<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1997
REGISTRATION NO. 333-22429
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SPECTRX, INC.
(Exact name of Registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
DELAWARE 3845 58-2029543
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Identification
of Classification Code Number) Number)
incorporation or organization)
</TABLE>
6025A UNITY DRIVE
NORCROSS, GEORGIA 30071
(770) 242-8723
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
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MARK A. SAMUELS
CHIEF EXECUTIVE OFFICER
SPECTRX, INC.
6025A UNITY DRIVE
NORCROSS, GEORGIA 30071
(770) 242-8723
(Name, address, including zip code, and telephone number,
including area code, of agent of service)
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COPIES TO:
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<C> <C>
ROBERT D. BROWNELL, ESQ. THOMAS W. CHRISTOPHER, ESQ.
KELLY AMES MOREHEAD, ESQ. GARETH NOONAN, ESQ.
WILSON SONSINI GOODRICH & ROSATI WHITE & CASE
PROFESSIONAL CORPORATION 1155 AVENUE OF THE AMERICAS
650 PAGE MILL ROAD NEW YORK, NY 10036-2787
PALO ALTO, CA 94304 (212) 819-8200
(415) 493-9300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. []
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act of 1933 registration statement number of the earlier
effective registration statement for the same offering. []
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act of
1933 registration statement number of the earlier effective registration
statement for the same offering. []
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []
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CALCULATION OF REGISTRATION FEE
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<S> <C> <C>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value................ $30,383,448 $9,210
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee. The estimate is made pursuant to Rule 457(o) of the Securities Act of
1933, as amended.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAW OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED JUNE 11, 1997
PROSPECTUS
2,201,699 SHARES
SPECTRX (LOGO)
COMMON STOCK
Of the 2,201,699 shares of common stock (the "Common Stock") offered hereby
(the "Offering"), 2,000,000 shares are being sold by SpectRx, Inc., a Delaware
corporation ("SpectRx" or the "Company"), and 201,699 shares are being sold by
the Selling Stockholders. The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders. See "Principal and Selling
Stockholders."
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $10.00 and $12.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol SPRX.
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
- ------------------------------------------------------------------------------------------------
Total(3)................ $ $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $650,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 330,255 additional shares of Common Stock solely to cover
over-allotments, if any. Of the shares subject to this option, all 330,255
shares will be sold by the Company. If all such shares are purchased, the
total Price to Public, Underwriting Discount and Proceeds to Company will
be $ , $ and $ , respectively. See
"Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY
, 1997.
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THIS
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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SpectRx(TM), is a trademark of the Company. This Prospectus also includes
trade names, trademarks and registered trademarks of companies other than
SpectRx.
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The Common Stock offered hereby,
involves a high degree of risk. See "Risk Factors."
THE COMPANY
SpectRx, Inc. ("SpectRx" or the "Company") is engaged in the research and
development of products that offer less invasive and painless alternatives to
blood tests currently used for glucose monitoring, diabetes screening and infant
jaundice. The Company's goal is to introduce products that reduce or eliminate
pain, are convenient to use and provide rapid results at the point of care,
thereby improving patient well being and reducing health care costs. The
Company's glucose monitoring, diabetes screening and infant jaundice products
are based on proprietary electro-optical and microporation technology that can
eliminate the pain and inconvenience of a blood sample. The Company has entered
into collaborative arrangements with Abbott Laboratories ("Abbott"), Boehringer
Mannheim Corporation ("Boehringer Mannheim") and Healthdyne Technologies, Inc.
("Healthdyne") to facilitate the development, commercialization and introduction
of its glucose monitoring, diabetes screening and infant jaundice products,
respectively.
Diabetes is a major health care problem which according to the World Health
Organization is estimated to affect 100 million people worldwide by the year
2000. If undiagnosed and untreated, diabetes leads to severe medical
complications over time, including blindness, loss of kidney function, nerve
degeneration and cardiovascular disease. Diabetes is the sixth leading cause of
death by disease in the United States and is estimated to cost the American
economy over $90 billion annually, including indirect costs such as lost
productivity. Diabetes occurs when the body does not produce sufficient levels
of, or effectively utilize, insulin, a hormone that regulates the metabolism
(breakdown) of glucose. Glucose levels in the blood must be within a specific
concentration range to ensure proper cellular function and health. Studies
indicate that maintaining proper glucose control through adjustments to oral
medication, diet, exercise, and insulin injections can significantly reduce the
risk of complications from diabetes. Personal glucose monitoring products play a
critical role in managing diabetes by helping diabetics make the proper
adjustments to control their blood glucose levels.
The Company is developing a hand held glucose monitoring product that
combines its proprietary microporation technology with a disposable assay
cartridge. This product is intended to offer an alternative to current glucose
monitoring products, which require a blood sample usually obtained by lancing
the fingertip. The Company believes that the worldwide market for glucose
monitoring products at manufacturers' price levels is approximately $2.0 billion
annually and growing at approximately 17% a year. The North American market was
approximately $1.0 billion in 1996. The Company's prototype glucose monitoring
product uses a laser to create one or more micropores, each approximately the
diameter of a human hair, and each with a depth approximately the thickness of a
sheet of paper. A micropore provides painless access to interstitial fluid, an
extracellular fluid that is prevalent throughout the body and just beneath the
skin, which contains glucose and many other analytes found in blood. Because
interstitial fluid is found throughout the body, a micropore can be created on
various parts of the body. Once access to interstitial fluid is achieved, the
device is intended to force the interstitial fluid out of the micropore and into
the disposable assay cartridge. The fluid is then analyzed using chemistry
similar to that in currently available blood glucose monitors. In a pilot study
involving 10 subjects and yielding 438 measurements, the Company found a
correlation coefficient of 0.96 between blood glucose levels measured using
conventional finger stick technology and interstitial fluid glucose levels
measured using the Company's early stage prototype. A correlation coefficient is
a quantitative representation of the relationship between two measurements with
a correlation coefficient of 1.0 indicating identical information in the
measurements. In October 1996, the Company entered into a collaborative
arrangement with Abbott under which Abbott is primarily responsible for
undertaking or funding the development, regulatory clearance, manufacture and
sale of the Company's glucose monitoring product. Under its agreement with
Abbott, the Company receives development funding, payments on achievement of
technical milestones and a royalty on Abbott's sales of the product. In
addition, Abbott has made a $3 million equity investment in the Company. If
development milestones are achieved, the Company expects Abbott to file a 510(k)
premarket notification with the United States Food and Drug Administration (the
"FDA") for its glucose monitoring product in 1999, but there can be no assurance
that this filing will occur within this time frame, or at all.
The Company has also developed a compact diabetes screening product based
on measurements of fluorescence in the lens of the eye. This product is intended
to provide an alternative to the fasting plasma glucose test, the screening
technique recommended by the American Diabetes Association (the "ADA"), which
requires a blood draw following an eight hour fasting period. The Company
believes that the market for diabetes screening tests in the United States is
approximately $300 million per year. While the individual looks into the
Company's device it automatically tracks the eye
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<PAGE> 5
and measures lens fluorescence, which is evaluated by the Company's proprietary
algorithm. An abnormally high level of lens fluorescence can be indicative of
prolonged exposure to high levels of glucose due to diabetes. The entire
procedure takes approximately one minute and does not require a fasting period.
In a pilot study of more than 1,300 subjects conducted by Boehringer Mannheim,
an early stage prototype of the Company's diabetes screening product
demonstrated an ability to detect diabetes comparable to the fasting plasma
glucose test. In December 1994, the Company entered into a collaborative
arrangement with Boehringer Mannheim under which Boehringer Mannheim is
primarily responsible for the clinical trials, regulatory clearance and sale of
the Company's diabetes screening product. Under the Company's agreement with
Boehringer Mannheim, the Company receives development milestone payments and
would receive a manufacturing profit on products sold to Boehringer Mannheim. If
development milestones are achieved, the Company expects Boehringer Mannheim to
file a 510(k) premarket notification with the FDA for the Company's diabetes
screening product in 1998, but there can be no assurance that this filing will
occur within this time frame, or at all.
In addition to its two products for diabetes, the Company is developing an
infant jaundice screening and monitoring product. Infant jaundice is
characterized by a yellowing of the skin and eyes caused by an excess of
bilirubin in the body. If left untreated infant jaundice may, in extreme cases,
lead to brain damage or death. Of the approximately four million newborns in the
United States each year, approximately 50% have recognizable jaundice. Annually,
approximately 1.7 million newborns receive at least one blood test for
bilirubin. Of those newborns tested, approximately 700,000 have elevated
bilirubin levels, and a portion of these newborns will receive additional tests.
The cost to the patient for a bilirubin test ranges from $22.25 to $37.75. The
Company's infant jaundice product is intended to offer an alternative to
conventional blood tests for infant jaundice, which involve a traumatic heel
stick to obtain a blood sample from the infant. This product is intended to be a
hand held instrument, which incorporates a microspectrometer to collect
spectroscopic information from the skin and a proprietary, disposable
calibration element. After calibration, the instrument is applied to the skin of
the infant for five to ten seconds, during which time the bilirubin level is
measured using a proprietary algorithm that adjusts for testing difficulties due
to skin color, gestational age and other factors. Using an early stage
prototype, the Company tested 361 infants in a pilot study and found a
correlation coefficient of 0.92 between total serum bilirubin measured using a
conventional blood test and that measured using the Company's prototype. In June
1996, the Company entered into a collaborative arrangement with Healthdyne under
which Healthdyne is responsible for regulatory approval and sales of the
Company's infant jaundice product in the United States and Canada. The Company
retains manufacturing rights and is responsible for regulatory approval and
sales of the infant jaundice product outside of the United States and Canada.
Under its agreement with Healthdyne, the Company receives license fees and would
receive a manufacturing profit on hand held instruments sold to Healthdyne and a
share of any profits from the sales of disposables by Healthdyne. The Company
expects Healthdyne to commence clinical testing and file a 510(k) premarket
notification with the FDA for the Company's infant jaundice product in 1997, but
there can be no assurance that this filing will occur within this time frame, or
at all.
The Company's offices are located at 6025A Unity Drive, Norcross, Georgia
30071, and its telephone number is (770) 242-8723. The Company was incorporated
in Delaware in 1992.
RISK FACTORS
SpectRx is a development stage company with a limited operating history and
a history of operating losses. To date the Company has only tested prototypes of
its products. Because the Company's research and clinical development programs
are at an early stage, substantial additional research and development and
clinical trials will be necessary before commercial prototypes of the Company's
products are produced. The Company's success is dependent upon maintaining its
collaborative arrangements for the development and commercialization of its
products. These collaborative arrangements grant a substantial amount of
discretion to the Company's collaborative partners, including the right to
terminate the arrangements upon the expiration of certain notice periods. No
510(k) premarket notification has been filed with the FDA for any of the
Company's products. There can be no assurance that the FDA will act favorably or
quickly on 510(k) submissions for the Company's products and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the sale of the Company's
products in the United States. In addition, there can be no assurance that the
FDA will not request additional data or require a more extensive regulatory
submission known as a premarket approval application ("PMA"), which would cause
the Company to incur substantial additional costs and delays. Even if necessary
regulatory approvals are obtained, there can be no assurance that the Company's
products will gain market acceptance. Other risk factors include the Company's
dependence on licensed patent applications and proprietary technology, the
Company's need to comply with government regulations, intense competition, the
Company's dependence on sole sources of supply and the Company's lack of
manufacturing, marketing and sales experience. For the foregoing reasons, an
investment in the shares of Common Stock offered hereby involves a high degree
of risk. See "Risk Factors."
4
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THE OFFERING
Common Stock offered by the Company... 2,000,000 shares
Common Stock offered by the Selling
Stockholders........................ 201,699
Common Stock to be outstanding after
the offering.......................... 7,567,590 shares(1)
Use of Proceeds....................... For continued development, testing and
clinical trials for the Company's
products; continued research and
development; sales, marketing and
manufacturing activities; capital
expenditures; and working capital and
other general corporate purposes.
Proposed Nasdaq National Market
symbol................................ SPRX
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ---------------
1994 1995 1996 1996 1997
------- ------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues.................................................... $ 122 $1,179 $ 452 $ -- $ 76
Operating loss.............................................. (1,223) (793) (3,110) (652) (1,297)
Net Loss.................................................... (1,347) (680) (3,178) (673) (1,249)
Pro forma net loss per share................................ $ (1.03) $ (0.40)
======= =======
Shares used in per share calculation(2)..................... 3,094 3,094
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
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ACTUAL AS ADJUSTED(3)
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CONSOLIDATED BALANCE SHEET DATA
Cash and Cash Equivalents................................... $ 3,108 $23,610
Working capital............................................. 2,098 22,600
Total assets................................................ 4,894 25,396
Total liabilities........................................... 1,370 1,370
Accumulated deficit......................................... (7,671) (7,671)
Total stockholders' equity.................................. 3,524 24,026
</TABLE>
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(1) Based on the number of shares outstanding as of March 31, 1997. Includes
553,126 shares of Common Stock issuable upon exercise of warrants upon the
closing of this offering; excludes 663,362 shares of Common Stock issuable
upon exercise of options outstanding on such date, which had a weighted
average exercise price of $0.64 per share; excludes 8,572 shares of Common
Stock issuable upon exercise of an outstanding warrant with an exercise
price of $1.40 per share; and excludes 48,293 shares of Common Stock
issuable pursuant to a Convertible Promissory Note at any time until June
19, 1998 at an assumed initial public offering price of $11.00 per share.
See "Management -- Stock Plans" and "Description of Capital Stock -- Notes,
Warrants and Options."
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net earnings per share.
(3) As adjusted (i) to reflect the sale of 2,000,000 shares of Common Stock
offered hereby at an assumed public offering price of $11.00 per share and
the receipt of the estimated proceeds therefrom, and (ii) the exercise of
warrants (which expire if they are not exercised prior to the closing of
this offering) for 553,126 shares of Common Stock and receipt of the
exercise price therefrom. See "Use of Proceeds" and "Capitalization."
---------------
Except as otherwise noted, all information in this Prospectus assumes (i) a
1 for 1.4 reverse stock split of the Company's Common Stock effective on
February 19, 1997, (ii) the filing and effectiveness upon the closing of this
offering of the Company's Amended and Restated Certificate of Incorporation
authorizing a class of undesignated Preferred Stock, (iii) the automatic
conversion of all outstanding shares of Preferred Stock into 3,482,762 Shares of
Common Stock upon the closing of this offering, (iv) the exercise of warrants
(which expire if they are not exercised upon the closing of this offering) for
553,126 shares of Common Stock with a weighted average exercise price of $1.25
per share, and (v) no exercise of the Underwriters' over-allotment option. See
"Description of Capital Stock," "Underwriting" and Notes to Consolidated
Financial Statements.
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RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to the other information in this
prospectus before purchasing the shares of Common Stock offered hereby.
Early Stage of Development; No Assurance of Successful Product Development
To date, the Company has only tested prototypes of its products. Because
the Company's research and clinical development programs are at an early stage,
substantial additional research and development and clinical trials will be
necessary before commercial prototypes of the Company's products are produced.
The Company could encounter unforeseen problems in the development of its
products such as delays in conducting clinical trials, delays in the supply of
key components or delays in overcoming technical hurdles. There can be no
assurance that the Company will be able to successfully address the problems
that may arise during the development and commercialization process. In
addition, there can be no assurance that any of the Company's products will be
successfully developed, proven safe and efficacious in clinical trials, meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be eligible for third-party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. If any of the Company's development programs are not successfully
completed, required regulatory approvals or clearances are not obtained, or
products for which approvals or clearances are obtained are not commercially
successful, the Company's business, financial condition and results of
operations would be materially adversely affected.
The Company's business is subject to the risks inherent in the development
of new products using new technologies and approaches. There can be no assurance
that unforeseen problems will not develop with these technologies or
applications, that the Company will be able to successfully address
technological challenges it encounters in its research and development programs
or that commercially feasible products will ultimately be developed by the
Company. See "Business -- Research, Development and Engineering."
Dependence on Collaborative Arrangements
The Company's business strategy for the development, clinical testing,
regulatory approval, manufacturing and commercialization of its products depends
upon the Company's ability to selectively enter into and maintain collaborative
arrangements with leading medical device companies. The Company has entered into
collaborative arrangements with (i) Abbott under which Abbott is primarily
responsible for undertaking or funding the development, clinical testing,
regulatory approval process, manufacture and sale of the Company's glucose
monitoring product, (ii) Boehringer Mannheim under which Boehringer Mannheim is
primarily responsible for undertaking or funding the development, clinical
testing, regulatory approval process and sale of the Company's diabetes
screening product, and (iii) Healthdyne under which Healthdyne is primarily
responsible for undertaking or funding the development, clinical testing,
regulatory approval process and sale of the Company's infant jaundice product in
the United States and Canada. The agreements evidencing these collaborative
arrangements grant a substantial amount of discretion to each of Abbott,
Boehringer Mannheim and Healthdyne. For example, each of these collaborative
partners may terminate their respective collaborative arrangements with the
Company effective upon the expiration of certain notice periods. In addition,
the obligation of each of the Company's collaborative partners to fund or
undertake the development, clinical testing, regulatory approval process,
marketing, distribution and/or sale of the products covered by their respective
collaborative arrangements with the Company is, to a large extent, dependent
upon the satisfaction of certain goals or "milestones" by certain specified
dates, some of which are outside the Company's control. To the extent that the
obligations of the Company's collaborative partners to fund or undertake all or
certain of the foregoing activities are not contingent upon the satisfaction of
certain goals or milestones, the collaborative partners nevertheless retain a
significant degree of discretion regarding the timing of these activities and
the amount and quality of financial, personnel and other resources that they
devote to these activities. Furthermore, there can be no assurance that disputes
will not arise between the Company and one or more of
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its collaborative partners regarding their respective rights and obligations
under the collaborative arrangements. Finally, there can be no assurance that
one or more of the Company's collaborative partners will not be unable, due to
financial, regulatory or other reasons, to satisfy its obligations under its
collaborative arrangement with the Company or will not intentionally or
unintentionally breach its obligations under the arrangement.
There can be no assurance that one or more of the Company's collaborative
partners will not, for competitive reasons, support, directly or indirectly, a
company or product that competes with the Company's product that is the subject
of its collaborative arrangement with the Company. Furthermore, any dispute
between the Company and one of its collaborative partners might require the
Company to initiate or defend expensive litigation or arbitration proceedings.
Any termination of any collaborative arrangement by one of the Company's
collaborative partners, any inability of a collaborative partner to fund or
otherwise satisfy its obligations under its collaborative arrangements with the
Company and any significant dispute with, or breach of a contractual commitment
by, a collaborative partner, would likely require the Company to seek and reach
agreement with another collaborative partner or to assume, to the extent
possible and at its own expense, all the responsibilities being undertaken by
this collaborative partner. There can be no assurance that the Company would be
able to reach agreement with a replacement collaborative partner. If the Company
were not able to find a replacement collaborative partner, there can be no
assurance that the Company would be able to perform or fund the activities for
which such collaborative partner is currently responsible. Even if the Company
were able to perform and fund these activities, the Company's capital
requirements would increase substantially. In addition, the further development
and the clinical testing, regulatory approval process, marketing, distribution
and sale of the product covered by such collaborative arrangement would be
significantly delayed.
In January 1997, Healthdyne became the subject of a hostile takeover
attempt by Invacare Corporation. As of May 29, 1997, approximately 17% of
Healthdyne's outstanding shares of common stock was held by Invacare, and the
offer has been extended to June 20, 1997 and may be extended further. There can
be no assurance that a change in control of Healthdyne would not adversely
affect the Company's collaborative arrangement with Healthdyne.
In May 1997, Roche Holding, Ltd. announced it would acquire Corange, Ltd.,
which is the parent company of Boehringer Mannheim, GmbH., the parent company of
Boehringer Mannheim. There can be no assurance that a change in control of
Boehringer Mannheim will not adversely affect the Company's collaborative
arrangement with Boehringer Mannheim.
Any of the foregoing circumstances could have a material adverse effect
upon the Company's business, financial condition and results of operations. See
"Business -- Collaborative Arrangements" and "-- Research, Development and
Engineering."
Limited Operating History; History of Losses and Expectations of Future Losses
The Company has a limited operating history upon which its prospects can be
evaluated. Such prospects must be considered in light of the substantial risks,
expenses and difficulties encountered by entrants into the medical device
industry, which is characterized by an increasing number of participants,
intense competition and a high failure rate. The Company has experienced
operating losses since its inception, and, as of March 31, 1997, the Company had
an accumulated deficit of approximately $7.7 million. To date, the Company has
engaged primarily in research and development efforts, and a number of the
Company's key management and technical personnel have only recently joined the
Company. The Company has never generated revenues from product sales and does
not have experience in manufacturing, marketing or selling its products. There
can be no assurance that the Company's development efforts will result in
commercially viable products, that the Company will be successful in introducing
its products, or that required regulatory clearances or approvals will be
obtained in a timely manner, or at all. There can be no assurance that the
Company's products will ever gain market acceptance or that the Company will
ever generate revenues or achieve profitability. The development and
commercialization of its products will require substantial development,
regulatory, sales and marketing, manufacturing and other expenditures. The
Company expects
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its operating losses to continue through 1999 as it continues to expend
substantial resources to complete development of its products, obtain regulatory
clearances or approvals, build its marketing, sales, manufacturing and finance
organizations and conduct further research and development. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Manufacturing and Sources of Supply," "-- Sales, Marketing and
Distribution," "-- Research, Development and Engineering" and "-- Government
Regulation."
Government Regulations; No Assurance of Regulatory Approvals
The design, manufacturing, labeling, distribution and marketing of the
Company's products will be subject to extensive and rigorous government
regulation in the United States and certain other countries where the process of
obtaining and maintaining required regulatory clearance or approvals is lengthy,
expensive and uncertain. In order for the Company to market its products in the
United States, the Company must obtain clearance or approval from the United
States Food and Drug Administration ("FDA"). The Company intends to seek
clearance to market each of its products through a 510(k) premarket notification
supported by clinical data. Although no 510(k) premarket notification has been
filed with the FDA for clearance to market any of the Company's products, the
Company expects 510(k) premarket notifications for clearance to market its
infant jaundice product, its diabetes screening product and its glucose
monitoring product to be filed in 1997, 1998 and 1999, respectively. There can
be no assurance that any such notifications will be filed in accordance with
this schedule, that the FDA will act favorably or quickly on such 510(k)
submissions, or that significant difficulties and costs will not be encountered
during efforts to obtain FDA clearance or approval. Specifically, the FDA may
request additional data or require additional clinical studies be conducted to
obtain 510(k) clearance for one or more of the Company's products. In addition,
there can be no assurance that the FDA will not require the submission of a
premarket approval ("PMA") application to obtain FDA approval to market one or
more of the Company's products. The PMA process is more rigorous and lengthier
than the 510(k) clearance process and can take several years from initial filing
and require the submission of extensive supporting data and clinical
information. In addition, there can be no assurance that the FDA will not impose
strict labeling or other requirements as a condition of its 510(k) clearance or
PMA, any of which could limit the Company's ability to market its products.
Further, if the Company wishes to modify a product after FDA clearance of a
510(k) premarket notification or approval of a PMA application, including
changes in indications or other modifications that could affect safety and
efficacy, additional clearances or approvals will be required from the FDA. Any
request by the FDA for additional data or any requirement by the FDA that the
Company conduct additional clinical studies or submit to the more rigorous and
lengthier PMA process could result in a significant delay in bringing the
Company's products to market and substantial additional research and other
expenditures by the Company. Similarly, any labeling or other conditions or
restrictions imposed by the FDA on the marketing of the Company's products could
hinder the Company's ability to effectively market its products. Any of the
foregoing actions by the FDA could delay or prevent altogether the Company's
ability to market and distribute its products and could have a material adverse
effect on the Company's business, financial condition and results of operations.
In order for the Company to market its products under development in Europe
and certain other foreign jurisdictions, the Company and its distributors and
agents must obtain required regulatory registrations or approvals and otherwise
comply with extensive regulations regarding safety, efficacy and quality in
those jurisdictions. Specifically, certain foreign regulatory bodies have
adopted various regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. These regulations vary from country to country. In order to
commence sales in Europe, the Company will be required to obtain ISO 9001
certifications and after mid-1998, the Company will be prohibited from selling
its products in Europe until such time as the Company receives CE mark
certification, which is an international symbol of quality and compliance with
applicable European medical device directives. There can be no assurance that
the Company will be successful in obtaining ISO 9001 or CE mark certification.
Failure to receive ISO 9001 or CE mark certification or other foreign regulatory
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will obtain any other required regulatory registrations or approvals
in such countries or that it will not be required to incur significant costs in
obtaining or maintaining such
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regulatory registrations or approvals. Delays in obtaining any registrations or
approvals required to market the Company's products, failure to receive these
registrations or approvals, or future loss of previously obtained registrations
or approvals could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company and its collaborative partners will be required to adhere to
applicable FDA regulations regarding Good Manufacturing Practice ("GMP") and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP and other applicable
regulatory requirements will be strictly enforced in the United States through
periodic inspections by state and federal agencies, including the FDA, and in
foreign jurisdictions by comparable agencies. Failure to comply with applicable
regulatory requirements could result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant premarket
clearance or premarket approval for devices, withdrawal of approvals previously
obtained and criminal prosecution. The restriction, suspension or revocation of
regulatory approvals or any other failure to comply with regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Clinical Chemistry Branch of the FDA's Division of Clinical Laboratory
Devices (the "Branch") has traditionally been the reviewing branch for
blood-based personal glucose monitoring products. The Clinical Chemistry and
Clinical Toxicology Devices Panel (the "Panel") is an external advisory panel
that provides advice to the Branch regarding devices that are reviewed by the
Branch. The Panel met on March 20-21, 1997 to discuss invasive and non-invasive
self-monitoring blood glucose devices. The Panel submitted comments to the
Branch suggesting revisions of existing guidelines relating to the laboratory
and clinical testing of blood glucose devices. The Branch may take the Panel's
comments into consideration in determining whether to revise the existing
guidelines. To date, there has been no change in the existing 510(k) guidance
document for blood glucose monitoring devices. There can be no assurance that
the Panel's comments will not result in a FDA policy or change in FDA policy
that is materially adverse to the Company's regulatory position.
The Company will rely upon Abbott and Boehringer Mannheim to obtain United
States and foreign regulatory approvals and clearances for its glucose
monitoring and diabetes screening products, respectively, and if such approvals
or clearances are obtained the Company will rely upon these collaborative
partners to maintain them in full force and effect and to otherwise remain in
compliance with all applicable United States and foreign regulatory
restrictions. The inability or failure of such third parties to comply with the
varying regulations or the imposition of new regulations would materially
adversely effect the Company's business, financial condition and results of
operations. See "Business -- Government Regulation."
Dependence on Licensed Patent Applications and Proprietary Technology
SpectRx's success depends in large part upon its ability to establish and
maintain the proprietary nature of its technology through the patent process and
to license from others patents and patent applications necessary to develop its
products. The Company has licensed from Non-Invasive Monitoring Company, Inc.
("Nimco") one granted patent and know how related to its glucose monitoring
product, jointly applied with Altea Technologies, Inc. ("Altea") for a U.S.
patent and an international patent related to this device and has licensed this
granted patent and these patent applications to Abbott pursuant to the parties'
collaborative arrangements. SpectRx has license agreements with Georgia Tech
Research Corporation ("GTRC") that give the Company the right to use two patents
related to its diabetes screening product, and the Company has licensed this
proprietary technology to Boehringer Mannheim pursuant to the Company's
collaborative arrangement with Boehringer Mannheim. The Company has license
agreements with the University of Texas M.D. Anderson Cancer Center ("M.D.
Anderson") that give SpectRx access to one patent related to the Company's
infant jaundice product, and the Company has applied for two patents related to
this product. SpectRx has licensed the one patent and two patent applications to
Healthdyne pursuant to its collaborative arrangement with that company. In
addition, SpectRx has licensed from Joseph Lakowicz, Ph.D. of the University of
Maryland several granted patents and patent applications related to fluorescence
spectroscopy that it intends to use in its research and development efforts.
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There can be no assurance that one or more of the patents held directly by
the Company or licensed by the Company from third parties, including the
disposable components to be used in connection with its glucose monitoring and
infant jaundice products, or processes used in the manufacture of the Company's
products, will not be successfully challenged, invalidated or circumvented or
that the Company will otherwise be able to rely on such patents for any reason.
In addition, there can be no assurance that competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that prevent, limit
or interfere with the Company's ability to make, use and sell its products
either in the United States or in foreign markets. If any of the Company's
patents are successfully challenged, invalidated or circumvented or the
Company's right or ability to manufacture its products were to be proscribed or
limited, the Company's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Certain companies in
the medical device industry have instituted intellectual property litigation,
including patent infringement actions, for legitimate and, in certain cases,
competitive reasons. In addition, the United States Patent and Trademark Office
("USPTO") may institute litigation or interference proceedings. There can be no
assurance that the Company will not become subject to patent infringement claims
or litigation or interference proceedings instituted by the USPTO to determine
the priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time consuming. Litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others. Any litigation or interference proceedings
brought against, initiated by or otherwise involving the Company may require the
Company to incur substantial legal and other fees and expenses and may require
some of the Company's employees to devote all or a substantial portion of their
time to the prosecution or defense of such litigation or proceedings. An adverse
determination in litigation or interference proceedings to which the Company may
become a party, including any litigation that may arise against the Company,
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties or prevent the Company from
selling its products in certain markets, or at all. Although patent and
intellectual property disputes regarding medical devices are often settled
through licensing or similar arrangements, there can be no assurance that the
Company would be able to reach a satisfactory settlement of such a dispute that
would allow it to license necessary patents or other intellectual property. Even
if such a settlement were reached, the settlement process may be expensive and
time consuming and the terms of the settlement may require the Company to pay
substantial royalties. An adverse determination in a judicial or administrative
proceeding or the failure to obtain a necessary license could prevent the
Company from manufacturing and selling its products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition to patents, the Company relies on trade secrets and proprietary
know how, which it seeks to protect, in part, through confidentiality and
proprietary information agreements. There can be no assurance that such
confidentiality or proprietary information agreements will not be breached, that
the Company would have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known to or be independently developed
by competitors. See "Business -- Patents."
Fixed Royalty Rates and Manufacturing Profits
Substantially all of the Company's revenues and profits are expected to be
derived from royalties and manufacturing profits that the Company will receive
from Abbott, Boehringer Mannheim and Healthdyne resulting from sales of its
glucose monitoring, diabetes screening and infant jaundice products,
respectively. The royalties and manufacturing profits that the Company is
expected to receive from each of its collaborative partners depend on sales of
such products. There can be no assurance that the Company, together with its
collaborative partners, will be able to sell sufficient volumes of the Company's
products to generate substantial
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royalties and manufacturing profits for the Company. In addition, the Company's
profit margins are not likely to increase over time because the Company's
royalty rates and manufacturing profit rates are predetermined.
In addition, it is common practice in the glucose monitoring device
industry for manufacturers to sell their glucose monitoring devices at
substantial discounts to their list prices or to offer customers rebates on
sales of their products. Manufacturers offer such discounts or rebates to expand
the use of their products and thus increase the market for the disposable assay
strips they sell for use with their products. Because Abbott may, pursuant to
its collaborative arrangement with the Company, determine the prices at which it
sells the Company's glucose monitoring devices, it may choose to adopt this
marketing strategy. If Abbott adopts this marketing strategy and discounts the
prices at which it sells the Company's glucose monitoring devices, the royalties
earned by the Company in respect of such sales will decline. There can be no
assurance that, if this strategy is adopted, royalties earned by the Company on
sales of the disposable cartridges to be used in connection with its glucose
monitoring device will be equal to or greater than the royalties the Company
would have earned had its glucose monitoring devices not been sold at a
discount. This possible reduction in royalties on sales of the Company's glucose
monitoring devices could have a material adverse effect upon the Company's
business, financial condition and results of operations. See
"Business -- Collaborative Arrangements" and "-- Licensing Arrangements."
Uncertainty of Market Acceptance
The Company's products are based upon new methods of glucose monitoring,
diabetes screening and infant jaundice monitoring and screening, and there can
be no assurance that any of these products will gain market acceptance.
Physicians and individuals will not recommend or use the Company's products
unless they determine, based on experience, clinical data, relative cost, and
other factors, that these products are an attractive alternative to current
blood-based tests that have a long history of safe and effective use. To date,
the Company's products have been utilized by only a limited number of subjects,
and no independent studies regarding the Company's products have been published.
The lack of any such independent studies may have an adverse effect on the
Company's ability to successfully market its products. In addition, purchase
decisions for products like the Company's diabetes screening and infant jaundice
products are greatly influenced by health care administrators who are subject to
increasing pressures to reduce costs. Failure of the Company's products to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"-- Uncertainty of Third-Party Reimbursement" and "Business -- Third-Party
Reimbursement."
Intense Competition
The medical device industry in general, and the markets for glucose
monitoring and diabetes screening devices and processes in particular, are
intensely competitive. If successful in its product development, the Company
will compete with other providers of personal glucose monitors, diabetes
screening tests and infant jaundice products. A number of competitors, including
Johnson & Johnson, Inc. (which owns Lifescan, Inc.), Boehringer Mannheim, Bayer
AG (which owns Miles Laboratories, Inc.) and Abbott (which owns MediSense Inc.),
are currently marketing traditional glucose monitors. These monitors are widely
accepted in the health care industry and have a long history of accurate and
effective use. Furthermore, a number of companies have announced that they are
developing products that permit non-invasive and less invasive glucose
monitoring. Accordingly, competition in this area is expected to increase.
Many of the Company's competitors have substantially greater financial,
research, technical, manufacturing, marketing and distribution resources than
the Company and have greater name recognition and lengthier operating histories
in the health care industry. There can be no assurance that the Company will be
able to effectively compete against these and other competitors. In addition,
there can be no assurance that the Company's glucose monitoring, diabetes
screening or infant jaundice products will replace any currently used devices or
systems, which have long histories of safe and effective use. Furthermore, there
can be no assurance that the Company's competitors will not succeed in
developing, either before or after the development and commercialization of the
Company's products, devices and technologies that permit more efficient, less
expensive non-invasive and less invasive glucose monitoring, diabetes screening
and infant jaundice monitor-
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<PAGE> 13
ing. It is also possible that one or more pharmaceutical or other health care
companies will develop therapeutic drugs, treatments or other products that will
substantially reduce the prevalence of diabetes or infant jaundice or otherwise
render the Company's products obsolete. Such competition could have a material
adverse effect on the Company's business, financial condition and results of
operation.
In addition, there can be no assurance that one or more of the Company's
collaborative partners will not, for competitive reasons, reduce its support of
its collaborative arrangement with the Company or support, directly or
indirectly, a company or product that competes with the Company's product that
is the subject of the collaborative arrangement. See "Business -- Competition."
No Manufacturing Experience; Dependence on Sole Sources of Supply
To date, the Company's manufacturing activities have consisted only of
building certain prototype devices. If the Company successfully develops its
diabetes screening and infant jaundice products and, together with Boehringer
Mannheim and Healthdyne, obtains FDA clearance and other regulatory approvals to
market these products, the Company will undertake to manufacture these products.
The Company has no experience manufacturing such products in the volumes that
would be necessary for the Company to achieve significant commercial sales.
There can be no assurance that the Company will be able to establish and
maintain reliable, full scale manufacturing of these products at commercially
reasonable costs. Although the Company has leased space that it plans to use to
manufacture its products, it may encounter various problems in establishing and
maintaining its manufacturing operations, resulting in inefficiencies and
delays. Specifically, companies often encounter difficulties in scaling up
production, including problems involving production yield, quality control and
assurance, and shortages of qualified personnel. In addition, the Company's
manufacturing facilities will be subject to GMP regulations, including possible
preapproval inspection, international quality standards and other regulatory
requirements. Difficulties encountered by the Company in manufacturing scale-up
or failure by the Company to implement and maintain its manufacturing facilities
in accordance with GMP regulations, international quality standards or other
regulatory requirements could result in a delay or termination of production,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
The microspectrometer and disposable calibration element, components of the
Company's infant jaundice product, and the blue light module and calibration
element, components of the Company's diabetes screening product, are each
available from only one supplier and these products would require a major
redesign in order to incorporate a substitute component. Certain other
components of the infant jaundice and diabetes screening products are currently
obtained from only one supplier, but have readily available substitute
components that can be incorporated in the applicable product with minimal
design modifications. If the Company's products require a PMA, the inclusion of
substitute components could require the Company to qualify the new supplier with
the appropriate government regulatory authorities. Alternatively, if the
Company's products qualify for a 510(k) premarket notification, the substitute
components need only meet the Company's product specifications. Any significant
problem experienced by one of the Company's sole source suppliers may result in
a delay or interruption in the supply of components to the Company until such
supplier cures the problem or an alternative source of the component is located
and qualified. Any delay or interruption would likely lead to a delay or
interruption in the Company's manufacturing operations, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business -- Manufacturing and Sources of Supply."
No Marketing and Sales Experience
If the Company, together with Healthdyne, successfully develops the
Company's infant jaundice product and obtains, in countries other than the
United States and Canada, necessary regulatory approvals and clearances to
market this product, the Company will be responsible for marketing this product
in these countries. The Company has no experience in marketing or selling
medical device products and only has a three person marketing and sales staff.
In order to successfully market and sell its infant jaundice product outside the
United States and Canada, the Company must either develop a marketing and sales
force or enter into arrangements with third parties to market and sell this
product. There can be no assurance that the
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<PAGE> 14
Company will be able to successfully develop a marketing and sales force or that
it will be able to enter into marketing and sales agreements with third parties
on acceptable terms, if at all. If the Company develops its own marketing and
sales capabilities, it will compete with other companies that have experienced
and well-funded marketing and sales operations. If the Company enters into a
marketing arrangement with a third party for the marketing and sale of its
infant jaundice product outside the United States and Canada, any revenues to be
received by the Company from this product will be dependent on this third party,
and the Company will likely be required to pay a sales commission or similar
amount to this party. Furthermore, the Company is currently dependent on the
efforts of Abbott and Boehringer Mannheim for any revenues to be received from
its glucose monitoring and diabetes screening products, respectively. There can
be no assurance that the efforts of these third parties for the marketing and
sale of the Company's products will be successful. See "-- Dependence on
Collaborative Arrangements," "Business -- Sales, Marketing and Distribution,"
and "-- Collaborative Arrangements."
Product Liability Risk; Limited Insurance Coverage
The development, manufacture and sale of medical products entail
significant risks of product liability claims. The Company currently has no
product liability insurance coverage beyond that provided by its general
liability insurance. Accordingly, there can be no assurance that the Company is
adequately protected from any liabilities, including any adverse judgments or
settlements, it might incur in connection with the development, clinical
testing, manufacture and sale of its products. In addition, product liability
insurance is expensive and may not be available to the Company on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company that results in an adverse judgment against or
settlement by the Company in excess of any insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Product Liability and Insurance."
Need for Additional Capital; Uncertainty of Access to Capital
Substantial capital will be required to develop the Company's products,
including completing product testing and clinical trials, obtaining all required
United States and foreign regulatory approvals and clearances, commencing and
scaling up manufacturing and marketing its products. Pursuant to the Company's
collaborative arrangements with Abbott, Boehringer Mannheim and Healthdyne,
these collaborative partners will either directly undertake these activities or
will fund a substantial portion of these expenditures. The obligations of the
Company's collaborative partners to fund the Company's capital expenditures is
largely discretionary and depends on a number of factors, including the
Company's ability to meet certain milestones in the development and testing of
its products. There can be no assurance that the Company will meet such
milestones or that the Company's collaborative partners will continue to fund
the Company's capital expenditures. Any failure of the Company's collaborative
partners to fund its capital expenditures would have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition to funds that the Company expects to be provided by its
collaborative partners, the Company may be required to raise additional funds
through public or private financing, additional collaborative relationships or
other arrangements. The Company believes that its existing capital resources and
the net proceeds of this offering will be sufficient to satisfy its funding
requirements for at least the next 24 months, but may not be sufficient to fund
the Company's operations to the point of commercial introduction of its glucose
monitoring product. There can be no assurance that any required additional
funding, if needed, will be available on terms attractive to the Company, or at
all, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Any additional equity financing
may be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Uncertainty of Third-Party Reimbursement
In the United States and elsewhere, sales of medical products are
dependent, in part, on the ability of consumers of these products to obtain
reimbursement for all or a portion of their cost from third-party payors,
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<PAGE> 15
such as government and private insurance plans. Third-party payors are
increasingly challenging the prices charged for medical products and services.
If the Company succeeds in bringing one or more products to market, there can be
no assurance that these products will be considered cost effective and that
reimbursement to the consumer will be available or sufficient to allow the
Company to sell its products on a competitive basis. See
"Business -- Third-Party Reimbursement."
Need to Attract and Retain Key Employees
The Company's ability to operate successfully and manage its potential
future growth depends in significant part upon the continued service of certain
key scientific, technical, managerial and finance personnel, and its ability to
attract and retain additional highly qualified scientific, technical, managerial
and finance personnel. The officers listed in the Executive Officers and
Directors table comprise the Company's key personnel. The Chief Financial
Officer and the Vice President, Operations joined the Company within the last 12
months. None of these key employees has an employment contract with the Company
nor are any of these employees covered by key person or similar insurance. In
addition, if the Company, together with its collaborative partners, is able to
successfully develop and commercialize the Company's products, the Company will
need to hire additional scientific, technical, managerial and finance personnel.
The Company faces intense competition for qualified personnel in these areas,
many of whom are often subject to competing employment offers, and there can be
no assurance that the Company will be able to attract and retain such personnel.
The loss of key personnel or inability to hire and retain additional qualified
personnel in the future could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Employees" and "Management -- Executive Officers and Directors."
Control by Directors, Executive Officers and Affiliated Entities
The Company's directors, executive officers and entities affiliated with
them will, in the aggregate, beneficially own approximately 48% of the Company's
outstanding Common Stock following the completion of this offering. These
stockholders, acting together, would be able to control substantially all
matters requiring approval by the stockholders of the Company, including the
election of directors and the approval of mergers and other business combination
transactions. See "Principal and Selling Stockholders."
No Prior Public Market for Common Stock; Potential Volatility of Stock Price
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that a regular trading market will
develop and continue after this offering or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price will be determined through negotiations between the
Company and the representatives of the Underwriters and may not be indicative of
the market price of the Common Stock following this offering. The stock markets
have experienced extreme price and volume fluctuations that have substantially
affected small capitalization medical technology companies, resulting in changes
in the market prices of the stocks of many such companies that may not have been
directly related to their operating performance. Such broad market fluctuations
may adversely affect the market price of the Common Stock following this
offering. In addition, the market price of the Common Stock following this
offering may be highly volatile. Factors such as variations in the Company's
financial results, changes in the Company's collaborative arrangements, comments
by security analysts, announcements of technological innovations or new products
by the Company or its competitors, changing government regulations and
developments with respect to FDA submissions, patents and proprietary rights, or
litigation may have a material adverse effect on the market price of the Common
Stock. See "Underwriting."
Potential Adverse Effect of Shares Eligible for Future Sale
The number of shares of Common Stock available for sale in the public
market is limited by lock-up agreements under which the Company (subject to
certain exceptions) and all directors, executive officers and certain other
stockholders of the Company that beneficially own or have dispositive power over
substantially all of the shares of Common Stock outstanding prior to this
offering, including Common Stock to be issued
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upon the closing of this offering upon conversion of the Company's Preferred
Stock, have agreed not to issue (in the case of the Company), sell or otherwise
dispose of any of their shares for a period of 180 days following the offering,
without the prior written consent of Hambrecht & Quist LLC. However, Hambrecht &
Quist LLC may, in its sole discretion, permit the sale or other disposition of
all or any portion of the securities subject to such lock-up agreements prior to
the expiration of this 180 day period. If Hambrecht & Quist LLC were to release
any securities from the prohibitions on sales and other dispositions imposed by
these lock-up agreements, up to 5,077,007 shares of Common Stock, including
363,602 shares issuable upon exercise of currently outstanding vested options,
may be eligible for immediate sale. Except as described in "Shares Eligible for
Future Sale" and "Underwriting," Hambrecht & Quist LLC does not have any
agreements or understandings regarding the release of any securities from the
prohibitions on sales and other dispositions imposed by these lock-up
agreements. Hambrecht & Quist LLC, however, retains the right at any time and
without notice to release from the scope of the lock-up restrictions all or any
portion of the securities currently subject to such restrictions. The release of
any securities from such prohibitions and the subsequent sale of such shares may
have an adverse effect on the ability of the Company to raise capital and could
adversely affect the market price of the Company's Common Stock. See "Shares
Eligible for Future Sale" and "Underwriting."
Anti-Takeover Effect of Certain Charter and Bylaw Provisions on Price of Common
Stock
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire, control of the
Company. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Company's Common Stock. Certain
of these provisions allow the Company to issue Preferred Stock without any vote
or further action by the stockholders, eliminate the right of stockholders to
act by written consent without a meeting and specify procedures for director
nominations by stockholders and submission of other proposals for consideration
at stockholder meetings. Certain provisions of Delaware law applicable to the
Company, including Section 203, which prohibits a Delaware corporation from
engaging in any business combination with any interested stockholders for a
period of three years unless certain conditions are met, could also delay or
make more difficult a merger, tender offer or proxy contest involving the
Company. The possible issuance of Preferred Stock, the procedures required for
director nominations and stockholder proposals and Delaware law could have the
effect of delaying, deferring or preventing a change in control of the Company,
including without limitation, discouraging a proxy contest or making more
difficult the acquisition of a substantial block of the Company's Common Stock.
These provisions could also limit the price that investors might be willing to
pay in the future for shares of the Company's Common Stock. See "Description of
Capital Stock -- Preferred Stock" and "-- Certain Charter and Bylaw Provisions
and Delaware Anti-Takeover Statute."
Immediate and Substantial Dilution
Investors purchasing shares of Common Stock in this offering will incur
immediate and substantial dilution in net tangible book value of the Common
Stock of $7.84 per share. To the extent that currently outstanding options to
purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution."
Lack of Dividends
The Company has not paid any dividends and does not anticipate paying any
dividends in the foreseeable future. See "Dividend Policy."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share are estimated to be approximately $19.8 million
(approximately $23.2 million if the Underwriters' over-allotment option is
exercised in full).
The Company anticipates that the net proceeds of this offering will be used
as follows: approximately $5.9 million to fund the further development of the
Company's infant jaundice and diabetes screening products, approximately $3.8
million to further develop the Company's production capacity and increase its
inventory, approximately $3.4 million to develop sales, marketing and
distribution capability, approximately $5.2 million for working capital and
approximately $1.5 million for other capital expenditures. The amounts actually
expended for these purposes will depend upon numerous factors, including the
results of clinical studies, the design and cost of the Company's initial
manufacturing facility and other factors. Pending the use of the net proceeds of
the offering, the Company will invest the funds in short-term, interest-bearing,
investment-grade securities. The Company believes that its existing capital
resources and the net proceeds of this offering will be sufficient to fund its
operations for at least the next 24 months, but such amounts may not be
sufficient to fund the Company's operations to the point of commercial
introduction of its glucose monitoring product. The Company expects to continue
to receive development funding from its collaborative partners to fund the
further development and commercialization of its products. The Company will not
receive any of the proceeds from the sale of Common Stock by the Selling
Stockholders. See "Business -- Collaborative Arrangements," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Principal and Selling
Stockholders."
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock. The
Company intends to retain earnings, if any, and will not pay cash dividends in
the foreseeable future. Any future determination to pay cash dividends will be
at the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements,
general business conditions and such other factors as the Board of Directors may
deem relevant.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth as of March 31, 1997, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
after giving effect to the conversion of all of the outstanding shares of
Convertible Preferred Stock into Common Stock and the exercise of warrants
(which expire if they are not exercised upon the closing of this offering) for
553,126 shares of Common Stock with a weighted average exercise price of $1.25
per share, and (iii) the pro forma capitalization of the Company as adjusted to
reflect the issuance and sale of 2,000,000 shares of Common Stock offered hereby
at an assumed public offering price of $11.00 per share and the receipt of the
estimated net proceeds therefrom. This table should be read in conjunction with
the Consolidated Financial Statements and the Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(1)
------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Convertible subordinated promissory notes................... $ 250 $ 250 $ 250
------- ------- -------
Stockholders' equity:
Preferred Stock, 5,000,000 shares ($0.001 par
value) authorized; 4,875,835 shares issued and
outstanding; none issued and outstanding pro
forma or pro forma as adjusted.................. 5 -- --
Common Stock, 50,000,000 shares ($0.001 par value)
authorized; 1,531,702 shares issued and
outstanding; 5,567,590 shares issued and
outstanding pro forma and 7,567,590 shares
issued and outstanding pro forma as adjusted.... 2 6 8
Additional paid-in capital........................ 11,330 12,196 32,004
Notes receivable from officers.................... (48) (48) (48)
Deferred compensation............................. (267) (267) (267)
Warrants.......................................... 173 -- --
Accumulated deficit............................... (7,671) (7,671) (7,671)
------- ------- -------
Total stockholders' equity.............. 3,524 4,216 24,026
------- ------- -------
Total capitalization............... $ 3,774 $ 4,466 $24,276
======= ======= =======
</TABLE>
- ---------------
(1) Excludes, as of March 31, 1997, 663,362 shares of Common Stock reserved for
issuance upon exercise of outstanding options granted pursuant to the
Company's 1995 Stock Plan at a weighted average price of $0.64 per share;
8,572 shares of Common Stock issuable upon the exercise of an outstanding
warrant with an exercise price of $1.40 per share; and 48,293 shares of
Common Stock issuable pursuant to a Convertible Promissory Note at any time
until June 19, 1998 at an assumed initial public offering price of $11.00
per share. See "Management -- Stock Plans" and "Description of Capital
Stock -- Notes, Warrants and Options."
17
<PAGE> 19
DILUTION
As of March 31, 1997, the Company had a net tangible book value of
approximately $3,399,000 or approximately $0.68 per share of Common Stock. Net
tangible book value represents the amount of total tangible assets less total
liabilities and net tangible book value per share equals such amount divided by
the number of shares of Common Stock outstanding. After giving effect to the
receipt by the Company of the net proceeds from the sale of 2,000,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share, the conversion of all of the outstanding shares of
convertible Preferred Stock into Common Stock and the exercise of warrants
(which expire if they are not exercised upon the closing of this offering) for
553,126 shares of Common Stock with a weighted average price of $1.25 per share,
the pro forma net tangible book value of the Company as of March 31, 1997 would
have been approximately $23,901,000 or approximately $3.16 per share. This
represents an immediate increase in net tangible book value per share of
approximately $2.48 to existing stockholders and an immediate dilution of
approximately $7.84 per share to new investors. The following table sets forth
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $11.00
Pro forma net tangible book value per share as of March 31,
1997........................................................... $ .68
Increase per share attributable to new investors................ 2.48
-----
Pro forma net tangible book value per share after the Offering....... 3.16
------
Dilution per share to new investors.................................. $ 7.84
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
the differences between existing stockholders and new investors with respect to
the total number of shares of Common Stock and Preferred Stock (all of which
Preferred Stock will be converted into Common Stock upon the closing of the
Offering) purchased from the Company, the total consideration paid and the
average price per share paid (assuming the sale of 2,000,000 shares of Common
Stock at an initial public offering price of $11.00 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 5,567,590 73.6% $11,908,000 35.1% $ 2.14
New investors............ 2,000,000 26.4 22,000,000 64.9 11.00
--------- ----- ----------- -----
Total... 7,567,590 100.0% $33,908,000 100.0%
========= ===== =========== =====
</TABLE>
- ------------------------------
(1) Sales by the Selling Stockholders in this Offering will reduce the number of
shares of Common Stock held by existing stockholders as of March 31, 1997 to
5,365,891 shares or approximately 70.9% of the total number of shares of
Common Stock outstanding, and will increase the number of shares held by new
investors to 2,201,699 shares, or approximately 29.1% of the total number of
shares of Common Stock to be outstanding after this Offering (approximately
32.1% if the Underwriter's over-allotment option is exercised in full). See
"Principal and Selling Stockholders."
The above calculations do not give effect to (i) the exercise of outstanding
options to purchase 663,362 shares of Common Stock at a weighted average
exercise price of $0.64 per share outstanding on March 31, 1997, (ii) the
exercise of an outstanding warrant to purchase 8,572 shares of Common Stock at
an exercise price of $1.40 per share outstanding on March 31, 1997 and (iii) the
conversion of 48,293 shares of Common Stock pursuant to a Convertible Promissory
Note convertible at any time until June 19, 1998 at an assumed initial public
offering price of $11.00 per share. To the extent that these options and
warrants become exercisable and are exercised, or the Convertible Promissory
Note is converted, there will be further dilution to new investors. See
"Management -- Stock Plans" and "Description of Capital Stock -- Notes, Warrants
and Options."
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of and for the period from
October 27, 1992 (date of inception) through December 31, 1993, and as of and
for the years ended December 31, 1994, 1995 and 1996 are derived from the
Consolidated Financial Statements of the Company which have been included
elsewhere herein and have been audited by Arthur Andersen LLP, independent
public accountants. The selected historical financial data set forth below as of
and for the three month periods ended March 31, 1996 and 1997 were derived from
unaudited financial statements of the Company. In the opinion of management, the
unaudited information includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations of the Company at the date and for the
periods presented. Results for the three month period ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the full
fiscal year. The data set forth below is qualified by reference to and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- -----------------
1993(1) 1994 1995 1996 1996 1997
------- ------- ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues......................... $ -- $ 122 $1,179 $ 452 $ -- $ 76
Expenses:
Research and development....... 638 869 1,189 1,815 328 526
Sales and marketing............ 196 126 146 221 44 138
General and administrative..... 403 350 637 1,526 280 709
------- ------- ------ ------- ------ -------
1,237 1,345 1,972 3,562 652 1,373
------- ------- ------ ------- ------ -------
Operating loss................. (1,237) (1,223) (793) (3,110) (652) (1,297)
Interest Expense, net............ -- 144 5 132 23 2
Other (Income)................... (20) (20) (118) (64) (2) (50)
------- ------- ------ ------- ------ -------
Net Loss......................... $(1,217) $(1,347) $ (680) $(3,178) $ (673) $(1,249)
======= ======= ====== ======= ====== =======
Pro forma net loss per
share(2)....................... $ (1.03) $ (0.40)
======= =======
Pro forma weighted average shares
outstanding.................... 3,094 3,094
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
------------------------------------- ----------------------
1993 1994 1995 1996 ACTUAL PRO FORMA(3)
------- ------- ------- ------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents....... $ 422 $ 937 $ 107 $ 4,721 $ 3,108 $ 3,800
Working capital................. 313 299 (444) 3,870 2,098 2,790
Total assets.................... 756 1,327 751 5,946 4,894 5,586
Total liabilities............... 133 689 787 1,192 1,370 1,370
Accumulated deficit............. (1,217) (2,564) (3,244) (6,422) (7,671) (7,671)
Total stockholders' equity
(deficit)..................... 623 638 (36) 4,754 3,524 4,216
</TABLE>
- ---------------
(1) From the Company's inception on October 27, 1992 through December 31, 1993.
(2) See Note 2 of Notes to Financial Statements for a description of the
computation of pro forma net loss per share.
(3) Pro forma gives effect to the conversion of all of the outstanding shares of
Convertible Preferred Stock into Common Stock and the exercise of warrants
(which expire if they are not exercised upon the closing of this offering)
for 553,126 shares of Common Stock with a weighted average exercise price of
$1.25 per share.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. Except for
the historical information contained herein, the discussion in this Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations, and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
OVERVIEW
SpectRx was incorporated on October 27, 1992, and since that date has
raised capital through the sale of preferred stock, issuance of debt securities
and funding from collaborative arrangements. Following its initial funding in
early 1993, the Company immediately began research and development activities
with the objective of commercializing less invasive diagnostic screening and
monitoring products. As part of its business strategy, the Company has
selectively established arrangements with leading medical device companies for
the development, commercialization and introduction of its products. Since
inception, the Company has entered into collaborative arrangements with Abbott,
Boehringer Mannheim and Healthdyne for its glucose monitoring, diabetes
screening and infant jaundice products, respectively. In December 1996, the
Company sublicensed certain technology to and acquired a 64.8% interest in
FluorRx, Inc., a Delaware corporation formed for the purpose of developing and
commercializing technology related to fluorescence spectroscopy.
The Company has a limited operating history upon which its prospects can be
evaluated. Such prospects must be considered in light of the substantial risks,
expenses and difficulties encountered by entrants into the medical device
industry, which is characterized by an increasing number of participants,
intense competition and a high failure rate. The Company has experienced
operating losses since its inception, and, as of March 31, 1997, the Company had
an accumulated deficit of approximately $7.7 million. To date, the Company has
engaged primarily in research and development efforts, and a number of the
Company's key management and technical personnel have only recently joined the
Company. The Company has never generated revenues from product sales and does
not have experience in manufacturing, marketing or selling its products. There
can be no assurance that the Company's development efforts will result in
commercially viable products, that the Company will be successful in introducing
its products, or that required regulatory clearances or approvals will be
obtained in a timely manner, or at all. There can be no assurance that the
Company's products will ever gain market acceptance or that the Company will
ever generate revenues or achieve profitability. The development and
commercialization of its products will require substantial development,
regulatory, sales and marketing, manufacturing and other expenditures. The
Company expects its operating losses to continue through 1999 as it continues to
expend substantial resources to complete development of its products, obtain
regulatory clearances or approvals, build its marketing, sales, manufacturing
and finance organizations and conduct further research and development.
Substantially all of the Company's revenues and profits are expected to be
derived from royalties and manufacturing profits that the Company will receive
from Abbott, Boehringer Mannheim and Healthdyne resulting from sales of its
glucose monitoring, diabetes screening and infant jaundice products,
respectively. The royalties and manufacturing profits that the Company is
expected to receive from each of its collaborative partners depend on sales of
such products. There can be no assurance that the Company, together with its
collaborative partners, will be able to sell sufficient volumes of the Company's
products to generate substantial royalties and manufacturing profits for the
Company. In addition, the Company's profit margins are not likely to increase
over time because the Company's royalty rates and manufacturing profit rates are
predetermined.
In addition, it is common practice in the glucose monitoring device
industry for manufacturers to sell their glucose monitoring devices at
substantial discounts to their list prices or to offer customers rebates on
20
<PAGE> 22
sales of their products. Manufacturers offer such discounts or rebates to expand
the use of their products and thus increase the market for the disposable assay
strips they sell for use with their products. Because Abbott may, pursuant to
its collaborative arrangement with the Company, determine the prices at which it
sells the Company's glucose monitoring devices, it may choose to adopt this
marketing strategy. If Abbott adopts this marketing strategy and discounts the
prices at which it sells the Company's glucose monitoring devices, the royalties
earned by the Company in respect of such sales will decline. There can be no
assurance that, if this strategy is adopted, royalties earned by the Company on
sales of the disposable cartridges to be used in connection with its glucose
monitoring device will be equal to or greater than the royalties the Company
would have earned had its glucose monitoring devices not been sold at a
discount. This possible reduction in royalties on sales of the Company's glucose
monitoring devices could have a material adverse effect upon the Company's
business, financial condition and results of operations.
The Company has entered into collaborative arrangements with Abbott,
Boehringer Mannheim and Healthdyne. The agreements evidencing these
collaborative arrangements grant a substantial amount of discretion to each
collaborative partner. If one or more of the Company's collaborative partners
were to terminate its arrangement with the Company, the Company would either
need to reach agreement with a replacement collaborative partner or undertake at
its own expense the activities handled by its collaborative partner prior to
such termination, which would require the Company to develop expertise it does
not currently possess, would significantly increase the Company's capital
requirements and would limit the programs the Company could pursue. The Company
would likely encounter significant delays in introducing its products and the
development, manufacture and sale of its products would be adversely affected by
the absence of such collaborative arrangements. The termination of any of the
Company's collaborative arrangements would have a material adverse effect on the
Company's business, financial condition and results of operations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1997 and 1996
General. Net losses increased to approximately $1.2 million during the
three months ended March 31, 1997 from approximately $673,000 during the same
period in 1996 due to an increase in research and development expenses,
marketing expenses, and general and administrative expenses. The Company expects
net losses to continue. If the Company is unable to attain certain milestones
under a collaborative arrangement, its collaborative partner may not make
milestone payments under or may terminate altogether such arrangement. If this
were to happen, future net losses would escalate rapidly because of spending
increases necessary to complete research, development and clinical trials of the
Company's products, commence sales and marketing efforts and establish a
manufacturing capability.
Research and development expenses. Research and development expenses
increased to approximately $526,000 during the three months ended March 31, 1997
from approximately $328,000 during the same period in 1996. The increase in
research and development expenses was primarily due to increases in
compensation, benefit and employee recruiting costs and, to a lesser extent,
increases in consulting expenses, patent legal fees and the cost of prototype
materials purchased. The Company expects research and development expenses to
increase in the future as it begins clinical trials for its products.
Sales and marketing expenses. Sales and marketing expenses increased to
$138,000 during the three months ended March 31, 1997 from $44,000 during the
same period in 1996. The increase was due primarily to compensation and
recruiting costs, product design costs and expenses related to building a
marketing organization for the Company's infant jaundice product. Sales and
marketing expenses are expected to increase in the future as the Company begins
to market this product.
General and administrative expenses. General and administrative expenses
increased to approximately $709,000 during the three months ended March 31, 1997
from approximately $280,000 during the same period in 1996. The increase in
general and administrative expenses was due to increases in compensation and
facility costs. General and administrative expenses are expected to increase in
the future as a result of overhead costs associated with research and
development activities and, to a lesser extent, expenses associated with being a
public company.
21
<PAGE> 23
Net interest expense. Net interest expenses decreased to $2,000 during the
three months ended March 31, 1997 from an expense of $23,000 during the same
period in 1996. This decrease results from the redemptions of convertible notes
which were outstanding during the first quarter of 1996.
Comparison of Years Ended December 31, 1996 and 1995
General. Net losses increased to approximately $3.2 million during the
year ended December 31, 1996 from approximately $680,000 during the same period
in 1995 due to an increase in research and development expenses and general and
administrative expenses.
Research and development expenses. Research and development expenses
increased to approximately $1.8 million during the year ended December 31, 1996
from approximately $1.2 million during the same period in 1995. The increase in
research and development expenses was primarily due to increases in
compensation, benefit and employee recruiting costs and, to a lesser extent,
increases in consulting expenses, patent legal fees and the cost of prototype
materials purchased.
Sales and marketing expenses. Sales and marketing expenses increased to
$221,000 during the year ended December 31, 1996 from $146,000 during the same
period in 1995. The increase was due primarily to compensation and recruiting
costs, product design costs and expenses related to building a marketing
organization for the Company's infant jaundice product.
General and administrative expenses. General and administrative expenses
increased to approximately $1.5 million during the year ended December 31, 1996
from approximately $637,000 during the same period in 1995. The increase in
general and administrative expenses was due to increases in compensation and
facility costs.
Net interest expense. Net interest expense increased to $132,000 during
the year ended December 31, 1996 from an expense of $5,000 during the same
period in 1995. This increase resulted from interest incurred in conjunction
with the issuance of convertible notes, which have since been redeemed.
Comparison of Years Ended December 31, 1995 and 1994
General. Net losses decreased to approximately $680,000 during 1995 from
$1.3 million during 1994. This decrease was the result of an increase in
licensing fees earned by the Company, and other income.
Research and development expenses. Research and development expenses
increased to approximately $1.2 million during 1995 from approximately $869,000
during 1994. The increases in research and development expenses were due
primarily to increases in compensation, benefit and employee recruiting costs
and, to a lesser extent, increases in consulting expenses, patent legal fees and
the cost of prototype materials purchased.
Sales and marketing expenses. Sales and marketing expenses increased to
approximately $146,000 during 1995 from approximately $126,000 during 1994. The
increase was due primarily to increases in compensation and recruiting and
product design costs.
General and administrative expenses. General and administrative expenses
increased to approximately $637,000 during 1995 from approximately $350,000
during 1994. The increases in general and administrative expenses were due to
increases in compensation, facility costs and depreciation of furniture and
equipment.
Net interest expense. Net interest expense decreased to approximately
$5,000 during 1995 from approximately $144,000 during 1994, due to the
conversion to equity securities of notes outstanding during 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private sales of its debt and equity securities. From October 27, 1992
(inception) through December 31, 1996, the Company received approximately $11.3
million in net proceeds from sales of its debt and equity securities. At March
31, 1997, the Company had cash of approximately $3.1 million and working capital
of approximately $2.1 million. The
22
<PAGE> 24
Company currently invests its excess cash balances and intends to invest the
estimated net proceeds of this offering primarily in short-term,
investment-grade, interest-bearing obligations until such funds are utilized in
operations.
Substantial capital will be required to develop the Company's products,
including completing product testing and clinical trials, obtaining all required
United States and foreign regulatory approvals and clearances, commencing and
scaling up manufacturing and marketing its products. Pursuant to the Company's
collaborative arrangements with Abbott, Boehringer Mannheim and Healthdyne,
these collaborative partners will either directly undertake these activities or
will fund a substantial portion of these expenditures. Capital expenditures of
the Company for the remainder of 1997 are expected to be $1.1 million, including
approximately $661,000 for the build up of production capacity. The obligations
of the Company's collaborative partners to fund the Company's capital
expenditures is largely discretionary and depends on a number of factors,
including the Company's ability to meet certain milestones in the development
and testing of its products. There can be no assurance that the Company will
meet such milestones or that the Company's collaborative partners will continue
to fund the Company's development expenditures. Any failure of the Company's
collaborative partners to fund its development expenditures would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition to funds that the Company expects to be provided by its
collaborative partners, the Company may be required to raise additional funds
through public or private financing, additional collaborative relationships or
other arrangements. The Company believes that its existing capital resources and
the net proceeds of this offering will be sufficient to satisfy its funding
requirements for at least the next 24 months, but may not be sufficient to fund
the Company's operations to the point of commercial introduction of its glucose
monitoring product. There can be no assurance that any required additional
funding, if needed, will be available on terms attractive to the Company, or at
all, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Any additional equity financing
may be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants.
23
<PAGE> 25
BUSINESS
OVERVIEW
SpectRx is engaged in the research and development of products that offer
less invasive and painless alternatives to blood tests currently used for
glucose monitoring, diabetes screening and infant jaundice. The Company's goal
is to introduce products that reduce or eliminate pain, are convenient to use
and provide rapid results at the point of care, thereby improving patient well
being and reducing health care costs. The Company's products for glucose
monitoring, diabetes screening and infant jaundice are based on proprietary
electro-optical and microporation technology that can eliminate the pain and
inconvenience of a blood sample. The Company has entered into collaborative
arrangements with Abbott, Boehringer Mannheim and Healthdyne to facilitate the
development, commercialization and introduction of its glucose monitoring,
diabetes screening and infant jaundice products, respectively.
The Company is developing a hand held glucose monitoring product that
combines its proprietary microporation technology with a disposable assay
cartridge. This product is intended to offer an alternative to current glucose
monitoring products, which require a blood sample usually obtained by lancing
the fingertip. The Company believes that the worldwide market for glucose
monitoring products at manufacturers' price levels is approximately $2.0 billion
annually and is growing at approximately 17% a year. The North American market
for such products was approximately $1.0 billion in 1996. The Company's
prototype glucose monitoring product uses a laser to create one or more
micropores, each approximately the diameter of a human hair, and each with a
depth approximately the thickness of a sheet of paper. A micropore provides
painless access to interstitial fluid, an extracellular fluid that is prevalent
throughout the body and just beneath the skin, which contains glucose and many
other analytes found in blood. Because interstitial fluid is found throughout
the body, a micropore can be created on various parts of the body. Once access
to interstitial fluid is achieved, the device is intended to force interstitial
fluid out of the micropore and into the disposable assay cartridge. The fluid is
then analyzed using chemistry similar to that in currently available blood
glucose monitors. In a pilot study involving 10 subjects and yielding 438
measurements, the Company found a correlation coefficient of 0.96 between blood
glucose levels measured using conventional finger stick technology and
interstitial fluid glucose levels measured using the Company's early stage
prototype. A correlation coefficient is a quantitative representation of the
relationship between two measurements, with a correlation coefficient of 1.0
indicating identical information in the measurements. In October 1996, the
Company entered into a collaborative arrangement with Abbott under which Abbott
is primarily responsible for undertaking or funding the development, regulatory
clearance, manufacture and sale of the Company's glucose monitoring product.
Under its agreement with Abbott, the Company receives development funding,
payments on achievement of technical milestones and a royalty on Abbott sales of
the product. In addition, Abbott has made a $3 million equity investment in the
Company. If the development milestones are achieved, the Company expects Abbott
to file a 510(k) premarket notification for its glucose monitoring product in
1999, but there can be no assurance that this filing will occur during this time
frame, or at all.
The Company has developed a compact diabetes screening product based on
measurements of fluorescence in the lens of the eye. This product is intended to
provide an alternative to the fasting plasma glucose test, the screening
technique recommended by the ADA, which requires a blood draw following an eight
hour fasting period. The Company believes that the market for diabetes screening
tests in the United States is approximately $300 million per year. While the
individual looks into the Company's device it automatically tracks the eye and
measures lens fluorescence, which is evaluated by the Company's proprietary
algorithm. An abnormally high level of lens fluorescence can be indicative of
prolonged exposure to high levels of glucose due to diabetes. The entire
procedure takes approximately one minute and does not require a fasting period.
In a pilot study of more than 1,300 subjects conducted by Boehringer Mannheim,
an early stage prototype of the Company's diabetes screening product
demonstrated an ability to detect diabetes comparable to the fasting plasma
glucose test. In December 1994, the Company entered into a collaborative
arrangement with Boehringer Mannheim under which Boehringer Mannheim is
primarily responsible for the clinical trials, the regulatory clearance and sale
of the Company's diabetes screening product. Under the Company's
24
<PAGE> 26
agreement with Boehringer Mannheim, the Company receives development milestone
payments and would receive a manufacturing profit on products sold to Boehringer
Mannheim. If development milestones are achieved, the Company expects Boehringer
Mannheim to file a 510(k) premarket notification with the FDA for the Company's
diabetes screening product in 1998, but there can be no assurance that this
filing will occur within this time frame, or at all.
In addition to its two products for diabetes, the Company is developing an
infant jaundice screening and monitoring product. Infant jaundice is
characterized by a yellowing of the skin and eyes caused by an excess of
bilirubin in the body. If left untreated infant jaundice may, in extreme cases,
lead to brain damage or death. Of the approximately four million newborns in the
United States each year, approximately 50% have recognizable jaundice. Annually,
approximately 1.7 million newborns receive at least one blood test for
bilirubin. Of those newborns tested, approximately 700,000 have elevated
bilirubin levels, and a portion of these newborns will receive additional tests.
The cost to the patient for a bilirubin test ranges from $22.25 to $37.75. The
Company's infant jaundice product is intended to offer an alternative to
conventional blood tests, which involve a traumatic heel stick to obtain a blood
sample from the infant. This product is intended to be a hand held instrument,
which incorporates a microspectrometer to collect spectroscopic information from
the skin, and a proprietary, disposable calibration element. After calibration,
the instrument is applied to the skin of the infant for five to ten seconds,
during which time the bilirubin level is measured using a proprietary algorithm
that adjusts for testing difficulties due to skin color, gestational age and
other factors. Using an early stage prototype, the Company tested 361 infants in
a pilot study and found a correlation coefficient of 0.92 between total serum
bilirubin measured using a conventional blood test and that measured using the
Company's prototype. In June 1996, the Company entered into a collaborative
arrangement with Healthdyne under which Healthdyne is responsible for regulatory
approval and sales of the Company's infant jaundice product in the United States
and Canada. The Company retains manufacturing rights and is responsible for
regulatory approval and sales of the infant jaundice product outside of the
United States and Canada. Under its agreement with Healthdyne, the Company
receives license fees and would receive a manufacturing profit on hand held
instruments sold to Healthdyne and a share of any profits from the sales of
disposables by Healthdyne. The Company expects Healthdyne to commence clinical
testing and file a 510(k) premarket notification with the FDA for the Company's
infant jaundice product in 1997, but there can be no assurance that this filing
will occur within this time frame, or at all. Healthdyne has stated that it
plans to commence marketing of the product in the United States and Canada,
subject to obtaining FDA clearance and necessary Canadian regulatory approvals.
The Company expects to commence marketing of the infant jaundice marketing
product in certain European countries by the end of 1997 subject to obtaining
necessary regulatory approvals. There can be no assurance that marketing will
occur within this time frame, or at all.
SPECTRX'S BUSINESS STRATEGY
The Company's goal is to introduce products that reduce or eliminate pain,
are convenient to use and provide rapid results at the point of care, thereby
improving patient well being and reducing health care costs. To achieve this
objective, the Company is pursuing the following business strategy.
- FOCUS ON CURRENT PRODUCT PORTFOLIO. The Company intends to continue to
advance its current products to commercialization by (i) leveraging the
expertise of its collaborative partners, (ii) seeking 510(k) clearance
from the FDA for these products, (iii) expanding its internal product
development capabilities and (iv) developing its sales, marketing and
manufacturing capabilities.
- EXPAND THE MARKET FOR ITS GLUCOSE MONITORING PRODUCT. The Company
believes that its less invasive, easy-to-use glucose monitoring product
could lead to greater patient compliance with recommended glucose
monitoring rates. In addition, the Company believes that its diabetes
screening product could substantially increase the number of diagnosed
diabetics, thus increasing the demand for its glucose monitoring device
and disposable assay cartridge.
- COLLABORATE WITH MARKET LEADERS. The Company has selectively established
collaborative arrangements with Abbott, Boehringer Mannheim and Healthdyne
to develop and commercialize its products.
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The Company intends to continue selectively establishing strategic
relationships with leading companies, as appropriate, for the development,
commercialization and introduction of future products.
- LEVERAGE PROPRIETARY TECHNOLOGIES. The Company intends to leverage its
proprietary electro-optical and microporation technologies by developing
future products based on these technologies that can provide cost
effective, less invasive alternatives to current diagnostic or monitoring
products. For example, the Company believes its interstitial fluid
sampling technology may be applicable for monitoring analytes other than
glucose.
- ADDRESS LARGE MARKET OPPORTUNITIES. The Company intends to selectively
develop future products for large markets in which its products can (i)
apply for 510(k) clearance from the FDA, (ii) incorporate a disposable
component and (iii) qualify for third-party reimbursement.
DIABETES
Background
Diabetes is a major health care problem which, according to the World
Health Organization, is estimated to affect 100 million people worldwide by the
year 2000. If undiagnosed and untreated, diabetes leads to severe medical
complications over time, including blindness, loss of kidney function, nerve
degeneration and cardiovascular disease. Diabetes is the sixth leading cause of
death by disease in the United States and is estimated to cost the American
economy over $90 billion annually, including indirect costs such as lost
productivity.
Diabetes occurs when the body does not produce sufficient levels of, or
effectively utilize, insulin, a hormone that regulates the metabolism
(breakdown) of glucose. Glucose levels in the blood must be within a specific
concentration range to ensure proper cellular function and health. Insulin
deficiency results in an abnormally high blood glucose concentration, which
causes protein glycation throughout the body, impairs the ability of cells to
intake glucose and has other adverse effects. In Type I (insulin-dependent
juvenile-onset) diabetes, which affects from 5% to 10% of all people with
diagnosed diabetes, the cells that make insulin have been destroyed. Type I
diabetes is treated with daily insulin injections. In the more prevalent form of
diabetes, Type II (non-insulin-dependent adult-onset) diabetes, the insulin
producing cells are unable to produce enough insulin to compensate for the
patient's poor sensitivity to the hormone in glucose using tissues such as
skeletal muscle (a condition called insulin resistance). Type II diabetes is
initially managed with proper diet, exercise and oral medication. However, based
on statistics published by the National Institutes of Health, the Company
estimates that approximately 50% of Type II diabetics will eventually require
insulin therapy.
The Glucose Monitoring Market
Many people with diabetes have difficulty achieving optimal glucose
control. For proper glucose control, each insulin injection should be adjusted
to reflect the person's current blood glucose concentration, carbohydrate
consumption, exercise pattern, stress or other illness. Accordingly, personal
glucose monitoring products have become critical in managing diabetes by
allowing diabetics to measure their glucose levels in order to adjust their
diet, exercise and use of oral medication or insulin to maintain proper blood
glucose levels.
In June 1993, the National Institutes of Health announced the results of
the Diabetes Control and Complications Trial ("DCCT"). This long term study of
approximately 1,400 people with Type I diabetes confirmed the importance of
glucose control as a determinant of long term risk of degenerative
complications. The data from the DCCT demonstrated that the risk of degenerative
complications is significantly reduced if blood glucose concentrations in people
with Type I diabetes can be brought closer to the concentrations measured in
non-diabetic individuals. For example, the DCCT study demonstrated that the risk
of complications of diabetic retinopathy, the leading cause of blindness in the
United States, could be reduced by 76% through proper glucose control. The DCCT
panel recommended that Type I diabetics measure their blood glucose four times
per day in order to maintain proper control over their glucose levels. Although
the DCCT study involved people with Type I diabetes only, a similar Japanese
study on Type II diabetics supports
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the conclusion of the DCCT study that maintaining low average glucose levels
reduces the risks of complications associated with diabetes.
Because glucose monitoring is an important part of the everyday life of the
world's diagnosed diabetics, the personal glucose monitoring market is
substantial. The Company believes that the worldwide market for glucose
monitoring products at manufacturers' price levels is approximately $2.0 billion
annually and is growing at approximately 17% per year. The North American market
for such products was approximately $1.0 billion in 1996. The Company believes
that the market for personal glucose monitoring products is driven by four main
factors: 1) an aging population; 2) the realization that tight glucose control
dramatically reduces the risk of complications; 3) the availability of
third-party reimbursement in developed nations; and 4) the promotion and
increased availability of glucose monitoring products. It is estimated that
currently diabetics monitor their glucose on average less than twice a day
instead of the DCCT recommendation of four times per day. The Company believes
that the pain and inconvenience associated with conventional finger stick blood
glucose monitoring systems is the primary reason that most people with diabetes
fail to comply with the recommendations of the DCCT panel. The Company believes
that greater awareness of the benefit of frequent self-monitoring and less
painful, more convenient monitoring products could significantly increase the
global market. There are currently no non-invasive glucose monitoring systems
commercially available.
Glucose monitoring products have evolved rapidly over time. Various factors
have allowed new entrants to establish market share in the glucose monitoring
product market, including technological advances, broader product distribution
and increased patient awareness of product innovations. These factors have also
expanded the overall size of the market for glucose monitoring products.
Current commercially available glucose monitoring systems are painful and
inconvenient. These systems require that a blood sample be obtained from a
patient, applied to a disposable test strip and then measured for glucose
concentrations using a battery-powered, hand held monitor. Under these systems,
the blood sample is usually obtained from a patient's fingertip because of the
high concentration of capillaries at this site and because the blood produced at
the fingertip can most easily be applied directly to test strips used in such
devices. These systems typically require the patient to complete the following
steps: insert the disposable test strip into the meter, lance the finger, apply
the drop of blood to the test strip and wait for the meter to display the
results. Because nerve endings are concentrated in the fingertips, this sampling
process can be painful. The level of patient discomfort is compounded by the
fact that the fingertips offer a limited surface area from which to obtain a
blood sample. Thus, the patient can be required to repeatedly sample from the
same site, eventually resulting in callouses. In addition, applying the drop of
blood to the test strip is difficult for those diabetics who have lost dexterity
in their extremities due to nerve degeneration.
The SpectRx Glucose Monitoring Product
The Company is developing a glucose monitoring product in collaboration
with Abbott that utilizes the Company's proprietary interstitial fluid sampling
technology to allow people with diabetes to easily and accurately measure their
glucose levels. Interstitial fluid is an extracellular fluid that is prevalent
throughout the body and just beneath the skin. Interstitial fluid is the means
by which proteins and chemicals, including glucose, pass between capillaries and
cells. Studies based on the Company's and independent research have indicated
that interstitial fluid glucose levels correlate closely with blood glucose
levels. The Company believes that using interstitial fluid to assay glucose
levels is more efficient than using blood because it is free of interferences
such as red blood cells, which must often be separated from the plasma prior to
measurement. SpectRx's glucose monitoring product uses the Company's
microporation technology to rapidly collect a sufficient sample of interstitial
fluid. The product is intended to measure the glucose concentration of the fluid
using disposable assay technology supplied and being designed by Abbott
specifically for use with the Company's product. Because the Company's glucose
monitoring product is designed to obtain a sample of interstitial fluid from the
outermost layers of the skin and does not require a blood sample, its use does
not stimulate pain sensors and capillaries found in the deeper layers of skin
and is thus free of the pain and blood
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involved in conventional finger stick assaying techniques. In addition, the
Company believes that the entire process will take no longer than current blood
glucose monitoring tests.
[CROSS SECTION OF HUMAN SKIN
GLUCOSE MONITORING GRAPH]
The Company's glucose monitoring product is designed to be comprised of a
small, hand held battery-powered, monitoring device and a proprietary,
disposable assay cartridge. The monitoring device will be placed on the skin,
and a laser or other suitable energy source mounted in the housing will be
directed onto the skin. When activated, one or more micropores will be
painlessly created in the outermost layer of skin, the stratum corneum. The
Company believes the creation of a micropore will not damage adjacent tissue or
penetrate deeply enough to reach the capillary bed or nerve layer below the
stratum corneum. The Company anticipates that the device will have a proprietary
mechanism that will force the interstitial fluid out of a micropore and into the
disposable cartridge. When the assay cartridge is full and the interstitial
fluid has been analyzed, the results will appear on a LCD display.
In January 1996, the Company undertook a pilot study of 10 subjects (six
diabetics and four nondiabetics) under a protocol reviewed and approved by the
Georgia Baptist Medical Center. The study was designed to evaluate the
correlation between results obtained using early stage prototypes of the
Company's glucose monitoring system and a leading conventional personal blood
glucose monitoring system. The study compared the glucose levels in interstitial
fluid and blood of 10 subjects who were each administered 75 grams of glucose.
The study, which yielded a total of 438 glucose measurements (219
contemporaneous measurements of interstitial fluid and blood), produced a
correlation coefficient of 0.96 between glucose levels in interstitial fluid and
blood.
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In October 1996, the Company entered into a collaborative arrangement with
Abbott for the development and commercialization of the Company's glucose
monitoring product. Pursuant to the arrangement the Company granted Abbott an
exclusive worldwide license for the Company's glucose monitoring product and
other related glucose monitoring devices in all countries except Singapore and
the Netherlands, where the license is non-exclusive. Pursuant to the terms of
the collaborative arrangement, Abbott has agreed to pay all costs associated
with a joint research and development program, to make certain milestone
payments to the Company and to pay the Company a royalty based on net sales.
Abbott will also be responsible for conducting clinical trials, obtaining
regulatory approval for and manufacturing, marketing, distributing and selling
the products covered by the arrangement. In addition, Abbott made a $3 million
equity investment in the Company. See "-- Collaborative Arrangements -- Abbott
Laboratories" and "Risk Factors -- Dependence on Collaborative Arrangements."
The Company expects to complete development related to the collection of
interstitial fluid, followed by the integration of the Company's microporation
technology and Abbott's disposable assay technology into a prototype device. The
Company expects prototype development to be followed by clinical trials and a
regulatory submission. Unexpected problems may, however, arise during the
development process. In addition, Abbott retains a significant degree of
discretion regarding the timing of these activities and the amount and quality
of financial, personnel and other resources that it devotes to these activities.
Accordingly, there can be no assurance that these events will occur. See "Risk
Factors -- Early Stage of Development; No Assurance of Successful Product
Development."
The Company's glucose monitoring product will be subject to rigorous FDA
and other government regulation and may not be marketed in the U.S. unless and
until the Company has received the necessary approval or clearance from the FDA.
Pursuant to the Company's collaboration agreement with Abbott, Abbott will be
responsible for obtaining such approval or clearance. While the Company believes
the FDA may grant the Company and Abbott clearance to market the Company's
glucose monitoring device through the 510(k) premarket notification process, the
Company and Abbott will need to devote a substantial amount of time and effort
attempting to secure such clearance because they will need to demonstrate that
the device is substantially equivalent to one or more currently marketed
"predicate" glucose monitoring devices. There can be no assurance that Abbott
and the Company will be successful in obtaining clearance of a 510(k) premarket
notification in a timely manner if at all. Additionally, there can be no
assurance that the FDA will not require the submission of a PMA application to
obtain FDA approval to market the Company's glucose monitoring product. See
"-- Government Regulation" and "Risk Factors -- Government Regulations; No
Assurance of Regulatory Approvals."
The Diabetes Screening Market
The ADA estimates that there are over 16 million people in the United
States with diabetes, only half of whom have been diagnosed with the disease.
The long term health care costs of a diabetic patient can be substantially
reduced if the patient can be diagnosed in the early stages of the disease so
that glucose levels can be monitored and properly controlled, thereby reducing
complications that result from long term exposure to elevated glucose levels.
These complications include diabetic retinopathy, kidney disease, nerve
degeneration and cardiovascular disease. Currently, approximately 625,000 new
cases of diabetes are diagnosed each year in the United States, and many of
those diagnosed have complications that generally appear eight to ten years
after onset of the disease. The Company believes that the low rate of diabetes
diagnosis and the failure in many cases to diagnose the disease prior to the
onset of complications is due primarily to the lack of a convenient and accurate
diabetes screening test. The Company believes that the market in the United
States for diabetes screening tests is approximately $300 million per year.
There are several existing diabetes screening tests in use today. The ADA
recommended diabetes screening procedure is the blood-based fasting plasma
glucose test. This test is difficult and inconvenient to administer because it
requires the patient to fast for eight hours prior to the drawing of blood, and
because the blood sample is usually sent to a laboratory for analysis, which
delays the receipt by the patient of the test results. Current methods for
diabetes screening utilizing random finger stick blood glucose tests are no
longer recommended by the ADA because the random nature of the test results in
an unacceptably low level of
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sensitivity (i.e., the ability to correctly determine that a particular person
has diabetes) and specificity (i.e., the ability to correctly determine that a
particular person does not have diabetes). Glucose urine test products, which
are available over-the-counter, have an even lower test sensitivity and
specificity and are not recommended for screening by the ADA. The low levels of
sensitivity and specificity in both the random finger stick blood glucose test
and the glucose urine test result in cases of both undetected diabetes, which
can prevent early treatment of the disease in such cases, and false indications
of diabetes, which can cause patients to incur the expense of, and devote the
time for, needless additional testing.
The SpectRx Non-Invasive Diabetes Screening Product
The SpectRx diabetes screening product is designed to detect and measure
fluorescence in the lens of the eye and evaluate that measurement using the
Company's proprietary algorithm. An abnormally high level of florescence in the
lens of the eye is indicative of prolonged exposure to high levels of glucose
due to diabetes. A measurement indicating a patient has or is likely to have
diabetes could be confirmed by subsequent testing using conventional blood-based
diagnostics. The performance of the Company's diabetes screening product has
been shown to be comparable to that of the blood-based fasting plasma glucose
test. Unlike the fasting plasma glucose test, however, the SpectRx diabetes
screening product is painless and would provide the patient with test results in
less than a minute, and would not require the patient to fast for eight hours
prior to administration of the test.
The Company's diabetes screening product is designed to be simple and
painless to use and to produce accurate point of care results in a very short
period of time. The Company believes this is likely to become as prevalent as
glaucoma testing, which is regularly performed during eye exams. Thus, the
Company believes that the product may result in increased diagnoses of the
approximately 50 million undiagnosed diabetics worldwide, including the
approximately eight million in the United States. For this reason, the Company
believes that its diabetes screening product presents a substantial opportunity
to identify new patients who can benefit from proper treatment thereby reducing
incidence of complications and their associated cost.
The Company's diabetes screening product is designed as a compact
instrument that will meet the space requirements of optometrists' and
physicians' offices and will also be suitable for retail establishments such as
pharmacies. To use the device, the individual looks into the instrument while
placing his head against a rest. The individual is instructed to look at a fixed
light as the instrument locates the eye and automatically tracks the pupil
opening. The device measures fluorescence in the lens of the eye using a
low-intensity blue light. The results of the analysis will indicate that the
patient should undergo further diagnostic testing or that there is no indication
of diabetes. In a pilot study of more than 1,300 subjects (both diabetics and
non-diabetics) conducted by Boehringer Mannheim, an early stage prototype of the
Company's diabetes screening product demonstrated an ability to detect diabetes.
The results of this pilot study indicated that the sensitivity and specificity
of the Company's diabetes screening product were comparable to the sensitivity
and specificity indicated in published studies of the fasting plasma glucose
test. The Company is currently testing four advanced prototypes of its diabetes
screening product.
The Company is currently conducting pilot clinical studies with a prototype
of its diabetes screening product. The Company believes the data from these
pilot studies are expected to provide the design changes necessary to complete
the production prototype. The Company expects Boehringer Mannheim to commence
clinical testing and file for 510(k) clearance from the FDA in 1998. Unexpected
problems may, however, arise in the development process. In addition, Boehringer
Mannheim retains a significant degree of discretion regarding the timing of
these activities and the amount and quality of financial, personnel and other
resources that it devotes to these activities. Accordingly, there can be no
assurance that this filing will occur within this time frame, or at all.
The Company has entered into a collaboration agreement with Boehringer
Mannheim, pursuant to which the Company has granted Boehringer Mannheim an
exclusive worldwide license to sell and market the Company's diabetes screening
product. The Company receives development milestone payments and expects to
receive a manufacturing profit on products sold to Boehringer Mannheim.
Boehringer Mannheim is responsible for conducting clinical testing, obtaining
regulatory approvals for, and the marketing, distribution and sales of, the
Company's diabetes screening product. See "-- Collaborative
Arrangements -- Boehringer
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Mannheim Corporation" and "Risk Factors -- Early Stage of Development; No
Assurance of Successful Product Development" and "-- Dependence on Collaborative
Arrangements."
INFANT JAUNDICE
Background
Infant jaundice is a condition that primarily affects newborns within the
first three to 10 days of life. If left untreated infant jaundice may, in
extreme cases, lead to brain damage or death (kernicterus). Jaundice is
characterized by a yellowing of the skin and eyes caused by an excess of
bilirubin in the body. Bilirubin is a normal waste product resulting from the
breakdown of red blood cells and is removed from the body by the liver. Prior to
birth, the bilirubin in an infant is processed by the mother's liver and
excreted. After birth, an infant must eliminate bilirubin without the mother's
help. It may take the infant's system several days to begin eliminating the
bilirubin faster than it is produced. Infants who are born prematurely, who are
underfed, or who belong to certain ethnic groups are at increased risk of
developing jaundice. The initial screening of jaundice is the observation of
yellow skin. This is a subjective determination prone to errors due to differing
skin colors and gestational ages. If a baby is selected for further jaundice
testing, the current procedure requires that a blood sample be obtained from the
infant, usually by lancing the infant's heel, which is a traumatic process for
the infant. Since jaundice normally presents in infants 36 to 72 hours after
birth, infants who are sent home after a short hospital stay pursuant to managed
care guidelines in the United States are at risk because the condition may not
have presented prior to release.
The Infant Jaundice Screening and Monitoring Market
Of the approximately four million newborns each year in the United States,
approximately 50% have recognizable jaundice. Annually, approximately 1.7
million newborns receive at least one blood test for bilirubin. Of those
newborns tested, approximately 700,000 have elevated bilirubin levels, and a
portion of these newborns will receive additional tests. The cost to the patient
for a bilirubin test ranges from $22.25 to $37.75. Many of those infants in the
United States diagnosed with jaundice will undergo phototherapy, a treatment
that converts bilirubin into a water soluble form that can be processed and
eliminated from the infant's system. The Company believes that the average
newborn under active phototherapy treatment receives three to four bilirubin
monitoring tests.
The SpectRx Non-Invasive Infant Jaundice Product
The Company's infant jaundice product is based upon reflection spectroscopy
that measures bilirubin regardless of skin color or gestational age. The product
is designed to provide rapid, point of care bilirubin measurements and to serve
as an initial screening and ongoing monitoring device. The Company believes that
the device has the potential to replace the painful heel stick procedure
currently utilized.
The design of the Company's infant jaundice product consists of a hand
held, battery-operated instrument, which sits in a compact recharger base. This
instrument incorporates a microspectrometer to collect spectroscopic information
from the skin and a proprietary, disposable calibration element. After
calibration, the instrument is applied to the skin of the infant for five to ten
seconds, during which time the bilirubin level is measured by collecting
spectroscopic information from the skin and analyzing it using a proprietary
algorithm that adjusts for testing difficulties due to skin color, gestational
age and other factors.
Using an early stage prototype, the Company tested 361 infants in a pilot
study conducted at Northside Hospital and found a correlation coefficient of
0.92 between total serum bilirubin measured using conventional blood tests and
that measured using the Company's prototype. In addition, the Company has
ongoing pilot study programs at Northside Hospital, Gwinnett Women's Hospital
and Pennsylvania Hospital.
The Company is currently conducting pilot clinical trials at two sites
using a laboratory prototype of its infant jaundice product. The Company expects
Healthdyne to commence clinical testing and file for 510(k) clearance from the
FDA in 1997. Healthdyne has stated that it plans to commence marketing of the
product in the United States and Canada, subject to obtaining FDA clearance and
necessary Canadian regulatory approvals. Subject to obtaining necessary
regulatory approvals, the Company expects to commence marketing of the infant
jaundice monitoring product in certain European countries by the end of 1997.
Unexpected
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problems may arise in the development and regulatory approval process. In
addition, Healthdyne retains a significant degree of discretion regarding the
timing of these activities and the amount and quality of financial, personnel
and other resources that they devote to these activities. Accordingly, there can
be no assurance that the filing schedule will be met, if at all.
The Company's infant jaundice product is being developed pursuant to a
collaborative arrangement with Healthdyne. Under the terms of the arrangement,
SpectRx will develop and manufacture the product and Healthdyne will pay the
costs associated with the FDA approval process and conducting clinical trials.
In addition, Healthdyne will pay for a portion of the product development.
Healthdyne has been granted a license to market and sell the product in the
United States and Canada, while SpectRx retains the rights to sell the product
in all other world markets. See "-- Collaborative Arrangements -- Healthdyne
Technologies, Inc." and "Risk Factors -- Dependence on Collaborative
Arrangements."
COLLABORATIVE ARRANGEMENTS
The Company's business strategy for the development, clinical testing,
regulatory approval, manufacturing and commercialization of its products depends
upon the Company's ability to selectively enter into and maintain collaborative
arrangements with leading medical device companies. The Company currently has
collaborative arrangements with Abbott, Boehringer Mannheim and Healthdyne. The
Company is, to varying degrees, dependent upon its collaborative partners for
the development, clinical testing, regulatory approval, manufacturing and
commercialization of its products. The Company's current collaborative
arrangements grant a great deal of discretion to its collaborative partners. The
termination of any collaborative arrangement by one of the Company's
collaborative partners, any inability of a collaborative partner to fund or
otherwise satisfy its obligations under its collaborative arrangements with the
Company, or any significant disputes with, or breaches of contractual
commitments by, a collaborative partner could have a material adverse effect
upon the Company's business, financial condition and results of operations. See
"Risk Factors -- Dependence on Collaborative Arrangements."
Abbott Laboratories
In October 1996, SpectRx entered into a Research & Development and License
Agreement (the "Abbott Agreement") with Abbott for the development and
commercialization of the Company's glucose monitoring product in the field of
extracting interstitial fluid samples for glucose monitoring (the "Field").
Pursuant to the Agreement, SpectRx has granted to Abbott a worldwide license
under its patents, patent applications and know how (the "Technology") useful in
the Field, including improvements, to manufacture and sell products in the
Field. The license is exclusive in all countries except Singapore and the
Netherlands where the license is non-exclusive. Abbott also has certain rights
of first negotiation with the Company regarding any rights the Company may have
to license the Technology for the development and commercialization of other
products relating to the measurement of analytes in interstitial fluid and the
delivery of therapeutic agents based on such measurements. Under the Abbott
Agreement, SpectRx receives from Abbott development funding, payments on
achievement of milestones and a royalty on Abbott product sales. In addition,
Abbott made a $3 million equity investment in SpectRx.
Under the Abbott Agreement, the parties have agreed to jointly conduct a
research program to demonstrate that the Company's glucose monitoring product
can extract an adequate sample of interstitial fluid in a targeted time period.
During the joint development program Abbott will pay mutually agreed development
costs. SpectRx is responsible for the completion of a prototype and its human
clinical testing. Thereafter, if Abbott wishes to commercialize the product, it
is responsible for further product development and obtaining all required
regulatory approvals. After obtaining these regulatory approvals, Abbott is
required to diligently pursue the sales of the products but is not prohibited
from marketing competing products. If Abbott elects not to commercialize the
product, the agreement may be terminated by either party. Abbott has a fixed
period from the date of notice to the Company of its intention to commercialize
the product in which to complete commercialization and begin shipment of
products. If such commercialization has not been completed within the permitted
time, SpectRx may terminate the agreement.
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Under the Abbott Agreement, all technology invented solely by SpectRx
during the joint development program is owned solely by SpectRx. All technology
invented solely by Abbott and all clinical data, regulatory filings and
government marketing approvals developed solely by Abbott is the property of
Abbott. On certain early termination events, SpectRx has a right to obtain a
license to certain of the relevant Abbott technology. Technology jointly
invented during the joint development program will be jointly owned pursuant to
a royalty sharing arrangement.
The Abbott Agreement remains in effect until the expiration of the last
licensed patent to expire. Abbott has the right to terminate the Abbott
Agreement without cause upon not less than 60 days' prior notice to the Company
at any time prior to the first shipment of products and upon not less than 120
days' prior notice to the Company thereafter. If Abbott terminates without cause
after completion of the research program but before the first product is
shipped, Abbott must pay to the Company a one time development program milestone
payment. Abbott may terminate the Abbott Agreement upon not less than 30 days'
prior notice to the Company for certain product development failures or failure
to obtain key patent protection.
Boehringer Mannheim Corporation
In December 1994, SpectRx entered into a Development and License Agreement
(the "Development Agreement") with Boehringer Mannheim with respect to a
non-invasive instrument that measures changes in the lens of the human eye for
the purpose of detecting diabetes. Pursuant to the Development Agreement,
SpectRx has granted to Boehringer Mannheim an exclusive, worldwide license to
sell and market the Company's diabetes screening product. SpectRx receives
development milestone payments from Boehringer Mannheim pursuant to the
Development Agreement. The Development Agreement remains exclusive for so long
as Boehringer Mannheim meets certain minimum volume purchase requirements set
forth in the Supply Agreement with Boehringer Mannheim (discussed below). The
Development Agreement may be terminated at any time by Boehringer Mannheim upon
written notice to SpectRx.
In January 1996, Boehringer Mannheim and SpectRx entered into a Supply
Agreement for the supply by SpectRx to Boehringer Mannheim of the Company's
diabetes screening product (the "Supply Agreement"). Boehringer Mannheim's
purchase price for the Company's diabetes screening product is calculated
pursuant to a formula based on a gross margin. Boehringer Mannheim is required
to meet minimum annual purchase requirements for the diabetes screening product
each year or Boehringer Mannheim forfeits its exclusivity under the marketing
license granted in the Development Agreement. The term of the Supply Agreement
is coincident with the term of the Development Agreement. Boehringer Mannheim
may terminate the Supply Agreement for material breach (including a failure to
supply adequate requirements) of the agreement by the Company which breach
remains unremedied for 30 days after notice to the Company, in which case
Boehringer Mannheim is deemed to have acquired a manufacturing license under the
Development Agreement. If Boehringer Mannheim acquires this manufacturing
license, it must pay royalties to SpectRx on Boehringer Mannheim sales of the
diabetes screening product. SpectRx has agreed that during the term of the
Supply Agreement it will not enter into any agreement to develop or manufacture
a non-invasive diabetes detection instrument using the same or similar
technology as used in the Company's diabetes screening product other than with
Boehringer Mannheim affiliates. Boehringer Mannheim is not restricted from
pursuing the development of a diabetes screening instrument with another party.
In May 1997, Roche Holding, Ltd. announced it would acquire Corange, Ltd.,
which is the parent company of Boehringer Mannheim, GmbH., the parent company of
Boehringer Mannheim. There can be no assurance that a change in control of
Boehringer Mannheim will not adversely affect the Company's collaborative
arrangement with Boehringer Mannheim.
Healthdyne Technologies, Inc.
In June 1996, SpectRx entered into a Purchasing and Licensing Agreement
with Healthdyne (the "Healthdyne Agreement"). Pursuant to the Healthdyne
Agreement, Healthdyne is responsible for clinical trials, the regulatory
approval process and sale of the Company's infant jaundice product in the United
States and Canada. The Company retains manufacturing rights and is responsible
for the regulatory approval process
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and sale of the infant jaundice product outside of the United States and Canada.
Under the Healthdyne Agreement the Company receives from Healthdyne licensing
fees and a manufacturing profit on products sold to Healthdyne and shares any
profit from the sales of disposables by Healthdyne. Healthdyne receives an
exclusive license for the United States and Canada (i) to use and sell
instruments for non-invasive bilirubin measurement ("Instruments"), (ii) to use
and sell disposable probes, tips or other devices which, when used with
Instruments, measure bilirubin levels ("Disposables") and items accessory to and
not necessary for the operation of Instruments or Disposables ("Accessories"),
and (iii) to make Instruments, Disposables and/or Accessories (collectively,
"Licensed Products"). Unless SpectRx is unable to supply Licensed Products,
Healthdyne must purchase its requirements for Licensed Products from SpectRx.
Healthdyne has agreed to pay SpectRx's cost for manufacturing each Licensed
Product. Healthdyne and SpectRx then share equally the margin earned on the sale
of Licensed Products. In order to maintain license exclusivity, Healthdyne has
agreed to purchase from SpectRx certain minimum amounts of Licensed Products or
pay a royalty to SpectRx for an equivalent number of Licensed Products. In the
event that SpectRx is unable to supply Licensed products, Healthdyne receives a
license to manufacture the Licensed Products and pays a royalty to SpectRx on
sales of Licensed Products.
SpectRx has granted to Healthdyne the exclusive option to acquire an
exclusive license for the United States and Canada, on terms substantially
similar to those contained in the Healthdyne Agreement, in respect of any new
intellectual property that comes into existence after the effective date of the
Healthdyne Agreement, covers devices that would compete, directly or indirectly,
with the Licensed Products and for which SpectRx has the right and authority to
grant licenses. In such event, Healthdyne has agreed to reimburse SpectRx for
one-half of SpectRx's cost to develop and commercialize such product, in lieu of
paying any license fees. If Healthdyne fails to exercise such option, SpectRx
may license such intellectual property to any third party on terms no more
favorable than those offered to Healthdyne.
The Healthdyne Agreement remains in effect for the longer of fifteen years
or until the expiration date of the last licensed patent to expire. Upon
expiration of the Healthdyne Agreement, Healthdyne has the option to renew the
Healthdyne Agreement for additional fifteen year terms indefinitely. Healthdyne
also has the right to terminate the Healthdyne Agreement without cause upon not
less than 30 days' written notice to the Company. In the event that certain
milestones are not achieved before certain specified dates, Healthdyne has the
right to assume the commercialization efforts with respect to the Licensed
Products, in which case: (i) all further development funding payable to SpectRx
under the Healthdyne Agreement ceases, (ii) Healthdyne must pay SpectRx a
royalty, and (iii) SpectRx must compensate Healthdyne for commercialization
costs through a royalty offset.
In January 1997, Healthdyne became the subject of a hostile takeover
attempt by Invacare Corporation. As of May 29, 1997, approximately 17% of
Healthdyne's outstanding shares of Common stock was held by Invacare, and the
offer has been extended to June 20, 1997 and may be extended further. There can
be no assurance that a change in control of Healthdyne would not adversely
affect the Company's collaborative arrangement with Healthdyne.
LICENSING ARRANGEMENTS
Georgia Tech Research Corporation
The Company has a license agreement with Georgia Tech Research Corporation
("GTRC") pursuant to which GTRC has granted the Company an exclusive, worldwide
license (including the right to grant sublicenses) to make, use and sell
products that incorporate GTRC's know how related to a method of using
non-invasive instrumentation to quantitatively measure molecular changes in
living human lenses for the purposes of diagnosing diabetes and precataractous
conditions (the "GTRC Agreement"). Under the license, the Company must pay a
royalty to GTRC on net sales of any such products manufactured and sold by the
Company. The term of the GTRC Agreement is until the expiration date of the last
expiring patent covering any of the technology licensed or, if no patent issues,
for 15 years from the date of execution of the GTRC Agreement.
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Altea Technologies, Inc.
In March 1996, SpectRx entered into a License and Joint Development
Agreement (the "Altea/Nimco Agreement") among the Company, Altea and
Non-Invasive Monitoring Company, Inc. ("Nimco") pursuant to which certain rights
in respect of jointly developed technology are allocated between the Company and
Altea. Both Altea and Nimco are jointly controlled by Jonathan Eppstein, a Vice
President of the Company, and his sister. See "Certain Transactions." The
Altea/Nimco Agreement also covers one granted patent and know how related to the
glucose monitoring product, the joint application of the Company and Altea for a
U.S. patent and an international patent related to the glucose monitoring
product, and provides for continued joint development efforts between SpectRx
and Altea as mutually agreed. The Altea/Nimco Agreement further provides for the
joint ownership by SpectRx and Altea of certain patents and technology relating
to the transdermal/intradermal movement of substances utilizing various methods.
Under the Altea/Nimco Agreement, SpectRx receives worldwide, exclusive rights to
any technology for monitoring applications covered by the Nimco patents and
related joint technology and Altea receives exclusive, worldwide rights to any
technology for delivery applications covered by the joint technology. Future
inventions made by each of SpectRx and Altea based on newly developed technology
are included within the Altea/Nimco Agreement.
SpectRx is obligated to pay royalties to Nimco for products using its
technology and to Altea for products using its technology, in each case based on
net sales of products and net revenues from sublicensees. Royalties on products
using both Nimco and Altea technology will be allocated as mutually agreed.
Minimum annual royalties are payable by SpectRx to Altea. See Note 10 of Notes
to Consolidated Financial Statements. If actual accrued royalties are less than
the minimum royalty amount, SpectRx may pay Altea the difference or the license
will become non-exclusive. Thereafter, SpectRx must offer a right of first
refusal to acquire exclusive rights to the monitoring technology to Altea.
The term of the Altea/Nimco Agreement is for the life of the patents
covered by the agreement. The agreement may be terminated by any party in the
event of a default by any other party that is not cured within 90 days of notice
to the defaulting party. The agreement may be terminated globally by Altea if
SpectRx fails to commercialize any product, use or application utilizing the
monitoring technology in any major country by the date of the first commercial
shipment date under the Abbott Agreement and may be terminated by Altea with
respect to certain regions if SpectRx fails to commercialize any product, use or
application in those regions by this date. SpectRx may terminate the agreement
upon not less than three months prior notice to Altea and Nimco if given before
it has commercialized the technology and upon not less than six months prior
notice to each party if given after commercialization has commenced. Except in
the case of termination of the agreement by SpectRx for breach, upon termination
all technology and joint technology shall become the exclusive property of
Altea, except the Nimco patents. If the agreement is terminated by SpectRx for
breach, all rights to the monitoring technology in the countries in which
SpectRx has retained its exclusive rights shall become the exclusive property of
SpectRx, each party shall retain non-exclusive rights to the monitoring
technology in other countries, and Altea shall retain all rights to the delivery
technology. If SpectRx loses its rights to the monitoring technology for failure
to commercialize (but not due to breach), Altea and Nimco, after their
reacquisition of rights from SpectRx, will pay an amount of money by way of a
royalty to SpectRx according to a formula to reflect each party's relative
investment.
The University of Texas M.D. Anderson Cancer Center
In March 1996, SpectRx, entered into a Patent License Agreement with the
Board of Regents (the "Board") of the University of Texas System and M.D.
Anderson pursuant to which the Board granted SpectRx an exclusive license under
certain of its patents to manufacture, have manufactured, use and sell products
within the United States for use within the licensed field of optical
measurement of bilirubin in human tissue (the "MDA Patent License Agreement").
SpectRx has the right to assign this license to affiliates and the right to
sublicense the foregoing rights. In connection with the MDA Patent License
Agreement, SpectRx has agreed to pay all expenses incurred in prosecuting and
maintaining the patents licensed and a royalty on net sales of products that
incorporate the licensed patents, subject to annual minimum royalty payments.
See Note 10 of Notes to Consolidated Financial Statements. The term of the MDA
Patent License Agreement is until the expiration date of the last expiring
patent licensed. The Board
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has the right at any time after one year from the effective date of the MDA
Patent License Agreement to terminate the license if SpectRx, within 90 days
after written notice from the Board, fails to provide written evidence
satisfactory to the Board that SpectRx has commercialized or is actively and
effectively attempting to commercialize an invention licensed under the MDA
Patent License Agreement.
Joseph Lakowicz, Ph.D.
The Company has a license agreement with Joseph Lakowicz, Ph.D. whereby Dr.
Lakowicz has granted the Company an exclusive, worldwide license (including the
right to grant sublicenses) to make, use, and sell medical products that
incorporate Dr. Lakowicz's intellectual property related to lifetime
fluorescence technology (the "Lakowicz Agreement"). The intellectual property
consists of a portfolio of granted patents, patent applications and foreign
filings in the area of lifetime fluorescence technology. The Company has agreed
to pay a royalty to Dr. Lakowicz on net sales of such products manufactured and
sold. Additionally, the Company is committed to fund certain research programs
under the direction of Dr. Lakowicz. See Note 10 of Notes to Consolidated
Financial Statements, which includes these funding commitments. The Company has
sublicensed some parts of this intellectual property related to invasive blood
tests to its majority owned subsidiary, FluorRx, Inc. The term of the Lakowicz
Agreement is until the expiration date of the last expiring patent covering any
of the technology licensed.
RESEARCH, DEVELOPMENT AND ENGINEERING
To date, the Company has been engaged primarily in the research,
development and testing of the Company's glucose monitoring, diabetes screening
and infant jaundice products, including research for and development of its core
electro-optical and microporation technologies. Since inception to March 31,
1997, the Company incurred approximately $5.0 million in research and
development expenses, net of approximately $918,000 of which was reimbursed
through collaborative arrangements. Three distinct groups within the Company
conduct research, development and engineering. One group consists of 23
engineers and support personnel who design optics, electronics, mechanical
components and software for the infant jaundice and diabetes screening products.
A second group consists of 18 scientists and engineers who devote their time to
the development of microporation technology for the monitoring of glucose and
other analytes. The third group consists of four engineers and scientists
focused on investigating new applications for the Company's core electro-optical
and microporation technologies.
The Company believes that the interstitial fluid sampling technology under
development at SpectRx and Abbott for use in connection with the Company's
glucose monitoring product may also be used to develop alternatives for certain
blood tests where the analyte being tested is also present in comparable volumes
in interstitial fluid. Abbott has a right of first negotiation with the Company
regarding the use of interstitial fluid sampling technology for these
applications.
In 1996, SpectRx executed a licensing agreement with Dr. Lakowicz of the
University of Maryland pursuant to which the Company licenses a portfolio of
intellectual property related to lifetime fluorescence technology, a technology
used to determine the spectroscopic fingerprint of a substance. The Company
believes lifetime fluorescence technology may have applications including in
vitro blood chemistry, molecular diagnostics, flow cytometry, combinatorial
chemistry for pharmaceutical discovery research and noninvasive optical
diagnostics.
To date, the Company has only tested prototypes of its glucose monitoring,
diabetes screening and infant jaundice products. Because the Company's research
and clinical development programs are at an early stage, substantial additional
research and development and clinical trials will be necessary before commercial
prototypes of the Company's glucose monitoring and infant jaundice products are
produced. The Company could encounter unforeseen problems in the development of
its products such as delays in conducting clinical trials, delays in the supply
of key components or delays in overcoming technical hurdles. There can be no
assurance that the Company will be able to successfully address the problems
that may arise during the development and commercialization process. In
addition, there can be no assurance that any of the Company's products will be
successfully developed, proven safe and efficacious in clinical trials, meet
applicable
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regulatory standards, be capable of being produced in commercial quantities at
acceptable costs, be eligible for third-party reimbursement from governmental or
private insurers, be successfully marketed or achieve market acceptance. If any
of the Company's development programs are not successfully completed, required
regulatory approvals or clearances are not obtained, or products for which
approvals or clearances are obtained are not commercially successful, the
Company's business, financial condition and results of operations would be
materially adversely affected.
In addition, a substantial amount of the research and development work
required to develop the Company's products is either performed or funded by the
Company's collaborative partners. There can be no assurance that the Company's
collaborative partners will be willing or able to continue to perform and to
fund this research and development work. Any failure by one or more of the
Company's collaborative partners to continue to perform or fund such work could
significantly delay or prevent the development or commercialization of the
Company's products, which could have a material adverse effect upon the
Company's business, financial condition and results of operations. See
"-- Collaborative Arrangements" and "-- Licensing Arrangements" and "Risk
Factors -- Dependence on Collaborative Arrangements."
MANUFACTURING AND SOURCES OF SUPPLY
One element of the Company's business strategy is to manufacture certain of
its products and to outsource the production of other, high volume products and
associated disposables. To date, the Company's manufacturing activities have
consisted only of building certain prototype devices. If the Company
successfully develops its diabetes screening and infant jaundice products and,
together with Boehringer Mannheim and Healthdyne, obtains FDA clearance and
other regulatory approvals to market these products, the Company will undertake
to manufacture these products. The Company has no experience manufacturing such
products in the volumes that would be necessary for the Company to achieve
significant commercial sales. Currently four individuals are employed by the
Company to accomplish the pre-production planning, quality system development,
facility development and production scaling that will be needed to bring
production to commercial levels. There can be no assurance that the Company will
be able to establish and maintain reliable, full scale manufacturing of these
products at commercially reasonable costs. Although the Company has leased space
that it plans to use to manufacture its products, it may encounter various
problems in establishing and maintaining its manufacturing operations, resulting
in inefficiencies and delays. Specifically, companies often encounter
difficulties in scaling up production, including problems involving production
yield, quality control and assurance, and shortages of qualified personnel. In
addition, the Company's manufacturing facilities will be subject to GMP
regulations, including possible preapproval inspection, international quality
standards and other regulatory requirements. Difficulties encountered by the
Company in manufacturing scale-up or failure by the Company to implement and
maintain its manufacturing facilities in accordance with GMP regulations,
international quality standards or other regulatory requirements could result in
a delay or termination of production, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
The microspectrometer and disposable calibration element, components of the
Company's infant jaundice product, and the blue light module and calibration
element, components of the Company's diabetes screening product, are each
available from only one supplier and these products would require a major
redesign in order to incorporate a substitute component. Certain other
components of the infant jaundice and diabetes screening products are currently
obtained from only one supplier, but have readily available substitute
components that can be incorporated in the applicable product with minimal
design modifications. If the Company's products require a PMA, the inclusion of
substitute components could require the Company to qualify the new supplier with
the appropriate government regulatory authorities. Alternatively, if the
Company's products qualify for a 510(k) premarket notification, the substitute
components need only meet the Company's product specifications. Any significant
problem experienced by one of the Company's sole source suppliers may result in
a delay or interruption in the supply of components to the Company until such
supplier cures the problem or an alternative source of the component is located
and qualified. Any delay or interruption would likely lead to a delay or
interruption in the Company's manufacturing operations, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
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SALES, MARKETING AND DISTRIBUTION
The Company has elected to focus the sales and distribution of its current
products through its collaborative partners. The Company believes that by
aligning with larger, more established partners, in specific market segments, it
can utilize its partners' already developed strengths and more effectively and
quickly penetrate the market place. The Company's primary efforts to date have
been to build the skill and information base to identify and quantify market
segments to which the Company's technologies can be economically developed and
marketed.
Abbott has the exclusive right to market and sell the Company's glucose
monitoring product in all countries except Singapore and the Netherlands, where
the license is non-exclusive. Boehringer Mannheim has the exclusive worldwide
right to market and sell the Company's diabetes screening product. Healthdyne
has the exclusive right to market and sell the Company's infant jaundice product
in the United States and Canada. Thus, if the Company, together with its
collaborative partners successfully develops its products and obtains FDA
clearance or approval and other regulatory approvals to market these products,
the Company will be heavily dependent upon the willingness and ability of its
collaborative partners to market the products. There can be no assurance that
the Company's collaborative partners will be willing and able to devote
sufficient financial, administrative and personnel resources to successfully
market the Company's products. Any failure by one or more the Company's
collaborative partners to commit sufficient resources to the marketing and sales
of the Company's products could significantly adversely affect the sales, and
revenues from the sales, of these products, which could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
If the Company, together with Healthdyne, successfully develops the
Company's infant jaundice product and obtains, in countries other than the
United States and Canada, necessary regulatory approvals and clearances to
market this product, the Company will be responsible for marketing this product
in these countries. The Company has no experience in marketing or selling
medical device products and only has a three-person marketing and sales staff.
In order to successfully market and sell its infant jaundice product outside the
United States and Canada, the Company must either develop a marketing and sales
force or enter into arrangements with third parties to market and sell this
product. There can be no assurance that the Company will be able to successfully
develop a marketing and sales force or that it will be able to enter into
marketing and sales agreements with third parties on acceptable terms, if at
all. If the Company develops its own marketing and sales capabilities, it will
compete with other companies that have experienced and well-funded marketing and
sales operations. If the Company enters into a marketing arrangement with a
third party for the marketing and sale of its infant jaundice product outside of
the United States and Canada, any revenues to be received by the Company from
this product will be dependent on this third party, and the Company will likely
be required to pay a sales commission or similar amount to this party.
Furthermore, the Company is currently dependent on the efforts of Abbott and
Boehringer Mannheim for any revenues to be received from its glucose monitoring
and diabetes screening products, respectively. There can be no assurance that
the efforts of these third parties for the marketing and sale of the Company's
products will be successful. See "-- Collaborative Arrangements" and "Risk
Factors -- Dependence on Collaborative Arrangements."
PATENTS
The Company has pursued a strategy of developing and acquiring patents and
patent rights and licensing technology. SpectRx's success depends in large part
upon its ability to establish and maintain the proprietary nature of its
technology through the patent process and to license from others patents and
patent applications necessary to develop its products. The Company has licensed
from Nimco one granted patent and know how related to its glucose monitoring
product, jointly applied with Altea for a U.S. patent and an international
patent related to this device and has licensed this granted patent and these
patent applications to Abbott pursuant to the parties' collaborative
arrangements. SpectRx has license agreements with GTRC that give the Company the
right to use two patents related to its diabetes screening product, and the
Company has licensed this proprietary technology to Boehringer Mannheim pursuant
to the Company's collaborative arrangement with Boehringer Mannheim. The Company
has license agreements with M.D. Anderson that give SpectRx access to one patent
related to the Company's infant jaundice product, and the Company has applied
for two
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patents related to this product. SpectRx has licensed the one patent and two
patent applications to Healthdyne pursuant to its collaborative arrangement with
that company. In addition, SpectRx has licensed from Dr. Joseph Lakowicz of the
University of Maryland several granted patents and patent applications related
to fluorescence spectroscopy that it intends to use in its research and
development efforts.
There can be no assurance that one or more of the patents held directly by
the Company or licensed by the Company from third parties, including the
disposable components to be used in connection with its glucose monitoring and
infant jaundice products, or processes used in the manufacture of the Company's
products, will not be successfully challenged, invalidated or circumvented or
that the Company will otherwise be able to rely on such patents for any reason.
In addition, there can be no assurance that competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that prevent, limit
or interfere with the Company's ability to make, use and sell its products
either in the United States or in foreign markets. If any of the Company's
patents are successfully challenged, invalidated or circumvented or the
Company's right or ability to manufacture its products were to be proscribed or
limited, the Company's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Certain companies in
the medical device industry have instituted intellectual property litigation,
including patent infringement actions, for legitimate and, in certain cases,
competitive reasons. In addition, the United States Patent and Trademark Office
("USPTO") may institute litigation or interference proceedings. There can be no
assurance that the Company will not become subject to patent infringement claims
or litigation or interference proceedings instituted by the USPTO to determine
the priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time consuming. Litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others. Any litigation or interference proceedings
brought against, initiated by or otherwise involving the Company may require the
Company to incur substantial legal and other fees and expenses and may require
some of the Company's employees to devote all or a substantial portion of their
time to the prosecution or defense of such litigation or proceedings. An adverse
determination in litigation or interference proceedings to which the Company may
become a party, including any litigation that may arise against the Company,
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties or prevent the Company from
selling its products in certain markets, or at all. Although patent and
intellectual property disputes regarding medical devices are often settled
through licensing or similar arrangements, there can be no assurance that the
Company would be able to reach a satisfactory settlement of such a dispute that
would allow it to license necessary patents or other intellectual property. Even
if such a settlement were reached, the settlement process may be expensive and
time consuming and the terms of the settlement may require the Company to pay
substantial royalties. An adverse determination in a judicial or administrative
proceeding or the failure to obtain a necessary license could prevent the
Company from manufacturing and selling its products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition to patents, the Company relies on trade secrets and proprietary
know how, which it seeks to protect, in part, through confidentiality and
proprietary information agreements. There can be no assurance that such
confidentiality or proprietary information agreements will not be breached, that
the Company would have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known to or be independently developed
by competitors.
COMPETITION
The medical device industry in general, and the markets for glucose
monitoring and diabetes screening devices and processes in particular, are
intensely competitive. If successful in its product development, the Company
will compete with other providers of personal glucose monitors, diabetes
screening tests and infant
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jaundice products. A number of competitors, including Johnson & Johnson, Inc.
(which owns Lifescan, Inc.), Boehringer Mannheim, Bayer AG (which owns Miles
Laboratories, Inc.) and Abbott (which owns MediSense, Inc.) are currently
marketing traditional glucose monitors. These monitors are widely accepted in
the health care industry and have a long history of accurate and effective use.
Furthermore, a number of companies have announced that they are developing
products that permit non-invasive and less invasive glucose monitoring.
Accordingly, competition in this area is expected to increase.
Many of the Company's competitors have substantially greater financial,
research, technical, manufacturing, marketing and distribution resources than
the Company and have greater name recognition and lengthier operating histories
in the health care industry. There can be no assurance that the Company will be
able to effectively compete against these and other competitors. In addition,
there can be no assurance that the Company's glucose monitoring, diabetes
screening or infant jaundice products will replace any currently used devices or
systems, which have long histories of safe and effective use. Furthermore, there
can be no assurance that the Company's competitors will not succeed in
developing, either before or after the development and commercialization of the
Company's products, devices and technologies that permit more efficient, less
expensive non-invasive and less invasive glucose monitoring, diabetes screening
and infant jaundice monitoring. It is also possible that one or more
pharmaceutical or other health care companies will develop therapeutic drugs,
treatments or other products that will substantially reduce the prevalence of
diabetes or infant jaundice or otherwise render the Company's products obsolete.
Such competition could have a material adverse effect on the Company's business,
financial condition and results of operation.
In addition, there can be no assurance that one or more of the Company's
collaborative partners will not, for competitive reasons, reduce its support of
its collaborative arrangement with the Company or support, directly or
indirectly, a company or product that competes with the Company's product that
is the subject of the collaborative arrangement.
GOVERNMENT REGULATION
All of the Company's products are regulated as medical devices. Medical
device products are subject to rigorous FDA and other governmental agency
regulations in the United States and may be subject to regulations of relevant
foreign agencies. The FDA regulates the clinical testing, manufacture, labeling,
packaging, marketing, distribution and record keeping for such products in order
to ensure that medical products distributed in the United States are safe and
effective for their intended uses. Noncompliance with applicable requirements
can result in import detentions, fines, civil penalties, injunctions,
suspensions or losses of regulatory approvals or clearances, recall or seizure
of products, operating restrictions, refusal of the government to approve
product export applications or allow the Company to enter into supply contracts,
and criminal prosecution. Failure to obtain regulatory approvals, the
restriction, suspension or revocation of regulatory approvals or clearances, if
obtained, or any other failure to comply with regulatory requirements would a
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Clinical Chemistry Branch of the FDA's Division of Clinical Laboratory
Devices (the "Branch") has traditionally been the reviewing branch for
blood-based personal glucose monitoring products. The Clinical Chemistry and
Clinical Toxicology Devices Panel (the "Panel") is an external advisory panel
that provides advice to the Branch regarding devices that are reviewed by the
Branch. The Panel met on March 20-21, 1997 to discuss invasive and non-invasive
self-monitoring blood glucose devices. The Panel submitted comments to the
Branch suggesting revisions of existing guidelines relating to the laboratory
and clinical testing of blood glucose devices. The Branch may take the Panel's
comments into consideration in determining whether to revise the existing
guidelines. To date, there has been no change in the existing 510(k) guidance
document for blood glucose monitoring devices. There can be no assurance that
the Panel's comments will not result in a FDA policy or change in FDA policy
that is materially adverse to the Company's regulatory position.
In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under
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FDA regulations, Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to GMP), and Class II devices are
subject to general and special controls (for example, performance standards,
postmarket surveillance, patient registries, and FDA guidelines). Generally,
Class III devices are those which must receive premarket approval from the FDA
to ensure their safety and effectiveness (for example, life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed Class I or II devices).
A medical device manufacturer may seek clearance to market a medical device
by filing a 510(k) premarket notification with the FDA if a medical device
manufacturer establishes that a newly developed device is "substantially
equivalent" to either a device that was legally marketed prior to May 28, 1976,
the date upon which the Medical Device Amendments of 1976 were enacted, or to a
device that is currently legally marketed and has received 510(k) premarket
clearance from the FDA. The 510(k) premarket notification must be supported by
appropriate information, including, where appropriate, data from clinical
trials, establishing the claim of substantial equivalence to the satisfaction of
the FDA. Commercial distribution of a device for which a 510(k) premarket
notification is required can begin only after the FDA issues an order finding
the device to be "substantially equivalent" to a predicate device. The FDA has
recently been requiring a more rigorous demonstration of substantial equivalence
than in the past. It generally takes from four to 12 months from the date of
submission to obtain clearance of a 510(k) submission, but it may take
substantially longer. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device, or that additional
information is needed before a substantial equivalence determination can be
made. The Company believes that its products will qualify for 510(k) premarket
notification.
A "not substantially equivalent" determination, or a request for additional
information, could delay the market introduction of new products that fall into
this category and could have a material adverse effect on the Company's
business, financial condition and results of operations. For any of the
Company's products that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or efficacy of the
device or that constitute a major change to the intended use of the device will
require new 510(k) submissions or approval of a PMA application. Any modified
device for which a new 510(k) premarket notification is required cannot be
distributed until 510(k) clearance is obtained for the modified device. There
can be no assurance that the Company will obtain 510(k) clearance in a timely
manner, if at all, for any devices or modifications to devices for which it may
submit a 510(k) notification.
A PMA application must be submitted if a proposed device is not
substantially equivalent to a legally marketed Class I or Class II device, or
for a Class III device for which FDA has called for PMAs. The PMA application
must contain valid scientific evidence to support the safety and effectiveness
of the device which includes the results of clinical trials, all relevant bench
tests, and laboratory and animal studies. The PMA application must also contain
a complete description of the device and its components, and a detailed
description of the methods, facilities and controls used for manufacture,
including, where appropriate, the method of sterilization and its assurance. In
addition, the submission must include proposed labeling, advertising literature
and training methods (if required). If human clinical trials of a device are
required in connection with a PMA application, and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an investigational device
exemption ("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing, and a description of how the device will be
manufactured. If the IDE application is reviewed and approved by the FDA and one
or more appropriate institutional review boards ("IRBs"), human clinical trials
may begin at a specific number of investigational sites with a specific number
of patients, as approved by the FDA. If the device presents a "nonsignificant
risk" to the patient, a sponsor may begin clinical trials after obtaining
approval for the study by one or more appropriate IRBs, but FDA approval for the
commencement of the study is not required. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study provided
such compensation does not exceed recovery of costs of manufacture, research,
development and handling. An IDE supplement must be submitted to and approved by
FDA before a sponsor or an investigator may make a significant change to the
investigational plan that may affect the plan's scientific soundness or the
rights, safety or welfare of human subjects.
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<PAGE> 43
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
An incomplete application will be returned to the sponsor and must be
resubmitted and accepted for filing before the application will be substantively
reviewed. Once the submission is accepted for filing, the FDA begins an in-depth
review of the PMA application. An FDA review of a PMA application generally
takes one to two years from the date the PMA application is accepted for filing,
but may take significantly longer. The review time is often significantly
extended by the FDA asking for more information or clarification of information
already provided in the submission. During the PMA application review period,
the submission may be sent to an FDA-selected scientific advisory panel composed
of physicians and scientists with expertise in the particular field. The FDA
scientific advisory panel issues a recommendation to the FDA that may include
conditions for approval. The FDA is not bound by the recommendations of the
advisory panel. Toward the end of the PMA application review process, the FDA
will conduct an inspection of the manufacturer's facilities to ensure that the
facilities are in compliance with applicable GMP requirements.
If the FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will issue an approvable letter, which usually
contains a number of conditions which must be met in order to secure final
approval of the PMA application. When those conditions have been fulfilled to
the satisfaction of the FDA, the agency will issue a PMA application approval
letter authorizing commercial marketing of the device for certain indications
and intended uses. The PMA application review process can be expensive,
uncertain and lengthy. A number of devices for which a PMA has been sought have
never been approved for marketing. The FDA may also determine that additional
clinical trials are necessary, in which case the PMA may be significantly
delayed while such trials are conducted and data is submitted in an amendment to
the PMA application. Modifications to the design, labeling or manufacturing
process of a device that is the subject of an approved PMA application, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMA applications. Supplements to a PMA often require the
submission of the same type of information required for an initial PMA, except
that the supplement is generally limited to that information needed to support
the proposed change from the product covered by the original PMA. The FDA
generally does not call for an advisory panel review for PMA supplements. There
can be no assurance that, if required, the Company will be able to meet the
FDA's PMA requirements or that any necessary approvals will be received. Failure
to comply with regulatory requirements would have a material adverse effect on
the Company's business, financial condition and results of operations.
Regulatory approvals and clearances, if granted, may include significant
labeling limitations and limitations on the indicated uses for which the product
may be marketed. In addition, to obtain such approvals and clearances, the FDA
and certain foreign regulatory authorities impose numerous other requirements
with which medical device manufacturers must comply. FDA enforcement policy
strictly prohibits the marketing of approved medical devices for unapproved
uses. Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. The FDA also requires the Company to provide it with information on
death and serious injuries alleged to have been associated with the use of the
Company's products, as well as any malfunctions that would likely cause or
contribute to death or serious injury. Failure to comply with applicable
regulatory requirements can result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal by the government to grant premarket
clearance or premarket approval for devices, withdrawals of approvals and
criminal prosecutions.
The Company is required to register with the FDA as a device manufacturer
and list its products with the Agency. The Company also is subject to biannual
inspections, for compliance with GMP, by the FDA and state agencies acting under
contract with the FDA. The GMP regulations require that the Company manufacture
its products and maintain its documents in a prescribed manner with respect to
manufacturing, testing, quality assurance and quality control activities. The
FDA also has promulgated final regulatory changes to the GMP regulations that
require, among other things, design controls and maintenance of service records,
and which will increase the cost of complying with GMP requirements.
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<PAGE> 44
Labeling and promotional activities are subject to scrutiny by the FDA and
in certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved users. The Company
and its products are also subject to a variety of state and local laws and
regulations in those states and localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers are
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's ability to do business.
International sales of the Company's products are subject to the regulatory
requirements of each target country. The regulatory review process varies from
country to country. The ISO 9000 series of standards for quality operations have
been developed to ensure that companies know the standards of quality to which
they must adhere to receive certification. The European Union has promulgated
rules which require that medical products receive by mid-1998 the right to affix
the CE mark, an international symbol of adherence to quality assurance standards
and compliance with applicable European medical device directives. The ISO 9001
certification will be one of the CE mark certification requirements required by
mid-1998. Failure to receive the right to affix the CE mark will prohibit the
Company from selling its products in member countries of the European Union.
The Company will rely upon its corporate partners to obtain certain United
States and foreign regulatory approvals and if such approvals are obtained the
Company will rely upon its corporate partners to remain in compliance with
ongoing United States and foreign regulatory restrictions. The inability or
failure of such third parties to comply with the varying regulations or the
imposition of new regulations would materially adversely effect the Company's
business, financial condition and results of operations.
THIRD-PARTY REIMBURSEMENT
In the United States, patients, hospitals and physicians who purchase
medical devices such as the Company's products, generally rely on third-party
payors, principally federal Medicare, state Medicaid and private health
insurance plans, to reimburse them for all or a portion of the cost of the
medical device. Reimbursement for devices that have received FDA approval has
generally been available in the United States. In addition, certain health care
providers are gradually adopting a managed care system in which such providers
contract to provide comprehensive health care services for a fixed cost per
person. The Company is unable to predict what changes will be made in the
reimbursement methods utilized by third-party health care payors. Although the
Company anticipates that patients, hospitals and physicians will justify the use
of the Company's products by the attendant cost savings and clinical benefits
that the Company believes will be derived from the use of its products, there
can be no assurance that this will be the case. Furthermore, the Company could
be adversely affected by changes in reimbursement policies of governmental or
private health care payors. Any inability of patients, hospitals, physicians and
other users of the Company's products to obtain sufficient reimbursement from
health care payors for the Company's products or adverse changes in relevant
governmental policies or the policies of private third-party payors regarding
reimbursement for such products could have a material adverse effect on the
Company's business, financial condition and results of operations.
If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products in international markets will be dependent,
in part, upon the availability of reimbursement within prevailing health care
payment systems. Reimbursement and health care payment systems in international
markets vary significantly by country and include both government sponsored
health care and private insurance. Although the Company intends to seek
international reimbursement approvals, there can be no assurance that such
approvals will be obtained in a timely manner, if at all. Any failure to receive
international reimbursement approvals could have an adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought.
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<PAGE> 45
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products entail
significant risks of product liability claims. The Company currently has no
product liability insurance coverage beyond that provided by its general
liability insurance. Accordingly, there can be no assurance that the Company is
adequately protected from any liabilities, including any adverse judgments or
settlements, it might incur in connection with the development, clinical
testing, manufacture and sale of its products. In addition, product liability
insurance is expensive and may not be available to the Company on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company that results in an adverse judgment against or
settlement by the Company in excess of any insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
EMPLOYEES
As of March 31, 1997, the Company had 56 employees and consulting or other
contract arrangements with 24 additional persons to provide services to the
Company on a full- or part-time basis. Of the 80 people so employed or engaged
by the Company, 55 are engaged in research and development activities, six are
engaged in sales and marketing activities, three are engaged in regulatory
affairs and quality assurance, five are engaged in manufacturing and
development, and 11 are engaged in administration and accounting. No employees
are covered by collective bargaining agreements, and the Company believes it
maintains good relations with its employees. The Company's ability to operate
successfully and manage its potential future growth depends in significant part
upon the continued service of certain key scientific, technical, managerial and
finance personnel, and its ability to attract and retain additional highly
qualified scientific, technical, managerial and finance personnel. None of these
key employees has an employment contract with the Company nor are any of these
employees covered by key person or similar insurance. In addition, if the
Company, together with its collaborative partners, is able to successfully
develop and commercialize the Company's products, the Company will need to hire
additional scientific, technical, managerial and finance personnel. The Company
faces intense competition for qualified personnel in these areas, many of whom
are often subject to competing employment offers, and there can be no assurance
that the Company will be able to attract and retain such personnel. The loss of
key personnel or inability to hire and retain additional qualified personnel in
the future could have a material adverse effect on the Company's business,
financial condition and results of operations.
FACILITIES
The Company leases approximately 30,000 square feet in Norcross, Georgia,
which comprise the Company's administrative, research and development, marketing
and production facilities and the Company's planned manufacturing facility. The
Company's lease for the portion of this facility housing the finance department
and certain planned manufacturing operations extends through 1999, the portion
housing certain research and development operations expires in June 2000 and the
portion housing administration, sales and marketing, engineering and certain
other planned manufacturing operations expires in March 2001.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company, and their ages as of May 31,
1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark A. Samuels............................ 39 President, Chief Executive Officer and
Director
Keith D. Ignotz............................ 49 Executive Vice President, Chief Operating
Officer and Director
Thomas H. Muller, Jr....................... 55 Executive Vice President, Chief Financial
Officer and Secretary
Robert G. Rothfritz........................ 48 Vice President, Operations
Jonathan A. Eppstein....................... 44 Vice President, Transdermal Systems
Richard L. Fowler.......................... 41 Vice President, Engineering
Charles G. Hadley(1)(2).................... 41 Director
Jack R. Kelly, Jr.(1)(2)................... 62 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
Mark A. Samuels has served as a member of the Company's Board of Directors,
President and Chief Executive Officer since co-founding the Company in 1992.
Prior to that time, Mr. Samuels was a founder of Laser Atlanta Optics, Inc., an
optical sensor company, where he held the position of President and Chief
Executive Officer until 1992, and was a director until October 1996. While at
Laser Atlanta Optics, Mr. Samuels focused on the development of commercial and
medical applications of electro-optics. Mr. Samuels earned a B.S. in Physics and
an M.S. (Electrical Engineering) from Georgia Institute of Technology.
Keith D. Ignotz has served as a member of the Company's Board of Directors
and Chief Operating Officer since co-founding the Company in 1992. Formerly, Mr.
Ignotz was President of Humphrey Instruments SmithKline Beckman (Japan),
President of Humphrey Instruments GmbH (Germany), and Senior Vice President of
Allergan Humphrey Inc., a $100 million per year ophthalmic diagnostic company.
Mr. Ignotz is a member of the board of directors of Vismed, Inc. (Dicon), an
ophthalmic diagnostic products company, and Pennsylvania College of Optometry.
Mr. Ignotz earned a B.A. in Sociology from San Jose State University and an
M.B.A. from Pepperdine University.
Thomas H. Muller, Jr. has served as the Company's Chief Financial Officer
since joining the Company in December 1996. Prior to that time, Mr. Muller was
President of Muller & Associates, an operational and financial management
services company and Chief Financial Officer of Nurse On Call, Inc. From 1984 to
1992, Mr. Muller was Chief Financial Officer of HBO & Company, a provider of
information systems and services to the health care industry. Mr. Muller earned
a B.I.E. in Industrial Engineering from Georgia Institute of Technology and an
M.B.A. from Harvard Business School.
Robert G. Rothfritz, has served as the Company's Vice President of
Operations since joining the Company in July 1996. From 1994 to 1996, Mr.
Rothfritz was Director of Manufacturing for Atlantic Envelope Company, a
National Service Industries, Inc. division, and from 1993 to 1994, he was a
Senior Manager, Manufacturing Systems Leader for Ethicon EndoSurgery, a Johnson
& Johnson division. From 1988 to 1992, Mr. Rothfritz was Vice President,
Operations for the Oral Care Division of Bausch & Lomb, Inc. Mr. Rothfritz
earned a B.S. in Mechanical Engineering from Georgia Institute of Technology.
Jonathan A. Eppstein has served as the Company's Vice President of
Transdermal Systems since December 1996, and was Vice President of Research and
Development since co-founding the Company in 1992. Prior to that time, Mr.
Eppstein was Systems Engineering Manager and Director of Medical Programs for
Laser Atlanta Optics, Inc. Mr. Eppstein earned a B.S. in Electrical Engineering
and a M.S. in
45
<PAGE> 47
Mathematics from Western Michigan University. Mr. Eppstein, together with his
sister, controls Altea and Nimco.
Richard L. Fowler has served as the Company's Vice President of Engineering
since joining the Company in February 1996. Prior to that time, Mr. Fowler
worked for Laser Atlanta Optics, Inc., where he held the positions of President
and Chief Executive Officer from August 1994 to February 1996. As Vice President
of Engineering for Laser Atlanta Optics from 1992 to 1994, Mr. Fowler managed
the development of three laser sensor products. Mr. Fowler earned a B.S. in
Electrical Engineering from University of Texas.
Charles G. Hadley has served as a member of the Company's Board of
Directors since 1993. Since 1988, Mr. Hadley has been general partner of Cashon
Biomedical Associates, L.P., which is the managing general partner of the
Hillman Medical Ventures Partnerships. These venture capital funds focus on
early stage medical technology. Mr. Hadley earned a B.A. from George Washington
University and a J.D. and M.B.A. from Stanford University.
Jack R. Kelly, Jr. has served as a member of the Company's Board of
Directors since February, 1993. Since 1983, Mr. Kelly has been a general partner
of Noro-Moseley Partners, a venture capital fund. Prior to 1983, Mr. Kelly was
the Chief Operating Officer for Scientific Atlanta. Mr. Kelly is a director of
Syntellect, Inc. and Novoste Corporation. Mr. Kelly earned a B.S. in Physics
from Georgia State University.
All directors hold their offices until the next stockholder meeting of the
Company and until their successors are elected and qualified or until their
earlier resignation or removal. The Company's executive officers are appointed
by the Board of Directors and serve until their successors are elected or
appointed.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company makes
recommendations concerning salaries, incentives and other forms of compensation
for directors, officers and other employees of the company, subject to
ratification by the full Board of Directors. The Compensation Committee also
administers the Company's various stock plans. In 1996, the Compensation
Committee consisted of Jack R. Kelly, Jr. and Mark A. Samuels, the Company's
President and Chief Executive Officer, until December 10, 1996. While a member
of the Compensation Committee, Mr. Samuels borrowed approximately $228,000 from
the Company pursuant to two separate promissory notes. Presently, Charles G.
Hadley and Jack R. Kelly, Jr. comprise the Compensation Committee. See
"Management--Stock Plans" and "Certain Transactions."
DIRECTOR COMPENSATION
Directors currently receive no cash fees for services provided in that
capacity but are reimbursed for out-of-pocket expenses they incur in connection
with their attendance at meetings of the Board. Upon closing of the offering,
nonemployee directors ("Outside Directors") will receive payments of $3,000 per
quarter, $1,000 per meeting attended in person ($500 if attended by telephone)
and $500 per committee meeting attended, up to a maximum of $20,000 per year,
and all directors will be reimbursed for expenses actually incurred in attending
meetings of the Board of Directors and its committees. Upon closing of the
offering, Outside Directors may be granted options to purchase Common Stock
under the 1995 Stock Option Plan.
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<PAGE> 48
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company during
the fiscal year ended December 31, 1996 to the Chief Executive Officer and its
five other most highly compensated executive officers (the Chief Executive
Officer and such other executive officers are hereinafter referred to as the
"Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------ STOCK OPTION
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER(1) SHARES
--------------------------- -------- ------ -------- ------------
<S> <C> <C> <C> <C>
Mark A. Samuels..................................... $150,000 $ -- -- 114,287
President and Chief Executive Officer
Keith D. Ignotz..................................... 150,000 -- -- 89,287
Chief Operating Officer
Thomas H. Muller, Jr................................ 3,918(2) -- -- 60,715
Executive Vice President, Chief Financial Officer
and Secretary
Robert G. Rothfritz................................. 43,846(3) -- -- 21,429
Vice President, Operations
Jonathan A. Eppstein................................ 95,385 -- -- --
Vice President, Transdermal Systems
Richard L. Fowler................................... 78,872 3,046 -- 21,429
Vice President, Engineering
</TABLE>
- ---------------
(1) Other annual compensation in the form of perquisite and other personal
benefits, securities or property has been omitted in those cases where the
aggregate amount of such compensation is the lesser of either $50,000 or
10% of the total of annual salary and bonus reported for the named
Executive Officer.
(2) Includes salary from December 20, 1996 upon commencement of employment. Mr.
Muller's current annual compensation is $130,000.
(3) Includes salary from July 8, 1996 upon commencement of employment. Mr.
Rothfritz's current annual compensation is $95,000.
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<PAGE> 49
STOCK OPTION INFORMATION
The following table sets forth certain information for the fiscal year
ended December 31, 1996, with respect to each grant of stock options to the
Executive Officers:
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
----------------------------------------------- RATES OF
% OF TOTAL STOCK PRICE
OPTIONS APPRECIATION FOR
GRANTED EXERCISE OPTION TERM(2)
OPTIONS TO EMPLOYEES PRICE PER EXPIRATION ------------------
NAME GRANTED IN 1996(1) SHARE DATE 5% 10%
- ---- ------- ------------ --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Samuels..................... 114,287 34% $ .70 2006 $50,312 $127,500
Keith D. Ignotz..................... 89,287 26% .70 2006 39,306 99,610
Thomas H. Muller, Jr................ 60,715 18% 2.45 2006 93,549 237,072
Robert G. Rothfritz................. 21,429 6% .70 2006 9,434 23,907
Jonathan A. Eppstein................ -- -- -- -- -- --
Richard L. Fowler................... 21,429 6% .70 2006 9,434 23,907
</TABLE>
- ---------------
(1) In 1996, the Company granted employees and consultants options to purchase
an aggregate of 338,940 shares of Common Stock.
(2) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the gains or "option spreads" that would exist for
the respective options granted. These gains are based on the assumed rates
of annual compound stock price appreciation of 5% and 10% applied to the
grant price from the date the option was granted over the full option term.
These assumed annual compound rates of stock price appreciation are
mandated by the rules of the Commission and do not represent the Company's
estimate or projection of future Common Stock prices.
AGGREGATED OPTION EXERCISES IN 1996 AND DECEMBER 31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 IN-THE-MONEY OPTIONS (1) THE IPO PRICE (2)
--------------------------- --------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Samuels........... 31,027 136,832 $157,133 $674,841 $ 327,781 $1,427,417
Keith D. Ignotz........... 27,901 114,958 142,128 569,846 295,583 1,202,115
Thomas H. Muller, Jr...... -- 60,715 -- 185,181 -- 519,113
Robert G. Rothfritz....... 2,232 19,197 10,714 92,146 22,990 197,729
Jonathan A. Eppstein...... 109,657 62,488 580,086 330,562 1,183,119 674,246
Richard L. Fowler......... 4,018 17,411 19,286 83,573 41,385 179,333
</TABLE>
- ---------------
(1) Based upon an assumed fair market value of $5.50 per share as of December
31, 1996 less the exercise price per share.
(2) Based upon an assumed initial public offering price of $11.00 less the
exercise price per share.
STOCK PLANS
1995 Stock Plan. A total of 1,428,572 shares of Common Stock have been
reserved for issuance under the Company's 1995 Stock Plan (the "Stock Plan").
Under the Stock Plan, as of March 31, 1997, options to purchase an aggregate
663,362 shares were outstanding, 403 shares of Common Stock had been purchased
pursuant to exercises of stock options and stock purchase rights and 764,807
shares were available for future grant.
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<PAGE> 50
The Stock Plan provides for the grant of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonqualified stock options and stock purchase rights to employees and
consultants of the Company. Incentive stock options may be granted only to
employees. The Stock Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors, which determines the terms of
options granted, including the exercise price and the number of shares subject
to each option. The Board of Directors also determines the schedule upon which
options become exercisable. The exercise price for employees generally of
incentive stock options granted under the Stock Plan must be at least equal to
the fair market value of the Company's Common Stock on the date of grant.
However, for any employee holding more than 10% of the voting power of all
classes of the Company's stock, the exercise price will be no less than 110% of
the fair market value. The exercise price of nonqualified stock options is set
by the administrator of the Stock Plan. The maximum term of options granted
under the Stock Plan is ten years. In the event of a merger, reorganization or
change in the ownership of the Company, all options outstanding under the Plan
shall be fully vested.
In the event a consultant or an employee is terminated, such employee or
consultant will have at least 30 days after such termination to exercise any
vested non-qualified option and any vested incentive stock option. After the
applicable exercise period, all unexercised options will be canceled. All
unvested options will be canceled as of the date of the employee's termination.
In the event of a merger, sale of substantially all of the Company's assets or
change in the ownership of the Company, all options outstanding under the Stock
Plan shall be fully vested. Each such vested option will remain exercisable in
accordance with the terms under which such option was granted.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Company's Board of Directors and
approved by the Company's stockholders in January 1997. The Purchase Plan is
intended to qualify under Section 423 of the Code. The Company has reserved
214,286 shares of Common Stock for issuance under the Purchase Plan. Under the
Purchase Plan, an eligible employee will be granted an option to purchase shares
of Common Stock from the Company through payroll deductions of up to 10% of his
or her compensation, at a price per share equal to 85% of the lower of (i) the
fair market value of the Company's Common Stock on the first day of an offering
period under the Purchase Plan or (ii) the fair market value of the Company's
Common Stock on the last day of an offering period. Except for the first
offering period, each offering period will last for six months and will commence
the first day on which the national stock exchanges and the Nasdaq National
Market System are open for trading on or after May 1 and November 1 of each
year. The first offering period will begin upon the effective date of this
offering and will end on October 31, 1997. On the last day of each offering
period, the option to purchase the shares will be exercised automatically, and
the maximum number of full shares subject to the option will be purchased for
the employee with the accumulated payroll deductions in his or her account. Any
employee who is customarily employed for at least 20 hours per week and more
than five months per calendar year and who has been so employed for at least
three consecutive months on or before the commencement date of an offering
period is eligible to participate in the Purchase Plan. An employee may elect to
withdraw from the Purchase Plan by withdrawing all, but not less than all,
payroll deductions from his account prior to the exercise date, and a
termination of employment will be treated as a withdrawal from the Purchase
Plan.
In the event of merger of the Company with or into another corporation, all
outstanding options will either be assumed or an equivalent option will be
substituted by the successor corporation, unless the Board in its discretion
accelerates the exercise date of such options or cancels the options and refunds
all payroll deductions collected from the employees. If the Board accelerates
the exercise date, it must give the employees ten days' notice of the new
exercise date.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for (i) breach of their duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or
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<PAGE> 51
unlawful stock repurchases or redemptions, or (iv) any transaction from which
the director derived an improper personal benefit. Such limitation of liability
does not apply to liabilities arising under the federal or state securities laws
and does not affect the availability of equitable remedies such as injunctive
relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its
directors, officers, employees and other agents to the fullest extent permitted
by law. The Company believes that indemnification under its Bylaws covers at
least negligence and gross negligence on the part of indemnified parties. The
Company's Bylaws also permit it to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the Bylaws permit such
indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the Company's
directors and executive officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of the Company
arising out of such person's services as a director, officer, employee, agent or
fiduciary of the Company, any subsidiary of the Company or any other company or
enterprise to which the person provides services at the request of the Company.
The Company believes that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted, and the Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
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<PAGE> 52
CERTAIN TRANSACTIONS
On October 31, 1996, the Company loaned Mark A. Samuels, President, Chief
Executive Officer and a director of the Company, $200,000. The loan, which is
evidenced by a promissory note secured by Common Stock of the Company and other
securities, bears interest at the rate of 6.72% per year and becomes due and
payable on the earlier of October 31, 2001 or 120 days after the date when he
ceases to be an employee of the Company. The outstanding balance, including
interest, as of April 30, 1997 was approximately $207,000. Mark A. Samuels'
largest aggregate amount of indebtedness outstanding to the Company since
January 1, 1996 was approximately $239,000.
On October 31, 1996, the Company loaned Keith D. Ignotz, Chief Operating
Officer and a director of the Company, $200,000. The loan, which is evidenced by
a promissory note secured by Series B Preferred Stock of the Company and other
securities, bears interest at the rate of 6.72% per year and becomes due and
payable on the earlier of October 31, 2001 or 120 days after the date when he
ceases to be an employee of the Company. The outstanding balance, including
interest, as of April 30, 1997 was approximately $207,000. Keith D. Ignotz's
largest aggregate amount of indebtedness outstanding to the Company since
January 1, 1996 was approximately $231,000.
On June 30, 1994, the Company loaned Mark A. Samuels, President, Chief
Executive Officer and a director of the Company, approximately $28,000 in
connection with his purchase of Common Stock of the Company. The loan is
evidenced by a promissory note secured by the underlying stock, bears interest
at the rate of 6% per year and becomes due and payable on June 30, 1999. The
outstanding balance, including interest, as of April 30, 1997 was approximately
$32,000.
On June 30, 1994, the Company loaned Keith D. Ignotz, Chief Operating
Officer and a director of the Company, approximately $21,000 in connection with
his purchase of Common Stock of the Company. The loan, which is evidenced by a
promissory note secured by the underlying stock, bears interest at the rate of
6% per year and becomes due and payable on June 30, 1999. The outstanding
balance, including interest, as of April 30, 1997 was approximately $24,000.
On September 16, 1996, the Company loaned Laser Atlanta Optics, Inc.
("LAO") $30,000. Mark A. Samuels was treasurer and a director of LAO until
October 1996, and owns more than 10% of LAO's equity securities. Richard L.
Fowler, Vice President, Engineering of the Company, was secretary and a director
of LAO until November 1996. Keith D. Ignotz was a director of LAO until October
1996, and owns more than 10% of LAO equity securities. The loan bore interest at
a rate of 6% per year and was repaid in full as of December 31, 1996.
On March 1, 1996, the Company issued 28,572 shares of Common Stock to LAO
pursuant to the Assignment and Bill of Sale, dated February 29, 1996, between
the Company and LAO (the "Assignment"). Under the terms of the Assignment, LAO
relinquished any and all claims it may have had to the right, title and interest
in and to any technology, patents, products, uses, and applications related to
transdermal monitoring and delivery in exchange for payment of $10.00 by the
Company and the 28,572 shares of the Company's Common Stock.
On December 5, 1996, the Company purchased 129,000 shares of FluorRx, Inc.
Series A Preferred Stock, thereby acquiring a 64.8% interest in FluorRx, Inc.
Mark A. Samuels is a director of FluorRx, Inc., and Keith D. Ignotz is Vice
President, Secretary and a director of FluorRx, Inc. In addition, the Company
has a third seat on the Board of Directors, which is currently vacant. In
connection with the purchase of this stock, the Company has agreed to loan
FluorRx, Inc. up to $100,000. This loan, which has not been made, would be
evidenced by a convertible promissory note, would bear interest at the rate of
8% per year and would become due and payable on December 5, 1997.
On March 1, 1996, the Company entered into a License and Joint Development
Agreement (the "Altea/Nimco Agreement") with Altea Technologies, Inc. ("Altea")
and Non-Invasive Monitoring Company, Inc. ("Nimco"). Jonathan Eppstein, Vice
President, Transdermal Systems of the Company, and Deborah Eppstein, Jonathan
Eppstein's sister, are principals of Altea and Nimco. On March 8, 1996, the
Company issued 71,429 shares of Common Stock to Altea pursuant to section 3.1 of
the Altea/Nimco
51
<PAGE> 53
Agreement. Also pursuant to the Altea/Nimco Agreement, in June 1995, March 1996,
September 1996 and November 1996, the Company paid, $5,000 to Nimco, and $1,100,
$19,000 and $150,000 to Altea, respectively. See "Business -- Licensing
Arrangements."
On October 10, 1996, the Company entered into a Research & Development and
License Agreement (the "Abbott Agreement") with Abbott. In connection with the
Abbott Agreement, on October 21, 1996, Abbot purchased $3,000,000 of equity in
the Company in the form of Series C Preferred Stock, and thereby became a holder
of 6.4% of the Company's outstanding equity prior to this offering. See
"Business -- Collaborative Arrangements."
On November 6, 1995 and April 15, 1996, the Company sold Convertible
Subordinated Promissory Notes ("Notes"), which automatically converted into
278,548 aggregate shares of Series B Preferred Stock on an as converted basis,
and Stock Purchase Warrants ("Warrants") to purchase 317,614 aggregate shares of
Common Stock. On August 30, 1996, the Company sold shares of Series B Preferred
Stock which automatically convert to 908,621 shares of Common Stock upon the
closing of this offering at an as-converted price of $5.60 per share. On October
21, 1996, the Company sold shares of Series C Preferred Stock which
automatically convert to 357,143 shares of Common Stock upon the closing of this
offering at an as-converted price of $8.40 per share. The purchasers of the
Notes, Warrants, Series B Preferred Stock, and Series C Preferred Stock included
the following directors, entities affiliated with directors and 5% stockholders.
<TABLE>
<CAPTION>
NUMBER OF SHARES SHARES
SHARES OF OF
WARRANT PURCHASED SERIES B SERIES C
NOTE PURCHASE UNDER PREFERRED PREFERRED
NAME AMOUNT PRICE WARRANT STOCK STOCK
---- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND ENTITIES AFFILIATED WITH
DIRECTORS:
Entity Affiliated with Charles G. Hadley(1)
(Hillman Medical Ventures Partnerships(2))... $348,040 $6,960 74,581 450,381 --
Entity Affiliated with Jack Kelly(1)
(Noro-Moseley Partners, L.P.(3))............. 348,040 6,960 74,581 137,882 --
Keith D. Ignotz(4)............................. 59,804 1,196 12,815 20,009 --
OTHER 5% STOCKHOLDERS:
Abbott Laboratories(5)......................... -- -- -- -- 357,143
</TABLE>
- ---------------
(1) Charles G. Hadley and Jack Kelly each sit on the Board of Directors of the
Company pursuant to the Series A Preferred Stock Purchase Agreement which
provides that as of February 5, 1993, "the Company's Board of Directors
will consist of Mark A. Samuels and Keith D. Ignotz, two persons chosen by
the Purchasers and a fifth person to be chosen by the holders of Common
Stock."
(2) Hillman Medical Ventures 1995 L.P. held a $250,000 Note that converted into
Series B Preferred Stock, holds a Warrant for 53,572 shares of Common Stock
purchased for $5,000 and holds 48,288 shares of Series B Preferred Stock on
an as converted basis; Hillman Medical Ventures 1996 L.P. held a $98,040
Note that converted into Series B Preferred Stock, holds a Warrant for
21,009 shares of Common Stock purchased for $1,960 and holds 402,093 shares
of Series B Preferred Stock on an as converted basis. The Hillman Medical
Ventures partnerships hold 27.2% of the Company's outstanding equity prior
to this offering. The general partners of the Hillman Medical Ventures
partnerships are Cashon Biomedical Associates L.P. and Hillman/Dover
Limited Partnership. The general partner of Hillman/Dover Limited
Partnership is a wholly-owned subsidiary of The Hillman Company, a firm
engaged in diversified investments and operations. The Hillman Company is
controlled by Henry L. Hillman, Elsie Hilliard Hillman and C.G.
Grefenstette, Trustees of the Henry L. Hillman Trust, which Trustees may be
deemed the beneficial owners of the 1,515,201 shares owned by the Hillman
Medical Ventures partnerships.
(3) Noro-Moseley Partners, L.P. holds 18.9% of the Company's outstanding equity
prior to this offering.
(4) Keith Ignotz sits on the Board of Directors of the Company, is the Executive
Vice President and Chief Operating Officer, and holds 7.7% of the Company's
outstanding equity prior to this offering.
(5) Abbott holds 6.4% of the Company's outstanding equity prior to this
offering.
52
<PAGE> 54
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of April 30, 1997, and as adjusted to
reflect the sale by the Company and the Selling Stockholders of the shares of
Common Stock offered hereby, certain information with respect to the beneficial
ownership of the Common Stock as to (i) each person known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (ii) each
director of the Company, (iii) each of the Executive Officers named in the
Summary Compensation Table, (iv) all directors and executive officers of the
Company as a group and (v) the Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
BENEFICIAL OWNER> OFFERING(1) OFFERING(2)
- --------------------------------------- ----------------------- -----------------------
PERCENT OF NUMBER OF PERCENT OF
SHARES SHARES BEING SHARES
5% STOCKHOLDERS, DIRECTORS AND OFFICERS NUMBER OUTSTANDING OFFERED NUMBER OUTSTANDING
- --------------------------------------- --------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Hillman Medical Ventures
Partnerships(3)...................... 1,515,201 27.2% -- 1,515,201 20.0%
824 Market Street
Suite 900
Wilmington, DE 19801
Noro-Moseley Partners(4)............... 1,050,631 18.9% -- 1,050,631 13.9%
4200 Northside Parkway
Building 9
Atlanta, GA 30327
Mark A. Samuels(5)..................... 472,395 8.4% -- 472,395 6.2%
c/o SpectRx, Inc.
6025A Unity Drive
Norcross, GA 30071
Keith D. Ignotz(6)..................... 431,389 7.7% -- 431,389 5.7%
c/o SpectRx, Inc.
6025A Unity Drive
Norcross, GA 30071
Abbott Laboratories.................... 357,143 6.4% -- 357,143 4.7%
100 Abbott Park Road
Abbott Park, IL 60064
Jonathan A. Eppstein(7)................ 210,925 3.7% -- 210,925 2.7%
Richard L. Fowler(8)................... 31,172 * -- 31,172 *
Thomas H. Muller, Jr.(9)............... 7,589 * -- 7,589 *
Robert G. Rothfritz(10)................ 4,911 * -- 4,911 *
Charles G. Hadley(11).................. 1,515,201 27.2% -- 1,515,201 20.0%
Jack R. Kelly, Jr.(12)................. 1,050,631 18.9% -- 1,050,631 13.9%
All directors and executive officers as
a group (8 persons)(13).............. 3,724,213 64.1% -- 3,724,213 47.7%
SELLING STOCKHOLDERS
Daniel Hankey.......................... 17,137 * 17,137 -- --
Scott W. Patterson..................... 167,425 3.0% 167,425 -- --
Glenn Robinson......................... 17,137 * 17,137 -- --
</TABLE>
- ---------------
(*) Less than 1%
(1) Applicable percentage ownership based on 5,567,590 shares of Common Stock
as of April 30, 1997, together with applicable options for such
stockholder. Beneficial ownership is determined in accordance with the
rules of the Commission, based on factors including voting and investment
power with respect to shares. Shares of Common Stock subject to the options
currently exercisable, or exercisable within
53
<PAGE> 55
60 days after April 30, 1997, and any warrants to purchase shares of Common
Stock are deemed outstanding for computing the percentage ownership of any
other person.
(2) After giving effect to the issuance of 2,000,000 shares of Common Stock
offered by the Company hereby.
(3) Consists of 402,093 shares owned by Hillman Medical Ventures 1996 L.P.,
48,288 shares owned by Hillman Medical Ventures 1995 L.P., 214,728 shares
owned by Hillman Medical Ventures 1994 L.P., 714,286 shares owned by
Hillman Medical Ventures 1993 L.P., a warrant exercisable for 21,009 shares
owned by Hillman Medical Ventures 1996 L.P., a warrant exercisable for
53,572 shares owned by Hillman Medical Ventures 1995 L.P., and a warrant
exercisable for 61,225 shares owned by Hillman Medical Ventures 1994 L.P.
The general partners of the Hillman Medical Ventures partnerships are
Cashon Biomedical Associates L.P. and Hillman/Dover Limited Partnership.
The general partner of Hillman/Dover Limited Partnership is a wholly-owned
subsidiary of The Hillman Company, a firm engaged in diversified
investments and operations. The Hillman Company is controlled by Henry L.
Hillman, Elsie Hilliard Hillman and C.G. Grefenstette, Trustees of the
Henry L. Hillman Trust, which Trustees may be deemed the beneficial owners
of the 1,515,201 shares owned by the Hillman Medical Ventures partnerships.
(4) Consists of 908,702 shares held by Noro-Moseley Partners and 141,929 shares
issuable pursuant to four warrants to purchase shares of Common Stock. Mr.
Kelly disclaims beneficial ownership of the shares held by Noro-Moseley
Partners.
(5) Consists of 420,386 shares held by Mr. Samuels and 52,009 shares subject to
stock options that are exercisable within 60 days of April 30, 1997.
(6) Consists of 362,099 shares held by Mr. Ignotz, 45,760 shares subject to
stock options that are exercisable within 60 days of April 30, 1997 and
23,530 shares issuable pursuant to two warrants to purchase shares of
Common Stock.
(7) Consists of 11,296 shares held by Mr. Eppstein, 71,429 shares held by Altea
of which Mr. Eppstein has beneficial ownership and 128,200 shares subject
to stock options that are exercisable within 60 days of April 30, 1997.
(8) Consists of 24,476 shares held by Mr. Fowler and 6,696 shares subject to
stock options that are exercisable within 60 days of April 30, 1997.
(9) Consists of 7,589 shares subject to options held by Mr. Muller that are
exercisable within 60 days of April 30, 1997.
(10) Consists of 4,911 shares subject to stock options held by Mr. Rothfritz
that are exercisable within 60 days of April 30, 1997.
(11) Consists of 402,093 shares owned by Hillman Medical Ventures 1996 L.P.,
48,288 shares owned by Hillman Medical Ventures 1995 L.P., 214,728 shares
owned by Hillman Medical Ventures 1994 L.P., 714,286 shares owned by
Hillman Medical Ventures 1993, a warrant exercisable for 21,009 shares
owned by Hillman Medical Venture 1996 L.P., a warrant exercisable for
53,572 shares owned by Hillman Medical Venture 1995 L.P., and a warrant
exercisable for 61,225 shares owned by Hillman Medical Venture 1993 L.P.
The general partners of the Hillman Medical Ventures partnerships are
Cashon Biomedical Associates L.P. and Hillman/Dover Limited Partnership.
The general partner of Hillman/Dover Limited Partnership is a wholly-owned
subsidiary of The Hillman Company, a firm engaged in diversified
investments and operations. The Hillman Company is controlled by Henry L.
Hillman, Elsie Hilliard Hillman and C.G. Grefenstette, Trustees of the
Henry L. Hillman Trust, which Trustees may be deemed the beneficial owners
of the 1,515,201 shares owned by the Hillman Medical Ventures partnerships.
(12) Consists of 908,702 shares held by Noro-Moseley Partners and 141,929 shares
issuable pursuant to four warrants to purchase shares of Common Stock. Mr.
Kelly disclaims beneficial ownership of the shares held by Noro-Moseley
Partners.
(13) Includes an aggregate 245,165 shares issuable pursuant to options and
warrants exercisable within 60 days of April 30, 1997.
54
<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
Upon completion of the offering, the total number of shares of all classes
of stock which the Company has authority to issue will be 50,000,000 shares of
Common Stock, $0.001 par value, and 5,000,000 shares of undesignated preferred
stock, $0.001 par value. As of April 30, 1997, there were 5,567,590 shares of
Common Stock outstanding which were held of record by 56 stockholders, and no
shares of undesignated Preferred Stock outstanding. Upon completion of this
offering and assuming no exercise of options after April 30, 1997, the Company
will have outstanding 7,567,590 shares of Common Stock, 7,897,845 shares if the
Underwriter's over-allotment option is exercised.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors of the Company out of funds legally available
therefor and in liquidation proceedings. Holders of Common Stock have no
preemptive or subscription rights and there are no redemption rights with
respect to such shares. The outstanding shares of Common Stock are, and the
shares of Common Stock offered hereby will be, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized, without further stockholder
action, to issue preferred stock in one or more series and to fix the voting
rights, liquidation preferences, dividend rights, repurchase rights, conversion
rights, redemption rights and terms, including sinking fund provisions, and
certain other rights and preferences, of the preferred stock.
Although there is no current intention to do so, the Board of Directors of
the Company may, without stockholder approval, issue shares of a class or series
of preferred stock with voting and conversion rights which could adversely
affect the voting power or dividend rights of the holders of Common Stock and
may have the effect of delaying, deferring or preventing a change in control of
the Company.
NOTES, WARRANTS AND OPTIONS
The Company has issued a Convertible Promissory Note ("Note") convertible
into shares of its Common Stock on or at any time following the closing of this
offering and on or before June 19, 1998. The number of shares issuable under the
Note is equal to the outstanding principal and accrued interest divided by
one-half of the per share purchase price paid by the public in this offering. As
of April 30, 1997, and assuming an initial public offering price of $11.00 per
share, the Note could convert to 48,592 shares of Common Stock.
The Company has issued warrants to purchase its Common Stock from time to
time in connection with certain financing arrangements. Warrants to purchase a
total of 561,698 shares of Common Stock have been issued by the Company at a
weighted average exercise price of $1.25 per share in connection with certain
transactions. All warrants except one for 8,572 shares of Common Stock are
currently exercisable and expire upon the closing of this offering. All
outstanding warrant agreements provide for antidilution adjustments in the event
of certain mergers, consolidations, reorganizations, recapitalizations, stock
dividends, stock splits or other changes in the corporate structure of the
Company. Holders of these warrants will be entitled to certain rights to cause
the Company to register the sale of such shares under the Securities Act. See
"Shares Eligible for Future Sale."
As of April 30, 1997, the Company had issued options to purchase a total of
663,362 shares of Common Stock pursuant to the Company's 1995 Stock Plan (the
"Stock Plan") at a weighted average exercise price of $0.64 per share.
Recommendations for option grants under the Stock Plan are made by the
Compensation Committee, subject to ratification by the full Board of Directors.
The Compensation Committee may issue options with varying vesting schedules, but
all options granted pursuant to the Stock Plan must be exercised within ten
years from the date of grant.
55
<PAGE> 57
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 4,035,888 shares of Common Stock (the "Registrable
Securities") or their transferees are entitled to certain registration rights
with respect to the registration of such shares under the Securities Act of
1933, as amended (the "Securities Act"). These rights are provided under the
terms of the Amended and Restated Registration Rights Agreement between the
Company and the holders of the Registrable Securities. The holders of at least
80% of the Registrable Securities (or any lesser number of shares of Registrable
Securities having an expected aggregate offering price greater than $7.5
million) may require, respectively, subject to certain limitations in the Stock
Purchase Agreements, on one or two occasions, after the later of September 1,
1998 or six months after the effective date of this Prospectus, that the Company
use its best efforts to register the Registrable Securities for public resale.
In addition, if, following this offering, the Company registers any of its
Common Stock either for its own account or for the account of other security
holders, the holders of Registrable Securities are entitled to include their
shares of Common Stock in the registration. These shares will not form a part of
the shares of the Common Stock registered in this offering. A holder's right to
include shares in an underwritten registration statement is subject to the
ability of the underwriters to limit the number of shares included in the
offering. The holder or holders of Registrable Securities may also require the
Company to register all or a portion of their Registrable Securities on Form S-3
when use of such form becomes available to the Company, provided, among other
limitations, that the proposed aggregate selling price, net of underwriting
discounts and commissions, is at least $500,000. All registration expenses must
be borne by the Company and all selling expenses relating to Registrable
Securities must be borne by the holders of the securities being requested. If
such holders, by exercising their demand registration rights, cause a large
number of securities to be registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were to initiate a registration and include Registrable
Securities pursuant to the exercise of piggyback registration rights, the sale
of such Registrable Securities may have an adverse effect on the Company's
ability to raise capital.
CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUTE
Certain provisions of the Restated Certificate of Incorporation and the
Company's Bylaws may have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock without
any vote or further action by the stockholders and eliminate the right of
stockholders to act by written consent without a meeting. These provisions may
make it more difficult for stockholders to take certain corporate actions and
could have the effect of delaying or preventing a change in control of the
Company. In addition, the Company is subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless: (1) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, or (2) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding of those shares owned (i) by
persons who are directors and also officers and (ii) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer, or (iii) on or subsequent to such time the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Common Stock will be
Suntrust Bank in Atlanta, Georgia, and its telephone number is (404) 724-3762.
56
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and assuming no exercise of options after
April 30, 1997, the Company will have outstanding 7,567,590 shares of Common
Stock (7,897,845 shares if the Underwriter's over-allotment option is
exercised). Of these shares, the 2,201,699 shares (2,531,954 shares if the
Underwriters' over-allotment option is exercised in full) sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 of the Securities Act ("Rule 144"). The remaining 5,365,891
shares outstanding upon completion of this offering will be "restricted
securities" as that term is defined under Rule 144 (the "Restricted Shares").
The Company (subject to certain exceptions described below and in
"Underwriting") and each of the officers, directors and certain other
stockholders of the Company that beneficially own or have dispositive power over
substantially all of the Restricted Shares have agreed with the Underwriters not
to issue (in the case of the Company), sell or otherwise dispose of any shares
of Common Stock for a period of 180 days after the date of this Prospectus (the
"Lock-up Period") without the written consent of Hambrecht & Quist LLC.
Hambrecht & Quist LLC, in its sole discretion at any time and without notice,
may release any or all shares from the lock-up agreements and permit holders of
the shares to resell all or any portion of their shares at any time prior to the
expiration of the Lock-up Period. See "Underwriting." The number of shares of
Common stock available for sale in the public market is further limited by
restrictions under the Securities Act.
Because of the restrictions noted above, on the date of this Prospectus, no
shares other than the 2,201,699 shares (2,531,954 shares if the Underwriter's
over-allotment option is exercised) offered hereby will be eligible for sale.
Beginning 180 days after the date of this Prospectus (or earlier with the prior
written consent of Hambrecht & Quist LLC), 1,290,880 shares, including 363,602
shares issuable upon exercise of currently outstanding vested options, will be
eligible for sale in the public market without restriction. In addition,
3,786,126 shares will be eligible for sale subject to certain volume
limitations. The remaining 652,487 shares held by existing stockholders will
become eligible for sales from time to time upon the expiration of the minimum
holding period prescribed by Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least one year from the later of the date such
Restricted Shares are acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
in the Nasdaq National Market System during the four calendar weeks preceding
the filing of Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner and notice of sales and the
availability of public information concerning the Company. All shares, including
Restricted Shares, held by affiliates of the Company eligible for sale in the
public market under Rule 144 are subject to the foregoing volume limitations and
other restrictions. In addition, an individual that is not deemed to have been
an affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned for at least two years the shares proposed to be
sold, would be entitled to sell such shares under paragraph(k) thereof without
regard to the requirements described above.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirements,
contained in Rule 144. Prior to the expiration of the Lock-up Period, the
Company intends to register on a registration statement on Form S-8, (i) a total
of 214,286 shares of Common Stock reserved for issuance under the Purchase Plan
and (ii) assuming no exercise of options after April 30, 1997, 663,362 shares of
Common Stock subject to outstanding options under the Stock Plan and 764,807
shares reserved for future issuance pursuant to such plan. Such registration
will permit the resale of shares so registered by non-affiliates in the public
market without restriction under the Securities Act.
Prior to this offering, there has been no public market for the Common
Stock of the Company, and any sale of substantial amounts of Common Stock in the
open market may adversely affect the market price of the Common Stock offered
hereby. See "Risk Factors -- Potential Adverse Effect of Shares Eligible for
Future Sale."
57
<PAGE> 59
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC
and Volpe Brown Whelan & Company, LLC, have severally agreed to purchase from
the Company and the Selling Stockholders the following respective number of
shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------ ---------
<S> <C>
Hambrecht & Quist LLC.............................................
Volpe Brown Whelan & Company, LLC.................................
---------
Total...................................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, the Selling
Stockholders, their respective counsel and the Company's independent auditors.
The nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters. The
Representatives have informed the Company and the Selling Stockholders that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 330,255
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company, executive officers, directors and certain other stockholders
of the Company who will beneficially own in the aggregate 5,358,795 shares of
Common Stock after the offering, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock or securities exchangeable for or convertible into shares of Common
Stock owned by them during the 180-day period following the date
58
<PAGE> 60
of this Prospectus. The Company has agreed that it will not, without prior
written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
during the 180-day period following the date of this Prospectus, except that the
Company may issue shares upon the exercise of options granted prior to the date
hereof, and may grant additional options under its stock option plans, provided
that, without the prior written consent of Hambrecht & Quist LLC, such
additional options shall not be exercisable during such period.
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company, the Selling Stockholders and the
Representatives. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, revenues
and earnings of the Company, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
In connection with this offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created by the Underwriters in connection with this offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Common Stock and
syndicate short positions created by the Underwriters involve the sale by the
Underwriters of a greater number of shares of Common Stock than they are
required to purchase from the Company in this offering. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock sold in this
offering for their account may be reclaimed by the syndicate if such shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C. Certain legal matters relating
to patents in connection with this offering will be passed on by Fleshner & Kim;
Kilpatrick Stockton LLP; and Thorpe, North & Western. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by White &
Case.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
The statements in this Prospectus (only to the extent such statements
describe the legal status of patents handled, or in the case of Kilpatrick
Stockton LLP prosecuted, by the following counsel) under the caption "Risk
Factors -- Dependence on Licensed Patent Applications and Proprietary
Technology" and "Business -- Patents" have been reviewed and approved by
Fleshner & Kim; Kilpatrick Stockton LLP; and Thorpe, North & Western.
The statements in this Prospectus under the caption "Risk Factors -- No
Assurance of Regulatory Approvals" and "Business -- Government Regulation" have
been reviewed and approved by Medical Device Consultants, Inc.
59
<PAGE> 61
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement, of
which this Prospectus constitutes a part, under the Securities Act with respect
to the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information with
respect to the Company and the Common Stock offered hereby. Statements contained
herein concerning the provisions of any documents are not necessarily an
exhaustive description of such documents, and reference is made to the copy of
each such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference. The Registration
Statement, including exhibits filed therewith, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be
obtained from the Public Reference Section of the Commission, Room 1034,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public
reference facilities in New York, New York and Chicago, Illinois, at prescribed
rates. In addition, the Commission maintains a World Wide Web site that contains
reports, proxy and information statements that are filed electronically with the
Commission. The address of the site is http://www.sec.gov.
60
<PAGE> 62
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996, and March 31, 1997 (unaudited)...................... F-3
Consolidated Statements of Operations for the Years ended
December 31, 1994, 1995, 1996, and the Period From
Inception (October 27, 1992) to December 31, 1996, and the
Three Months Ended March 31, 1996 and 1997 (unaudited).... F-4
Consolidated Statements of Stockholders' (Deficit) Equity
for the Period from Inception (October 27, 1992) to
December 31, 1996 and the Three Months Ended March 31,
1997 (unaudited).......................................... F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1994, 1995, 1996 and the Period From
Inception (October 27, 1992) to December 31, 1996, and the
Three Months Ended March 31, 1996 and 1997 (unaudited).... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SpectRx, Inc.:
We have audited the accompanying consolidated balance sheets of SPECTRX,
INC. (a Delaware corporation in the development stage) as of December 31, 1995
and 1996 and the related consolidated statements of operations, stockholders'
(deficit) equity, and cash flows for each of the three years in the period ended
December 31, 1996 and for the period from inception (October 27, 1992) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SpectRx, Inc. as of December
31, 1995 and 1996 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 and for the period from
inception (October 27, 1992) to December 31, 1996 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
February 24, 1997
F-2
<PAGE> 64
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
----------------- MARCH 31, DECEMBER 31,
1995 1996 1997 1996
------- ------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 107 $ 4,721 $ 3,108
Accounts receivable.................................. 216 1 2
Other current assets................................. 20 90 108
------- ------- -------
Total current assets....................... 343 4,812 3,218
------- ------- -------
Property and equipment, net of accumulated
depreciation of $148 and $274 in 1995 and 1996,
respectively....................................... 300 596 695
------- ------- -------
OTHER ASSETS, net:
Other Assets......................................... 108 126 562
Due from related parties............................. -- 412 419
------- ------- -------
Total other assets......................... 108 538 981
------- ------- -------
$ 751 $ 5,946 $ 4,894
======= ======= =======
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 166 $ 557 $ 399
Accrued liabilities.................................. 146 385 721
Convertible subordinated promissory notes............ 475 -- --
------- ------- -------
Total current liabilities.................. 787 942 1,120
------- ------- -------
CONVERTIBLE SUBORDINATED PROMISSORY NOTES............ -- 250 250
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' (DEFICIT) EQUITY:
Series A convertible preferred stock, $0.001 par
value; 3,560,000 shares authorized, 3,103,784
shares issued and outstanding in 1995 and 1996..... 3 3 3 --
Series B convertible preferred stock, $0.001 par
value; 1,375,000 shares authorized, 0 and 1,272,051
shares issued and outstanding in 1995 and 1996,
respectively....................................... -- 1 1 --
Series C convertible preferred stock, $0.001 par
value; 500,000 shares authorized, 0 and 500,000
shares issued and outstanding in 1995 and 1996,
respectively....................................... -- 1 1 --
Common stock, $0.001 par value; 15,000,000 shares
authorized, 1,409,643 and 1,531,702 shares issued
and outstanding in 1995 and 1996, respectively..... 1 2 2 6
Additional paid-in capital........................... 3,138 11,330 11,330 12,196
Deferred Compensation................................ -- (286) (267) (267)
Notes receivable from officers....................... (48) (48) (48) (48)
Warrants............................................. 114 173 173 --
Deficit accumulated during development stage......... (3,244) (6,422) (7,671) (7,671)
------- ------- ------- -------
Total stockholders' (deficit) equity....... (36) 4,754 3,524 $ 4,216
------- ------- ------- =======
$ 751 $ 5,946 $ 4,894
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 65
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 27, THREE MONTHS
YEAR ENDED DECEMBER 31, 1992) TO ENDED MARCH 31,
------------------------------- DECEMBER 31, -----------------
1994 1995 1996 1996 1996 1997
------- ------- --------- ------------ ----- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES.................... $ 122 $ 1,179 $ 452 $ 1,753 $ -- $ 76
------- ------- --------- ------- ----- ---------
EXPENSES:
Research and development.... 869 1,189 1,815 4,511 328 526
Sales and marketing......... 126 146 221 689 44 138
General and
administrative............ 350 637 1,526 2,916 280 709
------- ------- --------- ------- ----- ---------
1,345 1,972 3,562 8,116 652 1,373
------- ------- --------- ------- ----- ---------
Operating loss.... (1,223) (793) (3,110) (6,363) (652) (1,297)
INTEREST EXPENSE, NET....... 144 5 132 281 23 2
OTHER (INCOME).............. (20) (118) (64) (222) (2) (50)
------- ------- --------- ------- ----- ---------
NET LOSS.................... $(1,347) $ (680) $ (3,178) $(6,422) $(673) $ (1,249)
======= ======= ========= ======= ===== =========
PRO FORMA NET LOSS PER
COMMON AND COMMON
EQUIVALENT SHARE.......... $ (1.03) $ (0.40)
========= =========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING............... 3,093,583 3,093,583
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 66
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ------------------ ---------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ ------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 27, 1992
(inception)........................... -- $-- -- $-- -- $-- -- $--
Initial stockholders' contribution at
$0.001 per share...................... -- -- -- -- -- -- 1,178,584 1
Net loss............................... -- -- -- -- -- -- -- --
--------- --- --------- --- ------- --- --------- ---
BALANCE, December 31, 1992............. -- -- -- -- -- -- 1,178,584 1
Issuance of Series A preferred stock at
$1 per share, net of issuance costs of
$12................................... 1,850,000 2 -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
--------- --- --------- --- ------- --- --------- ---
BALANCE, December 31, 1993............. 1,850,000 2 -- -- -- -- 1,178,584 1
Issuance of common stock at $0.21 per
share................................. -- -- -- -- -- -- 231,074 --
Conversion of subordinated notes at $1
per share............................. 1,253,784 1 -- -- -- -- -- --
Series A Preferred stock warrants
issued in connection with convertible
subordinated promissory notes......... -- -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
--------- --- --------- --- ------- --- --------- ---
BALANCE, December 31, 1994............. 3,103,784 3 -- -- -- -- 1,409,658 1
Common stock warrants issued in
connection with convertible
subordinated promissory notes......... -- -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
--------- --- --------- --- ------- --- --------- ---
BALANCE, December 31, 1995............. 3,103,784 3 -- -- -- -- 1,409,658 1
Common stock warrants issued in
connection with convertible
subordinated promissory notes......... -- -- -- -- -- -- -- --
Conversion of subordinated notes....... -- -- 389,951 -- -- -- -- --
Issuance of Series B preferred stock at
$4 per share, net of issuance costs of
$23................................... -- -- 882,100 1 -- -- -- --
Issuance of Series C preferred stock at
$6 per share, net of issuance costs of
$24 and royalty payments of $223...... -- -- -- -- 500,000 1 -- --
Exercise of stock options at $0.21 per
share................................. -- -- -- -- -- -- 403 --
Issuance of common stock in settlement
of a dispute valued at $0.49 per
share................................. -- -- -- -- -- -- 28,572 --
Issuance of common stock for purchased
technology valued at $0.49 per
share................................. -- -- -- -- -- -- 71,429 1
Exercise of common stock warrant at
$1.12 per share....................... -- -- -- -- -- -- 21,640 --
Issuance of stock options at $0.70 and
$2.45 per share, valued at $1.05 and
$5.50 per share, respectively......... -- -- -- -- -- -- -- --
Amortization of deferred
compensation.......................... -- -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
--------- --- --------- --- ------- --- --------- ---
BALANCE, December 31, 1996............. 3,103,784 $ 3 1,272,051 $ 1 500,000 $ 1 1,531,702 $ 2
========= === ========= === ======= === ========= ===
Amortization of deferred
compensation.......................... -- -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
--------- --- --------- --- ------- --- --------- ---
BALANCE, March 31, 1997 (Unaudited).... 3,103,784 $ 3 1,272,051 $ 1 500,000 $ 1 1,531,702 $ 2
========= === ========= === ======= === ========= ===
<CAPTION>
DEFICIT
NOTES ACCUMULATED TOTAL
ADDITIONAL RECEIVABLE DURING STOCKHOLDERS'
PAID-IN DEFERRED FROM DEVELOPMENT (DEFICIT)
CAPITAL COMPENSATION OFFICERS WARRANTS STAGE EQUITY
---------- ------------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, October 27, 1992
(inception)........................... $ -- $ -- $ -- $ -- $ -- $ --
Initial stockholders' contribution at
$0.001 per share...................... 1 -- -- -- -- 2
Net loss............................... -- -- -- -- (36) (36)
------- ----- --- --- ------- -------
BALANCE, December 31, 1992............. 1 -- -- -- (36) (34)
Issuance of Series A preferred stock at
$1 per share, net of issuance costs of
$12................................... 1,836 -- -- -- -- 1,838
Net loss............................... -- -- -- -- (1,181) (1,181)
------- ----- --- --- ------- -------
BALANCE, December 31, 1993............. 1,837 -- -- -- (1,217) 623
Issuance of common stock at $0.21 per
share................................. 48 -- (48) -- -- --
Conversion of subordinated notes at $1
per share............................. 1,253 -- -- -- -- 1,254
Series A Preferred stock warrants
issued in connection with convertible
subordinated promissory notes......... -- -- -- 79 -- 79
Net loss............................... -- -- -- -- (1,347) (1,347)
------- ----- --- --- ------- -------
BALANCE, December 31, 1994............. 3,138 -- (48) 79 (2,564) 609
Common stock warrants issued in
connection with convertible
subordinated promissory notes......... -- -- -- 35 -- 35
Net loss............................... -- -- -- -- (680) (680)
------- ----- --- --- ------- -------
BALANCE, December 31, 1995............. 3,138 -- (48) 114 (3,244) (36)
Common stock warrants issued in
connection with convertible
subordinated promissory notes......... -- -- -- 59 -- 59
Conversion of subordinated notes....... 1,560 -- -- -- -- 1,560
Issuance of Series B preferred stock at
$4 per share, net of issuance costs of
$23................................... 3,504 -- -- -- -- 3,505
Issuance of Series C preferred stock at
$6 per share, net of issuance costs of
$24 and royalty payments of $223...... 2,752 -- -- -- -- 2,753
Exercise of stock options at $0.21 per
share................................. -- -- -- -- -- --
Issuance of common stock in settlement
of a dispute valued at $0.49 per
share................................. 14 -- -- -- -- 14
Issuance of common stock for purchased
technology valued at $0.49 per
share................................. 34 -- -- -- -- 35
Exercise of common stock warrant at
$1.12 per share....................... 24 -- -- -- -- 24
Issuance of stock options at $0.70 and
$2.45 per share, valued at $1.05 and
$5.50 per share, respectively......... 304 (304) -- -- -- --
Amortization of deferred
compensation.......................... -- 18 -- -- -- 18
Net loss............................... -- -- -- -- (3,178) (3,178)
------- ----- --- --- ------- -------
BALANCE, December 31, 1996............. $11,330 $(286) $(48) $173 $(6,422) $ 4,754
======= ===== === === ======= =======
Amortization of deferred
compensation.......................... -- 19 -- -- -- 19
Net loss............................... -- -- -- -- (1,249) (1,249)
------- ----- --- --- ------- -------
BALANCE, March 31, 1997 (Unaudited).... $11,330 $(267) $(48) $173 $(7,671) $(3,524)
======= ===== === === ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 67
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(OCTOBER 27, ENDED
YEAR ENDED DECEMBER 31, 1992) TO MARCH 31,
--------------------------- DECEMBER 31, ---------------
1994 1995 1996 1996 1996 1997
------- ------- ------- ------------ ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(1,347) $ (680) $(3,178) $(6,422) $(673) $(1,249)
------- ------- ------- ------- ----- -------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 83 111 182 396 37 49
Amortization of debt discount............... 67 5 66 138 15 --
Issuance of stock in settlement of
dispute................................... -- -- 14 14 14 --
Amortization of deferred compensation....... -- -- 18 18 -- 19
Changes in assets and liabilities:
Accounts receivable....................... (16) (200) 215 (1) 186 (1)
Other assets.............................. (10) 14 (60) (98) (9) (21)
Due from related parties.................. -- -- (412) (412) -- (7)
Accounts payable.......................... 100 158 391 557 61 (158)
Accrued liabilities....................... -- -- 317 517 30 336
Deferred revenue.......................... 534 (534) -- -- -- --
------- ------- ------- ------- ----- -------
Total adjustments...................... 758 (446) 731 1,129 334 217
------- ------- ------- ------- ----- -------
Net cash used in operating
activities........................... (589) (1,126) (2,447) (5,293) (339) (1,032)
------- ------- ------- ------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........... (80) (177) (422) (870) (13) (148)
Payment of royalties.......................... -- -- (223) (223) -- --
Additions to purchased technology............. (3) (32) (49) (205) (35) (7)
------- ------- ------- ------- ----- -------
Net cash used in investing
activities........................... (83) (209) (694) (1,298) (48) (155)
------- ------- ------- ------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Under revolving credit facility............... (25) -- -- -- -- --
Issuance of common stock...................... -- -- -- 2 -- --
Issuance of Series A preferred stock.......... -- -- -- 1,850 -- --
Issuance of Series B preferred stock.......... -- -- 3,528 3,528 -- --
Issuance of Series C preferred stock.......... -- -- 3,000 3,000 -- --
Issuance of stock warrants.................... 12 5 18 35 -- --
Exercise of warrant........................... -- -- 24 24 -- --
Payment of stock issuance costs............... -- -- (47) (59) -- (426)
Issuance of convertible subordinated
promissory notes............................ 1,200 500 1,232 2,932 500 --
------- ------- ------- ------- ----- -------
Net cash provided by financing
activities........................... 1,187 505 7,755 11,312 500 (426)
------- ------- ------- ------- ----- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 515 (830) 4,614 4,721 113 (1,613)
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 422 937 107 -- 107 4,721
------- ------- ------- ------- ----- -------
CASH AND CASH EQUIVALENTS, end of period........ $ 937 $ 107 $ 4,721 $ 4,721 $ 220 $ 3,108
======= ======= ======= ======= ===== =======
CASH PAID FOR:
Interest...................................... $ -- $ -- $ -- $ -- $ -- $ --
Income taxes.................................. $ -- $ -- $ -- $ -- $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of subordinated promissory notes to
preferred stock............................. $ 1,254 $ -- $ 1,560 $ 2,814 $ -- $ --
Stock issued for subscription receivable...... $ 48 $ -- $ -- $ 48 $ -- $ --
Warrants issued in connection with convertible
subordinated notes.......................... $ 67 $ 30 $ 41 $ 138 $ -- $ --
Issuance of common stock for purchased
technology.................................. $ -- $ -- $ 35 $ 35 $ 35 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 68
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997 (UNAUDITED)
1. ORGANIZATION AND BACKGROUND
SpectRx, Inc. ("SpectRx" or the "Company") is engaged in the research and
development of products that offer less invasive and painless alternatives to
blood tests currently used for glucose monitoring, diabetes screening and infant
jaundice. The Company's goal is to introduce products that reduce or eliminate
pain, are convenient to use and provide rapid results at the point of care,
thereby improving patient well being and reducing health care costs. The
Company's glucose monitoring, diabetes screening and infant jaundice products
are based on proprietary electro-optical and microporation technology that can
eliminate the pain and inconvenience of a blood sample. The Company has entered
into collaborative arrangements with Abbott Laboratories ("Abbott"), Boehringer
Mannheim Corporation ("Boehringer Mannheim") and Healthdyne Technologies, Inc.
("Healthdyne") to facilitate the development, commercialization and introduction
of its glucose monitoring, diabetes screening and infant jaundice products,
respectively.
The developmental nature of the Company's activities is such that inherent
risks exist in its operations. The Company is subject to a number of risks
including, successful product development, dependence on collaborative
arrangements, fixed royalty rates and manufacturing profits, dependence on
licensed patent applications and proprietary technology, completion of
regulatory approvals, a market for its products, competition from well
established larger companies and the potential for other non-invasive products,
the potential need for additional financing, a lack of sales experience, product
liability and a dependence upon key personnel. While management believes that
the Company will be successful, there are no assurances of successful future
operations.
In the second quarter of 1997, the Company is planning an initial public
offering (the "Offering") of its Common Stock (Note 12). In connection with the
Offering, the Board of Directors approved a reverse stock split of 1-for-1.4 for
the Company's Common Stock effective February 19, 1997. Accordingly, all share,
per share, weighted average share, stock option, and common stock warrant
information has been restated to reflect the split. The reverse stock split will
have no effect upon the number of shares of preferred stock issued and
outstanding, just the number of shares of common stock into which the preferred
stock will convert. Accordingly, all preferred stock, preferred stock warrants,
and preferred stock price amounts have not been adjusted for the reverse stock
split. Upon completion of the planned offering, the total of shares of all
classes of stock which the Company has authority to issue will be 50,000,000
shares of Common Stock, $0.001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
SpectRx, Inc. and, since December 5, 1996, its 65%-owned subsidiary, FluorRx,
Inc. ("FluorRx") (Note 3). All significant intercompany amounts have been
eliminated.
PRESENTATION
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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-7
<PAGE> 69
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash and cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives of five to seven years.
Expenditures for repairs and maintenance are expensed as incurred. Property and
equipment are summarized as follows at December 31, 1995 and 1996 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
<S> <C> <C>
Equipment................................................... $381 $689
Furniture and fixtures...................................... 67 181
---- ----
448 870
Less accumulated depreciation............................... 148 274
---- ----
Property and equipment, net....................... $300 $596
==== ====
</TABLE>
OTHER ASSETS
Other assets include purchased technology of $90,000 and $118,000 at
December 31, 1995 and 1996, respectively, which is being amortized using the
straight-line method over its estimated useful life of five years.
PATENT COSTS
Costs incurred in filing, prosecuting and maintaining patents are expensed
as incurred. Such costs aggregated approximately $3,000, $71,000 and $165,000 in
1994, 1995 and 1996, respectively.
REVENUE RECOGNITION
Revenue from collaborative research and development agreements is recorded
when earned. Other periodic license fee payments under collaborative agreements
related to future performance are deferred and recognized as income when earned.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of expenditures for research
conducted by the Company and payments made under contracts with consultants. All
research and development costs are expensed as incurred.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes."
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock and dilutive Common Stock equivalent shares ("CSEs")
issuable upon the conversion of convertible preferred stock (using the
if-converted method) and stock options and warrants (using the treasury stock
method). Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and
F-8
<PAGE> 70
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CSEs issued at prices below the expected public offering price during the
12-month period prior to the Offering have been included in the calculation as
if they were outstanding for all periods presented prior to the Offering,
regardless of whether they are dilutive.
Historical net loss per share has not been presented in view of anticipated
change in capital structure upon the closing of the Offering.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS 128 supersedes APB 15, "Earnings per Share" and
promulgates new accounting standards for the computation and manner of
presentation of the Company's loss per share. The Company is required to adopt
the provisions of SAFS 128 for the year ending December 31, 1997. Earlier
application is not permitted; however, upon adoption the Company will be
required to restate previously reported annual and interim loss per share in
accordance with the provisions of SFAS 128. The Company does not believe that
the adoption of SFAS 128 will have a material impact on the computation or
manner of presentation of its loss per share as currently or previously
presented under APB 15.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, trade accounts receivable, trade accounts payable,
and other financial instruments approximate their fair values principally
because of the short-term maturities of these instruments. The fair value of the
Company's long term debt is estimated based on the current rates offered to the
Company for debt of similar terms and maturities. Under this method, the fair
value of the Company's long term debt was not significantly different than the
stated value at December 31, 1996.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and purchased technology, to determine if any
impairments are other than temporary. Management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.
3. FORMATION OF FLUORRX, INC.
In December 1996, the Company sublicensed certain technology to and
acquired a 64.8% interest in FluorRx, a newly organized Delaware corporation
formed for the purpose of developing and commercializing technology related to
fluorescence spectroscopy. The Company's interest is represented by three seats
on FluorRx's board of directors, one of which is currently vacant, and 129,000
shares of FluorRx's Series A Convertible Preferred Stock purchased for $250,000.
Concurrently, the Company agreed to provide a series of convertible promissory
notes of up to $100,000. The notes bear interest at 8% and are due and payable
December 5, 1997. The Company has the option to convert any outstanding balance
under the facility into Series A Convertible Preferred Stock at a price per
share of $1.94. As of December 31, 1996, FluorRx had not borrowed any amounts
under the facility.
For the year ended December 31, 1996, FluorRx incurred an operating loss of
$58,000, which the Company fully consolidated.
4. CONVERTIBLE SUBORDINATED PROMISSORY NOTES
In April and June 1994, the Company issued 8% convertible subordinated
promissory notes for $1,000,000 and $200,000 respectively. Pursuant to the terms
of these notes, all outstanding principal and accrued interest were converted in
December 1994 into 1,253,784 shares of Series A Convertible Preferred Stock.
Warrants to purchase 360,000 shares of Series A Preferred Stock were issued with
the promissory notes in consideration for additional proceeds of $12,000 (Note
8). The value of these warrants was determined to
F-9
<PAGE> 71
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be $79,000 based on the difference between the stated interest rate and the
Company's estimated effective borrowing rate for the term of the notes. The
noncash allocation to the warrants of $67,000 was accounted for as a debt
discount and was expensed as additional interest expense during 1994.
In November 1995 and April 1996, the Company issued 10% convertible
subordinated promissory notes for $500,000 and $982,000, respectively. Pursuant
to the terms of these notes, all outstanding principal and accrued interest were
converted in August 1996 into 389,951 shares of Series B Convertible Preferred
Stock. Warrants to purchase 107,143 and 210,470 shares of common stock were
issued with the promissory notes in consideration for additional proceeds of
$5,000 and $18,000, respectively, in November 1995 and April 1996, respectively
(Note 8). The value of the warrants issued in November 1995 and April 1996 was
determined to be $35,000 and $59,000, respectively, based on the difference
between the stated interest rate and the Company's estimated effective borrowing
rate for the terms of the notes. The noncash allocation to the warrants of
$30,000 and $41,000 in November 1995 and April 1996, respectively, was accounted
for as a debt discount. The unamortized debt discount was expensed as additional
interest expense upon the conversion of the notes in August 1996. At December
31, 1995, the unamortized debt discount amounted to $25,000.
In June 1996, the Company issued an 8% convertible subordinated promissory
note for $250,000. Principal and interest are payable June 1998. Upon an initial
public offering, as defined, the holder of the note may convert outstanding
principal and interest into common stock at a conversion rate equal to one-half
of the per share initial public offering price.
5. STOCKHOLDERS' (DEFICIT) EQUITY
The Company's Series A, B and C convertible preferred stock (collectively,
"Preferred Stock") is convertible at the option of the holder at any time into
0.7143 shares of Common Stock, adjusted for the reverse stock split discussed in
Note 1. In the event of a public offering, as defined, the shares of Preferred
Stock are automatically converted into 0.7143 share of Common Stock. The holders
of the Series A, B, and C preferred stock are entitled to annual noncumulative
dividends, if declared, at a rate of $0.10, $0.40 and $0.60 per share,
respectively. No dividends have been declared to date. In addition, the holders
of the Series A, B and C Preferred Stock have certain liquidation preferences of
an amount equal to $1.00, $4.00 and $6.00 per share, respectively. The holders
of Preferred Stock are entitled to the number of votes equal to the number of
shares of Common Stock into which each share of Preferred Stock could be
converted on the record date. The holders of the Series A, B and C Preferred
Stock have been issued certain demand registration rights.
The Company has also authorized 3,560,000, 1,375,000 and 500,000 shares of
Series A-1, B-1 and C-1 convertible preferred stock (collectively, "Shadow
Preferred"), respectively. Shadow Preferred is issuable in the case of certain
dilutive events. A dilutive event is generally defined as a sale of Common
Stock, or equivalent, at a per share price less than that originally paid by the
preferred stockholders. Generally, the number of issuable Shadow Preferred
shares is equivalent to the number of outstanding shares of the corresponding
Preferred Stock. Upon the occurrence of a dilutive event, Preferred Stock
converts into an equivalent number of Shadow Preferred shares plus additional
common shares that has the effect of mitigating any dilution to the Preferred
Stockholders. Upon the issuance of a class of Shadow Preferred, the
corresponding class of Preferred Stock is canceled. As of March 31, 1997, there
have been no dilutive events.
In June 1994, 231,072 shares of Common Stock were sold, in exchange for
promissory notes, to certain founding officers at estimated fair market value of
$0.21 per share (Note 9). These shares were deemed restricted stock and, in
certain termination related circumstances, were subject to repurchase by the
Company at fair market value, as defined. All restrictions on these shares
expired in January 1997.
F-10
<PAGE> 72
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1997, the Company authorized 5,000,000 shares of Preferred
Stock, with a $0.001 par value. The Board of Directors has the authority to
issue these shares and to fix dividends, voting and conversion rights,
redemption provisions, liquidation preferences, and other rights and
restrictions.
6. INCOME TAXES
The Company has incurred net operating losses since inception. As of
December 31, 1996, the Company had net operating loss ("NOL") carryforwards of
approximately $6,300,000 available to offset its future income tax liability.
The NOL carryforwards begin to expire in the year 2007. The Company has recorded
a valuation allowance for all NOL carryforwards. Utilization of existing NOL
carryforwards may be limited in future years, if significant ownership changes
have occurred.
Components of deferred tax assets are as follows at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
NOL carryforwards........................................... $ 1,225,000 $ 2,394,000
Valuation allowance......................................... (1,225,000) (2,394,000)
----------- -----------
Deferred tax assets......................................... $ 0 $ 0
=========== ===========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments at December 31, 1996 under noncancelable
operating leases for office space and equipment are as follows:
<TABLE>
<S> <C>
1997........................................................ $229,000
1998........................................................ 230,000
1999........................................................ 203,000
2000........................................................ 136,000
2001........................................................ 24,000
</TABLE>
Rental expense was $42,000, $49,000 and $92,000 in 1994, 1995 and 1996,
respectively.
In the past, the Company has been subject to certain asserted and
unasserted claims against certain intellectual property rights owned and
licensed by the Company. A successful claim against intellectual property rights
owned or licensed by the Company could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from third
parties, or prevent the Company from selling its products in certain markets or
at all. In the opinion of management, there are no known claims against the
Company's owned or licensed intellectual property rights that will have a
material adverse impact on the Company's financial position or results of
operations.
8. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
In May 1995, the Company adopted the 1995 Stock Option Plan (as amended the
"Plan"), under which 1,428,572 shares of Common Stock are authorized and
reserved for use in the Plan. The Plan allows the issuance of incentive stock
options, nonqualified stock options and stock purchase rights. The exercise
price of options is determined by the Company's Board of Directors, but
incentive stock options must be granted at an exercise price equal to the fair
market value of the Company's Common Stock as of the grant date. Options
generally become exercisable over four years and expire ten years from the date
of grant. At December 31, 1996, options to purchase 764,807 shares of Common
Stock were available for future grant under the Plan.
F-11
<PAGE> 73
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity is as follows at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS PRICE PER SHARE
--------- -----------------
<S> <C> <C>
Plan inception, May 1995................................... -- $ --
Granted.................................................. 329,834 $0.21
Canceled................................................. (3,983) $0.21
-------
Outstanding, December 31, 1995............................. 325,851 $0.21
Granted.................................................. 338,940 $1.05
Exercised................................................ (403) $0.21
Canceled................................................. (1,026) $0.21
-------
Outstanding, December 31, 1996............................. 663,362 $0.64
=======
Exercisable, December 31, 1996............................. 212,957 $0.32
=======
</TABLE>
The following table sets forth the number of shares, weighted average
exercise price, and remaining contractual lives by groups of similar price and
grant date:
<TABLE>
<CAPTION>
NUMBER WEIGHTED WEIGHTED AVERAGE
OF AVERAGE CONTRACTUAL
SHARES PRICE LIFE
- ------- -------- ----------------
<C> <C> <S>
324,422 $ .21 2.6 years
269,652 .70 3.5 years
69,288 2.45 3.9 years
</TABLE>
In June 1996, November 1996 and December 1996, the Company granted options
to purchase 269,652, 8,573 and 60,715, respectively, shares of Common Stock at
exercise prices of $0.70, $2.45 and $2.45 per share, respectively. In connection
with the issuance of these options, the Company recognized $304,000 as deferred
compensation for the excess of the deemed value for accounting purposes of the
Common Stock issuable upon exercise of such options over the aggregate exercise
price of such options. This deferred compensation is amortized ratably over the
vesting period of the options.
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option plan or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the method
of accounting prescribed by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with the
accounting in APB No. 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value-based method of accounting
defined in the statement had been applied.
The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1995 and 1996 using the Black
Scholes option pricing model as prescribed by SFAS No. 123 and using the
following weighted average assumptions used for grants in 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Risk-free interest rate..................................... 6.0% 6.6%
Expected dividend yield..................................... --% --%
Expected lives.............................................. 4 years 4 years
Expected volatility......................................... 90% 90%
</TABLE>
F-12
<PAGE> 74
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total values of the options granted during the years ended December 31,
1995 and 1996 were computed as approximately $46,000 and $511,000, respectively,
which would be amortized over the vesting period of the options. If the Company
had accounted for these plans in accordance with SFAS No. 123, the Company's
reported net loss and pro forma net loss per share for the years ended December
31, 1995 and 1996 would have increased by the following pro forma amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
----- -------
<S> <C> <C>
Net loss:
As reported............................................... $(680) $(3,178)
Pro forma................................................. (694) (3,226)
Primary EPS:
As reported............................................... -- (1.03)
Pro forma................................................. -- (1.04)
</TABLE>
WARRANTS
In connection with establishing a revolving line of credit in 1993, a bank
received warrants giving the bank the right to purchase 8,572 shares of Common
Stock of the Company at $1.40 per share. These warrants expire in 2003. None of
the proceeds from the original draw on the line of credit were allocated to the
warrants. During 1994, the Company terminated the revolving line of credit.
In connection with the April and June 1994 note sale (Note 4), the Company
issued warrants to purchase 360,000 shares of Series A Convertible Preferred
Stock at an exercise price of $1.00 per share. These warrants are exercisable
through June 1999.
In connection with the November 1995 and April 1996 note sales (Note 4),
the Company issued warrants to purchase 317,613 shares of Common Stock at an
exercise price per share of 20% of the price per share paid in the next equity
financing of $5,000,000 or more, inclusive of the notes and warrants subject to
conversion. In August 1996, the exercise price was set at $1.12 per share. These
warrants are exercisable through November 2000 and April 2001.
A summary of the warrants to purchase Common Stock and Preferred Stock
which remain outstanding (and for which Common and Preferred Stock are reserved
for issuance) is as follows as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES
- ------------------ PRICE
COMMON SERIES A PER SHARE EXPIRATION
- ------- -------- --------- ----------
<C> <C> <C> <C>
8,572 $1.40 2003
360,000 1.00 1999
107,143 1.12 2000
188,830 1.12 2001
</TABLE>
Under the terms of a certain license and technology agreement (Note 10),
the Company issued a right to Altea Technologies, Inc. ("Altea") to obtain a
warrant for the purchase of up to 588,572 shares of Common Stock at $.21 per
share. Upon a liquidity event (for which the Offering would qualify), as
defined, Altea had the option to sell all rights to the licensed technology in
exchange for a warrant to purchase up to 588,572 shares of Common Stock,
depending on the achievement of certain milestones with respect to the licensed
technology. Altea has not elected to exercise its right to obtain the warrant;
and the Company will continue with the existing royalty arrangement.
Upon the close of the Offering, all warrants except a warrant exercisable
for 8,572 shares of Common Stock become immediately exercisable and expire if
not exercised.
F-13
<PAGE> 75
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED-PARTY TRANSACTIONS
In connection with a June 1994 sale of restricted stock, the Company loaned
two officers of the Company $48,525. These loan were secured by Common Stock of
the Company held by the officers, bear interest at 6% per annum and become
payable on June 30, 1999.
In March 1996, the Company issued 28,572 shares of Common Stock to Laser
Atlanta Optics, Inc. ("LAO") in settlement of a dispute. The Company and LAO are
related through a common group of shareholders. The shares were valued at
$14,000, which was expensed upon issuance. In September 1996 the Company loaned
LAO $30,000, which was repaid in December 1996.
In October 1996, the Company loaned two officers a total of $400,000. The
loans are secured by Common Stock and Series B Preferred Stock of the Company
and common stock of LAO held by the officers. The loans bear interest at 6.72%
per annum and are due and payable in cash October 2001.
In March 1996, the Company entered into a license and joint development
agreement with Altea, a company equally owned by Jonathan Eppstein, an officer
and principal stockholder of the Company, and his sister (Notes 8 and 10). On
March 8, 1996, pursuant to the terms of the agreement, the Company received
certain rights to technology useful in glucose monitoring, issued 71,429 shares
of Common Stock at the par value, which were valued at $35,000, and made cash
payments totaling $25,000 for the rights to the technology. The Company paid
royalties to Altea totaling $273,000 during 1996.
In October 1996, the Company entered into a Research & Development and
License Agreement (the "Abbott Agreement") with Abbott for the development and
commercialization of the Company's glucose monitoring product. Under the Abbott
Agreement, the Company receives from Abbott development funding, payments on
achievement of milestones and a royalty on Abbott product sales. In connection
with the Abbott Agreement, Abbott purchased $3 million of Series C Preferred
Stock. As the preferred stock investment was related to the sublicense of
glucose monitoring technology, the Company remitted a royalty to Altea of
$273,000.
A portion of the proceeds from the Company's sale of convertible
subordinated promissory notes and Series A and B Preferred Stock were received
from officers, directors or other parties related to the Company as a result of
previous equity transactions. The sales were conducted concurrently with and on
the same terms as those entered into with unrelated parties.
10. LICENSE AND TECHNOLOGY AGREEMENTS
As part of the Company's efforts to conduct research and development
activities and to commercialize potential products, the Company, from time to
time, enters into agreements with certain organizations and individuals that
further those efforts but also obligate the Company to make future minimum
payments or to remit royalties ranging from 1% to 3% of revenue from sale of
commercial products developed from the research.
The Company generally has the option not to make required minimum royalty
payments, in which case the Company loses the exclusive license to develop
applicable technology. Minimum required payments to maintain exclusive rights to
licensed technology are as follows at December 31, 1996:
<TABLE>
<S> <C>
1997............................................. $ 360,000
1998............................................. 410,000
1999............................................. 510,000
2000............................................. 760,000
2001............................................. 1,110,000
</TABLE>
F-14
<PAGE> 76
SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No royalty payments were made during 1994 or 1995. During 1996, the Company
paid $273,000 in royalties in connection with the sale of the Series C Preferred
Stock, of which $50,000 was expensed as required minimum payments and $223,000
was netted with the proceeds of the related stock sale.
Additionally, the Company is obligated to obtain and maintain certain
patents, as defined by the agreements.
11. REVENUES FROM COLLABORATIVE AGREEMENTS
The Company has entered into collaborative research and development
agreements (the "Agreements") with collaborative partners for the joint
development, regulatory approval, manufacturing, marketing, distribution and
sales of products. The Agreements generally provide for nonrefundable payments
upon contract signing and additional payments upon reaching certain milestones
with respect to technology. The Abbott Agreement requires Abbott to remit
royalties to the Company based on net product sales and to reimburse certain
direct expenses incurred by the Company. Reimbursed expenses of $0, $0 and
$490,000 for the years ended December 31, 1994, 1995 and 1996 have been netted
with research and development expenses in the accompanying statements of
operations. In connection with the Healthdyne and Boehringer Mannheim
Agreements, the partners are required to purchase products manufactured by the
Company at a predetermined profit margin subject to renegotiation between the
parties in certain instances.
Major customers who contributed 10% or more of the Company's total revenues
from collaborative agreements were as follows for the years ended December 31,
1994, 1995, and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Boehringer Mannheim.................... 98.4% 68.8% -- %
Healthdyne............................. -- 10.7 100.0
Teijin................................. -- 20.5 --
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
INITIAL PUBLIC OFFERING
In the second quarter of 1997, the Company is planning an initial public
offering of its Common Stock (the "Offering"). The Company plans to issue
2,000,000 (plus an additional 330,255 if the Underwriter's over-allotment option
is exercised in full) shares at an estimated initial public offering price of
between $10.00 and $12.00 per share. There can be, however, no assurance that
the Offering will be completed at a per share price within the estimated range
or at all.
PRO FORMA STOCKHOLDERS' (DEFICIT) EQUITY
The pro forma stockholders' equity at March 31, 1997 gives effect to the
conversion of all outstanding shares of Preferred Stock into 3,482,762 shares of
Common Stock and warrants exercisable for 553,126 shares of Common Stock, upon
the close of the Company's Offering.
EMPLOYEE STOCK PURCHASE PLAN
In connection with the Offering, the Company intends to adopt an employee
stock purchase plan under which the Company may issue up 214,286 shares of
Common Stock. Eligible employees may use up to 10% of their compensation to
purchase through payroll deductions the Company's Common Stock at the end of
each plan year for 85% of the lower of the beginning or ending stock price in
the plan year.
F-15
<PAGE> 77
============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 24
Management............................ 45
Certain Transactions.................. 51
Principal and Selling Stockholders.... 53
Description of Capital Stock.......... 55
Shares Eligible for Future Sale....... 57
Underwriting.......................... 58
Legal Matters......................... 59
Experts............................... 59
Additional Information................ 60
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
============================================================
============================================================
2,201,699 SHARES
[SPECTRX LOGO]
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST
VOLPE BROWN WHELAN
& COMPANY
, 1997
============================================================
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the registration fee, the NASD filing fee and the Nasdaq National Market System
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Registration Fee.......................................................... $ 9,210
NASD Filing Fee........................................................... 3,260
The Nasdaq National Market System Listing Fee............................. 37,250
Printing.................................................................. 100,000
Legal Fees and Expenses................................................... 350,000
Accounting Fees and Expenses.............................................. 130,000
Blue Sky Fees and Expenses................................................ 13,000
Registrar and Transfer Agent Fees......................................... 6,000
Miscellaneous............................................................. 1,280
--------
Total........................................................... $650,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article VII of the Registrant's Certificate of Incorporation provides for
the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VII of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the corporation if
such person acted in good faith and in a manner reasonably believed to be in and
not opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) From January 1, 1994 through December 31, 1996, the Registrant has
issued and sold the following unregistered securities (all numbers are adjusted
to reflect the Company's 1-for-1.4 reverse stock split):
(1) On June 30, 1994, the Registrant sold 131,711 and 99,361 shares of
its Common Stock to Mark A. Samuels and Keith D. Ignotz, respectively. Mr.
Samuels and Mr. Ignotz each purchased the above shares in exchange for
Promissory Notes executed in favor of the Registrant in the aggregate
amounts of $27,659.25 and $20,865.75, respectively. Both Promissory Notes
have maturity dates of June 30, 1999. The entire amount payable on each
Promissory Note in respect of principal and interest remains outstanding.
(2) On November 6, 1995, the Registrant sold to two investors
Convertible Promissory Notes for an aggregate purchase price of $500,000
which automatically converted to Series B Preferred Stock at an as
converted price of $5.60 per share.
II-1
<PAGE> 79
(3) On November 6, 1995, the Registrant sold to two investors Warrants
to purchase 107,144 shares of Common Stock at an as converted exercise
price of $1.12 per share.
(4) On April 15, 1996, the Registrant sold to 20 investors Convertible
Promissory Notes for an aggregate purchase price of $982,141 which
automatically converted to Series B Preferred Stock at an as converted
price of $5.60 per share.
(5) In March of 1996, two entities were issued an aggregate of 71,429
shares of the Common Stock of the Registrant as payment for a license.
(6) On April 15, 1996, the Registrant sold to 20 investors Warrants to
purchase 210,470 shares of Common Stock at an as converted exercise price
of $1.12 per share.
(7) On August 14, 1996, one option holder exercised an option to
purchase 403 shares of the Common Stock of the Registrant at a per share
exercise price of approximately $0.21.
(8) On August 30, 1996, the Registrant sold shares of Series B
Preferred Stock, which automatically convert into 908,621 shares of Common
Stock upon the closing of this offering, to 29 investors at an as converted
price of $5.60 per share, payable in cash or conversion of debt.
(9) On October 21, 1996, the Registrant sold 357,143 shares of Series
C Preferred Stock, which automatically convert into 357,143 shares of
Common Stock upon the closing of this offering, to one investor at an as
converted price of $8.40 per share.
(10) On October 26, 1996, one warrant holder exercised a warrant to
purchase 21,640 Shares of the Common Stock of the Registrant at a per share
exercise price of approximately $1.12.
(b) There were no underwriters, brokers or finders employed in connection
with any of the transactions set forth above.
(c) The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the instruments representing such securities issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C> <S>
1.1** -- Form of Underwriting Agreement.
3.1* -- Certificate of Incorporation of the Company, as amended, as
currently in effect.
3.2* -- Form of Restated Certificate of Incorporation of the
Company, to be filed immediately following the closing of
the offering made under this Registration Statement.
3.3* -- Bylaws of the Company.
4.1* -- Specimen Common Stock Certificate.
5.1* -- Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* -- 1997 Employee Stock Purchase Plan and form of agreement
thereunder.
10.2* -- 1995 Stock Plan, as amended, and form of Stock Option
Agreement thereunder.
10.3* -- Series A Preferred Stock Purchase Agreement, dated February
5, 1993, between the Company and certain investors.
10.4* -- Note and Warrant Purchase Agreement, dated November 6, 1995
and April 15, 1996, between the Registrant and certain
investors.
</TABLE>
II-2
<PAGE> 80
<TABLE>
<S> <C> <S>
10.5* -- Series B Preferred Stock Purchase Agreement, dated August
30, 1996, between the Company and certain investors.
10.6* -- Series C Preferred Stock Purchase Agreement, dated October
21, 1996, between the Company and Abbott Laboratories
(included in Exhibit 10.23).
10.7* -- Stock Purchase Agreement, dated June 30, 1994, between Mark
A. Samuels and the Company.
10.8* -- Stock Purchase Agreement, dated June 30, 1994, between Keith
D. Ignotz and the Company.
10.9* -- Assignment and Bill of Sale, dated February 29, 1996,
between LAO and the Company.
10.10* -- Security Agreement, dated October 31, 1996, between Mark A.
Samuels and the Company.
10.11* -- Security Agreement, dated October 31, 1996, between Keith D.
Ignotz and the Company.
10.12A+* -- License Agreement, dated May 7, 1991, between GTRC and LAO.
10.12B* -- Agreement for Purchase and Sale of Technology, Sale, dated
January 16, 1993, between LAO and the Company.
10.12C* -- First Amendment to License Agreement, dated October 19,
1993, between GTRC and the Company.
10.13* -- Clinical Research Study Agreement, dated July 22, 1993,
between Emory University and the Company.
10.14A+* -- Development and License Agreement, dated December 2, 1994,
between Boehringer Mannheim Corporation and the Company.
10.14B+* -- Supply Agreement, dated January 5, 1996, between Boehringer
Mannheim and the Company.
10.15* -- Sponsored Research Agreement, No. SR95-006, dated May 3,
1995, between University of Texas, M.D. Anderson Cancer
Center and the Company.
10.16* -- Sole Commercial Patent License Agreement, dated May 4, 1995,
between Martin Marietta Energy Systems, Inc. and the
Company.
10.17* -- Joint Development Agreement, dated July 10, 1995, between
Teijin and the Company.
10.18A* -- License Agreement, dated November 22, 1995, between Joseph
R. Lakowicz, Ph.D. and the Company.
10.18B* -- Amendment of License Agreement, dated November 28, 1995,
between Joseph R. Lakowicz, Ph.D. and the Company.
10.18C* -- Second Amendment to License Agreement, dated March 26, 1997,
between Joseph R. Lakowicz, Ph.D. and the Company.
10.19* -- License and Joint Development Agreement, dated March 1,
1996, between NonInvasive-Monitoring Company, Inc., Altea
Technologies, Inc. and the Company.
10.20+* -- Patent License Agreement, dated March 12, 1996, between the
Board of Regents of the University of Texas System, M.D.
Anderson and the Company.
10.21+ -- Purchasing and Licensing Agreement, dated June 19, 1996,
between Healthdyne and the Company.
10.22* -- Research Services Agreement, dated September 3, 1996,
between Sisters of Providence in Oregon doing business as
the Oregon Medical Laser Center, Providence St. Vincent
Medical Center and the Company.
10.23+* -- Research and Development and License Agreement, dated
October 10, 1996, between Abbott Laboratories and the
Company.
10.24* -- Lease, dated September 21, 1993, between National Life
Insurance Company d/b/a Plaza 85 Business Park and the
Company, together with amendments 1, 2 and 3 thereto and
Tenant Estoppel Certificate, dated September 20, 1994.
11.1 -- Calculation of earnings per share.
</TABLE>
II-3
<PAGE> 81
<TABLE>
<S> <C> <S>
21.1* -- List of Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2* -- Consent of Counsel (included in Exhibit 5.1).
23.3 -- Consent of Fleshner & Kim, patent counsel for the Company.
23.4 -- Consent of Kilpatrick Stockton LLC, patent counsel for the
Company.
23.5 -- Consent of Thorpe, North & Western, patent counsel for the
Company.
23.6 -- Consent of Medical Device Consultants.
24.1* -- Power of Attorney.
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
** Supersedes previously filed exhibit.
+ Confidential treatment requested for portions of these agreements.
* Previously filed.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497 (h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Norcross,
State of Georgia, on the 11th day of June, 1997.
SPECTRX, INC.
By: /s/ MARK A. SAMUELS
--------------------------------------
Mark A. Samuels
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARK A. SAMUELS President, Chief Executive June 11, 1997
- ----------------------------------------------------- Officer and Director
Mark A. Samuels
/s/ KEITH D. IGNOTZ* Executive Vice President, Chief June 11, 1997
- ----------------------------------------------------- Operating Officer and Director
Keith D. Ignotz
/s/ THOMAS H. MULLER, JR. Executive Vice President, Chief June 11, 1997
- ----------------------------------------------------- Financial Officer and
Thomas H. Muller, Jr. Secretary
/s/ CHARLES G. HADLEY* Director June 11, 1997
- -----------------------------------------------------
Charles G. Hadley
/s/ JACK R. KELLY, JR.* Director June 11, 1997
- -----------------------------------------------------
Jack R. Kelly, Jr.
*By: /s/ MARK A. SAMUELS
------------------------------------------------
Mark A. Samuels
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S> <C>
1.1** -- Form of Underwriting Agreement..............................
3.1* -- Certificate of Incorporation of the Company, as amended, as
currently in effect.........................................
3.2* -- Form of Restated Certificate of Incorporation of the
Company, to be filed immediately following the closing of
the offering made under this Registration Statement.........
3.3* -- Bylaws of the Company.......................................
4.1* -- Specimen Common Stock Certificate...........................
5.1* -- Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.................................................
10.1* -- 1997 Employee Stock Purchase Plan and form of agreement
thereunder.
10.2* -- 1995 Stock Plan, as amended, and form of Stock Option
Agreement thereunder........................................
10.3* -- Series A Preferred Stock Purchase Agreement, dated February
5, 1993, between the Company and certain investors..........
10.4* -- Note and Warrant Purchase Agreement, dated November 6, 1995
and April 15, 1996, between the Registrant and certain
investors...................................................
10.5* -- Series B Preferred Stock Purchase Agreement, dated August
30, 1996, between the Company and certain investors.........
10.6* -- Series C Preferred Stock Purchase Agreement, dated October
21, 1996, between the Company and Abbott Laboratories
(included in Exhibit 10.23).................................
10.7* -- Stock Purchase Agreement, dated June 30, 1994, between Mark
A. Samuels and the Company..................................
10.8* -- Stock Purchase Agreement, dated June 30, 1994, between Keith
D. Ignotz and the Company...................................
10.9* -- Assignment and Bill of Sale, dated February 29, 1996,
between LAO and the Company.................................
10.10* -- Security Agreement, dated October 31, 1996, between Mark A.
Samuels and the Company.....................................
10.11* -- Security Agreement, dated October 31, 1996, between Keith D.
Ignotz and the Company......................................
10.12A+* -- License Agreement, dated May 7, 1991, between GTRC and
LAO.........................................................
10.12B* -- Agreement for Purchase and Sale of Technology, Sale, dated
January 16, 1993, between LAO and the Company...............
10.12C* -- First Amendment to License Agreement, dated October 19,
1993, between GTRC and the Company..........................
10.13* -- Clinical Research Study Agreement, dated July 22, 1993,
between Emory University and the Company....................
10.14A+* -- Development and License Agreement, dated December 2, 1994,
between Boehringer Mannheim Corporation and the Company.....
10.14B+* -- Supply Agreement, dated January 5, 1996, between Boehringer
Mannheim and the Company....................................
10.15* -- Sponsored Research Agreement, No. SR95-006, dated May 3,
1995, between University of Texas, M.D. Anderson Cancer
Center and the Company......................................
10.16* -- Sole Commercial Patent License Agreement, dated May 4, 1995,
between Martin Marietta Energy Systems, Inc. and the
Company.....................................................
10.17* -- Joint Development Agreement, dated July 10, 1995, between
Teijin and the Company......................................
10.18A* -- License Agreement, dated November 22, 1995, between Joseph
R. Lakowicz, Ph.D. and the Company..........................
10.18B* -- Amendment of License Agreement, dated November 28, 1995,
between Joseph R. Lakowicz, Ph.D. and the Company...........
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S> <C>
10.18C* -- Second Amendment to License Agreement, dated March 26, 1997,
between Joseph R. Lakowicz, Ph.D. and the Company.
10.19* -- License and Joint Development Agreement, dated March 1,
1996, between NonInvasive-Monitoring Company, Inc., Altea
Technologies, Inc. and the Company..........................
10.20+* -- Patent License Agreement, dated March 12, 1996, between the
Board of Regents of the University of Texas System, M.D.
Anderson and the Company....................................
10.21+ -- Purchasing and Licensing Agreement, dated June 19, 1996,
between Healthdyne and the Company..........................
10.22* -- Research Services Agreement, dated September 3, 1996,
between Sisters of Providence in Oregon doing business as
the Oregon Medical Laser Center, Providence St. Vincent
Medical Center and the Company..............................
10.23+* -- Research and Development and License Agreement, dated
October 10, 1996, between Abbott Laboratories and the
Company.....................................................
10.24* -- Lease, dated September 21, 1993, between National Life
Insurance Company d/b/a Plaza 85 Business Park and the
Company, together with amendments 1, 2 and 3 thereto and
Tenant Estoppel Certificate, dated September 20, 1994.......
11.1 -- Calculation of earnings per share...........................
21.1* -- List of Subsidiaries of the Company.........................
23.1 -- Consent of Arthur Andersen LLP, Independent Public
Accountants.................................................
23.2* -- Consent of Counsel (included in Exhibit 5.1)................
23.3 -- Consent of Fleshner & Kim, patent counsel for the Company...
23.4 -- Consent of Kilpatrick & Stockton, patent counsel for the
Company.....................................................
23.5 -- Consent of Thorpe, North & Western, patent counsel for the
Company.....................................................
23.6 -- Consent of Medical Device Consultants.......................
24.1* -- Power of Attorney...........................................
27.1 -- Financial Data Schedule.....................................
</TABLE>
- ---------------
** Supersedes previously filed exhibit.
+ Confidential treatment requested for portions of these agreements.
* Previously filed.
<PAGE> 85
APPENDIX -- DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER OF THE PROSPECTUS
The inside of the Prospectus front cover contains three artists' renditions of
the Company's glucose monitoring microporation technology and the page is
entitled "SpectRx Glucose Monitoring Microporation Technology."
OVERALL DESCRIPTION AT TOP OF PAGE: Above the artwork on the inside front cover
of the Prospectus is the following language:
"The SpectRx glucose monitoring product is intended as a painless
alternative to current blood glucose monitoring products that require a
blood sample drawn from an incision created by a lancet."
DESCRIPTION #1: This illustration in the upper left hand corner of the page
depicts the diameter of the micropore created by the SpectRx Glucose Monitoring
product. For size comparison, a human hair is depicted next to the micropore.
CAPTION: "The micropore magnified 200 times. Note the size of the micropore in
relation to the human hair to the right."
DESCRIPTION #2: This illustration is being pointed to by the box that is around
the micropore in the illustration in the bottom left of the page and is a blowup
of the micropore. The illustration depicts the depth that the micropore
penetrates the skin. Moreover, the diameter of the micropore is compared to that
of a human hair depicted on the left of the illustration.
CAPTION: "The SpectRx micropore is approximately the diameter of a human hair
and penetrates through a layer of skin about the thickness of a piece of paper."
DESCRIPTION #3: This illustration depicts a cross section of the skin and
labels the location of the stratum corneum, the free nerve endings (pain
receptors), the blood vessels and the sweat glands. The illustration also
depicts the depth that a lancet must penetrate to reach the capillary bed in
order to obtain a blood sample. Finally, the illustration depicts the depth that
the micropore penetrates the skin. There is a box around the micropore with an
arrow attached to it that points to the illustration on the upper right of the
page (see Description #2).
CAPTION: "A cross section showing the relationship between a micropore
painlessly created to access interstitial fluid with the Company's proprietary
technology and an incision used to draw blood using a standard lancet."
OVERALL CAPTION AT BOTTOM OF PAGE: Under all the artwork on this page set out
within a box is the following caption:
THE COMPANY MUST RECEIVE PRE-MARKET APPROVAL OR CLEARANCE FROM U.S. FOOD
AND DRUG ADMINISTRATION BEFORE ANY OF THE COMPANY'S PRODUCTS CAN BE DISTRIBUTED
COMMERCIALLY IN THE UNITED STATES. SUCH APPROVAL OR CLEARANCE HAS NOT YET BEEN
APPLIED FOR AND THERE CAN BE NO ASSURANCE THAT SUCH AN APPLICATION WILL BE MADE
OR IF MADE, WILL BE OBTAINED. TO DATE, THE COMPANY HAS ONLY TESTED PROTOTYPES OF
ITS PRODUCTS. SUBSTANTIAL ADDITIONAL RESEARCH AND DEVELOPMENT AND CLINICAL
TRIALS WILL BE NECESSARY BEFORE COMMERCIAL PROTOTYPES OF THE COMPANY'S PRODUCTS
ARE PRODUCED. THERE CAN BE NO ASSURANCE THAT ANY OF THE COMPANY'S PRODUCTS WILL
BE SUCCESSFULLY DEVELOPED, PROVEN SAFE AND EFFICACIOUS IN CLINICAL TRIALS OR
MEET APPLICABLE REGULATORY STANDARDS. SEE "RISK FACTORS -- GOVERNMENT
REGULATIONS; NO ASSURANCE OF REGULATORY APPROVALS" AND "-- EARLY STAGE OF
DEVELOPMENT; NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT."
The diagram presented on page 28 depicts a drawing of a cross section of
human skin.
DESCRIPTION #1: This illustration depicts the cross section of human skin.
Words around the drawing label the layers of skin with and without pain sensors
and label a micropore and hairshaft and other levels of the skin.
CAPTION #1: The title above this illustration reads: "Cross Section of the
Human Skin."
<PAGE> 86
INSIDE BACK COVER OF THE PROSPECTUS
The inside of the Prospectus back cover is divided into two sections. The top
half of the page is entitled "Diabetes Screening Product" and contains two
photographs, which depict this product. The bottom half of the page is entitled
"Infant Jaundice Product" and contains three photographs, which depict blood
tests currently used and the Company's infant jaundice product.
DIABETES SCREENING PRODUCT
OVERALL DESCRIPTION AT TOP OF PAGE: Above the artwork on the inside back cover
of the Prospectus is the following language:
"The SpectRx diabetes screening product is designed to identify diabetics
by painlessly measuring the fluorescence in the lens of the eye."
DESCRIPTION #1: The illustration in the upper right hand corner of the page
depicts a close-up of the lens of a human eye with the reflective fluorescence
created by the SpectRx diabetes screening product.
CAPTION: The Company's diabetes screening product makes measurements in the
lens of the eye.
DESCRIPTION #2: The illustration in the mid-left hand side of the page depicts
a prototype of the SpectRx Diabetes screening product on a counter top with a
test subject gazing into the prototype to illustrate the manner in which a
subject would be screened.
CAPTION: Prototypes of the Company's diabetes screening product undergoing
pilot studies.
INFANT JAUNDICE PRODUCT
OVERALL DESCRIPTION IN THE MIDDLE OF THE PAGE: Above the artwork related to the
infant jaundice product is the following language:
"The Company's infant jaundice product is intended to offer an alternative
to conventional blood tests."
DESCRIPTION #1: The illustration on the far left depicts an infant undergoing a
heel stick currently used to test for jaundice.
CAPTION: "A representation of the heel stick blood test currently used on
infants."
DESCRIPTION #2: The illustration in the center of this section depicts a
prototype of the Company's infant jaundice product.
CAPTION: "A prototype of the Company's infant jaundice instrument in a hospital
pilot study."
DESCRIPTION #3: The illustration on the far right of this section depicts a
prototype of the Company's infant jaundice product.
CAPTION: "A prototype of the Company's handheld infant jaundice product and
disposable."
OVERALL CAPTION AT BOTTOM OF PAGE: Under all the artwork on this page set out
within a box is the following caption:
THE COMPANY MUST RECEIVE PRE-MARKET APPROVAL OR CLEARANCE FROM U.S. FOOD
AND DRUG ADMINISTRATION BEFORE ANY OF THE COMPANY'S PRODUCTS CAN BE DISTRIBUTED
COMMERCIALLY IN THE UNITED STATES. SUCH APPROVAL OR CLEARANCE HAS NOT YET BEEN
APPLIED FOR AND THERE CAN BE NO ASSURANCE THAT SUCH AN APPLICATION WILL BE MADE
OR IF MADE, WILL BE OBTAINED. TO DATE, THE COMPANY HAS ONLY TESTED PROTOTYPES OF
ITS PRODUCTS. SUBSTANTIAL ADDITIONAL RESEARCH AND DEVELOPMENT AND CLINICAL
TRIALS WILL BE NECESSARY BEFORE COMMERCIAL PROTOTYPES OF THE COMPANY'S PRODUCTS
ARE PRODUCED. THERE CAN BE NO ASSURANCE THAT ANY OF THE COMPANY'S PRODUCTS WILL
BE SUCCESSFULLY DEVELOPED, PROVEN SAFE AND EFFICACIOUS IN CLINICAL TRIALS OR
MEET APPLICABLE REGULATORY STANDARDS. SEE "RISK FACTORS -- GOVERNMENT
REGULATIONS; NO ASSURANCE OF REGULATORY APPROVALS" AND "-- EARLY STAGE OF
DEVELOPMENT; NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT."
<PAGE> 1
EXHIBIT 1.1
SPECTRX, INC.
2,201,699 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
_____ __, 1997
HAMBRECHT & QUIST LLC
VOLPE BROWN WHELAN & COMPANY, LLC
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
SpectRx, Inc., a Delaware corporation (herein called the Company),
proposes to issue and sell 2,000,000 shares of its authorized but unissued
Common Stock, $.001 par value (herein called the "Common Stock"), and the
stockholders of the Company named in Schedule II hereto (the "Selling
Stockholders") propose to sell an aggregate amount of 201,699 shares of Common
Stock of the Company (said 201,699 shares of Common Stock being herein called
the "Underwritten Stock"). The Company proposes to grant to the Underwriters (as
hereinafter defined) an option to purchase up to 330,255 additional shares of
Common Stock (herein called the Option Stock and with the Underwritten Stock
herein collectively called the Stock). The Common Stock is more fully described
in the Registration Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Stockholders hereby severally confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and
warrant that you have been authorized by each of the other Underwriters to enter
into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities
and Exchange Commission (herein called the Commission) a registration statement
on Form S-1 (No. 333-22429), including the related preliminary prospectus, for
the registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
- --------
(1)Plus an option to purchase from the Company up to 330,255 additional
shares to cover over-allotments.
-1-
<PAGE> 2
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY AND
THE SELLING STOCKHOLDERS.
(a) The Company hereby represents and warrants as follows:
(i) The Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws
of the jurisdiction of its incorporation, has full corporate power
and authority to own or lease its properties and conduct its
business as described in the Registration Statement and the
Prospectus and as being conducted, and is duly qualified as a
foreign corporation and in good standing in all jurisdictions in
which the character of the property owned or leased or the nature of
the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material
adverse effect on the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as
a whole).
(ii) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, there has not been any materially adverse change in the
business, properties, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole, whether or
not arising from transactions in the ordinary course of business,
other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has
entered into any material transaction not referred to in the
Registration Statement and the Prospectus.
(iii) The Registration Statement and the
Prospectus comply, and on the Closing Date (as hereinafter defined)
and any later date on which Option Stock is to be purchased, the
Prospectus will comply, in all material respects, with the
provisions of the Securities Act and the Securities Exchange Act of
1934, as amended (herein called the Exchange Act) and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a
material fact and did not omit to state any material fact required
to be stated therein or necessary in order to make the statements
therein not misleading; and, on the Effective Date the Prospectus
did not and, on the Closing Date and any later date on which Option
Stock is to be purchased, will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that
none of the representations and warranties in this subparagraph
(iii) shall apply to statements in, or omissions
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<PAGE> 3
from, the Registration Statement or the Prospectus made in reliance
upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the
Underwriters for use in the Registration Statement or the
Prospectus.
(iv) The Stock is duly and validly authorized, is
(or, in the case of shares of the Stock to be sold by the Company,
will be), when issued and sold to the Underwriters as provided
herein, duly and validly issued, fully paid and nonassessable and
conforms to the description thereof in the Prospectus. No further
approval or authority of the stockholders or the Board of Directors
of the Company will be required for the transfer and sale of the
Stock to be sold by the Selling Stockholders or the issuance and
sale of the Stock as contemplated herein.
(v) This Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding
obligation of the Company, enforceable against the Company in
accordance with its terms, except as enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors'
rights generally and general principles of equity and the discretion
of the court before which any proceeding therefor may be brought.
The execution, delivery and performance of this Agreement by the
Company, the consummation by the Company of the transactions
contemplated herein and the compliance by the Company with the terms
of this Agreement have been duly authorized by all necessary
corporate action on the part of the Company and do not and will not,
with or without the giving of notice or the lapse of time, or both,
(1) result in any violation of the Certificate of Incorporation or
By-laws of the Company; (2) result in a breach of the terms or
provisions of, or constitute a default under, or result in the
modification or termination of, or result in the creation or
imposition of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company pursuant to any
indenture, mortgage, note, contract, commitment or other agreement
or instrument to which the Company is a party or by which the
Company or any of its properties or assets is or may be bound or
affected; (3) violate any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any of
its properties or business; or (4) have any effect on any permit,
certification, registration, approval, consent, order, license,
franchise or other authorization necessary for the Company to own or
lease and operate its properties and to conduct its business or the
ability of the Company to make use thereof, which, in the case of
clauses (2), (3) and (4) of this Section 2(v), would have material
adverse effect on the business, properties, financial condition or
result of operations of the Company and its subsidiaries, taken as a
whole.
(vi) Neither the Commission nor, to the best of
the Company's knowledge, any state regulatory authority has issued
any order preventing or suspending the use of any Preliminary
Prospectus or has instituted or, to the best of the Company's
knowledge, threatened to institute any proceedings with respect to
such an order.
(vii) The Company had at the date or dates
indicated in the Prospectus a duly authorized and outstanding
capitalization as set forth in the Registration Statement and
Prospectus. Based on the assumptions stated in the Registration
Statement and the Prospectus, the Company will have on the Closing
Date the adjusted stock capitalization set forth therein. Except as
set forth in the Registration Statement or the Prospectus, on the
Effective Date and on the Closing Date, there will be no options to
purchase, warrants or other rights to subscribe for, or any
securities or obligations convertible into, or any contracts or
commitments to issue or sell shares of the Company's capital stock
or any such warrants, convertible securities or obligations. Except
as set forth in the Prospectus, no holders of any of the Company's
securities has any rights, "demand," "piggyback" or otherwise, to
have such securities registered under the Securities Act.
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<PAGE> 4
(viii) The descriptions in the Registration
Statement and the Prospectus of contracts and other documents are in
all material respects accurate and present fairly the information
required to be disclosed, and there are no contracts or other
documents required to be described in the Registration Statement or
the Prospectus or to be filed as exhibits to the Registration
Statement under the Securities Act or the regulations promulgated
thereunder which have not been so described or filed as required.
(ix) The financial statements and schedules and
the notes thereto filed as part of the Registration Statement and
included in the Prospectus are complete, correct and present fairly
in all material respects the financial position of the Company as of
the dates thereof, and the results of operations and changes in
financial position of the Company for the periods indicated therein,
all in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved except
as otherwise stated in the Registration Statement and Prospectus.
The selected financial data set forth in the Registration Statement
and the Prospectus present fairly in all material respects the
information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in
the Registration Statement and the Prospectus.
(x) The Company has filed with the appropriate
federal, state and local governmental agencies, and all appropriate
foreign countries and political subdivisions thereof, all tax
returns, including franchise tax returns, which are required to be
filed or has duly obtained extensions of time for the filing thereof
and has paid all taxes shown on such returns and all assessments
received by it to the extent that the same have become due; and the
provisions for income taxes payable, if any, shown on the financial
statements filed with or as part of the Registration Statement are
sufficient for all accrued and unpaid foreign and domestic taxes,
whether or not disputed, and for all periods to and including the
dates of such financial statements. Except as previously disclosed
in writing, the Company has not executed or filed with any taxing
authority, foreign or domestic, any agreement extending the period
for assessment or collection of any income taxes and is not a party
to any pending action or proceeding by any foreign or domestic
governmental agency for assessment or collection of taxes; and no
claims for assessment or collection of taxes have been asserted
against the Company the adverse determination of which would have
material adverse effect on the business, properties, financial
condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(xi) The outstanding equity securities of the
Company and outstanding options and warrants to purchase equity
securities of the Company have been duly authorized and validly
issued. The outstanding equity securities of the Company are fully
paid and nonassessable. The outstanding options and warrants to
purchase equity securities of the Company constitute the valid and
binding obligations of the Company, enforceable in accordance with
their terms, except as enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights
generally and general principles of equity and the discretion of the
court before which any proceeding therefor may be brought. None of
the outstanding equity securities of the Company or options or
warrants to purchase such equity securities has been issued in
violation of the preemptive rights of any shareholder of the
Company. None of the holders of the outstanding equity securities of
the Company is subject to personal liability solely by reason of
being such a holder. The offers and sales of the outstanding equity
securities of the Company and outstanding options and warrants to
purchase such equity securities were at all relevant times either
registered under the Securities Act and the applicable state
securities or blue sky laws or exempt from such registration
requirement. The authorized equity securities of the Company and
outstanding options and warrants to purchase such equity securities
conform in all material respects to the descriptions thereof
contained in the Registration Statement and Prospectus. Except as
set forth in the Registration Statement and the Prospectus, on the
Effective Date and the Closing Date, there will be no outstanding
options or warrants for the purchase of, or other outstanding rights
to purchase, Common Stock or securities convertible into Common
Stock.
-4-
<PAGE> 5
(xii) No securities of the Company have been sold
by the Company or by or on behalf of, or for the benefit of, any
person or persons controlling, controlled by, or under common
control with the Company within the three years prior to the date
hereof, except as disclosed in the Registration Statement.
(xiii) The Company is not in violation of, nor in
default under, (1) any term or provision of its Articles of
Incorporation or By-Laws; (2) any term or provision or any financial
covenants of any indenture, mortgage, contract, commitment or other
agreement or instrument to which it is a party or by which it or any
of its property or business is or may be bound or affected; or (3)
any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court, domestic or foreign,
having jurisdiction over the Company or any of the Company's
properties or business, which, in the case of clause (2) and clause
(3), would have material adverse effect on the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. The Company owns, possesses or has
obtained all governmental and other (including those obtainable from
third parties) permits necessary to own or lease, as the case may
be, and to operate its properties, whether tangible or intangible,
and to conduct any of the business or operations of the Company as
presently conducted. All such permits are outstanding and in good
standing and there are no proceedings pending or, to the best of the
Company's knowledge, threatened (nor, to the Company's knowledge, is
there any basis therefor) seeking to cancel, terminate or limit such
permits.
(xiv) Except as set forth in the Prospectus, there
are no claims, actions, suits, proceedings, arbitrations,
investigations, or inquiries before any governmental agency, court
or tribunal, domestic or foreign, or before any private arbitration
tribunal, pending, or, to the best of the Company's knowledge,
threatened against the Company or involving its properties or
business which, if determined adversely to the Company would,
individually or in the aggregate, result in a material adverse
effect on the business, properties, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole,
or which question the validity of the capital stock of the Company
or this Agreement or of any action taken or to be taken by the
Company pursuant to, or in connection with, this Agreement; nor to
the best of the Company's knowledge, is there any basis for any such
claim, action, suit, proceeding, arbitration, investigation or
inquiry. There are no outstanding orders, judgments or decrees of
any court, governmental agency or other tribunal naming the Company
and enjoining the Company from taking, or requiring the Company to
take, any action, or to which the Company or the Company's
properties or business is bound or subject.
(xv) To the best of the Company's knowledge,
except as described in the Prospectus no parties other than the
Company has any right or license to make or sell the Company's
glucose marketing product, its diabetes screening product or its
infant jaundice monitoring product, each as described in the
Prospectus.
(xvi) The Company has good and marketable title in
fee simple to all real property and good title to all personal
property (tangible and intangible) owned by it, free and clear of
all security interests, charges, mortgages, liens, encumbrances and
defects, except such as are described in the Registration Statement
and Prospectus or such as do not materially affect the value or
transferability of such property and do not interfere with the use
of such property made, or proposed to be made, by the Company. The
leases, licenses or other contracts or instruments under which the
Company leases, holds or is entitled to use any property, real or
personal, are valid, subsisting and enforceable only with such
exceptions as are not material and do not interfere with the use of
such property made, or proposed to be made, by the Company, and
except as enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally and
general principles of equity and the discretion of the court before
which any proceeding therefor may be brought, and all rentals,
royalties or other payments accruing thereunder which became due
prior to the date of this Agreement have been duly paid, and neither
the Company nor, to the best of the Company's knowledge, any other
party is in default thereunder and, to the best of the Company's
knowledge, no event has occurred
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<PAGE> 6
which, with the passage of time or the giving of notice, or both,
would constitute a default thereunder, in each case which would have
a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its
subsidiaries, taken as a whole. The Company has not received notice
of any violation of any applicable law, ordinance, regulation, order
or requirement relating to its owned or leased properties. The
Company has insured its properties against loss or damage by fire or
other casualty and maintains such casualty and other insurance as is
usually maintained by companies engaged in the same or similar
businesses.
(xvii) Each contract or other instrument (however
characterized or described) to which the Company is a party or by
which its property or business is or may be bound or affected and to
which reference is made in the Prospectus has been duly and validly
executed, is in full force and effect in all respects and is
enforceable against the Company, and, to the best of the Company's
knowledge, the other parties in accordance with its terms, except as
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally and general
principles of equity and the discretion of the court before which
any proceeding therefor may be brought, and none of such contracts
or instruments has been assigned by the Company, and neither the
Company nor, to the best of the Company's knowledge, any other party
is in default thereunder and, to the best of the Company's
knowledge, no event has occurred which, with the lapse of time or
the giving of notice, or both, would constitute a default hereunder,
which, in each case, would have a material adverse effect on the
business, properties, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
None of the provisions of such contracts or
instruments violates any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court
having jurisdiction over the Company or any of its assets or
businesses, including, without limitation, those relating to the
production, development, research, marketing or commercialization
of medical devices, which, in each case, would have a material
adverse effect on the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as
a whole.
(xviii) Except as set forth in the Prospectus, the
Company has no employee benefit plans (including, without
limitation, profit sharing and welfare benefit plans) or deferred
compensation arrangements that are subject to the provisions of the
Employee Retirement Income Security Act of 1974.
(xix) To the best of the Company's knowledge, no
labor problem exists with any of the Company's employees or is
imminent which could result in a material adverse effect on the
business, properties, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
(xx) The Company has not, directly or indirectly,
at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution
in violation of law or (ii) made any payment to any state, federal
or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause
the Company to comply in all material respects with the Foreign
Corrupt Practices Act of 1977, as amended.
(xxi) The Company owns, or possesses adequate
rights to use, all patents, patent rights, inventions, trade
secrets, licenses, know-how, proprietary techniques, including
processes and substances, trademarks, service marks, trade names and
copyrights described or referred to in the Prospectus as owned or
used by it or which are necessary for the conduct of its business as
described in the Prospectus, except as otherwise disclosed in the
Prospectus. To the best knowledge of the Company, all such patents,
patent rights, licenses, trademarks, service marks and copyrights
are (a) valid and enforceable and (b) not being infringed by any
third parties which infringement could, whether singly or in the
aggregate, materially and adversely
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<PAGE> 7
affect the business, properties, operations, condition (financial or
otherwise), income, business prospects or results of operations of
the Company, as presently being conducted or as proposed to be
conducted in the Prospectus. The Company has no knowledge of, nor
has it received any notice of, infringement of or conflict with,
asserted rights of others with respect to any patents, patent
rights, inventions, trade secrets, licenses, know-how, proprietary
techniques, including processes and substances, trademarks, service
marks, trade names or copyrights which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding could
materially and adversely affect the business, properties,
operations, condition (financial or otherwise), income, business
prospects or results of operations of the Company as presently being
conducted or as proposed to be conducted in the Prospectus.
(xxii) Prior to the Closing Date the Stock to be
issued and sold by the Company and by the Selling Stockholders will
be authorized for listing by the Nasdaq National Market upon
official notice of issuance.
(b) Each Selling Stockholder, severally and not jointly, hereby
represents, warrants and covenants as follows:
(i) Such Selling Stockholder has valid
marketable title to the shares of Stock to be sold by such Selling
Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest other than pursuant to the
Custody Agreement; and upon delivery of such shares of Stock
hereunder and payment of the purchase price, each of the
Underwriters will obtain valid marketable title to the shares of
Stock purchased by it from such Selling Stockholder, free and clear
of any pledge, lien, security interest pertaining to such Selling
Stockholder or such Selling Stockholder's property, encumbrance,
claim or equitable interest, including any liability for estate or
inheritance taxes, or any liability to or claims of any creditor,
devisee, legatee or beneficiary of such Selling Stockholder.
(ii) Such Selling Stockholder has duly authorized
(if applicable), executed and delivered, in the form heretofore
furnished to the Underwriters the Irrevocable Power of Attorney and
the Custody Agreement; each of the Irrevocable Power of Attorney and
the Custody Agreement constitutes a valid and binding agreement on
the part of such Selling Stockholder, enforceable in accordance with
its terms, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights
generally or by general equitable principles, and each of such
Selling Stockholder's Attorney-in-Fact, acting alone, is authorized
to execute and deliver this Agreement and the certificate referred
to in Section 9(e) of this Agreement on behalf of such Selling
Stockholder in accordance with the terms of such Irrevocable Power
of Attorney.
(iii) All consents, approvals, authorizations and
orders required for the execution and delivery by such Selling
Stockholder of the Irrevocable Power of Attorney and the Custody
Agreement, the execution and delivery by or on behalf of such
Selling Stockholder of this Agreement and the sale and delivery of
the shares of Stock of the Selling Stockholder under this Agreement
(other than, at the time of the execution hereof (if the
Registration Statement has not yet been declared effective by the
Commission), the issuance of the order of the Commission declaring
the Registration Statement effective and such consents, approvals,
authorizations or order as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full
force and effect; and such Selling Stockholder has full legal right,
power and authority to enter into and perform its obligations under
this Agreement, the Irrevocable Power of Attorney and the Custody
Agreement, and to sell, assign, transfer and deliver the shares of
Stock to be sold by such Selling Stockholder under this Agreement.
(iv) Such Selling Stockholder has executed a NASD
Questionnaire, and represents, warrants and covenants that the
information contained therein is, and at the time the Registration
Statement became or becomes, as the case may be, effective and all
times subsequent thereto up to and on the Closing Date (or such
later date on which Option Stock may be purchased), was or will be,
true, correct and complete, and
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<PAGE> 8
does not, and will not, and at the time the Registration Statement
became or becomes, as the case may be, effective and all times
subsequent thereto up to and on the Closing Date (or such later date
on which Option Stock may be purchased), contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make such information
not misleading.
(v) Certificates in negotiable form for the
shares of Stock to be sold hereunder by such Selling Stockholder
have been placed in custody under the Custody Agreement and
Irrevocable Power of Attorney which appoints SunTrust Bank as
custodian (the "Custodian") for each Selling Stockholder for the
purpose of making delivery of such shares under this Agreement. Such
Selling Stockholder agrees that the shares of Stock represented by
the certificates held in custody for such Selling Stockholder under
the Custody Agreement and the Irrevocable Power of Attorney are for
the benefit of and coupled with and subject to the interest
hereunder of the Custodian, the Attorney-in-Fact (as defined in the
Irrevocable Power of Attorney), the Underwriters, each other Selling
Stockholder and the Company, that the arrangements made by such
Selling Stockholder for such custody and the appointment of the
Custodian and the Attorney-in-Fact by such Selling Stockholder are
irrevocable, and that the obligations of such Selling Stockholder
hereunder shall not be terminated by any act of such Selling
Stockholder or by operation of law, whether by the death,
disability, incapacity or liquidation of any Selling Stockholder or
the occurrence of any other event. If any Selling Stockholder should
die, become disabled or incapacitated or be liquidated or if any
other such event should occur before the delivery of the shares of
Stock hereunder, certificates for the shares of Stock shall be
delivered by the Custodian in accordance with the terms and
conditions of this Agreement and actions taken by the
Attorney-in-Fact and the Custodian pursuant to the Custody Agreement
and Irrevocable Power of Attorney, shall be as valid as if such
death, liquidation, incapacity or other event had not occurred,
regardless of whether or not the Custodian or the Attorney-in-Fact,
or either of them, shall have received notice thereof.
(vi) Each of this Agreement, the Irrevocable
Power of Attorney and the Custody Agreement has been duly authorized
by each Selling Stockholder that is not a natural person and has
been duly executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as
rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof maybe limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles; and the performance of this Agreement and the
consummation of the transactions herein contemplated will not result
in a material breach or violation of any of the terms and provisions
of, or constitute a default under, (i) any bond, debenture, note or
other evidence of indebtedness, or under any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder may be bound or (ii) to
the best of such Selling Stockholder's knowledge, result in any
violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over such Selling
Stockholder or over the properties of such Selling Stockholder.
(vii) Such Selling Stockholder has not taken and
will not take, directly or indirectly, any action designed to or
that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the shares of Stock.
(viii) Such Selling Stockholder has not distributed
and will not distribute any prospectus or other offering material in
connection with the offering and sale of the shares of Stock.
(ix) All information furnished by or on behalf of
such Selling Stockholder relating to such Selling Stockholder and
the Stock of such Selling Stockholder that is set forth on the cover
page, the back cover page and pages 5, 16, 18, 53, 58 and 59 of the
Prospectus is, and at the time the Registration Statement
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<PAGE> 9
became or becomes, as the case may be, effective and all times
subsequent thereto up to and on the Closing Date (or such later date
on which Option Stock may be purchased), was or will be, true,
correct and complete, and does not, and will not, and at the time
the Registration Statement became or becomes, as the case may be,
effective and all times subsequent thereto up to and on the Closing
Date (or such later date on which Option Stock may be purchased),
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
such information not misleading.
(x) Such Selling Stockholder has reviewed the
Prospectus and has complied with all agreements and satisfied all
conditions on its part to be complied with or satisfied pursuant to
this Agreement as of the date hereof and has advised its
Attorney-in-Fact if any statement to be made on behalf of such
Selling Stockholder in the certificate contemplated by Section 9(e)
of this Agreement is inaccurate.
(xi) Such Selling Stockholder does not have, or
has waived, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the shares of
Stock that are to be sold by the Company or any of the other Selling
Stockholders to the Underwriters pursuant to this Agreement; such
Selling Stockholder does not have, or has waived, any registration
right or other similar right to participate in the offering made by
the Prospectus, other than such rights of participation as have been
satisfied by the participation of such Selling Stockholder in the
transactions to which this Agreement relates in accordance with the
terms of this Agreement; and such Selling Stockholder does not own
any warrants, options or similar rights to acquire, and does not
have any right or arrangement to acquire, any capital stock, rights,
warrants, options or other securities from the Company, other than
those described in the Registration Statement and the Prospectus.
Any certificate signed by an officer of the Company and
delivered to Hambrecht & Quist LLC or to White & Case, counsel to the
Underwriters, shall be deemed to be a representation and warranty by the Company
to Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC as to the matters
covered thereby.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell 2,000,000 shares of the Underwritten Stock to the several
Underwriters, each Selling Stockholder agrees to sell to the several
Underwriters the number of shares of Underwritten Stock set forth in Schedule II
opposite the name of such Selling Stockholder, and each of the Underwriters
agrees to purchase from the Company and the Selling Stockholders the respective
aggregate number of shares of Underwritten Stock set forth opposite their names
in Schedule I and Schedule II, respectively. The price at which such shares of
Underwritten Stock shall be sold by the Company and the Selling Stockholders and
purchased by the several Underwriters shall be $___ per share. The obligation of
each Underwriter to the Company and the Selling Stockholders shall be to
purchase from the Company and the Selling Stockholders that number of shares of
the Underwritten Stock which represents the same proportion of the total number
of shares of the Underwritten Stock to be sold by the Company and the Selling
Stockholders pursuant to this Agreement as the number of shares of the
Underwritten Stock set forth opposite the name of such Underwriter in Schedule I
hereto represents of the total number of shares of the Underwritten Stock to be
purchased by all Underwriters pursuant to this Agreement, as adjusted by you in
such manner as you deem advisable to avoid fractional shares. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 3, the agreement of each
Underwriter is to purchase only the respective number of shares of the
Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall
fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 8 or 9 hereof) to
purchase and pay for the number of shares of the Stock agreed to be purchased by
such Underwriter or Underwriters, the Company or the Selling Stockholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice to
purchase, or procure one or more other Underwriters
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<PAGE> 10
to purchase, in such proportions as may be agreed upon between you and such
purchasing Underwriter or Underwriters and upon the terms herein set forth, all
or any part of the shares of the Stock which such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to
make such arrangements with respect to all such shares and portion, the number
of shares of the Stock which each non-defaulting Underwriter is otherwise
obligated to purchase under this Agreement shall be automatically increased on a
pro rata basis to absorb the remaining shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase; provided, however, that the
non-defaulting Underwriters shall not be obligated to purchase the shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase if
the aggregate number of such shares of the Stock exceeds 10% of the total number
of shares of the Stock which all Underwriters agreed to purchase hereunder. If
the total number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed to purchase shall not be purchased or absorbed in accordance
with the two preceding sentences, the Company and the Selling Stockholders shall
have the right, within 24 hours next succeeding the 24-hour period above
referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company and the Selling
Stockholders shall have the right to postpone the Closing Date determined as
provided in Section 5 hereof for not more than seven business days after the
date originally fixed as the Closing Date pursuant to said Section 5 in order
that any necessary changes in the Registration Statement, the Prospectus or any
other documents or arrangements may be made. If neither the non-defaulting
Underwriters nor the Company and the Selling Stockholders shall make
arrangements within the 24-hour periods stated above for the purchase of all the
shares of the Stock which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company or the Selling
Stockholders to any non-defaulting Underwriter and without any liability on the
part of any non-defaulting Underwriter to the Company. Nothing in this paragraph
(b), and no action taken hereunder, shall relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
(c) On the basis of the representations, warranties and
covenants herein contained, and subject to the terms and conditions herein set
forth, the Company grants an option to the several Underwriters to purchase,
severally and not jointly, up to 330,255 shares in the aggregate of the Option
Stock from the Company at the same price per share as the Underwriters shall pay
for the Underwritten Stock. Said option may be exercised only to cover
over-allotments in the sale of the Underwritten Stock by the Underwriters and
may be exercised in whole or in part at any time (but not more than once) on or
before the thirtieth day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
shares of the Option Stock as to which the several Underwriters are exercising
the option. Delivery of certificates for the shares of Option Stock, and payment
therefor, shall be made as provided in Section 5 hereof. The number of shares of
the Option Stock to be purchased by each Underwriter shall be the same
percentage of the total number of shares of the Option Stock to be purchased by
the several Underwriters as such Underwriter is purchasing of the Underwritten
Stock, as adjusted by you in such manner as you deem advisable to avoid
fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters
of the Stock to be purchased by them shall be as set forth in the Prospectus.
The Underwriters may from time to time change the public offering price after
the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the
front cover page and under "Underwriting" in any Preliminary Prospectus and the
Prospectus relating to the Stock filed by the Company (insofar as such
information relates to the Underwriters) constitutes the only information
furnished by the Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of
the respective Underwriters represent and warrant to the Company that the
statements made therein are correct.
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<PAGE> 11
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten
Stock and the Option Stock (if the option granted by Section 3(c) hereof shall
have been exercised not later than 10:00 a.m., New York time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of (degree) , (degree) , at 10:00 a.m.,
New York time, on the [fourth](2) business day after the date of this
Agreement, or at such time on such other day, not later than seven full
business days after such [fourth] business day, as shall be agreed upon in
writing by the Company and you. The date and hour of such delivery and payment
(which may be postponed as provided in Section 3(b) hereof) are herein called
the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 10:00 a.m., New York time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of (degree) ,
(degree) , at 10:00 a.m., New York time, on the third business day after
the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order and payment for the Stock purchased from the Selling
Stockholders shall be made to the Custodian for the account of the Selling
Stockholders, in each case by one or more certified or official bank check or
checks in same day funds. Such payment shall be made upon delivery of
certificates for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the Stock
to be delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New
York, New York 10004 on the business day prior to the Closing Date or, in the
case of the Option Stock, by 3:00 p.m., New York time, on the business day
preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Stockholders for shares to be purchased by any Underwriter whose
check shall not have been received by you on the Closing Date or any later date
on which Option Stock is purchased for the account of such Underwriter. Any such
payment by you shall not relieve such Underwriter from any of its obligations
hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the
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(2) This assumes that the transaction will be priced after the close of market
and that T+4 will apply to the transaction. If the pricing took place
before or during market hours (which will generally not be the case), the
closing would be three business days after pricing.
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<PAGE> 12
institution or notice of intended institution of any action or proceeding for
that purpose, (iv) the receipt by the Company of any notification with respect
to the suspension of the qualification of the Stock for sale in any
jurisdiction, or (v) the receipt by it of notice of the initiation or
threatening of any proceeding for such purpose. The Company will make every
reasonable effort to prevent the issuance of such a stop order and, if such an
order shall at any time be issued, to obtain the withdrawal thereof at the
earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the initial
public offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the Stock.
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<PAGE> 13
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission (including the Report on Form SR required by Rule 463 of the
Commission under the Securities Act).
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of their obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. ("NASD") of
the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii)
the furnishing to the Underwriters of copies of any Preliminary Prospectus and
of the several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the printing of this Agreement and related documents delivered
to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees. The Company will pay any transfer taxes incident to the transfer to the
Underwriters of the shares of Stock being sold by the Selling Stockholders.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including
counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their counsel in
qualifying the Stock under state securities or blue sky laws and in the review
of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Stockholders hereby agree to pay and shall not
affect any agreement which the Company and the Selling Stockholders may make, or
may have made, for the sharing of any such expenses and costs.
(l) The Company hereby agrees that, without the prior written consent
of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not,
for a period of 180 days following the commencement of the public offering of
the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract
to sell, make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock or (ii) enter into any swap or other agreement
that transfers, in whole or in part, any of the economic consequences or
ownership of Common Stock, whether any such transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to the
Stock to be sold to the Underwriters pursuant to this Agreement.
(m) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(n) The Company is familiar with the Investment Company Act of 1940,
as amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not
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<PAGE> 14
and will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Selling Stockholders severally agree to
indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls any Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Securities Exchange
Act of 1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Stockholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreement of the Company
and the Selling Stockholders contained in this paragraph (a) shall not apply to
any such losses, claims, damages, liabilities or expenses if such statement or
omission was made in reliance upon and in conformity with information furnished
as herein stated or otherwise furnished in writing to the Company by or on
behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company or the Selling Stockholders with paragraph (c) of Section 7 hereof.
Each Selling Stockholder shall only be liable under this paragraph with respect
to (A) information pertaining to such Selling Stockholder furnished in writing
directly (and not through an attorney-in-fact or other agent) by such Selling
Stockholder expressly for use in any Preliminary Prospectus or the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto
or (B) facts that would constitute a breach of any representation or warranty of
such Selling Stockholder set forth in Section 2(b) hereof. The indemnity
agreement of the Company and the Selling Stockholders contained in this
paragraph (a) and the representations and warranties of the Company and the
Selling Stockholders contained in Section 2 hereof shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act and the Selling Stockholders from and against any and
all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and
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<PAGE> 15
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto.
The indemnity agreement of each Underwriter contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder; provided, however, that the failure so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
it may have to the indemnified party (y) under this Section 7 except to the
extent that the indemnifying party has been materially prejudiced by such
failure or (z) otherwise than under this Section 7. Any indemnifying party shall
be entitled at its own expense to participate in the defense of any action, suit
or proceeding against, or investigation or inquiry of, an indemnified party. Any
indemnifying party shall be entitled, if it so elects within a reasonable time
after receipt of the Notice by giving written notice (herein called the Notice
of Defense) to the indemnified party, to assume (alone or in conjunction with
any other indemnifying party or parties) the entire defense of such action,
suit, investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
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<PAGE> 16
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the Stock received by the Company and the Selling
Stockholders and the total underwriting discount received by the Underwriters,
as set forth in the table on the cover page of the Prospectus, bear to the
aggregate public offering price of the Stock. Relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by each indemnifying party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. In determining the
relative fault of the Selling Stockholders under this paragraph (d), the
limitations on the obligations of the Selling Stockholders set forth in
paragraph (a) of this Section 7 shall be applicable.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Stockholders will, without
the prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The term "jointly and severally" in the second and fifth lines of
paragraph (a) of this Section 7 means that the Company's obligation is joint and
several with the obligation for each of the Selling Stockholders, but that the
obligation of a Selling Stockholder is several and not joint with the obligation
of the Company or any other Selling Stockholder. The liability of each Selling
Stockholder under the indemnity, contribution and reimbursement agreements
contained in the provisions of this Section 7 and Section 11 hereof shall be
limited to an amount equal to the price to
-16-
<PAGE> 17
the underwriters of the stock sold by such Selling Stockholder to the
Underwriters. The Company and the Selling Stockholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amount of such liability for which each shall be
responsible.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Shareholders if after the date of this Agreement trading in the Common
Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Stock
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, or The Nasdaq Stock Market, or limitations on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities, or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Stockholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Stockholders; provided, however, that in the event of any
such termination the Company agrees to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the Selling Stockholders under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and the Selling Stockholders of all their respective
obligations to be performed hereunder at or prior to the Closing Date or any
later date on which Option Stock is to be purchased, as the case may be, and to
the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by White & Case, counsel for the Underwriters.
(c) You shall have received from (i) Wilson Sonsini Goodrich &
Rosati, counsel for the Company, an opinion addressed to the Underwriters and
dated the Closing Date, covering the matters set forth in Annex A hereto, and if
Option Stock is purchased at any date after the Closing Date, an additional
opinion from such counsel, addressed to the Underwriters and dated such later
date, confirming that the statements expressed as of the Closing Date in such
opinion remain valid as of such later date; (ii) Johnson & Montgomery, counsel
for the Selling Stockholders, an opinion addressed to the Underwriters and dated
the Closing Date, covering the matters set forth in Annex B hereto, and if
Option Stock is purchased at any date after the Closing Date, an additional
opinion from such counsel, addressed to the Underwriters and dated such later
date, confirming that the statements expressed as of the Closing Date in such
opinion remain valid as of such later date; (iii) Thorpe, North & Western,
Kilpatrick & Stockton and Fleshner & Associates, each patent counsel for the
Company, opinions, addressed to the Underwriters and dated the Closing Date,
covering
-17-
<PAGE> 18
the matters set forth in Annex C hereto, with respect to the Company's glucose
monitoring product, diabetes screening product and infant jaundice monitoring
product, each as described in the Prospectus, and if Option Stock is purchased
at any date after the Closing Date, additional opinions from such counsel,
addressed to the Underwriters' and dated such later date, confirming that the
statements expressed as of the Closing Date in such opinions remain valid as of
such later date; and (iv) FDA counsel to the Company, as opinion addressed to
the Underwriters and dated the Closing Date, covering the matters set forth in
Annex D hereto, and if Option Stock is purchased at any date after the Closing
Date, an additional opinion from such counsel, addressed to the Underwriters and
dated such later date, confirming that the statements expressed as of the
Closing Date in such opinion remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are no pending or known threatened legal proceedings to
which the Company or any of its subsidiaries is a party or of which property of
the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are no franchises, contracts, leases or other documents which are required
to be filed as exhibits to the Registration Statement which have not been filed
as required, (vii) the representations and warranties of the Company herein are
true and correct in all material respects as of the Closing Date or any later
date on which Option Stock is to be purchased, as the case may be, and (viii)
there has not been any material change in the market for securities in general
or in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make a
public offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the Attorney- in-Fact for the
Selling Stockholders, stating that the representations and warranties of the
Selling Stockholders are true and correct in all material respects as of the
Closing Date or the date on which Option Stock is to be purchased, as the case
may be.
(f) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(g) You shall have received from Arthur Andersen & Co., a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased
-18-
<PAGE> 19
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such later
date, as the case may be, and (ii) setting forth any revisions and additions to
the statements and conclusions set forth in the Original Letter which are
necessary to reflect any changes in the facts described in the Original Letter
since the date of the Original Letter or to reflect the availability of more
recent financial statements, data or information. The letters shall not disclose
any change, or any development involving a prospective change, in or affecting
the business or properties of the Company or any of its subsidiaries which, in
your sole judgment, makes it impractical or inadvisable to proceed with the
public offering of the Stock or the purchase of the Option Stock as contemplated
by the Prospectus.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from
each director, officer, and stockholder (other than the Selling Stockholders)
agreements, in form reasonably satisfactory to Hambrecht & Quist LLC, stating
that without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, each such person or entity will not, for a period of 180 days
following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make
any short sale, pledge, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or ownership of
Common Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if White & Case, counsel for the Underwriters, shall be
satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and the Selling Stockholders. Any such termination shall be without
liability of the Company or the Selling Stockholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Stockholders; provided, however, that (i) in the event of such termination, the
Company agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company and the
Selling Stockholders under this Agreement, including all costs and expenses
referred to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this
Agreement is terminated by you because of any refusal, inability or failure on
the part of the Company or the Selling Stockholders to perform any agreement
herein, to fulfill any of the conditions herein, or to comply with any provision
hereof other than by reason of a default by any of the Underwriters, the Company
will reimburse the Underwriters severally upon demand for all out-of-pocket
expenses (including reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the transactions contemplated
hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
STOCKHOLDERS. The obligation of the Company and the Selling Stockholders to
deliver the Stock shall be subject to the conditions that (a) the Registration
Statement shall have become effective and (b) no stop order suspending the
effectiveness thereof shall be in effect and no proceedings therefor shall be
pending or threatened by the Commission.
-19-
<PAGE> 20
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
Stockholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Stockholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Stockholders; provided, however, that in the event of any such termination the
Company and the Selling Stockholders jointly and severally agree to indemnify
and hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Stockholders under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company, the Selling Stockholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Stockholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Hambrecht & Quist
LLC, One Bush Street, San Francisco, California 94104; and if to the Company,
shall be mailed, telegraphed or delivered to it at its office, 6025A Unity
Drive, Norcross, Georgia 30071, Attention: (degree) ; and if
to the Selling Stockholders, shall be mailed, telegraphed or delivered to the
Selling Stockholders in care of (degree) at
(degree) . All notices given by telegraph shall be promptly
confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or the Selling Stockholders or their respective directors
or officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraphs (l) and (m) of Section 6 hereof shall be of
no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement among the Company,
the Selling Stockholders and the several Underwriters in accordance with its
terms.
Very truly yours,
SPECTRX, INC.
By
------------------------------
[Name]
[Title]
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<PAGE> 21
SELLING STOCKHOLDERS
By
------------------------------
Name: Dr. Dan Hankey
By
------------------------------
Name: Scott Patterson
By
------------------------------
Name: Glenn Robinson
The foregoing Agreement is hereby
confirmed and accepted as of the date first
above written.
HAMBRECHT & QUIST LLC
VOLPE BROWN WHELAN & COMPANY, LLC
By Hambrecht & Quist LLC
By
---------------------
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in
Schedule I hereto.
-21-
<PAGE> 22
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
------------ ---------
<S> <C>
Hambrecht & Quist LLC . . . . . . . . . . . X
Volpe Brown Whelan & Company, LLC . . . . . Y
</TABLE>
<PAGE> 23
SCHEDULE II
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITTEN
SHARES
TO BE
NAME OF SELLING STOCKHOLDER SOLD
--------------------------- ----
<S> <C>
Dr. Dan Hankey 17,137
Scott Patterson 167,425
Glenn Robinson 17,137
Total 201,699
</TABLE>
<PAGE> 24
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF WILSON SONSINI GOODRICH & ROSATI,
COUNSEL FOR THE COMPANY
(i) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign corporation
and in good standing in each state of the United States of America in which its
ownership or leasing of property requires such qualification [(except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole)], and has full corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement; all the issued and outstanding capital
stock of each of the subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and such stock as is owned
by the Company is owned by the Company free and clear of all liens, encumbrances
and security interests, and to the best of such counsel's knowledge, no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in such subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of (degree)
shares of (degree) Stock, of which there are outstanding (degree) shares, and
(degree) shares of Common Stock, $ (degree) par value, of which there are
outstanding _ ___(degree)_ ___ shares (including the Underwritten Stock plus the
number of shares of Option Stock issued on the date hereof); proper corporate
proceedings have been taken validly to authorize such authorized capital stock;
all of the outstanding shares of such capital stock (including the Underwritten
Stock and the shares of Option Stock issued, if any) have been duly and validly
issued and are fully paid and nonassessable; any Option Stock purchased after
the Closing Date, when issued and delivered to and paid for by the Underwriters
as provided in the Underwriting Agreement, will have been duly and validly
issued and be fully paid and nonassessable; and no preemptive rights of, or
rights of refusal in favor of, stockholders exist with respect to the Stock, or
the issue and sale thereof, pursuant to the Certificate of Incorporation or
Bylaws of the Company;
(iii) the Registration Statement has become effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act, the Exchange Act
and with the rules and regulations of the Commission thereunder;
(v) such counsel have no reason to believe that the Registration Statement
(except as to the financial statements and schedules and other financial data
contained or incorporated by reference therein, as to which such counsel need
not express any opinion or belief) at the Effective Date contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus (except as to the financial statements and schedules and
other financial data contained or incorporated by reference therein, as to which
such counsel need not express any opinion or belief) as of its date or at the
Closing Date (or any later date on which Option Stock is purchased), contained
or contains any untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading;
<PAGE> 25
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1 is to the best of such counsel's knowledge accurately and
adequately set forth therein in all material respects or no response is required
with respect to such Items, and to the best of such counsel's knowledge, the
description of the Company's stock option plans and the options granted and
which may be granted thereunder and the options granted otherwise than under
such plans set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to said plans and options to the
extent required by the Securities Act and the rules and regulations of the
Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(viii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company and is the legal, valid and binding obligation of
each of the Company and the Selling Stockholders, enforceable against each of
the Company and the Selling Stockholders in accordance with its terms;
(ix) the issue and sale by the Company of the shares of Stock sold
by the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Certificate of Incorporation or Bylaws of
the Company or any of its subsidiaries or any agreement or instrument known to
such counsel to which the Company or any of its subsidiaries is a party or any
applicable law or regulation, or so far as is known to such counsel, any order,
writ, injunction or decree, of any jurisdiction, court or governmental
instrumentality;
(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(xi) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock by
the Underwriters; and
(xii) the Stock issued and sold by the Company will been duly
authorized for listing on the Nasdaq National Market System upon official notice
of issuance.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or of the State of Delaware, upon
opinions of local counsel satisfactory in form and scope to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representative(s) and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel.
<PAGE> 26
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF JOHNSON & MONTGOMERY,
COUNSEL FOR THE SELLING STOCKHOLDERS
(i) The Underwriting Agreement has been duly authorized, executed
and delivered by each of the Selling Stockholders.
<PAGE> 27
ANNEX C
MATTERS TO BE COVERED IN THE OPINION OF (DEGREE)
PATENT COUNSEL FOR THE COMPANY
Such counsel are familiar with [the technology used by the Company in
its ________ product or products (the "Technology")] [the patents and other
intellectual property set forth on Schedule I hereto (the "IP")] and the manner
of its use thereof and have read the Registration Statement and the Prospectus,
including particularly the portions of the Registration Statement and the
Prospectus referring to the [Technology] [IP] and:
(i) such counsel have no reason to believe that the Registration
Statement or the Prospectus (A) contains any untrue statement of a material fact
with respect to the [Technology] [IP], or the manner of its use thereof, or any
allegation on the part of any person that the Company is infringing any patent
rights, trade secrets, trademarks, service marks or other proprietary
information or materials of any such person or (B) omits to state any material
fact relating to the [Technology] [IP], or the manner of its use thereof, or any
allegation of which such counsel have knowledge, that is required to be stated
in the Registration Statement or the Prospectus or is necessary to make the
statements therein not misleading;
(ii) to the best of such counsel's knowledge there are no legal or
governmental proceedings pending relating to the [Technology] [IP], and to the
best of such counsel's knowledge no such proceedings are threatened or
contemplated by governmental authorities or others;
(iii) such counsel do not know of any contracts or other documents,
relating to the [Technology] [IP] of a character required to be filed as an
exhibit to the Registration Statement or required to be described in the
Registration Statement or the Prospectus that are not filed or described as
required;
(iv) to the best of such counsel's knowledge, the Company is not
infringing or otherwise violating any patents, trade secrets, trademarks,
service marks or other proprietary information or materials, of others, and to
the best of such counsel's knowledge there are no infringements by others of any
of the [Technology] [IP] which in the judgment of such counsel could affect
materially the use thereof by the Company; and
(v) to the best of such counsel's knowledge, the Company owns or
possesses sufficient licenses or other rights to use the [Technology] [IP] as
described in the Prospectus.
<PAGE> 28
ANNEX D
MATTERS TO BE COVERED IN THE OPINION OF
REGULATORY COUNSEL FOR THE COMPANY
During the course of preparation of the Registration Statement, such
counsel participated in discussions with officers of the Company as to the FDA
regulatory matters dealt with under the captions "Risk Factors - Lack of
Regulatory Approvals" and "Business -- Government Regulation" in the Prospectus.
On the basis of these discussions and such counsel's activities as special FDA
regulatory counsel to the Company, no facts have come to such counsel's
attention which cause such counsel to believe that the statements in the
Prospectus under the captions "Risk Factors - Lack of Regulatory Approvals" and
"Business - Government Regulation", insofar as such statements relate to FDA
regulatory matters, at the time the Registration Statement became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or as of the Closing Date contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Based upon, subject to and limited by the foregoing, such counsel are
of the opinion that the statements in the Prospectus under the captions "Risk
Factors - Lack of Government Regulations" and "Business - Government Regulation"
insofar as such statements summarize applicable provisions of the Federal Food,
Drug and Cosmetic Act and the regulations promulgated thereunder, are accurate
summaries in all material respects of the provisions summarized under such
captions in the Prospectus, and do not omit to summarize applicable provision of
the Federal Food, Drug and Cosmetic Act or the regulations promulgated
thereunder necessary to make those statements not misleading.
<PAGE> 1
EXHIBIT 10.21
PURCHASING AND LICENSING AGREEMENT
THIS PURCHASING AND LICENSING AGREEMENT ("Agreement") is made and
entered into as of this 19th day of June, 1996 by and between HEALTHDYNE
TECHNOLOGIES, INC., a Georgia corporation ("Healthdyne"), and SPECTRX, INC., a
Georgia corporation ("SpectRx"), with reference to the following:
R E C I T A L S:
A. SpectRx has developed technology applicable to non-invasive
bilirubin testing and has entered into a license for certain additional
technology applicable to the instrument which will be utilized for non-invasive
bilirubin testing. SpectRx is the sole and exclusive owner of two patents and a
Patent Cooperation Treaty ("PCT") application in respect of such technology, as
more specifically defined below. SpectRx has also signed a Product License
Agreement with the University of Texas M.D. Anderson Cancer Center and related
parties (herein defined as the "MD Anderson License"). Such Patent License
Agreement has been signed by authorized representatives of the University of
Texas M.D. Anderson Cancer Center and the Board of Regents of the University of
Texas System and is awaiting final approval by the Board of Regents in August of
1996. A true and correct copy of such Patent License Agreement as executed by
SpectRx, M.D. Anderson and the Board of Regents of the University of Texas
System has been previously delivered from SpectRx to Healthdyne. Subject to the
final approval of the Board of Regents, SpectRx desires to license or
sublicense, as the case may be, all such technology to Healthdyne in accordance
with the terms and conditions set forth herein.
B. Healthdyne manufactures and markets medical equipment and desires to
license or sublicense, as the case may be, SpectRx technology from SpectRx in
accordance with the terms and conditions set forth herein.
C. Healthdyne also desires to purchase from SpectRx certain items
utilizing the SpectRx technology for the use and/or resale by Healthdyne.
D. SpectRx desires to manufacture and sell such items to Healthdyne
pursuant to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, Healthdyne and SpectRx hereby agree as follows:
1. Definitions. As used in this Agreement, the following terms, whether
used in the singular or the plural, shall have the following meaning:
1.1 Accessory means items manufactured by SpectRx which would
be considered accessory to and not necessary for the operation of the Instrument
or the Disposable. Initial product specifications for Accessories are set forth
on Exhibit A. Final product specifications for Accessories shall be mutually
agreed upon by the parties prior to commercial introduction.
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1.2 Affiliate means any company, corporation, or business ("Company")
in which:
(a) the party owns or controls, directly or indirectly, 50% or
more of the voting stock of that Company;
(b) the party owns or controls, directly or indirectly,
sufficient voting stock in that Company to elect a majority of the directors of
that Company;
(c) that Company owns or controls, directly or indirectly, 50%
or more of the voting stock of the party;
(d) that Company owns or controls, directly or indirectly,
sufficient voting stock in the party to elect a majority of the directors of the
party;
(e) an organization owns or controls, directly or indirectly,
50% or more of the voting stock of the party and that Company; or
(f) an organization owns or controls, directly or indirectly,
Sufficient voting stock in the party and that Company to elect a majority of
the directors of the party and that Company.
1.3 Average Selling Price means the average of the Net Selling Price
for a particular product in a calendar quarter.
1.4 Change In Control means changes in the ownership of a corporation,
changes in the effective control of a corporation and changes in ownership of a
substantial portion of a corporation's assets all as defined, discussed and
illustrated in Section 280G of the Internal Revenue Code and the duly
promulgated Treasury Regulations thereunder, and the disposition of a
substantial portion of the corporation's assets as set forth below.
A disposition of a substantial portion of a corporations assets occurs
on the date that the corporation transfers assets by sale, distribution to
shareholders, assignment to creditors, foreclosure or otherwise, in a
transaction or transactions not in the ordinary course of the corporation's
business (or has made such transfers during the twelve (12) month period ending
on the date of the most recent such transfer of assets) that have a total fair
market value equal to or more than one-half of the total fair market value of
all of the assets of the corporation as of the date immediately prior to the
first of such transfer or transfers. The transfer of assets by a corporation is
not treated as a disposition of a substantial portion of the corporation s
assets if the assets are transferred to an entity, fifty percent (50%) or more
of the total value or voting power of which is owned, directly or indirectly, by
the corporation.
1.5 Disposable Cost means the cost for direct materials and direct
labor per generally accepted accounting principles ("GAAP") or the landed cost
from an outside supplier in the event SpectRx utilizes a contract manufacturer.
In the event SpectRx utilizes an outside supplier as a
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contract manufacturer, Healthdyne shall approve the form and substance of the
agreement and any modifications thereto, which approval shall not be
unreasonably withheld.
1.6 Instrument means an instrument for non-invasive bilirubin
measurement with required [*] utilizing the Disposable to measure bilirubin
levels. The initial product specifications for the Instruments are set forth on
Exhibit A. Final product specifications for the Instrument shall be mutually
agreed upon by the parties prior to commercial introduction.
1.7 Healthdyne Improvements shall have the meaning set forth in
Section 10.
1.8 Healthdyne Subsidiary means any majority-owned subsidiary of
Healthdyne or any of Healthdyne's wholly owned subsidiaries.
1.9 Gross Margin means gross margin as defined by GAAP.
1.10 Improvement means any invention, modification, adaptation or
change relating to SpectRx Technology, but in no event shall include
improvements to Healthdyne Technology.
1.11 Licensed Products shall mean the Instruments, Disposables and
Accessories.
1.12 Licensed Trademark means the SpectRx Products designation set
forth on Exhibit B to this Agreement.
1.13 Healthdyne Technology means technical information, inventions,
products, components, concepts, trade secrets, know-how, techniques, designs,
processes, communications, protocols, software, whether patentable or not,
patent applications, Healthdyne Improvements, copyright applications, patent
rights of any kind and copyrights and all other intellectual property rights
relating to Healthdyne's business other than SpectRx Technology.
1.14 SpectRx Technology means technical information, inventions,
products, components, concepts, trade secrets, know-how, techniques, designs,
processes, communications, protocols, Software, whether patentable or not,
patent applications, copyright applications, the Patent Rights, and copyrights
and all other intellectual property rights relating to SpectRx proprietary
technology and related proprietary documentation.
1.15 Net Selling Price means the total sales revenue for the product in
question excluding charges for returns, outbound prepaid or allowed
transportation charges, sales taxes, tariffs or duties directly imposed with
reference to particular sales or similar items. In the event a Party leases,
licenses or permits the use of a Licensed Product without effecting a sale
thereof (except for demo loaners and end user evaluation samples), the Net
Selling Price therefor shall be deemed to be the Average Selling Price of such
Licensed Product for the relevant calendar quarter. In the event a Party sells a
Licensed Product through an Affiliate, the Net Selling Price for that sale shall
be the Net Selling Price for the first sale to a customer which is not an
Affiliate of a Party. Net Selling Price shall only include one sale per Licensed
Product.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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1.16 Party means Healthdyne or SpectRx; "Parties" means Healthdyne and
SpectRx.
1.17 Patent Rights shall mean any U.S. and Canadian patents filed by
SpectRx relating to the SpectRx Technology which are necessary, used or useful
for the manufacture, sale or use of Licensed Products, the inventions described
and claimed therein, and any divisions, patents of addition, continuations,
continuations-in-part, extensions, patents and patent applications
corresponding thereto; which will be automatically incorporated in and added to
this Agreement and shall be periodically added to Exhibit C attached to this
Agreement and made a part thereof. Patent Rights shall also be defined to
include the patent rights licensed by SpectRx pursuant to the M.D. Anderson
License.
1.18 Purchase Orders shall have the meaning set forth in Section 4.1
hereof.
1.19 Royalty shall mean a percentage of the Net Selling Price for the
Licensed Product in question.
1.20 Software means any and all computer/instrument software and/or
firmware developed by or acquired by SpectRx that is used or useful in
connection with SpectRx Technology.
1.21 Disposable means disposable probes, tips or other devices
for calibration, cross-contamination prevention, or other purposes as agreed to
by the p which when used with the Instrument measure bilirubin levels. Initial
product specifications for the Disposable are set forth on Exhibit A. Final
product specifications for the Disposable shall be mutually agreed upon by the
parties prior to commercial introduction.
1.22 Territory shall mean the United States and Canada.
1.23 M.D. Anderson License has the meaning assigned to it in the
recitals hereto.
1.24 Cost of Goods Sold means cost of goods sold as defined by GAAP.
2. Licenses Granted.
2.1 Licenses Granted to Licensee. Subject to the terms and conditions
set forth herein, SpectRx grants to Healthdyne an exclusive and a
non-transferable (except as set forth herein) license or sublicense, as the case
may be, within the Territory to SpectRx Technology for the following
applications:
(i) to use and sell Instruments; Healthdyne and SpectRx shall
each execute the Sub-license Agreement attached hereto as Exhibit D-1 for the
portion of the SpectRx Technology licensed from M.D. Anderson relating to the
Instrument within ten (10) days of the approval of the Board of Regents. In the
event of a conflict between the terms of this Agreement and the Sub-License
Agreement, the terms of this Agreement shall control. Each party shall use
reasonable business efforts to obtain the approval of the Board of Regents to
the Successor Letter Agreement
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attached hereto as Exhibit D-2; except as specifically set forth in Section 6.1
hereof, neither the execution, delivery and performance of the Sub-license
Agreement between SpectRx and Healthdyne nor the Successor Letter Agreement will
require Healthdyne to pay any additional fees, royalties, payments or the like.
Healthdyne's sole payment obligation for the Instrument shall be as set forth in
Section 6.1. SpectRx shall use its best efforts to obtain the approval of the
Board of Regents to the M.D. Anderson License and the Successor Letter Agreement
as set forth herein on or before August 30, 1996; failure to obtain approval for
any reason within such time period shall be grounds for Healthdyne to terminate
this Agreement immediately upon the giving of written notice from Healthdyne to
SpectRx. Within thirty (30) days of receipt of such notice of termination,
SpectRx shall return all license fees paid to SpectRx by Healthdyne.
(ii) to use and sell Disposables and
Accessories; and
(iii) to make Instruments, Accessories and/or
Disposables in the event that SpectRx, following the first thirty (30) days
after commercial release of the Instrument, Disposable or Accessory, as the case
may be, is unable to meet the requirements of Subsections (A) or (B) of this
Section 2.1(iii) within the immediately succeeding two (2) calendar months
following the calendar month which is the subject of written notice from
Healthdyne that SpectRx failed to meet the requirements of Subsections (A) or
(B) of this Section 2.1(iii) or in the event that the United States Food and
Drug Administration ("FDA") enjoins SpectRx from distributing into interstate
commerce Instruments, Accessories and/or Disposables pursuant to the Federal
Food, Drug and Cosmetic Act, as amended ("FDA Injunction"). Healthdyne shall
notify SpectRx of an FDA Injunction or SpectRx's failure to meet the
requirements of Subsections (A) or (B) within ten (10) days of the end of the
calendar month which is the subject of the notice. in the event of an FDA
Injunction, the license to make Licensed Products shall be deemed granted
immediately upon receipt of the notice.
In the event Healthdyne becomes licensed to make
Instruments, Disposables or Accessories, as the case may be, as set forth above,
it shall be entitled to utilize the documentation as set forth in Section 16.15
and SpectRx shall provide Healthdyne with access to SpectRx tooling to permit
the manufacture of such Licensed Product(s) in a timely manner. In the event
such tooling is in the possession of a third party, SpectRx shall cause such
third party to supply Healthdyne with access to such tooling. In the event such
tooling is in the possession of SpectRx, SpectRx shall provide such tooling to
Healthdyne; provided, however, Healthdyne shall give SpectRx reasonable access
to such tooling to allow duplication of same. SpectRx may resume making Licensed
Products following Healthdyne's commencement of making a Licensed Product if
SpectRx demonstrates it can meet the requirements of Subsections (A) and (B) of
this Section 2.l(iii), and SpectRx reimburses Healthdyne for reasonable costs to
commence manufacturing [*] plus the cost of any enhanced or improved tooling
developed by Healthdyne to the extent such enhanced or improved tooling cost,
when added to Healthdyne's reasonable costs to commence manufacturing, would
[*]. In the event SpectRx resumes making the Product, all SpectRx tooling will
be returned promptly to SpectRx by Healthdyne. If such SpectRx tooling has been
altered or improved, such altered or improved tooling shall be returned to
SpectRx. In addition, all manufacturing know-how acquired by Healthdyne in
manufacturing the Licensed Products will be licensed to SpectRx on a
non-exclusive royalty-free basis in perpetuity. In the event Healthdyne has
made Instruments, Accessories, or Disposables, as
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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the case may be, for two (2) years, SpectRx will no longer have the right to
resume making such Licensed Products.
(A) [*] of all units of a Licensed Product
delivered in any one calendar month period must meet the
inspection and acceptance standards set forth in Section 8
hereof,
(B) in any one calendar month period,
SpectRx must deliver quantities representing [*] of all units
of a Licensed Product called for on purchase orders accepted
or required to be accepted by SpectRx under Section 4 hereof
Deliveries of replacement Licensed Products
shall be included within the calculation of (A) or (B) above
in the month in which such replacement Licensed Products are
delivered to Healthdyne. If SpectRx fails to meet (A) or (B)
above, and Healthdyne delivers notice of such failure pursuant
to this Section 2.1(iii), Healthdyne, at its option and
expense, may engage a consultant to review the circumstances
and suggest corrective action to be taken during the two (2)
month cure period specified above in order to assist in the
correction of the failures specified in the notice. Engagement
of the Consultant by Healthdyne or adoption of corrective
action suggested by the Consultant shall not extend or affect
in any manner the two (2) month cure period specified above.
The provisions of this Section 2.1(iii) are in addition to and
not in lieu of any other rights or remedies of Healthdyne in
this Agreement (or otherwise in law or in equity) to require
Licensed Products to meet final product specifications and to
be delivered in a timely manner.
2.2 OEM Licenses. Notwithstanding anything to the contrary set
forth herein, Healthdyne may (i) grant sub-licenses to one or more third parties
to manufacture Instruments in the event a manufacturing license is granted in
accordance with Section 2.1(iii), and (ii) may grant non-exclusive sub-licenses
to use and sell Licensed Products to one or more third parties (but not the
manufacture of such Licensed Products unless such manufacture is pursuant to a
manufacturing license granted in accordance with Section 2.1(iii)) in such third
party's name, or such third party's name in conjunction with Healthdyne's name
provided such third party is a hospital, or a home care dealer or distributor
who, in the absence of the sub-license, would be considered an end user within
Healthdyne's normal channels of distribution ("Private Label Dealer").
Healthdyne covenants that no more than [*] of its net sales revenue for Licensed
Products shall be sold to Private Label Dealers.
2.3 Other Sub-Licenses. Except for sub-licenses and licenses
consistent with Section 2.2 or assignments consistent with Section 16.2,
Healthdyne may only sublicense SpectRx Technology with SpectRx's written
consent, which shall not be unreasonably withheld.
2.4 Reservation of Rights. This Agreement does not grant,
license or permit (either expressly or by implication) Healthdyne to transfer,
assign, sell, give, license, sub-license or in any way permit the use of any of
the SpectRx Technology by or to any person, including any Affiliate of
Healthdyne, other than as, and to the extent, expressly provided for herein.
Healthdyne shall not
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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use the SpectRx Technology for any purpose or purposes other than those
expressly permitted under the license grants provided for in Section 2.1 hereof,
and subject to the limitations, and terms and conditions, thereof. The licenses
granted to Healthdyne provided for herein grants unto Healthdyne, subject to the
terms and conditions hereof, the right to use the SpectRx Technology to use and
sell the Licensed Products, and under certain defined circumstances to make
certain Licensed Products only, and only within the Territory, and, except for
the right to receive royalties on sale of Licensed Products sold outside the
Territory under the circumstances set forth in Section 14.5, nothing contained
herein or elsewhere shall be construed to permit the use by Healthdyne of the
SpectRx Technology to use or sell, or make or have made products other than the
Licensed Products, or to use or sell Licensed Products outside of the Territory.
3. Commercialization Efforts and License Fees.
3.1 Commercialization Efforts. Each party agrees to utilize reasonable
business efforts to progress through the milestones toward commercialization of
the Licensed Products, as specifically set forth in Exhibit E. Once
commercialized, Healthdyne shall promote and support the Licensed Products at an
effort level consistent with Healthdyne's sales support, customer service and
technical support levels with respect to Healthdyne's other products. Healthdyne
covenants that it will only sell Disposables which have been manufactured in
accordance with the terms of this Agreement. Healthdyne shall submit a marketing
plan in respect of the Licensed Products to SpectRx in respect of each calendar
year no later than thirty (30) days prior to the commencement of such year. Such
plan shall include, without limitation, plans to undertake clinical studies,
advertisements in journals and other publications and other typical marketing
communications as may be reasonably necessary to promote sales of the Licensed
Products.
3.2 License Fees. Healthdyne agrees to pay license fees for the
Disposable based upon achievement of certain milestones set forth in Exhibit E.
If all milestones are attained, the total license fees will amount to [*]. The
parties agree that [*] of such license fees have been paid by Healthdyne to
SpectRx. Each such milestone payment shall be due and payable in advance upon
the completion of the previous milestone as set forth in Exhibit E. SpectRx will
give Healthdyne no less than ten (10) days written notice of a meeting at which
it will review with Healthdyne its completion of a milestone as set forth on
Exhibit E. Healthdyne shall, within ten (10) business days of the meeting set
forth in the notice, pay SpectRx with respect to the following milestone or give
SpectRx written notice its intent to arbitrate. Notwithstanding the above, the
milestone for the Delivery of the Pre-Production Unit shall only be payable upon
the satisfactory completion of the milestone.
4. Purchase and Distribution of Licensed Products.
4.1 Purchase Orders. During the term of this Agreement and in
accordance with its provisions, SpectRx agrees to sell and Healthdyne agrees to
purchase the Instruments, Disposables and Accessories, in accordance with the
terms of this Agreement. The purchase and sale of the products between the
Parties shall be made by means of purchase orders placed by Healthdyne or its
designee to SpectRx ("Purchase Orders"). Purchase Orders and change orders may
be placed by telex or facsimile. A Purchase Order may provide for delivery of
the products for a period of up to
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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one hundred eighty (180) days following termination of this Agreement in order
to complete the inventory of Licensed Products necessary to complete purchase
orders for Licensed Products outstanding at the time of termination and all
terms and conditions of this Agreement shall govern. Any Purchase Order issued
for the products hereunder shall be non-cancelable after the expiration of
fifteen (15) days from the acceptance of the Purchase Order, and Healthdyne
thereafter shall be responsible for taking deliveries of and paying for all
products set forth on such Purchase Order.
4.2 Acceptance. Purchase Orders and change orders issued by
Healthdyne shall be deemed to be offers to purchase Licensed Products on the
terms and conditions of this Agreement subject to acceptance by telex or
facsimile within five (5) working days after receipt of Healthdyne's Purchase
Orders. Acceptance of receipt and acceptance by SpectRx may be placed by telex
or facsimile.
4.3 Contents. All Purchase Orders for the products submitted
by Healthdyne shall state the following: (i) price, (ii) the quantities ordered,
(iii) the requested delivery dates, (iv) destination, (v) requested method of
shipment, and (vi) model or number of the products in accordance with the terms
and conditions hereof Healthdyne shall use its form of Purchase Order attached
hereto as Exhibit F to place Purchase Orders and emergency orders referred to in
Section 4.6 below, provided that, in the event of a conflict between the form of
the Purchase Order and this Agreement, the terms and conditions of this
Agreement shall prevail.
4.4 Rolling Forecasts. On or before the fifth (5th) day of
each calendar quarter commencing with the second quarter following
commercialization of a Licensed Product, Healthdyne agrees to submit to SpectRx
a non-binding forecast of its anticipated product purchases for the following
six (6) calendar months. The quantity of Licensed Products contained in a
particular calendar quarter may not vary by more than twenty percent (20%) from
the previous forecast for such calendar quarter.
4.5 Purchase Orders Quantities. Healthdyne will issue a
Purchase Order consistent with subsection 4.3 at least thirty (30) days prior to
the scheduled delivery date. SpectRx shall be required to accept Purchase Orders
calling for delivery of Licensed Products which are within [*] of the quantities
forecasted for such Licensed Products in the most recent forecast as set forth
in Section 4.4. Failure to accept Purchase Orders greater than [*] of the most
recent forecast or less than [*] of the most recent forecast shall not be
grounds for Healthdyne to notify SpectRx of its failure to deliver Licensed
Products as set forth in Section 2.1(iii) hereof.
4.6 Emergency Orders. The rolling forecasts and Purchase
Orders submitted by Healthdyne under subsections 4.4 and 4.5 above shall not
prevent Healthdyne from placing additional orders or emergency orders for units
of the products for delivery in less than thirty (30) days. SpectRx agrees to
use reasonable business efforts (at an effort level equivalent to SpectRx's
efforts with respect to its other customers) to deliver such units of products
on the requested schedule. Failure to deliver quantities of products on or
before the date specified in the Emergency Purchase Order shall not be grounds
for Healthdyne to notify SpectRx of its failure to deliver Licensed Products as
set forth in Section 2.1(iii).
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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5. Minimum Purchases.
5.1 Instruments and Disposables. In order to maintain the exclusivity
provisions in Section 2.1 hereof, Healthdyne will purchase from SpectRx (or pay
a Royalty for equivalent number of sales of Licensed Products in the event
Healthdyne is making Licensed Products pursuant to Section 2.1(iii)) during the
term of this Agreement the minimum number of Instruments and Disposable units
set forth on Exhibit G. The sole remedy of SpectRx for the failure of Healthdyne
to meet minimum unit purchases for any period shall be to convert the license
granted hereunder for the remainder of the term of the License Agreement to a
non-exclusive license. Such conversion shall be effective upon the giving
forty-five (45) days prior written notice to Healthdyne following the end of any
minimum period hereunder. If during the forty-five (45) day notice period
Healthdyne makes up the previous minimum short fall, then Healthdyne's rights
remain exclusive. Licensed Products purchased during such period to make up the
shortfall will not be counted for purposes of the then current period in respect
of the minimum purchase required therefor. If Healthdyne's rights under this
Agreement become non-exclusive, Healthdyne thereafter shall not be required to
make minimum purchases.
6. Prices, Royalties and Payment.
6.1 Instrument Price. SpectRx's price to Healthdyne for the Instrument
(excluding Disposables) delivered in accordance with this Agreement shall be [*]
each. In addition, Healthdyne agrees to pay [*] of the Royalty due and payable
to M.D. Anderson, [*] of the Net Selling Price for the Instrument all as set
forth in the Sub-license Agreement set forth in Exhibit D-1 hereto. All prices
are F.O.B. SpectRx's shipping dock. Should SpectRx's or Healthdyne's respective
Gross Margin for the sale of Instruments ever fall below [*] for [*] consecutive
quarters, then Healthdyne and SpectRx will renegotiate transfer pricing for the
Instrument in good faith. If SpectRx's or Healthdyne's Gross Margin for the sale
of Instruments ever exceed [*] for [*] consecutive quarters, then Healthdyne and
SpectRx will renegotiate transfer pricing for the Instrument in good faith. In
the event that Healthdyne becomes entitled to make the Instruments, SpectRx will
receive a Royalty equal to the difference between the [*] then in effect and
Healthdyne's [*] for manufacturing the Instrument. In the event that the
difference between the transfer price then in effect and Healthdyne's Cost of
Goods Sold is a negative number (i.e. Healthdyne's Cost of Goods Sold exceed the
then existing transfer price), there will be no amount payable to SpectRx. [*]
following Healthdyne's commencement of making a Licensed Product, SpectRx's
total compensation will be revised to a [*] Royalty on Healthdyne's Net Selling
Price. [*] following Healthdyne's commencement of making a Licensed Product,
SpectRx's total compensation will be reduced to a [*] Royalty on Healthdyne's
Net Selling Price. [*] following Healthdyne's commencement of making a Licensed
Product and thereafter for the remaining term of the Agreement, SpectRx's total
compensation will be reduced to a [*] royalty on Healthdyne's Net Selling Price.
6.2 Disposable and Accessory Pricing. Healthdyne shall pay
SpectRx SpectRx's Disposable Cost for manufacturing the Disposable or Accessory
in question. SpectRx and Healthdyne agree to split equally the available margin
for Disposables and Accessories manufactured by SpectRx where the margin is
defined as the difference between (i) Healthdyne's Average Selling
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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Price, and (ii) the sum of (a) SpectRx's Disposable Costs to manufacture the
Disposables or Accessory in question and (b) [*] of Healthdyne's Average Selling
Price for Disposables and Accessories. Healthdyne agrees to use reasonable
business efforts (an effort level equivalent to Healthdyne's efforts with
respect to its own products) to maximize the amounts to be split from
Disposables and Accessories. SpectRx agrees to use reasonable business efforts
(at an effort level equivalent to SpectRx's efforts with respect to its other
products) to minimize its Disposable Costs. Should SpectRx's Disposable Cost for
the Disposable ever [*], the Parties will renegotiate pricing in good faith.
Margins and Average Selling Price shall be calculated for each calendar quarter.
In the event Healthdyne becomes entitled to make any of the Disposables or
Accessories for use with Instruments, Healthdyne shall pay to SpectRx a Royalty
equal to [*] between (i) Healthdyne's Average Selling Price and (ii) the sum of
(a) Healthdyne's Disposable Cost to produce the Disposable or Accessory in
question and (b) [*] of Healthdyne's Average selling price for Disposables and
Accessories. In the event that the difference as calculated above is a negative
number, no amounts will be paid to SpectRx hereunder.
6.3 Audit Rights. SpectRx shall have the right to verify, at
its expense and not more frequently than twice per year and upon not less than
thirty (30) days' prior written notice to Healthdyne, the accuracy of the
accounting reports and Royalty payments provided by Healthdyne hereunder,
through inspection of Healthdyne's pertinent records and books of accounts
maintained in the ordinary course of business. Such audit shall be conducted by
a certified public accountant (the "CPA") chosen by SpectRx in its reasonable
discretion, and which CPA is reasonably acceptable to Healthdyne. If the CPA
determines that Healthdyne has overpaid SpectRx, SpectRx will promptly repay
Healthdyne. If the CPA determines that Healthdyne has underpaid SpectRx,
Healthdyne shall have sixty (60) days from receipt of notice of the alleged
underpayment to investigate and review the alleged underpayment. If Healthdyne
concurs that there has been an underpayment, Healthdyne shall promptly pay
SpectRx the amount of any such underpayment. In such event, SpectRx shall pay
all costs, expenses and fees of the CPA unless (i) Healthdyne has underpaid
SpectRx, and (ii) the amount of such underpayment exceeds five percent (5%) of
the amount actually due to SpectRx for the period audited, in which event the
CPA's costs, fees and expenses shall be paid by Healthdyne. If Healthdyne does
not concur with the CPA's determination, the matter will be sent to binding
arbitration in accordance with the rules set forth as Exhibit H, provided,
however, the arbitrator shall be a CPA from an agreed upon national accounting
firm which is not affiliated with either party and is reasonably satisfactory to
each party. Each party shall pay its own costs in arbitration.
Healthdyne shall have the right to verify, at its expense and
not more frequently than twice per year and upon not less than thirty (30) days
prior written notice to SpectRx, the accuracy of the accounting records reported
to Healthdyne by SpectRx hereunder, through inspection of SpectRx's pertinent
records and books of accounts (including but not limited to product costs)
maintained in the ordinary course of business. Such audit shall be conducted by
a certified public accountant (the "CPA") chosen by Healthdyne in its reasonable
discretion, and which CPA is reasonably acceptable to SpectRx. If the CPA
determines that Healthdyne has underpaid SpectRx, Healthdyne will promptly pay
SpectRx such amount. If the CPA determines that Healthdyne has overpaid SpectRx,
SpectRx shall have sixty (60) days from receipt of notice of the alleged
overpayment to investigate and review the alleged overpayment. If SpectRx
concurs that there has
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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been an overpayment, SpectRx shall promptly pay Healthdyne the amount of any
such overpayment. In such event, Healthdyne shall pay all costs, expenses and
fees of the CPA unless (i) Healthdyne has overpaid SpectRx, and (ii) the amount
of such overpayment exceeds five percent (5%) of the amount actually due to
SpectRx for the period audited, in which event the CPA's costs, fees and
expenses shall be paid by SpectRx. If SpectRx does not concur with the CPA's
determination, the matter will be sent to binding arbitration in accordance with
the rules set forth as Exhibit H; provided, however, the arbitrator shall be a
CPA from an agreed upon national accounting firm which is not affiliated with
either party and is reasonably satisfactory to each party. Each party shall pay
its own costs in arbitration.
6.4 Currency Basis. Prices for the products sold to Healthdyne shall be
in U.S. Dollars.
6.5 F.O.B. Point. Title to and risk of loss of the products shall pass
to Healthdyne, F.O.B. SpectRx's United States shipping dock.
6.6 Payment. Payment by Healthdyne to SpectRx for the transfer price
for Instruments shall be made thirty (30) days following receipt of delivery by
Healthdyne. Payment by Healthdyne to SpectRx for margin split amounts due for
Disposables and Accessories under 6.2 hereof shall be payable within forty-five
(45) days of the end of each calendar quarter. Any Royalty payable under 6.1 or
6.2 shall be payable within forty-five (45) days of the end of each calendar
quarter together with a report providing in reasonable detail the basis for
calculating the royalty.
6.7 Instrument Only Business. In the event the marketplace for sales of
Instruments and Disposables becomes predominantly for the sale of Instruments
only, the Parties agree to meet and negotiate in good faith to revise the
pricing under this Section 6.
6.8 Covenant as to Pricing. In determining the Net Selling Price for
each Licensed Product, Healthdyne covenants and agrees to not disadvantage or
understate the Net Selling Price to the advantage of Healthdyne relative to the
sale of its other products.
7. Delivery.
7.1 Transportation. The method of transportation and carrier selected
shall be as specified by Healthdyne in its Purchase Orders. Unless otherwise
agreed, after delivery of the products to the F.O.B. point, all transportation
charges, including insurance, shall be paid by Healthdyne.
7.2 Packaging. SpectRx shall package Licensed Products for shipment and
ship Licensed Products in accordance with standards mutually agreed upon by the
parties and other required international regulatory standards. Each shipment
shall include a packing list containing: (i) Purchase Order number, (ii) model
number of the products, (iii) quantity, (iv) serial number or date code of
shipped products, and (v) the results of applicable quality assurance and other
tests performed with respect to the products being shipped.
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<PAGE> 12
7.3 Delivery. SpectRx shall use reasonable business efforts (at an
effort level consistent with its efforts with respects to its other customers)
to assure that it fills all Purchase Orders by delivery dates and in quantities
specified by Healthdyne in its Purchase Orders.
8. Inspection and Acceptance.
8.1 SpectRx Inspection. SpectRx shall be an FDA registered
manufacturing facility and shall follow good manufacturing practices established
by the FDA and provide and maintain an inspection procedure and quality
assurance program for the products sold by SpectRx to Healthdyne hereunder and
its production processes. Complete records of all inspection and quality
assurance work done by SpectRx shall be made available to Healthdyne upon its
request at reasonable times during the term of this Agreement. Healthdyne shall
have the right to audit SpectRx's manufacturing facilities upon reasonable
notice to determine whether SpectRx is following good manufacturing practices.
8.2 Healthdyne Inspection.
8.2.1 Prior to commercial introduction of Licensed Products, the
parties shall mutually agree on Healthdyne's criteria for acceptance testing
("Acceptance Test"). All products ordered by Healthdyne under this Agreement may
be subject to statistical lot sampling inspection or 100% testing to
Healthdyne's Acceptance Test at Healthdyne's receiving facility. In order to
invoke Section 2.I(iii) hereof, Healthdyne must 100% inspect the units involved
in such shipments. Any of the products or lots of products ("Lot") which
materially fall to meet the mutually agreed upon final product specifications
following the Acceptance Test may be rejected by Healthdyne and returned to
SpectRx for replacement. Prior to returning any products to SpectRx, Healthdyne
shall notify SpectRx by facsimile or telex that Healthdyne has rejected the
products, inclusive of the reason or basis of such rejection. Within three (3)
working days of the receipt of the non-conforming notification, SpectRx will
issue a "Return to Vendor" ("RTV") number to Healthdyne by facsimile or telex,
which RTV number will be Healthdyne's authorization to return the products. In
Healthdyne's sole discretion, it may allow SpectRx to enter on Healthdyne's
premises to repair products otherwise subject to replacement under the
provisions of this Section 8.2.
8.2.2 Healthdyne shall promptly notify SpectRx of any incoming
failure. Except for products repaired pursuant to Section 8.2.1, Products which
do not conform to the final product specifications shall be returned by
Healthdyne to SpectRx freight collect and insured for full replacement value.
Within twenty (20) days after the date of receipt of the nonconforming products
by SpectRx, replacement product will be shipped to Healthdyne at SpectRx's
expense. Should SpectRx fail to replace rejected products by shipping conforming
products to Healthdyne within twenty (20) days of its receipt of the
nonconforming products, Healthdyne shall have the option, in addition to any
other remedies available to it in law or equity, to cancel without cost or
liability the purchase of such products and receive, at Healthdyne's option, a
credit or rebate if payment has been made. Healthdyne shall pay freight charges,
insurance and other customary charges for transportation for improperly rejected
products.
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<PAGE> 13
8.2.3 All costs to replace or repair including transportation with
respect to the defective products shall be the sole responsibility of SpectRx.
8.2.4 If Healthdyne attempts to correct deficiencies to the
products purchased under this Agreement without prior authorization from
SpectRx, then SpectRx shall have no further obligations with respect to such
products.
8.3 Nonconforming Acceptance. Healthdyne may choose to accept
the products which fail to conform in a minor aspect to the specifications
established by this Agreement without prejudice to its right to reject
nonconforming items in the future. If Healthdyne so chooses, Healthdyne will
notify SpectRx of its intent to accept nonconforming items. However, SpectRx
accepts no responsibility for the nonconforming aspects of the items accepted by
Healthdyne.
9. Confidentiality; Exclusive Rights; Exclusive Option and Right of First
Refusal.
9.1 Confidentiality. The parties agree that the terms and conditions of
that certain Confidentiality Agreement between the parties dated February 22,
1995 are superseded by the following confidentiality provisions:
(a) Each party agrees to keep the Trade Secrets and Confidential
Information of the other party confidential. For purposes of this Agreement,
"Trade Secrets" means information including, but not limited to, technical or
nontechnical data, formulas, patterns, compilations, programs, devices, methods,
techniques, drawings, processes, financial data, financial plans, product plans
or fists of actual or potential customers or suppliers which (1) derives
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by other persons who can obtain
economic value from its disclosure or use; and (2) is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy.
"Confidential Information" means data and information relating to the business
of a party (which does not rise to the level of Trade Secret) which is or has
been disclosed to the other party or of which the other party became aware as a
consequence of or through its relationship with the disclosing party and which
has value to the disclosing party and is not generally known to the disclosing
party's competitors. Trade Secrets and Confidential Information will not include
any data or information that is already known to a party at the time of
disclosure to such party, or which (i) has become generally known to the public
through no wrongful act of such party; (ii) has been rightfully received by such
party from a third party without restriction on disclosure and without breach of
an obligation of confidentiality running either directly or indirectly to the
other party; (iii) has been approved for release and released to the general
public by written authorization of the other party; (iv) has been disclosed
pursuant to a requirement of a governmental agency or of law without similar
restrictions or other protections against public disclosure, or has been
required to be disclosed by operation of law; provided, however, that a party
must first have given written notice of such required disclosure to the other
party, used reasonable business efforts to obtain a protective order requiring
that the Trade Secret or Confidential Information so disclosed be used only for
the purposes for which disclosure is required, and taken reasonable steps to
allow the other party to seek to protect the confidentiality of the information
required to be disclosed; (v) is independently developed by a party without use,
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<PAGE> 14
directly or indirectly, of the Trade Secret or Confidential Information; or (vi)
is furnished to a non-Affiliated third party by the other party without
restrictions on the third party's right to disclose the information. The
provisions of this Agreement restricting the use of Trade Secrets shall survive
termination of this Agreement for so long as is permitted by the Georgia Trade
Secrets Act of 1990, O.C.G.A. Section 10-1-760-10-767. The provisions of this
Agreement restricting the use of Confidential Information shall survive for a
period of three (3) years following termination or expiration of this Agreement.
(b) Disclosure may be made by Healthdyne to governmental agencies to
the extent required or desirable to obtain regulatory approval for Licensed
Products and to nonclinical and clinical investigators and consultants where
necessary or desirable for their information to the extent normal and usual in
the custom of the trade and under a secrecy agreement with provisions as to
confidentiality essentially the same as those in this Agreement.
9.2 Exclusive Option. SpectRx hereby grants to Healthdyne the exclusive
option to acquire an exclusive license for the United States and Canada, on
substantially the same terms and conditions as are set out in this Purchasing
and License Agreement, to any new technology and intellectual property (other
than the SpectRx Technology and any Improvement thereto) for which SpectRx has
right and authority to grant licenses that may be conceived, invented, reduced
to practice, or otherwise come into existence subsequent to the date of this
Agreement by SpectRx for such other devices as may be directly or indirectly
competitive with the Licensed Products manufactured using the SpectRx Technology
(hereinafter referred to as the "Area Device"), provided that Healthdyne agrees
to reimburse SpectRx for [*] to develop and commercialize an Area Device.
Payment of [*] shall be in lieu of any license fees, and the parties agree that
"substantially the same terms and conditions" as used in the preceding sentence
shall not include license fees or the like.
9.3 Right of First Refusal. With respect to the option granted in
Section 9.2, Healthdyne shall have a three (3) month period after notification
by SpectRx in which to exercise in writing its option to obtain such license.
Such notification shall include a detailed description of the new technology,
the design of the proposed Area Device, and any prototype in existence together
with the projected costs of development and manufacture of the Area Devices and
the schedule for commercialization. If Healthdyne falls to exercise its option,
SpectRx may license such development to any third party on terms no more
favorable than those offered to Healthdyne. If SpectRx proposes to offer more
favorable terms to a third party, then Healthdyne shall be notified of the more
favorable terms and shall have a thirty (30) day period to accept the new terms
after which period SpectRx may enter into a license with a third party. For the
purposes of clarity, SpectRx may only enter into a license with a third party
for any technology relative to the Area Device after Healthdyne has had the
opportunity to accept the license on equivalent or better terms.
9.4 Exclusive Rights. During the term of any exclusive license granted
under the terms of this Agreement, SpectRx agrees that as part of the exclusive
license granted hereby, it will not market or sell within the Territory any Area
Devices without first complying with the provisions of Section 9.2 and 9.3
hereof in respect thereof.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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<PAGE> 15
10. Proprietary Rights.
10.1 If, during the term of this Agreement, either party shall discover
or invent an improvement (hereinafter called the "Improvement") to the SpectRx
Technology, such party agrees to promptly disclose to the other party and
furnish to the other party all information pertaining thereto, including
blueprints, sketches, drawings, designs, computer programs, and other data.
Healthdyne and SpectRx shall, to the best of their ability, cause its
employees to disclose only to Healthdyne and SpectRx, respectively, any
Improvement made or developed by them or any of them during the term of this
Agreement, and Healthdyne and SpectRx each agree to inform the other party
promptly of any such Improvement of which it becomes aware within a reasonable
time. Title to any such Improvement shall as it relates to the SpectRx
Technology shall reside with SpectRx. During the term of this Agreement,
Healthdyne may use such Improvements as are discovered or invented by SpectRx
only in conjunction with the SpectRx Technology and only for the purposes
contemplated by this Agreement and such discovery or invention shall be deemed
to be part of the licensed subject matter for all purposes of this Agreement.
Notwithstanding the foregoing, an Improvement made by Healthdyne which
also has application to Healthdyne Technology shall be owned by Healthdyne as it
relates to Healthdyne Technology ("Healthdyne Improvement"). In such case, both
parties shall be entitled to utilize such enhancement or revisions in connection
with Licensed Products (and, in the case of Healthdyne, with its other products)
without the payment of any additional Royalty, provided however that SpectRx
shall not make any commercial use thereof in the United States and Canada during
the term of this Agreement.
In the event an Improvement increases the cost for direct materials and
direct labor per GAAP ("Direct Cost") for manufacturing the Instrument, SpectRx
may increase the transfer pricing in Section 6.1 by the amount of such increase
in the Direct Cost provided Healthdyne approves in writing the incorporation of
such Improvement into the Instrument. Healthdyne shall also approve
incorporation of an Improvement to a Disposable or an Accessory.
10.2 Further Action. Healthdyne and SpectRx each agree that it shall
promptly notify the other of any Improvement, invention or other improvement in
which such party has involvement and which relates to this Agreement and fully
disclose such Improvement, invention or other improvement to the other party.
Each party agrees that it shall take all actions and execute all documents, as
the other party may reasonably . request, to effectuate the acknowledgment of
any party's ownership or exclusive license under this Section 10.
11. Warranty.
11.1 SpectRx Warranty.
11.1.1 SpectRx warrants that the Instruments supplied by SpectRx
to Healthdyne to be under normal use and care free for a period of the longer of
[*] after shipment to
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<PAGE> 16
Healthdyne or [*] from sale to the end-user from any defect in workmanship or
material and to materially conform with the mutually agreed upon final product
specifications. All replacement costs under this Warranty shall be borne by
SpectRx. Units returned to SpectRx for warranty repairs shall be shipped to
SpectRx freight collect according to SpectRx's instruction. Within twenty (20)
days of the receipt of Instruments, SpectRx shall replace or repair such units
and shall ship them to Healthdyne's designated return destination freight
prepaid. The foregoing warranties extend to the products returned by
Healthdyne's customers.
11.1.2 SpectRx warrants that for a period that an Accessory is
warranted by a manufacturer other than SpectRx, the Accessories supplied by
SpectRx to Healthdyne hereunder will be, under normal use and care, free from
any defect in workmanship or material and to be in conformity with the
manufacturer's specifications. All replacement costs under this Warranty shall
be borne by SpectRx. Units returned to SpectRx for warranty repairs shall be
shipped to SpectRx or the manufacturer freight collect according to SpectRx's
instruction. Within twenty (20) days of the receipt of the returned Accessories,
SpectRx shall replace or repair such units and shall ship them to Healthdyne's
designated return destination freight prepaid. The foregoing warranties extend
to the products returned by Healthdyne's customers. Accessories manufactured by
SpectRx shall have the same warranty as the Instrument.
11.1.3 SpectRx warrants that for a period of the lesser of [*]
from SpectRx to Healthdyne of a Disposable (single patient use only) supplied by
SpectRx to Healthdyne hereunder will be, under normal use and care, and only
upon first use free from any defect in workmanship or material and to materially
conform with the mutually agreed upon n product specifications. SpectRx shall
bear all replacement costs under this Warranty. Healthdyne shall ship units
returned to SpectRx for warranty repairs to SpectRx freight collect according to
SpectRx's instruction. Within ten (10) days of the receipt of the Disposable,
SpectRx shall replace or repair such units and shall ship them to Healthdyne's
designated return destination freight prepaid. The foregoing warranties extend
to the products returned by Healthdyne's customers.
11.2 Limitation of Liability. EXCEPT FOR THE EXPRESS WARRANTIES SET
FORTH ABOVE, SPECTRX GRANTS NO WARRANTIES, EITHER EXPRESS OR IMPLIED, ON THE
LICENSED PRODUCTS, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL EITHER PARTY BE RESPONSIBLE
FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL DAMAGES, LOSS OF PROFIT, SUFFERED BY THE
OTHER PARTY IN CONNECTION WITH THIS AGREEMENT.
12. Infringement.
12.1 Third Party Infringement of Patent Rights. In the event that
Healthdyne believes a third party to be infringing one or more of the Patent
Rights or Healthdyne's exclusive license granted hereunder ("License Rights"),
Healthdyne shall bring such infringement to the attention of SpectRx. If SpectRx
does not institute infringement proceedings against such third party within
ninety (90) days after written notice from Healthdyne that such third party
appears to be
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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<PAGE> 17
infringing one or more of the Patent Rights or License Rights, Healthdyne shall
have the right to take whatever steps in its own and sole discretion it shall
deem advisable, including but not limited to, settlement or the filing of suit
for damages, or to enjoin such sales or offers for sale by such third party. In
the event that Healthdyne exercises its discretion to bring an infringement
action, SpectRx shall perform all acts which may become necessary or desirable
to vest in Healthdyne the right to institute any such suit and shall, upon
reasonable notice, cooperate and, to the extent deemed necessary or desirable by
Healthdyne and at Healthdyne's expense, participate in any suit to enjoin such
infringement and to collect, for the benefit of Healthdyne, damages, profits and
awards of any nature recoverable for such infringement. In the event the third
party infringer is a licensee of SpectRx, SpectRx agrees to take all actions
reasonably requested by Healthdyne to require such licensee to cease such
infringement and recoup damages, profits and awards of any nature recoverable
for such infringement; such action by SpectRx may include, but is not limited
to, termination of the license of the infringing licensee. The costs and
expenses of such suit or settlement shall be borne by the party hereto bringing
the suit. Recovery of damages in any such suit or settlement any third party
shall first be applied to reimburse the party brining the suit for its
reasonable attorneys' fees, costs plus other out-of-pocket costs or expenses
incurred in connection with such suit or settlement. Any excess recovered
damages shall be applied one-half to SpectRx and one-half to Healthdyne.
12.2 Patent Rights Allegedly Infringe Rights of Third Party. In the
event a third party alleges that the SpectRx Technology infringes upon
intellectual property rights of another entity in the United States or Canada,
the party learning of such alleged infringement shall notify the other party. In
accordance with the provisions hereinafter provided, SpectRx will settle or
defend all proceedings, threats of proceedings or claims against SpectRx,
Healthdyne or its customers for infringement or alleged infringement by the
SpectRx Technology furnished by SpectRx to Healthdyne under this Agreement of
patents, copyrights, or similar intellectual property rights of any third party
in the United States or Canada. Healthdyne agrees to give SpectRx necessary
assistance where practical, to modify the SpectRx Technology to make Licensed
Products non-infringing or, where practical, to obtain licenses under such
patents, copyrights or similar intellectual property rights. SpectRx may, at its
sole discretion, modify the SpectRx Technology to make it non-infringing
provided the Licensed Product so modified meets final product specifications for
the Licensed Product. In all other instances, the parties agree to consult with
one another concerning the defense or settlement of any and all proceedings,
threats of proceedings or claims against SpectRx or Healthdyne hereunder, and
Healthdyne shall have the right to obtain independent counsel to represent its
interests in the proceedings, threats of proceedings or claims; such counsel
shall be provided full access to all documents and meetings and be allowed to
participate in the proceedings or claims to the extent permitted by the court.
Both parties shall be required to approve and execute any settlement of the
proceedings, threats of proceedings or claims. Healthdyne and SpectRx each agree
to pay one-half of any (i) defense costs incurred by either party (including
reasonable attorney's fees) in defending any proceedings, threats or claims, and
(ii) damages, settlement payments, ongoing royalties, license fees or the like
payable to a third party by either party to allow the continued manufacture, use
and sale of the Licensed Products. In the event either Healthdyne or SpectRx is
enjoined from further sale of a Licensed Product hereunder during the first two
(2) years of commercialization of Licensed Products, SpectRx will pay Healthdyne
one-half of all License Fees paid by Healthdyne to SpectRx hereunder.
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<PAGE> 18
12.3 Regulatory Compliance.
Healthdyne shall be solely responsible for identifying and obtaining,
at its sole cost and expense, all FDA and United States or Canadian safety
agency required approvals and any other agency or regulatory approvals which are
required for Healthdyne's use or sale of the Licensed Products in the United
States or Canada. SpectRx will reasonably cooperate with Healthdyne by providing
at no charge to Healthdyne any SpectRx engineering data that is reasonably
required to obtain the regulatory approvals, including but not limited to 510(k)
application materials submitted by SpectRx for its own products that incorporate
SpectRx Technology. Other than as stated above, SpectRx will not, however, be
required to produce any new data or reformat or otherwise republish any existing
data. Disclosure by Healthdyne of any such data shall be subject to the
confidentiality provisions of Section 9.
13. Incident Reporting.
13.1 SpectRx Reporting. SpectRx represents and warrants that all
products manufactured and sold to Healthdyne pursuant to this Agreement shall be
manufactured in conformance with all applicable requirements of the FDA and in
accordance with all United States federal, state and local statues, ordinances
and regulations, including, but not limited to, the Federal Food, Drug and
Cosmetic Act (21 U.S.C. 301 et seq.).
13.2 Recall. If for any reason (i) the FDA mandates a recall of
Licensed Product(s), or (ii) the parties agree that a recall of Licensed
Product(s) is (are) necessary, Healthdyne agrees that it shall as expediently as
possible issue a recall notice to all its customers recalling the Licensed
Products in question. Provided that the products meet the final product
specifications, SpectRx's responsibilities under the recall shall be to repair
or replace the part that causes the recall free of charge. In respect of a
recalled Licensed Product, if the Licensed Products fail to meet materially
final product specifications, then SpectRx shall repair and/or replace the
Licensed Product in question free of charge and pay all freight or shipping
charges involved with such recall. In the event of any recall of any Licensed
Product which does not arise from the incorporation of SpectRx Technology into
such Licensed Products, the parties shall cooperate to the extent reasonably
necessary to conduct such recall in accordance with Healthdyne's policies and
procedures.
14. Term and Termination.
14.1 Term. This Agreement shall become effective as of the effective
date first set forth above, and shall remain in effect for the longer of
fifteen years (15) or the last to expire patent contained in the Patent Rights.
At Healthdyne's option, Healthdyne may give SpectRx notice of its intent to
renew at least ninety (90) days prior to the end of the initial term or any
renewal term, as the case may be, for additional fifteen year terms.
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<PAGE> 19
14.2 Termination.
14.2.1 The default by one Party of a material obligation of such
Party under this Agreement shall entitle the other Party to give the Party in
default written notice describing such default and requiring it to remedy such
default. If such default is not reasonably remedied within ninety (90) days
after the date of such notice, the notifying Party shall be entitled to
terminate this Agreement by a written notice to the defaulting Party.
14.2.2 Either Party may terminate this Agreement after the filing
against the other Party by any third party of a petition in bankruptcy (which
petition remains undismissed for forty-five (45) days), or upon or after any
adjudication that the other Party is insolvent, or upon or after the filing by
the other Party of any petition or answer seeking reorganization, readjustment
or arrangement of the business of the other Party under any law relating to
bankruptcy or insolvency, or upon or after the appointment of a receiver for all
or substantially all of the property of the other Party of any assignment or
attempted assignment for the benefit of creditors, or upon or after the
institution of any proceedings for the liquidation or winding up of the other
Party's business.
14.3 Rights Upon Termination. In the event of any valid termination of
this Agreement by SpectRx under Section 14.2 hereof, all of Healthdyne's rights
under this Agreement shall be terminated. In the event of any valid termination
of this Agreement by Healthdyne under Section 14.2 hereof, Healthdyne, at its
option, may abandon all use of SpectRx Technology or continue use of its rights
in this Agreement by making, using and selling Licensed Products and the
provisions of Sections 2.2, 5.1, 6 and 16.15 shall continue to apply. In the
event of any termination, all requirements under Sections 9.1, 10, 11, 12, and
13 shall remain in effect. No termination shall impact SpectRx's rights to
collect for accrued royalties and payment for ordered and delivered product.
14.4 Not For Cause Termination. Healthdyne may terminate with or
without cause at any time during the term of this Agreement upon thirty (30)
days prior written notice to SpectRx. If Healthdyne terminates this Agreement
prior to the first sale of a Licensed Product, then all of Healthdyne's rights
under this Agreement with respect to the Licensed Product shall be terminated.
If subsequent to such termination by Healthdyne, SpectRx either licenses or
sells the SpectRx Technology or commercializes the SpectRx Technology or
Licensed Products, then any fees actually paid by Healthdyne to SpectRx that had
not been refunded to Healthdyne shall be paid to Healthdyne, as when sums become
available to SpectRx in the form of license fees, royalties on product-related
payments from third parties, or revenue from commercialization by SpectRx.
14.5 Liquidated Damages. In the event that the Milestone on Exhibit E
entitled "Acceptance by Healthdyne of Quantities Delivered Pursuant to First
Purchase Order" does not occur on or before [*] (the "Milestone Deadline") for
any reason whatsoever (other than the failure of Healthdyne to submit a purchase
order on a timely basis in order to prevent SpectRx from meeting such
milestone), Healthdyne shall have the right to assume the Commercialization
Efforts with respect to the Licensed Products as set forth in Section 3.1 and on
Exhibit E. In such event (i) SpectRx shall immediately supply Healthdyne with
all SpectRx Technology and documentation with respect to the
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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<PAGE> 20
Licensed Products as such documentation is described in Section 16.15, (ii)
SpectRx shall be deemed to have granted to Healthdyne, in addition to the
licenses set forth in Section 2.1(i) and (ii), the license set forth in Section
2.1(iii) to make Licensed Products once it completes the Commercialization
Efforts, (iii) all further License Fees from Healthdyne to SpectRx shall cease,
and (iv) SpectRx shall compensate Healthdyne by paying the Liquidated Damages
(as defined herein) in the manner provided for herein below. Notwithstanding the
assumption of the Commercialization Efforts by Healthdyne, and except as
expressly provided for in this Section 14.5, all other terms and conditions of
this Agreement shall remain in effect as provided for in this Agreement.
Although Healthdyne shall have the right to make Licensed Products pursuant to
subclause (ii) above, SpectRx shall have the right to resume making Licensed
Products in lieu of Healthdyne pursuant to the terms and conditions of Section
2.1 hereof "Liquidated Damages", as used herein, shall mean [*] Healthdyne's
actual costs in commercializing the Licensed Products incurred from the
Milestones Deadline until the time of the first commercial sale of a Licensed
Product in the Territory, although such Liquidated Damages shall in no event in
the aggregate [*]. The sum of "Healthdyne's actual costs in commercializing the
Licensed Products", as used in the preceding sentence to compute Liquidated
Damages, will be reduced by the amount of any unpaid License Fees which would
have otherwise been due to SpectRx by Healthdyne. The parties agree that
Healthdyne shall offset any amounts due to SpectRx from Healthdyne as such
amounts become due and payable to pay the Liquidated Damages (except that if
SpectRx is selling the Licensed Products to Healthdyne, Healthdyne may not
offset against or otherwise reduce or be excused from paying that portion of the
purchase price constituting the Disposable Cost thereof). All remaining
Liquidated Damages shall be paid by SpectRx solely in the form of a ten percent
(10%) royalty payable quarterly on the Average Selling Price for all SpectRx
sales of Licensed Products outside the Territory.
15. Dispute. In the event of a dispute hereunder, the Parties agree to
submit the matter to binding arbitration by one Party giving the other Party
notice of the intent to arbitrate. The arbitration shall be conducted in
accordance with the rules and procedures set forth as Exhibit H hereto, provided
each Party shall select one arbitrator who is an expert in the subject matter
area in dispute within ten (10) days of the receipt of the notice of arbitration
and the two arbitrators chosen by the Parties shall select a third within ten
(10) days of being selected.
16. Miscellaneous.
16.1 Marking. Healthdyne agrees to mark each Licensed Product
manufactured or sold by it in accordance with the Statutes of the United States
relating to the marking of patented articles. SpectRx will, from time to time,
update its patent numbers for Healthdyne as patents issue. Healthdyne shall
include the SpectRx Licensed Trademark on the Licensed Products when
Healthdyne's Licensed Trademark is utilized. The Licensed Trademark shall be
used to signify that the Licensed Product was developed by SpectRx and shall be
no less than thirty percent (30%) of the size of Healthdyne's Licensed
Trademark.
16.2 Assignability--Healthdyne. Except as set forth in Sections
2.2 and 2.3 hereof or in connection with a Change In Control of Healthdyne or
the sale of all or substantially all of the assets of a product line, Healthdyne
may not assign, transfer or sublicense any of the rights or obli-
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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<PAGE> 21
gations under this Agreement without the prior written consent of SpectRx, which
consent shall not be unreasonably withheld. Notwithstanding the foregoing,
Healthdyne may assign its rights to receive any revenue or payments due
hereunder. For purposes of this Section 16.2, a product line shall be defined,
at a minimum, as phototherapy devices and devices for the diagnosis and
treatment of neonatal jaundice.
16.3 Assignability--SpectRx. Except in connection with a Change in
Control of SpectRx or the sale of all or substantially all of the assets of a
product line, SpectRx may not assign this Agreement without the prior written
consent of Healthdyne, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, SpectRx may assign its rights to receive any
revenue or payments due hereunder. For purposes of this Section 16.3, a product
fine shall be defined, at a minimum, as phototherapy devices and devices for the
diagnosis and treatment of neonatal jaundice.
16.4 Successors and Assigns. This Agreement will inure to the benefit
of and bind SpectRx's and Healthdyne's successors and assigns.
16.5 Failure to Enforce. The failure of either Party to enforce at any
time or for any period of time the provisions of this Agreement shall not be
construed to be a waiver of such provisions or of the right of such Party to
enforce each and every such provision.
16.6 Governing Law. This Agreement shall be governed by and construed
according to the laws of the State of Georgia, U.S.A.
16.7 Severability. In the event that any of the provisions of this
Agreement shall be held by a court or other tribunal of competent jurisdiction
to be unenforceable, such provisions shall be deleted from this Agreement and
the remaining portions of this Agreement shall remain in full force and effect,
except where the economic equity of both parties hereto is materially affected
by such unenforceability.
16.8 Notice. Except as either Party may hereafter notify the other with
respect to itself, the addresses of the Parties for all purposes of this
Agreement shall be:
SpectRx: SpectRx Inc.,
6025A Unity Drive
Norcross, Georgia 30071
Attention: Mark A. Samuels
Healthdyne: Healthdyne Technologies, Inc.
1255 Kennestone Circle
Marietta, Georgia 30066
Attention: President and General Counsel
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<PAGE> 22
All notices and communications pursuant to this Agreement shall be addressed as
set forth above and shall be delivered to the Party for whom intended by hand or
by postage prepaid, first class, registered or certified mad, return receipt
requested. Such notices and recommendations shall be deemed to have been given
and delivered as of the date of receipt.
16.9 Force Majeure. Except with respect to the Liquidated Damages set
forth in Section 14.5, neither Party shall be liable to the other Party hereto
for any loss, injury delay, damages or other casualties suffered or incurred by
such other Party due to strikes, riots, storms, fires, acts of God, or war or
any other cause beyond the reasonable control of either Party.
16.10 Headings. Headings to paragraphs and sections of this Agreement
are to facilitate reference only, do not form a part of this Agreement and shall
not in any way affect the interpretation hereof.
16.11 Survival From This Agreement. The rights and obligations of the
parties hereto under Articles 9, 10, 11, 12, and 13 of this Agreement shall
survive and continue after any expiration or termination of this Agreement and
shall bind the Parties and their representatives, successors, heirs and
assignees.
16.12 Exhibits. All exhibits and attachments to which this Agreement
refers are hereby incorporated into and made a part of this Agreement.
16.13 Entire Agreement. This Agreement constitutes the entire agreement
between Healthdyne and SpectRx, and there are no other understandings,
agreements or representations, express or implied, written or oral, not
specified herein. The letter agreement dated April 18, 1995 between the parties
is hereby superseded and terminated. This Agreement may only be amended by
express written agreement and signed by authorized representatives of both
Parties.
16.14 Publicity.
(i) A copy of all public announcements and press releases which
either Party intends to release or make shall be provided to the other Party
prior to being released or made. Any public announcement or news release that
names, refers to or in any way identifies both Parties shall be approved by both
Parties prior to being released or made. Each party shall respond to a request
for approval within three (3) working days or receipt of the copy and the
approval of each Party will not be unreasonably withheld.
(ii) Except as set forth herein, the Parties shall not use each
other's name in any advertising material without the prior written consent of
the other Party, which consent may not be unreasonably withheld.
16.15 Documentation. Immediately upon FDA clearance of a Licensed
Product SpectRx shall provide Healthdyne with all SpectRx Technology and
documentation with respect to the Licensed Product, including, but not limited
to, any and all models, photographs, drawings,
-22-
<PAGE> 23
calculations, specifications, test results, hardware, software, and operation
instructions together with any and all other documentation which may be used or
useful in the manufacture of the Instruments, Disposables and Accessories for
the Licensed Products sufficient in all respect to allow the manufacture of such
Licensed Products in the event Healthdyne becomes entitled to do so in
accordance with the terms and conditions of this Agreement. The Parties agree
that this provision is necessary in order for Healthdyne to assume making
Licensed Products in accordance with provisions set forth in this Agreement in a
manner which will allow Healthdyne to meet product demand and Healthdyne's
quality standards. SpectRx shall update such documentation from time to time and
upon written request from Healthdyne to assure that all such documentation is
current and meets the requirements of this Section 16.15.
16.16 Offset. Healthdyne shall have the right to offset from any
amounts due to SpectRx hereunder any amounts due and payable from SpectRx to
Healthdyne whether arising under this Agreement or the Convertible Note executed
by SpectRx on the date hereof.
-23-
<PAGE> 24
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date forth above.
HEALTHDYNE TECHNOLOGIES, INC.
By: /s/ Craig B. Reynolds
--------------------------------------
Craig B. Reynolds, President and
Chief Executive Officer
SPECTRX, INC.
By: /s/ Mark A. Samuels
--------------------------------------
Mark A. Samuels, President
Chief Executive Officer
-24-
<PAGE> 25
EXHIBIT A
<PAGE> 26
- --------------------------------------------------------------------------------
"BILI-TEST"PRELIMINARY PRODUCT REQUIREMENTS DOCUMENT
(PRD)
- --------------------------------------------------------------------------------
This document describes application, market, intended use, end user,
(and predicate device) for serum chemistry with regard to bili-test.
Following are the device related product requirements, based on inputs
from various sources (see customer market research reports).
1.0 ASSUMPTIONS
1.01 Overall starting point, or reference, for the physical concept
shall be per the first version of physical model developed by
SpectRx, Healthdyne Technologies and Inno in terms of looks,
shape, aesthetics or eye appeal, ergonomics, human
engineering, size volume and physical characteristics. (See
attached.)
(See attached Inno industrial design).
1.02 Exact dimensions and weight will be finalized after finalizing
specifications.
1.03 HDTC, mutually agreed by SpectRx, Inc. has ultimate right to
make any. changes to these requirements.
1.04 Schedule, cost specifications, quality or quantity goals may
change by mutual agreement of SpectRx and HDTC.
1.05 All other HDTC/SpectRx contractual agreements are met,
including ISO, FDA, other requirements.
1.06 Bili-test system has four components:
1). Hand held device
2). [*]
3). [*]
4). Mateable to a ("Hertz) holster/printer later
1.07 End user, RN, Nursing Assistant, RRT
3). Neonatologist
4). Pediatrician
5). Homecare phototherapy service
1.08 Printer to be available after launch of product
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
<PAGE> 27
2.0 FUNCTIONS AND FEATURES
2.01 Non-invasively read and display result in units of mg/dl of
total serum bilirubin.
2.02 [*] with a standard error of TBD.
2.03 Optical radiation output will not cause retinal burn. Device
shall not exceed the optical radiation Threshold Limit Values
(TLV's) as determined by the American Conference of
Governmental Industrial Hygenists for light, near infrared
radiation or UV radiation.
2.04 Two second total measurement time measured from when trigger
is engaged until reading is displayed.
2.05 User calibration at power up. Calibration good for 5 (maybe 3)
applications after which device requires another calibration
and a replacement of disposable tip.
2.06 [*], including calibration. Automatic time-out between
measurements 2 minutes.
2.07 Does not require any input such as age, etc. of patient before
displaying a reading.
2.08 Simple, easy to follow user prompts and messages.
2.09 Battery backed up, time, date and last reading by primary
battery.
1). Battery life between charges [*] tests/shift.
2). Low battery LCD icon.
3). When battery is at lowest device activation level,
the device will not take a measurement, will emit the
invalid tone, and will display three dashes.
4). Last reading maintained until device is turned off
or recalibrated.
2.10 Field upgradeable and serviceable by trained technicians or
hospital bio-meds, and trained personnel.
1). Connectors
2). Battery
3). E-prom
4). Light source
2.11 Failure rate of less than [*].
1). FMECA
2). MTBF
3). Hazards analysis
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-2-
<PAGE> 28
2.12 Mean time to troubleshoot and repair in field to be less than
30 minutes, without factory intervention.
2.13 [*]
2.14 Have built in error messages, test point, diagnostic features
for minimal downtime in troubleshooting device failures, using
off-the-shelf test fixtures.
2.15 Can be used by end user with no special training required.
2.16 Operator and service manual.
1). Operator's manual by HDTC
2). Service manual by SpectRx
3.0 HAND HELD DEVICE PHYSICAL
3.1 GENERAL
3.1.1 Must meet FDA/EMC tests for Attachment A.
3.1.2 It will be a hand-held device, easily packaged and
transportable using off-the-shelf and easily available
packaging materials.
3.1.3 User grip is intuitive and comfortable.
3.1.4 Per physical concept defined by HDTC/SpectRx/Inno.(see
attached)
3.1.5 Resistant to scratches and normal abuse including during
transport.
3.1.6 Cleanable by specified, off-the-shelf available agents, not
prone for infection hazards. Low stain risk. Smooth surface to
reduce harboring of bacteria.
1). [*]
3.2 PORTS
3.2.1 [*] conforming to [*] in accordance with Attachment A.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-3-
<PAGE> 29
3.3 INPUTS
3.3.1 ELECTRICAL/POWER INPUT
3.3.1.1 Input voltage through a minimum of 2 pins
through housing from associated charger.
3.3.1.2 Limit switch at disposable interface as unit
triggers only with disposable in place.
3.3.1.3 Deleted
3.3.1.4 Meet UL, CSA, CE and International symbol
and color standards.
3.3.2 TERMINAL INPUT
3.3.2.1 Use standard, off-the-shelf, IRDA output
port.
3.3.2.2 Bi-directional communication with IRDA
compatible terminals.
3.3.3 KEYPAD INPUT
3.3.3.1 Two "soft" keys per concept, linked to
display prompts.
1). First soft key for working and/or
calibrating the device.
2). Second soft key for triggering the
device.
3.3.4 DATA INPUT
3.3.4.1 Ability to accept data such as date(mm/dd or
dd/nun), with 12 hours or 24 hour time
(extra LED or with graphics display).
3.3.4.2 Data entry using 2 keys located inside
battery housing.
3.4 OUTPUTS
3.4.1 DATA OUTPUT
3.3.4.1 Output results with relevant, associated
information via onboard display and/or
annunciator, or via external IRDA compatible
printers or terminal.
-4-
<PAGE> 30
3.4.2 DISPLAY OUTPUT
3.4.2.1 High contrast, back-lit LCD(TBD), size
comparable to current concept. Three digit
display desired (XX.X) with one ready icon
and one low-battery indication icon
(consistent with agreed-upon power budget).
Time and date always visible.
3.4.3 ANNUNCIATORS, ADVISORIES & WARNINGS
3.4.3.1 Audible annunciator with two distinct
levels, one for valid, other for invalid
entered, detected, displayed or transferred
data.
3.4.3.2 Display indicates when calibration is
required.
3.4.3.3 Display indicates when trigger sequence is
ready.
3.4.3.4 Display indicates standby mode.
3.4.3.5 Display indicates when batteries are low and
unit requires a charge.
3.4.3.6 Display indicates invalid reading by
returning three dashes (---).
3.5. BULB/LIGHT SOURCE
3.5.1 Ideally, does not require periodic
replacement of light source.
3.5.2 If it has to have bulbs replaced
periodically:
a). [*] per bulb, whichever provides
longer usage (Based on source
analysis).
b). Easy to access and replace bulb
assembly by end user.
c). No special tools, techniques, or
skills needed to replace bulb.
d). Spare bulb socket desired.
e). May have up to maximum of three
bulbs/cartridge.
f). Maximum of $50/cartridge.
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-5-
<PAGE> 31
4.0 CHARGE BASE PHYSICAL
4.1 GENERAL
4.1.1 It must meet all FDA requirements (per
Attachment A).
4.1.2 It will be able to be mounted on a wall, or
on a counter.
4.1.3 It will be manufactured with off-the-shelf
and easily available packaging materials.
4.1.4 Per physical concept defined by
HDTC/SpectRx/Inno.
4.1.5 Resistant to scratches and normal abuse
including during transport.
4.1.6 Cleanable by specified, off-the-shelf
agents, not prone to infection hazards (per
3.1.6).
4.1.7 Wall bracket to allow mounting to accompany
base.
4.2 INPUTS
4.2.1 ELECTRICAL/POWER INPUT
4.2.1.1 Input voltage externally adjustable from
87-250 Vac. 50/60 Hz.
4.2.1.2 Meet specifications with voltage
fluctuations +/- 10% of set voltage.
4.2.1.3 Fast blow, commonly available, externally
accessible, replaceable fuse, with slot for
spare fuse in holder.
4.2.1.4 Sufficient heat dissipation to allow one to
touch any outside part after 24 hours of
continuous use.
4.2.1.5 Meet CSA, IEC 601 safety standard, and
international symbol and color requirement.
4.2.1.6 Transformer for unit to be placed on a wall
at socket.
4.2.1.7 Monitors four charging pins to determine
when hand held is fully charged.
-6-
<PAGE> 32
4.2.2 SOFT KEY INPUT
4.2.2.1 Soft key push-button toggle switch to select
fast-charge or normal charge.
4.3 OUTPUT
4.3.1.1 Output TBD+/- TBD (per battery selection)
VCD voltage into four charging pins on hand
held unit.
4.3.2 DISPLAY OUTPUT
4.3.2.1 LED icon indicates electrical
contact, comparable to current
concept.
4.3.2.2 LED icon indicates if hand held is
currently under charge.
4.3.2.3 LED icon indicates if hand held is
currently under fast charge.
5.0 PRINTER
5.01 [*]
5.02 [*]
5.03 Resolution will be legible at 3 feet with 20/20 vision.
5.04 Dimensions (TBD)
a). weight (TBD)
b). height (TBD)
c). length (TBD)
5.05 Battery life - no less than ____________ (TBD)
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-7-
<PAGE> 33
6.0 DISPOSABLE CALIBRATION TIP PHYSICAL
6.1 GENERAL
6.1.1 It will meet as many of the HDTC Industrial
guideline requirements as possible. (See
Attachment A)
6.1.2 It will be a [*] and transportable using
off-the-shelf and easily available packaging
materials.
6.1.3 The [*] that also serves to protect the patient [*]
from debris.
6.1.4 User grip and device attachment is intuitive and
comfortable.
6.1.5 Per physical concept defined by HDTC/SpectRx/Inno.
6.1.6 Resistant to scratches and normal abuse including
during transport.
7.0 ENVIRONMENTAL CONDITIONS
7.1 Operate within specifications between [*]. Be undamaged and
fully operational after storage at [*]. Must not fail in such
a way as to be a hazard to users.
7.2 Operate within specifications between [*], w/o condensation.
Not be damaged by storage at a non-condensing [*] for a
duration of at least 24 hours.
7.3 No effect of altitude.
7.4 No effect of extraneous light.
7.5 Meet FCC, FDA, EC standards for Electromagnetic compatibility
(EMC).
7.6 Meet [*] standards for Electrostatic Discharge Immunity
standards. Will not be permanently damaged by discharge of up
to +/- 15kV. and discharges of 10kV or less will cause only
transient effects. In no case may internal stored data be lost
or corrupted, or incorrect measurement results be displayed or
stored.
7.7 Meet [*], second edition standards for Electromagnetic
Interference Immunity (EMI); Operate within specifications
when exposed to field strengths of 10 V/m at frequencies from
[*], from I meter.
7.8 Meet following Class B Electromagnetic Emissions standards.
[*]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-8-
<PAGE> 34
7.9 Meet Electrical Fast Transient Burst standards in accordance
[*]; instrument will not be permanently damaged after being
exposed to fast transient bursts of [*] to the mains
connections and [*] for interconnecting lines greater than [*]
meters. In no case will the device lose or corrupt data, or
display incorrect results.
7.10 Meet [*] standard for electrical surges; instrument will not
be permanently damaged after being exposed to differential
surges of [*], or common mode surges of [*], to the mains
connection. In no case will the device lose or corrupt stored
data, or display incorrect results.
8.0 SHOCK, VIBRATION & DROP
(In no case will the device lose or corrupt stored data, or
display incorrect results).
8.1 Be able to meet all specifications after subjected to shock
levels in accordance to Healthdyne Technologies Product
Environmental Testing Procedure, [*].
8.2 Be able to meet all specifications after subjected to random
vibration in accordance with Healthdyne Technologies Product
Environment Testing Procedure, [*].
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-9-
<PAGE> 35
ATTACHMENT A
1. It will meet the following technical and environmental requirements and
standards specified by the Food and Drug Administration (FDA), we well
as the following internal engineering and quality standards specified
by Healthdyne Technologies:
a. FDA environmental test requirements and test protocols
specified by domestic and international standards contained
within the Reviewer Guidance for Premarket Notification
Submissions, November 1993.
b. FDA firmware and software test methods and documentation
requirements specified with the Reviewer Guidance for Computer
Controlled Medical Devices.
c. FDA Biological Evaluation of Medical Devices, ISO 10993
Part-1.
d. Healthdyne Technologies, Product Environmental Testing
Procedure, EOP 9001 4.4.106.
e. American National Standards, Safe Current Limits for
Elctro-Medical Apparatus, ANSI/AAMI, ESI-1095.
f. Canadian Standards Association, Medical Electrical Equipment-
Part 1; General Requirements for Safety - 2. Collateral
Standard: Electromagnetic Compatibility-Requirements and Test.
[*]
g. [*], Medical Electrical Equipment, Part 1; General
Requirements for Safety, 2nd Edition.
h. [*] standards for products with LED devices or revisions
(possible rev. March 1, 1996.)
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
<PAGE> 36
EXHIBIT B
<PAGE> 37
LOGO
-2-
<PAGE> 38
EXHIBIT C
<PAGE> 39
[UNIVERSITY OF TEXAS
Letterhead]
April 12, 1996
VIA AIRBORNE
Keith D. Ignotz
Chief Operating Officer
SpectRx
6025A Unity Drive
Norcross, Georgia 30071
RE: Patent and Technology License Agreement
"Optical Measurement of Bilirubin in Human Tissue", UTSC:254
Steven Jacques, et al, Principal Investigator
Dear Keith:
Enclosed is one fully executed original counterpart of the subject
agreement for your files.
Best regards,
/s/ Carla
------------------------------
Carla for Karen V. Francis
Licensing Specialist
KVF/cjs
Enclosure
cc: Steven Jacques, Ph.D., Box 017 (w/enclosure)
<PAGE> 40
PATENT LICENSE AGREEMENT
THIS Sixteen (16) Page AGREEMENT ("AGREEMENT") is made by and between
the BOARD OF REGENTS ("BOARD") of THE UNIVERSITY OF TEXAS SYSTEM ("SYSTEM"), an
agency of the State of Texas, whose address is 201 West 7th Street, Austin Texas
78701, THE UNIVERSITY OF TEXAS M.D. ANDERSON CANCER CENTER ("MDA"), a component
Institution of the SYSTEM and SpectRx, a Norcross, Georgia corporation having a
principal place of business located at 6025 A Unity Drive, Norcross, GA 30071
("LICENSEE").
TABLE OF CONTENTS
<TABLE>
<S> <C>
RECITALS Page 2
I. EFFECTIVE DATE Page 2
II. DEFINITIONS Page 2
III. LICENSE Page 4
IV. CONSIDERATION, PAYMENTS, AND REPORTS Page 5
V. SPONSORED RESEARCH Page 8
VI. INFRINGEMENT BY THIRD PARTIES Page 9
VII. PATENT MARKING Page 9
VIII. INDEMNIFICATION Page 9
IX. USE OF BOARD AND COMPONENTS NAME Page 10
X. CONFIDENTIAL INFORMATION Page 10
XI. ASSIGNMENT Page 10
XII. TERMS AND TERMINATION Page 11
XIII. WARRANTY: SUPERIOR-RIGHTS Page 12
XIV. GENERAL Page 13
SIGNATURES Page 15
</TABLE>
<PAGE> 41
RECITALS
A. BOARD owns certain PATENT RIGHTS related to LICENSED SUBJECT
MATTER, which were developed at MDA, a component institution
of SYSTEM.
B. BOARD desires to have the LICENSED SUBJECT MATTER developed in
the LICENSED FIELD and used for the benefit of LICENSEE, the
inventor, BOARD, and the public as outlined in the
Intellectual Property Policy promulgated by the BOARD.
C. LICENSEE wishes to obtain a license from BOARD to practice
LICENSED SUBJECT MATTER.
NOW, THEREFORE, in consideration of the mutual covenants and premises
herein contained, the parties hereto agree as follows:
I. EFFECTIVE DATE
1.1 This AGREEMENT shall be effective as of March 12, 1996 subject
to approval by BOARD ("EFFECTIVE DATE").
II. DEFINITIONS
As used in this AGREEMENT, the following terms shall have the meanings
indicated:
2.1 AFFILIATE shall mean any business entity more than 50% owned
by LICENSEE, any business entity which owns more than 50% of
LICENSEE, or any business entity that is more than 50% owned
by a business entity that owns more than 50% of LICENSEE.
2.2 LICENSED FIELD shall mean Optical Measurement of Bilirubin in
Human Tissue within the LICENSED SUBJECT MATTER.
2.3 LICENSED PRODUCTS shall mean any product or service SOLD by
LICENSEE comprising LICENSED SUBJECT MATTER pursuant to this
AGREEMENT.
2.4 LICENSED SUBJECT MATTER shall mean PATENT RIGHTS.
2.5 LICENSED TERRITORY shall mean the United States in which
LICENSED PRODUCTS are sold by LICENSEE.
2.6 NET SALES shall mean the gross revenues received by LICENSEE
from the SALE of LICENSED PRODUCTS less sales and/or use taxes
actually paid, import and/or
<PAGE> 42
export duties actually paid, outbound transportation prepaid
or allowed, and amounts allowed or credited due to returns
(not to exceed the original billing or invoice amount).
2.7 PATENT RIGHTS shall only mean any and all of BOARD'S rights in
information or discoveries claimed in U.S. Patent No.
5,353,790 issued and entitled "Methods and Apparatus for
Optical Measurement of Bilirubin in Tissue" and all
divisionals, continuations, continuations-in-part, reissues,
reexaminations or extensions thereof.
2.8 SALE or SOLD shall mean the transfer or disposition of a
LICENSED PRODUCT for value to a third party other than
LICENSEE or an AFFILIATE.
III. LICENSE
3.1 BOARD hereby grants to LICENSEE a royalty-bearing, exclusive
license under LICENSED SUBJECT MATTER to manufacture, have
manufactured, use and/or sell LICENSED PRODUCTS within
LICENSED TERRITORY for use within LICENSED FIELD and, subject
to Paragraph 4.5 herein, shall extend to BOARD's undivided
interest in any LICENSED SUBJECT MATTER developed during the
term of this AGREEMENT and jointly owned by BOARD and
LICENSEE. This grant shall be subject to Paragraph 14.2 and
14.3, hereinbelow, the payment by LICENSEE to BOARD of all
consideration as provided in Paragraph 4.2 of this AGREEMENT,
(as well as the timely payment of all amounts due under any
Sponsored Research Agreement between MDA and LICENSEE in
effect during the term of this AGREEMENT) and shall be further
subject to rights retained by BOARD and MDA to:
(a) Publish the general scientific findings from research
related to LICENSED SUBJECT MATTER. In the event that
MDA wishes to publish, MDA shall notify LICENSEE of
its desire to publish at least (30) days in advance
of publication and shall furnish to LICENSEE a
written description of the subject matter of the
publication in order to permit LICENSEE to review and
comment thereon; and
(b) Subject to the provisions of ARTICLE XI herein below,
use any information contained in LICENSED SUBJECT
MATTER for research, teaching, patient care, and
other educationally-related purposes.
3.2 LICENSEE shall have the right to extend the license granted
herein to any AFFILIATE provided that such AFFILIATE consents
to be bound by this AGREEMENT to the same extent as LICENSEE.
-2-
<PAGE> 43
3.3 Subject to the Paragraph 3.4 herein below, LICENSEE shall have
the right to grant sublicenses under LICENSED SUBJECT MATTER
consistent with the terms of this AGREEMENT provided that
LICENSEE shall be responsible for its sublicensees relevant to
this AGREEMENT, and for using its best reasonable efforts to
diligently collect all amounts due LICENSEE from subicensees.
In the event a sublicensee pursuant hereto becomes bankrupt,
insolvent or is placed in the hands of a receiver or trustee,
LICENSEE, to the extent allowed under applicable law and in a
timely manner, agrees to use its best reasonable efforts to
collect any and all consideration owed to LICENSEE and to have
the sublicense agreement confirmed or rejected by a court of
proper jurisdiction.
3.4 LICENSEE agrees to either.
(a) deliver to BOARD for BOARD'S approval a true and
correct copy of any sublicense granted by LICENSEE,
and any modification or termination thereof, within
thirty (30) days after execution, modification, or
termination; and upon termination of this AGREEMENT,
any and all sublicenses granted by LICENSEE and
approved by BOARD shall be assigned to BOARD; or
(b) deliver to BOARD for BOARD'S Information a true and
correct copy of each sublicense granted by LICENSEE,
and any modification or termination thereof, within
thirty (30) days after execution, modification, or
termination; and upon termination of this AGREEMENT,
any and all existing sublicenses granted by LICENSEE
and not approved by BOARD shall be terminated, unless
otherwise agreed to in writing by BOARD.
IV. CONSIDERATION, PAYMENTS AND REPORTS
4.1 In consideration of rights granted by BOARD to LICENSEE under
this AGREEMENT, LICENSEE agrees to pay MDA the following:
(a) [*] for all out-of-pocket expenses incurred by MDA
through [*] in filing, prosecuting, enforcing and
maintaining PATENT RIGHTS licensed hereunder. SPECTRX
will pay all future patent maintenance expenses for
so long as, and in such countries as, this AGREEMENT
remains in effect. One half of these total patent
expenses [*] will be due upon execution, and the
other half will be due at the time of the first FDA
510K filing. MDA will invoice LICENSEE upon approval
of this AGREEMENT by BOARD, and upon a quarterly
basis thereafter beginning [*] for expenses incurred
by MDA after [*] and the amounts invoiced will be due
and payable by LICENSEE within thirty (30) days
thereafter; and
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-3-
<PAGE> 44
(b) A non-refundable license documentation fee to be made
in staged payments in the total amount of $50,000.00,
which shall not reduce the amount of any other
payment provided for in this ARTICLE IV, and which
shall be due and payable within thirty (30) days when
invoiced by MDA as follows:
(i) [*] upon execution of this Agreement by
BOARD;
(ii) [*] upon the completion by LICENSEE of data
collection, analysis, and review of the
feasibility studies, but no later than sixty
(60) days following the entry of the last
patient in the clinical study;
(iii) [*] upon the first FDA 510K filing; and
(iv) [*] upon first FDA 510K approval.
(c) A running royalty equal to [*] of LICENSEE'S NET
SALES of LICENSED PRODUCTS in LICENSED TERRITORY and
[*] of LICENSEE'S NET SALES of LICENSED PRODUCTS
outside of LICENSED TERRITORY as long as there are no
competing products outside of LICENSED TERRITORY
(with minimum annual royalties of [*]), and [*] of
all consideration other than Research and Development
("R&D") money received by LICENSEE from any
sublicensee pursuant to Paragraphs 3.3 and 3.4 herein
above, including but not limited to royalties,
up-front payments, marketing, distribution,
franchise, option, license, or documentation fees,
bonus and milestone payments and equity securities,
payable within thirty (30) days after March 31, June
30, September 30, and December 31, at which time
LICENSEE shall also deliver to BOARD and MDA a true
and accurate report, giving such particulars of the
business conducted by LICENSEE and its sublicensee,
if any exist, during the preceding three (3) calendar
months under this AGREEMENT as are pertinent to an
account for payments hereunder. Such report shall
include at least (a) the quantities of LICENSED
PRODUCTS that it has produced; (b) the total SALES,
(c) the calculation of royalties thereon; and (d) the
total royalties so computed and due BOARD. In the
event that there are competing products outside of
LICENSED TERRITORY, then no royalty will be due
related to that specific territory. Simultaneously
with the delivery of each such report, LICENSEE shall
pay to BOARD the amount, if any, due for the period
of such report. The requirement to pay minimum annual
royalties shall commence upon FDA final approval of
the LICENSED PRODUCTS. A pro rata portion of the
annual minimum royalties shall be payable in respect
of any partial period not constituting a full year.
Should LICENSEE be obligated to pay running royalties
to third parties to avoid infringing such third
parties' patent rights which dominate BOARD'S PATENT
RIGHTS, LICENSEE may reduce the running royalty due
MDA by such running royalties to such third parties,
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-4-
<PAGE> 45
provided, however, the running royalty due MDA shall
in no case be less than one-half the rates stated
herein above.
4.2 During the Term of this AGREEMENT and for one (1) year
thereafter, LICENSEE shall keep complete and accurate records
of its and its sublicensees' SALES and NET SALES of LICENSED
PRODUCTS to enable the royalties payable hereunder to be
determined. LICENSEE shall permit BOARD or its
representatives, at BOARD'S expense, to periodically examine
after reasonable written notice to LICENSEE its books,
ledgers, and records during regular business hours for the
purpose of and to the extent necessary to verify any report
required under this AGREEMENT. In the event that the amounts
due to BOARD are determined to have been underpaid in an
amount equal to or greater than five percent (5%) of the total
amount due during the period of time so examined, LICENSEE
shall pay the cost of such examination, and accrued interest
at prime rate plus 10% (ten percent).
4.3 Upon the request of BOARD or MDA but not more often than once
per calendar year, LICENSEE shall deliver to BOARD and MDA a
written report as to LICENSEE'S efforts and accomplishments
during the preceding year in commercializing LICENSED SUBJECT
MATTER in the LICENSED TERRITORY and LICENSEE'S
commercialization plans for the upcoming year. Such report
will be deemed for all purposes to be confidential information
governed by Article XI hereof.
4.4 All amounts payable hereunder by LICENSEE shall be payable in
United States funds without deductions for taxes, assessments,
fees, or charges of any kind. Checks shall be made payable to
The University of Texas M.D. Anderson Cancer Center and
mailed by U.S. Mail to Box 297402, Houston, Texas 77297
Attention: Manager, Sponsored Programs.
4.5 No payments due or royalty rates under this AGREEMENT shall be
reduced as the result of co-ownership of LICENSED SUBJECT
MATTER by BOARD and another party, including LICENSEE.
V. SPONSORED RESEARCH
If LICENSEE desires to fund sponsored research, within LICENSED SUBJECT
MATTER and particularly where LICENSEE receives money for sponsored research
payments pursuant to a sublicense, LICENSEE shall notify MDA in writing of all
opportunities to conduct such sponsored research (including clinical trials, if
applicable), shall solicit research and/or clinical proposals from MDA for such
purpose, and shall give good faith consideration to funding such proposals at
MDA.
-5-
<PAGE> 46
VI. INFRINGEMENT BY THIRD PARTIES
6.1 LICENSEE shall have the obligation of enforcing at its expense
any patent exclusively licensed hereunder against infringement
by third parties and shall be entitled to retain recovery from
such enforcement. LICENSEE shall pay MDA a royalty on any
monetary recovery, net of LICENSEE'S direct out-of-pocket
expenses from such enforcement not otherwise paid to third
parties, to the extent that such monetary recovery by LICENSEE
is held to be damages or a reasonable royalty in lieu thereof.
In the event that LICENSEE does not file suit against a
substantial infringer of such patents within six (6) months of
knowledge thereof, then BOARD shall have the right to enforce
any patent licensed hereunder on behalf of itself and LICENSEE
(MDA retaining all recoveries from such enforcement) and/or
reduce the license granted hereunder to non-exclusive.
6.2 In any suit or dispute involving a third party infringer, the
parties shall cooperate fully, and upon the request and at the
expense of the party bringing suit, the other party shall make
available to the party bringing suit at reasonable times and
under appropriate conditions all relevant personnel, records,
papers, information, samples, specimens, and the like which
are in its possession.
VII. PATENT MARKING
7.1 LICENSEE agrees that all packaging containing individual
LICENSED PRODUCT(S), and documentation therefor, sold by
LICENSEE, AFFILIATE, and sublicensees of LICENSEE will be
marked permanently and legibly with the number of the
applicable patent(s) licensed hereunder in accordance with
each country's patent laws, including Title 35, United States
Code.
VIII. INDEMNIFICATION
8.1 LICENSEE shall hold harmless and indemnify BOARD, SYSTEM, MDA,
its Regents, officers, employees, students, and agents from
and against any claims, demand, or causes of action
whatsoever, costs of suit and reasonable attorney's fees
including without limitation those costs arising on account of
any injury or death of persons or damage to property caused
by, or arising out of, or resulting from, the exercise or
practice of the license granted hereunder by LICENSEE or its
officers, employees, agents or representatives.
-6-
<PAGE> 47
IX. USE OF BOARD AND COMPONENTS NAME
9.1 LICENSEE shall not use the name of (or the name of any
employee of) MDA, SYSTEM or BOARD without the advance,
express written consent of BOARD secured through:
The University of Texas
M. D. Anderson Cancer Center
Office of Public Affairs
1515 Holcombe Boulevard
Box 229
Houston, Texas 77030
ATTENTION: Stephen C. Stuyck
X. CONFIDENTIAL INFORMATION
10.1 BOARD and LICENSEE each agree that all information contained
in documents marked "confidential" which are forwarded to one
by the other shall be received in strict confidence, used only
for the purposes of this AGREEMENT, and not disclosed by the
recipient party (except as required by law or court order),
its agents or employees without the prior written consent of
the other party, unless such information (a) was in the public
domain at the time of disclosure, (b) later became part of the
public domain through no act or omission of the recipient
party, its employees, agents, successors or assigns, (c) was
lawfully disclosed to the recipient party by a third party
having the right to disclose it, (d) was already known by the
recipient party at the time of disclosure, (e) was
independently developed or (f) is required to be submitted to
a government agency pursuant to any preexisting obligation.
10.2 Each party's obligation of confidence hereunder shall be
fulfilled by using at least the same degree of care with the
other party's confidential information as it uses to protect
its own confidential information. This obligation shall exist
while this AGREEMENT is in force and for a period of three (3)
years thereafter.
XI. ASSIGNMENT
11.1 Except to effect the sale and transfer of all or substantially
all of LICENSEE'S assets to a third party, this AGREEMENT may
not be assigned by LICENSEE without the prior written consent
of BOARD.
-7-
<PAGE> 48
XII. TERMS AND TERMINATION
12.1 The term of this AGREEMENT shall extend from the Effective
Date set forth hereinabove to the full end of the term or
terms for which PATENT RIGHTS have not expired or been
declared invalid by a court of final jurisdiction.
12.2 BOARD shall have the right at any time after one (1) year from
the EFFECTIVE DATE of this AGREEMENT to terminate the license
granted herein if LICENSEE, within ninety days after written
notice from BOARD of such intended termination, fails to
provide written evidence satisfactory to BOARD that LICENSEE
has commercialized or is actively and effectively attempting
to commercialize an invention licensed hereunder within such
jurisdiction. Accurate, written evidence provided by LICENSEE
to BOARD within said ninety (90) day period that LICENSEE has
an effective, ongoing and active research, development,
manufacturing, marketing, sales and/or licensing program, as
appropriate, directed toward obtaining regulatory approval
and/or production and/or sale of LICENSED PRODUCTS
incorporating PATENT RIGHTS shall be deemed satisfactory
evidence.
12.3 Subject to any rights herein which survive termination, this
AGREEMENT will earlier terminate in its entirety:
(a) automatically if LICENSEE shall become bankrupt or
insolvent and/or if the business of LICENSEE shall be
placed in the hands of a receiver or trustee, whether
by voluntary act of LICENSEE or otherwise; or
(b) (i) upon thirty (30) days written notice by BOARD if
LICENSEE shall breach or default on the payment
obligations of ARTICLE IV, or use of name obligations
of ARTICLE X; or (ii) upon ninety (90) days written
notice by BOARD if LICENSEE shall breach or default
on any other obligation under this AGREEMENT;
provided, however, LICENSEE may avoid such
termination if before the end of such thirty (30) or
ninety (90) day period if LICENSEE provides notice
and accurate, written evidence satisfactory to BOARD
that such breach has been cured or that LICENSEE has
commenced all reasonable action to cure as soon as
possible and the manner of such cure; or
(c) at any time by mutual written agreement between
LICENSEE and BOARD, or without cause upon one hundred
eighty (180) days written notice by LICENSEE to
BOARD, subject to any rights herein which survive
termination.
-8-
<PAGE> 49
12.4 Upon termination of this AGREEMENT for any cause:
(a) nothing herein shall be construed to release either
party of any obligation matured prior to the
effective date of such termination.
(b) LICENSEE and the BOARD covenant and agree to be bound
by the provisions of ARTICLES IX, X AND XI of this
AGREEMENT.
(c) LICENSEE (and its SUBLICENSEES) may, after the
effective date of such termination, sell all LICENSED
PRODUCTS and parts therefore that it may have on hand
at the date of termination, provided that LICENSEE
pays the earned royalty thereon and any other amounts
due pursuant to ARTICLE IV of this AGREEMENT.
XIII. WARRANTY: SUPERIOR-RIGHTS
13.1 Except for the rights, if any, of the Government of the United
States as set forth herein below, BOARD represents and
warrants its belief that it is the owner of the entire right,
title, and interest in and to LICENSED SUBJECT MATTER, and
that it has the sole right to grant licenses thereunder, and
that it has not knowingly granted licenses thereunder to any
other entity that would restrict rights granted hereunder
except as stated herein.
13.2 LICENSEE understands that the LICENSED SUBJECT MATTER may have
been developed under a funding agreement with the Government
of the United States of America and, if so, that the
Government may have certain rights relative thereto. This
AGREEMENT is explicitly made subject to the Government's
rights under any such agreement and any applicable law or
regulation, including P.L. 96-517 as amended by P.L. 98-620.
To the extent that there is a conflict between any such
agreement, applicable law or regulation and this AGREEMENT,
the terms of such Government agreement, applicable law or
regulation shall prevail.
13.3 LICENSEE understands and agrees that BOARD, by this AGREEMENT,
makes no representation as to the operability or fitness for
any use, safety, efficacy, approvability by regulatory
authorities, time and cost of development, patentability,
and/or breadth of the LICENSED SUBJECT MATTER. BOARD, by this
AGREEMENT, makes no representation as to whether there are any
patents now held, or which will be held, by others or by BOARD
in the LICENSED FIELD, nor does BOARD make any representation
that the inventions contained in PATENT RIGHTS do not infringe
any other patents now held or that will be held by others or
by BOARD.
13.4 LICENSEE, by execution hereof, acknowledges, covenants and
agrees that LICENSEE has not been induced in anyway by BOARD,
SYSTEM, MDA or
-9-
<PAGE> 50
employees thereof to enter into this Agreement, and further
agrees that LICENSEE has conducted sufficient due diligence
with respect to all items and issues pertaining to Article XIV
herein and all other matters pertaining to this Agreement and
agrees to accept all risks inherent herein.
XIV. GENERAL
14.1 This AGREEMENT constitutes the entire and only AGREEMENT
between the parties for LICENSED SUBJECT MATTER and all other
prior negotiations, representations, agreements and
understandings are superseded hereby. No agreements altering
or supplementing the terms hereof may be made except by means
of a written document signed by the duly authorized
representatives of the parties.
14.2 Any notice required by this AGREEMENT shall be given by
prepaid, first class, certified mail, return receipt
requested, and addressed in the case of BOARD to:
BOARD OF REGENTS
The University of Texas System
201 West Seventh Street
Austin, Texas 78701
ATTENTION: Office of General Counsel
with copy to: The University of Texas
M.D. Anderson Cancer Center
Office of Technology Development
1020 Holcombe Boulevard, Suite 1405
Houston, Texas 77030
ATTENTION: William J. Doty
or in the case of LICENSEE to: SPECTRX, INC.
6025 A Unity Drive
Norcross, Georgia 30071
ATTENTION: Mark A. Samuels
or such other address as may be given from time to time under the terms of this
notice provision.
14.3 Each party hereto covenants and agrees to comply with all
applicable federal, state and local laws and regulations in
connection with its activities pursuant to this AGREEMENT.
14.4 This AGREEMENT shall be construed and enforced in accordance
with the laws of the United States of America and of the State
of Texas.
-10-
<PAGE> 51
14.5 Failure of any party hereto to enforce a right under this
AGREEMENT shall not act as a waiver of that right or the
ability to later assert that right relative to the particular
situation involved.
14.6 Headings included herein are for convenience only and shall
not be used to construe this AGREEMENT.
14.7 If any provision of this AGREEMENT shall be found by a court
to be void, invalid or unenforceable, the same shall be
reformed to comply with applicable law or stricken if not so
conformable, so as not to affect the validity or
enforceability of this AGREEMENT.
14.8 Upon the request of LICENSEE, LICENSOR shall reasonably assist
LICENSEE in recording this Agreement in the records of the
U.S. Patent and Trademark Office at LICENSEE'S expense.
-11-
<PAGE> 52
IN WITNESS WHEREOF, parties hereto have caused their duly authorized
representatives to execute this AGREEMENT.
THE UNIVERSITY OF TEXAS BOARD OF REGENTS OF THE
M.D. ANDERSON CANCER CENTER UNIVERSITY OF TEXAS SYSTEM
By: /s/ David J. Bachrach By: /s/ Ray Farabee
------------------------------------ ------------------------------
David J. Bachrach Ray Farabee
Executive Vice President Vice Chancellor and
for Administration and Finance General Counsel
APPROVED AS TO CONTENT: APPROVED AS TO FORM:
By: /s/ William J. Doty By: /s/ Dudley R. Dobie, Jr.
------------------------------------ -------------------------------
William J. Doty Dudley R. Dobie, Jr.
Director, Technology Development Manager, Intellectual
Property
SPECTRX, INC.
By: /s/ Mark A. Samuels
--------------------------------------
Mark A. Samuels
President and CEO
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-12-
<PAGE> 53
EXHIBIT 1
[*]
[*]
[*]
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
<PAGE> 54
EXHIBIT D
<PAGE> 55
EXHIBIT D-1
SUB-LICENSE AGREEMENT
This Sub-license Agreement is entered into by and between SpectRx, Inc.
("SpectRx") and Healthdyne Technologies, Inc. ("Healthdyne") dated this ____ day
of August, 1996.
W I T N E S S E T H:
WHEREAS, SpectRx has entered into a Product License Agreement with the
University of Texas M.D. Anderson Cancer Center and related parties dated
_______________ ("M.D. Anderson License");
WHEREAS, SpectRx desires to sub-license to Healthdyne and Healthdyne
desires to sub-license from SpectRx certain patents licensed under the M.D.
Anderson License;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, Healthdyne and SpectRx hereby agree as follows:
1. A true and correct copy of the M.D. Anderson License is attached
hereto as Exhibit A.
2. SpectRx hereby sub-licenses to Healthdyne within the Territory, and
Healthdyne hereby accepts the sublicense within the Territory, of the M.D.
Anderson License subject to the terms and conditions as agreed to in writing by
authorized representatives of the parties. The Territory shall be the United
States and Canada.
3. Healthdyne agrees to pay one-half of the royalty due and payable by
SpectRx to M.D. Anderson under the M.D. Anderson License, not to exceed One
Percent (1%) of the Net Selling Price for the Instrument. For purposes of this
Sub-License Agreement, Instrument means an instrument for non-invasive bilirubin
measurement with required software, optics, circuitry, charger base and
encasement. The initial product specifications for the Instrument is set forth
on Exhibit B. Net Selling Price means the total sales revenue for the Instrument
excluding charges for returns, outbound prepaid or allowed transportation
charges, sales taxes, tariffs or duties directly imposed with reference to
particular sales or similar items. Net Selling Price shall only include one sale
per Instrument.
4. The parties hereto agree to be bound by the Successor Letter
Agreement entered into between Healthdyne and the University of Texas M.D.
Anderson Cancer Center dated ___________.
5. Exhibit A and Exhibit B hereto are incorporated by reference.
<PAGE> 56
IN WITNESS WHEREOF, the parties hereto have caused their authorized
representatives to execute this Sub-License Agreement as of the day and year
first above written.
HEALTHDYNE TECHNOLOGIES, INC. SPECTRX, INC.
By: By:
---------------------------- --------------------------
Title: Title:
---------------------------- --------------------------
Date: Date:
---------------------------- --------------------------
-2-
<PAGE> 57
EXHIBIT D-2
[UNIVERSITY OF TEXAS
Letterhead]
June 17, 1996
VIA AIRBORNE
Keith D. Ignotz
Chief Operating Officer
SpectRx
6025A Unity Drive
Norcross, GA 30071
RE: Successor Letter Agreement between HealthDyne and SpectRx
Dear Keith:
Enclosed is one fully executed original of the subject agreement for
your files.
Best regards,
/s/ Carla Strobel
------------------------
Carla Strobel
Administrative Assistant
CS/cjs
Enclosure
cc: (with enclosure of executed original)
President and CEO
Healthdyne Technologies, Inc.
1255 Kennestone Circle
Marietta, GA 30066
<PAGE> 58
SUCCESSOR LETTER AGREEMENT
June 10, 1996
Healthdyne Technologies, Inc.
1255 Kennestone Circle
Marietta, Georgia 30066
Attention: Craig B. Reynolds
President and Chief Executive Officer
Re: PATENT AND TECHNOLOGY LICENSE AGREEMENT ("AGREEMENT"),
effective March 12,1996 by and between the BOARD OF REGENTS
("BOARD") of THE UNIVERSITY OF TEXAS SYSTEM ("SYSTEM"), THE
UNIVERSITY OF TEXAS M.D. ANDERSON CANCER CENTER (MDA"), and
SPECTRX, INC. ("LICENSEE")
Dear Mr. Reynolds:
This Successor Letter Agreement is written at your request in
connection with the contemplated sublicense agreement between LICENSEE and
Healthdyne Technologies, Inc. ("HEALTHDYNE").
BOARD, SYSTEM and MDA hereby agree that in the event that LICENSEE
enters into a written and fully executed sublicense agreement with HEALTHDYNE
pursuant to Articles 3.3 and 3.4(b) of the AGREEMENT, and, subsequent thereto
while such sublicense agreement is in effect, the AGREEMENT with LICENSEE is
terminated, HEALTHDYNE shall, at its sole option with written notice to MDA by
Certified Mail, Postage Prepaid, Return Receipt Requested at the address herein
below within ninety (90) days of said termination, have the right to succeed to
all of LICENSEE's rights and responsibilities under the AGREE provided, however,
that HEALTHDYNE shall not assume any liabilities of LICENSEE to BOARD, SYSTEM or
MDA accruing prior to, or as a result of, said termination of the AGREEMENT.
BOARD, SYSTEM and MDA confirm that: (i) the AGREEMENT with LICENSEE is
in full force and effect as of the date hereinabove; and (ii) they know of no
present facts or circumstances, which, with the passage of time or otherwise,
would cause the termination of the AGREEMENT.
-1-
<PAGE> 59
Successor Letter Agreement
June 10, 1996
Page 2
If this Successor Letter Agreement is acceptable to you, please sign
the three (3) originals in the space provided below and return two (2) of such
originals to me at the following address:
William J. Doty
Director, Technology Development
1020 Holcombe, Suite 1405
Houston, Texas 77030
Very truly yours,
/s/ William J. Doty
--------------------------------
William J. Doty
Director, Technology Development
IN WITNESS WHEREOF, parties hereto have caused their duly authorized
representatives to execute this AGREEMENT.
THE UNIVERSITY OF TEXAS BOARD OF REGENTS OF THE
M.D. ANDERSON CANCER CENTER UNIVERSITY OF TEXAS SYSTEM
By: /s/ David J. Bachrach By: /s/ Ray Farabee
----------------------------------- ------------------------------
David J. Bachrach Ray Farabee
Executive Vice President Vice Chancellor and
for Administration and Finance General Counsel
APPROVED AS TO FORM:
By: /s/ Dudley R. Doble, Jr.
------------------------------
Dudley R. Doble, Jr.
Manager, Intellectual
Property
HEALTHDYNE TECHNOLOGIES, INC.
By: /s/ Craig B. Reynolds
-----------------------------------
<PAGE> 60
EXHIBIT E
<TABLE>
<CAPTION>
ESTIMATED DOLLARS
DATE (IN THOUSANDS) MILESTONE
- ----------------- ------------- -------------------------------------------------------------------------
<S> <C> <C>
[*] Pre-Signing Payment
[*] Signing Definitive Agreements
[*] [*] Program Review
Clinical Instruments Available
[*] [*] Program Review
Miniature Photospectometer Board Functional Test
[*] [*] Program Review
[*] Signed and Board Approved M.D. Anderson License and Successor Letter
Agreement
[*] [*] Calibration Component and Enclosure Tooling.
Purchase Order Issued
Formal Documentation Released
[*] [*] Delivery of Pre-Production Unit
[*] [*] Pre-Production Unit Test Completed
[*] [*] Seven Pieces Manufacturing Pilot Run Units Delivered
[*] [*] Manufacture Pilot Run Test Complete
[*] [*] FDA Approval
[*] [*] Acceptance by Heathdyne of Quantities Delivered Pursuant to First
Purchase Order
[*] [*] First Anniversary of Acceptance by Healthdyne of First Purchase Order
Quantities Delivered by SpectRx
</TABLE>
* For each full month for which SpectRx has completed the "Acceptance by
Healthdyne of Quantities Delivered Pursuant to First Purchase Order"
milestone, [*] of this final milestone shall be prepaid. For example,
if the "Acceptance by Healthdyne of Quantities Delivered Pursuant to
First Purchase Order" milestone is completed on April 11, 1997, [*]
would be payable to SpectRx together with the [*] milestone payment
otherwise payable on that date, and [*] would be payable on the "First
Anniversary of Acceptance by Healthdyne of First Purchase Order
Quantities Delivered by SpectRx".
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
<PAGE> 61
EXHIBIT G
Healthdyne's minimum unit sales for Instruments and Disposables from SpectRx
will be:
<TABLE>
<S> <C>
Year 2 Following Commercialization: Year 1 Healthdyne actual Disposable [*]
Year 3 Following Commercialization: Year 2 Healthdyne actual Disposable [*] minimum.
Year 4 Following Commercialization: Year 3 Healthdyne actual Disposable [*] minimum.
Year 5 Following Commercialization: Year 4 Healthdyne actual Disposable [*] minimum.
Year 6 Following commercialization: No further purchase minimum.
and onward
</TABLE>
[*] Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
<PAGE> 62
EXHIBIT H
RULES FOR ARBITRATION
The Parties agree that any Arbitration will be binding and conducted
pursuant to the following terms and conditions:
1. The Arbitration Tribunal shall be formed in the following
manner:
(1) The Party desiring to submit a dispute to arbitration will
give the other Party notice to arbitrate by certified mail, which states therein
the name and address of its arbitrator (a citizen of the United States), the
subject of the dispute, and the proposed date of arbitration. The date when the
notification letter is sent will be the date of first notification.
(2) The other Party, within thirty (30) days after receipt of
the notice to arbitrate, will inform the party who sent the notice, by certified
mail, of the name and address of its arbitrator (a citizen of the United
States).
(3) If the Party who receives the notice to arbitrate does not
inform the Party who gave the notice of the name and address of its arbitrator
within the thirty (30) day period specified above, then the Party who gave
notice to arbitrate may request the President of the American Arbitration
Association to appoint an arbitrator for such other Party. This appointment must
be made within thirty (30) days after the end of the thirty (30) day period in
which each Party could appoint its own arbitrator.
(4) The American Arbitration Association will be asked to
appoint an impartial arbitrator within thirty (30) days after appointment of the
other two arbitrators who will act as Chairman of the Arbitration Tribunal. The
appointment of the impartial Chairman must be made within thirty (30) days after
application for the appointment is made.
2. Notwithstanding provisions of any rules herein adopted, it is agreed
that all arbitrators shall be independent impartial neutrals who explicitly
undertake to be bound by the ABA/AAA Code of Ethics in Commercial Disputes, for
neutrals, and who shall have no ex parte direct or indirect communications with
a party relating to the dispute or otherwise tending to bias or influence the
arbitrator.
3. No Party shall conduct any private interview with an arbitrator
nominee concerning their substantive views or the dispute. Any arbitrator
nominee who has been interviewed regarding their substantive views or the
dispute shall be disqualified.
4. Both Parties agree that prompt disposal of any dispute arising out
of or relating to this Agreement or activities governed by it is important and
necessary and thus, the resolution of any
<PAGE> 63
dispute shall be conducted expeditiously, and as soon as possible, but in no
event more than six (6) months from the date of first notification.
5. The Arbitration Tribunal will have its seat in Atlanta, Georgia,
United States of America. The Parties agree that each Arbitrator must commit in
their employment contract that they have adequate time for expeditiously
handling the dispute and that they will commit to giving this matter priority,
to the end that final disposition shall be accomplished not more than six (6)
months from the date of first notification.
6. The Chairman of the Tribunal is instructed, directed and commanded
to assume case management initiative and control of the dispute resolution
process and to initiate early scheduling of all events to assure that
disposition of the dispute is accomplished as expeditiously as practical but in
no event should final disposition be later than six (6) months from the date of
first notification. The Tribunal shall permit and Facilitate discovery as it
shall determine is appropriate under the circumstances, taking into account the
needs of the parties and the desirability of making discovery expeditious and
cost-effective. The Chairman may issue orders to protect the confidentiality of
proprietary information, trade secrets and other sensitive information disclosed
during discovery and may give general orders to the Parties regarding the
proceedings. The Chairman shall give active attention to the scope, form, likely
cost effectiveness and scheduling of all discovery, and shall issue orders
accordingly. The Chairman is instructed to attend key depositions, if any, so as
to expedite them and rule immediately on questions arising during the course of
the proceeding.
7. The Arbitration Tribunal is permitted and empowered to construe the
Agreement to arbitrate and determine the scope of its own jurisdiction.
8. Neither Party may seek a temporary restraining order, preliminary
injunctive or other extraordinary relief, either before or after the
arbitrator(s) are appointed and assume their responsibilities. Any preliminary
or extraordinary relief will be handled on an expedited basis by the Arbitration
Tribunal.
9. The Arbitration Tribunal will give the Parties an opportunity to
present their views at a hearing in Atlanta, Georgia. The hearing win be
conducted in accordance with the Rules of the American Arbitration Association
as at present in force. The English language shall be used throughout the
arbitration proceedings.
(1) The Arbitration Tribunal will render a written decision on
the dispute submitted to arbitration, which must be based on the terms and
conditions contained in this Agreement. If the Arbitration Tribunal cannot
decide a dispute without reference to provisions of substantive law, the
Arbitration Tribunal may refer to the substantive law of the State of Georgia,
U.S.A.
(2) The written decision will not specify reasons for the
decision, but will identify the arbitrators, describe the place and time of
decision, and describe the opportunity given to the Parties to present their
views.
-2-
<PAGE> 64
(3) The Arbitration Tribunal will render its decision not
later than thirty (30) days after the close of evidence. Each arbitrator's fee
will be reduced by ten percent (10%) for every five (5) day period in which a
decision has not been rendered past this thirty (30) day time period.
(4) The Arbitration Tribunal will have authority to decide all
disputes relating to the same subject.
10. The decision and award of a majority of the Arbitration Tribunal on
any dispute submitted to arbitration under this Agreement will be final and
binding on the Parties. In case the arbitrators are unable to reach a majority
decision, the final decision will be rendered by the Chairman. No appeal or
recourse to any court of law will be available to any Party after the
Arbitration Tribunal has reached its decision.
11. Judgment upon the award of the Arbitration Tribunal may be entered
in any court having jurisdiction, or application may be made to such court for a
judicial acceptance of the award and an order for enforcement, as the case may
be. Any Party who fails to comply with an arbitration award will reimburse the
other Party for all reasonable costs and expenses incurred in connection with
the enforcement of the award. The Parties acknowledge that this Agreement and
any award rendered pursuant to it shall be governed by the 1958 United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
12. Each Party shall share equally in the costs incurred by the
Arbitration Tribunal to arbitrate any dispute, including but not limited to
arbitrators' fees, and costs and expenses directly related to the arbitration
proceedings; however, each Party shall bear its own costs to prepare and present
evidence to the Arbitration Tribunal, including but not limited to any expert
fees, or costs and expenses incurred to prepare each Party's case.
-3-
<PAGE> 1
EXHIBIT 11.1
SPECTRX, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1997
-------- ------------------
PRIMARY AND FULLY DILUTED
<S> <C> <C>
Pro forma net loss...................................... $ (3,178) (1,249)
======== ========
Weighted average Common Stock outstanding during
the period............................................ 1,532 1,532
Cheap Stock(1).......................................... 1,562 1,562
Dilutive effect of common stock equivalents............. 0 0
-------- --------
Total................................................. 3,094 3,094
======== ========
Per share amount........................................ (1.03) (0.40)
======== ========
</TABLE>
(1) Pursuant to Securities and Exchange Commission Accounting Bulletin No. 83,
common stock and common stock equivalents issued at prices below the
assumed initial public offering price per share ("cheap stock")
during the twelve months immediately preceding the initial filing date of
the Company's Registration Statement for its public offering have been
included as outstanding for all periods presented, regardless of whether
they are antidilutive.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
June 10, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF COUNSEL
We consent to the use of our name under the caption "Experts" in the
Prospectus, which constitutes part of the Registration Statement for the Common
Stock of SpectRx, Inc. on Form S-1.
FLESHNER & KIM
/s/ Mark Fleshner
- ----------------------------
Mark Fleshner
June 11, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF COUNSEL
We consent to the use of our name under the caption "Experts" in the
Prospectus, which constitutes part of the Registration Statement for the Common
Stock of SpectRx, Inc. on Form S-1.
KILPATRICK STOCKTON LLP
/s/ Dean W. Russell
- -----------------------------
Dean W. Russell
June 11, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF COUNSEL
We consent to the use of our name under the caption "Experts" in the
Prospectus, which constitutes part of the Registration Statement for the Common
Stock of SpectRx, Inc. on Form S-1.
THORPE NORTH & WESTERN
/s/ M. Wayne Western
- ----------------------------
M. Wayne Western
June 11, 1997
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT REGULATORY COUNSEL
We consent to the use of our name under the caption "Experts" in the
Prospectus, which constitutes part of the Registration Statement for the Common
Stock of SpectRx, Inc. on Form S-1.
MEDICAL DEVICE CONSULTANTS, INC.
/s/ James R. Veale
- ----------------------------
James R. Veale
June 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH REGISTRATION STATEMENT.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 4,721 3,108
<SECURITIES> 0 0
<RECEIVABLES> 1 2
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,812 3,218
<PP&E> 870 1,015
<DEPRECIATION> (274) 320
<TOTAL-ASSETS> 5,946 4,894
<CURRENT-LIABILITIES> 942 1,120
<BONDS> 0 0
0 0
5 5
<COMMON> 2 2
<OTHER-SE> 4,747 3,517
<TOTAL-LIABILITY-AND-EQUITY> 5,946 4,894
<SALES> 0 0
<TOTAL-REVENUES> 452 76
<CGS> 0 0
<TOTAL-COSTS> 3,562 1,373
<OTHER-EXPENSES> (64) (50)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 132 2
<INCOME-PRETAX> (3,178) (1,249)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,178) (1,249)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,178) (1,249)
<EPS-PRIMARY> (1.03) (0.40)
<EPS-DILUTED> (1.03) (0.40)
</TABLE>
