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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
Commission File Number: 0-22179
SPECTRX, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-2029543
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
6025A Unity Drive, Norcross, GA 30071
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (770) 242-8723
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $150 million as of February 29, 2000, based
upon the average of the high and low prices of the Registrant's Common Stock
reported for such date by the Nasdaq National Market. Shares of Common Stock
held by each executive officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 29, 2000, the Registrant had outstanding 8,463,638
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE.
Parts of the following documents are incorporated by reference in Part
III of this Form 10-K Report: Proxy Statement for Registrant's 2000 Annual
Meeting of Shareholders -- Items 10, 11, 12 and 13.
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PART I
ITEM 1. BUSINESS
OVERVIEW
SpectRx is a medical biophotonics company that develops and
manufactures painless and bloodless alternatives to traditional medical
diagnostic and monitoring procedures. Medical biophotonics is the technology of
using light beams and other forms of energy to gain unique access to the human
body to diagnose and monitor medical conditions. The Company has developed a
non-invasive alternative to conventional tests for monitoring infant jaundice,
and is developing less invasive and painless alternatives than are currently
available for conventional diabetes detection, glucose monitoring and cancer
detection tests. The Company has entered into collaborative arrangements with
Respironics, Inc. ("Respironics") through its acquired business, Healthdyne
Technologies, Inc., Abbott Laboratories ("Abbott"), Roche Diagnostics Boehringer
Mannheim Corp. ("Roche Diagnostics") and Welch Allyn, Inc. ("Welch Allyn") to
facilitate the development, commercialization and introduction of its infant
jaundice, diabetes detection, glucose monitoring and cancer detection products,
respectively.
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 Products. 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 United States Food and Drug
Administration ("FDA") for these products where possible,
(iii) expanding its internal product development
capabilities, and (iv) developing its sales, marketing and
manufacturing capabilities. This includes the manufacturing
and marketing of its BiliChek(TM) system and the continued
development and introduction of the Company's diabetes
detection product.
- Develop Additional Products. Develop additional products from
the current product foundation. The Company believes that its
development activities in glucose monitoring and cancer
detection have significant promise for as many as four
additional product offerings that utilize the Company's
biophotonic technologies. The Company believes that its
diabetes detection product will lead to increased testing,
enlarging the market for glucose monitoring. The Company also
believes that the cancer detection products will be an
extension upon the technology used in the BiliChek(TM) and
diabetes detection products.
- Collaborate with Market Leaders. The Company has selectively
established collaborative arrangements with Abbott, Roche
Diagnostics, Respironics and Welch Allyn to develop and
commercialize its products. 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 biophotonic technologies by
developing future products based on these technologies that
can provide cost effective, less invasive alternatives to
current diagnostic or monitoring products at the point of
care. 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 ideally (i) apply for timely clearance
from the FDA, (ii) incorporate a disposable component and
(iii) qualify for third-party reimbursement.
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INDUSTRY OVERVIEWS
INFANT JAUNDICE
Background
Infant jaundice is a condition that primarily affects newborns within
the first three to ten days of life. If left untreated infant jaundice may, in
extreme cases (kernicterus), lead to brain damage or death. 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 for 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 40-60% 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 laboratory processing cost usually ranges from $10.00-$12.00. 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, named the "BiliChek(TM)"
Non-Invasive Bilirubin Analyzer (sold internationally as BiliCheckTM) is based
upon reflection spectroscopy and measures bilirubin regardless of the patient's
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 BiliChek(TM) has the
potential to replace the painful heel stick procedure currently utilized.
The design of the BiliChek(TM) consists of a hand held,
battery-operated instrument, which, when not in use, sits in a compact charger
base. This instrument incorporates a microspectrometer to collect spectroscopic
information from the skin and a proprietary, disposable calibration element,
BiliCal(TM). After calibration, the instrument is applied to the skin of the
infant for five applications, which generally takes less than one minute to
produce a measureable value. During this time the bilirubin level is measured
by collecting the light reflected from the skin and analyzing it using a
proprietary algorithm that adjusts for interfering factors that are present due
to skin color, gestational age and other factors.
In 1998, the Company received ISO 9001/EN 46001 certification and was
granted the CE mark which allowed it to begin selling the BiliChek(TM)
internationally. In April 1998, the Company announced it had begun commercially
shipping BiliChek(TM) units to certain international distributors. The
BiliChek(TM) is currently being marketed in more than 60 countries worldwide. In
August 1998, the Company announced that a 510(k) premarket notification
submission was filed with the U.S. Food and Drug Administration (FDA) on behalf
of the BiliChek(TM) by Respironics (formerly Healthdyne Technologies). In March
1999, the Company announced that it had received clearance from the FDA for
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Respironics to market the BiliChek(TM) in the U.S. Respironics commenced
marketing of the BiliChek(TM) in the United States after obtaining FDA
clearance. In September 1998, Atom Medical Corporation was named as distributor
of the BiliChek(TM) in the Japanese market. In November 1999 the Japanese
Ministry of Health and Welfare granted marketing clearance to Atom. In January
2000 Respironics reported it had filed a 510(k) premarket notification
application with the FDA for expanded claims for use of the BiliChek(TM) during
phototherapy.
The Company's BiliChek(TM) was developed pursuant to a collaborative
arrangement with Respironics. Under the terms of the arrangement, SpectRx
developed and manufactures the product and Respironics paid and will continue
to pay certain costs associated with additional product developmental and
clinical trials. Respironics 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 geographic markets. Respironics 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
marketing schedules will be met, if at all.
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 can lead 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 $110 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. 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 Diabetes Detection Market
The American Diabetes Association (the "ADA") estimates that
approximately 16 million people in the United States have diabetes, but only
10.3 million 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. Early diagnosis allows glucose
levels to 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 798,000 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 detection test. In June 1997, the ADA altered its
recommendation for diabetes detection to increase the recommended level of
screening for all adults over 45 years old to every three years, which the
Company believes will increase market spending.
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There are several diabetes detection tests in use today. The diabetes
detection procedure recommended by the ADA 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 detection that utilize random finger stick blood glucose tests are no
longer recommended by the ADA because the random nature of the tests results in
an unacceptably low level of 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 Detection Product (The Accu-Chek(TM)
D-Tector(TM))
The SpectRx non-invasive diabetes detection product being developed
by SpectRx and Roche 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 fluorescence in the lens of the eye may
be indicative of prolonged exposure to high levels of glucose due to diabetes.
A measurement indicating a patient is likely to have diabetes could be
confirmed by subsequent testing using conventional blood-based diagnostics. The
performance of the diabetes detection product has been shown to be comparable
to that of the blood-based screening test. Unlike the blood based tests,
however, the SpectRx diabetes detection product is painless, would provide the
patient with test results in less than a minute at the point of care, and would
not require the patient to fast for eight hours prior to administration of the
test.
The Company's non-invasive diabetes detection 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 that such a method of
diabetes detection 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 5.5 million in the
United States. For this reason, the Company believes that its non-invasive
diabetes detection 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 diabetes detection instrument, trademarked Accu-Chek(TM)
D-Tector(TM), 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 or her 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 either 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 Roche Diagnostics, an early stage prototype of the Company's
diabetes detection product demonstrated an ability to detect diabetes.
The Company is in the process of final testing and manufacturing
ramp-up of the product. In December 1998, a 510(k) premarket notification
submission was filed with the U.S. Food and Drug Administration by Roche
Diagnostics on behalf of the SpectRx non-invasive diabetes detection product.
That application was withdrawn in June 1999. In June 1999 Roche reported that
the FDA required a PMA approval process for the device and began the filing
process. We expect the Accu-Chek(TM) D-Tector(TM) to be reviewed as an expedited
PMA. In addition, Roche Diagnostics 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 the production or regulatory
approval will occur.
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The Company has entered into a collaboration agreement with Roche
Diagnostics, as a result the Company has granted Roche Diagnostics an exclusive
worldwide license to sell and market the Company's non-invasive diabetes
detection product. The Company receives development milestone payments and
expects to receive a manufacturing profit on products sold to Roche
Diagnostics. Roche Diagnostics is responsible for conducting clinical testing,
obtaining regulatory approvals for, and the marketing, distribution and sales
of the Accu-Chek(TM) D-Tector(TM). In 1999 the Company received development
milestones for a total of $987,000 from Roche.
The Glucose Monitoring Market
People with diabetes have difficulty achieving optimal glucose
control. For proper glucose control, each insulin injection, or other form of
medication, 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 up to 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 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 every day 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 $3.0
billion annually and is growing at approximately 12%-18% 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 diabetics currently 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, inconvenience and cost 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. Currently, no
non-invasive glucose monitoring systems are commercially available in the U.S.
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, handheld 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
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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 Products
The Company is developing glucose monitoring products that utilize
the Company's proprietary interstitial fluid sampling technology that will
allow people with diabetes to easily and accurately measure their glucose
levels. Interstitial fluid is an extracellular fluid that is prevalent
throughout the body 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 products use the Company's
microporation technology to collect a sample of interstitial fluid. This
interstitial fluid sample may be measured once in a single-use application, or
a stream of interstitial fluid may be repeatedly measured for a continuous
monitoring application. Products using either sampling methodology are intended
to measure the glucose concentration of the interstitial fluid using disposable
assay technology. Because the Company's glucose monitoring products are
designed to obtain a sample of interstitial fluid from the outermost layers of
the skin and do not require a blood sample, their use does not stimulate pain
sensors and capillaries found in the deeper layers of skin and is thus free of
the pain and blood involved in conventional finger stick assaying techniques.
The Company initially focused its research effort in the area of
single use glucose monitoring in collaboration with Abbott. Since the fall of
1998 SpectRx has focused its research efforts on applications in the continuous
monitoring area. In November 1999, the Company entered into an amendment to its
agreement with Abbott to include continuous monitoring products. The primary
focus of the Abbott/SpectRx collaboration is currently upon the continuous
monitoring product.
Continuous Glucose Monitoring Product
During the course of research and development of its single-use
interstitial fluid-based glucose monitoring product, the Company discovered a
technique which allows for continuous monitoring of glucose. By applying a
constant state of low-level vacuum to an array of micropores, a stream of
interstitial fluid is produced. This stream of interstitial fluid may be passed
over a sensor which measures the glucose concentration periodically providing
the patient with multiple readings. Feasibility data generated by the company
in 1998 indicates that an array of micropores may be kept viable for up to
three days. A second feasibility study showed that the concentration of
interstitial fluid glucose continued to correlate to the concentration of blood
glucose during a three day period.
The product concept of the continuous glucose monitoring product
consists of a disposable patch electronically connected to a beeper-sized
meter. The patch would be placed over a small array of micropores created on
the body. This array could be placed in a number of locations, but the current
concept would have it placed on the torso. The patch would be designed to
eliminate spent interstitial fluid. The meter would be worn on a belt or hidden
under clothing. The system would collect a new glucose reading every 10 to 15
minutes which would be recorded by the meter and presented on the meter's
display. The stored information would be capable of being downloaded for
analysis. The meter could also indicate if the current reading is higher or
lower than any previous reading, showing a trend. The meter would also be
capable of indicating high or low glucose levels via an alarm. For convenience,
the umbilical would be detachable so that the patient may bathe or engage in
other activities, then reattach the umbilical and resume monitoring the stream
of interstitial fluid. In June 1999, at the American Diabetes Association
meeting, the Company publicly demonstrated an integrated prototype capable of
measuring glucose concentration in a stream of interstitial fluid.
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In October 1999, the Company received a grant of $292,000 from the
Centers for Disease Control to adapt its continuous glucose monitoring
technology to monitor levels of children and the elderly.
In November 1999, the Company and Abbott entered into an amendment of
the agreement signed in 1996. The primary focus of the amendment was to include
the continuous glucose monitoring research, development and commercialization
effort with the agreement between SpectRx and Abbott. It also included potential
manufacturing by SpectRx and other potential collaborations with Abbott. In
addition, SpectRx issued redeemable, convertible preferred stock to Abbott for
$5,250,000 in conjunction with the signing of the amendment.
The research and development is focused on the integration of the
Company's microporation technology, fluid management and the glucose assay
technology into a prototype device. The Company expects prototype development to
be followed by clinical trials and a regulatory submission. Unexpected problems,
however, may arise during the development and regulatory approval processes. 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.
Single-use Glucose Monitoring Product
The single-use glucose monitoring product is expected 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, an array of micropores will be
painlessly created in the outermost layer of skin, the stratum corneum. The
Company believes the creation of micropores 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 the
micropores and into the disposable cartridge. When the assay cartridge is full
and the interstitial fluid has been analyzed, the results will appear on a
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 product and a leading conventional personal blood
glucose monitoring system. The study compared the glucose levels in
interstitial fluid and blood of the 10 subjects who were each administered 75
grams of glucose. The study, which yielded a total of 876 glucose measurements
(438 contemporaneous measurements of interstitial fluid and blood), produced a
correlation coefficient of 0.96 between glucose levels in interstitial fluid
and blood.
In October 1996, the Company entered into a collaborative arrangement
with Abbott for the development and commercialization of the Company's glucose
monitoring products. Pursuant to the arrangement, the Company granted Abbott an
exclusive worldwide license for the Company's single use 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 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 in 1996 whereby it purchased
500,000 shares of Series C Preferred Stock which converted into 357,143 shares
of Common Stock upon the Company's initial public offering.
The Company conducted research on the single use glucose monitoring
product through the third quarter of 1998. At that point in time that research
work was transferred to Abbott. Abbott is currently responsible for the research
program for single use glucose monitoring. The focus of that research will be to
produce methodologies that will permit collection of interstitial fluid at a
minimum volume level, and within a specified time, on a universal basis within
the target diabetic population. 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.
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NON-INVASIVE CANCER DETECTION
Background
According to the American Cancer Society, cancer is a group of many
related diseases. All forms of cancer involve out-of-control growth and spread
of abnormal cells. Normal body cells grow, divide, and die in an orderly
fashion. Cancer cells, however, continue to grow and divide, and can spread to
other parts of the body. In America, half of all men and one-third of all women
will develop cancer during their lifetimes. According to the Society, the
sooner a cancer is found, and the sooner treatment begins, the better a
patient's chances are of a cure.
Cervical Cancer
Cervical cancer is a cancer which begins in the lining of the cervix
(the lower part of the uterus) which may spread to other parts of the body if
left untreated. Cervical cancers form over time. There is generally a gradual
change from a normal cervix to cervix with precancer cells to cervical cancer.
For some women, precancerous changes may go away without any treatment. While
the majority of precancerous changes do not advance to cancer, if these
precancers are treated, true cancers can be prevented. The Pap smear, where a
sample of cervical tissue is placed on a slide and observed in a laboratory, is
the most common form of cervical cancer screening.
Cervical Cancer Market
The American Cancer Society estimates that during 1999, about 12,800
cases of invasive cervical cancer will be diagnosed in the United States.
Cervical cancer is the ninth most deadly cancer in the U.S. with 4,800 deaths
predicted in 1999. According to published data, cervical cancer results in
approximately 190,000 deaths annually worldwide with 371,000 new cases reported
each year.
The major market opportunities are in screening and diagnosis. Since
the introduction of better screening and diagnosis methods, the number of
cervical cancer deaths in the U.S. has declined dramatically. The main reason
for this change is the increased use of the Pap smear screening test. However
the Pap smear screening test has a wide variation in sensitivity (11% to 99%)
and specificity (14% to 97%), according to a meta-analysis of Pap test accuracy
published in the American Journal of Epidemiology, Vol. 141, No. 7, 1995.
Approximately 55 million Pap tests are given annually in the U.S. and Europe.
The average price of a Pap test in the U.S. is $26. New technologies improving
the sensitivity and specificity of pap smear screening have recently been
introduced and are finding acceptance in the market place.
The standard for cervical cancer diagnosis, after screening, is a
visual examination of the cervix using a Colposcope followed by a biopsy. This
method looks for visual morphological changes attributable to cancer. There are
approximately two million Colposcope examinations annually in the U.S. and
Europe. The average cost of a Colposcope examination in the U.S. is $185.
Non-invasive Cervical Cancer Product
The Company, in collaboration with Welch Allyn, is developing a
non-invasive cervical cancer detection product. The product is based on
SpectRx's proprietary biophotonic technology and the intended design is
expected to identify cancers and precancers painlessly, non-invasively and at
the point of care by shining light onto the cervix, then analyzing the light
reflected from the cervix. The information presented by the reflected light
will be used to produce a map or image of diseased tissue. Consequently, this
test, unlike the Pap smear test or biopsy, preserves the perspective and
positional information of disease on the cervix, allowing for more accurate
diagnosis. The SpectRx/Welch-Allyn product, in addition to detecting the
morphological changes, is also expected to detect the biochemical changes that
precede the development of visual lesions. In this way the cancer is detected
early in its development thereby increasing the chances of effective treatment.
The product is expected to incorporate a calibration disposable.
During 1999, the Company conducted human clinical feasibility studies
of laboratory prototypes. In December 1999, the Company concluded the
feasibility studies and received a $700,000 milestone from Welch Allyn.
As a result the program moved into the development/engineering phase.
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The feasibility clinical studies were conducted at three U.S. centers
and resulted in 252 enrolled patient tests. The prototype devices effectively
differentiated cancerous and precancerous lesions from normal tissue and other
lesions with sensitivity from the three studies ranging from 89% to 100% (0% to
11% false negative rate) and specificity ranging from 80% to 89% (11% to 20%
false positive rate). In contrast, for patients where Pap test data could be
obtained, the Pap test classified 30% of cancerous and precancerous lesions as
normal or infection for a sensitivity of 70% (30% false negative rate), with a
corresponding specificity of 72% (28% false positive rate). The majority of the
cancerous and precancerous lesions missed by the Pap test were accurately
classified by the SpectRx test as precancerous.
The Company expects prototype development to be followed by pivotal
clinical trials and a regulatory submission. Unexpected problems, however, may
arise during the development and regulatory approval processes. In addition,
Welch Allyn 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.
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 been successful in its history in developing such strategic
relationships. The Company currently has collaborative arrangements with
Abbott, Roche Diagnostics, Respironics and Welch Allyn. The Company is, to
varying degrees, dependent upon its collaborative partners for the development,
clinical testing, regulatory approval, manufacturing, and commercialization of
its products.
Respironics
In June 1996, SpectRx entered into a Purchasing and Licensing
Agreement with Healthdyne Technologies, Inc., which was later acquired by
Respironics (the "Respironics Agreement"). This agreement was amended October
21, 1998. Pursuant to the Respironics Agreement, Respironics is responsible for
clinical trials, the regulatory approval process and sale of the BiliChek(TM)
in the United States and Canada. The Company retains manufacturing rights and
is responsible for the regulatory approval process and sale of the infant
jaundice product outside of the United States and Canada. Under the Respironics
Agreement, the Company receives from Respironics licensing fees and a
manufacturing profit on products sold to Respironics and shares any profit from
the sales of disposables by Respironics. Respironics 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,
Respironics must purchase its requirements for Licensed Products from SpectRx.
Respironics has agreed to pay SpectRx's cost for manufacturing each Licensed
Product. Respironics and SpectRx then share equally the margin earned on the
sale of Licensed Products. In order to maintain license exclusivity,
Respironics 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, Respironics receives a license to manufacture the Licensed Products
and pays a royalty to SpectRx on sales of Licensed Products.
SpectRx has granted to Respironics the exclusive option to acquire an
exclusive license for the United States and Canada, on terms substantially
similar to those contained in the Respironics Agreement, with respect to any
new intellectual property that comes into existence after the effective date of
the Respironics Agreement, which 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, Respironics 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 Respironics fails to exercise
such option,
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SpectRx may license such intellectual property to any third party on terms no
more favorable than those offered to Respironics.
The Respironics 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 Respironics Agreement, Respironics has the option to renew
the Respironics Agreement for additional fifteen year terms indefinitely.
Respironics also has the right to terminate the Respironics Agreement without
cause upon not less than 30 days' written notice to the Company.
Roche Diagnostics
In December 1994, SpectRx entered into a Development and License
Agreement with Boehringer Mannheim Corp. (which has since merged with Roche
Diagnostics) with respect to a non-invasive instrument that measures changes in
the lens of the human eye for the purpose of detecting diabetes. The agreement
was superceded by a new Development and License Agreement (the "Development
Agreement") between SpectRx and Roche in June 1999. Pursuant to the Development
Agreement, SpectRx has granted to Roche Diagnostics an exclusive, worldwide
license to sell and market the Company's diabetes detection product. SpectRx
receives development milestone payments from Roche Diagnostics pursuant to the
Development Agreement. The Development Agreement remains exclusive for so long
as Roche Diagnostics meets certain minimum volume purchase requirements set
forth in the Supply Agreement with Roche Diagnostics (discussed below). The
Development Agreement may be terminated at any time by Roche Diagnostics upon
written notice to SpectRx.
In January 1996, Roche Diagnostics and SpectRx entered into a Supply
Agreement for the supply by SpectRx to Roche Diagnostics of the Company's
diabetes detection product. This agreement was also superceded by a new Supply
Agreement (the "Supply Agreement") in June 1999. Roche Diagnostics 's purchase
price for the Company's diabetes detection product is calculated pursuant to a
formula based on a gross margin. Roche Diagnostics is required to meet minimum
annual purchase requirements for the diabetes detection product each year or
Roche Diagnostics 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. Roche Diagnostics 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 and in which case Roche Diagnostics is
deemed to have acquired a manufacturing license under the Development
Agreement. If Roche Diagnostics acquires this manufacturing license, it must
pay royalties to SpectRx on Roche Diagnostics sales of the diabetes detection
product. SpectRx would retain the right to reacquire the manufacturing license.
During the term of the Supply Agreement, SpectRx cannot 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 detection product other than with Roche Diagnostics affiliates. Roche
Diagnostics is not restricted from pursuing the development of a diabetes
detection instrument with another party.
Abbott Laboratories
In October 1996, SpectRx entered into a Research & Development and
License Agreement with Abbott for the development and commercialization of the
Company's glucose monitoring technology in the field of extracting interstitial
fluid samples for glucose monitoring (the "Field"). In November 1999, SpectRx
and Abbott entered into an amendment of the Research Development and License
Agreement which included specific terms related to the continuous monitoring
program (the "Abbott Agreement".) 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.
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In conjunction with the first agreement, Abbott made a $3 million
equity investment in SpectRx in 1996 whereby it purchased 500,000 shares of
Series C Preferred Stock which converted into 357,143 shares of Common Stock
upon the Company's initial public offering. Abbott subsequently purchased
SpectRx Common Stock on the open market and currently owns 6.2% of the
outstanding Stock of the Company. In conjunction with the signing of the
amendment, Abbott made a $5.25 million equity investment whereby it purchased
100,000 shares of Redeemable, Convertible Preferred Stock which is convertible
into the Company Common Stock. The conversion price is to be set at the market
price at the date of conversion, or at $9.388 per share, whichever is higher.
If the stock were to convert at $9.388 per share, Abbott would own 13.2% of the
outstanding stock of the Company, based upon shares outstanding on December 31,
1999.
Under the Abbott Agreement, the parties agreed to jointly conduct a
research program designed to demonstrate that the Company's single use glucose
monitoring product can extract an adequate sample of interstitial fluid in a
targeted time period. The focus of that development activity through August
1998 was toward a single use product concept. During the joint development
program, which began in the fourth quarter of 1996, Abbott paid mutually agreed
development costs. Abbott currently is responsible for all research on means of
extracting adequate samples of interstitial fluid related to single use glucose
monitoring applications. The current focus of research and development activity
is on the continuous monitoring application. After satisfactory demonstration
of sample extraction and measurement of glucose in interstitial fluid using the
continuous process, and 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.
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 are 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. Abbott may terminate the Abbott
Agreement upon not less than 30 days' prior notice to the Company for certain
product development failures.
Welch Allyn
In December 1998, SpectRx entered into a Development and
Commercialization Agreement with Welch Allyn, Inc. with respect to noninvasive
cervical and skin cancer diagnostic products. Under the terms of the agreement,
the two companies jointly share in the development costs for such products and
also will jointly share in the revenue produced by such products, if those
products are developed to commercialization. SpectRx can also receive certain
milestone payments pursuant to the agreement. The agreement further anticipates
that both Welch Allyn and SpectRx would manufacture portions of any
commercialized products and would collaborate in sales and marketing. Both
SpectRx and Welch Allyn are prohibited from pursuing development of devices,
utilizing the technology covered by the agreement, with another party while the
collaboration remains in effect. The agreement specifically focuses on the
development of a cervical cancer detection product. Should SpectRx determine
through research efforts that an application of the technology for the
detection of skin cancer is feasible, the agreement provides for, and retains
certain rights for Welch Allyn to expand the relationship with SpectRx to
develop and commercialize a skin cancer (melanoma) detection product. In
December 1999, SpectRx completed the requirements for Phase II (feasibility),
which triggered a milestone payment of $700,000.
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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.
Altea Technologies, Inc
In March 1996, SpectRx entered into a License and Joint Development
Agreement (the "Altea/Nimco Agreement") among the Company, Altea ("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 former Vice President of the Company, and his sister. 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 in certain areas made by each of SpectRx
and Altea based on newly developed technology related to the licensed
technology could be 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 8 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
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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 8 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 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 8 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 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
detection, infant jaundice and cancer detection products, including research
for and development of its core biophotonic technologies. Since inception to
December 31, 1999, the Company incurred approximately $17.6 million in research
and development expenses, net of approximately $4.6 million which was
reimbursed through collaborative arrangements. Three distinct groups within the
Company conduct research, development and engineering. One group consists of 24
engineers and support personnel who design optics, electronics, mechanical
components and software for the infant jaundice, diabetes detection, continuous
glucose monitoring and non-invasive cervical cancer detection products. A
second group consists of 21 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 12 scientists and engineers focused
on the development of cancer detection products.
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 products 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.
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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. All activity related to this technology is being conducted
by our subsidiary, FluorRx.
To date, the Company has only tested prototypes of its glucose
monitoring and cancer 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 cancer detection products are produced.
The company is developing the pre-production prototypes and beginning its
ramp-up for production of the diabetes detection device. While significant
progress has been made in development and engineering, considerable additional
effort and expense will be required before a commercial device is shipped.
MANUFACTURING
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 of building certain prototype devices, developing
production infrastructure and building production versions of its BiliChek(TM)
and BiliCal(TM) products. If the Company successfully develops its diabetes
detection product and, together with Roche Diagnostics obtains FDA clearance
and other regulatory approvals to market this product, the Company will
undertake to manufacture both of these products in commercial quantities. The
Company has little experience manufacturing such products in the volumes that
would be necessary for the Company to achieve significant commercial sales.
Currently 12 individuals are employed by the Company to accomplish the
production planning, quality system management, facility development, and
production scaling that will be needed to bring production to commercial
levels. The Company announced in 1998 that it had received ISO 9001/EN46001 and
CE mark Certification. These approvals enabled the Company to commence
production of its BiliChek(TM) and BiliCal(TM) products and to begin shipment
of these products into markets for which it has received regulatory clearance.
SALES, MARKETING AND DISTRIBUTION
The Company has elected to focus most of the sales and distribution
of its current and developing 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 and to launch the
BiliChek(TM) product system.
The Company has developed the BiliChek(TM) and BiliCal(TM) internal
marketing and distribution program to an introductory stage. SpectRx has
developed packaging, advertising, display materials, and training, and has, in
addition, signed distribution agreements or is in negotiation with companies it
believes to be highly experienced in the neonatal markets that SpectRx is
targeting in Europe, Asia and South America. The Company has also added or
engaged marketing personnel to develop and execute the programs necessary to
launch the BiliChek(TM) system and to manage sales of these products. The
Company launched its products in markets outside the U.S. and Canada in April
1998 and began introductory programs during the remainder of 1998.
Nevertheless, significant volumes of these products have not yet been shipped
and the efficacy of the marketing programs or the distributors has not yet been
tested with SpectRx's products.
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Respironics has the exclusive right to market and sell the Company's
infant jaundice product in the United States and Canada. Abbott has the
exclusive right to market and sell the Company's glucose monitoring products in
all countries except Singapore and the Netherlands, where the license is
non-exclusive. Roche Diagnostics has the exclusive worldwide right to market
and sell the Company's diabetes detection product. It is anticipated that Welch
Allyn and SpectRx will jointly manage the sales and marketing of any cancer
products that are developed.
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 detection product, and the
Company has licensed this proprietary technology to Roche Diagnostics pursuant
to the Company's collaborative arrangement. 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 patents
related to this product. SpectRx has licensed the one patent and two patent
applications to Respironics 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.
COMPETITION
The medical device industry in general, and the markets for glucose
monitoring, cervical cancer detection and diabetes detection 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 detection tests, infant jaundice and cancer
products.
A number of competitors, including Johnson & Johnson, Inc. (which
owns Lifescan, Inc.), Roche Diagnostics, Bayer AG (which owns Miles
Laboratories, Inc.) and Abbott (which owns MediSense, Inc.) are currently
marketing traditional single use 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.
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There is also competition in the diabetes detection and infant
jaundice markets. The existing blood test providers, companies that produce
blood tests and other technologies that could replace blood testing will
compete for a share of these markets.
Competition in cancer detection is also intense. Current screening
systems, primarily the Pap smear and colposcopy, are well established and
pervasive. The Company will be required, in conjunction with Welch Allyn, to
develop devices that are more accurate, easier to use or less costly to
administer, such that these devices have a competitive advantage to be
commercially successful. In addition to existing external competitors,
SpectRx's partner, Welch Allyn, is currently a competitor in the colposcopy
market.
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 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 meets from time to time and provides comments on testing
guidelines. 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
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.
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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.
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
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<PAGE> 19
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.
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 received 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 was one of the CE mark certification
requirements required by mid-1998. The Company currently has ISO 9001/EN46001
certification. Failure, however, to maintain the right to affix the CE mark
would prohibit the Company from selling its products in member countries of the
European Union.
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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
affect the Company's business, financial condition and results of operations.
EMPLOYEES AND CONSULTANTS
As of December 31, 1999, the Company had 62 employees and consulting
or other contract arrangements with 41 additional persons to provide services
to the Company on a full- or part-time basis. Of the 103 people so employed or
engaged by the Company, 59 are engaged in research and development activities,
10 are engaged in sales and marketing activities, 7 are engaged in regulatory
affairs and quality assurance, 13 are engaged in manufacturing and development,
and 14 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, marketing, 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.
RISK FACTORS
The following risk factors should be considered carefully in addition
to the other information presented in this report. This report contains forward
looking statements that involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the forward
looking statements. Factors that might cause such differences include, but are
not limited to, the following risk factors.
Early Stage of Development; No Assurance of Successful Product Development
To date, the Company has released for sale one product line. For the
remainder of its expected products, the company has only tested prototypes and
pre-release production versions 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 other products are produced. The Company
could encounter unforeseen problems in the development of those 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 all 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.
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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.
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) Respironics under
which Respironics has significant responsibility 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, (ii) Roche
Diagnostics under which Roche Diagnostics has significant responsibility for
undertaking or funding the development, clinical testing, regulatory approval
process and sale of the Company's diabetes detection product, (iii) 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 products and (iv) Welch Allyn which is
a cooperative development program in the early stages of product development
for a cervical cancer detection product. The agreements evidencing these
collaborative arrangements grant a substantial amount of discretion to each of
Abbott, Roche Diagnostics, Respironics and Welch Allyn. 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
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 able, 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.
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Any of the foregoing circumstances could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
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 December 31, 1999,
the Company had an accumulated deficit of approximately $25.3 million. To date,
the Company has engaged primarily in research and development efforts. The
Company has only generated limited revenues from product sales and does not
have significant 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 significant 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 2001
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.
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 FDA. The Company intends to seek clearance to market each of its
products, where possible through a 510(k) premarket notification supported by
clinical data. A 510(k) premarket notification has been filed with and approved
by the FDA, for clearance to market the Company's infant jaundice product. A
510(k) has been filed for expanded use during phototherapy treatment for the
BiliChek(TM). A 510(k) premarket notification was filed in 1998 with the FDA
for clearance to market the diabetes detection product. The 510(k) was later
withdrawn, and discussions have been held by Roche Diagnostics with the FDA in
preparation for clinical activity and the submission of a PMA for this product
to be filed in 2000. The Company has not filed any other 510(k) premarket
notification or PMA for clearance with the FDA. A 510k or PMA for the glucose
monitoring product is expected after the completion of development. 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. Preliminary expectations regarding the
Company's cancer program and glucose program are that those filings would be a
PMA. 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
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<PAGE> 23
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 has obtained ISO
9001 certification and CE mark certification, which is an international symbol
of quality and compliance with applicable European medical device directives.
While the Company has received ISO 9001 and CE mark certification, it must
maintain its certifications in future periods. Failure to receive or maintain
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 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 meets from time to time and provides comments to the
Branch regarding guidelines. 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, Roche Diagnostics and Respironics
to obtain United States and foreign regulatory approvals and clearances for its
glucose monitoring, diabetes detection and infant jaundice 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 affect the Company's business, financial
condition and results of operations.
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
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<PAGE> 24
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 detection
product, and the Company has licensed this proprietary technology to Roche
Diagnostics 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 Respironics 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.
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.
-24-
<PAGE> 25
Royalty Rates and Manufacturing Profits
The majority of the Company's revenues and profits are expected to be
derived from royalties and manufacturing profits that the Company will receive
from Abbott, Roche Diagnostics and Respironics resulting from sales of its
glucose monitoring, diabetes detection 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 on some of its
products are not likely to increase over time because the royalty rates and
manufacturing profit rates on those products 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 be less. 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 collaboration with Welch Allyn is a joint development and
commercialization effort. It is anticipated that both SpectRx and Welch Allyn
would manufacture portions of the cancer detection device and both would share
in the revenues of products sold to customers. There can be no assurance,
however, that the Company, together with Welch Allyn, will sell sufficient
volumes of these products to generate substantial revenues.
Uncertainty of Market Acceptance
The Company's products are based upon new methods of glucose
monitoring, diabetes detection, infant jaundice monitoring and cervical cancer
detection. 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 or other 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
detection 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.
Intense Competition
The medical device industry in general, and the markets in which the
company expects to offer products in particular, are intensely competitive. If
successful in its product development, the Company will compete with other
providers of personal glucose monitors, diabetes detection tests, infant
jaundice and cancer detection products.
A number of competitors, including Johnson & Johnson, Inc. (which
owns Lifescan, Inc.), Roche Diagnostics, 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
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<PAGE> 26
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 detection, infant jaundice or cancer detection 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 detection, infant jaundice monitoring and
cancer detection. 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.
Little Manufacturing Experience; Dependence on Sole Sources of Supply
To date, the Company's manufacturing activities have only included
its BiliChek(TM) and BiliCal(TM) products on a limited scale. If the Company
successfully develops its diabetes detection product and, together with Roche
Diagnostics obtains FDA clearance and other regulatory approvals to market that
product, the Company will undertake to manufacture this product in significant
volumes. 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 detection 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 detection 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. For the Company's products which require a PMA, the
inclusion of substitute components could require the Company to qualify the new
supplier with the appropriate government regulatory authorities. Alternatively,
for the Company's products which 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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<PAGE> 27
Limited Marketing and Sales Experience
The Company is responsible for marketing its infant jaundice product
in countries other than the United Sates and Canada. The Company has relatively
limited experience in marketing or selling medical device products and only has
a six person marketing and sales staff. In order to successfully continue to
market and sell its infant jaundice product outside the United States and
Canada, the Company must either develop a marketing and sales force or expand
its arrangements with third parties to market and sell this product. While the
Company has signed distributor agreements for its BiliCheck(TM) and BiliCal(TM)
products, there can be no assurance that the Company will be able to
successfully fully develop a marketing and sales force or that it will be able
to enter into and maintain marketing and sales agreements with third parties on
acceptable terms. 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 Roche Diagnostics for any revenues to be received
from its glucose monitoring and diabetes detection 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.
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.
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, Roche Diagnostics,
Respironics and Welch Allyn, 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
will be sufficient to satisfy its funding requirements for at least the next 12
months, but may not be sufficient to fund the Company's operations to the point
of commercial introduction of either of its glucose monitoring product concepts.
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.
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<PAGE> 28
Uncertainty of 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.
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, 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.
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 included in the Company's 2000 Proxy
Statement comprise the Company's key 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, marketing, 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.
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<PAGE> 29
Control by Directors, Executive Officers and Affiliated Entities
The Company's directors, executive officers and entities affiliated
with them, in the aggregate, beneficially owned as of December 31, 1999
approximately 32% of the Company's outstanding Common Stock. 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.
Potential Volatility of Stock Price
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 Company's Common Stock. In addition, the market price of
the Common Stock 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.
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.
Lack of Dividends
The Company has not paid any dividends and does not anticipate paying
any dividends in the foreseeable future.
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<PAGE> 30
ITEM 2. PROPERTIES
The Company leases approximately 38,000 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
2001, the portions housing certain research and development operations expire
in June 2002 and March 2003 and the portion housing administration, sales and
marketing, engineering and certain other planned manufacturing operations
expires in March 2001.
ITEM 3. LEGAL PROCEEDINGS
In March 2000, SpectRx filed a Demand for Arbitration of certain
disputes arising under its License Agreement with Altea/NIMCO and a former
officer-employee of SpectRx, Jonathan Eppstein, who is also a principal in
Altea/NIMCO. SpectRx seeks an interpretation of certain portions of the License
Agreement relating to SpectRx's obligation to assign future intellectual
property rights and seeks relief and damages for these and other issues. Altea
has subsequently sent a letter to SpectRx purporting to give notice of material
breach of the License Agreement for failure to assign certain intellectual
property rights to Altea or NIMCO and to participate in a joint development
program. The company believes that Altea's claims are without merit, but intends
to abide by the decision of the Arbitration panel as to the proper scope of
SpectRx's duties to assign future intellectual property rights under the
License Agreement and to participate in a joint development program.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
(ticker symbol SPRX). The number of record holders of the Company's Common
Stock at February 28, 2000 was 103.
The Company completed an initial public offering of 2,361,699 shares
of Common Stock in July 1997. Prior to the initial public offering, the
Company's Common Stock was not publicly traded.
The high and low last sales prices for the calendar year 1999 as
reported by the Nasdaq National Market are as follows:
<TABLE>
<CAPTION>
1999
-----------------------
HIGH LOW
------ ------
<S> <C> <C>
First Quarter $ 8.00 $4.875
Second Quarter $8.125 $ 6.00
Third Quarter $11.25 $ 7.25
Fourth Quarter $12.50 $ 8.25
</TABLE>
The Company has not paid any dividends since its inception and does
not intend to pay any dividends in the foreseeable future.
On July 1, 1997, the Company commenced and completed its initial
public offering (the "IPO") of 2,361,699 shares (including 201,699 shares sold
by selling stockholders and including the exercise of the underwriters'
over-allotment option consisting of 160,000 shares) of its Common Stock, $0.001
par value per share, at a public offering price of $7.00 per share pursuant to
a registration statement on Form S-1 (file no. 333-80453) filed with the
Securities and Exchange Commission. All of the shares registered were sold.
Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC were the managing
underwriters of the IPO. Aggregate gross proceeds to the Company from the IPO
(prior to deduction of underwriting discounts and commissions and expenses of
the offering) were $15,120,000.
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<PAGE> 31
The Company paid underwriting discounts and commissions of $1,058,400
and other expenses of approximately $896,000 in connection with the IPO. The
total expenses paid by the Company in the IPO were $1,954,400, and the net
proceeds to the Company in the IPO were $13,165,600.
In conjunction with the amendment of the Abbott Agreement in November
1999, the Company received a total of $5.25 million in November 1999 and
January 2000. The funds received are to be applied to research on the
continuous monitoring technology.
In February of 2000, the Company sold 400,000 shares of Common Stock
in a private placement transaction to a small group of individual investors for
total gross proceeds of $5.0 million.
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<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
SPECTRX
(IN THOUSANDS EXCEPT FOR PER SHARE FIGURES)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES $ 3,337 $ 1,406 $ 901 $ 452 $ 1,179 $ 122
COST AND EXPENSES:
COST OF PRODUCT SALES 1,708 1,626 0 0 0 0
RESEARCH & DEVELOPMENT 5,170 4,234 3,714 1,815 1,189 869
MARKETING 900 1,058 835 221 146 126
GENERAL & ADMINISTRATIVE 2,222 1,908 2,272 1,526 637 350
------- ------- -------- ------- ------- -------
LOSS FROM OPERATIONS (6,663) (7,420) (5,920) (3,110) (793) (1,223)
NET INTEREST AND OTHER INCOME (EXPENSE) 125 783 194 (68) 113 (124)
------- ------- -------- ------- ------- -------
NET LOSS $(6,538) $(6,637) $ (5,726) $(3,178) $ (680) $(1,347)
======= ======= ======== ======= ======= =======
PREFERRED STOCK DIVIDENDS (14)
-------
LOSS AVAILABLE TO COMMON SHARE STOCKHOLDERS $(6,552)
=======
NET LOSS PER SHARE
BASIC $ (.82) $ (.84) $ (1.26) $ (2.13) $ (0.48) $ (0.96)
DILUTED $ (.82) $ (.84) $ (1.26) $ (2.13) $ (0.48) $ (0.96)
SHARES USED TO COMPUTE NET LOSS PER SHARE
BASIC 8,033 7,926 4,528 1,494 1,410 1,410
DILUTED 8,033 7,926 4,528 1,494 1,410 1,410
CONSOLIDATED BALANCE SHEET DATA
TOTAL ASSETS 7,693 7,654 14,999 5,946 751 1,327
TOTAL LONG TERM OBLIGATIONS, INCLUDING 5,645 0 752 250 0 475
CONVERTIBLE, REDEEMABLE PREFERRED STOCK
</TABLE>
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<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this report which express "belief", "anticipation" or
"expectation" as well as other statements which are not historical fact are
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or
anticipated results, including those set forth under "Risk Factors" in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in or incorporated by reference into this report.
Examples of such uncertainties and risks include, but are not limited to,
whether the Company's products in development will prove safe and effective;
whether and when the Company or its strategic partners will obtain approval
from the United States Food and Drug Administration ("FDA") and corresponding
foreign agencies; the Company's need to achieve manufacturing scale-up in a
timely manner, and its need to provide for the efficient manufacturing of
sufficient quantities of its products; the lack of immediate alternate sources
of supply for some critical components of its products; the Company's patent
and intellectual property position; the company's need to fully develop the
marketing, distribution, customer service and technical support and other
functions critical to the success of the Company's potential product lines; the
effectiveness and ultimate market acceptance of the Company's products; and the
dependence of the Company on its strategic partners for funding, development
assistance, clinical trials, distribution and marketing of products developed
by the Company. The following discussion should be read in conjunction with the
Company's Financial Statements and Notes thereto included elsewhere in this
report.
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,
the public and private sale of common stock 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. The company has entered into
collaborative arrangements with Abbott, Roche Diagnostics, Respironics, (a
successor to Healthdyne Technologies, Inc.) and Welch Allyn for its glucose
monitoring, diabetes detection, infant jaundice and cancer detection 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. At December 31, 1999, as a result of a subsequent
financing, SpectRx's interest in FluorRx was 45%.
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 December 31, 1999,
the Company had accumulated deficit of approximately $25.3 million. To date,
the Company has engaged primarily in research and development efforts. The
Company first generated revenues from product sales in 1998 and does not have
significant 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 significant 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 2001
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.
The majority of the Company's revenues and profits are expected to be
derived from royalties and manufacturing profits that the Company will receive
from Abbott, Roche Diagnostics and Respironics resulting from
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<PAGE> 34
sales of its glucose monitoring, diabetes detection 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.
The Company has entered into collaborative arrangements with Abbott,
Roche Diagnostics, Respironics, and Welch Allyn. 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 sales 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 1999 and 1998
General. Net losses were approximately $6.6 million, or ($.82) per
share, for the year ended December 31, 1999 compared to approximately $6.6
million, or ($.84) per share, in 1998 due to increases in cost of production,
research and development expenses and administrative expenses. The Company
expects net losses to continue. If the Company is unable to attain certain
milestones under a collaboration agreement, its collaborative partner may not
make milestone payments under, or may terminate altogether, such agreement. 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.
Revenues and Cost of Sales. Revenues increased to approximately $3.3
million for the year ended December 31, 1999 from approximately $1.4 million in
1998. The increase was both in revenue from product sales and milestones from
collaboration partners. Product sales of the Company's BiliCheck(TM) product
grew 75% to approximately $1.4 million in 1999. Revenue from collaborative
agreements, which is generally predicated on achievement of milestones,
increased to approximately $1.9 million for the twelve months ended December
31, 1999 from approximately $600,000 in 1998. Cost of Sales were approximately
$1.7 million for the twelve months ended December 31, 1999, compared to $1.6
million in 1998. All Cost of Sales are related to product sales and those costs
exceeded sales revenues because the Company is in the early stages of product
introduction and has excess capacity.
Research and Development Expenses. Research and development expenses
increased to approximately $5.2 million for the year ended December 31, 1999
from approximately $4.2 million in 1998. The increase in research and
development expenses was primarily due to increases in prototype materials
($290,000) temporary help ($130,000) and royalty expense ($125,000) primarily
related to the initiatives in continuous glucose monitoring and cancer
detection, in clinical costs ($70,000) for the company's infant jaundice and
diabetes detection products, in legal expenses ($183,000) for patent filings and
patent maintenance and a reduction in reimbursed expenses. The Company expects
research and development expenses to increase in the future as it expands
clinical trials for its products.
Sales and marketing expenses. Sales and marketing expenses decreased to
approximately $900,000 for the year ended December 31, 1999 from $1.1 million in
1998. The decrease was due primarily to decreases in marketing materials
($112,000), and in travel costs ($56,000) related to the infant jaundice product
introduction and marketing activity. Sales and marketing expenses are expected
to increase in the future, however, as the Company begins to market this product
in additional territories.
-34-
<PAGE> 35
General and administrative expenses. General and administrative
expenses increased to approximately $2.2 million for the year ended December 31,
1999 from approximately $1.9 million in 1998. The increase in general and
administrative expense was due to the increases in compensation ($112,000), and
outside professional fees ($148,000). General and administrative expenses are
expected to increase in the future as a result of overhead costs associated with
expanded research and development activities and, to a lesser extent, expenses
associated with being a public company.
Net interest income and other expense. Net interest and other income
decreased to $125,000 for the year ended December 31, 1999 from $783,000 in
1998. This decrease results primarily from recognizing $329,000 of income in
1998 relating to the deconsolidation of FluorRx and lower interest income due
to lower cash balances.
Comparison Of 1998 and 1997
General. Net losses increased to approximately $6.6 million, or
($.84) per share (on more shares), for the year ended December 31, 1998 from
approximately $5.7 million, or ($1.26) per share, in 1997 due to increases in
cost of production, research and development expenses and marketing expenses.
Revenues and Cost of Sales. Revenues increased to approximately $1.4
million for the year ended December 31, 1998 from approximately $900,000 in
1997. All of the increase was due to product sales of the Company's
BiliChek(TM) product (approximately $823,000) which was introduced in April
1998. Revenue from collaborative agreements, which is generally predicated on
achievement of milestones, declined to approximately $583,000 for the twelve
months ended December 31, 1998 from approximately $900,000 in 1997. Cost of
Sales were approximately $1.6 million for the twelve months ended December 31,
1998. There was no Cost of Sales in 1997. All Cost of Sales are related to
product sales and those costs exceeded sales revenues because the Company is in
the early stages of product introduction and has excess capacity.
Research and development expenses. Research and development expenses
increased to approximately $4.2 million for the year ended December 31, 1998
from approximately $3.7 million in 1997. The increase in research and
development expenses was primarily due to increases in compensation ($392,000)
primarily related to new initiatives in continuous glucose monitoring and
cancer detection, in clinical costs ($108,000) for the company's infant
jaundice and diabetes detection products, in legal expenses ($76,000) for
patent filings and patent maintenance, offset by a reduction in FluorRx expense
($550,000) as a result of reporting FluorRx results under the equity method.
Sales and marketing expenses. Sales and marketing expenses increased
to approximately $1.1 million for the year ended December 31, 1998 from
$835,000 in 1997. The increase was due primarily to increases in advertising
and marketing materials ($110,000), in travel ($70,000) and compensation costs
($50,000) for additional personnel all related to the infant jaundice product
introduction and marketing activity.
General and administrative expenses. General and administrative
expenses decreased to approximately $1.9 million for the year ended December
31, 1998 from approximately $2.3 million in 1997. The decrease in general and
administrative expense was due to the exclusion of FluorRx administrative
expense in 1998. SpectRx did not consolidate FluorRx during 1998 as its
ownership declined below 50%. (See Note 3 in the accompanying notes). In
addition, production planning and development expenses of approximately
$750,000 were incurred as general and administrative expense in 1997; and
because production began in 1998 all such costs are included in cost of product
sales. These decreases were offset primarily by increases in compensation
($200,000), recruiting expenses ($105,000), and outside professional fees
($85,000).
Net interest expense and other expense. Net interest and other income
increased to $783,000 for the year ended December 31, 1998 from $194,000 in
1997. This increase results primarily from a one-time gain of $329,000 (net of
previously recognized losses in connection with the deconsolidation of FluorRx)
(See Note 3 in the accompanying notes), and from an increase in interest
received on cash balances received from the initial public offering, available
for a full year in 1998, offset by other expense items.
-35-
<PAGE> 36
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily
through private sales of its debt and equity securities and public sale of its
common stock. From October 27, 1992 (inception) through December 31, 1999, the
Company received approximately $31.2 million in net proceeds from sales of its
debt and equity securities. At December 31, 1999, the Company had cash of
approximately $2.1 million and working capital of approximately $4.8 million.
In November 1999, the Company received $2.75 million from its sale of
redeemable convertible preferred stock to Abbott in conjunction with an
amendment to its Agreement with Abbott for research and development of the
Company's glucose monitoring technology. The Company completed an initial
public offering of its common stock on July 7, 1997 which resulted in net
proceeds received by the Company, of approximately $13.2 million. The Company
currently invests its excess cash balances 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. 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.
Subsequent to December 31, 1999, the Company received additional
financing. In January 2000 it received $2.5 million for completion of its sale
of Redeemable Convertible Preferred Stock to Abbott, and in February 2000, it
received $5.0 million in gross proceeds from the sale of 400,000 shares of its
Common Stock in a private placement transaction.
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
will be sufficient to satisfy its funding requirements for at least the next 12
months, but may not be sufficient to fund the Company's operations to the point
of commercial introduction of its glucose monitoring product.
OTHER MATTERS
Year 2000 Issue Update: We did not experience any significant
malfunctions or errors in our operating or business systems when the date
changed from 1999 to 2000. Based on operations since January 1, 2000, we do not
expect any significant impact to our ongoing business as a result of the year
2000 issue. However, it is possible that the full impact of the date change has
not been fully recognized. We believe that any such problems are likely to be
minor and correctable. In addition, we could still be negatively affected if our
customers or suppliers are adversely affected by year 2000 or similar issues.
Currently we are not aware of any significant year 2000 or similar problems that
have arisen for our customers and suppliers. Expenditures related to year 2000
compliance efforts were less than $40,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
[Not applicable]
-36-
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SPECTRX, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1998 1999
------ -------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,962 2,143
Accounts receivable, net of allowance for doubtful accounts of $24 and $69 in 1998 AND 1999, 683 952
respectively
Inventories 404 541
Subscription receivable 0 2,500
-------- -------
Other current assets 119 204
-------- -------
Total current assets 6,168 6,340
-------- -------
PROPERTY AND EQUIPMENT, NET 973 839
-------- -------
OTHER ASSETS:
Other assets, net 42 15
Due from related parties 471 499
-------- -------
Total other assets 513 514
-------- -------
$ 7,654 7,693
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999
------------------------------------ -------- -------
CURRENT LIABILITIES:
Accounts payable $ 436 534
Accrued liabilities 399 1,044
-------- -------
Total current liabilities 835 1,578
-------- -------
COLLABORATIVE PARTNER ADVANCE 0 381
REDEEMABLE CONVERTIBLE PREFERRED STOCK 0 5,264
-------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000 shares authorized , 0 and 525 shares 0 0
issued as redeemable convertible preferred stock in 1998 and 1999 respectively
Common stock, $.001 par value; 50,000 shares authorized, 8,014 and 8,056 shares 8 8
issued and outstanding in 1998 and 1999, respectively
Additional paid-in capital 25,761 25,888
Deferred compensation (134) (58)
Notes receivable from officers (31) (31)
Accumulated deficit (18,785) (25,337)
-------- -------
Total stockholders' equity 6,819 470
-------- -------
$ 7,654 7,693
======== =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
-37-
<PAGE> 38
SPECTRX, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
REVENUES
PRODUCT SALES 0 823 1,440
COLLABORATIVE AGREEMENTS 901 583 1,897
------- -------- --------
TOTAL REVENUE $ 901 $ 1,406 $ 3,337
EXPENSES:
Cost of Product sales 0 1,626 1,708
Research and development 3,714 4,234 5,170
Sales and marketing 835 1,058 900
General and administrative 2,272 1,908 2,222
------- -------- --------
6,821 8,826 10,000
------- -------- --------
Operating loss (5,920) (7,420) (6,663)
INTEREST EXPENSE (INCOME), NET (430) (462) (133)
OTHER (INCOME) EXPENSE 236 (321) 8
------- -------- --------
NET LOSS $(5,726) $ (6,637) $ (6,538)
======= ======== ========
PREFERRED STOCK DIVIDENDS 0 0 (14)
LOSS AVAILABLE TO COMMON SHAREHOLDERS $(5,726) $ (6,637) $ (6,552)
======= ======== ========
BASIC AND DILUTED NET LOSS PER SHARE $ (1.26) $ (0.84) $ (0.82)
======= ======== ========
BASIC AND DILUTED WEIGHTED AVERAGE 4,528 7,926 8,033
======= ======== ========
SHARES OUTSTANDING
</TABLE>
The accompanying notes are an integral part of these statements.
-38-
<PAGE> 39
SPECTRX, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
DECEMBER 31, , 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C COMMON STOCK ADDITIONAL
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK --------------- PAID-IN
---------------- ---------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 3,104 3 1,272 1 500 1 1,532 2 11,503
Issuance of common stock at $7 0 0 0 0 0 0 2,160 1 13,152
per share, net of issuance
costs of $909,000
Conversion of convertible (3,104) (3) (1,272) (1) (500) (1) 3,483 4 1
preferred stocks
Exercise of warrants at a 0 0 0 0 0 0 560 1 693
weighted average price per
share of $1.24
Exercise of stock options at a 0 0 0 0 0 0 10 0 3
weighted average price per
share of $.26
Employee stock purchase plan at 0 0 0 0 0 0 3 0 20
a weighted average price per
share of $5.95
Amortization of deferred 0 0 0 0 0 0 0 0 0
compensation
Net loss 0 0 0 0 0 0 0 0 0
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 0 $ 0 0 $ 0 0 $ 0 7,748 $ 8 $25,372
====================================================================================
Exercise of stock options 0 0 0 0 0 0 169 0 37
Employee stock purchase plan 0 0 0 0 0 0 14 0 63
Amortization of deferred 0 0 0 0 0 0 0 0 0
compensation
Conversion of subordinated 0 0 0 0 0 0 83 0 289
promissory notes to equity
securities
Repayment of note receivable 0 0 0 0 0 0 0 0 0
from officer
Net loss 0 0 0 0 0 0 0 0 0
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 0 $ 0 0 $ 0 0 $ 0 8,014 $ 8 $25,761
====================================================================================
Exercise of stock options 0 0 0 0 0 0 31 0 84
Employee stock purchase plan 0 0 0 0 0 0 11 0 43
Amortization of deferred 0 0 0 0 0 0 0 0 0
compensation
Dividend on preferred stock 0 0 0 0 0 0 0 0 0
Net loss 0 0 0 0 0 0 0 0 0
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 0 $ 0 0 $ 0 0 $ 0 8,056 $ 8 $25,888
====================================================================================
<CAPTION>
DEFERRED NOTES ACCUMULATED STOCKHOLDERS
RECEIVABLE DEFICIT EQUITY
FROM
COMPENSATION OFFICERS
--------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 (286) (48) (6,422) 4,754
Issuance of common stock at $7 0 0 0 13,153
per share, net of issuance
costs of $909,000
Conversion of convertible 0 0 0 0
preferred stocks
Exercise of warrants at a 0 0 0 694
weighted average price per
share of $1.24
Exercise of stock options at a 0 0 0 3
weighted average price per
share of $.26
Employee stock purchase plan at 0 0 0 20
a weighted average price per
share of $5.95
Amortization of deferred 76 0 0 76
compensation
Net loss 0 0 (5,726) (5,726)
----------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ (210) $(48) $(12,148) $12,974
Exercise of stock options 0 0 0 37
Employee stock purchase plan 0 0 0 63
Amortization of deferred 76 0 0 76
compensation
Conversion of subordinated 0 0 0 289
promissory notes to equity
securities
Repayment of note receivable 0 17 0 17
from officer
Net loss 0 0 (6,637) (6,637)
----------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ (134) $(31) $(18,785) $ 6,819
====================================================
Exercise of stock options 0 0 0 84
Employee stock purchase plan 0 0 0 43
Amortization of deferred 76 0 0 76
compensation
Dividend on preferred stock 0 0 (14) (14)
Net loss 0 0 (6,538) (6,538)
----------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ (58) $(31) $(25,337) $ 470
====================================================
</TABLE>
The accompanying notes are an integral part of these statements.
-39-
<PAGE> 40
SPECTRX, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,726) $ 6,637 $(6,538)
-------- -------- -------
Adjustments to reconcile net loss to net cash in operating activities:
Depreciation and amortization 281 375 374
Gain on deconsolidation of FluorRx 0 (329) 0
Retirement of Fixed Assets 0 0 38
Amortization of deferred compensation 76 76 76
Changes in operating assets and liabilities:
Accounts receivable (553) (129) (269)
Inventory (218) (186) (137)
Other assets (36) (16) (85)
Due from related parties (30) (29) (28)
Accounts payable (42) (79) 98
Accrued liabilities 354 (4) 645
-------- -------- -------
Total adjustments (168) (321) 712
-------- -------- -------
Net cash used in operating activities (5,894) (6,958) (5,826)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (769) (321) (251)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 13,870 100 127
Issuance of redeemable convertible preferred stock 0 0 2,750
Advance from a collaborative partner 521 0 381
Repayment of note receivable from officer 0 17 0
-------- -------- -------
Net cash provided by financing activities 14,391 117 3,258
-------- -------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,728 (7,162) (2,819)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,721 12,124 4,962
-------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,449 $ 4,962 $ 2,143
======== ======== =======
CASH PAID FOR:
Interest $ 10 $ 8 $ 2
======== ======== =======
Income taxes $ 0 $ 0 $ 0
======== ======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of subordinated promissory notes to equity securities $ 0 $ 289 $ 0
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
-40-
<PAGE> 41
SPECTRX, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. ORGANIZATION AND BACKGROUND
SpectRx, Inc. (the "Company") is engaged in the research and
development of products that offer painless and less invasive
alternatives to blood tests currently used for glucose monitoring,
diabetes screening, and infant jaundice. The Company is also in the
process of developing a cervical cancer detection system. 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 infant jaundice product and products in development for
glucose monitoring, diabetes screening, and cervical cancer 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"), Roche Diagnostics BMC ("Roche"), Respironics, Inc.
("Respironics"), and Welch Allyn, Inc. ("Welch Allyn") to facilitate
the development, commercialization, and introduction of its glucose
monitoring, diabetes screening, infant jaundice, and cervical cancer
detection system products, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash or cash equivalents.
INVENTORIES
Inventories are stated at lower of cost or market using the
first-in, first-out method. Inventories are summarized as follows at
December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Raw materials $ 261 $ 323
Work in process 5 78
Finished goods 138 140
------ ------
$ 404 $ 541
====== ======
</TABLE>
-41-
<PAGE> 42
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, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Equipment $1,496 $1,676
Furniture and fixtures 314 287
------ ------
1,810 1,963
Less accumulated depreciation 837 1,124
------ ------
Property and equipment, net $ 973 $ 839
====== ======
</TABLE>
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to
long-lived assets, such as property and equipment and purchased
technology, to determine whether any impairments are other than
temporary. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
PATENT COSTS
Costs incurred in filing, prosecuting, and maintaining patents
are expensed as incurred. Such costs aggregated approximately $286,000,
$496,000, and $608,000 in 1997, 1998, and 1999, respectively.
REVENUE RECOGNITION
Revenue from product sales is recorded upon shipment of the
product to the customer.
Revenue from collaborative research and development agreements
is recorded when milestones have been met. 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 or other outside parties. All research and development
costs are expensed as incurred.
NET LOSS PER SHARE
The calculation and presentation of net loss per share are
presented in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." Basic earnings per
share are based on the weighted average number of shares outstanding.
Diluted earnings per share are based on the weighted average number of
shares outstanding and the dilutive effect of common stock equivalent
shares ("CSEs") issuable on the conversion of convertible preferred
stock (using the if-converted method) and stock options and warrants
(using the treasury stock method). For all periods presented, CSEs have
been excluded from weighted average shares outstanding, as their impact
was antidilutive.
-42-
<PAGE> 43
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 collaborative partner
advance 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 collaborative partner advance was not
significantly different than the stated value at December 31, 1999.
COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," which establishes new rules for the
reporting and display of comprehensive income and its components;
however, the Company has no other comprehensive income items as defined
in SFAS No. 130.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value, and changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. In June 1999, the FASB issued SAFS No. 137 which deterred the
effective date of SFAS No. 133 for fiscal quarters of all fiscal years
beginning after June 15, 2000, although earlier adoption is permitted.
The Company plans to adopt SFAS No. 133 in the first quarter of fiscal
2001. Management does not believe the adoption of this statement will
have a material effect on the financial statements of the Company.
3. INVESTMENT IN FLUORRX, INC.
In December 1996, the Company sublicensed certain technology
to and acquired a 65% interest in FluorRx, Inc. ("FluorRx"), a
corporation organized for the purpose of developing and commercializing
technology related to fluorescence spectroscopy. The Company's interest
in FluorRx is represented by two seats on the board of directors and
1.2 million shares of convertible preferred stock purchased for
$250,000. In December 1997, March 1998, August 1998, and April 1999,
FluorRx sold additional convertible preferred stock for net cash
proceeds of $521,000, $429,000, $511,000, and $300,000, respectively.
The issuance of additional preferred stock reduced the Company's
ownership (on a converted basis) to 45%.
For the year ended December 31, 1997, FluorRx incurred an
operating loss of $632,000 which was fully consolidated as the Company
represented FluorRx's sole source of financial support and
substantially all the capital at risk related to investments and
advances from the Company. Beginning with the December 1997 funding and
through the August 1998 funding, the Company consolidated the FluorRx
losses, but with appropriate allocations to the minority shareholders.
FluorRx losses recorded by the Company during the fiscal 1998 amounted
to $306,000. Effective with the August 1998 funding, the Company began
accounting for its investment in FluorRx under the equity method of
accounting. In connection with the change in accounting from
consolidation to the equity method, the Company adjusted its investment
in FluorRx to $0, which resulted in a one-time gain of $635,000. All
FluorRx activity (losses and the one-time gain) is reflected in other
(income) expense in the accompanying statements of operations. The
Company has also suspended recording losses from its investment in
FluorRx. Suspended equity losses amounted to $577,000 and $342,000 for
the years ended December 31, 1998 and 1999, respectively. At December
31, 1999, the cumulative suspended equity loss amounted to $1,133,000.
-43-
<PAGE> 44
In 1997, 1998, and 1999, the Company paid certain patent
maintenance and minimum royalty costs amounting to $157,000, $57,000,
and $80,000, respectively, related to technology owned by the Company
and sublicensed to FluorRx. These costs have been expensed as paid.
4. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In July 1997, the Company successfully completed its initial
public offering of common stock. The Company sold 2,160,000 shares of
common stock, including an underwriter's overallotment of 160,000
shares, at an initial public offering price of $7. The total proceeds
of the initial public offering, net of underwriting discounts and
offering expenses, were approximately $13.2 million. In connection with
the offering, all outstanding shares of Series A, B, and C preferred
stock converted into 3,482,762 shares of common stock. Additionally,
warrants to purchase 559,986 shares of common stock were exercised for
proceeds of $694,000.
PREFERRED STOCK
In January 1997, the Company authorized 5,000,000 shares of
preferred stock with a $.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.
In November 1999, the board of directors designated 525,000
shares of the preferred stock as redeemable convertible preferred
stock. Dividends are payable annually in cash or securities at a rate
of 6% per annum. The preferred shares, together with any accrued but
unpaid dividends, are convertible into common shares at the greater of
$9.39 per share or the average of the closing sales price for 15 days
prior and 15 days subsequent to the conversion and automatically
convert on December 31, 2004 at the then conversion rate. The shares
are mandatorily redeemable at $10 per share, plus accrued but unpaid
dividends, at the later of December 31, 2002 or 60 days subsequent to
the date upon which the Company gives notice to Abbott of Abbott's
right to redeem the shares (which notice may not be given prior to June
1, 2002). Additionally, the Company may redeem the shares upon
receiving a conversion notice. The shares have a liquidation preference
of $10 per share, plus all accrued but unpaid dividends.
In November 1999, Abbott subscribed to 525,000 shares of
Redeemable Convertible Preferred Stock for consideration of $5,250,000
of which $2,750,000 was received in November 1999 and $2,500,000 was
received in January 2000.
CONVERSION OF SUBORDINATED PROMISSORY NOTES
In June 1996, the Company issued an 8% convertible
subordinated promissory note for $250,000. In June 1998, the holder of
the note converted outstanding principal and interest into 82,637
shares of common stock at a conversion rate of $3.50.
STOCK OPTIONS
In May 1995, the Company adopted the 1995 Stock Option Plan
(the "Plan") (as amended), 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, 1999, options to purchase 110,494 shares of
common stock were available for future grant under the Plan.
-44-
<PAGE> 45
Stock option activity for each of the three years ended
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
OPTIONS SHARE
--------- ---------
<S> <C> <C>
Outstanding, December 31, 1996 663,362 $ 0.64
Granted 418,000 7.50
Exercised (10,065) 0.26
Canceled (5,656) 0.46
---------
Outstanding, December 31, 1997 1,065,641 3.34
Granted 121,000 6.43
Exercised (169,472) 0.22
Canceled (44,256) 3.69
---------
Outstanding, December 31, 1998 972,913 4.25
Granted 194,500 7.52
Exercised (31,130) 2.65
Canceled (29,274) 6.51
---------
Outstanding, December 31, 1999 1,107,009 4.82
=========
Exercisable, December 31, 1999 645,243 3.39
========= ========
</TABLE>
The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual
lives by groups of similar price:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE
EXERCISE PRICES OF SHARES PRICE LIFE OF SHARES PRICE
--------------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.21-$0.70 364,621 $ 0.55 6.2 years 338,617 $ 0.53
$2.45-$4.13 94,288 2.90 8.9 years 60,700 2.65
$5.13-$8.50 648,100 7.51 8.5 years 245,926 7.50
--------- -------
Total 1,107,009 4.82 7.7 years 645,243 3.39
========= =======
</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 $.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.
-45-
<PAGE> 46
The Company has elected to account for its stock-based
compensation plan under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," however, the Company has
computed for pro forma disclosure purposes the value of all options
granted in each of the three years ended December 31, 1999 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," and using the following
weighted average assumptions used for grants in 1997, 1998, and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Risk-free interest rate 5.86% 5.17% 5.09%
Expected dividend yield 0% 0% 0%
Expected lives 4 years 4 years 4 years
Expected volatility 58% 58% 58%
</TABLE>
The total values of the options granted during the years ended December
31, 1997, 1998, and 1999 were computed as approximately $1,587,000,
$437,000, and $749,000, 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 net loss per share for each of the three years ended December 31,
1999 would have increased by the following pro forma amounts (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net loss available to common shareholders:
As reported $ (5,726) $ (6,637) $ (6,552)
SFAS No. 123 Pro forma (5,890) (7,226) (7,315)
Basic and diluted net loss per share:
As reported $ (1.26) $ (.84) $ (.82)
SFAS No. 123 Pro forma (1.30) (.91) (.91)
</TABLE>
WARRANTS
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.
Upon the close of the initial public offering, all outstanding
warrants to purchase 559,986 shares of common stock were exercised
providing proceeds of approximately $694,000.
EMPLOYEE STOCK PURCHASE PLAN
In connection with the offering, the Company adopted an
employee stock purchase plan under which the Company may issue up to
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 period for 85% of the
lower of the beginning or ending stock price in the plan period. At
December 31, 1999, there were 185,948 shares available for future
issuance under the Plan.
-46-
<PAGE> 47
5. INCOME TAXES
The Company has incurred net operating losses ("NOLs") since
inception. As of December 31, 1999, the Company had net operating loss
carryforwards of approximately $24,357,000 available to offset its
future income tax liability. The NOL carryforwards begin to expire in
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, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
NOL carryforwards $ 6,852 $ 9,256
Valuation allowance (6,852) (9,256)
------- -------
Deferred tax assets $ 0 $ 0
======= =======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments at December 31, 1999 under
noncancellable operating leases for office space and equipment are as
follows (in thousands):
<TABLE>
<S> <C>
2000 $270
2001 249
2002 102
</TABLE>
Rental expense was $215,000, $261,000, and $225,000 in 1997,
1998, and 1999, 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 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.
7. RELATED-PARTY TRANSACTIONS
In connection with a June 1994 sale of restricted stock, the
Company loaned two officers of the Company $48,000, of which $31,000 is
outstanding at December 31, 1999. These loans are secured by common
stock of the Company held by the officers, bear interest at 6% per
annum, and become payable on December 31, 2001. Outstanding balances
are classified as a reduction of stockholders' equity in the
accompanying balance sheets.
In October 1996, the Company loaned two officers a total of
$400,000. The loans are secured by common stock of Laser Atlanta
Optics, Inc. ("LAO"). The Company and LAO are related through a common
group of shareholders. The loans bear interest at 6.72% per annum and
are due and payable in cash in October 2001. Outstanding balances are
reflected as due from related parties in the accompanying balance
sheets.
-47-
<PAGE> 48
In 1997, 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.
8. 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 the 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, 1999 (in thousands):
<TABLE>
<S> <C>
2000 $ 858
2001 1,160
2002 1,410
2003 1,410
2004 1,410
</TABLE>
During 1997, 1998, and 1999, the Company incurred royalty expenses of
$110,000, $188,000, and $423,000, respectively.
Additionally, the Company is obligated to obtain and maintain
certain patents, as defined by the agreements.
9. 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.
ABBOTT
The Abbott Agreement, as amended, requires Abbott to make
milestone payments based on progress achieved, to remit royalties to
the Company based on net product sales, and to reimburse certain direct
expenses incurred by the Company in connection with the development of
glucose monitoring products. Reimbursed expenses of $1,798,000,
$1,260,000, and $39,000 for the years ended December 31, 1997, 1998,
and 1999, respectively, have been netted with research and development
expenses in the accompanying statements of operations.
The Company recorded revenues of $500,000 during 1997 related
to the achievement of a milestone. Additionally, in 1997, Abbott
purchased $3,000,000 of Series C preferred stock and in November 1999,
subscribed to $5,250,000 of redeemable convertible preferred stock
(Note 4).
-48-
<PAGE> 49
WELCH ALLYN
The Welch Allyn agreement requires Welch Allyn to share
equally the operating expenses and cost of capital assets, to make
milestone payments based on progress achieved, and to pay the Company a
technology access fee. Reimbursed expenses of $0, $250,000, and
$524,000 for the years ended December 31, 1997, 1998, and 1999,
respectively, have been netted with research and development expenses
in the accompanying statements of operations. Welch Allyn will have the
exclusive rights to manufacture and supply the cervical cancer
detection system product with the exception of a certain module. The
parties have agreed to enter into a joint venture for purposes of
carrying out the commercialization of the cervical product. The Company
recorded revenues of $0, $250,000, and $700,000 during 1997, 1998, and
1999, respectively, related to the achievement of certain milestones.
At December 31, 1999, a receivable from Welch Allyn
represented 74 % of accounts receivable. The balance due was paid in
January 2000.
ROCHE
The Roche agreement requires Roche to make milestone payments
based on progress achieved and to purchase diabetes screening products
manufactured by the Company at a predetermined profit margin, subject
to renegotiation between the parties in certain instances. During 1997,
1998, and 1999, the Company recorded $0, $0, and $987,000,
respectively, in revenues related to the achievement of certain
milestones.
In July 1999, the Company received $381,000 in advance
payments for inventory components with long lead times from Roche. The
balance is non interest bearing and is due January 2001.
RESPIRONICS
The Respironics agreement requires Respironics to make
milestone payments based on progress achieved and to purchase infant
jaundice products manufactured by the Company at a predetermined profit
margin, subject to renegotiation between the parties in certain
instances. The Company recorded revenues of $250,000, $275,000, and
$200,000 in 1997, 1998, and 1999, respectively, related to the
achievement of certain milestones. Additionally, Respironics purchased
products amounting to $0, $191,000, and $364,000 during 1997, 1998, and
1999, respectively, from the Company.
10. BUSINESS SEGMENT INFORMATION
The Company operates in one business segment, the research and
development of products that offer less invasive and painless
alternatives to blood tests currently used for glucose monitoring,
diabetes screening, cervical cancer detection, and infant jaundice. The
Company had no product sales prior to fiscal year 1998. During fiscal
years 1998 and 1999, total product revenues of $823,000 and $1,440,000,
respectively, related to the Company's infant jaundice product. The
Company has licensed the right to distribute the infant jaundice
product within the United States and Canada to Respironics. The Company
distributes the product outside the United States and Canada through a
diverse group of foreign distributors. All sales are payable in United
States dollars. Product revenues attributable to countries based on the
location of the customer are as follows (in thousands):
-49-
<PAGE> 50
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Europe $ 0 $ 480 $ 566
United States and Canada 0 191 364
Mexico 0 4 209
Middle East 0 64 154
Far East 0 39 81
Other 0 45 66
------ ------ ------
Total $ 0 $ 823 $1,440
====== ====== ======
</TABLE>
Because all product revenues are derived from the sale of U.S.-produced
product, the Company has no significant long-lived assets located
outside the United States.
11. SUBSEQUENT EVENT
On February 23, 2000, the Company completed a private
placement of 400,000 shares of common stock. The shares were sold for
$12.50 per share resulting in gross proceeds of $5,000,000.
-50-
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-51-
<PAGE> 52
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file a definitive proxy statement within
120 days after the end of the fiscal year covered by this Report pursuant to
Regulation 14A relating to the Registrant's 2000 Annual Meeting of Stockholders
(the "Proxy Statement") to be held on May 25, 2000, and certain information
included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and nominees for directors of the
Company is incorporated by reference to the Company's Proxy Statement.
The executive officers of the Company, who are elected by and serve at
the discretion of the Board of Directors, and their ages at February 28, 2000,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Mark A. Samuels 42 Chairman, Chief Executive Officer and Director
Keith D. Ignotz 52 President, Chief Operating Officer and Director
Thomas H. Muller, Jr. 58 Executive Vice President, Chief Financial Officer and Secretary
Mark L. Faupel 44 Vice President, Research & Development
Richard L. Fowler 43 Vice President, Engineering
Robert G. Rothfritz 50 Vice President, Operations
</TABLE>
Except as set forth below, all of the executive officers have been
associated with the Company in their present or other capacities for more than
the past five years. Officers are elected annually by the Board of Directors and
serve at the discretion of the Board. There are no family relationships among
executive officers of the Company.
Mark A. Samuels has served as a member of the Company's Board of
Directors 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 is a member of the board of directors of NetB@nk, Inc., an internet
banking company. Mr. Muller earned a B.I.E. in Industrial Engineering from
Georgia Institute of Technology and an M.B.A. from Harvard Business School.
-52-
<PAGE> 53
Mark L. Faupel, Ph.D. has served as the Company's Vice President of Research and
Development since August 1998. Dr. Faupel joined the Company on February 2, 1998
in the capacity of Vice President, New Product Development. Prior to that time,
Dr. Faupel was an independent consultant to the Company and other firms in
cancer research. From 1987-1997, Dr. Faupel held various positions with Biofield
Corporation, a medical device company in the area of breast cancer detection, a
firm which he co-founded and served as Vice President, Director of Science and
Vice President, Research and Development.
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.
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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
-53-
<PAGE> 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULE.
Schedules are not included in this Annual Report on Form 10-K,
as they are not required or the information required to be set
forth therein is included in the Consolidated Financial
Statements on Notes thereto.
3. EXHIBITS
Refer to (c) below.
(B) REPORTS ON FORM 8-K
The Company was not required to and did not file any Current
Reports on Form 8-K during the quarter ended December 31,
1998.
(C) EXHIBITS
The exhibits listed on the accompanying Index to Exhibits are
filed as part hereof, or incorporated by reference into, this
Report.
-54-
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NO. -------------------------------------------------------------------------------------------------
- ------------
<S> <C>
3.1 (2) Certificate of Incorporation of the Company, as amended, as
currently in effect.
3.2 (1) Bylaws of the Company.
4.1 (1) Specimen Common Stock Certificate.
10.1 (1) 1997 Employee Stock Purchase Plan and form of agreement
thereunder.
10.2 (1) 1995 Stock Plan, as amended, and form of Stock Option Agreement
thereunder.
10.3 (1) Stock Purchase Agreement, dated June 30, 1994, between Mark A.
Samuels and the Company.
10.4 (1) Stock Purchase Agreement, dated June 30, 1994, between Keith D.
Ignotz and the Company.
10.5 (1) Assignment and Bill of Sale, dated February 29, 1996, between
Laser Atlanta Optics, Inc. and the Company.
10.6 (1) Security Agreement, dated October 31, 1996, between Mark A. Samuels
and the Company.
10.7 (1) Security Agreement, dated October 31, 1996, between Keith D. Ignotz
and the Company.
10.11A (1)* License Agreement, dated May 7, 1991, between Georgia Tech Research
Corporation and Laser Atlanta Optics, Inc.
10.11B (1) Agreement for Purchase and Sale of Technology, Sale, dated
January 16, 1993, between Laser Atlanta Optics, Inc. and the
Company.
10.11C (1) First Amendment to License Agreement, dated October 19,
1993, between Georgia Tech Research Corporation and the
Company.
10.12 (1) Clinical Research Study Agreement, dated July 22, 1993, between
Emory University and the Company.
10.13A (1)* Development and License Agreement, dated December 2, 1994,
between Boehringer Mannheim Corporation and the Company.
10.13B (1)* Supply Agreement, dated January 5, 1996, between Boehringer
Mannheim and the Company.
10.14 (1) Sponsored Research Agreement, No. SR95-006, dated May 3, 1995,
between University of Texas, M.D. Anderson Cancer Center and the
Company.
10.15 (1) Sole Commercial Patent License Agreement, dated May 4, 1995,
between Martin Marietta Energy Systems, Inc. and the Company.
10.16A (1) License Agreement, dated November 22, 1995, between Joseph R.
Lakowicz, Ph.D. and the Company.
10.16B (1) Amendment of License Agreement, dated November 28, 1995, between
Joseph R. Lakowicz, Ph.D. and the Company.
10.16C (1) Second Amendment to License Agreement, dated March 26, 1997,
between Joseph R. Lakowicz, Ph.D. and the Company.
10.16D (4) Third Amendment to License Agreement, dated November 20, 1998,
between Joseph R. Lakowicz, Ph.D. and the Company.
10.16E (4)** Fourth Amendment to License Agreement, dated November 20, 1998,
between Joseph R. Lakowicz, Ph.D. and the Company.
10.17 (1) License and Joint Development Agreement, dated March 1, 1996,
between NonInvasive-Monitoring Company, Inc., Altea Technologies,
Inc. and the Company.
10.18 (1)* Patent License Agreement, dated March 12, 1996, between the
Board of Regents of the University of Texas System, M.D. Anderson
and the Company.
10.19A (1)* Purchasing and Licensing Agreement, dated June 19, 1996, between
Respironics and the Company.
10.19B** Amendment to Purchasing and Licensing Agreement, dated October
21, 1998 between Respironics and the Company.
10.20 (1) 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.
10.21A (1)* Research and Development and License Agreement, dated
October 10, 1996, between Abbott Laboratories and the Company.
10.21B(3)* Letter Agreement, dated December 22, 1997, between Abbott
Laboratories and the Company.
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NO. -------------------------------------------------------------------------------------------------
- ------------
<S> <C>
10.21C** Third Amendment to Research and Development and License
Agreement, dated November 30, 1999 between Abbott Laboratories
and the Company
10.22A (1) 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.
10.24 (4)** Development and Commercialization Agreement, dated December 31, 1998,
between Welch Allyn, Inc. and the Company.
10.25A**(5) Development and License Agreement, dated July 13, 1999, between
Roche Diagnostics Corporation and the Company.
10.25B**(5) Supply Agreement, dated July 13, 1999, between Roche Diagnostics
Corporation and the Company.
11.1 Calculation of earnings per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of independent accountants.
24.1 Power of Attorney (included at signature page.)
27.1 Financial Data Schedule.
</TABLE>
- -------------------
* Confidential treatment granted for portions of these agreements.
** Confidential treatment requested for portions of this agreement.
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 333-22429) filed February 27,
1997, and amended on April 24, 1997, June 11, 1997, and June 30, 1997,
which Registration Statement became effective June 30, 1997.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 filed
August 12, 1997.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, filed
March 26, 1998.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10K for the year ended December 31, 1998, filed
March 30, 1999.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-Q for the quarter ended June 30, 1999 filed
August 13, 1999.
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Norcross, State of Georgia, on the 30th day of March 2000.
SPECTRX, INC.
By: /s/ MARK A. SAMUELS
---------------------------------------
Mark A. Samuels
Chairman and Chief Executive Officer
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Mark A. Samuels and Thomas H.
Muller, Jr., jointly and severally, his or her attorneys-in-fact, and each with
the power of substitution, for him or her in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------------------- -----------------------
<S> <C> <C>
/s/ MARK A. SAMUELS Chairman, Chief Executive Officer and Director March 30, 2000
- ---------------------------------------
(Principal Executive Officer)
Mark A. Samuels
/s/ THOMAS H. MULLER, JR. Executive Vice President and Chief Financial March 30, 2000
- ---------------------------------------
Officer (Principal Financial and Accounting
Thomas H. Muller, Jr. Officer)
/s/ KEITH D. IGNOTZ President, Chief Operating Officer and Director March 30, 2000
- ---------------------------------------
Keith D. Ignotz
/s/ CHARLES G. HADLEY Director March 30, 2000
- ---------------------------------------
Charles G. Hadley
/s/ EARL R. LEWIS Director March 30, 2000
- ---------------------------------------
Earl R. Lewis
/s/ WILLIAM E. ZACHARY Director March 30, 2000
- ---------------------------------------
William E. Zachary
</TABLE>
<PAGE> 1
Exhibit 10.21(c)
THIRD AMENDMENT DATED NOVEMBER 30, 1999
to the Agreement between
Abbott Laboratories and SpectRx, Inc.
Dated October 10, 1996
As amended December 22, 1997 and March 31, 1998
THIS THIRD AMENDMENT dated November 30, 1999 ("Third Amendment
Effective Date"), by and between Abbott Laboratories, an Illinois corporation
with principal offices at 100 Abbott Park Road, Abbott Park, Illinois 60064-3500
and its Affiliates ("ABBOTT") and SpectRx, Inc. a Delaware corporation with
principal offices at 6025A Unity Drive, Norcross, Georgia 30071 and its
Affiliates ("SPECTRX").
WHEREAS, ABBOTT and SPECTRX have previously entered into an agreement
dated October 10, 1996, as amended December 22, 1997 and March 31, 1998,
relating to the use of (*) for the extraction of interstitial fluid samples for
diagnostic applications, including glucose monitoring ("Agreement");
WHEREAS, ABBOTT and SPECTRX desire to now modify that Agreement and to
that end desire to enter into this Third Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
promises and covenants set forth below, ABBOTT and SPECTRX mutually agree as
follows:
1. INTRODUCTION
1.1 Conflict with Agreement. The provisions of this Third Amendment are
hereby made a part of the Agreement. All capitalized terms used in this Third
Amendment, and not defined herein, shall have the same meanings as given to them
in the Agreement. Any conflict between the provisions of this Third Amendment
and the Agreement shall be resolved in favor of this Third Amendment; provided,
however, that all definitions in this Third Amendment shall only apply
prospectively from the Third Amendment Effective Date, unless otherwise noted in
this Third Amendment, and such application will be without prejudice to
interpretation of the Agreement as it was in effect prior to the Third Amendment
Effective Date.
1.2 Modified Provisions. The following modifications are hereby made to
the Agreement:
(A) The following shall be added to the end of Section
1.8 and shall be effective as of June 1, 1998:
"(*) Technology includes, but is not limited to,
the means to measure the (*). (*) Technology
does not include (*) Technology."
(*) 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> 2
(B) Section 1.12 is modified as follows:
"(*)" or "(*)" means a single or multiple use
device other than a (*), or the equivalent
to a (*) for the Non-Continuous Product,
sold or marketed with labeling or
instructions identifying it for use with
Product, which effectuates or facilitates
any measurement of glucose or is involved
with (*)Technology for such Product
including, but not limited to, (*).
(C) Section 1.20 shall be amended as follows and shall be
effective as of the Effective Date of the Agreement:
replace "that cover inventions useful within
the Field" with "that (1) cover (*)
Technology for glucose monitoring and/or (2)
cover inventions useful within the Field"
(D) The following shall be added to the end of
Section 1.20(A):
"and any patents or patent applications
covering inventions within the Field arising
out of SPECTRX Continuous Product Research
Program Technology as set forth in Section
11.1(A) and 11.1(B)(1) of the Third
Amendment, and the Joint Continuous Product
Research Program Technology as set forth in
Section 11.3 of the Third Amendment;"
(E) The following shall be added to the end of Section 1.21:
"provided, however, that a (*) will not be
included in Licensed Product if SPECTRX or a
Third Party is marketing (other than
exclusively to ABBOTT) (*), except for an
item that is a Directly Competitive
Product."
(F) Section 1.26 shall be amended as follows:
(1) replace "but for the licenses granted under
Section 4.1 of this Agreement" with "but for
the licenses granted under Section 4.1 of
this Agreement, as to ABBOTT, or the license
granted under Section 4.2 of the Third
Amendment, as to 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.
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<PAGE> 3
(2) add to the end of Section 1.26 ", as to
ABBOTT, or as to which SPECTRX is otherwise
required to pay royalties hereunder as to
SPECTRX."
(G) Section 1.29 is modified to delete the words "as described
in Appendix 1.28."
(H) The following shall be added to the end of Section 1.30
and shall be effective as of June 1, 1998:
"including, but not limited to, (*). Such
site includes, but is not limited to, a site
at which (*). (*) includes, but is not
limited to, devices which incorporate (*)
does not include (*) Technology."
(I) Section 3.1(A) shall be amended as follows:
replace "set forth in Section 2.5" with "set
forth in Section 3.4 of the Third
Amendment"
(J) Section 3.1(B) shall be amended as follows:
(1) replace "shall extend the periods of the
time set forth in Section 3.2 of this
Agreement" with "shall extend the periods of
time set forth in Section 3.7 of the Third
Amendment"
(2) replace "extend the time periods set forth
in Section 3.2(A) and (B)" with "extend the
time periods set forth in Section 3.7 of the
Third Amendment"
(K) The following shall be added at the beginning of
Section 3.4:
"Except for those (*) in accordance with
Section 5.2 of the Third Amendment and the
SPECTRX Continuous Product as allowed in
Article 4 of the Third Amendment,"
(L) The following shall be added to the end of Section
6.2(A):
"; except for Abbott Research Program
Technology invented on or after August 29,
1998, which, to the extent applicable to the
Field, shall be treated in the same manner
that Development Program Technology would be
treated in Section 7.1 of the Agreement
after delivery of the Development Program
Notification but prior to the First Shipment
Date."
(*) 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> 4
(M) Section 6.2(C) shall be amended as follows:
replace "pursuant to Section 2.5(A) (subject
to the exception in that Section) or 2.5(B)
or Section 10.2(A)(i) or by SPECTRX pursuant
to Section 3.2(A) or (B) subject to certain
exceptions set forth in those Sections) or
pursuant to Section 10.2(D) prior to the
First Shipment Date:" with "pursuant to
Section 3.8(A) of the Third Amendment or
Section 10.2(A)(i) or by SPECTRX pursuant to
Sections 3.7(D) or (F) of the Third
Amendment (subject to certain exceptions set
forth in those Sections) or pursuant to
Section 10.2(D) prior to the First Shipment
Date:"
(N) Sections 8.1(A), 8.1(B), and 8.3(A) shall be amended
as follows:
replace "SPECTRX Research Program
Technology" with "SPECTRX Research Program
Technology and SPECTRX Continuous Product
Research Program Technology"
(O) Sections 8.2, 8.3(B) and 8.5(B) shall be amended as
follows:
replace "Joint Research Program Technology"
with "Joint Research Program Technology and
Joint Continuous Product Research Program
Technology"
(P) Section 10.1 shall be amended as follows:
replace "pursuant to Sections 2.2, 2.5, 3.2,
4.2(D) or (E) (on a country by country
basis), 10.2 or 14.1," with "pursuant to
Sections 4.2 (D) or (E) (on a country by
country basis), 10.2 or 14.1 of the
Agreement or Sections 3.7 or 3.8 of the
Third Amendment"
(Q) Section 10.2 shall be amended as follows:
replace "In addition to Sections 2.2, 2.5,
and 4.2(D) and (E) (on a country by country
basis), 3.2 and 14.1," with "In addition to
Sections 4.2(D) and (E) (on a country by
country basis) and 14.1 of the Agreement and
Sections 3.7 and 3.8 of the Third
Amendment,"
(R) Section 10.2(D)(iv) shall be amended as follows:
replace "except as provided in Sections 2.2,
2.5, 3.2, 4.2(D) and (E) (on a country by
country basis), 10.2(A),(B) and (C) and
14.1," with "except as provided in Sections
4.2(D) and (E) (on a country by country
basis), 10.2(A), (B) and (C) and 14.1 of the
Agreement and Section 3.7 and 3.8 of the
Third Amendment,"
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<PAGE> 5
(S) Section 10.3(A) shall be amended as follows:
replace "under Sections 2.2, 2.5, 3.2,
4.2(D) and (E) (on a country by country
basis), 10.2 and 14.1:" with "under Sections
4.2(D) and (E) (on a country by country
basis), 10.2 and 14.1 of the Agreement and
Sections 3.7 and 3.8 of the Third
Amendment:"
(T) Section 10.3(B) shall be amended as follows:
replace "under Sections 2.2, 2.5, 3.2,
4.2(D) and (E) (on a country by country
basis), 10.2 and 14.1," with "under Sections
4.2(D) and (E) (on a country by country
basis), 10.2 and 14.1 of the Agreement and
Sections 3.7 and 3.8 of the Third
Amendment,"
(U) Section 10.3(C) shall be amended as follows:
replace "under Section 2.2, by ABBOTT under
Sections 2.5, 4.2(D) and (E) (on a country
by country basis), 10.2(A), (C) and (D); or
by SPECTRX under Sections 3.2(A) or (B) and
10.2(B) and (D) or by either party under
Section 14.1." with "by ABBOTT under
Sections 4.2(D) and (E) (on a country by
country basis), 10.2(A), (C) and (D); or by
SPECTRX under Section 3.7(F) of the Third
Amendment and 10.2(B) and (D) or by either
party under Section 14.1 and Section 3.8 of
the Third Amendment."
(V) Section 10.3(D) shall be amended as follows:
replace "under Section 2.5(A) (subject to
the exception in that Section) or (B) or
10.2(A)(i) or if SPECTRX terminates this
Agreement under Section 3.2(A) or (B) (in
accordance with the terms of Section 3.2(A)
or (B))" with "under Section 10.2(A)(i) or
if SPECTRX terminates this Agreement under
Section 3.7(F) of the Third Amendment (in
accordance with the terms of Section 3.7) or
under Section 3.8(A) of the Third Amendment
or under Section 10.2(D) prior to the First
Shipment Date."
(W) Section 10.3(E) shall be amended as follows:
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<PAGE> 6
replace "under Section 2.5(B) or 10.2(A)(i)
or if SPECTRX terminates this Agreement
under Section 3.2(A) or (B) or under Section
10.2(D) prior to the First Shipment Date"
with "under Section 3.8(A) of the Third
Amendment or Section 10.2(A)(i) or if
SPECTRX terminates this Agreement under
Section 3.7(F) of the Third Amendment or
under Section 10.2(D) prior to the First
Shipment Date."
(X) The following shall be added to Section 10.3:
"(I) SPECTRX shall be entitled to the
license set forth in Section 6.1(A)(2) of
the Third Amendment upon early termination
or expiration of the Agreement other than
for breach by SPECTRX."
(Y) The second sentence in Section 13.1 shall be amended
as follows:
"Neither party will use Confidential
Information of the other party, nor allow it
to be used for its own benefit or the
benefit of others, except as provided by
this Agreement and will exercise due care to
prevent the disclosure of Confidential
Information of the other party.
(Z) Section 13.3 shall be amended as follows:
Replace "Research Program" with "Research
Program or Continuous Product Research
Program"
1.3 Deleted Agreement Provisions. The following provisions are deleted
from the Agreement and will have no further force or effect:
(A) Section 1.5
(B) Section 1.10
(C) Section 1.28
(D) Article 2
(E) Section 3.2
(F) Section 4.2 (B)
(G) Section 4.3
(H) Section 10.3(G)
(I) Appendices 2.3 and 2.4
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<PAGE> 7
1.4 Added Appendices. The following Appendices are added to the
Agreement:
(A) Appendix 2.7 - Continuous Product Research Program Specifications
(B) Appendix 4.2 - (*)
(C) Appendix 4.4 - SPECTRX Continuous Product Royalty Rate
(D) Appendix 5.1 - Common Stock Agreement
(E) Appendix 5.2 - Supply Agreement
(F) Appendix 5.5 - Preferred Stock Agreement
2. DEFINITIONS
2.1 "ABBOTT Continuous Product Research Program Technology" has the
meaning attributed to it in Section 11.2.
2.2 "Abbott Post-Transfer Technology" has the meaning attributed to it
in Section 11.2(E).
2.3 "Abbott (*) Technology" means technology (1) which was Derived from
SPECTRX (*) Technology or SPECTRX (*) and (2) such derivation occurs on or
between July 28, 1999, and the earlier of (a) the delivery of a Development
Program Notification by ABBOTT to SPECTRX or (b) the transfer of the Continuous
Product Research Program to ABBOTT as set forth in Section 3.3(B) or (c) the
termination of ABBOTT's rights to all Continuous Products.
2.4 "CDA" means the confidential disclosure agreements entered into by
ABBOTT and SPECTRX dated December 15, 1995 and July 28, 1999 to the extent of
Confidential Information disclosed after the Third Amendment Effective Date. The
confidential disclosure agreements dated March 4, 1996, May 31, 1996, and July
28, 1999 (to the extent of Confidential Information disclosed between July 28,
1999 and the Third Amendment Effective Date), are not included as CDAs for
purposes of this Agreement and shall remain in full force and effect in
accordance with their respective terms.
2.5 "Continuous Product" means a Product, consisting of one or more
components, with at least one component continuously attached to or worn by a
subject, during the device's period of use, whereby one of the continuously
attached components provides a means to take more than one measurement of an
Analyte in the subject's interstitial fluid without removal of said component
during its period of use.
(*) 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> 8
2.6 "Continuous Product Research Program" means the research carried
out by SPECTRX or ABBOTT (including the case in which the Continuous Product
Research Program is transferred to ABBOTT pursuant to Section 3.3(B)), to
determine the feasibility of a Continuous Product, including, but not limited
to, potential development activities related to a (*), which program shall
commence on (*) and shall end on the earlier of (1) the date of ABBOTT's
Development Program Notification to SPECTRX in accordance with Section 3.4 of
the Third Amendment, or (2) the date of termination of ABBOTT'S rights to all
Continuous Products. Continuous Product Research Program also includes
activities separately funded by SPECTRX between and including (*), which were
directly related to research for a Continuous Product.
2. 7 "Continuous Product Research Program Specifications" means
specifications for a Continuous Product listed as "Product Specs. Minimum
Acceptable" in Appendix 2.7, definitions and protocols applicable to demonstrate
the achievement of the specifications also listed in Appendix 2.7, and the
deliverables listed in Appendix 2.7. Such specifications may be amended by
written agreement of the parties.
2.8 "Continuous Product Research Program Technology" means all
inventions, developments, know-how, or discoveries, whether or not patentable,
which are conceived and/or reduced to practice during the course of the work
under the Continuous Product Research Program.
2.9 "Derived" means technology whose conception, development and/or
reduction to practice by one party is based, in whole or in part, upon the
Confidential Information of the other party including, but not limited to, the
Information (as that term is defined in the CDA dated July 28, 1999) disclosed
as of the Third Amendment Effective Date, which Information is subject to such
CDA.
2.10 "Development Program" means that work to be carried out by ABBOTT
(whether at ABBOTT or at SPECTRX, or both as set forth in Section 3.5(A) or
3.6(A) of the Third Amendment) specifically to develop the first Continuous
Product and the first Non-Continuous Product which is actually commercialized,
which program shall commence upon the date of ABBOTT's Development Program
Notification to SPECTRX in accordance with Section 3.5 and/or Section 3.7 of the
Third Amendment, as the case may be, and, for the Continuous Product, shall end
on the First Shipment Date of the Continuous Product being developed and ,for
the Non-Continuous Product, on the First Shipment Date of the Non-Continuous
Product being developed.
2.11 "Development Program Notification" means a written notification by
ABBOTT to SPECTRX that ABBOTT has determined to commence a Development Program.
(*) 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> 9
2.12 "Diligent," "Diligently" and "Diligence" means the degree of
effort employed by a party hereto consistent with the exercise of good business
judgment, which with respect to Continuous Product Research Program, Research
Program, Development Programs and commercialization of Licensed Products, shall
not be less than the degree of effort accorded projects or products of similar
commercial value which result from the party's own research and/or development
and commercialization activities, nor less than customary in current industry
practice for projects or products of similar commercial value (unless otherwise
specifically agreed to in writing by the parties). If a minimum spending level
is specified, such minimum will be the maximum spending level needed to meet the
financial component of any Diligence.
2.13 "(*) Technology" means that technology which effectuates or
facilitates accessing and/or extraction of interstitial fluid (*), including,
but not limited to (*), use of (*) into and/or out of the (*). This definition
shall be effective as of the Effective Date of the Agreement.
2.14 "Joint Continuous Product Research Program Technology" has the
meaning attributed to it in Section 11.3.
2.15 "Manufacturing Costs" means direct labor, direct materials and
allocated manufacturing overhead, used in the manufacture of the Product, such
calculation being based on generally accepted accounting principles.
2.16 (*) means an (*) of a Continuous Product including, but not
limited to, (*), which Product is (*), or the (*), or the (*), the component not
being a (*) or a (*) or a (*)
2.17 "Milestones" means those milestones set forth in Section 5.1.
2.18 "Non-Continuous Product" means any Product which is not a
Continuous Product.
2.19 "Non-Invasive Electromagnetic Radiation Technology" means
technology using electromagnetic radiation to measure the properties of a
biological substance or condition inside or outside the body without the
addition of reagents.
2.20 "(*) Milestone" means the milestone set forth in Section
5.1(A)(2).
2.21 "Research Oversight Committee" has the meaning set forth in
Section 3.2.
2.22 "Research Program" means the research carried out jointly from the
Effective Date of the Agreement to and including (*) under former Article 2 of
the Agreement and the research carried out (*) at ABBOTT and to be carried out
by ABBOTT under the provisions of this Third Amendment to determine the
feasibility of 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.
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<PAGE> 10
Non-Continuous Product. The Research Program shall end on the earlier of (1) the
date of ABBOTT's Development Program Notification to SPECTRX in accordance with
Section 3.6 of the Third Amendment, or (2) the date of termination of ABBOTT's
rights to all Non-Continuous Product. All Diligence obligations under the
Research Program shall only be those performance obligations set forth in
Sections 3.6(B) and 3.7(F) of the Third Amendment.
2.23 "SPECTRX Continuous Product" means the Continuous Product
developed by SPECTRX for SPECTRX as set forth in Article 4 of this Third
Amendment.
2.24 "SPECTRX Continuous Product Research Program Technology" has the
meaning attributed to it in Section 11.1.
2.25 "Supply Agreement" has the meaning attributed to it in Section
5.2.
2.26 "Transfer Price" means the agreed upon purchase price of any (*)
supplied by SPECTRX under agreement with ABBOTT.
3. RESEARCH AND DEVELOPMENT
3.1 Continuous Product Research Program. The Continuous Product
Research Program for ABBOTT primarily will be conducted by SPECTRX at its
facility in Norcross, Georgia. SPECTRX will have control over the Continuous
Product Research Program provided that SPECTRX is working toward achieving the
Continuous Product Research Program Specifications, unless it is transferred to
ABBOTT pursuant to Section 3.3(B), in which case ABBOTT will have control. All
deviations from or modifications to the Continuous Product Research Program
Specifications will be in writing and signed by both parties. SPECTRX shall
Diligently undertake, pursue and support those activities under the Continuous
Product Research Program required to achieve the Continuous Product Research
Program Specifications. For avoidance of doubt, non-achievement of the
Continuous Product Research Program Specifications does not necessarily mean
lack of Diligence on the part of either party. ABBOTT shall Diligently
undertake, pursue, and support those research activities to which the parties
have mutually agreed in writing shall be carried out by ABBOTT as part of the
Continuous Product Research Program, including a specific reference to what
performance requirements constitutes Diligence with regard to such activities.
However, notwithstanding such research activities by ABBOTT, other than ABBOTT's
obligation of Diligence in the preceding sentence, ABBOTT shall have no
responsibility for achievement of, nor any liability for failure to achieve, the
Continuous Product Research Program Specifications, no matter what is the reason
for such failure. Further, after ABBOTT delivers a Development Program
Notification for the first Continuous Product under this Agreement, neither
ABBOTT nor SPECTRX shall have
(*) 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> 11
further obligations with regard to any research activities or Diligence
obligations with regard to any other Continuous Product that ABBOTT may
determine to develop or any improvements to any Continuous Product that ABBOTT
may make. Diligence requirements for development of the first Continuous Product
which is actually commercialized remain in accordance with Section 3.4 of the
Third Amendment . If SPECTRX and ABBOTT determine that certain activities have
the potential for intellectual property disputes then the parties will negotiate
an agreement to cover such specific activities including relevant intellectual
property issues before commencing such activities where possible.
3.2 Research Oversight Committee. Within thirty (30) days of the Third
Amendment Effective Date, ABBOTT and SPECTRX will appoint members to a committee
to review the work under the Continuous Product Research Program ("Research
Oversight Committee"). The parties will define the number of members, duties and
frequency of meetings (which shall not be less than every two (2) months) within
thirty (30) days of the Third Amendment Effective Date. Notwithstanding the
foregoing, upon thirty (30) days prior notice by ABBOTT, SPECTRX will disclose
such data and other information related to the Continuous Product Research
Program as reasonably requested by ABBOTT. Prior to each Research Oversight
Committee meeting, ABBOTT and SPECTRX shall each provide to the other a written
report of its respective activities under the Continuous Product Research
Program, including relevant data, a description of progress made, and a
discussion of any plan variances or problems encountered.
3.3 Completion, Termination or Transfer of the Continuous Product
Research Program.
(A) ABBOTT will have no obligation to pay any wind-down
or other expenses of SPECTRX if the Continuous
Product Research Program is successfully completed,
terminated or transferred under this provision or any
other provision of the Third Amendment or the
Agreement; provided, however, that SPECTRX may
utilize the funds from ABBOTT's purchase of preferred
stock as set forth in Section 5.5 of this Third
Amendment for such expenses.
(B) ABBOTT may, in its sole discretion, after (*), elect
to transfer the Continuous Product Research Program
to ABBOTT and/or redefine the Continuous Product
Research Program Specifications and to cease funding
such Continuous Product Research Program as conducted
by SPECTRX if SPECTRX has not achieved the (*)
Milestone by such date. If ABBOTT makes such
election, ABBOTT will give SPECTRX forty-five (45)
days prior written notice of such election. For
clarification, but not limitation, ABBOTT may give
(*) 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> 12
such notice any time after (*). At the end of the
forty-five (45) day notice period if ABBOTT transfers
the Continuous Product Research Program to ABBOTT,
ABBOTT will Diligently undertake the research
activities in an attempt to achieve acceptable
performance to meet the Continuous Product Research
Program Specifications and expenditures for that
purpose shall be in accordance with Section
3.4(A)(2). If ABBOTT notifies SPECTRX of its interest
to transfer the Continuous Product Research Program,
SPECTRX will promptly, after such notice, (i)
transfer to ABBOTT all information, all data and half
of the (*) Products related to the Continuous Product
Research Program as conducted by SPECTRX; (ii)
provide shared access to all materials, hardware,
software and pilot manufacturing lines related to the
Continuous Product Research Program as conducted by
SPECTRX for a reasonable period of time until ABBOTT
is able to develop or acquire its own capabilities in
these areas, and (iii) provide reasonable assistance
to ABBOTT in transferring such activities to ABBOTT,
and ABBOTT shall reimburse SPECTRX for its reasonable
direct expenses, excluding the cost of personnel time
required to physically transfer the Continuous
Product Research Program materials. If only one
hardware item or other item exists, ABBOTT and
SPECTRX will develop a plan that allows use by both
parties, including the sharing of any operating costs
of such item.
(C) ABBOTT may elect to cease funding the Continuous
Product Research Program as either conducted by
SPECTRX or ABBOTT, including declining to make any
preferred stock purchase in accordance with Section
5.5.
(1) If ABBOTT elects not to make such preferred
stock purchase, it will give SPECTRX twenty
(20) days prior written notice and the
Continuous Product Research Program will
terminate at the end of such twenty (20) day
notice period.
(2) If ABBOTT elects to cease funding the
Continuous Product Research Program after it
is transferred to ABBOTT, then ABBOTT will
give SPECTRX ten (10) days prior written
notice and the Continuous Product Research
Program will terminate at the end of such
ten (10) day notice period.
(3) If, after (*), ABBOTT elects to cease
funding the Continuous Product Research
Program, after a decision by ABBOTT to
maintain such program at SPECTRX as
communicated in
(*) 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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writing to SPECTRX, then ABBOTT will give SPECTRX
thirty (30) days prior written notice and the
Continuous Product Research Program will terminate at
the end of such thirty (30) day notice period.
(D) If ABBOTT does not deliver the Development Program
Notification to SPECTRX for a Continuous Product by
the end of the first notice period to come into
existence, if any, under Section 3.3(C)(1)-(3), then
ABBOTT shall have no further rights under the
Agreement (except any right of ABBOTT in ABBOTT
Research Program Technology, Derived Technology,
Joint Research Program Technology, ABBOTT Continuous
Product Research Program Technology, or Joint
Continuous Product Research Program Technology or any
right pursuant to Article 6 of this Third Amendment
or Section 10.3 of the Agreement) to any and all
Continuous Products.
3.4 Development Program Notification.
(A) At any time prior to (*), but in no event later than
the notice periods specified after the notice for
termination of the Continuous Product Research
Program as set forth in Section 3.3(C) or (*) after
the (*) Milestone has been achieved by SPECTRX,
ABBOTT may deliver the Development Program
Notification to SPECTRX if ABBOTT determines to
commence the Development Program for the Continuous
Product. Such time period for delivery by ABBOTT of
the Development Program Notification for the
Continuous Product may be extended to the earlier of
(*) after the (*) Milestone has been achieved or (*),
if the (*) Milestone for the Continuous Product has
not been achieved by (*); if ABBOTT provides notice
to SPECTRX of such extension on or before (*); and if
the following occur:
(1) ABBOTT provides additional funding at a
minimum rate of (*) per quarter and
continues the Continuous Product Research
Program at SPECTRX to achieve the Continuous
Product Research Program Specifications or
any such specifications as redefined by
ABBOTT, or
(2) ABBOTT transfers the Continuous Product
Research Program to ABBOTT due to technical
problems which SPECTRX has been unable to
overcome to achieve the (*) Milestone; and
if the Continuous Product Research Program
(*) Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities Exchange Commission. Omitted
portions have been filed separately with the Commission.
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<PAGE> 14
is transferred to ABBOTT, ABBOTT spends at the
minimum rate of (*) per quarter for each quarter and
Diligently pursues the solution to such technical
problems until ABBOTT resolves the technical problems
to achieve the Continuous Product Research Program
Specifications or any such specifications as
redefined by ABBOTT.
(B) Such time period for delivery by ABBOTT of the
Development Program Notification to SPECTRX may be
further extended to (*), if ABBOTT makes a Milestone
pre-payment of (*) towards the (*) Milestone payment
to SPECTRX any time prior to (*)and, if ABBOTT has
transferred the Continuous Product Research Program
to ABBOTT, ABBOTT continues in accordance with
Section 3.4(A)(2) to pursue a solution to the
technical problems.
(C) If ABBOTT does not deliver the Development Program
Notification for a Continuous Product by (*), or such
extended time period as set forth in Section 3.4
(A)-(B), then all rights of ABBOTT under the
Agreement for all Continuous Products (except any
right of ABBOTT in ABBOTT Research Program
Technology, Derived Technology, Joint Research
Program Technology, ABBOTT Continuous Product
Research Program Technology, or Joint Continuous
Product Research Program Technology or any rights
pursuant to Article 6 of this Third Amendment or
Section 10.3 of the Agreement) shall immediately
revert to SPECTRX. SPECTRX shall promptly send a
notice to ABBOTT confirming such reversion of rights;
however, such notice will not impact whether such
reversion occurs.
3.5 Development Program - Continuous Product.
(A) ABBOTT shall have complete control of the Development
Program for the Continuous Product, including, but
not limited to, whether to conduct the Development
Program itself or to maintain a Development Program
for a Continuous Product at SPECTRX or at both
SPECTRX and ABBOTT. The cost of such Development
Program shall be borne by ABBOTT. Notwithstanding the
foregoing, it is anticipated that SPECTRX will be
performing development oriented activities prior to
ABBOTT providing Development Program Notification
(which activities shall have the prior approval of
both SPECTRX and ABBOTT) that will be funded by the
preferred stock purchase set forth in Section 5.5. To
the extent such activities require additional
expenditures, which
(*) 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
together with expenditures made or to be made by
SPECTRX for the Continuous Product Research Program,
are in excess of the funding by the preferred stock
purchase, then such additional expenditures shall be
separately funded by ABBOTT with prior written
approval of ABBOTT. If ABBOTT determines, and SPECTRX
agrees, to maintain a portion of the Development
Program at SPECTRX, such determination and agreement
to be made at the time of Development Program
Notification, then ABBOTT and SPECTRX shall establish
a mutually agreeable plan and budget for such
Development Program within ninety (90) days of the
date the Development Program Notification is
delivered to SPECTRX. Such Development Program plan
will require that SPECTRX at a minimum provide the
same resources and expertise, as it has used during
the Continuous Product Research Program, or their
equivalents as agreed to by ABBOTT and SPECTRX.
ABBOTT and SPECTRX shall agree on interim activities,
if any, and ABBOTT shall provide interim funding for
such activities between Development Program
Notification and establishment of the mutually
agreeable plan. If SPECTRX is concurrently pursuing
development of the SPECTRX Continuous Product, then
SPECTRX will also provide equivalent resources,
expertise, and priorities for the ABBOTT Continuous
Product Development Program. If ABBOTT believes that
there is a conflict of interest between the SPECTRX
Continuous Product development and the Continuous
Product Development Program that materially impacts
ABBOTT's Continuous Product Development Program, then
ABBOTT shall notify SPECTRX in writing describing the
specifics of the conflict of interest. Upon such
written notification, the parties will meet to
attempt to resolve any issue and SPECTRX shall have
thirty (30) days to correct the conflict of interest.
If SPECTRX does not correct such conflict of interest
within such thirty (30) day period, then ABBOTT (1)
will have no obligation to enter into a Supply
Agreement or may terminate an existing Supply
Agreement for the manufacture of (*)s by SPECTRX; (2)
ABBOTT may immediately cease funding SPECTRX
activities under the Continuous Product Development
Program; and (3) then SPECTRX will promptly transfer
to ABBOTT everything related to the Continuous
Product Development Program, including, but not
limited to, all information, data, Products,
materials, hardware, software, pilot manufacturing
lines and provide reasonable assistance in
transferring such activities and items to ABBOTT.
Such transfer shall not include information, data,
Products, materials, hardware, software and pilot
manufacturing lines that are solely part of the
development
(*) 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.
15
<PAGE> 16
program for the SPECTRX Continuous Product. If any of
these items are common between the ABBOTT program and
the SPECTRX program, then the parties will negotiate
in good faith on an approach to split or share such
items. For clarification, neither the fact that
SPECTRX is developing the SPECTRX Continuous Product,
nor the fact that it has entered into a Third Party
relationship, shall be deemed in and of itself to
constitute a conflict of interest for the purposes of
this Section 3.5(A).
(B) Notwithstanding Section 3.4(A), if the (*) Milestone
has been achieved less than (*) before (*), and
ABBOTT has not delivered the Development Program
Notification for such Product by (*), then ABBOTT
shall have (*) from the date of (*) Milestone
achievement to deliver the Development Program
Notification and will be obligated to pay for any
Continuous Product Research Program expenses or any
development activities expenses for such Continuous
Product requested and authorized in writing by ABBOTT
and incurred by SPECTRX after (*) until the date of
Development Program Notification. In such case,
SPECTRX will have no obligation to continue the
research activities for the Continuous Product
Research Program after (*) unless ABBOTT and SPECTRX
agree to such activities commencing (*).
3.6 Development Program - Non-Continuous Product.
(A) At any time prior to (*), ABBOTT may deliver the
Development Program Notification to SPECTRX if ABBOTT
determines to commence the Development Program for
the Non-Continuous Product. ABBOTT shall have
complete control of the Development Program for the
Non-Continuous Product or Non- Continuous Products
under this Agreement. However, such control by ABBOTT
shall not affect the timing of Milestones or the rate
of royalties for such Non-Continuous Product or
Non-Continuous Products.
(B) If ABBOTT does not Diligently pursue research
activities beginning (*), and spend at the minimum
rate of (*) per year on the Non-Continuous Product
research activities beginning (*) and ending upon
delivery of the Development Program Notice for such
product, or does not deliver the Development Program
Notification for a Non-Continuous Product by (*),
then all rights of ABBOTT under the Agreement for any
and all Non-Continuous Products (except any right of
ABBOTT in ABBOTT Research Program Technology, Derived
Technology, Joint Research Program Technology,
(*) 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.
16
<PAGE> 17
ABBOTT Continuous Product Research Program
Technology, or Joint Continuous Product Research
Program Technology, or any rights pursuant to Article
6 of this Third Amendment) shall immediately revert
to SPECTRX. SPECTRX shall promptly send a notice to
ABBOTT confirming such reversion of rights; however,
such notice will not impact whether such reversion
occurs.
(C) If ABBOTT's rights to all Continuous Products have
been terminated as set forth in Section 3.4(C), or if
ABBOTT notifies SPECTRX that it is terminating the
Continuous Product Research Program or Development
Program, then ABBOTT must deliver the Non-Continuous
Product Development Program Notification to SPECTRX
prior to (*) from such termination date for the
Continuous Product rights or from notice of
termination of the Continuous Product Research
Program or Development Program or (*), whichever is
earlier or ABBOTT's rights to a Non-Continuous
Product shall terminate (except any right of ABBOTT
in ABBOTT Research Program Technology, Derived
Technology, Joint Research Program Technology, ABBOTT
Continuous Product Research Program Technology, or
Joint Continuous Product Research Program Technology,
or any rights pursuant to Article 6 of this Third
Amendment).
3.7 ABBOTT Development Program Due Diligence.
(A) For the Continuous Product and the Non-Continuous
Product on which ABBOTT delivers a Development
Program Notification to SPECTRX, ABBOTT shall
Diligently use its commercially reasonable efforts to
achieve:
(1) submission of a Regulatory Filing with the
FDA within (*) (if a 510K Filing submission
is to be made) (*) (if a PMA submission is
to be made) after delivery of such
Development Program Notification for such
Product;
(2) the First Shipment Date for such Product
within (*) after delivery of such
Development Program Notification for such
Product if a 510K Filing submission is to be
made for such Product or within (*) if a PMA
submission is to be made for such Product.
(B) If the First Shipment Date has not occurred and if
ABBOTT has not submitted a Regulatory Filing to the
FDA within the period set forth in Section 3.7(A)(1)
above (or any extended period agreed to by the
parties pursuant to Section 3.1 of the Agreement) and
such
(*) 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> 18
failure is not due to a lack of SPECTRX Diligence in
fulfilling its responsibilities, if any, under the
Development Program, then prior to the end of the
period set forth in Section 3.7(A)(1) or such
extended period agreed by the parties, ABBOTT may
extend such period by (*) by written notice of
extension to SPECTRX and within thirty (30) days of
such notice, payment to SPECTRX of (*)set forth in
Section 5.1(A)(4). ABBOTT further may extend such
period by an additional (*) if SPECTRX has commenced
developing its SPECTRX Continuous Product and if
ABBOTT is Diligently working toward a Regulatory
Filing to the FDA. If ABBOTT's failure under this
Section 3.7(B) is due to a lack of SPECTRX Diligence,
if any, then any such deadline will be extended to
the extent impacted by SPECTRX's lack of Diligence.
(C) If the First Shipment Date has not occurred and such
failure is not due to a lack of SPECTRX Diligence in
fulfilling its responsibilities, if any, under the
Development Program, then prior to the end of the (*)
period set forth in Section 3.7(A)(2), as the case
may be, ABBOTT may extend such period (*) ,
respectively, by written notice of extension to
SPECTRX and within thirty (30) days of such notice,
payment to SPECTRX of (*). ABBOTT further may extend
such period by an additional (*) if SPECTRX has
commenced developing its SPECTRX Continuous Product
and if ABBOTT is Diligently working toward the First
Shipment Date. If ABBOTT's failure under this Section
3.7(C) is due to a lack of SPECTRX Diligence, then
such deadlines will be extended to the extent
impacted by SPECTRX's lack of Diligence.
(D) Unless the parties agree to extend such time for the
Regulatory Filing in Section 3.7(A)(1) above, if
ABBOTT (i) has not made such Regulatory Filing within
the period set forth in Section 3.7(A)(1) or an
extended period pursuant to Section 3.7(B) or (ii) if
the First Shipment Date has not occurred within the
period set forth in Section 3.7(A)(2) or an extended
period pursuant to Section 3.7(C), then upon written
notice from SPECTRX, ABBOTT shall have no further
rights to any and all Continuous Products or to any
and all Non-Continuous Products, as the case may be
(except any right of ABBOTT in ABBOTT Research
Program Technology, Derived Technology, Joint
Research Program Technology, ABBOTT Continuous
Product Research Program Technology, or Joint
Continuous Product Research Program Technology, or
any rights pursuant to Article 6 of this Third
Amendment), provided that, if ABBOTT has relinquished
all rights pursuant to this Section 3.7(D)
(*) 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> 19
and as a result this Agreement terminates in
accordance with Section 3.8(A), and a Regulatory
Filing did not occur due to one of the events set
forth in Section 3.1(B) of the Agreement, then
SPECTRX shall not be entitled to the license in
Section 6.2(C) of the Agreement and grant back of
rights set forth in Section 7.1 of the Agreement or
the license set forth in Section 11.2(B) of the Third
Amendment upon termination of the Agreement.
(E) If ABBOTT has made a payment for a particular
extension under Section 3.7(B) and/or 3.7(C) for
either the first Continuous Product or the first
Non-Continuous Product, then if ABBOTT requires the
same extension for the first Product of the other
type (Non-continuous Product or Continuous Product,
as the case may be) under a Development Program,
ABBOTT will receive such extension (*) upon prior
written notification to SPECTRX within the original
time period; provided, that, ABBOTT is employing
Diligent commercially reasonable efforts to meet the
requirements as set forth in Section 3.7(A) (1) or
(2) for such Product and requires such extension to
meet such requirements.
(F) If ABBOTT does not deliver the Development Program
Notification for a Continuous Product by the
prescribed date or if ABBOTT notifies SPECTRX that it
is terminating all Continuous Product Research or
Development Programs, then in the first (*) following
the prescribed date or notice of such termination,
ABBOTT will Diligently pursue research activities or
Development Program, (including spending at the rate
of at least (*) on Non-Continuous Product research
activities or Development Program and, thereafter, at
the rate of (*) per each (*) period until completion
or termination of such program). If ABBOTT does not
meet these requirements, then SPECTRX may terminate
ABBOTT's rights to all Non-Continuous Products upon
written notice to ABBOTT and the Agreement will
terminate in accordance with Section 3.8(A).
3.8 Termination of all Programs.
(A) Prior to the First Shipment Date, if ABBOTT ceases
funding all research activities as set forth in the
Agreement, and does not deliver any Development
Program Notifications within the prescribed times or
ceases all or does not commence any Development
Program with regard to either the Continuous Product
or Non-Continuous Product, and the parties have not
agreed otherwise, then this Agreement shall terminate
upon receipt of written notice of same from one party
to the other, subject 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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Sections 10.3 and 10.4 of the Agreement. In any case,
prior to the First Shipment Date, if rights to both
the Continuous Product and the Non-Continuous Product
are relinquished by ABBOTT, this Agreement shall
terminate.
(B) After the First Shipment Date, if rights to both the
Continuous Product and the Non-Continuous Product are
relinquished by ABBOTT, this Agreement shall
terminate.
(C) If ABBOTT ceases funding any research activities,
ceases any research activities or any development
activities which are required by the Agreement for
the Continuous Product or the Non-Continuous Product,
ABBOTT shall notify SPECTRX within thirty (30) days
of each such cessation unless otherwise provided by
this Third Amendment or the Agreement.
3.9 Reports. ABBOTT and SPECTRX each will provide the other with
quarterly reports on its activities under either the Continuous Product Research
Program or Research Program and reports every six (6) months for activities
under Development Programs, including summary data generated, to the extent
necessary to demonstrate that such party is meeting its Diligence requirements
(including spending requirements) set forth in the Agreement. Such reports shall
redact any data or other information which is subject to a confidentiality
agreement between ABBOTT and a Third Party and any data which is outside the
scope of ABBOTT's obligations under this Agreement. This requirement for reports
for a Research Program and any Development Programs shall not commence until a
party has Diligence requirements for such Research Program or Development
Program as set forth in Sections 3.5, 3.6 and/or 3.7, as the case may be. Such
reports to the Research Oversight Committee will satisfy reporting requirements
under this Section 3.9.
3.10 R & D Expense Records and Audit. ABBOTT and SPECTRX each shall
keep and maintain records of amounts spent on the Continuous Product Research
Program, the Research Program and Development Programs conducted in accordance
with the provisions of Article 3 of the Agreement and Article 3 of this Third
Amendment, except for Abbott's requirement for the Research Program and
Development Program which shall commence upon the date it has Diligence
requirements for such Research Program or Development Program as set forth in
Sections 3.5, 3.6 and/or 3.7, for a period of two (2) years after the period to
which such records relate. During this period, such records shall be open to
inspection upon reasonable written notice by one party to the other party. Such
inspection shall be performed by a nationally recognized independent certified
public accountant selected by the party requesting the audit and approved by the
party to be audited, which approval shall not be unreasonably withheld. All
expenses of such inspection shall be borne by the party requesting the audit;
provided that, if the audited party is found to have overstated its spending by
more than (*) any amounts required to be spent for the Continuous Product
Research
(*) 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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Program, Research Program or Development Programs under Article 3, and as a
result is non-compliant with its Diligence requirements, then the audited party
shall bear such expenses. The independent certified public accountant shall sign
a confidentiality agreement and shall then have the right to examine the records
kept pursuant to this Section and report findings (but not the underlying data)
of the examination to the party requesting the audit as is necessary to evidence
that records were or were not maintained and expenditures made as required by
this Article 3. A copy of any report provided to the party requesting the audit
by the independent certified public accountant shall be given concurrently to
the audited party.
4. SPECTRX CONTINUOUS PRODUCT
4.1 Development by SPECTRX. If ABBOTT delivers a notice to materially
redefine the Continuous Product Research Program Specifications or of the
transfer to ABBOTT of the Continuous Product Research Program or to extend the
Development Program Notification date for the Continuous Product in accordance
with the Agreement, then SPECTRX may determine to develop not earlier than (*),
one (1) Continuous Product, for its own benefit, such research and development
to be funded by SPECTRX ("SPECTRX Continuous Product"). SPECTRX shall have the
right to modify SPECTRX Continuous Product to eliminate the use of any or all
Licensed Rights (as defined in Section 4.2(B)). Notwithstanding the foregoing,
SPECTRX will not have such rights to develop a SPECTRX Continuous Product until
after (*) if ABBOTT funds the Continuous Product Research Program at SPECTRX
after (*) with a commercially reasonable funding level agreed to by the parties
in order to develop a (*) Product that meets the Continuous Product Research
Program Specifications as first specified in Appendix 2.7. SPECTRX will provide
ABBOTT with ten (10) days prior written notice prior to commencing development
of a SPECTRX Continuous Product. One Continuous Product means (*) Continuous
Product which shall be sold (*) and pursuant to a (*) and which, after
commercial launch, (*). Notwithstanding anything in this Section 4.1, (A) if the
(*) Milestone is achieved between (*), and (*),, and ABBOTT delivers Development
Program Notification within sixty (60) days of SPECTRX's achievement of the (*)
Milestone, or (B) if ABBOTT provides Development Program Notification to SPECTRX
between (*), and (*), after funding the Continuous Product Research Program at
SPECTRX after (*), as set forth in this Section 4.1, then SPECTRX shall not have
the right to develop a SPECTRX Continuous Product.
4.2 License to SPECTRX.
(A) If the criteria of Section 4.1 are met and within the time
period that ABBOTT has extended the deadline for delivering
the Product Development Notification ABBOTT receives a written
notification from SPECTRX of its election to develop such
SPECTRX Continuous Product, ABBOTT shall grant to SPECTRX a
royalty-bearing, non-exclusive license, without the right to
sublicense,
(*) 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> 22
under the Licensed Patents and Know-How to make, have
made, use, sell and import the SPECTRX Continuous
Product in the Territory, (*). ABBOTT and SPECTRX
shall enter into a license agreement which shall
include the grant set forth in this Section 4.2(A),
the royalty in Section 4.4 and other customary terms
and conditions, similar where appropriate, to those
license terms set forth in the Agreement.
(B) Upon receiving SPECTRX's election to develop such
SPECTRX Continuous Product, ABBOTT shall grant to
SPECTRX a royalty-bearing, non-exclusive license,
without the right to sublicense, under those ABBOTT
patent rights and know-how ("Licensed Rights") which
have been incorporated into the Continuous Product at
the earliest of the following: (1) date of ABBOTT's
notice to materially redefine the Continuous Product
Research Program Specifications as set forth in
Section 4.1; or (2) date of ABBOTT's notice of the
transfer to ABBOTT of the Continuous Product Research
Program as set forth in Section 4.1; or (3) date of
SPECTRX's notice as set forth in Section 4.2(A), to
use, sell, and import the SPECTRX Continuous Product
in the Territory. ABBOTT and SPECTRX shall enter into
a license agreement for such Licensed Rights under
commercially reasonable royalty rates and other
customary terms and conditions, similar where
appropriate, to those license terms set forth in the
Agreement.
4.3 Manufacturing Rights.
(A) If SPECTRX is granted a license under Section 4.2(B),
ABBOTT shall have the option to manufacture for
SPECTRX those items covered by the Licensed Rights.
SPECTRX shall deliver notification of such
anticipated date to ABBOTT within (*) prior to
SPECTRX's commercially reasonable anticipated date of
the first commercial sale of the SPECTRX Continuous
Product. ABBOTT may exercise its option hereunder by
written notice to SPECTRX (*) days of receiving
SPECTRX's notification. If ABBOTT delivers such
notice to SPECTRX, SPECTRX and ABBOTT shall enter
into a manufacturing agreement under commercially
reasonable terms agreed upon by the parties. If
ABBOTT does not exercise its option within the
designated time period, then ABBOTT shall modify
SPECTRX's license grant set forth in Section 4.2(B)
to extend it to "make and have made."
(B) If SPECTRX is manufacturing (*)s for ABBOTT in
accordance with Section 5.2 and SPECTRX's (*) of the
SPECTRX Continuous
(*) 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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Product and (*) exceed the greater of (*) of SPECTRX
(*) as defined in Section 4.4(B) in any rolling
twelve (12) month period, or (2) (*) of the combined
total of the (*) of SPECTRX (*) as defined in Section
4.4(B) of the SPECTRX Continuous Product and (*) and
the (*) of ABBOTT Continuous Product and (*), then
ABBOTT shall have the option to transfer such
manufacture of (*)s to ABBOTT or a Third Party
designated by ABBOTT. ABBOTT may exercise its option
at any time after SPECTRX exceeds the threshold set
forth in this Section by written notice to SPECTRX.
ABBOTT and SPECTRX will agree on a commercially
reasonable transition plan and timetable to transfer
such manufacturing to ABBOTT or ABBOTT's designee and
SPECTRX will provide the necessary documentation and
assistance for such transfer. SPECTRX will provide
the necessary documentation and limited assistance at
its own expense and ABBOTT shall pay for all other
expenses associated with such transfer.
4.4 Royalty.
(A) In consideration for the license granted under
Section 4.2(A), SPECTRX shall pay to ABBOTT a royalty
as set forth in Section 4.4(B) on (*) of the SPECTRX
Continuous Product and (*) in the Territory applying
the same criteria to SPECTRX as in (*) for ABBOTT,
including the same provisions for deductions as set
forth in Section 1.23(A) of the Agreement and Section
5.6(B) of the Third Amendment. No royalty shall be
due for sales through ABBOTT or by ABBOTT under
distributor rights negotiated under Section 4.5 or
for items manufactured by ABBOTT for SPECTRX that are
related to the SPECTRX Continuous Product; provided,
that royalties also shall be due under the
circumstances that would call for ABBOTT to pay
royalties on its (*) under Section 4.2(D) of the
Agreement.
(B) Prior to First Shipment Date of Abbott's Continuous
Product, royalties will be calculated on (*) at a
royalty rate of (*). Thereafter, the royalty rate
will be based on SPECTRX (*) (as defined in Section
4.4(B)(1)) in accordance with Appendix 4.4. Royalties
shall be calculated as follows:
(1) It is anticipated that a majority of
SPECTRX's (*), if any, of the SPECTRX
Continuous Product and (*) will be made (*)
for each year, total SPECTRX actual (*) of
the SPECTRX Continuous Product and (*) shall
be (*) unless SPECTRX or ABBOTT can
demonstrate that the impact of such (*) is
materially different than (*) for such year.
The royalty rate(s)
(*) 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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for such year shall be determined by
applying such SPECTRX (*) to the chart in
Appendix 4.4.
(2) The royalty payment shall be determined by
the formula (*) where (*) is the applicable
royalty rate in Appendix 4.4; (*) is the
total SPECTRX (*); and (*) is a fraction,
the numerator of which is that portion of
the SPECTRX (*) applicable to such royalty
rate and the denominator of which is the
total (*).
(C) Any sales of the SPECTRX Continuous Product and/or
(*) by a Third Party in which SPECTRX has a material
financial interest shall be deemed sales by SPECTRX
and such sales shall be included in (*) for purposes
of calculation of the royalty payment under this
Article.
4.5 Right of First Negotiation - Distribution Rights. ABBOTT shall have
the right of first negotiation for the exclusive right to the distribution of
the SPECTRX Continuous Product which right of first negotiation may be exercised
as follows:
(A) Within (*) prior to SPECTRX's commercially reasonable
anticipated date of first commercial sale of the
SPECTRX Continuous Product, SPECTRX shall deliver
written notification to ABBOTT regarding its right of
first negotiation. SPECTRX shall not engage in any
discussions with any Third Party concerning such
distribution until ABBOTT's right of first
negotiation terminates in accordance with Section
4.5(C) or 4.5(D).
(B) ABBOTT shall have (*) after receipt of the notice and
the report in Section 4.5(C) to provide a written
response indicating whether ABBOTT is interested or
not in such distribution rights.
(C) At the time that the notice is delivered to ABBOTT,
SPECTRX shall provide to ABBOTT a full report on the
SPECTRX Continuous Product, including technical
specifications and performance of the SPECTRX
Continuous Product reasonably necessary to assess
performance and marketability and any other
information reasonably requested by ABBOTT. Within
(*) after receipt of such report, ABBOTT may send to
SPECTRX an initial proposal containing proposed
financial and other material terms for such
distribution relationship (the "ABBOTT Proposal"). If
ABBOTT does not send an ABBOTT Proposal within such
period of time, then ABBOTT's right of first
negotiation with regard to such distribution rights
shall terminate.
(*) 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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(D) If ABBOTT delivers an ABBOTT Proposal to SPECTRX,
SPECTRX and ABBOTT shall promptly enter into good
faith negotiations towards a distribution agreement
upon mutually agreed terms and conditions. Subject to
SPECTRX making all reasonable efforts to meet and
negotiate with ABBOTT on a timely basis and in good
faith, if SPECTRX and ABBOTT fail to reach mutual
agreement on a term sheet covering the material terms
and conditions of a distribution agreement within (*)
from the receipt of the ABBOTT Proposal by SPECTRX,
or fail to execute a definitive distribution
agreement within (*) of such receipt, then upon
written notice from SPECTRX, ABBOTT shall have no
further right of first negotiation with regard to
such distribution rights except as set forth in
Section 4.5(E).
(E) (1) If, during the (*) period subsequent to the
process set forth in Section 4.5(A)-(D),
SPECTRX negotiates proposed terms for a
distribution agreement for the SPECTRX
Continuous Product with a Third Party under
terms and conditions that are more favorable
to the Third Party than those originally
proposed during negotiation with ABBOTT
(taking into consideration all relevant
terms of both proposals, including, but not
limited to, quantities, any minimum purchase
obligations, type of distribution rights,
type of Third Party and other agreement
obligations) ("More Favorable Terms"), then
SPECTRX by written notice promptly shall
inform ABBOTT of the More Favorable Terms
and ABBOTT shall have (*) to accept such
More Favorable Terms by written notice to
SPECTRX.
(2) If ABBOTT and SPECTRX fail to enter into a
distribution relationship pursuant to
Section 4.5(D), and prior to entering into
any other definitive distribution agreement
with a Third Party, SPECTRX makes
significant improvements to the SPECTRX
Continuous Product, then ABBOTT shall have
the right of first negotiation with regard
to such improved SPECTRX Continuous Product
under the same process as set forth in this
Section 4.5(A)-(D).
4.6 Post Election Efforts on ABBOTT's Program. Notwithstanding
SPECTRX's election to develop a SPECTRX Continuous Product, if SPECTRX is
continuing to perform research or development work under this Agreement for
ABBOTT, SPECTRX agrees that it will Diligently pursue all such activities in
accordance with Section 3.5(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.
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5. CONSIDERATION
5.1 Milestone Payments.
(A) ABBOTT shall pay to SPECTRX the following payments
for the milestones listed below ("Milestones"):
(1) (*) or achievement of the Milestone set
forth in Section 5.1(A)(2), whichever is
earlier (but in no case prior to (*).
(2) (*) of ABBOTT's (or a mutually acceptable
competent Third Party's) written notice of
determination that a (*) meets all of the
Continuous Product Research Program
Specifications or on (*), whichever is
later; such written notice of determination
to be made within (*) after receipt by
ABBOTT of the investigator's final report on
the (*) study and all other reports
described in the Continuous Product Research
Program Specifications necessary to assess
the achievement of this Milestone (excluding
items required for the Development Program,
e.g., drawings, parts list, etc.). (This
Milestone shall be deemed achieved if ABBOTT
delivers the Development Program
Notification in Section 5.1(A)(3) for either
a Continuous Product or Non-Continuous
Product.)
(3) (*) of delivery by ABBOTT to SPECTRX of a
Development Program Notification.
(4) (*) of submission by ABBOTT of a Regulatory
Filing with the FDA for a Product.
(5) (*) of ABBOTT receiving the first written
approval to market from the FDA for a
Product.
(6) (*) of the First Shipment Date of Product.
(B) The payment for each Milestone shall be made only
once, notwithstanding that the Milestone is met for
more than one Product. The total consideration due
from ABBOTT under this Section 5.1 shall not exceed
(*).
(C) ABBOTT at its election by the delivery of a written
notice to SPECTRX ("Common Stock Election Notice"),
may use a portion, up to one-half, of its payment
obligations under each of Section
(*) 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.
26
<PAGE> 27
5.1(A)(2) and Section 5.1(A)(3) to purchase shares of
common stock of SPECTRX ("SPECTRX Common Stock") as
detailed in the Common Stock Purchase Agreement,
Appendix 5.1. If ABBOTT elects to make any such
purchase of SPECTRX Common Stock, then, as further
provided in Section 5.4(A) hereof, the credit against
royalties for certain Milestone payments shall be
reduced by a sum equal to the aggregate purchase
price of such SPECTRX Common Stock.
(D) If a Milestone payment is made as specified in 5.1(A)
or as a prepayment for an extension (Sections 3.4(B),
3.7(B), 3.7(C)) any such payment is non-refundable,
except as to credits in Section 5.4, or in any case,
if this Agreement is terminated.
5.2 Transfer Price - (*)s for Continuous Product. If SPECTRX is
competitive with regard to Manufacturing Costs (*) greater than those by
bonafide Third Party manufacturers) unless SPECTRX adjusts its Transfer Price to
an amount equal to that Transfer Price that would have resulted had SPECTRX
Manufacturing Costs been no more than (*) greater, and manufacturing quality of
the (*)s for the Continuous Product (i.e., SPECTRX meets FDA QSR and European
EN46001 requirements, demonstrates to ABBOTT's reasonable satisfaction it has
sufficient manufacturing capacity to timely meet reasonably expected demand in
accordance with the forecast according to the Supply Agreement, and is able to
consistently supply (*)s that meet the final product specifications), then
ABBOTT and SPECTRX shall enter into a supply agreement substantially in the form
of Appendix 5.2 and containing the following terms for the supply of the (*)s by
SPECTRX to ABBOTT ("Supply Agreement"). ABBOTT shall pay a Transfer Price for
each (*) whether manufactured by SPECTRX or for SPECTRX by a Third Party that
equals the product of the Manufacturing Costs multiplied (*) or such lower
Transfer Price as SPECTRX may propose. If SPECTRX elects to supply the (*)s that
are manufactured by a Third Party under the direction of SPECTRX, ABBOTT shall
have the right to approve such Third Party, which approval will not be
unreasonably withheld.
5.3 Royalty - Continuous Product. ABBOTT will pay royalties on annual
(*) of all Continuous Product and all (*) which are Licensed Products, excluding
that part of (*) attributable to (*) manufactured by SPECTRX, in the Territory
as set forth in Section 4.2(C) of the Agreement; subject to the (*) deduction in
Section 5.6, and provided, however, that the (*) of all Licensed Products shall
be aggregated to obtain the (*) Within One Year for purposes of the royalty
calculation set forth in Section 4.2(C) of the Agreement.
5.4 Credits Against Royalties and Transfer Price.
(A) The Milestone payments under Sections 5.1(A)(5) and
5.1(A)(6), up to a total amount of (*), less any
amounts paid for preferred
(*) 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.
27
<PAGE> 28
stock as set forth in Section 5.5 or SPECTRX Common
Stock in lieu of Milestone payments as set forth in
Section 5.1(C), shall be credited against future
royalties payable by ABBOTT and/or the Transfer Price
of the (*)s purchased by ABBOTT from SPECTRX. Such
payments shall be credited against royalties or the
Transfer Price due to SPECTRX (1) at the time of
payment of such royalty so that SPECTRX shall receive
(*) of the royalty amount due to it (i.e., for every
(*) in royalties due SPECTRX, SPECTRX shall receive
(*) or (2) at a rate of (*) of the Transfer Price,
respectively, until the total of (*) or such
applicable lesser amount, has been credited against
royalties and/or the Transfer Price due SPECTRX from
ABBOTT.
(B) If (*) of the first Licensed Product, which Licensed
Product establishes the First Shipment Date, and all
subsequent Licensed Products, have not totaled (*)
within (*) of the First Shipment Date ("Cumulative
Amount"), then upon written notice by ABBOTT to
SPECTRX the following amounts would be creditable
against royalties and/or the Transfer Price of the
(*)s, in accordance with the formula set forth in
Section 5.4(A), until the total credited amount had
been attained or until the (*) by ABBOTT of the
Licensed Product for any twelve (12) month period
following the First Shipment Date (i.e. months 1-12,
13-24, 25-36, etc. starting from the First Shipment
Date) equal (*), whichever is first:
<TABLE>
<CAPTION>
Cumulative Amount Up to and Including Credited Amount
------------------------------------- ---------------
<S> <C>
(*) (*)
(*) (*)
(*) (*)
</TABLE>
(C) ABBOTT may within (*) of the Third Amendment
Effective Date identify a (*) and, thereafter, if
ABBOTT chooses in its commercially reasonable
business judgment to take a license under such (*) or
any foreign counterparts, any divisions,
continuations and continuations-in-part, extensions,
renewals or reissues of such patent to make, have
made, use, sell or import a Product, in order not to
infringe such (*) by the practice of the Licensed
Patents or Know How for such Product, then up to (*)
of payments made by Abbott to acquire and maintain
such license, not to exceed (*) of such payments),
shall be creditable against royalties and/or Transfer
Price due to SPECTRX from ABBOTT, in accordance with
the formula set forth in Section 5.4(A), provided,
however, that no such payments shall be creditable
for license payments made to an affiliate of ABBOTT.
To the extent that such license also covers
(*) 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.
28
<PAGE> 29
other products or services, the payments shall be
allocated among Product and such other products or
services based on sales and the credit shall be
limited to the percentage allocated to Product.
(D) If SPECTRX fails to supply the (*)s and ABBOTT elects
to transfer the manufacturing to ABBOTT or an ABBOTT
designated Third Party, all in accordance with the
terms of the Supply Agreement, then ABBOTT shall be
entitled to a credit against any royalties due to
SPECTRX for the reasonable costs of transition of
such manufacturing from SPECTRX. ABBOTT shall give
written notification of such costs with the first
royalty payment due SPECTRX after the transfer is
effective. The credit shall be taken against any
royalties due to SPECTRX under the Agreement without
recourse to the formula under Section 5.4(A).
5.5 Preferred Stock Purchase.
(A) Contemporaneously with the execution and delivery of
this Third Amendment, and effective as of the Third
Amendment Effective Date, ABBOTT and SPECTRX have
entered into that certain Redeemable Convertible
Preferred Stock Purchase Agreement pursuant to which
and subject to its terms and conditions, SPECTRX has
agreed to issue and sell, and ABBOTT has agreed to
purchase, an aggregate of 525,000 shares of a new
class of preferred stock of SPECTRX to be designated
Redeemable Convertible Preferred Stock at a purchase
price of Ten Dollars ($10.00 ) per share. The date of
the First Closing (as defined in such Redeemable
Convertible Preferred Stock Purchase Agreement) shall
be the Third Amendment Effective Date.
(B) SPECTRX shall use all of the payments for preferred
stock received from ABBOTT only for the costs
associated with the Continuous Product Research
Program for ABBOTT (such costs to be similar to those
outlined in the original Appendix 2.3 of the
Agreement) under the Third Amendment or any wind-down
expenses of SPECTRX in accordance with Section 3.3,
if a Continuous Product Research Program is
completed, terminated or transferred by ABBOTT. If,
at the time ABBOTT elects to transfer the Continuous
Product Research Program to ABBOTT, ABBOTT and
SPECTRX agree to continue research activities at
SPECTRX, or at the time that ABBOTT gives Development
Program Notification, ABBOTT and SPECTRX agree (in
both cases, SPECTRX's agreement will not be
unreasonably withheld) to continue development
activities at SPECTRX, then to the extent
(*) 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.
29
<PAGE> 30
that the total costs and expenses incurred by SPECTRX
for performance of the Continuous Product Research
Program are less than the payments for preferred
stock received from ABBOTT, SPECTRX shall first use
the balance of those payments for the above-mentioned
continuing research and development activities and
upon the complete use of those payments, ABBOTT shall
provide separate funding for the costs and expenses
of the remainder of such activities. ABBOTT shall
have up to three (3) months from the above election
or notice to identify and agree with SPECTRX on such
activities. The obligation to use the preferred stock
payments, if any balance remains, will cease six (6)
months from any such election or notice. SPECTRX
shall employ Diligent commercially reasonable efforts
to limit wind-down expenses, including, but not
limited to, immediately terminating or noticing
termination, as permitted, of any obligations which
incur costs, not entering into any new financial
commitments and Diligently taking all reasonable
steps to minimize any existing and/or continuing
costs which cannot be immediately terminated.
5.6 (*) Deduction. Prior to the determination of any royalty amount due
to SPECTRX by ABBOTT, (*) for each year shall be adjusted as follows:
(A) (*)
(B) (*)
6. OTHER LICENSES
6.1 (*) Technology and (*).
(A) Subject to Section 6.1(B), if either SPECTRX or
ABBOTT possesses any rights pursuant to a patent or
patent application (which it has the right to
sublicense) covering (*) Technology or (*) and the
other party requests the right to practice under such
patent rights, then the party possessing such rights
pursuant to a patent or patent application agrees to
grant a non-exclusive license, without the right to
sublicense, except for a limited right to sublicense
for Third Party manufacture, to the other party,
under reasonable commercial terms mutually agreed
upon by the parties, to make, have made, use, sell
and import Continuous Products as follows:
(1) If SPECTRX is the party possessing such
rights, then SPECTRX shall grant to ABBOTT a
non-exclusive license under SPECTRX (*)
Technology or (*); the term of any such
(*) 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.
30
<PAGE> 31
license(s) from SPECTRX to ABBOTT shall be concurrent
with the term of the rights under Licensed Patents
and Know How held in the Field by ABBOTT except any
such license for technology Derived by SPECTRX from
ABBOTT (*) Technology or (*) shall survive
termination, other than for breach by ABBOTT of the
Agreement; or
(2) if ABBOTT is the party possessing such rights, then:
(a) if the Agreement is terminated other
than for breach by SPECTRX, ABBOTT
shall grant SPECTRX a non-exclusive
license under ABBOTT (*) Technology
for Continuous Products;
(b) if, pursuant to the terms of this
Agreement, ABBOTT's rights to all
Continuous Products are terminated,
other than by a termination by
ABBOTT of the Agreement for breach
by SPECTRX, then ABBOTT shall grant
SPECTRX a non-exclusive license
under ABBOTT (*) Technology for
Continuous Products.
(c) The term of any such license(s)
granted under this Section
6.1(A)(2) shall survive termination
of the Agreement other than
termination for breach by SPECTRX.
(B) Any license granted to SPECTRX under Section 6.1(A)
shall be strictly limited to ABBOTT (*) Technology
and shall not include or imply the right to use any
ABBOTT (*) Technology or (*) which was not Derived
from SPECTRX technology, nor shall it include or
imply any right to practice under any intellectual
property rights based on technology recorded in the
written records of ABBOTT before July 28, 1999
(except for Derived Technology), or any technology
under which ABBOTT acquires a license from Third
Parties except for the (*) referenced in Section
5.4(C).
(C) If SPECTRX utilizes the license granted by ABBOTT
pursuant to Section 6.1(A), then ABBOTT will have the
right to manufacture any (*) for the SPECTRX Product
which utilizes such license during the term of such
license under commercially reasonable terms agreed to
by the parties. At the time SPECTRX delivers written
notice to ABBOTT of its intention to commence
development of a SPECTRX Continuous Product pursuant
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.
31
<PAGE> 32
Section 4.1 of this Third Amendment, which shall not
be before specifications sufficient to allow
reasonable estimate of Manufacturing Costs of such
(*) are finalized, SPECTRX and ABBOTT will enter into
good faith negotiations toward an agreement for the
supply of such (*) by ABBOTT. In the event that the
parties are not able to reach an agreement within (*)
despite Diligent negotiations, either party may
terminate such negotiations upon written notice to
the other, after which SPECTRX shall have the right
to manufacture for itself, or have manufactured for
it by Third Parties, such (*), provided, however that
the terms and conditions for SPECTRX of such
manufacturing arrangement shall not be, in the
aggregate, less favorable to SPECTRX than the terms
offered by ABBOTT. During such negotiation, ABBOTT
shall supply (*) to SPECTRX on mutually agreeable
terms, or at SPECTRX's option, SPECTRX shall have the
right to purchase (*) from a Third Party.
(D) In any case in which a license to patent rights
covering (*) Technology is conveyed to a party, it
shall convey a license to patent rights covering
combinations of (*) Technology with (*) Technology or
combinations of (*) Technology with (*), in which the
advancement over the art is in (*) Technology, and
the combination is made with (*) Technology or (*) in
existence as of the Effective Date of this Third
Amendment, but shall not convey a license to patent
rights covering (*) Technology or (*) alone.
Therefore, a license to such patent rights for the
combinations does not in and of itself provide the
right to practice the combination unless the party
already has the right to use such (*)Technology or
(*).
6.2 (*). At SPECTRX's written request, ABBOTT agrees to enter into good
faith negotiations with SPECTRX for the granting of a license to SPECTRX for
ABBOTT Diagnostic Division (*) (which technology is not subject to an exclusive
license or other restrictions prohibiting the granting of a license at the time
of SPECTRX's request); provided, that, ABBOTT Diagnostics Division desires to
out-license such technology to Third Parties, not including technology which
ABBOTT is cross-licensing or has cross-licensed with a Third Party in order to
obtain the technology of such Third Party. If SPECTRX makes such a request to
ABBOTT and ABBOTT does not desire to out-license such technology at the time of
such request, then SPECTRX's request shall be effective for a (*) period
following the date the request is received by ABBOTT. If ABBOTT desires to
out-license such technology during such (*) period, ABBOTT will notify SPECTRX
and SPECTRX and ABBOTT will enter into good faith negotiations for the grant of
a license to SPECTRX for such technology. After such (*) period, ABBOTT will
have no obligation to enter into such negotiations unless SPECTRX makes another
request in writing. Any breach of this Section 6.2 by ABBOTT will not be
considered a material breach of the Agreement.
(*) 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.
32
<PAGE> 33
6.3 (*). For avoidance of doubt, the parties acknowledge that ABBOTT
has the right to (*)
6.4 License Limitation.
(A) The licenses granted by either party pursuant to this
Article 6 shall not extend to making, having made,
using, selling or importing (*) for either (i) the
Products developed for or by the other party or (ii)
devices of any kind other than Products in which the
other party has any exclusive or co-exclusive right
and neither party shall have an obligation under the
Agreement to grant such license to the other.
(B) If under the terms of a contract that existed prior
to the Effective Date of the Agreement between a
party to this Agreement and a Third Party, such party
is obligated to license to such Third Party any
rights granted to it under this Article 6, then such
license shall be granted to such Third Party only to
the extent of the license granted to such party
(i.e., such license to a Third Party must include all
limitations imposed on the original licensee
hereunder).
7. (*)
7.1 Payments by ABBOTT. Under the agreement among (*)
7.2 (*). SPECTRX agrees to (*)
8. OTHER MANUFACTURING BY SPECTRX
Upon the request of SPECTRX, ABBOTT will consider using SPECTRX to
manufacture devices for ABBOTT Diagnostic Division which devices use optical
technology or any other devices that could be economically manufactured in a
SPECTRX manufacturing facility. Any breach of this Article 8 by ABBOTT will not
be construed as a material breach of the Agreement by ABBOTT.
9. WAIVER
SPECTRX hereby waives any milestone payments associated with the
milestones set forth in Section 4.2(B) of the Agreement, including, but not
limited to, the payment set forth in Section 4.2(B)(v) of the Agreement, all of
which milestones and milestone payments are superceded by the Milestones and
Milestone payments set forth in Section 5.1.
(*) 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.
33
<PAGE> 34
10. EXISTING AGREEMENT TERMS
All other terms and conditions of the Agreement shall be effective to
the extent they are not inconsistent with this Third Amendment as set forth in
Section 1.1 of this Third Amendment.
11. OWNERSHIP OF INTELLECTUAL PROPERTY
11.1 SPECTRX Continuous Product Research Program Technology. All
Continuous Product Research Program Technology invented solely by SPECTRX
employees, agents or contractors ("SPECTRX Continuous Product Research Program
Technology") shall be the property of SPECTRX; and all SpectRx Continuous
Product Research Program Technology in the Field and all SPECTRX Continuous
Product Research Program Technology related to (*) Technology, (*) or (*)
Technology shall be promptly disclosed in writing to ABBOTT; and shall be
subject to the following:
(A) If the SPECTRX Continuous Research Program Technology
is useful solely within the Field, then such SPECTRX
Continuous Product Research Program Technology shall
be included under the Licensed Patents or Know-How,
as appropriate, and shall be included under ABBOTT's
Licenses in the Field as set forth in Section 4.1 of
the Agreement.
(B) If the SPECTRX Continuous Product Research Program
Technology is useful within the Field and outside the
Field, then:
(1) such SPECTRX Continuous Product Research
Program Technology shall be included under
the Licensed Patents or Know-How, as
appropriate, and shall be included under
ABBOTT's Licenses in the Field as set forth
in Section 4.1 of the Agreement; and
(2) ABBOTT shall have the right of first
negotiation for a license under the SPECTRX
Continuous Product Research Program
Technology in all other fields with the
exception of (*), such right to be exercised
as set forth in Section 11.3(D).
(C) If the SPECTRX Continuous Product Research Program
Technology is useful solely outside the Field, then
ABBOTT shall have the right of first negotiation to a
license under the SPECTRX Continuous Product Research
Program Technology in all other fields with the
exception of (*), such right to be exercised as set
forth in Section 11.3(D).
(*) 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.
34
<PAGE> 35
(D) By way of clarification, but not limitation, all
technology invented by SPECTRX, its employees, agents
or contractors outside the Continuous Product
Research Program (other than that invented under the
Research Program as set forth in Section 6.1 of the
Agreement) and outside the Field or acquired or
licensed by SPECTRX outside the Field, are the sole
property of SPECTRX, and except as set forth in
Section 6.1, SPECTRX shall have no obligation
hereunder to grant a license under such technology to
ABBOTT.
11.2 ABBOTT Continuous Product Research Program Technology
(A) All Continuous Product Research Program Technology
invented solely by ABBOTT employees, agents or
contractors ("ABBOTT Continuous Product Research
Program Technology") shall be the property of ABBOTT
and all ABBOTT Continuous Product Research Program
Technology in the Field and all ABBOTT Continuous
Product Research Program Technology related to ABBOTT
(*) Technology shall be promptly disclosed in writing
to SPECTRX and shall be subject to Section 11.2(B).
(B) In the event of early termination pursuant to
Section 3.8(A) or by ABBOTT pursuant to Section
10.2(A)(i) of the Agreement or by SPECTRX pursuant to
Section 3.7(D) (subject to certain exceptions set
forth in that Section) or pursuant to Section 10.2(D)
of the Agreement prior to the First Shipment Date,
ABBOTT shall grant to SPECTRX a worldwide,
royalty-bearing, nonexclusive license with the right
to sublicense, under ABBOTT Continuous Product
Research Program Technology, other than (*)Technology
or (*), except for ABBOTT (*) Technology set forth in
Section 6.1, to make, have made, use, sell and import
products in the Field.
(C) ABBOTT and SPECTRX shall enter into a license
agreement regarding the licenses in Section 11.2
which shall contain the standard license terms and
conditions under which ABBOTT shall be entitled to
(*) of all license fees and royalties received by
SPECTRX from any sublicense from SPECTRX to a Third
Party, which shall not include SPECTRX's existing
license obligations to (*) under an agreement dated
(*).
(D) By way of clarification, but not limitation, the
following are the sole property of ABBOTT and, except
for Abbott (*) Technology as set forth in Section
6.1, ABBOTT shall have no obligation hereunder 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.
35
<PAGE> 36
grant a license to SPECTRX under: (1) technology
invented by ABBOTT employees, agents and/or
contractors outside the Continuous Product Research
Program other than that invented under the Research
Program as set forth in Section 6.2 of the Agreement;
(2) (*) Technology including (*) and (*); and (3)
technology under which ABBOTT acquires a license from
Third Parties except for the (*) referenced in
Section 5.4(C), whether or not within the Field.
(E) Notwithstanding anything in this Section 11.2, if the
Continuous Product Research Program is transferred to
ABBOTT, then all ABBOTT Continuous Product Research
Program Technology conceived and/or reduced to
practice solely by ABBOTT or by ABBOTT with a Third
Party after such transfer ("Abbott Post-Transfer
Technology") shall be the property of ABBOTT or
ABBOTT and such Third Party and all such technology
to the extent applicable to the Field shall be
treated in the same manner that Development Program
Technology would be treated in Section 7.1 of the
Agreement after delivery of the Development Program
Notification but prior to the First Shipment Date.
11.3 Joint Continuous Product Research Program Technology. All
Continuous Product Research Program Technology invented by at least one
employee, agent or contractor of ABBOTT and at least one employee agent or
contractor of SPECTRX ("Joint Continuous Product Research Program Technology")
shall be the joint property of ABBOTT and SPECTRX subject to the following:
(A) If the Joint Continuous Product Research Program
Technology is useful within the Field, then SPECTRX's
interest in such Joint Continuous Product Research
Program Technology shall be included under the
Licensed Patents or Know-How, as appropriate, and
shall be included under ABBOTT's Licenses in the
Field as set forth in Section 4.1 of the Agreement.
(B) If either party grants a license to a Third Party
outside the Field (or after termination of this
Agreement within or outside what was defined as the
Field when the Agreement was effective) under that
party's interest in any Joint Continuous Product
Research Program Technology, then the other party
shall be entitled to (*) of all license fees and
royalties received by the licensed party in
consideration for such license which shall not
include SPECTRX's existing license obligations to (*)
under an agreement dated (*). If the parties jointly
grant an Exclusive License to a Third Party, then the
parties shall equally share in all license fees and
royalties generated by such license.
(*) 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> 37
(C) If either party is interested in obtaining an
Exclusive License, or in outlicensing its interest
under any Joint Continuous Product Research Program
Technology outside the Field, then such party
("licensing party") shall promptly notify the other
party, and in the latter case, such other party shall
have the right of first negotiation to obtain an
Exclusive License under the licensing party's
interest in such Joint Continuous Product Research
Program Technology, in accordance with the procedure
under Section 11.3(D).
(D) ABBOTT and SPECTRX have the right of first
negotiation to certain Continuous Product Research
Program Technology of the other in accordance with
Sections 11.1(B)(2), 11.1(C) and 11.3(C) or the
Business (as defined in Section 7.2 of the Agreement)
for Continuous Products. If either party intends to
outlicense or desires to collaborate regarding such
Continuous Product Research Program Technology (or
ABBOTT desires to sell the Business for Continuous
Products), such party ("Notifying Party") shall
deliver written notification of such intent or a
proposal ("Notice") to the other party. The Notice
shall be delivered prior to the Notifying Party
engaging in discussions with any Third Party
concerning such Continuous Product Research Program
Technology (or the Business for Continuous Products),
provided that the Notifying Party may acknowledge to
any such Third Party that the other party has such a
right of first negotiation. The other party shall
have (*) after receipt of the Notice to provide a
written response indicating whether or not it is
interested in such Continuous Product Research
Program Technology (or the Business for Continuous
Products). At the time that the Notice is delivered,
the Notifying Party shall provide to the other party
a report on the current status of its research and
development activities with regard to such Continuous
Product Research Program Technology (or the Business
for Continuous Products). At any time within (*)
after receipt of such report, the other party may
send to the Notifying Party an initial proposal
containing proposed financial and other material
terms for a license and/or collaboration agreement
for the development and commercialization of such
Continuous Product Research Program Technology (or
for a purchase agreement for the Business for
Continuous Products) (the "Proposal"). If the other
party does not send a Proposal within such period of
time or any extended time period agreed to by the
parties, then the other party's right of first
negotiation with regard to such Continuous Product
Research Program Technology (or the Business for
Continuous Products), shall expire. If the other
party sends a Proposal to the Notifying
(*) 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.
37
<PAGE> 38
Party, the parties shall promptly enter into good
faith negotiations towards an agreement upon mutually
agreed terms and conditions. Subject to the Notifying
Party making all reasonable efforts to meet and
negotiate with the other party on a timely basis and
in good faith, if the parties fail to reach mutual
agreement on a term sheet covering the material terms
and conditions of an agreement within (*) from the
receipt of the Proposal, then upon written notice
from the Notifying Party to the other party, all
negotiations shall cease and the other party shall
have no further right of first negotiation with
regard to such Continuous Product Research Program
Technology (or the Business for Continuous Products).
ABBOTT LABORATORIES SPECTRX, INC.
By: By:
------------------------------- -------------------------------------
James J. Koziarz Mark A. Samuels
Title: Corporate Vice President Title: Chairman, Chief Executive Officer
Diagnostic Products
Research and Development
Date: Date:
----------------------------- -----------------------------------
(*) 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.
38
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Appendix 2.7
Continuous Product Research Program Specifications
(*)
Appendix 2.7 Definitions:
(*)
Appendix 2.7 Information for Protocols:
(*)
Appendix 2.7 (*) 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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Appendix 4.2
List of Companies
(*)
Appendix 4.2 (*) 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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Appendix 4.4
SPECTRX Continuous Product Royalty Rate
<TABLE>
<CAPTION>
SPECTRX (*)
-----------
Within One Year
---------------
($MM) Royalty Rate Percent
----- --------------------
------------------------------------------------------------------------------
<S> <C>
Up to (*) (*)
------------------------------------------------------------------------------
(*) (*)
------------------------------------------------------------------------------
(*) (*)
------------------------------------------------------------------------------
(*) (*)
------------------------------------------------------------------------------
(*) (*)
------------------------------------------------------------------------------
</TABLE>
Appendix 4.4 (*) 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
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Appendix 5.1
COMMON STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of November November 30, 1999
between SpectRx, Inc., a Delaware corporation located at 6025A Unity Drive,
Norcross, Georgia 30071 ("SpectRx"), and Abbott Laboratories, an Illinois
corporation located at 100 Abbott Park Road, Abbott Park, Illinois 60064
("Abbott").
WITNESSETH:
WHEREAS, contemporaneously with the execution and delivery of
this Agreement, the parties hereto have entered into a certain Amendment dated
of even date herewith to that certain Research & Development and License
Agreement between the parties dated October 10, 1996 (the "Development
Amendment");
WHEREAS, pursuant to Section 5.1(A)(2) and Section 5.1(A)(3)
of the Development Amendment, and subject to certain terms and conditions,
Purchaser has agreed to make certain milestone payments to SpectRx, each in the
amount of (*);
WHEREAS, the parties hereto have agreed that Abbott (*) and
receive in exchange therefor shares of common stock of SpectRx ("SpectRx Common
Stock"), and to accommodate these agreements and the purchase and sale of such
shares of SpectRx Common Stock, the parties have entered into this Common Stock
Purchase Agreement;
NOW, THEREFORE, in consideration of the premises and the
mutual promises and covenants set forth below, SpectRx and Abbott agree as
follows:
1. AGREEMENT AS TO PURCHASE AND SALE OF SPECTRX COMMON STOCK.
Abbott at its election by delivery of a written notice to SpectRx ("Common Stock
Election Notice"), may use a portion, up to one-half, of its payment obligations
under each of Section 5.1(A)(2) and Section 5.1(A)(3) of the Development
Amendment to purchase shares of common stock of SpectRx ("SpectRx Common
Stock"). The number of shares of SpectRx Common Stock to be issued and sold by
SpectRx, and purchased by Abbott, should Abbott make any of the elections
described in the preceding sentence, will equal the sum so elected by Abbott to
be applied to purchase SpectRx Common Stock, divided by the average closing
sales price of the SpectRx Common Stock as reported by NASDAQ for the thirty
(30) trading days prior to the date of the Common Stock Election Notice. The
Common Stock Election Notice in respect of the payments due under Section
5.1(A)(2) and under Section 5.1(A)(3) shall be
Appendix 5.1 (*) 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.
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issued and delivered simultaneously with the respective notifications pursuant
to such Section 5.1(A)(2) and Section 5.1(A)(3) made by Abbott of achievement of
such milestones. If Abbott elects to make any such purchase of SpectRx Common
Stock, then as further provided in Section 5.4(A) of the Development Agreement,
the credit against royalties for certain milestone payments shall be reduced by
a sum equal to the aggregate purchase price of such SpectRx Common Stock.
2. CLOSING AND DELIVERIES. The closing of the purchase
and sale of SpectRx Common Stock pursuant to this Agreement shall be held at the
executive offices of SpectRx on the fifth (5th) business day following the date
of receipt by SpectRx of the Common Stock Election Notice, or at such other time
and place upon which SpectRx and Abbott shall agree. At such closing, SpectRx
will deliver to Abbott a certificate, registered in Abbott's name, representing
the shares of SpectRx Common Stock to be purchased, against payment of the sum
as to which Abbott has made an election to receive and purchase SpectRx Common
Stock as provided for hereinabove.
3. REPRESENTATIONS AND WARRANTIES. Coincident with the
closing of the purchase and sale of SpectRx Common Stock pursuant to this
Agreement, SpectRx will deliver a certificate by which it will make to Abbott
representations and warranties that are substantially similar to those contained
in the Redeemable Convertible Preferred Stock Purchase Agreement of even date
herewith between the parties ("Preferred Stock Agreement"), although such
representations and warranties shall be updated or exceptions made thereto to
account for changes or events that have occurred between the date of this
Agreement and the date of such closing, and such other corresponding changes to
dates and references to financial statements and share numbers and the like so
as to enable SpectRx to make such representations on a current basis. Similarly,
Abbott will deliver a certificate at closing where it will make to SpectRx as of
the date of such closing the representations and warranties contained in Section
4 of the Preferred Stock Agreement.
4. COVENANT RE: TRANSFER OF SPECTRX COMMON STOCK. Abbott
covenants and agrees that it shall not sell, make any short sale of, loan, grant
any option for the purchase of, or otherwise dispose of any shares of SpectRx
Common Stock acquired by Abbott pursuant to this Agreement for a period of one
hundred eighty (180) days from the date of issuance of shares of SpectRx Common
Stock. Abbott agrees that the certificates for shares of SpectRx Common Stock
issued pursuant to this Agreement shall bear the following legend:
"THESE SECURITIES MAY NOT BE SOLD, PLEDGED OR OTHERWISE DISPOSED OF
PRIOR TO ____________________ [181st day after issuance] BY REASON OF
AN AGREEMENT BETWEEN THE COMPANY AND THE HOLDER OF THE SHARES
REPRESENTED BY THIS CERTIFICATE."
Appendix 5.1
2
<PAGE> 44
5. GOVERNING LAW. This Agreement shall be governed in
all respects by the internal laws of the State of Delaware as applied to
agreements entered into among Delaware residents to be performed entirely within
Delaware, without reference to the principles of conflict of laws under Delaware
law.
6. SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto, provided, however, that the rights of Abbott to purchase the
SpectRx Common Stock shall not be assignable without the consent of SpectRx.
7. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the
other documents delivered pursuant hereto at the closing constitute the full and
entire understanding and agreement between the parties with regard to the
subject hereof and thereof, and no party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
8. NOTICES, ETC. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, or by facsimile transmission, or
otherwise delivered by hand or by messenger, addressed (a) if to Abbott, at
Abbott's address set forth above, or at such other address as Abbott shall have
furnished to SpectRx in writing, or (b) if to SpectRx, one copy should be sent
to its address set forth on the cover page of this Agreement and addressed to
the attention of the Corporate Secretary, or at such other address as SpectRx
shall have furnished to Abbott.
Each such notice or other communication shall for all purposes
of this Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid, or if
by facsimile transmission, as indicated by the facsimile imprint date.
9. DELAYS OR OMISSIONS. Except as expressly provided herein, no
delay or omission to exercise any right, power or remedy accruing to any party
hereto, upon any breach or default of any other party under this Agreement,
shall impair any such right, power or remedy of such holder nor shall it be
construed to be a waiver of
Appendix 5.1
3
<PAGE> 45
any such breach or default, or an acquiescence therein, or of or in any similar
breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
10. GEORGIA LEGEND. Abbott acknowledges that each
certificate shall bear, in addition to the legend referenced in Section 4.9 of
the Preferred Stock Agreement, the following legend: THESE SECURITIES HAVE BEEN
ISSUED OR SOLD IN RELIANCE ON PARAGRAPH 13 OF CODE SECTION 10-5-9 OF THE GEORGIA
SECURITIES ACT OF 1973, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A
TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE
REGISTRATION UNDER SUCH ACT.
11. EXPENSES. SpectRx and Abbott shall bear its own legal
and other expenses with respect to this Agreement.
12. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
13. SEVERABILITY. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
14. TITLES AND SUBTITLES. The titles and subtitles used
in this Agreement are used for convenience only and are not considered in
construing or interpreting this Agreement.
The foregoing agreement is hereby executed as of the date first above
written.
"PURCHASER" "COMPANY"
ABBOTT LABORATORIES SPECTRX, INC.
By: By:
------------------------- --------------------------
Title: Title:
---------------------- -----------------------
Appendix 5.1
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<PAGE> 46
Appendix 5.2
(*) Supply Agreement Terms
Unless otherwise defined in this Exhibit 5.2, the defined terms have the
meanings set forth in the Third Amendment or the Agreement.
I. PRICING, ORDERING, DELIVERY, and INVOICING
A. Transfer Price. The Transfer Price for (*)s supplied by SPECTRX to ABBOTT
hereunder shall be as set forth in Section 5.2 of the Third Amendment. The
Transfer Price will be adjusted as follows: 1) at least semi-annually, or 2) if
purchased material costs change by more than (*) since the last adjustment, or
3) if there is any other change which significantly impacts the Manufacturing
Costs. A reconciliation process will be developed as part of the Supply
Agreement to reconcile any differences between actual and estimated
Manufacturing Costs.
B. Manufacturing Costs Reduction. SPECTRX will use commercially reasonable
efforts to minimize Manufacturing Costs. If the then current Transfer Price for
(*)s results in a gross margin for SPECTRX of less than (*) any cost savings
will be absorbed by SPECTRX until said margin reaches (*). Gross margin shall be
computed as the difference between the Transfer Price and actual Manufacturing
Costs divided by the Transfer Price. SPECTRX will implement commercially
reasonable manufacturing process changes requested by ABBOTT. Any costs
associated with said changes will be paid (*). SPECTRX will buy raw materials
and components of the (*) through ABBOTT if ABBOTT can purchase such raw
materials and components at a lower price than SPECTRX.
C. Delivery. SPECTRX will ship within (*) from date of receipt of purchase order
if requested by ABBOTT as long as the cumulative quantities of (*)s ordered by
ABBOTT and scheduled to ship during that month do not exceed the forecast for
that month or SPECTRX's production capacity as defined in Section II-G. SPECTRX
will make commercially reasonable efforts to ship (*)s that are ordered in
excess of the amount forecasted for that month within thirty (30) days of
receipt of said order. ABBOTT will reimburse SPECTRX, with prior written
approval by ABBOTT, for any (*). SPECTRX shall ship (*)s ordered by ABBOTT
F.O.B. SPECTRX's manufacturing facility.
D. Forecasting and Ordering. ABBOTT shall provide rolling 12-month forecasts of
its monthly requirements starting six (6) months prior to the delivery of the
first production units, and, updated monthly for the first year after the first
(*) shipment, and quarterly thereafter, submitted thirty (30) days in advance of
the beginning of said quarter. The first three (3) months of such forecast shall
be binding and shall vary by no more than
Appendix 5.2 (*) 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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(*) of the previous forecast for the same three (3) month period. The last nine
(9) months of the forecast shall not be binding and shall be used only for
planning purposes and ordering materials.
E. Purchase Orders. Orders shall be placed upon ABBOTT's purchase order form,
specifying quantities ordered and delivery dates. Purchase orders must be placed
at least thirty (30) days prior to requested shipment date. Terms and conditions
in the Supply Agreement supersede terms and conditions on the purchase order.
Purchase orders issued by ABBOTT are non-cancellable.
F. Invoice Terms. SPECTRX shall invoice ABBOTT for (*)s purchased by ABBOTT upon
shipment of such (*)s to ABBOTT. Such invoices shall be paid in full within
thirty (30) days of the date such invoice is received by ABBOTT.
G. Certificate of Analysis. Each shipment of (*)s will be delivered with a full
certificate of analysis verifying the (*)s' compliance with the current (*)
Specifications (as defined in Section II-A).
H. (*). At SPECTRX's option, ABBOTT will pay SPECTRX in advance for (*).
I. Tooling & Equipment. All tooling and equipment required to be purchased
exclusively for the manufacture of (*)s for ABBOTT will be paid for and owned by
ABBOTT, including any such tooling and equipment required to increase capacity.
ABBOTT shall bear all costs for replacement of such tooling and equipment owned
byAbbott, except in cases of negligence or willful misconduct on the behalf of
Spectrx in which case SPECTX shall bear all such costs.
J. ABBOTT Purchases. Any tooling, equipment, raw materials, and components that
are purchased by ABBOTT for use in manufacturing by SPECTRX and not then sold to
SPECTRX will not be included in calculating Manufacturing Costs for purposes of
determining the Transfer Price.
K. (*) Acceptance. ABBOTT shall have twenty (20) business days from date of
receipt to inspect (*)s for conformance to the (*) Specifications and accept or
reject (*)s. Any (*)s not rejected in writing within twenty (20) business days
of receipt shall be deemed accepted by ABBOTT. Such acceptance does not waive
SPECTRX's obligations in the Supply Agreement related to the (*)s including, but
not limited to, warranty, indemnification, and product recall obligations.
Appendix 5.2 (*) 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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II. SPECIFICATIONS AND MANUFACTURING
A. Specifications. The specifications for the (*)(s) will be incorporated into
the Supply Agreement and shall include SpectRx's internal manufacturing
specifications as well as technical specifications and test protocols relating
to the (*)s ("(*) Specifications").
B. Regulatory & QSR Compliance. (*)s manufactured by SPECTRX for ABBOTT under
the Supply Agreement shall be manufactured and tested by SPECTRX in accordance
with the (*) Specifications, United States FDA QSR, European EN46001, and all
applicable federal, state and local laws, regulations and guidelines. Any fees
and expenses for licensing or registration to market the (*) in the U.S. and in
world markets shall be (*).
C. Safety Stock. At ABBOTT's request, SPECTRX shall maintain and store a safety
stock of key raw materials and (*) components sufficient to produce that
quantity of (*)s in ABBOTT's (*) forecast. In order to minimize the cost of
maintaining safety stock, SPECTRX will be allowed a reasonable amount of time to
adjust its safety stock as new forecasts are issued by ABBOTT in accordance with
Section I-D or as requested in writing by ABBOTT. (*).
D. Termination. In the event of termination of the Supply Agreement, ABBOTT will
be (*)
E. Manufacturing Changes. SPECTRX and ABBOTT shall establish a "Change
Notification Protocol" covering changes in the manufacturing process of (*)s,
including but not limited to any changes that affect written quality plans for
production or written quality procedures respecting same, as well as any changes
outside the validated level or procedure, in manufacturing procedures, component
part or raw materials vendors or manufacturing sites. ABBOTT will have final
approval of such Change Notification Protocol. Under the Change Notification
Protocol, manufacturing changes will be classified, as determined by ABBOTT,
into three categories: 1) ABBOTT written approval required prior to
implementation, 2) SPECTRX notification to ABBOTT prior to implementation, and
3) no notification required. For those changes requiring approval by ABBOTT,
only upon notice of written approval from ABBOTT may SPECTRX incorporate such
change into the manufacturing process (such approval shall not be unreasonably
withheld and, if forthcoming, shall be delivered in a timely manner). All
changes to the design and manufacturing process will be made in accordance with
SPECTRX's written change control procedures incorporated into the Change
Notification Protocol, and in compliance with 21 CFR ss. 820.40. In the event
such manufacturing change was due to SPECTRX and it has an impact on product
Appendix 5.2 (*) 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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registrations, SPECTX shall reimburse ABBOTT for the costs of any such product
registration amendment, notification or resubmission as a result of such
manufacturing change. In the event such manufacturing change was due to ABBOTT
and it has an impact on product registrations, ABBOTT shall pay for the costs of
any such product registration amendment, notification or resubmission as a
result of such manufacturing change. Abbott shall be responsible for the cost of
any inventory obsoleted by design or process changes requested by Abbott.
F. Manufacturing Site. Abbott shall have approval of SPECTRX's choice of
manufacturing site and any future changes, which approval shall not be
unreasonably withheld. In the event SPECTRX changes the manufacturing site for
reasons other than force majeure and such relocation has an impact on product
registrations, SPECTRX shall reimburse ABBOTT for the costs of any such product
registration amendment, notification or resubmission.
G. Manufacturing Capacity. SPECTRX shall maintain manufacturing capacity
(facilities, support personnel, equipment and tooling) of at least (*) above the
(*) forecast provided by ABBOTT.
H. Failure to Supply. Failure by SPECTRX to deliver by the requested delivery
date (*), will constitute a "Failure to Supply," unless such failure is due to
changes in design or process required by Abbott or due to ABBOTT's failure to
timely approve requested changes to the design and manufacturing process
requested by SPECTRX as described in Section II-E. Upon written notification by
ABBOTT of Failure to Supply, Abbott may (i) agree to a future delivery date,
(ii) terminate the Supply Agreement or (iii) require SPECTRX to assist ABBOTT,
and at ABBOTT's sole discretion, to allow ABBOTT to manufacture (*)s itself or
by a designated Third Party by transferring all know-how, technology, trade
secrets and patent rights necessary to manufacture (*)s ("(*) Technology")
thereby enabling ABBOTT to manufacture (*)s. To the extent required beyond
ABBOTT's licenses set forth in the Agreement to implement ABBOTT's right to
manufacture and sell such (*)s, SPECTRX hereby grants to ABBOTT, without the
necessity of any further documentation, a non-exclusive, royalty-free,
irrevocable worldwide manufacturing license. The license will include access to
SPECTRX's (*) Technology to make and have made such (*)s. In the event any (*)
Technology is owned by, controlled by or licensed from a Third Party, to the
extent required to implement ABBOTT's right to manufacture (*)s, SPECTRX shall
use commercially reasonable efforts to obtain from the owners, the right for
ABBOTT to use said (*) Technology for the production of (*)s. In addition,
SPECTRX shall reasonably assist ABBOTT in the transfer and the start-up of
manufacturing operations for such (*)s and shall make the necessary plans,
formulations and manufacturing processes and
Appendix 5.2 (*) 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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procedures available to ABBOTT. Further, SPECTRX shall grant ABBOTT access to
its regulatory files and shall supply technical or regulatory assistance as is
reasonably requested by ABBOTT. Any tooling, equipment and component parts owned
or committed to be purchased by SPECTRX exclusively for the manufacture of the
(*)s will be sold to ABBOTT at SPECTRX's asset value for equipment and (*) for
raw materials and WIP. Within thirty (30) days of the first anniversary of
ABBOTT's shipment of (*)s manufactured by Abbott, if SPECTRX can demonstrate in
reasonable detail, its ability to resume manufacturing of the (*)s in accordance
with the Supply Agreement, SPECTRX may resume manufacturing within a mutually
agreed to time frame, with tooling, equipment and component parts sold back to
SPECTRX and reasonable assistance provided by ABBOTT. ABBOTT will not
unreasonably deny SPECTRX the right to resume manufacturing.
I. Warranty. SpectRx will warrant the (*)s for the same period of time ABBOTT
warrants the (*)s to its customers up to (*) from date of delivery to ABBOTT's
customers or (*) from delivery to ABBOTT, whichever comes first, for failure to
meet the (*) Specifications or SPECTRX's internal manufacturing specifications
due to defects in material (other than design) or workmanship, and will replace,
free of charge, any (*) component (*), that fails such warranty. Any spare parts
and shipping expenses associated with warranty work will be at SPECTRX's
expense. Abbott will return all (*)s to SpectRx which it wants replaced under
warranty, within thirty (30) days of return by customer and no later than thirty
(30) days after expiration of warranty. (*)
III. REGULATORY MATTERS
A. (*) Recalls. Should either party's actions or any governmental action
attributable to a (*) require: (a) the recall, destruction or withholding from
market of any Product sold by ABBOTT ("Recall") or (b) institution of a field
correction of any Product containing a (*) sold by ABBOTT ("Field Correction"),
SPECTRX shall bear the costs and expenses of such Recall or Field Correction to
the extent such Recall or Field Correction is attributable to SPECTRX's
manufacture of the (*)s, and ABBOTT shall bear the costs and expenses of such
Recall or Field Correction to the extent such Recall or Field Correction is not
attributable to SPECTRX's manufacture of the (*)s. Such Recall or Field
Correction shall be based solely on ABBOTT's policies and historical practices.
B. Site Inspections. SPECTRX shall allow representatives of ABBOTT to tour and
inspect all facilities utilized by SPECTRX in manufacturing, testing, packaging
and shipment of (*)s sold to ABBOTT under the Supply Agreement. During such
visits (and other reasonable times), SPECTRX shall provide reasonable access to
its manufacturing quality control documentation and shall cooperate with such
Appendix 5.2 (*) 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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representatives in every reasonable manner. Except in extreme circumstances,
ABBOTT will provide a minimum of five (5) business days notice of any such
inspections. All such inspections shall be arranged by SpectRx, conducted during
SPECTRX's normal business hours and in the presence of a representative of
SpectRx.
C. Customer Complaints. In the event that ABBOTT or SPECTRX receives any
customer complaint regarding ABBOTT's Products containing SPECTRX (*)s, the
complaint shall be evaluated and investigated by ABBOTT. If ABBOTT determines
that the complaint is related to SPECTRX's (*), then SPECTRX shall assist ABBOTT
in follow-up correction of Product complaints, at ABBOTT's reasonable request,
should said complaint be the result of the (*).
IV. TERM AND TERMINATION
A. Term. The Supply Agreement shall become effective upon full execution of the
Supply Agreement and, unless terminated early in accordance with the terms of
the Supply Agreement, the Supply Agreement shall remain in effect for (*).
Thereafter, the Supply Agreement shall automatically be renewed annually unless
SPECTRX is not meeting its obligations under the Supply Agreement or the Supply
Agreement is terminated as set forth below.
B. Early Termination. The Supply Agreement may be terminated at any time as set
forth below.
1. The Supply Agreement, and any license(s) granted thereunder,
will terminate immediately upon the termination of the
Agreement or upon ABBOTT's loss of rights to all Continuous
Products pursuant to the Agreement.
2. If either party is in default of any material obligation
imposed upon such party under the Supply Agreement, such party
shall use reasonable efforts to remedy such default as soon as
possible, and if such default is not remedied within a period
of sixty (60) days after written notice thereof is given to
the defaulting party by the other party, then the other party
may terminate the Supply Agreement immediately by giving
written notice of termination to the defaulting party.
3. If SPECTRX is not cost competitive or does not elect to change
the Transfer Price, as set forth in Section 5.2 of the Third
Amendment, which determination may be made at the end of each
contract year of the Supply Agreement. Contract year shall
mean each twelve (12) month period starting with the effective
date of the Supply Agreement.
Appendix 5.2 (*) 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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4. Other standard reasons for early termination (e.g. bankruptcy).
V. INDEMNIFICATION
In addition to indemnification obligations as set forth in Article 11 of the
Agreement, SPECTRX shall indemnify ABBOTT against Third Party actions brought
against ABBOTT regarding product liability related to SPECTRX's, its
subcontractors' and its Third Party manufacturer's actions or omissions in
connection with manufacture of (*)s.
VI. MISCELLANEOUS
Articles similar to Article 12 Limitation of Liability and Remedies, Article 13
Confidentiality, and Article 14 Miscellaneous of the Agreement will be
incorporated into the Supply Agreement.
Appendix 5.2 (*) 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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Appendix 5.5
REDEEMABLE CONVERTIBLE PREFERRED
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of November 30, 1999 between SPECTRX, INC., a
Delaware corporation located at 6025A Unity Drive, Norcross, Georgia 30071 (the
"Company"), and ABBOTT LABORATORIES, an Illinois corporation located at 100
Abbott Park Road, Abbott Park, Illinois 60064 (the "Purchaser").
SECTION 1
AUTHORIZATION AND SALE OF PREFERRED STOCK
1.1 AUTHORIZATION. The Company will prior to the First Closing (as
defined below) authorize the sale and issuance of up to 525,000 shares of its
Redeemable Convertible Preferred Stock (the "Preferred Shares"), having the
rights, privileges and preferences as set forth in the Certificate of
Designations (the "Designations") in the form attached to this Agreement as
Exhibit A.
1.2 SALES OF PREFERRED. Subject to the terms and conditions
hereof, the Company will issue and sell to the Purchaser and the Purchaser will
buy from the Company a total of 525,000 Preferred Shares, with 275,000 Preferred
Shares to be purchased and sold at the First Closing and 250,000 Preferred
Shares to be purchased and sold at the Second Closing (as defined below), for
the purchase price of $10.00 per share.
SECTION 2
CLOSING DATES; DELIVERY
2.1 CLOSING DATE. The first closing of the purchase and sale of
the Preferred Shares hereunder (the "First Closing") shall be held at the
executive offices of the Company or at such other place upon which the Company
and the Purchaser shall agree. The First Closing shall occur simultaneously with
or immediately after the execution and delivery of this Agreement by the
Purchaser and the Company, which the parties intend to execute and deliver
coincident with the execution and delivery of the Development Amendment (defined
in Section 5.6 below). The second closing of the purchase and sale of Preferred
Shares hereunder (the "Second Closing") shall be held at the executive offices
of the Company on January 3, 2000, or such other time and place upon which the
Purchaser and Company shall agree.
2.2 DELIVERY. At the First Closing, the Company will deliver to
the Purchaser a certificate, registered in the Purchaser's name, representing
275,000 Preferred Shares to be purchased by the Purchaser at the First Closing,
against payment of the purchase price therefor by wire transfer per the
Company's wiring instructions. At the
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Second Closing, the Company will deliver to Purchaser a certificate registered
in the Purchaser's name, representing 250,000 Preferred Shares to be purchased
by the Purchaser at the Second Closing, against payment of the purchase price
therefor by wire transfer per the Company's wiring instructions.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser as follows:
3.1 ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS. The Company
is a corporation duly organized and validly existing under, and by virtue of,
the laws of the State of Delaware and is in good standing under such laws. The
Company has requisite power and authority to own and operate its properties and
assets, and to carry on its business as presently conducted and as proposed to
be conducted. The Company is not presently qualified to do business as a foreign
corporation in any jurisdiction other than Georgia, and the failure to be so
qualified will not have a material adverse effect on the Company's business as
now conducted or as now proposed to be conducted.
3.2 CORPORATE POWER. The Company has all requisite legal and
corporate power and authority to execute and deliver this Agreement and at the
First Closing to execute and deliver the agreements set forth as Exhibits hereto
(collectively referred to with this Agreement as the "Agreements"), and at each
of the First Closing and Second Closing to sell and issue the Preferred Shares
to be issued and sold at such respective closings, to issue the Common Stock
issuable upon conversion of the Preferred Shares and to carry out and perform
its obligations under the terms of the Agreements.
3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated
companies and does not otherwise own or control, directly or indirectly, any
equity interest in any corporation, association or business entity, other than
its equity interest in FluorRx, Inc.
3.4 CAPITALIZATION. The authorized capital stock of the Company
consists or will, upon the filing of the Certificate of Designations, consist of
50,000,000 shares of Common Stock, and 5,000,000 shares of Preferred Stock, of
which 525,000 shall be designated as Redeemable Convertible Preferred Stock
pursuant to the Certificate of Designations (the "Preferred Stock"). As of
November 29, 1999, there are 8,048,856 shares of Common Stock, issued and
outstanding and no other shares of capital stock which are issued and
outstanding. As of November 29, 1999, there are options outstanding issued by
the Company to purchase an aggregate of 1,121,789 shares of Common Stock. All of
the outstanding shares of Common Stock are duly authorized, validly issued,
fully paid and nonassessable, and were issued in compliance with applicable
federal and state securities laws. The Preferred Shares, when issued pursuant to
the terms of this Agreement, will be duly authorized, validly issued, fully
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paid and nonassessable. The Company has reserved 559,225 shares of Common Stock
for issuance upon conversion of the Preferred Stock, and 1,303,112 shares of its
Common Stock for issuance pursuant to its stock option plans. Except as set
forth above, there are no options, warrants or other rights (including
conversion or pre-emptive rights) or agreements outstanding to purchase any of
the Company's authorized and unissued capital stock.
3.5 AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution, delivery and performance of the Agreements by the
Company, the authorization, sale, issuance and delivery of the Preferred Shares
(and the Common Stock issuable upon conversion of the Preferred Stock) and the
performance of all of the Company's obligations under the Agreements has been
taken or will be taken prior to the Closing. The approval of the transactions
provided for herein will constitute approval of Abbott becoming an interested
stockholder under Section 203 of the Delaware General Corporation Law, to the
extent applicable. The Agreements, when executed and delivered by the Company,
shall constitute valid and binding obligations of the Company, enforceable in
accordance with their terms, and subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
The Preferred Shares, when issued in compliance with the provisions of this
Agreement, will be validly issued, will be fully paid and nonassessable, and
will have the rights, preferences and privileges described in the Certificate of
Designations; the Common Stock issuable upon conversion of the Preferred Stock
has been duly and validly reserved and, when issued in compliance with the
provisions of this Agreement and the Certificate of Designations, will be
validly issued, and will be fully paid and nonassessable; and the Preferred
Stock and such Common stock will be free of any liens or encumbrances, assuming
the Purchaser takes the Preferred Shares with no notice thereof, other than any
liens or encumbrances created by or imposed upon the holders; provided, however,
that the Preferred Stock (and the Common Stock issuable upon conversion thereof)
may be subject to restrictions on transfer under state and/or federal securities
laws as set forth herein.
3.6 REPORTS AND FINANCIAL STATEMENTS. The Company has delivered to
the Purchaser prior to the execution of this Agreement a copy of each
registration statement, schedule, report, proxy statement or information
statement it has filed with the Securities and Exchange Commission ("SEC") since
December 31, 1998, without limitation, the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, the Company's Quarterly Reports on Form
10-Q for the quarters ended March 31, 1999 and June 30, 1999, the definitive
proxy statement for the Company's 1999 annual meeting of shareholders and any
Current Reports on Form 8-K (as such documents have since the time of their
filing been amended or supplemented, the "SEC Reports"). The SEC Reports (a)
complied as to form in all material respects with the requirements of the
Securities Exchange Act of 1934, as amended and (b) did not contain any untrue
statement of a material fact or omit to state a material fact required
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to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim consolidated
financial statements (including, in each case, the notes, if any, thereto)
included in the SEC Reports complied as to form in all material respects with
the published rules and regulations of the SEC with respect thereto, were
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as may be indicated
therein or in the notes thereto and except with respect to unaudited statements
as permitted by Form 10-Q of the SEC) and fairly present (subject, in the case
of the unaudited interim financial statements, to year-end audit adjustments and
the absence of footnotes) the consolidated financial position of the Company as
at the respective dates thereof and the consolidated results of their operations
and cash flow for the respective periods then ended.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Company with respect to
the purchase of the Preferred Shares as follows:
4.1 EXPERIENCE. It has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to the Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own interests.
4.2 INVESTMENT. It is acquiring the Preferred Shares and the
Common Stock underlying the Preferred Stock for investment for its own account,
not as a nominee or agent, and not with the view to, or for resale in connection
with, any distribution thereof. It understands that the Preferred Shares to be
purchased and the Common Stock underlying the Preferred Stock have not been, and
will not be, registered under the Securities Act of 1933, as amended (the
"Securities Act") by reason of a specific exemption from the registration
provisions of the Securities Act, the availability of which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
such Purchaser's representations as expressed herein.
4.3 RULE 144. It acknowledges that the Preferred Stock and the
underlying Common Stock must be held indefinitely unless subsequently registered
under the Securities Act or unless an exemption from such registration is
available. It is aware of the provisions of Rule 144 promulgated under the
Securities Act which permit limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things, the existence of a public market for the shares, the availability
of certain current public information about the Company, the resale occurring
not less than one year after a party has purchased and paid for the security to
be sold, the sale being effected through a "broker's transaction" or in
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transaction directly with a "market maker" and the number of shares being sold
during any three-month period not exceeding specified limitations.
4.4 NO PUBLIC MARKET. It understands that no public market now
exists for the Preferred Shares and that the Company has made no assurances that
such a public market will ever exist.
4.5 ACCESS TO DATA. It has had an opportunity to discuss the
Company's business, management and financial affairs with its management. It has
also had an opportunity to ask questions of officers of the Company, which
questions were answered to its satisfaction. It understands that such
discussions, as well as any written information issued by the Company, were
intended to describe certain aspects of the Company's business and prospects but
were not a thorough or exhaustive description.
4.6 AUTHORIZATION. This Agreement when executed and delivered by
such Purchaser will constitute a valid and legally binding obligation of the
Purchaser, enforceable in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies.
4.7 BROKERS OR FINDERS. The Company has not, and will not, incur,
directly or indirectly, as a result of any action taken by such Purchaser, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement.
4.8 TAX LIABILITY. It has reviewed with its own tax advisors the
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. It relies solely on such advisors
and not on any statements or representations of the Company or any of its
agents. It understands that it (and not the Company) shall be responsible for
its own tax liability that may arise as a result of this investment or the
transactions contemplated by this Agreement.
4.9 LEGEND. It is understood that the certificates evidencing the
Preferred Shares, and shares of Common Stock to be issued upon conversion of the
Preferred Shares, will bear the following legend: "THESE SECURITIES HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN
EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS
SOLD PURSUANT TO RULE 144 OF SUCH ACT."
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SECTION 5
CONDITIONS TO CLOSING OF PURCHASER
The Purchaser's obligation to purchase the Preferred Shares at the
First Closing is, at the option of the Purchaser, subject to the fulfillment of
the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations
and warranties made by the Company in Section 3 hereof shall be true and correct
in all material respects as of the First Closing.
5.2 COVENANTS. All covenants, agreements and conditions contained
in this Agreement to be performed by the Company on or prior to the First
Closing shall have been performed or complied with in all material respects.
5.3 COMPLIANCE CERTIFICATE. Should the Closing occur as of a date
other than the date of this Agreement, the Company shall have delivered to the
Purchaser a certificate of the Company executed by the President of the Company,
dated as of the Closing certifying to the fulfillment of the conditions
specified in Sections 5.1 and 5.2 of this Agreement.
5.4 CERTIFICATE OF DESIGNATIONS. The Designations shall have been
filed with the Delaware Secretary of State.
5.5 REGISTRATION RIGHTS AGREEMENT. The Company and the parties
listed thereon shall have executed and delivered the First Amendment to the
Amended Registration Rights Agreement of the Company in substantially the form
attached hereto as Exhibit B.
5.6 AMENDMENT TO RESEARCH & DEVELOPMENT AGREEMENT. The Company
shall have entered into the Amendment to that certain Research & Development and
License Agreement dated October 10, 1996, between the Company and the Purchaser
(the "Development Amendment").
5.7 SECRETARY'S CERTIFICATE. The Company shall have delivered to
the Purchaser a certificate of the Company executed by the Secretary of the
Company, dated as of the Closing, certifying (i) resolution adopted by the Board
of Directors of the Company authorizing the execution of the Agreement, the
filing of the Certificate of Designation and the transactions contemplated
hereby; (ii) the Certificate of Incorporation and Bylaws of the Company, each as
amended, and copies of the third party consents, approvals and filings required
in connection with the consummation of the transactions contemplated by the
Agreement; and (iii) such other documents relating to the transactions
contemplated by the Agreement.
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The Purchaser's obligation to purchase the Preferred Shares at the
Second Closing is, at the option of the Purchaser, subject to the fulfillment,
as of the Second Closing, of the following conditions:
5.1A PRIOR CONDITIONS. The fulfillment, as of the Second Closing,
of the conditions set forth in Sections 5.1, 5.2 and 5.3 hereof.
5.2A DEVELOPMENT PROGRAM NOTIFICATION. Purchaser will have not
delivered the "Development Program Notification" (as same is defined in Section
2.6 of the Development Amendment) to the Company on or prior to December 10,
1999.
5.3A TERMINATION OF 1996 AGREEMENT. On or prior to December 10,
1999, the Agreement (as defined in the Development Amendment) will not have been
terminated, nor will Purchaser have given written notice prior to December 10,
1999 electing to terminate such Agreement.
SECTION 6
CONDITIONS TO CLOSING OF COMPANY
The Company's obligation to sell and issue the Preferred Shares at the
First Closing is, at the option of the Company, subject to the fulfillment as of
the First Closing of the following conditions:
6.1 REPRESENTATIONS. The representations made by the Purchaser in
Section 4 hereof shall be true and correct when made, and shall be true and
correct on the Closing.
6.2 CERTIFICATE OF DESIGNATIONS. The Designations shall have been
filed with the Delaware Secretary of State.
6.3 AMENDMENT TO RESEARCH & DEVELOPMENT AGREEMENT. The Purchaser
shall have entered into the Development Amendment.
6.4 LEGAL MATTERS. All material matters of a legal nature which
pertain to this Agreement, and the transactions contemplated hereby, shall have
been reasonably approved by counsel to the Company.
The Company's obligation to sell and issue the Preferred
Shares at the Second Closing is, at the option of the Company, subject to the
fulfillment, at the Second Closing, of the conditions set forth in Sections 6.1
and 6.4 hereof.
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SECTION 7
COVENANT RE: TRANSFER OF COMMON STOCK
The Purchaser covenants and agrees that it shall not sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any of the shares of Common Stock acquired by Purchaser upon conversion of
any Preferred Shares for a period of one hundred eighty (180) days from the date
of issuance of such shares of Common Stock upon such conversion. Purchaser
agrees that the certificates for shares of Common Stock issued upon conversion
of the Preferred Shares shall bear the following legend: "THESE SECURITIES MAY
NOT BE SOLD, PLEDGED OR OTHERWISE DISPOSED OF PRIOR TO ___________________
[181st day after issuance] BY REASON OF AN AGREEMENT BETWEEN THE COMPANY AND THE
HOLDER OF THE SHARES REPRESENTED BY THIS CERTIFICATE."
SECTION 8
MISCELLANEOUS
8.1 GOVERNING LAW. This Agreement shall be governed in all
respects by the internal laws of the State of Delaware as applied to agreements
entered into among Delaware residents to be performed entirely within Delaware,
without reference to the principles of conflict of laws under Delaware law.
8.2 SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by the Purchaser and
the Closing of the transactions contemplated hereby.
8.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto,
provided, however, that the rights of the Purchaser to purchase the Preferred
Stock shall not be assignable without the consent of the Company.
8.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
documents delivered pursuant hereto at the Closing constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof, and no party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought;
provided, however, that holders of a majority of the Common Stock issued or
issuable upon conversion of the Preferred Stock may, with the Company's prior
written consent, waive, modify or amend on behalf of the Purchaser, any
provision hereof.
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8.5 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or by facsimile transmission, or otherwise
delivered by hand or by messenger, addressed (a) if to the Purchaser, at the
Purchaser's address set forth above, or at such other address as such Purchaser
shall have furnished to the Company in writing, or (b) if to any other holder of
any shares, at such address as such holder shall have furnished the Company in
writing, or, until any such holder so furnishes an address to the Company, then
to and at the address of the last holder of such shares who has so furnished an
address to the Company, or (c) if to the Company, one copy should be sent to its
address set forth on the cover page of this Agreement and addressed to the
attention of the Corporate Secretary, or at such other address as the Company
shall have furnished to the Purchaser.
Each such notice or other communication shall for all purposes
of this Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid, or if
by facsimile transmission, as indicated by the facsimile imprint date.
8.6 DELAYS OR OMISSIONS. Except as expressly provided herein, no
delay or omission to exercise any right, power or remedy accruing to any holder
of any shares, upon any breach or default of the Company under this Agreement,
shall impair any such right, power or remedy of such holder nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any holder of any
breach or default under this Agreement, or any waiver on the part of any holder
of any provisions or conditions of this agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.
8.7 GEORGIA LEGEND. The Purchaser acknowledges that each
certificate shall bear the following legend: THESE SECURITIES HAVE BEEN ISSUED
OR SOLD IN RELIANCE ON PARAGRAPH 13 OF CODE SECTION 10-5-9 OF THE GEORGIA
SECURITIES ACT OF 1973, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A
TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE
REGISTRATION UNDER SUCH ACT.
8.8 FURTHER LEGEND. The Purchaser acknowledges that each
certificate shall bear the following legend: "THE CORPORATION WILL FURNISH
WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS A STATEMENT OF THE
DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS
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APPLICABLE TO EACH CLASS, AND SERIES WITHIN A CLASS, OF CAPITAL STOCK OF THE
CORPORATION AND THE VARIATIONS IN RIGHTS, PREFERENCES AND LIMITATIONS APPLICABLE
TO EACH SERIES (AND THE AUTHORITY OF THE CORPORATION'S BOARD OF DIRECTORS TO
DETERMINE VARIATIONS FOR FUTURE SERIES)."
8.9 EXPENSES. The Company and the Purchaser shall bear its own
legal and other expenses with respect to this Agreement.
8.10 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
8.11 SEVERABILITY. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
8.12 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
The foregoing agreement is hereby executed as of the date first above written.
"PURCHASER" "COMPANY"
ABBOTT LABORATORIES SPECTRX, INC.
By: By:
----------------------------- ---------------------------
Title: Title:
-------------------------- -------------------------
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Appendix 5.5 (continued)
EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND
RIGHTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
OF
SPECTRX, INC.
SpectRx, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of
Directors by the Restated Certificate of Incorporation of the Corporation, and
pursuant to the provisions of Section 151 of Title 8 of the Delaware General
Corporation Law, said Board of Directors by unanimous written consent executed
on __________________, 1999, adopted resolutions providing for the designations,
preferences and relative, participating, optional or other rights, and the
qualifications, limitations or restrictions thereof, of the Redeemable
Convertible Preferred Stock of the Corporation, which resolutions are set forth
below (with the attachment to such resolution being attached hereto as Schedule
1):
WHEREAS, Section 151(g) of the Delaware General
Corporation Law and the Restated Certificate of Incorporation
of SpectRx, Inc. (the Company") authorized the Board of
Directors to divide the share of the Company's $.001 par value
preferred stock into one or more series and to issue shares of
any such series, and to fix and to determine the relative
rights and preferences of the shares of such series; and
WHEREAS, the Board of Directors of the Company has
determined that it is in the best interests of the Company to
enter into a Redeemable Convertible Preferred Stock Purchase
Agreement by and among the Company and Abbott Laboratories
(the "Purchase Agreement"), pursuant to which the Company will
issue and sell 525,000 shares of its Redeemable Convertible
Preferred Stock for $10.00 per share or the aggregate
consideration of $5,250,000;
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NOW, THEREFORE, BE IT RESOLVED, that the Board of
Directors of the Company hereby establishes a series of $.001
par value preferred stock of the Company to be designated the
"Redeemable Convertible Preferred Stock";
FURTHER RESOLVED, that the number of shares of
Redeemable Convertible Preferred Stock, the voting rights,
dividend rights, liquidation rights and conversion rights of
the holder of the shares of the Redeemable Convertible
Preferred Stock, the provisions for redemption of the shares
of Redeemable Convertible Preferred Stock, and all other
preferences and relative rights in respect of shares of
Redeemable Convertible Preferred Stock, shall be as set forth
on Schedule 1 attached to these resolutions.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed by _____________________________, its
________________________, and attested by _______________________________, its
Secretary, this _______ day of __________________, 1999.
SPECTRX, INC.
By:
---------------------------------
------------------, -------------
ATTEST:
By:
------------------------------------
_____________________, Secretary
(Corporate Seal)
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Appendix 5.5 (continued)
Schedule 1
DESIGNATIONS, PREFERENCES AND RIGHTS OF
REDEEMABLE CONVERTIBLE PREFERRED STOCK OF
SPECTRX, INC.
Pursuant to authority granted in the certificate of incorporation, as
amended, of SpectRx, Inc. (the "Corporation"), the Board of Directors of the
Corporation has been authorized to issue in series shares of preferred stock and
to designate by resolution the relative preferences and rights of each series
established. By resolution of the Corporation's Board of Directors, the
Corporation has established and fixed the relative preferences and rights of
525,000 shares of preferred stock designated the "Redeemable Convertible
Preferred Stock," each of $0.001 par value.
For the purposes of this statement,
"Board of Directors" shall mean the board of directors of the
Corporation.
"Common Stock" shall mean the common stock, $0.001 par value,
of the Corporation.
"Corporation" shall mean SpectRx, Inc.
"Holder" means a holder of record of shares of Preferred
Stock.
"Issue Date" as to any share of Preferred Stock shall mean the
date of issuance of such share.
"Invested Amount" per share of Preferred Stock shall mean
$10.00 (as adjusted for changes in the Preferred Stock by stock split, stock
dividend, or the like occurring after the Original Issue Date).
"Junior Stock" means shares of any class of capital stock of
the Corporation ranking subordinate to the Preferred Stock as to both dividends
and distribution of assets upon liquidation.
"Original Issue Date" shall mean the initial Issue Date, when
shares of Preferred Stock are first issued.
"Preferred Stock" shall mean the 525,000 shares of Redeemable
Convertible Preferred Stock, $0.001 par value, hereby designated.
The rights, preferences, privileges and restrictions granted
to and imposed upon the Preferred Stock are as follows:
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(a) Dividend Rights. The Holders shall be entitled when
and if declared by the Board of Directors to receive dividends out of assets of
the Corporation legally available therefor at an annual rate of $0.60 per share
of Preferred Stock (as adjusted for changes in the Preferred Stock by stock
split, stock dividend, or the like occurring after the Original Issue Date).
Such dividends shall be cumulative and shall accrue whether or not declared by
the Board of Directors of the Corporation. So long as any shares of Preferred
Stock shall be outstanding, the Corporation shall not declare or pay on any
Junior Stock any dividend whatsoever, whether in cash, property or otherwise,
nor shall the Corporation make any distribution on any Junior Stock, nor shall
any Junior Stock be purchased or redeemed by the Corporation, nor shall any
monies by paid or made available for a sinking fund for the purpose of
redemption of Junior Stock, unless all dividends declared or accrued on any
outstanding shares of Preferred Stock shall have been paid or declared and a sum
of money sufficient for the payment thereof set apart.
(b) Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, before
any payment or distribution of the assets of the Corporation shall be made to or
set apart for the holders of Junior Stock, the Holders shall be entitled to
receive in respect of their shares of Preferred Stock payment out of assets of
the Corporation of Ten Dollars ($10.00) per share, plus all accrued but unpaid
dividends to the date of final distribution.
(c) Conversion. The Holders shall have conversion rights
in respect of these shares of Preferred Stock as follows (the "Conversion
Rights"):
1. Conversion Rate. The shares of Preferred
Stock shall be convertible, at the times and under the conditions described in
this Section (c) hereafter, at the rate (the "Conversion Rate") of one share of
Preferred Stock into the number of shares of Common Stock that equals the
quotient obtained by dividing the Invested Amount by the Conversion Price
(defined hereinafter). Thus, the number of shares of Common Stock to which a
Holder shall be entitled upon any conversion provided for in this Section (c)
shall be the product obtained by multiplying the Conversion Rate by the number
of shares of Preferred Stock being converted. Such conversion shall be deemed to
have been made on the Conversion Effective Date (defined hereinafter), and such
conversion shall be effected in accordance with the procedures described in
Subsection (c)(3) below. Upon conversion of any shares of Preferred Stock, the
Company shall pay all declared or accrued but unpaid dividends as to such shares
to the Holders thereof to and through the Conversion Effective Date; provided,
however, that the Corporation may, at its option, in lieu of making a full cash
payment of all such declared or accrued but unpaid dividends, make payment
thereof in that number of whole shares of Common Stock calculated by dividing
the total of such declared or accrued but unpaid dividends due such Holders by
the Conversion Price.. The "Conversion Price" shall be equal to the greater of
(I) (*) or (ii) the average of the closing sales price of the Common Stock as
reported by the NASDAQ Stock Market for each day of the thirty (30)-day trading
period that begins on the trading day that is
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fifteen (15) trading days prior to the date of the receipt by the Corporation of
the Conversion Notice (defined hereinafter).
2. Conversion Right. Each share of Preferred
Stock shall be convertible, at the option of the Holder thereof and without
payment of additional consideration, at any time after the first (1st)
anniversary of the Issue Date in respect of such share at the office of the
Corporation or any transfer agent for the Preferred Stock, into Common Stock at
the then effective Conversion Rate; provided, however, that if on or prior to
such first anniversary, the Corporation shall effect a merger or consolidation
wherein shares of Common Stock are exchanged for securities of another
corporation or for other consideration, then each of the Holders will be
afforded reasonable prior notice of such merger or consolidation and permitted,
if such Holder so chooses, to convert its shares of Preferred Stock into Common
Stock at the then effective Conversion Rate to be effective immediately prior to
the effectiveness of such merger or consolidation.
3. Automatic Conversion. Each outstanding share
of Preferred Stock shall automatically be converted into Common Stock on and as
of December 31, 2004, at the then effective Conversion Rate. Such conversion
shall be automatic, without need for any further action by the Holders and
regardless of whether the certificates representing such shares are surrendered
to the Corporation or its transfer agent; provided, however, that the
Corporation shall not be obligated to issue certificates evidencing the shares
of Common Stock issuable upon such conversion or to pay the dividends payable
upon such conversion unless certificates evidencing such shares of the Preferred
Stock are surrendered to the Corporation in accordance with the procedures
described in Subsection (c)(5) below. Upon the conversion of the Preferred Stock
pursuant to this Subsection (c)(3), the Corporation shall promptly send notice
thereof to each Holder, which notice shall state that certificates evidencing
shares of Preferred Stock must be surrendered at the office of the Corporation
(or of its transfer agent for the Common Stock, if applicable) in the manner
described in Subsection (c)(5) below.
4. Fractional Shares. No fractional shares of
Common Stock shall be issued upon conversion of Preferred Stock, and any shares
of Preferred Stock surrendered for conversion that would otherwise result in a
fractional share of Common Stock shall be redeemed at the then effective
Conversion Price per share, payable as promptly as possible when funds are
legally available therefor.
5. Mechanics of Conversion. Before any Holder
shall be entitled to receive certificates representing the shares of Common
Stock into which shares of Preferred Stock are converted in accordance with
Subsections (c)(2) or (c)(3) above, such Holder shall surrender the certificate
or certificates for such shares of Preferred Stock, duly endorsed, at the office
of the Corporation or of any transfer agent for the Preferred Stock, and shall
give written notice to the Corporation at such office of the name or names in
which such Holder wishes the certificate or certificates for
15
<PAGE> 68
shares of Common Stock to be issued, if different from the name shown on the
books and records of the Corporation. Said conversion notice ("Conversion
Notice") shall also contain such representations of the Holder as may reasonably
be required by the Corporation to the effect that the shares to be received upon
conversion are not being acquired and will not be transferred in any way that
might violate the then applicable securities laws. In the case of a conversion
pursuant to Subsection (c)(2) hereof, the Corporation shall, on the
seventy-fifth (75th) day succeeding receipt by the Corporation of the Conversion
Notice, unless the Corporation elects to redeem such shares of Preferred Stock
in accordance with the provisions of Subsection (d)(2) hereof, issue and deliver
at such office to such Holder, or to the nominee or nominees of such Holder as
provided in the Conversion Notice, a certificate or certificates for the number
of shares of Common Stock to which such Holder shall be entitled as aforesaid.
Such date for issuance and delivery of the shares of Common Stock received upon
conversion of Preferred Stock pursuant to Subsection (c)(2) hereof is hereafter
referred to as the Conversion Effective Date. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion pursuant to
Subsection (c)(2) hereof shall be treated for all purposes as the record holder
or holders of such shares of Common Stock as of the Conversion Effective Date.
All certificates issued upon the exercise or occurrence of the conversion shall
contain a legend governing restrictions upon such shares imposed by law or
agreement of the Holder or his or its predecessors.
6. Adjustment for Subdivisions or Combinations
of Common Stock. In the event the Corporation at any time or from time to time
after the Original Issue Date effects a subdivision or combination of the
outstanding Common Stock into a greater or lesser number of shares without a
proportionate and corresponding subdivision or combination of the outstanding
Preferred Stock, then and in each such event the Conversion Price (and the
corresponding Conversion Rate) shall be increased or decreased proportionately.
7. No Impairment. The Corporation shall not, by
amendment of its Certificate of Incorporation or Bylaws or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but shall at all times in good faith assist in the
carrying out of all the provisions of this Section (c) and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the Holders against impairment.
8. Reservation of Stock Issuable Upon
Conversion. The Corporation shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of the Preferred Stock such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Preferred Stock; and if at any time
the number of authorized but unissued shares of
16
<PAGE> 69
Common Stock shall be insufficient to effect the conversion of all then
outstanding shares of the Preferred Stock, the Corporation shall take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose.
(d) Redemption. The Preferred Stock shall be
subject to redemption as follows:
1. Optional Redemption at Election of
Holders. In the event the Holders elect, by a vote of the Holders of a majority
of the issued and outstanding shares of Preferred Stock, to cause the redemption
of the outstanding shares of Preferred Stock, then such Holders shall so notify
the Corporation by delivery of a written notice to the Corporation on or prior
to the later to occur of (i) September 30, 2002 or (ii) sixty (60) days
subsequent to the date upon which the Company gives the Holders notice (which
notice the Company undertakes to timely issue) of its right to cause such
redemption (which notice may not be given prior to June 1, 2002). Should such
election be timely made, then all shares of Preferred Stock shall be redeemed in
accordance with the following provisions of this Subsection (d)(1). The
Corporation shall, on December 31, 2002, redeem one-half (1/2) of all of the
then outstanding shares of Preferred Stock held by each Holder of Preferred
Stock at a price per share equal to the Redemption Price (hereinafter defined).
If the Corporation has achieved the Revenue Threshold (defined hereinafter),
then the Corporation shall, as soon as reasonably practicable after the
determination of whether the Corporation has met the Revenue Threshold, but in
any event on or prior to January 31, 2004, redeem all of the then outstanding
shares of Preferred Stock at a price per share equal to the Redemption Price. If
the Corporation has not achieved the Revenue Threshold, it shall, no later than
the time for redemption indicated in the immediately prior sentence, redeem
one-half (1/2) of the then outstanding shares of Preferred Stock held by each
Holder of Preferred Stock at a price per share equal to the Redemption Price,
and it shall, on December 31, 2004, redeem all of the then remaining outstanding
shares of Preferred Stock at a price per share equal to the Redemption Price.
Notwithstanding the foregoing, the date for notification of the election of the
Holders to cause a redemption as provided herein, and the dates for redemption
provided herein, may be extended by written agreement of the Corporation and the
Holders of a majority of the outstanding shares of Preferred Stock.
2. Optional Redemption Upon Conversion
Notice. In addition to the foregoing provisions governing mandatory redemption,
the Corporation may at its option redeem any shares of Preferred Stock which any
Holder has elected to convert to Common Stock by the issuance of a Conversion
Notice by redeeming any or all of such shares at a price per share equal to the
Redemption Price. If the Corporation elects to so redeem any such shares of
Preferred Stock, it shall, by the issuance of a notice to the Holders whose
shares are to be so redeemed, schedule a date for redemption, which date must be
prior to the Conversion Effective Date which would
17
<PAGE> 70
apply to such shares in accordance with the provisions of Subsection (c)(4) were
they to be converted to Common Stock pursuant thereto. On or before each date
scheduled for redemption, each Holder of shares to be redeemed shall surrender
the certificate representing such shares to the Corporation and shall receive
payment of the Redemption Price therefor in cash. If fewer than all of the
shares represented by a surrendered certificate are redeemed, the Corporation
shall issue a new certificate representing the unredeemed shares.
3. Certain Definitions. As used
herein, "Redemption Price" means $10.00 per share on Preferred Stock (as
adjusted for changes in the Preferred Stock by stock split, stock dividend, or
the like occurring after the Original Issue Date), plus all accrued but unpaid
dividends in respect of such share of Preferred Stock. "Revenue Threshold" shall
mean the recognition of Twenty Million Dollars ($20,000,000) or more of revenue
by the Corporation on a consolidated basis as reflected on the regularly
prepared income statements of the Corporation for the twelve (12) months ended
December 31, 2003.
(e) Voting Rights. Except as set forth in this Section
(e), the Holders shall have no voting rights in respect of the Preferred Stock
except that Holders shall have the right to vote on those matters which, under
the Delaware General Corporation Law, voting by classes of stock is required.
So long as any shares of Preferred Stock are outstanding, the
Corporation shall not, without the unanimous consent (given by vote in person or
by proxy at a meeting called for the purpose, or by written consent) of the
Holders of the shares of Preferred Stock then outstanding:
(i) alter or change the annual dividend rate on
the Preferred Stock;
(ii) alter or change the cumulative nature of the
annual dividend rate on the Preferred Stock or the date from which such
dividends are cumulative;
(iii) alter or change the amounts which the
Holders shall be entitled to receive on the liquidation, dissolution or winding
up of the Corporation;
(iv) alter or change the terms relating to time
of payment or price to be paid in connection with the redemption of Preferred
Stock by the Corporation;
(v) alter or change the terms relating to
conversion of Preferred Stock to shares of Common Stock;
(vi) allocate any earned surplus, whether now
existing or hereafter arising, to capital, in accordance with Delaware law, if
the effect thereof would
18
<PAGE> 71
be to reduce the legally available funds for payment of dividends or for
redemption of the Preferred Stock; or
(vii) create or authorize any shares of any class
of capital stock of the Corporation having any preference or priority as to
either dividends or distribution or assets upon liquidation superior to any such
preference or priority of the shares of Preferred stock or reclassify any
securities into shares of such superior stock.
(f) Registration of Transfer. The Corporation shall keep
at its principal office (or such other place as the Corporation reasonably
designates) a register for the registration of Preferred Stock. Upon the
surrender of any certificate representing Preferred Stock at such place, the
Corporation shall, at the request of the record Holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares represented by the surrendered certificate, and the Corporation forthwith
shall cancel such surrendered certificate. Each such new certificate will be
registered in such name and shall represent such number of shares as is
requested by the Holder of the surrendered certificate and will be substantially
identical in form to the surrendered certificate, and dividends shall accrue on
the Preferred Stock represented by such new certificate from the date to which
dividends have been fully paid on such Preferred Stock represented by the
surrendered certificate. The issuance of new certificates shall be made without
charge to the Holders of the surrendered certificates.
(g) Replacement. Upon receipt of evidence reasonably
satisfactory to the Corporation (an affidavit of the registered Holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing shares of Preferred Stock, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the Holder is a financial
institution, other institutional investor or executive officer of the
Corporation, such Holder's own agreement shall be satisfactory), or, in the case
of any such mutilation upon surrender of such certificate, the Corporation shall
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares represented by such
lost, stolen, destroyed or mutilated certificate and dated the date of such
lost, stolen, destroyed or mutilated certificate, and dividends shall accrue on
the Preferred Stock represented by such new certificate from the date to which
dividends have been fully paid on such lost, stolen, destroyed or mutilated
certificate.
(h) Notices. Any notice required by the provisions hereof
to be given to the Corporation or Holders shall be deemed given if deposited in
the United States Postal Service, postage prepaid, and addressed to the
Corporation at its then principal executive office, or to each Holder at the
address of such Holder appearing on the books of the Corporation.
19
<PAGE> 72
Appendix 5.5 (continued)
EXHIBIT B
FIRST AMENDMENT TO
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This First Amendment to Amended and Restated Registration
Rights Agreement (the "Amendment") amends that certain Amended and Restated
Registration Rights Agreement dated as of October 21, 1996 (the "Agreement") by
and among SPECTRX, INC., a Delaware corporation (the "Company") and the holders
of Registrable Securities (as such term is defined in the Agreement).
W I T N E S S E T H:
WHEREAS, the Company has determined to issue and sell to
Abbott Laboratories, an Illinois corporation ("Abbott") shares of a new series
of preferred stock of the Company designated Redeemable Convertible Preferred
Stock ("Preferred Stock"), and as a condition to the obligation of Abbott to
purchase shares of Preferred Stock the Company and Abbott desire to effect an
amendment to the Agreement to provide Abbott with registration rights in respect
of shares of Common Stock of the Company which may be issued upon conversion of
the shares of Preferred Stock to be issued to Abbott by the Company;
WHEREAS, the holders of at least a majority of the Registrable
Securities for the benefit of the Company and to induce Abbott to purchase the
shares of Preferred Stock agree to amend the Agreement by entering into this
Amendment;
NOW, THEREFORE, in consideration of the mutual promises and
other terms and conditions set forth in the Agreement and in the agreements
pursuant to which Abbott will acquire the Preferred stock referenced above, the
parties hereto agree as follows:
1. Effectiveness of Amendment. The Company and the
holders of Registrable Securities who have executed and delivered this Amendment
below acknowledge and agree that the Agreement is hereby amended by this
Amendment pursuant to the provisions of Section 14 of the Agreement whereby any
provision of the Agreement may be amended with the written consent of the
Company and the holders of a majority of the Registrable Securities then
outstanding, and further acknowledge and agree that such Amendment shall be
binding upon each holder of Registrable Securities then outstanding and each
future holder of all Registrable Securities of the Company.
2. Amendment. The parties hereto agree that the
definition of "Registrable Securities" as contained in Section 2 of the
Agreement is hereby amended and restated as follows:
20
<PAGE> 73
"Registrable Securities" shall mean (i) the Common Stock
issued upon conversion of the Series A Preferred Stock, (ii)
the Common Stock issued upon conversion of the Series A
Preferred Stock issued upon exercise of certain warrants
issued pursuant to the Note and Warrant Purchase Agreement
dated April 6, 1994, (iii) the Common Stock issued upon
conversion of the Series A Preferred Stock issued upon
exercise of certain warrants issued pursuant to the Note and
Warrant Purchase Agreement dated April 29, 1994, (iv) the
Common Stock issued upon conversion of the Series A Preferred
Stock issued upon exercise of certain warrants issued pursuant
to the Note and Warrant Purchase Agreement dated June 15,
1994, (v) the Common Stock issued upon conversion of the
Series B Preferred Stock, (vi) the Common Stock issued upon
conversion of the Series C Preferred Stock, (vii) the Common
Stock issuable or issued upon conversion of the Redeemable
Convertible Preferred Stock, (viii) the Common Stock which may
be issued to Abbott Laboratories pursuant to the Common Stock
Purchase Agreement dated November 30, 1999, by and between the
Company and Abbott Laboratories, and (ix) any Common Stock or
other securities issued with respect to such Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Redeemable Convertible Preferred Stock or Common Stock;
provided, however, that shares of Common Stock or other
securities shall only be treated as Registrable Securities if
and so long as they have not been (i) sold to or through a
broker or dealer or underwriter in a public distribution or a
public securities transaction or (ii) sold by a person in a
transaction in which their rights under this Agreement are not
assigned."
21
<PAGE> 74
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the date first above written.
SPECTRX, INC.
By:
------------------------------------------
Title:
---------------------------------------
HILLMAN MEDICAL VENTURES 1993 L.P.,
a Delaware limited partnership
By: Hillman/Dover Limited Partnership,
general partner
By: Wilmington Securities, Inc.,
its sole general partner
By:
------------------------------------------
Title:
---------------------------------------
NORO-MOSELEY PARTNERS II, L.P.,
a Georgia limited partnership
By: Moseley & Company, II,
general partner
By:
------------------------------------------
Jack R. Kelly, Jr.
Title: General Partner
ABBOTT LABORATORIES
By:
------------------------------------------
Title:
---------------------------------------
22
<PAGE> 75
THIRD AMENDMENT
TO THE AGREEMENT BETWEEN
ABBOTT LABORATORIES
AND
SPECTRX, INC.
<PAGE> 76
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. INTRODUCTION......................................................................................1
1.1 Conflict with Agreement................................................................1
1.2 Modified Provisions....................................................................1
1.3 Deleted Agreement Provisions...........................................................6
1.4 Added Appendices.......................................................................7
2. DEFINITIONS.......................................................................................7
3. RESEARCH AND DEVELOPMENT.........................................................................10
3.1 Continuous Product Research Program...................................................10
3.2 Research Oversight Committee..........................................................11
3.3 Completion, Termination or Transfer of the Continuous Product
Research Program......................................................................11
3.4 Development Program Notification......................................................13
3.5 Development Program - Continuous Product..............................................14
3.6 Development Program - Non-Continuous Product..........................................16
3.7 ABBOTT Development Program Due Diligence..............................................17
3.8 Termination of all Programs...........................................................19
3.9 Reports...............................................................................19
3.10 R & D Expense Records and Audit.......................................................20
4. SPECTRX CONTINUOUS PRODUCT.......................................................................20
4.1 Development by SPECTRX................................................................20
4.2 License to SPECTRX....................................................................21
4.3 Manufacturing Rights..................................................................22
4.4 Royalty...............................................................................23
4.5 Right of First Negotiation - Distribution Rights......................................24
4.6 Post Election Efforts on ABBOTT's Program.............................................25
5. CONSIDERATION....................................................................................26
5.1 Milestone Payments....................................................................26
5.2 Transfer Price - (*)s for Continuous Product..........................................27
5.3 Royalty - Continuous Product..........................................................27
5.4 Credits Against Royalties and Transfer Price..........................................27
5.5 Preferred Stock Purchase..............................................................29
5.6 (*) Deduction.........................................................................30
</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> 77
<TABLE>
<S> <C>
6. OTHER LICENSES.................................................................................30
6.1 (*) Technology and (*)................................................................30
6.2 (*) Technology........................................................................32
6.3 (*)s..................................................................................33
6.4 License Limitation....................................................................33
7. (*) ......................................................................................33
7.1 Payments by ABBOTT....................................................................33
7.2 (*)...................................................................................34
8. OTHER MANUFACTURING BY SPECTRX.................................................................34
9. WAIVER 34
10. EXISTING AGREEMENT TERMS.......................................................................34
11. OWNERSHIP OF INTELLECTUAL PROPERTY.............................................................34
11.1 SPECTRX Continuous Product Research Program Technology................................34
11.2 ABBOTT Continuous Product Research Program Technology.................................36
11.3 Joint Continuous Product Research Program Technology..................................37
</TABLE>
Appendix 2.7
Continuous Product Research Program Specifications
Appendix 4.2
(*)
Appendix 4.4
SPECTRX Continuous Product Royalty Rate
Appendix 5.1
Common Stock Purchase Agreement
Appendix 5.2
(*) Supply Agreement Terms
Appendix 5.5
Redeemable Convertible Preferred Stock Purchase Agreement
(*) 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> 1
EXHIBIT 11.1
SPECTRX, INC.
COMPUTATION OF LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR END
DECEMBER 31
1998 1999
<S> <C> <C>
LOSS AVAILABLE TO COMMON SHAREHOLDERS (6,637) (6,552)
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING
DURING THE PERIOD 7,926 8,033
------ ------
BASIC AND DILUTED
LOSS PER SHARE BASIC AND DILUTED $(0.84) $(0.82)
</TABLE>
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
FluorRx, Inc., a Delaware Corporation
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accounts, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statement on Form S-8, File No. 333-34301.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SPECTRX, INC. FOR THE YEAR ENDED DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,143
<SECURITIES> 0
<RECEIVABLES> 952
<ALLOWANCES> 0
<INVENTORY> 541
<CURRENT-ASSETS> 6,340
<PP&E> 1,963
<DEPRECIATION> 1,124
<TOTAL-ASSETS> 7,693
<CURRENT-LIABILITIES> 1,578
<BONDS> 0
0
5,264
<COMMON> 8
<OTHER-SE> 462
<TOTAL-LIABILITY-AND-EQUITY> 7,693
<SALES> 1,440
<TOTAL-REVENUES> 3,337
<CGS> 1,708
<TOTAL-COSTS> 10,000
<OTHER-EXPENSES> 8
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (133)
<INCOME-PRETAX> (6,552)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,552)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,552)
<EPS-BASIC> (0.82)
<EPS-DILUTED> (0.82)
</TABLE>
