich Krauss
-----------------------------
Title: Director of Sales, Surgical
Products
duly authorized hereunto
Schedule 1: Photoelectron Product Line
Schedule 2.1: Product Two Development Plan
Schedule 2.2: Product Three Development Plan
Schedule 4.1(b)(i): Sales Plan
Schedule 4.3(a): Price List
Schedule 4.9(a): Photoelectron Limited Warranty
Schedule 4.10: Service Contract
Schedule 5.1: Form of Warrant
-27-
<PAGE>
Schedules
---------
SCHEDULE 1: PHOTOELECTRON PRODUCT LINE
- -----------
PHOTOELECTRON PRODUCT LINE
--------------------------
(August 1999)
-------------
1. CORE PHOTON RADIOSURGERY SYSTEM
-------------------------------
OPERATIONAL SET
---------------
. Control Console (CC)
. X-Ray Source (XRS) with 10cm x 3.2mm probe
. External Radiation Monitor (ERM)
. Disposable Probe Sheaths (box of 10)
QUALITY ASSURANCE SET
---------------------
. Photodiode Array
. Probe Adjuster and Ionization Chamber Holder (PAICH)
. Ionization Chamber
. External Radiation Monitor Test Adapter
. Electrometer
. V-block Alignment Tool Set
STERILIZATION AND STORAGE SET
-----------------------------
. XRS Sterilization/Storage Tray
. ERM Sterilization/Storage Tray
. PDA and PAICH/Storage Sterilization Tray
PRS TREATMENT SYSTEM OPERATOR MANUAL
------------------------------------
2. CLINICAL THERAPY PACKAGES
-------------------------
INTERSTITIAL RADIOSURGERY (Inter-Cranial)
-------------------------
. Stereotactic Frame Adapter System
. Dilator Set
. Dilator Manual
. Dilator Sterilization/Storage Tray Set
. Sterile Sheaths
Schedules Page -1-
<PAGE>
3. UPGRADE OPTIONS
---------------
WP400 WATER PHANTOM
-------------------
(the cost includes electrometer and computer = *)
CCD MICRODENSITOMETER SET
-------------------------
CRW STEREOTACTIC FRAME ADAPTER SYSTEM
-------------------------------------
DILATOR SET WITH STERILIZATION TRAY
-----------------------------------
ADDITIONAL X-RAY SOURCE
-----------------------
DISPOSABLES
-----------
. CCD 400 Microdensitometer Film (Gaff Chromic Film)
. Controle Console Thermal Paper
. XRS Probe Sheaths (box of 10)
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
Schedules Page -2-
<PAGE>
SCHEDULE 2.1: PRODUCT TWO DEVELOPMENT PLAN
- -------------------------------------------
Schedules Page -3-
<PAGE>
SCHEDULE 2.2: PRODUCT THREE DEVELOPMENT PLAN
- ---------------------------------------------
Schedules Page -4-
<PAGE>
SCHEDULE 4.1(b)(i): SALES PLAN
- -------------------------------
The Sales Plan for the period ending December 31, 2001 is as follows:
[minimum of 80 PRS Units sold. This number assumes that a suitable distribution
channel for Product Three can be rapidly identified. The expectation for the
Products other than Product Three is 60 Units.]
The Sales Plan for each subsequent calendar year during the term of this
Agreement shall be established by Photoelectron and Zeiss in accordance with
Section 4.1(b)(i) of this Agreement and incorporated into this 4.1(b)(i).
Schedules Page -5-
<PAGE>
SCHEDULE 4.3(a): PRICE LIST
- ----------------------------
CURRENT U.S. DISTRIBUTOR PRICE LIST
<TABLE>
<CAPTION>
TRANSFER
PRICE
-----
<S> <C>
1. CORE PHOTON RADIOSURGERY SYSTEM *
-------------------------------
OPERATIONAL SET
---------------
. Control Console (CC)
. X-Ray Source (XRS) with 10cm x 3.2mm probe
. External Radiation Monitor (ERM)
. Disposable Probe Sheaths (box of 10)
QUALITY ASSURANCE SET
---------------------
. Photodiode Array
. Probe Adjuster and Ionization Chamber Holder (PAICH)
. Ionization Chamber
. External Radiation Monitor Test Adapter
. Electrometer
. V-block Alignment Tool Set
STERILIZATION AND STORAGE SET
-----------------------------
. XRS Sterilization/Storage Tray
. ERM Sterilization/Storage Tray
. PDA and PAICH/Storage Sterilization Tray
TRAINING FOR TWO PHYSICISTS (Photoelectron Components
---------------------------
only, exclusive of travel)
PRS TREATMENT SYSTEM OPERATOR MANUAL
------------------------------------
PHOTOELECTRON LIMITED WARRANTY
------------------------------
2. CLINICAL THERAPY PACKAGES
---------------------------
INTERSTITIAL RADIOSURGERY (Inter-Cranial) *
-------------------------
. Stereotactic Frame Adapter System
. Dilator Set
. Dilator Manual
. Dilator Sterilization/Storage Tray Set
. Sterile Sheaths
</TABLE>
Price List Page -1-
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
<PAGE>
<TABLE>
<CAPTION>
TRANSFER
PRICE
-----
<S> <C>
3. UPGRADE OPTIONS
---------------
WP400 WATER PHANTOM *
-------------------
(the cost includes electrometer and computer =
$7,000)
CCD MICRODENSITOMETER SET *
-------------------------
CRW STEREOTACTIC FRAME ADAPTER SYSTEM *
-------------------------------------
DILATOR SET WITH STERILIZATION TRAY *
-----------------------------------
ADDITIONAL X-RAY SOURCE (bought within warranty period *
-----------------------
of system)
(bought independently) *
DISPOSABLES/CONSUMABLES
-----------------------
. CCD 400 Microdensitometer Film
(Gaff Chromic Film) *
. Controle Console Thermal Paper *
. XRS Probe Sheaths (box of 10) *
4. TRAINING, INSTALLATION, SERVICE AND REPAIR
------------------------------------------
A. Customer Training (Photoelectron Components)*
Training for one physicist* *
Training for additional physicist* *
Hourly Training Rate* *
B. Installation
Installation Rate (per PRS Unit)* *
Installation Training Rate (per hour)* *
C. Service Contract (per PRS Unit, per year) *
D. Service Rates (no Service Contract; on-site hours
are for hours actually on-site, minimum 2 hours per
service call)
BASE HOURLY RATE* *
OVERTIME (PER THEN CURRENT ZEISS POLICIES) HOURLY
RATE* *
DOUBLE OVERTIME (PER THEN CURRENT ZEISS POLICIES)
HOURLY RATE* *
</TABLE>
* In addition to any such rates, Zeiss shall also reimburse Photoelectron for
reasonable out of pocket travel expenses incurred by Photoelectron's
representatives (meals, airfare - economy class, hotel, local transportation,
etc.) in providing the services.
Price List Page -2-
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER NOMENCLATURE
TRANSFER
SET PART PART # PRICE
--- ---- ------ -----
<S> <C> <C> <C> <C>
I. CORE PHOTON RADIOSURGERY
SYSTEM
OPERATIONAL SET
- ---------------
Control Console Set (CC) 47000007 *
PRS400 Control Console (modified by country
according to 47000266) 47000064 . *
PRS400 Control Console Cart 46000321 *
PRS400 Power Cord Control Console, USA 40000017 . *
PRS400 Control Console, Connector 37000070 . *
PRS400 Control Console, Interlock Plug w/ Chain 47000182 . *
PRS400 Control Console, Keys 46000185 . *
PRS400 Control Console Thermal Paper 43000318 *
PRS400 Control Console Power Cord 40000021 *
PRS400 Control Console Fuses 40000434 *
40000433 *
X-Ray Source (XRS) with
10cm x 3.2mm probe Set 47000009 . *
PRS400 XRS w/ Protector 47000001 *
PRS400 Cable from XRS To CC 47000050 . *
PRS400 XRS Probe Protector 46000063 . *
PRS400 XRS Probe Protector Thumb Screw 42001294 . *
PRS400 XRS Sterilization Tray 43000006 . *
</TABLE>
Parts List Page -1-
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER NOMENCLATURE
TRANSFER
SET PART PART # PRICE
--- ---- ------ -----
<S> <C> <C> <C> <C>
PRS400 Treatment System
Operator's Manual 99200001 . *
External Radiation Monitor
(ERM) Set 47000004 . *
PRS400 External Radiation Monitor (ERM) 47000005 . *
PRS400 External Radiation Monitor Cable 47000048 . *
PRS400 External Radiation Monitor Test Adapter 46000119 . *
PRS400 External Radiation Monitor and Test Adapter
Sterilization Tray 43000280 . *
Screws to connect to CRW Frame Adapter Sum *
42000796 *
42001195 *
42000794 *
42000690 *
QUALITY ASSURANCE SET *
- ---------------------
Photodiode Array and
Probe Adjuster / 46000060 *
Ionization Chamber Holder
Probe Adjuster / Ionization Chamber Holder (PAICH) 46000058 . *
</TABLE>
Parts List Page -2-
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER NOMENCLATURE
TRANSFER
SET PART PART # PRICE
--- ---- ------ -----
<S> <C> <C> <C> <C>
Photodiode Array (PDA) 47000003 . *
Cable for (PAICH to CC) and (PDA to CC) 47000049 . *
PAICH and PDA Sterilization Tray 43000005 *
Ionization Chamber Set 47000059 . *
PRS400 Electrometer Calibrated 69000008 *
PRS400 Ionization Chamber, Calibrated 69000009 . *
PRS400 Ionization Chamber Cable 47000188 . *
PRS400 Ionization Chamber Shield 46000108 . *
PRS400 Ionization Chamber Shield Cover 43000310 *
PRS400 Ionization Chamber Shield Wand 43000311 *
PRS400 Ionization Chamber Set Case w/ Label 98000001 *
Electrometer Details PRS400 Electrometer, 120V/240v, Calibrated 69000008 *
Power Fuse, Electrometer, 115 V, 315 mA 40000188 *
Power Fuse, Electrometer, 230 V, 160 mA 40000187 *
V-block Alignment Tool Set 46000062 . *
V-Block Alignment Tool ( aka PTS Accessory) 46000061 . *
</TABLE>
Parts List Page -3-
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER NOMENCLATURE
TRANSFER
SET PART PART # PRICE
--- ---- ------ -----
<S> <C> <C> <C> <C>
STERILIZATION/STORAGE SET
- -------------------------
XRS Sterilization/Storage Tray 43000006 . *
ERM Sterilization/Storage Tray 43000280 . *
PDA sterilization/Storage Tray 43000005 . *
II. UPGRADE OPTIONS
WATER PHANTOM 46000240 *
Enclosure and Electronics 46000163 *
Enclosure 46000125 *
WP400 Motion controller driver 47000252 *
WP400 Electrometer 69000008 *
WP400 Ion Chamber NIST Calibrated 69000009 *
WP 400 Industrial Hardened PC 47000167 *
WP400 Water Phantom System Alignment Probe
(aka Dummy) 43000752 *
WP 400 Ink Jet Printer 69040004 *
WP400 WP 400 software set Windows 1995 version 66000081 *
WP400 Input Power Module 40000405 *
WP400 Line Cord 10 amp 125 VAC Power supply
to Enclosure 40000021 *
Power Fuse, WP400 Water Phantom System, 5A,
for 200-240V 40000303 *
Power Fuse, WP400 Water Phantom System, 10A,
for 100-120V 40000286 *
WP400 Cabinet Line Cord Europe Cntl Box 40000412 *
</TABLE>
Parts List Page -4-
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER NOMENCLATURE
TRANSFER
SET PART PART # PRICE
--- ---- ------ -----
<S> <C> <C> <C> <C>
WP400 Cabinet Line Cord Japan Cntl Box 40000413 *
WP400 Cabinet Line Cord USA Cntl Box 110 Volt 40000411 *
Water Tank 46000162 *
Probe Height Setup Wedge 43000498 CFM *
Bearing X Axis includes lead screws
(prone to leaking lubricant) 46000174 *
Bearing Z Axis includes lead screws
(prone to leaking lubricant) 46000175 *
Ion Chamber Holder 43000486 *
Power Fuse, 1.5 A 40000174 *
WP400 Water Phantom System Operator's Manual 99200008 *
WP400 Kit Packaging Water Phantom Enclosure 80000051 *
WP400 Kit Packaging Water Tank 80000050 *
CCD 400 MICRODENSITOMETER (CFM) 46000370 *
- --------------------------------
Light tight cabinet 4631850 *
ST6 C4D Imaging Camera 4631300 *
Lens Focal Length + Aperture 28mm f/4-16 4631311 *
Precision Lightbox (Optimized for Radiochromic
Film) 47000027
470nm, 8x10 47000018 *
558nm, 8x10 47000017 *
665nm, 8x10 47000016 *
</TABLE>
Parts List Page -5-
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER NOMENCLATURE
TRANSFER
SET PART PART # PRICE
--- ---- ------ -----
<S> <C> <C> <C> <C>
470nm, 4x5 47000015 *
558nm, 4x5 47000014 *
665nm, 4x5 47000013 *
Phantom for Radiochromic Film (Hand-Grenade) XPA100 *
CCD100 Microdensitometer Operator's Manual 99200004 *
CCD100 Microdensitometer Software 66000004 *
CRW STEREOTACTIC FRAME XRS
- --------------------------
ADAPTER SET 46000056 *
- -----------
PRS400 Stereotactic Frame (Radionics, CRW)
Adapter XRS Bushing 46000115 *
PRS400 Stereotactic Frame (Radionics, CRW)
Adapter XRS Slide Mount 46000057 *
PRS400 Stereotactic Frame (Radionics, CRW)
Sterilization Tray 43000003 *
DISPOSABLE SHIELD SET (CFM) 46000627 *
- ---------------------------
Applicator Shield, Spherical, 1.5cm 46000285 *
Applicator Shield, Spherical, 2.0cm 46000628 *
Applicator Shield, Spherical, 2.5cm 46000629 *
Applicator Shield, Spherical, 3.0cm 46000630 *
Applicator Shield, Spherical, 3.5cm 46000631 *
Applicator Shield, Spherical, 4.0cm 46000632 *
Applicator Shield, Spherical, 4.5cm 46000633 *
Applicator Shield, Spherical, 5.0cm 46000634 *
</TABLE>
Parts List Page -6-
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER NOMENCLATURE
TRANSFER
SET PART PART # PRICE
--- ---- ------ -----
<S> <C> <C> <C> <C>
DILATOR SET WITH STERILIZATION
TRAY 46000051 *
- ----
PRS400 Dilator 2.0mm 46000052 *
PRS400 Dilator 2.5mm 46000053 *
PRS400 Dilator 3.0mm 46000054 *
PRS400 Dilator 3.5mm 46000055 *
PRS400 Dilator Body 43000007 *
PRS400 Dilator Sterilization Tray 43000002 *
PRS400 Dilator User's Manual 99200002 *
ADDITIONAL X-RAY SOURCE 47000009 *
- -----------------------
DISPOSABLE
- ----------
Disposable Shield Set 46000627 *
PRS400 Applicator Shield, Spherical, 1.5cm
(PRS3 Compatible, 46000285 *
Prototype)
PRS400 Applicator Shield, Spherical, 2.0cm
(PRS3 Compatible, 46000628 *
Prototype)
PRS400 Applicator Shield, Spherical, 2.5cm
(PRS3 Compatible, Prototype) 46000629 *
PRS400 Applicator Shield, Spherical, 3.0cm
(PRS3 Compatible, Prototype) 46000630 *
</TABLE>
Parts List Page -7-
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER NOMENCLATURE
TRANSFER
SET PART PART # PRICE
--- ---- ------ -----
<S> <C> <C> <C> <C>
PRS400 Applicator Shield, Spherical, 3.5cm
(PRS3 Compatible, Prototype) 46000631 *
PRS400 Applicator Shield, Spherical, 4.0cm
(PRS3 Compatible, Prototype) 46000632 *
PRS400 Applicator Shield, Spherical, 4.5cm
(PRS3 Compatible, 46000633 *
Prototype)
PRS400 Applicator Shield, Spherical, 5.0cm
(PRS3 Compatible, 46000634 *
Prototype)
Other Disposables CCD400 Microdensitometer Film 43000873 *
PRS400 Control Console, Thermal Paper 43000318 *
PRS400 XRS Sheaths, Box of 10 46000049 *
</TABLE>
Parts List Page -8-
* Omitted pursuant to request for confidential treatment and filed separately
with the Commission.
<PAGE>
Schedule 4.10: Service Contract
- --------------------------------
A Service Contract purchased with respect to any Core Photon Radiosurgery System
purchased by Zeiss from Photoelectron includes the following services:
(i) full parts and labor coverage on all Photoelectron Components sold to
Zeiss for the Product in which such Core Photon Radiosurgery System is
incorporated;
(ii) one on-site preventative maintenance inspection per year;
(iii) software maintenance on the control console;
(iv) training of Zeiss service personnel according to a schedule to be mutually
agreed between Zeiss and Photoelectron, and
(v) travel costs and expenses in connection with the foregoing throughout the
United States at no charge with a FLAT ADDITIONAL FEE OF $2,500 per
contract year, if any, in which travel outside the United States is
necessary.
Page -1-
<PAGE>
SCHEDULE 4.9(a): PHOTOELECTRON LIMITED WARRANTY
- ------------------------------------------------
Photoelectron warrants that each Photoelectron Component (excluding consumables
such as sheaths and other limited use components) sold to Zeiss pursuant to this
Agreement will be free of defects in design, material or workmanship for a
period of twelve (12) months from the date of installation. If the equipment
fails to satisfy this warranty, Zeiss will promptly notify Photoelectron of such
failure within the warranty period. At Photoelectron's option Photoelectron
will repair or replace the defective equipment. Zeiss will not return any
equipment or component to Photoelectron without Photoelectron's prior written
authorization. If Photoelectron is unable to repair or replace the equipment
after reasonable efforts, Photoelectron will, as Zeiss' exclusive remedy, refund
the portion of the purchase price previously paid by Zeiss that is attributable
to the defective equipment. Notwithstanding the foregoing provisions,
Photoelectron shall have no obligation or responsibility to repair or replace
any defective equipment if the defect was caused by: (a) Zeiss' or Zeiss'
customer's failure to properly operate, sterilize or maintain the equipment in
accordance with Photoelectron's written instructions; (b) any attempted repair
or modification of the equipment that is not performed or authorized in writing
by Photoelectron; (c) any power failure, power surge, fire, water damage, Act of
God or other circumstance or event not within Photoelectron's reasonable
control; (d) any damage resulting from transporting or improperly handling the
equipment; (e) normal wear and tear; or (f) any other act or omission of Zeiss,
Zeiss' agents or any other third party except as provided in this Agreement.
Form of Warranty Page -1-
<PAGE>
SCHEDULE 5.1: FORM OF WARRANT
- ------------------------------
NEITHER THIS WARRANT NOR ANY SECURITIES PURCHASABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS.
NEITHER THIS WARRANT NOR ANY SECURITIES PURCHASABLE UPON EXERCISE HEREOF MAY BE
SOLD OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR
SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE
SECURITIES LAWS, OR EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND LAWS.
Photoelectron Corporation
5 Forbes Road
Lexington, Massachusetts 02421
STOCK PURCHASE WARRANT
Date of Issuance: _________, ____ Right to Purchase ________
Shares of Common Stock
(subject to adjustment)
Warrant # __
For value received, Photoelectron Corporation, a Massachusetts corporation
(the "Company"), hereby grants to Carl Zeiss Oberkochen, a trust foundation
organized and existing under the laws of Germany, or its registered assigns (the
"Registered Holder"), the right to purchase from the Company ______ shares of
the Company's Common Stock (subject to adjustment pursuant to Section 3 hereof)
at a price of $____ per share (as adjusted pursuant to Section 3 hereof, the
"Exercise Price"). The amount and kind of securities purchasable pursuant to
the rights granted under this Warrant and the purchase price for such securities
are subject to adjustment pursuant to the provisions contained in this Warrant.
This Warrant is subject to the following provisions:
1. Definitions. As used in this Warrant, the following terms have the
-----------
meanings set forth below:
"Commission" means the Securities and Exchange Commission, or any other
------------
Federal agency at the time administering the securities laws of the United
States.
Form of Warranty Page -1-
<PAGE>
"Common Stock" means the Company's Common Stock, $.01 par value per share.
--------------
"Date of Issuance" shall have the meaning specified in Section 10 of this
------------------
Warrant.
"Market Price" is defined as the average of the daily closing prices for
--------------
the 20 consecutive trading days, immediately preceding the date of computation.
The closing price for each day shall be (i) if the shares of Common Stock are
listed or admitted to trading on a principal national securities exchange or the
Nasdaq National Market, the last reported sales price on the principal national
securities exchange on which the shares of Common Stock are listed or admitted
to trading or on the Nasdaq National Market or (ii) if the shares of Common
Stock are not listed or admitted to trading on any such exchange or the Nasdaq
National Market, the average of the highest bid and lower asked prices, as
reported on the Automated Quotation System of the National Quotations Bureau,
Incorporated or an equivalent, generally accepted reporting service. If at any
time such security is not listed on any domestic securities exchange or quoted
in the Nasdaq System or the domestic over-the-counter market, the "Market Price"
will be the fair value thereof determined by the Board of Directors in good
faith.
"Nasdaq System" means the Nasdaq Inter-Dealer Quotation System or such
---------------
other similar inter-dealer quotation system as may in the future be used
generally by members of the National Association of Securities Dealers, Inc.,
for the over-the-counter transactions in securities.
"Registrable Securities" means the shares of Warrant Stock, and any other
------------------------
shares of capital stock of the Company issued in respect of the Warrant Stock
(because of stock splits, stock dividends, reclassifications, recapitalizations,
mergers, consolidations, or similar events), provided, however, that any shares
of Warrant Stock previously sold by the Registered Holder to the public pursuant
to a registered public offering or Rule 144 under the Securities Act shall cease
to be Registrable Securities.
"Registration Statement" means a registration statement (other than with
------------------------
respect to a registration statement relating to a Rule 145 transaction, an
offering solely to employees or any other registration which is not appropriate
for the registration of Registrable Securities) filed by the Company with the
Commission under the Securities Act for a public offering and sale of securities
of the Company.
"Person" means an individual, a partnership, a corporation, a limited
--------
liability company, a trust, a joint venture, an unincorporated organization or
any other entity or a government or any department or agency of a government.
"Securities Act" means the Securities Act of 1933, as amended, or any
----------------
similar Federal statute, and the rules and regulations of the Commission issued
under that Act, as they each may, from time to time, be in effect.
Form of Warranty Page -2-
<PAGE>
"Warrant" or "Warrants" means this Warrant and all stock purchase warrants
-----------------------
issued in exchange therefor pursuant to the terms thereof.
"Warrant Stock" means shares of the Company's authorized but unissued
---------------
Common Stock; provided that if there is a change such that the securities
issuable upon exercise of the Warrant are issued by an entity other than the
Company or there is a change in the class of securities so issuable, then the
term "Warrant Stock" will mean one share of the security issuable upon exercise
of the Warrant if such security is issuable in shares, or will mean the smallest
unit in which such security is issuable if such security is not issuable in
shares.
2. Exercise of Warrant.
-------------------
2.1 Exercise Period. The Registered Holder may exercise this
---------------
Warrant, in whole or in part (but not as to a fractional share of Warrant
Stock), at any time and from time to time prior to the fifth anniversary of the
Date of Issuance of the Warrant (the "Exercise Period").
2.2 Exercise Procedure.
------------------
(a) This Warrant may be exercised by the Registered Holder in
whole or in part (but not as to fractional shares of Warrant Stock) by the
surrender of this Warrant and delivery of an executed Notice of Exercise in the
form appended hereto duly executed by the Registered Holder to the Company at
its principal office at any time or times during the Exercise Period accompanied
by payment for the Warrant Stock as to which this Warrant is being exercised by
wire transfer to an account designated by the Company or by certified or bank
check. In the event of a partial exercise of this Warrant, this Warrant will be
canceled and the Company will deliver a new Warrant of like tenor representing
the balance of the shares of Warrant Stock purchasable hereunder. Alternatively,
the Registered Holder may elect to exercise the rights represented by this
Warrant in whole or in part (but not as to fractional shares of Warrant Stock)
by the surrender of this Warrant and delivery of an executed Notice of Exercise
specifying that the value (as determined below) of this Warrant shall be the
consideration for the shares of Warrant Stock, in which event the Company shall
issue to the Registered Holder a number of shares of Warrant Stock computed
using the following formula:
X = Y (A-B)
-------
A
Where: X = the number of shares of Warrant Stock to be issued to the Registered
Holder.
Y = the number of shares of Warrant Stock issuable upon exercise of the Warrant
on the date of delivery of the Notice of Exercise.
A = the Market Price of one share of Warrant Stock.
B = the Exercise Price.
This Warrant will be deemed to have been exercised at such time (the "Exercise
Date") as the Company has received the Notice of Exercise accompanied by this
Warrant and
Form of Warranty Page -3-
<PAGE>
either (1) a wire transfer to an account designated by the Company or a
certified or bank check in the amount of the Exercise Price multiplied by the
number of shares of Warrant Stock for which the Warrant is being exercised or
(2) a written election on the Notice of Exercise to use the alternative method
set forth above.
(b) Certificates for shares of Warrant Stock purchased upon
exercise of this Warrant will be delivered by the Company to the Purchaser
within ten days after the Exercise Date. Unless this Warrant has expired or all
of the purchase rights represented hereby have been exercised, the Company will
prepare a new Warrant, substantially identical hereto, representing the rights
formerly represented by this Warrant which have not expired or been exercised.
The Company will, within such ten-day period, deliver such new Warrant to the
Person designated for delivery in the Notice of Exercise.
(c) The Warrant Stock issuable upon the exercise of this Warrant
will be deemed to have been issued to the Purchaser on the Exercise Date, and
the Purchaser will be deemed for all purposes to have been the record holder of
such Warrant Stock on the Exercise Date.
(d) The issuance of certificates for shares of Warrant Stock upon
exercise of this Warrant will be made without charge to the Registered Holder or
the Purchaser for any issuance tax in respect thereof or any other cost incurred
by the Company in connection with such exercise and the related issuance of
shares of Warrant Stock. The Company shall not, however, be required to pay any
tax which may be payable in respect of any transfer, in whole or in part, of
this Warrant (including the issuance of new Warrants in connection therewith) or
the delivery of stock certificates in a name other than that of the Registered
Holder of this Warrant presented for exercise, and any such tax shall be paid by
such Registered Holder at the time of presentation.
2.3 Notice of Exercise. The Notice of Exercise will be
------------------
substantially in the form set forth in Exhibit I hereto, except that if the
shares of Warrant Stock are not to be issued in the name of the Registered
Holder of this Warrant, the Notice of Exercise will also state the name of the
Person to whom the certificates for the shares of Warrant Stock are to be
issued, and if the number of shares of Warrant Stock to be issued does not
include all the shares of Warrant Stock purchasable hereunder, it will also
state the name of the Person to whom a new Warrant for the unexercised portion
of the rights hereunder is to be delivered.
3. Exercise Price and Adjustments for Certain Events.
--------------------------------------------------
3.1 General. The initial Exercise Price will be $___, subject to
-------
adjustment as set forth below.
3.2 Stock Splits, etc. In case the Company shall at any time
-----------------
subdivide its outstanding shares of Common Stock into a greater number of
shares, whether by way of a stock dividend or otherwise, the Exercise Price in
effect immediately prior to such
Form of Warranty Page -4-
<PAGE>
subdivision shall be proportionately reduced, and the number of shares of Common
Stock issuable upon exercise of this Warrant shall be proportionately increased;
and conversely, in case the outstanding shares of Common Stock of the Company
shall be combined into a smaller number of shares, the Exercise Price in effect
immediately prior to such combination shall be proportionately increased and the
number of shares of Common Stock issuable upon exercise of this Warrant shall be
proportionately reduced.
3.3 Adjustments for Capital Reorganization or Reclassification. If
----------------------------------------------------------
any capital reorganization or reclassification of the capital stock of the
Company is effected (other than an Acquisition, as defined below), then, as a
condition of such capital reorganization or reclassification, lawful and
adequate provision shall be made whereby the Registered Holder shall thereafter
have the right to purchase and receive upon the basis and upon the terms and
conditions specified in this Warrant, in lieu of shares of Warrant Stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, those shares of stock, securities or assets which
would have been issued or payable with respect to or in exchange for the Warrant
Stock issuable upon exercise of this Warrant had this Warrant been exercised
immediately prior to the record date (or the effective date, as the case may be)
for such capital reorganization or reclassification.
3.4 Acquisition Transaction. If the Company is to be consolidated
-----------------------
with or acquired by another Person in a merger or otherwise, or in the event of
a sale of all or substantially all of the Company's assets (an "Acquisition"),
the Company may take such action with respect to this Warrant as the Company's
Board of Directors may deem to be equitable and in the best interests of the
Company, its stockholders and the Registered Holder under the circumstances,
including, without limitation, (i) making appropriate provision for the
continuation of the Warrant by substituting on an equitable basis for the shares
then subject to the Warrant either the consideration payable with respect to the
outstanding shares of Warrant Stock in connection with the Acquisition or
securities of any successor or acquiring entity or (ii) giving the Registered
Holder reasonable advance notice of the pendency of the Acquisition and
canceling the Warrant effective upon the Acquisition if it is not exercised
prior to the Acquisition.
4. Notice of Adjustments. Immediately upon any adjustment of the
---------------------
Exercise Price or increase or decrease in the number of shares of Common Stock
purchasable upon exercise of this Warrant, the Company will send written notice
thereof to all Registered Holders, stating the adjusted Exercise Price and the
increased or decreased number of shares purchasable upon exercise of this
Warrant and setting forth in reasonable detail the method of calculation for
such adjustment and increase or decrease.
5. Reservation Of Common Stock. The Company will at all times reserve
---------------------------
and keep available for issuance upon the exercise of Warrants such number of its
authorized but unissued shares of Common Stock as will be sufficient to permit
the exercise in full of all outstanding Warrants, and upon such issuance such
shares of Common Stock will be validly issued, fully paid and nonassessable.
Form of Warranty Page -5-
<PAGE>
6. No Voting Rights. This Warrant will not entitle the holder hereof to
----------------
any voting rights or other rights as a stockholder of the Company.
7. Piggyback Registration Rights.
-----------------------------
(a) If at any time the Company shall decide to register any of its
securities under the Securities Act, (other than with respect to a registration
statement relating to a Rule 145 transaction, an offering solely to employees or
any other registration which is not appropriate for the registration of
Registrable Securities), the Company will promptly give written notice thereof
to the Registered Holder. Upon the written request of the Registered Holder
given within 30 days after receipt of any such notice from the Company, the
Company will, except as herein provided, cause all such Registrable Securities
which the Registered Holder has requested to be registered to be included in
such Registration Statement, all to the extent requisite to permit the sale or
other disposition of the Registrable Securities. Nothing herein shall prevent
the Company from at any time abandoning or delaying any registration.
(b) If any registration pursuant to this Section 7 shall be
underwritten in whole or in part, the Company may require that the Registrable
Securities requested for inclusion pursuant to this Section 7 be included in the
underwriting on the same terms and conditions as the securities otherwise being
sold through the underwriters. If in the good faith judgment of the managing
underwriter of such public offering the inclusion of all of the Registrable
Securities originally covered by a request for registration would reduce the
number of shares to be offered by the Company or interfere with the successful
marketing of the shares of stock offered by the Company, then the number of
Registrable Securities otherwise to be included in the underwritten public
offering may be reduced pro rata among the Registered Holder requesting such
registration and any other selling security holder (based on the number of
Registrable Securities for which registration is requested expressed as a
percentage of the total number of shares being registered on behalf of selling
security holders (including the Registered Holder)).
8. Transfer of Warrant.
-------------------
(a) Subject to the transfer conditions referred to in paragraph (b),
below, this Warrant and all rights hereunder may not be assigned or transferred,
in whole or in part, without the prior written consent of the Company. Any
assignment or transfer shall require the surrender of this Warrant with a
properly executed Assignment (in the form of Exhibit II hereto) at the principal
office of the Company.
(b) Each Registered Holder of this Warrant acknowledges that this
Warrant has not been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and agrees not to sell, pledge, distribute, offer for
sale, transfer or otherwise dispose of this Warrant or any Warrant Stock issued
upon its exercise in the absence of (i) an effective registration statement as
to this Warrant or such Warrant Stock under the Securities Act (or any similar
statute then in effect), or (ii) an opinion of counsel for the Company to the
effect that such registration is not, under the circumstances, required.
Form of Warranty Page -6-
<PAGE>
9. Warrant Exchangeable for Different Denominations. This Warrant is
------------------------------------------------
exchangeable, upon the surrender hereof by the Registered Holder at the
principal office of the Company, for new Warrants of like tenor representing in
the aggregate the purchase rights hereunder, and each of such new Warrants will
represent such portion of such rights as is designated by the Registered Holder
at the time of such surrender. The date the Company initially issues this
Warrant will be deemed to be the "Date of Issuance" of this Warrant regardless
of the number of times new certificates representing the unexpired and
unexercised rights formerly represented by this Warrant are issued.
10. Representations, Warranties and Covenants of the Registered Holder.
------------------------------------------------------------------
(a) The Registered Holder represents, warrants, acknowledges and
agrees as follows: (i) the Registered Holder is an "accredited investor" within
the meaning of that term in Rule 501 under the Securities Act; (ii) the
Registered Holder is acquiring this Warrant and, has a present intention of
acquiring the Warrant Stock issuable upon exercise of this Warrant, for its own
account for investment and not with a view to any distribution thereof, and will
not transfer this Warrant or any shares of the Warrant Stock in violation of the
provisions of any applicable securities law; (iii) the Registered Holder has
been granted access to information and materials concerning the Company, this
Warrant and the Warrant Stock sufficient to permit it to evaluate the merits and
risks of an investment in this Warrant and the Warrant Stock and has had the
opportunity to its satisfaction to question and to receive answers from officers
and other representatives of the Company concerning the Company, this Warrant
and the Warrant Stock; (iv) the Registered Holder has taken full cognizance of
and understands all of the risks associated with an investment in this Warrant
and the Warrant Stock, including those described in documents filed by the
Company with the Securities and Exchange Commission the ("SEC"); (v) the
Registered Holder has not relied upon any representations or warranties made by
the Company or any of its officers or other representatives or agents except as
set forth in publicly available documents filed by the Company with the SEC;
(vi) this Warrant and the Warrant Stock issuable upon exercise of this Warrant
have not been registered under the Securities Act, or registered or qualified
under any state securities law, and they must be held indefinitely unless they
are subsequently registered under the Securities Act and registered or qualified
under any applicable state securities law or an exemption from such registration
or qualification is available; and (vii) neither the SEC nor any state
securities commission has approved or disapproved of this Warrant or the Warrant
Stock purchasable upon exercise of this Warrant and the Registered Holder
understands that any representation to the contrary is a criminal offense.
(b) The Registered Holder further represents and warrants to, and
covenants with, the Company that the Registered Holder has full right, power,
authority and capacity to enter into this Warrant and to consummate the
transactions contemplated hereby.
11. Miscellaneous.
-------------
11.1 Amendment and Waiver. The provisions of the Warrants may
--------------------
be amended and the Company may take any action herein prohibited, or omit to
perform any
Form of Warranty Page -7-
<PAGE>
act herein required to be performed by it, only if the Company has obtained the
written consent of the Registered Holders of Warrants representing at least 50%
of the shares of Warrant Stock obtainable upon the exercise of the Warrants
outstanding at the time of such consent.
11.2 Notices. All notices and other communications under this
-------
Warrant shall be (a) in writing (which shall include communications by fax),
(b) (i) delivered by hand, (ii) delivered by a nationally recognized air
courier, or (iii) sent by fax. Notices and other communications hereunder shall
be effective or deemed delivered or furnished (1) if given by fax, when such
communication is transmitted and the appropriate answer back is received or
receipt is otherwise acknowledged and (2) if given by hand delivery or sent by
air courier, when received. Any notices or other communications to be given to a
Registered Holder will be given to the address or fax number of such Registered
Holder shown on the books of the Company. Any notices or other communications to
be sent to the Company will be sent or delivered to the Company at:
Photoelectron Corporation
5 Forbes Road
Lexington, Massachusetts 02421
Attention: Euan S. Thomson, President
Fax: 781-861-0129
11.3 Descriptive Headings; Governing Law. The descriptive headings
-----------------------------------
of the paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The construction, validity and
interpretation of this Warrant will be governed by the laws of the Commonwealth
of Massachusetts.
IN WITNESS WHEREOF, the Company and the Registered Holder have caused
this Warrant to be executed by their duly authorized officers.
PHOTOELECTRON CORPORATION
By:
----------------------------------
Euan S. Thomson
President
Accepted and agreed to by the Registered
Holder:
CARL ZEISS OBERKOCHEN
By:
--------------------------------
Form of Warranty Page -8-
<PAGE>
By:_____________________________
By:____________________________
Title:
duly authorized hereunto
Form of Warranty Page -9-
<PAGE>
EXHIBIT I
---------
NOTICE OF EXERCISE
------------------
(To be Executed by
the Registered Holder
in Order to Exercise the Warrant)
The undersigned hereby irrevocably elects to exercise the right to purchase
______________________________ (_________) shares of the common stock of
Photoelectron Corporation according to the conditions thereof and herewith makes
payment of the Exercise Price of such shares in full.
Specify method of exercise by check mark:
1. Such payment is hereby made in the amount of $________ by wire transfer or
by certified or bank check.
2. The holder elects to receive shares net of shares having a value (as
determined pursuant to Section 2.2 of the Warrant) equal to the Exercise
Price of the Warrant.
Printed Name
of Registered Holder: ____________________________
Signature: ____________________________
Title (if signing
on behalf of a
Registered Holder): ____________________________
Address: ____________________________
____________________________
____________________________
Dated:__________________
Form of Warranty Page -10-
<PAGE>
EXHIBIT II
----------
ASSIGNMENT
----------
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers all of
the rights of the undersigned under the within Warrant with respect to the
number of shares of the Warrant Stock covered thereby set forth below, unto:
Names of Assignees Address No. of Shares
Date:__________________________
Signature_________________________________________
__________________________________________________
Witness___________________________________________
Form of Warranty Page -11-
<PAGE>
EXHIBIT 10.26
-------------
SNN MEMBER AGREEMENT
--------------------
This AGREEMENT is made with effect as of the 30th day of June, 1999 (the
"Effective Date") between SURGICAL NAVIGATION SPECIALISTS INC., a corporation
under the laws of Ontario ("SNS") and PHOTOELECTRON CORPORATION
("PHOTOELECTRON"), a corporation incorporated under the laws of "MASSACHUSETTS".
This document describes the involvement, rights, obligations and duties of the
SNS and the SNN Member Companies, who together form the Surgical Navigation
Network.
A. VISION
The Surgical Navigation Network (SNN) is a voluntary organization that
enables multiple medical equipment companies to provide their customers
with surgical navigation network platform integrated with their own product
lines, to deliver a broad range of solutions through plug and play
compatibility, at a reasonable cost.
B. MISSION
(a) Increase visibility of image-guided therapy in the market place with a
high tech image.
(b) Secure market share for its members, through new integrated
applications designed for image-guided surgery.
(c) Increase market share through new applications such as orthopedics,
ENT, radiation therapy.
(d) Increase market access by increasing distribution channels through
synergistic companies serving the OR.
(e) Guarantee compatibility of PHOTOELECTRON components with product and
technology of SNN products.
(f) Deliver a low cost platform with Windows NT based applications.
(g) Ensure compatible software and hardware platforms.
(h) Meet competition from others and preserve a competitive marketplace for
products and services from OEM Supplier Members, Application Members,
and others in the marketplace.
NOW THEREFORE the Parties, each intending to be legally bound, agree as follows:
ARTICLE ONE
INTERPRETATION
--------------
1.1 DEFINITIONS. In this Agreement, unless the context otherwise requires,
-----------
each capitalized term shall have the meaning attributed thereto in Schedule "A".
All references to a member or members of SNN includes the PHOTOELECTRON.
1.2 SCHEDULES. The following schedules are attached hereto and incorporated
---------
herein and form part hereof:
Schedule "A" - Definitions
Schedule "B" - Membership Criteria
Schedule "C" - Description of SNS Technology
Schedule "D" - SNN Professional Services
Schedule "E" - Integration Policy
Schedule "F" - Upstream/Downstream Marketing Services
Schedule "G" - Additional Legal Terms and Conditions
<PAGE>
-2-
ARTICLE TWO
ORGANIZATION AND MANAGEMENT OF SURGICAL NAVIGATION NETWORK
2.1 MEMBERSHIP OF SNN.
-----------------
(a) SNN is an open network. Membership is available on an equal basis to any
and all supplier(s) of relevant goods and services meeting the Membership
Criteria set out in Schedule "B" to this Agreement, on application to SNS
and execution by the member of this Agreement and all related scheduled
agreements.
(b) SNN is comprised of OEM Supplier Members and Application Members,
collectively known as SNN Members. SNS as a separate entity provides SNN
Products and Services to OEM Supplier Members and Application Members. It
is intended that SNN will include members representing a number of sectors
of medical equipment, including microscope, instrument, spine, scanner,
radiotherapy, medical implants, Picture Archive and Communication Systems
(PACS) and hospital information systems (HIS) companies.
(c) There are two types of SNN Members.
i. Application Members who sell their proprietary products to the SNN for
integration with the SNS developed Image Guided Surgery (IGS) Platform
product. Application Members do not re-sell SNN products and services
and have only the involvement, rights, obligations, and duties
specified herein, and;
ii. OEM Supplier Members, who integrate their proprietary products and the
proprietary products of Application Members with the SNS developed
Image Guided Surgery Platform product and re-sell their SNN products
and services. OEM Supplier Members may also be Application Members.
2.2 STEERING COMMITTEE. SNS will create a formal Steering Committee
------------------
comprised of one delegate from each SNN Member and delegates from the SNS.
Subject to the discretion of SNS, and after considering advice from the
Scientific Advisory Committee, the Steering Committee will advise on interface
standards for SNN, which will be published for industry wide use and will
consider and advise on future product and technology directions. The Steering
Committee may discuss and exchange technical and market information but shall
not discuss or exchange the confidential business information (such as prices
and marketing plans) of any OEM Supplier Member or Application Member, nor
engage in any activities directed toward coordinating or lessening the
competitive actions of OEM Supplier Members or Application Members.
2.3 SCIENTIFIC ADVISORY BOARD. SNS will create one or more scientific advisory
-------------------------
boards, which will assist SNN in attaining its vision by advising the Steering
Committee on, among other matters, the advisability of new technologies and
product directions and evaluating new applications.
2.4 PRESIDENT OF SNS. SNS shall appoint a President (the "President"). The
----------------
President shall be responsible for the day-to-day affairs of SNN.
The President shall, subject to such input as he may determine appropriate from
the Steering Committee and Scientific Advisory Committee, and after good faith
discussions with SNN Members, have the right to make reasonable modifications
to this Agreement and its Schedules as follows:
i. the Scope of Business and Geographic Scope may be modified on six months
notice and after good faith discussions with SNN Members, having regard to
the SNN's ability to support new applications and to obtain regulatory
approval in a given country.
<PAGE>
-3-
ii Other sections of this Agreement and its Schedules dealing with the
products and services to be provided by the SNS to members and their
integration may be modified on 3 months notice for purposes of addressing
profitability concerns of the SNS or so as to enhance the market
positioning of the SNN products and services, but no more than twice in
each calendar year.
iii. By the Agreement of the SNN Members at any time.
2.5 ACCOUNT MANAGERS. Communication is essential to the effective operation
----------------
of SNN. On the Effective Date, the Parties shall designate specific account
managers, acceptable to the other in general terms, to deal with the day-to-day
matters arising under this Agreement. Specifically, these individuals will, on
behalf of their respective employers, in accordance with the spirit of this
Agreement, use reasonable efforts to coordinate the provision of the products
and services contemplated herein including in respect of the delivery,
installation, acceptance, operation, maintenance and support of SNN Products.
Each Party may, at its discretion to be reasonably exercised, from time to time
change its account manager with another individual acceptable to the other
Party.
ARTICLE THREE
DUTIES AND OBLIGATIONS OF THE SNS
3.1 The SNN provides its members, through SNS, with equal rights to integrate
SNN Products with their own product lines or to resell SNN Products on a
standalone basis. To fulfil this role, as more particularly described in this
Agreement:
(i) SNS will develop and provide the Image Guided Surgery platform
product (" the SNS Technology", as more particularly described in
Schedule "C") which is intended to be be capable of integration with
the core products of SNN Members;
(ii) SNS will fund certain research and development, clinical development,
product marketing, sales support, service and production of IGS
products in support of the SNS Technology;
(iii)SNS will develop and promptly publish for industry-wide use interface
standards, through the Steering Committee, for all SNS IGS products
from time to time and will also monitor SNN Products and Services for
quality and maximization of mutual interface with the products and
services of all SNN members;
(iv) SNS will provide marketing support services as set out in Schedule F.
"Upstream/Downstream Marketing Services";
(v) SNS will deliver to Member Companies an annual report of SNS
activities on behalf of the SNN;
3.2 Members shall deploy the IGS platform common to SNN, and can either deploy
IGS applications, which they source from SNS, other members or through internal
development pursuant to the Integration Policy.
3.3 SNS will play an integral role in sales support and shall be permitted to
assist in sales demonstrations upon the request of the SNN Member.
3.4 SNN's Scope of Business may vary but initially will include neurosurgery,
spine surgery, and expansion into orthopedic surgery and radiotherapy,
consistent with market maturity and within the Geographic Scope. Subsequently,
SNS, in consultation with the Steering Committee, may choose to expand SNN's
scope of business into other market segments and geographic regions. SNS may
reduce the Scope of Business and Geographic Scope on six month's notice after
good faith discussions with SNN Members.
<PAGE>
-4-
ARTICLE FOUR
RIGHTS, DUTIES AND OBLIGATIONS OF MEMBER COMPANIES
4.1 OEM SUPPLIER AGREEMENT. All those SNN members authorized to sell and
----------------------
distribute SNN Products and SNN Service and Maintenance Contracts will do so
under a separate OEM Supplier Agreement.
4.2 INTEGRATION RIGHTS. All members, including PHOTOELECTRON, can integrate
------------------
their products with the SNN Products for the purpose of developing Integrated
Products. SNS, in conjunction with the Steering Committee, has developed a
detailed procedure as set out in Schedule E (the "Integration Policy") which
must be followed by members who wish to integrate their products with the SNN
Products.
4.3 MARKETING EFFORT. It is the intention of both parties that PHOTOELECTRON
-----------------
shall at all times use commercially reasonable efforts and due diligence, at
least to the same extent and degree it accords to its own products, to promote
the sale of SNN Products and Services, whether standalone or together with its
own products. PHOTOELECTRON shall represent SNS in a manner intended to preserve
and enhance the reputation of SNS and the SNN as a provider of quality services
and products. PHOTOELECTRON agrees that it shall not sell or service any third
party IGS product that competes directly with the SNS Technology.
4.4 INITIAL AND SUSTAINING MEMBER CONTRIBUTIONS. This Agreement is conditional
-------------------------------------------
upon PHOTOELECTRON entering into a Distribution Agreement with Carl Zeiss Inc.,
or another mutually agreed upon SNN Member Company, and no amount is payable
until such Distribution Agreement is finalized. All SNN members are required to
pay the same initial and annual sustaining fees. Payment of SNS Membership fee
($US150,000) for the year commencing on the effective date will be as follows:
(a) $US37,500 directly, immediately by Photoelectron following execution of the
above mentioned Distribution Agreement; and (b) $US37,500 by Photoelectron on
January 1, 2000; (c) with the balance in the amount of $US75,000 to be paid
under the Terms of the Distribution Agreement between Photoelectron and Carl
Zeiss, Inc., but no sooner than the completion of the integration of
Photoelectron to Carl Zeiss' platform and results in end user revenues. In
addition, on each anniversary date of the Effect Date, an annual sustaining fee
of $US150,000., Photoelectron hereby commits to pay the second year's annual
sustaining fee on the first anniversary date. Said fees shall be non-
refundable.
4.5 RESALE BY PHOTOELECTRON. PHOTOELECTRON shall be free to resell SNN
-----------------------
products and services at such prices as it may, in its sole discretion,
determine from time to time.
ARTICLE FIVE
OBLIGATIONS OF THE PARTIES
5.1 GENERAL OBLIGATIONS. Both Parties shall:
-------------------
(a) promote and support in good faith the interests of the SNN and its Purpose
and Role;
(b) maintain such competent staff and otherwise commit such other resources as
are reasonably required to meet its day-to-day obligations hereunder
(including, in the case of PHOTOELECTRON, the provision of maintenance and
support for those elements of Integrated Products which are not part of the
applicable SNN Product);
(c) comply fully with all applicable laws and regulations of all relevant
jurisdictions relative to its activities under this Agreement; and
(d) obtain and maintain such permits and approvals as are required to meet its
day-to-day obligations hereunder.
<PAGE>
-5-
ARTICLE SIX
LIMITATION OF LIABILITY
6.1 LIMITATION OF LIABILITY. The limitation of liability provisions of this
-----------------------
Agreement reflect an informed voluntary allocation of the risks (known and
unknown) and such voluntary risk allocation represents a material part of the
agreement reached between SNS and PHOTOELECTRON. Should SNS or PHOTOELECTRON be
in breach of any obligation, each party agrees that its remedies will be
limited to those set forth in this Agreement.
(a) Direct Damages Only. Subject to the restrictions in this Article 7 and
subject to the Aggrieved Parties election, if so entitled in law, to
rescind or be discharged from this Agreement, in the event of any breach by
the other Party of its obligations under this Agreement, including any
breach of a fundamental term or a fundamental breach, Each Party's
exclusive remedy under this or any related agreement shall be to receive
actual, direct damages up to US $1,000,000.
(b) No Indirect Damages, etc. IN NO EVENT, WHETHER BASED IN CONTRACT, TORT OR
OTHERWISE, SHALL EITHER PARTY BE LIABLE FOR ANY CLAIM FOR: (A) PUNITIVE,
EXEMPLARY, OR AGGRAVATED DAMAGES; (B) DAMAGES FOR LOSS OF PROFITS OR
REVENUE, FAILURE TO REALIZE EXPECTED SAVINGS, BUSINESS INTERRUPTION, OR
LOSS OF USE OR LACK OF AVAILABILITY OF PHOTOELECTRON's FACILITIES,
INCLUDING ITS COMPUTER RESOURCES AND ANY STORED DATA; (C) INDIRECT,
CONSEQUENTIAL OR SPECIAL DAMAGES; OR (D) CONTRIBUTION OR INDEMNITY IN
RESPECT OF ANY CLAIMS AGAINST THE OTHER PARTY OTHER THAN BY END USER.
(c) Time Limit. No action, regardless of form, may be brought by either Party
more than 12 months after the facts giving rise to the cause of action
becomes known or ought to have become known.
ARTICLE SEVEN
TERMINATION
7.1 TERM. The term of this Agreement shall commence as of the Effective Date
----
and shall continue indefinitely, subject to early termination in accordance with
the terms hereof.
7.2 EARLY TERMINATION.
-------------------
(a) If the Member is in good standing with its initial and second annual
contributions, it may terminate this Agreement at any time after it has
been a member for at least two years, on six months' notice to SNS.
(b) SNS may terminate the SNN and this Agreement in its discretion on twelve
months' notice to all SNN members, but no sooner than two (2) years from
the date of this Agreement.
(c) Without prejudicing any other rights it may have, a Party may terminate
this Agreement if:
(i) the other Party is in breach of any material term hereof; and
within thirty (30) days written notice of such breach the other
Party fails to rectify such breach, or
(ii)the other Party becoming insolvent or being unable to, or ceasing
to, pay its debts as they come due, the making of an assignment
for the benefit of creditors, its liquidation, winding up or
dissolution or the commencement of any such proceedings.
7.3 SURVIVAL. Articles 6 and , and Schedule G shall survive the termination
---------
of this Agreement.
<PAGE>
-6-
ARTICLE EIGHT
GENERAL
8.1 NOTICE. Any notice required or permitted to be given hereunder shall be
------
considered given if delivered in person, if acknowledged by the receiving
Party, or if sent by registered, prepaid mail addressed to the address
below or such other address as the addressee may have given to the other
Party from time to time.
(i) Notice to SNS: (ii) Notice to PHOTOELECTRON:
6509 Airport Road 5 Forbes Road, Suite #2
Mississauga, ON Lexington, MA 02471
L4V 1S7
Attention: President Attention: The President
Telephone No. (905) 672 2100 Telephone No. (781) 861 2069
Fax No. (905) 672 2307 Fax No.(781) 259 0482
or at such other address as the Party to whom such notice is to be given shall
have last notified (in the manner provided in this Section) the Party giving
such notice. Any notice delivered to the Party to whom it is addressed as
provided herein shall be deemed to have been given and received on the day it is
so delivered at such address, provided that if such day is not a Business Day,
then the notice shall be deemed to have been given and received on the next
Business Day. Any notice mailed as provided herein shall be deemed to have been
given and received on the fifth Business Day following the date of its mailing
provided that no postal strike is then in effect or comes into effect within
five Business Days after such mailing. Any notice transmitted by telecopier
shall be deemed given and received on the day of its transmission if such day is
a Business Day or, if not, on the next day that is a Business Day.
8.2 FORCE MAJEURE. Except as expressly provided otherwise in this Agreement,
-------------
dates and times by which a Party is required to render performance under this
Agreement or any schedule hereto shall be postponed automatically to the extent
and for the period of time that such Party is prevented from meeting them by
reason of any cause beyond its reasonable control, provided the Party prevented
from rendering performance notifies the other Party immediately and in detail of
the commencement and nature of such cause and the probable consequences thereof,
and provided further that such Party uses its reasonable efforts to render
performance in a timely manner utilizing to such end all resources reasonably
required in the circumstances, including obtaining supplies or services from
other sources if same are reasonably available. The benefit of this Section
shall not apply to the performance of an obligation, which has 120 or more days
in default.
8.3 ENTIRE AGREEMENT. The Parties agree that this Agreement constitutes the
----------------
complete and exclusive statement of the terms and conditions between them
covering the performance thereof and cannot be altered, amended or modified
except in writing executed by both Parties. There are no warranties,
conditions, or representations (including any that may be implied by statute)
and there are no agreements in connection with such subject matter except as
specifically set forth or referred to in this Agreement. No reliance is placed
on any warranty, representation, opinion, advice or assertion of fact made by
any Party hereto or its directors, officers, employees or agents, to any other
Party hereto or its directors, officers, employees or agents, except to the
extent that the same has been reduced to writing and included as a term of this
Agreement. Accordingly, there will be no liability, in tort, contract, or any
other legal or equitable theory, assessed in relation to any such warranty,
representation, opinion, advice or assertion of fact, except to the extent
aforesaid.
8.4 GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Province of Ontario and the federal laws of
Canada applicable therein and shall be treated, in all respects, as an Ontario
contract. Subject to dispute resolution as set out in Schedule "H", the Parties
<PAGE>
-7-
hereby irrevocably submit to the non-exclusive jurisdiction of the courts of the
Province of Ontario. The Parties expressly exclude the application of the United
Nations Convention on Contracts for the International Sale of Goods.
8.5 ADDITIONAL LEGAL TERMS AND CONDITIONS. The Parties agree that Schedule "G"
Additional Legal Terms and Conditions form an integral part of this Agreement
8.6 COUNTERPARTS AND FACSIMILE. This Agreement may be executed in counterparts
and each of which so executed will be deemed to be an original and such
counterparts together will be one and the same instrument. The execution and
delivery of this Agreement by either Party by facsimile transmission will
constitute valid execution and delivery of this Agreement.
IN WITNESS WHEREOF the Parties have duly executed this Agreement with effect as
of the Effective Date.
SURGICAL NAVIGATION SPECIALISTS INC.
By: /s/ Reinhard Schmidt
---------------------------------------
President and General Manager
PHOTOELECTRON CORPORATION
By: /s/ Euan S. Thomson
---------------------------------------
President and Chief Operating Officer
<PAGE>
SCHEDULE "A"
DEFINITIONS
As used in this Agreement, unless there is something in the subject matter or
context inconsistent therewith, the following terms shall have the following
respective meanings:
"Affiliate" means, with reference to a specified Person, a Person who directly,
or indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with, such specified Person "CONTROL" means direct or
indirect (i.e. through another corporation or company under control) ownership
of more than 50% of the voting shares of the Affiliate;
"Agreement" means this SNN Member Participation Agreement and all schedules
annexed to this agreement as the same may be amended from time to time in
accordance with the provisions hereof; "HEREOF", "HERETO" and "HEREUNDER" and
similar expressions mean and refer to this Agreement and not to any particular
article or section; "ARTICLE" or "SECTION" means and refers to the specified
article or section of this Agreement;
"Application Member" means a member of the SNN who sells proprietary products to
the SNN for integration with the SNS developed Image Guided Surgery Platform
product. Application Members do not resell SNN products and services, and have
only the involvement, rights, obligations and duties specified herein.
"Business Day" means any day other than a Saturday, Sunday or statutory or civic
holiday in Toronto, Ontario;
"Confidential Information" means all information relating to any Party's
business including operations, processes, methods, equipment, products, sales,
customers, trade secrets, technology and financial position to which access is
obtained or granted hereunder or provided by virtue of the performance of this
Agreement or any agreement referred to or contemplated herein by one Party to
another which when provided is designated in writing as being confidential,
provided, however, that Confidential Information shall not include any
information which:
(i) is or becomes publicly available through no fault of the other Party;
(ii) is already in the rightful possession of the other Party prior to its
receipt from the other Party;
(iii)is independently developed by the other Party;
(iv) is rightfully obtained by the other Party from a third party;
(v) is disclosed with the written consent of the Party whose information
it is; or
(vi) is disclosed pursuant to any law, court order or other legal
compulsion without a protective order to maintain the confidentiality
of such information;
"Effective Date" has the meaning attributed thereto on the first page of this
Agreement;
"End User" means a Person, which is obtaining SNN Products and/or Services for
use with patients pursuant to an End User Agreement;
"End User Agreement" means either an End User Sale and License Agreement or End
User Service and Maintenance Agreement;
<PAGE>
-2-
"End User Sale and License Agreement" means a written agreement entered into
between SNS and an End User for the sale and licensing of SNN Products or
between PHOTOELECTRON or Sub-Distributor and an End User for the use of an SNN
Product or Integrated Product;
"End User Service and Maintenance Agreement" means a written agreement entered
into between SNS and an End User or PHOTOELECTRON or Sub-Distributor and an End
User for the provision of SNS Services;
"Geographic Scope" means North America, Europe, and Japan and may be amended by
the President of the SNS from time to time.
"IGS" has the meaning attributed to it in section 3.1 of the Agreement of which
this Schedule is a part;
"Intellectual Property Rights" includes any proprietary right provided under (i)
patent law, (ii) copyright law, (iii) trade mark law, (iv) design patent or
industrial design law, (v) semi-conductor chip or mask work law, and (vi) any
other statutory provision or common law principle applicable to this Agreement
which may provide a right in either (a) ideas, formulae, algorithms, concepts,
inventions or know-how generally including trade secret law, or (b) the
expression of such ideas, formulae, algorithms, concepts, inventions or know-
how;
"IGS" has the meaning attributed to it in paragraph A of the Background;
"Integration Policy" has the meaning attributed thereto in Section 3.2;
"Integrated Products" means equipment and software developed to work with the
SNN Products in accordance with the Integration Policy;
"Modification" means all improvements, enhancements, additions and other
modifications made to the SNN Products or Services or underlying SNS Technology;
"Party" means either of SNS or PHOTOELECTRON and "PARTIES" means both of them;
"Person" includes an individual, corporation, partnership, joint venture, trust,
unincorporated organization, the Crown or any agency or instrumentality thereof
or any other judicial entity recognized by law; and
"OEM Supplier Member" means a member who integrates its own proprietary products
and the proprietary products of Application Members with the SNS-developed Image
Guided Surgery Platform product and resells SNN products and services. OEM
Supplier Members may also be Application Members.
"SNN Products and Services" means those products and related services
incorporating the SNS Technology and generally offered from time to time by SNS
to PHOTOELECTRON for marketing and distribution (which currently consists of
those products and related services set out in Schedule "C and D");
"SNS Technology" has the meaning attributed thereto in Schedule "C".
<PAGE>
SCHEDULE "B"
MEMBERSHIP CRITERIA
Any company, corporation, partnership or other legal entity which has the
expertise, skills and capacity to sell high quality products and services to the
medical profession and medical institutions such as hospitals and healthcare
delivery companies, which desires to and has the skills, expertise and capacity
to offer and sell the SNN Products and Services, either separately or together
with its own products and services, and which has had annual gross sales of its
products or services for the preceding years of not less than $U.S 10, 000,000
may apply to become a member of the SNN.
The SNS, in consultation with the Steering Committee, shall be the sole judge of
whether these criteria have been satisfied and SNS shall, in all cases, act
reasonably and with the objective that the SNN is to be a network open to the
widest possible group of qualified members throughout the world.
The minimum gross sales requirement above is intended only to ensure that each
Member will be financially viable and able to perform its obligations as a
member of the SNN. Applicants for membership not meeting that criterion may
demonstrate financial qualification in other ways (e.g. the guarantee of its
bankers, parent company or affiliates), to the satisfaction of the President.
<PAGE>
SCHEDULE "C"
DESCRIPTION OF SNS TECHNOLOGY
SNN 2.2 Product
SNN 2.2 PRODUCT GMA RELEASE: MARCH 30, 1999
Regulatory status: FDA cleared, CE marked
Clinical applications: Cranial, ENT, Spine, plus
associated instrumentation. Integration to the
Zeiss OPMI Neuro NC4 and OPMI Neuro ES microscopes.
<TABLE>
<S> <C> <C>
SNN2.2 Feature
- ---------------------------------------------------------------------------------------------------------
ADDITION OF COMPANY LOGO
- ---------------------------------------------------------------------------------------------------------
Cranial application
- ---------------------------------------------------------------------------------------------------------
Cranial application with Microscope integration
- ---------------------------------------------------------------------------------------------------------
Spine application
- ---------------------------------------------------------------------------------------------------------
PATIENT EXAMS
- ---------------------------------------------------------------------------------------------------------
Silhouette compatibility (3D data transfer)
- ---------------------------------------------------------------------------------------------------------
Load Dataset
- ---------------------------------------------------------------------------------------------------------
Import dataset
- ---------------------------------------------------------------------------------------------------------
Non-zero gantry tilt supported
- ---------------------------------------------------------------------------------------------------------
DICOM compatible (ISG validated scanners)
- ---------------------------------------------------------------------------------------------------------
Scanner Interface support (ISG validated
connections)
- ---------------------------------------------------------------------------------------------------------
REMAINING DATABASE SPACE DISPLAYED ON
PATIENT LIST MENU
- ---------------------------------------------------------------------------------------------------------
3D OBJECT CREATION
- ---------------------------------------------------------------------------------------------------------
Simple threshold
- ---------------------------------------------------------------------------------------------------------
Threshold + 2D seeding
- ---------------------------------------------------------------------------------------------------------
Add/excise drawn region
- ---------------------------------------------------------------------------------------------------------
Quick 3D
- ---------------------------------------------------------------------------------------------------------
Edit/delete objects
- ---------------------------------------------------------------------------------------------------------
DISPLAY
- ---------------------------------------------------------------------------------------------------------
Set quality of MPR views and 3D
reconstruction
- ---------------------------------------------------------------------------------------------------------
PROJECTION OF PROBE TRAJECTORY ON MPR VIEWS.
A BLUE LINE REPRESENTS THE PROBE.
- ---------------------------------------------------------------------------------------------------------
Projection of Trajectories along MPR
- ---------------------------------------------------------------------------------------------------------
Display of video image on one quadrant
of screen with high resolution.
MAXIMIZED VIDEO VIEWPORT ON ALL VIDEO
LAYOUTS
- ---------------------------------------------------------------------------------------------------------
Video IN/OUT to record operation on tape
or display external video signal on screen
- ---------------------------------------------------------------------------------------------------------
Identify landmarks
- ---------------------------------------------------------------------------------------------------------
Re-register to landmarks
- ---------------------------------------------------------------------------------------------------------
Heads up display - OPMI neuro microscope
- ---------------------------------------------------------------------------------------------------------
Annotation
- ---------------------------------------------------------------------------------------------------------
REGISTRATION
- ---------------------------------------------------------------------------------------------------------
Pre-registration point identification
- ---------------------------------------------------------------------------------------------------------
Point registration
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-3-
<TABLE>
<S> <C> <C>
"UNDO" LAST POINT IN REGISTRATION
- ---------------------------------------------------------------------------------------------------------
Surface fitting registration
- ---------------------------------------------------------------------------------------------------------
"UNDO LAST SURFACE FIT"
- ---------------------------------------------------------------------------------------------------------
Identify landmarks
- ---------------------------------------------------------------------------------------------------------
Re-register to landmarks
- ---------------------------------------------------------------------------------------------------------
Auditory feedback for pre-registration
points, registration points, surface points.
- ---------------------------------------------------------------------------------------------------------
PLANNING
- ---------------------------------------------------------------------------------------------------------
Create/delete labeled points
- ---------------------------------------------------------------------------------------------------------
Create/delete paths
- ---------------------------------------------------------------------------------------------------------
Translate path, move path end points
- ---------------------------------------------------------------------------------------------------------
View path projection on orthogonal plane
- ---------------------------------------------------------------------------------------------------------
View path intersection with orthogonal plane
- ---------------------------------------------------------------------------------------------------------
Measure distance between points
- ---------------------------------------------------------------------------------------------------------
Delete annotations
- ---------------------------------------------------------------------------------------------------------
Change visibility of all annotations
VISIBILITY OF ANNOTATIONS FOR TRACKED OBJECTS
ONLY; ALL ANNOTATIONS OR NONE.
- ---------------------------------------------------------------------------------------------------------
SPINE PLANNING
- ---------------------------------------------------------------------------------------------------------
Display of screws in MPR and trajectory views
- ---------------------------------------------------------------------------------------------------------
Modify diameter and length of the screw
- ---------------------------------------------------------------------------------------------------------
Interactively translate screw position and
move end points of screw.
- ---------------------------------------------------------------------------------------------------------
Attach the screw to the probe
- ---------------------------------------------------------------------------------------------------------
ROLL-ANGLE FEATURE ADDED
- ---------------------------------------------------------------------------------------------------------
TRACKING ANNOTATIONS
- ---------------------------------------------------------------------------------------------------------
Annotation points
- ---------------------------------------------------------------------------------------------------------
Annotation paths
- ---------------------------------------------------------------------------------------------------------
Track distance to nearest landmark
- ---------------------------------------------------------------------------------------------------------
QUICK SELECTION BOX IN SURGERY FOR SELECTING PATH
TO BE TRACKED
- ---------------------------------------------------------------------------------------------------------
MOUSE FUNCTIONS
- ---------------------------------------------------------------------------------------------------------
Manual crosshair positioning
- ---------------------------------------------------------------------------------------------------------
Rotation of 3D views + re-center 3D object in
viewport (Spine Mode only)
- ---------------------------------------------------------------------------------------------------------
Window width/level of MPR views
- ---------------------------------------------------------------------------------------------------------
IMAGE MANIPULATION
- ---------------------------------------------------------------------------------------------------------
QuickZoom
- ---------------------------------------------------------------------------------------------------------
Zoom individual viewports
- ---------------------------------------------------------------------------------------------------------
Panning of zoomed images
- ---------------------------------------------------------------------------------------------------------
Pre-set orientation of 3D views
- ---------------------------------------------------------------------------------------------------------
MPR view thickness adjustment
- ---------------------------------------------------------------------------------------------------------
Pre-set window/level selection of MPR views
- ---------------------------------------------------------------------------------------------------------
3D object color selection
- ---------------------------------------------------------------------------------------------------------
3D object visibility control
- ---------------------------------------------------------------------------------------------------------
3D object translucency control
- ---------------------------------------------------------------------------------------------------------
3D object cutplane control
- ---------------------------------------------------------------------------------------------------------
LAYOUTS
- ---------------------------------------------------------------------------------------------------------
Preset layout selection
- ---------------------------------------------------------------------------------------------------------
Trajectory views
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-4-
<TABLE>
<S> <C> <C>
MPR views
- ---------------------------------------------------------------------------------------------------------
Projection of pointer onto orthogonal views
- ---------------------------------------------------------------------------------------------------------
3D views
- ---------------------------------------------------------------------------------------------------------
Screen Save Utility
- ---------------------------------------------------------------------------------------------------------
Export View (disk or tape media)
- ---------------------------------------------------------------------------------------------------------
External Video Feed and views
- ---------------------------------------------------------------------------------------------------------
NAVIGATION
- ---------------------------------------------------------------------------------------------------------
Probe and position updating
- ---------------------------------------------------------------------------------------------------------
Toggle probe and manual modes
- ---------------------------------------------------------------------------------------------------------
Virtual tip offset
- ---------------------------------------------------------------------------------------------------------
Priority assigned to tools (between probe and
microscope)
- ---------------------------------------------------------------------------------------------------------
Probe-path trajectory alignment
- ---------------------------------------------------------------------------------------------------------
Auto selection of freehand probe
- ---------------------------------------------------------------------------------------------------------
Probe accuracy verification
- ---------------------------------------------------------------------------------------------------------
Probe button control of virtual offset (AAG)
- ---------------------------------------------------------------------------------------------------------
Probe button control of probe/manual toggle
(AAG)
- ---------------------------------------------------------------------------------------------------------
PROBE BUTTON CONTROL OF VIRTUAL ROLL-ANGLE
(AAG)
- ---------------------------------------------------------------------------------------------------------
Probe button control of "Alignment Mode"
(AAG)
- ---------------------------------------------------------------------------------------------------------
Ability to select path to track in surgery
- ---------------------------------------------------------------------------------------------------------
Diagnostic messages for tools
- ---------------------------------------------------------------------------------------------------------
Support for Passive Instrumentation
- ---------------------------------------------------------------------------------------------------------
Track separate rigid bodies
- ---------------------------------------------------------------------------------------------------------
MICROSCOPE INTEGRATION
- ---------------------------------------------------------------------------------------------------------
Focal point location visible in views
- ---------------------------------------------------------------------------------------------------------
Injection of on 3D contour into
microscope eyepiece
- ---------------------------------------------------------------------------------------------------------
Injection of text into microscope
eyepiece
- ---------------------------------------------------------------------------------------------------------
ALTERNATIVE INPUT/CONTROL DEVICES (STERILE USER)
- ---------------------------------------------------------------------------------------------------------
Voice control commands
- ---------------------------------------------------------------------------------------------------------
Foot switch control
- ---------------------------------------------------------------------------------------------------------
OTHER FEATURES
- ---------------------------------------------------------------------------------------------------------
Support for Polaris Camera Array
- ---------------------------------------------------------------------------------------------------------
Support for Flashpoint Camera Array
- ---------------------------------------------------------------------------------------------------------
SUPPORT FOR FARO ARM POSITION SENSOR
- ---------------------------------------------------------------------------------------------------------
Diagnostics for system components
- ---------------------------------------------------------------------------------------------------------
GUI for licenses and system information
- ---------------------------------------------------------------------------------------------------------
GUI for log file browsing
- ---------------------------------------------------------------------------------------------------------
Display probe icon on UI
- ---------------------------------------------------------------------------------------------------------
Camera positioning aid
- ---------------------------------------------------------------------------------------------------------
Track tools and microscope
- ---------------------------------------------------------------------------------------------------------
Inform user of IR sources
- ---------------------------------------------------------------------------------------------------------
Archive to DAT tape
- ---------------------------------------------------------------------------------------------------------
Archive to ZIP disk
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-5-
SCHEDULE "D"
SNN PROFESSIONAL SERVICES
SNN PROFESSIONAL SERVICES SUPPORT FOR SNN MEMBERS
- -------------------------------------------------
The SNN Professional Services group will support all SNN Member companies. The
goal of the Professional Services group will be to provide a responsive,
customer focused service organization.
The initial focus will be on training the Member Companies' sales groups and
initiating sales activity. A high quality training program will be available to
prepare the PHOTOELECTRON representatives to pursue IGS business. Full marketing
support will also be provided with literature, trade show activity and resources
as reasonably requested and approved by the President of the SNS.
The SNN Professional Services group will publish a Policies and Procedure Manual
with detailed descriptions of the following services and procedural
requirements.
Sales Training
Sales Specialist Support
End User Training
PHOTOELECTRON Support
Technical Service
Marketing
SNN Operations and Mechanics
SALES TRAINING
- ---------------
The sales training program will be available in March 1998. The program will
cover the SNN concept, product training, clinical applications, competitive
information, sales issues and marketing materials. The training is estimated to
be 2 days in duration and it is expected that update training will occur at
least once per year or at major software releases. This will be the full time
focus of training specialists. Purchase of Demo systems will be contingent on a
SNN Member having personnel attend an SNN training program. At the "Initial
training" session (minimum 12 sales reps in attendance) three sales reps will
share one training system. Training material and equipment will be provided by
the SNS (along with demo systems purchased). The SNN Member will cover
accommodation, travel and personal expenses for their personnel.
SALES SPECIALISTS ROLE
- -----------------------
Sales Specialists will be responsible for motivating, training, strategizing and
assisting lead closure with the SNN Member sales reps. A strong surgical sales
background, IGS experience and collaborative selling skills will be provided.
These people will work closely with the reps in qualifying all leads, planning
account strategies, leading demos, presenting competitive analyses, assisting in
site planning and quote preparation, and assisting in closure of sales. They
will act as an impartial resource to all SNN Members. These specialists will
also be in a unique position to promote "leveragability of sales costs" as they
will be able to identify appropriate situations to bring in a complementary SNN
Member in assisting sales closure.
<PAGE>
-6-
END USER TRAINING
- ------------------
End user training specialists will be available to assist with initial
applications training upon installation of a new system. This resource can be
positioned as a large "value added" to customers. The program will be offered
at SNN training sites or customer sites and includes 2 days of classroom
learning and 2 days of O.R. room experience.
PHOTOELECTRON COMMUNICATIONS
- -----------------------------
The SNN Professional Services Account Managers will drive responsiveness at the
management level, creativity in leveraging Member sales, luminary customer
involvement, distribution strength and key relationship management. Acting as a
key contact point for the Member Companies they will be the conduits to all
areas of the SNN Professional Group.
TECHNICAL SERVICE - MAINTENANCE
- -------------------------------
The SNN Professional Services will provide technical service to the installed
base and support sales activities with site planning and installations. The
Maintenance Contract (Schedule G) describes the terms and conditions of service
offerings. Additional service product offerings may also be considered.
MARKETING
- -----------
The SNN Professional Services will provide product literature, sponsor clinical
papers, public relations support, advertising and trade show activity. Workshops
and symposia will also be supported with personnel and equipment at reasonable
levels and with sufficient notice. Clinical development activities will also be
used in support of SNN Members whenever possible in leveraging the profile of
the SNN and the SNN Member.
SNN MEMBERS USE OF SNS OPERATIONS
- ---------------------------------
The SNS will be the support infrastructure to all SNN Members and will provide
Service, Training and Sales Support in pursuit of SNN Product sales as required
by the Members. This section describes the overall mechanics of SNN Members' use
of the SNS. A SNN Member handbook, which describes these operations in much more
detail, will be available to each SNN Member. The first version of this handbook
will be published by the SNS in September 1998.
A SNN Member will first require training on the product as described above. This
training may be conducted at a location of the SNN Member's choice with
equipment of either the SNN Professional Services or the SNN Member.
A SNN Member will generate and qualify sales leads for SNN products and
communicate those leads to the SNS using the Qualified Lead Form. Response of
Sales Specialists will be within 5 business days, with pager response possible
at any time.
The Sales Specialists will then fully qualify these leads and together with the
SNN Member reps establish an account strategy for gaining the business
appropriate to that account.
Implementation of an account strategy will be carried out as a team with the SNN
Member rep acting as the key account contact. Presentations, product
demonstrations, site planning, competitive analyses,
<PAGE>
-7-
RFP's and associated sales activities will be supported by the SNN Professional
Services Sales Specialists, service techs and application/training personnel as
required. The SNN Member rep maintains control of this process at all times.
If two SNN Members are competing at the site, the role of the SNN Professional
Services Sales Specialist does not change. The sale of the SNN product versus
competitive IGS systems is their key focus.
The Sales Specialist may also, at the request of the SNN Member, introduce
another SNN Member into a sale in order to leverage the strengths of both
companies. In such a case, the first company will be considered the SNN lead
company and provide the SNN product quotation to the hospital if requested.
SNS Services will be available to all SNN Members and customers via phone, fax
and email.
When a SNN Member receives an SNN product purchase commitment from an end-buyer,
the SNN Member will submit a PO to the SNS with the product configuration and
requirements indicated. The SNS will provide a PO template for SNN Members' use.
The SNS will then advise the Member/customer as to delivery date and training
schedule for that customer.
The SNN Member and the SNS will then complete delivery, installation and
training to customer requirements.
<PAGE>
SCHEDULE "E"
INTEGRATION POLICY
This document describes how SNN Member products can be integrated into the SNN
product. This will be planned as part of the roadmap creation.
CREATION OF THE SNN PRODUCT ROADMAP
The SNN Product Roadmap is a document that will be available to SNN Members. The
Roadmap describes the features that will be implemented in future product
releases by the SNS, and specifies the content and timing of each release. This
document is confidential.
To create the Roadmap, product features (including requests for integration) are
proposed by the SNN Steering Committee. Market requirements, technical
feasibility will be considered in creating the roadmap. The final roadmap has to
be approved by the President of the SNN Professional Services.
INTEGRATION OF PRODUCTS
Integration of the SNN PHOTOELECTRON product is subject to the following
process:
A. Specifications provided by the SNS to integrate the PHOTOELECTRON product
The SNS will provide specifications on integration of the PHOTOELECTRON product
and its features.
B. Specifications provided by the PHOTOELECTRON to integrate PHOTOELECTRON
components
The PHOTOELECTRON will provide a detailed specification list describing the
features, the interfaces required, as well as the communication process (if
required) to the image-guided surgery system. In addition, the PHOTOELECTRON
will provide specifications on preferred additional features requested to be
integrated into the image-guided surgery system as well as a description of
their cohesion into the overall workflow of the system. In order to ensure that
the integration is technically feasible and meets the requirements of the
PHOTOELECTRON, the method of integration is subject to approval by both parties.
C. DEVELOPING A ROADMAP WITH MUTUALLY APPROVED MILESTONES
The roadmap must contain a description of the milestones, the timeline for
achieving these milestones as well as indicators to measure milestone
achievement. The roadmap must be based on the specifications provided by the
SNS and the PHOTOELECTRON, a drawing of the UI, a description of workflow
integration and a description of compatibility with the image-guided surgery
system.
D. PROJECT MANAGER IDENTIFIED BY BOTH PARTIES
A project manager must be assigned by both parties and information on name,
title, contact phone number, fax number and e-mail address provided. The
project manager is responsible for ensuring that the required developments,
under his facility, are carried. The project manager must indicate, by a
signature, approval of the roadmap milestone completion dates. The project
manager must ensure that the described specifications are met and that the
timeline is adhered to. If the project manager is to be replaced by an alternate
designate, then the other partner must be notified at least two weeks in advance
to minimize disruption of the project.
<PAGE>
-2-
E. PRODUCT MANAGER DEFINED BY BOTH PARTIES TO MARKET PRODUCT.
A product manager must be assigned by both parties and information on name,
title, contact phone number, fax number and e-mail address provided. The
product manager is responsible for ensuring that the specifications determined
are in accordance with market requirements. The product manager must ensure
that the PHOTOELECTRON product is approved by appropriate persons and that both
a user manual as well as a service manual are available. Warranty, repair and
pricing policies must also be communicated to the SNS by the product manager of
the PHOTOELECTRON.
F. INTEGRATION AND TESTING OF PRODUCT
The integration and testing of the integrated image-guided surgery product will
be performed at the SNS according to the specifications provided by the SNS as
well as the PHOTOELECTRON. Once the integrated system has passed the internal
testing of the SNS, it will then be passed on to the PHOTOELECTRON. The
PHOTOELECTRON may at their sole discretion perform compliance tests to ensure
specifications are met.
G. DEVELOPMENT ON BEHALF OF PHOTOELECTRON FOR PRODUCT INTEGRATION NOT INCLUDED
IN GENERAL ROADMAP
If a PHOTOELECTRON requires integration of its' products and the requirement is
outside the approved general roadmap, then the integration will be performed
based on the hourly, daily or monthly rates generally applicable for R&D custom
engineering work.
R&D custom engineering rates are as follows:
Hourly - US $150 for assignments not exceeding 10 days* duration.
Daily - US $1,000 for assignments exceeding, and including, 10 days*
duration.
Monthly - US $18,750**.
* Based on a 7.5 hour work day.
** Work days in a month do not include Saturdays and Sundays and are
based on a 7.5 hour work day.
The above includes integration of a PHOTOELECTRON product applies as well as
custom integration of a PHOTOELECTRON product.
Responsibility of the PHOTOELECTRON for all regulatory approvals
The PHOTOELECTRON product to be integrated into the image-guided surgery product
must have all the required approvals prior to integration into the system. The
PHOTOELECTRON must define the planned geographical territory for which to market
the product, and therefore must also ensure compliance with all required
regulatory approvals for that territory. The overall system integration will be
performed at the SNS.
Responsibility of the PHOTOELECTRON for user manual, service manual, warranty,
repair and pricing
The product of the PHOTOELECTRON must be delivered in conjunction with a user
manual, a service manual, both in hard and soft copy. The soft copy is required
to ensure that the product of the PHOTOELECTRON can be integrated into the
overall manual at the SNS facility. The PHOTOELECTRON must guarantee that they
will provide warranty for the components integrated into the image-guided
surgery product as well as repair for these components as legally required. The
<PAGE>
-3-
PHOTOELECTRON is also responsible for pricing of the product and providing this
information to the SNS.
SECURITY OF INTELLECTUAL PROPERTY PRIOR TO THE EXCHANGE OF IDEAS
Prior to the exchange of product ideas, concepts, inspirations, specifications,
features, workflow, user interfaces or any other material in written or verbal
form, all partners must secure their intellectual property. During the process
of integration of the PHOTOELECTRON product, each party retains ownership of the
components and ownership of work completed by each respective party. This
includes respective development of the PHOTOELECTRON product, its features,
abilities, etc. The SNS retains the ownership rights for the development of the
source code and the specific integration into the image-guide surgery product.
The general spirit should be to exchange ideas as much as possible to make a
wide variety of products available to the surgeon.
<PAGE>
-4-
SCHEDULE "F"
UPSTREAM/DOWNSTREAM MARKETING SERVICES
<TABLE>
<CAPTION>
<S> <C>
UPSTREAM DOWNSTREAM
- ------------------------------------------------------------------------------------------------------------------
. MARKET INTELLIGENCE . MARCOM
. PRODUCT MANAGEMENT AND INDUSTRIAL DESIGN . CUSTOMER TRAINING
. CLINICAL DEVELOPMENT . SUPPORT TO SALES AND PLANNING
. REGULATORY . STRATEGIC ALLIANCE - FORMATION AND CONTRACTS
. CUSTOMER VISITS
. LUMINARY SITES
. FIELD CLINICAL APPLICATIONS
. EXHIBITIONS/TRADE SHOWS
. APPLICATIONS SPECIALISTS
. STEERING COMMITTEE
. SALES SPECIALISTS BY DISEASE CLASS
. MC DISTRIBUTION SUPPORT
. ADVISORY PANEL MANAGEMENT
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE "G"
ADDITIONAL LEGAL TERMS AND CONDITIONS
A. STANDARD REPRESENTATIONS, WARRANTIES AND CONDITIONS.
A.1 ACKNOWLEDGEMENT OF SNN MEMBER RE: SNS'S INTELLECTUAL PROPERTY RIGHTS.
---------------------------------------------------------------------
SNN Member recognizes the great value of the SNS Technology and of any products
or services derived therefrom and of the goodwill associated therewith and
acknowledges that all Intellectual Property Rights therein and goodwill
pertaining thereto belongs to SNS or its licensors and further acknowledges that
ownership of the SNS Technology and of any products or services derived
therefrom and the Intellectual Property Rights therein shall be held in the name
of SNS or such Person as SNS may designate. SNN Member acknowledges that the
Intellectual Property Rights in any Modifications to the SNS Technology or any
products or services derived therefrom shall remain with SNS or such Person as
SNS may designate whether or not the work is performed by SNN Member, SNS or by
any other Person.
A.2 COVENANTS OF SNN MEMBER RE: SNS'S INTELLECTUAL PROPERTY RIGHTS. SNN
----------------------------------------------------------------
Member covenants to SNS that it shall:
(a) assist and cooperate with SNS to the extent requested by SNS in the
protection of SNS's or its licensor's Intellectual Property Rights
including the execution of any document, including assignment
documentation, to confirm SNS's or its licensor's title to and interest in
the SNS Technology and of any products or services derived therefrom;
(b) take no steps either directly or indirectly to claim or dispute ownership
or the enforceability or validity of SNS's or its licensor's Intellectual
Property Rights in the SNS Technology and of any products or services
derived therefrom;
(c) promptly notify SNS of any infringements or imitations by others of the SNS
Technology or of any products or services derived therefrom when such
becomes known to SNN Member;
(d) promptly notify SNS of the failure of any End User to abide by any and all
of the terms of the relevant End User Agreement that becomes known to SNN
Member;
(e) take all reasonable precautions and actions to ensure that none of the SNS
Technology or products or services derived therefrom is marketed,
distributed or otherwise made available to any Person except in accordance
with the terms of this Agreement;
(f) not manufacture, copy, translate, adapt, alter, reverse engineer,
decompile, disassemble, download, change hardware formats, rent, lease,
lend, sublicense, electronically distribute (e.g. telephonically or through
broadcast signals), remote processing services, micro-mainframe linkups or
multi-user/local area SNN machines, any of IGS Surgical Navigation
Technology or products or services derived therefrom except as expressly
provided for in writing by SNS;
(g) not remove or deface any logo, notice or legend of copyright, trade marks
or trade secrets from any packaging which contains the SNS Technology or
products or services derived therefrom; and
<PAGE>
-2-
(h) SNN Member may not use the SNN name and Trademark except in conjunction
with Products and Services approved by the President. SNN Member
acknowledges that it obtains no rights or interest in any registered or
unregistered trade mark or trade name of SNS , SNN or SNN Products and
Services or in the goodwill accruing therefrom.
A.3 CONFIDENTIALITY. Each Party covenants to the other Party that it shall
---------------
keep confidential the Confidential Information of the other Party to which such
Party obtains access to as a consequence of entering into this Agreement and
that it will take all reasonable precautions to protect such Confidential
Information from any use, disclosure or copying except as expressly authorized
by this Agreement. Each Party shall implement such procedures as the other
Party may reasonably require from time to time to improve the security of the
Confidential Information in its possession. This Section shall survive the
termination of the Agreement.
A.4 IRREPARABLE HARM. SNN Member acknowledges that a breach of any of the
----------------
covenants in this Article Seven shall result in immediate irreparable and
irremediable damage to SNS. The Parties agree that, in the event of such
failure, there is no adequate remedy at law and incurring such damage shall be
entitled to relief in the way of temporary or permanent injunctions and such
other and further relief as any Court with jurisdiction may deem just and
proper.
B. DISPUTE RESOLUTION.
B.1 DISPUTE RESOLUTION PROCESS.
--------------------------
(a) Any dispute, disagreement, controversy or claim arising out of or relating
to this Agreement including, without limitation, its formation, execution,
validity, application, interpretation, performance, breach, termination,
enforcement or damages, or remedies arising out of the breach of or non-
compliance therewith which cannot be settled by discussion, conciliation or
mediation within a period of thirty days after the dispute arises shall be
finally settled by arbitration to be conducted by a single arbitrator under
the provisions of the United Nations Commission for International Trade Law
(UNCITRAL) Rules for International Commercial Arbitration, in the English
language and in a mutually convenient place (or in Metropolitan Toronto,
Ontario, Canada if the place can not be mutually agreed within 30 days of
the demand for arbitration). The appointing authority for the arbitrator
shall be a Justice of the Court of Justice of Ontario, Canada, in
accordance with the said UNCITRAL Rules and the Rules of said Court.The
Parties acknowledge and agree that the award of the arbitrator shall be
final and conclusive and there shall be no appeal therefrom, except as
permitted by the said UNCITRAL Rules, and the award may be enforced in the
jurisdiction of the relevant Party and anywhere else where a court or other
relevant authority will accept the jurisdiction of the arbitrator for
purposes of enforcement of his/her award.
(b) Notwithstanding the foregoing, either Party may apply to the courts of the
Province of Ontario or any other jurisdiction for injunctive or other
equitable remedies to protect its rights in Intellectual Property Rights
respecting the SNN Products and Services.
C. OTHER TERMS OF GENERAL APPLICATION.
C.1 ASSIGNMENT. The rights and obligations of SNN Member under this
----------
Agreement shall not be assigned, in whole or in part, by SNN Member without the
prior consent in writing of SNS and any purported assignment made without that
consent is void and of no effect. No assignment of this
<PAGE>
-3-
Agreement shall relieve SNN Member from any obligation under this Agreement or
impose any liability upon SNS, unless otherwise agreed to in writing by SNS. SNS
may assign its rights and obligations under this Agreement to any Affiliate or
to a party purchasing the part of its business with which the subject matter of
this Agreement is related, without SNN Member's prior written consent.
C.2 BINDING ON SUCCESSORS. This Agreement shall ensure to the benefit of and
---------------------
be binding upon the Parties and their respective successors and permitted
assigns.
C.3 FURTHER ASSURANCES. Each Party agrees that upon the written request of
------------------
any other Party, it will do all such acts and execute all such further
documents, conveyances, deeds, assignments, transfers and the like, and will
cause the doing of all such acts and will cause the execution of all such
further documents as are within its power to cause the doing or execution of, as
any other party hereto may from time to time reasonably request be done and/or
executed as may be necessary or desirable to give effect to this Agreement.
C.4 NO PARTNERSHIP. The Member acknowledges and agrees that this Agreement is
--------------
a contractual joint venture and does not create nor shall it deemed to create or
constitute a legal partnership or other formal legal association or comparable
relationship between the Member and SNS or among the Member and any other member
of the SNN or among any member of SNS or the SNN and any SNN Standards Adherent.
Without limiting the generality of the foregoing, neither Party is the agent of
the other nor has either Party any authority to enter into contracts or assume
other legal obligations binding the other;
C.5 GENDER AND NUMBER. Words expressed in the singular include the plural and
-----------------
vice versa and words expressed in one gender include all genders.
C.6 HEADINGS AND INDEX. The headings and the index in this Agreement are for
------------------
convenience of reference only and shall not affect the construction or
interpretation hereof.
C.7 INVALIDITY. If any of the provisions contained in this Agreement is found
----------
by a court of competent jurisdiction to be invalid, illegal or unenforceable in
any respect, the validity, legality or enforceability of the remaining
provisions contained herein shall not be in any way affected or impaired
thereby.
<PAGE>
EXHIBIT 10.27
PHOTOELECTRON CORPORATION
5 FORBES ROAD
LEXINGTON, MASSACHUSETTS 02421
LOAN AGREEMENT
8% SHORT TERM LINE OF CREDIT
COMMON STOCK PURCHASE WARRANTS
November 15, 1999
PYC Corporation
c/o Aegeus Shipping Co., Ltd.
17-19 Akti Miaouli
Piraeus 18535
Greece
Dear Sirs:
The undersigned, Photoelectron Corporation, a Massachusetts corporation
(the "Company"), agrees with you as follows:
(S)1. Authorization of Note and Warrants. The Company has authorized the
(i) agreement to its 8% 6-month line of credit in the aggregate principal amount
of $2,250,000 evidenced by a note (the "Note") to be in the form of Exhibit A
hereto, and (ii) its Common Stock Purchase Warrants (the "Warrants") to be
substantially in the form of Exhibit B hereto, evidencing rights to purchase in
the aggregate a maximum of 450,000 shares of the Company's Common Stock (the
"Warrant Stock").
(S)2. Issue of the Note and the Warrants. The Company will issue to you
and, subject to the terms and conditions hereof and in reliance upon the written
representations and warranties of the Company, you will make the loans as
described in the Note. You shall be entitled to receive Warrants, to purchase
one share of the Company's common stock for each $5.00 which you have advanced
to the Company pursuant to the Note. Such Warrants shall be issued at the time
of each advance under the Note. The exercise price of each share which may be
purchased under each Warrant shall be (i) if the Company's common stock is then
traded on a securities exchange or the Nasdaq National Market, equal to the
average closing price of such stock on that exchange or the Nasdaq National
Market for the 10 trading days immediately preceding the date of such advance,
or (ii) if the Company's
<PAGE>
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common stock is then traded in an over-the-counter market, equal to the average
closing bid price for such stock on such market for the same period.
(S)3. Closing. The closing hereunder shall take place at the offices of
Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110, at such time
and on such date (no later than November 19, 1999) and at such time as the
Company shall designate by notice to you.
(S)4. Representations and Warranties. The Company represents and warrants
as follows:
(S)4.1 Organization, Good Standing and Authority. The Company is a
corporation duly organized and validly existing under the laws of the
Commonwealth of Massachusetts and has all requisite corporate power and
authority to conduct its business as it is now conducted or proposed to be
conducted, to enter into this Agreement, to issue the Note and the Warrants
as contemplated herein and to carry out the provisions of this Agreement,
the Note and the Warrants. The Company is not qualified as a foreign
corporation in any jurisdiction and the conduct of its business and the
nature of its activities require no such qualification. The Company is in
good tax standing under the laws of the Commonwealth of Massachusetts.
(S)4.2. Capitalization. As of October 2, 1999, the authorized capital
stock of the Company consisted of 15,000,000 shares of Common Stock, $0.01
par value (the "Common Stock"), of which 7,754,254 shares were duly issued
and outstanding, and 7,500,000 shares of Preferred Stock, $0.01 par value,
of which no shares were duly issued and outstanding. With the exception of
(i) warrants to purchase 910,000 shares of Common Stock previously issued
to you, (ii) warrants to purchase 50,000 shares of Common Stock to be
issued to Needham & Company, Inc. pursuant to a letter agreement dated June
8, 1999, (iii) a contractual obligation to issue an undetermined number of
warrants to purchase shares of Common Stock (based on achieving certain
sales objectives) to Carl Zeiss Oberkochen pursuant to the Development and
Distribution Agreement dated as of August 21, 1999 between the Company and
Carl Zeiss Oberkochen, (iv) a contractual obligation to issue up to 25,000
shares of Common Stock (based on achieving certain technical objectives) to
Pyramid Technical Consultants, Inc pursuant to the Product Development
Agreement dated as of September 1, 1999 between the Company and Pyramid
Technical Consultants, Inc., (v) an 8% Convertible Subordinated Demand Note
dated as of May 13, 1992 previously issued to Mr. Peter
<PAGE>
-3-
M. Nomikos that is convertible into 235,000 shares of Common Stock
(together with accrued interest of $42,670 that is convertible into shares
of Common Stock at various conversion rates), and (vi) options to purchase
888,442 shares of Common Stock granted to officers, directors, employees
and consultants to the Company, as of October 2, 1999, there were not
outstanding any warrants, options, convertible securities or other rights
binding upon the Company or, to the knowledge of the officers of the
Company, upon the shareholders of the Company, to subscribe for or to
purchase any of the capital stock of the Company.
(S)4.3 Subsidiaries; Other Investments. Except for Photoelectron
(Europe) Ltd., a wholly owned subsidiary of the Company organized under the
laws of England, the Company has no subsidiaries or other material
investments in capital stock of other corporations.
(S)4.4. Financial Statements; Changes. There have been delivered to
you (i) unaudited balance sheets as at October 2, 1999, and statements of
income and of changes in financial position for the periods then ended of
the Company, and (ii) a balance sheet as at January 2, 1999, and statement
of income for the 12-month period then ended of the Company. Such financial
statements fairly represent the financial condition of the Company at the
dates thereof and have been prepared in accordance with generally accepted
accounting principles consistently followed. There are no contingent
liabilities or guarantees of the indebtedness of others by the Company
involving material amounts known to the Company and not disclosed in said
financial statements and the footnotes thereto. Since October 2, 1999,
there has been no change in the assets, liabilities, financial condition or
business of the Company, other than changes in the ordinary course of
business, the effect of which has not been in any case or in the aggregate
materially adverse, and other than such changes as are described in a
writing delivered to you referenced to this Section. The Company has not
authorized, agreed to pay or paid any dividends.
(S)4.5 Litigation. There is no action, suit or proceeding pending
against the Company before any court or administrative agency, nor is there
any known basis for any such litigation.
(S)4.6. No Materially Adverse Contracts, etc. The Company is not
obligated under any contract or agreement or under any law,
<PAGE>
-4-
regulation or decree, which materially and adversely affects its business,
properties, prospects, assets or condition, financial or otherwise. Neither
the execution nor the delivery of this Agreement, nor the consummation of
the transactions contemplated hereby, nor the fulfillment of the terms
hereof, will conflict with, or result in a breach of the terms, conditions
or provisions of or By-laws of the Company or of any agreement or
instrument under which the Company is obligated.
(S)4.7. Compliance with Instruments, etc. The Company is not in
violation of its Articles of Organization or By-laws or, to the knowledge
of its officers, of any applicable law, or in default with respect to any
order, writ, injunction or decree of any court, or in default under any
order, license, regulation or demand of any governmental agency, which
default or violation might have consequences which would materially and
adversely affect the business, property, financial position or results of
operations of the Company.
(S)4.8. Taxes. The Company has filed all Federal and state tax returns
required to be filed, and all taxes, assessments and other governmental
charges now known by the officers of the Company to be due upon the Company
or any of its income, property or assets have been duly paid and no
extensions for the time of payment have been requested. The Company has
paid or set up on its books accruals or reserves adequate for the payment
of all Federal and state income tax liabilities.
(S)4.9. Properties. The Company has good and marketable title to all
properties and assets reflected in the financial statements referred to in
(S)4.4 hereon, or acquired since October 2, 1999, such properties and
assets include all of the fixed assets used in or necessary to the
operation of the business of the Company as such business is presently
being conducted; and none of the property or assets of the Company is
subject to any liens or encumbrances, other than liens of materialmen,
mechanics, contractors or subcontractors which do not materially or
adversely affect the business, property, financial position or results of
operations of the Company.
(S)4.10. Patents, Franchises, etc. The Company owns or possesses the
rights to use all the patents, trademarks, service marks, tradenames,
copyrights, licenses and franchises currently used by it in the conduct of
its business. Neither the Company nor any of its officers
<PAGE>
-5-
has received notice, oral or written, that any product of the Company
infringes any patent or patent application of any other person and, to the
best of the Company's knowledge, no such infringement exists.
(S)4.11. Employment Relations. The Company is in material compliance
with all federal and state laws, regulations and orders governing its
relations with its employees and to the knowledge of the officers of the
Company no dispute exists between the Company and any of its employees
regarding employee organization or wages, hours or conditions of
employment.
(S)4.12. Disclosure. Neither the financial statements referred to in
(S)4.4 nor any certificate, written statement or document furnished to you
by or on behalf of the Company in connection with the transactions
contemplated hereby nor this agreement (other than forecasts of future
events) contains any untrue statement of a material fact or omits to state
a material fact necessary to make the statements contained therein or
herein not misleading.
All representations and warranties contained herein or made by or on behalf of
the Company in writing in connection with the transactions contemplated herein
shall survive the execution and delivery of this Agreement, the sale of purchase
of the Note and the Warrants and payment therefor and shall remain in effect so
long as the Note or the Warrants remain outstanding. All statements contained
in any certificate or other instrument delivered by or on behalf of the Company
pursuant hereto or in connection with the transactions contemplated herein shall
constitute representations and warranties by the Company hereunder.
(S)5. Securities Act. You represent to and agree with the Company (i)
that you are making the loans described by the Note and receiving the Warrants
for your own account without a view to any distribution thereof in violation of
the Securities Act of 1933, as amended, and that any shares of Warrant Stock
which you may acquire by reason of exercise of the Warrants will not be acquired
by you with a view to the distribution thereof in violation of the Securities
Act of 1933, as amended, (ii) that you have been fully informed that the Note
and Warrants being sold to you and the Warrant Stock have not been registered
pursuant to the provisions of Section 5 of the Securities Act of 1933, as
amended, and must be held indefinitely unless they are subsequently registered
under the provisions of said Act or an exemption from such registration is
available.
<PAGE>
-6-
You acknowledge that you have received all information that you requested
from the Company to make your decision to invest therein; that you have the
ability to bear the economic risk of such an investment, including the loss of
such investment, and that you have sufficient knowledge and experience in
business and financial matters to evaluate the merits and risks of such an
investment.
The representations and agreements contained in this (S)5 shall survive the
sale and purchase of the Note and the Warrants and payment therefor as provided
in this Agreement, and it is understood that the Company is relying on your
representations and agreements contained in this (S)5 in entering into this
Agreement and in issuing the Note and the Warrants.
(S)6. Conditions of Purchaser's Obligations. Your obligation to purchase
and pay for the Note and the Warrants to be sold and delivered to you is subject
to the accuracy of all representations and warranties by the Company contained
herein or otherwise made by the Company in writing in connection with the
transactions contemplated hereby and to the satisfaction of the following
conditions:
(S)6.1 Legal Opinion. At the closing hereunder, you shall have
received from Messrs. Goulston & Storrs, Counsel for the Company, a
favorable opinion addressed to you, dated the date of the closing and
satisfactory in form and substance to you an your counsel as to (a) the due
organization and valid existence of the Company; (b) due authorization
(including any consent of stockholders required by law or by the Articles
of Organization or By-laws of the Company), execution and delivery by the
Company and the validity and binding effect and enforceability as
obligations of the Company, of this Agreement, the Note and the Warrants,
including the due authorization and reservation for issuance of the shares
of Common Stock of the Company initially issuable upon exercise of the
Warrants and the validity, full payment and non-assessibility, when issued
pursuant to the terms of the Warrants, of shares of Common Stock of the
Company to be issued upon exercise of the Warrants; and (c) the Company
having authorized capital stock as set forth in (S)4.2 hereof.
(S)6.2. Representations and Warranties. The representations and
warranties contained in (S)4 hereof shall be true on and as of the date of
the closing hereunder (except to the extent that the facts upon which such
representations are based may have been changed by transactions
contemplated by this Agreement) with the same effect as though such
representations and warranties had been made on and as
<PAGE>
-7-
of such date and the Company shall have delivered to you its certificate
dated the date of the closing and signed on its behalf by its President and
its Treasurer to the foregoing effects.
(S)6.3 Proceedings. All corporate and other proceedings to be taken in
connection with the transactions contemplated hereby and all documents
incident thereto shall be satisfactory in substance and form to your and
your special counsel, and you and such counsel shall have received all such
counterpart originals or certified or other copies of such documents as you
or they may request.
(S)6.4. No Legal Impediment. No change shall have occurred in any law
or in the regulations thereunder or interpretations thereof which, in the
opinion of your counsel, would make it illegal for you to purchase any of
the Note or the Warrants.
(S)7. Furnishing of Financial Data and Certificates. So long as you shall
hold the Note, the Company shall deliver to you:
(S)7.1. As soon as practicable, and in any event within 20 days after
the close of each month beginning with the month of November, 1999 a copy
of the internal financial statement for that preceding month in reasonable
detail, certified subject to year-end adjustments by the principal
accounting officer of the Company. Such monthly financial statements shall
be accompanied by a statement of events anticipated to occur during the
month commencing next following the date of delivery which are deemed
significant by the Company; and
(S)7.2 Promptly as they become available, copies of all financial
statements and reports as you shall reasonably request.
(S)8. Inspection, etc. So long as you shall hold the Note, the Company
will permit any person designated by you in writing and reasonably acceptable to
the Company, at no expense to the Company, to visit and inspect any of the
properties of the Company, including books of account, and to discuss its
affairs, finances and accounts with its officers, all at such reasonable times
and as often as may reasonably be requested. All information so obtained by you
pursuant to this (S)8 or delivered to you pursuant to (S)7 will be kept
confidential by you.
(S)9. Negative Pledge. So long as you shall hold the Note, the Company
will not mortgage, sell, exchange or otherwise dispose of, or permit any lien or
encumbrance to be imposed or remain on any of its patents,
<PAGE>
-8-
trademarks, service marks copyrights, licenses or other proprietary rights used
or useful in the Company's business.
(S)10. Agreement as to Agents or Brokers. The Company hereby agrees to
indemnify and hold you harmless against and in respect of any claim, arising as
a result of any act of the Company, for brokerage or other commissions relating
to this agreement or the transactions contemplated hereby. You agree to
indemnify and hold the Company and each of the other parties to this Agreement
harmless against and in respect of any claim, arising as a result of any act of
yours, for brokerage or other commissions relating to this Agreement or the
transactions contemplated hereby.
(S)11. Expenses. Whether or not the transactions contemplated hereby
shall be consummated, the Company will pay (a) the costs of (i) preparing this
Agreement and the other instruments mentioned herein, and (ii) the issue of the
Note and Warrants; and (b) the reasonable fees, expenses and disbursements of
your counsel, Messrs. Bingham Dana LLP in connection with the transactions
contemplated hereby, including amendments, waivers and consents in connection
therewith.
(S)12. Parties in Interest. All covenants and agreements contained in
this Agreement by or on behalf of any of the parties hereto shall bind and inure
to the benefit of the respective successors and assigns of the parties hereto.
(S)13. Use of Proceeds. The Company will use the proceeds received from
the sale of the Note hereunder for working capital.
(S)14. Notices, etc. All notices, requests, consents and other
communications hereunder shall be in writing and shall be sent by confirmed
facsimile transmission or forwarded by receipted courier.
(a) if to the Company, at the address set forth on the first page hereof,
or at such other address as may have been furnished to you in writing by
the Company, marked "Attention: President",
(b) if to you, at the address set forth on the first page hereof, or at
such other address as may have been furnished to you in writing by the
Company, marked "Attention: President".
Any notice or other communication so addressed and so mailed shall be deemed to
have been given when mailed.
<PAGE>
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(S)15. Law Governing. This Agreement is being executed and delivered in
the Commonwealth of Massachusetts and shall be construed in accordance with and
governed by the laws thereof.
(S)16. Changes, Waiver. Neither this Agreement nor any provision hereof
may be changed, waived, discharged or terminated orally but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought. No such change, waiver,
discharge or termination by you shall be effective unless executed by you.
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed copy of this letter and return such copy to the
undersigned, whereupon this letter as so accepted shall become a binding
agreement between you and the undersigned.
Very truly yours,
PHOTOELECTRON CORPORATION
By /s/ Euan S. Thomson
--------------------------------
President
The foregoing Loan Agreement
is hereby accepted as of the date
thereof.
PYC CORPORATION
By /s/ Peter M. Nomikos
------------------------
<PAGE>
EXHIBIT A
-10-
Photoelectron Corporation
Promissory Note
$2,250,000 November 15, 1999
Lexington, Massachusetts
For value received, the undersigned hereby promises to pay to PYC
Corporation, a Liberian corporation ("PYC"), or order, the principal amount of
Two Million Two Hundred and Fifty Thousand and no/100 Dollars $2,250,000) (or
such lesser amount as shall have been advanced and remain outstanding and
unpaid) on six months from the date hereof as described in the Agreement
referred to below, in immediately available funds, and to pay interest on the
unpaid principal amount hereof in like funds, for the period commencing on the
date hereof until paid in full, at the rate of 8% per annum.
Terms not otherwise defined herein shall be used as defined in such
Agreement.
Overdue payments of principal (whether at stated maturity, by acceleration
or otherwise), and, to the extent permitted by law, overdue interest, shall bear
interest, payable on demand in immediately available funds, at a rate per annum
equal to 4% above the rate provided in such Agreement.
The undersigned may request advances under this Note once every 30 days
during the period from the date of this Note until the maturity hereof, whether
stated maturity or accelerated maturity pursuant to the terms hereof. Each such
request shall be in writing, addressed to PYC at the address thereof in the
Agreement and may be in any amount, not exceeding $400,000 or such lesser amount
which, together with all amounts advanced previously under this Note and
remaining outstanding, does not exceed $2,250,000 in the aggregate, as the
undersigned may specify.
This Note is issued pursuant to, and entitled to the benefits of, and is
subject to, the provisions of a Loan Agreement dated November 15, 1999 by and
between the undersigned and PYC (herein, as the same may from time to time be
amended or extended, referred to as the "Agreement"), but neither this reference
to the Agreement nor any provision thereof shall affect or impair the absolute
and unconditional obligation of the undersigned maker of this Note to pay
principal of and interest on this Note as herein provided.
<PAGE>
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In case any default in the terms hereof or of the Agreement shall occur, or
if the undersigned shall file for bankruptcy protection or become insolvent, the
aggregate unpaid principal of, plus accrued interest on, this Note shall become
or may be declared to be due and payable and no further advances pursuant to
this Note shall be required.
The undersigned may, at its option, prepay all or any part of the principal
of this Note before maturity and is obligated to prepay this Note upon receipt
by the undersigned of the proceeds of any future financings of the undersigned,
the net proceeds of which to the undersigned in the aggregate equal or exceed
$5,000,000.
Upon the maturity or entire prepayment of this Note, PYC shall have the
option, exercisable by written notice to the undersigned within 30 days
subsequent to such maturity or prepayment, to convert this Note into Common
Stock of the undersigned at a conversion price per share equal to the market
price per share of Common Stock as of the date of such conversion, determined
using the method set forth in the last sentence of (S)2 of the Agreement for
determining the exercise price per Warrant (as defined in the Agreement).
The undersigned hereby waives presentment, demand, notice of dishonor,
protest and all other demands and notices in connection with the delivery,
acceptance, performance and enforcement of this Note.
This instrument shall have the effect of an instrument executed under seal
and shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).
PHOTOELECTRON CORPORATION
By:
------------------------------
Title:
---------------------------
<PAGE>
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Exhibit B
NEITHER THIS WARRANT NOR ANY SECURITIES PURCHASABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS.
NEITHER THIS WARRANT NOR ANY SECURITIES PURCHASABLE UPON EXERCISE HEREOF MAY BE
SOLD OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR
SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE
SECURITIES LAWS, OR EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND LAWS.
PHOTOELECTRON CORPORATION
5 FORBES ROAD
LEXINGTON, MASSACHUSETTS 02421
STOCK PURCHASE WARRANT
Date of Issuance: Right to Purchase
--------------------- --------------------
Shares of Common Stock
(subject to adjustment)
Warrant #
---
For value received, Photoelectron Corporation, a Massachusetts
corporation (the "Company"), hereby grants to CYP Corporation, or its registered
assigns (the "Registered Holder"), the right to purchase from the Company ______
shares of the Company's Common Stock (subject to adjustment pursuant to Section
3 hereof) at a price of $____ per share (as adjusted pursuant to Section 3
hereof, the "Exercise Price"). The amount and kind of securities purchasable
pursuant to the rights granted under this Warrant and the purchase price for
such securities are subject to adjustment pursuant to the provisions contained
in this Warrant.
This Warrant is subject to the following provisions:
1. Definitions. As used in this Warrant, the following terms have the
meanings set forth below:
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"Common Stock" means the Company's Common Stock, $.01 par value per
share.
"Date of Issuance" shall have the meaning specified in Section 10 of
this Warrant.
"Person" means an individual, a partnership, a corporation, a limited
liability company, a trust, a joint venture, an unincorporated organization or
any other entity or a government or any department or agency of a government.
"Warrant" or "Warrants" means this Warrant and all stock purchase
warrants issued in exchange therefor pursuant to the terms thereof.
"Warrant Stock" means shares of the Company's authorized but unissued
Common Stock; provided that if there is a change such that the securities
issuable upon exercise of the Warrant are issued by an entity other than the
Company or there is a change in the class of securities so issuable, then the
term "Warrant Stock" will mean one share of the security issuable upon exercise
of the Warrant if such security is issuable in shares, or will mean the smallest
unit in which such security is issuable if such security is not issuable in
shares.
2. Exercise of Warrant.
2.1 Exercise Period. The Registered Holder may exercise this
Warrant, in whole or in part (but not as to a fractional share of Warrant
Stock), at any time and from time to time prior to the fifth anniversary of the
Date of Issuance of the Warrant (the "Exercise Period").
2.2 Exercise Procedure.
(a) This Warrant may be exercised by the Registered Holder in whole or
in part (but not as to fractional shares of Warrant Stock) by the surrender of
this Warrant and delivery of an executed Notice of Exercise in the form appended
hereto duly executed by the Registered Holder to the Company at its principal
office at any time or times during the Exercise Period accompanied by payment
for the Warrant Stock as to which this Warrant is being exercised by wire
transfer to an account designated by the Company or by certified or bank check.
In the event of a partial exercise of this Warrant, this Warrant will be
canceled and the Company will deliver a new Warrant of like tenor representing
the balance of the shares of Warrant Stock purchasable hereunder. This Warrant
will be deemed to have
<PAGE>
-14-
been exercised as such time (the "Exercise Date") as the Company has received
the Notice of Exercise accompanied by this Warrant and a wire transfer to an
account designated by the Company or a certified or bank check in the amount of
the Exercise Price multiplied by the number of shares of Warrant Stock for which
the Warrant is being exercised. Alternatively, the Registered Holder may elect
to exercise the rights represented by this Warrant in whole or in part (but not
as to fractional shares of Warrant Stock) by the surrender of this Warrant and
delivery of an executed Notice of Exercise specifying that the Warrant shall be
exercised, and the exercise price therefor paid, by the Company's issuing to the
Registered Holder a number of shares of Warrant Stock computed using the
following formula:
X = Y (A-B)
-------
A
Where: X = the number of shares of Warrant Stock to be issued to the
Registered Holder.
Y = the number of shares of Warrant Stock issuable upon exercise of
this Warrant on the date of delivery of the Notice of Exercise.
A = the current fair market value of one share of Warrant Stock.
B = Exercise Price.
As used herein, current fair market value of the Warrant Stock shall mean
the numerical average of the fair market value per share of Warrant Stock over
the 10 trading days immediately preceding the day on which the Notice of
Exercise is received by the Company. If the Warrant Stock is then traded on a
securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market,
"fair market value per share" on any given day shall be the closing price of a
share of Warrant Stock on that exchange, the Nasdaq National Market or the
Nasdaq SmallCap Market for that day, or if the Warrant Stock is then traded in
an over-the-counter market, "fair market value per share" on any given day shall
be the closing bid price for a share of Warrant Stock on such market for that
day. If at any time the Warrant Stock is not listed on any securities exchange
or quoted in the Nasdaq National Market or the Nasdaq SmallCap Market or the
over-the-counter market, the "current fair market value" of Warrant Stock shall
be the highest price per share which the Company could obtain from a willing
buyer (not a current employee or director) for shares of Warrant Stock sold by
the Company, from authorized but unissued shares, as determined in good faith by
the Board of Directors of the Company. Notwithstanding the foregoing, if the
Company shall engage in an "Acquisition" transaction, as defined below, the
current fair market value of the Common Stock shall be determined with reference
to the value ascribed to the Company by the terms of the Acquisition
transaction.
<PAGE>
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(b) Certificates for shares of Warrant Stock purchased upon exercise
of this Warrant will be delivered by the Company to the Purchaser within ten
days after the Exercise Date. Unless this Warrant has expired or all of the
purchase rights represented hereby have been exercised, the Company will prepare
a new Warrant, substantially identical hereto, representing the rights formerly
represented by this Warrant which have not expired or been exercised. The
Company will, within such ten-day period, deliver such new Warrant to the Person
designated for delivery in the Notice of Exercise.
(c) The Warrant Stock issuable upon the exercise of this Warrant will
be deemed to have been issued to the Purchaser on the Exercise Date, and the
Purchaser will be deemed for all purposes to have been the record holder of such
Warrant Stock on the Exercise Date.
(d) The issuance of certificates for shares of Warrant Stock upon
exercise of this Warrant will be made without charge to the Registered Holder or
the Purchaser for any issuance tax in respect thereof or any other cost incurred
by the Company in connection with such exercise and the related issuance of
shares of Warrant Stock. The Company shall not, however, be required to pay any
tax which may be payable in respect of any transfer, in whole or in part, of
this Warrant (including the issuance of new Warrants in connection therewith) or
the delivery of stock certificates in a name other than that of the Registered
Holder of this Warrant presented for exercise, and any such tax shall be paid by
such Registered Holder at the time of presentation.
2.3 Notice of Exercise. The Notice of Exercise will be substantially in the
form set forth in Exhibit I hereto, except that if the shares of Warrant Stock
are not to be issued in the name of the Registered Holder of this Warrant, the
Notice of Exercise will also state the name of the Person to whom the
certificates for the shares of Warrant Stock are to be issued, and if the number
of shares of Warrant Stock to be issued does not include all the shares of
Warrant Stock purchasable hereunder, it will also state the name of the Person
to whom a new Warrant for the unexercised portion of the rights hereunder is to
be delivered.
<PAGE>
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3. Exercise Price and Adjustments for Certain Events.
3.1 General. The initial Exercise Price will be $___ , subject to
adjustment as set forth below.
3.2 Stock Splits, etc. In case the Company shall at any time subdivide
its outstanding shares of Common Stock into a greater number of shares, whether
by way of a stock dividend or otherwise, the Exercise Price in effect
immediately prior to such subdivision shall be proportionately reduced, and the
number of shares of Common Stock issuable upon exercise of this Warrant shall be
proportionately increased; and conversely, in case the outstanding shares of
Common Stock of the Company shall be combined into a smaller number of shares,
the Exercise Price in effect immediately prior to such combination shall be
proportionately increased and the number of shares of Common Stock issuable upon
exercise of this Warrant shall be proportionately reduced.
3.3 Adjustments for Capital Reorganization or Reclassification. If any
capital reorganization or reclassification of the capital stock of the Company
is effected (other than an Acquisition, as defined below), then, as a condition
of such capital reorganization or reclassification, lawful and adequate
provision shall be made whereby the Registered Holder shall thereafter have the
right to purchase and receive upon the basis and upon the terms and conditions
specified in this Warrant, in lieu of shares of Warrant Stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, those shares of stock, securities or assets which would have
been issued or payable with respect to or in exchange for the Warrant Stock
issuable upon exercise of this Warrant had this Warrant been exercised
immediately prior to the record date (or the effective date, as the case may be)
for such capital reorganization or reclassification.
3.4 Acquisition Transaction. If the Company is to be consolidated with
or acquired by another Person in a merger or otherwise, or in the event of a
sale of all or substantially all of the Company's assets (an "Acquisition"), the
Company may take such action with respect to this Warrant as the Company's Board
of Directors may deem to be equitable and in the best interests of the Company,
its stockholders and the Registered Holder under the circumstances, including,
without limitation, (i) making appropriate provision for the continuation of the
Warrant by substituting on an equitable basis for the shares then subject to the
Warrant either the consideration payable with respect to the outstanding shares
of Warrant Stock in connection with the Acquisition or securities of any
successor or acquiring entity or (ii) giving the Registered Holder reasonable
advance
<PAGE>
-17-
notice of the pendency of the Acquisition and canceling the Warrant effective
upon the Acquisition if it is not exercised prior to the Acquisition.
4. Notice of Adjustments. Immediately upon any adjustment of the Exercise
Price or increase or decrease in the number of shares of Common Stock
purchasable upon exercise of this Warrant, the Company will send written notice
thereof to all Registered Holders, stating the adjusted Exercise Price and the
increased or decreased number of shares purchasable upon exercise of this
Warrant and setting forth in reasonable detail the method of calculation for
such adjustment and increase or decrease.
5. Reservation Of Common Stock. The Company will at all times reserve and
keep available for issuance upon the exercise of Warrants such number of its
authorized but unissued shares of Common Stock as will be sufficient to permit
the exercise in full of all outstanding Warrants, and upon such issuance such
shares of Common Stock will be validly issued, fully paid and nonassessable.
6. No Voting Rights. This Warrant will not entitle the holder hereof to any
voting rights or other rights as a stockholder of the Company.
7. Transfer of Warrant.
(a) Subject to the transfer conditions referred to in paragraph (b),
below, this Warrant and all rights hereunder may not be assigned or transferred,
in whole or in part, without the prior written consent of the Company. Any
assignment or transfer shall require the surrender of this Warrant with a
properly executed Assignment (in the form of Exhibit II hereto) at the principal
office of the Company.
(b) Each Registered Holder of this Warrant acknowledges that this
Warrant has not been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and agrees not to sell, pledge, distribute, offer for
sale, transfer or otherwise dispose of this Warrant or any Warrant Stock issued
upon its exercise in the absence of (i) an effective registration statement as
to this Warrant or such Warrant Stock under the Securities Act (or any similar
statute then in effect), or (ii) an opinion of counsel for the Company to the
effect that such registration is not, under the circumstances, required.
8. Warrant Exchangeable for Different Denominations. This Warrant is
exchangeable, upon the surrender hereof by the Registered Holder at the
principal office of the Company, for new Warrants of like tenor representing in
the aggregate the purchase rights hereunder, and each of
<PAGE>
-18-
such new Warrants will represent such portion of such rights as is designated by
the Registered Holder at the time of such surrender. The date the Company
initially issues this Warrant will be deemed to be the "Date of Issuance" of
this Warrant regardless of the number of times new certificates representing the
unexpired and unexercised rights formerly represented by this Warrant are
issued.
9. Representations, Warranties and Covenants of the Registered Holder. (a)
The Registered Holder represents, warrants, acknowledges and agrees as follows:
(i) the Registered Holder is an "accredited investor" within the meaning of that
term in Rule 501 under the Securities Act; (ii) the Registered Holder is
acquiring this Warrant and, has a present intention of acquiring the Warrant
Stock issuable upon exercise of this Warrant, for its own account for investment
and not with a view to any distribution thereof, and will not transfer this
Warrant or any shares of the Warrant Stock in violation of the provisions of any
applicable securities law; (iii) the Registered Holder has been granted access
to information and materials concerning the Company, this Warrant and the
Warrant Stock sufficient to permit it to evaluate the merits and risks of an
investment in this Warrant and the Warrant Stock and has had the opportunity to
its satisfaction to question and to receive answers from officers and other
representatives of the Company concerning the Company, this Warrant and the
Warrant Stock; (iv) the Registered Holder has taken full cognizance of and
understands all of the risks associated with an investment in this Warrant and
the Warrant Stock, including those described in documents filed by the Company
with the Securities and Exchange Commission the ("SEC"); (v) the Registered
Holder has not relied upon any representations or warranties made by the Company
or any of its officers or other representatives or agents except as set forth in
publicly available documents filed by the Company with the SEC; (vi) this
Warrant and the Warrant Stock issuable upon exercise of this Warrant have not
been registered under the Securities Act, or registered or qualified under any
state securities law, and they must be held indefinitely unless they are
subsequently registered under the Securities Act and registered or qualified
under any applicable state securities law or an exemption from such registration
or qualification is available; and (vii) neither the SEC nor any state
securities commission has approved or disapproved of this Warrant or the Warrant
Stock purchasable upon exercise of this Warrant and the Registered Holder
understands that any representation to the contrary is a criminal offense.
(b) The Registered Holder further represents and warrants to, and
covenants with, the Company that the Registered Holder has full right,
<PAGE>
-19-
power, authority and capacity to enter into this Warrant and to consummate the
transactions contemplated hereby
10. Miscellaneous.
10.1 Amendment and Waiver. The provisions of the Warrants may be
amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company has
obtained the written consent of the Registered Holders of Warrants representing
at least 50% of the shares of Warrant Stock obtainable upon the exercise of the
Warrants outstanding at the time of such consent.
10.2 Notices. All notices and other communications under this Warrant
shall be (a) in writing (which shall include communications by fax), (b) (i)
delivered by hand, (ii) delivered by a nationally recognized air courier, or
(iii) sent by fax. Notices and other communications hereunder shall be
effective or deemed delivered or furnished (1) if given by fax, when such
communication is transmitted and the appropriate answer back is received or
receipt is otherwise acknowledged and (2) if given by hand delivery or sent by
air courier, when received. Any notices or other communications to be given to
a Registered Holder will be given to the address or fax number of such
Registered Holder shown on the books of the Company any notices or other
communications to be sent to the Company will be sent or delivered to the
Company at:
Photoelectron Corporation
5 Forbes Road
Lexington, Massachusetts 02421
Attention: President
Fax: 781-861-0129
10.3 Descriptive Headings; Governing Law. The descriptive headings
of the paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The construction, validity and
interpretation of this Warrant will be governed by the laws of the Commonwealth
of Massachusetts.
<PAGE>
-20-
IN WITNESS WHEREOF, the Company and the Registered Holder have caused this
Warrant to be executed by their duly authorized officers.
PHOTOELECTRON CORPORATION
By:
------------------------
Euan S. Thomson
President
Accepted and agreed to by the
Registered
Holder
PYC CORPORATION
By:
------------------------------
<PAGE>
-21-
EXHIBIT I
---------
NOTICE OF EXERCISE
------------------
(To be Executed by
the Registered Holder
in Order to Exercise the Warrant)
The undersigned hereby irrevocably elects to exercise the right to
purchase ______________________________ (_________) shares of the common stock
of Photoelectron Corporation according to the conditions thereof and herewith
makes payment of the Exercise Price of such shares in full. Such payment is
hereby made in the amount of $________ by wire transfer or by certified or bank
check.
Printed Name
of Registered Holder:
--------------------------------------
Signature:
----------------------------
Title (if signing
on behalf of a
Registered Holder):
--------------------------------------
Address:
----------------------------
--------------------------------------
--------------------------------------
Dated:
----------------------------
<PAGE>
-22-
EXHIBIT II
----------
ASSIGNMENT
----------
FOR VALUE RECEIVED, _________________ hereby sells, assigns and
transfers all of the rights of the undersigned under the within Warrant with
respect to the number of shares of the Warrant Stock covered thereby set forth
below, unto:
Names of Assignees Address No. of Shares
Date:__________________________
Signature____________________________
Witness_____________________________
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K for the year ended January 1, 2000 into the
Company's previously filed Registration Statement on Form S-8 (File No.
333-32957).
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10K FOR
PERIOD ENDING JANUARY 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-01-2000 JAN-02-1999
<PERIOD-START> JAN-02-1999 JAN-03-1998
<PERIOD-END> JAN-01-2000 JAN-02-1999
<CASH> 134,104 3,686,457
<SECURITIES> 0 0
<RECEIVABLES> 87,500 260,000
<ALLOWANCES> 0 0
<INVENTORY> 1,437,557 1,454,706
<CURRENT-ASSETS> 1,838,232 7,846,309
<PP&E> 3,898,399 3,597,563
<DEPRECIATION> 2,872,636 2,308,683
<TOTAL-ASSETS> 2,863,995 9,135,189
<CURRENT-LIABILITIES> 2,616,748 1,682,522
<BONDS> 0 0
0 0
0 0
<COMMON> 77,688 77,042
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 2,863,995 9,135,189
<SALES> 0 0
<TOTAL-REVENUES> 534,634 678,000
<CGS> 266,653 278,251
<TOTAL-COSTS> 7,852,066 8,540,517
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 95,184 83,569
<INCOME-PRETAX> (7,548,642) (7,674,009)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,548,642) (7,674,009)
<EPS-BASIC> (0.97) (1.02)
<EPS-DILUTED> (0.97) (1.02)
</TABLE>
