-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VRBOcFkPYXfOMWJLOCePjz1njxlLCJE+ZHEWL8/sdIhE9nZQ9UHlxY7syiG/RV7u 9KWZ6PO/uTxiLjfWXstFlQ== 0000897101-96-000078.txt : 19960223 0000897101-96-000078.hdr.sgml : 19960223 ACCESSION NUMBER: 0000897101-96-000078 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960222 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRASCIENCE INC CENTRAL INDEX KEY: 0000727672 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411448837 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13092 FILM NUMBER: 96524059 BUSINESS ADDRESS: STREET 1: 5909 BAKER ROAD SUITE 580 CITY: MINNEAPOLIS STATE: MN ZIP: 55345 BUSINESS PHONE: 612-931-9000 MAIL ADDRESS: STREET 2: 5909 BAKER RD, STE 580 CITY: MINNETONKA STATE: MN ZIP: 55345 FORMER COMPANY: FORMER CONFORMED NAME: GV MEDICAL INC DATE OF NAME CHANGE: 19920703 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from _________________ to _________________ For the fiscal year ended: DECEMBER 31, 1995 Commission File Number: 0-13092 SPECTRASCIENCE, INC. (Name of small business issuer in its charter) MINNESOTA 41-1448837 (State of incorporation) (I.R.S. Employer Identification No.) 5909 BAKER ROAD, SUITE 580, MINNETONKA, MINNESOTA 55345 TEL: (612) 931-9000 (Address and telephone number of principal executive offices) Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, $.25 PAR VALUE Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its fiscal year ended December 31, 1995, were: $134,652 The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 14, 1996 was approximately $20,534,836 based on the average of the bid price of $6.50 and the ask price of $7.50 per share. The number of shares of the Registrant's Common Stock outstanding on February 14, 1996 was 2,933,548. DOCUMENTS INCORPORATED BY REFERENCE Documents incorporated by reference herein: Portions of the (1) definitive Proxy Statement for its 1996 Annual Meeting of Shareholders and (2) Form S-3 Registration Statement, to be filed with the Securities and Exchange Commission on or before February 28, 1996 are incorporated herein by reference in Part III. Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_ SPECTRASCIENCE, INC. FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 TABLE OF CONTENTS Page PART I Item 1. Description of Business............................................ 3 Item 2. Description of Properties.......................................... 8 Item 3. Legal Proceedings.................................................. 8 Item 4. Submission of Matters to a Vote of Security Holders................ 9 PART II Item 5. Market for Common Equity and Related Shareholder Matters........... 9 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................10 Item 7. Financial Statements and Supplemental Data.........................12 Item 8. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure...........................................12 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act...............12 Item 10. Executive Compensation..............................................13 Item 11. Security Ownership of Certain Beneficial Owners and Management......15 Item 12. Certain Relationships and Related Transactions......................15 Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....16 Signatures...................................................................18 SPECTRASCIENCE, INC. FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 PART I ITEM 1. DESCRIPTION OF BUSINESS (a) BUSINESS DEVELOPMENT GENERAL SpectraScience, Inc. (the "Company" or "SpectraScience"), is a market-driven company which utilizes its expertise in the underlying core technologies of spectroscopy, fiber optics, computer software and hardware, and minimally-invasive medical delivery systems to design, develop, manufacture and market medical products for the diagnosis and facilitation of treatment of a broad range of human diseases. The Company was incorporated in the state of Minnesota on May 4, 1983 as GV Medical, Inc. Subsequently the Company changed its name to SpectraScience, Inc. on October 16, 1992, which was approved by the shareholders on May 13, 1993. The executive offices of the Company are located at 5909 Baker Road, Suite 580, Minnetonka, Minnesota 55345. Its telephone number is (612) 931-9000 and its fax number is (612) 933-9090. The Company declared a one-for-five reverse split of its common stock effective June 30, 1994. As a result, the stated par value of the common stock was increased from five cents ($.05) to twenty-five cents ($.25) per share and the number of authorized shares of common stock was reduced from 20,000,000 shares to 4,000,000 shares (the "Common Stock"). The changes did not adversely affect the rights or preferences of the holders of the Company's outstanding Common Stock. In 1995, the Company raised a net total of $5,491,625 through the completion of two private placements of preferred stock ("Private Placements"), including the conversion of $525,000 of non-interest bearing bridge loans ("Bridge Loans") outstanding. A total of 1,467,498 shares of preferred stock, par value $1.00, which are convertible to Common Stock, were sold to investors, and warrants to purchase 796,508 shares of Common Stock ("Warrants"), were issued to investors, lenders and selling agents. The Warrants, if exercised, will raise a total of $4,900,213 for the Company. (Please refer to Item 5(d) "Other Securities" for additional details.) Proceeds from the Private Placements will be applied to accelerate product development, conduct clinical trials, conduct studies on alternative medical applications, expand the scope of the Company's international and future domestic sales and marketing activities and for general corporate purposes, including working capital. (b) BUSINESS OF THE COMPANY The Company initially pursued the development, manufacture and sale of laser-enhanced angioplasty catheter systems for the treatment of heart and blood vessel disease through 1989, by focusing on its LASTAC(R) ("LASTAC") system. In April 1990, the Company developed a new laser angioplasty system, known as the Laser Angiosurgery System ("LAS"), in conjunction with Massachusetts Institute of Technology ("MIT") and Cleveland Clinic Foundation ("CCF"), which utilized laser induced fluorescence spectroscopy for the diagnosis of the nature of tissue, and a unique catheter which allowed selective removal of only diseased tissue. In 1992, the Company changed its name to SpectraScience, Inc. and refocused its development efforts on a new diagnostic product for cardiovascular applications, the Spectroscopic Guidewire(TM) System ("SGS"). The Company is also currently developing a similar product for cancer detection, called the Optical Biopsy(TM) System ("OBS"). PRODUCTS AND MARKETS Both the SGS and OBS (the "System(s)") are comprised of three components, two of which are the Spectroscopic Diagnostic System console (the "Console") and the proprietary system software (the "Software"). The third component of the SGS is a disposable optical core Spectroscopic Guidewire (the "Guidewire") which also functions both mechanically as a conventional coronary guidewire and optically in the transmission and collection of light energy when connected to the Console. The third component of the OBS is a disposable optical biopsy forceps (the "Forceps") utilized in non-cardiovascular applications, instead of the Guidewire. The target markets for the Systems are as follows: (a) The SGS is currently targeted for the detection of intracoronary thrombus and differentiation of atherosclerotic plaque. The primary market for this application is hospitals with cardiovascular programs, both in the United States and overseas. Currently the market size for all percutaneous transluminal coronary angioplasty ("PTCA") procedures worldwide is estimated to be about 950,000 procedures worldwide, or $1.3 billion. Slightly more than half of these procedures are performed at about 1,000 centers in the United States, 200 of which perform about 65% of the total procedures in the United States. The number of PTCA procedures is growing rapidly with the introduction of intracoronary stents that have been found to reduce the rate of restenosis (i.e. reestablishment of blockage) in PTCA procedures. The Company believes that the SGS would be able to provide additional knowledge of the composition of plaque and detect the presence of thrombus which may help the cardiologist select the most appropriate cost-effective lesion-specific angioplasty modality. In addition, the use of the SGS may offer significant benefits to the patient in terms of maximizing success rate, minimizing complications and improving long-term patient outcomes. (b) The OBS is currently targeted for the detection and differentiation of cancerous, pre-cancerous and healthy tissues. The Company will initially target the detection and differentiation of cancer in the gastro-intestinal tract using minimally invasive endoscopic and laparoscopic techniques. There are approximately 165,000 new cases of gastro-intestinal cancer detected annually. The current method of detection is through biopsies, which entails the insertion of an endoscope with a pair of biopsy forceps, to harvest tissue samples to be analyzed in the pathology laboratory. Both the physician and patient have to wait approximately two weeks to obtain confirmation of results. The Company believes that the OBS could potentially offer immediate feedback to the doctor with this application thereby possibly reducing cost in biopsies and waiting time. The annual expenditure on cancer screenings has been estimated to be between $3-$4 billion annually in the United States alone. These include Pap smears, mammograms and colorectal exams. Other areas that are also targeted by the Company include the detection of cancer in the lung, bladder, prostate, and cervix. Direct annual expenditures in the treatment of lung cancer and prostate cancer are approximately $5 billion. DISTRIBUTION, MARKETING AND CUSTOMERS The Company intends to build an in-house marketing department to commercialize the Company's products worldwide and to provide clinical education to physicians, nurses, and laboratory technicians. This department will consist of marketing and clinical education personnel. For cardiovascular applications in international markets, marketing and distribution will be serviced by a strong strategic partner. To this end, in August 1994, the Company and SCIMED Life Systems, Inc. ("SCIMED"), a company which became a wholly-owned subsidiary of Boston Scientific Corporation (NYSE:BSX) in February 1995, signed a three-year exclusive international distribution agreement to distribute the SGS. SCIMED and Boston Scientific Corporation ("BSC") are world leaders in the field of angioplasty and have a strong subsidiary network throughout the world. There is no assurance that SCIMED will be able to perform its role successfully. The Company's product is one of many products that SCIMED or BSC, sells worldwide. On August 14, 1995, the Company received the European Community Certificate of Conformity from the TUV Product Service GmbH, Munich, Germany, for the SGS. The TUV Product Service GmbH is a designated Competent Body in accordance with the Council Directive on the harmonization of the laws of the member countries of the European Community. This enabled the Company to put the Conformite Europeane ("CE") mark on the SGS systems that the Company sells in Europe. The CE mark is recognized worldwide as an assurance of product quality and the Company believes that it will enhance market penetration in the European markets. For cardiovascular applications in the United States, the Company will focus its marketing efforts on approximately 200 interventional cardiology centers that perform a majority of the coronary angioplasty procedures. The Company is currently in negotiations with possible strategic partners for the distribution of the Company's products in the United States, once future regulatory approval is obtained. The Company is currently exploring various strategies for the distribution of the Company's products worldwide for non-cardiovascular purposes. These strategies may include forming the Company's own sales organization or selling through distributors in various territories or a combination of both of these strategies. COMPETITION The Company has no direct competitors in cardiovascular spectroscopic diagnostics. While there are no similar products, the potentially competing technologies presently in the cardiovascular market are intravascular ultrasound imaging ("IVUS") and angioscopy. Companies currently marketing products utilizing IVUS technology are Cardiovascular Imaging Systems/CVIS (Sunnyvale, California), a wholly-owned subsidiary of BSC, Endosonics (Pleasanton, California) and Hewlett Packard (Milpitas, California). Companies marketing products based upon angioscopy technology are Baxter-Edwards (Irvine, California), Olympus (Rye, New York) and A.D. Krauth (Germany). Several prominent universities and medical institutions have basic research projects involving "in-vivo" spectroscopic diagnostics. There is a growing interest in the application of spectroscopic diagnostics for other medical specialties, though few products, if any, have been commercialized. The Company believes that Mediscience (New Jersey), Xillix (Canada) and Lifespex (Texas) are development stage companies utilizing spectroscopic diagnostic techniques for the identification of cancerous tissue. MANUFACTURING AND SOURCES OF SUPPLY The SGS is comprised of three components: the Console, the Software, and the Guidewire. The OBS is comprised of the Console, the Software, and the Forceps. The basic assembly of the Console is completed by an outside contractor. The Software is developed in-house in conjunction with outside consultants. The Guidewire is produced by another contract manufacturer that is experienced and specialized in the manufacture of medical guidewires and related products. The Forceps is still in the design and pilot stage. The Company then assembles certain proprietary components, inspects and tests the completed Systems at the Company's facility. There are risks involved in having sole sources of supply for the basic assembly of the Console, and also the manufacturing of the Guidewire. While the performance of these manufacturers have been satisfactory to-date, there is no assurance that they will continue to perform up to the Company's high standards, meet governmental regulations and handle labor unrest, if any. Any shortfalls in the ability of these contract manufacturers to meet standards and regulations could severely impact the Company's ability to test and sell its products. The Company purchases many components from various suppliers that are either standard components or are built to the Company's proprietary specifications. In addition, the Company contracts with third parties to perform certain manufacturing processes. Most of the purchased components and processes are available from more than one vendor. Any supply interruption would have a material adverse effect on the Company's ability to sell its products and could have an adverse effect on the Company's business, financial condition and results of operations. Although the Company is in the process of identifying alternative vendors, the qualification of additional or replacement vendors for certain components or services is a lengthy process, especially in the heavily regulated medical device industry. PATENTS The Company has 8 United States and 16 foreign patents issued in 1994. In 1995, the Company was issued 2 new patents in the United States, entitled "Guidewire Catheter and Apparatus for Diagnostic Imaging" (Patent No. 5383467) and "Method of Diagnosing Tissue with Guidewire" (Patent No. 5439000). The Company expects to file additional patent applications in 1996. There is no assurance that any additional patents will be issued, or if issued, that such patents will afford the Company any competitive advantage. In addition to the above, the Company also has an exclusive licensing agreement with MIT for 31 issued patents and pending applications, relative to the use of spectroscopy for the diagnosis of atherosclerotic cardiovascular disease. This licensing agreement runs for the life of the patents and includes technology developed under National Institute of Health funding. The Company also has a licensing arrangement with the Massachusetts General Hospital's Wellman Laboratory of Photomedicine ("Wellman Lab"). Any patents that result from the Wellman Lab's research on cancer detection will be licensed exclusively to the Company. There are currently 2 pending patent applications in this area. In 1989, the Company entered into a licensing agreement with the Patlex Corporation ("Patlex"), which holds a number of laser patents granted in the name of Mr. Gordon Gould, which involves the payment to Patlex of a nominal license fee. Currently, the Company's Systems do not utilize any components or technology that would entail the payment of any license fees to Patlex. The Company believes its patent position to be strong and will assist the Company in its research and development and marketing efforts. INDUSTRY ECONOMICS In the United States, the market for the Company's products are medical institutions. The health care services that they provide to their patients are paid by various third-party payers, such as Medicare, Medicaid, other government programs and private insurance plans. Medicare and Medicaid determine whether a particular procedure should be covered. Hospitals are reimbursed for medical procedures at a fixed rate according to Diagnosis Related Groups ("DRG's") established by the Health Care Financing Administration ("HCFA"). The fixed rate of reimbursement is based on the procedure performed and is typically unrelated to the specific devices used in that procedure. If a procedure is not covered by a DRG, payers may deny reimbursement. In addition, payers may deny reimbursement if they determine that the device used in a treatment was unnecessary, inappropriate, experimental, used for a non-approved indication, or not cost-effective. Currently, there are no established DRG's covering spectroscopic diagnostic procedures for either cardiovascular or cancer detection procedures. Although reimbursement for PTCA procedures is covered under a DRG, the amount of reimbursement is fixed. Therefore, the profit relating to the procedure would be reduced to the extent the physician performs additional procedures such as spectroscopic diagnostics. Nevertheless, the additional information provided by the SGS may help physicians select the appropriate treatment method, potentially reducing the number of therapeutic catheters used during a PTCA procedure which would produce a more effective result. Accordingly, physicians must determine that the clinical benefits of the SGS justify the additional cost. Governmental prospective reimbursement programs, which provide fixed reimbursement based on DRG's, provide economic incentives for health care institutions to reduce operating costs by being more efficient and productive. For every illness to be treated or procedure to be performed, only an average rate will be reimbursed. Therefore, the more cases that can be treated below the designated rate with less major surgery and shorter hospitals stays, the higher the level of profitability. Capital costs for medical equipment purchased by hospitals are reimbursed separately from DRG payments. Therefore, the market for the Company's products could be adversely affected by changes in governmental and private third-party payers' policies or by federal legislation that reduces reimbursements under the capital cost pass through systems for the Medicare program for capital equipment, such as the Company's Systems. Certain trends are emerging in the medical device industry. These are outlined below: (a) Emphasis on lower cost of medical procedures. This has led to increasing use of capitation pricing (i.e. fixed price for one procedure, rather than the number of disposables or hospital supplies used), and consignment sales from many hospital suppliers. It is possible that this trend could accelerate and thereby affect the Company's selling strategies. (b) More strident views on Medicare reimbursements. This could lead to cuts in reimbursements for new procedures or experimental procedures, which would affect the ability of smaller companies with new technologies, like SpectraScience, to compete with larger established firms. (c) Emergence of dominant vendors to hospitals. There is a trend towards consolidations in the medical device industry. It appears that the ability of vendors to offer a range of products is important to gain entry to hospitals, whether it be competition for shelf space or on the basis of price. The spate of acquisitions by BSC exemplifies this trend. BSC in 1995 alone has acquired SCIMED, CVIS Corp, Meadox, and Heart Technology. The pending acquisition of Cordis by Johnson & Johnson, which currently has the most widely accepted intravascular stent in the market, is another example. (d) Food and Drug Administration ("FDA") emphasis on clinical safety as well as economic utility. It is possible that this could lead to less advances in innovative developmental technologies which will need to prove economic advantages up-front. (e) Foreign governmental issues. These could potentially get more difficult, again with the emphasis on costs and reimbursement levels. Other regulations such as import tariffs, duties and taxes could severely impact the Company's ability to compete and enter those foreign markets. GOVERNMENT REGULATIONS The Company's development, manufacturing and marketing activities are subject to regulation by numerous governmental authorities in the United States and other countries, particularly regarding safety and efficacy. In the United States, medical device products are subject to approval and review by the Food and Drug Administration ("FDA"). The Food, Drug, and Cosmetic Act, as amended by the Safe Medical Devices Act of 1990, and modified by the Medical Device Amendments of 1992, the Public Health Service Act and other federal statutes and regulations, govern or influence the testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of such products. In order to obtain FDA approval of a new medical device, the Company must submit either a pre-market notification (510(k)) or Pre-Market Approval ("PMA") application. Receipt of 510(k) clearance normally takes at least three months and may require the submission of clinical safety and efficacy data. For cardiovascular applications, the SGS will require clinical trials on humans to prove the safety and efficacy of the product. The Company received an Investigational Device Exemption ("IDE") from the FDA on December 5, 1995, which allowed the Company to begin its clinical trials at two clinical sites with 15 patients each. These clinical trials began January 1996 and will require approximately three months to complete. For cancer detection, the Company will be starting clinical testing of the OBS before the end of the second quarter 1996 at Wellman Lab. If the FDA determines that the SGS is a "new" system (as opposed to being "substantially equivalent" to what already existed in the market pre-1976), then it will require a more rigorous review and approval process through a full PMA application. The full PMA review and approval process generally takes more than a year to complete from the date of filing and there can be no assurance if or when a PMA may be approved. There can be no assurance that FDA clearance for these products, any future product or any modification of an existing product will be granted, or that the process will not be unduly lengthy. Clinical testing is also taking place in Europe. International sales of the Company's products are subject to regulatory agency requirements of each country. The regulatory review process varies from country to country. There can be no assurance, however, that such approvals will be obtained on a timely basis or at all. The Company is required to register as a medical device manufacturer with the FDA and state agencies. As such, the Company and/or its contract manufacturers are inspected on a routine basis by the FDA for compliance with the FDA's Good Manufacturing Practices ("GMP") regulations and various FDA requirements for labeling. These regulations require that the Company manufacture its products and maintain its documents in a prescribed manner with respect to manufacturing, testing and control activities. One of the Company's contract manufacturers was audited by the FDA in 1995 and no material deficiencies were noted. Failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that it complies in all material respects with such applicable regulations; however, failure to comply could subject the Company to fines or other enforcement actions. The Company is also subject to other federal, state and local regulations regarding environmental protection and hazardous substance controls, among others. To-date, the costs or effects of compliance with federal, state and local environmental laws are routine and customary for a development stage medical device company. PRODUCT RESEARCH AND DEVELOPMENT During the years ended December 31, 1995, 1994 and 1993, the Company's research and development expenditures were $660,504, $869,670 and $1,363,795, respectively. The Company's product research and development is focused on finalizing the design of the Console that incorporates the Guidewire, and to continue clinical research and gain FDA regulatory approval in the United States. As the Company is seeking regulatory approval of the first generation SGS, it is anticipated that the Company will continue to enhance the Systems, focusing on other medical applications. The Company will also continue research and development in tissue recognition algorithms and analysis software for diagnostic spectroscopy in order to further advance the technology and enhance the effectiveness of its innovative products. EMPLOYEES As of December 31, 1995, the Company's full-time work force consisted of seven employees; four of whom were engaged in product design and development and manufacturing, and the remaining three were engaged in marketing, management and general finance and administration. The Company also relies on external consultants in the areas of regulatory, software development and others. The Company has been successful in attracting and retaining qualified technical personnel. There is no assurance, however, that the Company will be able to attract or retain the skilled employees it requires for profitable operations. The Company is not subject to any collective bargaining agreement and believes that its employee relations are good. ITEM 2. DESCRIPTION OF PROPERTY. The Company's offices are located at 5909 Baker Road, Suite 580, Minnetonka, Minnesota 55345. The facility consists of approximately 2,940 square feet of office, laboratory, quality testing, and warehouse space. The lease provides for monthly rental payments of $3,011 including a pro rata share of operating expenses and real estate taxes. The lease expires in August, 1996. The Company maintains adequate levels of standard property and casualty insurance coverage on its property. The Company is seeking additional adjacent space to accommodate normal expansion, failing which the Company might be forced to move. The Company anticipates that it will need a total of about 6,000 square feet. ITEM 3. LEGAL PROCEEDINGS. There is no current, pending or on-going litigation which involves the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of the security holders since the 1995 annual meeting. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. (a) MARKET INFORMATION The Common Stock had been traded in the over-the-counter ("OTC") market and quoted on the National Association of Security Dealers Automated Quotation System ("NASDAQ") Small-Cap Market since November 13, 1984. In September 1992, the stock symbol was changed from "GVMI" to "SPSC". On March 21, 1994, the Company's stock was delisted by NASDAQ for a two-week period. It was relisted until June 9, 1994, and then was again delisted after NASDAQ denied the Company's request for a further extension to the minimum bid price exception previously granted. The stock symbol was then changed to "SPSI". The Common Stock is currently being traded on the OTC Bulletin Board. The Company intends to seek relisting on NASDAQ in 1996. On June 30, 1994, the Company had a 1 for 5 reverse stock split. The following table sets forth (unadjusted for the reverse split in the quarters ending March 31 and June 30, 1994), for the periods indicated, high and low bid and ask prices as reported by NASDAQ and OTC Bulletin Board and also prices that the Company obtained from third party sources, e.g. MetroData Services. To the best of its knowledge, the Company believes that the information obtained from these sources to be accurate.
STOCK PRICES(1): 1995 1994 (in $ per share) High Bid Low Bid High Ask Low Ask High Bid Low Bid High Ask Low Ask Quarter Ended March 31(2) 3.125 2 3.3125 2.25 0.75 0.125 1 0.625 June 30(2) 4.875 2.9375 5.25 3.125 0.625 0.0625 1 0.3125 September 30 6.125 3.5 6.375 4.25 3.75 0.375 4 0.625 December 31 7.625 4.625 8.375 5.125 3.5 1.625 4.125 1.875
(1) The prices of the Company's stock reflect inter-dealer prices and do not necessarily reflect the prices of actual transactions. The bid prices reflect prices without retail mark-up, mark-down or commission. (2) On June 30, 1994, the Company had a 1 for 5 reverse stock split. Stock prices in the quarters ending March 31 and June 30, 1994, were not adjusted to reflect this split. On February 14, 1996, the closing bid and ask prices quoted for the Common Stock were $6.50 and $7.50, respectively. (b) HOLDERS On February 14, 1996, there were 720 holders of record of 2,933,548 shares of the Common Stock, excluding shareholders that are registered in "street-names". (c) DIVIDENDS Since its incorporation, the Company has not paid any dividends, and no dividend payments are contemplated in the foreseeable future. The Company will retain any earnings it may generate to provide for the operation and expansion of its business. (d) OTHER SECURITIES On September 30, 1994, the Company raised a total of $300,000 in Bridge Loans. Lenders were given five-year Warrants to purchase 100,000 shares of Common Stock exercisable at $3.00 per share. In the first fiscal quarter of 1995, the Company raised $225,000 in additional Bridge Loans with the same terms. This group of lenders was given five-year Warrants to purchase 74,998 shares of Common Stock exercisable at $3.00 per share. The Bridge Loans were converted to preferred stock in the Private Placement which closed on June 29, 1995. The total number of Warrants issued to Lenders were 174,998, which if exercised would raise an additional $524,994 for the Company. Two Private Placements of convertible preferred stock with attached Warrants were completed in 1995. Neither the shares of preferred stock nor the Warrants are intended for trading in any official exchanges. The first Private Placement, which closed on June 29, 1995, involved the placement with qualified investors of 674,998 shares of Series A Preferred Stock ("Preferred A"), par value $1.00, at $3.00 per share. A net amount of $1,965,000 was raised. Of this amount, $525,000 was from the conversion of Bridge Loans on March 31, 1995. Preferred A shares are non-voting, do not yield dividends or interests, and are convertible to an equivalent number of shares of Common Stock, after March 31, 1996, but generally one year from the date of receipt of funds. Each Preferred A share was issued with a three-year Warrant to buy one-third share of Common Stock at a price of $5.00 per share. A total of 225,000 Warrants was issued to investors in this Private Placement, which if exercised would raise an additional $1,125,000 for the Company. The second Private Placement, which closed on December 28, 1995, involved the placement with qualified investors of 792,500 shares of Series B Preferred Stock ("Preferred B"), par value $1.00, at $5.00 per share. A net amount of $3,526,625 was raised. Preferred B shares are non-voting, do not yield dividends, unless the holders of Common Stock fail to authorize sufficient additional shares of Common Stock for the conversion of the Preferred B, and are convertible to an equivalent number of shares of Common Stock on or after December 28, 1996. Each Preferred B share was issued with a three-year Warrant to buy one-third share of Common Stock at a price of $9.50 per share. A total of 264,175 Warrants was issued to investors in this Private Placement, which if exercised would raise an additional $2,509,663 for the Company. In addition, the selling agent for Preferred A, R.J. Steichen & Co., received two Warrants: a five-year Warrant to purchase 20,000 shares of Common Stock at $3.00 per share and a three-year Warrant to purchase 6,667 shares of Common Stock at $5.00 per share. The selling agent for Preferred B, Miller, Johnson & Kuehn, received a five-year Warrant to purchase 79,250 shares of Common Stock at $5.00 per share and a conditional five-year Warrant to purchase up to an additional 26,418 shares of Common Stock at $9.50 per share. If all the Warrants issued to the selling agents were exercised, it would raise another $740,556 for the Company. In all, there are a total of 1,467,498 preferred shares and 796,508 Warrants for the purchase of Common Stock outstanding. As of February 14, 1996, there were 842,072 stock options outstanding, 77.0% of which were held by employees. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. This discussion should be read in conjunction with the financial statements and footnotes which follow. PLAN OF OPERATION In 1995, the Company raised a net total of $5,491,625 through the completion of two Private Placements, including the conversion of Bridge Loans outstanding. Proceeds from these Private Placements will be applied to accelerate product development, conduct clinical trials, conduct studies on alternative medical applications, expand the scope of the Company's international and future domestic sales and marketing activities and for general corporate purposes, including working capital. The Company believes that this cash will last about two years, and thus does not believe it will have to raise additional funds in the next twelve months. Due to acceleration of clinical studies and product development, the Company expects to lease approximately 3,000 square feet of additional space. As the current market for commercial space is tight, it is anticipated that the Company will have to pay lease rates at least comparable to its current space, or slightly higher. The Company anticipates adding two individuals, one with strong disposable medical products research and development background and the other with strong spectroscopy, software and systems development background, to spearhead its development efforts. It is possible that the Company might add an additional two to three people in manufacturing, probably one manufacturing engineer and the other(s) technician(s), if it is beneficial for the Company to bring certain aspects of the manufacturing process, currently contracted by outside vendors, in-house. RESULTS OF OPERATIONS Revenue Gross revenue for the year ended December 31, 1995 was $134,652. This compares favorably with $0 for 1994, and $35,002 in 1993. Research and Development Research and development expenses in 1995 totaled $660,504 compared with $869,670 1994 and $1,363,795 in 1993. The reduction in research and development expenses primarily resulted from the reduction in the engineering prototype materials used in the development of the SGS and payroll expenses due to fewer people employed in research and development activities. In 1995, the Company signed a two-year research and development agreement with Wellman Lab, to commence research on the detection and differentiation of cancerous, pre-cancerous and healthy tissues. This agreement called for the payment of approximately $50,000 per quarter to Wellman Lab. A total of approximately $150,000 was expensed in 1995. The agreement expires in March 1997. In the fourth quarter of 1993, the Company reduced the license fees paid to MIT by renegotiating its patent licensing agreement, which allowed the Company to retain exclusive rights to the MIT patents. The license fees paid to MIT annually is currently $50,000 per year until 2003, after which it decreases to $30,000 per year until the expiration of the licensed patents. The Company also realized additional expense savings during the year with the elimination of eight employees and lower purchases of materials for engineering prototypes. Selling, General & Administrative Expenses Selling, general and administrative expenses in 1995 totaled $711,753, compared with $701,278 in 1994, and $1,119,793 in 1993. The slight increase in 1995 was the result of the hiring of the Chief Financial Officer, who was necessary to relieve the President in administrative matters, and enable the President to focus on strategic business development, clinical studies and international marketing. Nevertheless, the expenses in both 1995 and 1994 were lower than 1993 because of a strong effort to curb costs through lower salary expense resulting from fewer employees, reduced building rent due to significant office space down sizing, and a lower asset base following the sale of unneeded assets. Interest and Other Income Interest and other income was $16,608 in 1995 compared to $66,468 in 1994, and $181,897 in 1993, principally due to a reduction in interest income resulting from a decrease in cash balances coupled with a lower interest rate environment. This was partially offset by a gain on the sale of unneeded assets. Net Losses As a result of the above factors, the Company reported a net loss for the year ended December 31, 1995 of $1,345,910 compared to $1,504,480 in 1994 and $2,443,006 in 1993. The loss per share was $.47 in 1995, $.55 in 1994 and $.93 in 1993 (adjusted for splits). LIQUIDITY AND SOURCES OF CAPITAL On December 31, 1995, the working capital (current assets less current liabilities) of the Company was $4,231,371. The positive working capital position compares favorably to a deficit of $280,271 in 1994. The increased working capital in 1995 resulted from the Private Placements in 1995 (previously discussed) and the conversion of Bridge Loans outstanding. Net cash used in operating activities was $1,399,518 in 1995, compared with $1,593,130 in 1994 and $2,826,073 in 1993. This was achieved through a combination of reduced operating expenses and asset levels. An increase in accounts receivable and inventories in 1995 partially offset this result. Even though net cash used in operating activities decreased from 1993 to 1994, it was offset by a rapid increase in inventories which grew from $-0- to more than $200,000. Net cash (used in) provided by investing activities was ($107,079) in 1995, $25,742 in 1994 and $60,614 in 1993. The positive cash generated in both 1994 and 1993 was due to the sale of unneeded assets for $56,540 in 1994 and $78,609 in 1993. The expenditure for the purchase of fixed assets in 1995 reflected acquisition of more current equipment needed for research and development purposes. Net cash provided by financing activities was $5,571,625 in 1995, compared to $375,000 in 1994 and $3,230,814 in 1993. The increase in 1995 was provided primarily in the Private Placements, and the exercise of stock options. The 1995 amount only included $225,000 of the $525,000 Bridge Loans converted to Preferred A, since $300,000 of the Bridge Loans was provided in 1994. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Reference is made to the Report of Independent Auditors and Financial Statements included in the Index to Financial Statements at Page F of this Annual Report on Form 10-KSB. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The directors and executive officers of the Company and their ages as of February 14, 1996 are as follows:
Served as Officer or Name Age Term Title Director Since Brian T. McMahon(1) 42 1995/96 President, Chief Executive Officer and 1993 Director Ching-Meng Chew(2) 39 1995/96 Vice President Finance and 1995 Administration, Chief Financial Officer, Treasurer, Secretary Henry M. Holterman(3) 40 1995/96 Director 1992 Nathaniel S. Thayer(4) 71 1995/96 Director 1992
(1) BRIAN T. MCMAHON was elected Director, President and Chief Executive Officer in May, 1993, and assumed the position of Acting Chairman of the Board on May 27, 1994. Mr. McMahon joined the Company in the capacity of Executive Vice President and Chief Operating Officer in July, 1992, and prior to this, served as an independent consultant to the Company since May, 1992. Mr. McMahon held a succession of marketing, business development and sales management positions during a 10-year career with a prominent medical device company, SCIMED, his last position there being the Director of Marketing and Business Development. (2) CHING-MENG CHEW joined the Company on August 30, 1995 as the Vice President of Finance and Administration. He also holds the titles of Chief Financial Officer, Treasurer and Secretary of the Company. Prior to joining the Company, Mr. Chew served SCIMED for three years, his last position as Treasurer. Prior to SCIMED, his background included eight years with Norwest Bank Minnesota, N.A., his last position being Vice President, International Banking, and a Master of Business Administration from the Wharton School, University of Pennsylvania. (3) HENRY M. HOLTERMAN is Managing Director of Reggeborgh Beheer BV, a company located in Netherlands that invests in companies and owns property projects generally located in Netherlands. Mr. Holterman is a chartered accountant, and from 1987 to 1991, was group controller for Transport Development Group PLC and the Dutch Holding Company ETOM NV. From 1984 to 1988, Mr. Holterman was the President of the Board of Directors of LETO Recycling, a Swedish-Dutch company involved in recycling chemical waste. (4) NATHANIEL S. THAYER has been a partner in the law firm of Blais Cunningham & Crowe Chester since 1969. All directors hold office until the next annual meeting of the shareholders and until their successors have been duly elected and qualified. The executive officers of the Company hold office at the discretion of the board of directors. DISCLOSURE OF SECTION 16(a) FILINGS The Company's officers and directors and persons who are beneficial owners of more than 10% of the Common Stock ("10% Shareholders") are required to file reports of their holdings and transactions in the Common Stock with the Securities and Exchange Commission and to furnish the Company with copies of such reports. Based solely upon its review of the copies the Company has received or upon written representations from certain reporting persons, the Company believes that no such persons failed to file any of such forms on a timely basis or any of the forms required by Section 16(a) during the most recent fiscal year. In addition, the Company believes that no filings on Form 5 were required for such persons. The Company believes that during the year ended December 31, 1995, all Section 16(a) filing requirements applicable to its officers, directors, and 10% Shareholders were complied with. ITEM 10. EXECUTIVE COMPENSATION. CASH COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth the Chief Executive Officer ("CEO")and each other officer ("Named Executive(s)") of the Company who received in excess of $100,000 cash compensation paid for the year ended December 31, 1995. The Company has adopted a 1991 Stock Option Plan, As Amended (the "Plan") to succeed the stock option plans adopted in 1983 and 1988 which had expired. The Company has not granted any restrictive stock awards or stock appreciation rights or made any long-term incentive plan payouts.
SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards Payouts Other Annual Restricted Securities Compen- Stock Underlying LTIP All Other Name and Salary Bonus sation Award(s) Options/ Payments Compensation Principal Position Year ($) ($) ($) ($) SAR's (#) ($) ($) Brian T. McMahon, 1995 $146,490 N/A $8,580(2) N/A 150,000(6) N/A N/A President and CEO(1) 1994 $110,000 N/A $20,976(3) N/A 350,000(5) N/A N/A 1993 $104,494 N/A N/A(4) N/A 150,000(5) N/A N/A
(1) Mr. McMahon was elected President, Chief Executive Officer and Director of the Company on May 13, 1993, and assumed the position of Acting Chairman of the Board on May 27, 1994. Prior to his election, Mr. McMahon was the Company's Executive Vice President and Chief Operating Officer since July 1992. (2) This included a $5,400 automobile allowance, $2,838 medical benefit, and other fringe benefits. (3) On June 30, 1994, the Company had a 1 for 5 reverse stock split which had the effect of reducing the number of stock options granted while increasing the exercise price by a factor of five. On October 14, 1994, Mr. McMahon's 50,000 shares of non-qualified pre-split options were canceled and reissued for 50,000 post-split shares at $2.50. The fair market value at the date of reissuance was $2.75 which resulted in $12,500 (50,000 shares x $.25) of compensation expense. Additional perquisites include a $5,400 automobile allowance. (4) The aggregate amount of perquisites and other personal benefits, securities, or property is less than $50,000 or 10% of the total of annual salary and bonus. (5) In 1992, Mr. McMahon received incentive stock options for 150,000 shares and non-qualified stock options for 50,000 shares under the Plan expiring in five years. In 1993, Mr. McMahon received incentive stock options for an additional 150,000 shares expiring in five years. On June 30, 1994, the Company had a 1 for 5 reverse stock split. On October 14, 1994, these stock options were canceled and replaced with non-qualified stock options for 50,000 shares and incentive stock options for 300,000 shares at $2.50 and $3.00 per share, respectively. (6) In 1995, Mr. McMahon received incentive stock options for 150,000 shares. On December 31, 1995, the total number of stock options that Mr. McMahon held was 500,000. On January 24, 1996, Mr. McMahon received an additional incentive stock option for 50,000 shares, expiring in ten years, vesting one-third per year over 3 years, at an exercise price of $7.00 per share. The total number of stock options that Mr. McMahon held on February 14, 1996 was 550,000. STOCK OPTIONS The Company adopted the Plan to succeed the stock option plans adopted in 1983 and 1988 which have expired. Management intends to seek approval from shareholders to increase the number of shares available to be issued under the Plan and also ratify other changes to the plan at the next shareholder meeting. The following table sets forth information concerning individual grants of stock options made to Named Executive(s) having cash compensation in excess of $100,000 during the year ended December 31, 1995. OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants % of Total Market Options Granted Exercise Price on Name and Options to Employees or Base Price Date of Grant Expiration Principal Position Granted # in Fiscal Year (U.S. $/Sh) (U.S. $/Sh) Date Brian T. McMahon 150,000(1) 62.5% $3.00 $3.00 April 12, 2000
(1) The five-year incentive stock options were granted pursuant to the Plan. One third of the options vest on each anniversary date from the date of grant, so that all the options are vested by the third anniversary date. OPTION VALUE TABLE The following table sets forth certain information concerning individual exercises of stock options during the year ended December 31, 1995 and the value of unexercised stock options as of December 31, 1995 for Mr. McMahon. No shares were acquired through the exercise of options by Mr. McMahon during 1995. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
Number of unexercised Value of unexercised Shares options/SARs at FY-end (#) in-the-money options/SARs at acquired on Value exercisable/ FY-end ($) exercisable/ Name exercise (#) realized ($) unexercisable unexercisable(1) Brian T. McMahon N/A N/A 350,000/ $1,468,750/ 150,000 $618,750
(1) Upon the exercise of an option, the Optionee must pay the exercise price in cash or stock. For the purpose of evaluating the value of the stock options, the fair market value would be the closing bid price, which is the realistic price at which the Common Stock can be readily sold. Stock options are "in-the-money" if the closing bid price for the Common Stock is greater than the exercise price of the stock options. The closing bid price for the Common Stock on December 29, 1995 (last business day of the fiscal year) was $7.125 per share. The value of the options is calculated by taking the difference between the exercise price and the closing bid price, and multiplying this difference by the number of option shares. COMPENSATION OF DIRECTORS Non-employee directors are paid $500 for each Board or Committee meeting that the directors attend. Directors are also reimbursed for out-of-pocket expenses. Non-employee directors are eligible to participate in the Plan. Under the Plan, non-employee directors received options at fair market value to purchase 25,000 shares when first elected to serve on the Board and 3,000 stock options annually thereafter upon re-election. Options granted to non-employee directors are ten-year options and vest in their entirety, six months after grant date. The annual grant to non-employee directors was increased to 5,000 at an October 1995 Board meeting. Shareholder ratification will be sought in the upcoming annual meeting for this increase. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of February 14, 1996, by: (i) persons known to the Company to be beneficial owners of more than 5% of the Common Stock; (ii) each of the Company's directors and Named Executives; and (iii) the officers and directors of the Company as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares. The number of shares of the Common Stock outstanding on February 14, 1996 was 2,933,548.
Title of Name and Address Amount and Nature of Percent Class of Beneficial Owner Beneficial Ownership of Class Common Reggeborgh Beheer BV 184,000 6.3% Postbox 319, Industrieweg 12 7460 AH Rijssen, Netherlands Common Perkins Capital Management, Inc 558,205(1) 19.4% 730 East Lake Street, Wayzata, MN 55391-1769 Common Brian T. McMahon 350,000(2) 10.7% Common Henry M. Holterman 36,000(3) 1.2% Common Nathaniel S. Thayer 487,238(4) 16.4% Common Officers and Directors as a Group 873,238(5) 26.0% (3 persons)
(1) The Company relied upon information obtained from Schedule 13G under the Securities Exchange Act of 1934, filed by Perkins Capital Management, Inc. ("Perkins") on or about February 1, 1996. The number of shares of Common Stock beneficially owned by Perkins is 558,205, which includes 359,766 shares for which Perkins has sole voting power. (2) Includes 350,000 shares issuable upon exercise of options held by Mr. McMahon that are exercisable within 60 days of February 14, 1996. (3) Includes 36,000 shares issuable upon exercise of options held by Mr. Holterman that are exercisable within 60 days of February 14, 1996. (4) Includes 33,000 shares issuable upon exercise of options held by Mr. Thayer that are exercisable within 60 days of February 14, 1996. Mr. Thayer owns 454,238 shares of Common Stock, which includes 200 shares representing Mr. Thayer's beneficial ownership of a 50% interest in 400 shares held in a joint account. (5) Includes 419,000 shares issuable upon exercise of options held by all officers and directors that are exercisable within 60 days of February 14, 1996. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In October 1993, the Company entered into a consulting agreement with Strategic Business Development Inc. ("SBDI"), a wholly-owned corporation of Mr. Stephen M. Fry, Ph.D., who at that time was a Director of the Company. Under the agreement, SBDI was to provide technical and management consulting services to the Company in the areas of research and development, quality assurance, regulatory affairs and manufacturing. Under the arrangement, the Company paid a total of $41,567 and $70,860 to SBDI during 1994 and 1993, respectively, including reimbursement for travel and entertainment expenses. No payments were made to SBDI in 1995 and the Company does not anticipate any future payments to be made to SBDI. On May 27, 1994, the Company entered into a Severance and Settlement Agreement with Mr. Daryl F. Yurek, the former Chairman of the Board of Directors and a former employee. The agreement gave Mr. Yurek a lump sum severance amount and he retained the rights to stock options that had been vested as of May 27, 1994, along with certain other nominal obligations of the Company and Mr. Yurek. The options were all exercised in the first and second quarters of 1995. No other payments were made to Mr. Yurek in 1995, and the Company does not anticipate any future payments to be made to Mr. Yurek. ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K. (A) The following documents are filed as part of this Form 10-KSB: (1) FINANCIAL STATEMENTS. Audited financial statements for each of the three years ended December 31, 1995, 1994 and 1993 are filed as part of this Form 10-KSB. See Index to financial Statements on Page F. (2) REPORTS ON FORM 8-K. No Reports on Form 8-K were filed during the fourth quarter of 1995. (3) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B: Exhibit Number Description 3.1 Articles of Incorporation, As Amended, filed herein. 3.2 Bylaws, As Amended, filed herein. 10.1 Incentive Stock Option Plan adopted by the Company's Board of Directors and shareholders on August 1, 1983, as amended March 5, 1987, and May 5, 1987. (Incorporated by reference to the Company's Registration Statement on Form S-8, Commission File No. 2-93693-C, as filed on March 28, 1986, effective April 17, 1986, as amended on June 2, 1987 and March 21, 1988.) 10.2 Incentive Stock Option Plan As Amended as adopted by the Company's Board of Directors and shareholders on March 10, 1988 (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.) 10.3 1988 Stock Option Plan adopted by the Company's Board of Directors on March 10, 1988 and shareholders on May 5, 1988 (Incorporated by reference to the Company's Registration Statement on Form S-8, Commission File No. 33-22052, as filed on May 25, 1988, effective June 14, 1988.) 10.4 1990 Restricted Stock Plan adopted by the Company's Board of Directors on March 15, 1990 and shareholders on May 17, 1990 (Incorporated by reference to the Company's Registration Statement on Form S-8, Commission File No. 33-36385, as filed on August 15, 1990, effective August 15, 1990.) 10.5 1991 Stock Option Plan adopted by the Company's Board of Directors on July 11, 1991 and shareholders on January 30, 1992. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.) 10.6 Amendment to 1991 Stock Option Plan adopted by the Company's Board of Directors on July 11, 1991 and shareholders on January 30, 1992. (Incorporated by reference to the Company's Form 8-K Report filed with the Securities and Exchange Commission on or about February 3, 1992.) 10.7 Amendment to 1991 Stock Option Plan adopted by the Company's shareholders on June 28, 1995 (Incorporated by reference to the Company's Registration Statement on Form S-8, Commission File No. 033-63047, as filed on September 28, 1995) 10.8 Amendment to 1991 Stock Option Plan adopted by the Company's Board of Directors on October 4, 1995, to be submitted to shareholders for ratification at the 1996 Annual Meeting of Shareholders (Incorporated by reference to the Company's definitive Proxy Statement for its 1996 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission on or before February 28, 1996). 10.9 Self-Insurance Trust Agreement between the Company and Richfield Bank and Trust Co., as trustee dated March 5, 1987 (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1986). 10.10 Form of Indemnification Agreement that the Company has provided to all officers and directors. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1986.) 10.11 Yurek Employment Agreement dated February 3, 1992 by and between the Company and Mr. Daryl F. Yurek. (Incorporated by reference to the Company's Form 8-K report filed with the Securities and Exchange Commission on or about February 17, 1992.) 10.12 Employment Agreement and Severance Agreement between the Company and Brian T. McMahon dated September 30, 1992 (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1992.) 10.13 Lease between the Company and Plymouth Business Center dated September 1, 1992. (Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1992.) 10.14 Distribution Agreement between SCIMED Life Systems, Inc. and the Company dated August 19, 1994 (Incorporated by reference to Annual Report on Form 10-KSB, Exhibit 10.29, for the year ended December 31, 1994). 10.15 Clinical Research Agreement between The General Hospital Corporation, doing business as Massachusetts General Hospital, and the Company dated June 1, 1995, filed herein. 10.16 Bridge Loan Agreement, including form of Promissory Note and form of Warrant by and between the Company and Qualified Lenders, dated September 30, 1994 (Incorporated by reference to the Company's Annual Report on Form 10-KSB, Exhibit 10.28, for the year ended December 31, 1994) 10.17 Form of Promissory Note that was issued in conjuction with the Bridge Loan Agreement by and between the Company and Qualified Lenders, dated September 30, 1994 (Incorporated by reference to the Company's Annual Report on Form 10-KSB, Exhibit 10.28, page 45, for the year ended December 31, 1994) 10.18 Form of Warrant (Incorporated by reference to the Company's Annual Report on Form 10-KSB, Exhibit 10.28, for the year ended December 31, 1994; also incorporated by reference to the Company's Form S-3 Regisration Statement under The Securities Act of 1933, Exhibit 4.2, to be filed with the Securities and Exchange Commission on or before February 28, 1996.) 10.19 List of Lenders in the Bridge Loans, and Investors in the Company's Preferred Stock (Incorporated by reference to the Company's Form S-3 Registration Statement under The Securities Act of 1933, Exhibit 99, to be filed with the Securities and Exchange Commission on or before February 28, 1996.) 10.20 Form of Subscription Agreement that was used in conjunction with the Private Placements of the Company's Preferred Stock, filed herein. 23.1 Consent of Independent Auditors, filed herein. SIGNATURES Pursuant to the requirements of Sections 13 and 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. SPECTRASCIENCE, INC. (Registrant) Date: February 14, 1996 By: /s/ Brian T. McMahon BRIAN T. MCMAHON PRESIDENT AND CHIEF EXECUTIVE OFFICER 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. /s/ Brian T. McMahon President, Chief Executive February 14, 1996 Brian T. McMahon Officer and Director (Principal Executive Officer) /s/ Ching-Meng Chew Vice President Finance and February 14, 1996 Ching-Meng Chew Administration, Chief Financial Officer, Treasurer, Secretary (Principal Financial and Accounting Officer) /s/ Dawn M. Leuer Controller February 14, 1996 Dawn M. Leuer /s/ Henry M. Holterman Director February 14, 1996 Henry Holterman /s/ Nathaniel S. Thayer Director February 14, 1996 Nathaniel S. Thayer ITEM 13. (a)(1) FINANCIAL STATEMENTS. The following financial statements of SpectraScience, Inc. are included in Item 7. CONTENTS Page Reference Report of Independent Auditors F-1 Balance Sheets -- December 31, 1995 and 1994 F-2 Statements of Operations -- Years Ended F-3 December 31, 1995, 1994 and 1993 Statement of Changes in Shareholders' Equity (Deficit) F-4 -- Years Ended December 31, 1995, 1994 and 1993 Statements of Cash Flows -- Years Ended F-5 December 31, 1995, 1994 and 1993 Notes to Financial Statements -- December 31, 1995 F-6 SPECTRASCIENCE, INC. AUDITED FINANCIAL STATEMENTS DECEMBER 31, 1995 Report of Independent Auditors Board of Directors SpectraScience, Inc. We have audited the accompanying balance sheets of SpectraScience, Inc. as of December 31, 1995 and 1994, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SpectraScience, Inc. at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Ernst & Young LLP Minneapolis, Minnesota January 19, 1996
SpectraScience, Inc. Balance Sheets DECEMBER 31 1995 1994 -------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 4,123,326 $ 58,298 Accounts receivable (net of allowances of $50,000 in 1995 and $171,000 in 1994) 100,641 781 Inventory 181,871 200,468 Other current assets 80,197 78,245 -------------------------------------- Total current assets 4,486,035 337,792 Fixed assets: Office furniture and equipment 232,492 232,492 Machinery and equipment 447,645 381,585 Tooling - 359,704 -------------------------------------- 680,137 973,781 Less accumulated depreciation (521,907) (870,328) -------------------------------------- 158,230 103,453 Other assets - 37,444 -------------------------------------- $ 4,644,265 $ 478,689 ====================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 150,278 $ 139,890 Accrued compensation and taxes 74,328 29,337 Accrued expenses 30,058 122,836 Deferred income - 26,000 Notes payable - 300,000 -------------------------------------- Total current liabilities 254,664 618,063 Commitments Stockholders' equity (deficit): Convertible preferred stock, Series A, par value $1.00 per share: Authorized shares--5,000,000 Issued and outstanding shares--674,998 in 1995 674,998 - Convertible preferred stock, Series B, par value $1.00 per share: Authorized shares--1,000,000 Issued and outstanding shares--792,500 in 1995 792,500 - Common stock, $.25 par value: Authorized shares--4,000,000 Issued and outstanding shares--2,933,348 in 1995 and 2,785,348 in 1994 733,337 696,337 Additional paid-in capital 43,136,284 38,765,897 Accumulated deficit (40,947,518) (39,601,608) -------------------------------------- Total stockholders' equity (deficit) 4,389,601 (139,374) -------------------------------------- Total liabilities and stockholders' equity $ 4,644,265 $ 478,689 ======================================
See accompanying notes.
SpectraScience, Inc. Statements of Operations YEAR ENDED DECEMBER 31 1995 1994 1993 ----------------------------------------------------- NET REVENUES Product revenues $ 134,652 $ $ 28,683 - Service revenues - - 6,319 ----------------------------------------------------- Total net revenues 134,652 - 35,002 Cost of products sold 124,913 - 176,317 ----------------------------------------------------- 9,739 - (141,315) EXPENSES Research and development 660,504 869,670 1,363,795 Selling, general and administrative 711,753 701,278 1,119,793 Interest and other income (16,608) (66,468) (181,897) ----------------------------------------------------- Total expenses 1,355,649 1,504,480 2,301,691 ----------------------------------------------------- Net loss $(1,345,910) $(1,504,480) $(2,443,006) ===================================================== Net loss per share $(.47) $(.55) $(.93) Weighted average common shares 2,857,738 2,753,128 2,622,125
See accompanying notes.
SpectraScience, Inc. Statement of Changes in Stockholders' Equity (Deficit) SERIES A CONVERTIBLE SERIES B CONVERTIBLE COMMON STOCK PREFERRED STOCK PREFERRED STOCK -------------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------------------- Balance December 31, 1992 1,880,882 $470,221 - $ - - $ - Exercise of warrants 867,466 216,866 - - - - Exercise of stock options 2,000 500 - - - - Net loss - - - - - - -------------------------------------------------------------------------------- Balance December 31, 1993 2,750,348 687,587 - - - - Exercise of stock options 30,000 7,500 - - - - Issuance of non-interest bearing notes - - - - - - Issuance of common stock for services 5,000 1,250 - - - - Stock options granted at below market value - - - - - - Net loss - - - - - - -------------------------------------------------------------------------------- Balance December 31, 1994 2,785,348 696,337 - - - - Exercise of stock options 148,000 37,000 - - - - Issuance of non-interest bearing notes - - - - - - Issuance of Series A convertible preferred stock upon debt conversion - - 174,998 174,998 - - Proceeds from issuance of Series A convertible preferred stock, net of expenses of $60,000 - - 500,000 500,000 - - Proceeds from issuance of Series B convertible preferred stock, net of expenses of $435,875 - - - - 792,500 792,500 Net loss - - - - - - -------------------------------------------------------------------------------- Balance December 31, 1995 2,933,348 $733,337 674,998 $674,998 792,500 $792,500 ================================================================================
(TABLE CONTINUED FROM ABOVE)
ADDITIONAL PAID-IN ACCUMULATED CAPITAL DEFICIT TOTAL ------------------------------------------------ Balance December 31, 1992 $35,657,449 $(35,654,122) $ 473,548 Exercise of warrants 3,008,948 - 3,225,814 Exercise of stock options 4,500 - 5,000 Net loss - (2,443,006) (2,443,006) ------------------------------------------------ Balance December 31, 1993 38,670,897 (38,097,128) 1,261,356 Exercise of stock options 67,500 - 75,000 Issuance of non-interest bearing notes 15,000 - 15,000 Issuance of common stock for services - - 1,250 Stock options granted at below market value 12,500 - 12,500 Net loss - (1,504,480) (1,504,480) ------------------------------------------------ Balance December 31, 1994 38,765,897 (39,601,608) (139,374) Exercise of stock options 343,000 - 380,000 Issuance of non-interest bearing notes 3,260 - 3,260 Issuance of Series A convertible preferred stock upon debt conversion 350,002 - 525,000 Proceeds from issuance of Series A convertible preferred stock, net of expenses of $60,000 940,000 - 1,440,000 Proceeds from issuance of Series B convertible preferred stock, net of expenses of $435,875 2,734,125 - 3,526,625 Net loss - (1,345,910) (1,345,910) ------------------------------------------------ Balance December 31, 1995 $43,136,284 $(40,947,518) $4,389,601 ================================================
See accompanying notes.
SpectraScience, Inc. Statements of Cash Flows YEAR ENDED DECEMBER 31 1995 1994 1993 ----------------------------------------------------- OPERATING ACTIVITIES Net loss $(1,345,910) $(1,504,480) $(2,443,006) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 52,302 53,192 97,944 Compensation expense recognized in connection with granting of stock options - 12,500 - Non-cash interest expense 3,260 15,000 - Stock issued for services - 1,250 - Gain on sale of fixed assets - (28,335) (24,725) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (99,860) 35,986 (12,169) (Increase) decrease in inventories 18,597 (200,468) 8,718 Decrease (increase) in other assets 35,492 15,015 (31,385) Increase (decrease) in current liabilities (63,399) 7,210 (421,450) ----------------------------------------------------- Net cash used in operating activities (1,399,518) (1,593,130) (2,826,073) INVESTING ACTIVITIES Purchases of fixed assets (107,379) (30,798) (17,995) Proceeds from sale of fixed assets 300 56,540 78,609 ----------------------------------------------------- Net cash (used in) provided by investing activities (107,079) 25,742 60,614 FINANCING ACTIVITIES Proceeds from issuance of notes payable 225,000 300,000 - Proceeds from issuance of common stock 380,000 75,000 3,230,814 Proceeds from issuance of preferred stock 4,966,625 - - ----------------------------------------------------- Net cash provided by financing activities 5,571,625 375,000 3,230,814 ----------------------------------------------------- Net increase (decrease) in cash and cash equivalents 4,065,028 (1,192,388) 465,355 Cash and cash equivalents at beginning of year 58,298 1,250,686 785,331 ----------------------------------------------------- Cash and cash equivalents at end of year $4,123,326 $ 58,298 $ 1,250,686 ===================================================== SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS Notes payable converted into preferred stock $ 525,000 $ - $ -
See accompanying notes. SpectraScience, Inc. Notes to Financial Statements December 31, 1995 1. BUSINESS The Company was incorporated on May 4, 1983 as GV Medical, Inc. and was engaged in the development of laser angioplasty catheter systems. Subsequently the Company changed its name to SpectraScience, Inc. on October 16, 1992, which was approved by the shareholders on May 13, 1993. The Company is now focused primarily on the design, development, manufacturing and marketing of medical products for the diagnosis and facilitation of treatment of a broad range of human diseases. During 1995, the Company received net proceeds of approximately $5.0 million in conjunction with the issuance of convertible preferred stock (see Notes 3 and 4). Management believes that this capital infusion will be sufficient to fund continued operations through December 1997. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. FIXED ASSETS Fixed assets are stated at cost. The Company depreciates the cost of the property over its estimated useful life using the straight line method. INVENTORY VALUATION Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from the estimates. INCOME TAXES The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amount of assets and liabilities and their respective tax bases. NET LOSS PER SHARE Net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Common equivalent shares from stock options, warrants and convertible preferred stock are excluded from the computation as their effect is antidilutive. 3. NOTES PAYABLE During 1994, the Company received $300,000 of convertible bridge financing from an investor group. The promissory notes were non-interest bearing and were due on March 31, 1995. In connection with the notes payable, the Company granted warrants to the participants in the bridge financing to purchase 100,000 shares of the Company's common stock at $3.00 per share. The warrants are exercisable for five years from the date of grant. During 1995, the Company received $225,000 of convertible bridge financing from an investor group. The promissory notes were non-interest bearing and were due on March 31, 1995. In connection with the notes payable, the Company granted warrants to the participants in the bridge financing to purchase 74,998 shares of the Company's common stock at $3.00 per share. The warrants are exercisable for five years from the date of grant. Upon completion of the sale of convertible preferred stock, Series A in 1995 (see Note 4), bridge loans of $525,000 were converted into 174,998 shares of convertible preferred stock at a price of $3.00 per share. In addition, the Company issued warrants to the investors to purchase 58,335 shares of the Company's common stock at $5.00 per share. The warrants are exercisable for three years from the date of grant. 4. CAPITAL STOCK During 1993, the Company received net proceeds of $3,225,814 from the exercise of 867,466 warrants that had been issued in 1992. The remaining 465,867 warrants expired. In addition, the Company issued 50,000 warrants to a company helping the Company with its public relations in the investment community. These warrants were exercisable at $2.50 per share. The warrants were canceled in 1995 and 50,000 options were reissued to the company and exercised in 1995 at $2.50 per share. On June 30, 1994, the Company's Board of Directors approved a 1-for-5 reverse stock split. Accordingly, all share, per share, weighted average share, and stock option information has been restated to reflect the split. From March 1995 to June 1995, the Company sold 500,000 shares of convertible preferred stock, Series A at $3.00 per share in a private placement for $1,500,000 less related costs of $60,000. The nondividend yielding shares of convertible preferred stock are first convertible into an equivalent number of shares of common stock on March 31, 1996. Holders of shares of the convertible preferred stock also received warrants to purchase 166,665 shares of the Company's common stock at $5.00 per share. The warrants are exercisable for three years from the date of grant. In addition, the Company issued warrants to the underwriter to purchase 20,000 shares of the Company's common stock at $3.00 per share. The warrants are exercisable for five years from the date of grant. The Company issued additional warrants to the underwriter to purchase 6,667 shares of the Company's common stock at $5.00 per share. The warrants are exercisable for three years from the date of grant. In December 1995, the Company sold 792,500 shares of convertible preferred stock, Series B at $5.00 per share in a private placement for $3,962,500 less related costs of $435,875. Holders of shares of the convertible preferred stock also received warrants to purchase 264,175 shares of the company's common stock at $9.50 per share. The warrants are exercisable for three years from the date of grant. In addition, the Company issued warrants to the underwriter to purchase 79,250 shares of the Company's common stock at $5.00 per share. The warrants are exercisable for five years from the date of grant. The Company issued additional warrants to the underwriter to purchase 26,418 shares of the Company's common stock at $9.50 per share, conditional upon exercise of the previous warrant issued to the underwriter. The warrants are exercisable for five years from the date of grant. 5. STOCK OPTIONS The Company has a stock option plan under which selected employees and non-employees may be granted incentive and non-qualified options to purchase common stock of the Company. The options granted are exercisable over a period of no longer than ten years and are granted at not less than 85% of the market price on the date of the grant. The following table summarizes the stock option activity for the three plans:
SHARES STOCK OPTIONS AVAILABLE OUTSTANDING UNDER PRICE FOR GRANT THE PLANS PER SHARE -------------------------------------------------------- Balance December 31, 1992 62,270 430,820 $2.50 - $11.25 Options granted (70,200) 70,200 5.00 - 5.80 Options exercised - (2,000) 2.50 Options forfeited 97,448 (97,448) 2.50 - 5.80 ----------------------------------- Balance December 31, 1993 89,518 401,572 2.50 - 11.25 Options granted (459,000) 459,000 2.50 - 3.00 Options exercised - (30,000) 2.50 Options forfeited 140,700 (140,700) 2.50 - 11.25 Options canceled 89,600 (89,600) 2.65 ----------------------------------- Balance December 31, 1994 (139,182) 600,272 2.50 - 11.25 Amendment to plan 540,000 - - Options granted (320,000) 320,000 2.50 - 4.75 Options exercised - (148,000) 2.50 - 3.00 Options forfeited 5,000 (5,000) 3.00 Options canceled 5,000 (5,000) 2.50 Option plans terminated (30,890) - - ----------------------------------- Balance December 31, 1995 59,928 762,272 $2.50 - $11.25 ===================================
At December 31, 1995, options for 527,184 shares were exercisable. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The Company has not determined the impact of the new statement on its financial statements. 6. COMMITMENTS The Company has an operating lease agreement for certain premises within a building in Minneapolis, Minnesota that has a term extending through August 1996. The lease requires annual base rent of approximately $24,000 plus a sharing of certain expenses. The Company incurred total lease and rental expenses of $36,000, $37,000 and $107,000 for the years ended December 31, 1995, 1994 and 1993, respectively. In 1995, the Company entered into a clinical research agreement for up to two years with a hospital. Under the terms of the agreement, the Company has agreed to pay $200,000 for the first year of the study, of which $150,000 was charged to expense in 1995. The second year of the study will not be initiated until the partners have agreed to the amount of funding to be provided by the Company. The Company entered into a license agreement with Massachusetts Institute of Technology for the use of certain patents. Under the terms of the agreement, the Company has agreed to pay $50,000 per year through October 2003 and $30,000 per year thereafter until the expiration of the patent rights. The agreement will immediately terminate if any scheduled payment is not made within 30 days of its due date. 7. INCOME TAXES The tax effect of the Company's deferred tax assets is as follows: DECEMBER 31 1995 1994 -------------------------------------- Net operating loss carryforward $14,616,000 $14,270,000 Accounts receivable allowance 18,000 62,000 Accrued liabilities 40,000 52,000 Tax credits 740,000 607,000 -------------------------------------- 15,414,000 14,991,000 Valuation allowance (15,414,000) (14,991,000) -------------------------------------- $ - $ - ====================================== At December 31, 1995, the Company had net operating loss carryforwards of approximately $40,600,000 that expire at various times through the year 2010. In addition, the Company has research and development tax credits that expire at various times through 2010. As a result of previous stock transactions, the Company is limited as to the amount of net operating loss and tax credit carryforwards which may be utilized in any one year. The annual limitation is approximately $1,000,000. 8. BUSINESS SEGMENT AND EXPORT SALES INFORMATION The Company is focused primarily on the design, development, manufacturing and marketing of medical products for the diagnosis and facilitation of treatment of a broad range of human diseases. Its product is marketed primarily through an independent distributor in foreign countries. The Company's only export sales were $28,000 in 1993. 9. EMPLOYEE BENEFIT PLAN The Company has a 401(k) profit sharing and savings plan covering substantially all employees. The plan allows employees to defer up to 15% of their annual earnings. The Company will match 25% of the employee contributions to a maximum of 4% of employee earnings. The contributions by the Company totaled approximately $4,000, $4,000 and $10,000 for 1995, 1994 and 1993, respectively. EX-3.1 2 EXHIBIT 3.1 TO FORM 10-KSB: ARTICLES OF INCORPORATION OF SPECTRASCIENCE, INC INCLUDING AMENDMENTS ARTICLES OF INCORPORATION OF SPECTRASCIENCE, INC. The undersigned incorporator, a natural person 18 years of age or older, in order to form a corporation under Minnesota Statutes, Section 302A, hereby adopts the following Articles of Incorpration: ARTICLE I The name of this corporation is G V Medical, Inc. ARTICLE I - AMENDED The name of this corporation is SpectraScience, Inc. ARTICLE II The registered office of this corporation is located at 4200 IDS Center, 80 South Eighth Street, Minneapolis, Minnesota 55402 ARTICLE II - AMENDED (A) The registered office of this corporation is located at 3750 Annapolis Lane, Minneapolis, Minnesota 55441 ARTICLE II - AMENDED (B) The registered office of this corporation is located at 3750 Annapolis Lane, Minneapolis, Minnesota 55447 ARTICLE II - AMENDED (C) The registered office of this corporation is located at 5909 Baker Road, Suite 580, Minnetonka, Minnesota 55345 ARTICLE III The corporation is authorized to issue an aggregate total of 2,000,000 shares, par value of $.05 per share. All shares shall be of one class and one series. ARTICLE III - AMENDED (A) The corporation is authorized to issue an aggregate total of 5,000,000 shares, par value of $.05 per share. All shares shall be of one class and one series. ARTICLE III - AMENDED (B) CAPITAL STOCK The authorized capital stock of this corporation shall be Twenty Million (20,000,000) shares of common stock with a stated par value of twenty five cents ($.05) per share (the "Common Stock") and Twenty Million (20,000,000) shares of preferred stock with a stated par value of one dollar ($1.00) per share (the "Preferred Stock"). The designation and the powers, preferences and rights, and the qualifications, limitations or restrictions of the shares of each class of stock shall be as follows: SECTION 1. Common Stock. Subject to all of the rights of the Preferred Stock, and except as may be expressly provided with respect to the Preferred Stock herein, by law or by the Board of Directors pursuant to this Article III: (a) dividends may be declared and paid or set apart for payment upon the Common Stock out of any assets or funds of the corporation legally available for the payment of dividends; (b) the holders of the Common Stock shall have the exclusive right to vote for the election of directors and on all other matters requiring stockholder action, each share being entitled to one vote; and (c) upon the voluntary or involuntary liquidation, dissolution or winding up of the corporation, the net assets of the corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective share ownership. SECTION 2. Preferred Stock. The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more series. Subject to the provisions hereof and the limitations prescribed by law, the Board of Directors is expressly authorized by adopting resolutions providing for the issuance of shares of any particular series and, if and to the extent from time to time required by law, by filing with the Minnesota Secretary of State a statement with respect to the adoption of the resolutions pursuant to the Minnesota Business Corporation Act (or other law hereafter in effect relating to the same or substantially similar subject matter), to establish the number of shares to be included in each such series and to fix the designation and relative powers, preferences and rights and the qualifications and limitations or restrictions thereof relating to the shares of each such series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) the distinctive serial designation of such series and the number of shares constituting such series, provided that the aggregate number of shares constituting all series of Preferred Stock shall not exceed Twenty Million (20,000,000); (b) the annual dividend rate on shares of such series, if any, whether dividends shall be cumulative and, if so, from which date or dates; (c) whether the shares of such series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon and after which such shares shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (d) the obligation, if any, of the corporation to retire shares of such series pursuant to a sinking fund; (e) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (f) whether the shares of such series shall have voting rights provided by law, and, if so, the terms of such voting rights; (g) the rights of the shares of such series in the event of the voluntary or involuntary liquidation, dissolution or winding up of the corporation; and (h) any other rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series. The shares of Preferred Stock of any one series shall be identical with each other in all respects except as to the dates from and after which dividends thereon shall cumulate, if cumulative. ARTICLE III - AMENDED (C) CAPITAL STOCK The following text hereby replaces the first paragraph of Article III - Amended (B): The authorized capital stock of this corporation shall be Twenty Million (20,000,000) shares of common stock with a stated par value of twenty five cents ($.05) per share (the "Common Stock") and Twenty Million (20,000,000) shares of preferred stock with a stated par value of one dollar ($1.00) per share (the "Preferred Stock"). Effective as of 11:59 p.m. CDT on June 30, 1994, a one-for-five reverse split of shares of Common Stock of the Corporation issued and outstanding immediately prior to that time and date shall be and hereby is enacted, with each holder of Common Stock of the Corporation of record as of 11:59 p.m. CDT on June 30, 1994, to be deemed the owner of one share of Common Stock for every three shares of Common Stock owned by such holder as of 11:59 p.m. CDT on June 30, 1994. Fractional shares of Common Stock shall not be issued and no payment in lieu of fractional shares of Common Stock shall be made, but each fractional share of Common Stock interest of .5 or more held by any one holder of Common Stock shall be rounded up to the next higher full share, and each fractional share of Common Stock interest of less than .5 held by any one holder of Common Stock shall be rounded down to zero. Effective as of June 30, 1994, the stated par value of the Common Stock shall be twenty-five cents ($.25) per share and the number of authorized shares of Common Stock shall be reduced to four million (4,000,000). The changes stated herein shall not adversely effect the rights or preferences of the holders of outstanding shares of any class or series and shall not result in the percentage of authorized shares that remains unissued after the combination of shares of Common Stock exceeding the percentage of authorized shares that were unissued before the combination. The designation and the powers, preferences and rights, and the qualifications, limitations or restrictions of the shares of each class of stock shall be as follows: ARTICLE III AMENDED (D) CAPITAL STOCK The authorized capital stock of this corporation shall be Four Million (4,000,000) shares of common stock with a stated par value of twenty five cents ($.25) per share (the "Common Stock") and Twenty Million (20,000,000) shares of preferred stock with a stated par value of one dollar ($1.00) per share (the "Preferred Stock"). The designation and the powers, preferences and rights, and the qualifications, limitations or restrictions of the shares of each class of stock shall be as follows: SECTION 1. Common Stock. Subject to all of the rights of the Preferred Stock, and except as may be expressly provided with respect to the Preferred Stock herein, by law or by the Board of Directors pursuant to this Article III: (a) dividends may be declared and paid or set apart for payment upon the Common Stock out of any assets or funds of the corporation legally available for the payment of dividends; (b) the holders of the Common Stock shall have the exclusive right to vote for the election of directors and on all matters requiring shareholder action, each share being entitled to one vote; and (c) upon the voluntary or involuntary liquidation, dissolution or winding up of the corporation, the net assets of the corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective share ownership. SECTION 2. Preferred Stock. The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more series. Subject to the provisions hereof and the limitations prescribed by law, the Board of Directors is expressly authorized by adopting resolutions providing for the issuance of shares of any particular series and, if and to the extent from time to time required by law, by filing with the Minnesota Secretary of State a statement with respect to the adoption of the resolutions pursuant to the Minnesota Business Corporation Act (or other law hereafter in effect relating to the same or substantially similar subject matter), to establish the number of shares to be included in each such series and to fix the designation and relative powers, preferences and rights and the qualifications and limitations or restrictions thereof relating to the shares of each such series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) the distinctive serial designation of such series and the number of shares constituting such series, provided that the aggregate number of shares constituting all series of Preferred Stock shall not exceed Twenty Million (20,000,000); (b) the annual dividend rate on shares of such series, if any, whether dividends shall be cumulative and, if so, from which date or dates; (c) whether the shares of such series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon and after which such shares shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (d) the obligation, if any, of the corporation to retire shares of such series pursuant to a sinking fund; (e) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (f) whether the shares of such series shall have voting rights provided by law, and, if so, the terms of such voting rights; (g) the rights of the shares of such series in the event of the voluntary or involuntary liquidation, dissolution or winding up of the corporation; and (h) any other rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series. The shares of Preferred Stock of any one series shall be identical with each other in all respects except as to the dates from and after which dividends thereon shall cumulate, if cumulative. Although the Board of Directors may fix and determine the relative rights and preferences among the various series of Preferred Stock in accordance with the authority set forth above, in all other respects, the shares of all series shall be of equal rank with each other, regardless of series. 2.1 Redemption and Conversion. Any share of any series of Preferred Stock which has been redeemed or converted shall have the status of an authorized and unissued share of Preferred Stock and may be reissued as a part of the series of which it was originally a part or may be reissued as part of another series of Preferred Stock established by the Board of Directors. 2.2 Preferential Distribution in Liquidation. Upon the liquidation, dissolution or winding up of the corporation, the holders of the Preferred Stock then outstanding shall be entitled to receive the amount per share fixed for the various series before any of the assets of the corporation are distributed to the holders of the Common Stock. If the assets of the corporation distributable to the holders of the Preferred Stock have a value which is less that the full amount so fixed for the various series, such assets shall be distributed among the holders of the various series of Preferred Stock in accordance with any preferences among the series that may have been established or, to the extent that no such preferences shall have been established, pro rata among the holders of all of the series of Preferred Stock. After distribution of the preferential amounts required to be distributed to the holders of the Preferred Stock then outstanding, the holders of the Common Stock shall be entitled, to the exclusion of the holders of the Preferred Stock unless otherwise provided, to share in all the remaining assets of the corporation. SERIES A CONVERTIBLE STOCK There is hereby established and created an initial series of Preferred Stock in the number of shares and having the designation, relative rights, preferences and limitations as follows: 2.3 Designation and Number of Shares. The distinctive designation of the series shall be "Series A Convertible Preferred Stock" (par value $ 1.00 per share) herein sometimes referred to as the "Series A Preferred Stock") and the number of shares initially constituting the series shall be 5,000,000. 2.4 Dividends. The Series A Preferred Stock shall bear no dividends. 2.5 Preferences in Liquidation. (a) Preferential Payment. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the holders of shares of the Series A Preferred Stock then outstanding shall be entitled to be paid according to their relationship with other holders of Preferred Stock, out of the assets of the corporation available for distribution to shareholders, whether from capital, surplus or earnings, before any payment shall be made in respect of the corporation's Common Stock, an amount equal to $1.00 per share. After setting apart or paying in full the preferential amounts due the holders of the Series A Preferred Stock and any other holders of Preferred Stock, the remaining assets of the corporation available for distribution to shareholders, if any, shall be distributed to the holders of Common Stock unless otherwise provided. If upon liquidation, dissolution or winding up of the corporation, the assets of the corporation available for distribution to its shareholders shall be insufficient to pay the holders of the Series A Preferred Stock the full preferential distribution of $1 per share, the holders of the Series A Preferred Stock shall share ratably in the distribution of such assets. (b) Notice. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the corporation shall, within 10 days after the date the Board of Directors approves such action, or within 20 days prior to any shareholders' meeting called to approve such action, or within 20 days after the commencement of any involuntary proceeding, whichever is earlier, give each holder of shares of Series A Preferred Stock initial written notice of the proposed action. Such initial written notice shall describe the material terms and conditions of the proposed action, including a description of the stock, cash and property to be received by the holders of shares of Series A Preferred Stock upon consummation of the proposed action and the date of delivery thereof. If any material change in the facts set forth in the initial notice shall occur, the corporations shall promptly give written notice to each holder of shares of Series A Preferred Stock of such material change. 2.6 Voting Rights. Except as otherwise provided by law or as expressly provided herein, the Common Stock shall have exclusive voting rights and powers, including the exclusive right to notice of shareholders' meetings. 2.7 Conversion Rights. (a) Optional Conversion. Shares of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after March 31, 1996, (the "Conversion Period"), into fully paid and nonassessable shares of Common Stock of the corporation. (b) Conversion Ratio. Each share of Series A Preferred Stock shall be converted into one share of the Common Stock of the corporation, subject to adjustment as provided in paragraph 2.8 below. (c) Procedure For Conversion. The holder of any shares of Series A Preferred Stock may exercise the conversion rights during the Conversion Period as to such shares or any part thereof by delivering to the corporation during regular business hours, at the office of any transfer agent of the corporation for the Series A Preferred Stock, or at the principal office of the corporation, the certificate or certificates for the shares to be converted, duly endorsed for transfer to the corporation, accompanied by written notice stating that the holder elects to convert such shares or a part thereof. Conversion shall be deemed to have been effected on the date when such delivery is made, and such date is referred to herein as the "Conversion Date". As promptly as practicable thereafter the corporation shall issue and deliver to or upon the written order of such holder, at such office or other place designated by the corporation, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check for cash with respect to any fractional interest in a share of Common Stock as provided in paragraph 2.7(d). The holder shall be deemed to have become a shareholder of record on the applicable Conversion Date unless the transfer books of the corporation are closed on such date, in which event he shall be deemed to have become a shareholder of record on the next succeeding date on which the transfer books are open, but the Conversion Ratio shall be that in effect on the Conversion Date. Upon conversion of only a portion of the number of shares of Series A Preferred Stock represented by a certificate surrendered for conversion, the corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the corporation, a new certificate covering the number of shares of Series A Preferred Stock representing the unconverted portion of the certificate so surrendered. (d) Fractional Shares. No fractional shares of Common Stock or scrip shall be issued upon conversion of shares of Series A Preferred Stock. If more than one share of Series A Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Series A Preferred Stock, the corporation shall pay a cash adjustment in respect of such fractional interest equal to the fair market value of such fractional interest as determined by the Board of Directors. (e) Reserved Shares. The corporation shall reserve and keep available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of the Series A Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all Series A Preferred Stock from time to time outstanding. The corporation shall from time to time (subject to obtaining necessary director and shareholder action) increase the authorized amount of its Common Stock if at any time the authorized number of shares of its Common Stock remaining unissued shall not be sufficient to permit the conversion of all of the shares of Series A Preferred Stock at the time outstanding. (f) Registration. If any shares of Common Stock to be reserved for the purpose of shares of Series A Preferred Stock require registration or listing with, or approval of, any governmental authority, stock exchange, or other regulatory body under any federal or state law or regulation or otherwise, before such shares may be validly issued or delivered upon conversion, the corporation will in good faith and as expeditiously as reasonable endeavor to secure such registration, listing or approval, as the case may be. (g) Validly Issued. All shares of Common Stock which may be issued upon conversion of the shares of Series A Preferred Stock will, upon issuance by the corporation, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. (h) Negative Covenants. This corporation will not, by amendment of its articles of incorporation 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 thereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in the taking of such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock against impairment. In addition, the corporation shall at no time issue or sell any shares of its Common Stock or Preferred Stock, options or warrants for a consideration less than fair market value, as reasonably determined by the Board of Directors, except for grants or awards of Common Stock or options to acquire Common Stock made to the corporation's employees, officers, and directors and to consultants and other participants in the corporation's stock option, stock award, stock purchase and other benefit plans, provided such grants and awards made after the date of the first issuance of the corporation's Series A Preferred Stock shall not represent more than 10% of the then outstanding shares of Common Stock of the corporation. 2.8 Antidilution. The Conversion Ratio (referred to in paragraph 2.7 (b)) shall be subject to adjustment from time to time, and the number of shares of Common Stock issuable on conversion of any shares of Series A Preferred Stock shall be subject to a resultant increase or decrease (calculated to the nearest 1/100th of a share) by reason of such adjustment, as hereafter stated, except that no adjustment shall be made, unless by reason of the occurrence of one or more of the events hereinafter specified, the Conversion Ratio theretofore in effect shall be changed by an amount equal to at least 5% thereof, but in the event that an adjustment would be required except of insufficiency of amount, such amount shall be carried forward and added to and shall be made at the time of and together with any subsequent adjustment which, together with any adjustment or adjustments so carried forward, amount to at least 5% of the Conversion Ratio at such later time: (a) Stock Dividends, Subdivisions and Combinations. In the event the corporation shall declare a stock dividend with respect to its Common Stock or shall effect a subdivision or combination of its Common Stock into a greater or lesser number of shares without a proportionate and corresponding stock dividend, subdivision or combination with respect to its outstanding Series A Preferred Stock, then the existing Conversion Ratio for the Series A Preferred Stock shall be increased or decreased proportionately. (b) Classification, Reclassification, Capital Reorganization, Etc. In the case of any classification, reclassification, capital reorganization or other change of outstanding shares of Common Stock (other than a change in par value, or from without par value to par value, or from par value to without par value, or as a result of an issuance of Common Stock by way of dividend or other distribution or of a subdivision or combination), or in case of any consolidation or merger of the corporation with or into another corporation (other than a merger with a subsidiary in which the corporation is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of the Common Stock issuable upon conversion of the shares of the Series A Preferred Stock) or in case of any sale or conveyance to another corporation of the property of the corporation as an entirety or substantially as an entirety, the corporation shall cause the holders of the Series A Preferred Stock to have the right, by exercising their conversion rights thereunder, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance, if any, which the holders of the Series A Preferred Stock would have received had the conversion taken place immediately prior to such event. 2.9 Changes Affecting Series A Preferred Stock. So long as any shares of Series A Preferred Stock are outstanding, the corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of shares of Series A Preferred Stock outstanding, voting separately as a class, (i) alter or change any of the powers, preferences, privileges, or rights of the Series A Preferred Stock; or (ii) amend the provisions of this paragraph 2.9; or (iii) create any new class or series of shares having preferences prior to the Series A Preferred Stock or reclassifying any class or series of any Common Stock or any other shares of stock hereafter created junior to the Class A Preferred Stock into shares having any preference or priority over the Series A Preferred Stock. ARTICLE III AMENDED (E) CAPITAL STOCK The authorized capital stock of this corporation shall be Four Million (4,000,000) shares of common stock with a stated par value of twenty five cents ($.25) per share (the "Common Stock") and Twenty Million (20,000,000) shares of preferred stock with a stated par value of one dollar ($1.00) per share (the "Preferred Stock"). The designation and the powers, preferences and rights, and the qualifications, limitations or restrictions of the shares of each class of stock shall be as follows: SECTION 1. Common Stock. Subject to all of the rights of the Preferred Stock, and except as may be expressly provided with respect to the Preferred Stock herein, by law or by the Board of Directors pursuant to this Article III: (a) dividends may be declared and paid or set apart for payment upon the Common Stock out of any assets or funds of the corporation legally available for the payment of dividends; (b) the holders of the Common Stock shall have the exclusive right to vote for the election of directors and on all matters requiring shareholder action, each share being entitled to one vote; and (c) upon the voluntary or involuntary liquidation, dissolution or winding up of the corporation, the net assets of the corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective share ownership. SECTION 2. Preferred Stock. The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more series. Subject to the provisions hereof and the limitations prescribed by law, the Board of Directors is expressly authorized by adopting resolutions providing for the issuance of shares of any particular series and, if and to the extent from time to time required by law, by filing with the Minnesota Secretary of State a statement with respect to the adoption of the resolutions pursuant to the Minnesota Business Corporation Act (or other law hereafter in effect relating to the same or substantially similar subject matter), to establish the number of shares to be included in each such series and to fix the designation and relative powers, preferences and rights and the qualifications and limitations or restrictions thereof relating to the shares of each such series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) the distinctive serial designation of such series and the number of shares constituting such series, provided that the aggregate number of shares constituting all series of Preferred Stock shall not exceed Twenty Million (20,000,000); (b) the annual dividend rate on shares of such series, if any, whether dividends shall be cumulative and, if so, from which date or dates; (c) whether the shares of such series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon and after which such shares shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (d) the obligation, if any, of the corporation to retire shares of such series pursuant to a sinking fund; (e) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (f) whether the shares of such series shall have voting rights provided by law, and, if so, the terms of such voting rights; (g) the rights of the shares of such series in the event of the voluntary or involuntary liquidation, dissolution or winding up of the corporation; and (h) any other rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series. The shares of Preferred Stock of any one series shall be identical with each other in all respects except as to the dates from and after which dividends thereon shall cumulate, if cumulative. Although the Board of Directors may fix and determine the relative rights and preferences among the various series of Preferred Stock in accordance with the authority set forth above, in all other respects, the shares of all series shall be of equal rank with each other, regardless of series. 2.1 Redemption and Conversion. Any share of any series of Preferred Stock which has been redeemed or converted shall have the status of an authorized and unissued share of Preferred Stock and may be reissued as a part of the series of which it was originally a part or may be reissued as part of another series of Preferred Stock established by the Board of Directors. 2.2 Preferential Distribution in Liquidation. Upon the liquidation, dissolution or winding up of the corporation, the holders of the Preferred Stock then outstanding shall be entitled to receive the amount per share fixed for the various series before any of the assets of the corporation are distributed to the holders of the Common Stock. If the assets of the corporation distributable to the holders of the Preferred Stock have a value which is less that the full amount so fixed for the various series, such assets shall be distributed among the holders of the various series of Preferred Stock in accordance with any preferences among the series that may have been established or, to the extent that no such preferences shall have been established, pro rata among the holders of all of the series of Preferred Stock. After distribution of the preferential amounts required to be distributed to the holders of the Preferred Stock then outstanding, the holders of the Common Stock shall be entitled, to the exclusion of the holders of the Preferred Stock unless otherwise provided, to share in all the remaining assets of the corporation. SERIES A CONVERTIBLE STOCK There is hereby established and created an initial series of Preferred Stock in the number of shares and having the designation, relative rights, preferences and limitations as follows: 2.3 Designation and Number of Shares. The distinctive designation of the series shall be "Series A Convertible Preferred Stock" (par value $ 1.00 per share) herein sometimes referred to as the "Series A Preferred Stock") and the number of shares initially constituting the series shall be 5,000,000. 2.4 Dividends. The Series A Preferred Stock shall bear no dividends. 2.5 Preferences in Liquidation. (a) Preferential Payment. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the holders of shares of the Series A Preferred Stock then outstanding shall be entitled to be paid according to their relationship with other holders of Preferred Stock, out of the assets of the corporation available for distribution to shareholders, whether from capital, surplus or earnings, before any payment shall be made in respect of the corporation's Common Stock, an amount equal to $1.00 per share. After setting apart or paying in full the preferential amounts due the holders of the Series A Preferred Stock and any other holders of Preferred Stock, the remaining assets of the corporation available for distribution to shareholders, if any, shall be distributed to the holders of Common Stock unless otherwise provided. If upon liquidation, dissolution or winding up of the corporation, the assets of the corporation available for distribution to its shareholders shall be insufficient to pay the holders of the Series A Preferred Stock the full preferential distribution of $1 per share, the holders of the Series A Preferred Stock shall share ratably in the distribution of such assets. (b) Notice. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the corporation shall, within 10 days after the date the Board of Directors approves such action, or within 20 days prior to any shareholders' meeting called to approve such action, or within 20 days after the commencement of any involuntary proceeding, whichever is earlier, give each holder of shares of Series A Preferred Stock initial written notice of the proposed action. Such initial written notice shall describe the material terms and conditions of the proposed action, including a description of the stock, cash and property to be received by the holders of shares of Series A Preferred Stock upon consummation of the proposed action and the date of delivery thereof. If any material change in the facts set forth in the initial notice shall occur, the corporations shall promptly give written notice to each holder of shares of Series A Preferred Stock of such material change. 2.6 Voting Rights. Except as otherwise provided by law or as expressly provided herein, the Common Stock shall have exclusive voting rights and powers, including the exclusive right to notice of shareholders' meetings. 2.7 Conversion Rights. (a) Optional Conversion. Shares of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after March 31, 1996, (the "Conversion Period"), into fully paid and nonassessable shares of Common Stock of the corporation. (b) Conversion Ratio. Each share of Series A Preferred Stock shall be converted into one share of the Common Stock of the corporation, subject to adjustment as provided in paragraph 2.8 below. (c) Procedure For Conversion. The holder of any shares of Series A Preferred Stock may exercise the conversion rights during the Conversion Period as to such shares or any part thereof by delivering to the corporation during regular business hours, at the office of any transfer agent of the corporation for the Series A Preferred Stock, or at the principal office of the corporation, the certificate or certificates for the shares to be converted, duly endorsed for transfer to the corporation, accompanied by written notice stating that the holder elects to convert such shares or a part thereof. Conversion shall be deemed to have been effected on the date when such delivery is made, and such date is referred to herein as the "Conversion Date". As promptly as practicable thereafter the corporation shall issue and deliver to or upon the written order of such holder, at such office or other place designated by the corporation, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check for cash with respect to any fractional interest in a share of Common Stock as provided in paragraph 2.7(d). The holder shall be deemed to have become a shareholder of record on the applicable Conversion Date unless the transfer books of the corporation are closed on such date, in which event he shall be deemed to have become a shareholder of record on the next succeeding date on which the transfer books are open, but the Conversion Ratio shall be that in effect on the Conversion Date. Upon conversion of only a portion of the number of shares of Series A Preferred Stock represented by a certificate surrendered for conversion, the corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the corporation, a new certificate covering the number of shares of Series A Preferred Stock representing the unconverted portion of the certificate so surrendered. (d) Fractional Shares. No fractional shares of Common Stock or scrip shall be issued upon conversion of shares of Series A Preferred Stock. If more than one share of Series A Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Series A Preferred Stock, the corporation shall pay a cash adjustment in respect of such fractional interest equal to the fair market value of such fractional interest as determined by the Board of Directors. (e) Reserved Shares. The corporation shall reserve and keep available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of the Series A Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all Series A Preferred Stock from time to time outstanding. The corporation shall from time to time (subject to obtaining necessary director and shareholder action) increase the authorized amount of its Common Stock if at any time the authorized number of shares of its Common Stock remaining unissued shall not be sufficient to permit the conversion of all of the shares of Series A Preferred Stock at the time outstanding. (f) Registration. If any shares of Common Stock to be reserved for the purpose of shares of Series A Preferred Stock require registration or listing with, or approval of, any governmental authority, stock exchange, or other regulatory body under any federal or state law or regulation or otherwise, before such shares may be validly issued or delivered upon conversion, the corporation will in good faith and as expeditiously as reasonable endeavor to secure such registration, listing or approval, as the case may be. (g) Validly Issued. All shares of Common Stock which may be issued upon conversion of the shares of Series A Preferred Stock will, upon issuance by the corporation, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. (h) Negative Covenants. This corporation will not, by amendment of its articles of incorporation 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 thereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in the taking of such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock against impairment. In addition, the corporation shall at no time issue or sell any shares of its Common Stock or Preferred Stock, options or warrants for a consideration less than fair market value, as reasonably determined by the Board of Directors, except for grants or awards of Common Stock or options to acquire Common Stock made to the corporation's employees, officers, and directors and to consultants and other participants in the corporation's stock option, stock award, stock purchase and other benefit plans, provided such grants and awards made after the date of the first issuance of the corporation's Series A Preferred Stock shall not represent more than 10% of the then outstanding shares of Common Stock of the corporation. 2.8 Antidilution. The Conversion Ratio (referred to in paragraph 2.7 (b)) shall be subject to adjustment from time to time, and the number of shares of Common Stock issuable on conversion of any shares of Series A Preferred Stock shall be subject to a resultant increase or decrease (calculated to the nearest 1/100th of a share) by reason of such adjustment, as hereafter stated, except that no adjustment shall be made, unless by reason of the occurrence of one or more of the events hereinafter specified, the Conversion Ratio theretofore in effect shall be changed by an amount equal to at least 5% thereof, but in the event that an adjustment would be required except of insufficiency of amount, such amount shall be carried forward and added to and shall be made at the time of and together with any subsequent adjustment which, together with any adjustment or adjustments so carried forward, amount to at least 5% of the Conversion Ratio at such later time: (a) Stock Dividends, Subdivisions and Combinations. In the event the corporation shall declare a stock dividend with respect to its Common Stock or shall effect a subdivision or combination of its Common Stock into a greater or lesser number of shares without a proportionate and corresponding stock dividend, subdivision or combination with respect to its outstanding Series A Preferred Stock, then the existing Conversion Ratio for the Series A Preferred Stock shall be increased or decreased proportionately. (b) Classification, Reclassification, Capital Reorganization, Etc. In the case of any classification, reclassification, capital reorganization or other change of outstanding shares of Common Stock (other than a change in par value, or from without par value to par value, or from par value to without par value, or as a result of an issuance of Common Stock by way of dividend or other distribution or of a subdivision or combination), or in case of any consolidation or merger of the corporation with or into another corporation (other than a merger with a subsidiary in which the corporation is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of the Common Stock issuable upon conversion of the shares of the Series A Preferred Stock) or in case of any sale or conveyance to another corporation of the property of the corporation as an entirety or substantially as an entirety, the corporation shall cause the holders of the Series A Preferred Stock to have the right, by exercising their conversion rights thereunder, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance, if any, which the holders of the Series A Preferred Stock would have received had the conversion taken place immediately prior to such event. 2.9 Changes Affecting Series A Preferred Stock. So long as any shares of Series A Preferred Stock are outstanding, the corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of shares of Series A Preferred Stock outstanding, voting separately as a class, (i) alter or change any of the powers, preferences, privileges, or rights of the Series A Preferred Stock; or (ii) amend the provisions of this paragraph 2.9; or (iii) create any new class or series of shares having preferences prior to the Series A Preferred Stock or reclassifying any class or series of any Common Stock or any other shares of stock hereafter created junior to the Class A Preferred Stock into shares having any preference or priority over the Series A Preferred Stock. SERIES B CONVERTIBLE STOCK There is hereby established and created a second series of Preferred Stock in the number of shares and having the designation, relative rights, preferences and limitations as follows: 2.10 Designation and Number of Shares. The distinctive designation of the series shall be "Series B Convertible Preferred Stock" (par value $ 1.00 per share) herein sometimes referred to as the "Series B Preferred Stock") and the number of shares initially constituting the series shall be 1,000,000. 2.11 Dividends. Except as provided below, the Series B Preferred Stock shall bear no dividends. In the event that the corporation has not increased the number of authorized shares of its Common Stock to the extent sufficient to enable the corporation to reserve a number of shares of Common Stock sufficient to cover the conversion of the shares of Series B Preferred Stock and the exercise of all Warrants issued in connection with the offering of the Series B Preferred Stock by December 15, 1996, the Series B Preferred Stock shall bear an 8% cumulative annual dividend, payable quarterly, commencing upon the corporation's failure to satisfy such condition and terminating on the date compliance with such condition is satisfied. 2.12 Preferences in Liquidation. (a) Preferential Payment. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the holders of shares of the Series B Preferred Stock then outstanding shall be entitled to be paid according to their relationship with other holders of Preferred Stock, out of the assets of the corporation available for distribution to shareholders, pari passu, whether from capital, surplus or earnings, before any payment shall be made in respect of the corporation's Common Stock, an amount equal to $1.00 per share. After setting apart or paying in full the preferential amounts due the holders of the Series B Preferred Stock and any other holders of Preferred Stock, the remaining assets of the corporation available for distribution to shareholders, if any, shall be distributed to the holders of Common Stock unless otherwise provided. If upon liquidation, dissolution or winding up of the corporation, the assets of the corporation available for distribution to its shareholders shall be insufficient to pay the holders of the Series B Preferred Stock the full preferential distribution of $1 per share, the holders of the Series B Preferred Stock shall share ratably in the distribution of such assets. (b) Notice. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the corporation shall, within 10 days after the date the Board of Directors approves such action, or within 20 days prior to any shareholders' meeting called to approve such action, or within 20 days after the commencement of any involuntary proceeding, whichever is earlier, give each holder of shares of Series B Preferred Stock initial written notice of the proposed action. Such initial written notice shall describe the material terms and conditions of the proposed action, including a description of the stock, cash and property to be received by the holders of shares of Series B Preferred Stock upon consummation of the proposed action and the date of delivery thereof. If any material change in the facts set forth in the initial notice shall occur, the corporations shall promptly give written notice to each holder of shares of Series B Preferred Stock of such material change. 2.13 Voting Rights. Except as otherwise provided by law or as expressly provided herein, the Common Stock shall have exclusive voting rights and powers, including the exclusive right to notice shareholders' meetings. 2.14 Conversion Rights. (a) Optional Conversion. Shares of Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time after December 28, 1996 (the "Conversion Period"), into fully paid and nonassessable shares of Common Stock of the corporation. (b) Conversion Ratio. Each share of Series B Preferred Stock shall be converted into one share of the Common Stock of the corporation, subject to adjustment as provided in paragraph 2.15 below. (c) Procedure For Conversion. The holder of any shares of Series B Preferred Stock may exercise the conversion rights during the Conversion Period as to such shares or any part thereof by delivering to the corporation during regular business hours, at the office of any transfer agent of the corporation for the Series B Preferred Stock, or at the principal office of the corporation, the certificate or certificates for the shares to be converted, duly endorsed for transfer to the corporation, accompanied by written notice stating that the holder elects to convert such shares or a part thereof. Conversion shall be deemed to have been effected on the date when such delivery is made, and such date is referred to herein as the "Conversion Date". As promptly as practicable thereafter the corporation shall issue and deliver to or upon the written order of such holder, at such office or other place designated by the corporation, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check for cash with respect to any fractional interest in a share of Common Stock as provided in paragraph 2.14(d). The holder shall be deemed to have become a shareholder of record on the applicable Conversion Date unless the transfer books of the corporation are closed on such date, in which event he shall be deemed to have become a shareholder of record on the next succeeding date on which the transfer books are open, but the Conversion Ratio shall be that in effect on the Conversion Date. Upon conversion of only a portion of the number of shares of Series B Preferred Stock represented by a certificate surrendered for conversion, the corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the corporation, a new certificate covering the number of shares of Series B Preferred Stock representing the unconverted portion of the certificate so surrendered. (d) Fractional Shares. No fractional shares of Common Stock or scrip shall be issued upon conversion of shares of Series B Preferred Stock. If more than one share of Series B Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series B Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Series B Preferred Stock, the corporation shall pay a cash adjustment in respect of such fractional interest equal to the fair market value of such fractional interest as determined by the Board of Directors. (e) Reserved Shares. The corporation shall reserve and keep available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of the Series B Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all Series B Preferred Stock from time to time outstanding. The corporation shall from time to time (subject to obtaining necessary director and shareholder action) increase the authorized amount of its Common Stock if at any time the authorized number of shares of its Common Stock remaining unissued shall not be sufficient to permit the conversion of all of the shares of Series B Preferred Stock at the time outstanding. (f) Registration. If any shares of Common Stock to be reserved for the purpose of shares of Series B Preferred Stock require registration or listing with, or approval of, any governmental authority, stock exchange, or other regulatory body under any federal or state law or regulation or otherwise, before such shares may be validly issued or delivered upon conversion, the corporation will in good faith and as expeditiously as reasonable endeavor to secure such registration, listing or approval, as the case may be. (g) Validly Issued. All shares of Common Stock which may be issued upon conversion of the shares of Series B Preferred Stock will, upon issuance by the corporation, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. (h) Negative Covenants. This corporation will not, by amendment of its articles of incorporation 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 thereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in the taking of such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series B Preferred Stock against impairment. 2.15 Antidilution. The Conversion Ratio (referred to in paragraph 2.14 (b)) shall be subject to adjustment from time to time, and the number of shares of Common Stock issuable on conversion of any shares of Series B Preferred Stock shall be subject to a resultant increase or decrease (calculated to the nearest 1/100th of a share) by reason of such adjustment, as hereafter stated, except that no adjustment shall be made, unless by reason of the occurrence of one or more of the events hereinafter specified, the Conversion Ratio theretofore in effect shall be changed by an amount equal to at least 5% thereof, but in the event that an adjustment would be required except of insufficiency of amount, such amount shall be carried forward and added to and shall be made at the time of and together with any subsequent adjustment which, together with any adjustment or adjustments so carried forward, amount to at least 5% of the Conversion Ratio at such later time. (a) Stock Dividends, Subdivisions and Combinations. In the event the corporation shall declare a stock dividend with respect to its Common Stock or shall effect a subdivision or combination of its Common Stock into a greater or lesser number of shares without a proportionate and corresponding stock dividend, subdivision or combination with respect to its outstanding Series B Preferred Stock, then the existing Conversion Ratio for the Series B Preferred Stock shall be increased or decreased proportionately. (b) Classification, Reclassification, Capital Reorganization, Etc. In the case of any classification, reclassification, capital reorganization or other change of outstanding shares of Common Stock (other than a change in par value, or from without par value to par value, or from par value to without par value, or as a result of an issuance of Common Stock by way of dividend or other distribution or of a subdivision or combination), or in case of any consolidation or merger of the corporation with or into another corporation (other than a merger with a subsidiary in which the corporation is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of the Common Stock issuable upon conversion of the shares of the Series B Preferred Stock) or in case of any sale or conveyance to another corporation of the property of the corporation as an entirety or substantially as an entirety, the corporation shall cause the holders of the Series B Preferred Stock to have the right, by exercising their conversion rights thereunder, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance, if any, which the holders of the Series B Preferred Stock would have received had the conversion taken place immediately prior to such event. 2.16 Changes Affecting Series B Preferred Stock So long as any shares of Series B Preferred Stock are outstanding, the corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of shares of Series B Preferred Stock outstanding, voting separately as a class, (i) alter or change any of the powers, preferences, privileges, or rights of the Series B Preferred Stock; or (ii) amend the provisions of this paragraph 2.16; or (iii) create any new class or series of shares having preferences prior to the Series B Preferred Stock or reclassifying any class or series of any Common Stock or any other shares of stock hereafter created junior to the Class B Preferred Stock into shares having any preference or priority over the Series B Preferred Stock. ARTICLE IV The name and address of the incorporator is Thomas H. Garrett III, 4200 IDS Center, 80 South Eighth Street Minneapolis, Minneosta 55402. ARTICLE V No shareholder of this corporation shall have any cumulative voting rights. ARTICLE VI No shareholder of this corporation shall have any preemptive rights to subscribe for, purchase, or acquire any shares of the corporation of any class, whether unissued or now or hereafter authorized, or any obligations or other securities convertible into or exchangeable for any such shares. ARTICLE VII The affirmative note of the holders of a majority of the voting power of the shares represented and voting at a duly held meeting of the shareholders of this corporation is required for an action of the shareholders, except where Minnesota Statutes, Section 302A requires the affirmative vote of a majority of the voting power of all voting shares. ARTICLE VIII The number of directors of this corporation shall be fixed in the manner provided in the bylaws. ARTICLE IX Any action required or permitted to be taken at a meeting of the board of directors of this corporation not needing approval by the shareholders under Minnesota Statutes, Section 302A, may be taken by written action signed by the number of directors that would be required to take such action at a meeting of the board of directors at which all directors were present. ARTICLE X DIRECTOR LIABILITY No director of this corporation shall be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its shareholders; (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived any improper personal benefit; (v) for any act or omission occurring prior to the date when this provision becomes effective. The provisions of this Article X shall not be deemed to limit or preclude indemnification of a director by the corporation for any liability of a director which has not been eliminated by the provisions of this Article. If the Minnesota Statues hereafter are amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Statutes, as so amended. EX-3.2 3 EXHIBIT 3.2 TO FORM 10-KSB FOR THE FISCAL YEAR ENDING DECEMBER 31, 1995 SPECTRASCIENCE, INC AMENDED BYLAWS ARTICLE I OFFICERS, CORPORATE SEAL AND SHAREHOLDER CONTROL AGREEMENT SECTION 1.01. REGISTERED AND OTHER OFFICES. The registered office of the corporation in Minnesota shall be that set forth in the Articles of Incorporation or statement of the Board of Directors filed with the Secretary of State of Minnesota changing the registered office in the manner prescribed by law. The corporation may have such other offices, within or without the State of Minnesota, as the Board of Directors shall, from time to time, determine. SECTION 1.02. CORPORATE SEAL. If so directed by the Board of Directors, the corporation may use a corporate seal. The failure to use such seal, however, shall not affect the validity of any documents executed on behalf of the corporation. The seal need only include the word "seal", but it may also include, at the discretion of the Board, such additional wording as is permitted by law. SECTION 1.03. SHAREHOLDER CONTROL AGREEMENT. In the event of any conflict or inconsistency between these Bylaws, or any amendment thereto, and any shareholder control agreement or any stock repurchase or redemption agreement, whenever adopted, such shareholder control agreement shall govern. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 2.01. TIME AND PLACE OF MEETINGS. Regular or special meetings of the shareholders, if any, shall be held on the date and at the time and place fixed by the President in the absence of Board of Director action, except that a special meeting called by, or at the demand of a shareholder or shareholders, pursuant to Minnesota Statutes, Section 302A.431, Subd. 2, shall be held in the county where the principal executive office is located. SECTION 2.02. REGULAR MEETING. At any regular meeting of the shareholders there shall be an election of qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six (6) months after the date of the meeting. Any business appropriate for action by the shareholders may be transacted at a regular meeting. No meeting shall be considered a regular meeting unless specifically designated as such in the notice of meeting unless all the shareholders are present in person or by proxy and none of them objects to such designation. Regular meetings may be held no more frequently than once per year. SECTION 2.03. DEMAND BY SHAREHOLDERS. Regular or special meetings may be demanded by a shareholder or shareholders, pursuant to the provisions of Minnesota Statutes, Section 302A.431, Subd. 2, and 302A.433, Subd. 2, respectively. SECTION 2.04. QUORUM; ADJOURNED MEETINGS. The holders of a majority of the voting power of the shares entitled to vote at a meeting constitute a quorum for the transaction of business; said holders may be present at the meeting either in person or by proxy. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though withdrawal of shareholders originally present leaves less than the proportion or number otherwise required for a quorum. A meeting of the shareholders at which there is a quorum may be adjourned as to all or part of the matters to be considered at the meeting upon motion by the person presiding at such meeting and by a majority vote of shares represented in person or by proxy at such meeting. Such adjournment shall be until a specific time and place, and the time and place for the reconvened meeting shall be announced at the meeting and reflected in the minutes thereof. SECTION 2.05. VOTING. At each meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote either in person or by proxy. Unless otherwise provided by the Articles of Incorporation or a resolution of the Board of Directors filed with the Secretary of State, each shareholder shall have one vote for each share held. Upon demand of any shareholder, the vote upon any question before the meeting shall be by ballot. SECTION 2.06. CLOSING OF BOOKS. The Board of Directors may fix a time, not exceeding sixty (60) days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the corporation after any record date so fixed. The Board of Directors may close the books of the corporation against the transfer of shares during the whole or any part of such period. If the Board of Directors fail to fix a record date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the record date shall be the sixtieth (60th) day preceding the date of such meeting. SECTION 2.07. NOTICE OF MEETINGS. Notice of all meetings of shareholders shall be given to every holder of voting shares, except where the meeting is an adjourned meeting and the date, time and place of the meeting was announced at the time of adjournment. The notice shall be given at least ten (10) days, but not more than sixty (60) days, before the date of the meeting, except that written notice of a meeting at which an agreement of merger is to be considered shall be given to all shareholders, whether entitled to vote or not, at least fourteen (14) days prior thereto. Every notice of any special meeting shall state the purpose or purposes for which the meeting has been called, and the business transacted at all special meetings shall be confined to the purpose stated in the call, unless all of the shareholders are present in person or by proxy and none of them object to consideration of a particular item of business. SECTION 2.08. WAIVER OF NOTICE. A shareholder may waive notice of any meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at or after the meeting and whether given in writing, orally or by attendance. SECTION 2.09. AUTHORIZATION WITHOUT A MEETING. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting as authorized by law. ARTICLE III DIRECTORS SECTION 3.01. GENERAL PURPOSES. Except as authorized by the shareholders pursuant to a shareholder control agreement or unanimous affirmative vote, the business and affairs of the corporation shall be managed by or shall be under the direction of the Board of Directors. SECTION 3.02. NUMBER, QUALIFICATIONS AND TERM OF OFFICE. The Board of Directors shall consist of five Directors, which number may be increased by the Board of Directors and additional Directors elected by the existing Board of Directors, without approval of the shareholders; but this number shall only be decreased in accordance with Section 302A.223 of the Minnesota Business Corporation Act. Directors need not be shareholders. The Board of Directors, in its discretion, may elect a Chairman of the Board of Directors, who, when present, shall preside at all meetings of the Board of Directors, and who shall have such powers as the Board shall prescribe. Each of the directors shall hold office until the regular meeting of the shareholders next held after his election, until his successor shall have been elected and shall qualify, or until he shall resign or shall have been removed as provided by law. SECTION 3.03. BOARD MEETINGS; PLACE AND NOTICE. Meetings of the Board of Directors may be held from time to time at any place within or without the State of Minnesota that the Board of Directors may designate. In the absence of designation by the Board of Directors, Board meetings shall be held at the principal executive office of the corporation, except as may be otherwise unanimously agreed orally or in writing or by attendance. Any director may call a Board meeting by giving twenty-four (24) hours notice to all directors of the date and time of the meeting. The notice need not state the purpose of the meeting. Notice may be given by mail, telephone, telegram, or in person. If a meeting schedule is adopted by the Board of Directors, or if the date and time of a Board meeting has been announced at a previous meeting, no notice is required. SECTION 3.04. WAIVER OF NOTICE. A director may waive notice of a meeting of the Board of Directors. A waiver of notice by a director is effective, whether given before, at or after the meeting and whether given in writing, orally or by attendance. SECTION 3.05. QUORUM. A majority of the whole Board is a quorum for the transaction of business, except that when a vacancy or vacancies exist, a majority of the remaining directors shall constitute a quorum. SECTION 3.06. VACANCIES. Vacancies on the Board of Directors resulting from the death, resignation or removal of a director may be filled by the affirmative voting of a majority of the remaining directors, even though less than a quorum. Each director elected under this Section to fill a vacancy holds office until a qualified successor is elected by the shareholders at their next regular meeting or at any meeting duly called for that purpose. SECTION 3.07. COMMITTEES. The Board may, by resolution, establish committees in the manner provided by law. Committee members need not be directors. SECTION 3.08. COMPENSATION. Directors shall not receive any stated salary for their services in such capacity, but by resolution of the Board may receive a fixed fee and expenses of attending meetings. Nothing herein precludes any director from serving in another capacity and receiving compensation for such other capacity. SECTION 3.09. ABSENT DIRECTORS. A director may give advance written consent or opposition to a proposal to be acted on at a Board of Directors meeting. SECTION 3.10. AUTHORIZATION WITHOUT A MEETING. Any action required or permitted to be taken at a meeting of the Board or any committee may be taken without a meeting as authorized by law. ARTICLE IV OFFICERS SECTION 4.01. NUMBER. The officers of the corporation shall consist of a President and may also consist of one or more Vice Presidents, a Secretary and a Treasurer. The Board may elect or appoint any other officers it deems necessary for the operation and management of the corporation, each of whom shall have the powers, rights, duties, responsibilities and terms of office determined by the Board from time to time. Any number of offices or functions of those offices may be held or exercised by the same person. SECTION 4.02. ELECTION AND TERM OF OFFICE. The Board of Directors shall from time to time elect a President and may elect one or more Vice Presidents, a Secretary and a Treasurer and any other officers or agents the Board deems necessary. Such officers shall hold their offices until their successors are elected and qualified. SECTION 4.03. PRESIDENT. Unless otherwise stipulated, the President shall be the chief executive officer and the chief financial officer of the corporation and shall have responsibility for the general active management of the corporation. When present, he shall preside at all meetings of the shareholders and, unless a Chairman of the Board of Directors has been elected and is present, shall preside at meetings of the Board of Directors and see that all orders and resolutions of the Board of Directors are carried into effect. The President, unless some other person is specifically authorized by vote of the Board of Directors, shall sign all certificates of stock, bonds, deeds, mortgages, agreements, modification of mortgage agreements, leases, and contracts of the corporation. The President, if no Secretary has been elected, shall maintain records of and, whenever necessary, certify all proceedings of the Board of Directors and the shareholders. As chief financial officer, the President shall keep accurate financial records of the corporation; deposit all money, drafts and checks in the name of and to the credit of the corporation in the banks and depositories designated by the Board of Directors; endorse for deposit all notes, checks, and drafts received by the corporation as ordered by the Board of Directors, making proper vouchers therefor; and disburse corporate funds and issue checks and drafts in the name of the corporation, as ordered by the Board of Directors. The President shall perform such other duties as the Board of Directors shall designate. SECTION 4.04. VICE PRESIDENT. If a Vice President or Vice Presidents have been elected, they shall have such powers and perform such duties as may be prescribed by the Board of Directors or by the President. In the event of absence or disability of the President, Vice Presidents shall succeed to the President's power and duties in the order designated by the Board of Directors. SECTION 4.05. SECRETARY. If a Secretary has been elected, the Secretary shall keep accurate minutes of all meetings of the shareholders and the Board of Directors, shall give proper notice of meetings of shareholders and directors, shall certify all proceedings of the Board of Directors and the shareholders, and shall perform such other duties and have such other powers as the Board of Directors or the President may from time to time prescribe. In the Secretary's absence at any meeting an Assistant Secretary or a Secretary Pro Tempore shall perform the Secretary's duties. SECTION 4.06. TREASURER. If a Treasurer has been elected, the Treasurer shall assist the President in carrying out the President's duties as chief financial officer and perform such other duties and have such other powers as the Board of Directors or the President may from time to time prescribe. SECTION 4.07. REMOVAL AND VACANCIES. Any officer may be removed from his office by a majority of the whole Board of Directors, with or without cause. Such removal, however, shall be without prejudice to the contract rights of the person so removed. If there be a vacancy among the officers of the corporation by reason of death, resignation or otherwise, such vacancy may be filled for the unexpired term by the Board of Directors. SECTION 4.08. DELEGATION OF AUTHORITY. An officer elected or appointed by the Board may delegate some or all of the duties or powers of his office to other persons, provided that such delegation is in writing. ARTICLE V SHARES AND THEIR TRANSFER SECTION 5.01. CERTIFICATES FOR SHARES. Every shareholder of this corporation shall be entitled to a certificate, to be in such form as prescribed by law and adopted by the Board of Directors, certifying the number of shares of the corporation owned by him. The certificates shall be numbered in the order in which they are issued and shall be signed by the President (or such other officer or officers as the Board of Directors may designate) and shall have typed or printed thereon such legend as may be required by any shareholder control agreement or stock repurchase or redemption agreement. Such signatures may be by facsimile if authorized by the Board of Directors. Every certificate surrendered to the corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled. SECTION 5.02. ISSUANCE OF SHARES. The Board of Directors is authorized to cause to be issued shares of the corporation up to the full amount authorized by the Articles of Incorporation in such amounts as may be determined by the Board of Directors and as may be permitted by applicable law. Shares shall be allotted only in exchange for consideration in such forms as may be permitted by applicable law. At the time of any such allotment of shares, the Board of Directors making such allotment shall state, by resolution, their determination of the fair value of the corporation in monetary terms of any consideration other than cash for which shares are allotted. The amount of consideration to be received in cash or otherwise shall not be less than the par value of the shares so allotted. SECTION 5.03. TRANSFER OF SHARES. Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate, or the shareholder's legal representative, or the shareholders' duly authorized attorney-in-fact, and upon surrender of the certificate or the certificates for such shares. The corporation may treat as the absolute owner of shares of the corporation the person or persons in whose name or names the shares are registered on the books of the corporation. SECTION 5.04. LOST CERTIFICATES. Any shareholder claiming that a certificate for shares has been lost, destroyed or stolen shall make an affidavit of the fact in such form as the Board of Directors shall require and shall, if the Board of Directors so requires, give the corporation a sufficient indemnity bond, in form, in an amount, and with one or more sureties satisfactory to the Board of Directors, to indemnify the corporation against any claims which may be made against it on account of the reissue of such certificates. A new certificate shall then be issued to said shareholder for the same number of shares as the one alleged to have been destroyed, lost or stolen. ARTICLE VI DISTRIBUTIONS SECTION 6.01. DISTRIBUTIONS. Subject to the provisions of the Articles of Incorporation, the Board of Directors may cause the corporation to make distributions pursuant to the provisions of the Minnesota Statutes, Section 302A.551. SECTION 6.02. RECORD DATE. Subject to any provisions of the Articles of Incorporation, the Board of Directors may fix a date preceding the date fixed for the payment of any distribution or allotment of other rights as the record date for the determination of the shareholders entitled to receive payment of such distribution or allotment of such rights; and in such case only shareholders of record on the date so fixed shall be entitled to receive payment or allotment notwithstanding any transfer of shares on the books of the corporation after such record date. The Board of Directors may close the books of the corporation against the transfer of shares during the whole or any part of such period. ARTICLE VII BOOKS AND RECORDS; FISCAL YEAR SECTION 7.01. BOOKS AND RECORDS. The Board of Directors of the corporation shall cause to be kept in such place as it may designate: (a) a share register, giving the names and addresses of the shareholders, the number and classes of shares held by each, and the dates on which the certificates therefor were issued; (b) records of all proceedings of shareholders and directors; (c) such other records and books of account as shall be necessary and appropriate to the conduct of corporate business; and (d) Bylaws of the corporation and all amendments thereto. SECTION 7.02. FISCAL YEAR. The fiscal year of the corporation shall be determined by resolution of the Board of Directors. ARTICLE VIII INSPECTION OF BOOKS SECTION 8.01. EXAMINATION BY SHAREHOLDERS. Every shareholder of the corporation and every holder of a voting trust certificate shall have the right to examine, in person or by agent or attorney authorized in writing to represent the shareholder, at any reasonable time or times, for any proper purpose, and at the place or places where usually kept, the share register, books of account and records of the proceedings of the shareholders and directors and to make extracts therefrom. SECTION 8.02. INFORMATION TO SHAREHOLDERS. Upon written request by a shareholder of the corporation, the Board of Directors shall furnish to him a statement of profit and loss for the last fiscal year and a balance sheet containing a summary of the assets and liabilities as of the close of such fiscal year. ARTICLE IX INDEMNIFICATION Any person who at any time shall serve or shall have served as a director, officer, or employee of the corporation, or of any other enterprise at the request of the corporation, and the heirs, executors and administrators of such person shall be indemnified by the corporation in accordance with, and to the fullest extent permitted by, the provisions of the Minnesota Business Corporation Act, as it may be amended from time to time. ARTICLE IX (AMENDED) INDEMNIFICATION SECTION 9.01. DEFINITIONS. (a) For purposes of this Article, the terms defined in this Section have the meanings given them. (b) "CORPORATION" includes a domestic or foreign corporation that was the predecessor of the corporation referred to in this section in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. (c) "OFFICIAL CAPACITY" means (1) with respect to a director, the position of director in the corporation, (2) with respect to a person other than a director, the elective or appointive office or position held by an officer, member of a committee of the Board, or the employment relationship undertaken by an employee of the corporation, (3) with respect to a director, officer or employee of the corporation who is or was serving at the request of the corporation or whose duties in that position involve or involved service as a director, officer, partner, trustee, or agent of another organization or employee benefit plan, the position of that person as director, officer, partner, trustee, employee or agent, as the case may be, of the other organization or employee benefit plan. (d) "PROCEEDING" means a threatened, pending or completed civil, criminal, administrative, arbitration or investigative proceeding, including a proceeding by or in the right of the corporation. (e) "SPECIAL LEGAL COUNSEL" means counsel who has not represented the corporation or a related corporation, or a director, officer, member of a committee of the Board or employee whose indemnification is in issue. SECTION 9.02. INDEMNIFICATION MANDATORY; STANDARD. (a) Subject to the provisions of Section 4, a corporation shall indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person against judgments, penalties, fines, including without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements and reasonable expenses, including attorneys' fees and disbursements, incurred by the person in connection with the proceeding if, with respect to the acts or omissions of the person complained of in the proceeding, the person: (1) has not been indemnified by another organization or employee benefit plan for the same judgments, penalties, fines, including without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements and reasonable expenses, including attorneys' fees and disbursements incurred by the person in connection with the proceeding with respect to the same acts or omissions; (2) acted in good faith; (3) received no improper personal benefit and Section 302A.255, if applicable, has been satisfied; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) in the case of acts or omissions occurring in the official capacity described in Section 1, paragraph (c), clause (1) or (2), reasonably believed that the conduct was in the best interests of the corporation, or in the case of acts or omissions occurring in the official capacity described in Section 1, paragraph (c), clause (3), reasonable believed that the conduct was not opposed to the best interests of the corporation. If the person's acts or omissions complained of in the proceeding relate to conduct as a director, officer, trustee, employee, or agent of an employee benefit plan, the conduct is not considered to be opposed to the best interests of the corporation if the person reasonably believed that the conduct was in the best interests of the participants or beneficiaries of the employee benefit plan. (b) The termination of a proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent does not, of itself, establish that the person did not meet the criteria set forth in this Section 2. SECTION 9.03. ADVANCES. Subject to the provisions of Section 4, if a person is made or threatened to be made a party to a proceeding, the person is entitled, upon written request to the corporation, to payment or reimbursement by the corporation of reasonable expenses, including attorneys' fees and disbursements, incurred by the person in advance of the final disposition of the proceeding, (a) upon receipt by the corporation of a written affirmation by the person of a good faith belief that the criteria for indemnification set forth in Section 2 have been satisfied and a written undertaking by the person to repay all amounts so paid or reimbursed by the corporation, if it is ultimately determined that the criteria for indemnification have not been satisfied, and (b) after a determination that the facts then known to those making the determination would not preclude indemnification under this Article. The written undertaking required by clause (a) is an unlimited general obligation of the person making it, but need not be secured and shall be accepted without reference to financial ability to make the repayment. SECTION 9.04. PROHIBITION OR LIMIT ON INDEMNIFICATION OR ADVANCES. The Articles or Bylaws either may prohibit indemnification or advances of expenses otherwise required by this Article or may impose conditions on indemnification or advances of expenses in addition to the conditions contained in Sections 2 and 3 including, without limitation, monetary limits on indemnification or advances of expenses, if the conditions apply equally to all persons or to all persons within a given class. A prohibition or limit on indemnification or advances may not apply to or affect the right of a person to indemnification or advances of expenses with respect to any acts or omissions of the person occurring prior to the effective date of a provision in the Articles or the date of adoption of a provision in the Bylaws establishing the prohibition or limit on indemnification or advances. SECTION 9.05. REIMBURSEMENT TO WITNESS. This section does not require or limit the ability of a corporation to reimburse expenses, including attorneys' fees and disbursements, incurred by a person in connection with an appearance as a witness in a proceeding at a time when the person has not been made or threatened to be made a party to a proceeding. SECTION 9.06. DETERMINATION OF ELIGIBILITY. (a) All determinations whether indemnification of a person is required because the criteria set forth in Section 2 have been satisfied and whether a person is entitled to payment or reimbursement of expenses in advance of the final disposition of a proceeding as provided in Section 3 shall be made: (1) by the Board by a majority of a quorum. Directors who are at the time parties to the proceeding shall not be counted for determining either a majority or the presence of a quorum; (2) if a quorum under clause (1) cannot be obtained by a majority of a committee of the Board, consisting solely of two or more directors not at the time parties to the proceeding, duly designated to act in the matter by a majority of the full Board, including directors who are parties; (3) if a determination is not made under clause (1) or (2) by special legal counsel, selected either by a majority of the Board or a committee by vote pursuant to clause (1) or (2) or, if the requisite quorum of the full Board cannot be obtained and the committee cannot be established, by a majority of the full Board including directors who are parties; (4) if a determination is not made under clauses (1) to (3) by the shareholders, excluding the votes of shares held by parties to the proceeding; or (5) if an adverse determination is made under clauses (1) to (4) or under paragraph (b), or if no determination is made under clauses (1) to (4) or under paragraph (b) within 60 days after the termination of a proceeding or after a request for an advance of expenses, as the case may be, by a court in this state, which may be the same court in which the proceeding involving the person's liability took place, upon application of the person and any notice the court requires. (b) With respect to a person who is not, and was not at the time of the acts or omissions complained of in the proceedings, a director, officer or person possessing, directly or indirectly, the power to direct or cause the direction of the management or policies of the corporation, the determination whether indemnification of this person is required because the criteria set forth in Section 2 have been satisfied and whether this person is entitled to payment or reimbursement of expenses in advance of the final disposition of a proceeding as provided in Section 3 may be made by an annually appointed committee of the Board, having at least one member who is a director. The committee shall report at least annually to the Board concerning its actions. SECTION 9.07. INSURANCE. A corporation may purchase and maintain insurance on behalf of a person in that person's official capacity against any liability asserted against and incurred by the person in or arising from that capacity, whether or not the corporation would have been required to indemnify the person against the liability under the provisions of this section. SECTION 9.08. DISCLOSURE. A corporation that indemnifies or advances expenses to a person in accordance with this section in connection with a proceeding by or on behalf of the corporation shall report to the shareholders in writing. SECTION 9.09. INDEMNIFICATION OF OTHER PERSONS. Nothing in this section shall be construed to limit the power of the corporation to indemnify other persons by contract or otherwise. ARTICLE X AMENDMENTS SECTION 10.01. Subject to Section 10.02, these Bylaws may be amended by a vote of the majority of the whole Board of Directors at any meeting, provided that notice of such proposed amendment shall have been included in the notice of such meeting given to the directors. The Board of Directors shall not adopt, amend or repeal any Bylaw fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the Board of Directors, or fixing their qualification, classification, term of office or number; except that the Board may adopt or amend any Bylaw to increase its number. SECTION 10.02. Notwithstanding the provisions of Section 10.01, the shareholders may amend or repeal any Bylaw by a majority vote of the shareholders present or represented at any regular meeting or at any special meeting of shareholders called for such purpose. END EX-10.15 4 EXHIBIT 10.15 TO FORM 10-KSB FOR FISCAL YEAR ENDING DECEMBER 31, 1996 SPECTRASCIENCE, INC CLINICAL RESEARCH AGREEMENT Agreement made this first day of June, 1995, ("Effective Date") between The General Hospital Corporation, a not-for-profit corporation doing business as Massachusetts General Hospital, having a principal place of business at Fruit Street, Boston, Massachusetts 02114 ("General") and SpectraScience, Inc., a corporation having an office at 5909 Baker Road, Suite 580. Minnetonka, MN 55345 ("SpectraScience"). 1. For the purposes of this Agreement, the following terms shall have the following meanings: (a) "Invention" shall mean any invention which constitutes a new use of or modification to the Study Device which any Investigator, solely or jointly, conceives and reduces to practice in the performance of the Study. (b) "Investigator" shall mean the Principal Investigator together with other General professional staff members, students, research fellows, and employees who perform the Study under his or her direction. (c) "Study" shall mean the scientific research described in the research protocol (s) attached hereto as Exhibit A on the Effective Date or thereafter appended hereto pursuant to paragraph 2(b) below and funded by SpectraScience and performed by the Investigators. (d) "Study Device" shall mean the Spectroscopic Guidewire System (comprised of the Spectroscopic Diagnostics System console, proprietary system software, and the disposable optical core Spectroscopic Guidewire) provided by SpectraScience for the Study at General. 2. (a) General, through a Principal Investigator, agrees to conduct clinical research of the Study Device in accordance with the study protocol (s) attached hereto as Exhibit A (hereinafter referred to as the "Study"). In the event of any conflict between Exhibit A and the provisions of this Agreement, the provisions of this Agreement shall govern. (b) At any time during the term of this Agreement either party may propose in writing additional research pertaining to the Study Device not previously described in any research protocol appended hereto as Exhibit A. Each such protocol shall name the individual at General who will be the Principal Investigator and shall include a description of the additional research proposed and a budget of the costs to be funded by SpectraScience and a schedule of payment of such costs. Unless the parties shall otherwise agree in writing, negotiations between them over any such protocol shall not extend beyond the sixtieth (60) day next following the date when the protocol shall have first been proposed, and whenever such negotiations shall end without agreement between the parties to proceed with the proposed research, the party proposing the additional research may go ahead without the other party and seek funding from any other sponsor including but not limited to a commercial sponsor for such protocol. When such protocol is accepted by General and SpectraScience, the Principal Investigator shall, when necessary under the applicable regulations, submit such protocol to the General's IRB and , if approved, it shall be appended hereto as a Study and shall be subject to the terms and conditions of this Agreement unless otherwise specified, and the research described therein shall commence and budgeted amounts shall be paid as set forth in the protocol or as otherwise agreed by the parties in writing. (c) The Study will be conducted by a Principal Investigator at General with the prior approval and ongoing review of all appropriate and necessary review authorities and in accordance with all federal, state and local laws and regulations. Principal Investigator shall provide SpectraScience with written evidence of review and approval of the Study by General's Institutional Review Board prior to the initiation of the Study and of the Board's continuing review and approval of the Study whenever it is reviewed, but at least once per year. All volunteers will meet the legal age requirements of the Commonwealth of Massachusetts, the state in which the Study is to be conducted. 3. Principal Investigator will furnish SpectraScience with the data resulting from the Study in signed case report forms within a reasonable time after completion of each case and SpectraScience shall have the unrestricted right to use such data including, but only to the extent that subjects' consents have been obtained, the subjects' names, any identifying information, and any audiotapes, photographs or other likenesses. Study records shall be made available to SpectraScience representatives upon request for comparison with case report forms. Such records will also be made available upon request for review by representatives of the U.S. Food and Drug Administration. Records of the Study including either the original or a copy of all volunteer consent forms shall be retained in conformance with applicable federal regulations. SpectraScience shall notify Principal Investigator of the date a premarket approval application (PMA) is approved for the device; or if the application is not approved, SpectraScience shall notify Principal Investigator when all clinical investigations have been discontinued and the FDA notified. 4. Principal Investigator will be free to publish the results of the Study subject only to the provisions of Paragraph 5 regarding SpectraScience's proprietary information. SpectraScience will be furnished with a copy of any proposed publication for review and comment prior to submission for publication, for manuscripts, at least thirty (30) days prior to submission, and for abstracts, at least seven (7) days prior to submission. At the expiration of such thirty (30) day or seven (7) day period, Principal Investigator may proceed with submission for publication. 5. In the event that SpectraScience discloses to any General personnel any information which relates to the Study that SpectraScience considers confidential, the rights and obligations of the parties with respect to such information shall be governed by the terms and conditions set forth in Exhibit B. 6. The Principal Investigator and any other Investigator who shall make an Invention, solely or jointly, shall promptly report such Invention to General and shall assign all of his or her rights, title and interest in the Invention to General. General shall promptly advise SpectraScience in writing of each Invention disclosed to General and shall discuss with SpectraScience whether a patent application or applications (hereinafter referred to, together with any patents issued thereon, as "Patent Rights") pertaining to such Invention should be filed and in which countries. In the event of joint inventorship between SpectraScience personnel and General Investigators, SpectraScience personnel shall assign all of their rights, title and interest in the Invention to SpectraScience, and General Investigators shall assign all of their rights, title and interest in the Invention to General, and the Invention will be deemed to be jointly owned. If both parties mutually agree that Patent Rights should be filed, applications assigned solely to General shall be filed by General, and applications owned jointly by General and SpectraScience shall be filed as mutually agreed upon by the parties. In the event SpectraScience is not interested in having Patent Rights filed with respect to a particular Invention, SpectraScience shall advise General of such fact within ninety (90) days from the date on which the Invention was disclosed to SpectraScience by General and General shall be free to file and prosecute Patent Rights on such Invention at its own expense and to license such Patent Rights to any other party. All information given to SpectraScience by General in accordance with this paragraph 6 will be held in confidence by SpectraScience so long as such information remains unpublished or publicly undisclosed by General All patent costs pertaining to any Patent Rights filed by mutual agreement of SpectraScience and General, including preparation, filing, prosecution, issuance and maintenance costs, shall be borne by SpectraScience. As to any Patent Rights assigned in whole or in part to General and filed by mutual agreement of the parties, to the extent not prohibited by the United States Government or prevented by the obligations of General to any other sponsor of research at General, SpectraScience shall have for the twelve (12) months next following the filing of such Patent Rights in the United States Patent and Trademark Office the option to obtain a world-wide, royalty bearing, exclusive license under General's rights therein with the right to sublicense. In the event that General is prohibited or prevented as aforesaid from granting an exclusive license to any Patent Right hereunder, General will grant to SpectraScience the most exclusive license that it is able to grant to SpectraScience. The option is to be exercised by written notice to General during said twelve month period and the negotiation of a license agreement containing license terms standard for agreements between universities and industry including without limitation clauses providing for payment of reasonable royalties to General, objective, time-limited due diligence provisions for the development, commercialization and marketing of a product embodying the Invention and product liability indemnification and insurance requirements which are acceptable to General's liability insurance carrier. In the absence of such notice by SpectraScience and Agreement on license terms, General may grant a license to such Patent Rights to any other party. 7. The term of this Agreement shall be two (2) years from the Effective Date. Any party hereto shall have the right to terminate this Agreement at any time upon thirty (30) days prior written notice thereof to the other parties. In the event of termination, the amount of the research grant by SpectraScience to support the Study shall be appropriately prorated. The obligations of the parties under Paragraphs 3,4,5,6,8,10,11 and 13 shall survive the termination of this Agreement. 8. SpectraScience shall provide, install and maintain, without cost to General, the Study Device to General to conduct the Study. The Study Device shall remain the property of SpectraScience. 9. In consideration of said undertaking by General, SpectraScience agrees to support the Study with research grants to General in accordance with the budgets included in the research protocol appended as Exhibit A. Such research grants shall include indirect costs computed at a rate of 28% of total direct costs payable to General. Checks should be made payable "The General Hospital Corporation" and sent, along with a letter indicating the name of the Principal Investigator and the specific clinical trial agreement for which the funds are intended, to: Director Office of Technology Affairs Massachusetts General Hospital Thirteenth Street, Building 149, Suite 1101 Charlestown, MA 02129 10. (a) SpectraScience shall indemnity, defend and hold harmless General and its trustees, officers, medical and professional staff, employees, and agents and their respective successors, heirs and assigns (the "Indemnities"), against any liability, damage, loss, or expense (including reasonable attorney's fees and expenses of litigation) incurred by or imposed upon the Indemnities or any one of them in connection with any claims, suits, actions, demands or judgments: (i) arising out of any theory of product liability (including, but not limited to, actions in the form of tort, warranty, or strict liability) concerning the Study Device or any modification thereof developed pursuant to this Agreement; (ii) arising out of any side effect or adverse reaction, illness or injury resulting from Indemnities' performance of the Study and occurring to any person involved in the Study; or (iii) arising out of damage to any property resulting from and occurring during the Indemnities' performance of the Study. General agrees to notify SpectraScience promptly of any such claim, suit, action, demand or judgment and General and Principal Investigator agree to reasonably cooperate with SpectraScience in the handling thereof. (b) SpectraScience's indemnification under (a) above shall not apply to any liability, damage, loss or expense to the extent that it is attributable to the: (i) negligent activities, reckless misconduct or intentional misconduct of the Indemnities; or (ii) failure of the indemnities to adhere to the terms or the protocol for the Study (c) SpectraScience agrees, at its own expense, to provide attorneys reasonably acceptable to the General to defend against any actions brought or filed against any party indemnified hereunder with respect to the subject of indemnity contained herein, whether or not such actions are rightfully brought. (d) SpectraScience also agrees to reimburse General for the costs of the care and treatment of any illness or injury to a subject resulting from his or her participation in the Study to the extent that such costs are not covered by the subject's medical or hospital insurance or governmental programs providing such coverage. 11. (a) At such time as the Study Device or any modification thereof is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by SpectraScience or by a licensee, affiliate or agent of SpectraScience, SpectraScience shall, at its sole cost and expense, procure and maintain commercial general liability insurance in amounts not less than $2,000,000 per incident and $2,000,000 annual aggregate and naming the Indemnities as additional insureds. Such commercial general liability insurance shall provide (i) product liability coverage and (ii) broad form contractual liability coverage for SpectraScience's' indemnification under Paragraph 10 of this Agreement. If SpectraScience elects to self-insure all or part of the limits described above (including deductibles or retentions which are in excess of $250,000 annual aggregate) such self-insurance program must be acceptable to the General and the Risk Management Foundation of the Harvard Medical Institutions, Inc. The minimum amounts of insurance coverage required under this Paragraph 11 shall not be construed to create a limit of SpectraScience's liability with respect to its indemnification under Paragraph 10 of this Agreement. (b) SpectraScience shall provide General with written evidence of such insurance upon request of General. SpectraScience shall provide General with written notice at least fifteen (15) days prior to the cancellation, non-renewal or material change in such insurance. (c) SpectraScience shall maintain such commercial general liability insurance during (i) the period that the Study Device or any modification thereof is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by SpectraScience or by a licensee, affiliate or agent of SpectraScience and (ii) a reasonable period after the period referred to in (c) (i) above which in no event shall be less that fifteen (15) years. 12. The terms of this Agreement can be modified only by a writing which is signed by General, Principal Investigator and SpectraScience. 13. No party to this Agreement shall use the name of any other party or of any staff member, employee or student of any other party or any adaptation thereof in any advertising, promotional or sales literature or in any publicity without the prior written approval of the party or individual whose name is to be used. For General, such approval shall be obtained from the Director of Public Affairs. 14. The provisions of this Agreement shall be interpreted under the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. SPECTRASCIENCE, INC. THE GENERAL HOSPITAL CORPORATION (Federal Tax ID No. : 042 697 983) BY: /s/ Brian T. McMahon BY: TITLE: Brian T. McMahon TITLE: Vice President for Patents, President & CEO Licensing and Industry Sponsored Research DATE: 5/31/95 DATE: 6/6/95 Exhibit A STUDY PROTOCOLS The parties agree that the attached protocol entitled "Optical Diagnostic Techniques for GI Endoscopy" is a Study protocol under the Agreement. The study will be conducted under the direction of Norman Nishioka, M.D. ("Principal Investigator") at General. Pursuant to paragraph 9 of the Agreement, SpectraScience agrees to provide payment to General in the amount of One Hundred Ninety-Nine Thousand Eight Hundred and Fifty Dollars ($199,850) which includes indirect costs in the amount of Forty-Three Thousand Seven Hundred Seventeen Dollars ($43,717) for the first year of the Study. Such grant shall be payable as follows: Forty-Nine Thousand Nine Hundred Sixty-Two Dollars and Fifty Cents ($49,962.50) upon execution of the Agreement; Forty-Nine Thousand Nine Hundred Sixty-Two Dollars and Fifty Cents ($49,962.50) on or about September 1, 1995; Forty-Nine Thousand Nine Hundred Sixty Two Dollars and Fifty Cents ($49,962.50) on or about December 1, 1995; and, Forty-Nine Thousand Nine Hundred Sixty-Two Dollars and Fifty Cents ($49,962.50) on or about March 1, 1996. The parties agree that the Study may continue for two (2) years and further agree that the second year of the Study will not be initiated until the parties have agreed in writing to the amount of funding to be provided by SpectraScience. Checks should be made payable to "The General Hospital Corporation" and sent, along with a letter indicating the name of the Principal Investigator and the specific clinical trial agreement for which the funds are intended, to: Director Office of Technology Affairs Massachusetts General Hospital Thirteenth Street, Building 149, Suite 1101 Charlestown, MA 02129 I have read the Agreement and agree to comply with the obligations of the Principal Investigator stated therein. In addition, I have read Exhibit B and agree to comply with the obligations of General stated therein. /s/ Norman Nishioka, M.D. Name: Norman Nishioka, M.D. Date: 6/9/95 Exhibit A Optical Diagnostic Techniques for GI Endoscopy MASSACHUSETTS GENERAL HOSPITAL - SPECTRASCIENCE COLLABORATIVE RESEARCH PROJECT TO DEVELOP NOVEL OPTICAL DIAGNOSTIC METHODS STATEMENT OF WORK Under this research agreement, Dr. Nishioka's research group at the Massachusetts General Hospital will perform investigations aimed at developing optical diagnostic capabilities to augment gastrointestinal endoscopy. Whenever possible, the program will seek to develop optical methods for tissue diagnosis without the use of exogenous dyes or markers. Because previous research has indicated that tissue optical signals are very sensitive to metabolic conditions, the most reliable data are those obtained from living tissue. For this reason, the proposed research program will make extensive use of optical measurements from clinical subjects (in vivo). In the first year, the main focus of the investigations will be the detection of neoplasia in several settings including the determination of neoplasia in polyps (hyperplastic vs. adenomatous polyps) and the location of "flat"dysplasia (e.g. ulcerative colitis and Barrett's esophagus). Whenever possible the techniques developed in the course of this work will be tested in other organ systems (specifically, skin, bladder and gynecology) to test the general applicability of the techniques. The initial optical techniques to be examined will be laser-induced fluorescence emission spectroscopy, fluorescence excitation spectroscopy and reflectance spectroscopy. Based on data obtained from clinical subjects, we plan to use statistical methods to develop algorithms capable of making reliable discriminations between tissue types. Although preliminary, recent measurements by us suggest that wavelengths outside the visible range might provide enhanced diagnostic accuracy. In the gastrointestinal tract, it is anticipated that specialized devices will be needed to make optical measurements of high quality that can be accurately correlated with tissue histology. The development of such devices will be guided by MGH investigators but will require the expertise of SpectraScience for design and fabrication. In the second year, work on the optical techniques developed in year one will continue and the application of the most promising techniques to other organ systems will be examined in a systematic fashion. Studies examining the feasibility of using optical techniques to enhance diagnostic accuracy in non-neoplastic lesions of the gastrointestinal tract will also be started. Specifically, the use of optical techniques to predict the risk of recurrent bleeding from ulcers and the presence of Helicobacter pylori infection in the gastric antrum will be examined. FACILITIES Wellman Laboratories Wellman Laboratories of Photomedicine occupies 23,000 square feet on the main campus of MGH. The majority of this space was specifically designed for laser biology research. All Wellman facilities will be available for this work. Only equipment most germane to the proposed research is described. Two portable laser-induced fluorescence systems are available for diagnostic use. The systems employ a fiber-optic pulsed nitrogen laser and an intensified optical multi-channel analyzer capable of gating to 10 ns. Several filtered-flash, filtered CCD cameras interfaced to personal computers are available for fluorescence and non-fluorescence image acquisition and analysis. A portable fiber-optic coupled reflectance spectrometer is also available. For in vitro measurements, a UV/VIS/NIR spectrophotometer, a diode-array spectrophotometer, a spectrofluorometer/phosphorimeter system, complete tissue culture facilities, two high-performance liquid chromatographs and a cold room are available. The photopathology laboratory is able to process specimens for routine light microscopy, frozen sections, immunohistrochemistry, special stains, computerized image analysis, transmission and scanning electron microscopy. For analysis of light microscopic samples, there is a PC-based imaging system. Images can be input to a computer utilizing a Newvicon tube camera attached to a microscope for routine bright field examination or a SIT camera for low intensity images such as fluorescence examination. The electron microscopy facilities include a Phillips CM-10 transmission electron microscope, Riechert Ultracut E ultramicrotome, critical point and sputter coater. There is access to an Amray 1400 scanning electron microscope in an adjacent laboratory. Medical Endoscopy Unit The Medical Endoscopy Unit at MGH is fully-equipped with state-of-the art gastrointestinal endoscopy equipment manufactured by Olympus and Pentax. All procedures are performed with the capability of digitally capturing and storing images for later retrieval, printing or analysis. The unit performs close to 5,000 endoscopic procedures per year. weeks 5/10/95 INVESTIGATOR: Norm Nishioka, M.D. TITLE OF STUDY: Optical Diagnostic Techniques for GI Endoscopy SPONSOR: SpectraScience BUDGET PERIOD: 06/01/95 - 05/31/96 PERSONNEL
Role in % Base Fringe Name Project Effort Salary Salary Benefits Total 26.04% Norm Nishioka, M.D. P.I. 25% $82,915 $20,729 5,398 $26,127 Kevin Schomacker, Ph.D. Investigator 35% $46,782 $16,374 4,264 $20,637 Postdoctoral Fellow, TBN 100% $30,000 $30,000 7,812 $37,812 Clinical Fellow, TBN 50% $35,000 $17,500 4,557 $22,057 Subtotal: $106,633 EQUIPMENT Computer 6,000 Compact Ex/Em Spectrometer (SPEX) 28,000 SUPPLIES Fibers, optical components, software 8,000 TRAVEL To attend ASLMS, SPIE and DIG DIS week 6,000 MISCELLANEOUS COSTS Publication Costs 1,500 TOTAL DIRECT COSTS 156,133 INDIRECT COSTS (28%) 43,717 TOTAL COSTS $199,850
/s/ Marcia L. Smith Marcia L. Smith, Manager, Pre-Award Grant/Contract Administration Reused 5/12/95 Exhibit B SPECTRASCIENCE PROPRIETARY INFORMATION It is anticipated that in the performance of the Study Sponsored by SpectraScience, the Principal Investigator and members of the research team designated by him/her will be provided with or given access by SpectraScience to certain information which the SpectraScience considers proprietary. The rights and obligations of the parties with respect to such information are as follows: 1. PROPRIETARY INFORMATION. For the purposes of this Agreement, "Proprietary Information" refers to information of any kind which is disclosed by SpectraScience to General and which, by appropriate marking, is identified as confidential and proprietary at the time of disclosure. In the event that proprietary information must be provided visually or orally, obligations or confidence shall attach only to that information which is confirmed by SpectraScience in writing within ten (10) working days as being confidential. 2. LIMITATIONS ON USE. General shall use the SpectraScience's Proprietary Information solely for the purposes of the conducting the Study, obtaining any required review of the Study or its conduct, or ensuring proper medical treatment of any patient or subject. It is agreed by SpectraScience and General that the transfer of Proprietary Information shall not be construed as a grant of any right or license with respect to the information delivered except as set forth herein or in a duly executed license agreement. 3. CARE OF PROPRIETARY INFORMATION . The SpectraScience and General agree that all Proprietary Information communicated by SpectraScience and accepted by General in connection with this Agreement shall be kept confidential by General as provided herein unless specific written release is obtained from SpectraScience. General agrees to exert reasonable efforts (no less than the protection given its own confidential information) to maintain such Proprietary Information in confidence, to make such Proprietary Information available only to those employees and students who require access to it in the performance of this Agreement and to inform them of the confidential nature of such information. General shall be deemed to have discharged its obligations hereunder provided General has exercised the foregoing degree of care and provided further that General shall immediately, upon discovery of any disclosure not authorized hereunder, notify SpectraScience and take reasonable steps to prevent any further disclosure or unauthorized use. When the Proprietary Information is no longer required for the purpose of this Agreement, General shall return it or dispose of is as directed by the SpectraScience. General's obligations of confidentiality with respect to Proprietary Information provided under this Agreement will expire five (5) years after the date of this Agreement. 4. INFORMATION NOT COVERED. It is agreed by SpectraScience and General that information shall not be deemed Proprietary Information in the event: (a) it is publicly available prior to the date of the Agreement or becomes publicly available thereafter through no wrongful act of General; (b) it was known to General prior to the date of disclosure or becomes known to General thereafter from a third party having an apparent bona fide right to disclose the information; (c) it is disclosed by General in accordance with the terms of the SpectraScience's prior written approval; (d) it is disclosed by SpectraScience without restriction on further disclosure; (e) it is independently developed by General; or (f) General is obligated to produce pursuant to an order of a court of competent jurisdiction or a valid administrative or Congressional subpoena, provided that General (a) promptly notifies the SpectraScience and (b) cooperates reasonably with the SpectraScience's efforts to contest or limit the scope of such order EX-10.20 5 EXHIBIT 10.20 TO FORM-10KSB FOR FISCAL YEAR ENDING DECEMBER 31, 1995 SPECTRASCIENCE, INC SUBSCRIPTION AGREEMENT THIS SUBSCRIPTION AGREEMENT (the "Agreement") dated as of ______________, 1995, is made by and between SPECTRASCIENCE, INC., a Minnesota corporation (the "Company"), and _____________________________ ___________________________________ (the "Investor"). RECITALS (a) Whereas, the Company needs additional cash to fund its 1995 Business Plan; and (b) Whereas, the Investor desires to subscribe for shares of the Company's preferred stock and certain warrants on the terms and conditions set forth in this Agreement, Accordingly, in consideration of the foregoing, the mutual promises set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties thereto agree as follows: 1. PREFERRED STOCK. Pursuant to the terms hereof, the Company shall sell to the Investor, and the Investor shall purchase from the Company, shares of the Company's Series B preferred stock (the "Preferred Shares"). (a) Purchase Price. The purchase price for the Preferred Shares shall be Five Dollars ($5.00) per share. (b) Convertibility. At any time during the period commencing on the first anniversary of the closing of the sale of the Preferred Shares and ending on the third anniversary of such event, the Investor may convert all or any number of the Preferred Shares into an equivalent number of shares of the Company's common stock. (c) Voting Rights. The Investor shall have no voting rights with respect to the Preferred Shares other than the right to vote on matters which specifically change the rights of holders of the same series of the Company's preferred stock. * THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH AT THE BOTTOM OF THE LAST PAGE HEREOF. (d) Liquidation Preference. Upon liquidation of the Company, the Preferred Shares shall have a liquidation preference as to the par value of such shares. (e) Dividends. In the event that the Company has not increased the number of authorized shares of its common stock to the extent sufficient to enable the Company to reserve a number of shares of common stock sufficient to cover the conversion of the shares of Series B Preferred Stock and the exercise of all Warrants issued in connection with the offering of the Series B Preferred Stock by December 15, 1996, the Series B Preferred Stock shall bear an 8% cumulative annual dividend, payable quarterly, commencing upon the Company's failure to satisfy such condition and terminating on the date compliance with such condition is satisfied. 2. WARRANTS. In partial consideration of the Investor's subscription for the Preferred Shares, the Company shall issue to the Investor concurrently with delivery of each three shares of preferred stock, a warrant, in the form attached hereto as Exhibit A (the "Warrant"), to purchase one share of common stock of the Company ("Warrant Stock"). Each Warrant shall have an exercise price equal to $9.50 per share of Warrant Stock . Each Warrant shall have a term of three years. 3. CLOSING. The closing of the sale and purchase of the Preferred Shares and the issuance of the Warrants shall take place at 10:00 a.m., Minnesota time, on or before December 15, 1995. At the closing, the Investor will pay the purchase price for the Preferred Shares and Warrants by a wire transfer into an account designated by the Company or by the delivery of a certified or bank cashiers' check payable to the order of the Company in the amount of such purchase price. At the closing, the Company shall deliver to the Investor a certificate for the Preferred Shares and the Warrants. 4. REGISTRATION. The Company shall register the shares of common stock issuable upon conversion of the Preferred Shares and shall use its best efforts to have such registration declared effective by the SEC no later than one year from the date of closing. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Investor that this Agreement has been duly authorized by all necessary corporate action on behalf of the Company, has been duly executed and delivered by an authorized officer of the Company, and is a valid and binding agreement on the part of the Company. All corporate action necessary to authorize, issue and deliver the Preferred Shares, the Warrants and the Warrant Stock has been or will be taken on or prior to the date thereof. 6. REPRESENTATIONS, WARRANTIES, AND ACKNOWLEDGMENTS OF THE INVESTOR. The Investor represents, warrants, and acknowledges to the Company as follows: (a) That the Investor has received and carefully reviewed the Business Plan of the company, dated March, 1995 and has had the opportunity to discuss with officers of the Company events and facts relating to the Company's business and prospects; (b) That the Investor believes the Investor is able to bear the economic risk of the investment in the Preferred Shares and the Warrants; (c) That the Investor believes that the Investor has knowledge and experience in financial and business matters, that the Investor is capable of evaluating the merits and risks of the prospective investment in the Preferred Shares, the Warrants and Warrant Stock and that the Investor is able to bear such risks; (d) That the Investor understands investments in the Preferred Shares and the Warrants are highly speculative but believes that the investments are suitable for the Investor based upon the investment objectives and financial needs of the Investor, and has adequate means for providing for his current financial needs and personal contingencies and has no need for liquidity of investment with respect to the Preferred Shares and the Warrants; (e) That the Investor has been given access to full and complete information regarding the Company (including the opportunity to meet with Company officers and review all the documents as the Investor may have requested in writing) and has utilized such access to his satisfaction for the purpose of obtaining information in addition to, verifying information included in, the Business Plan; (f) That the Investor recognizes that the Preferred Shares and the Warrants, as investments, involve a high degree of risk; (g) That the Investor recognizes that (i) the purchase of the Preferred Shares and the Warrants is a long-term investment, (ii) the purchaser of the Preferred Shares and the Warrants must bear the economic risk of investment for an indefinite period of time because neither the Preferred Shares, the Warrants nor the Warrant Stock have been registered under the Act of 1933 (the "Act") and, therefore, cannot be sold unless they are subsequently registered under said Act or an exemption from such registration is available and (iii) the transferability of the Preferred Shares, the Warrants and the Warrant Stock is restricted and (A) requires conformity with the restrictions contained herein and (B) will be further restricted by a legend placed on the Preferred Shares, the Warrants and certificate(s) representing the Warrant Stock stating that such have not been registered under the Act and referring to the restrictions on transferability, and by stop transfer orders or notations on the Company's records referring to the restrictions on transferability. (h) Except as provided in Section 4 above or in Section 8 of the Warrant, the Investor has been advised that neither the Preferred Shares, the Warrants nor the Warrant Stock are being registered under the Act or the relevant state securities laws pursuant to exemptions from the Act and laws, and that the Company's reliance upon such exemptions is predicated in part on the representations of the Investor to the Company as contained herein. The Investor represents and warrants that the Preferred Shares and the Warrants are being purchased for the Investor's own account and for investment and without the intention of reselling or redistributing the same of the Preferred Shares and the Warrant Stock, that the investor has made no agreement with others regarding the Preferred Shares and the Warrants or any of the Warrant Stock and that the financial condition of the Investor is such that it is not likely that it will be necessary to dispose of the Preferred Shares, the Warrants or the Warrant Stock in the foreseeable future. The Investor is aware that, in the view of the Securities and Exchange Commission and applicable state bodies that administer state securities laws, a purchase of a security with an intent to resell by reason of any foreseeable specific contingency or anticipated change in market values, or any change in the condition of a company or its business, or in with a contemplated liquidation or settlement of any loan obtained for the acquisition of the shares and for which the shares were pledged as security, would represent an intent inconsistent with the representations set forth above. The Investor further represents and agrees that if, contrary to his foregoing intentions, the Investor should later desire to dispose of or transfer the Preferred Shares, the Warrants or any of the Warrant Stock in any manner, the Investor shall not do so without first obtaining (a) the opinion of counsel designated by the Company that such proposed disposition or transfer lawfully may be made without the registration of the Preferred Shares, the Warrants or the Warrant Stock for such purpose pursuant to the Act, as then in effect, and applicable state securities laws or (b) such registrations (it being expressly understood that the Company shall not have any obligation except as otherwise provided in Section 4 above, to register the Preferred Shares, the Warrants or the Warrant Stock for such purpose). (i) The Investor agrees that the Company may place a restrictive legend on the Preferred Shares, the Warrants and certificate(s) representing the Warrant Stock, containing substantially the following language: "The shares represented by this Certificate were issued without registration under the Securities Act of 1933, as amended (the "Act") and without registration under Minnesota securities laws, and reliance upon exemptions contained in the Act and such laws. No transfer of these shares or any interest therein may be made except pursuant to effective registration statements under said laws unless this Corporation has received an opinion of counsel satisfactory to it that such transfer or disposition does not require registration under said laws and, for any sales under Rule 144 of the Act, such evidence as it shall request for compliance with that rule." (j) The Investor agrees and consents that the Company may place a stop transferorder on the Preferred Shares, the Warrants and certificate(s) representing the Warrant Stock when issued, to assure the Investor's compliance with this Agreement and the matters referenced above. (k) The Investor agrees to save and hold harmless, defend and indemnify theCompany and its directors, officers and agents from any claims, liabilities, damages, losses, expenses or penalties arising out of any misrepresentation of information furnished by the Investor to the Company in this Agreement. (l) The Investor represents and warrants that at the time of the execution of this Agreement, the Investor is a bona fide resident of, and is domiciled in, the State of ________________ and that the Warrants are being acquired solely for the beneficial interest of the Investor and not as nominee for, or on behalf of, or for the beneficial interest of, or with the intention to transfer to, anyother person, trust or organization, except as specifically set forth herein. (m) The Investor represents, warrants and agrees that the Investor is an "Accredited Investor' within the meaning of Section 501(a) of Regulation D of the Act, and acknowledges, represents and warrants that the following responses, if applicable, are true and correct: (i) The yearly income of the Investor from all sources for each of the two most recent calendar years was: 1993 1994 Less than $200,000 ____ ____ More than $200,000 ____ ____ (ii) The Investor reasonably expects that the yearly income of the Investor for the current calendar year will be: 1995 Less than $200,000 ____ More than $200,000 ____ (iii) The yearly joint income of the Investor and the spouse of the Investor (if married) from all sources during the two most recent years was: 1993 1994 Less than $300,000 ____ ____ More than $300,000 ____ ____ (iv) The Investor together with the spouse of the Investor reasonably expects that the joint income of the Investor and the spouse of the Investor for the current year will be: 1995 Less than $300,000 ____ More than $300,000 ____ (v) The individual net worth of the Investor, or joint net worth with the spouse of the Investor, at fair market value is: ____ Less than $1,000,000 ____ Greater than $1,000,000 (vi) If the Investor is not an individual, and the entity was formed for the purpose of this investment, all of the equity owners qualify as an accredited investor under paragraphs (1), (2), (3), (4), (5), (6), or (7) of Section 501(a) or Regulation D. (vii) The Investor is one of the following types of accredited investors (check type of investor applicable): ____ Any Bank defined in Section 3(a)(2) or a savings and loan association or other institution defined in Section 3(a)(5)(A) of the Act; ____ Insurance Company as defined in Section 2(13) of the Act; ____ Investment Company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of the Act; ____ Small Business Investment Company licensed by U.S. SmallBusiness Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; ____ Employee Benefit Plan within the meaning of Title I of theEmployee Retirement Security Act of 1974 and the investment decision to purchase the Shares is being made by a plan fiduciary as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company or registered investment adviser, or said employee benefit plan has total assets in excess of $5,000,000 or if a self-directed plan, a plan whose investment decisions are made solely by persons who are accredited investors; ____ Any private business development company defined in Section 202(a)(22) of the Investment Advisers Act of 1940; ____ Any organization described in Section 501(c)(3) of the Internal Revenue Code, Corporation, Massachusetts or similar business trust, or partnership with total assets in excess of $5,000,000; ____ Any Director or Executive Officer of the Company; ____ A trust with total assets in excess of $5,000,000 whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of the Act; ____ An entity, all of whose members are Accredited Investors. All of the foregoing information which the Investor has provided concerning the investor and the financial position of the Investor and the Investor's knowledge of financial and business matters or in the case of a corporation, partnership, trust or other entity, concerning the knowledge of financial and business matters of the person making the investment decision on behalf of such entity, is correct and complete as of the date hereof, and if there should be any adverse change in such information prior to the acceptance of the subscription of the Investor, the Investor will immediately provide theCompany with such information. The Investor is informed of the significance to the Company of the foregoing representations, and they are made with the intention that the Company will rely upon them. (n) Type of Ownership (check one): ____ Individual Ownership ____ Joint Tenant with Right of Survivorship (both parties must sign) ____ Trust or Estate ____ Other (attach (describe and description) enclose authority) The Investor further represents and warrants that if the Preferred Shares and the Warrant are to be acquired by a corporation, general partnership, limited partnership or other entity, the Investor has the requisite authority to sign this Agreement on behalf of such entity and bind such entity hereunder; the description of such entity attached hereto is true and correct; and each of the equity owners of such entity is a natural person (1) who had an individual income in excess of $200,000, or together with any spouse had a joint income in excess of $300,000, in each of the years 1993 and 1994 and reasonable expects an income in excess of $200,000, or joint income in excess of $300,000 in 1995 or (2) whose individual net worth, or joint net worth with such person's.spouse, as of the date hereof and at the time of purchase exceeds $1,000,000. (o) The Investor acknowledges and understands that: (i) This Agreement is and shall be irrevocable, but the Investor shall not have any obligations hereunder if this agreement is not accepted by the Company. (ii) The Company shall have the right to accept or reject this Agreement, in whole or in part, and the Investor will be notified of its decision. (p) Other: (i) This Agreement and the rights and obligations of the parties hereunder shall not be assignable, in whole or in part, by any party without the prior written consent of the other party, and neither this Agreement nor any provision hereof may be amended, modified, waived or discharged without the written consent of the party against whom enforcement of such amendment, modification, waiver, or discharge is sought. (ii) This Agreement, including the exhibits attached hereto, constitutes the entire agreement of the parties relative to the subject matter hereof and supersedes any and all other agreements and understandings, whether written or oral, relative to the matters discussed herein. (iii) This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. (iv) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed. INVESTOR: COMPANY: SPECTRASCIENCE, INC. ______________________________________ ______________________________________ By: Brain T. McMahon Its: President & CEO Print Names: ________________________ Social Security Number(s) or ________________________ Taxpayer Identification Address: ________________________ Number(s): ___________________ Telephone #: ________________________ ___________________ EX-23.1 6 Exhibit 23.1 -- Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-3 no. 33-57116) pertaining to 1,083,333 shares of common stock and 50,000 shares of common stock issuable upon exercise of warrants, (Form S-3 No. 33-45536) pertaining to 1,810,000 shares of common stock, (Form S-8 No. 33-63047) pertaining to the 1991 Stock Option Plan, (Form S-8 No. 33-45523) pertaining to the 1991 Stock Plan, (Form S-8 No. 33-36385) pertaining to the 1990 Restricted Stock Plan, (Form S-8 No. 33-22052) pertaining to the 1988 Employee Incentive Stock Plan and (Form S-8 No. 2-93693-C) pertaining to the 1983 Employee Stock Option Plan of GV Medical, Inc., of our report dated January 19, 1996, with respect to the financial statements of SpectraScience (formerly GV Medical, Inc.) included in this Annual Report (Form 10-KSB) for the year ended December 31, 1995. Ernst & Young LLP Minneapolis, Minnesota February 22, 1996 EX-27 7
5 YEAR DEC-31-1995 DEC-31-1995 4,123,326 0 150,641 50,000 262,068 4,486,035 680,137 521,907 4,644,265 254,664 0 733,337 0 1,467,498 2,188,766 4,644,265 134,652 134,652 124,913 124,913 1,372,257 0 (16,608) (1,345,910) 0 0 0 0 0 (1,345,910) (0.47) 0
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