-----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, AK5q2t2KmFd+y4uKFYKbvfwoMM6HRMqaZ0ct2rdBfrRDUENaG52FytRKcEnUE8FW 7oz+Q/OpfYjA8wu9omm5Dg== 0000912057-97-022555.txt : 19970702 0000912057-97-022555.hdr.sgml : 19970702 ACCESSION NUMBER: 0000912057-97-022555 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970701 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHROMAVISION MEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0001038223 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 752649072 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-26129 FILM NUMBER: 97633854 BUSINESS ADDRESS: STREET 1: 33171 PASEO CORVEZA CITY: SAN JUAN CAPISTRANO STATE: CA ZIP: 92675 BUSINESS PHONE: 8887764276 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1997 REGISTRATION NO. 333-26129 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ AMENDMENT NO. 4 TO REGISTRATION STATEMENT ON FORM S-1 UNDER THE SECURITIES ACT OF 1933 ------------------------ CHROMAVISION MEDICAL SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 3826 75-2649072 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code No.) Identification No.)
------------------------ 33171 PASEO CERVEZA SAN JUAN CAPISTRANO, CALIFORNIA 92675 1-888-776-4276 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ DOUGLAS S. HARRINGTON, M.D. CHIEF EXECUTIVE OFFICER CHROMAVISION MEDICAL SYSTEMS, INC. 33171 PASEO CERVEZA SAN JUAN CAPISTRANO, CALIFORNIA 92675 1-888-776-4276 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES OF ALL COMMUNICATIONS TO: JAMES A. OUNSWORTH, ESQ. N. JEFFREY KLAUDER, ESQ. ROBERT H. STROUSE, ESQ. SAFEGUARD SCIENTIFICS, INC. MORGAN, LEWIS & BOCKIUS LLP DRINKER BIDDLE & REATH LLP 800 THE SAFEGUARD BUILDING 2000 ONE LOGAN SQUARE 1000 WESTLAKES DRIVE 435 DEVON PARK DRIVE PHILADELPHIA, PENNSYLVANIA SUITE 300 WAYNE, PENNSYLVANIA 19087 19103-6993 BERWYN, PENNSYLVANIA 19312-2409 (610) 293-0600 (215) 963-5694 (610) 993-2213
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /_________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /_________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. /X/ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS 6,720,000 SHARES [LOGO] CHROMAVISION MEDICAL SYSTEMS, INC. COMMON STOCK (AND RIGHTS TO ACQUIRE UP TO 6,400,000 OF SUCH SHARES) ---------------------------- ChromaVision Medical Systems, Inc. is granting at no cost to you, as a holder of common stock of Safeguard Scientifics, Inc., transferable rights to purchase shares of our Common Stock. As a Safeguard shareholder, you will receive one right for every five Safeguard common shares that you own as of June 30, 1997. Each right will entitle you to purchase one share of our Common Stock at an exercise price of $5.00 per share. Up to 6,400,000 shares of Common Stock will be offered in the rights offering. Of these shares, we will be selling 6,020,000 shares and Safeguard and three other selling stockholders will be selling 380,000 shares. If shares remain unsold after the rights offering, the underwriters will purchase any remaining unsold shares pursuant to a Standby Underwriting Agreement. (CONTINUED) -------------------------- YOU SHOULD CAREFULLY CONSIDER THE RISKS THAT ARE DISCUSSED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 8. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING UNDERWRITING DISCOUNT PROCEEDS EXERCISE AND DISCOUNT PAID BY SELLING TO THE OFFER PRICE PAID BY THE COMPANY STOCKHOLDERS COMPANY Min. $0.15 Min. $0.15 Max. $4.85 Per Share............ $5.00 Max. $0.35 Max. $0.35 Min. $4.65 Min. $ 903,000 Min. $105,000 Max. $29,197,000 Total................ $33,600,000 Max. $2,107,000 Max. $181,000 Min. $27,993,000 Total with Over- Min. $ 903,000 Min. $329,000 Max. $29,197,000 Allotment........... $36,800,000 Max. $2,107,000 Max. $405,000 Min. $27,993,000 PROCEEDS TO THE SELLING STOCKHOLDERS Max. $4.85 Per Share............ Min. $4.65 Max. $3,395,000 Total................ Min. $3,319,000 Total with Over- Max. $6,371,000 Allotment........... Min. $6,295,000
The minimum underwriting discount assumes the exercise of all rights in the rights offering and reflects the payment of a financial advisory fee to the underwriters equal to 3% of the exercise price on the 6,720,000 shares sold in the offering. In such a case, the minimum underwriting discount would yield the maximum proceeds to us and to the selling stockholders. The maximum underwriting discount assumes that none of the rights offered in the rights offering were exercised and reflects the payment of an underwriting discount of 4% of the exercise price on the 6,400,000 shares purchased by the underwriters in addition to the 3% financial advisory fee on the 6,720,000 shares sold in the offering. The maximum underwriting discount yields the minimum proceeds to us and to the selling stockholders. The last row of the table assumes that the underwriters have exercised their option granted by the selling stockholders to purchase an additional 640,000 shares of Common Stock. The exercise of the over-allotment option would yield additional proceeds to the selling stockholders and would require the payment of the 4% underwriting discount and the 3% financial advisory fee by the selling stockholders for such shares. ROBERT W. BAIRD & CO. ADAMS, HARKNESS & HILL, INC. INCORPORATED THE DATE OF THIS PROSPECTUS IS JULY 1, 1997. [Inside Front Cover: A photograph of the ChromaVision Digital Analyzer appears in the foreground with a magnified slide of stained cells in the background. To the left of the photograph is the following text: "The ChromaVision Digital Analyzer is an automated intelligent microscopy system that utilizes proprietary imaging software and technology to locate target cells by detecting color generated from common laboratory reagents or stains and is designed to improve patient care by displacing unnecessary, typically invasive and costly procedures." Above the photograph appear the words: "ChromaVision Digital Analyzer." The Company's name and logo appear below the photographs with the phrase: "The Vision in Medical Imaging."] THE CHROMAVISION DIGITAL ANALYZER DEPICTED ON THE INSIDE FRONT COVER PAGE HAS ONLY BEEN CLEARED BY THE U.S. FOOD AND DRUG ADMINISTRATION FOR USE WITH A STAIN TO SCREEN BLOOD FOR MALIGNANCY. (CONTINUED FROM COVER PAGE) Safeguard and the other selling stockholders will also be selling an additional 320,000 shares of our Common Stock to persons selected by us. These persons may have a relationship with us, Safeguard or one of Safeguard's other partnership companies. The exercise period for the rights will expire at 5:00 p.m., New York City time, on August 5, 1997. You may only exercise your rights if you purchase at least 20 shares of our Common Stock through such exercise. Once you exercise a right and we accept the exercise, you may not withdraw the exercise. The shares of our Common Stock that are sold in the offering will come first from the shares being issued by us, and then from the shares being sold by the selling stockholders. If shares remain unsubscribed after the end of the rights exercise period, the first 300,000 shares not purchased through the exercise of rights will be offered by us to other persons. These persons may have a relationship with us, Safeguard or one of Safeguard's other partnership companies. If any shares remain unsold after this offer, the underwriters will purchase any remaining unsold shares. The number of rights that will be granted to the holders of Safeguard common shares is calculated based upon the number of Safeguard common shares that are outstanding on June 30, 1997. If there are fewer than 32,000,000 Safeguard common shares outstanding on June 30, 1997, we will grant fewer than 6,400,000 rights in the rights offering. If fewer than 6,400,000 rights are granted, we will offer the remaining shares for purchase at a price of $5.00 per share to persons selected by us. In any event, a total of 6,400,000 shares will be sold in the offering. We will not receive any proceeds from the sale of shares by the selling stockholders. After the completion of the offering, the selling stockholders together will own approximately 40.4% of our Common Stock. There is no minimum number of shares that must be subscribed for in the rights offering for the offering to be consummated. However, the rights offering may be cancelled by the underwriters if certain conditions are not satisfied. In that event, if you have made any payments to the rights agent, ChaseMellon Shareholder Services, L.L.C., the full amount of your payments will be promptly returned to you. We have filed a Registration Statement with the SEC covering the rights and the shares of Common Stock. Before this offering, the Common Stock has not been listed on any stock exchange or The Nasdaq Stock Market. The rights and the Common Stock have been approved for quotation on the Nasdaq National Market. The underwriters may engage in transactions involving the Common Stock during and after the rights exercise period. As a result, the underwriters may realize profit in addition to the underwriting compensation received for their participation in this offering. If there are shares of Common Stock that are not purchased before the expiration date, the underwriters will be obligated to purchase all of the remaining shares from us. We expect that we will deliver any remaining shares on or about August 13, 1997 at the offices of Robert W. Baird & Co. Incorporated in Milwaukee, Wisconsin. After the offering, we intend to send to all of our stockholders annual reports containing financial statements that have been examined and reported upon, with an opinion expressed by, the Company's independent auditors. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY, INCLUDING INITIATING BIDS OR EFFECTING PURCHASES ON THE NASDAQ NATIONAL MARKET FOR THE PURPOSE OF PREVENTING OR RETARDING A DECLINE IN THE MARKET PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) CONTAINED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) ASSUMES AN EXERCISE PRICE OF $5.00 PER SHARE, (III) GIVES EFFECT TO A 5-FOR-4 SPLIT OF THE COMMON STOCK EFFECTED AS OF MARCH 19, 1997 AND (IV) ASSUMES CONVERSION OF ALL OUTSTANDING SHARES OF SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK. UNLESS THE CONTEXT OTHERWISE INDICATES, CHROMAVISION MEDICAL SYSTEMS, INC., FORMERLY KNOWN AS MICROVISION MEDICAL SYSTEMS, INC., AND ITS PREDECESSOR DIVISION ARE REFERRED TO HEREIN AS "CHROMAVISION" OR THE "COMPANY." THE COMPANY ChromaVision has developed an automated intelligent microscope system that uses the Company's proprietary imaging technologies for a wide variety of diagnostic and research applications. The Company currently markets to research centers and intends to introduce to the healthcare market its system, the ChromaVision Microscopic Digital Analyzer (the "ChromaVision Digital Analyzer"). The ChromaVision Digital Analyzer is designed to identify cells with specific characteristics within a sample of cells by detecting color produced by the reaction between common laboratory reagents (or stains) and the cells. The ChromaVision Digital Analyzer uses proprietary imaging software and technology to capture digital images of cell samples and to detect the presence, count the number and measure the color intensity of cells containing a particular stain. The ChromaVision Digital Analyzer offers substantial flexibility because the software can be configured to identify different stains, thereby allowing the system to be adapted for use with different reagents to identify a broad range of target cellular conditions. The Company seeks to establish the ChromaVision Digital Analyzer as the preferred platform for multiple diagnostic applications. The Company believes that the ChromaVision Digital Analyzer will be attractive to healthcare providers and beneficial to their patients because of its ability to deliver superior diagnostic solutions, thus reducing the need for more invasive or more costly procedures. Preliminary tests have demonstrated superior accuracy compared to other existing techniques used in rare event detection, such as polymerase chain reaction ("PCR") and flow cytometry, as the ChromaVision Digital Analyzer can locate a single abnormal cell among 100 million normal cells. This improved detection capability enables the ChromaVision Digital Analyzer to be applied to a variety of diagnostic situations, such as high-value rare event detection procedures, which include the detection of minute quantities of cancer cells that have spread to parts of the body away from a tumor's primary location. The Company has identified a broad range of potential applications for the ChromaVision Digital Analyzer, including prenatal screening for Down syndrome, quantitative viral load measurement for HIV and cancer detection. The Company focuses on developing diagnostic applications that are clinically and economically compelling to patients, providers (laboratories) and payors (insurance and managed care organizations). The Company has completed clinical trials and has received a 510(k) clearance from the U.S. Food and Drug Administration (the "FDA") to market the ChromaVision Digital Analyzer with a stain (marker) to screen blood for malignancy. The Company plans to expand this clearance for a higher-value use of the ChromaVision Digital Analyzer in its intended first commercial application called Triple Plus-TM-, a procedure using a related stain, Urea Resistant Neutrophil Alkaline Phosphatase ("UR-NAP"), as a marker in the prenatal screening of maternal blood for indicating the risk of a Down syndrome pregnancy. The current screening processes falsely indicate an elevated risk of a Down syndrome baby in a significant number of mothers with normal fetuses (false positives), which typically leads to performing invasive and expensive amniocenteses. The Company believes its Triple Plus-TM- application will significantly improve the diagnostic accuracy of the existing screening process, thereby reducing the number of amniocenteses performed on mothers with normal fetuses. As a result, once clearance is received for commercial use, the Triple Plus-TM- application should result in substantial cost savings to healthcare 3 providers and improved patient care. The Company is also currently testing the ChromaVision Digital Analyzer for a number of additional applications, such as the detection of prostate, breast, lung and colorectal cancers. To support its 510(k) application for the Triple Plus-TM- procedure, the Company has entered into an agreement with Cambridge University (Addenbrooke's Hospital, Cambridge, England), to lead multi-site clinical trials with participants expected to include Harvard Medical School (Brigham and Women's Hospital) and The State of California Prenatal Testing Program (Berkeley). Dr. Sandy Goodburn of Addenbrooke's National Health Services Trust Department of Medical Genetics and Dr. Tony Andrews of Cambridge University's Department of Medical Genetics are the co-principal investigators. Dr. Goodburn was one of the original investigators of a 1990 study that supports the application of UR-NAP used in the Company's Triple Plus-TM- procedure. While the study supported the potential superiority of the stain in this application, the manual process used in the study made it impractical for commercial use. Recently, Dr. Goodburn has successfully employed the automated ChromaVision Digital Analyzer system in support of the clinical research relating to the application of UR-NAP in evaluating prenatally the risk of Down syndrome. The Company's multi-site clinical trials will enable the Company to rapidly obtain affected and normal maternal blood specimens and clinical data to validate the Triple Plus-TM- test for adoption by practitioners and for FDA submission. The Company anticipates that it will file for clearance from the FDA for the Triple Plus-TM- and distribute manuscripts for peer-review publication in early 1998. The Company initially plans to work directly with its clinical collaborators to gain acceptance in the medical community of the Triple Plus-TM- procedure. However, the Company intends to pursue strategic alliances with third parties capable of effectively distributing the ChromaVision Digital Analyzer and providing related services on a large-scale basis. The Company believes that such alliances will enable it to minimize certain risks related to the time, effort and expense associated with the internal development of similar distribution capabilities, particularly for international markets. The first alliance partnership in development is with Sigma Diagnostics ("Sigma"), a St. Louis based subsidiary of Sigma-Aldrich Corporation, and a manufacturer of diagnostic instruments and reagents with a worldwide distribution capability. In March 1997, the Company signed a term sheet setting forth the principal terms of a strategic distribution and application commercialization relationship with Sigma focusing on the Triple Plus-TM- test. The Company has also signed a letter of intent regarding a possible joint development agreement with Specialty Laboratories, a privately held specialized testing services provider located in Santa Monica, California, to leverage their extensive experience and capability in developing cutting-edge laboratory tests in the areas of cancer, immunology, microbiology, genetics and molecular biology. Additionally, ChromaVision has established a non-exclusive cooperative market development relationship with Centocor, Inc. ("Centocor") to identify market opportunities and requirements for various rare event detection applications, such as minimal residual disease. The Company believes that each new application can provide value to all other ChromaVision strategic alliance partners, as new applications will drive new platform installations and in turn make the ChromaVision Digital Analyzer an increasingly attractive means to access the marketplace for new applications. 4 THE OFFERING Description of the Rights Offering..... If you hold Safeguard common shares on June 30, 1997, you will receive one right to purchase our Common Stock for every five Safeguard common shares you own. Fractional rights will be rounded up to the next whole number in determining the number of rights to be issued to Safeguard shareholders. Each right entitles you to purchase one share of our Common Stock at a purchase price of $5.00. You must own at least 20 rights to be eligible to exercise your rights. In other words, if you own fewer than 96 Safeguard common shares, you will receive fewer than 20 rights and you will not be eligible to exercise your rights unless you purchase additional rights in the market. Together with the selling stockholders, we are offering up to 6,400,000 shares of our Common Stock for purchase through the exercise of rights. The Exercise Price of the Rights....... If you wish to exercise your rights to purchase our Common Stock, the purchase price will be $5.00 per share of Common Stock. When You Can Exercise Your Rights...... The rights will only be exercisable from the period beginning on July 1, 1997 and ending on August 5, 1997 at 5:00 p.m., New York City time. How Your Rights Will be Evidenced...... You will receive certificates that represent your transferable rights. Offer of Unsubscribed Shares to Other Purchasers........................... In the event that not all of the rights are exercised, we and the selling stockholders will offer the first 300,000 unsubscribed shares and any shares of Common Stock subject to rights that were not distributed, to persons selected by us. These persons may have a relationship with us, Safeguard or one of Safeguard's other partnership companies. Obligations of the Underwriters........ The underwriters will purchase any shares offered in the rights offering that have not been purchased through the exercise of rights and have not otherwise been sold by us by August 5, 1997, if any, at the exercise price less the underwriters' discount. The underwriters will then offer these shares to the public.
5 Number of Shares of Common Stock Offered in the Rights Offering....... Of the 6,400,000 shares offered in the rights offering, we will be selling 6,020,000 shares and the selling stockholders will be selling 380,000 shares. Offer of Direct Shares to Direct Purchasers........................... The selling stockholders are also offering up to 320,000 shares of our Common Stock that are owned by them to persons selected by us. Common Stock to be Outstanding After the Rights Offering.................. After the offering, 17,147,393 shares of Common Stock will be outstanding, not including 1,608,688 shares issuable upon the exercise of outstanding stock options at a weighted average exercise price of $2.09 per share as of May 27, 1997. How We Intend to Use the Proceeds...... We will use the money received from the sale of shares to repay our outstanding debt, for the further development of the ChromaVision Digital Analyzer, including the financing of clinical trials and certain pre-marketing activities, for working capital, for general corporate purposes and for capital expenditures. We may also use a portion of the net proceeds for future acquisitions, although we currently are not engaged in any acquisition negotiations. Proposed Nasdaq National Market Symbols.............................. During the period in which you can exercise your rights, the rights will trade on the Nasdaq National Market under the symbol CVSNR and the Common Stock will trade under the symbol CVSNV on a when-issued basis. After the expiration of the rights period, the Common Stock will trade under the symbol CVSN.
6 SUMMARY FINANCIAL INFORMATION
PERIOD FROM YEAR ENDED PERIOD FROM MARCH 28, 1996 THREE MONTHS ENDED DECEMBER 31, JANUARY 1, 1996 (INCORPORATION) MARCH 31, ---------------------- THROUGH MARCH 27, THROUGH DECEMBER 31, ------------------------- 1994 1995 1996 1996 1996 1997 ---------- ---------- ----------------- -------------------- ------------- ---------- (DIVISIONAL (DIVISIONAL OPERATIONS(1)) OPERATIONS(1)) STATEMENT OF OPERATIONS DATA: Revenue--product(2).......... $ 220,000 $ 900,000 $ -- $ -- $ -- $ -- Revenue--services(2)......... 76,886 -- -- -- -- -- Cost of revenues--product.... 201,886 310,103 -- -- -- -- Cost of revenues--services... 30,750 -- -- -- -- -- Operating expenses(3)........ 1,645,556 2,553,084 452,157 4,396,617 452,157 1,384,430 Other income (expense)(4).... -- -- 75,000 366,354 75,000 (22,268) ---------- ---------- ----------------- -------------------- ------------- ---------- Net profit (loss)............ $(1,581,306) $(1,963,187) $(377,157) $ (4,030,263) $ (377,157) $(1,406,698) Net profit (loss) subsequent to incorporation(1)(5)..... $ (4,030,263) $(1,406,698) -------------------- ---------- -------------------- ---------- Net profit (loss) per common share(1)(5)................ $ (0.33) $ (0.11) -------------------- ---------- -------------------- ---------- Pro forma weighted average number of common shares outstanding................ 12,111,580 12,280,331
AS OF MARCH 31, 1997 -------------------------- BALANCE SHEET DATA: ACTUAL AS ADJUSTED(6) ---------- -------------- Cash and cash equivalents.................................................................. $ 65,100 $24,747,280 Total assets............................................................................... 1,187,343 25,869,523 Total indebtedness(7)...................................................................... 2,410,820 -- Total stockholders' equity (deficit)....................................................... (2,063,880) 25,029,120
- ------------------------ (1) Prior to Incorporation on March 28, 1996, the Company operated as a division of XL Vision, Inc. See Note 1 to the Notes to the Financial Statements appearing elsewhere in the prospectus. (2) Revenue includes income from prototype research instrument sales and support services. (3) Operating expenses for the period from March 28, 1996 (incorporation) through December 31, 1996 include the value of the preferred stock issued to Centocor as compensation for its clinical collaboration on certain minimal residual disease applications. (4) Other income relates to reimbursement of the Company's cost for design work performed as well as interest income. (5) See Note 2 of the Notes to Financial Statements for information concerning the calculation of net profit (loss) per common share. (6) Adjusted to give effect to the sale by the Company of 6,020,000 shares of Common Stock, the receipt of approximately $27,093,000 in net proceeds from this offering, after deducting the maximum total underwriting discount with respect to such shares of approximately $2,107,000 and estimated offering expenses of approximately $900,000 (including $200,000 representing the maximum applicable non-accountable expense allowance to the underwriters) and the application of proceeds to pay off existing indebtedness. (7) Total indebtedness includes the Company's revolving line of credit and amounts due to XL Vision of $1,958,432 and $452,388 at March 31, 1997, respectively. 7 RISK FACTORS AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION IN THIS PROSPECTUS, BEFORE INVESTING IN THE SHARES OF THE COMMON STOCK AND RIGHTS OFFERED HEREBY. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FUTURE EVENTS AND THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS REFLECTED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE FOLLOWING RISK FACTORS. DEVELOPMENT STAGE ENTERPRISE; HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY The Company is a development stage enterprise, has no commercialized products or revenue base and has a limited operating history. Since its inception in 1993 as a division of XL Vision, Inc. ("XL Vision"), the Company has incurred losses totaling approximately $10.2 million, principally associated with the research and development of the ChromaVision Digital Analyzer technology, conducting clinical trials, preparing regulatory approval filings and other matters related to the commercialization of its system. The Company anticipates that it will not realize any material commercial revenues before the third quarter of 1998 and, therefore, will continue to incur losses for the foreseeable future. Delays in completing research and clinical tests, receiving necessary regulatory approvals, establishing a scaled-up manufacturing operation and developing marketing capabilities may significantly limit or prevent the Company's future profitability. There can be no assurance that the Company will be able to achieve profitable operations at any time in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Governmental Regulation," "Business--Manufacturing; Research and Development" and "Business--Marketing." GOVERNMENT REGULATION The Company's products, services and manufacturing activities are subject to extensive and rigorous government regulation in the United States and other countries. In the United States, the Medical Device Amendments to the Federal Food, Drug and Cosmetic Act, as amended (the "FDC Act"), and other statutes and regulations, including various state statutes and regulations, govern the testing, manufacture, labeling, storage, recordkeeping, distribution, sale, marketing, advertising and promotion of its products. To the extent that the Company manufactures or distributes its products in foreign countries, the Company's products will be subject to similar foreign regulation. Foreign regulatory approvals or clearances can require extensive testing and data submissions. Failure to comply with applicable requirements in the United States or in foreign countries can result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. See "Business--Governmental Regulation." Prior to commercial distribution in the United States, most medical devices, including the Company's products, must be cleared by the FDA. The process of obtaining required regulatory clearance can be lengthy, expensive and uncertain. Moreover, regulatory clearance, if granted, may include significant limitations on the indicated uses for which a product may be marketed. The Company believes that the FDA will generally require clearance for each application for the ChromaVision Digital Analyzer. On June 5, 1997, the Company received its first 510(k) clearance from the FDA to market the ChromaVision Digital Analyzer product for Neutrophil Alkaline Phosphatase ("NAP") quantification. There can be no assurance that the Company will obtain clearance from the FDA to market the ChromaVision Digital Analyzer for any other applications in a timely manner, if at all. See "Business--Governmental Regulation." The Company intends next to pursue FDA clearance for its Triple Plus-TM- application. The Triple Plus-TM- application uses the same technology and methods as the initial NAP quantification application. The filing of a new 510(k) or a PMA would be costly and time consuming. There can be no assurance that 8 the necessary clearance from the FDA for the Triple Plus-TM- application will be received in a timely manner, if at all. The FDA actively enforces regulations prohibiting marketing of products for other than research and investigational use without compliance with the premarket clearance provisions of applicable laws. The effect of governmental regulation may be to delay for a considerable period of time or to prevent the marketing and full commercialization of the Company's products or services and to impose costly requirements on the Company. There can be no assurance that any of the Company's products will receive clearance by the FDA for manufacture and distribution in the United States. See "Business--Governmental Regulation." The FDA also regulates computer software, such as the Company's software technology, that performs the functions of a regulated device or that is closely associated with a given device, such as software for imaging or other devices. The FDA is in the process of reevaluating its regulation of such software, and the Company cannot predict the extent to which the FDA will regulate such software in the future. Should the FDA increase regulation of such software, the Company's software technology could become subject to more extensive regulatory processes and clearance requirements. As a result, the Company could be required to devote additional time, resources and effort in the areas of software design, production and quality control to ensure compliance. No assurance can be given that compliance with more extensive regulatory processes would be achieved or that the necessary clearances for such software be obtained by the Company on a timely basis, if at all. Delay or failure to achieve any required FDA clearance with respect to such software could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Governmental Regulation." Manufacturers of medical diagnostic devices are subject to strict federal regulations regarding validation and the quality of manufacturing, including periodic FDA inspections of the manufacturing facilities to determine compliance with its Good Manufacturing Practice ("GMP") regulations. The Company's manufacturing operations, including any expansion of such operations, will continue to be required to comply with these and all other applicable regulations, and with applicable regulations imposed by other governments. The Company's failure to comply with GMP regulations could result in civil or criminal penalties or enforcement proceedings being imposed on the Company, including the recall of a product or a "cease distribution" order requiring the Company to stop placing its products in service or selling its products, as the case may be. Similar results could occur if the Company were to violate foreign regulations. The Company will be required to be in GMP compliance prior to completing its first commercial product sale. There can be no assurance that the Company will be able to attain or maintain compliance with GMP requirements. Failure to attain or maintain compliance with the applicable manufacturing requirements of various regulatory agencies would have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Governmental Regulation" and "Business--Manufacturing; Research and Development." Changes in existing regulations or adoption of new regulations could affect the timing of, or prevent the Company from obtaining, future regulatory clearance. There can be no assurance that additional regulations will not be adopted or that current regulations will not be amended in such a manner as will materially adversely affect the Company. DEPENDENCE ON SUCCESSFUL COMMERCIALIZATION OF INITIAL PRODUCT APPLICATION The Company has identified prenatal screening of maternal blood for Down syndrome in fetuses as its initial commercial diagnostic application for use on the ChromaVision Digital Analyzer. The Company's business plan contemplates that the Company will not begin generating material revenues from commercial use of this application until the third quarter of 1998 and that this application will generate a significant portion of the Company's revenues for the foreseeable future. The Company's ability to generate revenues from this application is dependent upon a number of factors, including successful completion of clinical trials demonstrating that the use of Triple Plus-TM- is 9 superior to alternative tests for detection of Down syndrome, FDA clearance for the use of the ChromaVision Digital Analyzer for this application, adoption by the medical community of this application as its standard of practice, acceptance by the medical insurance industry of this application as an eligible reimbursable expense and the Company's development of a sales force, internally or with a corporate partner, to successfully market Triple Plus-TM- to laboratories and other users. Delays in the commercialization of, or the failure to successfully commercialize, Triple Plus-TM- would have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON SINGLE PRODUCT LINE; UNCERTAIN MARKET ACCEPTANCE The Company has focused all of its activities to date on the development of the ChromaVision Digital Analyzer and has performed only limited research on specific diagnostic applications for this platform. The Company will depend on the successful development and marketing of such specific applications in order to establish a commercially viable market. The extent of market acceptance and penetration achieved by the ChromaVision Digital Analyzer will depend on a number of variables including but not limited to: cost, ability of the ChromaVision Digital Analyzer to perform as expected and acceptance by patients, physicians, third-party payors and laboratories. There can be no assurance that a viable commercial market for ChromaVision Digital Analyzer applications will ever develop, that the ChromaVision Digital Analyzer will perform as intended or that the ChromaVision Digital Analyzer will achieve the desired market acceptance. See "Business--The ChromaVision Digital Analyzer Advantage." POTENTIAL INTELLECTUAL PROPERTY DISPUTE The Company has been made aware that a third party competitor has a dispute with the Company relating to the Company's UR-NAP application for the ChromaVision Digital Analyzer. If a claim is successfully asserted against the Company, the Company could be subject to significant liabilities to such third party and may be required to license disputed rights from such other party. There can be no assurance that if a claim is successfully asserted against the Company, that any license required under any such patent would be available on terms acceptable to the Company, if at all. The successful assertion of any such claim against the Company, could have a material adverse effect on the Company's business, operating results and financial condition. Furthermore, regardless of the outcome of such claim, the Company could incur substantial costs in defending itself in legal proceedings brought in connection with such claim or in suits brought by the Company asserting its patent or proprietary rights against another party. See "Business--Patents and Proprietary Technology." UNCERTAINTY REGARDING INSURANCE REIMBURSEMENTS The Company is attempting to commercialize the ChromaVision Digital Analyzer by replacing or augmenting existing diagnostic procedures, most if not all of which are deemed to be eligible expenses and covered by the medical insurance industry. Accordingly, the Company's success in commercializing the ChromaVision Digital Analyzer is, in part, dependent on the ChromaVision Digital Analyzer related diagnostic procedures also being deemed eligible for reimbursement. Historically, insurance carriers generally have been slow in adopting new procedures as eligible expenses and, specifically, have been slow in agreeing to cover other types of automated microscopy diagnostic procedures. There can be no assurance that insurance carriers will deem the ChromaVision Digital Analyzer related procedures as reimbursable expenses at any time in the future. See "Business--Third-Party Reimbursement and Healthcare Legislation." LIMITED MANUFACTURING EXPERIENCE As a development stage company, ChromaVision has limited manufacturing experience. As such, the Company may encounter significant delays and incur significant unexpected costs in scaling-up its manufacturing operations. In addition, the Company may encounter delays and difficulties in hiring and 10 training the workforce necessary to manufacture the ChromaVision Digital Analyzer. There can be no assurance that the Company will be able to manufacture the ChromaVision Digital Analyzer at a cost or in quantities necessary to make the product commercially viable. The failure to scale-up manufacturing operations successfully in a timely and cost-effective manner could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Manufacturing; Research and Development." FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING The Company currently estimates that its existing capital resources, together with the net proceeds from this offering, will enable it to sustain operations for at least one year after receipt of the proceeds. The Company has expended and will continue to expend substantial funds for research and development, clinical trials, manufacturing and marketing of its system. The timing and amounts of such capital requirements will depend upon several factors, including the progress of research and development efforts, the results of clinical trials, the receipt of regulatory clearances, technological and market developments, the commercialization of competing products and market acceptance and demand for the Company's system. Specifically, the Company's need for capital will be accelerated if the Company is delayed in bringing the Triple Plus-TM- application to market or the Company fails to achieve the level of revenues from this application in the time frame contemplated by its business plan. To the extent required, the Company may need to seek additional funds through equity or debt financings, collaborative arrangements with third parties and from other sources. There can be no assurance that additional financing will be available on terms acceptable to the Company, if at all. The inability to obtain sufficient funds may require the Company to delay, scale back or eliminate some or all of its development activities, clinical studies and/or regulatory activities or to license to third parties the right to commercialize products or technologies that the Company would otherwise seek to commercialize itself. See "Use of Proceeds." The Company currently has a $5.0 million revolving credit line under which it may need to borrow funds in the future. The balance on its revolving line of credit as of March 31, 1997 is approximately $2.0 million, which the Company intends to repay with a portion of the proceeds of this offering. The revolving credit line is guaranteed by Safeguard under a separate guaranty agreement. Pursuant to the guaranty agreement, a default by Safeguard on its line of credit would constitute a default by the Company on its revolving line of credit. Such default would result in the Company being unable to borrow funds under its line of credit and, if any balance under the line of credit is outstanding at the time, would result in immediate acceleration of the repayment term. There can be no assurance that the Company will be able to obtain additional funds, if necessary, from other sources or to repay any outstanding balance in the event of a default by Safeguard. DEPENDENCE ON COLLABORATORS AND STRATEGIC ALLIANCES The Company's strategy for the development and commercialization of the ChromaVision Digital Analyzer platform contemplates entering into collaborations and strategic alliances with third parties. The Company intends to enter into corporate collaborations for the development of new applications, such as its arrangement with Centocor, clinical collaborations for testing of the system, such as its relationship with Cambridge University, and strategic alliances for the commercialization of its product, such as its proposed alliance with Sigma. The Company may therefore be dependent upon the subsequent success of third parties in performing their responsibilities. There can be no assurance that the Company will be able to enter into arrangements that the Company deems necessary or appropriate to develop and commercialize its products, or that any of the contemplated benefits from such arrangements will be realized. Furthermore, there can be no assurance that any revenues or profits will be derived from the Company's collaborative and other arrangements. See "Business--Strategic Alliances." 11 HEALTHCARE REFORM From time to time, Congress has considered restructuring the delivery and financing of healthcare services in the United States. The Company cannot predict what form such legislation, if any, may take or the effect of such legislation on its business. It is possible that future legislation will contain provisions resulting in limitations which may adversely affect the business, operating results and financial condition of the Company. It is also possible that future legislation could either result in modifications to the nation's public and private healthcare insurance systems, which could affect reimbursement policies in a manner adverse to the Company, or encourage integration or reorganization of the healthcare delivery system in a manner that could adversely affect the Company. The Company cannot predict what other legislation, if any, relating to its business or to the healthcare industry may be enacted, including legislation of third-party reimbursement, or what effect any such legislation may have on its business, operating results and financial condition. See "Business--Industry Overview" and "Business--Third-Party Reimbursement and Healthcare Legislation." RAPID TECHNOLOGICAL CHANGE; DEVELOPMENT OF NEW PRODUCTS The medical imaging technology market is characterized by rapid technological change, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable in short periods of time. The Company expects new products and services, and enhancements to existing products and services, to be developed and introduced by others, which will compete with the products and services offered by the Company. The life cycles of the Company's products are difficult to estimate. The Company's future success will depend upon its ability to enhance its current products and to develop and introduce new products that keep pace with technological developments and emerging industry standards and that address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing such products or produce enhancements that meet these changing demands, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products or that its new products and product enhancements will adequately meet the demands of the marketplace and achieve market acceptance. The Company's inability to develop and introduce new products or product enhancements in a timely manner, or its failure to achieve market acceptance of a new product will have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Competition." DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY TECHNOLOGY The Company's commercial success will depend in part on its ability to protect and maintain the Company's proprietary technology and to obtain and enforce patents on the Company's technology. The Company relies primarily on a combination of copyright, patent and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. No assurance can be given that the Company's efforts will provide meaningful protection for its proprietary technology against others who independently develop or otherwise acquire substantially equivalent techniques or gain access to, misappropriate or disclose the Company's proprietary technology. The Company has applied for patents with the U.S. Patent & Trademark Office ("PTO") regarding certain aspects of the ChromaVision Digital Analyzer software technology. There can be no assurance that any patent applications filed by the Company will result in the issuance of patents or that any patents issued to the Company will afford protection against competitors that develop similar technology. Substantial elements of the hardware component of the Company's ChromaVision Digital Analyzer technology were initially developed by XL Vision for Intelligent Medical Imaging, Inc. ("IMI"). Pursuant to an agreement with IMI, XL Vision assigned ownership of the technology underlying those hardware elements to IMI, subject to a perpetual, transferable, non-exclusive fully paid-up license to XL Vision to 12 use, develop and sell such technology. XL Vision has transferred this license to the Company. See "Business--Patents and Proprietary Technology." The medical device industry has been the subject of extensive litigation regarding patents and other proprietary rights. Any claims of infringement by third parties, with or without merit, could be time-consuming, resulting in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all. A determination that the Company is infringing the proprietary rights of others could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Patents and Proprietary Technology." COMPETITION The markets in which the Company competes are highly competitive. Competition exists and potential competition may arise from several sources, including skilled medical technologists and manufacturers of clinical laboratory equipment. The Company's existing and potential competitors may possess substantially greater resources than the Company. The Company believes that the current primary source of competition for the ChromaVision Digital Analyzer is existing manual methods of microscopic analysis. To compete effectively, the Company will need to demonstrate that the ChromaVision Digital Analyzer produces comparable or better performance relative to existing methods. There can be no assurance that the Company will be able to compete effectively with existing or potential competitors. The Company is aware of at least six companies that are developing or have developed similar products for applications which the Company does not currently intend to pursue. There can be no assurance, however, that such companies will not adapt their systems for other applications competing directly with the ChromaVision Digital Analyzer. See "Business--Competition." PRODUCT LIABILITY AND UNCERTAINTY OF ADEQUATE INSURANCE; POTENTIAL EXPOSURE TO CLAIMS The manufacture and sale of the ChromaVision Digital Analyzer entails an inherent risk of product liability arising from an inaccurate, or allegedly inaccurate, test or diagnosis. There can be no assurance that the Company will be able to maintain or acquire additional product liability insurance in the future with adequate coverages or at acceptable costs. Any product liability claim against the Company could have a material adverse effect on the Company's business, operating results and financial condition. The failure to comply with the FDA's GMP regulations could have a material adverse effect on the ability of the Company to defend against product liability lawsuits. See "Business." DEPENDENCE ON KEY PERSONNEL The Company believes that its continued success depends to a significant extent upon the efforts and abilities of its executive officers. The loss of services of any of the Company's executive officers or senior managers could have a material adverse effect on the Company's business, operating results and financial condition. Furthermore, the Company's anticipated growth and expansion into activities requiring additional expertise will require the addition of highly skilled technical, management, financial, sales and marketing personnel. Competition for such personnel is intense, and the failure of the Company to hire and retain talented personnel or the loss of one or more key employees could have a material adverse effect on the Company's business, operating results and financial condition. See "Management." RISK ASSOCIATED WITH RAPID GROWTH The Company currently has limited management and administrative resources. If the Company is successful in implementing its strategy, it may experience a period of rapid growth and expansion which could place significant additional demands on the Company's management and administrative resources. The failure by the Company's management team to manage this potential growth effectively could have a 13 material adverse effect on the Company's business, operating results and financial condition. See "Business--Employees." LIMITED NUMBER OF POTENTIAL CUSTOMERS FOR THE INITIAL DOWN SYNDROME SCREENING APPLICATION The Company intends to initially market its products to prenatal care healthcare providers and laboratories. There are currently a limited number of such organizations in the marketplace. In particular, with respect to Down syndrome, the Company estimates that approximately 70% of all tests in the United States are performed by five clinical organizations. There can be no assurance that the Company will be able to market successfully any of its products to any such organizations. Furthermore, in the event that the Company is successful in marketing its products to one or more of such organizations, the loss of a significant customer may have a material adverse effect on the Company. See "Business--Marketing." CONTROL BY PRINCIPAL STOCKHOLDERS After the completion of the offering, XL Vision, Safeguard, Technology Leaders I and Technology Leaders II (collectively, the "Principal Stockholders"), will beneficially own in the aggregate approximately 40.4% of the outstanding Common Stock. In addition, officers of the Principal Stockholders will own an additional 6.8% of the outstanding Common Stock (before the exercise of any rights they may receive in the offering). As a result, such stockholders will collectively have the voting power to substantially control the election of the Company's entire Board of Directors and all votes on matters requiring stockholder approval. See "Management--Executive Officers and Directors" and "Management--Certain Relationships," "Principal and Selling Stockholders," "Certain Transactions" and "Shares Eligible for Future Sale." DILUTION The average price per share paid upon the original issuance by the Company of Common Stock prior to the offering was $0.73. Purchasers of the Common Stock of the Company offered hereby will suffer an immediate dilution of $3.54 in the net tangible book value per share of the Common Stock from the exercise price of the rights and the offering price for the shares of Common Stock offered hereby. See "Dilution." REQUIREMENTS FOR LISTING SECURITIES ON THE NASDAQ NATIONAL MARKET; APPLICATION OF THE PENNY STOCK RULES The Common Stock and rights (the "Listed Securities") have been approved for listing on the Nasdaq National Market. If the Company is unable to maintain the standards for continued listing, the Listed Securities could be subject to delisting from the Nasdaq National Market. Trading, if any, in the Listed Securities would thereafter be conducted on the Nasdaq Small Cap Market. If, however, the Company did not meet the requirements of the Nasdaq Small Cap Market, trading of the Listed Securities would be conducted on an electronic bulletin board established for securities that do not meet the Nasdaq listing requirements or in what is commonly referred to as the "pink sheets." As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's securities. In addition, if the Company's securities were delisted, they would be subject to the so-called penny stock rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally defined as an investor with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with a spouse). For transactions covered by this rule, the broker-dealer must make a special suitability determination for the purchaser and must have received the purchaser's written consent to the transaction prior to sale. Consequently, delisting, if it occurred, may affect the ability of broker-dealers to sell the Company's securities and the ability of purchasers in the offering to sell their securities in the secondary market. The Securities and Exchange Commission (the "Commission") has adopted regulations that define a "penny stock" to be any equity security that has a market price (as defined in the regulations) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. For any 14 transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a disclosure schedule relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. As a result, if the Common Stock is determined to be "penny stock," an investor may find it more difficult to dispose of the Company's Common Stock. NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the offering, there has been no public market for the Common Stock or the rights, and there can be no assurance that an active public market will develop or be sustained. The exercise price of the rights and purchase price of the Common Stock has been determined solely by negotiations between the Company and the underwriters and does not necessarily reflect the price at which shares of Common Stock may be sold in the public market during or after the offering. See "The Offering--Why We are Selling Shares Through a Rights Offering" for a discussion of the factors considered in determining the exercise price. The public markets, in general, have from time to time experienced extreme price and volume fluctuations, which have in some cases been unrelated to the operating performance of particular companies, and the market for information technology, healthcare technology and biotechnology stocks, such as the Common Stock, can be subject to greater price volatility than the stock market in general. In addition, factors such as announcements of technological innovations, new products by the Company's competitors or third parties, potential litigation, healthcare reform initiatives, strategic alliances of the Company's competitors, the status of the Company's regulatory applications, regulatory action and market conditions in the medical imaging industry may have a significant impact on the market price of the Common Stock. CANCELLATION OF RIGHTS OFFERING If the conditions precedent to the sale of shares of Common Stock to the underwriters, set forth in the standby underwriting agreement entered into by the Company, the selling stockholders and the underwriters (the "Standby Underwriting Agreement"), are not satisfied, the underwriters may elect, on or before the sixth business day after the Expiration Date (the "Closing Date"), to cancel the rights offering and the Company and the selling stockholders will not have any obligations with respect to the rights except to return, without interest, any payment received in respect of the exercise price. See "Underwriting." The Company has been advised by the NASD that trades in the rights and the when-issued shares of Common Stock in the market would be canceled if the rights offering is not consummated. SHARES ELIGIBLE FOR FUTURE SALE A substantial number of outstanding shares of Common Stock and shares of Common Stock issuable upon exercise of outstanding stock options will become eligible for future sale in the public market at various times. In addition to the factors affecting the stock market in general and the market for the Common Stock discussed above, sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect the market price of the Common Stock. Upon completion of the offering, the Company will have 17,147,393 shares of Common Stock outstanding, excluding 1,608,688 shares of Common Stock subject to stock options outstanding as of May 27, 1997 and any stock options granted by the Company after May 27, 1997. Of these shares, the Common Stock sold by the Company in the offering, except for certain shares described below, will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Act"). The remaining 11,127,393 shares of Common Stock (the "Restricted Shares") were sold by the Company in reliance on exemptions from the registration requirements of the Act and are "restricted securities" as defined in Rule 144 under the Act ("Rule 144") and may not be sold in the absence of registration under the Act 15 unless an exemption is available, including an exemption afforded by Rule 144 or Rule 701 ("Rule 701") under the Act. Without considering the contractual restrictions described below, (i) 10,788,455 Restricted Shares will be eligible for sale ninety days after the date of this Prospectus, subject to volume and other resale conditions imposed by Rule 144, and (ii) 338,938 Restricted Shares will be eligible for future sale subject to the holding period and other conditions imposed by Rule 144. Rule 144 was recently amended to, among other things, reduce the holding period to one year (two years with respect to Rule 144(k)). Certain restrictions on shares of Common Stock are applicable to (i) any shares of Common Stock purchased in the offering by affiliates of the Company, which may generally only be sold in compliance with the limitations of Rule 144, except for the holding period requirements thereunder, and (ii) the shares of Common Stock beneficially owned by the Principal Stockholders all of which, together with the shares of Common Stock beneficially owned by the executive officers of the Company, all but 29,000 shares of Common Stock beneficially owned by the directors of the Company and 280,000 shares of Common Stock beneficially owned by Warren V. Musser (and/or his assignees), are subject to lock-up agreements (the "Lock-Up Agreements") and pursuant to such agreements will not be eligible for sale or other disposition until 180 days after the Expiration Date (the "Lock-Up Expiry Date") without the prior written consent of the Underwriters. In addition, the Company has granted certain registration rights to its shareholders whereby they may cause the Company to register shares of Common Stock. See "Shares Eligible for Future Sale." It is anticipated that a registration statement (the "Form S-8 Registration Statement") covering the Common Stock that may be issued pursuant to the exercise of options awarded by the Company will be filed and become effective prior to the Lock-Up Expiry Date, and that shares of Common Stock that are so acquired or offered thereafter pursuant to the Form S-8 Registration Statement generally may be resold in the public market without restriction or limitation. Subject to the provisions of any Lock-Up Agreement, shares of Common Stock may be resold in the public market beginning 90 days after the date of this Prospectus pursuant to Rule 701 (i) by persons who are not affiliates of the Company, without compliance with the public information, holding period, volume limitation or notice provisions of Rule 144 and (ii) by affiliates of the Company, without compliance with the holding period requirements of Rule 144. See "Management--Equity Compensation Plan," "Shares Eligible for Future Sale--Stock Options" and "Underwriting." POSSIBLE ISSUANCES OF PREFERRED STOCK Shares of preferred stock may be issued by the Company in the future without stockholder approval and upon such terms as the Board of Directors may determine. The rights of the holders of the Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding stock of the Company and potentially prevent the payment of a premium to stockholders in an acquisition transaction. The Company has no present plans to issue any shares of preferred stock and all shares of the Company's preferred stock which are currently outstanding will be converted to Common Stock prior to the consummation of the offering. See "Description of Capital Stock--Preferred Stock." NO DIVIDENDS To date, the Company has not paid any cash dividends on its Common Stock. The Company currently intends to retain future earnings for use in its business and, therefore, does not expect to declare or pay any cash or other dividends in the foreseeable future. See "Dividend Policy." 16 THE OFFERING WHY WE ARE SELLING SHARES THROUGH A RIGHTS OFFERING We have agreed with Safeguard and the other selling stockholders to make a rights offering to holders of Safeguard common shares. Although a rights offering is essentially an initial public offering directed first to Safeguard shareholders and then to the general public, we believe that the rights offering provides several advantages over a traditional initial public offering. We believe that this type of offering gives us the opportunity to offer our Common Stock to investors who, as Safeguard shareholders, already have some knowledge of our business, to distribute the securities to a broader, more stable shareholder base and to minimize costly underwriting discounts and commissions. In addition, Safeguard prefers the rights offering to a traditional initial public offering because it affords its shareholders the opportunity to purchase shares of our Common Stock at the initial offering price before the shares are offered to the general public by the underwriters. We determined the exercise price through negotiations with the selling stockholders and the underwriters. In making this determination, we considered such factors as our future prospects and historical financial data, our industry in general and our position in the industry; market valuations of the securities of companies engaged in activities similar to ours; the quality of our management team; and, the advice of our underwriters. We will also obtain two independent appraisals to further support the determination of the final exercise and offering price. WHAT YOU CAN DO WITH YOUR RIGHTS Until August 5, 1997, you may purchase one share of Common Stock for each right you receive, or you may sell your rights in the market. However, you may not exercise rights for fewer than 20 shares of Common Stock in an account, unless you have previously exercised rights for at least 20 shares in the same account and you provide a letter to ChaseMellon stating that you have already exercised at least 20 rights. If you hold Safeguard common shares in multiple accounts, you must meet the minimum purchase requirement for each account. You may, however, consolidate your rights into one account. If you receive fewer than 20 rights, you should consider purchasing enough additional rights to be eligible to exercise your rights or selling your rights in the market. You should consult with your regular investment advisor and carefully consider your alternatives. WHAT IF THE NUMBER OF SAFEGUARD COMMON SHARES YOU OWN IS NOT DIVISIBLE BY FIVE If the number of Safeguard common shares you own is not evenly divisible by five, we will round up to the next highest whole number in calculating the number of rights that you are entitled to receive. For example, if you hold 96 Safeguard common shares, you will receive 20 rights. If you are a nominee for beneficial holders of Safeguard common shares, we will round the number of rights that you will receive based upon the amount held by each beneficial holder individually. WHEN YOU CAN EXERCISE YOUR RIGHTS You can exercise your rights at any time during the period beginning on July 1, 1997 and ending at 5:00 p.m., New York City time, on August 5, 1997. After that date, you will not be able to exercise or transfer your rights and they will be worthless. We will not honor any rights received for exercise by ChaseMellon after August 5, 1997, regardless of when you sent your rights to ChaseMellon for exercise. HOW YOU CAN TRANSFER YOUR RIGHTS You may transfer all or a portion of your rights by endorsing and delivering to ChaseMellon (at the addresses set forth below) your rights certificate. You must properly endorse the certificate for transfer, 17 your signature must be guaranteed by a bank or securities broker and your certificate must be accompanied by instructions to reissue the rights you want to transfer in the name of the person purchasing the rights. ChaseMellon will reissue certificates for the transferred rights to the purchaser, and will reissue a certificate for the balance, if any, to you if it is able to do so before August 5, 1997. You will be responsible for the payment of any commissions, fees and other expenses (including brokerage commissions and any transfer taxes) incurred in connection with the purchase or sale of your rights. We believe that a market for the rights may develop during the period in which the rights may be exercised. To facilitate the market, we have received approval from the Nasdaq National Market to have the rights listed for the period July 1, 1997 through August 5, 1997. We have reserved "CVSNR" as the Nasdaq symbol under which the rights will trade. If you have any questions regarding the transfer of rights, you should contact ChaseMellon at P.O. Box 798, Midtown Station, New York, New York 10018, Attention: Reorganization Department, telephone number (800) 223-6554. HOW YOU CAN EXERCISE YOUR RIGHTS You may exercise your rights by completing and signing the election to purchase form that appears on the back of each rights certificate. You must send the completed and signed form, along with payment in full of the exercise price for all shares that you wish to purchase to ChaseMellon. ChaseMellon must receive these documents and the payment by 5:00 p.m. on August 5, 1997. We will not honor any exercise of rights received by ChaseMellon after that date. We will, however, accept your exercise if ChaseMellon has received full payment of the exercise price for shares to be purchased through the exercise of rights, and has received a letter or telegraphic notice from a bank, trust company or member firm of the New York Stock Exchange or the American Stock Exchange setting forth your name, address and taxpayer identification number, the number of shares you wish to purchase, and guaranteeing that a properly completed and signed election to purchase form will be delivered to ChaseMellon by 5:00 p.m. on August 8, 1997. If the properly executed documents are not received by 5:00 p.m. on August 8, 1997, the subscriptions will not be accepted. We suggest, for your protection, that you deliver your rights to ChaseMellon by overnight or express mail courier. If you mail your rights, we suggest that you use registered mail. If you wish to exercise your rights, you should mail or deliver your rights and payment for the exercise price to ChaseMellon as follows: By Mail: By Hand: By Overnight: ChaseMellon Shareholder ChaseMellon Shareholder ChaseMellon Shareholder Services, L.L.C. Services, L.L.C. Services, L.L.C. Reorganization Department Reorganization Department Reorganization Department P.O. Box 3301 120 Broadway, 13th Floor 85 Challenger Road, Mail South Hackensack, NJ 07606 New York, New York 10271 Drop--Reorg. Ridgefield Park, NJ 07660
You must pay the exercise price in U.S. dollars by cash, check or money order payable to the "Safeguard Escrow Account." Until the offering is closed, your payment will be held in escrow by Mellon Bank N.A., who will serve as the escrow agent of the Safeguard Escrow Account. ChaseMellon will issue certificates to you representing the Common Stock purchased through the exercise of rights by August 13, 1997. Until that date, ChaseMellon will hold all funds received in payment of the exercise price in escrow and will not deliver any funds to us or to the selling stockholders until the shares of Common Stock have been issued. If you are a broker or depository who holds Safeguard common shares for the account of others and you receive rights certificates for the account of more than one beneficial owner, you should provide copies 18 of this Prospectus to the beneficial owners. You should also carry out their intentions as to the exercise or transfer of their rights. Safeguard will decide all questions as to the validity, form, eligibility (including times of receipt, beneficial ownership and compliance with minimum exercise provisions), and the acceptance of subscription forms and the exercise price will be determined by Safeguard. We will not accept any alternative, conditional or contingent subscriptions. Safeguard reserves the absolute right to reject any subscriptions not properly submitted. In addition, Safeguard may reject any subscription if the acceptance of the subscription would be unlawful. Safeguard also may waive any irregularities (or conditions) in the subscription of shares of Common Stock, and their interpretations of the terms (and conditions) of the rights offering shall be final and binding. If you are given notice of a defect in your subscription, you will have five business days after the giving of notice to correct it. You will not, however, be allowed to cure any defect later than August 8, 1997. We are not obligated to give you notification of defects in your subscription. We will not consider an exercise to be made until all defects have been cured or waived. If your exercise is rejected, your payment of the exercise price will be promptly returned by ChaseMellon. HOW YOU CAN OBTAIN ADDITIONAL INFORMATION If you wish to receive additional copies of this Prospectus or additional information concerning the offering, you should contact Patrick T. Wasser at Robert W. Baird & Co. Incorporated, telephone number (414) 298-7358 or Thomas Cochran at Adams, Harkness & Hill, Inc., telephone number (617) 371-3900. EXPECTED EXERCISE OF RIGHTS BY SAFEGUARD CEO Warren V. Musser, the Chairman and Chief Executive Officer of Safeguard (or his assignees), is expected to exercise all rights distributed to him. As a result, he is expected to acquire approximately 560,000 shares of our Common Stock through the rights offering. WHAT HAPPENS TO THE UNSUBSCRIBED SHARES If there are any shares of Common Stock that are not subscribed for at the end of the rights exercise period, along with the selling stockholders, we will offer the first 300,000 unsubscribed shares at a purchase price of $5.00 per share to persons selected by us. These persons may have a relationship with us, Safeguard or one of Safeguard's other partnership companies. We expect to enter into agreements with these persons to purchase the unsubscribed shares before the end of the rights exercise period. If there are less than 300,000 unsubscribed shares at the end of the rights exercise period, the number of unsubscribed shares offered to each of these persons will be adjusted accordingly. To the extent that any unsubscribed shares remain unsold after the offer to these persons, the underwriters will purchase these shares at the exercise price less the underwriting discount. The underwriters must purchase these shares no later than August 13, 1997. In connection with this offering, the underwriters will receive a financial advisory fee of 3% of the exercise price for each share of Common Stock being offered in the offering, regardless of whether they purchase any shares in the offering. In addition, if the underwriters purchase any shares in the offering or through the exercise of rights that are purchased in the open market in stabilizing transactions, they may purchase the shares at the exercise price less a discount of 4% of the exercise price. The underwriters will offer shares of Common Stock purchased by them to the public at prices which may vary from the exercise price. The selling stockholders have granted to the underwriters an option to purchase an additional 640,000 shares of Common Stock to cover over-allotments, if any, during the 20-day period beginning on August 5, 1997. The underwriters will be entitled to purchase these over-allotment shares at the exercise price less the 4% underwriters' discount. 19 We intend to supplement the Prospectus after the rights exercise period is over to set forth the results of the rights offering, the transactions by the underwriters during the exercise period, the number of unsubscribed shares purchased, if any, and any resale transactions. WHAT HAPPENS IF THE RIGHTS OFFERING IS CANCELLED The underwriters have the right to cancel the rights offering if certain conditions are not satisfied or if certain circumstances exist prior to the closing date of the offering. If you exercise rights and the rights offering is cancelled, ChaseMellon will promptly return to you, without interest, any payment received in respect of the exercise price, and you will not receive any shares of our Common Stock. Along with the selling stockholders, we have established an escrow account with ChaseMellon to hold funds received prior to the closing date of the offering. The NASD has advised us that trades in the rights and the when-issued shares of Common Stock in the market would be cancelled if the offering is not consummated. FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the material federal income tax consequences affecting holders of Safeguard common shares receiving rights in the offering. In the opinion of Morgan, Lewis & Bockius LLP, the distribution of the rights by the Company to holders of Safeguard common shares more likely than not will constitute a taxable transaction under the Internal Revenue Code of 1986, as amended (the "Code"), and may also be subject to state or local income taxes. Because of the complexity of the provisions of the Code referred to below and because tax consequences may vary depending upon the particular facts relating to each holder of Safeguard common shares, such holders should consult their own tax advisors concerning their individual tax situations and the tax consequences of the offering under the Code and under any applicable state, local or foreign tax laws. Safeguard has been advised by Morgan, Lewis & Bockius LLP that, under current interpretations of case law, the Code, and applicable regulations thereunder, the federal income tax consequences applicable to holders of Safeguard common shares receiving rights in the offering generally are as follows: DISTRIBUTION OF RIGHTS TO HOLDERS OF SAFEGUARD SHARES The rights, representing the right to acquire shares of Common Stock from the Company, can be considered as constituting "property" within the meaning of Section 317(a) of the Code. The federal income tax consequences of a distribution of the rights by the Company to holders of Safeguard common shares, as determined under the Code and the regulations thereunder, are as follows: (i) each noncorporate holder of Safeguard common shares will be deemed to have received a distribution from Safeguard, generally taxable as ordinary dividend income, in an amount equal to the fair market value (if any) of the rights, as of the date of distribution, (ii) each corporate holder of Safeguard common shares (other than foreign corporations and S corporations) will be deemed to have received a distribution from Safeguard (generally taxable as a dividend subject to the dividends received deduction for corporations (generally 70%, but 80% under certain circumstances)) in an amount equal to the fair market value (if any) of the rights, as of the date of distribution; and (iii) the tax basis of the rights in the hands of each holder (whether corporate or noncorporate) of Safeguard common shares will be equal to the fair market value (if any) of the rights as of the date of distribution. Because of the predominantly factual nature of determining the fair market value, if any, of the rights, Morgan, Lewis & Bockius LLP has expressed no opinion with respect to the fair market value of the rights. Since the fair market value of the rights will determine the amount of taxable income deemed received by the holders of Safeguard common shares, the determination of the fair market value of each Right as of the date of distribution is critical. The exercise price was determined through arms-length negotiations among the Company and the underwriters. Based on these negotiations, Safeguard's Board of Directors believes that the per share value of Common Stock represented by the rights at the date of the 20 commencement of the offering approximates the exercise price, and that the rights should have no value for federal income tax purposes. However, the Internal Revenue Service is not bound by this determination. See "The Offering--Why We are Selling Shares Through a Rights Offering." EXERCISE OF RIGHTS Holders of rights, whether corporate or noncorporate, will recognize neither gain nor loss upon the exercise of the rights. A holder of rights who receives shares of Common Stock upon the exercise of the rights will acquire a tax basis in such shares equal to the sum of the exercise price paid under the offering and the tax basis (if any) of the holder of rights in the rights. TRANSFER OF RIGHTS The transferable nature of the rights will permit a holder of rights to sell rights prior to exercise. Pursuant to Section 1234 of the Code, a rights holder who sells rights prior to exercise will be entitled to treat the difference between the amount received for the rights and the adjusted tax basis (if any) of the holder of rights in the rights as a short-term capital gain or capital loss, provided that Common Stock subject to the rights would have been a capital asset in the hands of the holder had it been acquired by him. The gain or loss so recognized will be short-term since the rights will have been held for less than twelve months. NON-EXERCISE OF RIGHTS The income tax treatment applicable to holders of rights who fail to exercise or transfer their rights prior to the Expiration Date also is set forth in Section 1234 of the Code. Holders of rights who allow their rights to lapse are deemed under the Code to have sold their rights on the date on which the rights expire. Since upon such lapse no consideration will be received by a holder of rights, and since the rights will have been held for less than twelve months, a short-term capital loss equal to the tax basis (if any) in the rights will be sustained by the holder on such lapse, provided that Common Stock subject to the rights would have been a capital asset in the hands of the holder had it been acquired by him. 21 THE COMPANY The Company began operations in 1993 as the MicroVision division of XL Vision, a Delaware corporation, located in Sebastian, Florida. In March 1996, XL Vision formed MicroVision Medical Systems, Inc. as a subsidiary and transferred to the Company all rights held by XL Vision to the ChromaVision Digital Analyzer technology. Since that time, the Company has been operating as a separate entity. The Company was incorporated in the State of Delaware on March 28, 1996. The Company changed its corporate name to ChromaVision Medical Systems, Inc. on April 23, 1997. The Company's principal executive offices are located at 33171 Paseo Cerveza, San Juan Capistrano, California 92675 and its telephone number is 1-888-776-4276. USE OF PROCEEDS The minimum net proceeds to the Company from the sale of the 6,020,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $27,093,000 after deducting estimated offering expenses allocable to and payable by the Company (including the maximum applicable non-accountable expense allowance to the underwriters) and assuming the sale of all such shares pursuant to the Standby Underwriting Agreement and the payment to the underwriters of the total underwriting discount with respect to the shares sold by the Company pursuant to the Standby Underwriting Agreement. In the event more of the shares of Common Stock offered hereby are sold pursuant to the exercise of rights, the Company will not be obligated to pay the underwriting discount with respect to such shares and will, therefore, realize an amount of net proceeds greater than approximately $27,093,000. See "The Offering--What Happens to the Unsubscribed Shares" and "Underwriting." The Company intends to use $2,410,820 of the net proceeds of this offering to repay the outstanding balance on its revolving line of credit and amounts due to XL Vision as of March 31, 1997. The Company's $5.0 million revolving line of credit bears interest at a rate of LIBOR plus 2.1% and comes due on January 31, 1998. The remainder of the net proceeds will be used for the further development of the ChromaVision Digital Analyzer technology, including clinical trials and certain pre-marketing activities, working capital, general corporate purposes and capital expenditures. The Company has not determined the amounts it intends to utilize on each of such uses, or the timing of such uses. The amounts actually expended for each use may vary significantly depending upon a number of factors, including future revenue growth, if any, the amount of cash generated or used by the Company's operations and the status of acquisition opportunities, if any, presented to the Company. The Company believes that the net proceeds from the sale of the Common Stock offered hereby, together with its current cash balances will be sufficient to fund its operating requirements for at least one year from receipt of the proceeds. Pending such uses, the net proceeds of the offering will be invested in short-term, investment-grade, interest-bearing securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources." DIVIDEND POLICY To date, the Company has not paid any dividends on its Common Stock. The Company currently intends to retain future earnings for use in its business and, therefore, does not anticipate paying any dividends in the foreseeable future. The payment of future dividends, if any, will depend, among other things, on the Company's results of operations and financial condition and on such other factors as the Company's Board of Directors may, in its discretion, consider relevant. 22 CAPITALIZATION The following table sets forth the total actual capitalization of the Company as of March 31, 1997, and pro forma as adjusted to reflect (i) the conversion of all shares of Series A Preferred Stock and Series B Preferred Stock, (ii) the sale of 6,020,000 shares of Common Stock by the Company pursuant to the offering and (iii) the application of the estimated minimum net proceeds of approximately $27,093,000 therefrom. This table should be read in conjunction with the financial statements and related notes thereto and other financial information included elsewhere in this Prospectus.
AS OF MARCH 31, 1997 ----------------------------- PRO FORMA ACTUAL AS ADJUSTED(1) ------------- -------------- Total indebtedness(2).............................................................. $ 2,410,820 $ -- Stockholders' equity (deficit): Preferred Stock, par value $0.01 per share; 532,150 shares authorized and no shares issued and outstanding actual, and 8,000,000 shares authorized and no shares issued and outstanding pro forma as adjusted(3)......................... -- -- Series A Preferred Stock, par value $0.01 per share; 7,246,000 shares authorized, 7,135,064 shares issued and outstanding actual and no shares authorized, issued and outstanding pro forma as adjusted(3)....................................... 71,351 -- Series B Preferred Stock, par value $0.01 per share; 221,850 shares authorized, 221,850 issued and outstanding actual and no shares authorized, issued and outstanding pro forma as adjusted(3)........................................... 2,219 -- Common Stock, par value $0.01 per share; 50,000,000 shares authorized, and 1,931,250 shares issued and outstanding actual and 17,147,393 shares issued and outstanding pro forma as adjusted(3)(4)........................................ 19,313 171,474 Additional paid-in capital(4).................................................... 8,055,955 35,070,364 Accumulated deficit.............................................................. (10,212,718) (10,212,718) ------------- -------------- Total stockholders' equity (deficit)........................................... (2,063,880) 25,029,120 ------------- -------------- Total capitalization......................................................... $ 346,940 $ 25,029,120 ------------- -------------- ------------- --------------
- ------------------------ (1) Adjusted to give effect to the sale by the Company of 6,020,000 shares of Common Stock and the receipt and application of approximately $27,093,000 in net proceeds from the offering, after deducting the maximum total underwriting discount with respect to such shares of approximately $2,107,000 and offering expenses of approximately $900,000 (including $200,000 representing the maximum applicable non-accountable expense allowance to the underwriters). (2) Total indebtedness includes the Company's revolving line of credit and amounts due to XL Vision, $1,958,432 and $452,388 at March 31, 1997, respectively. (3) Pro forma as adjusted assumes conversion of all outstanding shares of Series A Preferred Stock and Series B Preferred Stock. Each share of Series A Preferred Stock and Series B Preferred Stock will automatically convert into 1.25 shares of Common Stock upon consummation of this offering. (4) Excludes as of March 31, 1997, 1,539,188 shares of Common Stock issuable upon the exercise of options at a weighted average exercise price of $1.96 per share (of which options to purchase 299,016 shares were exercisable as of March 31, 1997). As of May 27, 1997, 1,608,688 shares of Common Stock were issuable upon the exercise of options at a weighted average exercise price of $2.09 per share. See "Management--Stock Options." 23 DILUTION As of March 31, 1997, the Company had a net tangible book value of $(2,063,880) or $(0.19) per share of Common Stock. Net tangible book value per share of Common Stock represents the amount of the Company's tangible assets less its total liabilities, divided by the total number of shares of Common Stock outstanding. Without taking into account any changes in net tangible book value after March 31, 1997, other than to give effect to the items described in Note 1 appearing immediately below the following table, the pro forma net tangible book value of the Company as of March 31, 1997, would have been $25,029,120 or $1.46 per share. This represents an immediate increase in such pro forma net tangible book value of $1.65 per share to existing stockholders and an immediate dilution of $3.54 per share to investors purchasing Common Stock at the exercise price in the offering. New stockholders that acquire Common Stock from the underwriters at a price greater than the exercise price will experience greater dilution. The following table illustrates this per share dilution in net tangible book value: Exercise Price.............................................................. $ 5.00 Net tangible book value per share as of March 31, 1997.................... $ (0.19) Increase per share attributable to new stockholders(1).................... 1.65 --------- Pro forma net tangible book value per share as of March 31, 1997............ 1.46 --------- Dilution per share to new stockholders...................................... $ 3.54 --------- ---------
- ------------------------ (1) Reflects the conversion of all outstanding shares of Series A Preferred Stock and Series B Preferred Stock, the sale by the Company of 6,020,000 shares of Common Stock and the receipt of approximately $27,093,000 in net proceeds from the offering, after deducting the maximum total underwriting discount with respect to such shares of approximately $2,107,000 and offering expenses of approximately $900,000 (including $200,000 representing the maximum applicable non-accountable expense allowance to the underwriters). The following table sets forth, on an adjusted basis as of March 31, 1997, the number of shares of Common Stock issued by the Company, the total consideration and the average price per share upon original issuance to stockholders prior to the offering and by new investors before deducting the underwriters' compensation and estimated offering expenses:
SHARES PURCHASED TOTAL CONSIDERATION(1) ------------------------ ------------------------- AVERAGE PRICE NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE(1) ------------ ---------- ------------- ---------- --------------- Existing stockholders................. 11,127,393 64.9% $ 8,148,838(2) 21.3% $ 0.73(2) New stockholders...................... 6,020,000 35.1 30,100,000 78.7 5.00 ------------ ---------- ------------- ---------- Total............................. 17,147,393 100.0% $ 38,248,838 100.0% 2.23 ------------ ---------- ------------- ---------- ------------ ---------- ------------- ----------
- ------------------------ (1) Reflects gross consideration from the issuance of stock, and therefore does not reflect deductions for stock issuance costs, underwriting discount and offering expenses. (2) Includes the value attributed to the release of rights and claims by Centocor related to the issuance of 770,192 shares of Series A Preferred Stock to Centocor, which is convertible into 962,740 shares of Common Stock. See Note 11 to the Notes to the Financial Statements. The foregoing tables assume no exercise of outstanding options. As of March 31, 1997, there were outstanding options to purchase an aggregate of 1,539,188 shares of Common Stock (of which 299,016 were exercisable at March 31, 1997) at a weighted average exercise price of $1.96 per share, and the Company had an additional 173,563 shares of Common Stock available for future grants and other issuances under its Equity Compensation Plan. As of May 27, 1997, there were outstanding options to purchase an aggregate of 1,608,688 shares of Common Stock at a weighted average exercise price of $2.09 per share, and the Company had an additional 232,375 shares of Common Stock available for future grants and other issuances under its Equity Compensation Plan. See "Management" and Note 9 to the Notes to the Financial Statements appearing elsewhere in this Prospectus. 24 SELECTED FINANCIAL DATA The selected financial data set forth below for the years ended December 31, 1994 and 1995 and the period from January 1, 1996 through March 27, 1996 and the period from March 28, 1996 (incorporation) through December 31, 1996 are derived from the financial statements of the Company, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The audited balance sheets as of December 31, 1995 and 1996 and the related statements of operations, stockholders' deficit and cash flows for the years ended December 31, 1994 and 1995, for the period from January 1, 1996 through March 27, 1996, and the period from March 28, 1996 (incorporation) through December 31, 1996 and the KPMG Peat Marwick LLP report thereon are included elsewhere in this Prospectus. The selected financial data for the periods ended December 31, 1993 and 1994 is derived from the Company's financial statements not included herein, which have also been audited by KPMG Peat Marwick LLP. The selected financial data as of March 31, 1996 and 1997 is unaudited. The following information should be read in conjunction with the Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
PERIOD FROM PERIOD FROM MARCH 28, JANUARY 1, 1996 1996 (INCORPORATION) YEAR ENDED DECEMBER 31, THROUGH THROUGH ------------------------------------ MARCH 27, DECEMBER 1993 1994 1995 1996 31, 1996 ---------- ----------- ----------- ----------- ----------- (DIVISIONAL OPERATIONS(1)) STATEMENTS OF OPERATIONS DATA: Revenues--product(2)........ $ -- $ 220,000 $ 900,000 $ -- $ -- Revenues--services(2)....... -- 76,886 -- -- -- Cost of revenues--product... -- 201,886 310,103 -- -- Cost of revenues--services........ -- 30,750 -- -- -- ---------- ----------- ----------- ----------- ----------- Gross profit................ -- 64,250 589,897 -- -- Operating expenses: Selling, general and administrative............ 304,951 787,167 1,040,070 216,579 2,762,673 Research and development(3)............ 549,156 858,389 1,513,014 235,578 1,633,944 ---------- ----------- ----------- ----------- ----------- Total operating expenses................ 854,107 1,645,556 2,553,084 452,157 4,396,617 Total other income (expense)(4)............ -- -- -- 75,000 366,354 ---------- ----------- ----------- ----------- ----------- Net profit (loss)........... $ (854,107) $(1,581,306) $(1,963,187) $ (377,157) $(4,030,263) ---------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- Net profit (loss)(1)(5)..... $(4,030,263) ----------- ----------- Net profit (loss) per common share subsequent to incorporation(1)(5)....... $ (0.33) ----------- ----------- Pro forma weighted average number of common shares outstanding............... 12,111,580 ----------- ----------- PERIOD FROM APRIL 1, 1993 THREE MONTHS ENDED (INCEPTION) MARCH 31, THROUGH ---------------------------- MARCH 31, 1996 1997 1997 -------------- ----------- ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (DIVISIONAL OPERATIONS(1)) STATEMENTS OF OPERATIONS DATA: Revenues--product(2)........ $ -- $ -- $ 1,120,000 Revenues--services(2)....... -- -- 76,886 Cost of revenues--product... -- -- 511,989 Cost of revenues--services........ -- -- 30,750 -------------- ----------- ------------- Gross profit................ -- -- 654,147 Operating expenses: Selling, general and administrative............ 216,579 784,622 5,896,062 Research and development(3)............ 235,578 599,808 5,389,889 -------------- ----------- ------------- Total operating expenses................ 452,157 1,384,430 11,285,951 Total other income (expense)(4)............ 75,000 (22,268) 419,086 -------------- ----------- ------------- Net profit (loss)........... $ (377,157) $(1,406,698) $ (10,212,718) -------------- ----------- ------------- -------------- ----------- ------------- Net profit (loss)(1)(5)..... $(1,406,698) ----------- ----------- Net profit (loss) per common share subsequent to incorporation(1)(5)....... $ (0.11) ----------- ----------- Pro forma weighted average number of common shares outstanding............... 12,280,331 ----------- -----------
AS OF DECEMBER 31, ------------------------------------------------- 1993 1994 1995 1996 ---------- ----------- ----------- ----------- (DIVISIONAL OPERATIONS(1)) BALANCE SHEET DATA: Cash and cash equivalents............. $ -- $ -- $ -- $ 124,092 Total assets.......................... 60,000 1,066,328 345,664 880,430 Total liabilities(6).................. 914,107 3,501,741 4,744,264 2,535,937 Accumulated deficit(7)................ (854,107) (2,435,413) (4,398,600) (8,806,020) Total stockholders' equity (deficit)........................... (854,107) (2,435,413) (4,398,600) (1,655,507) AS OF MARCH 31, 1997 ----------- BALANCE SHEET DATA: Cash and cash equivalents............. $ 65,100 Total assets.......................... 1,187,343 Total liabilities(6).................. 3,251,223 Accumulated deficit(7)................ (10,212,718) Total stockholders' equity (deficit)........................... (2,063,880)
- ------------------------ (1) Prior to Incorporation on March 28, 1996, the Company operated as a division of XL Vision, Inc. See Note 1 to the Notes to Financial Statements appearing elsewhere in the prospectus. (2) Revenue includes income from prototype instrument sales and support services. (3) Research and development expenses for the period from March 28, 1996 (incorporation) through December 31, 1996 include the value of the Preferred Stock issued to Centocor as compensation for its clinical collaboration on the minimal residual disease applications. (4) Other income for 1996 relates to reimbursement of the Company's cost for design work performed as well as interest income. (5) See Note 2 of the Notes to the Financial Statements for information concerning the calculation of net profit (loss) per common share. (6) Includes the outstanding balance on the revolving line of credit and amounts due to XL Vision. The balance of the Company's revolving line of credit and amounts due to XL Vision as of March 31, 1997 were $1,958,432 and $452,388, respectively. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY'S FISCAL YEAR ENDS ON DECEMBER 31. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FUTURE EVENTS AND THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS REFLECTED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." OVERVIEW From inception on April 1, 1993 until March 27, 1996, the Company operated as a business division of XL Vision. On March 28, 1996, XL Vision established the Company as an incorporated subsidiary to which it transferred all its rights to the ChromaVision Digital Analyzer. The Company continues to utilize certain XL Vision resources including administrative support, marketing and development. The Company has produced fifteen ChromaVision Digital Analyzer systems currently being used in various research and clinical trial applications. Since inception through March 31, 1997, the Company had accumulated losses totaling approximately $10.2 million. The financial statements included in this Prospectus reflect the Company's operations since inception as if it had been a separate entity. Until the Company begins to realize significant revenue associated with its planned operations, the Company will be considered in the development stage. The Company has developed and intends to introduce to the healthcare market the ChromaVision Digital Analyzer, a computer-based, automated intelligent microscope system. The Company has received 510(k) clearance from the FDA to market the ChromaVision Digital Analyzer for the use of NAP quantification, a blood cell application with the ChromaVision Digital Analyzer. The Company believes this clearance will be a valuable baseline measure from which to further pursue FDA clearance for its first commercial application, the Triple Plus-TM- application for prenatal screening of maternal blood for Down syndrome in fetuses. In March 1997, the Company executed a letter of intent to form a strategic distribution alliance with Sigma Diagnostics in order to leverage its worldwide distribution capabilities and reagent manufacturing capabilities in an attempt to gain rapid market acceptance of the ChromaVision Digital Analyzer. As the Company continues to pursue commercialization of the ChromaVision Digital Analyzer and develop new enhancements and applications for the ChromaVision Digital Analyzer, the Company expects selling, general and administrative expenses and research and development expenses to increase accordingly. Upon completion of the clinical trials for the Triple Plus-TM- application, the Company intends to seek peer-review publication, which will enable the Company to commercialize the product in certain international markets. The Company also plans to file a second 510(k) application with the FDA to gain clearance for the Triple Plus-TM- application with the ChromaVision Digital Analyzer in order to commercially market the ChromaVision Digital Analyzer in the United States. No assurance can be made that the ChromaVision Digital Analyzer will achieve market acceptance or that the Company will generate significant revenue or profitability. The Company believes that charging laboratories and other potential users of the ChromaVision Digital Analyzer on a per slide or a "per click" basis as opposed to selling the system outright will result in faster market adoption of the product and recurring revenues for the Company. The Company believes that laboratories will be more willing to adopt the ChromaVision Digital Analyzer if they are required to pay only for system usage, rather than commit the capital required for the purchase of a full system. The "per click" pricing model includes all necessary operator training, maintenance and system upgrades. The per click approach contemplates that the Company will retain ownership of the ChromaVision Digital Analyzer systems placed at customer sites and consequently will require a significant capital commitment to purchase the equipment and components required to manufacture the ChromaVision Digital Analyzer. Each ChromaVision Digital Analyzer system, upon placement with the customer, will be classified as 26 depreciable equipment and will be depreciated on a straight line basis over its estimated useful life, anticipated to be three years. The Company anticipates increasing its level of expenditures for sales, marketing, customer support, regulatory compliance activities including clinical trials, research and development, manufacturing and administrative expenses. Therefore, the Company expects to incur negative cash flow from operations and additional losses for the foreseeable future. In March 1997, the Company relocated its headquarters and principal executive offices from Sebastian, Florida to San Juan Capistrano, California. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 REVENUE. The Company is a development stage company and had no revenue for the three months ended March 31, 1997 and March 31, 1996. GROSS PROFIT. The Company had no gross profits for the three-month periods ended March 31, 1997 and March 31, 1996 because there were no revenues during these periods. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Expenses increased $568,043 to $784,622 as compared to $216,579 in 1996. This increase is due primarily to relocation costs, totaling $223,781, incurred in moving the Company to California. Additionally, management and administrative personnel increased by three to a total of four people. RESEARCH AND DEVELOPMENT EXPENSES. Expenses increased $364,230 to $599,808 as compared to $235,578 in 1996. This increase was attributable to the clinical trial costs and the preparation of the necessary information for the submission of the 510(k) filing with the FDA. The increase was also primarily attributable to additional headcount which is necessary to further develop the Company's products. OTHER EXPENSES. Other expenses were $22,268 as compared to other income of $75,000 in 1996. This was attributable to the recording of an installment payment received from IMI for royalties totaling $75,000. 1996 COMPARED TO 1995 AND 1994 OVERVIEW. During 1996, the Company was operated as a business division of XL Vision until March 28, 1996. After its incorporation on March 28, 1996, the Company operated as a subsidiary of XL Vision. While the financial statements segregate the results of operations between periods prior to and after the Company's incorporation, for comparison purposes below, the results have been combined for all of 1996 in order to facilitate comparisons of results of operations for 1996, 1995 and 1994. REVENUE. The Company is a development stage company and had no revenue in 1996. Revenue of $900,000 for 1995 consisted of the sale of six prototype ChromaVision Digital Analyzer systems. The Company sold two digital analyzers to IMI, accounting for all of the Company's 1994 product revenue. The services revenues in 1994 are comprised of engineering services rendered to IMI primarily related to software development. GROSS PROFIT. Gross profit of $589,897 for 1995 or a 65.5% gross margin consisted of profit associated with the manufacture of six ChromaVision Digital Analyzer systems. Gross profit of $64,250 for 1994 consisted of profit associated with the manufacture of two ChromaVision Digital Analyzer systems of $18,114, or an 8.2% gross margin on product revenues, and support services of $46,136, for a 60.1% gross margin on service revenues. The increase in gross margin realized from product sales in 1995 of 65.5% as compared to 8.2% in 1994 is due to the fact that systems sold in 1994 were the first systems to be sold. 27 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Expenses increased $2.0 million to $3.0 million for 1996 as compared to $1.0 million for 1995 and increased by $252,903 for 1995 as compared to $787,167 for 1994. The increase in 1996 was due primarily to $912,050 in severance costs associated with the resignation of the Company's former President, including $443,700 for the repurchase of vested stock options. The balance of the increase was associated with the hiring of additional management, marketing and technical personnel. These costs are expected to increase in the future as the Company builds the necessary infrastructure to support its anticipated growth. The increase in 1995 was due primarily to the continuing development of the Company. RESEARCH AND DEVELOPMENT EXPENSES. Expenses increased $356,508 to $1.9 million for 1996 as compared to $1.5 million for 1995 and increased $654,625 for 1995 as compared to $858,389 for 1994. The increase in 1996 consisted of $770,192 of value attributed to Preferred Stock issued to Centocor for its clinical collaboration on the minimal residual disease application (see Note 11 of the Notes to Financial Statements) which is offset by the decrease primarily related to the completion of the initial development of the ChromaVision Digital Analyzer. The increase in 1995 was due to an increase in the overall activity surrounding the development of the Company. This decrease is due primarily to the completion of the initial development of the ChromaVision Digital Analyzer. The Company anticipates that such expenses will increase in the future due to costs related to the development of new applications, the application for regulatory clearances and the continuation of technological advances to the ChromaVision Digital Analyzer system. OTHER INCOME. Other income of $441,354 related to the reimbursement of the Company's cost for design work performed for IMI totaling $423,525 (see Note 4 of the Notes to Financial Statements) and interest income of $17,829. There was no comparable income for the previous periods. LIQUIDITY AND CAPITAL RESOURCES Prior to March 28, 1996, the Company operated as a division of, and was funded by, XL Vision. In June 1996, the Company completed a private placement, raising $6.4 million. From these proceeds, approximately $4.8 million was paid to XL Vision to satisfy certain liabilities of the Company as of incorporation. These liabilities related to costs incurred while operating as a division of XL Vision and for the net assets contributed to the Company. The remaining proceeds supported the ongoing operations and capital requirements of the Company. As of March 31, 1997, the Company had $65,100 of cash and cash equivalents. In April 1997, the Company renegotiated its existing revolving line of credit to increase its borrowing limit to $5.0 million. The revolving line of credit, which is guaranteed by Safeguard, bears interest at LIBOR plus 2.1%, which is payable monthly. The full amount of the outstanding balance is due on January 31, 1998. The outstanding balance of the Company's line of credit was $1,958,432 at March 31, 1997. The Company intends to repay any amounts outstanding under this loan from proceeds of the Offering. As a development stage company, the business has not been capital intensive and capital asset expenditures in any year have not been significant. Capital expenditures for the year ended December 31, 1996 were $44,117 and related primarily to the purchase of computers and computer software for employees. Capital expenditures are expected to be approximately $610,000 in 1997, and are expected to be primarily related to the Company's relocation to California. As the Company begins to generate commercial revenues, capital expenditures associated with the manufacture of the ChromaVision Digital Analyzer will also be necessary. The Company anticipates that the net proceeds of this offering will be sufficient to satisfy its operating cash needs for at least one year from the receipt of the proceeds. Management expects that losses from operations and increases in working capital requirements will produce significant negative cash flows from operations for the foreseeable future. The Company's business plan anticipates manufacturing the ChromaVision Digital Analyzer instruments, placing them with users at no charge and charging a "per 28 click" fee for each use of the instrument. The manufacture of these instruments will require a significant outlay of cash for which revenues will not be recognized until future periods. As a result, the Company intends to arrange third-party financing for the instruments. In addition, to support the Company's future cash needs it intends to consider, but not be limited to, additional debt, or equity financing. However there can be no assurance that any such financings will be available to the Company, or that adequate funds for the Company's operations will be available when needed, or on terms attractive to the Company. If the Company is unable to obtain sufficient additional funds, the Company may have to delay, scale back or eliminate some or all of its development activities, clinical studies and/or regulatory activities. 29 BUSINESS OVERVIEW ChromaVision has developed an automated intelligent microscope system that uses the Company's proprietary imaging technologies for a wide variety of diagnostic and research applications. The Company currently markets to research centers and intends to introduce to the healthcare market its system, the ChromaVision Digital Analyzer. The ChromaVision Digital Analyzer is designed to identify cells with specific characteristics within a sample of cells by detecting color produced by the reaction between common laboratory reagents (or stains) and the cells. The ChromaVision Digital Analyzer uses proprietary imaging software and technology to capture digital images of cell samples and to detect the presence, count the number and measure the color intensity of cells containing a particular stain. The ChromaVision Digital Analyzer offers substantial flexibility because the software can be configured to identify different stains, thereby allowing the system to be adapted for use with different reagents to identify a broad range of target cellular conditions. The Company seeks to establish the ChromaVision Digital Analyzer as the preferred platform for multiple diagnostic applications. The Company believes that the ChromaVision Digital Analyzer will be attractive to healthcare providers and beneficial to their patients because of its ability to deliver superior diagnostic solutions, thus reducing the need for more invasive or more costly procedures. Preliminary tests have demonstrated superior accuracy compared to other existing techniques used in rare event detection, such as polymerase chain reaction ("PCR") and flow cytometry, as the ChromaVision Digital Analyzer can locate a single abnormal cell among 100 million normal cells. This improved detection capability enables the ChromaVision Digital Analyzer to be applied to a variety of diagnostic situations, such as high-value rare event detection procedures, which include the detection of minute quantities of cancer cells that have spread to parts of the body away from a tumor's primary location. The Company has identified a broad range of potential applications for the ChromaVision Digital Analyzer, including prenatal screening for Down syndrome, quantitative viral load measurement for HIV and cancer detection. The Company focuses on developing diagnostic applications that are clinically and economically compelling to patients, providers (laboratories) and payors (insurance and managed care organizations). The Company has completed clinical trials and has received 510(k) clearance from the FDA to market the ChromaVision Digital Analyzer with a stain (marker) to screen blood for malignancy. The Company plans to expand this clearance for a higher-value use of the ChromaVision Digital Analyzer in its intended first commercial application called Triple Plus-TM-, a procedure using a related cytochemical measurement, UR-NAP, as a marker in the prenatal screening of maternal blood for indicating the risk of Down syndrome in fetuses. The current screening processes falsely indicate an elevated risk of a Down syndrome baby in a significant number of mothers with normal fetuses (false positives), which typically leads to performing invasive and expensive amniocenteses. The Company believes its Triple Plus-TM- application will significantly improve the diagnostic accuracy of the existing screening process, thereby reducing the number of amniocenteses performed on mothers with normal fetuses. As a result, once clearance is received for commercial use, the Triple Plus-TM- application should result in substantial cost saving to healthcare providers and improved patient care. The Company commenced clinical trials for its Triple Plus-TM- application in May 1997. Assuming the clinical trials for UR-NAP are successfully completed, the Company anticipates that it will file for FDA clearance of the Triple Plus-TM- application in early 1998. The Company is also currently testing the ChromaVision Digital Analyzer for a number of additional applications, such as the detection of prostate, breast, lung and colorectal cancers. INDUSTRY OVERVIEW The healthcare industry, for which total expenditures in the United States are estimated to have exceeded one trillion dollars in 1996, is experiencing a shift from predominantly a fee-for-service system to a managed care system. The pricing structure under the managed care system is based on "firm-fixed" 30 pricing, as compared to the "cost-plus" pricing under the fee-for-service system. This change in pricing structure is effectively shifting much of the economic liability for healthcare from employers and individuals to insurance companies, healthcare delivery systems, hospitals and physicians. Unlike the fee-for-service system, in which each diagnostic examination and each treatment procedure results in a fee, the cost of many diagnostic examinations and treatment procedures is not directly reimbursable under the managed care system, which in turn results in reduced revenue and lower profits for healthcare providers as service utilization increases. Consequently, healthcare providers are increasingly seeking more efficient and more accurate methods of disease diagnosis in order to improve patient care and eliminate many unnecessary and costly examinations and procedures. A critical aspect in the diagnosis of many diseases and genetic disorders is the detection of abnormal cells, or cells and organisms with specific characteristics, during a microscopic examination of biological specimens taken from patients. Estimates place the number of diagnostic procedures performed in the United States at over one billion. The biotechnology industry has responded to this opportunity by rapidly developing a growing number of highly specific and increasingly sensitive reagents. Currently, the cell detection process in the vast majority of microscopic examinations is performed manually by a human observer. Typically, a biological specimen such as blood, urine, bone marrow, lymph nodes, sputum or other sample is placed on a microscope slide and treated with a specific reagent that is reactive to cells or organisms which have specific characteristics or which are affected by disease or other pathological conditions. Manual examinations are currently being performed in approximately 10,800 clinical laboratories in the United States, and approximately 31,000 clinical laboratories worldwide. The manual method of sample review requires a trained technologist or physician to examine individual cells in the illuminated area of each microscope slide while attempting to identify target cells or objects relative to normal cells. The manual method requires a slide containing a specimen sample to be placed on the stage of a microscope and then manually scanned for cells or objects of interest one field of view at a time. Most microscopes contain a mechanical stage that is designed to be manipulated by a series of knobs which control the X and Y axis of the slide being scanned. To thoroughly scan the entire area of the slide that is of interest, the observer must tediously manipulate the stage slide controls. Since most of the specimens look similar from field to field, there are few visual cues to indicate that an area has not or has already been examined. These characteristics of the manual process can inadvertently lead to scans which miss critical diagnostic areas of the slide potentially resulting in incorrect diagnoses. The ability of the microscopist to remain focused on the details of a large number of cells contained in a field of view, while retaining a full knowledge of all fields examined and to be examined on each slide, is generally accepted as extremely difficult to accomplish without error by even the most skilled technologist or physician. The difficulty of a technologist's or physician's task is compounded by the need to examine high volumes of slides on a daily basis. In addition, many microscopists remove the mechanical controls from the stage so that they can manually move the slide over the stage platform at greater speed. As a result, the microscopist must rely on even greater manual dexterity which can further increase the probability of missing critical areas of the slide. These potential sources of error can result in incorrect diagnoses and lead to inadequate or unnecessary treatment. Recently, several companies have introduced automated morphology-based microscopes (i.e. discriminating cells based on size and shape) to the market, primarily to perform adjunct Pap smear testing for cervical cancer. Morphology-based systems are inherently complex as they must simultaneously differentiate a myriad of subtle cellular features, which are not necessarily unique to each specific disease. Because of this complexity, the Company believes that morphology-based systems are difficult to adapt to multiple diagnostic applications. In addition, as a result of the shift to managed care, healthcare service providers are developing information systems technology capable of providing healthcare business managers and clinicians with patient-focused data in a format commonly referred to as the "Computerized Patient Record" or CPR. 31 The Company believes that automated microscopes capable of integrating digital images and associated patient data into the CPR will eventually become the industry standard. THE CHROMAVISION DIGITAL ANALYZER ADVANTAGE The ChromaVision Digital Analyzer is a fully automated, computer-based microscope designed to detect and count cells based on color and measure specific diagnostic characteristics of rare cellular events. The ChromaVision Digital Analyzer is designed to enable diagnostic procedures that would be impractical or impossible by using manual methods. Additionally, the Company believes that the ChromaVision Digital Analyzer can replace the most time consuming and costly part of many manual microscopic procedures as a result of its ability to scan large amounts of biological material quickly, accurately and consistently with minimal operator supervision. The Company believes that the ChromaVision Digital Analyzer will enable healthcare providers to improve the consistency and accuracy of patient diagnosis, enhance overall patient care and lower costs. The key benefits of the ChromaVision Digital Analyzer include: SUPERIOR SOLUTIONS AT LOWER COST. The Company believes that the increased speed and accuracy of the ChromaVision Digital Analyzer will lower healthcare costs by enabling better and more timely diagnoses, which will enable healthcare providers to avoid more expensive and typically invasive procedures. Furthermore, as a highly automated system, the ChromaVision Digital Analyzer is capable of operating continuously with limited human supervision and maintenance. The Company believes that the ChromaVision Digital Analyzer can significantly improve the speed, accuracy and consistency of laboratory results by automating certain steps involved in the basic microscopic procedure, such as the loading, positioning, focusing, identification, quantification and scanning of slides thereby enabling labs to provide superior service to physicians, hospitals and healthcare systems. The ChromaVision Digital Analyzer can automatically scan and process up to 100 slides while operating unattended. As each slide is processed, the ChromaVision Digital Analyzer automatically stores the coordinates of each targeted cell or object enabling the subsequent examination of cells on the slide, or a stored digital image of the cell on a computer monitor. The instrument can simultaneously quantify cell and color characteristics which have prognostic and diagnostic significance. The ChromaVision Digital Analyzer enables diagnosticians to quickly and efficiently arrive at accurate diagnoses by reviewing relevant data or stored images of the cells which have been automatically captured, analyzed and stored. IMPROVED SENSITIVITY AND ACCURACY. Unlike certain other automated microscope systems currently available (which primarily discriminate cells on the basis of morphology), the ChromaVision Digital Analyzer employs sophisticated proprietary software and algorithms capable of advanced color detection to identify abnormal cells, specific cells and other objects of interest using common laboratory stains. The instrument relies on the inherent sensitivity and specificity of the color characteristics of the reagent reaction product used in a particular application. This internally developed proprietary technology was invented by scientists experienced in satellite-based imagery, reconnaissance and aerial imagery, and complex color space transformations which are used to yield maximum detail from image-based data. Because of the sophistication of these software programs and algorithms, the ChromaVision Digital Analyzer technology provides enhanced detection sensitivity for use in clinical applications. The ChromaVision Digital Analyzer can rapidly scan large fields of view at low magnification to detect the presence of specific color characteristics and then return under high magnification to capture and store the targeted cells. By contrast, morphology-based microscopes require higher resolution imaging and are inherently more complex than the ChromaVision Digital Analyzer due to the need to carefully scrutinize each cell for subtle differences in morphology. Preliminary tests using specific color-yielding reagents have shown that the ChromaVision Digital Analyzer is capable of consistently detecting one abnormal cell in a population of 120 million normal cells during "spiking" experiments in which a known number of malignant cells were mixed with a known quantity of normal cells. In addition to highly sensitive detection, the Company's advanced technology can 32 quantify the color characteristics of each targeted cell, thereby enabling the measurement of the likelihood or severity of the disease or condition. Through this capability, the Company believes that the ChromaVision Digital Analyzer can enhance the speed, accuracy and consistency of test results, thus leading to improved overall patient care and reduction in the liabilities associated with diagnostic errors. In certain cases, the use of less sensitive systems which are incapable of detecting conditions in which an extremely limited number of abnormal cells are present (rare event detection), can result in false negative diagnoses. In contrast, the ChromaVision Digital Analyzer is capable of extremely high levels of sensitivity making significantly more reliable "rare event detection" possible. For example, the Company believes that the superior accuracy and precision of the ChromaVision Digital Analyzer can be effectively used to detect cases of "micrometastases" in patients with previously undiagnosed and untreated conditions, and "minimal residual disease" in patients with previously diagnosed and treated conditions, such as cancer. Both of these conditions are characterized by minute quantities of tumor cells which have spread to other distant parts of the body away from the tumor (e.g., bone marrow). The Company believes that the ChromaVision Digital Analyzer's sensitivity and accuracy will facilitate not only better diagnoses, but better patient outcomes as well. In particular, the Company believes that the speed, accuracy and consistency of the ChromaVision Digital Analyzer can be valuable in aiding researchers and diagnosticians in characterizing the degree to which cancer has either been contained (localized) or spread to distant locations (metastasized) in a patient. This characterization process, known as "cancer staging" is often dependent upon finding relatively small numbers of tumor cells among large numbers of normal cells in various samples including peripheral blood, bone marrow, lymph nodes and other tissues. The Company believes that the ChromaVision Digital Analyzer has the ability to detect cancer cells from a wide variety of locations and samples within patients, and in turn will become a valuable tool in the staging process. ADAPTABLE PLATFORM FOR EXPANSION. The Company's technology supports a variety of established reagents and stains, and as a result the Company believes its technology can be readily adapted for use in multiple applications. To the extent new reagents and stains are introduced, the ChromaVision Digital Analyzer is designed to be "reconfigured" to detect new colors, thus giving the ChromaVision Digital Analyzer a technological flexibility unique among currently available automated microscope systems. The ability to add new applications can further increase cost savings for healthcare providers and patients by minimizing the need for specialized machines performing individual procedures. The Company believes these capabilities will enable the ChromaVision Digital Analyzer to penetrate potential markets quickly and will enable the Company to commercialize a broad spectrum of healthcare markets. INFORMATION SYSTEM INTEGRATION. Recently, healthcare providers have begun to develop information system technologies capable of providing patient-focused data in a format known as the Computerized Patient Record. Microscopy is one of the last systems within medical technology to be integrated into such patient-focused information systems. The Company has designed the ChromaVision Digital Analyzer to capture, store, display and print cellular images and related data in digital format, which can be integrated into the Computerized Patient Record. As a result, this portion of patient data may be stored, retrieved, printed or displayed across local and wide area networks. The Company believes that providing for more timely, improved diagnostics and collaboration consistent with the emerging trends in medical technology can result in significantly enhanced patient care. STRATEGY The Company seeks to introduce selected "high-value" applications on the ChromaVision Digital Analyzer and develop a foundation from which to establish the ChromaVision Digital Analyzer as the preferred platform for multiple microscopic diagnostic applications. The Company plans to pursue this objective through the following strategic initiatives: 33 DELIVER VALUE THROUGH SUPERIOR DIAGNOSTIC SOLUTIONS. ChromaVision intends to offer the ChromaVision Digital Analyzer based applications with the specific goal of enabling clinical laboratories to deliver value to healthcare providers through superior diagnostic solutions. The Company believes that the ChromaVision Digital Analyzer can provide value to all of the constituents of the healthcare industry by (i) detecting disease sooner (rare event detection) and thereby enabling the appropriate treatment, (ii) monitoring therapeutic response, (iii) employing an adaptable platform which supports multiple applications to achieve cost-effectiveness, (iv) eliminating costly and invasive procedures and (v) improving throughput with consistent and rapid results. Consequently, the Company believes it is well-positioned to benefit from the increased emphasis on cost and quality driven by both healthcare providers and patients. FOCUS INITIAL LAUNCH ON DOWN SYNDROME APPLICATION. ChromaVision is focusing its initial commercialization efforts for the ChromaVision Digital Analyzer on the Triple Plus-TM- application for prenatal screening of maternal blood indicating the risk of Down syndrome in fetuses. In 1990, pilot tests indicated that UR-NAP screening could increase the detection rate while significantly reducing the occurrence of false positives from the current Triple Screen test. One conclusion drawn from these pilot tests, however, was that the commercialization of the UR-NAP application was not feasible without the development of an automated microscope because of the impractical and subjective nature of the manual examination for UR-NAP. The Company is collaborating with the initial investigator of the pilot study to conduct multi-centered clinical trials using the ChromaVision Digital Analyzer technology to evaluate the utility of Triple Plus-TM- for commercial use. The Company estimates that this enhanced screening test could lead to cost savings of approximately $85 million per year as a result of the elimination of as many as 85,000 amniocentesis procedures in the United States alone. The Triple Plus-TM-, which the Company believes will enhance the widely used Triple Screen, was chosen as the initial application for the ChromaVision Digital Analyzer to pursue near term market acceptance due to the significant improvement in predictive value and dramatic reduction in costly and potentially dangerous amniocenteses. Additionally, this application is particularly attractive as an entry into the automated microscopy market due to the relatively concentrated distribution of laboratories currently performing the Triple Screen test. The Company estimates that in the United States, over 70% of all Triple Screen tests are provided by five laboratory enterprises, and the balance are provided by an additional 200 hospital-based laboratories. The Company believes that this concentration of users is ideal for rapid penetration into the market. The Company further believes that similar market demographics in Europe also make Triple Plus-TM- an ideal initial application for developing international markets for the ChromaVision Digital Analyzer. In conjunction with its sales effort, the Company intends to create awareness with obstetricians and gynecologists on the clinical efficacy, safety and economic value of Triple Plus-TM-through peer-reviewed publications, selected involvement in clinical trials and other appropriate educational materials in order to facilitate worldwide market acceptance. See "Business--ChromaVision Digital Analyzer Applications--Triple Plus-TM- Application." IMPLEMENT "PER CLICK" PRICING. ChromaVision believes that, by providing laboratories with the ChromaVision Digital Analyzer on a "per click" basis, the Company will be able to introduce its color-based technology to its targeted markets rapidly and enhance its long-term revenue potential. The Company believes that laboratories will be more willing to adopt the ChromaVision Digital Analyzer if they are required to pay only for system usage, rather than commit the capital required for the purchase of a full system. The "per click" pricing model also includes all necessary operator training, maintenance and system upgrades. Using a "per click" approach allows the Company to better monitor and control the use of its technology to ensure proper use, obtain customer feedback and implement product upgrades, including new applications. PURSUE ADDITIONAL APPLICATIONS. ChromaVision intends to pursue additional applications for the ChromaVision Digital Analyzer technology in the diagnosis of breast, prostate, lung, colorectal and other cancers, as well as infectious agents, genetically-based abnormalities and other diseases. Because the underlying technology used in the ChromaVision Digital Analyzer is based on color detection, the ChromaVision Digital Analyzer offers significant flexibility to aid in the diagnosis and treatment of 34 multiple diseases. Furthermore, the Company believes that the ChromaVision Digital Analyzer may be effectively used in the identification of abnormal cells or cells with specific characteristics within a wide variety of sample types including blood, urine, bone marrow, lymph node and fine needle aspirates. The Company will continue to devote significant time and resources developing certain of these applications, including those related to the evaluation of cancer pervasiveness and avoidance of unnecessary invasive procedures. In addition, the Company also intends to examine market opportunities for an enhanced ChromaVision Digital Analyzer architecture with "front-end" slide preparation handling components and "back-end" information system interfaces. See "Business--Other Potential Applications." FORM STRATEGIC ALLIANCES. ChromaVision intends to develop and pursue new applications for the ChromaVision Digital Analyzer system through strategic alliances. The Company is seeking to form strategic alliances with reagent manufacturers, researchers and other third parties to market reagents using the ChromaVision Digital Analyzer as the platform of choice for the detection and quantification of such reagents. These application specific alliances will focus on integrating the reagents and other color-based detection probes with the ChromaVision Digital Analyzer platform in a manner which provides quality and economic value to patients, laboratories and healthcare payors. In addition, the Company intends to enhance its distribution capabilities through alliances. The Company initially plans to work directly with its clinical collaborators to gain acceptance in the medical community for the Triple Plus-TM- procedure. However, in capturing market share for this application and pursuing other applications in which distribution would be more widely disbursed, the Company intends to pursue relationships with third parties capable of effectively distributing ChromaVision Digital Analyzer and providing related services on a large-scale basis. The Company believes that such alliances will enable it to minimize certain risks related to the time, effort and expenses associated with the internal development of similar distribution capabilities, particularly for international markets. The first application partnership in development is with Sigma, a St. Louis based diagnostic instrument and reagent manufacturer with a worldwide distribution capability. In March 1997, the Company signed a term sheet setting forth the principal terms of a strategic distribution and application commercialization relationship with Sigma focusing on the Down syndrome screening test using UR-NAP. In May 1997, the Company signed a letter of intent regarding a proposed joint development agreement with Specialty Laboratories, a privately held specialized testing services provider located in Santa Monica, California, to leverage their extensive experience and capability in developing cutting edge laboratory tests in the areas of cancer, immunology, microbiology, genetics and molecular biology. In addition, ChromaVision has established a nonexclusive cooperative market development relationship with Centocor to identify market opportunities and requirements for various minimal residual disease applications. The Company believes that each new application alliance can provide value to all other ChromaVision application partners as new applications will drive new platform installations, and in turn make the ChromaVision Digital Analyzer an increasingly attractive means to access the marketplace. See "Business--Strategic Alliances." EXPEDITIOUSLY GAIN NECESSARY REGULATORY CLEARANCES. The Company has obtained its first 510(k) clearance from the FDA to market the ChromaVision Digital Analyzer with an NAP marker to screen blood for malignancy. The Company had submitted this application primarily to establish the various key operational parameters of the ChromaVision Digital Analyzer, including sensitivity and reproducibility. The Company believes that the FDA's review and approval of this application has provided the FDA with a certain level of familiarity and a set of baseline information to facilitate the expeditious review and clearance of subsequent filings. CHROMAVISION DIGITAL ANALYZER APPLICATIONS The Company believes that its technology can be used in the identification of abnormal cells within blood, urine, bone marrow, lymph node, fine needle aspirates and other sample types and may be used to aid in the diagnosis of breast, prostate, lung, colorectal and other cancers, as well as infectious agents, 35 genetically based abnormalities and other diseases. The following are the initial target applications being pursued by the Company: TRIPLE PLUS-TM- APPLICATION The Company is focusing its initial commercialization efforts for the ChromaVision Digital Analyzer on the Triple Plus-TM- application. Through its use in prenatal screening, women who are at high risk of a Down syndrome pregnancy will be more effectively identified for a diagnostic amniocentesis. The Triple Plus-TM- test makes use of the cytochemical marker UR-NAP either alone or in combination with one or more of the biochemical components of the current Triple Screen. Triple Plus-TM- is intended to become the successor to the Triple Screen test, which is currently the most commonly used prenatal screen of maternal blood to indicate the degree of risk of carrying a fetus affected with Down syndrome. The Triple Screen test is considered to be the "standard of practice" for pregnant women under the age of 35 years, and the Company believes that it is performed approximately 2.5 million times per year in the United States and approximately 6 million times per year worldwide. In the case of prenatal screening for Down syndrome, the patient is usually under the care of a primary care physician, most commonly an obstetrics and gynecology specialist or, less frequently, a family physician. Based on the age of the patient and the results of the Triple Screen test, the patient is evaluated for the need of undergoing an amniocentesis to diagnose a Down syndrome fetus. Down syndrome risk estimates are currently derived by a complex mathematical process that combines results of the Triple Screen with the known odds of a Down syndrome fetus based on maternal age. The combined risk indicates likelihood of Down syndrome affecting a pregnancy, and thus the need for amniocentesis. Approximately 85% of the patients identified as patients with a high risk pregnancy by the Triple Screen test choose to undergo amniocentesis. The Company has entered into an agreement with Cambridge University (Addenbrooke Hospital, Cambridge, England) to lead multi-site clinical trials with participants expected to include Harvard Medical School (Brigham and Womans Hospital) and the State of California Prenatal Testing Program (Berkeley). Dr. Sandy Goodburn of Addenbrooke's National Health Services Trust Department of Medical Genetics, and Dr. Tony Andrews of Cambridge University Department of Medical Genetics are the co-principal investigators. Dr. Goodburn was one of the original investigators in the research team that documented the utility of the UR-NAP test in 1990. These clinical trials will evaluate the Triple Plus-TM- test, which uses UR-NAP as a screening marker for Down syndrome using the ChromaVision Digital Analyzer. This new test is designed to improve the existing predictive value and to significantly lower the overall false positive rates in initial screens for Down syndrome. Clinical trials have begun using samples collected at more than a dozen sites worldwide. In the 1990 study, tests indicated that UR-NAP is capable of producing better than a 68% detection rate with a false positive rate of approximately 1%. An improvement in the detection rate will increase the screening efficacy and reduce the number of undetected Down syndrome pregnancies over the Triple Screen test, which is capable of producing a detection rate between 60-65%, with a false positive rate of 5%. In addition, achievement of a 1% false positive rate could reduce the number of amniocenteses with normal fetuses by 80% or approximately 85,000 annually in the United States and 200,000 worldwide. Based on an average price of $1,000 for an amniocentesis, the Company estimates that the reduction in the number of amniocenteses performed would yield a cost savings of approximately $85 million annually in the United States and $200 million worldwide. Additionally, the Company believes that the Triple Plus-TM- test would reduce the number of fetal deaths resulting from amniocenteses which, based on an estimated fetal loss rate of 0.5%--0.8% (GUIDE TO CLINICAL PREVENTATIVE SERVICES), the Company estimates to be between 425 to 680 fetal deaths per year in the United States and 1,000 to 1,600 fetal deaths per year worldwide. The Company believes that the significant cost savings to healthcare providers and improvement to patient care will provide an economic and clinical incentive for healthcare providers to select laboratories offering the ChromaVision Digital Analyzer based Triple Plus-TM- test. 36 Women 35 years of age or older are generally not considered as candidates for the initial screen for Down syndrome because the high risk of carrying a Down syndrome fetus for women in that age group requires higher detection rates than can be obtained by the current screening test. Pregnant women in the over 35 year age group are typically offered amniocentesis as the test for Down syndrome. The Company believes, however, that Triple Plus-TM- represents a significantly more effective alternative to using age alone as a screening marker for Down syndrome in women in this age group. By targeting those pregnancies that are at a high risk of Down syndrome on the basis of the Triple Plus-TM- test, amniocenteses are more effectively assigned to those women most likely to be carrying a Down syndrome fetus, thus increasing the detection rate while dramatically reducing the number of unnecessary amniocenteses. For example, in a test of women 35 years of age and older using the original Triple Screen, it was demonstrated that (i) at a 5% false positive rate, the detection rate of Down syndrome was 59%, (ii) at a 15% false positive rate the detection rate was 78%, and (iii) at a 25% false positive rate the detection rate was 89%. UR-NAP alone has been documented to provide a detection rate of 89% at a false positive rate of only 12%. It is estimated that such an improvement has the potential to significantly reduce the number of amniocenteses for women over 35 years of age. The Company believes that the multi-site clinical trial will enable it to rapidly obtain affected and normal maternal blood specimens and clinical data to validate the Triple Plus-TM- test for adoption by practitioners and for FDA submission. The Company anticipates that it will file for clearance from the FDA and distribute manuscripts for peer-review publication in early 1998. CANCER APPLICATIONS The Company is currently evaluating the use of the ChromaVision Digital Analyzer for various cancer applications including prostate, breast, lung and colorectal cancer. The applications currently under investigation are referred to as micrometastases ("MM"), minimal residual disease ("MRD") and hematologic malignancies. Scientists researching MM and MRD during the last 15 years have had to employ manual microscopy to test samples from patients with many forms of cancer. Researchers attempting to detect and quantify MM or MRD seek to address issues such as the location and pervasiveness of various forms of cancer, and the effectiveness of treatments in preventing the relapse of a disease. Typically, MM and MRD require the search for a few tumor cells on slides with potentially one million or more cells and the tedious manual examination required for such diseases may hinder clinical acceptance and usefulness of test procedures. The Company believes that the speed, accuracy and consistency made possible by the ChromaVision Digital Analyzer can have a material impact on addressing clinical issues such as the location and pervasiveness of various forms of cancer, and further, can hasten the clinical practicality and acceptance of the procedure. Such information is important during the on-going monitoring of a patient's condition as it may contribute to the categorization or "staging" of the cancer's status. This monitoring and staging procedure is generally regarded as necessary to prescribing appropriate treatments. Preliminary results from tests conducted for the Company by Centocor at the University of Rotterdam (Netherlands) and at the Kenneth Norris Cancer Center at the University of Southern California indicate that the ChromaVision Digital Analyzer may be useful in MM and MRD applications, and the Company believes that the ChromaVision Digital Analyzer may make MM and MRD applications practical on a broader scale than had previously been possible. The Company is focusing initially on prostate and breast cancer for micrometastases and minimal residual disease applications, as well as blood and lymph node malignancies for diagnosis and prognosis. Due to the time required to conduct clinical trials, determine viability, review outcomes and gain FDA clearance, the Company does not anticipate that it will be able to commercialize the ChromaVision Digital Analyzer for any of the following applications, if at all, until after 1998. 37 PROSTATE CANCER The Company, in collaboration with Centocor, is examining the feasibility of using the ChromaVision Digital Analyzer to detect MM in patients diagnosed with prostate cancer. Prostate cancer is the second leading cause of death among adult males in the United States. A common form of current treatment is the radical prostatectomy (surgical removal of the prostate gland), which is performed 95,000 times annually in the United States and estimated to be conducted over 200,000 times annually worldwide. Prostatectomies can result in severe side effects, including impotence in 20% of patients and incontinence in 2% of patients. Furthermore, one-half of prostate cancer patients are clinically understaged (cancer has spread outside of the prostate gland) potentially making the prostatectomy unnecessary. In such cases, surgical removal of the prostate could be avoided if an improved diagnostic tool, such as the ChromaVision Digital Analyzer, is employed. At an average cost of $15,000 per prostatectomy procedure in the United States, the Company estimates that the potential savings attributable to the elimination of unnecessary operations would be significant. BREAST CANCER Approximately 182,000 new cases of breast cancer occur annually in the United States. The impressive success of chemotherapy for treating early-stage, operable breast cancer has stimulated significant interest in prognostic factors for breast cancer. Prognostic factors are important tools to predict patients destined for recurrence, and those that are likely to remain disease free. This distinction is clinically critical because patients who will likely experience a recurrence can be selected for systemic chemotherapy, while patients who will not have a recurrence can avoid the significant side effects of a treatment that offers no benefit and great risk. During breast cancer surgery, axillary lymph nodes are typically removed for analysis to determine whether the cancer has spread beyond the breast. Unfortunately, approximately 30% of patients with primary breast cancer and no apparent axillary lymph node contamination by the tumor at the time of surgery will relapse within 10 years and 10-20% of the patients with distant metastases will be lymph node negative at surgery. Alternatively, recent studies have demonstrated that finding tumor cells in bone marrow biopsies is a valuable prognostic tool for predicting the risk of cancer recurrence in patients with early stage breast cancer. In these studies, tumor cells were detected in 31% of patients who had no tumor cells in their lymph node glands at the time of surgery. Consequently, those patients who had no tumor cells in their lymph nodes would have been presumed to have no additional disease present, even though 31% of the time a bone marrow diagnosis would have found tumor cells indicating that their disease had spread outside of the breast. The finding of tumor cells in bone marrow of patients with no tumor in their lymph nodes suggests that these patients should receive additional treatment. In fact, among patients with tumors less than two cm, tumor cells in bone marrow were the most powerful predictor of outcome. Preliminary clinical trials with the ChromaVision Digital Analyzer device have revealed its superiority to manual screening in cost, accuracy, reproducibility and sensitivity at detecting tumor cells in bone marrow. The Company believes that these preliminary studies indicate the potential for the ChromaVision Digital Analyzer device to make micrometastasis examinations practical in the clinical arena and intends to aggressively pursue this application. 38 BLOOD AND LYMPH NODE MALIGNANCIES Malignancies involving blood and lymphoid tissue are called leukemias and lymphomas, respectively. In 1996, 27,600 new leukemia cases and 74,600 new lymphoma cases occurred. Proper treatment of these patients requires classification of these leukemias and lymphomas into specific subtypes to determine proper therapy. Manually identifying special stains on slides or using automated technology known as flow cytometry are two methods most commonly used to assist subtyping these tumors. The former is manual and the latter is expensive, complex and destructive of the specimen. Alternatively, the ChromaVision Digital Analyzer can enhance and automate these determinations without destroying the specimen and does not require expensive maintenance or personnel. QUANTITATIVE VIRAL LOAD (HIV, HPV, CMV) The Center for Disease Control estimates that approximately 1,000,000 Americans are currently infected with HIV, the virus responsible for Acquired Immune Deficiency Syndrome (AIDS). Early studies quickly identified the value of following the levels of certain types of blood cells, known as CD4 and CD8 T-cells, to predict patient prognosis. The absolute level of CD4 T-cells and the ratio of CD4 to CD8 T-cells are markers of disease progression and prognosis. The determination of these markers currently requires flow cytometry and hematology analyzers. More recent studies have demonstrated the value of directly measuring the amount of virus in the bloodstream to predict disease progression and monitor therapy. However, most of the virus is inside cells and current methods only measure virus that is shed into the blood fluid. The ChromaVision Digital Analyzer can perform viral load quantification at the cellular level and simultaneous CD4 and CD8 T-cell determinations, allowing more accurate assessment of prognosis and therapeutic response. The technology also has application to cervical cancer screening by identifying and quantifying certain types of Human Papilloma Virus (HPV) in cervical cells that are associated with a high risk of progression to cervical cancer. Cytomegalovirus (CMV) is a virus that can cause blindness in immune deficient patients. CMV serum markers are unreliable in diagnosing active disease and only demonstration of actual virus in cells allows treatment to be initiated. OTHER POTENTIAL APPLICATIONS The Company is evaluating the potential use of the ChromaVision Digital Analyzer in other applications, including colon cancer (133,500 new cases per year), lung cancer (177,000 new cases per year), blood screening for various contaminants and mycobacteria (tuberculosis). As with all applications, the Company intends to employ the ChromaVision Digital Analyzer color detection as the primary means of cellular detection. While the Company believes that the ChromaVision Digital Analyzer may be effective for these potential applications, additional tests are required to address the clinical efficacy, value propositions, regulatory requirements and other issues associated with each application. There can be no assurance that the Company will successfully develop the ChromaVision Digital Analyzer for any of these applications. THE CHROMAVISION DIGITAL ANALYZER TECHNOLOGY In 1993, XL Vision developed and produced an automated microscope. This internally developed, proprietary technology was developed by scientists experienced in satellite-based imagery, reconnaissance and aerial imagery, and color space transformations used to extract maximum detail from image-based data. In March 1996, XL Vision contributed the rights to the technology to ChromaVision for $4.8 million and 1,545,000 shares of Common Stock of ChromaVision. SOFTWARE. The technology underlying the ChromaVision Digital Analyzer is the Company's internally developed software which enables it to detect colored objects (i.e. stained cells) dramatically better than the human eye and with greater accuracy and sensitivity than morphology-based automated systems. The Company's software utilizes advanced imaging concepts referred to as "color spaces" and "color space 39 conversion." In this manner, the ChromaVision Digital Analyzer reduces the cell detection problem to finding bright objects on a dark background. The ChromaVision Digital Analyzer's ability to locate stained objects is not limited to any specific reagent color nor is it affected by the brightness of the background. Additionally, the sophisticated autofocus algorithms, fast image acquisition and proprietary color space transformations occur at rapid processing speeds, thereby making possible rare event detection and "imaging on the fly." HARDWARE. The hardware components used in the ChromaVision Digital Analyzer consist primarily of (i) an optically superior visible light microscope, (ii) a color CCD camera, (iii) an automated, precision robotics slide transport system, (iv) a central processor unit with a specialized image processor subsystem and (v) system interfaces including two monitors, trackball or mouse, keyboard, serial dial-up and local area network ports and color printer. The Company employs a development and manufacturing strategy which uses "state of the art" components which are generally available off-the-shelf to make development, service and upgrades less costly. The ChromaVision Digital Analyzer is designed to enable a laboratory technician to operate the system using simple "point and click" commands. The system interface includes one monitor for system commands and status, and one monitor for viewing high quality color images of the cells. Initial setup of the system is configurable through extensive preference and configuration menus so that scanning magnifications, stain types and other operations may be tailored to the application. During normal operation, a laboratory technologist mounts prepared microscope slides onto a specially designed slide carrier, which has the capacity to hold up to four slides. Up to 25 slide carriers can be loaded into the ChromaVision Digital Analyzer slide transport system. The operator may specify the size, shape and location of the area on the microscope slide to be scanned or alternatively, the system will automatically locate the relevant area. The scanning process begins with the automatic loading of the first carrier of slides onto the microscope stage. During this stage of the process, the ChromaVision Digital Analyzer automatically reads bar codes affixed to the slides to facilitate patient data storage and access. During scanning, the ChromaVision Digital Analyzer automatically focuses each field of the object, images the object using the CCD camera and processes the resulting digital image through the image processor. Slides are then scanned at a "low" optical magnification (typically 20x objective) to identify objects of interest based primarily on their color characteristics. The locations of suspected cells are stored until scanning is completed. When the "low" power scanning is completed, the system automatically returns to each suspected object, reimages it at "high" power (typically 60x objective), verifies that it is a proper cell candidate, and stores a digital image of the cell for scoring and later review by the laboratory technician or pathologist. After scanning is completed, the operator is able to view a montage of all stored images for interpretation of the detected objects, along with quantitative information, such as the number of objects detected. If desired, the operator may also directly view a detected object through oculars using the ChromaVision Digital Analyzer's automatic repositioning feature, which automatically repositions the slide according to the previously stored cell coordinates. Upon completion of this review, a report containing relevant images identified by the ChromaVision Digital Analyzer may be printed. Images may be saved on a removable hard disk, optical disk or archived on magnetic tape. The ChromaVision Digital Analyzer can be configured to support the transmission and reception of images via local area network and wide area network communications facilities, including the Internet. The Company believes that by presenting clinical information in a digital format, including relevant cell images, the ChromaVision Digital Analyzer is potentially capable of integrating cell-based laboratory information with Computerized Patient Records. 40 PATENTS AND PROPRIETARY TECHNOLOGY Substantial elements of the hardware component of the Company's ChromaVision Digital Analyzer were initially developed by XL Vision for IMI. Pursuant to an agreement with IMI, XL Vision assigned ownership of the technology underlying those hardware elements to IMI, subject to a perpetual, transferable, non-exclusive, fully paid-up license to XL Vision to use, develop and sell such technology. At the inception of the Company, XL Vision transferred this license to the Company. The Company's commercial success will depend in part on its ability to protect and maintain its proprietary technology and to obtain and enforce patents on its technology. The Company has applied for two patents with the PTO regarding certain aspects of the ChromaVision Digital Analyzer software technology. There can be no assurance that any patent will be issued. The Company is not aware of any patents held by others that would prevent the Company from manufacturing and commercializing ChromaVision Digital Analyzer in the United States and abroad. However, the Company has not performed an exhaustive worldwide search. There can be no assurance that any patent applications filed by the Company will result in the issuance of patents or that any patents issued to the Company will afford protection against competitors that develop similar technology, or that a competitor will not reverse-engineer the Company's software. The Company is aware of an existing patent regarding the UR-NAP test. Although the Company has been made aware that a third party competitor has a dispute with the Company relating to this technology, the Company believes that the use of the Company's Triple Plus-TM- application for the ChromaVision Digital Analyzer product will not infringe upon or violate any third-party rights. The Company entered into an agreement with such third-party competitor dated April 17, 1997, by which the Company and the third party competitor agreed to negotiate in good faith their dispute over the patent for a period of six months. During this period, each party agreed that it will not initiate any lawsuit or other proceeding based on such dispute. The Company currently relies on a combination of trade secrets, proprietary knowledge, technological advances and disclosure, confidentiality and non-competition agreements entered into with its employees and certain consultants to protect its proprietary rights. No assurance can be given that the Company's efforts will provide meaningful protection for its unpatented proprietary technology against others who independently develop or otherwise acquire substantially equivalent technologies or gain access to misappropriate or disclose the Company's proprietary technology. There can be no assurance that other parties will not in the future make claims or threaten to take legal action against the Company alleging infringement of patents by the Company. The medical device industry has been the subject of extensive litigation regarding patents and other rights. Patent litigation can be costly and time consuming, and there can be no assurance that the Company's litigation expenses will not increase in the future. If the Company were determined to be infringing any patent, the Company could be required to pay damages, alter its products or processes, obtain licenses and/or cease certain activities. In addition, if patents are issued to others which contain claims that cover subject matter made, used or sold by the Company, the Company may be required to obtain licenses to these patents, to develop or obtain alternative technology or to cease using such technology. If the Company is required to obtain any licenses, there can be no assurance that the Company will be able to do so on terms acceptable to the Company, if at all. A determination that the Company is infringing the patents of others could have a material adverse effect on the Company's business and results of operations. MARKETING The Company intends to focus its marketing efforts on independent reference laboratories, hospital laboratories and Health Maintenance Organization laboratories by offering the ChromaVision Digital Analyzer on a "per click" basis. This strategy is intended to simplify customer procurement decisions, facilitate the introduction of new diagnostic tests as they become available and develop recurring revenue for the Company. 41 Currently, the Company intends to market and distribute its Down syndrome screening product (Triple Plus-TM-), through an agreement under negotiation with Sigma. Sigma has a worldwide distribution and service capability in conjunction with its parent, Sigma-Aldrich. The Company believes that significant advantages exist as a result of its relationship with Sigma, which will greatly enhance the time to market and reduce the cost of sales. The current Triple Screen application is performed by a relatively concentrated market. The Company estimates that in the United States, approximately 70% of all tests are performed by five laboratory enterprises. An additional 30% of the tests are performed at approximately 70 hospital laboratories. Similar characteristics exist for the European market. The Company believes that these market characteristics make the Triple Plus-TM- test the ideal application to introduce the ChromaVision Digital Analyzer device to the healthcare market and to use as a platform to subsequently launch follow-on applications. The Company currently has two executive officers with combined experience of over 20 years in the marketing and sales of healthcare services, including 11 years in the business development of digital imaging systems for healthcare applications. The Company's clinical collaboration will facilitate the commercialization efforts through professional and clinical market development programs including the on-going publication of clinical results and other related information. The Company's marketing and sales personnel will work closely with Sigma to assist laboratory customers to develop their local marketing campaign to generate referrals among physicians and managed care providers. The Company intends to broaden the applicability of the ChromaVision Digital Analyzer as the market recognizes the system's ability to operate effectively in identifying rare events and the resulting reduction in costs associated with more timely and cost-effective treatments. Additionally, the Company believes that the expected improvement in patient outcomes generated by the ChromaVision Digital Analyzer will eventually be viewed as giving managed care providers a strategic advantage in their effort to attract more subscribers based on superior quality of care. STRATEGIC ALLIANCES As part of its business strategy, the Company intends to develop and pursue new applications for the ChromaVision Digital Analyzer product and enhance its distribution, marketing and manufacturing capabilities through strategic alliances. These application-specific alliances will focus on integrating the reagents and other color-based detection probes with the ChromaVision Digital Analyzer platform in a manner which provides quality and economic value to patients, laboratories and healthcare payors. The Company is seeking to form strategic alliances with reagent manufacturers, researchers and other third parties under which the ChromaVision Digital Analyzer will be used as the platform of choice for the detection and quantification of such reagents. The Company believes that each new application alliance can provide value to all other ChromaVision application partners as new applications drive new platform installations, and in turn make the ChromaVision Digital Analyzer an increasingly attractive means to access the marketplace for new applications. The Company initially plans to work directly with its clinical collaborators to gain acceptance in the medical community for the Triple Plus-TM- procedure. In order to capture market share for this application and other applications in which distribution would be more widely disbursed, the Company intends to pursue relationships with third parties capable of effectively distributing the ChromaVision Digital Analyzer and providing related services on a large-scale basis. The Company believes that such alliances will enable it to minimize certain risks related to the time, effort and expenses associated with the internal development of similar distribution capabilities, particularly for international markets. In March 1997, the Company agreed to a term sheet setting forth the principal terms of a strategic distribution and application commercialization relationship with Sigma focusing on the Down syndrome test using UR-NAP. In addition to manufacturing the primary reagents used for the test, Sigma also has worldwide marketing and sales capabilities. Sigma is a vertically integrated, ISO 9000 certified, in vitro 42 device manufacturer. Sigma was the first in vitro diagnostics manufacturer to kit chemistries for the clinical diagnostics market. For the past 50 years, Sigma-Aldrich, the parent company of Sigma, has developed a worldwide distribution and communication network that serves as the basis for an extensive distribution capability for Sigma. This capability gives Sigma a greater sales and distribution reach than it would normally have for a manufacturer of its size. Sigma is able to utilize the more than 30 subsidiaries of Sigma-Aldrich throughout the world and their distributors to promote its products in over 140 countries. In the subsidiaries located in Western Europe including France, Germany, United Kingdom, Italy, the Netherlands and Luxembourg, Sigma maintains support capabilities for both reagents and instruments. All Sigma distributors are trained and qualified to support their product lines. The Company has signed a letter of intent and expects to enter into a joint development agreement with Specialty Laboratories, a privately held specialized testing services provider located in Santa Monica, California, to leverage their extensive experience and capability in developing laboratory tests in the areas of cancer, immunology, microbiology, genetics and molecular biology on the ChromaVision Digital Analyzer device and also pursue joint ventures where appropriate. Specialty Laboratories serves approximately 8,000 clients worldwide including hospitals, reference laboratories, clinics, physicians, universities and the pharmaceutical industry. ChromaVision has established a nonexclusive cooperative market development relationship with Centocor to identify market opportunities and requirements for various minimal residual disease applications. The Centocor relationship is focused on applying various reagents to the ChromaVision Digital Analyzer platform in a manner which provides quality and economic value to patients, laboratories, and healthcare payors. Based upon the results of clinical trials being conducted on the ChromaVision Digital Analyzer platform by Centocor researchers and Centocor's academic research partners, ChromaVision and Centocor intend to pursue further arrangements for offering Centocor oncology reagents and the ChromaVision Digital Analyzer platform either through a combination of Centocor and ChromaVision distribution channels, or through one or more third parties. At this time, the Centocor relationship is focused on application and market development activities. GOVERNMENTAL REGULATION The Company's products are subject to stringent governmental regulation in the United States and other countries. In the United States, the Medical Device Amendments to the FDC Act, and other statutes and regulations, including various state statutes and regulations, govern the testing, manufacture, labeling, storage, recordkeeping, distribution, sale, marketing, advertising and promotion of such products. Failure to comply with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. Prior to commercial sale in the United States, most medical devices, including the ChromaVision Digital Analyzer, must be cleared by the FDA for specific uses. The regulatory process can be lengthy, expensive and uncertain. Securing FDA clearance may require the submission of extensive clinical data together with other supporting information to the FDA. Any clinical testing of medical devices must be conducted in conformity with applicable FDA regulations. In addition, state and local approvals may be required for some clinical activities. Under the FDC Act, medical devices are classified into one of three classes on the basis of the controls necessary to reasonably ensure their safety and effectiveness. Class I devices are those whose safety and effectiveness can reasonably be ensured through general controls, such as labeling, premarket notification and adherence to FDA-mandated GMP. Class II devices are those whose safety and effectiveness can reasonably be ensured through "special controls," such as performance standards, post-market surveillance, patient registries and FDA guidelines. Class III devices are devices that must receive premarket approval ("PMA") by the FDA to ensure their safety and effectiveness. They are generally life- 43 sustaining, life-supporting or implantable devices, and also include most devices that were not on the market before May 18, 1976 and for which the FDA has not made a finding of substantial equivalence based upon a 510(k). Before a new device or a new use of an existing device can be introduced to the market, the manufacturer generally must obtain FDA clearance of a 510(k) or approval of a PMA application. Following submission of the 510(k), the manufacturer may not market the new device until an order is issued by the FDA finding the device to be "substantially equivalent" to a legally marketed medical device, i.e., a legally marketed Class I or Class II medical device or a legally marketed Class III medical device for which the FDA has not called for PMA applications ("predicate device"). The FDA has no specific time limit by which it must respond to a 510(k). It generally takes from three to nine months from the date of submission for the FDA to respond with a clearance for a 510(k) application depending on the complexity of the technology and the level of review the FDA employs for evaluating the 510(k), but it may take longer. The FDA may determine that the proposed device is not substantially equivalent, or that additional clinical or other data are needed before a substantial equivalence determination can be made. Modification or enhancement of a product that has been cleared through the 510(k) process requires clearance of a new 510(k) if the modification or enhancement could significantly affect the safety or effectiveness of the original device. The Company has obtained its first 510(k) clearance from the FDA to market the ChromaVision Digital Analyzer with an NAP marker to screen blood for malignancy. The Company is developing, and intends to develop, additional applications for the device, and plans on developing new, and/or enhanced capabilities for the device. The Company will file additional 510(k)s or PMAs as required. For future applications, should the FDA determine that ChromaVision Digital Analyzer is not substantially equivalent to other 510(k) predicate devices, the Company may be required to file for a PMA. The PMA process is significantly more complex, expensive and time consuming than the 510(k) process. The PMA process generally requires the performance of well controlled clinical investigations in order to obtain FDA clearance, although other kinds of valid scientific evidence may be sufficient to determine the effectiveness of some devices. The PMA process typically requires two years, and may never result in approval. Determination by the FDA that any of the Company's products or applications are subject to the PMA process could have a material adverse effect on the Company's business, results of operations and financial condition. Nonetheless, should a PMA be required, a business benefit can accrue in the sense that a PMA can serve as a competitive barrier to entry. Although no time frames can be assured for either a 510(k) or PMA clearance, it is generally assumed that a 510(k) may be more readily obtained. The time allocated to clinical testing accounts for a considerable amount of the difference in 510(k) versus PMA clearance. The FDC Act requires that medical devices be manufactured in accordance with the FDA's current GMP regulations. These regulations require, among other things, that (i) the manufacturing process must be regulated and controlled by the use of written procedures and (ii) the ability to produce devices which meet the manufacturer's specifications be validated by extensive and detailed testing of every aspect of the process. They also require investigation of any deficiencies in the manufacturing process or in the products produced and detailed record keeping. Manufacturing facilities are therefore subject to FDA inspection on a periodic basis to monitor compliance with GMP requirements. If violations of the applicable regulations are noted during FDA inspections of the Company's manufacturing facilities or the manufacturing facilities of its contract manufacturers, there may be a material adverse effect on the continued marketing of the Company's products. Other applicable requirements include the medical device reporting regulation, which requires that the Company provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of its devices, as well as product malfunctions that would likely cause or contribute to a death or serious injury if the malfunction were to recur. 44 The FDA regulates certain computer products as medical devices, such as control software for imaging or other diagnostic devices, including the Company's ChromaVision Digital Analyzer software. The FDA is in the process of reevaluating its regulation of such software, and if the FDA undertakes increased or more rigorous regulation of such software (which the Company cannot predict), the Company's ChromaVision Digital Analyzer software may become subject to further regulatory processes and clearance requirements. The Company is currently in full compliance with FDA guidelines with respect to its software. No assurance can be given that compliance with more extensive regulatory processes will be achieved or that the necessary clearances for such software will be obtained by the Company on a timely basis, if at all. The Company may, as a result, be required to expend additional time, resources and effort in the areas of software design, production and quality control to ensure full technical compliance. Laws and regulations regarding the manufacture, sale and use of medical devices are subject to change and depend heavily on administrative interpretations. There can be no assurance that future changes in regulations or interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company. The Company and its products may be subject to a variety of other laws and regulations in those states and countries where its products are or will be marketed. These restrictions may hinder the Company's ability to market its products in those states or countries. Use of the Company's products may further be subject to periodic inspection, quality control, quality assurance, proficiency testing, documentation and safety reporting standards pursuant to the Joint Commission on Accreditation of Healthcare Organizations. If the FDA believes that the Company is not in compliance with the law, the FDA can take one or more of the following actions: withdraw previously approved applications; require notification to users regarding newly found, unreasonable risks; request repair or refund of faulty devices; request corrective advertisements, formal recalls or temporary marketing suspension; refuse to review or clear applications to market any of the Company's future products in the United States or to allow the Company to enter into government supply contracts; or institute legal proceedings to detain or seize products, enjoin future violations or assess criminal or civil penalties against the Company, its officers or employees. Any such action by the FDA could result in disruption of the Company's operations for an indeterminate period of time. Various states in which the Company's product may be sold in the future may impose additional regulatory requirements. In addition, the Company's products are subject to a variety of regulations in certain international markets. Depending on circumstances, including but not limited to Company strategies and discussions with potential distribution partners, the Company may develop a distribution strategy that initiates marketing in international markets prior to marketing in the United States. THIRD-PARTY REIMBURSEMENT AND HEALTHCARE LEGISLATION The willingness of hospitals, laboratories and other healthcare providers to purchase or lease the ChromaVision Digital Analyzer may depend on the extent to which such providers limit capital expenditures due to cost reimbursement regulations, including regulations promulgated by the Health Care Finance Association and other regulatory agencies, and general uncertainty about government healthcare policy. In addition, sales volumes and prices of the Company's products will depend in part upon the level of reimbursement available to hospitals, laboratories and other healthcare providers for automated microscopic blood tests from third-party payors, such as government and private insurance plans, health maintenance organizations and preferred provider organizations. There can be no assurance that existing reimbursement levels will not be decreased in the future and that any such decrease will not reduce the demand for, or the price of, the Company's products. Healthcare reform measures adopted by the federal government or state governments could adversely affect the prices of medical devices in the United States 45 or the amount of reimbursement available, and, consequently, could have a material adverse effect on the Company's business, results of operations and financial condition. No prediction can be made as to the outcome of any reform initiatives or their impact on the Company. COMPETITION The Company believes that the primary current source of competition for the ChromaVision Digital Analyzer is the use of medical technicians to perform microscopic analysis. Additionally, the Company is aware of six potential competitors that are substantially engaged in efforts to automate microscope examinations. Five of the six are currently focused primarily on the use of morphology for specific clinical applications, as opposed to the color-based approach to addressing multiple applications that has been developed by ChromaVision. Four of the primarily morphology-based companies identified, Morphometrix, Inc., Neuromedical Systems, Inc. ("NSI"), Neopath, Inc., and Autocyte, Inc. are focused on Pap smear testing. The fifth potential competitor, IMI, is focused on white blood cell differential tests and uses morphology and neural networks. Several elements of the hardware components and robotics control of the IMI system are similar to those used in the ChromaVision Digital Analyzer. ChromaVision has developed completely different and proprietary image analysis application software which includes the algorithms used by the ChromaVision Digital Analyzer to detect objects based primarily on color, a technique that the Company believes is more sensitive and flexible than morphology alone. This color-based technique differentiates the Company from other automated microscope manufacturers that target labor savings as the primary value proposition by enabling a platform that can use the multitude of available reagents to color cells or objects resulting in multiple applications and markets. The sixth potential competitor, Intelligent Remote Imaging Systems Inc. utilizes flow cytometry to image cellular material for various urine and blood applications. Flow cytometry does not use a glass slide to preserve samples, but rather destroys samples as cells are imaged. Additionally, the Company believes that the sensitivity of the ChromaVision Digital Analyzer substantially exceeds that of flow cytometry. Although each of these companies is initially focusing on one application or a limited set of specific applications, each has expressed a desire to pursue multiple applications as part of their respective strategies for product and market development. SERVICE The Company intends to offer service and maintenance to ChromaVision Digital Analyzer customers as part of the "per click" pricing structure. The Company has developed a support, field service, and parts distribution plan designed with the goal of enabling greater than 98% system functionality for its customers. This plan will offer the following services as part of the "per click" fee structure: (i) installation, (ii) customer training, (iii) a 24-hour a day, seven-day per week customer help desk available via a toll free number, (iv) the ability to remotely diagnose ChromaVision Digital Analyzer units and load new software via dial-up modems with a goal of correcting 80% of customer problems on a remote basis, and (v) on-site field service and parts replacement utilizing regionally based ChromaVision field engineers which will be supported by headquarters development and engineering staff. To achieve customer response-time and system up-time requirements, the Company plans to employ both preventive maintenance programs and as-needed service by deploying one field engineer for approximately every 20 ChromaVision Digital Analyzer units in operation. In addition, the Company may enter into agreements with third parties to provide service and support to the Company's customers. RESEARCH AND DEVELOPMENT The Company's core competency to date has been centered on research and development, specifically in the area of advanced imaging as applied to the detection and quantification of reagent-stained cellular material. Currently, the Company has nine employees dedicated to research and development, including 46 several scientists who hold Ph.D. degrees in various disciplines, primarily in the areas of image science and software algorithms. The senior members of the research and development staff that initially developed the proprietary technology have experience in the development of sophisticated imaging systems including those used in the Strategic Defense Initiative and the Cruise Missile program. ChromaVision's research and development staff is experienced in the rapid prototyping and development of advanced software-based, electro-optical-mechanical systems. The Company intends to continue to invest heavily in the recruitment of experienced scientists and engineers with an emphasis on achieving a balance between research and development innovation and support of focused, market driven requirements. MANUFACTURING As a development stage company, the Company currently has limited commercial scale manufacturing capabilities. The ChromaVision Digital Analyzer is currently developed and manufactured at the Company's headquarters in San Juan Capistrano, California. At the San Juan Capistrano facility, components are assembled, the microscope is optically aligned, software is loaded, and the system is tested. Components of the system are either manufactured by the Company, purchased off-the-shelf, or manufactured by subcontractors to the Company's specifications. The system uses an off-the-shelf CCD camera and an Intel/Microsoft-based personal computer. The system can be adapted for use with most popular microscopes and related optical accessories. A proprietary video capture and processing board is used along with proprietary color detection techniques developed by ChromaVision researchers. The Company intends to enhance its manufacturing capabilities to coincide with the commercialization of the ChromaVision Digital Analyzer. The Company is required to be GMP compliant prior to completing its first product. The Company is working toward, but has not yet achieved GMP compliance. FACILITIES The Company's executive and development and manufacturing facilities are located in San Juan Capistrano, California, in approximately 21,000 square feet. The Company leases the space at an annual rent of approximately $123,000. This lease expires on February 28, 2000. Management of the Company believes that this facility will be adequate to meet the Company's needs through the year 2000. EMPLOYEES As of March 31, 1997, the Company employed 13 persons in product development and engineering, four persons in manufacturing, four persons in finance, executive and administrative capacities and one person in sales and marketing. In addition to the above 22 employees, pursuant to the Administrative Services Agreement with XL Vision, the Company currently has access to certain resources of XL Vision, including accounting, shipping and receiving and payroll functions. Such services may be utilized by ChromaVision on an "as needed" basis. ChromaVision intends to continue this relationship until such time as ChromaVision's growth dictates the hiring of such additional personnel. The Company is not subject to any collective bargaining agreements and the Company believes that the relationship with its employees is good. See "Certain Transactions." LEGAL PROCEEDINGS Currently, the Company is not a party to any material legal proceedings. 47 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The names, ages and positions held by the executive officers and directors of the Company are as follows:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Douglas S. Harrington, M.D........................... 44 Chief Executive Officer and Director Kenneth S. Garber.................................... 43 Vice President of Marketing and Sales and Business Development Kevin C. O'Boyle..................................... 41 Vice President and Chief Financial Officer Michael G. Schneider................................. 47 Vice President of Manufacturing and Service John S. Scott, Ph.D.................................. 45 Chairman of the Board of Directors Christopher Moller, Ph.D.(1)......................... 43 Director Richard C. E. Morgan(2).............................. 53 Director Charles A. Root(1)(2)................................ 64 Director
- ------------------------ (1) Member of Compensation Committee (2) Member of Audit Committee DOUGLAS S. HARRINGTON, M.D. has been Chief Executive Officer since December 1996. From 1995 until he joined the Company in 1996, Dr. Harrington served as Chairman and President of Strategic Business Solutions, Inc., a privately held company specializing in commercialization of biotechnology, and as a Principal in Douglas S. Harrington and Associates, a strategic consulting firm. From 1992 to 1995, Dr. Harrington served as President of Nichols Institute, a publicly traded healthcare laboratory services provider, now part of Quest Diagnostics, Inc., a publicly traded laboratory services provider. Prior to 1992, Dr. Harrington held various management positions within Nichols Institute including Vice President of Operations and Medical Director. Dr. Harrington currently sits on the Boards, Advisory Boards, or Scientific Advisory Boards of ten healthcare and medical device companies, including as a director of Pacific Biometric, Inc., a publicly traded company and is an Associate Professor of Clinical and Anatomic Pathology at the University of Nebraska Medical Center. Dr. Harrington has over 18 years experience in the commercialization of healthcare technology and has published over 80 peer-reviewed publications. KENNETH S. GARBER has been Vice President of Marketing, Sales and Business Development of the Company since March 1996. From 1994 to 1996, Mr. Garber was Vice President and General Manager of the Imagelink Business Unit for Kodak Health Imaging Systems, Inc. In 1993, he was Assistant to the President of Kodak Health Imaging Systems and during 1992 was Director of Strategic Sales Development for Kodak Health Imaging Systems, Inc. From 1990 to 1991, Mr. Garber also was Director of Strategic Sales Development for Vortech Data, Inc. He previously held sales management and sales positions with Hughes Network Systems, Satellite Business Systems and Federal Data. KEVIN C. O'BOYLE has been Vice President and Chief Financial Officer of the Company since December 1996. From 1990 to 1994, Mr. O'Boyle was the Chief Financial Officer and from 1994 to 1996, he was Sr. Vice President of Operations for Albert Fisher North America, a publicly traded international food processor and distributor. From 1984 to 1990, Mr. O'Boyle served as the Vice President and Controller of American Cablesystems, a publicly traded cable television firm. He previously held various accounting positions on the audit and tax staff with Pannell, Kerr & Forster, a public accounting firm. MICHAEL G. SCHNEIDER has been Vice President of Manufacturing and Service since June 1996. From 1995 to May 1996, Mr. Schneider was Vice President of Manufacturing at Kodak Health Imaging Systems, Inc. From 1993 to 1995, Mr. Schneider was Director of Worldwide Service at Kodak's Customer Service Division. From 1990 to 1993, Mr. Schneider was Manager of Services Support at Kodak's Health Science Division. Mr. Schneider has twenty-four years of experience in manufacturing and service management. 48 JOHN S. SCOTT has been Chairman of the Board of the Company since March 1996. Since May 1993, he has also been Chairman of the Board, Chief Executive Officer and President of XL Vision. From 1991 until July 1993, Dr. Scott was the President of Lenzar Electro-Optics, Inc., a manufacturer of imaging devices. Dr. Scott has a Ph.D. in both physics (turbulence and particle acceleration, associated space-borne instrumentation, plasma physics and electro-optical sensor system development) and astrophysics. He has designed and developed scanners for a wide range of media types including intelligence imagery, microfiche, microfilm, fingerprint cards, aerial photos, voter registration cards and medical x-rays. CHRISTOPHER MOLLER has been a director of the Company since June 1996. Dr. Moller has served as Managing Director of Technology Leaders III and since 1994 Technology Leaders II Management L.P., and, in various capacities since 1990 with its predecessors. He is a director of five biotechnology companies including ViroPharma, Inc. (VPHM). Dr. Moller serves on the medical advisory board of the Lankenau Research Institute. He holds a Ph.D in immunology from the University of Pennsylvania. RICHARD C. E. MORGAN has been a director of the Company since March 1996. Mr. Morgan has been the Managing General Partner of Wolfensohn Partners L.P., a venture capital firm, since 1986 and is the Chairman and Chief Executive Officer of Lasertechnics, Inc., which manufactures and distributes small secure card printing systems and related equipment and small character coding systems. From 1990 to 1996, Mr. Morgan was the Chairman of MediSense, Inc., a manufacturer and distributor of blood glucose biosensors. Mr. Morgan has been a director of Quidel Corporation, a manufacturer and distributor of rapid diagnostic devices, for the past five years and, since July 1995, has served as Chairman. Mr. Morgan is also a director and member of the executive committee of Celgene Corporation, and a director of Sequus Pharmaceuticals, Inc., both biopharmaceutical companies. CHARLES A. ROOT has been a director of the Company since March 1996. Since 1986, Mr. Root has served as an Executive Vice President of Safeguard. From 1988 until March 1994, Mr. Root served as Chairman and Chief Executive Officer of Coherent Communications Systems Corporation, a manufacturer of telecommunications equipment and teleconferencing products, where he continues to serve as Chairman. Mr. Root is Chairman of the Board of CompuCom Systems, Inc. ("CompuCom"), and a director of Tangram Enterprise Solutions, Inc. ("Tangram"). CompuCom and Tangram are majority-owned subsidiaries of Safeguard. Each director is elected to hold office until the next annual meeting of stockholders and until his or her respective successor is elected and qualified. The Board of Directors has a Compensation Committee, which makes recommendations concerning salaries and incentive compensation for employees of and consultants to the Company, and an Audit Committee, which reviews the results and scope of the audit and other services provided by the Company's independent auditors. In consideration for his service on the Board of Directors, Mr. Morgan received options to purchase 83,750 shares of Common Stock, that vest over a four year period beginning in December 1997. These options expire in December 2003. All non-employee directors are reimbursed for travel and other expenses related to their service on the Board of Directors. ADVISORY BOARD The Company's Advisory Board consists of individuals with expertise in the medical diagnostic technology field who advise the Company concerning long-term scientific planning, research and development, personnel and technological matters. The members of the Advisory Board are: DAVID A. THOMPSON is currently Chairman of the Board and Chief Executive Officer of Diagnostic Marketing Strategies, a management consulting firm. From 1994 until his retirement in June 1995, Mr. Thompson served as Senior Vice President, Strategic Improvement Processes at Abbott Laboratories. From 1990 to 1994, he served as President, Diagnostics Division and Senior Vice President, Diagnostic Operations at Abbott Laboratories. JEFFREY K. COHEN, M.D. is currently a urologist and Assistant Professor at the Medical College of Pennsylvania and Allegheny University. Mr. Cohen is also a member of the Executive Committee of the 49 Medical Staff and the Operating Room Committee, and a Board member of the Integrated Health Care Systems at Allegheny General Hospital. From 1994 until 1995, Mr. Cohen served as President of Integrated Health Care Systems, and from 1990 until 1994, he served as Medical Director of the Short Procedure Unit. HENRY T. PIETRASZEK is currently President and Chief Executive Officer of Ventana Medial Systems, a manufacturer of autostaining equipment. From 1994 to 1996, Mr. Pietraszek served as President and Chief Executive Officer of Biostar, Inc., a medical diagnostic company. From 1975 to 1994, Mr. Pietraszek served as President and Chief Executive Officer of Tap Pharmaceuticals, a joint venture between Abbott Laboratories and Dainippon Pharmaceutical Company of Japan engaged in research, product development, manufacturing and marketing of U.S. pharmaceuticals. ERIK HORNAESS has been Divisional Vice President & General Manager at Abbott Diagnostics Division, a subsidiary of Abbott Laboratories located in Wiesbaden-Delkenheim, Germany, since October 1982. Mr. Hornaess has over thirty years of experience in the international medical diagnostic industry, most recently focused on Europe, Africa and the Middle East. ANEAL S. MASIH, M.D. is currently a Staff Pathologist at Space Coast Pathologists, and also serves as an outside consultant to the Company. From January 1992 to December 1994, Dr. Masih was an Assistant Professor in the Pathology Department at the University of Florida. From January 1992 to December 1994, Dr. Masih served as medical consultant at Veterans Administration Medical Center and the Eastern Cooperative Oncology Group. NICK HILGER is currently President and Chief Executive Officer for Transolution, Inc. in Chicago, Illinois. Transolution, Inc. is engaged in the enterprise of digital medical transcription. Mr. Hilger previously served as President of the Chicago Division of Columbia/HCA. He also previously served as President and Chief Executive Officer of Columbia-HealthONE, a joint venture between Columbia/HCA and HealthONE. He holds a Bachelor of Arts in Business and Finance from the College of St. Thomas in St. Paul, Minnesota, a Masters in Hospital Administration from the University of Minnesota and has completed Harvard's School of Business Program for Management Development. None of the members of the Advisory Board is employed by the Company, and members may have other commitments to or consulting or advisory contracts with their employers or other entities which may conflict or compete with their obligations to the Company. Accordingly, such persons are expected to devote only a portion of their time to the Company and are not expected to participate actively in the Company's affairs or in the development of the Company's technology. Members of the Company's Advisory Board receive options to purchase the Company's Common Stock as well as shares of Series A Preferred Stock. As of May 27, 1997, the Company has granted options to purchase 101,875 shares of the Company's Common Stock and has sold 134,000 shares of Series A Preferred Stock to members of its Advisory Board. Advisory Board members are reimbursed for travel and other expenses in connection with their services on the Advisory Board. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In 1996, the Company did not have a Compensation Committee or any other committee of the Board of Directors performing similar functions. Recommendations concerning the aggregate of the Company's employees were made to the Board of Directors by the Company's Chief Executive Officer. There are currently no compensation committee interlocks with other entities or insider participation on the Compensation Committee. CERTAIN RELATIONSHIPS Technology Leaders Management L.P., a limited partnership, is the sole general partner of Technology Leaders L.P. and a co-general partner of Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology Leaders Offshore C.V. are venture capital funds that are required by their governing documents to make all investment, voting and disposition actions in tandem. Technology Leaders L.P. and 50 Technology Leaders Offshore C.V. are referred to collectively in this Prospectus as "Technology Leaders I." Technology Leaders Management L.P. has sole responsibility for all investment, voting and disposition decisions for Technology Leaders I. The general partners of Technology Leaders Management L.P. are (i) Technology Leaders Management, Inc., a privately held subsidiary of Safeguard, (ii) TL Partners I, a general partnership among Technology Leaders Management, Inc. and the Managing Directors of Technology Leaders Management, Inc., other than Mark J. DeNino, and (iii) four other corporations (the "TLA Corporations") owned by individuals, one of whom serves as a director of Safeguard, and three of whom are not currently otherwise affiliated with Safeguard or the Company. Technology Leaders Management L.P. is managed by an executive committee, by whose decisions the general partners have agreed to be bound, that consists of seven voting members including (i) Warren V. Musser, Robert E. Keith, Jr. and Gary J. Anderson, M.D., each of whom are designees of Technology Leaders Management, Inc., and (ii) one designee of each of the TLA Corporations. Clayton S. Rose is a non-voting member of that executive committee. Technology Leaders Management, Inc. is the administrative manager of Technology Leaders, subject to the control and direction of the executive committee of Technology Leaders Management L.P. Mr. Musser is the chairman and Mr. Keith is president and chief executive officer of Technology Leaders Management, Inc. and Mr. Keith, Ira M. Lubert, Dr. Anderson, Mr. DeNino and Christopher Moller, Ph.D., are the managing directors of Technology Leaders Management, Inc. Mr. Keith, Mr. Lubert and Dr. Anderson are former officers of Safeguard and Mr. Keith is a director of Safeguard. Technology Leaders II Management L.P., a limited partnership, is the sole general partner of Technology Leaders II L.P. and a co-general partner of Technology Leaders II Offshore C.V. Technology Leaders II L.P. and Technology Leaders II Offshore C.V. are venture capital funds that are required by their governing documents to make all investment, voting and disposition actions in tandem. Technology Leaders II L.P. and Technology Leaders II Offshore C.V. are referred to in this Prospectus as "Technology Leaders II." Technology Leaders II Management L.P. has sole authority and responsibility for all investment, voting and disposition decisions for Technology Leaders II. The general partners of Technology Leaders II Management , L.P. are (i) Technology Leaders Management, Inc., a wholly-owned subsidiary of Safeguard, (ii) Robert E. Keith, Jr., Gary J. Anderson, M.D., Ira M. Lubert, Mark J. DeNino and Christopher Moller, a director of the Company, and (iii) four other corporations (the "TLA Corporations") owned by natural persons, one of whom is a director of Safeguard. Technology Leaders II Management L.P. is managed by an executive committee, by whose decisions the general partners have agreed to be bound, which consists of ten voting members including (i) Warren V. Musser, who is a designee of Technology Leaders Management, Inc., (ii) Mr. Keith, Dr. Anderson, Mr. Lubert, Mr. DeNino, Christopher Moller, individually, and (iii) one designee of each of the TLA Corporations and (as a non-voting member) Clayton S. Rose. Technology Leaders Management, Inc. is the administrative manager of Technology Leaders II, subject to the control and direction of the executive committee of Technology Leaders II Management L.P. Mr. Keith is a director of Safeguard. Safeguard Scientifics (Delaware), Inc., a privately held subsidiary of Safeguard, is a limited partner in Technology Leaders L.P. and Technology Leaders II, holding 3.3% of the aggregate limited partnership interest in Technology Leaders L.P. and 4.4% of the aggregate limited partnership interest in Technology Leaders II L.P. Technology Leaders Management, Inc. holds directly or indirectly 31% of the general partnership interests in Technology Leaders Management L.P. and 39% of the general partnership interests in Technology Leaders II Management L.P. Safeguard, Technology Leaders I and Technology Leaders II collectively beneficially own approximately 32% of the voting common stock of XL Vision and approximately 97% of the non-voting convertible preferred stock of XL Vision, and have the right to designate two of the nine members of XL Vision's Board of Directors. After the Company was spun out from XL Vision in March 1996, it raised its initial equity capital through a private offering of its Series A Preferred Stock primarily to XL Vision's stockholders. 51 EMPLOYMENT AGREEMENTS The Company entered into an employment agreement with Dr. Douglas S. Harrington as of December 30, 1996, which obligates him to serve as Chief Executive Officer until December 30, 1997. The agreement provides for the payment of an annual base salary of $160,000, bonuses up to 100% of his base salary upon the achievement of certain targets and an option to purchase 725,000 shares of Common Stock. Dr. Harrington's employment will continue on an at-will basis after December 30, 1997, subject to severance pay upon termination under certain conditions. Upon any change of control of the Company, Dr. Harrington will be entitled to immediate vesting of all stock options or the payment of an amount equal to the difference between the exercise price and the fair market value for each share of Common Stock which underlies an option which cannot vest and, if his employment terminates, one year salary continuation and payment of his maximum bonus for such year. In addition, upon the expiration of the Employment Agreement or the termination of employment after the expiration of the Employment Agreement, the Company has the option to retain Dr. Harrington as a consultant whereby Dr. Harrington would be entitled to receive monthly consulting fees equal to his prior monthly salary upon the provision of up to 20 hours of consulting services each month. On February 15, 1996, the Company entered into an at-will employment agreement with Kenneth S. Garber. Mr. Garber agreed to serve as Vice President of Marketing and Sales and Business Development in return for an annual salary of $130,000, the opportunity to earn additional compensation in the form of commissions upon the achievement of certain performance objectives and an option to purchase 277,313 shares of Common Stock. Upon a termination of Mr. Garber's employment by the Company for any reason other than cause, one-half of Mr. Garber's non-vested stock options automatically become vested, all performance-related compensation becomes immediately payable and the Company may elect to pay Mr. Garber his base salary for up to an 18-month period in return for Mr. Garber's agreement not to engage in activities in competition with the Company during such period. Upon any change of control of the Company, Mr. Garber will be entitled to immediate vesting of all stock options or the payment of the in-the-money value of all unvested options. On November 27, 1996, the Company entered into an at-will employment agreement with Kevin O'Boyle. Mr. O'Boyle agreed to serve as Vice President and Chief Financial Officer in return for the payment of an annual salary of $130,000, the opportunity to earn additional compensation in the form of bonuses and an option to purchase 68,750 shares of Common Stock. Upon a termination of Mr. O'Boyle's employment by the Company for any reason other than cause, one-half of Mr. O'Boyle's non-vested stock options automatically become vested, all performance related compensation becomes immediately payable and the Company will pay Mr. O'Boyle his base salary for a 12-month period in return for Mr. O'Boyle's agreement not to engage in activities in competition with the Company during such period. Upon any change of control of the Company, Mr. O'Boyle will be entitled to immediate vesting of all stock options or the payment of the in-the-money value of all unvested options. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation paid or accrued from the inception of the Company through December 31, 1996 with respect to the Company's Chief Executive 52 Officer, its former President and its other most highly compensated executive officer as of December 31, 1996 (collectively, the "Named Officers"):
LONG TERM COMPENSATION AWARDS ANNUAL ------------- COMPENSATION(1) SECURITIES ALL NAME AND -------------------- UNDERLYING OTHER PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION - ------------------------------------------------------- --------- --------- --------- ------------- ------------- Douglas S. Harrington, M.D.(2)......................... 1996 $ -- $ -- 737,500 $ 83,160 Chief Executive Officer Kenneth S. Garber(3)................................... 1996 110,000 37,500 277,313 -- Vice President of Marketing and Sales and Business Development Michael S. Shiff(4).................................... 1996 146,565 -- 554,625 468,350 Former President
- ------------------------ (1) The annual compensation described in this table reflects actual salary and bonus paid to such executive officers from the inception of the Company through December 31, 1996. In 1996, Messrs. Shiff and Garber were paid based upon an annual salary of $150,000 and $130,000, respectively. The compensation described in this table does not include medical, group life insurance or other benefits received by the Named Officers which are available generally to all salaried employees of the Company and certain perquisites and other personal benefits, securities or property received by the Named Officers which do not exceed the lesser of $50,000 or 10% of the aggregate of any such Named Officer's salary and bonus. (2) Dr. Harrington joined the Company on December 30, 1996. Dr. Harrington is paid a base salary of $160,000. Prior to that time, Dr. Harrington served on the Company's Advisory Board, in consideration for which Dr. Harrington was granted options to purchase 12,500 shares of the Company's Common Stock. In addition, Dr. Harrington received $83,160 in 1996 as payment for consulting services provided to the Company and reimbursement for expenses related thereto, which appears under the caption "All Other Compensation." Dr. Harrington received options to purchase 25,000 shares of the Company's Common Stock in January 1997. (3) Mr. Garber joined the Company in March 1996. Mr. Garber earned a bonus of $37,500 in 1996. (4) Mr. Shiff resigned as President of the Company as of December 10, 1996. The amounts in the table above reflect salary earned during the period beginning in March 1996 and ending on December 10, 1996. Upon resigning from the Company, Mr. Shiff received a cash severance payment of $468,350, which is listed in the table above under the caption "All Other Compensation." 53 The following table provides information on stock options granted by the Company in 1996 to the Named Officers. All Company option grants depicted below were made pursuant to the 1996 Equity Compensation Plan. OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF REALIZABLE POTENTIAL VALUE TOTAL AT OPTIONS ASSUMED ANNUAL RATE OF NUMBER OF GRANTED TO STOCK PRICE APPRECIATION SHARES EMPLOYEES FOR UNDERLYING IN EXERCISE OPTION TERM(1) OPTIONS FISCAL PRICE PER EXPIRATION -------------------------- NAME GRANTED YEAR SHARE DATE 5.0% 10.0% - ----------------------------------- ---------- ---------- --------- ------------ ------------ ------------ Douglas S. Harrington, M.D.(2)..... 12,500 0.6% $0.80 6/13/2003 $ 4,071 $ 9,487 725,000 37.7 2.40 12/30/2006 1,094,277 2,773,112 Kenneth S. Garber(3)............... 277,313 14.4 0.80 6/13/2003 90,315 210,473 Michael S. Shiff(4)................ 554,625 28.8 0.80 6/13/2003 180,630 420,945
- ------------------------ (1) The amounts shown are calculated assuming that the market value of the Common Stock was equal to the exercise price per share as of the date of grant of the options. This value is the approximate price per share at which shares of the Common Stock would have been sold in private transactions on or about the date on which the options were granted. The dollar amounts under these columns assume a compounded annual market price increase for the underlying shares of the Common Stock from the date of grant to the end of the option term of 5% and 10%. This format is prescribed by the Commission and is not intended to forecast future appreciation of shares of the Common Stock. The actual value, if any, a Named Officer may realize, will depend on the excess of the market price for shares of the Common Stock on the date the option is exercised over the exercise price. Accordingly, there is no assurance that the value realized by a Named Officer will be at or near the value estimated above. (2) Dr. Harrington received options to purchase 12,500 shares of the Company's Common Stock in June 1996 in consideration for his service as a member of the Company's Advisory Committee vesting 50% on March 31, 1997 and 50% on March 31, 1998. In December 1996, Dr. Harrington received options to purchase 725,000 shares of the Common Stock in connection with his employment as Chief Executive Officer, vesting in four equal annual installments beginning on December 12, 1996. Vesting accelerates in whole, or in part upon certain events including a termination without cause and a change of control. Dr. Harrington received options to purchase 25,000 shares of the Company's Common Stock in January 1997 at an exercise price of $2.40 per share. (3) Mr. Garber's options vest in equal installments over a four-year period beginning December 30, 1996, provided that 50% of the unvested options will vest upon closing of the Company's initial public offering and the first anniversary of the closing date. Vesting also will accelerate in whole or in part upon certain other events including a termination without cause and a change of control. (4) Mr. Shiff resigned as President of the Company as of December 10, 1996. In connection with his resignation from the Company, the Company repurchased all of Mr. Shiff's vested options for an aggregate purchase price of $443,700. In addition, effective upon his resignation, all of Mr. Shiff's unvested options (exercisable for 277,313 shares of Common Stock) automatically terminated. The following table sets forth information concerning options exercised during 1996 and the number and the hypothetical value of certain unexercised options of the Company held by the Named Officers as of December 31, 1996. This table is presented solely for purposes of complying with the Commission rules and does not necessarily reflect the amounts the optionees will actually receive upon any sale of the shares acquired upon exercise of the options. 54 AGGREGATE OPTION EXERCISES AND LAST FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE- OPTIONS AT MONEY OPTIONS AT SHARES DECEMBER 31, 1996 DECEMBER 31, 1996(1) ACQUIRED VALUE ------------------------- -------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------- ----------- ---------- ---------- ------------- ----------- ------------- Douglas S. Harrington, M.D......... -- $ -- 187,500 550,000 $ 497,500 $ 1,505,000 Kenneth S. Garber.................. -- -- 69,328 207,985 291,178 873,537 Michael S. Shiff................... 277,313 443,700(2) -- -- -- --
- ------------------------ (1) Assumes, for presentation purposes only, a per share fair market value of $5.00. (2) Reflects the actual value realized by Mr. Shiff upon the sale of 277,313 shares to the Company as of December 27, 1996, at a purchase price of $2.40, less the $0.80 exercise price per share. EQUITY COMPENSATION PLAN The Company has adopted the ChromaVision Medical Systems, Inc. 1996 Equity Compensation Plan (the "Plan") pursuant to which it has awarded and may in the future award stock options and equity compensation awards to its employees, officers, non-employee directors and independent contractors. The Plan, as amended on May 27, 1996, provides for the issuance to employees, non-employee directors and eligible independent contractors of up to 1,420,000 shares of Common Stock pursuant to the grant of incentive stock options ("ISOs"), non-qualified stock options ("NQSOs"), Stock Appreciation Rights ("SARs") and restricted stock awards. The maximum aggregate number of shares of stock that shall be subject to grants under the Plan to any recipient may not exceed 875,000. The Plan is administered by a Committee of two or more non-employee directors appointed by the Board of Directors (the "Committee"). Subject to the provisions of the Plan, the Committee has the authority to determine to whom stock options and equity compensation awards will be granted and the terms of the awards granted, including the number of shares subject to each award, vesting provisions and the duration of an award, to amend the terms of any outstanding award and to generally deal with any other matters arising under the Plan. Prior to the adoption of the Plan, the Company also granted NQSOs to purchase 975,688 shares of Common Stock, of which 277,313 have been repurchased and 277,313 have been cancelled. As of May 27, 1997, options to purchase a total of 1,608,688 shares of Common Stock, at a weighted average exercise price per share of $2.09, were outstanding. Of these options, options to purchase 299,016 shares were fully vested and exercisable as of May 27, 1997. As of May 27, 1997, the Company had an additional 232,375 shares of Common Stock available for future grants and other issuances under the Plan. The option price per share of stock under the Plan shall be determined by the Committee at the time of each grant, provided, however, that the option price per share for any ISO shall not be less than 100% of the fair market value of the stock at the time of the grant. If a 10% stockholder receives an ISO, the exercise price shall not be less than 110% of the fair market value at the time of grant. The term of each stock option shall be fixed by the Committee, but may not exceed ten years. In the case of a 10% stockholder, the term may not exceed five years. Stock options shall be exercisable at such time or times as shall be determined by the Committee. Payment for the exercise of an option shall be made by cash, check or other instrument as the Committee may accept, including, in the discretion of the Committee, unrestricted stock of the Company. The Committee may also agree to allow an optionholder to elect to cash out the excess of the fair market value over the option price of all or a portion of a stock option. The Committee may also grant, in its sole discretion, a "cashless exercise" feature for the exercise of stock options. 55 The Board of Directors may amend or revise the terms of the Plan in any respect whatsoever, provided, that certain amendments of the Plan are subject to shareholder approval. Unless sooner terminated, the Plan will terminate in 2006. Under Section 162(m) of the Code, the Company may be precluded from claiming a federal income tax deduction for total remuneration in excess of $1,000,000 paid to the Chief Executive Officer or to any of the other four most highly compensated officers in any one year. Total remuneration would include amounts received upon the exercise of stock options granted under the Plan. An exception does exist, however, for "performance-based compensation," including amounts received upon the exercise of stock options pursuant to a plan approved by stockholders that meets certain requirements. The Plan is intended to meet the requirements of Treasury Regulation section 1.162-27(f), and the options granted under the Plan are intended to meet the requirements of "performance-based compensation." CERTAIN TRANSACTIONS The Company's business commenced as an unincorporated business division of XL Vision in 1993 to develop an automated intelligent microscopy system. From the inception of the business through its incorporation as a separate entity in March 1996, the Company incurred approximately $4.8 million in development costs. On March 28, 1996, XL Vision transferred the assets of the business to the Company in exchange for 1,931,250 shares of the Company's Common Stock and the assumption of the $4.8 million intercompany debt. In 1996, the Company sold 6,364,872 shares of Series A Preferred Stock to certain stockholders of XL Vision, including Safeguard, Technology Leaders I, Technology Leaders II, John S. Scott and Charles A. Root, and certain officers and advisors of the Company, including Michael S. Shiff and Kenneth S. Garber. All of the shares were sold at a purchase price of $1.00 per share. The Company used a portion of the proceeds from the private placement to repay a portion of the intercompany debt to XL Vision. In connection with the purchase of shares in the private placement, the purchasers were granted certain registration rights. See "Shares Eligible for Future Sale--Registration Rights." In addition, the holders of Series A Preferred Stock are entitled to elect two members of the Company's Board of Directors for as long as the Series A Preferred Stock remains outstanding. The holders entered into an agreement to vote their shares of Series A Preferred Stock to elect one designee of Safeguard and one designee of Technology Leaders I and Technology Leaders II, together, to the Company's Board of Directors. Also, the Company agreed with Safeguard to make a rights offering to holders of Safeguard common shares. In 1995, the Company sold to Centocor six ChromaVision Digital Analyzers for an aggregate purchase price of $900,000 to facilitate Centocor's clinical trials for certain cancer applications. As Centocor received feedback from such clinical trials, the Company, which was continuing with its own research and development efforts, incorporated certain feedback into the Company's technology. In July 1996, the Company issued 770,192 shares of its Series A Preferred Stock to Centocor and granted to Centocor an option to resell to the Company the six ChromaVision Digital Analyzers for an aggregate purchase price of $800,000, as consideration for the release and assignment of certain rights that Centocor may have had related to the ChromaVision Digital Analyzer. In December 1996, Centocor and the Company commenced negotiations that resulted in Centocor's waiver of its option to resell to the Company the six ChromaVision Digital Analyzers. In consideration for Centocor's waiver, the Company agreed to provide a certain number of hours of technical support and software development services at no charge related to the ChromaVision Digital Analyzer. The Company continues to collaborate with Centocor on a nonexclusive basis to develop certain applications for the ChromaVision Digital Analyzer. In December 1996, Michael S. Shiff resigned as President of the Company. In connection with his separation, the Company repurchased Mr. Shiff's vested stock options for an aggregate purchase price of $443,700 and paid a severance payment of $468,350 plus the continuation of his base salary for three months. The Company financed such payments through the sale of 221,850 shares of Series B Preferred Stock to Safeguard for an aggregate purchase price of $998,325. In addition, the Company assigned its 56 right to repurchase 49,300 shares of Series A Preferred Stock from Mr. Shiff to Safeguard. Safeguard purchased such shares for an aggregate purchase price of $221,850. Upon consummation of the rights offering, all outstanding shares of Series A Preferred Stock and Series B Preferred Stock will automatically convert into shares of Common Stock. Since the Company's incorporation in March 1996, XL Vision has provided certain personnel and administrative services to the Company at cost. Administrative expenses incurred in 1996 were approximately $740,600. The Company anticipates that this arrangement will cease after June 1997, however, the Company may continue to utilize XL Vision personnel thereafter on a cost reimbursement basis. In addition, the Company subleased office and manufacturing space from XL Vision in Sebastian, Florida at a total cost of $72,200 during 1996. In March 1997, the Company relocated to San Juan Capistrano, California, and does not anticipate incurring any additional lease expenses to XL Vision. The Company entered into an Administrative Services Agreement with XL Vision and Safeguard, as of January 1, 1997. Under this agreement, XL Vision and Safeguard are obligated to provide the Company with administrative support services, including management consultation, investor relations, legal services and tax planning. In consideration for these services, the Company will pay an annual fee of 0.75% of the Company's gross revenues each year to each of XL Vision and Safeguard up to a maximum of $300,000 a year. Fees will accrue until the Company achieves a positive cash flow from operations. The agreement extends through January 31, 2002 and continues thereafter unless terminated by either party. The Company also entered into a Direct Charge Administrative Services Agreement with XL Vision, as of January 1, 1997. Under this agreement, XL Vision provides administrative services to the Company on an hourly basis at the request of the Company. The Company pays the Company for these services based upon an hourly fee. The agreement is month-to-month and may be terminated by either party. 57 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Common Stock as of the date of this Prospectus and as adjusted to reflect the sale of the shares offered hereby (i) by each selling stockholder, (ii) by each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (iii) by each director of the Company, (iv) by each Named Officer and (v) by all directors and executive officers of the Company as a group. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law.
BENEFICIAL OWNERSHIP PRIOR TO THE NUMBER OF BENEFICIAL OWNERSHIP OFFERING(1) SHARES AFTER THE OFFERING(1) ---------------------- TO BE SOLD IN ---------------------- NUMBER OF THE NUMBER OF NAME AND ADDRESS SHARES PERCENTAGE OFFERING(2) SHARES PERCENTAGE - -------------------------------------------- ---------- ---------- -------------- ---------- ---------- Safeguard Scientifics, Inc.(3).............. 4,159,515 37.4% 381,780 3,777,735 22.0% 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 XL Vision, Inc.(4).......................... 1,737,500 15.6 159,530 1,577,970 9.2 10305 102nd Terrace Sebastian, FL 32958 Centocor, Inc............................... 962,740 8.7 -- 962,740 5.6 244 Great Valley Parkway Malvern, PA Technology Leaders II(4).................... 891,667 8.0 81,900 809,767 4.7 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 Technology Leaders I(4)..................... 836,718 7.5 76,790 759,928 4.4 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087 John S. Scott, Ph.D.(5)..................... 458,125 4.1 -- 458,125 2.7 Douglas S. Harrington, M.D.(6).............. 193,750 1.7 -- 193,750 1.1 Kenneth S. Garber(7)........................ 204,133 1.8 -- 204,133 1.2 Charles A. Root(8).......................... 49,218 * -- 49,218 * Christopher Moller(9)....................... -- -- -- -- -- Richard C.E. Morgan......................... -- -- -- -- -- All executive officers and directors as a group (8 persons)(10).................. 944,288 8.2 -- 944,288 5.4
- ------------------------ * Less than 1% of the outstanding Common Stock. (1) Solely for the purpose of the percentage ownership calculation for each beneficial owner depicted herein, the number of shares of Common Stock deemed outstanding prior to the offering (i) assumes shares of Common Stock outstanding as of the date of this Prospectus, (ii) the conversion of all shares of Preferred Stock outstanding as of the date of this prospectus and (iii) includes additional shares issuable pursuant to options held by such owner which may be exercised within 60 days after the date of this Prospectus ("presently exercisable options"), as set forth below. Solely for the purpose of the percentage ownership calculation for each beneficial owner depicted herein, the number of shares of Common Stock deemed outstanding after the offering (i) assumes 17,147,393 shares of Common Stock will be outstanding upon the successful completion of the offering, and (ii) includes 58 additional shares issuable pursuant to presently exercisable options held by such owner. The beneficial ownership after the offering does not account for the exercise of rights by such stockholders in the offering. (2) Includes an aggregate of up to (i) 380,000 shares of Common Stock being sold in the rights offering and (ii) 320,000 shares of Common Stock being sold to certain persons selected by the Company. (3) The shares are held of record by Safeguard Scientifics (Delaware), Inc., a wholly-owned subsidiary of Safeguard. Includes 70,680 shares of Common Stock granted by Safeguard to certain of its employees pursuant to a long term incentive plan. Safeguard will continue to exercise voting control of these shares until the occurrence of certain vesting requirements. Excludes all shares of Common Stock beneficially owned by Technology Leaders I, Technology Leaders II and XL Vision, Inc., in each of which Safeguard has a beneficial interest. See "Management--Certain Relationships" for a description of the relationships between Safeguard, Technology Leaders I, Technology Leaders II and XL Vision. The largest shareholder of Safeguard is Warren V. Musser, the chairman and chief executive officer of Safeguard, who is the record holder of approximately 9.5% of the total Safeguard Common Shares outstanding. (4) See "Management--Certain Relationships" for a description of the relationships between Safeguard and Technology Leaders I, Technology Leaders II and XL Vision. (5) Includes 343,750 shares held by a family partnership, excludes 12,500 shares held by certain family members for which Dr. Scott disclaims beneficial ownership. Excludes shares owned by XL Vision, of which Dr. Scott is Chairman and CEO. (6) Represents shares of Common Stock issuable pursuant to presently exercisable options or options exercisable within 60 days of the date hereof. (7) Includes 173,321 shares of Common Stock issuable pursuant to presently exercisable options. (8) Excludes shares owned by Safeguard, of which Mr. Root is Executive Vice President. Mr. Root disclaims beneficial ownership of such shares. (9) Excludes shares owned by Technology Leaders I and Technology Leaders II, for each of which Mr. Moller serves as an indirect general partner. Mr. Moller disclaims beneficial ownership of such shares. (10) Includes 406,133 shares of Common Stock issuable pursuant to presently exercisable options or options exercisable within 60 days of the date hereof. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $.01 per share, and 8,000,000 shares of Preferred Stock, par value $.01 per share. COMMON STOCK As of March 31, 1997, there were 11,127,393 shares of Common Stock outstanding, after giving effect to the conversion to the shares of Preferred Stock. After giving effect to the issuance of the 6,020,000 shares of Common Stock offered by the Company hereby, there will be 17,147,393 shares of Common Stock outstanding. Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders and do not have cumulative voting rights. The election of directors is determined by a plurality of the votes cast and, except as otherwise required by law, all other matters are determined by a majority of the votes cast. Accordingly, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. See "Risk Factors--Control by Principal Stockholders." Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities. Holders of the 59 Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares offered by the Company in the Offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. See "Description of Capital Stock--Preferred Stock." RIGHTS The Company is granting on the date hereof the rights to the holders of Safeguard common shares. The rights, subject to minimum exercise requirements, are each exercisable for one share of Common Stock at an exercise price of $5.00 per share. Persons may not exercise rights for fewer than 20 shares of Common Stock. For purposes of the offering, a person that holds Safeguard common shares in multiple accounts must meet the 20 share minimum purchase requirement in each account. Accordingly, persons holding fewer than 20 rights in an account should consider the advisability of consolidating the rights in one account, selling rights, or purchasing additional rights to comply with the minimum exercise requirements of the offering. Rights may be transferred, in whole or in part, by endorsing and delivering to ChaseMellon Shareholder Services, L.L.C. a rights certificate that has been properly endorsed for transfer, with instructions to reissue the rights, in whole or in part, in the name of the transferee. ChaseMellon Shareholder Services, L.L.C. will reissue certificates for the transferred rights to the transferee, and will reissue a certificate for the balance, if any, to the holder of the rights, in each case to the extent it is able to do so prior to the Expiration Date. The offering will terminate and the rights will expire at 5:00 p.m., New York City time, on the Expiration Date, which is August 5, 1997. After the Expiration Date, unexercised rights will be null and void. For more information about the rights and the offering process, reference should be made to "The Offering" and to "Risk Factors--Cancellation of Rights Offering." PREFERRED STOCK The Company, by resolution of the Board of Directors and without any further vote or action by the stockholders, has the authority, subject to certain limitations prescribed by law, to issue from time to time up to an aggregate of 8,000,000 shares of Preferred Stock in one or more classes or series and to determine the designation and the number of shares of any class or series as well as the voting rights, preferences, limitations and special rights, if any, of the shares of any such class or series, including the dividend rights, dividend rates, conversion rights and terms, voting rights, redemption rights and terms, and liquidation preferences. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company. As of the date of this Prospectus, assuming the conversion of each outstanding share of Series A Preferred Stock and Series B Preferred Stock into 1.25 shares of Common Stock, there are no shares of Preferred Stock outstanding, and the Company has no plans to issue any shares of Preferred Stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C., 85 Challenger Road, Overpeck Centre, Ridgefield Park, New Jersey 07660. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, the Company will have 17,147,393 shares of Common Stock outstanding, excluding 1,608,688 shares of Common Stock subject to stock options outstanding as of May 27, 1997 and any stock options granted by the Company after May 27, 1997. Of these shares, the Common Stock sold in the offering, except for certain shares described below, will be freely tradeable without restriction or further registration under the Act. The remaining 11,127,393 shares of Common Stock (the "Restricted Shares") were sold by the Company in reliance on exemptions from the registration 60 requirements of the Act and are "restricted securities" as defined in Rule 144 and may not be sold in the absence of registration under the Act unless an exemption is available, including an exemption afforded by Rule 144 or Rule 701. See "Risk Factors--Shares Eligible for Future Sale." In general, under Rule 144 as currently in effect, if two years have elapsed since the date of acquisition of restricted securities from the Company or any affiliate and the acquiror or subsequent holder is not deemed to have been an affiliate of the Company for at least 90 days prior to a proposed transaction, such person would be entitled to sell such shares under Rule 144(k) without regard to the limitations described below. If one year has elapsed since the date of acquisition of restricted securities from the Company or any affiliate, the acquiror or subsequent holder thereof (including persons who may be deemed affiliates of the Company) is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then-outstanding shares of Common Stock or the average weekly trading volume in the Common Stock on the Nasdaq National Market during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain provisions regarding the manner of sale, notice requirements and the availability of current public information about the Company. Without considering the contractual restrictions described below, approximately 10,788,455 Restricted Shares will be eligible for sale ninety days after the date of this Prospectus, subject to manner of sale and other resale conditions imposed by Rule 144. Certain restrictions apply to any shares of Common Stock purchased in the offering by affiliates of the Company, which may generally only be sold in compliance with the limitations of Rule 144, except for the holding period requirements thereunder. See "Risk Factors--Shares Eligible for Future Sale." Rule 144A under the Act provides a nonexclusive safe harbor exemption from the registration requirements of the Act of specified resales of restricted securities to certain institutional investors. In general, Rule 144A allows unregistered resales of restricted securities to a "qualified institutional buyer," which generally includes an entity, acting for its own account or for the account of other qualified institutional buyers, that in the aggregate owns or invests at least $100 million in securities that, when issued, were of the same class as securities listed on a national securities exchange or quoted on Nasdaq. The shares of Common Stock outstanding as of the date of this Prospectus would be eligible for resale under Rule 144A because such shares, when issued, were not of the same class as any listed or quoted securities. STOCK OPTIONS As of May 27, 1997 there were outstanding options to purchase an aggregate of 1,608,688 shares of Common Stock (of which 299,016 were exercisable at May 27, 1997), at a weighted average exercise price of $2.09 per share. As of May 27, 1997, the Company had an additional 233,375 shares of Common Stock available for future grants and other issuances under the Plan. After the offering, the holders of options to purchase a total of 1,292,313 shares will be subject to Lock-Up Agreements, which restrict, until after the Lock-Up Expiry Date (without the underwriters' prior written consent), the holders' ability to sell or otherwise dispose of Common Stock acquired upon the exercise of such options. See "Management-- Equity Compensation Plan." The Company issued options and underlying shares of Common Stock to employees of the Company who were not executive officers and directors of the Company pursuant to Rule 701. Under Rule 701, such employees of the Company who prior to the Offering purchased shares pursuant to the Stock Option Plan are entitled to sell such shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 commencing 90 days after the date of this Prospectus. Rule 701 also permits the shares subject to unexercised options under such Plan to be sold upon exercise without having to comply with such provisions of Rule 144. As of March 31, 1997, approximately 175,000 shares of Common Stock subject to unexercised options will be eligible for sale under Rule 701 by Company employees (subject to applicable vesting provisions). 61 It is anticipated that a Form S-8 Registration Statement covering the Common Stock that may be issued pursuant to the exercise of options after the effectiveness of the Form S-8 Registration Statement will be filed and declared effective prior to the Lock-Up Expiry Date and that shares of Common Stock that are so acquired and offered thereafter pursuant to the Form S-8 Registration Statement generally may be resold in the public market without restriction or limitation, except in the case of affiliates of the Company, which generally may only resell such shares in compliance with Rule 144, except for the holding period requirements thereunder. LOCK-UP AGREEMENTS The Principal Stockholders, Centocor, each executive officer and each director of the Company, who will in the aggregate own 8,438,799 shares of Common Stock after the completion of the offering and will be deemed to beneficially own an additional 406,133 shares of Common Stock, have agreed with the Underwriters that they will not sell or otherwise dispose of any shares of Common Stock (except for 29,000 shares owned by one director) until after the Lock-Up Expiry Date without the prior written consent of the underwriters. See "Management--Equity Compensation Plan" and "Shares Eligible for Future Sale." In addition, Warren V. Musser has agreed that he and/or his assignees will not sell or otherwise dispose of 280,000 shares of Common Stock without the prior written consent of the Underwriters. See "Management--Stock Options" and "Shares Eligible for Future Sale." REGISTRATION RIGHTS The Company has granted certain piggyback and demand registration rights to holders of Preferred Stock. Holders of at least 1,200,000 shares of Preferred Stock have the right to request that the Company effect the registration, under the Securities Act, of the Common Stock issuable upon the conversion of the Preferred Stock, provided that the securities to be registered have a value of at least $3,000,000. These registration rights become exercisable six months after the completion of this offering. In addition, the holders of Preferred Stock have the right to include their securities in the offerings of the Company's securities under the Securities Act. By exercising such registration rights, subject to certain limitations, such holders could cause a significant number of shares to be registered and sold in the public market. Such sales may have an adverse effect on the market price for the Common Stock and could impair the Company's ability to raise capital through an offering of its equity securities. All of the holders of registration rights have waived their respective rights to participate in this offering. 62 UNDERWRITING The Company and the underwriters have entered into the Standby Underwriting Agreement on the date hereof, pursuant to which the underwriters are required, subject to certain terms and conditions (all of which are set forth below), to purchase the shares of Common Stock offered in the rights offering and not purchased (the "Excess Unsubscribed Shares") in accordance with the percentages set forth below. If all of the rights are exercised there will be no Excess Unsubscribed Shares and the underwriters will not be required to purchase any shares of Common Stock.
% OF UNDERWRITER UNDERWRITERS SHARES - ------------------------------------------------------------------------------------------ ---------------------- Robert W. Baird & Co. Incorporated........................................................ 50 Adams, Harkness & Hill, Inc............................................................... 50
The underwriters have agreed, severally and not jointly, subject to the condition that the Company complies with its obligations under the Standby Underwriting Agreement and subject to the Underwriter's right to terminate their obligations under the Standby Underwriting Agreement (as specified below), to purchase all of the Excess Unsubscribed Shares. The Company will pay the underwriters the financial advisory fee equal to 3% of the exercise price for each share of Common Stock included in the offering. The financial advisory fee is for services and advice rendered in connection with the structuring of the offering, valuation of the business of the Company, and financial advice to the Company before and during the offering. An additional fee of 4% of the exercise price will be paid to the underwriters (i) for each share of Common Stock purchased by the underwriters pursuant to the Standby Underwriting Agreement and (ii) for each share of Common Stock purchased upon the underwriters' exercise of rights if such rights were purchased by the underwriters at a time when the Common Stock was trading (on a "when issued" basis) at a per share price of less than 120% of the exercise price or if the underwriters purchase such rights with Safeguard's prior acknowledgment that it would be entitled to receive the underwriting discount for Common Stock purchased pursuant to the exercise of such rights. In addition, the Company has agreed to pay the underwriters a non-accountable expense allowance in the aggregate amount of $200,000, provided, however, such non-accountable expense allowance shall be reduced to $100,000 or zero if, on the Expiration Date, the closing price for the Common Stock traded on a "when issued" basis is at least $7.25 per share or greater than $8.25 per share, respectively. The selling stockholders have granted to the underwriters a 20-day option commencing on the Expiration Date to purchase a maximum of 640,000 additional shares of Common Stock at a per share price equal to the exercise price less the financial advisory fee and the underwriting discount. The underwriters may exercise such option in whole or in part only to cover over-allotments made in connection with the sale of shares of Common Stock by the underwriters. Prior to the Expiration Date, the underwriters may offer shares of Common Stock on a when-issued basis, including shares to be acquired through the purchase and exercise of rights, at prices set from time to time by the underwriters. It is not contemplated that the offering price set on any calendar day will be increased more than once during such day. After the Expiration Date, the underwriters may offer shares of Common Stock, whether acquired pursuant to the Standby Underwriting Agreement, the exercise of the rights or the purchase of Common Stock in the market, to the public at a price or prices to be determined. The underwriters may thus realize profits or losses independent of the underwriting discount and the financial advisory fee. Shares of Common Stock subject to the Standby Underwriting Agreement will be offered by the underwriters when, as and if sold to, and accepted by, the underwriters and will be subject to their right to reject orders in whole or in part. Prior to the offering, there has been no public market for the Common Stock or the rights. Consequently, the exercise price was determined by negotiations among the Company and the underwriters. In determining the exercise price, the underwriters and the Board of Directors of the Company considered such factors as the future prospects and historical growth rate in revenues and earnings of the Company, its industry in general and the Company's position in its industry; revenues, earnings and certain other financial and operating information of the Company in recent periods; market valuations of the 63 securities of companies engaged in activities similar to those of the Company; the management of the Company; and, with respect to the Company, the advice of the underwriters. The underwriters will be prohibited from engaging in any market making activities with respect to the Company's when-issued Common Stock and Common Stock until the underwriters have completed their participation in the distribution of shares offered hereby. As a result, the underwriters may be unable to provide a market for the Company's when-issued Common Stock and Common Stock should it desire to do so, during certain periods while the rights are exercisable. In connection with the offering, the underwriters and certain selling group members may engage in stabilizing, syndicate covering transactions or other transactions that stabilize, maintain or otherwise effect the market price of the Common Stock. A "syndicate covering transaction" is the placing of any bid or the effecting of any purchase on behalf of the Underwriters to reduce a short position created in connection with the Offering. After the opening of quotations for the Common Stock on the Nasdaq National Market, stabilizing bids for the purpose of preventing or retarding a decline in the market price may be initiated by the underwriters or selling group members in any market at a price no higher than the last independent transaction price for the Common Stock and then maintained, reduced or raised to follow the independent market. Such transactions may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. The Company has agreed to indemnify the underwriters against certain liabilities arising out of or based upon misstatements or omissions in this Prospectus or the Registration Statement of which this Prospectus is a part and certain other liabilities, including liabilities under the Act, and to contribute to certain payments that the underwriters may be required to make. The underwriters may terminate their obligations under the Standby Underwriting Agreement (i) if any calamitous domestic or international event or act or occurrence has disrupted the general securities market in the United States; (ii) if trading in the Common Stock (on a when-issued basis) shall have been suspended by the Commission or Nasdaq; (iii) if trading on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or by order of the Commission or any other government authority having jurisdiction; (iv) if the United States shall have become involved in a war or major hostilities which, in the underwriters' opinion, affects the general securities market in the United States; (v) if a banking moratorium has been declared by a California, New York, Pennsylvania, Massachusetts, Wisconsin or federal authority; (vi) if a moratorium in foreign exchange trading (with respect to a foreign exchange on which the Company's securities are traded) has been declared; (vii) if the Company shall have sustained a loss material to the Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act, whether or not such loss shall have been insured, or from any labor dispute or any legal or governmental proceeding; (viii) if there shall be such material adverse market conditions (whether occurring suddenly or gradually between the date of this Prospectus and the closing of the offering) affecting markets generally as in the underwriters' reasonable judgment would make it inadvisable to proceed with the offering, sale or delivery of the shares of Common Stock offered hereby; or (ix) if there shall have been such material adverse change, or any development involving a prospective material adverse change, in the financial condition, net worth or results of operations of the Company since December 31, 1996 or in the business prospects or condition of the Company since the date of this Prospectus, or that materially and adversely impacts the Standby Underwriting Agreement. The Company has agreed that, without the prior written consent of the underwriters, it will not offer, sell, grant any option for the sale of, or otherwise dispose of any shares of Common Stock (or securities convertible into shares of Common Stock) (collectively, the "Securities") acquired in the offering or held by it as of the date hereof until after the Lock-Up Expiry Date, other than (i) Common Stock to be sold in the offering, and (ii) Company option issuances and sales of Common Stock pursuant to the Stock Option Plan and (iii) Securities issued as consideration for an acquisition if the party being issued the Securities 64 agrees not to transfer, sell, offer for sale, contract or otherwise dispose of such Securities until after the Lock-Up Expiry Date. The Principal Stockholders, Centocor, each executive officer and each director of the Company, who will in the aggregate own 8,438,799 shares of Common Stock after the completion of the Offering and will be deemed to beneficially own an additional 406,133 shares of Common Stock, have agreed with the Underwriters that they will not sell or otherwise dispose of any shares of Common Stock (except for 29,000 shares owned by one director) until after the Lock-Up Expiry Date without the prior written consent of the underwriters. See "Management--Equity Compensation Plan" and "Shares Eligible for Future Sale." In addition, Warren V. Musser has agreed that he and/or his assignees will not sell or otherwise dispose of 280,000 shares of Common Stock without the prior written consent of the Underwriters. See "Management--Stock Options" and "Shares Eligible for Future Sale." LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters in connection with the Offering are being passed upon for the Underwriters by Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania. EXPERTS The financial statements of ChromaVision Medical Systems, Inc. as of December 31, 1996 and 1995 and for the years ended December 31, 1995 and 1994 and for the periods from January 1, 1996 through March 27, 1996 and the period from March 28, 1996 (incorporation) through December 31, 1996 included in this Prospectus and elsewhere in the Registration Statement have been included herein in reliance on the report of KPMG Peat Marwick LLP, independent accountants, given upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (including all amendments thereto, the "Registration Statement") under the Act with respect to the Common Stock and rights offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information contained in the Registration Statement. For further information with respect to the Company and the Common Stock and rights offered hereby, reference is hereby made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any agreement or other document filed as an exhibit to the Registration Statement are not necessarily complete, and in each instance reference is made to the copy of such agreement filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, DC 20549, and copies of all or any part thereof may be obtained from such office upon payment of the prescribed fees. In addition, the Commission maintains a Web site at http://www.sec.gov that contains reports, proxy statements, information statements and other information regarding the Company. 65 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report.......................................................... F-2 Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)........ F-3 Statements of Operations for the years ended December 31, 1994, 1995, the period from January 1, 1996 through March 27, 1996, the period from March 28, 1996 (incorporation) through December 31, 1996, the three months ended March 31, 1996 and 1997 (unaudited), the period from April 1, 1993 (inception) through December 31, 1996 and the period from April 1, 1993 (inception) through March 31, 1997 (unaudited)......................................................................... F-4 Statements of Stockholders' Deficit at December 31, 1995 and 1996 and March 31, 1997 (unaudited)......................................................................... F-5 Statements of Cash Flows for the years ended December 31, 1994, 1995, the period from January 1, 1996 through March 27, 1996, the period from March 28, 1996 (incorporation) through December 31, 1996, the three months ended March 31, 1996 and 1997 (unaudited), the period from April 1, 1993 (inception) through December 31, 1996 and the period from April 1, 1993 (inception) through March 31, 1997 (unaudited)......................................................................... F-6 Notes to Financial Statements......................................................... F-7
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors of ChromaVision Medical Systems, Inc.: (formerly MicroVision Medical Systems, Inc.): We have audited the accompanying balance sheet of ChromaVision Medical Systems (a development stage enterprise), a division of XL Vision, Inc., as of December 31, 1995 and ChromaVision Medical Systems, Inc. (a development stage enterprise) as of December 31, 1996 and the related statements of operations, stockholders' deficit and cash flows of ChromaVision Medical Systems (a development stage enterprise), a division of XL Vision, Inc., for the years ended December 31, 1994 and 1995 and the period from January 1, 1996 through March 27, 1996, and ChromaVision Medical Systems, Inc. (a development stage enterprise) for the period from March 28, 1996 (incorporation) through December 31, 1996, and for the cumulative development stage from April 1, 1993 (inception) through December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ChromaVision Medical Systems (a development stage enterprise), a division of XL Vision, Inc., at December 31, 1995 and ChromaVision Medical Systems, Inc. (a development stage enterprise) at December 31, 1996 and the results of operations and cash flows of ChromaVision Medical Systems (a development stage enterprise), a division of XL Vision, Inc., for the years ended December 31, 1994 and 1995 and for the period from January 1, 1996 through March 27, 1996, and ChromaVision Medical Systems, Inc. (a development stage enterprise) for the period from March 28, 1996 (incorporation) through December 31, 1996 and for the cumulative development stage from April 1, 1993 (inception) through December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Orlando, Florida March 19, 1997 F-2 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS
DECEMBER 31, ---------------------- DIVISIONAL OPERATIONS (NOTE 1) ---------- MARCH 31, ASSETS 1995 1996 1997 ---------- ---------- ---------- (UNAUDITED) Current assets: Cash and cash equivalents............................ $ -- $ 124,092 $ 65,100 Accounts receivable.................................. 200,000 550 550 Inventory............................................ 74,202 502,511 468,411 Prepaid expenses..................................... -- 27,677 42,422 Capitalized offering costs........................... -- 144,760 344,760 ---------- ---------- ---------- Total current assets............................... 274,202 799,590 921,243 Deposits............................................... -- -- 35,682 Property and equipment, net............................ 71,462 80,840 230,418 ---------- ---------- ---------- Total assets........................................... $ 345,664 $ 880,430 $1,187,343 ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Revolving line of credit............................. $ -- $ -- $1,958,432 Due to XL Vision, Inc................................ 4,726,635 380,439 452,388 Accounts payable..................................... 8,783 183,373 318,973 Accrued liabilities: Salaries and benefits.............................. 8,846 89,066 158,522 Severance costs.................................... -- 912,050 -- Warranty costs..................................... -- 60,000 60,000 Offering costs..................................... -- 105,000 273,000 Other.............................................. -- -- 29,908 ---------- ---------- ---------- Total current liabilities........................ 4,744,264 1,729,928 3,251,223 Revolving line of credit............................. -- 806,009 -- ---------- ---------- ---------- Total liabilities................................ 4,744,264 2,535,937 3,251,223 ---------- ---------- ---------- Commitments and contingencies Stockholders' deficit: Series A preferred stock, $.01 par value, authorized 7,246,000 shares, issued and outstanding 7,135,064 shares in 1996 and 1997............................ -- 71,351 71,351 Series B preferred stock, $.01 par value, authorized 221,850 shares, issued and outstanding -0- shares in 1996 and 221,850 shares in 1997................. -- -- 2,219 Common stock $.01 par value, authorized 50,000,000 shares, issued and outstanding 1,931,250 shares in 1996 and 1997...................................... -- 19,313 19,313 Additional paid-in capital........................... -- 7,059,849 8,055,955 Accumulated deficit during the development stage..... (4,398,600) (8,806,020) (10,212,718) ---------- ---------- ---------- Total stockholders' deficit...................... (4,398,600) (1,655,507) (2,063,880) ---------- ---------- ---------- Total liabilities and stockholders' deficit............ $ 345,664 $ 880,430 $1,187,343 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements. F-3 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS
PERIOD FROM PERIOD FROM MARCH 28, JANUARY 1, 1996 PERIOD FROM 1996 (INCORPORATION) APRIL 1, 1993 YEARS ENDED DECEMBER 31, THROUGH THROUGH (INCEPTION) THROUGH ------------------------ MARCH 27, DECEMBER 31, DECEMBER 31, 1994 1995 1996 1996 1996 ----------- ----------- ------------ ------------ ------------------- (DIVISIONAL OPERATIONS--NOTE 1) Revenue: Products.................... $ 220,000 $ 900,000 $ -- $ -- $ 1,120,000 Services.................... 76,886 -- -- -- 76,886 ----------- ----------- ------------ ------------ ------------------- 296,886 900,000 -- -- 1,196,886 ----------- ----------- ------------ ------------ ------------------- Cost of revenue: Products.................... 201,886 310,103 -- -- $ 511,989 Services.................... 30,750 -- -- -- 30,750 ----------- ----------- ------------ ------------ ------------------- 232,636 310,103 -- -- 542,739 ----------- ----------- ------------ ------------ ------------------- Gross profit................ 64,250 589,897 -- -- 654,147 ----------- ----------- ------------ ------------ ------------------- Operating expenses: Selling, general and administrative............ 787,167 1,040,070 216,579 2,762,673 5,111,440 Research and development.... 858,389 1,513,014 235,578 1,633,944 4,790,081 ----------- ----------- ------------ ------------ ------------------- Total operating expenses................ 1,645,556 2,553,084 452,157 4,396,617 9,901,521 ----------- ----------- ------------ ------------ ------------------- Profit (loss) from operations.............. (1,581,306) (1,963,187) (452,157) (4,396,617) (9,247,374) ----------- ----------- ------------ ------------ ------------------- Other income (expense): Interest income (expense)... -- -- -- 17,829 17,829 Other income (note 4) -- -- 75,000 348,525 423,525 ----------- ----------- ------------ ------------ ------------------- Total other income (expense)............... -- -- 75,000 366,354 441,354 ----------- ----------- ------------ ------------ ------------------- Profit (loss) before income taxes............ (1,581,306) (1,963,187) (377,157) (4,030,263) (8,806,020) Income tax expense (benefit)................... -- -- -- -- -- ----------- ----------- ------------ ------------ ------------------- Net profit (loss)......... $(1,581,306) $(1,963,187) $ (377,157) $(4,030,263) $(8,806,020) Net profit (loss) subsequent to incorporation (notes 1 and 2) $(4,030,263) ------------ ------------ Net loss per common share subsequent to incorporation (notes 1 and 2)............. $ (0.33) ------------ ------------ Pro forma weighted average number of common shares outstanding................. 12,111,580 PERIOD FROM APRIL 1, THREE MONTHS 1993 ENDED (INCEPTION) MARCH 31, THROUGH ----------------------- MARCH 31, 1996 1997 1997 ---------- ----------- ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) (DIVISIONAL OPERATIONS- NOTE 1) Revenue: Products.................... $ -- $ -- $ 1,120,000 Services.................... -- -- 76,886 ---------- ----------- ------------ -- -- 1,196,886 ---------- ----------- ------------ Cost of revenue: Products.................... -- -- 511,989 Services.................... -- -- 30,750 ---------- ----------- ------------ -- -- 542,739 ---------- ----------- ------------ Gross profit................ -- -- 654,147 ---------- ----------- ------------ Operating expenses: Selling, general and administrative............ 216,579 784,622 5,896,062 Research and development.... 235,578 599,808 5,389,889 ---------- ----------- ------------ Total operating expenses................ 452,157 1,384,430 11,285,951 ---------- ----------- ------------ Profit (loss) from operations.............. (452,157) (1,384,430) (10,631,804 ) ---------- ----------- ------------ Other income (expense): Interest income (expense)... -- (22,278) (4,449 ) Other income (note 4) 75,000 10 423,535 ---------- ----------- ------------ Total other income (expense)............... 75,000 (22,268) 419,086 ---------- ----------- ------------ Profit (loss) before income taxes............ (377,157) (1,406,698) (10,212,718 ) Income tax expense (benefit)................... -- -- -- ---------- ----------- ------------ Net profit (loss)......... $ (377,157) $(1,406,698) $(10,212,718) Net profit (loss) subsequent to incorporation (notes 1 and 2) $(1,406,698) ----------- ----------- Net loss per common share subsequent to incorporation (notes 1 and 2)............. $ (0.11) ----------- ----------- Pro forma weighted average number of common shares outstanding................. 12,280,331
See accompanying notes to financial statements. F-4 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF STOCKHOLDERS' DEFICIT
PREFERRED STOCK --------------------------------------------- SERIES A SERIES B COMMON STOCK ADDITIONAL --------------------- ---------------------- --------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ---------- --------- --------- ----------- ---------- --------- ------------ Balances at December 31, 1993............. -- $ -- -- $ -- -- $ -- $ -- Net profit (loss)......................... -- -- -- -- -- -- -- ---------- --------- --------- ----------- ---------- --------- ------------ Balances at December 31, 1994............. -- -- -- -- -- -- -- Net profit (loss)......................... -- -- -- -- -- -- -- ---------- --------- --------- ----------- ---------- --------- ------------ Balances at December 31, 1995............. -- -- -- -- -- -- -- Net profit (Loss)......................... -- -- -- -- -- -- -- ---------- --------- --------- ----------- ---------- --------- ------------ Balances at March 27, 1996................ -- -- -- -- -- -- -- Net profit (loss)......................... -- -- -- -- -- -- -- Issuance of common stock on March 28, 1996 (Incorporation)......................... -- -- -- -- 1,545,000 15,450 -- Sale of preferred stock................... 6,364,872 63,649 -- -- -- -- 6,301,222 Issuance of preferred stock for release of rights and claims (note 11)............. 770,192 7,702 -- -- -- -- 762,490 Five-for-four common stock split (note 12)..................................... -- -- -- -- 386,250 3,863 (3,863) ---------- --------- --------- ----------- ---------- --------- ------------ Balances at December 31, 1996............. 7,135,064 71,351 -- -- 1,931,250 19,313 7,059,849 Sale of preferred stock (unaudited)....... -- -- 221,850 2,219 -- -- 996,106 Net profit (loss) (unaudited)............. -- -- -- -- -- -- -- ---------- --------- --------- ----------- ---------- --------- ------------ Balances at March 31, 1997 (unaudited).... 7,135,064 $ 71,351 221,850 $ 2,219 1,931,250 $ 19,313 $ 8,055,955 ---------- --------- --------- ----------- ---------- --------- ------------ ---------- --------- --------- ----------- ---------- --------- ------------ ACCUMULATED DEFICIT DURING THE DEVELOPMENT STAGE TOTAL ------------- ------------ Balances at December 31, 1993............. $ (854,107) $ (854,107) Net profit (loss)......................... (1,581,306) (1,581,306) ------------- ------------ Balances at December 31, 1994............. (2,435,413) (2,435,413) Net profit (loss)......................... (1,963,187) (1,963,187) ------------- ------------ Balances at December 31, 1995............. (4,398,600) (4,398,600) Net profit (Loss)......................... (377,157) (377,157) ------------- ------------ Balances at March 27, 1996................ (4,775,757) (4,775,757) Net profit (loss)......................... (4,030,263) (4,030,263) Issuance of common stock on March 28, 1996 (Incorporation)......................... -- 15,450 Sale of preferred stock................... -- 6,364,871 Issuance of preferred stock for release of rights and claims (note 11)............. -- 770,192 Five-for-four common stock split (note 12)..................................... -- -- ------------- ------------ Balances at December 31, 1996............. (8,806,020) (1,655,507) Sale of preferred stock (unaudited)....... -- 998,325 Net profit (loss) (unaudited)............. (1,406,698) (1,406,698) ------------- ------------ Balances at March 31, 1997 (unaudited).... $ (10,212,718) $ (2,063,880) ------------- ------------ ------------- ------------
See accompanying notes to financial statements. F-5 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS
PERIOD FROM PERIOD FROM PERIOD FROM APRIL 1, JANUARY 1, MARCH 28, 1996 1993 THREE MONTHS YEARS ENDED 1996 (INCORPORATION) (INCEPTION) ENDED DECEMBER 31, THROUGH THROUGH THROUGH MARCH 31, ---------------------- MARCH 27, DECEMBER 31, DECEMBER 31, ----------------------- 1994 1995 1996 1996 1996 1996 1997 ---------- ---------- -------------- -------------- ------------ ----------- ---------- (DIVISIONAL OPERATIONS-NOTE 1) (UNAUDITED) (UNAUDITED) (DIVISIONAL OPERATIONS- NOTE 1) Cash flows from development stage activities: Net profit (loss).......... $(1,581,306) $(1,963,187) $ (377,157) $ (4,030,263) $(8,806,020) $(377,157) $(1,406,698) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........... 27,159 54,417 6,080 28,659 116,315 6,080 9,605 Non-cash issuance of preferred stock........ -- -- -- 770,192 770,192 -- -- Write-off of note receivable............. -- 40,000 -- -- 40,000 -- -- Changes in operating assets and liabilities: Accounts receivable.... (100,000) (100,000) 200,000 (550) (550) 200,000 -- Inventory.............. (1,646) (52,556) (1,888) (426,421) (502,511) (1,888) 34,100 Prepaid expenses....... -- -- -- (27,677) (27,677) -- (14,745) Deposits............... -- -- -- -- -- -- (35,682) Accounts payable....... 466 8,317 -- 174,590 183,373 -- 135,600 Accrued liabilities.... 1,110 5,080 21,514 1,135,756 1,166,116 21,514 (644,686) ---------- ---------- -------------- -------------- ------------ ----------- ---------- Net cash used in operating activities........... (1,654,217) (2,007,929) (151,451) (2,375,714) (7,060,762) (151,451) (1,922,506) ---------- ---------- -------------- -------------- ------------ ----------- ---------- Cash flows from investing activities: Notes receivable........... (785,000) -- -- -- (825,000) -- -- Collections on notes receivable............... -- 785,000 -- -- 785,000 -- -- Purchases of property and equipment................ (146,841) (6,197) (348) (43,769) (197,155) (348) (159,183) ---------- ---------- -------------- -------------- ------------ ----------- ---------- Net cash provided by (used in) investing activities........... (931,841) 778,803 (348) (43,769) (237,155) (348) (159,183) ---------- ---------- -------------- -------------- ------------ ----------- ---------- Cash flows from financing activities: Due to (from) XL Vision, Inc...................... 2,586,058 1,229,126 151,799 (4,497,995) 380,439 136,349 71,949 Sale of common stock....... -- -- -- 15,450 15,450 15,450 -- Borrowing under revolving line of credit........... -- -- -- 806,009 806,009 -- 1,152,423 Sale of preferred stock.... -- -- -- 6,364,871 6,364,871 -- 998,325 Capitalized offering costs.................... -- -- -- (144,760) (144,760) -- (200,000) ---------- ---------- -------------- -------------- ------------ ----------- ---------- Net cash provided by financing activities........... 2,586,058 1,229,126 151,799 2,543,575 7,422,009 151,799 2,022,697 ---------- ---------- -------------- -------------- ------------ ----------- ---------- Net increase (decrease) in cash and cash equivalents.......... -- -- -- 124,092 124,092 -- (58,992) Cash and cash equivalents-- beginning of period........ -- -- -- -- -- -- 124,092 ---------- ---------- -------------- -------------- ------------ ----------- ---------- Cash and cash equivalents--end of period..................... $ -- $ -- $ -- $ 124,092 $ 124,092 $ -- $ 65,100 ---------- ---------- -------------- -------------- ------------ ----------- ---------- ---------- ---------- -------------- -------------- ------------ ----------- ---------- PERIOD FROM APRIL 1, 1993 (INCEPTION) THROUGH MARCH 31, 1997 ------------ (UNAUDITED) Cash flows from development stage activities: Net profit (loss).......... ($10,212,718) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........... 125,920 Non-cash issuance of preferred stock........ 770,192 Write-off of note receivable............. 40,000 Changes in operating assets and liabilities: Accounts receivable.... (550) Inventory.............. (468,411) Prepaid expenses....... (42,422) Deposits............... (35,682) Accounts payable....... 318,973 Accrued liabilities.... 521,430 ------------ Net cash used in operating activities........... (8,983,268) ------------ Cash flows from investing activities: Notes receivable........... (825,000) Collections on notes receivable............... 785,000 Purchases of property and equipment................ (356,338) ------------ Net cash provided by (used in) investing activities........... (396,338) ------------ Cash flows from financing activities: Due to (from) XL Vision, Inc...................... 452,388 Sale of common stock....... 15,450 Borrowing under revolving line of credit........... 1,958,432 Sale of preferred stock.... 7,363,196 Capitalized offering costs.................... (344,760) ------------ Net cash provided by financing activities........... 9,444,706 ------------ Net increase (decrease) in cash and cash equivalents.......... 65,100 Cash and cash equivalents-- beginning of period........ -- ------------ Cash and cash equivalents--end of period..................... $ 65,100 ------------ ------------
See accompanying notes to financial statements. F-6 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED (1) ORGANIZATION ChromaVision Medical Systems, Inc. (formerly MicroVision Medical Systems, Inc.) (a development stage enterprise) ("ChromaVision" or the "Company") is a Delaware corporation. Prior to the formation of the Company on March 28, 1996, the Company's business was conducted as the MicroVision Medical Systems Division (the "Division") of XL Vision, Inc. ("XL Vision"). On March 28, 1996, the assets and liabilities of the Division were contributed to the Company, which is a wholly owned subsidiary of XL Vision. This transaction was accounted for as a reorganization of entities under common control and, accordingly, the assets and liabilities were recorded at their historical book value. As of the date of incorporation, the Division had assets, net of assumed liabilities of $102,677 and an accumulated deficit of $4,775,757. The Company assumed a liability to XL Vision totaling $4,862,984 which consisted of the net assets, the accumulated deficit of the Division less consideration paid for common stock, $15,450. Subsequent to incorporation, the Company raised $6.4 million from a private equity placement in June 1996, for which the proceeds were used primarily to fund the repayment of amounts due to XL Vision and for working capital. The accompanying financial statements for the period from April 1, 1993, inception, through March 27, 1996, reflect operations within XL Vision. Significant management assumptions were made in allocating costs from XL Vision in order to present the balance sheet and statement of operations for those periods. The Company was allocated all incremental costs and certain indirect or common costs based upon the proportional value of all expenses incurred by XL Vision. Management of the Company believes the allocated costs reasonably reflects the costs of the Division as if it were on a stand alone basis. The Company was established to develop medical imaging technologies and to introduce a computer-based microscope for the healthcare services market. From inception on April 1, 1993 through December 31, 1996, the Company has devoted substantially all of its resources to the development of the ChromaVision Digital Analyzer technology. The ChromaVision Digital Analyzer is designed to identify cells with specific characteristics within a sample of cells by detecting color produced by the reaction between common laboratory reagents (or stains) in the cells. The ChromaVision Digital Analyzer uses proprietary imaging software and technology to capture digital images of cell samples and detect the presence, count the number and measure the color intensity of cells containing a particular stain. The Company believes the ChromaVision Digital Analyzer offers flexibility because the software can be configured to identify different stains; thereby allowing the system to be adapted for use with different reagents to identify a broad range of cellular conditions. The Company intends to establish the ChromaVision Digital Analyzer as the preferred platform for multiple microscopic diagnostic applications. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) DEVELOPMENT STAGE From the inception of ChromaVision on April 1, 1993, the Company was considered to be in the development stage as defined by the Statement of Financial Accounting Standards ("SFAS") No. 7, "ACCOUNTING AND REPORTING BY DEVELOPMENT STAGE ENTERPRISES". Until the Company begins to realize significant revenue associated from its planned operations, the Company will be considered in the development stage. F-7 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (B) MANAGEMENT'S PLANS At March 31, 1997, the Company had a working capital deficiency of $2,329,980 and a stockholders' deficit of $2,063,880. Management expects additional working capital requirements as the Company continues its marketing and development efforts leading to initial revenues from its ChromaVision Digital Analyzer. Management expects initial system revenues to begin in 1998. The Company's business plans anticipate manufacturing the ChromaVision Digital Analyzer instruments, placing them with users at no charge and charging a "per click" fee for each use of the instruments. The manufacturing of these instruments will require a significant outlay of cash for which revenues will not be recognized until future periods. As a result, the Company intends to arrange third-party financing for the instruments. In addition, to support the Company's future cash needs, it may consider additional debt or equity financing. Although management believes that its initial public offering ("IPO") will be successful, there can be no assurances that it will be achieved or that the Company will be successful in raising other financing. The Company anticipates that net proceeds from its planned IPO of common stock (see note 13) will be sufficient to satisfy its operating cash needs for at least twelve months following the IPO. If the Company is unable to obtain sufficient additional funds, the Company may have to delay, scale back or eliminate some or all of its development activities and clinical studies. (C) INTERIM FINANCIAL INFORMATION The financial statements for the three months ended March 31, 1997 and 1996 are unaudited but reflect adjustments which are, in the opinion of management, necessary for the fair presentation of financial position and results of operations. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. (D) REVENUE RECOGNITION The Company's revenues in 1994 and 1995 were derived from the sale of digital analyzers and the provision of engineering services. The Company's revenue recognition policy for the 1994 and 1995 years was to recognize product revenues when a digital analyzer was sold and title transferred. The sales of the digital analyzers in 1994 and 1995 was inclusive of the software necessary to operate the various applications. None of the product sales made in 1994 and 1995 included any obligations related to future services required to be performed. Services revenue in 1994 was recognized at the completion of the performance of the related engineering services. The policy for future revenues on a "per use" or "per click" basis will be to record the revenues as each "per use" is incurred. It is anticipated that under this new pricing model the Company will own all digital analyzers that are engaged in service and accordingly, all development and maintenance costs will be expensed as incurred. (E) CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of amounts held as bank deposits and marketable securities with a maturity of three months or less. (F) INVENTORIES Inventories are stated at standard cost which approximates the lower of first-in, first-out cost or market. F-8 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (G) DEPRECIATION AND AMORTIZATION Demonstration equipment and property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets which are generally 7-10 years for production and engineering equipment, and 5-7 years for all other assets. Demonstration equipment is amortized over a 3 year period. (H) INCOME TAXES The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Prior to March 28, 1996, the Company operated as a division of XL Vision and, as such, did not record any income tax benefit for losses prior to that date. (I) STOCK-BASED COMPENSATION During 1996, the Company adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures for stock option grants made in 1996 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (J) USE OF ESTIMATES The preparation of the Company's financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. In particular, as further described in note 1, significant assumptions were made to allocate indirect costs from XL Vision to ChromaVision for periods prior to incorporation. (K) NET LOSS PER SHARE Pursuant to the requirements of the Securities and Exchange Commission, common shares and common equivalent shares issued at prices below the estimated public offering price during the 12 months immediately preceding the date of the initial filing of the registration statement have been included in the calculation of common shares and common share equivalents, using the modified treasury stock method, as if they were outstanding for all periods presented whether they are antidilutive or not. Calculation of net loss per share assumes that all outstanding preferred shares have been converted into common shares. Calculation of net loss per share is based upon operations subsequent to the initial capitalization (incorporation) of the Company in March 1996. F-9 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (L) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash, accounts receivable, accounts payable and accrued liabilities reflected in the financial statements approximates fair value due to the short-term maturity of these instruments. The carrying value of the Company's line of credit approximates fair value as the underlying interest rate fluctuates with current market rates. (3) INVENTORY The following is a summary of inventory:
DECEMBER 31, --------------------- MARCH 31, 1995 1996 1997 --------- ---------- ---------- Raw materials.................................................................. $ 74,202 $ 105,520 $ 85,987 Finished goods................................................................. -- 396,991 382,424 --------- ---------- ---------- $ 74,202 $ 502,511 $ 468,411 --------- ---------- ---------- --------- ---------- ----------
(4) NOTES RECEIVABLE In June 1993, the Company executed a letter of understanding with Intelligent Medical Imaging, Inc. ("IMI") under which ChromaVision agreed in principle to manufacture IMI's Micro21 System design units. During 1993, ChromaVision advanced $40,000 to IMI in contemplation of an equity investment in IMI. During 1994, an additional $785,000 was advanced. In addition to amounts advanced, ChromaVision incurred costs in developing hardware for the Micro21 System. The parties were unable to agree to definitive terms for the equity investment and their manufacturing relationship. On July 23, 1994, a settlement agreement was reached whereby IMI issued an $825,000 secured convertible promissory note payable (the "$825,000 note"), a $500,000 noninterest bearing secured promissory note payable (the "$500,000 note") and a $220,000 purchase order (the "purchase order") to ChromaVision. During 1994 the purchase order was paid in full. In 1995, ChromaVision accepted $785,000 in full payment of the $825,000 note. The $500,000 note was issued by IMI for support services but was not recognized as income based upon doubts as to its collectibility. During 1996, ChromaVision accepted $423,525 in full payment of the $500,000 note, $75,000 of which has been reflected in other income in the period from January 1, 1996 through March 27, 1996 and $348,525 of which has been reflected in other income in the period from March 28, 1996 (incorporation) through December 31, 1996. (5) PROPERTY AND EQUIPMENT The following is a summary of property and equipment:
DECEMBER 31, ---------------------- MARCH 31, 1995 1996 1997 ---------- ---------- ---------- Demonstration equipment...................................................... $ 140,000 $ 140,000 $ 140,000 Office and computer equipment................................................ 8,067 46,771 164,982 Furniture and fixtures....................................................... 4,971 5,874 5,874 Engineering and manufacturing equipment...................................... -- 4,510 16,286 Leasehold improvements....................................................... -- -- 29,196 ---------- ---------- ---------- 153,038 197,155 356,338
F-10 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED (5) PROPERTY AND EQUIPMENT (CONTINUED)
DECEMBER 31, ---------------------- MARCH 31, 1995 1996 1997 ---------- ---------- ---------- Less: accumulated depreciation and amortization.............................. 81,576 116,315 125,920 ---------- ---------- ---------- Total property and equipment, net............................................ $ 71,462 $ 80,840 $ 230,418 ---------- ---------- ---------- ---------- ---------- ----------
(6) LINE OF CREDIT The Company has an unsecured line of credit with a bank under which it may borrow up to $3,000,000 at the LIBOR plus 2.1% (7.76% at December 31, 1996). The outstanding balance on the line of credit was $806,009 at December 31, 1996. The line of credit is due on January 31, 1998. The line of credit is guaranteed by Safeguard Scientifics, Inc. ("Safeguard"). A default by Safeguard on their existing line of credit agreement with another bank would constitute default by the Company. As of March 31, 1997, the outstanding balance on the line of credit was $1,958,432. Availability under the line of credit was increased to $5,000,000 during April 1997. (7) PREFERRED STOCK As of December 31, 1996, the Company had authorized the issuance of 8,000,000 shares of preferred stock. The Company has designated 7,246,000 and 221,850 shares as Series A and Series B preferred shares, respectively. Series B shares are junior to Series A shares. SERIES A--The Company sold 6,364,872 shares of convertible Series A preferred stock in an offering based upon a private placement memorandum dated May 17, 1996 for $1 per share. Each share of Series A preferred stock is convertible into 1.25 shares of common stock at the option of the holder or upon the vote of holders of two-thirds of the Series A preferred shares outstanding. The Series A preferred stock is required to be converted upon a qualified initial public offering of at least $10 million with a Company valuation of at least $30 million or a public rights offering of the Company to shareholders of Safeguard Scientifics, Inc. ("Safeguard") (see note 13). The holders of preferred stock are entitled to vote as a separate class to elect two directors to the Board of Directors of the Company. The Series A shares are entitled to a liquidation preference before any distribution to common stockholders equal to the greater of (a) $1.00 per share plus an additional $.10 per year from June 30, 1996, or (b) the amount which would be distributed if all of the preferred stock of the Company were converted to common stock prior to liquidation. SERIES B--Each share of Series B preferred stock is convertible into 1.25 shares of common stock at the option of the holder or upon the vote of holders of two-thirds of the Series B preferred shares outstanding. The Series B preferred stock is required to be converted upon a qualified initial public offering of at least $10 million with a Company valuation of at least $30 million or a public rights offering of the Company to shareholders of Safeguard Scientifics, Inc. ("Safeguard") (see note 13). The Series B shares are entitled to a liquidation preference before any distribution to common stockholders equal to the greater of (a) $4.50 per share plus an additional $.10 for each year per year from January 1, 1997, or (b) the amount which would be distributed if all of the preferred stock of the Company were converted to common stock prior to liquidation. The Company sold 221,850 shares of convertible Series B preferred stock to Safeguard for $4.50 per share in January 1997. F-11 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED (8) INCOME TAXES Prior to March 28, 1996 (incorporation), the Company operated as a division of XL Vision and as such was not directly subject to income taxes. Accordingly, no income tax disclosures are presented for periods prior to 1996. The results of the Company's operations will be included in consolidated income tax returns of XL Vision for the period January 1, 1996 through May 17, 1996, when XL Vision was no longer deemed to control the Company for income tax purposes. The amount of net operating loss carryforward that will be allocated to the Company is estimated to be approximately $3,000,000. The Company's net operating loss was allocated on a separate return basis, but was limited by approximately $1 million based upon operating income generated by the XL Vision consolidated group. As the Company is a development stage enterprise, deferred tax benefits generated by deferred tax assets are offset by a corresponding valuation allowance. As ChromaVision was not a legal entity prior to incorporation, the transfer of funds to XL Vision of approximately $4,800,000 was deemed, for income tax purposes, to be the cost of the technology transfer from XL Vision (see note 1). For income tax purposes, this amount is considered to be an intangible asset which is being amortized over a fifteen year period. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred income tax assets and liability are as follows:
DECEMBER 31, 1996 ------------ Deferred tax assets: Net operating loss carryforward................................................................... $1,185,019 Intangible asset, net of amortization............................................................. 1,701,363 Accrued liabilities............................................................................... 40,883 ------------ Deferred tax assets........................................................................... 2,927,265 Deferred tax liability: Depreciation...................................................................................... (1,859) ------------ Total......................................................................................... 2,925,406 Less valuation allowance for deferred tax assets.................................................... (2,925,406) ------------ Deferred tax assets (liability), net.......................................................... $ -- ------------ ------------
The difference between the "expected" tax benefit (computed by applying the federal corporate income rate of 34% to the loss before income taxes) and the actual tax benefit is due to limitations on the benefit for the net operating losses recognized, resulting from allocations of the consolidated income tax results of XL Vision for the year ended December 31, 1996, and the effect of the valuation allowance. (9) STOCK OPTIONS In June 1996, the Company granted 975,688 non-qualified stock options to officers, key employees and members of the Company's Advisory Board, including 554,626 stock options which were issued to the former president of the Company. Unvested options of the former president, 277,313, were cancelled in December 1996. In December 1996, the Company agreed to repurchase vested options of the former president, 277,313, for $2.40 per share less the $.80 per share exercise price. The aggregate cash paid of $443,700 was expensed in selling general and administrative expenses during the period from March 28, F-12 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED (9) STOCK OPTIONS (CONTINUED) 1996 (incorporation) to December 31, 1996 and was included in accrued liabilities as of December 31, 1996. This liability was paid in full in January 1997. Through December 31, 1996, the Company granted 71,875 stock options to members of the Company's Advisory Board. In addition, the Company also sold 134,000 shares of Series A Preferred Stock to members of the Company's Advisory Board as part of the Series A Preferred Stock Offering described in Note 7. In December 1996, the Company adopted a stock option plan (the "Plan") pursuant to which the Company's Board of Directors may grant stock options to officers and key employees. The Plan authorizes grants of options to purchase up to 1,291,688 shares of authorized but unissued common stock. All options granted by the Company during 1996 and the three months ended March 31, 1997 had an exercise price equal to the stock's deemed fair market value at the date of grant. The fair value at the date of the grant was determined by the Company's Board of Directors based on several factors, including marketing and distribution arrangements and FDA applications. Stock options granted during 1996 have a maximum of ten year terms and have vesting schedules which are at the discretion of the Company and determined on the effective date of the grant. A summary of option transactions follows:
WEIGHTED AVERAGE RANGE OF WEIGHTED REMAINING EXERCISE AVERAGE CONTRACTUAL PRICES EXERCISE LIFE SHARES PER SHARE PRICE (IN YEARS) ---------- ---------- ----------- ------------- Balance outstanding March 28, 1996 (incorporation)................................................ -- $ -- $ -- Granted in June.............................................. 975,688 0.80 0.80 Granted in December.......................................... 949,375 2.40 2.40 Cancelled.................................................... (277,313) 0.80 0.80 ---------- Balance outstanding December 31, 1996............................ 1,647,750 $ .80-2.40 $ 1.72 9.20 ---------- ---------- ----- --- ---------- ---------- ----- --- Granted...................................................... 168,751 2.40 2.40 Repurchased and cancelled.................................... (277,313) 0.80 0.80 ---------- ---------- Balance outstanding March 31, 1997............................... 1,539,188 $ .80-2.40 $ 1.96 8.05 ---------- ---------- ----- --- ---------- ---------- ----- ---
The following summarizes information about the Company's stock options outstanding at December 31, 1996 of which the exericisable stock options had a weighted average exercise price of $1.39.
WEIGHTED AVERAGE EXERCISE OPTIONS NUMBER REMAINING PRICE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE - ----------- ----------- ----------- ----------------- $ 0.80 698,375 346,641 6.46 $ 2.40 949,375 204,687 9.25
At March 31, 1997, 299,016 options were exercisable at a weighted average price of $1.94. At December 31, 1996, and March 31, 1997, 342,313 and 173,562 options were available for grant, respectively. The per share weighted-average fair value of stock options granted during 1996 was $1.59 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: F-13 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED (9) STOCK OPTIONS (CONTINUED) expected dividend yield 0%, risk-free interest rate of 6.35%, and an expected life of 6.75 years. No volatility was assumed due to the use of the Minimum Value Method of computation for options issued by the Company prior to becoming a public entity as prescribed by SFAS 123. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below: Net loss as reported subsequent to incorporation................ $(4,030,263) Pro forma net loss subsequent to incorporation.................. $(4,312,126) Net loss per share subsequent to incorporation.................. $ (0.33) Proforma net loss per share subsequent to incorporation......... $ (0.36)
(10) RELATED PARTY TRANSACTIONS Prior to April 1, 1996, personnel and other administrative services were provided by XL Vision and allocated to ChromaVision. Administrative service fees incurred between April 1, 1996 and December 31, 1996 were approximately $740,600. In addition, the Company subleased its main facility in Sebastian, Florida from XL Vision under a facilities agreement effective April 1, 1996. Rental and facility costs totaled approximately $72,200 through December 31, 1996. The Company also shares its main facility with XL Vision and is responsible for certain allocated operating and maintenance costs of the facility. As of December 31, 1995 and 1996 and March 31, 1997, the Company owed XL Vision $4,726,635, $380,439 and $452,388 respectively. The advances from XL Vision do not provide for interest. Effective March 31, 1997, amounts due to XL Vision are due within thirty days of receipt. The average outstanding balance due to XL Vision for the years ended December 31, 1994 and 1995, the period from January 1, 1996 through March 27, 1996, the period from March 28, 1996 (incorporation) through F-14 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED (10) RELATED PARTY TRANSACTIONS (CONTINUED) December 31, 1996 and the three months ended March 31, 1997 were $2,203,480, $4,111,072, $4,794,810, $942,833 and $359,115, respectively. An analysis of amounts due to XL Vision is summarized as follows: Amounts due to XL Vision at December 31, 1993................... $ 911,451 Allocation of costs and funding of working capital to the Company..................................................... 2,584,058 --------- Amounts due to XL Vision at December 31, 1994................... 3,495,509 Allocation of costs and funding of working capital to the Company..................................................... 1,231,126 --------- Amounts due to XL Vision at December 31, 1995................... 4,726,635 Allocation of costs and funding of working capital to the Company..................................................... 136,349 --------- Amount due to XL Vision at March 28, 1996 (incorporation)....... 4,862,984 Allocation of costs to the Company............................ 1,710,403 Cash transferred to XL Vision................................. (6,275,000) Transfers of inventory, at cost............................... 82,052 --------- Amount due to XL Vision at December 31, 1996.................... 380,439 Allocation of costs to the Company............................ 321,949 Cash transferred to XL Vision................................. (250,000) --------- Amount due to XL Vision at March 31, 1997....................... $ 452,388 --------- ---------
Effective January 1997, the Company entered into an administrative service agreement which specifies a fee based upon a percentage of gross revenues. The fee is payable quarterly. The fee is payable to Safeguard and XL Vision based upon an aggregate of 1.5% of gross revenues subject to an annual limit of $300,000. The fee is payable upon achievement of positive cash flow from operations. The agreement extends through January 31, 2002 and continues thereafter unless terminated by either party. F-15 CHROMAVISION MEDICAL SYSTEMS, INC. (FORMERLY MICROVISION MEDICAL SYSTEMS, INC.) (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED (11) COMMITMENTS AND CONTINGENCIES AGREEMENT WITH CENTOCOR. The Company sold Centocor six digital analyzers in 1995 to facilitate their clinical trials for cancer applications. As Centocor received feedback from those trials the Company, which was continuing its research and development efforts, incorporated the feedback into their technology. In July 1996, both parties entered into an agreement stipulating their various rights to the reagents being tested for cancer and the digital analyzer technology. As an outcome of this agreement, the Company agreed to a put option by which Centocor would have the right to return the six instruments for $800,000 and the issuance of 770,192 shares of preferred stock at $1.00. As a result of this agreement, the Company has recognized $770,192 of research and development expenses for the period from March 28, 1996 (incorporation) through December 31, 1996. However, none of the instruments were returned to the Company during 1996. Accordingly, no liability for these instruments was recorded by the Company. During December 1996 negotiations commenced which prompted Centocor's waiver of their rights to return the six instruments and extinguished any commitment to repurchase these insruments. In exchange for Centocor's waiver, the Company is to provide a specified number of hours of technical support and software development services. The Company accrued an expense totaling $60,000 in the statement of operations as research and development costs related to these services for the period from March 28, 1996 (incorporation) through December 31, 1996. VOLUNTARY EMPLOYEE SAVINGS 401(K) PLAN. The Company established a voluntary employee savings 401(k) plan in 1996 which is available to all full time employees 21 years or older. The plan provides for a matching by the Company of the employee's contribution to the plan for 50% of the first 6% of the employee's annual compensation. The Company matching contributions were approximately $12,000 for the period from March 28, 1996 (incorporation) through December 31, 1996. LEASE COMMITMENT. In conjunction with a planned relocation of the Company to California, the Company entered into a lease beginning on March 1, 1997 and ending on February 28, 2000 for office space with monthly base rent of $10,227 and provisions for increases based on the cost of living indices. UNASSERTED CLAIM. The Company has been made aware of an unasserted claim relating to an application for its ChromaVision Digital Analyzer. In the opinion of management this claim is without merit. While the Company could vigorously defend against any such dispute, the successful assertion of such a claim could have a material adverse effect on the Company's financial position. (12) STOCK SPLIT On March 19, 1997, the Company authorized a five-for-four common stock split. As of December 31, 1996 preferred stock conversion factors, stock options outstanding and common shares outstanding have been adjusted to reflect retroactive effect of this stock split. (13) SUBSEQUENT EVENT INITIAL PUBLIC OFFERING. On March 26, 1997, the Company's Board of Directors authorized the filing of a registration statement on Form S-1. This will be conducted as a 6,400,000 rights offering primarily to Safeguard's stockholders and will result in the expected sale of new common shares totaling 6,020,000, to be sold in an initial public offering. Costs directly related to the proposed offering, $144,760, have been capitalized as of December 31, 1996. As of March 31, 1997, offering costs capitalized totaled $344,760. Upon completion of the proposed initial public offering, the offering costs will be netted against proceeds raised in the offering. Should the offering not be consummated, the offering costs will be expensed by the Company. F-16 [Inside Back Cover: Photographs of the same breast cancer sample appear. The top photograph shows an image of the sample without the use of the Company's Digital Analyzer. The following text appears next to the top photograph: "This is a view of a slide in which a physician attempts to locate a breast tumor cell amongst potentially millions of normal cells." The middle photograph shows an image of the same sample as identified by the ChromaVision Digital Analyzer. The following text appears next to the middle photograph: "This is what the automated ChromaVision Digital Analyzer sees-all abnormal cells are rapidly distinguished from the normal cellular background using proprietary color-based imaging technology. This makes rare event detection analogous to looking at bright stars against the dark night sky." The bottom photograph shows the image of the same sample as it appears to the user of the ChromaVision Digital Analyzer. The following text appears next to the bottom photograph: "After identifying abnormal cells, the ChromaVision Digital Analyzer provides a high resolution image of the targeted cells." Above the photographs appear the words: "ChromaVision Color-Based Technology." The Company's name and logo appear below the photographs with the phrase: "The Vision in Medical Imaging."] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary................................... 3 Risk Factors......................................... 8 The Offering......................................... 17 Federal Income Tax Consequences...................... 20 The Company.......................................... 22 Use of Proceeds...................................... 22 Dividend Policy...................................... 22 Capitalization....................................... 23 Dilution............................................. 24 Selected Financial Data.............................. 25 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 26 Business............................................. 30 Management........................................... 48 Certain Transactions................................. 56 Principal and Selling Stockholders................... 58 Description of Capital Stock......................... 59 Shares Eligible for Future Sale...................... 61 Underwriting......................................... 63 Legal Matters........................................ 65 Experts.............................................. 65 Additional Information............................... 65 Index to Financial Statements........................ F-1
------------------------ UNTIL AUGUST 30, 1997 (25 DAYS AFTER THE EXPIRATION DATE), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 6,720,000 SHARES (AND RIGHTS TO ACQUIRE UP TO 6,400,000 OF SUCH SHARES) [LOGO] CHROMAVISION MEDICAL SYSTEMS, INC. COMMON STOCK ----------------- PROSPECTUS ----------------- ROBERT W. BAIRD & CO. INCORPORATED ADAMS, HARKNESS & HILL, INC. JULY 1, 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses (other than underwriting discounts and commissions and underwriters' non-accountable expense allowance) payable in connection with the offering of the rights and the sale of the Common Stock offered hereby are as follows: Securities and Exchange Commission registration fee............... $ 11,152 NASD filing fee................................................... 4,180 Nasdaq filing fee................................................. 50,000 Printing and engraving expenses................................... 160,000 Legal fees and expenses........................................... 200,000 Accounting fees and expenses...................................... 125,000 Blue Sky fees and expenses (including legal fees)................. 15,000 Transfer agent and rights agent and registrar fees and expenses... 25,100 Miscellaneous..................................................... 109,568 --------- Total............................................................. $ 700,000 --------- ---------
The foregoing, except for the Securities and Exchange Commission registration fee, the NASD filing fee, and the Nasdaq filing fee, are estimates. All of the foregoing expenses will be borne by the Registrant. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrant's By-laws require the Registrant to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed proceeding by reason of the fact that he is or was a director or officer of the Registrant or is or was serving at the request of the Registrant as a director, officer, employee, fiduciary or agent of another corporation, trust or other enterprise against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Registrant, and, with respect to any such criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Such indemnification as to expenses is mandatory to the extent the individual is successful on the merits of the matter. Delaware law permits the Registrant to provide similar indemnification to employees and agents who are not directors or officers. The determination of whether an individual meets the applicable standard of conduct may be made by the disinterested directors, independent legal counsel or the stockholders. Delaware law also permits indemnification in connection with a proceeding brought by or in the right of the Registrant to procure a judgment in its favor. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers, or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in that Act and is therefore unenforceable. The Registrant expects to obtain a directors and officers liability insurance policy prior to the effective date of this Registration Statement. The Standby Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Registrant against certain liabilities, including liabilities under the Act. Reference is made to Section 8 of the form of Standby Underwriting Agreement which will be filed by amendment as Exhibit 1.1 hereto. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In the three years preceding the filing of this registration statement, the Registrant has issued the following securities that were not registered under the Act (the following information reflects the 5-for-4 split of the Company's Common Stock described in the prospectus): Since its inception, the Company has sold to employees and certain other persons, (i) an aggregate of 1,931,250 shares of Common Stock, (ii) an aggregate of 7,135,064 shares of Series A Preferred Stock, at a price of $1.00 per share, and (iii) an aggregate of 221,850 shares of Series B Preferred Stock at a price of $4.50 per share. All of such sales were made under the exemption from registration provided under Section 4(2) of the Act. Pursuant to the Company's Equity Compensation Plan, the Company has granted options to purchase a total of 1,608,688 shares of Common Stock to its employees and certain other persons during the past three fiscal years at a weighted average exercise price of $2.09 per share. For a more detailed description of the Company's Equity Compensation Plan, see "Management--Stock Options" in this registration statement. In granting the options and selling the underlying securities upon exercise of the options, the Company is relying upon exemptions from registration set forth in Rule 701 and Section 4(2) of the Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits:
EXHIBIT NUMBER DESCRIPTION - ----------------- ------------------------------------------------------------------------------------------------- 1.1 Form of Standby Underwriting Agreement.* 3.1 Certificate of Incorporation of the Company (as amended).** 3.2 By-laws of the Company, as amended.** 5.1 Opinion of Morgan, Lewis & Bockius LLP.** 8.1 Opinion of Morgan, Lewis & Bockius LLP regarding tax matters.* 10.1 ChromaVision Medical Systems, Inc. 1996 Equity Compensation Plan.** 10.2 Stock Option Grant Letter (Dr. Douglas S. Harrington).** 10.3 Stock Option Grant Letter (Kevin C. O'Boyle).** 10.4 Stock Option Grant Letter (Michael G. Schneider).** 10.5 Stock Option Grant Letter (Kenneth S. Garber).** 10.6 Employment Agreement between Dr. Douglas S. Harrington and the Company, as of December 30, 1996.** 10.7 Employment Agreement between Kenneth S. Garber and the Company, dated February 15, 1996.** 10.8 Employment Agreement between Kevin C. O'Boyle and the Company, dated November 27, 1996.** 10.9 Separation Agreement between Michael S. Shiff and the Company, dated December 27, 1996.** 10.10 Stock Purchase Agreement between the Company and the Series A Preferred Stockholders, dated as of June 6, 1996.** 10.11 Registration Rights Agreement between the Company and the Series A Preferred Stockholders, dated as of June 6, 1996.** 10.12 Stockholders' Agreement between the Company and the Series A Preferred Stockholders, dated as of June 6, 1996.** 10.13 Loan Agreement between the Company and the Barnett Bank, N.A., dated December 24, 1996.** 10.14 Unconditional and Unlimited Guaranty Agreement between Safeguard Scientifics, Inc. and Barnett Bank, N.A., dated December 24, 1996.** 10.15 Promissory Note by the Company to Barnett Banks, N.A., dated December 24, 1996.**
II-2
EXHIBIT NUMBER DESCRIPTION - ----------------- ------------------------------------------------------------------------------------------------- 10.16 Tax Indemnity Agreement between the Company and Barnett Bank, N.A., dated December 24, 1996.** 10.17 Administrative Services Agreement among the Company, XL Vision, Inc. and Safeguard Scientifics, Inc., dated as of March 21, 1997.** 10.18 Direct Charge Administrative Services Agreement between the Company and XL Vision, Inc., dated as of March 21, 1997.** 10.19 Lease Agreement between CEO/Executive Suites, Inc. and XL Vision, Inc., dated as of March 7, 1996.** 10.20 Subscription Agreement between the Company and Safeguard Scientifics, Inc., dated as of December 31, 1996.** 10.21 Contribution Agreement between the Company and XL Vision, Inc., dated as of May 13, 1996.** 10.22 Collaboration Agreement between the Company, XL Vision, Inc. and Centocor, Inc., as amended, as of February 25, 1997.** 10.23 Lease Agreement between Blue Family Trust, Lingo Family Trust and the Company, dated January 13, 1997.** 11.1 Statement Regarding Computation of Earnings Per Share.** 21.1 Subsidiaries of the Registrant.** 23.1 Consent of KPMG Peat Marwick LLP.* 23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).** 23.3 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 8.1).* 24.1 Power of Attorney (included on signature page).** 27.1 Financial Data Schedule.**
- ------------------------ * Filed herewith. ** Previously filed. (B) FINANCIAL STATEMENT SCHEDULES All information for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission is either included in the financial statements or is not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate II-3 offering price set forth in "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; and (iv) To reflect the results of the Offering. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the registrant pursuant to provisions described in Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes (1) to provide to the underwriters at the closing specified in the standby underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser; (2) that for purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective; and (3) that for the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by the underwriters during the subscription period, the amount of unsubscribed securities to be purchased by the underwriters, and the terms of any subsequent reoffering thereof. If any public offering by the underwriters is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment no. 4 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in San Juan Capistrano, California on July 1, 1997. CHROMAVISION MEDICAL SYSTEMS, INC. BY: /S/ DOUGLAS S. HARRINGTON ----------------------------------------- Douglas S. Harrington CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this amendment no. 4 to the registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURES TITLE(S) DATE - ------------------------------ --------------------------- ------------------- /s/ DOUGLAS S. HARRINGTON Chief Executive Officer and - ------------------------------ Director (Principal July 1, 1997 Douglas S. Harrington Executive Officer) Vice President and Chief /s/ KEVIN O'BOYLE Financial Officer - ------------------------------ (Principal Financial and July 1, 1997 Kevin O'Boyle Accounting Officer) * Chairman of the Board of - ------------------------------ Directors July 1, 1997 John S. Scott * Director - ------------------------------ July 1, 1997 Christopher Moller * Director - ------------------------------ July 1, 1997 Richard Morgan * Director - ------------------------------ July 1, 1997 Charles A. Root * By: /s/ DOUGLAS S. HARRINGTON - -------------------------------------- Douglas S. Harrington as Attorney-in-Fact II-5 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE NO. - ----------------- --------------------------------------------------------------------------------------- ------------- 1.1 Form of Standby Underwriting Agreement.* 3.1 Certificate of Incorporation of the Company (as amended).** 3.2 By-laws of the Company, as amended.** 5.1 Opinion of Morgan, Lewis & Bockius LLP.** 8.1 Opinion of Morgan, Lewis & Bockius LLP regarding tax matters.* 10.1 ChromaVision Medical Systems, Inc. 1996 Equity Compensation Plan.** 10.2 Stock Option Grant Letter (Dr. Douglas S. Harrington).** 10.3 Stock Option Grant Letter (Kevin C. O'Boyle).** 10.4 Stock Option Grant Letter (Michael G. Schneider).** 10.5 Stock Option Grant Letter (Kenneth S. Garber).** 10.6 Employment Agreement between Dr. Douglas S. Harrington and the Company, as of December 30, 1996.** 10.7 Employment Agreement between Kenneth S. Garber and the Company, dated February 15, 1996.** 10.8 Employment Agreement between Kevin C. O'Boyle and the Company, dated November 27, 1996.** 10.9 Separation Agreement between Michael S. Shiff and the Company, dated December 27, 1996.** 10.10 Stock Purchase Agreement between the Company and the Series A Preferred Stockholders, dated as of June 6, 1996.** 10.11 Registration Rights Agreement between the Company and the Series A Preferred Stockholders, dated as of June 6, 1996.** 10.12 Stockholders' Agreement between the Company and the Series A Preferred Stockholders, dated as of June 6, 1996.** 10.13 Loan Agreement between the Company and the Barnett Bank, N.A., dated December 24, 1996.** 10.14 Unconditional and Unlimited Guaranty Agreement between Safeguard Scientifics, Inc. and Barnett Bank, N.A., dated December 24, 1996.** 10.15 Promissory Note by the Company to Barnett Banks, N.A., dated December 24, 1996.** 10.16 Tax Indemnity Agreement between the Company and Barnett Bank, N.A., dated December 24, 1996.** 10.17 Administrative Services Agreement among the Company, XL Vision, Inc. and Safeguard Scientifics, Inc. dated as of March 31, 1997.** 10.18 Direct Charge Administrative Services Agreement between the Company and XL Vision, Inc., dated as of March 31, 1997.** 10.19 Lease Agreement between CEO/Executive Suites, Inc. and XL Vision, Inc., dated as of March 7, 1996.** 10.20 Subscription Agreement between the Company and Safeguard Scientifics, Inc., dated as of December 31, 1996.** 10.21 Contribution Agreement between the Company and XL Vision, Inc., dated as of May 13, 1996.** 10.22 Collaboration Agreement between the Company, XL Vision, Inc. and Centocor, Inc., as amended, as of February 25, 1997.** 10.23 Lease Agreement between Blue Family Trust, Lingo Family Trust and the Company, dated January 13, 1997.** 11.1 Statement Regarding Computation of Earnings Per Share.** 21.1 Subsidiaries of the Registrant.** 23.1 Consent of KPMG Peat Marwick LLP.* 23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).** 23.3 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 8.1).* 24.1 Power of Attorney (included on signature page).** 27.1 Financial Data Schedule.**
- ------------------------ * Filed herewith. ** Previously filed. EX-1.1 2 EX-1.1 DRAFT 062797 EXHIBIT 1.1 CHROMAVISION MEDICAL SYSTEMS, INC. 6,720,000 Shares of Common Stock (Par Value $.01 Per Share) Standby Underwriting Agreement _________ ___, 1997 Robert W. Baird & Co. Incorporated 777 East Wisconsin Avenue Milwaukee, Wisconsin 53202-5391 Adams, Harkness & Hill, Inc. 60 State Street Boston, Massachusetts 02109 Ladies and Gentlemen: ChromaVision Medical Systems, Inc., a Delaware corporation (the "Company"), Safeguard Scientifics (Delaware), Inc., a Delaware corporation ("Safeguard (DE)"), XL Vision, Inc., a Delaware corporation ("XL Vision"), Technology Leaders, L.P., a Delaware limited partnership ("TL"), Technology Leaders Offshore, C.V., a Netherlands Antilles limited partnership ("TL CV" and, together with TL, "Technology Leaders I"), Technology Leaders II, L.P., a Delaware limited partnership ("TL II"), Technology Leaders II Offshore, C.V., a Netherlands Antilles limited partnership ("TL II CV" and, together with TL II, "Technology Leaders II"), and Safeguard Scientifics, Inc., a Pennsylvania corporation ("SSI" and, together with Safeguard (DE), "Safeguard" and, together with Safeguard (DE), XL Vision, Technology Leaders I and Technology Leaders II, the "Selling Stockholders"), hereby confirm their respective agreements with you with respect to: (i) the proposed distribution by the Company to the Safeguard Shareholders of up to an aggregate of 6,400,000 rights (the "Rights") (which represent 6,020,000 shares of the Company's common stock, par value $.01 per share (the "Common Stock"), to be sold by the Company upon the exercise of 6,020,000 of such Rights and an aggregate of 380,000 shares of Common Stock being sold by the Selling Stockholders upon exercise of 380,000 Rights with 207,252, 86,602, 44,460 and 41,686 shares of Common Stock being sold by Safeguard, XL Vision, Technology Leaders II and Technology Leaders I, respectively), with (A) each Right entitling the holder thereof to purchase at any time prior to the Expiration Date, at a subscription price of $5.00 per share, one share of Common Stock of the Company, and (B) Rights being distributed on the basis of one Right for each five shares of Safeguard Stock held (with the holder of a number of shares of Safeguard Stock not evenly divisible by five entitled to receive the next higher whole number of Rights); (ii) the proposed sale of all Unsubscribed Shares by the Company and the Selling Stockholders, acting severally and not jointly, with: (A) the Other Purchasers Standby Shares being deemed to be Company Unsubscribed Shares to be sold pursuant to the Other Purchasers Standby Purchase Agreements; and (B) all Excess Unsubscribed Shares to be sold to and purchased by the Underwriters, severally and not jointly, in accordance with the terms and conditions of this Agreement; and (iii) the proposed sale by the Company to the Other Purchasers of the Undistributed Shares; and (iv) the grant by the Selling Stockholders to the Underwriters of an option described in Section 3(b) hereof to purchase additional shares of Common Stock for the purpose of covering over-allotments, if any. The parties acknowledge that concurrently with the Offering of the Rights, the Selling Stockholders intend to offer and sell to the Direct Purchasers the Direct Shares for purchase at a subscription price of $5.00 per share. The parties also acknowledge that, except as set forth in Section 7, the Direct Shares shall not be deemed to be Shares for purposes of this Agreement and are not otherwise a part of this Agreement. -2- 1. Certain Definitions. The following terms shall, when used in this agreement, have the following meanings: "Act" means the Securities Act of 1933, as amended. "Adverse Claim" means the term as used in Section 8-302 of the Delaware Uniform Commercial Code. "Application" means the application described in Section 9(a)(i)(B) hereof. "Associated Person Lock-Ups" means the agreements, acceptable in form and substance to the Underwriters, pursuant to which each of the Company's officers, directors and principal stockholders listed in Schedule A attached hereto has agreed not to, without the prior written consent of the Underwriters, transfer, sell, offer for sale, contract to sell or otherwise dispose of any shares of Common Stock or any securities exercisable or exchangeable for or convertible into shares of Common Stock owned by such person or with respect to which such person has the power of disposition during a period commencing on the date the Registration Statement is declared effective by the Commission and ending 180 days following the Expiration Date, except as otherwise permitted in the Associated Person Lock-Ups. "Bona Fide Purchaser" means the term as defined in Section 8-302 of the Delaware Uniform Commercial Code. "Closing" means 10:00 a.m., New York City time on the sixth business day after the Expiration Date (or the first business day thereafter), or at such other time on the same or such other date, not later than ________, 1997, as shall be agreed to by the Selling Stockholders, the Company and the Underwriters. "Closing Date" means the time and date of payment for and delivery of the Excess Unsubscribed Shares. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission. "Common Stock" means the shares of Common Stock, par value $.01 per share, of the Company. "Company Unsubscribed Shares" means the shares of Common Stock which had been offered by the Company pursuant to the Rights but which were not acquired through the exercise of Rights on or prior to the Expiration Date (after taking into account the agreement of the Company and the Selling Stockholders that the 560,000 shares of Common Stock that are expected to be sold to Warren V. Musser upon exercise of the Musser Rights shall be deemed to be sold by the Company). -3- "Controlling Person" means a person who controls the Underwriters, the Company or the Selling Stockholders within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act. "Direct Purchasers" means the certain persons selected by the Company to whom the Direct Shares are being offered. "Direct Shares" means the 320,000 shares of Common Stock offered to the Direct Purchasers. "Disagreement" means the term as used in Item 304 of Regulation S-K of the Rules and Regulations. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Escrow Agent" means the escrow agent named in the Rights Agent Agreement. "Excess Unsubscribed Shares" means all of the Unsubscribed Shares other than the Other Purchasers Standby Shares. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exercise Price" means the subscription price of $5.00 per share. "Expiration Date" means 5:00 p.m., New York City time, on ____________, 1997 or such later date as may be agreed upon by the Underwriters and the Company. "Intellectual Property" means all patents, trademarks, service marks, trade names, copyrights, inventions, trade secrets, proprietary techniques, including, without limitation, all software service codes, processes and substances, technology and know-how necessary to conduct (or used to conduct) the business now operated or proposed to be operated by the Company as described in the Prospectus. "Investment Company Act" means the Investment Company Act of 1940, as amended. "KPMG" means KPMG Peat Marwick, LLP. "Material Adverse Effect" means a material adverse effect on the condition, financial or otherwise, or on the earnings, business affairs, financial position, value, operations, properties, results of operation or business of the Company. "Musser Group" means Warren V. Musser and/or his assignees. -4- "Musser Lock-Up" means the agreement of the Musser Group not to, without the prior written consent of the Underwriters, transfer, sell, offer for sale, contract to sell or otherwise dispose of any shares of Common Stock acquired by the Musser Group upon exercise of the Musser Rights or any securities exercisable or exchangeable for or convertible into Common Stock (including the Musser Rights) owned on the date hereof or acquired through the rights offering or with respect to which the Musser Group has the power of disposition during a period commencing on the date the Registration Statement is declared effective and ending 180 days after the Expiration Date; provided, however, that the Musser Group may transfer, sell, offer for sale, contract to sell or otherwise dispose of up to 280,000 shares of Common Stock without the prior written consent of the Underwriters so long as the Musser Group notifies the Underwriters of any such transaction at least one business day before such transfer, sale, offer or disposition. "Musser Rights" means all Rights granted to the Musser Group as a shareholder of Safeguard. "NASD" means the National Association of Securities Dealers, Inc. "Offering" means the public offering of the Excess Unsubscribed Shares as set forth in the Prospectus; provided that the Offering shall also include the Other Purchasers Standby Shares purchased by the Underwriters, if any. "Option Closing Date" means the time of delivery of any of the Option Shares." "Option Shares" means any and all shares of Common Stock to be purchased by the Underwriters pursuant to the option described in Section 3(b) of this Agreement. "Other Purchasers" means certain persons selected by the Company. "Other Purchasers Standby Purchase Agreement" means the agreements between the Company and the Other Purchasers to be entered into after the date hereof and obligating the Other Purchasers to purchase from the Company up to 300,000 Other Purchasers Standby Shares on the Closing Date at a price of $5.00 per share. "Other Purchasers Standby Shares" means that number of Unsubscribed Shares purchased by the Other Purchasers pursuant to the Other Purchasers Standby Purchase Agreement. "Preliminary Prospectus" means each prospectus subject to completion filed with the Registration Statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time of the Registration Statement was or is declared effective). "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act, or, if no prospectus is required to be filed pursuant to said Rule 424(b), -5- the prospectus included in the Registration Statement. For purposes of Sections 2 and 8(d)(v) hereof, all references to the "Prospectus" are deemed to include, in the alternative, the most recent Preliminary Prospectus if the Prospectus is not in existence. "Provided Information" means the statements made in the second paragraph preceding the stabilization legend on the inside of the front cover page, the stabilization legend on the inside of the front cover page and the third and sixth paragraph under the heading "UNDERWRITING" in the Prospectus (and the same paragraphs and stabilization legend in any Preliminary Prospectus). "Registration Statement" means the registration statement described in Section 2(a)(i) hereof. "Reportable Event" means the term as used in Item 304 of Regulation S-K of the Rules and Regulations. "Rights Agent" means ChaseMellon Shareholder Services, L.L.C. "Rights Agent Agreement" means the agreement in the form previously approved by the Underwriters, dated the date hereof, by and among the Company, the Escrow Agent and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. "Rules and Regulations" means the rules and regulations adopted by the Commission under either the Act or the Exchange Act. "Safeguard Shareholders" means the holders of record of Safeguard Stock as of __________, 1997. "Safeguard Stock" means the common shares, $.10 par value per share, of Safeguard. "Selling Stockholders Unsubscribed Shares" means the shares of Common Stock which had been offered by the Selling Stockholders pursuant to the Rights but which were not acquired through exercise of the Rights on or prior to the Expiration Date (after taking into account the agreement of the Company and the Selling Stockholders that the 560,000 shares of Common Stock that are expected to be sold to Warren V. Musser upon exercise of the Musser Rights shall be deemed to be sold by the Company). "Shares" means the Option Shares, the Excess Unsubscribed Shares to be purchased by the Underwriters and the Other Purchasers Standby Shares purchased by the Underwriters, if any, pursuant to Section 3. "Significant Subsidiary" means the term as defined in Rule 405 of the Rules and Regulations. -6- "Transfer Agent and Registrar" means the transfer agent and registrar described in Section 6(a)(ix) hereof. "Underwriters" means Robert W. Baird & Co. Incorporated and Adams, Harkness & Hill, Inc. "Underwriters' Counsel" means Drinker Biddle & Reath LLP. "Undistributed Shares" means 6,400,000 shares of Common Stock less those shares of Common Stock that had been offered by the Company and the Selling Stockholders pursuant to the Rights if Rights to purchase fewer than 6,400,000 shares of Common Stock are granted to holders of the Safeguard Stock. "Unsubscribed Shares" means the Selling Stockholders Unsubscribed Shares, the Company Unsubscribed Shares and the Undistributed Shares. 2. Representations and Warranties of the Company and the Selling Stockholders. (a) The Company represents and warrants to, and agrees with, the Underwriters as follows: (i) The Company has filed with the Commission a registration statement on Form S-1 (No. 333-26129), including a prospectus subject to completion, for the registration of the Rights, the shares of Common Stock subject to the Rights, the Direct Shares and the Option Shares under the Act, and have filed with the Commission one or more amendments thereto. After the execution of this Agreement, the Company will file with the Commission either (A) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act as of the time of effectiveness of this Agreement, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have been provided to and approved by the Underwriters prior to the execution of this Agreement, or (B) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act as of the time of effectiveness of this Agreement, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Underwriters prior to the execution of this Agreement; (ii) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or any part thereof and, to the best knowledge of the Company, no proceedings for a stop order have been instituted or are pending or threatened. When any Preliminary Prospectus was filed with the Commission, it contained all statements required to be stated therein in accordance with, -7- and complied in all material respects with the requirements of, the Act and the Rules and Regulations except to the extent that such Preliminary Prospectus did not contain any such required statements, or did not so comply, in a manner corrected in the Prospectus. When the Registration Statement or any amendment thereto was (or is) declared effective, it (A) contained (or will contain) all statements required to be stated therein in accordance with, and complied in all material respects (or will comply in all material respects) with the requirements of, the Act and the Rules and Regulations and (B) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any amendment or supplement thereto is filed pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Closing Date and any Option Closing Date, the Prospectus, as amended or supplemented at any such time, (A) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the Rules and Regulations and (B) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (ii) do not apply to the Provided Information; (iii) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, is duly qualified to transact business and is in good standing as foreign corporations in each jurisdiction in which its ownership or leasing of any properties or the character or conduct of its operations requires such qualification, except where failures to be so qualified, individually or in the aggregate, would not result in a Material Adverse Effect. The Company does not own any stock of or other equity in, or otherwise control directly or indirectly, any corporation, firm, partnership, trust, joint venture or other business entity, except as disclosed in the Prospectus. The Company does not own capital stock in any other corporation; (iv) The Company has all requisite power and authority (corporate and other), and has obtained and currently maintains in full force and effect and is operating in compliance with any and all authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including those having jurisdiction over environmental or similar matters) necessary or required to own or lease its properties and conduct its business as described in the Registration Statement, the Prospectus and any amendment or supplement thereto, except where the failure to so maintain or operate would not result in a Material Adverse Effect. The Company is and has been doing business in compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all federal, state, local and foreign laws, rules and regulations (including without limitation -8- those relating to employment matters and the payment of taxes) except as disclosed in the Prospectus and except where failures to be in compliance, individually or in the aggregate, would not result in a Material Adverse Effect. The Company has not received any notice or notices of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise or permit that if the subject of unfavorable decisions, rulings or findings, would, individually or in the aggregate, result in a Material Adverse Effect; (v) The Company has duly executed and delivered the Rights Agent Agreement. The shares of Common Stock to be sold by the Company and the Selling Stockholders hereunder and upon the exercise of the Rights are subject to the rights and interests of the Underwriters and the Rights Agent hereunder and under the Rights Agent Agreement. Except to the extent otherwise provided therein, the arrangements for custody or reservation and delivery of the certificates for such shares, made by the Company hereunder and under the Rights Agent Agreement, are irrevocable, and are not subject to termination by any acts of the Company, the Selling Stockholders or by operation of law; (vi) The Company has all requisite power and authority (corporate and other) to enter into this Agreement, the Other Purchasers Standby Purchase Agreements and the Rights Agent Agreement, and to consummate the transactions provided for herein and therein; and this Agreement, the Other Purchasers Standby Purchase Agreements and the Rights Agent Agreement have each been duly authorized by the Company. Each of this Agreement and the Rights Agent Agreement have been and the Other Purchasers Standby Purchase Agreements will be prior to the Closing Date duly executed and delivered by the Company. Each of this Agreement and the Rights Agent Agreement constitutes and the Other Purchasers Standby Purchase Agreements will constitute prior to the Closing Date, assuming due authorization, execution and delivery by the other parties to such agreements, the legal, valid and binding obligation of the Company enforceable against the Company in accordance with their respective terms, subject to the effect of general principles of equity (including standards of materiality, good faith, fair dealing and reasonableness) whether applied by a court of law or equity, and except as rights to indemnity and contribution hereunder may be limited by applicable law, statutory duties or public policy. The Company's execution and delivery of this Agreement, the Other Purchasers Standby Purchase Agreements and the Rights Agent Agreement, its performance of its obligations hereunder and thereunder, the consummation of the transactions contemplated hereby and thereby by it, and its conduct of its business as described in the Registration Statement, the Prospectus and any amendment or supplement thereto, will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any material liens, charges, claims, encumbrances, pledges, security interests, defects or other like restrictions or material equities of any kind whatsoever upon, any right, property or assets (tangible or intangible) of the Company pursuant to the terms of (A) the Certificate of Incorporation or bylaws, each as amended -9- to date, of the Company, (B) any lease, license, permit, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement (including any related to indebtedness) or any other agreement or instrument to which the Company is a party or by which the Company is or may be bound or to which any of its properties or assets (tangible or intangible) is or may be subject, except to the extent that any such conflict, breach, violation or default, individually or in the aggregate, does not and would not result in a Material Adverse Effect and does not and would not interfere with the Offering or (C) any statute, judgment, decree, order, rule or regulation applicable to the Company or any of its activities or properties adopted or issued by an arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or any of its activities or properties (other than such as may be required under state securities or "Blue Sky" laws and such as may be required by the by-laws and rules of the NASD in connection with the purchase and distribution of the Shares by the Underwriters); (vii) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required in connection with the offer, issuance and sale of the shares of Common Stock to be sold by the Company hereunder or upon exercise of the Rights, the Company's performance of its obligations hereunder, or the consummation by the Company of the other transactions contemplated hereby, except (A) such as may be required under the state securities or "Blue Sky" laws of any jurisdiction or as may be required by the by-laws and rules of the NASD in connection with the purchase and distribution of the Shares by the Underwriters, (B) any filing of the Prospectus pursuant to Rule 424(b) or 430A of the Rules and Regulations and, if the Registration Statement has not been declared effective, an order of the Commission declaring the Registration Statement effective under the Act, and (C) such other approvals as have been obtained and remain in full force and effect; (viii) The authorized, issued and outstanding capital stock of the Company is set forth, and conforms to the description thereof contained, in the Registration Statement, the Prospectus, and any amendment or supplement thereto. All of the issued shares of capital stock of the Company, including the shares to be sold by the Selling Stockholders, have been duly authorized and validly issued, and are fully paid and nonassessable; the holders thereof have no rights of rescission against the Company with respect thereto and are not subject to personal liabilities solely by reason of being such holders (except to the extent that as a result of acquiring a substantial number of shares of Common Stock a holder may be subject to claims of personal liability as an affiliate or control person of the Company, as to which no representation is made hereby); and none of such shares have been issued in violation of the preemptive rights of any security holders of the Company arising as a matter of law or under or pursuant to the Company's Certificate of Incorporation, as amended, the Company's By-Laws, as amended, or any agreement or instrument to which the Company is a party or by which it is bound. The shares of Common Stock offered by the Company and to be sold upon -10- the exercise of the Rights or pursuant to this Agreement and the Other Purchasers Standby Purchase Agreements have been duly authorized and at the Closing Date, after payment therefor in accordance herewith or in accordance with the terms and conditions of the Rights (as the case may be), will be validly issued, fully paid and nonassessable and not subject to any Adverse Claim, with no personal liability attaching to the holder solely as a result of the ownership thereof (except to the extent that as a result of acquiring a substantial number of shares of Common Stock a holder may be subject to claims of personal liability as an affiliate or control person of the Company, as to which no representation is made hereby). Upon the issuance and delivery pursuant to this Agreement and the Rights Agent Agreement of the Shares to be sold by the Company, assuming that each of the Underwriters is a Bona Fide Purchaser, the Underwriters will acquire good and marketable title to the Shares free and clear of any liens, charges, claims, preemptive rights, encumbrances, pledges, security interests, defects or other like restrictions or like material equity of any kind whatsoever. The shares of Common Stock offered by the Company and to be sold upon the exercise of the Rights or pursuant to this Agreement or the Other Purchasers Standby Purchase Agreements will conform to the description thereof contained in the Prospectus. There are no preemptive or other rights to subscribe for or to purchase nor any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company's Certificate of Incorporation or By-Laws, as each amended to date, or pursuant to any agreement among stockholders to which the Company is a party, by which it is bound or of which it has knowledge, and the Shares to be sold by the Company are not otherwise subject to any preemptive or other similar rights of any security holder. The Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement and as described in the Prospectus. Except as described in the Prospectus with respect to Common Stock that may be registered by the Company in a registration statement on Form S-8, no holder of any securities of the Company has the right to include any securities issued by the Company in the Registration Statement or any registration statement to be filed by the Company during a period commencing on the date the Registration Statement is declared effective by the Commission and ending 180 days following the Expiration Date or to require the Company to file a registration statement under the Act during such period. All of the (i) Rights and (ii) outstanding shares of Common Stock and all of the shares of Common Stock to be issued by the Company as contemplated herein have been approved for quotation upon notice of issuance on the Nasdaq National Market of the Nasdaq Stock Market; (ix) The financial statements and schedules of the Company included in the Registration Statement, the Prospectus and any amendment or supplement thereto fairly present the financial position and results of operations of the Company as of the dates and for the periods therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles as in effect in the United States and as consistently applied throughout the periods involved and in accordance with the Rules and Regulations. The selected financial data set forth under -11- the caption "SELECTED FINANCIAL DATA" in the Prospectus fairly present, on the basis stated therein, the information included therein. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with management's general or specific authorizations; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company's internal accounting controls are designed to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended. KPMG, whose reports are filed with the Commission as a part of the Registration Statement, are independent auditors as required by the Act and the Rules and Regulations. Since April 1, 1993, KPMG has been the only public accountants engaged by the Company, and the Company has not had any Disagreement with KPMG, and has not experienced any Reportable Event since that date; (x) The Company has filed all federal, state, local and foreign tax returns that are required to be filed by it or has duly requested extensions thereof, except in any case in which the failure so to file, individually or in the aggregate, would not have a Material Adverse Effect. The Company has paid all taxes required to be paid by it and all other assessments, fines or penalties, if any, levied against it, to the extent that any of the foregoing are due and payable, except for (A) any such assessment, fine or penalty that is currently being contested in good faith or (B) any case in which the failure so to pay, individually or in the aggregate, would not have a Material Adverse Effect; (xi) No transfer tax, stamp duty or other similar tax is payable by or on behalf of the Underwriters in connection with the issuance by the Company, or the purchase by the Underwriters, of the Shares to be sold by the Company or any resales of such Shares by the Underwriters; (xii) The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus to be owned or leased by it, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other like restrictions or like equities of any kind whatsoever, other than (A) liens for taxes not yet due and payable, (B) liens as described or referred to in the Prospectus, and (C) liens that are not material in amount in relation to the business of the Company and which do not interfere with the Offering; (xiii) Except as disclosed in the Prospectus, the Company owns or possesses adequate licenses or other rights, in each case free of fees, charges or royalties payable after the date hereof, to use the Intellectual Property, except where the lack thereof would not result in a Material Adverse Effect. Except as disclosed in the -12- Prospectus, the Company has not received any notice of infringement of or conflict with (and does not know of any such infringement of or conflict with) rights or claims of others with respect to the Intellectual Property, any of the activities engaged in, or proposed to be engaged in, by the Company or any challenge to the ownership or right of the Company with respect to the Intellectual Property which could result in a Material Adverse Effect or which could have a material adverse effect on the development, marketing or sale of any of the Company's existing or contemplated products, services or processes as described in the Prospectus. None of the products, services or processes of the Company referred to in such Prospectus and relating to the business of the Company now operated or proposed to be operated by it as described in such Prospectus infringes or conflicts with any right or patent, or with any discovery, invention, product or process which is the subject of any patent application known to the Company, in a manner which would result in a Material Adverse Effect; (xiv) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which they are engaged, and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not result in a Material Adverse Effect; (xv) The Company is not in breach of, or in default under, any term, covenant or provision of any license, permit, contract, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which it is a party or by which it may be bound or to which any of its property or assets (tangible or intangible) is subject or affected, except as disclosed in the Registration Statement and Prospectus and except as to defaults that (A) individually or in the aggregate would not have a Material Adverse Effect and (B) would not interfere with the Offering. The Company is not in violation of any term or provision of its charter or bylaws, each as amended to date; (xvi) Other than as disclosed in the Prospectus, there is not pending or, to the Company's knowledge, threatened against the Company or involving the properties or business of the Company (or, to the Company's knowledge, any circumstance that may give rise to the same), any action, suit, proceeding, investigation, litigation or governmental proceeding (including those having jurisdiction over environmental or similar matters), domestic or foreign, that (A) is required to be disclosed in the Registration Statement and is not so disclosed, (B) questions the validity of the capital stock of the Company or the validity or enforceability of this Agreement, (C) questions the validity of any action taken or to be taken by the Company pursuant to or in connection with this Agreement, or (D) could materially adversely affect the -13- present or prospective ability of the Company to perform its obligations under this Agreement or result in a Material Adverse Effect. Any such proceedings summarized in the Prospectus are accurately summarized in all material respects; (xvii) Subsequent to the respective dates as of which information is set forth in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company has not (A) issued any securities other than the Rights, the shares of Common Stock to be sold by the Company upon the exercise of the Rights, the Shares to be sold by the Company pursuant to this Agreement and shares of Common Stock issuable upon the exercise of stock options disclosed in the Prospectus as outstanding as of the date hereof, (B) incurred any liability or obligation, direct or contingent, for borrowed money, (C) entered into any transaction other than in the ordinary course of business, (D) declared or paid any dividend or made any other distribution on or in respect of its capital stock, or (E) entered into any transactions with any affiliate, including, without limitation, the Selling Stockholders or their respective affiliates; (xviii) The Company has satisfactory employer-employee relationships with its employees. No labor or other dispute with the employees of the Company exists, or, to the best knowledge of the Company, is imminent; (xix) Except as disclosed in the Registration Statement or the Prospectus, each employee benefit plan, within the meaning of Section 3(3) of ERISA that is maintained, administered or contributed to by the Company or any of its affiliates for employees or former employees of the Company and its affiliates has been maintained in compliance with its terms and the requirements of any applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Code; no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code has occurred with respect to any such plan excluding transactions effected pursuant to a statutory or administrative exemption; and for each such plan which is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA no "accumulated funding deficiency" as defined in Section 412 of the Code has been incurred, whether or not waived, and the fair market value of the assets of each such plan (excluding for these purposes accrued but unpaid contributions) exceeded the present value of all benefits accrued under such plan determined using reasonable actuarial assumptions; (xx) The minutes books of the Company made available to Underwriters' Counsel, (A) contain minutes and consents from all meetings and actions of the Company's stockholders, board of directors, and the committees of such board since the respective dates of organization of the Company and (B) reflect all transactions referred to in such minutes accurately in all material respects; (xxi) All agreements filed as exhibits to the Registration Statement to which the Company is a party or by which the Company may be bound or to which any -14- of its assets, properties or businesses may be subject have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding agreements of the Company, enforceable in accordance with their respective terms, subject in each case to the effect of general principles of equity (including standards of materiality, good faith, fair dealing and reasonableness) whether applied by a court of law or equity and except as rights to indemnity and contribution under this Agreement may be limited by applicable law, statutory duties or public policy. The descriptions in the Registration Statement, the Prospectus and any amendment or supplement thereto of agreements, whether written or oral, and of other documents are accurate and fairly present the information required to be shown with respect thereto by Form S-1 under the Act. There are no agreements, whether written or oral, or other documents that are required by the Act or the Rules and Regulations to be described in the Registration Statement or filed as exhibits to the Registration Statement that are not described or filed as required; (xxii) Neither the Company nor any of its officers, directors, or affiliates (within the meaning of the Rules and Regulations) has taken or will take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock or the Rights in violation of Regulation M under the Exchange Act; (xxiii) There are no claims, payments, issuances, arrangements or understandings for services in the nature of a finder's, advisory or origination fee or otherwise, either with respect to the sale of the shares of Common Stock to be sold by the Company upon exercise of the Rights, the sale of the Shares hereunder or with respect to the proceeds received by the Company from such sales. Other than as reflected in this Agreement, there are no other arrangements, agreements, understandings, payments or issuances with respect to the Company or, to the Company's knowledge, any of its officers, directors, or affiliates that may constitute "underwriter's compensation," as determined by the NASD; (xxiv) The Company has delivered or caused to be delivered to the Underwriters the Associated Person Lock-Ups; (xxv) All of the Rights have been duly authorized, and, when issued and distributed as set forth in the Prospectus, will be legally issued and valid and binding obligations of the Company having the rights summarized in the Prospectus; and none of such Rights will have been issued in violation of the preemptive rights of any security holders of the Company arising as a matter of law or under or pursuant to the Company's Certificate of Incorporation, as amended, the Company's By-Laws, as amended, or any agreement or instrument to which the Company is a party or by which it is bound. -15- (xxvi) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, business, prospects, management, financial position, stockholders' equity or results of operations of the Company otherwise than as set forth or contemplated in the Prospectus; (xxvii) No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company, Safeguard or XL Vision, on the other hand, which is required by the Act to be described in the Registration Statement and the Prospectus which is not so described; (xxviii) The Company is not and, after giving effect to the Offering, will not be an "investment company" or entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act; and (xxix) The Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida), relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba; (b) Each Selling Stockholder severally represents and warrants to, and agrees with, the Underwriters as follows: (i) The Selling Stockholder has delivered certificates in negotiable form for the shares of Common Stock to be sold by it upon the exercise of the Rights and pursuant to this Agreement to the Company to be placed in custody for delivery pursuant to the terms of the Rights Agent Agreement and this Agreement. The shares represented by the certificates so held in custody for the Selling Stockholder are subject to the interests hereunder of the Underwriters, the Company and the Rights Agent under the Rights Agent Agreement. The arrangements for custody and delivery of such certificates are, to the extent provided hereunder, irrevocable, and are not subject to termination by any acts of the Selling Stockholder, or by operation of law; (ii) The Selling Stockholder has the legal right and power to enter into this Agreement and to sell, transfer and deliver the Shares proposed to be sold by it hereunder and the shares of Common Stock to be sold by it upon the exercise of the Rights. This Agreement has been duly authorized, executed and delivered by the Selling Stockholder and, assuming due authorization, execution and delivery by the other respective parties hereto, constitutes the legal, valid and binding obligation of the Selling Stockholder enforceable against the Selling Stockholder in accordance with its terms, subject to the effect of general principles of equity (including standards of materiality, good faith, fair dealing and reasonableness) whether applied by a court of law or equity, -16- and except as rights of indemnity and contribution hereunder may be limited by applicable law, statutory duties or public policy; (iii) The execution and delivery of this Agreement and the performance by the Selling Stockholder of its obligations hereunder will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under (A) any charter documents, including articles or certificates of incorporation, partnership agreements or by-laws, of the Selling Stockholder, as amended to date, (B) any lease, permit, license, contract, indenture, mortgage, deed of trust, voting trust agreement, shareholders agreement, note, loan or credit agreement or any other agreement or instrument to which the Selling Stockholder is a party or by which it is or may be bound or to which any of its properties or assets (tangible or intangible) is or may be subject, or any indebtedness, except to the extent that any such conflict, breach, violation or default, individually or in the aggregate, does not and would not result in a material adverse effect on the condition, financial or otherwise, or on the earnings, business affairs, financial position, prospects, value, operation, properties, results of operation or business of the Selling Stockholder and does not and would not interfere with the Offering or (C) any statute, judgment, decree, order, rule or regulation applicable to the Selling Stockholder or any of its activities or properties adopted or issued by any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Selling Stockholder or any of its activities or properties. No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required for the consummation by the Selling Stockholder of the transactions contemplated herein, except (A) such as may be required under the state securities or "Blue Sky" laws of any jurisdiction or as may be required by the by-laws of the NASD in connection with the purchase and distribution of the Shares by the Underwriters, (B) any filing of the Prospectus pursuant to Rule 424(b) or 430A of the Rules and Regulations and, if the Registration Statement has not been declared effective, an order of the Commission declaring the Registration Statement effective under the Act, and (C) such other approvals as have been obtained and remain in full force and effect; (iv) The Selling Stockholder has, and on the Closing Date will have, good and marketable title to the Shares proposed to be sold by the Selling Stockholder hereunder and the shares of Common Stock to be sold upon the exercise of the Rights, and none of such shares will be subject to any Adverse Claim. Upon delivery of and payment for the Shares to be sold by the Selling Stockholder hereunder, assuming that each of the Underwriters is a Bona Fide Purchaser, the Underwriters will acquire good and marketable title thereto free and clear of any liens, charges, claims, preemptive rights, encumbrances, pledges, security interests, voting trusts, defects or other like restrictions or other like material equity of any kind whatsoever; -17- (v) To the best knowledge of the Selling Stockholder, the Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or any part thereof and, to the best knowledge of the Selling Stockholder, no proceedings for a stop order have been instituted or are pending or threatened. When any Preliminary Prospectus was filed with the Commission, it contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the Rules and Regulations except to the extent that such Preliminary Prospectus did not contain any such required statements, or did not so comply, in a manner corrected in the Prospectus. To the best knowledge of the Selling Stockholder, when the Registration Statement (or any amendment thereto) was (or is) declared effective, it (A) contained (or will contain) all statements required to be stated therein in accordance with, and complied in all material respects (or will comply in all material respects) with the requirements of, the Act and the Rules and Regulations and (B) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. To the best knowledge of the Selling Stockholder, when the Prospectus or any amendment or supplement thereto is filed pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Closing Date and any Option Closing Date, the Prospectus, as amended or supplemented at any such time, (A) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the Rules and Regulations and (B) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (v) do not apply to the Provided Information; (vi) To the best knowledge of the Selling Stockholder, the descriptions in the Registration Statement, the Prospectus and any amendment or supplement thereto of agreements, whether written or oral, and of other documents are accurate and fairly present the information required to be shown with respect thereto by Form S-1 under the Act. To the best knowledge of the Selling Stockholder, there are no agreements, whether written or oral, or other documents that are required by the Act or the Rules and Regulations to be described in the Registration Statement or filed as exhibits to the Registration Statement that are not described or filed as required; (vii) Neither the Selling Stockholder nor any of its officers, directors, or affiliates (within the meaning of the Rules and Regulations) has (a) made or caused to be effected any transaction, directly or indirectly, designed to or that has constituted or that might reasonably be expected to cause or result in stabilization of the price of the Common Stock or the Rights, (b) taken or will take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result -18- in manipulation of the price of the Common Stock or the Rights in violation of Regulation M under the Exchange Act, or (c) failed to comply with the Act or the Rules and Regulations in order to effect the transactions contemplated hereby. 3. Purchase, Sale and Delivery of the Shares. (a) On the basis of the representations, warranties, covenants and agreements herein contained, and subject to the terms and conditions herein set forth, the Company agrees to issue and the Company and the Selling Stockholders agree, severally and not jointly, to sell to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase in the percentages set forth in Schedule B hereto, all of the Excess Unsubscribed Shares at a price of $5.00 per share. (b) In addition, on the basis of the representations, warranties, covenants and agreements herein contained and upon not less than two business days' notice from the Underwriters, for a period of 20 days after the Expiration Date, the Selling Stockholders agree to sell to the Underwriters all or part of up to 640,000 Option Shares at a purchase price of $5.00 per share for the sole purpose of covering over-allotments that may be made in connection with the offering and distribution of the shares of Common Stock. The Underwriters may exercise their option to purchase all or any portion of the Option Shares from the Company up to two times, provided that the aggregate number of Option Shares purchased by the Underwriters shall not exceed 640,000. Delivery of the Option Shares shall be made concurrently with payment therefor. Option Shares may be purchased by the Underwriters only for the purpose of covering over-allotments that may be made in connection with the offering and distribution of the shares of Common Stock. No Option Shares shall be delivered unless the Excess Unsubscribed Shares (if any are purchased by the Underwriters) shall be simultaneously delivered or shall theretofore have been delivered as herein provided. (c) Payment of the respective aggregate purchase prices of the Excess Unsubscribed Shares purchased from the Company and the Selling Stockholders shall be made by the Underwriters on the Closing Date by wire transfer in same day funds, payable to or upon the order of the Company and the Selling Stockholders at the offices of Robert W. Baird & Co. Incorporated at 777 E. Wisconsin Avenue, Milwaukee, Wisconsin 53202-5391, or at such other place as shall be agreed upon by the Underwriters and the Company, upon delivery of certificates (in form and substance satisfactory to the Underwriters) representing the Excess Unsubscribed Shares to the Underwriters. Delivery and payment for the Excess Unsubscribed Shares shall be made at the Closing. In addition, in the event that any or all of the Option Shares are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Shares shall be made at the above mentioned office or at such other place as shall be agreed upon by the Underwriters and the Company, on each Option Closing Date as specified in the notice from the Underwriters to the Company. Certificates for the Excess Unsubscribed Shares and the Option Shares, if any, shall be in definitive, fully registered form, shall bear no restrictive legends and shall be in such denominations and registered in such names as the Underwriters may request in writing at least two business days prior to the Closing -19- Date or the relevant Option Closing Date, as the case may be. The certificates for the Excess Unsubscribed Shares and the Option Shares, if any, shall be made available to the Underwriters at such office or such other place as the Underwriters may designate for inspection, checking and packaging not later than 9:30 a.m., New York City time, on the last business day prior to the Closing Date or the relevant Option Closing Date, as the case may be. (d) Delivery of certificates representing the shares of Common Stock to be sold pursuant to the exercise of the Rights, and the payment of the subscription price therefor to the Company and the Selling Stockholders shall be made at the Closing on the Closing Date pursuant to the Rights Agent Agreement, irrespective of whether or not any Excess Unsubscribed Shares are to be purchased by the Underwriters at such Closing. 4. Public Offering of the Excess Unsubscribed Shares. As soon after the Registration Statement becomes effective as the Underwriters deem advisable, the Underwriters shall make the Offering. 5. Registration of Common Stock in Certain States. (a) On the basis of the representations, warranties and covenants herein contained, but subject to the terms and conditions herein set forth, the Underwriters will act (or at their expense, will cause another broker-dealer registered in such state to act) as the agent of the Company and the Selling Stockholders to effect the offering of the Rights and the sale of the shares of Common Stock upon exercise thereof or pursuant to the Other Purchasers Standby Purchase Agreements in the States of Connecticut, Florida, Nebraska, Nevada, New Hampshire and New York, such states being those states in which applicable state law requires that a registered broker-dealer effect the offering of the Rights or the shares of Common Stock purchasable upon exercise thereof or pursuant to the Other Purchasers Standby Purchase Agreements. The Underwriters may delegate their obligations under the immediately preceding sentence through another registered broker-dealer satisfactory to them in states where the Underwriters are not registered as such. The Underwriters shall not be liable under this Section 5(a), except for gross negligence, lack of good faith and for their obligations expressly assumed hereunder. (b) The Company will deliver to the Underwriters, on or before the day the Registration Statement becomes effective, a "Blue Sky Memorandum" (herein so called), prepared by Morgan, Lewis & Bockius LLP relating to the securities or Blue Sky laws of any jurisdictions in which the transfer of the Rights or the offer and sale of the Common Stock is required to be qualified or registered, which will set forth the circumstances under which said transfer or offers and sales may be made and advising that the appropriate action, if any, will be taken in each of such jurisdictions so as to permit the transfer of the Rights and the offer and sale of the Common Stock (whether upon or in connection with the exercise of Rights, as part of the public offering of the Shares by the Underwriters or pursuant to the Other Purchasers Standby Purchase Agreements) to the persons resident in the jurisdictions indicated in such -20- survey. Such Blue Sky Memorandum may be based upon qualification of the Rights and the Common Stock as necessary with appropriate persons in such jurisdictions and an examination of the statutes and regulations, if any, of such jurisdictions as reported in standard compilations and upon interpretive advice obtained from representatives of certain securities commissions and such local counsel as may be necessary. Such Blue Sky Memorandum will be furnished only for the Underwriters' general information and guidance rather than as an opinion of counsel with regard to the laws of the jurisdictions referred to therein. 6. Covenants of the Company and the Selling Stockholders. (a) The Company covenants and agrees with the Underwriters as follows: (i) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto, to become effective as promptly as possible. Unless required by law, the Company will not file with the Commission the prospectus or amendment referred to in the second sentence of Section 2(a)(i) hereof, any amendment or supplement to such prospectus, any amendment to the Registration Statement, or any document under the Exchange Act before termination of the offering of the Shares by the Underwriters of which the Underwriters shall not previously have been advised and furnished with a copy, or to which the Underwriters shall have reasonably objected by notice to the Company in writing after having been provided a copy thereof, or which is not in compliance with the Act, the Exchange Act or the Rules and Regulations. During the time when a prospectus relating to the Shares is required to be delivered under the Act, the Company will comply with all requirements imposed upon it by the Act and the Rules and Regulations to the extent necessary to permit the continuance of sales of or dealings in the Shares in accordance with the provisions hereof and of the Prospectus, as amended or supplemented. The Company will prepare and file with the Commission, promptly upon the reasonable request by the Underwriters or Underwriters' Counsel, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Shares by the Underwriters, and will use its best efforts to cause the same to be filed with the Commission as promptly as possible; (ii) As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Underwriters, with a confirmation in writing, of (A) the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed, (B) the issuance by the Commission of any stop order, or of the initiation or threatening of any proceeding, suspending the effectiveness of the Registration Statement or any amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (C) the issuance by any state securities commission of any notice of any proceedings for the suspension of the qualification of the Shares for offering or sale in any jurisdiction or of -21- the initiation, or the threatening, of any proceeding for that purpose, (D) the receipt of any comments from the Commission, and (E) any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such order or the imposition of any such suspension and, if any such order is issued or suspension is imposed, to obtain the withdrawal thereof as promptly as possible; (iii) If required, the Company will file the Prospectus and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rule 424(b) and Rule 430A(a)(3) of the Rules and Regulations; (iv) The Company will arrange for the qualification of the shares of Common Stock for offering and sale under the securities or "Blue Sky" laws of such jurisdictions in which recipients of Rights and the Other Purchasers are resident and such jurisdictions as the Underwriters may reasonably designate and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the shares of Common Stock, provided, however, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction; (v) If, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which, in the opinion of the Company or counsel for the Company, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is otherwise necessary at any time to amend or supplement the Prospectus to comply with the Act or the Rules and Regulations, the Company will promptly notify the Underwriters thereof and, subject to Section 6(a)(i) hereof, prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which, in the opinion of the Underwriters or Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, the Underwriters will promptly notify the Company thereof and the Company will, subject to Section 6(a)(i) hereof, prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. The Company will furnish to the Underwriters and dealers (whose names and addresses shall be furnished to the Company by the Underwriters) to which Shares may have been -22- sold on behalf of the Underwriters and to any other dealers upon request, a reasonable number of copies of any amendment or supplement prepared pursuant to this paragraph (v); (vi) The Company will furnish to each of the Underwriters and to Underwriters' Counsel, without charge, a signed copy of the registration statement originally filed with respect to the Shares and each amendment thereto. So long as the Underwriters or any dealer is required by the Act or the Rules and Regulations to deliver a prospectus, the Company will also furnish as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Underwriters may reasonably request. The Company will provide to the Underwriters a copy of the report on Form SR filed by the Company pursuant to Rule 463 of the Rules and Regulations; (vii) As soon as practicable after the effective date of the Registration Statement, the Company will make generally available to its security holders, in the manner specified in Rule 158(b) of the Rules and Regulations, and to the Underwriters an earnings statement that will be in the detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations; (viii) For a period of five years following the date hereof, the Company will furnish to its stockholders, as soon as practicable, annual reports (including financial statements audited by independent public accountants) and will deliver to the Underwriters unaudited quarterly reports of earnings (through delivery of the Company's quarterly reports filed with the Commission on Form 10-Q or Form 10-QSB) and the following: (A) concurrently with furnishing quarterly reports, if any, to the stockholders, statements of income of the Company for each quarter in the form furnished to the Company's stockholders; (B) concurrently with furnishing such annual reports to its stockholders, a balance sheet of the Company as at the end of the preceding fiscal year, together with statements of operations, stockholders equity, and cash flows of the Company for such fiscal year, accompanied by a copy of the certificate thereon of independent public accountants; (C) as soon as they are available, copies of all reports (financial or other) mailed to its stockholders; (D) as soon as they are available, copies of all reports (other than preliminary proxy materials) and financial statements furnished to or filed with the Commission, the NASD or Nasdaq which are available to the public; -23- (E) as soon as they are available every press release and every material news item or article of interest to the financial community in respect of the Company or its affairs that is released or prepared by the Company; and (F) any additional information of a public nature concerning the Company that the Underwriters may reasonably request from time to time; (ix) The Company will maintain a Transfer Agent and Registrar for the shares of Common Stock. Effective as of the Closing Date, the Company will cause the Transfer Agent for the shares of Common Stock to make appropriate "stop transfer" restrictions in its records relating to the certificates representing all shares of Common Stock subject to restrictions under the agreements described in Sections 2(a)(xxiv), 2(b)(i) and 6(b)(i) hereof; (x) During the period commencing on the date the Registration Statement is declared effective by the Commission and ending 180 days after the Expiration Date, the Company, will not, without the prior written consent of the Underwriters, (A) directly or indirectly, transfer, sell, offer for sale, contract for sale, grant any option for the sale of, or otherwise dispose of (or announce any transfer, sale, offer for sale, contract for sale, grant of any option for sale of, or other disposition of) any shares of Common Stock, or other securities convertible into, or exercisable or exchangeable for, shares of Common Stock (except as contemplated by this Agreement) or (B) file any registration statement relating to any such securities with the Commission or any other authority except as contemplated herein, provided, however, that (1) the Company may grant or issue securities pursuant to any employee stock option plan or stock purchase plan or outstanding stock options described in the Prospectus and, commencing after the Closing Date, may file a registration statement on Form S-8 with respect to such plans and (2) the Company may issue shares of Common Stock, or other securities convertible into, or exercisable or exchangeable for shares of Common Stock, as consideration for any acquisition by the Company so long as the party being issued such securities signs an agreement, acceptable in form and substance to the Underwriters, that such party will not transfer, sell, offer for sale, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock owned by such party or with respect to which such party has the power of disposition during a period commencing on the date of issuance of such securities and ending 180 days following the Expiration Date; (xi) The Company will apply the net proceeds from the sale of the Common Stock sold by it in the manner set forth under "USE OF PROCEEDS" in the Prospectus. Except as described in the Prospectus, no portion of the net proceeds will be used directly or indirectly to acquire any securities issued by the Company; (xii) The Company will furnish to the Underwriters as early as practicable prior to each of the date hereof, the Closing Date and each Option Closing -24- Date, if any, but no later than two full business days prior thereto, a copy of the latest available unaudited interim financial statements of the Company (which in each case shall not be earlier than the last day of the preceding month, unless such month-end shall be less than three business days prior to the date such statements are to be delivered) that have been read by the Company's independent public accountants, as stated in their letters to be furnished pursuant to Section 8(h) hereof; (xiii) The Company will cause the Shares and the Rights to be approved for quotation on the Nasdaq National Market and will use its reasonable efforts to maintain such approvals; (xiv) The Company will file and cause to become effective prior to the Closing Date a registration statement with respect to the Common Stock pursuant to Section 12(g) of the Exchange Act and will use its best efforts to maintain such registration; (xv) The Company will apply the net proceeds from the sale of the shares of Common Stock sold by it and conduct its operations in a manner that will not subject it to registration as an investment company under the Investment Company Act of 1940, as amended; and (xvi) The Company will furnish, without charge, to the Underwriters and Underwriters' Counsel within four months of the Closing Date such number of closing binders as the Underwriters and Underwriters' Counsel may reasonably request. (b) Each Selling Stockholder covenants and agrees with the Underwriters as follows: (i) During the period commencing on the date the Registration Statement is declared effective by the Commission and ending 180 days after the Expiration Date, the Selling Stockholder will not, without the prior written consent of the Underwriters, directly or indirectly, transfer, sell, offer for sale, contract for sale, grant any option for the sale of or otherwise dispose of any shares of Common Stock or other securities convertible into, or exercisable or exchangeable for, shares of Common Stock except (A) as contemplated in this Agreement or (B) pursuant to grants or sales of such shares to employees of the Selling Stockholder or its subsidiaries, provided that such transferees agree to be bound by the restrictions contained in this paragraph. (ii) The Selling Stockholder will pay all applicable state transfer taxes, if any, involved in the transfer to the Underwriters of the Shares to be purchased by the Underwriters from such Selling Stockholder. (iii) The Company and the Selling Stockholders covenant and agree with each other and covenant and agree with the Underwriters that the Other Purchasers -25- Standby Shares to be sold and the 560,000 shares of Common Stock that are expected to be sold to the Musser Group upon exercise of the Musser Rights shall be deemed to be sold by the Company. 7. Payment of Expenses; Fees. (a) As compensation to the Underwriters for their services in connection with the transactions contemplated by this Agreement and their commitment hereunder, the Company and the Selling Stockholders hereby agree, jointly and severally, to pay to the Underwriters, by wire transfer, on the sixth business day following the Expiration Date, an amount equal to the sum of (i) 3% of the Exercise Price for each share of Common Stock subject to Rights, (ii) 3% of the subscription price for each Direct Share and each Undistributed Share sold to the Direct Purchasers, and (iii) an additional fee of 4% of the Exercise Price for each share (other than the Option Shares) purchased by the Underwriters pursuant to Section 3(a) of this Agreement or upon the exercise of Rights by the Underwriters if such Rights were purchased by the Underwriters at a time when the Common Stock was trading (on a "when-issued" basis) at a per share price of less than $6.00 or with the prior acknowledgement of Safeguard that the Underwriters would be entitled to receive such compensation pursuant to the exercise of such Rights. As compensation to the Underwriters for their commitment hereunder, the Company hereby agrees to pay the Underwriters, by wire transfer, on each Option Closing Date an amount equal to 7% of the Exercise Price for each Option Share purchased on such date by the Underwriters. As additional compensation to the Underwriters for their commitment hereunder, the Company shall reimburse the Underwriters, by wire transfer on the sixth business day following the Expiration Date, for a non-accountable expense allowance of (i) $200,000 if, on the Expiration Date, the closing price for the Common Stock was trading (on a "when-issued" basis) at a per share price of less than $7.25, (ii) $100,000 if, on the Expiration Date, the closing price for the Common Stock was trading (on a "when-issued basis) at a per share price between $7.25 and $8.25 or (iii) no expense allowance if, on the Expiration Date, the closing price for the Common Stock was trading (on a "when-issued" basis) at a per share price greater than $8.25. (b) The Company hereby agrees to pay all expenses and fees incident to the performance of the obligations by the Company and the Selling Stockholders under this Agreement, including all expenses and fees of the Company and the Selling Stockholders incurred in connection with or by (i) the engagement of accountants, counsel for the Company, counsel for Safeguard, the Rights Agent and the Transfer Agent and Registrar for the Common Stock, (ii) preparation, duplication, printing, filing and distribution of the registration statement originally filed with respect to the Shares and any amendments thereto, any Preliminary Prospectus and the Prospectus and any amendments and supplements thereto and related documents used in connection with the Offering, including in each case the cost of all copies supplied to the Underwriters in quantities as hereinabove stated, (iii) the printing, engraving, issuance and delivery of certificates representing the Rights and the Shares, (iv) the qualification of the Shares under state securities or "Blue Sky" laws, including filing fees, costs of printing and mailing of a "Preliminary Blue Sky Memorandum" and "Final Blue Sky Memorandum" and -26- disbursements and fees of Underwriters' Counsel in connection with the review of such materials (which shall be paid at the Closing), (v) the approval of the Common Stock and Rights for quotation on the Nasdaq National Market, (vi) the filing fees of the Underwriters in connection with any filings required to be made with the NASD, (vii) travel and out of pocket expenses of the Company and Safeguard in connection with meetings with prospective investors in the Shares (other than such expenses as shall have been specifically approved in writing by the Underwriters to be paid for by the Underwriters), and (viii) any expenses incurred by the Company in connection with a "road show" presentation to potential investors. (c) If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 8, Sections 12(a)(vii) or (a)(viii), or Section 13, the Company and Safeguard hereby agree, jointly and severally, to reimburse and indemnify the Underwriters for all of their reasonable accountable out-of-pocket expenses, including the reasonable fees and disbursements of Underwriters' Counsel and any of the state securities, "Blue Sky" and NASD fees and expenses identified in Sections 7(b)(iv) and 7(b)(vi) above, that shall have been incurred by them in connection with the proposed purchase and sale of the Shares. 8. Conditions of the Underwriters' Obligations. The obligations of the Underwriters to purchase and pay for the Shares shall be subject, in their sole discretion, to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein as of the date hereof and as of the Closing Date, as if they had been made on and as of the Closing Date, to the accuracy on and as of the Closing Date of the statements of the officers of the Company and the Selling Stockholders made in certificates delivered pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders on and as of the Closing Date of their respective covenants and obligations hereunder, and to the following further conditions: (a) If the Registration Statement or any amendment thereto filed prior to the Closing Date has not been declared effective as of the time of execution hereof, the Registration Statement or such amendment shall have been declared effective not later than the first full business day next following the date hereof or such later date and time as shall have been consented to in writing by the Underwriters. If required, the Prospectus shall have been timely filed with the Commission in accordance with Rule 424(b) of the Rules and Regulations. If required, any amendment or supplement to the Prospectus shall have been filed in accordance with Rule 424(c) under the Act. No stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company, the Selling Stockholders or the Underwriters, shall be contemplated by the Commission. The Company shall have complied, to the reasonable satisfaction of the Underwriters and Underwriters' Counsel, with any request of the Commission for additional information (to be included in the Registration Statement, the Prospectus or otherwise). -27- (b) The Underwriters shall not have advised the Company or any Selling Stockholders that, in the opinion of the Underwriters or Underwriters' Counsel, (i) the Registration Statement, or any amendment thereto, includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (ii) the Prospectus, or any amendment or supplement thereto, includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (c) The Underwriters shall have received from Underwriters' Counsel an opinion dated the Closing Date, with respect to the issuance and sale of the Shares, the Registration Statement, the Prospectus and such other related matters as the Underwriters reasonably may request. Underwriters' Counsel shall have received from the Company and the Selling Stockholders such papers and information as they may request to enable them to review or pass upon such matters or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties, or covenants of the Company or any Selling Stockholder contained herein. (d) The Underwriters shall have received from Morgan, Lewis & Bockius LLP, counsel to the Company, an opinion, on or prior to the date Rights certificates and Prospectuses are first mailed to Safeguard Shareholders and on the Closing Date, dated the respective dates thereof and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) The Company is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of organization and is duly qualified to transact business as foreign corporations and is in good standing in each jurisdiction in which the Company has represented to such counsel that they conduct business; (ii) The Company has all requisite corporate power and authority necessary or required to own or lease their respective properties and conduct its businesses as described in the Registration Statement and the Prospectus; (iii) The Company has all requisite power and authority (corporate and other) to enter into this Agreement, the Rights Agent Agreement and the Other Purchasers Standby Purchase Agreements and to consummate the transactions provided for herein and therein; and this Agreement, the Other Purchasers Standby Purchase Agreements and the Rights Agent Agreement have each been duly authorized, executed and delivered by the Company. Each of this Agreement, assuming due authorization, execution and delivery by the Underwriters, and each of the Other Purchasers Standby Purchase Agreements, and the Rights Agent Agreement, assuming due authorization, execution and delivery by the parties thereto other than the Company, constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, -28- insolvency, reorganization, moratorium, arrangement or similar laws affecting creditors' rights generally or by general principles of equity (including standards of materiality, good faith, fair dealing and reasonableness) whether applied by a court of law or equity, and except as rights to indemnity and contribution hereunder may be limited by applicable law, statutory duties or public policy (provided that as of the first date of the opinion only, such opinion need not express any opinion set forth above with respect to the Other Purchaser Standby Purchase Agreements that have not theretofore been executed and delivered). The Company's execution and delivery of this Agreement, the Other Purchasers Standby Purchase Agreements and the Rights Agent Agreement, its performance of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby do not and will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any liens, charges, claims, encumbrances, pledges, security interests, defects or other like restrictions or equities of any kind whatsoever upon, any right, property or asset (tangible or intangible) of the Company pursuant to the terms of (A) the charter or bylaws, each as amended through the date of the opinion, of the Company, (B) any material lease, permit, license, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement or any other agreement or instrument known to such counsel to which the Company is a party or by which it is or may be bound or to which any of its properties or assets (tangible or intangible) is or may be subject, or any indebtedness, except that such counsel need not express an opinion with respect to any violation based upon any covenant of a financial or numerical nature or that requires arithmetic computation and such counsel has not otherwise known of or had reason to expect the occurrence of such default, or (C) to the knowledge of Company counsel, any statute, rule, regulation, judgment, decree or order applicable to the Company or any of its activities or properties adopted or issued by an arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or any of its respective activities or properties (other than such as may be required under state securities or "Blue Sky" laws and such as may be required by the by-laws and rules of the NASD in connection with the purchase and distribution of the Shares by the Underwriters); (iv) No consent, approval, authorization or order of, or filing with, any governmental agency or body or, to such counsel's knowledge, any court is required in connection with the issuance of the shares of Common Stock to be sold by the Company, the Company's performance of its obligations hereunder, the Offering, or the consummation by the Company of the other transactions contemplated hereby, except such as may be required under the state securities or "Blue Sky" laws of any jurisdiction or as may be required by the by-laws and rules of the NASD in connection with the purchase and distribution of the Shares by the Underwriters and except such other approvals as have been obtained and remain in full force and effect. Upon the effectiveness of the Registration Statement, the Common Stock will be registered -29- pursuant to Section 12(g) of the Exchange Act, and will be included in the Nasdaq National Market; (v) At the date or dates indicated in the Prospectus, the authorized, issued and outstanding capital stock of the Company was as set forth therein, and conformed as to legal matters, to the extent that it constitutes matters of law or legal conclusions, to the description thereof contained therein under the captions "CAPITALIZATION" and "DESCRIPTION OF CAPITAL STOCK." All of the issued shares of Common Stock of the Company (including the Shares sold by the Selling Stockholders) have been duly authorized and validly issued, and are fully paid and non-assessable; the holders thereof are not subject to personal liabilities solely by reason of holding such shares; and none of such shares have been issued in violation of the preemptive rights of any security holders of the Company known to Company counsel. The Shares to be sold by the Company have been duly authorized and, when paid for in accordance herewith, will be validly issued, fully paid and non-assessable, and with no personal liability resulting solely from the ownership thereof. Upon the issuance and delivery pursuant to this Agreement of the Shares to be sold by the Company to the Underwriters, assuming the Underwriters do not have knowledge of any Adverse Claim, the Underwriters will acquire good and marketable title to such Shares free and clear of any liens, charges, claims, encumbrances, pledges, security interests, defects or other like restrictions or like equities of any kind whatsoever. Except as described in the Prospectus, there are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company's Certificate of Incorporation or By-Laws, each as amended to date, or pursuant to any agreement among stockholders to which the Company is a party or of which it has knowledge, and the Shares to be sold by the Company are not subject to any preemptive or other similar rights of any security holder. The Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement and as described in the Prospectus. Except as described in the Prospectus with respect to stock options (and shares issuable upon exercise thereof) that may be registered by the Company in a registration statement on Form S-8, no holder of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company which are exercisable for or convertible or exchangeable for securities of the Company has any right (which has not been waived) to include any securities issued by the Company in the Registration Statement or any registration statement to be filed by the Company within the period commencing on the date the Registration Statement is declared effective by the Commission and ending 180 days after the Expiration Date or to require the Company to file a registration statement under the Act during such period. Based on the form of specimen certificate filed as an exhibit to the Registration Statement, the certificates representing the Shares are in due and proper form; (vi) The Registration Statement has become effective under the Act. Any required filing of the Prospectus pursuant to Rule 424(b) and 430A(a)(3) of the -30- Rules and Regulations has been made in accordance with the time period required thereby. To such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or threatened, by the Commission; (vii) At the time the Registration Statement was declared effective by the Commission, the Registration Statement and the Prospectus and any amendment or supplement thereto (other than the financial statements, and notes thereto, the financial schedules, and the other financial and statistical data included in the Registration Statement or the Prospectus or omitted therefrom, as to which such counsel need express no opinion) complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; (viii) Such counsel has reviewed all contracts and other documents referred to in the Registration Statement and the Prospectus, and the summaries of and other disclosures regarding such contracts and other documents included in the Registration Statement and the Prospectus fairly present the information required to be shown with respect thereto. To such counsel's knowledge, there are no contracts or other documents of a character required to be filed as exhibits to the Registration Statement or required to be described in the Registration Statement or the Prospectus that were not filed or disclosed as required; (ix) Except as disclosed in the Prospectus, to such counsel's knowledge, there is not pending or threatened or contemplated against the Company, or involving the properties or business of the Company, any action, suit, proceeding, inquiry, investigation, litigation or governmental proceeding (including those having jurisdiction over environmental or similar matters), domestic or foreign, that (A) is required to be disclosed in the Registration Statement and is not so disclosed, (B) questions the validity of the capital stock of the Company or the validity or enforceability of this Agreement, (C) questions the validity of any action taken or to be taken by the Company pursuant to or in connection with this Agreement, or (D) could materially adversely effect the present or prospective ability of the Company to perform its obligations under this Agreement or result in a Material Adverse Effect; (x) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act, nor, by receipt of the proceeds from its sale by it of the Shares pursuant to this Agreement, will the Company become or be deemed to be an "investment company" under such Act; (xi) No transfer taxes are required to be paid in connection with the sale and delivery of the Common Stock by the Company to the Underwriters hereunder; -31- (xii) The certificates evidencing the Rights to be distributed to the Safeguard Shareholders and the shares of Common Stock to be delivered hereunder are in due and proper form under Delaware law; and (xiii) All of the Rights have been duly authorized and validly issued, and, when issued and distributed as set forth in the Prospectus, will be legally issued and valid and binding obligations of the Company having the rights summarized in the Prospectus; and none of such Rights will have been issued in violation of the preemptive rights of any security holders of the Company arising as a matter of law or under or pursuant to the Company's Certificate of Incorporation, as amended, the Company's By-Laws, as amended, or any agreement or instrument to which the Company is a party or by which it is bound. In addition, such opinion shall contain statements substantially to the following effect: In the course of the preparation by the Company and its counsel of the Registration Statement and the Prospectus, such counsel attended conferences with certain of the officers of, and the independent public accountants for, the Company, at which the Registration Statement and the Prospectus were discussed (some of which were attended by representatives of the Underwriters). Between the date of effectiveness of the Registration Statement and the Closing Date, such counsel attended (if applicable) additional conferences with certain of the officers of, and the independent public accountants for, the Company, at which the contents of the Registration Statement and the Prospectus were discussed. Given the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process, such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (other than as set forth in the first sentence of paragraph (v) and as set forth in paragraph (viii) above). Subject to the foregoing and on the basis of the information such counsel gained in the performance of the services referred to above, including information obtained from officers and other representatives of the Company, no facts have come to such counsel's attention that cause such counsel to believe (except that such counsel need not express any opinion or belief with respect to the financial statements, schedule and the notes thereto and other financial and statistical data included therein) that (y) the Registration Statement, at the time it was declared effective by the Commission, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (z) the Prospectus, as of its date or the Closing Date, contained or contains -32- an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinions, such counsel may rely as to matters of fact, to the extent they deem proper, on certificates and written statements of the Company or responsible officers of the Company and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. References to the Prospectus and Registration Statement in this Section 8(d) shall include any amendment or supplement thereto at the date of such opinion. (e) The Underwriters shall have received from Morgan, Lewis and Bockius LLP, counsel to the Selling Stockholders, an opinion, on or prior to the date Rights certificates and Prospectuses are first mailed to Safeguard Shareholders and on the Closing Date, dated the respective dates thereof and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) Each Selling Stockholder has the legal right and power to enter into this Agreement and to sell, transfer and deliver hereunder the Shares proposed to be sold hereunder. This Agreement has been duly authorized by each Selling Stockholder, has been duly executed and delivered by or on behalf of each Selling Stockholder and constitutes, the legal, valid, and binding obligations of each Selling Stockholder enforceable against each Selling Stockholder in accordance with its respective terms, subject to the effect of general principles of equity (including standards of materiality, good faith, fair dealing and reasonableness) whether applied by a court of law or equity and except as rights to indemnity and contribution hereunder or thereunder may be limited by applicable law, statutory duties or public policy; (ii) The execution and delivery of this Agreement, the performance by each Selling Stockholder of its obligations hereunder will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under (A) the charter documents, including articles and certificates of incorporation or by-laws, of any Selling Stockholder, as amended through the date of the opinion, or (B) any statute, judgment, decree, order, rule or regulation, known to such counsel, applicable to any Selling Stockholder or any of its activities or properties adopted or issued by any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including those having jurisdiction over environmental or similar matters), having jurisdiction over any Selling Stockholder or any of its activities or properties, in each case except where such breach, violation or default would not (i) affect the enforceability of this Agreement, (ii) affect the Offering or the sale of the -33- Common Stock contemplated hereby, or (iii) have a material impact, financial or otherwise, on any Selling Stockholder or any of its subsidiaries. To such counsel's knowledge, no consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required for the consummation by any Selling Stockholder of the transactions contemplated herein, except such as may be required under the state securities or "Blue Sky" laws of any jurisdiction or as may be required by the by-laws and rules of the NASD in connection with the purchase and distribution of the Shares by the Underwriters and except such other approvals as have been obtained and remain in full force and effect; (iii) To such counsel's knowledge, each Selling Stockholder has title to the Shares proposed to be sold by such Selling Stockholder hereunder free of any adverse claims and upon delivery of and payment for such Shares hereunder, assuming that each Underwriter does not have any notice of an adverse claim, such Underwriter will be a protected purchaser (as defined in Section 8303 of the Uniform Commercial Code as in effect in the Commonwealth of Pennsylvania); and (iv) The descriptions in the Registration Statement, the Prospectus and any amendment or supplement thereto of agreements, whether written or oral, and of other documents to which each Selling Stockholder or any of its affiliates (other than the Company) is a party, are accurate and fairly present the information required to be shown with respect thereto by Form S-1 under the Act. There are no agreements, whether written or oral, or other documents to which each Selling Stockholder or any of its affiliates (other than the Company) is a party, which, to the knowledge of such counsel, exist that are required by the Act or the Rules and Regulations to be described in the Registration Statement or filed as exhibits to the Registration Statement that are not described or filed as required. In addition, such opinion shall contain statements substantially to the following effect: In the course of the preparation by the Company and its counsel of the Registration Statement and the Prospectus, such counsel attended conferences with certain of the officers of, and the independent public accountants for, the Company, at which the Registration Statement and the Prospectus were discussed. Between the date of effectiveness of the Registration Statement and the Closing Date, such counsel attended additional conferences with certain of the officers of, and the independent public accountants for, the Company, at which the contents of the Registration Statement and the Prospectus were discussed. Given the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process, such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus. Subject to the foregoing and on the basis of the information -34- such counsel gained in the performance of the services referred to above, including information obtained from officers and other representatives of the Company and each Selling Stockholder, no facts have come to such counsel's attention that cause such counsel to believe that (x) the Registration Statement, at the time it was declared effective by the Commission, contained an untrue statement of a material fact or omitted to state a material fact relating to the Selling Stockholders or any of their affiliates (other than the Company) required to be stated therein or necessary to make the statements therein not misleading or (y) the Prospectus, as of its date or the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact relating to the Selling Stockholders or any of their affiliates (other than the Company) required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided such counsel need not express any belief as to the contents of the eighth paragraph under the heading "UNDERWRITING" in the Prospectus. The Underwriters are entitled to rely on the opinion of such firm, filed as an exhibit to the Registration Statement, as to the matters discussed in the Prospectus under the heading "FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. In rendering such opinion, such counsel may rely as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company and each Selling Stockholder, as appropriate, and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of each Selling Stockholder, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. References to the Prospectus and Registration Statement in this Section shall include any amendment or supplement thereto at the date of such opinion. (f) The Underwriters shall have received a certificate, dated the Closing Date and in form and substance satisfactory to the Underwriters, of the Company signed by each of the Chief Executive Officer and Chief Financial Officer of the Company to the effect that each of such officers has carefully examined the Registration Statement, the Prospectus and this Agreement and, to his best knowledge, that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date, and the Company has complied in all material respects with all agreements and covenants and satisfied all conditions contained in this Agreement on its part to be performed or satisfied at or prior to the Closing Date; -35- (ii) No stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or, to the best of such officers' knowledge, are contemplated or threatened by the Commission; and (iii) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (A) there has been no material adverse change, or development involving a prospective material adverse change (including a change in management or control of the Company), in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except in each case as described in or contemplated by the Prospectus; (B) the Company has not entered into any transactions not in the ordinary course of business; (C) the Company has not incurred any material liabilities or obligations, direct or contingent, other than as disclosed in the Registration Statement and the Prospectus; (D) the Company has not sustained a loss material to the Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act, whether or not such loss shall have been insured, or from any labor dispute or from any legal or governmental proceeding; (E) no action, suit or proceeding, at law or in equity, has been filed or, to the knowledge of such officer, is threatened against the Company before or by any court or federal, state or foreign commission, board or other administrative agency that (1) alleges that the conduct of such business as currently conducted or as proposed to be conducted infringes on any trademarks, service marks, copyrights, service names, trade names, patents, patent applications or trade secrets currently held by any third party and (2) has had as of the date of such certificate or, if pending and if decided unfavorably, is likely to have a Material Adverse Effect; and (F) there has not occurred any other event required to be set forth in the Prospectus that has not been so set forth. Except as otherwise provided in clause (iii)(A) above, references to the Prospectus and Registration Statement in this Section 8(f) shall include any amendment or supplement thereto at the date of such opinion. (g) The Underwriters shall have received a certificate, dated the Closing Date, of each of the Chairman and the Vice President and General Counsel of each Selling Stockholder or other principal officer, as appropriate, to the effect that such officers have carefully examined the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of each Selling Stockholder in this Agreement are true and correct on and as of the Closing Date, and that each Selling Stockholder has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date. (h) The Underwriters shall have received from KPMG letters dated, respectively, the date hereof and the Closing Date, in form and substance satisfactory to the Underwriters and Underwriters' Counsel, with respect to matters set forth below: -36- (i) confirming that they are and were independent public accountants with respect to the Company within the meaning of the Act and the Rules and Regulations; (ii) stating that it is their opinion that the audited financial statements and schedules examined by them and included in the Registration Statement and the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations; (iii) stating that, on the basis of certain procedures which included a reading of the latest available unaudited interim financial statements of the Company (with an indication of the date of the latest available unaudited interim financial statements), a reading of the latest available minutes of meetings and actions of the stockholders and board of directors and the various committees of the board of directors of the Company, inquiries of officers and other employees of the Company responsible for financial and accounting matters and other specified procedures and inquiries, nothing came to their attention that caused them to believe that (A) the unaudited financial statements, if any, and schedules of the Company included in the Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of the Company included in the Registration Statement and the Prospectus, (B) at a specified date not more than five days prior to the date of such letter, there was any change in the capital stock or long-term debt of the Company, or any decrease in the stockholders' equity, or net current assets of the Company, in each case, as compared with amounts shown in the December 31, 1996 balance sheet included in the Registration Statement and the Prospectus, except for changes set forth in such letter, and (C) during the period from December 31, 1996 to such specified date, there was any decrease in revenues, income before income taxes, or net income, or any decrease in net income per common share of the Company, in each case as compared with the corresponding period beginning January 1, 1996, except for changes set forth in such letter; (iv) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and -37- (v) statements as to such other matters incident to the transaction contemplated hereby as the Underwriters may reasonably request. In the event that either of the letters referred to above set forth any such changes, decreases or increases, it shall be a further condition of the obligations of the Underwriters that (A) such letter shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Underwriters deem such explanation unnecessary, and (B) such changes, decreases or increases do not, in the sole judgment of the Underwriters, make it impractical or inadvisable to proceed with the purchase and delivery of the Shares as contemplated by the registration statement originally filed with respect to the Shares, as amended as of the date hereof. References to the Registration Statement and the Prospectus in this Section 8(h) with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. (i) The Associated Person Lock-Ups with respect to each person listed on Schedule A annexed hereto and the Musser Lock-Up shall be in full force and effect. (j) The outstanding shares of Common Stock and the shares of Common Stock to be issued by the Company as contemplated by this Agreement shall have been approved for quotation on the Nasdaq National Market (upon notice of issuance in the case of the latter shares). (k) No order suspending the sale of the Shares in any jurisdiction designated by the Underwriters pursuant to Section 6(a)(iv) hereof shall be in effect on the Closing Date and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company or the Underwriters, shall be contemplated. (l) On or prior to the date that Rights certificates are first mailed to Safeguard Shareholders and on the Closing Date, dated the respective dates thereof and in form and substance satisfactory to Underwriters' counsel, the Company shall furnish to the Underwriters such information, certificates and documents as either of the Underwriters may reasonably request. (m) The Underwriters shall have received from Morris, Manning & Martin, L.L.P., intellectual property counsel to the Company, an opinion, on or prior to the date Rights certificates and Prospectuses are first mailed to Safeguard Shareholders and on the Closing Date, dated the respective dates thereof and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) To such counsel's knowledge, except as disclosed in the Prospectus, the Company has not received any notice of infringement of or conflict with (and such counsel does not know of any such infringement of or conflict with) any rights or claims -38- of others with respect to the ChromaVision Medical Digital Analyzer and its Triple Plus-TM- application, any of the activities engaged in, or proposed to be engaged in, by the Company as described in the Prospectus, in any such case which could reasonably be expected to result in a Material Adverse Effect or could reasonably be expected to have a Material Adverse Effect on the development, marketing or sale of any of the Company's existing or contemplated products, services or processes as described in the Prospectus. (ii) To such counsel's knowledge, the factual representations concerning the Company's patent applications contained in the Prospectus under the captions: "RISK FACTORS - POTENTIAL INTELLECTUAL PROPERTY DISPUTE" and "RISK FACTORS - DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY TECHNOLOGY" are accurate in all material respects. (iii) To such counsel's knowledge, the factual representations concerning the Company's patent applications contained in the Prospectus under the caption: "BUSINESS - PATENTS AND PROPRIETARY TECHNOLOGY" are accurate in all material respects. Such counsel has issued an opinion to the Company that the Company's Triple Plus-TM- application does not infringe U.S. Patent No. 5,352,613 which is owned by Idea Research. (iv) The Company has filed a U.S. Patent Application and a Continuation-In-Part Application and both applications are presently pending before the PTO. The U.S. patent application is directed to the aspects of the ChromaVision Medical Digital Analyzer for locating cellular objects of interest on a slide and the Continuation-In-Part application is directed to the Triple Plus-TM- application. Such counsel has no knowledge or information that would invalidate the claims of the Company's pending patent applications as filed or that would render an issued patent containing those claims unenforceable. In rendering such opinions, such counsel may rely as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company and each Selling Stockholder, as appropriate, and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. References to the Prospectus and Registration Statement in this Section shall include any amendment or supplement thereto at the date of such opinion. (n) The Underwriters shall have received from the counsel of Safeguard Scientifics, Inc. as special counsel to the Selling Stockholders, an opinion, on or prior to the date Rights certificates and Prospectuses are first mailed to Safeguard Shareholders and on the Closing Date, dated the respective dates thereof and in form and substance satisfactory to -39- Underwriters' Counsel, to the effect that the execution and delivery of this Agreement, the performance by each Selling Stockholder of its obligations hereunder will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under any lease, permit, license, contract, indenture, mortgage, deed of trust, voting trust agreement, shareholders agreement, note, loan or credit agreement or any other agreement or instrument, known to such counsel, to which any Selling Stockholder is a party or by which it is or may be bound or to which any of its properties or assets (tangible or intangible) is or may be subject, or any indebtedness, except to the extent that any such conflict, breach, violation or default, individually or in the aggregate, does not and would not result in a material adverse effect on the condition, financial or otherwise, or on the earnings, business affairs, financial position, prospects, value, operation, properties, results of operation or business of any Selling Stockholder and does not and would not interfere with the Offering, except where such breach, violation or default would not (A) affect the enforceability of this Agreement, (B) affect the Offering or the sale of the Common Stock contemplated hereby, or (C) have a material impact, financial or otherwise, on any Selling Stockholder or any of its subsidiaries. In addition, such opinion shall contain statements substantially to the following effect: In the course of the preparation by the Company and its counsel of the Registration Statement and the Prospectus, such counsel attended conferences with certain of the officers of, and the independent public accountants for, the Company, at which the Registration Statement and the Prospectus were discussed. Between the date of effectiveness of the Registration Statement and the Closing Date, such counsel attended additional conferences with certain of the officers of, and the independent public accountants for, the Company, at which the contents of the Registration Statement and the Prospectus were discussed. Given the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process, such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus. Subject to the foregoing and on the basis of the information such counsel gained in the performance of the services referred to above, including information obtained from officers and other representatives of the Company and each Selling Stockholder, no facts have come to such counsel's attention that cause such counsel to believe that (x) the Registration Statement, at the time it was declared effective by the Commission, contained an untrue statement of a material fact or omitted to state a material fact relating to the Selling Stockholders or any of their affiliates (other than the Company) required to be stated therein or necessary to make the statements therein not misleading or (y) the Prospectus, as of its date or the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact relating to the Selling Stockholders or any of their affiliates (other than the Company) required to be stated therein or necessary in order to make the -40- statements therein, in the light of the circumstances under which they were made, not misleading, provided such counsel need not express any belief as to the contents of the eighth paragraph under the heading "UNDERWRITING" in the Prospectus. In rendering such opinion, such counsel may rely as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company and each Selling Stockholder, as appropriate, and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of each Selling Stockholder, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. References to the Prospectus and Registration Statement in this Section shall include any amendment or supplement thereto at the date of such opinion. If any condition of the Underwriters' obligations hereunder to be fulfilled prior to or at the Closing Date is not so fulfilled, the Underwriters may terminate this Agreement or, if the Underwriters so elect, they may waive any such conditions that have not been fulfilled or extend the time for their fulfillment. In the event the Underwriters so elect to terminate this Agreement, all Rights and the Other Purchasers Standby Purchase Agreements shall become immediately null and void and the Company shall cause the Escrow Agent under the Rights Agent Agreement to promptly return to the subscribers any payments received by the Escrow Agent in respect of the exercise price relating thereto. All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Underwriters and Underwriters' Counsel. The Company shall furnish to the Underwriters such conformed copies of such opinions, certificates, letters and documents in such quantities as the Underwriters and Underwriters' Counsel shall reasonably request. The obligations of the Underwriters to purchase and pay for any Option Shares after having exercised an option set forth in Section 3(b) hereof shall be subject, in its discretion, to each of the foregoing conditions of this Section 8 to purchase the Excess Unsubscribed Shares, with all references to the Excess Unsubscribed Shares and the Closing Date being deemed to refer to such Option Shares and the related Option Closing Date, respectively. 9. Indemnification. (a) The Company and each Selling Stockholder, jointly and severally, agree to indemnify and hold harmless each of the Underwriters and each person, if any, who is a Controlling Person with respect to either of the Underwriters against any and all losses, claims, damages, expenses and liabilities, joint or several (and actions in respect thereof), whatsoever (including any and all reasonable expenses incurred in investigating, preparing or defending -41- against any litigation, commenced or threatened, or any claim whatsoever), as such are incurred, (i) to which the Underwriters or such Controlling Person may become subject under the Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus (as from time to time amended and supplemented) or (B) in any application or other document or written communication (in this Section 9 collectively called "Application") executed by the Company or the Selling Stockholders or based upon written information furnished by the Company or the Selling Stockholders in any jurisdiction in order to qualify the Common Stock under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Nasdaq National Market or any other securities exchange, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, unless such statement or omission was made in reliance upon, and in strict conformity with, the Provided Information or (ii) to which the Underwriters or such Controlling Person may become liable to any party which relate to, or arise out of, the Underwriters' or such Controlling Person's consummation of the transactions contemplated hereby or the Underwriters' or such Controlling Person's role in connection herewith (including without limitation as a result of any breach of any representation or warranty made by the Company or the Selling Stockholders); provided, however, that neither the Company nor the Selling Stockholders shall be responsible for any losses, claims, damages, expenses or liabilities that are finally judicially determined to have resulted primarily from the gross negligence or intentional or reckless misconduct of the Underwriters or such Controlling Person. The indemnity agreement contained in this subsection (a) with respect to any Preliminary Prospectus shall not inure to the benefit of the Underwriters and such Controlling Person with respect to a person asserting any such losses, claims, damages, liabilities or expenses who purchased the Shares if at or prior to the written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement contained in, or omission of a material fact from, such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented). The indemnity agreements in this subsection (a) shall be in addition to any liability that the Company or the Selling Stockholders may have at common law or otherwise. (b) The Underwriters agree to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, the Selling Stockholders and each other Controlling Person, if any, who controls the Company or the Selling Stockholders, to the same extent as the foregoing indemnity from the Company and the Selling Stockholders to the Underwriters but only with respect to statements made in, or omissions from, any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any Application made in reliance upon, and in strict conformity with, the Provided Information. (c) Promptly after receipt by any indemnified party or parties under this Section 9 of notice of the commencement of any action, suit or proceeding, such indemnified -42- party shall, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 9, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party or parties shall not relieve it from any liability that it may have under this Section 9 except to the extent that it has been prejudiced in any material respect by such failure or from any liability that it may have otherwise). In case any such action is brought against any indemnified party or parties, and it notifies the indemnifying party or parties of the commencement thereof, the indemnifying party or parties will be entitled to participate therein, and to the extent it may elect, by written notice delivered to the indemnified party or parties promptly after receiving the aforesaid notice from such indemnified party or parties, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party or parties. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action, (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action within a reasonable time after notice to the indemnifying party or parties of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them that are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying parties. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Anything in this Section 9 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not unreasonably withheld. (d) In order to provide for just and equitable contribution in any case in which (i) an indemnified party makes claim for indemnification pursuant to this Section 9, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 9 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any indemnified party, then each indemnifying party shall contribute to the amount paid as a result of such losses, claims, damages, expenses or liabilities (or action in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified on the other hand, from the offering of the Shares or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (A) above but also the relative fault of -43- each of the contributing parties, on the one hand, and the party to be indemnified on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In any case where either the Company and/or the Selling Stockholders are the contributing parties and the Underwriters are the indemnified parties, the relative benefits received by the Company and/or the Selling Stockholders, on the one hand (treated collectively as one person for this purpose), and the Underwriters, on the other, shall be deemed to be in the same proportion as the total proceeds from the offering of the Shares and the shares of Common Stock sold upon exercise of the Rights (net of underwriting discounts and other commissions paid to the Underwriters but before deducting the other expenses incurred by the Company and the Selling Stockholders in connection with the sale of the Shares) bear to the total underwriting discounts and other commissions received by the Underwriters hereunder, in each case as set forth in the table on the cover page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact related to information supplied by the Company and the Selling Stockholders (treated collectively, as one person for this purpose) or by the Underwriters, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, expenses or liabilities (or actions in respect thereof) referred to above in this Section 9(d) shall be deemed to include any legal or other expense reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9(d) the Underwriters shall not be required to contribute any amount in excess of the underwriting discount and other commissions applicable to the Shares purchased by the Underwriters hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act, each officer of the Company who has signed the Registration Statement, and each director of the Company shall have the same rights to contribution as the Company and the Selling Stockholders, subject in each case to this Section 9(d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect to which a claim for contribution may be made against another party or parties under this Section 9(d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this Section 9(d), but only to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. -44- 10. Representations and Agreements to Survive Delivery. All representations, warranties, agreements and covenants contained in this Agreement or contained in certificates of each of the officers of the Company or of each Selling Stockholder submitted pursuant hereto, shall be deemed to be representations, warranties, agreements and covenants at the Closing Date and the Option Closing Date, as the case may be, and such representations, warranties, agreements and covenants of the Underwriters, the Company and each Selling Stockholder, and the indemnity agreements contained in Section 9 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Underwriters, the Company and each Selling Stockholder, or any Controlling Person, and shall survive termination of this Agreement or the issuance and delivery of the Shares to the Underwriters, provided that to the extent any such representations, warranties, agreements or covenants are expressly waived in writing by the Underwriters, the survival of the same shall be as set forth in such waiver, or, if not so set forth, as provided in this Section 10. 11. Effective Date. This Agreement shall become effective at 9:00 a.m., New York time, on the next full business day following the date hereof or upon the commencement of the Rights Offering, whichever is earlier; provided, however, that the provisions of Sections 6, 7, 9, 10 and 12 of this Agreement shall at all times be effective. 12. Termination. (a) Subject to subsection (c) of this Section 12, the Underwriters shall have the right to terminate this Agreement (i) if any calamitous domestic or international event or act or occurrence has disrupted the general securities market in the United States; (ii) if trading in the Common Stock (on a when-issued basis) shall have been suspended by the Commission or the Nasdaq National Market; (iii) if trading on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or by order of the Commission or any other government authority having jurisdiction; (iv) if the United States shall have become involved in a war or major hostilities which, in the Underwriters' opinion, affects the general securities market in the United States; (v) if a banking moratorium has been declared by a California, New York, Pennsylvania, Massachusetts, Wisconsin or federal authority; (vi) if a moratorium in foreign exchange trading (with respect to a foreign exchange on which the Company's Securities are traded) has been declared; (vii) if the Company shall have sustained a loss material to the Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act, whether or not such loss shall have been insured, or from any labor dispute or any legal or governmental proceeding; (viii) if there shall have been such material adverse change, or any development involving a prospective material adverse change -45- in the financial condition, net worth or results of operations of the Company since December 31, 1996 or in the business prospects or conditions of the Company since the date of this Prospectus, or that materially and adversely impacts this Agreement; or (ix) on any date commencing on the date hereof and ending on the Closing Date, if there shall be such material adverse market conditions (whether occurring suddenly or gradually between the date hereof and the Closing Date) affecting the markets generally as in the Underwriters' reasonable judgment would make it inadvisable to proceed with the offering, sale or delivery of the Shares. (b) If the Underwriters elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 12, they shall so notify the Company on the same day as such election is made by telephone or telegram, confirmed by letter. (c) Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement (including pursuant to Section 13 hereof), and whether or not this Agreement is otherwise carried out, the provisions of Section 7 and Section 9 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 13. Default by the Company or the Selling Stockholders. If the Company or the Selling Stockholders shall fail to sell and deliver to the Underwriters the Excess Unsubscribed Shares to be sold and delivered by the Company or the Selling Stockholders at the Closing Date or the Option Shares to be sold and delivered by the Company at any Option Closing Date under the terms of this Agreement, then the Underwriters may at their option, by written notice to the Company and Selling Stockholders either (a) terminate this Agreement without any liability on the part of any non-defaulting party other than pursuant to Section 12 or (b) purchase the Shares which the Company and the Selling Stockholders have agreed to sell and deliver in accordance with the terms hereof. In the event of a failure of the Selling Stockholders to sell and deliver as referred to in this Section, either the Underwriters or the Company shall have the right to postpone the Closing Date or the Option Closing Date, as the case may be, for a period not exceeding seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, as may be effected. No action taken pursuant to this Section shall relieve the Company or the Selling Stockholders from liability in respect of such default. 14. Notices. All notices and communications hereunder may be mailed or transmitted by any standard form of telecommunication and, except as herein otherwise specifically provided, shall be in writing and shall be deemed to have been duly given when delivered to a notice party hereto at the address specified herein or at the address subsequently communicated in writing by the notice parties. Notices to the Underwriters shall be directed to the Underwriters in care of Robert W. Baird & Co. Incorporated, 777 E. Wisconsin Avenue, Milwaukee, WI 53202-5391, Attention: -46- Dominick P. Zarcone, and Adams, Harkness & Hill, Inc., 60 State Street, Boston, MA 02109, Attention: Tim McMahon, with a copy to Drinker Biddle & Reath LLP, 1000 Westlakes Drive, Suite 300, Five Westlakes, Berwyn, Pennsylvania 19132, Attention: Robert H. Strouse, Esq. Notices to the Company shall be directed to the address of the Company as set forth on the facing page to the Registration Statement, with a copy to Morgan, Lewis and Bockius LLP, 2000 One Logan Square, Philadelphia, Pennsylvania, Attention: N. Jeffrey Klauder, Esq. Notices to Safeguard shall be directed to Safeguard Scientifics, Inc., 800 Safeguard Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087, Attention: James A. Ounsworth, Esq., with a copy to Morgan, Lewis and Bockius LLP, 2000 One Logan Square, Philadelphia, Pennsylvania 19103, Attention: N. Jeffrey Klauder, Esq. In each case a party may change its address for notice hereunder by a written communication to the other parties. 15. Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Underwriters, the Company and the Selling Stockholders and the Controlling Persons, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. No purchaser of Shares from the Underwriters shall be deemed to be a successor by reason merely of such purchase. 16. Construction. This Agreement shall be governed by the laws of the State of New York without giving effect to the choice of law or conflict of laws principles thereof. The word "including" as used herein shall not be construed so as to exclude any other thing not referred to or described. 17. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which taken together shall be deemed to be one and the same instrument. 18. Entire Agreement. This Agreement contains the entire agreement between the parties hereto in connection with the subject matter hereof. If the foregoing correctly sets forth the understanding among the Underwriters, the Company and the Selling Stockholders, please so indicate in the space provided below for that purpose, thereupon this letter shall constitute a binding agreement among us. Very truly yours, -47- CHROMAVISION MEDICAL SYSTEMS, INC. By: ----------------------------------- Name: Title: SAFEGUARD SCIENTIFICS, INC. By: ----------------------------------- Name: Title: SAFEGUARD SCIENTIFICS (DELAWARE), INC. By: ----------------------------------- Name: Title: XL VISION, INC. By: ----------------------------------- Name: Title: TECHNOLOGY LEADERS, L.P. By: Technology Leaders Management L.P., as sole general partner By: ------------------------------ Name: Title: -48- TECHNOLOGY LEADERS OFFSHORE, C.V. By: Technology Leaders Management L.P., as co-general partner By: ------------------------------ Name: Title: TECHNOLOGY LEADERS II, L.P. By: Technology Leaders II Management L.P., as sole general partner By: ------------------------------ Name: Title: TECHNOLOGY LEADERS II OFFSHORE, C.V. By: Technology Leaders II Management L.P., as co-general partner By: ------------------------------ Name: Title: -49- Confirmed and accepted as of the date first above written: ROBERT W. BAIRD & CO. INCORPORATED ADAMS, HARKNESS & HILL, INC. By: By: ------------------------------ ------------------------------ Name: Name: Title: Title: -50- Schedule A Name Centocor, Inc. Safeguard Scientifics, Inc. Safeguard Scientifics (Delaware), Inc. Technology Leaders L.P. Technology Leaders Offshore C.V. Technology Leaders II L.P. Technology Leaders II Offshore C.V. XL Vision, Inc. Kenneth S. Garber Douglas S. Harrington Christopher Moller Richard C.E. Morgan Warren V. Musser (and his assignees, if any) Kevin O'Boyle Charles A. Root Michael G. Schneider John S. Scott -51- Schedule B Name of Underwriters % of Underwriter Shares Robert W. Baird & Co. Incorporated 50% Adams, Harkness & Hill, Inc. 50% -52- EX-8.1 3 EXHIBIT 8.1 EXHIBIT 8.1 July 1, 1997 Safeguard Scientifics, Inc. 800 The Safeguard Building 435 Devon Park Drive Wayne, Pennsylvania 19087 Re: Offering of Rights to Purchase Shares of Common Stock of ChromaVision Medical Systems, Inc. Ladies and Gentlemen: You have requested our opinion regarding certain federal income tax aspects of the grant by ChromaVision Medical Systems, Inc. (the "Company") of rights (the "Rights") to purchase shares of the Company's Common Stock (the "Offering"), all as described in the Registration Statement on Form S-1 (File No. 333-26129), as amended, filed with the Securities and Exchange Commission on the date hereof (the "Registration Statement"). This opinion is based upon our review of the Registration Statement and our assumption that the Offering will take place in accordance with the description included in the Registration Statement. Opinion Based on the foregoing and on the Internal Revenue Code of 1986, as amended (the "Code"), the regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect on the date of this letter, it is our opinion that the statements of law and conclusions of law included in the Registration Statement under the heading, "Federal Income Tax Consequences" are, in all material respects, true, correct and complete. This opinion also confirms the opinion set forth in "Federal Income Tax Consequences" in the Registration Statement. No opinion is expressed regarding any statements, assumptions or opinions regarding factual matters (including, without limitation, the value of the Rights) contained in the Registration Statement. Should any of the facts, assumptions or understandings referred to above prove incorrect, please let us know so that we may consider the effect, if any, on our opinion. No assurances can be given that any of the foregoing authorities will not be modified, revoked, supplemented, revised, reversed or overruled or that any such modification, renovation, supplementation, revision, reversal or overruling will not adversely affect the opinion set forth above. We understand that this opinion is to be used in connection with the registration of the Rights and the Company's Common Stock pursuant to the Securities Act of 1933, as amended. We consent to the filing of this opinion in connection with and as a part of the Registration Statement on Form S-1 and amendments thereto. We also hereby consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In giving such consents, however, we do not thereby admit that we are acting within the category of persons whose consent is required under Section 7 of the Act and the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /S/ Morgan, Lewis & Bockius LLP EX-23.1 4 EX-23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" and "Selected Financial Data" in the Prospectus. KPMG Peat Marwick LLP Orlando, Florida July 1, 1997 -----END PRIVACY-ENHANCED MESSAGE-----