Exhibit 99.1
DESCRIPTIVE MEMORANDUM
Diomed Holdings, Inc.
February 14, 2002
SUMMARY OF OUR BUSINESS AND OPERATIONS
This summary highlights information contained elsewhere in this
descriptive memorandum. This summary is not complete and does not contain all
the information you should consider before buying shares in the Company. You
should read this entire descriptive memorandum carefully, especially the "Risk
Factors."
In this descriptive memorandum "the Company" refers to Diomed Holdings,
Inc. The term "Diomed" refers to Diomed, Inc. and its consolidated subsidiaries.
We use the terms "we," "our," and "us" when we do not need to distinguish among
these entities or their predecessors or when any distinction is clear from the
context.
BUSINESS OVERVIEW
Diomed provides innovative clinical modalities and specializes in
developing and distributing equipment and disposable items used in minimal and
micro-invasive medical procedures. In developing and marketing our innovative
solutions, we use proprietary technology, and we aim to secure strong commercial
advantages over our competitors by gaining governmental approvals in advance of
others and through exclusive commercial arrangements. To participate in the
rapidly growing minimal and micro-invasive medical procedure industry we seek to
integrate disposable items into our product lines. To optimize our revenues, we
focus on clinical procedures that require the health care provider to own our
equipment and also purchase our disposable products, such as optical fibers. We
sell our products to hospital and office-based physicians, including specialists
in vascular surgery, oncology, interventional-radiology, phlebology and
dermatology.
Utilizing our proprietary technology in certain methods of
synchronizing diode light sources and in certain optical fibers, we focus on
photodynamic therapy, known as PDT, for use in cancer treatments, endovenous
laser treatment, known as EVLT for use in varicose vein treatments and on other
clinical applications such as dentistry and general surgery. If the treating
physician is knowledgeable about the reimbursement system and obtains
preapproval, then typically health insurance payors will reimburse for PDT and
EVLT procedures. Using high power semiconductor diodes as their energy source,
our diode lasers combine clinical efficacy, operational efficiency and cost
effectiveness in a versatile, compact, lightweight, easy-to-use and
easy-to-maintain system.
During 2001, we generated 79% of our revenues from sales of laser
devices and systems and 21%, from disposable items and other accessories. Viewed
from the perspective of the treatments we address, in 2001 35% of our revenues
were from PDT applications, 35% from EVLT applications and the balance from
other surgical applications.
On February 14, 2002, Diomed Holdings, Inc., a Nevada corporation,
acquired Diomed pursuant to the terms of an Agreement and Plan of Merger. As a
result of the merger that occurred under the Merger Agreement, Diomed became a
wholly-owned subsidiary of Diomed Holdings, Inc. The business of the Company now
is principally the business of Diomed.
Diomed was incorporated on December 24, 1997 in the State of Delaware.
On June 23, 1998, Diomed succeeded to the business of Diomed, Ltd., a company
formed under the laws of the United Kingdom in 1991.
Diomed's management team focuses on developing and marketing solutions
that address serious medical problems that have significant markets.
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In November 2000, to capture part of the disposable market segment of
its laser business, Diomed acquired the medical fiber business from QLT, Inc. of
Vancouver, British Columbia. Diomed acquired QLT's rights to manufacture and
market Optiguide(R) fibers that were developed for use in photodynamic therapy
cancer treatments and the distribution rights to customers of Laserscope and
Coherent, two manufacturers of medical laser devices.
PHOTODYNAMIC THERAPY
PDT is an effective treatment for late-stage lung and esophageal
cancers and is under study for treatment of various other cancers throughout the
body. The medical profession appears to be increasing its acceptance of PDT,
since the traditional cancer treatments, including surgery, radiation and
chemotherapy result in some significant and unpleasant side effects, and have
varying rates of success. PDT is based on the discovery that certain chemicals
can kill one-celled organisms in the presence of light. Recent interest in
photosensitizing agents stems from research showing that some of these
substances have a tendency to collect in cancer cells.
PDT requires three-interacting elements: (1) a photosensitive drug that
is absorbed by cancerous and abnormal cells, (2) a light source (laser) of a
specific wavelength that activates the drug, and (3) a delivery system,
including a thin optical fiber to guide the light source to the target area. PDT
technology is only effective when these three components work in concert.
Our proprietary technology, including diode lasers and optical fibers,
when used in combination with a photosensitizing drug, provides the cancer
therapy. We supply laser technology, services and disposable items to the global
PDT industry. We work jointly and early on with PDT drug companies in their
clinical development process to design a laser that optimizes the most effective
wavelength in combination with their respective PDT drugs. We have long-term
arrangements with some of the other world's leading PDT drug companies,
including Axcan, DUSA, Pharmacyclics and QLT, and lasers to them to be used in
clinical trials for PDT applications.
In the US, the Food and Drug Administration considers PDT to be a
modality that requires the FDA to grant individual pre-market approval for each
specific PDT treatment. As a result, we submit to the FDA a premarket approval
application, or PMA, that presents to that agency a singular combination of data
and product from the PDT drug company, laser manufacturer and fiber
manufacturer. As a result of the lengthy regulatory approval process and the
FDA's policy that it must approve each new method of use, requires potential
competitors to present similar collaborative PMA's to the FDA. Since we have
forged collaborative relationships with the most significant players in PDT drug
development, we believe that we have limited the ability of our competitors to
obtain FDA clearance and also limited our risk should one of the PDT companies
fail to receive regulatory approval or perform poorly in the marketplace.
We are the first diode laser manufacturer to receive FDA clearance for
its laser's use in PDT cancer treatments. In August 2000, Axcan Pharma, Inc. and
Diomed together received regulatory approval for Diomed's 630nm laser and
Optiguide(R) fiber, and Axcan's Photofrin drug used in the cancer treatment for
late stage lung and esophagial cancers. In November 2000, Diomed entered into a
five-year exclusive supply contract with Axcan for lasers.
ENDOVENOUS LASER TREATMENT
We have developed an innovative minimally invasive laser procedure for
the treatment of varicose veins caused by greater saphenous vein reflux. The
causes of varicose veins are genetic. People with past vein diseases, new
mothers, overweight individuals and people with jobs or hobbies that
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require extended standing are also at risk. According to a 1973 study by
Tecumseh Health of Alabama, approximately 42% of Americans over 60 have varicose
veins and this number is increasing as the population continues to age and to
live longer lives. According to the same study, 72% of women over 60 in the US
have varicose veins.
Diomed believes that worldwide more than one million people undergo
vein-stripping operations each year, but there are many more who suffer the
pain, discomfort and unattractive appearance of their legs in order to avoid
having surgery to treat their condition. We believe that most patients who
undergo vein-stripping procedures are candidates for EVLT. EVLT has several
competitive advantages over the current vein stripping treatment. EVLT is a 45-
to 60-minute procedure per leg that can be performed in a physician's office,
under local anesthesia and with the procedure guided by ultrasound technology,
and has a quick recovery period, reduced pain and minimal scarring. During
clinical studies, 97% of first-time EVLT treatments have been successful. The
remaining cases have been successfully resolved with a second EVLT treatment.
In September 2001, we became the first company to receive the CE mark
of approval, issued by the British Standard Institution, for marketing EVLT in
Europe. On January 22, 2002, we became the first company to receive FDA
clearance for EVLT.
FIBERSDIRECT.COM
In November 2000, we formed FibersDirect.com, a business unit that
promotes, sells and distributes laser fibers and other laser-delivery system
accessories for clinical applications directly to clinical end users in the US.
Acting as an e-commerce and direct marketing conduit, FibersDirect.com
distributes fibers directly from the manufacturer to the end user. The resulting
savings in distribution costs can significantly contribute to both lower prices
for end users, and increased profitability and margins for us. The Company's
OPTIGUIDE(R) fibers, which are used in PDT treatments for cancer, are promoted,
sold and distributed via FibersDirect.com. Subsequent to FDA clearance of EVLT,
FibersDirect.com promotes, sells and distributes fibers used in EVLT procedures.
BUSINESS STRATEGY
Our business strategy is based on our existing PDT and EVLT
applications and has four key components:
1.) RESEARCH AND DEVELOPMENT, WITH A FOCUS ON CLINICAL APPLICATIONS
We focus on the development of clinical applications for our laser
products, such as PDT and EVLT, to create and maintain a pipeline of new
clinical uses. We believe that new applications will generate demand for laser
and fiber technologies. Our assumption is that the ongoing launch of new
clinical solutions will drive revenue and income streams.
We emphasize the identification and the development of useful effective
clinical procedures. Our internal structure addresses the need for focus in this
area by means of a dedicated department with focus on new procedures. In
addition the expenditures for the Company's research and development program was
approximately $1.3 million in 2000 and approximately $1.0 million in the nine
months ended September 30, 2001, which represents 13% and 16% of sales,
respectively.
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2.) KEY ACQUISITIONS TO ENHANCE PROFITABILITY
We survey future acquisition targets, including fiber and diode
manufacturers, to create a one-stop laser and fiber business, with a focus on
increasing profit margins. In furtherance of this strategy, in November 2000 we
acquired QLT, Inc.'s manufacturing rights for the Optiguide(R) fiber.
3.) STRATEGIC PARTNERSHIPS TO ENHANCE CUSTOMER REACH
We work with the world's leading PDT drug companies, including Axcan
Pharma, Inc., QLT, Inc., Pharmacyclics, Inc. and DUSA Pharmaceuticals, Inc., to
bring new treatments to market. In addition, we maintain OEM relationships with
Olympus ProMarketing, Inc. and Dentek Lasersystems Vertriebs GmbH. We plan to
create long-term and exclusive working relationships that increase laser
applications and revenue potential. Accordingly, we will continue to work with
PDT drug companies beginning at an early stage to jointly develop additional new
treatments, develop the market and obtain FDA clearance.
4.) IMPROVEMENT OF RESULTS UTILIZING NEXT GENERATION LASER PROJECT
We anticipate developing the "next generation" laser to increase market
demand, further stimulating the demand for optical fibers used in clinical
procedures.
FACILITIES
Our executive offices are located at a leased facility at 1 Dundee
Park, Andover, Massachusetts 01810. We operate our leased principal research and
development facilities at Cambridge Research Park, Ely Road, Cambridge CB4 4WS,
England.
EMPLOYEES
As of December 31, 2001 we employed a total of 49 full-time employees,
with 7 employees in marketing and sales, 6 employees in research and
development, 16 employees in manufacturing, 4 employees in regulatory and
quality control, 3 employees in service, and 13 employees in general and
administrative.
MERGER INVOLVING DIOMED AND THE COMPANY
On February 14, 2002, Diomed Acquisition Corp., a Delaware corporation
and a wholly-owned subsidiary of Diomed Holdings, Inc., a Nevada corporation
formerly known as Natexco Corporation, merged with and into Diomed, Inc., a
Delaware corporation, pursuant to an Agreement and Plan of Merger dated January
29, 2002. Pursuant to the terms of the merger agreement, the Company issued (i)
2,328,922.50 shares of its Class A convertible preferred stock, which we refer
to as Class A Stock, to the former holders of Diomed common stock in exchange
for 9,315,690 shares of common stock of Diomed issued and outstanding as of the
effective time of the merger, which 2,328,922.50 shares convert into 9,315,690
shares of the Company's common stock, and (ii) 1,362,500 of our Class A Stock to
the former holders of 2,725,000 shares Diomed Series A preferred stock issued
and outstanding as of the effective time of the merger, which 1,362,500 shares
convert into 5,450,000 shares of the Company's common stock. In connection with
the merger, the Company assumed the obligations of Diomed with respect to
Diomed's outstanding 1,380,335 stock options and each of the two plans under
which Diomed had granted these options since 1998. Prior to its adoption of
formal stock option plans Diomed had also granted 489,679 options to officers,
other employees and consultants. With respect to these non-plan options, the
merger agreement obligates the Company, upon request of the option holders,
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to perform Diomed's obligations to issue shares upon the exercise of outstanding
options. If all existing optionees fully exercise their rights, the Company will
issue to them an aggregate of 467,503.50 shares of its Class A Stock which
shares convert into 1,870,014 shares of the Company's common stock.
The merger agreement also obligates the Company to perform Diomed's
obligations to issue shares upon exercise of outstanding warrants to purchase
121,924 shares. If the warrantholders fully exercise their rights, the Company
will issue to them an aggregate of 30,481 shares of its Class A Stock which
shares convert into 121,924 shares of the Company's common stock.
The shares issued to the former Diomed stockholders in the merger
represent approximately 51% of the Company's issued and outstanding voting
securities, before giving effect to options and warrants. Assuming that the
holders of the options and warrants fully exercise their rights, the shares
issued to the former Diomed stockholders in the merger would represent
approximately 47.8% of the Company's issued and outstanding voting securities
following the merger, the shares issued to the option holders would represent
approximately 5.8% of the Company's issued and outstanding voting securities
following the Merger and the shares issued to the warrant holders would
represent approximately 0.4% of the Company's issued and outstanding voting
securities following the merger.
In connection with the Merger, the Company conducted a private
placement of its securities. In the private placement, investors subscribed to
purchase from the Company an aggregate of 5,000,000 shares of common stock
pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company
intends to make the proceeds of the private placement available to Diomed for
the following uses: (a) to pay expenses incurred in connection with the merger,
the private placement and the repayment of a portion of Diomed's existing debt;
(b) to fund Diomed's laser development project and other research and
development initiatives; (c) to fund future business acquisitions; and (d) to
fund Diomed's working capital needs. The 5,000,000 shares of the Company's
common stock issued in the private placement completed on February 14, 2002
cannot be sold up for a period of six months following the later of (i) the
closing of the Merger and (ii) the effective date of the Merger, subject to
exception for gifts and transfers in trust.
REGISTRATION OF SECURITIES ISSUED
IN THE MERGER
The Company has agreed to file a registration statement with the SEC
within 120 days after the Merger and to have the registration statement declared
effective within 240 days after the Merger. The registration statement will
cover 5,000,000 shares of the Company's common stock sold in the private
placement related to the Merger and 14,765,690 shares of the Company's common
stock into which the Class A Stock issued in the Merger to the former Diomed
stockholders convert over a period of approximately two years after the Merger,
as well as 121,924 shares of its common stock issuable following the exercise of
Diomed warrants. The Company has also agreed to file, 45 days after the
effectiveness of the first registration statement, a second registration
statement covering the 1,870,014 shares of its common stock issuable following
the exercise of Diomed options that the Company assumed as part of the Merger.
If the Company's first registration statement does not become
effective, shares issued in the Merger and shares issued in the private
placement will generally become tradable in the public markets one year after
issuance under the SEC's Rule 144. Shares issued on the exercise of options or
warrants generally become tradeable one year after exercise, subject to the
volume limitations, manner of sale and notice of sale limitations of Rule 144.
Upon the closing of the Merger, 9,200,000 of the Company's 14,200,000
issued and outstanding shares of its common stock will be tradeable.
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SUMMARY FINANCIAL DATA
The following table presents summary audited historical and unaudited
interim financial data. The summary includes our audited consolidated financial
data for the years ended December 31, 1998, 1999 and 2000, our unaudited
consolidated financial data for the nine months ended September 30, 2000, and
our unaudited consolidated financial data and unaudited financial data for
Diomed Holdings, Inc. combined on a proforma basis for the nine months ended
September 30, 2001, as if the we had completed our combination on September 30,
2001. You should read this data together with our financial statements and
related notes included elsewhere in this Current Report on Form 8-K and the
information under Management's Discussion and Analysis of Financial Condition
and Results of Operations below in this memorandum.
Years ended Nine months ended
December 31, September 30,
(audited) (unaudited)
------------------------------- -----------------------------
Statements of operations data 1998 1999 2000 2000 2001 2001
(in thousands, except share data) proforma
- ----------------------------------------------------------------------------------------------------------------------------
Revenues............................................. $9,312 $6,751 $9,425 $5,462 $6,428 $6,434
Cost of revenues..................................... 5,179 6,706 7,415 4,767 4,952 4,952
------ ------ ------- ------ ----- -----
Gross profit (loss).................................. 4,133 45 2,010 695 1,476 1,482
------ ------ ------- ------ ----- -----
Operating expenses:
Research and development........................... 1,374 1,573 1,271 846 1,009 1,009
Selling and marketing.............................. 1,929 2,136 1,647 1,136 1,873 1,873
General and administrative......................... 2,578 2,116 2,229 1,395 1,936 1,976
Impairment of goodwill............................. - 1,586(1) - - - -
------ ------- ------- ------- ------ -----
Total operating expenses.......................... 5,881 7,411 5,147 3,377 4,818 4,858
------ ------- ------- ------- ------ -----
Income (loss) from operations........................ (1,748) (7,366) (3,137) (2,682) (3,342) (3,376)
Interest expense, net................................ 61 125 339 232 2,879(2) 2,881
------ ------- ------- ------- ------ ------
Net income (loss) from operations.................... (1,809) (7,491) (3,476) (2,914) (6,221) (6,257)
------ ------- ------- ------- ------- ------
Value ascribed to call option - - - - 423(2) 423
Net income (loss).................................... $(1,809) $(7,491) $(3,476) $(2,914)$ (6,644) (6,680)
====== ======= ======= ======= ======= ======
Net income (loss) per share:
Basic and diluted.................................. $(0.70) $ (2.34) $(0.82) $ (0.71) $(0.83) $(0.24)
====== ======= ======= ======= ======= ======
Weighted average number of common shares
outstanding used in per share
calculations:
Basic and diluted.................................. 2,597 3,197 4,246 4,081 8,004 27,654(3)
====== ======= ======= ====== ====== ======
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1) On May 31, 1998, we acquired substantially all of the assets and assumed
certain liabilities of LaserLite LLC ("LaserLite"), the distributor of
our cosmetic laser systems, including patents and other intangible
assets. In December 1999, we recorded a noncash accounting charge of
approximately $1,600,000 related to impairment of the goodwill arising
from this acquisition. We recognized this impairment when our development
of a next-generation laser led us to discontinue the sale of the
LaserLite product line.
2) In March 2001, we completed a recapitalization of certain of our
outstanding equity securities. As a result, we recognized $2,700,000 in
noncash interest expense related to beneficial conversion features
associated with the conversion of our 9% convertible loan notes into
common stock. Also, as a result of the recapitalization, we recognized an
additional beneficial conversion feature of $423,180 associated with a
call option granted to certain investors in the issuance of Diomed's
Series A preferred stock, originally issued in March 2001.
3) Includes 13,454,000 common stock equivalents for shares of Class A
convertible preferred stock that convert into shares of common stock.
As of September 30, 2001
------------------------
Balance sheet data (in thousands) Actual Proforma
- --------------------------------- ------ --------
Cash and cash equivalents........................ $ 293 $ 8,293
Working capital.................................. (96) 8,120
Total assets..................................... 7,102 14,926
Non-current liabilities.......................... 2,270 1,813
Accumulated deficit.............................. (30,019) (30,168)
Total stockholders' equity....................... 284 8,703
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FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary of our Business", "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Description of the Company's Business" and elsewhere in this memorandum are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934. Also, many of the
statements included the report of Atlas Capital Services that is attached as an
exhibit to the Current Report on SEC Form 8-K to which this descriptive
memorandum is attached are "forward looking statements," including the judgment
by Atlas as to the Company's fair market value, forecasted drug revenues and all
information regarding projected financial performance of Diomed and its revenue
model. None of these forward-looking statements are historical facts, but rather
are based on current expectations, estimates and projections about our industry,
our beliefs and our assumptions. They include statements relating to:
o future revenues, expenses and profitability;
o the future development and expected growth of our business;
o projected capital expenditures; and
o industry-specific trends.
You can identify forward-looking statements by the use of words such as
"may"' "should", "will", "could", "estimates", "predicts", "potential",
"continue", "anticipates," "believes," "plans," "expects," "future" and
"intends" and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our
control and difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
In evaluating these forward-looking statements, you should carefully consider
the risks and uncertainties described in "Risk Factors" and elsewhere in this
prospectus. These forward-looking statements reflect our view only as of the
date of this prospectus. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements and risk factors contained throughout this prospectus. We
assume no duty to update any of the forward-looking statements after the date of
this prospectus or to conform these statements to actual results.
IN REVIEWING THE COMPANY AND ITS BUSINESS, YOU SHOULD UNDERSTAND THE
HIGH DEGREE OF RISK INVOLVED. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS DESCRIPTIVE
MEMORANDUM, INCLUDING OUR HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES. THE FOLLOWING RISKS AND UNCERTAINTIES ARE NOT THE ONLY ONES WE
FACE. THESE ARE THE RISKS, HOWEVER, THAT MANAGEMENT BELIEVES ARE MATERIAL. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS COULD BE ADVERSELY AFFECTED. AS A RESULT, THE TRADING PRICE OF
OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE PART OR ALL OF ANY INVESTMENT
YOU MAY HOLD IN THE COMPANY.
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RISK FACTORS
We are an emerging growth business that develops, manufactures and
sells proprietary medical devices in the United States and elsewhere in the
world. We focus our business on the rapidly growing minimal and micro-invasive
medical procedure industry. Our mission is to develop innovative clinical
modalities and attain a dominant or exclusive position in our markets as a
result of our proprietary technology and regulatory approvals. We describe below
certain risk factors that are associated with the nature of our business, our
focus and our mission. If any of the following risks actually occur, they may
adversely affect our business, the results of our operations, our cash flows or
our ability to achieve our business objectives.
The risks and uncertainties described below are not the only ones that
we face. Other risks, unknown uncertainties and those risks that we currently
consider immaterial may nevertheless impair our business operations or our
prospects.
The following risks relate to our business as a medical device company
without a significant operating record:
OUR BUSINESS HAS NOT BEEN PROFITABLE IN THE PAST. WE MAY NEED ADDITIONAL FUNDS
TO CONTINUE OUR OPERATIONS IN THE FUTURE. IF WE DO NOT CREATE INTERNAL CASH FLOW
OR OBTAIN ADDITIONAL FUNDING, WE COULD BE FORCED TO REDUCE OR CEASE OPERATIONS.
We will need additional resources to fund the growth, acquisitions and
working capital that our business plan envisions. The timing and magnitude of
our future capital requirements will depend on many factors, including:
o the scope and results of preclinical studies and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
o the costs involved in any potential litigation;
o competing technological and market developments;
o our ability to establish additional collaborations;
o changes in existing collaborations;
o our dependence on others for development of our potential products;
o the cost of manufacturing, marketing and distribution; and
o the effectiveness of our activities.
We anticipate that we will have sufficient cash to fund operations
through December 2002, dependent upon the private placement financing related to
the reverse merger and upon the commercial success of EVLT post-FDA clearance.
We may, however, need to continue to rely on external sources of financing to
meet our cash needs for future acquisitions and internal expansion. Additional
financing, through subsequent public offerings or private offerings or private
equity or debt financings, may not, however, be available on acceptable terms or
at all. Any inability to obtain additional financing would cause us to reduce or
cease operations because we would not be able to fund the development of our
applications so that they may be commercialized and, thus, become profitable.
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WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES. WE MAY NOT EVER ACHIEVE OR
MAINTAIN PROFITABILITY.
We have incurred significant operating losses since our inception in
1997 and, as of December 31, 2000 and September 30, 2001, we have accumulated
deficits of approximately $23.4 million and $30.0 million, respectively. We may
continue to incur significant, and possibly increasing, operating losses over
the next few years, depending upon the commercial success of EVLT, as we
continue to incur increasing costs for research and development, regulatory,
sales and marketing, manufacturing and general corporate activities. Our ability
to achieve profitability depends upon our ability, alone or with others, to
successfully complete the development of our proposed applications, obtain the
required regulatory clearances and market our proposed applications. The
occurrence of any or all of these factors is uncertain.
WE MAY BE REQUIRED TO EXPAND OUR EXISTING MANUFACTURING AND MARKETING
CAPABILITY.
To be successful, we must manufacture our products in commercial
quantities and at acceptable costs as per the requirements of current Good
Manufacturing Practices, known as GMP's, of the Federal Drug Administration. We
currently have the capacity to manufacture products at certain commercial levels
within existing GMP's. Future regulatory clearances by the FDA and other
regulatory agencies could result in the need to expand manufacturing operations.
If we expand our manufacturing capabilities, we would need to expend substantial
funds, hire and retain significant additional personnel and comply with
extensive regulations. If we are not able to expand our manufacturing
capabilities, or are unable to continue to comply with GMP's, our ability to
grow and to maintain our competitiveness in the industry may be significantly
hindered.
Our marketing, distribution and sales capabilities or current or future
arrangements with third parties for such activities may not be adequate for the
successful commercialization of our products.
OUR BUSINESS RELIES ON OUR AGREEMENTS WITH OUR SUPPLIERS. IF WE FAIL TO MAINTAIN
OR ESTABLISH THESE AGREEMENTS, WE MAY NOT BE ABLE TO OBTAIN MATERIALS THAT ARE
NECESSARY TO DEVELOP OUR PRODUCT AND THEIR APPLICATIONS.
We depend on outside suppliers for certain raw materials and other
components for our products. These raw materials or components may not always be
available at our standards or on acceptable terms, if at all, and alternative
suppliers may not be available on acceptable terms, if at all. Furthermore, we
may not be able to adequately produce needed materials or components on our own.
If we cannot obtain these raw materials or produce them, we may be unable to
develop our applications and conduct trials, which will, in turn, affect our
ability to obtain regulatory approval of these applications.
THERE ARE SUBSTANTIAL CONCERNS REGARDING SAFETY AND HEALTH IN THE US MEDICAL
PRODUCTS INDUSTRY. WE MAY NOT HAVE ADEQUATE PROTECTION AGAINST PRODUCT LIABILITY
OR RECALL, AND, THEREFORE, WE MAY HAVE TO OUTLAY A SIGNIFICANT AMOUNT OF MONEY
ON LIABILITY CLAIMS OR RECALLS.
Testing, manufacturing, marketing and selling medical products and
applications entails significant inherent, industry-wide risks of allegations of
product liability. The use of our products in clinical trials and the sale of
our products may expose us to liability claims of patients or others who use or
sell our products may make these claims.
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A successful product liability claim could materially adversely affect
our cash flows and our ability to meet the costs of developing our applications.
WE MAY FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS,
OUR PATENTS OR OUR PROPRIETARY TECHNOLOGY. FOR OUR BUSINESS TO BE SUCCESSFUL IN
THE TECHNOLOGICALLY DEPENDENT MEDICAL PRODUCTS INDUSTRY, WE MUST BE ABLE TO
PROTECT AND ENFORCE THESE RIGHTS.
Our exclusive license relating to optical fibers may become
nonexclusive if we fail to satisfy certain development and commercialization
objectives. The termination or restriction of our rights under this or other
licenses would likely have a material adverse impact on us because our
competitors may be able to use the technology we have developed or our
technology may be rendered obsolete. Thus, any such event could be likely to
adversely effect our ability to set ourselves apart from our competitors.
We protect certain of our proprietary technology by confidentiality
agreements. Third parties may breach these agreements and we may not have
adequate remedies to protect our technology.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS,
OUR BUSINESS COULD BE ADVERSELY AFFECTED.
We rely on a combination of patents, licenses, trade secrets and
know-how to establish and protect our proprietary rights to our technologies and
products. As of January 31, 2002, Diomed held 43 patents in the US and foreign
countries. We cannot guarantee that the steps we have taken or will take to
protect our proprietary rights will be adequate to deter misappropriation of our
intellectual property. In addition to seeking formal patent protection whenever
possible, we attempt to protect our proprietary rights and trade secrets by
entering into confidentiality and non-compete agreements with employees,
consultants and third parties with which we do business. However, these
agreements can be breached and if they are, there may not be an adequate remedy
available to us and we may be unable to prevent the unauthorized disclosure or
use of our technical knowledge, practices or procedures. If our trade secrets
become known, we may lose our competitive advantage.
In addition, we may not be able to detect unauthorized use of our
intellectual property and take appropriate steps to enforce our rights. If third
parties infringe or misappropriate our patents or other proprietary rights, our
business could be seriously harmed. We may be required to spend significant
resources to monitor our intellectual property rights, we may not be able to
detect infringement of these rights and may lose our competitive advantages
associated with our intellectual property rights before we do so. In addition,
competitors may design around our technology or develop competing technologies
that do not infringe on our proprietary rights.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY CLAIMS, WHICH COULD BE COSTLY AND
TIME CONSUMING AND COULD DIVERT OUR MANAGEMENT AND KEY PERSONNEL FROM OUR
BUSINESS OPERATIONS.
While we do not believe that any of our products infringe the
intellectual property of third parties, we may be unaware of intellectual
property rights of others that may be used in our technology and products. Third
parties may claim that we are infringing their intellectual property rights, and
we may be found to have infringed those intellectual property rights. In
addition, third parties may claim that our patents have been improperly granted
and may seek to invalidate our existing or future patents. Although we do not
believe that any of our active patents should be subject to invalidation, if any
claim for invalidation prevailed, the result could be greatly expanded
opportunities for third parties to manufacture
13
and sell products which compete with our products. Any litigation or other
challenges regarding our patents or other intellectual property could be costly
and time consuming and could divert our management and key personnel from our
business operations. Claims of intellectual property infringement might also
require us to enter into costly royalty or license agreements. However, we may
not be able to obtain royalty or license agreements on terms acceptable to us,
or at all. We also may be subject to significant damages or injunctions against
development and sale of our products. Infringement claims, even if not
substantiated, could result in significant legal and other costs and may be a
distraction to management.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS. IF WE
FAIL TO DO SO, WE MAY NOT BE ABLE TO DEVELOP OUR APPLICATIONS.
Our success depends in large part on our ability to attract and retain
highly qualified management and other personnel. We depend upon the principal
members of our management, key employees, staff and consultants, that we engage
from time to time. Competition for such personnel and relationships is intense,
and we may not be able to continue to attract and retain such personnel. Our
consultants may be affiliated with or employed by others, and some have
consulting or other advisory arrangements with other entities that may conflict
or compete with their obligations to us. Inventions or processes discovered by
such persons will not necessarily become our property and may remain the
property of such persons or others. The flow of our operations may be disrupted
by personnel changes.
WE MAY SUFFER LOSSES OR ENCOUNTER OTHER PROBLEMS AS A RESULT OF FUTURE BUSINESS
COMBINATIONS AND ALLIANCES.
We may expand our operations and market presence by entering into
business combinations, joint ventures or other strategic alliances with other
companies. These transactions create risks, such as the difficulty in
assimilating the operations, technology and personnel of the combined companies;
the disruption or our ongoing business, including loss of management focus on
existing businesses and other market developments; problems retaining key
technical and managerial personnel; expenses associated with the amortization of
goodwill and other purchased intangible assets; additional operating losses and
expenses of acquired businesses; the impairment of relationships with existing
employees, customers and business partners; and, additional losses from any
equity investments we might make.
We may not succeed in addressing these risks, and we may not be able to
make business combinations and strategic investments on terms that are
acceptable to us. In addition, any business we may acquire may incur operating
losses.
WE ARE SUBJECT TO UNCERTAINTIES REGARDING HEALTH CARE REIMBURSEMENT AND REFORM.
AS A RESULT, THE ABILITIES OF OUR PRODUCTS AND THEIR APPLICATIONS TO ACHIEVE
MARKET ACCEPTANCE OR GENERATE REVENUES IS UNCERTAIN.
Various health care providers and third party payers may not cover our
products and their applications. If we do not obtain coverage, physicians may
not purchase our products. Our ability to commercialize our products
successfully depends, in part, on the extent to which third parties make
reimbursement available for these products and related treatments. These third
parties include collaborative partners, government health administration
authorities, private health insurers, managed care entities and other
organizations. Increasingly, these payors are challenging the price of medical
products and services and establishing protocols and formularies, which
effectively limit physicians' ability to select products and procedures.
Uncertainty exists as to the reimbursement status of health care
14
products, especially innovative technologies. Additionally, reimbursement
coverage, if available, may not be adequate to enable us to achieve market
acceptance of our products or to maintain price levels sufficient for
realization of an appropriate return on our products.
Further, our commercialization strategy depends on our collaborators. As
a result, our ability to commercialize our products may be hindered if cost
control initiatives adversely affect our collaborators.
FAILURE TO OBTAIN PRODUCT APPROVALS OR COMPLY WITH ONGOING GOVERNMENTAL
REGULATIONS COULD ADVERSELY AFFECT OUR ABILITY TO MARKET AND SELL OUR
APPLICATIONS AND COULD RESULT IN NEGATIVE CASH FLOWS.
The production and marketing of our products and our ongoing research
and development, preclinical studies and clinical trial activities are subject
to extensive regulation and review by numerous governmental authorities in the
United States, including the FDA, and in other countries. Before we can market
them, most medical devices that we develop, and all of the drugs we used in
conjunction with those devices, must undergo rigorous preclinical studies and
clinical trials and clear an extensive regulatory approval process administered
by the FDA and comparable foreign authorities. These processes involve
substantial cost and can often take many years. We have limited experience in,
and limited resources available for, regulatory activities, and we rely on our
collaborators and outside consultants. Failure to comply with the applicable
regulatory requirements can, among other things, result in non-approval,
suspensions of regulatory approvals, fines, product seizures and recalls,
operating restrictions, injunctions and criminal prosecution.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID CHANGES IN THE MEDICAL DEVICES
INDUSTRY. AS A RESULT, SOME OR ALL OF OUR PRODUCTS COULD BECOME NON-COMPETITIVE
OR OBSOLETE. COMPETING PRODUCTS AND TECHNOLOGIES MAY ALSO MAKE SOME OR ALL OF
OUR PROGRAMS OR POTENTIAL PRODUCTS NONCOMPETITIVE OR OBSOLETE.
Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Well-known pharmaceutical and
medical device companies are marketing well-established therapies for the
treatment of cancer and other diseases. Doctors may prefer familiar methods that
they are comfortable using rather than try our products. Therefore, our products
may not sell as planned. Many companies are also seeking to develop new products
and technologies for medical conditions for which we and our partners are
developing treatments. Our competitors may succeed in developing products that
are safer or more effective than ours and in obtaining regulatory marketing
approval for future products before we do. As a result, we may not be able to
recoup our costs in developing these products. We anticipate that we will face
increased competition as new companies enter our markets and as the scientific
development of PDT evolve.
SINCE TECHNOLOGY IN OUR INDUSTRY IS CONSTANTLY CHANGING, WE FACE INTENSE
COMPETITION FROM OTHER MEDICAL DEVICE MANUFACTURERS AND TECHNOLOGICAL
UNCERTAINTY.
We are a relatively new enterprise and are engaged in the development
of novel therapeutic technologies, such as PDT and EVLT. As a result, our
resources are limited and we may experience technical challenges inherent in
such novel technologies. Many of our competitors have substantially greater
financial, technical and human resources than we do, and may also have
substantially greater experience in developing products, conducting preclinical
studies or clinical trials, obtaining regulatory approvals and manufacturing and
marketing. Further, our competitive position could be materially
15
adversely affected if our competitors establish patent protection, because we
may have to pursue alternate means of developing our products. Existing
competitors or other companies may succeed in developing technologies and
products that are more safe more, effective or more affordable than those that
we develop.
SINCE THE MAJORITY OF OUR REVENUES TO DATE HAVE COME FROM INTERNATIONAL SALES,
EVENTS AFFECTING INTERNATIONAL COMMERCE MAY OCCUR THAT MAY ADVERSELY AFFECT OUR
FUTURE INTERNATIONAL SALES, FUTURE REVENUES AND OUR PRODUCTS' FUTURE
PROFITABILITY.
Our international revenues were 66% of total revenues for the year
ended December 31, 2000 and 52% of total revenues for the nine months ended
September 30, 2001. Our international sales are made through international
distributors and their wholly-owned subsidiaries with payments to us typically
denominated in the local currencies of the United Kingdom and Europe and in U.S.
dollars in the rest of the world. We intend to continue our operations outside
of the U.S and potentially to enter additional international markets. These
activities require significant management attention and financial resources and
further subject us to the risks of operating internationally. These risks
include:
o changes in regulatory requirements;
o delays resulting from difficulty in obtaining export licenses for
certain technology;
o customs, tariffs and other barriers and restrictions; and
o the burdens of complying with a variety of foreign laws.
We are also subject to general geopolitical risks in connection with
our international operations, such as:
o differing economic conditions;
o changes in political climate;
o differing tax structures; and
o changes in diplomatic and trade relationships.
In addition, fluctuations in currency exchange rates may negatively
affect our ability to compete in terms of price against products denominated in
local currencies.
BUSINESS INTERRUPTIONS COULD KEEP US FROM DEVELOPING OUR APPLICATIONS AND
INCREASING OUR REVENUES.
Natural or man-made disasters, such as fires, earthquakes, power
losses, telecommunications failures, terrorist attacks and resulting military
operations and other events beyond our control may interrupt our operations. We
do not have a detailed disaster recovery plan. In addition, we may not carry
sufficient business interruption insurance to compensate us for losses that may
occur and any losses or damages we incur could have a material adverse effect on
our cash flows and success as an overall business.
* * *
The following risks relate principally to our commercialization of our
current and future products and applications:
SOME OF THE APPLICATIONS, SUCH AS EVLT, MAY NEVER BE SUCCESSFULLY
COMMERCIALIZED, AND, THEREFORE, THESE APPLICATIONS MAY NEVER BECOME
16
PROFITABLE OR ALLOW US TO RECOUP EXPENSES INCURRED IN THEIR DEVELOPMENT.
Some applications' success, such as EVLT, rely on our ability to
effectively commercialize them. Commercialization depends upon:
o successfully completing development efforts or those of our
collaborative partners;
o obtaining the required regulatory approvals;
o manufacturing our products at an acceptable cost and with
appropriate quality;
o favorable acceptance of any products marketed; and
o successful marketing and sales efforts by our partner(s) and
ourselves.
We may not successfully achieve some or all of these goals, and if so,
our business and our financial condition would be adversely affected because our
revenue and profitability are largely dependent upon our ability to successfully
market and sell and these applications. The time frame necessary to achieve
these goals for any individual application is uncertain. Most applications will
require clinical studies and clinical trials and all will require regulatory
approval prior to commercialization. The likelihood of our success must be
considered in light of these and other problems, expenses, difficulties,
complications and delays that may arise.
PDT APPLICATIONS MAY NOT SUCCESSFULLY COMPLETE THE CLINICAL TRIALS PROCESS, AND
WE MAY NOT BE ABLE TO PROVE THAT THE METHODS OF TREATMENT ARE SAFE AND
EFFICACIOUS.
Although some PDT applications are currently approved and utilized, we
will rely on approval of additional PDT applications for a portion of our future
growth. Some of the PDT drugs, optical fiber and laser devices currently under
development require extensive preclinical studies and clinical trials prior to
regulatory approval. Many methods of treatment using PDT have not completed
testing for efficacy or safety in humans. We may be able to obtain regulatory
approval for these applications.
The failure to adequately demonstrate the safety and efficacy of a PDT
product could delay or prevent regulatory clearance of the potential product and
would materially harm our business in that our ability to market and sell these
applications will be postponed.
OUR APPLICATIONS MAY INDUCE ADVERSE SIDE EFFECTS THAT PREVENT THEIR WIDESPREAD
ADOPTION OR THAT NECESSITATE WITHDRAWAL FROM THE MARKET.
PDT drugs, fibers and laser devices may induce undesirable and
unintended side effects that may prevent or limit their commercial adoption and
use. One such side effect from PDT may be a period of photosensitivity to bright
light for a certain period of time after receiving PDT treatment. This period of
photosensitivity typically declines over time. Currently, this photosensitivity
is being considered in the clinical trials. Even after the FDA and other
regulatory authorities grant us their approvals, our products may later induce
adverse side effects that prevent widespread use or necessitate withdrawal from
the market. The manifestation of such side effects could cause our business to
suffer because we may not be able to recover the costs we have incurred in
developing these applications.
MARKET ACCEPTANCE OF OUR PRODUCTS OR THEIR USES IS UNCERTAIN. FAILURE TO ACHIEVE
MARKET ACCEPTANCE WILL HARM OUR BUSINESS' OVERALL CHANCES FOR PROFITABILITY.
17
Even if approved for marketing, our products may not achieve market
acceptance. Our revenues would suffer as a result. The degree of market
acceptance will depend upon a number of factors, including:
o the establishment and demonstration in the medical community of
the safety and clinical efficacy of our applications and their
potential advantages over existing applications;
o pricing and reimbursement policies of government and third-party
payers such as insurance companies, health maintenance
organizations and other plan administrators; and
o the possibility that physicians, patients, payers or the medical
community in general may be unwilling to accept, utilize or
recommend any of our applications.
In particular, since most PDT treatments still are in clinical trials,
there is no long-term safety or efficacy data available. The medical profession
may, therefore, prefer to prescribe conventional therapies, such as surgery,
chemotherapy and radiation.
If our applications are not accepted due to these or other factors, our
business will not develop as planned and may be harmed.
IF WE ARE UNABLE TO SUCCESSFULLY MAINTAIN OUR RELATIONSHIPS WITH PDT DRUG
COMPANIES AND ESTABLISH COLLABORATIVE AND LICENSING ARRANGEMENTS, WE MAY BE
UNABLE TO DEVELOP OUR PRODUCTS AND APPLICATIONS. BECAUSE OUR PRODUCTS'
APPLICATIONS MAY NEVER BECOME MARKETABLE, OUR REVENUES MAY BE ADVERSELY
AFFECTED.
We have entered into collaborative relationships with PDT drug
companies for the research and development, preclinical studies and clinical
trials, manufacturing, sales and distribution of our products and applications.
Our current and future collaborations are important to us because they allow us
access to research, development or testing resources that we would otherwise not
have. We intend to continue to rely on such collaborative arrangements. Some of
the risks and uncertainties related to our reliance on collaborations are:
o our ability to negotiate acceptable collaborative arrangements,
including those based upon existing agreements;
o future or existing collaborative arrangements may not be
successful or may not result in products that are marketed or
sold;
o collaborative relationships may limit or restrict us;
o collaborative partners are free to pursue alternative technologies
or products either on their own or with others, including our
competitors, for the diseases targeted by our applications and
products;
o our partners may fail to fulfill their contractual obligations or
terminate the relationships described above, and we may be
required to seek other partners, or expend substantial resources
to pursue these activities independently and these efforts may not
be successful; and our ability to manage, interact and coordinate
our timelines and objectives with our strategic partners may not
be successful.
18
The following risks relate principally to our common stock and its
market value:
OUR COMMON STOCK COULD BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS
DUE TO A NUMBER OF FACTORS, MANY OF WHICH WILL BE BEYOND OUR CONTROL, AND THOSE
FLUCTUATIONS MAY PREVENT OUR STOCKHOLDERS FROM RESELLING OUR COMMON STOCK AT A
PROFIT.
The securities markets have experienced extreme price and volume
fluctuations recently and the market prices of the securities of companies have
been especially volatile. This market volatility, as well as general economic or
political conditions, could reduce the market price of our common stock
regardless of our operating performance. In addition, our operating results
could be below the expectations of investment analysts and investors and, in
response, the market price of our common stock may decrease significantly. In
the past, companies that have experienced volatility in the market price of
their stock have been the subject of securities class action litigation. If we
were the subject of securities class action litigation, it could result in
substantial costs, liabilities and a diversion of management's attention and
resources.
OUR COMMON STOCK HAS NOT BEEN PUBLICLY TRADED TO ANY SIGNIFICANT EXTENT, AND WE
EXPECT THAT THE PRICE OF OUR COMMON STOCK COULD FLUCTUATE SUBSTANTIALLY.
Before this offering, there has not been any significant public market
for our common stock. An active public trading market may not develop after
completion of this offering or, if developed, may not be sustained. Although we
intend that we will list shares of our common stock for trading on the American
Stock Exchange, we cannot be certain that the AMEX will maintain our listing if
we fall below its listing qualifications. If our shares are not listed on the
AMEX, our shares are likely to be quoted on the Over-the-Counter Bulletin Board
of the National Association of Securities Dealers, where they have previously
been quoted, but where there may be less trading of our shares. The market price
for our common stock will be affected by a number of factors, including:
o our announcement of new products or new applications for our
products;
o our competitors' announcement of new products or new applications;
o quarterly variations in our or our competitors' results of
operations;
o changes in earnings estimates, recommendations by securities
analysts or our failure to achieve analysts' earning estimates;
o developments in our industry;
o the number of shares of our common stock that are available for
trading in the markets at any given time; and
o general market conditions and other factors, including factors
unrelated to our or our competitors' operating performance.
In addition, the stock prices of many companies in both the medical
device and medical services industries have experienced wide fluctuations often
unrelated to the operating performance of those companies. These factors and
price fluctuations may materially and adversely affect the market price of our
common stock.
SALES OF OUR STOCK BY STOCKHOLDERS PRIOR TO THE MERGER MAY HAVE A POTENTIAL
IMPACT ON US.
Prior to the time that Diomed has become the successor to Natexco
Corporation, there has been both public and private trading in the shares of
Natexco. We cannot be certain that the buyers or sellers in
19
those transactions will not assert claims arising out of their purchases and
sales of shares, and we cannot predict whether those claims will involve the
Company.
OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT
VOTING POWER.
Our officers, directors, and principal stockholders holding more than
5% of our common stock, together control approximately 21% of our voting stock.
As a result, if they act together, these stockholders, may be able to control
the management and affairs of our company. This concentration of ownership may
also delay or prevent a change in control and might adversely affect the market
price of our common stock. Therefore, concentration of ownership may not be in
the best interest of our other stockholders.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR STOCK.
We have never paid cash dividends on our stock and do not anticipate
paying cash dividends on our stock in the foreseeable future. The payment of
dividends on our stock will depend on our earnings, financial condition and
other business and economic factors affecting us at such time as the board of
directors may consider relevant. If we do not pay dividends, our stock may be
less valuable because a return on your investment will only occur if our stock
price appreciates.
A SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE.
If our stockholders sell substantial amounts of our common stock in the
public market, including shares issued upon the exercise of outstanding options
or warrants, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem reasonable or appropriate.
In this connection, the Company has agreed to file a registration
statement with the SEC within 120 days after the Merger and to have the
registration statement declared effective within 240 days after the Merger. The
registration statement will cover (i) 5,000,000 shares of the Company's common
stock sold in the private placement related to the Merger, (ii) 14,765,690
shares of common stock into which the Class A Stock issued in the Merger to the
former Diomed stockholders convert over a period of approximately two years
after the Merger and (iii) 121,924 shares of common stock issuable upon
conversion of the shares of Class A Stock that are issuable upon the exercise of
Diomed warrants that the Company assumed as part of the Merger. The Company has
also agreed to file, 45 days after the effectiveness of the first registration
statement, a second registration statement that will cover the 1,870,014 shares
of its common stock issuable upon conversion of all shares of Class A Stock that
are issuable upon the exercise of Diomed options that the Company assumed as
part of the Merger. If the Company's first registration statement does not
become effective, the SEC's Rule 144 will govern resale of the shares issued by
the Company and, in general, stockholders will be able to sell their shares
subject to the volume and manner of sale limitations of Rule 144, beginning one
year after the stockholders have acquired the Company's shares.
IF OUTSTANDING STOCK OPTIONS AND WARRANTS ARE EXERCISED, THE VALUE OF OUR COMMON
STOCK OUTSTANDING JUST PRIOR TO THE EXERCISE MAY BE DILUTED BECAUSE WE HAVE TO
ISSUE MORE SHARES.
20
As of December 31, 2001, there were outstanding stock options to
purchase 1,854,384 shares of common stock, with exercise prices ranging from
$1.25 to $8.23 per share, with a weighted average exercise price of $2.66 per
share. In addition, as of December 31, 2001, there were outstanding warrants to
purchase 111,924 shares of common stock, with exercise prices varying from $2.00
to $3.50 per share. If the holders exercise a significant number of these
securities at any one time, the market price of our stock could fall and the
value of our stock held by other stockholders may decrease since their shares
will be worth less after the exercise of our stock. After the exercise of
options or warrants, an increase in the number of shareholders will occur, thus
decreasing each shareholder's percentage of our total outstanding equity. The
holders of the options and warrants have the opportunity to profit if the market
price for the stock exceeds the exercise price of their respective securities,
without assuming the risk of ownership. If the market price of the common stock
does not rise above the exercise price of these securities, then they will
probably not be exercised and may expire based on their respective expiration
dates.
OUR CHARTER AND BYLAWS CONTAIN PROVISIONS THAT MAY PREVENT TRANSACTIONS THAT
COULD BE BENEFICIAL TO STOCKHOLDERS.
Our charter and bylaws restrict certain actions by our stockholders and
require greater than majority votes for certain actions. For example:
o Only our board of directors or the chairman of the board can call
special meetings of stockholders.
o Stockholders must give advance notice to the secretary of any
nominations for director or other business to be brought by
stockholders at any stockholders' meeting.
o Holders of two-thirds of our Series A Preferred Stock, must
approve any merger, debt financing, certain equity financings
involving a senior class of securities until a new board of
directors is installed.
o Upon the completion of the Merger, our board of directors will
have the authority to issue up to 700,000 additional shares of
preferred stock. Our board of directors can fix the price, rights,
preferences and privileges of the preferred stock without any
further vote or action by our stockholders. These rights,
preferences and privileges may be senior to those of the holders
of our common stock. We have no current plans to issue any shares
of preferred stock.
These and other provisions of our charter, our Class A stock and our
bylaws, as well as certain provisions of Nevada law, could prevent changes in
our management and discourage, delay or prevent a merger, tender offer or proxy
contest, even if the events could be beneficial to our stockholders. These
provisions could also limit the price that investors might be willing to pay for
our stock because these provisions may limit their rights and, thus, make an
investment in our stock appear less attractive.
DIVIDEND POLICY
It is our present policy not to pay cash dividends and to retain future
earnings to support our growth. We do not anticipate paying any cash dividends
in the foreseeable future.
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2001, on an actual basis and on a pro forma basis. You should read this table in
conjunction with our financial statements and the accompanying notes to our
financial statements, "Selected Financial Data", "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and pro forma
financial statements included elsewhere in this Current Report on Form 8-K.
21
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
ACTUAL PRO FORMA
------------------- -------------------
(UNAUDITED)
Total long-term debt $ 2,270 $ 1,813
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value $ 27 $ 14
Common stock, $0.001 par value 9 24
Additional paid-in capital 30,271 38,837
Accumulated other comprehensive loss (4) (4)
Accumulated deficit (30,019) (30,168)
Total stockholders' equity 284 8,703
Total Capitalization 2,554 10,516
22
DESCRIPTION OF THE COMPANY'S BUSINESS
OVERVIEW OF DIOMED'S BUSINESS
Diomed provides innovative clinical modalities and specializes in
developing and distributing equipment and disposable items used in minimal and
micro-invasive medical procedures. In developing and marketing our innovative
solutions, we use proprietary technology and we aim to secure strong commercial
advantages over our competitors by gaining governmental approvals in advance of
others and through exclusive commercial arrangements. To participate in the
rapidly growing minimal and micro-invasive medical procedure industry, we seek
to integrate disposable items into our product lines. Minimal and micro-invasive
medical procedures typically result in reduced pain and scarring, shorter
recovery periods and increased effectiveness compared to traditional surgical
procedures. Most of the pain associated with traditional surgical procedures
results from the slicing of the layers of skin and muscle tissue. To optimize
our revenues, we focus on clinical procedures that require the health care
provider to own our equipment and also purchase our disposable products, such as
optical fibers. We sell our products to hospital and office-based physicians,
including specialists in vascular surgery, oncology, interventional-radiology,
phlebology and dermatology.
Utilizing our proprietary technology in certain methods of
synchronizing diode light sources and in certain optical fibers, we focus on
photodynamic therapy, also known as PDT, for use in cancer treatments,
endovenous laser treatment also known as EVLT, for use in varicose vein
treatments and other clinical applications, such as dentistry and general
surgery. If the treating physician is knowledgeable about the reimbursement
system and obtains preapproval, then typically health insurance payors will
reimburse for PDT and EVLT procedures. Using high power semiconductor diodes as
their energy source, our diode lasers combine clinical efficacy, operational
efficiency and cost effectiveness in a versatile, compact, lightweight,
easy-to-use and easy-to-maintain system.
During 2001, we generated 79% of our revenues from sales of laser
devices and systems and 21% from disposable items and other accessories. Viewed
from the perspective of the treatments we address, in 2001 35% of our revenues
were from PDT applications, 35% from EVLT applications and the balance from
other surgical applications.
Diomed was incorporated on December 24, 1997 in the State of Delaware.
On June 23, 1998, Diomed succeeded to the business of Diomed, Ltd., a company
formed under the laws of the United Kingdom in 1991. It did so by offering to
issue shares of Diomed on a one-to-one exchange basis to the holders of the
shares of Diomed Ltd. As a result of the exchange, Diomed became the owner of
100% of the outstanding shares of Diomed Ltd., and Diomed Ltd. became a
wholly-owned subsidiary of Diomed. Diomed Ltd. continues to operate in the
United Kingdom. Its chief objectives are manufacturing, international sales and
marketing. Also, on June 23, 1998, we acquired the business of Laserlite LLC, a
US-based distributor of aesthetic laser systems, by issuing Diomed shares in
exchange for the outstanding membership interests of Laserlite.
Since its inception in 1991 in Cambridge, England, Diomed has focused
on the development of medical diode lasers. Our patented technology is capable
of bending light from many diodes simultaneously and concentrating them into a
very small opening, such as a small optic fiber. This proprietary diode laser
technology has made possible the simplification and minimalization of medical
procedures. Utilizing its core competency in diode light sources and optical
fibers, Diomed pioneered clinical applications for lasers that generate outcomes
superior to conventional treatments.
Diomed's management team focuses on developing and marketing solutions
that address serious medical problems that have significant markets. We
generally focus on markets that have the ability to
23
generate in excess of $100 million of revenues in a three- to five-year period
following governmental approval.
In November 2000, to enter the disposable market segment of its laser
business, Diomed acquired the medical fiber business of QLT, Inc. , known as
"QLT," a company based in Vancouver, British Columbia. Diomed acquired QLT's
rights to manufacture and market Optiguide(R) fibers that were developed for use
in photodynamic therapy cancer treatments and the distribution rights to
customers of Laserscope and Coherent, two manufacturers of medical laser
devices.
OVERVIEW OF PREDECESSOR BUSINESS
Diomed is the successor to Diomed Holdings, Inc., a corporation formed
under the laws of the State of Nevada on March 3, 1998 under the name Natexco
Corporation ("Natexco"). On February 11, 2002, Natexco changed its name to
Diomed Holdings, Inc. On February 14, 2002, Diomed Holdings acquired Diomed
pursuant to the terms of an Agreement and Plan of Merger, which we refer to as
the "Merger Agreement." In this memorandum, we refer to the merger that occurred
on February 14, 2002 under the Merger Agreement as the "Merger." As a result of
the Merger, Diomed became a wholly-owned subsidiary of Diomed Holdings, and the
future business of Diomed Holdings now is principally the business of Diomed.
Accordingly, except for this section of this memorandum, the discussion of our
business relates to Diomed's business.
For financial statement purposes, the Merger will be treated as a
recapitalization of Diomed. For tax purposes, the acquisition is structured to
qualify as a tax-free exchange of equity securities. We have not, however,
requested any ruling from the Internal Revenue Service.
We are the successor to Natexco. Natexco's initial business plan was to
provide promotional advertising and public relations services in the United
States to Canadian companies lacking the personnel and facilities to conduct
these activities outside Canada. This business plan was, however, unsuccessful.
On July 30, 2000, Natexco acquired all of the issued and outstanding shares of
common stock of Security Software Systems, Inc. ("Security Software"), a Florida
corporation incorporated on October 17, 1996. As a result of the acquisition of
Security Software, Natexco was in the sole business of developing,
manufacturing, marketing and selling security computer software designed for
access control for use by guarded communities, office buildings, high rise
condominiums, private estates, country clubs and other secure facilities.
Our sole business activity until the merger with Diomed was the
operation of Security Software.
DIOMED MERGER
On February 14, 2002, pursuant to the Merger Agreement, Diomed
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Diomed Holdings, merged with and into Diomed.
Pursuant to the Merger Agreement, Diomed Holdings, referred to as the
Company, issued:
o 2,328,922.50 shares of its Class A convertible preferred stock,
known as "Class A Stock," to the former holders of Diomed common
stock in exchange for 9,315,690 shares of common stock of Diomed
issued and outstanding as of the effective time of the Merger,
which 2,328,922.50 shares convert into 9,315,690 shares of the
Company's common stock, and
24
o 1,362,500 of its Class A Stock to the former holders of 2,725,000
shares Diomed Series A preferred stock issued and outstanding as
of the effective time of the Merger, which 1,362,500 shares
convert into 5,450,000 shares of the Company's common stock.
In connection with the Merger, the Company assumed the obligations of
Diomed with respect to Diomed's outstanding 1,870,014 stock options and 121,924
warrants. If all optionees and warrant-holders fully exercise their rights, the
Company will issue to them, respectively, 467,503.50 shares of Class A Stock,
which shares convert into 1,870,014 shares of the Company's common stock, and
30,481 shares of Class A Stock, which shares convert into 121,924 shares of the
Company's common stock.
The shares issued to the former Diomed stockholders in the Merger
represent approximately 51% of the Company's issued and outstanding voting
securities, before giving effect to options and warrants. Assuming that the
holders of the options and warrants fully exercise their rights, the shares
issued to the former Diomed stockholders in the Merger would represent
approximately 47.8% of the Company's issued and outstanding voting securities
following the Merger, the shares issued to the option holders would represent
approximately 5.8% of the Company's issued and outstanding voting securities
following the Merger and the shares issued to the warrant holders would
represent approximately 0.4% of the Company's issued and outstanding voting
securities following the Merger.
The directors of the Company appointed Peter Norris as a director of
the Company to fill a vacancy on the Board of Directors, and to serve in such
capacity until the next annual meeting of shareholders of the Company or until
his earlier resignation or removal. The directors also appointed Peter Klein,
the chief executive officer and president of Diomed as chief executive officer
and president of the Company. We anticipate that shortly after the Merger the
directors other than Mr. Norris will resign and Mr. Norris will appoint the
remaining Diomed directors as directors of the Company, subject to the
applicable rules of the Securities and Exchange Commission.
The Company has agreed to file a registration statement with the SEC
within 120 days after the Merger and to have the registration statement declared
effective within 240 days after the Merger. The registration statement will
cover (i) 5,000,000 shares of the Company's common stock sold in the private
placement related to the Merger, (ii) 14,765,690 shares of common stock into
which the Class A Stock issued in the Merger to the former Diomed stockholders
convert over a period of approximately two years after the Merger and (iii)
121,924 shares of common stock issuable upon conversion of the shares of Class A
Stock that are issuable upon the exercise of Diomed warrants that the Company
assumed as part of the Merger. Failure by the Company to meet the requirement of
effectiveness will result in a penalty payable to those stockholders who are not
able, as a consequence of such failure, to sell their sales. The Company has
also agreed to file, 45 days after the effectiveness of the first registration
statement, a second registration statement that will cover the 1,870,014 shares
of its common stock issuable upon conversion of all shares of Class A Stock that
are issuable upon the exercise of Diomed options that the Company assumed as
part of the Merger.
If the Company's registration statement does not become effective,
shares issued in the Merger and shares issued in the private placement will
generally become tradable in the public markets one year after issuance under
the SEC's Rule 144. Shares issued on the exercise of options or warrants
generally become tradeable one year after exercise, subject to the volume
limitations, manner of sale and notice of sale limitations of Rule 144.
BUSINESS STRATEGY
Our business strategy is based on our laser products and associated
disposable items, and has four key components:
25
1) RESEARCH AND DEVELOPMENT, WITH A FOCUS ON CLINICAL APPLICATIONS
We focus on the development of clinical applications for our laser
products, such as PDT and EVLT, to create and maintain a pipeline of new
clinical uses. We believe that new applications will generate demand for laser
and fiber technologies. Our assumption is that the ongoing launch of new
clinical solutions will drive revenue and income streams.
We emphasize the identification and the development of useful effective
clinical procedures. Our internal structure addresses the need for focus in this
area by means of a dedicated department with focus on new procedures. In
addition, the expenditures for the Company's research and development program
was $1.3 million in 2000 and $1.0 million in the nine months ended September 30,
2001, representing 13% and 16% of sales, respectively.
2) KEY ACQUISITIONS TO ENHANCE PROFITABILITY
We survey future acquisition targets, including fiber and diode
manufacturers, to create a one-stop laser and fiber business, with a focus on
increasing profit margins. In furtherance of this strategy, in November 2000 we
acquired QLT's manufacturing rights for the Optiguide(R) fiber.
3) STRATEGIC PARTNERSHIPS TO ENHANCE CUSTOMER REACH
We work with the world's leading PDT drug companies, including Axcan
Pharma, Inc., QLT, Pharmacyclics, Inc. and DUSA Pharmaceuticals, Inc., to bring
new treatments to market. In addition, we maintain original equipment
manufacture, or OEM, relationships with Olympus ProMarketing, Inc. and Dentek
Lasersystems Vertriebs GmbH. We plan to create long-term and exclusive working
relationships that increase laser applications and revenue potential.
Accordingly, we will continue to work with PDT drug companies beginning at an
early stage to jointly develop additional new treatments, develop the market and
obtain FDA clearance.
4) IMPROVEMENT OF RESULTS UTILIZING NEXT GENERATION LASER PROJECT
We anticipate developing the "next generation" laser to increase market
demand, further stimulating the demand for optical fibers used in clinical
procedures.
DIODE LASER TECHNOLOGY
Semiconductor laser diodes are used in optical disc drives, optical
fiber telecommunications, printers and bar code scanners. No larger than a grain
of salt, the diode chip converts electricity into laser light with such
efficiency that power consumption and heat generation are reduced. They are
related to the LEDs that are used as indicator lights in most electrical
devices. While LEDs produce light measured in milliwatts, high power laser
diodes each produce several watts of laser light. Because they are semiconductor
components, the products they support have no moving parts, are highly reliable
and can be run from a wall socket power supply with only limited requirements to
cool the components. The outcome of this miniaturization of laser technology is
a portable, lightweight, highly reliable and easy to use laser. Like electronic
semiconductors, management believes that semiconductor lasers will increasingly
replace most other laser technologies.
To achieve power levels beyond that of a single laser diode, the light
needs to be coupled from multiple diodes. One option is to attach an optical
fiber to the end of each diode and "bundle" the fibers together. This entails a
number of optical fiber joints inside the laser system to guide and couple the
light. Each optical joint reduces the amount of light that passes through the
system and each joint also has a finite lifetime that is usually less than the
life of the diode. As one optical joint fails so the others come under greater
stress and an increased likelihood of cascade failure. The result is an
inefficient optical
26
transfer where the power delivered to the working end of the fiber is a small
percentage of the power put out by the diode and a system of optical joints with
an excessive failure rate.
The core technology that gives us a competitive advantage uses an
optical arrangement to manipulate and combine the laser light in "free space",
which focuses the beams from all the laser diodes into the final optical fiber.
The ability to combine the power from a large number of laser diodes results in
a much higher efficiency of power delivered to the working site and in higher
reliability because there are no optical joints to burn out. The focusing
ability of this system also enables a more concentrated delivery of power as the
light is focused to a smaller spot size. This increased power density enables a
wider variety of medical, and other applications.
The first and most widely used medical diode laser emits laser energy
at 810nm, producing light in the near infra-red portion of the spectrum. At
powers of up to 60W and used in conjunction with a flexible optical delivery
fibre, this wavelength can be used in various surgical applications to cut,
close or vaporise soft tissue.
Semiconductor diode chips, including wavelengths of 630nm, 635nm,
652nm, 690nm and 730nm, are available, thereby permitting the development of
practical, portable laser systems for photodynamic therapy in the treatment of
certain types of cancer.
Practical and versatile, the diode laser can be used in the operating
theatre, outpatient clinic and the doctor's office as well as permitting shared
use between hospital departments. With healthcare providers under increasing
pressure to cut costs yet maintain a high standard of treatment, diode laser
technology can assist in achieving these targets
PRODUCTS, COMPETENCIES AND MARKET OPPORTUNITIES
Our focus on the development of minimal and micro invasive medical
procedures has led to an array of applications, which are described below.
Minimal and micro-invasive medical procedures in general are a growing market,
as they reduce the need for general anesthesia, expensive hospital stays, and
long and painful recovery periods. The procedures that we address with our
products are those that have the capability to produce a steady revenue stream
through sale of a disposable, such as a fiber, as well as the laser itself. With
the procedures described below, we have demonstrated our skill and ability to be
first to market in the United States with innovative treatment options, thereby
providing meaningful new treatment options and the foundation for a profitable
growing business.
1. CANCER TREATMENTS UTILIZING PDT. PDT is an effective treatment for
late-stage lung and esophageal cancers and is under study for treatment of
various other cancers throughout the body. Photodynamic therapy is based on the
discovery that certain chemicals can kill one-celled organisms in the presence
of light. Recent interest in photosensitizing agents stems from research showing
that some of these substances have a tendency to collect in cancer cells. The
photosensitizing agent injected into the body is absorbed by all cells. The
agent remains in or around tumor cells for a longer time than it does in normal
tissue. When treated cancer cells are exposed to red light from a laser, the
light is absorbed by the photosensitizing agent. This light absorption causes a
chemical reaction that destroys the tumor cells. Light exposure is carefully
timed to coincide with the period when most of the agent has left healthy cells
but still remains in cancer cells. There are several promising features of PDT:
(1) cancer cells can be selectively destroyed while most normal cells are
spared, (2) the damaging effect of the photosensitizing agent occurs only when
the substance is exposed to light, and (3) the side effects are relatively mild.
The laser light used in PDT is directed through an optical fiber (a very thin
glass strand). The optical fiber is placed close to the cancer to deliver the
proper amount of light. For example, the fiberoptic can be
27
directed through a bronchoscope into the lungs for the treatment of lung cancer
or through an endoscope into the esophagus for the treatment of esophageal
cancer.
Our proprietary technology, when used in combination with a
photosensitizing drug, provides the cancer therapy. As indicated, PDT requires
three-interacting elements: (1) a photosensitive drug that is absorbed by
cancerous and abnormal cells, (2) a light source (laser) of a specific
wavelength that activates the drug, and (3) a delivery system, including a thin
optical-fiber to guide the light source to the target area. PDT technology is
only effective when these three components are working in concert.
We supply laser technology, services and disposables to the global PDT
industry. We work jointly and early on with PDT drug companies in their clinical
development process in order to design a laser that optimizes the most effective
wavelength in combination with their PDT drugs. We have long-term agreements
with some of the world's other leading PDT drug companies, including Axcan,
DUSA, Pharmacyclics and QLT, and have sold each of them lasers to be used in
clinical trials for PDT applications.
In the US, regulatory approval by the FDA is given for each specific
treatment in response to a specific pre-market approval application, or PMA.
Each PMA is generally addressed to a use for the device that the PMA specifies.
The FDA considers PDT a modality that requires a combination PMA approval, where
the PDT drug company, laser manufacturer and fiber manufacturer work together to
obtain regulatory approval for the complete medical procedure. The lengthy
regulatory approval process and FDA modality factor create significant obstacles
to potential competition. In addition, we forged collaborative relationships
with the most significant players in PDT drug development, thus limiting the
Company's risk should one of the PDT companies fail to receive regulatory
approval or perform poorly in the marketplace.
We are the first diode laser manufacturer to receive FDA clearance for
its laser's use in PDT cancer treatments. In August 2000, Axcan and Diomed
together received regulatory approval for Diomed's 630nm laser and Optiguide(R)
fiber, and Axcan's Photofrin drug used in the cancer treatment for late stage
lung and esophagial cancers. In November 2000, Diomed entered into a 5-year
exclusive supply contract with Axcan for lasers.
Axcan is developing other clinical applications using Photofrin,
including treatment for Barrett's Esophagus, a pre-cursor to cancer of the
esophagus. Diomed believes that Axcan will receive FDA clearance for Photofrin
in the treatment of Barrett's Esophagus by the end of 2002.
Notwithstanding these market opportunities for PDT, our understanding
is derived from a variety of sources, and represents our best estimate of the
overall market sizes presented in certain disease areas. The actual market size
and our market share, depend upon a number of factors, including:
o competitive treatments, either existing or those that may arise in
the future;
o our products' performance and subsequent labelling claims; and
o actual patient population at and beyond product launch.
2. ENDOVENOUS LASER TREATMENT ("EVLT"). We developed an innovative
minimally invasive laser procedure for the treatment of varicose veins caused by
greater saphenous vein reflux. The causes of varicose veins are genetic. People
with past vein diseases, new mothers, overweight individuals, and people with
jobs or hobbies that require extended standing also are at risk. According to a
1973 study by Tecumseh Health of Alabama, approximately 25% of women in the US,
have varicose veins. In addition, varicose veins are more prevalent in older
people. According to the Tecumseh study, approximately 42% of Americans over age
60 have varicose veins and this number is increasing as the population continues
28
to age and to live longer lives. The Tecumseh study also indicates that 72% of
women over age 60 in the US have varicose veins. According to the American
Association of Retired Persons, approximately 76 million people in the US are 50
or older, and approximately an additional 4 million people turn 50 each year.
Diomed believes that worldwide more than one million people undergo
vein-stripping operations each year, but there are many more who suffer the
pain, discomfort and unattractive appearance of their legs in order to avoid
having surgery to treat their condition. We believe that most patients who
undergo vein-stripping procedures are candidates for EVLT. EVLT has several
competitive advantages over the current vein-stripping treatment. EVLT is a 45
to 60-minute procedure per leg that can be performed in a physician's office,
under local anesthesia and with the procedure guided by ultrasound technology.
EVLT also has a quick recovery period, reduced pain and minimal scarring. In an
EVLT treatment, the area of the leg affected is anesthetized locally and a thin
laser fiber is inserted into the abnormal vein to, deliver the laser energy in
short pulses. At the end of the procedure, the fiber is withdrawn and a
compression bandage is applied and worn up to three days. In addition, a
compression stocking is worn for seven days. Patients can resume their normal
routine, barring vigorous physical activities, directly after receiving the
laser treatment. Vein stripping is a surgical procedure that requires an
overnight hospital stay, a painful recovery period of six to eight weeks, and
possibly post-op scarring from incisions and post-op infections. During clinical
studies, 97% of first-time EVLT treatments in clinical trials have been
successful. A second EVLT treatment has successfully resolved the remaining
cases.
We developed a complete clinical solution and marketing model,
including a laser, disposable kit, and a training and a marketing plan, to
assist physicians and clinics in responding to the demand for treatment of
varicose veins in a minimally invasive manner. EVLT is attractive to physicians
because it's a rapid treatment for patients, reduces costs by up to 50%, is an
efficient use of resources, reduces the rate of complications and we believe
that patients will request this treatment. Also, EVLT is considered a
non-cosmetic procedure that is reimbursable by health insurance providers if the
treating physician is knowledgeable about the reimbursement system and obtains
preapproval.
In September 2001, we were the first company to receive the CE mark of
the European Economic Union for approval for marketing EVLT in Europe.
On January 22, 2002, we became the first company to receive FDA
clearance for EVLT.
3. FIBERS AND DISPOSABLE ITEMS. We also provide the health care
industry with the optical fiber, which is the necessary system that delivers the
laserlight during surgical, PDT and EVLT procedures. These sterile fibers,
typically used only once, can generate a steady stream of revenue.
The potential market for fibers and disposable items is driven by the
adoption rate of the specific clinical procedure. We have and will continue to
generate a disposable market by developing and promoting specific procedures,
such as PDT and EVLT treatments. As the volume of PDT increases and as EVLT
replaces the more expensive vein-stripping procedure, so will the volume of
fibers used in these treatments. As a result, we believe that our revenue stream
is likely to increase.
4. OTHER APPLICATIONS. Our technologies are also used in general
surgical applications as well as in dental applications. While our focus is on
the development of specific applications, such as cancer treatment with PDT and
varicose vein treatment with EVLT, other medical applications can be, and are
being, performed with our lasers. As our laser and fiber technology is
sufficiently versatile, that users may employ our technology for other surgical
procedures. Potential applications that we may address include:
29
NASAL POLYPECTOMY: Nasal polyps are usually benign growths in the nose,
which are removed with the laser with minimal bleeding and quick recovery
period.
TURBINATE REDUCTION: The turbinates are structures in the nose which
can become enlarged due to conditions such as allergies and obstruct the
airways. The laser can be used to reduce their size and clear the blockage.
Other nasal procedures include: Ethmoidectomy, Meatal antrostomy, Maxillary
endo-sinus surgery. These various procedures involve the removal of blockages,
opening up of the various airways and gaining access to various structures
within the nose.
DACRYOCYSTORHINOSTOMY (DCR): Tear ducts take tears from the corner of
the eye down into the nose. Blockage of the tear ducts results in watery eyes.
The laser fiber can be used down the tear duct to reopen the channel into the
nose and resolve the problem. This simple procedure can be performed under local
anaesthetic, is less traumatic than conventional surgery and leaves no surgical
scarring.
ONTOLOGICAL SURGERY: By carbonizing the end of the fiber, the trapped
laser energy heats up the tip producing in effect a tiny `hot knife', which can
be used, for cutting away tissue in a variety of conditions in the ear. The fine
tip size makes it a very controllable tool. Applications include Stapedotomy and
Stapedectomy (treatments involving the auditory bones in the ear to correct
hearing problems) , Myringotomy (incision in eardrum to relieve pressure from
infection), Cholesteatoma and Acoustic neuroma (benign growths in the ear which
are removed).
UVULOPALATOPLASTY (LAUP): Reshaping of the soft palate and uvula at the
back of the mouth is done in severe cases to reduce snoring and can be performed
in one session using a fine sculpted tip fiber. The coagulated area surrounding
the incision ensures virtually no blood loss, faster patient recovery and
minimal post-operative nursing requirements.
VAPORIZATION OF TUMORS: Areas of abnormal tissue due to inflammation or
infection can be destroyed or reduced in size with heat energy. The laser
delivers this in a very controllable way with a known depth of effect, which
avoids damage to surrounding structures.
GI: Cancer in the gullet will grow and block the tube stopping the
patient from swallowing. The cancer can be reduced in size and the tube reopened
using the laser. This relieves the symptoms allowing the patient to eat fairly
normally often returning home. It does not cure the cancer but produces a
temporary improvement in quality of life.
VASCULAR LESIONS: Although seen as primarily a cosmetic problem,
vascular and pigmented lesions can have a profound effect on lifestyle
especially when they occur in young people. For many years lasers have been used
to deal with such lesions with a high degree of success. Such treatments are
simple to perform and the nature of the laser light allows for a high degree of
precision while side effects are kept to a minimum. The laser can be used by
shining it through the skin (transdermally) to reduce the lesions' appearance.
Delivery of the laser energy is simplified by a range of specially designed hand
pieces.
There may be one or more common pathways for the development of
products for these potential applications. In general, however, each of them
will require extensive preclinical studies, successful clinical trials and
cleared PMA's or 510(k)'s before we can generate significant revenues from them.
We may rely on third parties, including our collaborative partners, to design
and conduct any required clinical trials. If, we are not be able to find
appropriate third parties to design and conduct clinical trials, and if we do
not have the resources to administer clinical trials in-house, this process may
become even more lengthy and expensive. Since we do work with third parties,
those parties generally maintain certain rights to control aspects of the
application development and clinical programs. Our business depends in
30
part on our ability to obtain regulatory approval for expanding applications and
uses of our products. Therefore, delays or other related problems may adversely
affect our ability to generate future revenues.
We may rely on third parties, including our collaborative partners, to
design and conduct any required clinical trials. In the future, we may not be
able to find appropriate third parties to design and conduct clinical trials or
we may not have the resources to administer clinical trials in-house. Therefore,
this process may become even more lengthy and expensive. Moreover, our
collaborative partners have certain rights to control aspects of the application
development and clinical programs. As a result, these programs might not be
conducted in the manner we currently contemplate. Since our business' success is
heavily dependent upon our ability to achieve regulatory approval for the
applications and uses of our products, our revenues may be adversely affected by
delays or other related problems.
Data already obtained from preclinical studies and clinical trials of
our products under development does not necessarily demonstrate that favorable
results will be obtained from future preclinical studies and clinical trials. A
number of companies in the medical devices industry, as in the pharmaceutical
industry, have suffered setbacks in advanced clinical trials, even after
promising results in earlier trials.
5. ORIGINAL EQUIPMENT MANUFACTURING. Our technology and manufacturing
capability has attracted OEM partners. In this relationship, we produce the
laser and other products to the OEM's specifications, which will then be
marketed under the OEM's label. Our most prominent OEM relationship is with
Olympus in Japan, which is using our technology for surgical and dental
applications. In addition we have a long-term partnership with Dentek
Lasersystems Vertriebs GmbH, which is using our laser module for dental
applications.
MANUFACTURING
We manufacture our products with components and subassemblies that our
subcontractors supply. We assemble and test each of our products at our
Cambridge, England facility. Ensuring adequate inventory, continuous cost
reduction and superior product quality are top priorities of our manufacturing
operations. To achieve our goals, we:
o work closely with our research and development, and sales and
marketing teams; and
o effectively manage a limited number of the most qualified
suppliers.
We use a variety of materials, including mechanical, electronic,
optical components and subassemblies for the lasers, plus other materials that
our customers purchase for direct consumption, such as fibers and kits. With the
lasers constructed in the UK, local high-quality sources of supply are utilized
for metalwork components and subassemblies. We procure standard
off-the-shelf-electronic components from various UK suppliers. Because of their
complexity, high quality requirements and relatively low volumes we choose to
procure our optical components from a single source. Currently, the majority of
these suppliers are located in Japan and Europe. We also use a number of
different laser diodes for our various products. The diodes are also currently
single-sourced, although we are currently exploring available opportunities for
dual sourcing. In addition, we purchase the fibers contained in our clinical
solution kits, and those fibers required to support our FibersDirect.com
business, from suppliers in the US.
Lead times for components and materials may vary significantly
depending on the size of the order, specific supplier requirements and current
market demand for the components. Inability of our suppliers to meet our
requirements on a timely basis, could interrupt our production until we obtain
an
31
alternative source of supply. To date, we have not experienced significant
delays in obtaining any of our products.
Although most of our raw materials and components are available from
various sources, we are currently developing qualified backup suppliers for each
of these resources.
We are required to manufacture our products to comply with the
international standard ISO 13485:2001 and the FDA's Quality System Regulations,
or QSR. The ISO 13485 and QSR cover the methods and documentation of the design,
testing, control, labeling, packaging, storage and shipping of our products. Our
manufacturing facility is subject to periodic audits by a notified body to
maintain its ISO approval, and is also auditable by the FDA. Our failure to
maintain compliance with the ISO 13485 and QSR requirements could result in the
shut down of our manufacturing operations and the recall of our products. If one
of our suppliers were not to maintain compliance with our quality requirements,
we might have to qualify a new supplier and could experience manufacturing
delays as a result.
In November 1999, we became certified to manufacture in the United
Kingdom and upgraded to ISO 13485 in 2001.
SALES AND MARKETING
Diomed began selling its products in the US in 1998, and as a result,
the Company has limited sales and marketing experience in the US market. We
sell, market and distribute our products and services through independent sales
representatives, or ISR's. We do not employ our ISR's, and, although they commit
to achieving certain minimum sales targets, we compensate them on commission
only. We formally implemented our strategy of using ISR's in the later half of
2001, before the FDA approved our EVLT product. We are currently evaluating our
ISR infrastructure and expect to expand into other strategic geographic
territories on an as-needed basis. Diomed will not, however, know the overall
effectiveness of its ISR infrastructure until the ISR's demonstrate whether they
can meet or exceed the minimum sales targets for EVLT, now that the FDA has
approved it.
In November 2000, we formed FibersDirect.com, a U.S. business unit that
promotes, sells and distributes optical fibers and other optical-delivery system
accessories for clinical applications directly to clinical end users. Acting as
an e-commerce and direct marketing conduit, FibersDirect.com distributes fibers
directly from the manufacturer to the end-user. The resulting savings in
distribution costs can significantly contribute to both lower prices for
end-users, and increased profitability and margins for us. Our OPTIGUIDE(R)
fibers, used in PDT cancer treatments, are promoted, sold and distributed via
FibersDirect.com. Subsequent to the FDA's clearance of EVLT, FibersDirect.com
will also promote, sell and distribute fibers used in EVLT procedures.
Internationally, we sell, market and distribute our products and services
through a network of distributors in Europe, the Middle East, South America,
Central America and Asia. We typically commit our distributors to minimum sales
targets. In addition, we develop and maintain strategic marketing alliances.
These alliances exist under agreements with include Olympus ProMarketing, Inc.,
Axcan Pharma, Inc., Dentek Lasersystems Veritriebs GmbH, Pharmacyclics Inc. and
DUSA Pharmacyclics, Inc., for certain products and market segments.
We target our marketing efforts to physicians through office visits,
trade shows and trade journals, and to consumers through glossy brochures and
the Company's websites. Our sales philosophy includes establishing strong
collaborations with well-known people in the industry regarding our technology
platforms, compiling substantive clinical data and supporting the publication of
peer review articles. Currently, we are the only EVLT manufacturer to have peer
review articles published in
32
scientific journals, such as The Journal of Vascular and International Radiology
and Dermatologic Survey. With respect to EVLT, we believe that we have collected
more clinical data regarding our products and their application then any of our
competitors.
Historically, over 35% of our revenues have been dependent upon a few
major customers. Going forward, we believe that our overall dependence on any
individual customer or group of customers will decrease, as more of our revenues
will derive from sales of EVLT directly to individual physician practices and
less to large-scale distributors.
COMPETITION
The medical device industry is highly competitive and regulated, and is
subject to rapid and substantial technological change. We compete primarily on
the basis of performance, brand name, reputation and price. Developments by
others, both public and private, may render our products under development or
existing technologies noncompetitive or obsolete, or we may be unable to keep
pace with technological developments and other market factors. Existing and
potential competitors may develop products and clinical solutions that could
prove to be more effective, safer or less costly than our products and clinical
solutions. Many of these competitors have significantly greater financial and
human resources than we do, and have established reputations as well as
worldwide distribution channels that are more effective than ours. Such
competition involves an intensive search for technological innovations and the
ability to market these innovations effectively. The introduction of new
products and clinical applications by competitors may result in price
reductions, reduced margins, loss of market share and product replacements, even
for products protected by patents. There can be no assurance that competitors,
many of which may have made substantial investments in competing technologies,
would not prevent, limit or interfere with our ability to make, use or sell our
products either in the United States or in international markets. To compete
effectively in the marketplace, we require the financial resources to support,
research and development, regulatory, quality control, an efficient sales and
marketing infrastructure, an efficient distribution system and a strong
technical-information and training service.
In the cancer treatment market, our competitors include manufacturers
and marketers of surgical and radiation therapy devices, and all the
pharmaceutical companies that provide various drugs used in chemotherapy and
immunotherapy. Within the specific PDT market, Lumenis, Laserscope and Biolitec
are our main competitors. However, we currently have the only approved diode
laser in the US for PDT cancer applications, which is used in conjunction with
Axcan Pharma, Inc.'s Photofrin drug for late stage lung and esophagus cancers.
We also face competition from current widespread treatment practices,
including surgery, chemotherapy and radiation. Since most PDT cancer treatments
are still in clinical trials, no long-term safety or efficacy data is available.
As a result, cancer patients may be more likely to choose proven traditional
forms of treatment to extend their lives.
We expect that our principal methods of competition with other PDT
support companies will be based upon such factors as:
o the ease of administration of our partners' PDT;
o the degree of generalized skin sensitivity to light;
o the number of required doses;
o the safety and efficacy profile;
o the selectivity of PDT drug for the target lesion or tissue of
interest;
o the type and cost of our light systems; and
o the cost of our partners' drug.
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Increased competition could result in:
o price reductions;
o lower levels of third-party reimbursements;
o failure to achieve market acceptance; and
o loss of market share.
In the vein treatment market, our competitors include manufacturers and
marketers of surgical and radiofrequency devices, and pharmaceutical companies
that provide drugs used in sclerotherapy and other vascular diseases. Within the
specific EVLT market, Lumenis, Biolitec and Dornier are potentially our main
competitors for surgical diode lasers. However, those companies do not currently
have regulatory approval for EVLT.
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
We hold the following US and international patents: solid state laser
diode light source, high power light source, laser diode drive circuit,
peltier-cooled apparatus and methods for dermatological treatment and medical
spacing guide. These patents expire from 2011 to 2018. Diomed has licensed
technology for optical fiber diffusers from under a royalty-bearing license from
Health Research, Inc. having a term that expires in 2010. The license provides
for earlier termination, however, if we breach its terms.
We hold the following US trademark trademarks: Diomed and Optiguide. We
have initiated but have not yet completed the registration of EVLT or Summer
Legs as trademarks or trade names.
Our proprietary technology includes:
o a device for scanning laser beams in a pre-defined pattern
across the patient's skin.
o an enclosure for protecting laser diodes and modules.
o a low cost method for measuring the light from optical
fibres of differing geometry (under development).
o a common platform for laser diodes of different
wavelengths.
o a user interface that is appropriate to the clinical
setting.
o a monolithic optical geometry for implementing the patented
technology
o a means for driving the laser diodes that provides a wide
dynamic range; and
o a means for efficiently removing heat from the diodes
thereby allowing the instrument to operate with standard
line power as the only service.
We registered various domain names, including diomedinc.com,
diomed-lasers.com, fibersdirect.com, fibresdirect.com, summerlegs.com and
evlt.com.
The patent position of medical device firms generally is highly
uncertain. Some of the risks and uncertainties include:
o the patent applications owned by or licensed to us may not
result in issued patents;
o our issued patents may not provide us with proprietary
protection or competitive advantages;
o our issued patents may be infringed upon or designed around
by others;
o our issued patents may be challenged by others and held to
be invalid or unenforceable;
o the patents of others may have a material adverse effect on
us; and
34
o significant time and funds may be necessary to defend our
patents.
We are aware that our competitors and others have been issued patents
relating to optical fibers and laser devices. In addition, our competitors and
others may have been issued patents or filed patent applications relating to
other potentially competitive products of which we are not aware. Further, in
the future our competitors and others may file applications for, or otherwise
obtain, proprietary rights to such products. These existing or future patents,
applications or rights may conflict with our patents or applications. These
conflicts could result in a rejection of our or our licensors' applications or
the invalidation of the patents, any of which could have a material adverse
effect on our ability to focus on the development or marketing of these
applications. If conflicts occur, or if we believe that other products may
infringe on our proprietary rights, we may pursue litigation or other legal
proceedings, or may be required to defend against litigation. Legal proceedings
may materially adversely affect our competitive position, and we may not be
successful in any such proceeding. Litigation and other proceedings can be
expensive and time consuming, regardless of whether we prevail. This can result
in the diversion of substantial financial, managerial and other resources from
other activities. An adverse outcome could subject us to significant liabilities
to third parties or require us to cease any related research and development
activities or product sales. Some of the risks and uncertainties include:
o we may be required to obtain licenses under dominating or
conflicting patents or other proprietary rights of others;
o these licenses may not be made available on terms acceptable to
us, if at all; and
o if we do not obtain such licenses, we could encounter delays or
could find that the development, manufacture or sale of products
requiring such licenses is foreclosed.
We also seek to protect our proprietary technology and processes in
part by confidentiality agreements with our collaborative partners, employees
and consultants. These third parties may breach their agreements with us, and we
may not have adequate remedies for their breach. Also, competitors may
independently learn or discover our trade secrets.
GOVERNMENT APPROVAL
The FDA and comparable international regulatory bodies regulate our
medical device products and their applications. The FDA governs, among other
things, the following activities that we or our partners perform:
o product design and development;
o product testing;
o product manufacturing;
o product labeling;
o product storage;
o premarket clearance or approval;
o advertising and promotion; and
o product sales and distribution.
Unless an exemption applies, each medical device we wish to
commercially distribute in the United States will require either prior clearance
on the basis of what is called a "510(k) application," or premarket approval
from the FDA. The FDA classifies medical devices that are manufactured or sold
in the US into one of three classes. Devices deemed to pose lower risks are
placed in either class I or II, which requires the manufacturer to submit to the
FDA a premarket notification requesting permission to commercially distribute
the device. This process is generally known as 510(k) pre-market notification.
35
Some low risks devices are exempted from this requirement. Devices deemed by the
FDA to pose the greatest risk, such as life-sustaining, life-supporting or
implantable devices, or devices deemed not substantially equivalent to a
previously cleared 510(k) device, are placed in class III, requiring premarket
approval.
Our laser devices require either 510(k) or PMA approval, depending on
the clinical application. These devices generally qualify for clearance under
510(k) procedures. We are the first diode laser manufacturer to receive FDA
clearance for use of our laser in PDT cancer treatments. In August 2000, Axcan
Pharma, Inc. and Diomed, Inc. received regulatory approval for our 630nm laser
and Optiguide(R) fiber, and Axcan's Photofrin drug used in the cancer treatment
for late stage lung and esophageal cancers. On January 22, 2002, we were the
first company to receive FDA clearance for EVLT, making Diomed the first company
to receive FDA clearance for this modality and use. Specifically, the FDA
approved Diomed's surgical laser and EVLT procedure kit as intended for use in
coagulation of the greater sapphous vein of the thigh in patients with varicose
veins and specifically found that it would not require Diomed to submit a PMA
for this use.
To obtain 510(k) clearance, we must submit a premarket notification
demonstrating that our proposed device is substantially equivalent to a
previously cleared 510(k) device or a device that was in commercial distribution
before May 28, 1976 for which the FDA has not yet called for the submission of
premarket approval applications, or PMA's. The FDA's 510(k) clearance review has
recently taken from three to twelve months from the date the application is
submitted, but it can take significantly longer.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance or,
alternatively, could require premarket approval. The FDA requires each
manufacturer to make this determination initially, but the FDA can review any
such decision and can disagree with a manufacturer's determination. If the FDA
disagrees with a manufacturer's determination, the FDA can require the
manufacturer to cease marketing and/or recall the modified device until 510(k)
clearance or obtain premarket approval. If the FDA requires us to seek 510(k)
clearance or premarket approval for any modifications to a previously cleared
product, we may be required to cease marketing or recall the modified device for
the unapproved, or so called "offlabel", use until we obtain this clearance or
approval. Also, in these circumstances, we may be subject to significant
regulatory fines or penalties.
We must submit a PMA to the FDA if we are not permitted to clear the
device through the 510(k) process. We must support our, PMA with extensive data
including, technical, preclinical, clinical trials, manufacturing and labeling,
to demonstrate the safety and efficiency of the device, to FDA's satisfaction.
After we file a PMA, the FDA conducts an in-depth review of the
submitted information. This review generally takes one to three years, but may
take significantly longer. During this review period, the FDA may request
additional information or clarification of information provided. Also during the
review period, in many cases an advisory panel of experts from outside the FDA
may be convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the device. In addition,
the FDA will conduct a pre-approval inspection of our manufacturing facility to
insure compliance with its quality system regulations, or GMP. The FDA requires
new PMAs or application supplements for significant modifications to the
manufacturing process, labeling and design of a device that is approved through
the premarket approval process. Premarket approval supplements often require
submission of the same type of information as a PMA, except that the supplement
may be limited to information needed to support any changes from the device
covered by the original PMA, and may not require as extensive clinical data or
the convening of an advisory panel.
36
We expect that any additional applications that we may seek for our
existing laser products will require premarket approval. The FDA requires
premarket approval for each specific clinical procedure.
The FDA generally requires at least one clinical trial to support a PMA
and occasionally to support a 510(k) premarket notification. These trials
generally require submission to the FDA of an application for investigational
device exemption, or IDE. We must support the IDE application with appropriate
data, such as animal and laboratory testing results, showing that it is safe to
test the device in humans and that the testing protocol is scientifically sound.
The FDA must approve the application in advance for a specified number of
patients, unless the FDA deems the product to be a non-significant risk device
and eligible for more abbreviated IDE requirements. Clinical trials for a
significant risk device may begin once the FDA and the appropriate institutional
review boards at the clinical trial sites clear the application. Future clinical
trials of our products may require that we submit and obtain clearance of an IDE
from the FDA prior to commencing clinical trials. The results of clinical
testing may not be sufficient to obtain clearance or approval of a new intended
use of our device.
After a device is placed on the market, numerous regulatory
requirements apply. These include:
o quality system regulations, which require manufacturers to follow
design, testing, control, documentation and other quality
assurance procedures during the manufacturing process;
o labeling regulations, which prohibit the promotion of products for
uncleared or unapproved, or off-label uses; and
o medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way
that would likely cause or contribute to a death or serious injury
if it were to recur.
Failure to comply with applicable regulatory requirements can result in
enforcement action by the FDA, which may include one or more of the following
sanctions:
o fines, injunctions and civil penalties;
o recall or seizure of our products;
o operating restrictions, partial suspension or total shutdown of
production;
o refusing our requests for 510(k) clearance or premarket approval
of new products or new intended uses;
o withdrawing 510(k) clearance or premarket approvals that are
already granted; and o criminal prosecution.
We are also regulated under the Radiation Control for Health and Safety
Act, which requires laser products to comply with performance standards,
including design and operation requirements, and manufacturers to certify in
product labeling and in reports to the FDA that their products comply with all
such standards. The law also requires laser manufacturers to file new product
and annual reports, maintain manufacturing, testing and sales records, and
report product defects. We must affix various warning labels and install certain
protective devices, depending on the class of the product.
Foreign governmental regulations, which vary substantially from country
to country govern international sales of medical devices. The time required to
obtain clearance or approval by a foreign country, may be longer or shorter than
that required for FDA clearance or approval, and the requirements may be
different.
37
Some of the risks and uncertainties of international governmental
regulation include:
o foreign regulatory requirements governing testing, development,
marketing, licensing, pricing and/or distribution of drugs and
devices in other countries;
o our products may not qualify for the centralized review procedure
or we may not be able to obtain a national market application that
would be accepted by other European Union, also known at EU,
member states;
o our devices must also meet the new Medical Device Directive that
became effective in Europe in 1998. The Directive requires that
our manufacturing quality assurance systems and compliance with
technical essential requirements be certified with a CE Mark
authorized by a registered notified body of an EU member state
prior to free sale in the EU; and
o registration and approval of a photodynamic therapy product in
other countries, such as Japan, may include additional procedures
and requirements, nonclinical and clinical studies, and may
require the assistance of native corporate partners.
These uncertainties could cause delays in our products entering the
international market or cause our expenses to increase significantly.
The primary regulatory environment in Europe is that of the European
Union, which consists of fifteen countries encompassing most of the major
countries in Europe. Other countries, such as Switzerland, have voluntarily
adopted laws and regulations that mirror those of the European Union with
respect to medical devices. The European Union has adopted numerous directives
and standards regulating the design, manufacture, clinical trials, labeling and
adverse event reporting for medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear CE conformity
marking, such as issued by the British Standards Institute, indicating that the
device conforms with the essential requirements of the applicable directives
and, accordingly, can be commercially distributed throughout Europe. The method
of assessing conformity varies depending on the class of the product, but
normally involves a combination of self-assessment by the manufacturer and a
third-party assessment by an official body. This third-party assessment may
consist of an audit of the manufacturer's quality system and specific testing of
the manufacturer's device. An assessment in one country within the European
Union is required in order for a manufacturer to commercially distribute the
product throughout the European Union. ISO 9001 certification is one of the CE
Mark certification requirements. In November 1999, our facility was awarded ISO
9001 and EN 46001 certification, thereby allowing us to apply the CE mark to our
products and market them throughout the European Union. In September 2001, we
were the first company to receive the CE mark of approval for marketing EVLT in
Europe.
THIRD PARTY REIMBURSEMENT
Securing reimbursement for our existing and future products is critical
to our success. In the United States, health care providers generally rely on
third-party payors, principally private health insurance plans, Medicare and
Medicaid to reimburse all or part of the cost of procedures in which medical
devices are used. However, we cannot assure that PDT and EVLT procedures, and
future clinical procedures will be reimbursed or that the amounts reimbursed
would be adequate.
The current cost reduction orientation of the third-party payor
community makes it exceedingly difficult for new medical devices and surgical
procedures to obtain reimbursement. Often, it is necessary to convince these
payors that the new devices or procedures will establish an overall cost savings
compared to currently reimbursed devices and procedures. We believe that EVLT
may offer an opportunity for payors to reduce the costs of treating varicose
vein patients by possibly reducing significantly the number of vein stripping
procedures performed. While we believe that EVLT possesses
38
economic advantages that will be attractive to payors, we cannot assure that
they will make reimbursement decisions based upon these advantages.
Reimbursement by third-party payors is often positively influenced by
the existence of peer-reviewed publications of safety and efficacy data. In
regards to EVLT, Diomed currently exceeds the competition in the magnitude of
clinical data it has compiled, and is currently the only company to have
peer-reviewed articles published in scientific journals, such as The Journal of
Vascular and Interventional Radiology and Dermalogic Survey.
Reimbursement systems in international markets vary significantly by
country and, within some countries, by region. Reimbursement approvals must be
obtained on a country-by-country basis or a region-by-region basis. In addition,
reimbursement systems in international markets may include both private and
government-sponsored insurance. We cannot be certain that we will be able to
continue to obtain such approvals in a timely manner, if at all. If we fail to
receive acceptable levels of international reimbursement approvals, market
acceptance of our products is likely to be adversely affected.
Nevertheless, the efforts of governments and third-party payors to
contain or reduce the cost of healthcare will continue to affect our business
and financial condition as a medical device company. In foreign markets, pricing
or profitability of medical products and services may be subject to government
control. In the United States, we expect that there will continue to be federal
and state proposals for government control of pricing and profitability. In
addition, increasing emphasis on managed healthcare has increased pressure on
pricing of medical products and will continue to do so. These cost controls may
have a material adverse effect on our revenues and profitability and may affect
our ability to raise additional capital.
In addition, cost control initiatives could adversely affect our
business in a number of ways, including:
o decreasing the price we, or any of our partners or licensees,
receive for any of our products;
o preventing the recovery of development costs, which could be
substantial; and
o limiting profit margins.
PRODUCT LIABILITY RISK
Our development of innovative solutions exposes us to significant
inherent, industry-wide risks of allegations of product liability. Patients or
others who use or sell our product may make these claims.
The following are some of the risks related to liability and recall:
o we are subject to the inherent risk that a governmental authority
or third party may require the recall of one or more of our
products;
o if we obtain insurance coverage in the future, this coverage may
not be available at a reasonable cost if at all, or in amounts
sufficient to protect us against claims that may be made; and
o liability claims relating to our products or a product recall
could adversely affect our ability to obtain or maintain
regulatory approval for our products and their applications.
NUMBER OF EMPLOYEES
As of December 31, 2001 we employed a total of 49 full-time employees,
with 7 employees in marketing and sales, 6 employees in research and
development, 16 employees in manufacturing, 4
39
employees in regulatory and quality control, 3 employees in service, and 13
employees in general and administrative. General and administrative includes
finance, information technology, human resources, order processing and
management. Forty employees are based at Diomed Ltd, our wholly-owned subsidiary
in Cambridge, England, where manufacturing, international sales and the bulk of
marketing operations are conducted. In the US, there are nine employees,
including seven at our headquarters in Andover, MA, where most of our Senior
Management team is based, and two employees for sales and service management
based in other strategic locations. We believe that our future success will
depend in part on our continued ability to attract, hire and retain qualified
personnel. None of our employees is represented by a labor union and we believe
our employee relations are good.
FACILITIES
We own no real property. We occupy 20,500 square feet of office,
manufacturing, and research and development space in Cambridge, UK under a lease
expiring in April 2024. The Company, however, has the option to terminate the
lease agreement at the end of 15 years. If the Company chooses not to exercise
its termination option, the lease agreement will continue for the remaining 10
years. We have sublet a portion of this space. We also occupy 2,563 square feet
of office space in Andover, Massachusetts under a lease expiring in June 2004.
We believe that these facilities are in good condition and are suitable and
adequate for its current operations.
LEGAL PROCEEDINGS
On October 22, 2001, MBG Technologies, Inc. and its United Kingdom
subsidiary Ci-Tec UK Ltd. filed an action entitled MBG Technologies, Inc. et al.
v. Diomed, Inc., et al, Superior Court of the State of California, County of
Orange, Case No. 01CC 13525 against us and our UK subsidiary, Diomed Ltd. MBG
alleges the Company disclosed trade-secret information. The trade secrets relate
to `the development and distribution of information for non-coherent light
sources...' and that we disclosed this information to MBG's competitor, Efos.
MBG seeks compensatory and punitive damages in an unspecified amount, but
apparently at least $80,000, and an injunction against further disclosures. On
December 11, 2001, the Company removed the State Action to the United District
Court for the Central District of California, Southern Division, where it is now
pending as Case No. SA 01-1190 GLT.
We have moved to dismiss the action and compel arbitration. MBG has
opposed this motion.
We are involved in other legal proceedings and claims of various types.
While any litigation contains an element of uncertainty, management believes
that the outcome of each such other proceeding or claim which is pending or
known to be threatened, will not have a material adverse effect on us.
40
MANAGEMENT'S DISCUSSION & ANALYSIS (OR PLAN OF OPERATION)
This section contains forward-looking statements, which involve known
and unknown risks and uncertainties. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as "may," "will," "should," "potential,"
"expects," "anticipates," "intends," "plans," "believes" and similar
expressions. These statements are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. Our actual
results could differ materially from those discussed in these statements. See
"Risk Factors" for a discussion of certain risks, including those relating to
our business as a medical device company without a significant operating record
and with operating losses, our risks relating to our commercialization of our
current and future products and applications and risks relating to our common
stock and its market value.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
OVERVIEW
Diomed provides innovative clinical modalities and specializes in
developing and distributing equipment and disposable items used in minimal and
micro-invasive medical procedures. In developing and marketing our innovative
solutions, we use proprietary technology and we aim to secure strong commercial
advantages over our competitors by gaining governmental approvals in advance of
others and through exclusive commercial arrangements. To participate in the
rapidly growing minimal and micro-invasive medical procedure industry, we seek
to integrate disposable items into our product lines. Minimal and micro-invasive
medical procedures typically result in reduced pain and scarring, shorter
recovery periods and increased effectiveness compared to traditional surgical
procedures. Most of the pain associated with traditional surgical procedures
results from the slicing of the layers of skin and muscle tissue. To optimize
our revenues, we focus on clinical procedures that require the health care
provider to own our equipment and also purchase our disposable products, such as
optical fibers. We sell our products to hospital and office-based physicians,
including specialists in vascular surgery, oncology, interventional-radiology,
phlebology and dermatology.
Utilizing our proprietary technology in certain methods of
synchronizing diode light sources and in certain optical fibers, we focus on
photodynamic therapy, also known as PDT, for use in cancer treatments,
endovenous laser treatment also known as EVLT, for use in varicose vein
treatments and other clinical applications, such as dentistry and general
surgery. If the treating physician is knowledgeable about the reimbursement
system and obtains preapproval, then typically health insurance payors will
reimburse for PDT and EVLT procedures. Using high power semiconductor diodes as
their energy source, our diode lasers combine clinical efficacy, operational
efficiency and cost effectiveness in a versatile, compact, lightweight,
easy-to-use and easy-to-maintain system.
Our historical revenues primarily consist of sales of our lasers and
from sales of disposable fibers. Revenue from product sales is recognized at the
time of shipment to the customer as long as there is persuasive evidence of an
arrangement, the sales price is fixed and determinable and collection of the
related receivable is probable. The Company provides for estimated product
returns and warranty costs at the time of product shipment. In December 1999,
the Securities and Exchange Commission issued a staff accounting bulletin,
referred to as SAB No. 101, Revenue Recognition in Financial Statements, which
establishes guidance in applying generally accepted accounting principles to
revenue recognition in financial statements and is effective beginning with the
Company's fourth quarter of the year ended
41
December 31, 2000. The Company has determined that its existing revenue
recognition practices comply with the requirements of SAB No. 101 for all
periods presented.
Domestic and international product sales are generated principally
through our independent sales representatives, or ISR's, in the US and through
our international distributors. We also have OEM relationships in Asia and
Europe. Historically, a relatively small portion of our sales has been generated
domestically. Through 2000, over half of our revenues have come from
international sales. In 2001, we expanded our domestic sales through the
expansion of ISRs and our US sales have increased as a result of their
activities.
For foreign currency translation purposes, the assets, excluding
property and equipment, and liabilities of Diomed Ltd. are translated at the
rate of exchange in effect at year-end, while stockholders' equity, excluding
the current year's loss, is translated at historical rates. Results of
operations are translated using the weighted average exchange rate in effect
during the year. Resulting translation adjustments are recorded as a separate
component of stockholders' equity in our balance sheets. Transaction gains and
losses are included in operating expenses for all periods presented.
Our cost of revenue consists primarily of materials, labor,
manufacturing, overhead expenses, warranty and shipping and handling costs. As
we grow our business and realize manufacturing efficiencies and economies of
scale, we expect our cost of revenue to decrease as a percentage of net sales,
thereby increasing our gross margin.
Our operating expenses include selling and marketing, research and
development and general and administrative expenses. Sales and marketing
expenses consist primarily of personnel costs, advertising, commissions, public
relations and participation in selected medical conferences and trade shows.
Research and development expenses consist primarily of personnel costs, clinical
and regulatory costs, patent application costs and supplies. General and
administrative expenses consist primarily of personnel costs, professional fees,
and other general operating expenses.
We value our inventories at the lower of cost (first-in, first-out) or
market. Our work-in-progress and finished goods inventories consist of
materials, labor and manufacturing overhead.
We have been unprofitable since our founding and have incurred a
cumulative net loss of approximately $30.0 million as of September 30, 2001 and
$23.4 million as of December 31, 2000. Although we expect to be profitable in
2002, dependent upon the commercial success of EVLT post FDA clearance, we may
continue to incur substantial and possibly increasing operating losses due to
spending on research and development programs, clinical trials, regulatory
activities, and the costs of manufacturing and administrative activities.
RESULTS OF OPERATIONS
FIRST NINE MONTHS OF FISCAL 2001 COMPARED TO FIRST NINE MONTHS OF FISCAL 2000
REVENUES
Revenues for the nine months ended September 30, 2001 was $6.4 million,
a $900,000, or 16%, increase from $5.5 million for the nine months ended
September 30, 2000. This increase was primarily due to an increase in revenue
from PDT laser sales, which accounted for 67% of the total increase. As a result
of a five-year exclusive supply agreement signed in August 2000, the Company
shipped significant units to Axcan Pharma, Inc. in the first half of 2001. We
shipped no units to Axcan Pharma, Inc. during the same period in 2000. Also,
revenue increased as a result of sales of surgical lasers utilized in EVLT
clinical studies and off-label procedures. The increase in total laser revenue
was partially offset
42
by a decrease in OEM laser sales as delays in regulatory approvals for one of
our strategic partners limited their shipments in the second quarter of 2001.
Also, revenues from fibers increased significantly as a result of our
acquisition, in the fourth quarter of 2000, of manufacturing rights from QLT,
Inc. for OPTIGUIDE(TM) fibers, which are utilized in PDT cancer procedures. We
sold no such fibers in the first nine months of 2000. Also, in the fourth
quarter of 2000, we formed FibersDirect.com, a business unit that promotes,
sells and distributes laser fibers and other laser-delivery system accessories
for clinical applications directly to clinical end users worldwide. Acting as an
e-commerce and direct marketing conduit, FibersDirect.com distributes fibers
directly from the manufacturer to the end user. The resulting savings in
distribution costs can significantly contribute to both lower prices for end
users and increased profitability of the fiber business for manufacturers. We
promote, sell and distribute OPTIGUIDE(TM) fibers via fibersDirect.com.
Subsequent to FDA clearance of EVLT, FibersDirect.com will promote, sell and
distribute fibers used in EVLT procedures.
COST OF REVENUES
Cost of revenues for the nine months ended September 30, 2001 was $5.0
million, a $0.2 million, or 4% increase from $4.8 million for the nine months
ended September 30, 2000. This increase was primarily due to higher materials,
warranty, shipping and handling costs associated with increased sales volume of
our products.
GROSS PROFIT
Gross profit for nine months ended September 30, 2001 was $1.5 million,
a $0.8 million, or 114%, increase from $0.7 million for the nine months ended
September 30, 2000. This increase was primarily due to the increased sales of
higher margin PDT units and higher absorption of fixed portions of manufacturing
overheads. Increased investment in quality and service partially offset these
efficiencies. As a percentage of revenue, gross profit was 23% and 13% for the
nine months ended September 30, 2001 and 2000, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the nine months ended September
30, 2001 were $1.0 million, a $0.2 million, or 20%, increase from $0.8 million
for the nine months ended September 30, 2000. This increase was primarily due to
increased efforts to develop surgical and PDT product improvements designed to
enhance and expand existing product lines.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the nine months ended September 30,
2001 were $1.9 million, a $0.7 million, or 58%, increase from $1.2 million for
the nine months ended September 30, 2000. This increase reflects increased labor
costs, travel, trade show expenses, promotional expenses and other expenses
related to expansion of our marketing and sales force incurred to support
growth. Additionally, we invested in marketing programs to support EVLT and
other applications.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended September
30, 2001 were $1.9 million, a $0.5 million, or 36%, increase from $1.4 million
for the nine months ended September 2000. The increase was primarily due to
higher labor costs in management, finance and information technology.
INTEREST EXPENSE, NET
For the first nine months, interest expense increased from $0.2 million
in 2000 to $2.9 million in 2001. The increase in interest expense reflects a
noncash charge totalling approximately $2.7 million. In March 2001, holders of
our 9% convertible subordinated notes, with a conversion price of $3.50 per
43
share, agreed to convert $2.5 million in principal amount of those notes into
common stock. The conversion rate was subject to adjustment in the event of
certain circumstances, including certain issues of common stock at a price below
$3.50 per share. Pursuant to our March 5, 2001 Stock Purchase and
Recapitalization Agreement, which provided certain shareholders with additional
shares of common stock at a purchase price of $1.00 per share, we adjusted the
conversion price of the notes from $3.50 per share to $1.00 per share. At the
same time, the noteholders converted $2.5 million of the notes into 2,500,000
shares of common stock. We repaid the remaining $225,000 of notes in cash. In
accordance with Emerging Issues Task Force (EITF) 00-27, Application of EITF
Issue No.98-5 to certain Convertible Instruments, we recorded a non-cash
interest expense charge of $2.7 million due to the adjustment of the conversion
price.
VALUE ASCRIBED TO CALL OPTION AND BENEFICIAL CONVERSION FEATURE RELATED TO
PREFERRED STOCK
Pursuant to the Diomed's Series A Preferred Stock financing in March
2001, two holders of Diomed, Inc's Series A Preferred Stock were issued a call
option requiring the Company to sell up to an additional 1,000,000 shares of
Diomed's Series A Preferred Stock at a price per share equal to $1.00. The
Company recorded the fair value of the call option and related beneficial
conversion feature, totaling an aggregate of $0.4 million in the accompanying
statement of stockholders' equity (deficit).
INCOME TAXES
For the first nine months, we recorded no provision for foreign,
federal and state income taxes for the periods 2000 and 2001, as we incurred net
operating losses.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
As a result of the above, the net loss applicable to common
stockholders for the nine months ended September 30, 2001 was $6.6 million, a
$3.7 million, or 128%, increase from the nine months ended September 30, 2000.
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999
REVENUES
Revenues for the year ended December 31, 2000 was $9.4 million, a $2.6
million, or 38%, increase from $6.8 million for the year ended December 31,
1999. This was mainly due to an increase in shipments of PDT lasers. As a result
of a supply agreement signed in August 2000, we shipped significant units to
Axcan Pharma, Inc. in the last two quarters of 2000. We shipped no units to
Axcan Pharma, Inc. in 1999. Additionally, OEM laser sales increased
significantly year over year, as one of our strategic partners increased
shipments in the second quarter of 2000. A decline in aesthetic laser units
partially offset these increases, as we continued to experience production
issues and diode reliability issues with this segment of the business.
COST OF REVENUES
Cost of revenues for the year ended December 30, 2000 was $7.4 million,
a $0.7 million, or 10%, increase from $6.7 million for the year ended December
31, 1999. This increase was primarily due to higher materials, labor, warranty,
shipping and handling costs associated with increased sales volume of our
products.
GROSS PROFIT
Gross profit for the year ended December 31, 2000 was $2.0 million, a
$2.0 million increase from zero for the year ended December 31, 1999. This was
primarily due to the increased sales of higher margin PDT units and higher
absorption of fixed portions of manufacturing overheads due to increased
production. Additionally, 1999 margins suffered from production issues and diode
reliability related to
44
aesthetic laser units. The production and diode reliability problems were
significantly reduced in 2000, as a result of engineering and design changes.
Increased investment in quality and service, with the addition of personnel,
partially offset these efficiencies. As a percentage of revenue, gross profit
was 20% and 0% for the year ended December 31, 2001 and 2000, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development for the year ended December 31, 2000 was $1.3
million, a $0.3 million, or 19%, decrease from $1.6 million for the year ended
December 31, 1999. The decline in research and development expense reflects
substantial efforts in 1999 to correct production issues and diode reliability
related to aesthetic laser units.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the year ended December 31, 2000 was
$1.6 million, a $0.5 million, or 24%, decrease from $2.1 million for the year
ended December 31, 1999. The decline reflects decreased staffing levels in the
sales and marketing, as we reduced the international direct sales force and
relied more on distributors.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the year ended December 31,
2000 was $2.2 million, a $0.1 million, or 5%, increase from $2.1 million for the
year ended December 31, 1999. The increase was primarily due to higher labor
costs in finance, human resources and information technology.
IMPAIRMENT OF GOODWILL
In December 1999, the Company recorded a non-cash accounting charge of
$1.6 million related to the impairment of the value of goodwill from the
LaserLite LLC ("LaserLite") acquisition in May 1998. An impairment was
recognized when the Company's development of a next generation laser led to a
decision to discontinue the sale of the Laserlite LLC product line.
INTEREST EXPENSE, NET
Interest expense for the year ended December 31, 2000 was $0.3 million,
a $0.2 million increase from $0.1 million for the year ended December 31, 1999.
The increase in interest expense reflects additional charges related to the
issuance of $2.7 million of 9% convertible subordinated notes in the second
quarter of 2000.
INCOME TAXES
We recorded no provision for foreign, federal and state income taxes
for the periods 1999 and 2000, as we incurred net operating losses.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
As a result of the above, the net loss applicable to common
stockholders for the year ended December 31, 2000 was $3.5 million, a $4.0
million, or 53%, decrease from the year ended December 31, 1999.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998
REVENUES
Revenues for the year ended December 31, 1999 was $6.8 million, a
$2.6 million, or 28%, decrease from $9.3 million for the year ended December 31,
1998. This decrease was primarily due to a decline in laser sales. In 1998 we
increased our sales of aesthetic laser units by expanding into the hair removal
segment. However, the product was released before it was fully developed, and
the product
45
experienced significant failures in the field. In the second half of 1999, we
decided to cease production and focus on improving performance and quality.
These production issues adversely impacted our other business segments, such as
PDT and surgical units.
COST OF REVENUES
Cost of revenues for the year ended December 31, 1999 was $6.7 million,
a $1.5 million, or 29%, increase from $5.2 million for the year ended December
31, 1998. This increase was primarily due to higher materials and labor
associated with increased charges due to production and diode reliability issues
with our aesthetic laser units.
GROSS PROFIT
Gross profit for the year ended December 31, 1999 was zero, a $4.1
million, or 100%, decrease from $4.1 million for the year ended December 31,
1998. This was primarily due to production issues and diode reliability related
to aesthetic laser units. The production and diode reliability problems were
significantly reduced in 2000, as a result of engineering and design changes.
Additionally, in the fourth quarter of 1999, we focused substantial efforts on
Good Manufacturing Practices (GMP), which significantly reduced short-term
productivity. Our move to a new manufacturing facility and the establishment of
an optics clean room further adversely affected our results. As a percentage of
revenue, gross profit was 0% and 44% for the year ended December 31, 1999 and
1998, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the year ended December 31, 1999
were $1.6 million, a $0.2 million, or 14%, increase from $1.4 million for the
year ended December 31, 1998. The increase in research and development expense
reflected substantial efforts in 1999 to correct production issues and diode
reliability related to aesthetic laser units.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the year ended December 31, 1999
were $2.1 million, a $0.2 million, or 11%, increase from $1.9 million for the
year ended December 31, 1998. The increase was primarily due to increased labor
costs for our sales force.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the year ended December 31,
1999 were $2.1 million, a $0.5 million, or 19%, decrease from $2.6 million for
the year ended December 31, 1998. The decline reflects reduced support
activities, as we experienced reduced revenues and focused on internal
improvements in manufacturing operations.
IMPAIRMENT OF GOODWILL
In December 1999, the Company recorded a non-cash accounting charge of
$1.6 million related to the impairment of the value of goodwill from the
LaserLite LLC ("LaserLite") acquisition in May 1998. An impairment was
recognized when the Company's development of a next generation laser led to a
decision to discontinue the sale of the Laserlite LLC product line.
INTEREST EXPENSE, NET
Interest expense, net for the year ended December 31, 1999 was $0.1
million and remained level to $0.1 million for the year ended December 31, 1998.
INCOME TAXES
We recorded no provision for foreign, federal and state income taxes
for the periods 1998 and 1999, as we incurred net operating losses.
47
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
As a result of the above, the net loss applicable to common
stockholders for the year ended December 31, 1999 was $7.5 million, a $5.7
million, or 317%, increase from the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through September 30, 2001, we have accumulated a
deficit of approximately $30.0 million and may continue to incur operating
losses for the next few years, dependent upon the commercial success of EVLT
post FDA clearance. We have financed our operations primarily through private
placements of common stock and preferred stock, and private placements of
convertible notes and short-term notes and credit arrangements. As of September
30, 2001, we have received proceeds from the sale of equity securities,
convertible notes and credit arrangements of approximately $29.8 million. We do
anticipate achieving profitability and/or positive cash flow from operations in
2002, dependent upon the commercial success of EVLT post FDA clearance. However,
we may need to continue to rely on external sources of financing to meet our
cash needs for future acquisitions and internal expansion.
Our future capital funding requirements will depend on our ability to
generate cash from our operations and on other factors, including:
o the progress and magnitude of our research and development
programs;
o preclinical studies and clinical trials;
o the time involved in obtaining regulatory approvals;
o the cost involved in filing and maintaining patent claims;
o competitor and market conditions;
o investment opportunities;
o our ability to establish and maintain collaborative arrangements;
o the cost of manufacturing scale-up;
o the cost and effectiveness of commercialization activities and
arrangements; and
o the extent and nature of costs reimbursed by current and future
collaborations.
We anticipate that we will have sufficient cash to fund operations
through December 2002, dependent upon the private placement financing related to
the reverse merger and upon the commercial success of EVLT post FDA clearance.
However, we may need to continue to rely on external sources of financing to
meet our cash needs for future acquisitions and internal expansion. Our ability
to generate substantial additional funding to continue our research and
development activities, preclinical studies and clinical trials and
manufacturing, and administrative activities and to pursue any additional
investment opportunities is subject to a number of risks and uncertainties and
will depend on numerous factors including:
o our ability to raise funds in the future through public or private
financings, collaborative arrangements or from other sources;
o the potential for equity investments, collaborative arrangements,
license agreements or development or other funding programs with
us in exchange for manufacturing, marketing, distribution or other
rights to products developed by us; and
o the amount of funds received from outstanding warrant and stock
option exercises.
We cannot guarantee that additional funding will be available to us
when needed, if at all. If additional funding is not available, we may be
required to scale back our research and development
47
programs, preclinical studies and clinical trials and administrative activities,
and our business and financial results and condition would be materially
adversely affected.
For 1998, 1999 and 2000, we required cash for operations of $1.0
million, $3.6 million and $5.8 million, respectively. The increase in net cash
used in operating activities in 2000 compared to 1999 was primarily due to
increases in receivables and decrease in accrued liabilities. The increase in
receivables was due to the significant increase in fourth quarter revenues in
2000 compared to 1999. The decrease in accrued liabilities was due to the
drawdown of a reserve established in 1999 for charges related to the repair of
aesthetic laser units. The increase in cash required for operations from 1999 to
1998 was due to increased operating losses offset by a non-cash charge for
goodwill impairment related to the LaserLite acquisition and an increase in
accrued liabilities due to reserve established in 1999 for the repair of
aesthetic laser units.
For 1998, 1999 and 2000, net cash used in investing activities was
$6,000,000, $700,000 and $200,000, respectively. The net cash used in 1998, 1999
and 2000 for investing were directly related to the purchases of computer and
manufacturing equipment for operating activities. Additionally, the increase in
1999 was related to the leasehold improvements for the new manufacturing
facility, including the optics clean room.
Effective October 16, 2000, we acquired certain intangible assets,
primarily manufacturing rights and inventory of QLT, Inc. necessary or useful to
commercialize certain series of its OPTIGUIDE Optical fibers product for $1.2
million in two promissory notes, payable within two years. The promissory notes
are payable in cash or in stock at the Company's election. In January, 2002,
Diomed issued 135,735 shares of its common stock in payment of the first of
these notes.
The Company has the right to pay the second QLT promissory note, in
the principal amount of $835,663.55 and due November 8, 2002, representing the
balance of the purchase price for acquisition, in cash or in shares of common
stock.
On February 11, 2002, QLT wrote Diomed and stated that it was accepting
the 135,735 shares issued to it under protest as it disagreed with the per share
price Diomed had used in calculating the number of shares issued to it. It also
pointed out that Diomed had failed, in connection with the issuance of those
shares, to confirm certain registration rights and deliver a legal opinion.
Based on the letter, it is unclear what QLT's position is. Diomed believes that
QLT's position may be that it should be issued up to an additional 542,940
shares. Diomed disputes this position based on the express terms of its
agreement with QLT and the relevant facts. In its letter, QLT also claimed that
Diomed has failed to deliver certain reports. Diomed believes that it has
substantially complied with the report requirements that QLT referenced and will
readily cure any deficiencies that may exist. The terms of the agreement
between Diomed and QLT requires senior management of both companies to meet
within a period of 60 days to attempt to resolve disputes arising thereunder.
On May 31, 1998, we acquired substantially all of the assets and
assumed certain liabilities of LaserLite, the distributor of our cosmetic laser
systems with certain patents and other intangible assets. As consideration, we
issued 414,143 shares of our common stock to LaserLite's members and issued
options to purchase 86,412 shares of common stock. We allocated approximately
$2,600,000 of the purchase price to goodwill and were amortizing such goodwill
on the straight-line basis over a four-year period. In December 1999, the
Company recorded a noncash accounting charge of approximately $1,600,000 related
to the impairment of the value of goodwill from the acquisition of Laserlite LLC
in May 1998. An impairment was recognized when the Company's development of a
next generation laser led to a decision to discontinue the sale of the Laserlite
LLC product line.
For 1998, 1999 and 2000, net cash provided by financing activities was
$400,000, $4.3 million and $6.0 million, respectively. Cash provided by
financing activities in 2000 was primarily attributed to the $2.7 million
provided under the convertible subordinated notes, the August and November
equity investments of $2.8 million, and $900,000 customer loan. Cash provided by
financing activities in 1999 was primarily attributed to equity investments of
$2.7 million and utilization of the bank line of credit of $1.5 million. In
1998, cash was primarily provided by utilization of the bank line of credit of
$300,000.
We had a (pounds sterling)400,000 ($646,000 at December 31, 1999) line
of credit with Barclays Bank. This line bore interest at 2.5% above Barclays
Bank's base rate (6.25% at December 31, 1999). Borrowings were guaranteed by one
of our shareholders and were due on March 31, 2000. Subsequently, the due date
was extended to May 11, 2000, at which time the outstanding balance was repaid.
We have a line of credit with Barclays Bank, which is limited to the
lesser of (pounds sterling)1,200,000 ($1,794,600 at December 31, 2000) or 80% of
eligible accounts receivable. This line bears interest at 3%
48
above Barclays Bank's base rate (6.0% at December 31, 2000) and borrowings are
due upon collection of receivables from customers. As of December 31, 2000,
there were borrowings of (pound)1,151,905 ($1,722,674) outstanding under this
line.
Between March and June 2000, we issued $2.7 million of our 9%
convertible subordinated notes, which were due on March 31, 2001. The notes were
convertible into common stock at $3.50 per share. The conversion rate was
subject to adjustment in the event of certain circumstances occurring, including
certain issues of common stock at a price below $3.50 per share.
Between August and November 2000, we issued 815,865 shares of our
common stock at a price of $3.50 per share, together with warrants to purchase
1,387,294 shares of common stock having an exercise price of $3.50 per share, in
private placements resulting in net proceeds of approximately $2.8 million.
Pursuant to the Stock Purchase and Recapitalization Agreement, dated March 5,
2001, certain of these private investors exchanged 773,941 shares of common
stock, together with warrants to purchase 1,345,370 of common stock, for
2,708,793 shares of common stock.
In October 2000, a customer advanced us $936,000 to secure certain key
materials. In September 2001, the Company issued a promissory note to this
customer in the amount of the advance. The note matures on January 1, 2004 and
bears interest at a rate of 8.5% per year. The note does not provide for
conversion rights.
In March 2001, we completed a recapitalization and financing
transaction in connection with which we (i) issued and sold 2,000,000 shares of
Diomed's Series A preferred stock at a purchase price of $1.00 per share, (ii)
committed to issue and sell an additional 500,000 shares of Diomed's Series A
preferred stock to certain investors at a purchase price of $1.00 per share by
April 30, 2001, (iii) issued a put/call option under which certain investors
could elect to purchase, and we could elect to require such investors to
purchase, up to an additional 1,000,000 shares of Diomed's Series A preferred
stock at a purchase price of $1.00 per share, (iv) converted $2,475,000 of the
9% convertible subordinated notes into 2,475,000 shares of common stock at $1.00
per share and paid back the remaining $225,000 of notes in cash to certain
noteholders, (v) exchanged 571,429 shares of common stock issued in August 2000
at a purchase price of $3.50 per share into 2,000,001 shares of common stock
(for an effective purchase price of $1.00 per share) and cancelled 1,142,858
warrants issued in August 2000 and (vi) exchanged 202,152 shares of common stock
issued in October 2000 at a purchase price of $3.50 per share for 708,792 shares
of common stock (for an effective purchase price of $1.00 per share) and
cancelled 202,152 warrants issued in October 2000. The investors who acquired
approximately 81 percent of the shares of Series A preferred stock were either
our existing stockholders or affiliates of existing stockholders. All of the
investors who acquired shares of our common stock in the transaction were
existing security holders. In March 2001, we recorded a noncash interest expense
totaling approximately $2.7 million due to the adjustment of the original
conversion price of the 9% convertible subordinated notes from $3.50 per share
to $1.00 per share.
Effective March 15, 2001, we increased our authorized capital stock to
43,500,000 shares, consisting of 40,000,000 shares of common stock, $0.001 par
value per share and 3,500,000 shares of preferred stock, $0.01 par value per
share, all of which are designated as Diomed's Series A preferred stock.
In March and April 2001, we sold 2,725,000 shares of Diomed's Series A
preferred stock for $1.00 per share, which resulted in gross proceeds of
$2,725,000.
49
In October and December 2001, we issued secured convertible promissory
notes in the aggregate principal amount of $500,000 and $200,000, respectively,
to two of our stockholders in exchange for their providing bridge financing to
us. The notes bear an annual interest rate of 7.5% and mature on January 1,
2003. We also issued 60,000 and 20,000 warrants to purchase shares of our common
stock, respectively, to these stockholders with a maximum exercise price of
$2.00 per share. At the election of the noteholders, prior to maturity, the
notes are convertible into, and the warrants are exercisable for, shares of
Diomed's common stock as follows: (1) if Diomed were to complete a reverse
merger, the conversion price of the notes would be set at the price per share
reflected in the reverse merger; (2) if another type of financing transaction
were to occur, the conversion price of the notes would be set at the lesser of
$2.00 per share and the price per share in the transaction, and (3) if a merger
or consolidation, other than a reverse merger, were to occur, the conversion
price of the notes would be set at the lesser of $2.00 per share and the price
per share of any warrants issued in the transaction.
The following transactions relate to the liquidity and capital
resources of our predecessor corporation:
On February 5, 2002, Natexco redeemed all of the shares of preferred
stock owned by RH Consulting Group, Inc. and Desert Bloom Investments, Inc.,
which represented all of Natexco's then outstanding preferred stock. All of such
shares of preferred stock were then canceled.
On January 23, 2002, Natexco redeemed 400,000 shares of common stock
owned by Anthony Mulhall, a director of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. This statement is effective for all
business combinations initiated after June 30, 2001.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. This statement applies to goodwill and intangible assets
acquired after June 30, 2001, as well as goodwill and intangible assets
previously acquired. Under this statement, goodwill as well as certain other
intangible assets determined to have an infinite life will no longer be
amortized; instead, these assets will be reviewed for impairment on a periodic
basis. This statement is effective for the first quarter in the fiscal year
ended December 2002. The adoption of this new accounting standard is not
expected to have a material impact on the our financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 144 further refines the requirements of SFAS No. 121
that companies (i) recognize an impairment loss only if the carrying amount of a
long-lived asset is not recoverable based on its undiscounted future cash flows
and (ii) measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. In addition, SFAS No. 144 provides
guidance on accounting and disclosure issues surrounding long-lived assets to be
disposed of by sale. The Company has yet to complete its impairment review, but
we do not anticipate adoption of this new accounting standard to have a material
impact on the financial statements.
50
CERTAIN MARKET INFORMATION
Our common stock is currently quoted on the OTC Electronic Bulletin
Board under the symbol "DIOM". Prior to November, 2001, there was no market for
our common stock. The following table sets forth for the periods indicated the
high and low bid price information for the common stock as reported on the OTC
Electronic Bulletin Board. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
Period High Low
First Quarter 2002 $1.01 $0.70
Fourth Quarter 2001 $1.00 $0.77
On January 23, 2002, the closing bid price as quoted by the OTC
Electronic Bulletin Board for our common stock was $1.00. As of January 23, 2002
there were 67 holders of our common stock.
51
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following tables set forth certain information concerning our
executive officers and directors. For information about ownership of our common
stock by the officers and directors named below, see "Security Ownership of
Certain Beneficial Owners and Management." As to Diomed Holdings, Inc.:
NAME AGE POSITIONS AND OFFICES WITH THE COMPANY
- -------------------------------------------------------------------------------------------------------
Gerald Mulhall 71 Director
Anthony Mulhall 43 Director
Peter Norris 47 Director
Peter Klein 48 President and Chief Executive Officer
As to Diomed:
NAME AGE POSITIONS AND OFFICES WITH DIOMED
- ----------------------------------------- ----- ---------------------------------------------------
James Arkoosh 48 Chairman
Sam Belzberg 74 Director
Peter Norris 47 Director
Peter Klein 48 Director, President and Chief Executive Officer
Geoffrey Jenkins 50 Director
Kevin Stearn 42 General Manager, Diomed Ltd
Charles T. Hoepper 52 Chief Financial Officer, Secretary and Treasurer
Wade Fox 49 Vice President, Marketing and Sales
All directors of the Company were elected to hold office until our 2003
Annual Meeting of Stockholders or special meeting in lieu thereof (and
thereafter until their successors have been duly elected and qualified). It is,
however, contemplated, that Messrs. Mulhall will resign and that Mr. Norris will
appoint four additional directors of the Company from among the directors of
Diomed. None of the persons named above are related by blood, marriage or
adoption to any of the Company's directors or executive officers. Executive
officers are elected annually by the board of directors and serve at the
discretion of the Board.
The following information regards the Company's directors:
GERALD A. MULHALL, DIRECTOR: Mr. Mulhall has served as the President,
and as a member of the Board of Directors of the Company since November 23,
1998. Since May 1999, he has been the president and a principal shareholder of
Aboyne Management, Ltd., a privately-held British Columbia, Canada, corporation.
Mr. Mulhall has also been self-employed as a management consultant with offices
in Victoria, British Columbia, Canada since 1980. Prior to operating his own
management consulting firm, Mr. Mulhall has held numerous management and
supervisory positions in various industries. Included in Mr. Mulhall's
experience are positions as follows: president, MS Management Services Ltd.,
Edmonton, Alberta, Canada, a consulting firm; director, OAS, of the University
of Alberta, Canada;
52
manager of Atco Industries Ltd., Calgary, Alberta, Canada, a company engaged in
the prefabricated housing business; vice-president of the Montreal and Canadian
Stock Exchanges; supervisor, BP Canada Limited, Montreal, Quebec, Canada, a
publicly-held oil and gas company. In addition, Mr. Mulhall has served as a
director of the Management Advisory Institute of the University of Alberta and
as a lecturer to the Department of Extension, University of Alberta, Canada, and
the Grant McEwan Community College, Edmonton, Alberta, Canada. He received a
Business Administration degree from Sir George William University, Montreal,
Quebec, Canada, in 1962 and a P. Mgr. degree from the Canadian Institute of
Management, Ottowa, Canada, in 1975.
ANTHONY MULHALL, DIRECTOR: Mr. Mulhall has served as Secretary, Treasurer
and a member of the Board of Director of the Company since December 1, 1998. For
the past approximately six years, he has been a professional marine diver
working on a contract basis for various seafood product companies in the
province of British Columbia, Canada.
PETER NORRIS, DIRECTOR: Mr. Norris has had more than twenty-four years of
international corporate finance experience spanning Europe, the Americas and
Southeast Asia. Between 1976 and 1984 and from 1987 to 1995 he worked with
Barings, the investment bank now part of ING, and from 1984 to 1987 with Goldman
Sachs. In 1995, he started a private equity and corporate finance advisory
business. Mr. Norris is retained by businesses in the media, technology,
Internet, fashion, consumer goods and industrial.
In March, 1998, Mr. Norris settled without contest an action brought by
the Department of Trade and Industry of the UK against himself and 9 other
former directors and officers of the Barings Investment Banking Group in
connection with its collapse following the discovery in its Singapore operations
of a substantial trading fraud. Prior to the collapse Mr. Norris had been the
Chief Executive Officer of that Group. Under the terms of the settlement, Mr.
Norris accepted a four year ban, ending March 2002, from acting as a director of
a company in the UK without court permission.
* * * *
The following information regards the directors of Diomed, each of whom
is expected to be appointed as a director of the Company after the completion of
the Merger:
JAMES ARKOOSH, NON-EXECUTIVE CHAIRMAN: Mr. Arkoosh is the COO/CFO of
Verus International Group Limited, a merchant bank focused on the globalization
of technology. Mr. Arkoosh is a licensed attorney and certified public
accountant and with over twenty years experience with the international services
group of KPMG LLP located in Hong Kong, San Francisco, Seattle and Singapore
prior to joining Verus International Group Limited. Mr. Arkoosh is a former
chairman of the California Council for International Trade, former vice chairman
for the Asia Pacific Council of American Chambers of Commerce and a former
director or officer with several other trade groups, including the China
Relations Council, the Japan America Society and the World Trade Club. He is a
graduate of the University of Washington Business and Law Schools and holds a BA
degree granted in 1976 and a JD degree granted in 1979.
SAM BELZBERG, DIRECTOR: Mr. Belzberg is the president of Gibralt Capital
Corporation, a Canadian private investment company, which, through its
affiliates, has an equity interest in several private and public operating
companies as well as significant real estate holdings. Prior to 1991, Mr.
Belzberg was chairman and chief executive officer of First City Financial
Corporation Ltd., a CDN$7 billion full-service financial institution that he
founded. Mr. Belzberg is a director of Westminster Capital, Inc., of Los
Angeles, California, Metromedia Asia Corporation of New York, e-Sim Ltd., of
Jerusalem, Israel, Versaware Technologies Ltd., of Jerusalem, Israel and Bar
Equipment Corporation of
53
America of Commerce, California. Mr. Belzberg received a Bachelor of Commerce
Degree from the University of Alberta in 1948. In 1989, he was awarded the Order
of Canada and also, he received an honorary doctorate from Simon Fraser
University. He received the Governor General of Canada Award in 1992. He is the
Chairman of the Dystonia Medical Research Foundation, which he and his wife
founded in 1977 and is Chairman of the Simon Wiesenthal Center of Los Angeles.
GEOFFREY JENKINS, DIRECTOR: Mr. Jenkins has over twenty-five years of
experience in building consumer and professional healthcare companies and is the
founder and president of UV-Solutions, LLC, a product development company. Prior
to founding UV-Solutions he held the positions of chief operating officer and
then president of MDI Instruments before it was acquired by Becton Dickinson in
January 1999. MDI Instruments developed and marketed diagnostic devices for the
healthcare market. Mr. Jenkins holds a BS and BA from Clarkson University
awarded in 1976.
PETER KLEIN, EXECUTIVE DIRECTOR, GROUP CHIEF EXECUTIVE OFFICER: Since
1986, Mr. Klein has served as an executive in the medical image processing
business as founder, president and co-chairman of Tomtec Imaging Systems and
became president and chief executive officer of Medison America, Inc. a
subsidiary of the Korean Group Medison, where he led a number of corporate
restructuring transactions. Mr. Klein has served as the president and chief
executive officer of Diomed since June 1999.
The following information regards the executive officers of Diomed, in
addition to Mr. Klein and Mr. Arkoosh.
KEVIN STEARN, GENERAL MANAGER, DIOMED LIMITED: Mr. Stearn joined Diomed
in March 2000 and is the general manager of its UK subsidiary. From 1987 to 2000
he served as the operations director of a medical diagnostic manufacturer,
joining the company in its early start-up phase and growing it to a workforce of
over 700 people and a 30-fold increase in production. Mr. Stearn has managed FDA
inspections.
CHARLES T. HOEPPER CPA, CFO: Mr. Hoepper joined Diomed in November 2000
as its chief financial officer. Prior to joining Diomed and since 1998, Mr.
Hoepper had served as the chief financial officer of Sprague. Sprague is a
private company with revenues of approximately $1 billion and operates in the
energy industry. Prior to joining Sprague, he held the position of chief
financial officer for Suburban Propane Partners, L.P., a public company with
revenues of $700 million. In 1996, as the chief financial officer he
participated in Suburban's initial public offering, including a listing on the
New York Stock Exchange. Mr. Hoepper is a certified public accountant, and has
an undergraduate degree from the University of Illinois in 1971, and an MBA from
St. John's University in 1978.
WADE FOX, VICE PRESIDENT MARKETING & SALES: Mr. Fox has over 20 years
of experience in the field of marketing and sales in medical devices at a senior
management level. He graduated from the University of North Carolina in 1974 and
received his MBA from Wake Forest University in 1977. During the last five
years, prior to joining Diomed, he was director of global marketing at Smith &
Nephew and the global director for the artificial heart program at Abiomed of
Danvers, Massachusetts.
54
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the
compensation that Diomed paid for services rendered in all capacities to Diomed
for the fiscal years ended December 31, 1999, 2000 and 2001 and by all
individuals serving as Diomed's CEO during 2001 and Diomed's other executive
officers serving on December 31, 2001 whose salary and bonuses for 2001 exceeded
$100,000. We refer to these officers of Diomed as the "Named Executive
Officers".
EXECUTIVE COMPENSATION
-------------------------------------------------------------------------------
LONG-TERM
COMPENSATION AWARDS
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL FISCAL SALARY BONUS OPTIONS(1) COMPENSATION(2)
POSITION YEAR ($) ($) (#) ($)
- ----------------------- -------- -------- ------- ------- -------
Peter Klein 12/31/01 $236,611 $51,540 221,263 $--
President and Chief 12/31/00 $205,000 $28,460 $--
Executive Officer 12/31/99 $155,320 $-- 118,737 $--
Gerald A. Mulhall 12/31/01 $-- $-- $-- $--
President and Chief 12/31/00 $-- $-- $-- $--
Executive Officer 12/31/99 $-- $-- $-- $--
Charles T. Hoepper 12/31/01 $159,069 $-- 110,000 $--
Chief Financial Officer, 12/31/00 $22,356 $-- 0 $--
Treasurer and Secretary
Wade Fox 12/31/01 $67,708 $-- 110,000 $--
Vice President
Marketing and Sales
Kevin Stearn 12/31/01 $99,209 $6,344 140,390 $14,631
General Manager 12/31/00 $84,198 19,610 $--
Diomed Ltd
(1) During fiscal 2001, 2000, and 1999, Diomed did not grant any restricted
stock awards or stock appreciation rights or make any long-term incentive
plan payouts to any of the Named Executive Officers.
(2) Prerequisites are not included if the aggregate amount is less than the
lesser of $50,000 or 10% of salary and bonus.
(3) Employment date for Mr. Wade was June 2001. His effective annual salary
is $125,000. Messrs. Hoepper and Stearn began employment in November 2000
and February 2000, respectively.
55
EMPLOYMENT AGREEMENTS
Effective July 1, 2001, Diomed entered into an employment agreement
with Mr. Klein, under which his employment continues until terminated in
accordance with certain provisions. Upon the closing of the Merger, the Company
assumed Mr. Klein's employment agreement, and as a result Mr. Klein serves as
the Company's President and Chief Executive Officer at an annual base salary of
$250,000. The agreement provides for bonuses as determined by the Company's
Board of Directors, and employee benefits, including vacation, sick pay and
insurance, in accordance with our policies. Mr. Klein's agreement provides that
if we terminate his employment without cause (as defined in the agreement), we
remain obligated to pay his annual salary as then in effect, and to continue his
medical benefits for one year to the extent permitted by our plans or policies.
Other executive officers have offer letters which generally provide,
that upon termination without cause, we are obligated to pay portions of their
annual salary and to continue their medical benefits for a similar period. The
offer letters also provide for bonus eligibility.
Our employment agreements with our executives also prohibit the
executive from directly or indirectly competing with us for a period of one-year
following termination of his employment.
There have been no adjustments or amendments to the exercise price of
stock options for Diomed's executive officers.
DIRECTOR COMPENSATION
Effective July 1, 2001, Mr. Arkoosh was elected as non-Executive
Chairman of Diomed with compensation at the rate of $50,000 per year paid to
Verus Support Services, Inc., known as VSSI, and received additional options to
purchase 50,000 shares of Diomed's common stock at an exercise price of $1.25
per share. In connection with the closing of the Merger, the Company assumed Mr.
Arkoosh's agreement. On May 14, 2001 Messrs. Arkoosh, Belzberg, Norris and
Jenkins each received options to purchase 50,000 shares of Diomed's common stock
at an exercise price of $1.25 per share. These options vest ratably over two
years.
Directors, directors who are also our employees serve as directors
without compensation. Directors are also reimbursed for reasonable out-of-pocket
expenses incurred in attending directors' meetings.
STOCK OPTION PLAN
In February 2002, the Company assumed the obligations of Diomed under
the 1998 Plan and the 2001 Plan. The Company did not have any stock option plans
prior to the Merger.
We rely on incentive compensation in the form of stock options to
retain and motivate directors, executive officers and employees. Incentive
compensation in the form of stock options is designed to provide long-term
incentives to directors, executive officers and other employees, to encourage
them to remain with us and to enable them to develop and maintain an ownership
position in our common stock. Prior to the Merger, Diomed granted stock options
under its 2001 Stock Option Plan and prior to May 2001 under its 1998 Stock
Option Plan.
Diomed's 2001 Plan authorizes to grant stock options to directors, and
eligible employees, including executive officers. Options generally become
exercisable based upon a vesting schedule over
56
four years. The value realizable from exercisable options is dependent upon the
extent to which our performance is reflected in the value of our common stock at
any particular point in time. Equity compensation in the form of stock options
is designed to provide long-term incentives to directors, executive officers and
other employees. We approve the granting of options in order to motivate these
employees to maximize stockholder value. Generally, vesting for options granted
under the plan is determined at the time of grant, and options expire after a
10-year period. Options are granted at an excise price not less than the fair
market value at the date of grant. As a result of this policy, directors,
executives and other employees are rewarded economically only to the extent that
the stockholders also benefit through appreciation in the market.
Options granted to employees are based on such factors as individual
initiative, achievement and performance. In administering grants to executives,
we evaluate each employee's total equity compensation package. We generally
review the option holdings of each of the executive officers, including vesting
and exercise price and the then current value of such unvested options. We
consider equity compensation to be an integral part of a competitive executive
compensation package and an important mechanism to align the interests of
management with those of our stockholders. In fiscal 2001, we granted options to
purchase shares of common stock to Messrs. Klein, Hoepper, Fox, and Stearn.
The board of directors adopted Diomed's 2001 Plan in May 2001, and
Diomed's stockholders approved the plan in December 2001. Options for 1,750,000
shares of common stock are authorized for issuance under the 2001 Plan. As of
December 31, 2001, options for 1,056,653 shares were outstanding under the 2001
Plan, and options for 693,347 shares remain available for future grants. As of
December 31, 2001, options for 308,052 shares were outstanding under Diomed's
1998 Plan. We do not expect to grant additional options under this latter Plan.
The options we grant under the 2001 Plan may be either "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or non-statutory stock options at the discretion of the
Board of Directors and as reflected in the terms of the written option
agreement. The 2001 Plan is not a qualified deferred compensation plan under
Section 401(a) of the Code, and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended (ERISA).
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock
options that Diomed granted in 2001 to the Named Executive Officers:
PERCENT OF
TOTAL
NUMBER OF SHARES OPTIONS GRANTED
NAME AND UNDERLYING TO EMPLOYEES EXERCISE PRICE EXPIRATION
PRINCIPAL POSITION OPTIONS GRANTED(1) IN FISCAL YEAR(2)(3) PER SHARE DATE
- ------------------------------ ----------------- ------------------- -------------- --------------
Peter Klein 121,263 30.2% $1.25 May 13, 2011
President and Chief 100,000 1.25 July 18, 2011
Executive Officer
Charles T. Hoepper 110,000 15.0% $1.25 November 8, 2114
Chief Financial Officer,
Treasurer and Secretary
Wade Fox
Vice President 110,000 15.0% $1.25 June 17, 2011
57
Marketing and Sales
Kevin Stearn 90,390 19.2% $1.25 May 13, 2011
General Manager 50,000 July 28, 2011
Diomed Ltd
(1) Numbers of options set forth above are expressed in terms of
equivalent shares of the Company's common stock. As a result of
the Merger, each option to purchase one share of Diomed's common
stock has been converted into an option to purchase 0.25 share of
the Company's Class A Stock, with a corresponding four-times
increase in the exercise price. Each share of the Company's Class
A Stock converts into four shares of the Company's common stock.
(2) Diomed granted options to purchase an aggregate of 415,000 shares
of its common stock to all employees other than Named Executive
Officers, granted 60,000 options to purchase shares of its common
stock to non-employees, and granted options to purchase an
aggregate of 581,653 shares of its common stock to all Named
Executive Officers as a group (4 persons) during fiscal 2001. See
Note 1 above for information regarding the conversion of Diomed's
options into the Company's options.
(3) In the case of Messrs. Klein and Stearn, the percentage is the
aggregate of both grants.
The following table sets forth certain information regarding stock
options that the Named Executive Officers hold as of December 31, 2001:
NUMBER OF UNEXERCISED
OPTIONS AT
DECEMBER 31, 2001
NAME AND EXERCISABLE
PRINCIPAL POSITION UNEXERCISABLE (1)
- -------------------------------- ---------------
Peter Klein
President and Chief 118,737/
Executive Officer 221,263
Charles T. Hoepper
Chief Financial Officer, 34,375/
Treasurer and Secretary 75,625
Wade Fox
Vice President 0/
Marketing and Sales 110,000
Kevin Stearn
General Manager 8,146/
Diomed Ltd 151/854
(1) Numbers of options set forth above are expressed in terms of equivalent
shares of the Company's common stock. As a result of the Merger, each
option to purchase one share of Diomed's common stock has been converted
into an option to purchase 0.25 share of the Company's Class A Stock,
with a corresponding four-times increase in the exercise price. Each
share of the Company's Class A Stock converts into four shares of the
Company's common stock.
58
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This section of this memorandum discuss transactions that occurred
during the past two years between Diomed and the following persons:
o Verus Investments Holdings Inc., a beneficial holder of more than
5% of the Company's common stock;
o Verus International Group Limited, a beneficial holder of more
than 5% of the Company's common stock and a subsidiary of Verus
Investments;
o Verus Support Services, Inc., known as VSSI, an affiliate of each
of Verus Investments and Verus International Group;
o Gibralt Capital Corp., a beneficial holder of more than 5% of the
Company's common stock and is an affiliate of Mr. Belzberg, who is
a director of Diomed and expected to be appointed as a director of
the Company;
o Winton Capital Holdings Ltd., a beneficial holder of more than 5%
of the Company's common stock; and
o James Arkoosh, who is an officer of Verus International Group and
a director and Chairman of Diomed and who is expected to be
appointed as a director and Chairman of the Company.
In March 2000, Diomed issued and sold $500,000 principal amount of 9%
convertible subordinated notes to Verus Investments. The notes matured in March
2001 and were converted into common stock at $1.00 per share as part of the
March 2001 recapitalization transaction discussed below.
In August 2000, Diomed issued and sold an aggregate of 511,281
investment units at a purchase price of $3.50 per unit to Verus Investments,
Gibralt Capital Corp. and James Arkoosh. Each unit was comprised of one share of
Diomed's common stock and one warrant to purchase two shares of Diomed's common
stock, each at an exercise price of $3.50 per share. The investors were granted
a one-year option to invest additional funds. The investors also received
approval right over future equity financings.
In March 2001, Diomed completed a recapitalization involving the March
2000 note purchasers and the August 2000 investors, as well as a new financing
transaction. In this recapitalization, Diomed (i) issued and sold 2,041,500
shares of Diomed's Series A preferred stock at a purchase price of $1.00 per
share to Verus Investments, Verus International Group, Winton Capital Holdings
Ltd. and James Arkoosh; (ii) issued a put/call option under which Winton Capital
Holdings and Verus International Group could elect to purchase, and Diomed could
elect to require such investors to purchase, up to an additional 1,000,000
shares of Diomed's Series A preferred stock at a purchase price of $1.00 per
share; (iii) converted $500,000 of the 9% convertible subordinated notes issued
in March 2000 to Verus Investments into 500,000 shares of Diomed's common stock
at $1.00 per share; and (iv) converted 511,281 shares of common stock issued in
August 2000 to Verus Investments, Gibralt Capital Corp. and James Arkoosh at
$3.50 per share into 1,799,983 shares of common stock at $1.00 per share and
cancelled 1,028,562 warrants issued to those same investors in August 2000.
Investors who acquired approximately 81 percent of the shares of Diomed's Series
A preferred stock in this transaction were existing stockholders of Diomed or
affiliates of existing stockholders of Diomed. All of the investors who acquired
common stock in this transaction were existing security holders of Diomed.
In May 2001, Diomed issued 112,500 shares of its Series A preferred
stock at a purchase price of $1.00 per share to Winton Capital Holdings when
Winton exercised its rights under the put/call option issued in the March 2001
recapitalization.
In October and December 2001, Diomed issued secured convertible
promissory notes in the aggregate principal amount of $500,000 and $200,000,
respectively, to Winton Capital Holdings and
59
Verus Investment Group in exchange for their providing bridge financing to
Diomed. The notes bear an annual interest rate of 7.5% and mature on January 1,
2003. Diomed also issued 60,000 and 20,000 warrants to purchase shares of its
common stock, respectively, to these stockholders with an exercise price of
$2.00 per share. The warrants are fully exercisable for two years from the date
of issuance. At the election of the noteholders, prior to maturity, the notes
are convertible into, and the warrants are exercisable for, shares of Diomed's
common stock as follows: (1) if Diomed were to complete a reverse merger, the
conversion price of the notes and the exercise price of the warrants would be
set at the price per share reflected in the reverse merger; (2) if another type
of financing transaction were to occur, the conversion price of the notes and
the exercise price of the warrants would be set at the lesser of $2.00 per share
and the price per share in the transaction, and (3) if a merger or
consolidation, other than a reverse merger, were to occur, the conversion price
of the notes and the exercise price of the warrants would be set at the lesser
of $2.00 per share and the price per share of any warrants issued in the
transaction.
VSSI has entered into two advisory agreements with Diomed. The
agreement provides that as an advisor to the Merger, VSSI will receive a fixed
advisory fee of $750,000 upon the closing of the Merger, which will be paid from
the gross proceeds of the private placement by the public company. Diomed
believes the VSSI fee is comparable to the fee that would be payable on an arm's
length basis to an unrelated advisor. A portion of this advisory fee may, at the
request of the Company and with the agreement by VSSI, be converted into equity
if the full $10,000,000 amount of the private placement related to the Merger is
not raised.
The second agreement was initially between VSSI and Diomed, and the
Company assumed this separate agreement as part of the Merger. Under the
agreement, the Company engages VSSI for eighteen months, which period may be
extended if mutually agreed upon by both parties, to act as a financial advisor
to (1) evaluate and recommend financial and strategic alternatives, (2) identify
potential acquisition and merger targets, and if requested by the Company,
contact such parties and assist the Company with analysis and negotiations, (3)
advise the Company as to the timing, structure and pricing, and (4) assist the
Parent in any agreements. The Company pays VSSI a monthly fee of $15,000, plus
out-of-pocket expenses. VSSI is entitled to a success fee of 3.5% of any
transaction value, including consideration that the Company and/or its
affiliates provides or receives in business combination transactions with third
parties with a minimum fee of $175,000. The success fee is payable if VSSI
identifies and introduces the transaction, notwithstanding the participation or
execution by other advisors. Also, the Company may request VSSI to perform other
advisory services that would be subject to customary fees and terms. In
addition, VSSI may terminate the agreement at any time during the eighteen-month
period by giving the Company thirty days written notice.
TRANSACTIONS WITH PROMOTERS
Because of their management positions, organizational efforts and/or
percentage share ownership of our predecessor, Natexco, Gerald A. Mulhall and
Anthony Mulhall may be deemed to be "parents" and "promoters" of the Company, as
the Securities Act and the rules thereunder define those terms. Mr. John H. and
Ms. Terese M. Tetstill may be "parents" and "promoters" of Security Software
because of their present management positions with, and organizational efforts
on behalf of, Security Software. Because of these relationships, transactions
between and among the Company, Security Software, Messrs. Gerald A. Mulhall and
Anthony Mulhall, Aboyne Management Ltd., of which Gerald A. Mulhall is the
president and controlling shareholder, and Mr. and Ms. Tetstill, should not be
considered to have occurred at arm's-length.
60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists ownership of the Company's Class A Stock for
the persons or groups specified therein. In case of this and the following
table, Ownership includes direct and indirect (beneficial) ownership, as defined
by the rules and regulations of the Securities and Exchange Commission. To our
knowledge, each person, along with his or her spouse, has sole voting and
investment power over the shares unless otherwise noted. Information for our
directors and officers is as of December 31, 2001 and is given on a pro forma
basis as if the Merger occurred on December 31, 2001.
- --------------------------------------------------------------------------------------------------------------------
TITLE OF CLASS NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF CLASS(5)
BENEFICIAL OWNER BENEFICIAL OWNER(1)
- --------------------------------------------------------------------------------------------------------------------
Class A Stock Ajmal Khan 4,417,826(2)(3) 15.2%
c/o Verus International Group Limited
PO Box 309 G.T.
South Church Street
Cayman Islands
- --------------------------------------------------------------------------------------------------------------------
Class A Stock Winton Capital Holdings Ltd 1,585,000(3)(4) 5.5%
1177 West Hastings, Suite 2000
Vancouver, British Columbia
- --------------------------------------------------------------------------------------------------------------------
Class A Stock Sam Belzberg 1,018,749 3.5%
c/o Gibralt Capital Corp
1177 West Hastings, Suite 2000
Vancouver, British Columbia
- -------------------- --------------------------------------- --------------------------------------------------------
Class A Stock James Arkoosh (6) 131,750 0.5%
240 East 39th Street
New York, NY
- --------------------------------------------------------------------------------------------------------------------
Class A Stock Peter Norris 69,828 0.2%
136-142 Bramley Road
London W10 6 SR
United Kingdom
- --------------------------------------------------------------------------------------------------------------------
Class A Stock Peter Klein 118,737 0.4%
c/o Diomed
1 Dundee Park
Andover, MA 01810
- --------------------------------------------------------------------------------------------------------------------
Class A Stock Geoffrey Jenkins, President 12,500 0.0%
UV Solutions
15 Glenbrook Road
Wellesley Hills, MA 02481
- --------------------------------------------------------------------------------------------------------------------
Class A Stock All officers and directors as a group 375,336 1.3%
(8 persons)
- --------------------------------------------------------------------------------------------------------------------
(1) Stated in terms of equivalent of the Company's common stock and not
shares of Class A Stock.
(2) Includes 40,000 warrants issued in connection with the October 2001 and
December 2001 bridge loan notes.
(3) Assumes that, as indicated by the holders thereof, the Company retires
the October 2001 and December 2001 bridge loan notes made in October 2001
and December 2001 at or as of the closing of the Merger and that the
notes have not been converted. Excludes 1,200,000 shares of the Company's
common stock held directly by Winton Capital and set forth in the
following table. Including such 1,200,000 shares, Winton Capital
beneficially owns a total of 2,785,000 shares, or 9.6% of the Company's
common stock.
(4) Includes 40,000 warrants issued in connection with the bridge loan notes
made in October 2001 and December 2001.
(5) Based on 28,965,690 common shares of the Company being issued and
outstanding shares of the Company's voting stock.
61
(6) Mr. Arkoosh is the chief operating officer and chief financial officer of
Verus International Group Limited and Verus Support Services Inc. Ajmal
Khan beneficially owns a majority interest in Verus Investments Holdings
Inc. Mr. Arkoosh disclaims all beneficial ownership in all shares that
Mr. Khan beneficially owns.
The following table lists ownership of the Company's common stock for
the persons or groups specified therein.
- --------------------------------------------------------------------------------------------------------------------
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENT OF CLASS(1)
BENEFICIAL OWNER(1)
- --------------------------------------------------------------------------------------------------------------------
Common Stock Gerald A. Mulhall (2)(3) 480,000 1.7%
3255 Norfolk Road
Victoria, British Columbia
Canada V8R 6H5
- --------------------------------------------------------------------------------------------------------------------
Common Stock Anthony Mulhall (2) -0- -0-
3255 Norfolk Road
Victoria, British Columbia
Canada V8R 6H5
- --------------------------------------------------------------------------------------------------------------------
Common Stock John H. Tetstill (4) -0- -0-
5 Pinion Road
Bailey, Colorado 80421
- --------------------------------------------------------------------------------------------------------------------
Common Stock Terese M. Tetstill (4) -0- -0-
5 Pinion Road
Bailey, Colorado 80421
- --------------------------------------------------------------------------------------------------------------------
Common Stock Peter Norris -0- -0-
136-142 Bramley Road
London W10 6 SR
United Kingdom
- --------------------------------------------------------------------------------------------------------------------
Common Stock Winton Capital Holdings Ltd. 1,200,000(5)
- --------------------------------------------------------------------------------------------------------------------
Common Stock All executive officers and 480,000 1.7%
directors as a group (5 persons)
- --------------------------------------------------------------------------------------------------------------------
(1) Represents the number of shares of the Company's common stock owned of
record and beneficially by each named person or group, expressed as a
percentage of 28,965,690 shares of the Company's common stock outstanding
upon consummation of the Merger, excluding any beneficial ownership
through ownership of shares of the Class A Stock.
(2) Member of the board of directors of the Company.
(3) Includes 40,000 shares held of record by his spouse.
(4) Executive officer and member of the board of directors of Security
Software.
(5) Excludes 1,585,000 shares of common stock held by Winton Capital as a
result of its ownership of 396,250 shares of the Company's Class A stock
(which shares convert into 1,585,000 shares of the Company's common
stock) and set forth in the preceding table. Including such 1,585,000
shares, Winton Capital beneficially owns a total of 2,785,000 shares, or
9.6%, of the Company's common stock.
In connection with the Merger, Messrs. Mulhall have appointed Peter
Norris, a director of Diomed, to the Company's board of directors and have
adopted a bylaw requiring that subsequent board
62
action be unanimous until five directors are in office. The Company has further
appointed Peter Klein, Diomed's chief executive officer, as its chief executive
officer. Messrs. Mulhall have also tendered their resignations from the
Company's board, but their resignations do not become effective unless and until
the Company accepts them. The Company believes that either prior to or after the
effectiveness of their resignations Mr. Norris will appoint the four remaining
Diomed directors as directors of the Company, subject to the rules of the
Securities and Exchange Commission requiring notice to the Company's
stockholders of those appointments and a filing with the Commission. To the best
of our knowledge, there are no other existing arrangements that may result in a
change in control of the issuer.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 80,000,000 shares of common
stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par
value .001 per share, of which we have designated 4,300,000 shares as shares of
Class A Stock. As of the Merger, there were 9,200,000 shares of common stock,
and no shares of Class A Stock issued and outstanding. In connection with the
closing of the Merger, we issued an additional 5,000,000 shares of our common
stock to approximately 45 investors in private offering. The following
description of our capital stock does not purport to be complete and is subject
to and qualified by our Articles of Incorporation and By-laws, which are
included as exhibits to this report, and by the provisions of applicable Nevada
law.
COMMON STOCK
Subject to preferences that may be applicable to any rights of holders
of outstanding stock having prior rights as to dividends, the holders of
outstanding shares of our common stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the board
of directors from time to time may determine. Holders of our common stock are
entitled to one (1) vote for each share held on all matters submitted to a vote
of the stockholders. No cumulative voting with respect to the election of
directors is permitted by the Articles of Incorporation. The common stock is not
entitled to preemptive rights and is not subject to conversion or redemption.
Upon our liquidation, dissolution or winding-up, the assets legally available
for distribution to stockholders are distributable ratably among the holders of
the common stock after payment of liquidation preferences, if any, on any
outstanding stock having prior rights on such distributions and payment of other
claims of creditors. Each share of common stock outstanding as of the date of
this report is validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's board of directors is authorized, subject to any
limitations prescribed by Nevada law, to issue preferred stock. The board of
directors can fix the rights, preferences and privileges of the shares and any
qualifications, limitations or restrictions thereon. The board of directors may
authorize the issuance of preferred stock with voting or conversion rights that
could adversely affect the voting power or other rights of the holders of common
stock. Each share of Class A Stock outstanding as of the date of this report is
validly issued, fully paid and nonassessable.
The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes could, among
other things, under certain circumstances, have the effect of delaying,
deferring or preventing a change in control of the Company. The issuance of
preferred stock may adversely affect the rights of our common stockholders by,
among other things:
o restricting dividends on common stock;
o diluting the voting power of the common stock;
o impairing the liquidation rights of the common stock; or
o delaying or preventing a change in control without further action
by the stockholders.
63
The Company has designated 4,300,000 shares of its preferred stock as
Class A Stock. The Class A Stock has rights that are identical to the rights of
the Company's common stock, except as follows:
o Each share of Class A Stock is convertible into four (4)
shares of common stock, subject to customary adjustment
including in the event of any stock splits, combinations or
reclassifications.
o Each share of Class A Stock issued in the Merger is
convertible into common stock at the following rate, based
upon the effectiveness of a registration statement to be
filed by the Company registering for resale shares of its
common stock issued in its private placement at the time of
the Merger and into which shares of the Class A Stock are
convertible:
(i) at the end of the second full month after the
effectiveness of the registration statement, five
percent (5%) of the shares of the Class A Stock
issued to the former Diomed stockholders in the
merger automatically converts into common stock;
(ii) at the end of each month after the second full month
after the effectiveness of the registration
statement through the twenty-third full month after
the month in which the registration statement became
effective, an additional five percent (5%) of the
Class A Stock issued in the Merger automatically
converts into common stock; and
(iii) in all events, and whether or not the SEC has
declared the registration statement effective, at
the end of the twenty-fourth full month after the
effectiveness of the registration statement, the
balance of the Class A Stock not theretofore
converted into shares of the common stock shall
automatically be converted into common stock.
o Our board of directors has the discretion, subject to the
satisfaction of certain conditions precedent, to postpone
and/or terminate all such restrictions on conversion.
Subsequent transferees of the Class A Stock shall also be
subject to the restrictions on conversion.
o Each share of Class A Stock votes on an "as converted"
basis.
o Each share of Class A Stock shares ratably in
distributions, either as dividends are paid or upon
liquidations of the Company, with shares of the Company's
common stock, except that amounts payable with regard to
the Class A Stock are four times the amount payable with
regard to the common shares.
o Until the anticipated recapitalization of the Company
discussed below occurs, the Company may not engage in
certain merger or other significant business combination
transactions, incur secured debt in excess of $1,000,000 or
create superior classes of preferred stock without the
consent of the holders of 66 2/3% of the outstanding
shares of Class A Stock.
The Company anticipates that it will reorganize itself as a Delaware
corporation. At that time it plans to recapitalize the Class A Stock by (i)
reducing the conversion rights so that each share of the Class A Stock converts
into one share of the common stock, (ii) limiting the dividend and liquidation
rights to a one-to-one equivalence with the shares of the Company's common stock
and (iii) distributing shares of the modified preferred stock to the holders of
the Class A Stock at the rate of four new shares for each existing share.
STOCK OPTIONS AND WARRANTS
64
In connection with the Merger, the Company assumed the obligations of
Diomed with respect to Diomed's outstanding 1,380,335 stock options and each of
the two plans under which Diomed had granted these options since 1998. Prior to
its adoption of formal stock option plans, Diomed had also granted 489,679
options to officers, other employees and consultants. With respect to these
non-plan options, the Merger Agreement obligates the Company, upon request of
the option holders, to perform Diomed's obligations to issue shares upon the
exercise of outstanding options. If all existing optionees fully exercise their
rights, the Company will issue to them an aggregate of 467,503.50 shares of its
Class A Stock which shares convert into 1,870,014 shares of its common stock.
The Merger Agreement also obligates the Company to perform Diomed's
obligations to issue shares upon exercise of outstanding warrants to purchase
121,924 shares. If the warrantholders fully exercise their rights, the Company
will issue to them an aggregate of 30,481 shares of its Class A Stock which
shares convert into 121,924 shares of the Company's common stock.
REGISTRATION OF SECURITIES ISSUED IN THE MERGER
The Company has agreed to file a registration statement with the SEC
within 120 days after the Merger and to have the registration statement declared
effective within 240 days after the Merger. The registration statement will
cover (i) 5,000,000 shares of the Company's common stock sold in the private
placement related to the Merger, (ii) 14,765,690 shares of common stock into
which the Class A Stock issued in the Merger to the former Diomed stockholders
convert over a period of approximately two years after the Merger and (iii)
121,924 shares of common stock issuable upon conversion of the shares of Class A
Stock that are issuable upon the exercise of Diomed warrants that the Company
assumed as part of the Merger. Failure by the Company to meet the requirement of
effectiveness will result in a penalty payable to those stockholders who are not
able, as a consequence of such failure, to sell their sales. The Company has
also agreed to file, 45 days after the effectiveness of the first registration
statement, a second registration statement that will cover the 1,870,014 shares
of its common stock issuable upon conversion of all shares of Class A Stock that
are issuable upon the exercise of Diomed options that the Company assumed as
part of the Merger.
If the Company's registration statement does not become effective,
shares issued in the Merger and shares issued in the private placement will
generally become tradable in the public markets one year after issuance under
the SEC's Rule 144. Shares issued on the exercise of options or warrants
generally become tradeable one year after exercise, subject to the volume
limitations, manner of sale and notice of sale limitations of Rule 144.
Upon the closing of the Merger, 9,200,000 of the Company's 14,200,000
issued and outstanding shares of its common stock will be tradable. The
5,000,000 shares of the Company's common stock issued in the private placement
cannot be sold for a period of six months following the later of (i) the closing
of the Merger and (ii) the effective date of the Merger, subject to exception
for gifts and transfers in trust.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Corporate
Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite #430, Denver,
Colorado 80209. We act as our own transfer agent and registrar as to the
warrants and the options.
EXPERTS
The consolidated balance sheets of Diomed, Inc. and subsidiaries as of
December 31, 1999 and 2000 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 2000 included in this memorandum and the
Form 8-K to which it is attached have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their
65
report with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act of
1934, as amended, and files reports, proxy and information statements and other
information with the SEC. You may read and copy all or any portion of the
reports, proxy and information statements or other information we file at the
SEC's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.C., Washington, D.C. 20549 and at the regional offices of the SEC located at
233 Broadway, New York, New York 10279 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You can request copies of these documents upon payment
of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings are also available to you on the SEC's Internet site
(HTTP://WWW.SEC.GOV).
66
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation provide that we may indemnify our
directors, officers, employees and agents as permitted by Nevada law. Our
By-laws provide that we may indemnify our directors, officers and employees as
permitted by Under such provisions of Nevada law, any directors, officers,
employees or agents, who in their capacity as such are made or are threatened to
be made a party to any suit or proceeding, shall be indemnified if it is
determined that such director, officer, employee, or agent acted in good faith
and in a manner he reasonably believed to be in or not opposed to our best
interests, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. Nevada law further
provides that indemnification shall be provided if the party in question is
successful on the merits or otherwise.
We intend to enter into Indemnity Agreements with each of our current
(and future) directors and officers to give these directors and officers
additional contractual assurances regarding the scope of the indemnification set
forth in our Articles of Incorporation and By-laws and to provide additional
procedural protections. At present, there is no pending litigation or proceeding
involving any director, officer or employee of ours regarding which
indemnification is sought, nor are we aware of any threatened litigation that
may result in claims for indemnification.
We will maintain directors' and officers' liability insurance providing
minimum aggregate coverage of $7,500,000 and expect such insurance to include
coverage for securities matters.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the provisions described above, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission (the "SEC") such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than our payment of expenses incurred or paid by
a director, officer or controlling person of ours in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the registration of our securities, we
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
RECENT SALES OF UNREGISTERED SECURITIES
SALES BY PREDECESSOR COMPANY
On December 5, 1998, our predecessor, Natexco, issued 10,000 shares of
preferred stock to Eastbury Consultants, Ltd., an Isle of Man, British Islands
corporation, in consideration for cash in the amount of $100. In connection with
this transaction, we relied on the statutory exemption provided by Section 4(2)
of the Securities Act.
On March 31, 1999, our predecessor, Natexco, issued an aggregate of
2,400,000 shares of common stock to a total of thirty-four (34) persons, all of
whom are residents of either Canada, the Isle of Man, British Islands, or
London, England, United Kingdom, for cash consideration totaling $2,400. In
connection with this transaction, we relied on the statutory exemption provided
by Section 4(2) of the Securities Act.
67
On March 21, 2000 and May 18, 2000, our predecessor, Natexco, issued
10,000 shares of preferred stock to Aboyne Management, Ltd., in consideration
for the aggregate sum of $20,000. Aboyne is a British Colombia, corporation of
which Mr. Gerald A. Mulhall, our then President and currently a director of the
Company, is the President and principal shareholder. In connection with this
transaction, we relied on the statutory exemption provided by Section 4(2) of
the Securities Act because the issuances did not involve public offerings.
On May 18, 2000, our predecessor, Natexco, issued 20,000 shares of
preferred stock to Desert Bloom Investments, Inc., a Colorado corporation, in
consideration for $20,000 in cash. In connection with this transaction, we
relied on the statutory exemption provided by Section 4(2) of the Securities Act
because the issuance did not involve a pubic offering.
On February 13, 2002 the Company issued 5,000,000 shares of Common
Stock to a total of 46 investors at a price per share of $2.00, for an
aggregate purchase price of $10,000,000. The issuance was made pursuant to
Section 4(2) of the Securities Act, as each investor was either an "accredited
investor" or a non-U.S. person. The shares were issued to the following
investors:
INVESTOR NUMBER OF SHARES
Lorne Neff 10,000
Gerry Nichele 12,500
Joan Woodrow 5,000
Cheryl More 5,000
Jim Fitzgerald 25,000
T&J Reilly Revocable Trust 35,000
Walter Eeds 35,000
3854973 Canada Inc. 100,000
Cirpa Inc. 132,500
Melvin Fogel 62,500
Bruce Fogel 100,000
Joseph Yanow 74,000
Elio Cerundolo 56,000
Alan Dershowitz 50,000
Elon Dershowitz 25,000
Panamerica Capital Group, Inc. 250,000
Private Investment Company Ltd. 250,000
Green Mountain Trading, Ltd. 50,000
Steve Leisher 50,000
Antonio Garcia 75,000
Renee Schatz Revocable Trust 35,000
Ray Grimm 25,000
Jeffrey Evans 12,500
Nicholas Burge 12,500
Julian Rogers-Coltman 12,500
Aslan Ltd. 25,000
Patricia Kelly-White 12,500
Ernest Holloway 10,000
W.T. Leahy III 25,000
Thomas Brassil 25,000
1212855 Ontario Ltd. 50,000
John Galt Fund, L.P. 50,000
Seneca Ventures 125,000
Woodland Ventures Fund 125,000
Steve Shraiberg 300,000
Semamor Enterprises 500,000
Matthew Bronfman Recipient Pour Off Trust 250,000
Jack L. Rivkin 100,000
Orva Harwood 40,000
Winton Capital Holdings 1,200,000
Bridge Finance Ltd. 50,000
Hyde Park International Holdings Ltd. 125,000
Sarah Investments Ltd. 250,000
Charles Diamond 150,000
Lord Anthony St. John 37,500
Alex Vahabzadeh Money Purchase Plan 50,000
The 5,000,000 shares of the Company's common stock issued in the
private placement completed on February 14, 2002 cannot be sold for a period of
six months following the later of (i) the closing of the Merger and (ii) the
effective date of the Merger, subject to exception for gifts and transfers in
trust.
On February 14, 2002 the Company completed the Merger, which for
accounting purposes was treated as a recapitalization. In connection with the
Merger, the Company converted all of the outstanding shares of Diomed's capital
stock into 3,691,422.50 shares of its Class A Stock. In connection with the
transaction, we relied upon the statutory exemption provided by Section 4(2) of
the Securities Act because the issuances did not involve public offerings.
On February 14, 2002, in connection with the Merger, the Company
assumed all of the 1,380,335 outstanding options to purchase shares of Diomed's
common stock that were issued under the Diomed 1998 Incentive Plan and the
Diomed 2001 Employee Stock Option Plan and because obligated upon the exercise
of those options to issue an aggregate of 345,083.75 shares of its Class A Stock
which shares convert into 1,380,335 shares of our common stock. The Company also
became obligated, upon request of the option holders, to perform Diomed's
obligations to issue shares upon the exercise of 489,679 outstanding options
that were issued prior to Diomed's adoption of formal stock option plans. If all
existing holders of non-plan options fully exercise their rights, the Company
will issue to them an aggregate of 122,419.75 shares of its Class A Stock which
shares convert into 489,679 shares of its common stock. In connection therewith,
the Company relied upon the statutory exemption provided by Section 4(2) of the
Securities Act because such issuances did not involve public offerings.
The Merger Agreement also obligates the Company to perform Diomed's
obligations to issue shares upon exercise of outstanding warrants to purchase
121,924 shares. If the warrantholders fully exercise their rights, the Company
will issue to them an aggregate of 30,481 shares of its Class A Stock which
shares convert into 121,924 shares of our common stock. In connection therewith,
the Company relied upon the statutory exemption provided by Section 4(2) of the
Securities Act because such issuances did not involve public offerings.
68
SALES BY DIOMED, INC.
Since January 1, 1999, Diomed, Inc. has sold and issued the
unregistered shares, notes and warrants described below, all expressed in terms
of Diomed shares, and not shares of the Company after giving effect to the
Merger.
In February 1999, Diomed sold 25,000 shares of its common stock to
James Remington Hobbs, a director, upon exercise of a stock option granted under
its 1998 Incentive Plan, for an aggregate purchase price of $123,210. Diomed
issued and sold its shares to Mr. Hobb in the above transaction in reliance upon
exemptions from registration under the Securities act of 1933, as amended, set
forth in Section 4(2) thereof or Regulation D thereunder. The purchaser
represented that he was an accredited investor and agreed that the securities
would not be resold without registration under the Securities Act or exemption
therefrom. Mr. Hobbs also represented his intention to acquire the securities
for investment only, and not with a view to the distribution thereof. Diomed
affixed appropriate legends to the stock certificate issued in such
transactions. Prior to making any offer or sale, Diomed had reasonable grounds
to believe and believed that Mr. Hobbs was capable of evaluating the merits and
risks of the investment and was able to bear the economic risk of the
investment.
1.) In July 1999, Diomed sold 1,139,580 shares of its common stock to
148 purchasers for an aggregate purchase price of $2,849,795, or $2.50 per
share. Each of the purchasers was an existing stockholder of Diomed and the
offering was a rights offering. The purchasers, the shares they purchased and
the respective purchase prices paid were as follows:
SHARES PURCHASE PRICE
--------- ---------------
HSBC Financial Services (Cayman) Limited - Trustee 15,735.0 $ 39,337.50
Adrian Grundy 5,000.0 $ 12,500.00
Alan Torry 432.0 $ 1,080.00
Andrew Hector Gray Esq 140.0 $ 350.00
Barry Chesters 500.0 $ 1,250.00
G R Ian Lowis 1,760.0 $ 4,400.00
Brian Charles Carter 160.0 $ 400.00
Brian Kingham 5,400.0 $ 13,500.00
Bryan M Elliott 800.0 $ 2,000.00
C C Cannon 300.0 $ 750.00
C C Cannon - a/c CMC 100.0 $ 250.00
Charles Graham-Wood, Esq (deceased) 813.0 $ 2,032.50
Charles Michael Orsborn 2,000.0 $ 5,000.00
Christopher Adam John Rothschild 560.0 $ 1,400.00
Christopher L Russon, Esq 280.0 $ 700.00
Citifriends Nominee Limited - A/C UTIS 40,000.0 $ 100,000.00
D Hold Limited 8,666.0 $ 21,665.00
David John Shaw 2,160.0 $ 5,400.00
Dr & Mrs David Burns 4,256.0 $ 10,640.00
Dr & Mrs David Burns (Raven trust) 650.0 $ 1,625.00
Dr Barbara Chalmers Hanson 400.0 $ 1,000.00
Dr Clare Foden 750.0 $ 1,875.00
Dr David Hartley 386.0 $ 965.00
Dr Geoffrey P Cubbin 340.0 $ 850.00
Dr Gillian Rosemary Evans 200.0 $ 500.00
Dr Leslie James Russell 140.0 $ 350.00
Dr Peter Arthur Eckstein 280.0 $ 700.00
Dr Richard William Falla Le Page 1,100.0 $ 2,750.00
69
SHARES PURCHASE PRICE
--------- ---------------
Dr Robert Alfred John Challiss 2,200.0 $ 5,500.00
Emily Anne Jenny Bourne 335.0 $ 837.50
Gareth Richard Hayward 140.0 $ 350.00
Geoffrey Miller and Mrs Pauline Miller 2,403.0 $ 6,007.50
Geoffrey Todd 200.0 $ 500.00
Ian Sloan Marshall Robertson, Esq 1,372.0 $ 3,430.00
Instrumentarium Corporation 80,000.0 $ 200,000.00
James Gerrard Potter 1,600.0 $ 4,000.00
James Remington Hobbs 14,383.0 $ 35,957.50
John Bai 401.0 $ 1,002.50
Jonathan Bartlett 630.0 $ 1,575.00
Katie Louise Victoria Bourne 940.0 $ 2,350.00
Kenneth Tait 150.0 $ 375.00
Leigh Carter 500.0 $ 1,250.00
Linda Germaine Mary Banner 900.0 $ 2,250.00
Majedie Portfolio Management Limited - A/c CLT 3,600.0 $ 9,000.00
Malcolm Hacking 1,000.0 $ 2,500.00
Maureen Chalker & T.M. Trustees Limited 1,600.0 $ 4,000.00
Fortis Fund Services (Cayman) Ltd - Trustee 300,000.0 $ 750,000.00
Michael Bourne 1,116.0 $ 2,790.00
Miss Rona C Jarvis 478.0 $ 1,195.00
Mr D & Mrs E S M Bendall 740.0 $ 1,850.00
Mr David Gerald Garton 200.0 $ 500.00
Mr Neil Braithwaite 170.0 $ 425.00
Mr Roderick Connors & Mrs Maureen Connors 1,800.0 $ 4,500.00
Mr Stuart Buchan Douglas 400.0 $ 1,000.00
Mrs Eve Stephanie Merrilees Bendall 624.0 $ 1,560.00
Mrs Florence Mildred Sladden 240.0 $ 600.00
Mrs Katherine Mary Watts 4,000.0 $ 10,000.00
Mrs Patricia Anne Money-Coutts 400.0 $ 1,000.00
Mrs V J Cannon 1,600.0 $ 4,000.00
N W Brown Nominees Limited A/C 000115 240.0 $ 600.00
N W Brown Nominees Limited A/C 000148 613.0 $ 1,532.50
N W Brown Nominees Limited A/C 000191 600.0 $ 1,500.00
N W Brown Nominees Limited A/C 000207 160.0 $ 400.00
N W Brown Nominees Limited A/C 001054 18.0 $ 45.00
N W Brown Nominees Limited A/C 001315 533.0 $ 1,332.50
N W Brown Nominees Limited A/C 001417 280.0 $ 700.00
N W Brown Nominees Limited A/C 001455 440.0 $ 1,100.00
N W Brown Nominees Limited A/C 001496 3,333.0 $ 8,332.50
N W Brown Nominees Limited A/C 001586 320.0 $ 800.00
N W Brown Nominees Limited A/C 001628 546.0 $ 1,365.00
N W Brown Nominees Limited A/C 001634 440.0 $ 1,100.00
N W Brown Nominees Limited A/C 001635 440.0 $ 1,100.00
N W Brown Nominees Limited A/C 001638 3,060.0 $ 7,650.00
N W Brown Nominees Limited A/C 001647 632.0 $ 1,580.00
N W Brown Nominees Limited A/C 001667 1,480.0 $ 3,700.00
N W Brown Nominees Limited A/C 001675 280.0 $ 700.00
N W Brown Nominees Limited A/C 001681 413.0 $ 1,032.50
N W Brown Nominees Limited A/C 001711 1,133.0 $ 2,832.50
N W Brown Nominees Limited A/C 001847 413.0 $ 1,032.50
70
SHARES PURCHASE PRICE
--------- ---------------
N W Brown Nominees Limited A/C 001975 2,880.0 $ 7,200.00
N W Brown Nominees Limited A/C 002011 106.0 $ 265.00
N W Brown Nominees Limited A/C 002024 280.0 $ 700.00
N W Brown Nominees Limited A/C 002025 280.0 $ 700.00
N W Brown Nominees Limited A/C 002027 80.0 $ 200.00
N W Brown Nominees Limited A/C 002028 80.0 $ 200.00
N W Brown Nominees Limited A/C 002073 760.0 $ 1,900.00
N W Brown Nominees Limited A/C 002076 365.0 $ 912.50
N W Brown Nominees Limited A/C 002084 605.0 $ 1,512.50
N W Brown Nominees Limited A/C 002167 900.0 $ 2,250.00
N W Brown Nominees Limited A/C 002311 360.0 $ 900.00
N W Brown Nominees Limited A/C 002387 400.0 $ 1,000.00
N W Brown Nominees Limited A/C 002405 240.0 $ 600.00
N W Brown Nominees Limited A/C 002461 320.0 $ 800.00
N W Brown Nominees Limited A/C 002486 266.0 $ 665.00
N W Brown Nominees Limited A/C 002492 266.0 $ 665.00
N W Brown Nominees Limited A/C 002604 870.0 $ 2,175.00
N W Brown Nominees Limited A/C 002962 200.0 $ 500.00
N W Brown Nominees Limited A/C 003066 740.0 $ 1,850.00
N W Brown Nominees Limited A/C 003344 800.0 $ 2,000.00
N W Brown Nominees Limited A/C 003435 240.0 $ 600.00
N W Brown Nominees Limited A/C 003482 200.0 $ 500.00
N W Brown Nominees Limited A/C 003592 400.0 $ 1,000.00
N W Brown Nominees Limited A/C 004039 1,244.0 $ 3,110.00
N W Brown Nominees Limited A/C 004575 800.0 $ 2,000.00
N W Brown Nominees Limited A/C 100045 311.0 $ 777.50
N W Brown Nominees Limited A/C 100082 333.0 $ 832.50
N W Brown Nominees Limited A/C 100103 3,730.0 $ 9,325.00
N W Brown Nominees Limited A/C 100165 413.0 $ 1,032.50
N W Brown Nominees Limited A/C 100182 1,600.0 $ 4,000.00
N W Brown Nominees Limited A/C 100193 667.0 $ 1,667.50
Nigel Playford 1,066.0 $ 2,665.00
P N J May 800.0 $ 2,000.00
Paul Lancelot Banner 900.0 $ 2,250.00
Quentin Puckridge 240.0 $ 600.00
Richard Bourne 2,611.0 $ 6,527.50
Richard Katz 5,522.0 $ 13,805.00
Robert William Raywood 80.0 $ 200.00
Rock (Nominees) Limited - A/C 0222557 5,500.0 $ 13,750.00
Scientific Generics Ltd 22,094.0 $ 55,235.00
South Yorkshire Pension Authority 48,249.0 $ 120,622.50
Stephen Oates 250.0 $ 625.00
Susan Tolliday 350.0 $ 875.00
T & C Nominees Limited 11,320.0 $ 28,300.00
Thomas Duncan Stewart Horsey 1,200.0 $ 3,000.00
Thomas James Bourne 335.0 $ 837.50
William Oliver Lane Fox-Pitt 2,500.0 $ 6,250.00
William Stoops 1,600.0 $ 4,000.00
N W Brown Nominees Limited A/C 100118 560.0 $ 1,400.00
Mr and Mrs Robert Rawe 686.0 $ 1,715.00
N W Brown Nominees Limited A/C 002492 392.0 $ 980.00
71
SHARES PURCHASE PRICE
--------- ---------------
David Muller 60,000.0 $ 150,000.00
T & C Nominees Limited 1,000.0 $ 2,500.00
Malcolm Hacking 2,500.0 $ 6,250.00
David Frederick Davies (decd) 768.0 $ 1,920.00
Marjorie Davies 2,216.0 $ 5,540.00
Mr John Nugent 1,500.0 $ 3,750.00
Mrs Tracy Andrea Howell 4,400.0 $ 11,000.00
Robin James Upton, Esq 477.0 $ 1,192.50
N W Brown Nominees Limited A/C 001667 632.0 $ 1,580.00
Mrs A M Gilbert 280.0 $ 700.00
Winton Capital Holdings Limited 320,000.0 $ 800,000.00
Verus Investments Holdings Inc. 65,250.0 $ 163,125.00
Shemin Scaranie 4,152.0 $ 10,380.00
Mrs T Norris 4,152.0 $ 10,380.00
Jack Manning 4,154.0 $ 10,385.00
Abacus (C.I) Ltd - R0789 2,304.0 $ 5,760.00
Abacus (C.I) Ltd - R1015 3,000.0 $ 7,500.00
Abacus (C.I) Ltd - R1016 3,000.0 $ 7,500.00
Diomed issued and sold the securities in the above transaction in
reliance upon exemptions from registration under the Securities act of 1933, as
amended, set forth in Section 4(2) thereof or Regulation D or Regulation S
thereunder. Each purchaser represented that such purchaser was, in the case of
approximately 10 of the above persons, an accredited investor or, in the case of
the remaining investors, not a U.S. person, and each agreed that the securities
would not be resold without registration under the Securities Act or exemption
therefrom. Each purchaser also represented such purchaser's intention to acquire
the securities for investment only, and not with a view to the distribution
thereof. Diomed affixed appropriate legends to the stock certificates issued in
such transactions. Prior to making any offer or sale, Diomed had reasonable
grounds to believe and believed that each purchaser was capable of evaluating
the merits and risks of the investment and was able to bear the economic risk of
the investment.
2.) Between March 7, 2000 and July 27, 2000, Diomed sold $2,700,000 in
principal amount of its 9% convertible subordinated notes due March 31, 2001 to
21 purchasers for an aggregate purchase price of $2,700,000 (such notes were
convertible into shares of its common stock at a conversion price of $3.50 per
share). The purchasers, the aggregate principal amounts of the notes they
purchased and the respective purchase prices paid therefor were as follows:
PRINCIPAL AMOUNT
OF NOTES PURCHASE PRICE
------------------ ------------------
CMWL Trust $500,000.00 $500,000.00
Verus Investments Holdings, Inc. $500,000.00 $500,000.00
Rathbone Jersey Limited re PT643 $1,000,000.00 $1,000,000.00
Michael May $ 25,000.00 $ 25,000.00
Jeffrey Evans $ 25,000.00 $ 25,000.00
Nick Burge $ 25,000.00 $ 25,000.00
Hugh Moreshead $ 25,000.00 $ 25,000.00
Charles Savill $100,000.00 $100,000.00
Edward Baxter $ 25,000.00 $ 25,000.00
Julian Rogers-Coltman $ 25,000.00 $ 25,000.00
Nick Robinson $ 50,000.00 $ 50,000.00
Rupert Scott $ 25,000.00 $ 25,000.00
72
PRINCIPAL AMOUNT
OF NOTES PURCHASE PRICE
------------------ ------------------
Chris Ohlsen $ 25,000.00 $ 25,000.00
Richard Gray $ 25,000.00 $ 25,000.00
Ross Jones $ 25,000.00 $ 25,000.00
Mark & Amanda Sater $ 25,000.00 $ 25,000.00
Robert N. Bee Delores M. Bee $ 25,000.00 $ 25,000.00
Neil Durazzo $100,000.00 $100,000.00
Xavier De. La Rochefoncould $ 50,000.00 $ 50,000.00
Ernest Goggio $ 75,000.00 $ 75,000.00
John Langham $ 25,000.00 $ 25,000.00
--------------------- -----------------------
$2,700,000.00 $2,700,000.00
Diomed issued and sold the notes in the above transaction in reliance
upon exemptions from registration under the Securities act of 1933, as amended,
set forth in Section 4(2) thereof or Regulation S thereunder. Each purchaser of
the notes represented that such purchaser was not a U.S. person, and each agreed
that the notes would not be resold without registration under the Securities Act
or exemption therefrom. Each purchase also represented such purchaser's
intention to acquire the notes for investment only, and not with a view to the
distribution thereof. Diomed affixed appropriate legends to the notes issued in
such transactions. Prior to making any offer or sale, Diomed had reasonable
grounds to believe and believed that each purchaser of the notes was capable of
evaluating the merits and risks of the investment and was able to bear the
economic risk of the investment.
3.) On August 31, 2000, Diomed sold 571,249 units, with each unit
including one share of its common stock and a warrant to purchase two shares of
its common stock at an exercise price of $3.50 per share, to five purchasers for
an aggregate purchase price of $1,999,372. Diomed also granted to such
purchasers an option to purchase on or before August 31, 2001 an additional
857,143 units, with each unit including one share of its common stock and a
warrant to purchase one share of its common stock, for an aggregate purchase
price of $3,000,000. The purchasers, the units they purchased and the respective
purchase prices paid, were as follows:
SHARES OF
COMMON STOCK WARRANTS PURCHASE PRICE
--------------- ----------- --------------
Verus Investments Holdings Inc. 220,567 441,134 $ 771,984
Gibralt Capital Corporation 285,714 571,428 999,999
James Arkoosh 5,000 10,000 17,500
George M. Lieberman 3,000 6,000 10,500
Marousa L. Dumaresq 57,148 114,296 200,017
----------------------------------------------------
571,429 1,142,858 $1,999,372
Diomed issued and sold the securities in the above transaction in
reliance upon exemptions from registration under the Securities act of 1933, as
amended, set forth in Section 4(2) thereof or Regulation D thereunder. Each
purchaser represented that such purchaser was an accredited investor, and each
agreed that the securities would not be sold without registration under the
Securities Act or exemption therefrom. Each purchaser also represented such
purchaser's intention to acquire the securities for investment only, and not
with a view to the distribution thereof. Diomed affixed appropriate legends to
the stock certificates or other instruments issued in such transactions. Prior
to making any offer or sale, Diomed had reasonable grounds to believe and
believed that each purchaser was capable of evaluating the merits and risks of
the investment and was able to bear the economic risk of the investment.
73
4.) In October 2000, Diomed sold 244,436 units, with each unit
including one share of its common stock and a warrant to purchase one share of
its common stock at an exercise price of $3.50 per share, to 20 purchasers for
an aggregate purchase price of $855,526. Each of the purchasers was an existing
stockholder of Diomed, and the offering was a rights offering. The purchasers,
the units they purchased and the respective purchase prices paid were as
follows:
UNITS PURCHASE PRICE
---------- -----------------
Brian Kingham 7,100.0 $ 24,850.00
David John Shaw 2,600.0 $ 9,100.00
Eric Leyns, Esq 916.0 $ 3,206.00
Gareth Richard Hayward 960.0 $ 3,360.00
D L G Rowlands 7,143.0 $ 25,000.50
J Beatson-Hird 4,100.0 $ 14,350.00
Jennifer Moody 900.0 $ 3,150.00
Malzam Investments 1,749.0 $ 6,121.50
Fortis Fund Services (Cayman) Ltd - Trustee 164,598.0 $ 576,093.00
HSBC Financial Services (Cayman) Limited - Trustee 23,243.0 $ 81,350.50
Mrs T Norris 3,500.0 $ 12,250.00
Mr Timothy Francis Fetherstonhaugh Nixon 1,133.0 $ 3,965.50
Mrs Lucy Elizabeth Muriel Nixon 1,133.0 $ 3,965.50
Emily Anne Jenny Bourne 495.0 $ 1,732.50
Katie Louise Victoria Bourne 1,389.0 $ 4,861.50
Michael Bourne 1,649.0 $ 5,771.50
Thomas James Bourne 495.0 $ 1,732.50
Richard Bourne 1,862.0 $ 6,517.00
The Bank of New York Nominees Limited 18,991.0 $ 66,468.50
John Cyril Adams 480.0 $ 1,680.00
---------------- -------------------
244,436.0 $ 855,526.00
Diomed issued and sold the securities in the above transaction in
reliance upon exemptions from registration under the Securities act of 1933, as
amended, set forth in Section 4(2) thereof or Regulation D or Regulation S
thereunder. Each purchaser represented that such purchaser was an accredited
investor or not a U.S. person, and each agreed that the securities would not be
resold without registration under the Securities Act or exemption therefrom.
Each purchaser also represented such purchaser's intention to acquire the
securities for investment only, and not with a view to the distribution thereof.
Diomed affixed appropriate legends to the stock certificates or other documents
issued in such transactions. Prior to making any offer or sale, Diomed had
reasonable grounds to believe and believed that each purchaser was capable of
evaluating the merits and risks of the investment and was able to bear the
economic risk of the investment.
5.) On March 15, 2001, pursuant to a plan of reorganization, Diomed
sold and issued, and agreed to sell and issue, securities as follows:
(i) Diomed sold 2,000,000 shares of its Series A preferred stock to
nine purchasers for an aggregate purchase price of $2,000,000 (each share of
Series A preferred stock may be converted into two shares of its common stock,
subject to adjustment as provided in its certificate of incorporation). The nine
purchasers, the shares of Diomed Series A preferred stock that they purchased
and the respective purchase prices paid were as follows:
74
SHARES PURCHASE PRICE
---------------- ---------------------
Verus International Group Limited 500,000 $500,000.00
Verus Investments Holdings Inc. 500,000 $500,000.00
Winton Capital Holdings Ltd. 500,000 $500,000.00
Green Cresent Corporation 318,500 $318,500.00
James Arkoosh 41,500 $ 41,500.00
George M. Lieberman 5,000 $5,000.00
Marousa L. Dumaresq 35,000 $ 35,000.00
Content Groove Inc. 50,000 $ 50,000.00
Jack L. Rivkin 50,000 $ 50,000.00
---------------- -----------------------
2,000,000.0 2,000,000.00
(ii) Diomed committed to sell an additional 500,000 shares of its
Series A preferred stock to Verus International, Group Limited by April 30,
2001, for an aggregate purchase price of $500,000;
(iii) Diomed issued a put/call option under which Verus International
Group Limited and Winton Capital Holdings Ltd. could elect to purchase, and
Diomed could elect to require such purchasers to purchase, up to an additional
1,000,000 shares of its Series A preferred stock at the same purchase price of
$1.00 per share. The put option expired on May 31, 2001 and the call option
expired on October 31, 2001;
(iv) Diomed issued 2,475,000 shares of its common stock in connection
with the conversion by 19 noteholders of $2,475,000 in principal amount of its
9% Convertible Subordinated Notes due March 31, 2001 (which notes were amended
as of March 15, 2001 to reduce the conversion price of such notes to $1.00 per
share). The 19 purchasers, the principal amounts of the notes they tendered to
Diomed and the number of shares of Diomed common stock issued upon conversions
of such notes were as follows:
PRINCIPAL
AMOUNT
OF NOTES SHARES ISSUED
----------------- -------------
Charles Savill $ 25,000.00 25,000.0
Chris Ohlsen $ 25,000.00 25,000.0
CMWL Trust $ 500,000.00 500,000.0
Edward Baxter $ 25,000.00 25,000.0
Hugh Moreshead $ 25,000.00 25,000.0
Jeffrey Evans $ 25,000.00 25,000.0
Julian Rogers-Coltman $ 25,000.00 25,000.0
Mark & Amanda Sater $ 25,000.00 25,000.0
Michael May $ 25,000.00 25,000.0
Mr Robert N. Bee and/or Mrs Delores M. Bee $ 25,000.00 25,000.0
Neil Durazzo $ 100,000.00 100,000.0
Nick Burge $ 25,000.00 25,000.0
Nick Robinson $ 25,000.00 25,000.0
Rathbone Jersey Limited re PT635 $ 1,000,000.00 1,000,000.0
Richard Gray $ 25,000.00 25,000.0
Ross Jones $ 25,000.00 25,000.0
Rupert Scott $ 25,000.00 25,000.0
Verus Investments Holdings Inc. $ 500,000.00 500,000.0
Xavier De. La Rochefoncould $ 25,000.00 25,000.0
--------------- ----------------
$ 2,475,000.0 2,475,000.00
75
(v) Diomed issued 2,000,001 shares of its common stock to the five
purchasers who purchased units on August 31, 2000 (see item 4.) above) in
consideration of the tender to it for cancellation of all securities purchased
by such purchasers from us in August 2000 (namely, 571,429 shares of its common
stock and warrants to purchase 1,142,858 shares of its common stock at an
exercise price of $3.50 per share) and the termination of all rights granted by
it to such purchasers in connection with the August 2000 transaction; and
(vi) Diomed issued 708,792 shares of its common stock to five purchasers
who purchased units in October 2000 in consideration of the tender to it for
cancellation of all securities purchased by such purchasers from us in October
2000 (namely, 202,152 shares of its common stock and warrants to purchase
202,152 shares of its common stock at an exercise price of $3.50 per share) and
the termination of all rights granted by it to such purchasers in connection
with the October 2000 transaction. The purchasers, the numbers of shares of
common stock that were reissued to them and, the numbers of shares of common
stock and warrants previously issued that were respectively cancelled were as
follows:
SHARES OF SHARES OF
COMMON COMMON WARRANTS
STOCK TO BE STOCK TO BE TO BE
REISSUED CANCELLED CANCELLED
DLG Rowlands 25,000.50 7,143 7,143
Mrs. T. Norris 12,250 3,500 3,500
HSBC Financial Services (Cayman) Limited - 81,350.50 23,243 23,243
Trustee The Abe-Sci Venture Fund
Fortis Fund Services (Cayman) Ltd. - Trustee of 576,093 164,598 164,598
Sofaer Funds/SCI Global Hedge Fund
Michael Bourne 14098 4028 4028
---------------- ------------------- ---------------
708,792.00 202,512 202,512
Diomed issued and sold the securities in the six above-referenced
transactions in reliance upon exemptions from registration under the Securities
act of 1933, as amended, set forth in Section 4(2) thereof or Regulation D or
Regulation S thereunder. Each purchaser represented that such purchaser was an
accredited investor or not a U.S. person, and each agreed that the securities
would not be resold without registration under the Securities Act or exemption
therefrom. Each purchaser also represented such purchaser's intention to acquire
the securities for investment only, and not with a view to the distribution
thereof. Diomed affixed appropriate legends to the stock certificates issued in
such transactions. Prior to making any offer or sale, Diomed had reasonable
grounds to believe and believed that each purchaser was capable of evaluating
the merits and risks of the investment and was able to bear the economic risk of
the investment.
6.) On April 30, 2001, Diomed sold 500,000 shares of its Series A
preferred stock to Verus International Group Limited pursuant to the commitment
entered into on March 15, 2001, for a purchase price of $500,000. Diomed issued
and sold its shares to Verus International Group Limited in the above
transaction in reliance upon exemptions from registration under the Securities
act of 1933, as amended, set forth in Section 4(2) thereof or Regulation D or
Regulation S thereunder. The purchaser represented that it was an accredited
investor, and each agreed that the securities would not be resold without
registration under the Securities Act or exemption therefrom. The purchaser also
represented its intention to acquire the securities for investment only, and not
with a view to the distribution thereof. Diomed affixed appropriate legends to
the stock certificate issued in such transactions. Prior to making any offer or
sale, Diomed had reasonable grounds to believe and believed that the purchaser
was capable of evaluating the merits and risks of the investment and was able to
bear the economic risk of the investment.
76
7.) On May 31, 2001, Diomed exercised its put rights under the
put/call option issued on March 15, 2001 and sold 225,000 shares of its Series A
preferred stock to four purchasers, three of which were assignees of Verus
International Group Limited, for an aggregate purchase price of $225,000 in
connection with the exercise of its rights. The purchasers, the numbers of
shares of common stock purchased and the amounts paid were respectively as
follows:
SHARES
PURCHASED PURCHASE PRICE
------------ -------------------
Winton Capital Holdings Ltd 112,500 $112,500.00
Virtual Winds Capital 80,500 $82,500.00
Philip Winder 25,000 $25,000.00
Caryn Baily 5,000 $5,000.00
------------ ------------------
225,000 $225,000.00
Diomed issued and sold the securities in the above transaction in
reliance upon exemptions from registration under the Securities act of 1933, as
amended, set forth in Section 4(2) thereof or Regulation D or Regulation S
thereunder. Each purchaser represented that such purchaser was an accredited
investor or not a U.S. person, and each agreed that the securities would not be
resold without registration under the Securities Act or exemption therefrom.
Each purchaser also represented such purchaser's intention to acquire the
securities for investment only, and not with a view to the distribution thereof.
Diomed affixed appropriate legends to the stock certificates issued in such
transactions. Prior to making any offer or sale, Diomed had reasonable grounds
to believe and believed that each purchaser was capable of evaluating the merits
and risks of the investment and was able to bear the economic risk of the
investment.
8.) On September 24, 2001, Diomed issued a Promissory Note due
January 1, 2004 in the principal amount of $936,000 to Axcan Pharma, Inc., a
customer, in consideration of a prior advance of funds by such customer of
$936,000. Diomed issued its note to Axcan in the above transaction in reliance
upon exemptions from registration under the Securities Act of 1933, as amended,
set forth in Section 4(2) thereof or Regulation D thereunder. Axcan represented
that it was an accredited investor, and agreed that the note would not be resold
without registration under the Securities Act or exemption therefrom. Axcan also
represented its intention to acquire the note for investment only, and not with
a view to the distribution thereof.
9.) On October 5, 2001, Diomed issued secured promissory notes due
January 1, 2003 (subject to prior maturity in certain circumstances specified in
such note) in the aggregate principal amount of $500,000 to Verus International
Group Limited and Winton Capital Holdings Ltd. for an aggregate purchase price
of $500,000 (which notes are convertible into shares of its common stock at a
conversion price, referred to as the "note conversion price," equal to the lower
of $2.25 per share or the price per share (on a common stock-equivalent basis)
paid by other persons who purchase shares of its capital stock in the
transaction in connection with which such conversion occurs) and warrants to
purchase an aggregate of 50,000 shares of its common stock (subject to increase
in certain circumstances specified in such warrant) at an exercise price equal
to the note conversion price. Each purchaser purchased equal amounts of the
notes and warrants. On December 21, 2001, Diomed and the noteholders agreed to
reduce the note conversion price and the warrant exercise price to the lower of
$2.00 per share or the price per share paid by other persons who purchase shares
of its capital stock in the transaction in connection with which such conversion
occurs. Diomed issued and sold its securities to Verus International Group
Limited and Winton Capital Holdings Ltd. in the above transactions in reliance
upon exemptions from registration under the Securities act of 1933, as amended,
set forth in Section 4(2) thereof or Regulation D thereunder. Each purchaser
represented that it was an accredited investor, and each agreed that the
securities would not be sold without registration under the Securities Act or
exemption therefrom. Each purchaser also represented its intention to acquire
the securities for investment only, and not with a view
77
to the distribution thereof. Diomed affixed appropriate legends to the
securities issued in the transactions with Verus International Group Limited and
Winton Capital Holdings Ltd. Prior to making any offer or sale, Diomed had
reasonable grounds to believe and believed that each purchaser was capable of
evaluating the merits and risks of the investment and was able to bear the
economic risk of the investment.
10.) On December 21, 2001, Diomed issued secured promissory notes due
January 1, 2003 (subject to prior maturity in certain circumstances specified in
such notes) in the aggregate principal amount of $200,000 to Verus International
Group Ltd. and Winton Capital Holdings, Ltd. for an aggregate purchase price of
$200,000 (which notes are convertible into shares of its common stock at a
conversion price, referred to as the "note conversion price," equal to the lower
of $2.00 per share or the price per share (on a common stock-equivalent basis)
paid by other persons who purchase shares of its capital stock in the
transaction in connection with which such conversion occurs) and warrants to
purchase an aggregate of 20,000 shares of common stock (subject to increase in
certain circumstances specified in such warrants) at an exercise price equal to
the note conversion price. Each purchaser purchased equal amounts of the notes
and warrants. Diomed issued and sold its securities to Verus International Group
Limited and Winton Capital Holdings Ltd. in the above transactions in reliance
upon exemptions from registration under the Securities act of 1933, as amended,
set forth in Section 4(2) thereof or Regulation D thereunder. Each purchaser
represented that it was an accredited investor, and each agreed that the
securities would not be sold without registration under the Securities Act or
exemption therefrom. Each purchaser also represented its intention to acquire
the securities for investment only, and not with a view to the distribution
thereof. Diomed affixed appropriate legends to the securities issued in the
transactions with Verus International Group Limited and Winton Capital Holdings
Ltd. Prior to making any offer or sale, Diomed had reasonable grounds to believe
and believed that each purchaser was capable of evaluating the merits and risks
of the investment and was able to bear the economic risk of the investment.
11.) Pursuant to the agreements under which Diomed issued warrants to
Verus International Group Limited and Winton Capital Holdings Ltd. On October 5,
2001 and December 21, 2001, on January 2002 Diomed issued 5,000 additional
warrants to each of Verus International Group Limited and Winton Capital
Holdings Ltd. The terms and conditions of the warrants issued in January were
substantially the same as the warrants issued to Verus International Group
Limited and Winton Capital Holdings Ltd. in December 2001. Diomed issued and
sold its warrants to Verus International Group Limited and Winton Capital
Holdings Ltd. in the above transaction in reliance upon exemptions from
registration under the Securities act of 1933, as amended, set forth in Section
4(2) thereof or Regulation D thereunder. Each purchaser also represented its
intention to acquire the warrants for investment only, and not with a view to
the distribution thereof. Diomed affixed appropriate legends to the warrants
issued in the transactions with Verus International Group Limited and Winton
Capital Holdings Ltd. Prior to making any offer or sale, Diomed had reasonable
grounds to believe and believed that each of Verus International Group Limited
and Winton Capital Holdings Ltd. was capable of evaluating the merits and risks
of the investment and was able to bear the economic risk of the investment.
Diomed affixed appropriate legends to the warrants issued in the transactions
with Verus International Group Limited and Winton Capital Holdings Ltd.
All of the above transactions were made directly without use of an
underwriter. In each case the aggregate sales proceeds, after payment of
offering expenses in immaterial amounts, were applied to its working capital and
other general corporate purposes.
RULE 14F-1 INFORMATION
On February 25, 2002, we anticipate that James Arkoosh, Sam Belzberg,
Geoffrey Jenkins and Peter Klein will become directors of Diomed Holdings, Inc.
Biographic, beneficial ownership and other required information is set forth in
"Executive Officers and Directors," "Security Ownership of Certain Beneficial
Owners and Management," "Summary Compensation Table," "Certain Relationships
and Related Transactions," "Employment Agreements," "Directors' Compensation,"
"Option Grants in Last Fiscal Year," "Merger Involving Diomed and the Company"
and "Description of Securities."
78
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants 81
Consolidated Balance Sheets as of December 31, 1999 and 2000 82
and September 30, 2001 (unaudited)
Consolidated Statements of Operations for the Years Ended 83
December 31, 1998, 1999, and 2000 and the Nine Months Ended
September 30, 2000 and 2001 (unaudited)
Consolidated Statements of Stockholders' Equity (Deficit) 84
for the Years Ended December 31, 1998, 1999, and 2000 and
the Nine Months Ended September 30, 2001 (unaudited)
Consolidated Statements of Cash Flows for the Years Ended 85
December 31, 1998, 1999, and 2000 and the Nine Months Ended
September 30, 2000 and 2001 (unaudited)
Notes to Consolidated Financial Statements 86
79
DIOMED, INC.
Consolidated Financial Statements
as of December 31, 2000 and 1999
Together with Auditors' Report
80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Diomed, Inc.:
We have audited the accompanying consolidated balance sheets of Diomed, Inc. (a
Delaware corporation) and subsidiary as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three-year period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Its responsibility is to express an opinion on these financial
statements based on its audits.
We conducted its audits in accordance with auditing standards generally accepted
in the United States. 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 its audits provide a reasonable basis for its
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diomed, Inc. and subsidiary as
of December 31, 1999 and 2000, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
September 26, 2001
(except with respect to the
matter discussed in Note 16,
as to which the date is
February 14, 2002)
81
DIOMED, INC.
Consolidated Balance Sheets
DECEMBER 31, SEPTEMBER 30,
ASSETS 1999 2000 2001
(UNAUDITED)
Current Assets:
Cash and cash equivalents $ 63,042 $ 118,872 $ 293,100
Accounts receivable, net of allowance for doubtful accounts of
$7,000, $300,000 and $238,000 in 1999, 2000 and 2001,
respectively 1,737,199 3,574,510 1,352,200
Inventories 1,759,480 2,348,594 2,504,035
Prepaid expenses and other current assets 513,445 219,808 301,704
--------------- --------------- ---------------
Total current assets 4,073,166 6,261,784 4,451,039
--------------- --------------- ---------------
Property and Equipment:
Office equipment and furniture and fixtures 843,681 1,024,529 1,193,665
Manufacturing equipment 620,081 746,060 736,000
Leasehold improvements 635,404 605,790 634,000
--------------- --------------- ---------------
2,099,166 2,376,379 2,563,665
Less--Accumulated depreciation and amortization 624,960 1,077,933 1,383,500
--------------- --------------- ---------------
1,474,206 1,298,446 1,180,165
--------------- --------------- ---------------
Intangible Assets, net of accumulated amortization of $0, $41,000
and $139,000 in 1999, 2000 and 2001, respectively - 940,487 801,400
--------------- --------------- ---------------
Other Assets 489,092 451,597 669,396
--------------- --------------- ---------------
$ 6,036,464 $ 8,952,314 $ 7,102,000
=============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank loan $ 1,985,550 $ 1,722,674 $ 529,900
Convertible loan notes - 2,700,000 -
Current maturities of convertible debt - 339,336 339,336
Current maturities of capital lease obligations 52,656 52,528 48,657
Accounts payable 1,896,117 1,983,206 2,308,821
Accrued expenses 2,626,073 1,584,962 832,500
Customer advance - - 488,500
--------------- --------------- ---------------
Total current liabilities 6,560,396 8,382,706 4,547,714
--------------- --------------- ---------------
Promissory Note Payable - 936,000 936,000
--------------- --------------- ---------------
Convertible Notes Payable to Stockholders - - 457,000
--------------- --------------- ---------------
Convertible Debt, less current maturities - 826,339 826,339
--------------- --------------- ---------------
Capital Lease Obligations, less current maturities 119,270 88,303 51,243
--------------- --------------- ---------------
Commitments (Note 14)
Stockholders' Equity (Deficit):
Series A convertible preferred stock, $0.01 par value-
Authorized--3,500,000 shares
Issued and outstanding--2,725,000 in 2001 - - 27,250
Common stock, $0.001 par value-
Authorized--40,000,000 shares
Issued and outstanding--3,954,238 in 1999, 4,770,103 shares
in 2000 and 9,179,955 shares in 2001 3,954 4,770 9,180
Additional paid-in capital 19,289,991 22,073,666 30,270,656
Cumulative translation adjustment (38,341) 15,332 (4,200)
Accumulated deficit (19,898,806) (23,374,802) (30,019,182)
--------------- --------------- ---------------
Total stockholders' equity (deficit) (643,202) (1,281,034) 283,704
--------------- --------------- ---------------
$ 6,036,464 $ 8,952,314 $ 7,102,000
=============== =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
82
DIOMED, INC.
Consolidated Statements of Operations
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------- -----------
1998 1999 2000 2000 2001
(UNAUDITED)
Revenues $ 9,312,347 $ 6,751,302 $ 9,424,514 $ 5,461,800 $ 6,427,800
Cost of Revenues 5,179,234 6,706,013 7,414,564 4,766,700 4,952,000
------------- ------------- ------------- ------------- -------------
Gross profit 4,133,113 45,289 2,009,950 695,100 1,475,800
------------- ------------- ------------- ------------- -------------
Operating Expenses:
Research and development 1,374,179 1,572,825 1,270,816 846,400 1,009,000
Selling and marketing 1,929,350 2,136,498 1,647,510 1,136,400 1,873,000
General and administrative 2,577,860 2,115,787 2,228,777 1,395,000 1,936,000
Impairment of goodwill (Note 5) - 1,586,370 - - -
------------- ------------- ------------- ------------- -------------
Total operating expenses 5,881,389 7,411,480 5,147,103 3,377,800 4,818,000
------------- ------------- ------------- ------------- -------------
Loss from operations (1,748,276) (7,366,191) (3,137,153) (2,682,700) (3,342,200)
Interest Expense, net (60,984) (124,535) (338,843) (231,600) (2,879,000)
------------- ------------- ------------- ------------- -------------
Net loss (1,809,260) (7,490,726) (3,475,996) (2,914,300) (6,221,200)
Value Ascribed to Call Option and
Beneficial Conversion Feature Related to
Preferred Stock - - - - (423,180)
------------- ------------- ------------- ------------- -------------
Net loss applicable to common
stockholders $ (1,809,260) $ (7,490,726) $ (3,475,996) $ (2,914,300) $ (6,644,380)
============= ============= ============= ============= =============
Net loss per share (Note 3):
Basic and diluted net loss per share
applicable to common stockholders $ (0.70) $ (2.34) $ (0.82) $ (0.71) $ (0.83)
============ ============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding 2,596,574 3,196,558 4,246,004 4,081,222 8,003,994
============= ============= ============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
83
DIOMED, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
NUMBER OF $0.01 PAR NUMBER OF $0.001 PAR PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
Balance, December 31, 1997 - $ - 2,346,811 $ 2,347 $ 13,602,136
Issuance of stock for services rendered - - 3,354 3 21,997
Issuance of stock in connection with acquisition - - 414,143 414 2,716,364
Exercise of options to purchase common stock - - 25,350 25 126,102
Change in cumulative translation adjustment - - - - -
Net loss - - - - -
------------ ------------ ------------ ------------ ------------
Comprehensive loss
Balance, December 31, 1998 - - 2,789,658 2,789 16,466,599
Issuance of stock, net of issuance costs of
$148,448 - - 1,139,580 1,140 2,700,207
Change in cumulative translation adjustment - - - - -
Exercise of options to purchase common stock - 25,000 25 123,185
Net loss - - - - -
------------ ------------ ------------ ------------ ------------
Comprehensive loss
Balance, December 31, 1999 - - 3,954,238 3,954 19,289,991
Issuance of stock and warrants, net of offering
costs of $71,036 - - 815,865 816 2,783,675
Change in cumulative translation adjustment - - - - -
Net loss - - - - -
------------ ------------ ------------ ------------ ------------
Comprehensive loss
Balance, December 31, 2000 - - 4,770,103 4,770 22,073,666
Issuance of Series A convertible preferred stock,
net of issuance costs of $192,530 (unaudited) 2,725,000 27,250 - - 2,505,220
Value ascribed to call option and beneficial
conversion feature related to preferred stock
(unaudited) - - - - 423,180
Conversion of debt into common stock, including
$2,700,000 related to beneficial conversion
feature (unaudited) - - 2,475,000 2,475 5,172,525
Value ascribed to warrants issued in connection
with issuance of debt to stockholders
(unaudited) - - - - 43,000
Compensation expense related to issuance of stock
options to consultants for services (unaudited) - - - - 55,000
Recapitalization of common stock held by certain
investors (unaudited) - - 1,934,852 1,935 (1,935)
Change in cumulative translation adjustment
(unaudited) - - - - -
Net loss (unaudited) - - - - -
------------ ------------ ------------ ------------ ------------
Comprehensive loss (unaudited)
Balance, September 30, 2001 (unaudited) 2,725,000 $ 27,250 9,179,955 $ 9,180 $ 30,270,656
============ ============ ============ ============ ============
TOTAL
CUMULATIVE STOCKHOLDERS'
TRANSLATION ACCUMULATED EQUITY COMPREHENSIVE
ADJUSTMENT DEFICIT (DEFICIT) LOSS
$ - $(10,598,820) $ 3,005,663
- - 22,000
- - 2,716,778
- - 126,127
27,014 - 27,014 $ 27,014
- (1,809,260) (1,809,260) (1,809,260)
------------ ------------ ------------ -------------
$ (1,782,246)
=============
27,014 (12,408,080) 4,088,322
- - 2,701,347
(65,355) - (65,355) $ (65,355)
- - 123,210
- (7,490,726) (7,490,726) (7,490,726)
------------ ------------ ------------ -------------
$ (7,556,081)
=============
(38,341) (19,898,806) (643,202)
- - 2,784,491
53,673 - 53,673 $ 53,673
- (3,475,996) (3,475,996) (3,475,996)
------------ ------------ ------------ -------------
$ (3,422,323)
=============
15,332 (23,374,802) (1,281,034)
- - 2,532,470
- (423,180) -
- - 5,175,000
- - 43,000
- - 55,000
- - -
(19,532) - (19,532) $ (19,532)
- (6,221,200) (6,221,200) (6,221,200)
------------ ------------ ------------ -------------
$ (6,240,732)
=============
$ (4,200) $(30,019,182) $ 283,704
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
84
DIOMED, INC.
Consolidated Statements of Cash Flows
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------- -------
1998 1999 2000 2000 2001
(UNAUDITED)
Cash Flows from Operating Activities:
Net loss $ (1,809,260) $ (7,490,726) $ (3,475,996) $ (2,914,300) $ (6,221,200)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 431,817 688,708 467,566 304,086 524,049
Noncash interest expense on convertible loan
notes - - - - 2,700,000
Issuance of stock options to consultants - - - - 55,000
Impairment of goodwill - 1,586,370 - - -
Changes in operating assets and liabilities,
net of acquisition-
Accounts receivable (19,771) 545,556 (1,965,681) 41,625 2,461,837
Inventories (254,245) (30,084) (421,071) (458,651) (155,339)
Prepaid expenses and other current assets (155,648) (269,088) 256,583 58,437 (88,997)
Accounts payable 607,244 82,218 226,307 137,012 353,166
Accrued expenses 209,478 2,055,614 (852,658) (915,222) (727,604)
Customer advance - - - - 488,500
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (990,385) (2,831,432) (5,764,950) (3,747,013) (610,588)
------------ ------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (36,151) (970,323) (272,414) (322,877) (374,398)
Increase in other assets - (489,092) - - (225,196)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (36,151) (1,459,415) (272,414) (322,877) (599,594)
------------ ------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Net proceeds (payments) from bank borrowings 308,395 1,500,073 (115,389) (350,277) (1,162,364)
Proceeds from convertible loan notes - - 2,700,000 2,700,000 -
Proceeds from convertible debt - - - - 500,000
Promissory note payable - - 936,000 - -
Payments on convertible debt - - (34,325) - (225,000)
Payments on capital lease obligations (17,419) (40,859) (50,388) (48,180) (38,445)
Proceeds from issue of stock 126,127 2,701,347 2,784,491 1,950,248 -
Proceeds from issue of preferred stock - - - - 2,532,470
Proceeds from exercise of stock options - 123,210 - - -
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 417,103 4,283,771 6,220,389 4,251,791 1,606,661
------------ ------------ ------------ ------------ ------------
Effect of Exchange Rate Changes (145) (37,143) (127,195) (174,443) (222,251)
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents (609,578) (44,219) 55,830 7,458 174,228
Cash and Cash Equivalents, beginning of period 716,839 107,261 63,042 63,042 118,872
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents, end of period $ 107,261 $ 63,042 $ 118,872 $ 70,500 $ 293,100
=========== =========== =========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 61,518 $ 124,535 $ 332,285 $ 205,248 $ 186,432
=========== =========== =========== =========== ===========
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Acquisition of property and equipment under
capital lease obligations $ - $ 172,159 $ 32,065 $ 32,065 $ -
=========== =========== =========== =========== ===========
Issuance of stock in connection with
acquisition of LaserLite LLC $ 2,738,778 $ - $ - $ - $ -
=========== =========== =========== =========== ===========
Exchange of convertible debt for QLT
intangible assets and inventory $ - $ - $ 1,200,000 $ - $ -
=========== =========== =========== =========== ===========
Conversion of convertible loan notes into
common stock $ - $ - $ - $ - $ 2,475,000
=========== =========== =========== =========== ===========
Value ascribed to warrants issued in
connection with issuance of debt to
stockholders $ - $ - $ - $ - $ 43,000
=========== =========== =========== =========== ===========
Value ascribed to call option and beneficial
conversion feature related to preferred stock $ - $ - $ - $ - $ 423,180
=========== =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
85
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS
Diomed, Inc. (the Company) provides innovative clinical modalities and
specializes in developing and distributing equipment and disposables used
in minimal and micro-invasive medical procedures.
Some of the Company's medical laser products are in various stages of
development, and as such, the success of future operations is subject to
a number of risks similar to those of other companies in similar stages
of development. Principal among these risks are the continued successful
development and marketing of the Company's products, proper regulatory
approval, the need to achieve profitable operations, competition from
substitute products and larger companies, the need to obtain adequate
financing to fund future operations and dependence on key individuals.
The Company has incurred significant losses since inception and is
devoting substantially all its efforts towards research and development,
regulatory approvals, manufacturing and marketing its products.
As discussed in Notes 8, 11(B), and 15, subsequent to year-end, certain
debt outstanding at December 31, 2000 has converted to equity and the
Company has raised additional funding through separate issuances of
equity and debt instruments. Management believes that this additional
capital, along with its cash flows from operations, will be sufficient to
fund its operations into 2002. As disucssed in Note 16, the Company
merged with another company subsequent to year-end.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain accounting policies as described below and
elsewhere in these notes to consolidated financial statements.
86
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(A) PRINCIPLES OF CONSOLIDATION
These financial statements include the amounts of the Company and its
wholly owned subsidiaries. All significant intercompany transactions have
been eliminated.
(B) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the September 30, 2000 and
2001 unaudited interim financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of results of the respective interim period. The results of
operations for the nine months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year or
for any future period.
(C) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
(D) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of short-term, highly liquid
investments with original maturity dates of 90 days or less. Cash
equivalents are carried at cost, which approximates fair value.
(E) FOREIGN CURRENCY TRANSLATION
Assets, excluding property and equipment and liabilities of the foreign
subsidiaries are translated at the rate of exchange in effect at
year-end, while stockholders' equity, excluding the current year's loss,
is translated at historical rates. Results of operations are translated
using the weighted average exchange rate in effect during the year.
Resulting translation adjustments are recorded as a separate component of
stockholders' equity in the accompanying consolidated balance sheets.
Transaction gains and losses are included in operating expenses for all
periods presented.
(F) REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment to the
customer as long as there is persuasive evidence of an arrangement, the
sales price is fixed and determinable and collection of the related
receivable is probable. The Company provides for estimated product
returns and warranty costs at the time of product shipment. In December
1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, which establishes guidance in applying generally accepted
accounting principles to revenue recognition in financial statements and
is effective beginning with the Company's fourth quarter of the year
ended December 31, 2000. The
87
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Company has determined that its existing revenue recognition practices
comply with the requirements of SAB No. 101 for all periods presented.
(G) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Work-in-progress and finished goods consist of materials, labor
and manufacturing overhead. Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1999 2000 2001
Raw materials $ 1,316,720 $ 2,022,590 $ 2,111,486
Work-in-progress - 243,612 270,467
Finished goods 442,760 82,392 122,082
--------------- --------------- ---------------
$ 1,759,480 $ 2,348,594 $ 2,504,035
=============== =============== ===============
(H) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using both
straight-line and accelerated methods by charges to operations in amounts
that allocate the cost of the assets over their estimated useful lives as
follows:
ESTIMATED
DESCRIPTION USEFUL LIFE
Office equipment and furniture and fixtures 2-5 years
Manufacturing equipment 2-5 years
Leasehold improvements Lesser of estimated
useful life or life of
lease
(I) LONG-LIVED ASSETS
The Company assesses the realizability of long-lived assets in accordance
with Statement of Financial Accounting Standards (SFAS) No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. Under SFAS No. 121, if qualitative factors
suggest that an impairment may have occurred, the Company is required to
assess the valuation of its long-lived assets. Based on the Company's
development of a next-generation laser and its decision to discontinue
the sale of the LaserLite LLC product line, the Company recorded an asset
impairment charge of approximately $1.6 million against the remaining
carrying value of goodwill related to the acquisition of LaserLite LLC
during the year ended December 31, 1999. As of December 31, 2000 and
September 30, 2001, the Company has determined that no material
adjustment to the carrying value of its long-lived assets was required.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, cash equivalents, accounts
receivable, accounts payable and various debt instruments approximate
fair value due to the short-term nature of these instruments. The
carrying amounts of debt issued pursuant to
88
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
agreements with banks approximate fair value as the interest rates on
these instruments fluctuate with market interest rates.
(K) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that subject the Company to credit risk consist
primarily of cash, cash equivalents and trade accounts receivable. The
Company places its cash and cash equivalents in established financial
institutions. The Company has no significant off-balance-sheet
concentration of credit risk such as foreign exchange contracts, options
contracts or other foreign hedging arrangements. The Company's accounts
receivable credit risk is not concentrated within any one geographic
area. The Company has not experienced any losses related to receivables
from any individual customers or groups of customers in any specific
industry or by geographic area. Due to these factors, no additional
credit risk beyond amounts provided for collection losses is believed by
management to be inherent in the Company's accounts receivable.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenues and total gross accounts
receivable for the periods presented:
REVENUES
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
1998 1999 2000 2000 2001
Customer A * * 20% * 28%
Customer B 27% 23% 18% 40% 15%
Customer C * 12% * * *
Customer D * 11% * * *
Customer E * * * * *
*Less than 10%
GROSS ACCOUNTS RECEIVABLE
DECEMBER 31, SEPTEMBER 30,
1999 2000 2001
Customer A * 29% 18%
Customer B * * *
Customer C 24% 18% 16%
Customer D 17% * *
Customer E 29% * *
*Less than 10%
(L) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and has included the pro forma disclosures required
by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, for all periods
presented in the notes to the consolidated financial statements.
89
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(M) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
(N) COMPREHENSIVE INCOME
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all
components of comprehensive income. Comprehensive income is defined as
the change in stockholders' equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. For all periods presented, comprehensive income consists of only
the Company's net loss and changes in cumulative translation adjustment
account (see Note 2(E)). The Company has disclosed comprehensive income
(loss) for all periods presented in the accompanying consolidated
statements of stockholders' equity (deficit).
(O) INCOME TAXES
The Company follows the provisions of SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. Deferred income taxes are provided on temporary differences that
arise in the recording of transactions for financial and tax reporting
purposes and result in deferred tax assets and liabilities. Deferred tax
assets are reduced by an appropriate valuation allowance if it is
management's judgment that part of the deferred tax asset will not be
realized. Tax credits are accounted for as reductions of the current
provision for income taxes in the year in which the related expenditures
are incurred.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING
STOCK COMPENSATION--AN INTERPRETATION OF APB OPINION NO. 25. This
interpretation clarifies the application of APB Opinion No. 25 in certain
situations, as defined. The interpretation is effective July 1, 2000, but
covers certain events occurring during the period after December 15, 1998
but before the effective date. The adoption of this new accounting
interpretation did not have a material impact on the Company's financial
statements.
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS. SFAS
No. 141 requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method. This statement is
effective for all business combinations initiated after June 30, 2001.
In July 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. This statement applies to goodwill and intangible assets acquired
after June 30, 2001, as well as goodwill and intangible assets previously
acquired. Under this statement, goodwill as well as certain other
intangible assets determined to have an infinite life will no longer be
amortized; instead, these assets will be reviewed for impairment on a
periodic basis. This statement is effective for the Company for the first
quarter in the fiscal year ended December 2002. The Company has not yet
completed its assessment
90
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
of whether the adoption of this new accounting standard will have a
material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supercedes SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 144 further refines the
requirements of SFAS No. 121 that companies (i) recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable
based on its undiscounted future cash flows and (ii) measure an
impairment loss as the difference between the carrying amount and the
fair value of the asset. In addition, SFAS No. 144 provides guidance on
accounting and disclosure issues surrounding long-lived assets to be
disposed of by sale. The Company does not expect adoption of this
statement to have a material impact on its financial position or results
of operations.
(3) NET LOSS PER SHARE
Net loss per share is computed based on the guidance of SFAS No. 128,
EARNINGS PER SHARE. SFAS No. 128 requires companies to report both basic
loss per share, which is based on the weighted average number of common
shares outstanding, and diluted loss per share, which is based on the
weighted average number of common shares outstanding and the weighted
average dilutive potential common shares outstanding using the treasury
stock method. As a result of the losses incurred by the Company for the
years ended December 31, 1998, 1999 and 2000 and the nine months ended
September 30, 2000 and 2001, all potential common shares were
antidilutive and were excluded from the diluted net loss per share
calculations.
The following table summarizes securities outstanding as of each
period-end which were not included in the calculation of diluted net loss
per share since their inclusion would be antidilutive.
DECEMBER 31, SEPTEMBER 30,
----------- -------------
1998 1999 2000 2000 2001
Common stock options
and warrants 565,979 714,995 2,248,944 841,850 1,921,305
========== ========== ========== ========== ==========
Convertible preferred
stock - - - - 5,450,000
========== ========== ========== ========== ==========
Convertible debt - - 1,104,479 771,429 832,838
========== ========== ========== ========== ==========
91
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) ACCRUED EXPENSES
Accrued liabilities consist of the following:
DECEMBER 31, SEPTEMBER 30,
1999 2000 2001
Payroll and related costs $ 286,452 $ 499,254 $ 221,393
Warranty 1,268,413 830,419 156,228
Deferred rent 276,724 151,184 172,131
Others 794,484 104,105 282,748
--------------- --------------- ---------------
$ 2,626,073 $ 1,584,962 $ 832,500
=============== =============== ===============
(5) ACQUISITON OF LASERLITE LLC
On May 31, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of LaserLite LLC (LaserLite), the distributor
of Diomed, Ltd.'s cosmetic laser systems, with certain patents and other
intangible assets. As consideration, the Company issued 414,143 shares of
common stock to LaserLite and options to purchase 86,412 shares of common
stock.
The Company allocated approximately $2.6 million of the purchase price to
goodwill and was amortizing such goodwill on the straight-line basis over
a four-year period. Included in general and administrative expenses are
$656,429 of amortization expense for the year ended December 31, 1999.
In December 1999, the Company recorded a noncash accounting charge of
$1,586,370 related to the impairment of the value of the goodwill that
had arisen from this acquisition. An impairment was recognized when the
Company's development of a next-generation laser led to a decision to
discontinue the sale of the LaserLite LLC product line.
(6) ACQUISITION OF MANUFACTURING RIGHTS
Effective October 16, 2000, the Company acquired certain manufacturing
rights and inventory of QLT, Inc. (QLT) necessary or useful to
commercialize certain series of its OPTIGUIDE(R) fibers for $1.2 million
in the form of two promissory notes, payable within two years. The first
promissory note is payable in cash or in shares of common stock. The
second promissory is payable, at the election of the Company, in cash or
in shares of common stock (see Note 9). In the event that the Company
closes an initial public offering (IPO) of its securities within two
years of the closing date, the due date of the balance payment would be
accelerated to the time of completion of the IPO and QLT would receive
payment in full in the form of common stock, at a 40% discount on the
offering price per share to the public. This contingent beneficial
conversion feature, valued at $556,667 and computed in accordance with
Emerging Issues Task Force (EITF) 00-27, APPLICATION OF EITF ISSUE NO.
98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS, would be recorded upon the
occurrence of an IPO as a discount to the debt and amortized ratably to
interest expense over the remaining term of the debt, unless converted
92
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
earlier. The aggregate purchase price of $1,200,000 was allocated based
on the fair value of the tangible and intangible assets acquired as
follows:
Inventory $ 218,623
Manufacturing rights 981,377
---------------
$ 1,200,000
===============
Amounts allocated to manufacturing rights are being amortized on the
straight-line basis over a five-year period. Included in general and
administrative expenses is amortization expense of approximately $41,000
and $139,000 for the year ended December 31, 2000 and the nine months
ended September 30, 2001, respectively.
(7) LINE-OF-CREDIT ARRANGEMENT
Diomed, Ltd. had a (pounds sterling)400,000 ($646,000 at December 31,
1999) line of credit with Barclays Bank. This line bore interest at 2.5%
above Barclays Bank's base rate (6.25% at December 31, 1999). Borrowings
were guaranteed by a shareholder of the Company and were due on March 31,
2000. Subsequently, the due date was extended to May 11, 2000, when the
outstanding balance was repaid.
Diomed, Ltd. also has a line of credit with Barclays Bank, which is
limited to the lesser of (pounds sterling)1,200,000 ($1,762,920 at
September 30, 2001) or 80% of eligible accounts receivable. This line
bears interest at 3% above Barclays Bank's base rate (4.75% at September
30, 2001) and borrowings are due upon collection of receivables from
customers. As of September 30, 2001, there were borrowings of (pounds
sterling)360,700 ($529,900) outstanding under this line and no available
future borrowings.
(8) CONVERTIBLE LOAN NOTES
Between March and June 2000, the Company issued $2.7 million of 9%
convertible subordinated notes (the Notes), which were due on March 31,
2001. The original conversion rate for the Notes was $3.50 per share of
common stock. The conversion rate was subject to adjustment in the event
of certain circumstances occurring, including certain issues of common
stock at a price below $3.50 per share.
Pursuant to the Stock Purchase and Recapitalization Agreement (the
Agreement), dated March 5, 2001, which provided certain existing
shareholders with additional shares of common stock which had the effect
of reducing their purchase price to $1.00 per share (see Note 11(C)), the
Company agreed to adjust the conversion price from $3.50 per share to
$1.00 per share. Concurrent with the Agreement, the noteholders agreed to
convert principle of $2,475,000 into 2,475,000 shares of common stock.
The balance due of $225,000 was repaid in cash.
In accordance with EITF 00-27, the Company has recorded noncash interest
expense totaling approximately $2.7 million in March 2001 due to the
adjustment of the original conversion price.
93
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) DEBT
As of December 31, 2000 and September 30, 2001, the two promissory notes
due to QLT for the acquisition of the manufacturing rights to the
OPTIGUIDE(R) fibers (see Note 6) are shown on the consolidated balance
sheet as convertible debt.
With respect to the First QLT Promissory Note, by letter dated June 7,
2001, QLT formally requested payment of the $339,336 balance due under
that note. QLT also indicated that it would exercise its option under the
Optiguide Asset Purchase Agreement to require Diomed to issue to QLT
shares of Diomed Common Stock having a value equal to $339,336. On
October 1, 2001 Diomed advised QLT that it was prepared to issue 135,735
shares based on a per share price of $2.50. Diomed asked QLT to respond
if the calculation was acceptable to it and also asked that, if the
calculation was not acceptable, that the matter be referred to
arbitration pursuant to the applicable provisions of the Optiguide Asset
Purchase Agreement. On January 28, 2002 Diomed issued QLT 135,735 shares
of Diomed Common Stock. On February 11, 2002, QLT wrote Diomed and stated
that it was accepting the 135,735 shares issued to it under protest as it
disagreed with the per share price Diomed had used in calculating the
number of shares issued to it. It also pointed out that Diomed had
failed, in connection with the issuance of those shares, to confirm
certain registration rights and deliver a legal opinion. Based on the
letter, it is unclear what QLT's position is. Diomed believes that QLT's
position may be that it should be issued up to an additional 542,940
shares. Diomed disputes this position based on the express terms of its
agreement with QLT and the relevant facts. The terms of the agreement
between Diomed and QLT requires senior management of both companies to
meet within a period of 60 days to attempt to resolve disputes arising
thereunder.
In October 2000, a customer advanced the Company $936,000 to secure
certain key materials. In September 2001, the Company issued a promissory
note to this customer in the amount of the advance. The note matures on
January 1, 2004 and bears interest at a rate of 8.5% per year. The note
does not provide for conversion rights.
A summary of the debt at December 31, 2000 and September 30, 2001 is as
follows:
CURRENT LONG-TERM
Convertible debt--QLT $ 339,336 $ 826,339
Promissory note payable - 936,000
--------------- ---------------
$ 339,336 $ 1,762,339
=============== ===============
(10) INCOME TAXES
No provision for foreign, federal or state income taxes has been
recorded, as the Company incurred net operating losses for all periods
presented. The Company has U.S. federal and state net operating loss
carryforwards of approximately $3.8 million at December 31, 2000 to
reduce future federal income taxes, if any. These carryforwards expire
through 2020 and are subject to review and possible adjustment by the
Internal Revenue Service (IRS). The Company also has approximately $13.5
million of foreign net operating loss carryforwards at December 31, 2000
to reduce future foreign income taxes, if any. These carryforwards do not
have an expiration date.
The Tax Reform Act of 1986 contains provisions that may limit the amount
of U.S. federal and state net operating loss and credit carryforwards
that the Company may utilize in any one year in the event of certain
cumulative changes in ownership over a three-year period in excess of
50%, as defined. The Company has not assessed whether its equity
transactions have caused such a change in ownership.
The approximate tax effects of temporary differences that give rise to
significant portions of the Company's deferred tax assets primarily
relate to net operating loss carryforwards and amount to approximately
$3.9 million and $5.8 million as of December 31, 1999 and 2000,
94
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
respectively. It is the Company's objective to become a profitable
enterprise and to realize the benefits of its deferred tax assets.
However, in evaluating the realizability of these deferred tax assets,
management has considered the Company's short operating history, the
volatility of the market in which it competes and the operating losses
incurred to date, and believes that, given the significance of this
evidence, a full valuation reserve against its deferred tax assets is
required as of December 31, 1999 and 2000. The components of the
Company's deferred tax assets are as follows:
DECEMBER 31
1999 2000
Net operating loss carryforwards $ 3,653,030 $ 5,581,915
Other temporary differences 259,605 261,805
Valuation allowance (3,912,635) (5,843,720)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
(11) STOCKHOLDERS' EQUITY
(A) AMENDED CERTIFICATE OF INCORPORATION
Effective March 15, 2001, the authorized capital stock of the
Company was increased to 43,500,000 shares, consisting of
40,000,000 shares of common stock, $0.001 par value per share and
3,500,000 shares of preferred stock, $0.01 par value per share,
all of which are designated Series A convertible preferred stock
(Series A Preferred Stock).
(B) SALE OF SERIES A PREFERRED STOCK
In March and April 2001, the Company sold an aggregate of
2,725,000 shares of Series A Preferred Stock for $1.00 per share,
which resulted in gross proceeds of $2,725,000.
The Series A Preferred Stock has the following rights, preferences
and privileges:
VOTING
Each share of Series A Preferred Stock shall entitle the
holder thereof to such number of votes equal to the number
of shares of common stock into which each share is then
convertible. The holders, collectively, by a two-thirds
vote, have the right to elect three members to the
Company's Board of Directors and can assign such rights to
the lead investor. Also, the holders are required, by a
two-thirds vote, to approve matters pertaining to corporate
governance and structure, dividends, sale or redemption of
securities or instruments convertible to securities, a
merger or consolidation, and sale, lease or disposal of all
or substantially all of the Company's assets. In addition,
until the effective date of a qualifying initial public
offering or private equity offering of common stock at a
price per share of at least $5.00, resulting in gross
proceeds of at least $15 million, the Company shall not
incur any debt, make any acquisitions or strategic
investments or enter into any contracts or payment
obligations that
95
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
commit the Company to $250,000 or more in aggregate without
the approval of the Board of Directors, including the three
members elected by the holders.
DIVIDENDS
The holders of Series A Preferred Stock are entitled to
receive non-cumulative 10% dividends annually, when and if
declared by the Company's Board of Directors.
LIQUIDATION PREFERENCE
Upon any liquidation, dissolution or winding-up of the
Company, whether voluntary or involuntary, the holders of
each share of Series A Preferred Stock is entitled to
receive an amount equal to the greater of (i) $1.00 per
share, subject to adjustment, plus any declared but unpaid
dividends or (ii) such amount per share of Series A
Preferred Stock as would have been payable had each share
been converted to common stock.
VOLUNTARY CONVERSION
Each share of Series A Preferred Stock is convertible, at
the option of the holder thereof, into two shares of common
stock, subject to adjustment, as defined.
AUTOMATIC CONVERSION
Each share of Series A Preferred Stock shall automatically
be converted into shares of common stock at the then
effective conversion price, upon written election of at
least two-thirds of the then outstanding Series A Preferred
Stock, merger or consolidation, as defined, or upon the
closing of a qualifying initial public offering at a price
per share of at least $5.00, resulting in gross proceeds of
at least $15,000,000.
CALL OPTION
On or prior to October 31, 2001 or the earlier merger or
consolidation of the Company, as defined, two holders of
Series A Preferred Stock can require the Company to sell up
to 1,000,000 shares of Series A Preferred Stock at a price
per share equal to $1.00, subject to adjustment, as
defined. The Company recorded the fair value of the call
option and related beneficial conversion feature, totaling
an aggregate of $423,180, in the accompanying statement of
stockholders' equity (deficit). Effective October 31, 2001,
the call option terminated.
(C) COMMON STOCK
As of September 30, 2001, the Company had authorized 40,000,000
shares of common stock, $0.001 par value, of which 9,179,955 are
outstanding.
Between August and November 2000, the Company issued 815,865
shares of its common stock at a price of $3.50 per share, together
with warrants to purchase
96
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1,387,294 shares of common stock at a price of $3.50 per
share, in private placements resulting in net proceeds of
approximately $2.8 million. In connection with the sale of
Series A Preferred Stock for $1.00 per share, substantially
all of the purchasers of common stock from August and
November 2000 elected to accept the Company's offer to
exchange the shares and warrants they originally acquired
(773,941 and 1,345,370, respectively) for 2,708,793 shares
of common stock. This recapitalization yields an effective
purchase price of $1.00 per share.
(D) STOCK OPTIONS
In November 1998 and May 2001, the Company's Board of
Directors approved the 1998 Incentive Plan (the 1998 Plan)
and the 2001 Stock Option Plan (the 2001 Plan)
(collectively, the Plans), respectively, permitting the
granting of stock options to employees, directors,
consultants and advisors, which may be either incentive
stock options or nonqualified options and stock awards. The
Board has reserved 750,000 and 1,750,000 shares of common
stock for issuance under the 1998 Plan and the 2001 Plan,
respectively.
The exercise price and vesting are determined by the Board
of Directors at the date of grant. Options generally vest
over two and four years and expire 10 years after the date
of grant. Incentive stock options under the Plans are
granted at not less than fair market value per share of
common stock on the date of grant or 110% of fair market
value for any stockholder who holds more than 10% of the
total combined voting power of all classes of stock of the
Company.
97
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
A summary of stock option activity is as follows:
WEIGHTED
RANGE OF NUMBER OF AVERAGE
EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding, December 31, 1997 $ 2.24-8.23 354,150 $ 5.11
Granted 5.98-6.56 257,662 6.62
Exercised 2.24-4.49 (25,350) 4.96
Forfeited 2.24-5.98 (31,600) 4.84
------------- ------------- -------------
Outstanding, December 31, 1998 2.24-8.23 554,862 5.54
Granted 2.50-5.98 198,316 3.63
Exercised 4.49 (25,000) 4.84
Forfeited 2.24-8.23 (24,100) 6.57
------------- ------------- -------------
Outstanding, December 31, 1999 2.24-8.23 704,078 4.89
Granted 3.50 172,738 3.50
Forfeited 2.24-8.23 (36,176) 6.46
------------- ------------- -------------
Outstanding, December 31, 2000 2.24-8.23 840,640 4.37
Granted 1.25-2.25 1,031,653 1.31
Forfeited 3.50-6.36 (42,909) 3.67
------------- ------------- -------------
Outstanding, September 30, 2001
$ 1.25-$8.23 1,829,384 $ 2.62
============= ============= =============
Exercisable, December 31, 1998 $ 2.50-$8.23 416,327 $ 5.54
============= ============= =============
Exercisable, December 31, 1999 $ 2.24-$8.23 573,343 $ 4.07
============= ============= =============
Exercisable, December 31, 2000 $ 2.24-$8.23 680,621 $ 4.59
============= ============= =============
Exercisable, September 30, 2001 $ 1.25-$8.23 837,404 $ 4.05
============= ============= =============
At September 30, 2001, 1,160,295 options were available for future grants
under the Plans.
The following table summarizes information relating to currently
outstanding and exercisable options as of September 30, 2001.
OUTSTANDING
WEIGHTED
AVERAGE EXERCISABLE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER OF LIFE (IN EXERCISE NUMBER OF EXERCISE
PRICE SHARES YEARS) PRICE SHARES PRICE
$ 1.25 971,653 9.7 $ 1.25 60,000 $ 1.25
2.24-3.50 449,081 5.6 2.86 370,421 2.77
4.00-6.56 390,250 4.6 5.52 388,583 5.52
7.48-8.23 18,400 4.5 7.76 18,400 7.76
----------- ----------- ----------- -----------
1,829,384 $ 2.62 837,404 $ 4.05
=========== =========== =========== ===========
98
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Had compensation cost for the Company's option plans been determined
based on the fair value at the grant dates, as prescribed in SFAS No. 123
for the years ended December 31, 1998, 1999 and 2000 and for the nine
months ended September 30, 2000 and 2001, the Company's pro forma net
loss would have been as follows:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------- --------
1998 1999 2000 2000 2001
Net loss applicable to common stockholders,
as reported $(1,809,260) $ (7,490,726) $ (3,475,996) $ (2,914,300) $ (6,644,381)
Net loss applicable to common stockholders,
pro forma $(1,828,228) $ (7,524,032) $ (3,541,425) $ (2,961,340) $ (6,692,853)
Basic and diluted net loss per share
applicable to common stockholders, as
reported $ (0.70) $ (2.34) $ (0.82) $ (0.71) $ (0.83)
Basic and diluted net loss per share
applicable to common stockholders, pro
forma $ (0.70) $ (2.35) $ (0.83) $ (0.73) $ (0.84)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used for grants during the applicable period:
-----------DECEMBER 31,--------- -- SEPTEMBER 30,
1998 1999 2000 2000 2001
Risk-free interest rate 4.62-5.57% 4.84-6.55% 5.78-6.68% 5.93-6.68% 4.62-6.29%
Expected dividend yield -% -% -% -% -%
Expected lives 5 years 5 years 5 years 5 years 5 years
Expected volatility -% -% -% -% -%
Weighted average grant date
fair value per share $ 0.90 $ 0.92 $ 0.95 $ 0.96 $ 0.30
Weighted average remaining
contractual life of options
outstanding 5.5 years 6.0 years 6.4 years 7.0 years 7.5 years
In connection with the private offerings of the Company's common stock,
options to purchase 48,966 and 8,438 shares of common stock were issued
to nonemployees in 1999 and 2000, respectively. The Company has recorded
stock-based offering costs of $30,000 and $33,752 based upon the fair
value of such options.
(E) ISSUANCE OF STOCK OPTIONS TO CONSULTANTS
In August 2001, the Company granted fully exercisable options to purchase
60,000 shares of common stock at an exercise price per share equal to
$2.25 to consultants in exchange for marketing services. The Company
recorded the fair value of such options, based on the Black-Scholes
option pricing model, as stock-based compensation expense totaling
$55,000 in the accompanying statement of operations for the nine months
ended September 30, 2001.
99
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(12) VALUATION AND QUALIFYING ACCOUNTS
A summary of the allowance for doubtful accounts is as follows:
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------- -------
1998 1999 2000 2001
Allowance for doubtful accounts:
Balance, beginning of period $ - $ - $ 7,000 $ 300,000
Provision for doubtful
accounts - 7,000 293,000 200,000
Write-offs - - - (262,000)
----------- ----------- ----------- -----------
Balance, end of period $ - $ 7,000 $ 300,000 $ 238,000
=========== =========== =========== ===========
(13) SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS No.
131 also establishes standards for related disclosures about products and
services and geographic areas.
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation
by the chief operating decision maker, or decision making group, in
making decisions on how to allocate resources and assess performance. The
Company's chief decision making group, as defined under SFAS No. 131, is
the Executive Management Committee.
The Company's reportable segments are determined by product type: laser
systems and fibers and other accessories. The accounting policies of the
segments are the same as those described in Note 2. The Executive
Management Committee evaluates segment performance based on revenue.
Accordingly, all expenses are considered corporate level activities and
are not allocated to segments. Also, the Executive Management Committee
does not assign assets to its segments.
This table presents revenues by reportable segment:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------- -------
1998 1999 2000 2000 2001
Laser systems $ 8,266,808 $ 5,818,270 $ 8,901,906 $ 4,802,800 $ 5,157,800
Fibers and other
accessories 1,045,539 933,032 522,608 659,000 1,270,000
----------- ----------- ----------- ----------- -----------
Total $ 9,312,347 $ 6,751,302 $ 9,424,514 $ 5,461,800 $ 6,427,800
=========== =========== =========== =========== ===========
100
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The following table represents percentage of revenues by geographic destination:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------- -------
1998 1999 2000 2000 2001
North America 15% 30% 33% 15% 48%
Asia/Pacific 34 28 30 40 27
Europe 44 34 33 43 25
Other 7 8 4 2 -
--------- --------- --------- --------- ---------
Total 100% 100% 100% 100% 100%
========= ========= ========= ========= =========
The following table represents long-lived assets by geographic destination:
DECEMBER 31, SEPTEMBER 30,
1999 2000 2001
North America $ 357,250 $ 1,200,955 $ 1,246,896
Europe 1,606,048 1,489,575 1,325,000
--------------- --------------- ---------------
Total $ 1,963,298 $ 2,690,530 $ 2,571,896
=============== =============== ===============
101
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(14) COMMITMENTS
(B) LEASES
The Company leases certain equipment and office facilities under
noncancelable operating and capital leases that expire at various dates
through 2014. The Company's building lease at its subsidiary in the UK is
a 25-year lease through 2024. However, the Company has an option, at its
election, to terminate the lease agreement after 10 years in 2014. If the
Company chooses not to exercise this option, the lease agreement
continues for the remaining 10 years through 2024. Total rent expense
under these operating lease agreements for the years ended December 31,
1998, 1999, 2000 and the nine months ended September 30, 2000 and 2001
was $69,776, $381,446, $454,529, $340,897 and $361,235, respectively.
Capital lease obligations bear interest at a rate of 20% per annum.
Future minimum lease payments required under these leases at September
30, 2001 are as follows:
CAPITAL LEASES OPERATING LEASES
2001, three months $ 18,612 $ 120,346
2002 63,809 481,383
2003 28,769 481,383
2004 8,845 462,801
2005 298 444,219
Thereafter - 3,701,826
--------------- ---------------
Total future minimum lease
payments 120,333 $ 5,691,958
===============
Less--Amount representing interest 20,433
--------------
Present value of future minimum
lease payments 99,900
Less--Current portion of capital lease
obligations 48,657
---------------
Capital lease obligations, net
of current portion $ 51,243
===============
(B) LITIGATION
From time to time, the Company is involved in legal and administrative
proceedings and claims of various types. While any litigation contains an
element of uncertainty, management, in consultation with the Company's
general counsel, presently believes that the outcome of each such other
proceedings or claims which are pending or known to be threatened, or all
of them combined, will not have a material adverse effect on the Company.
On October 22, 2001, a plaintiff filed an action against the Company,
alleging that the Company disclosed certain trade-secret information.
102
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The plaintiff seeks compensatory and punitive damages in an unspecified
amount and an injunction against further disclosures. The Company has
moved to dismiss the action and compel arbitration. MBG has opposed this
motion. Management believes that this claim will not have a material
adverse effect on the Company's consolidated financial position or
results of operations.
(15) BRIDGE LOANS FROM STOCKHOLDERS
In September 2001, the Company received an aggregate of $500,000 from two
stockholders of the Company in exchange for a bridge loan in the form of
two secured promissory notes ("notes"), dated October 5, 2001. The notes
mature on January 1, 2003 and bear an annual interest rate of 7.5%.
The notes are convertible, at the election of the noteholders, into
common stock prior to the maturity date under the following scenarios :
1) in the event the Company does not complete a reverse merger by October
31, 2001, the noteholders may exercise their call option issued in the
March 2001 Series A Preferred Stock financing (see Note 11B) and deliver
their notes as payment, 2) in the event the Company completes a reverse
merger, the notes are convertible into common stock at the lesser of
$2.25 per share and the price per share in the reverse merger, 3) in the
event of another type of financing transaction, as defined, the notes are
convertible into common stock at the lesser of $2.25 per share and the
price per share in the transaction, and 4) in the event of a merger or
consolidation, excluding a reverse merger, the notes are convertible into
common stock at the lesser of $2.25 per share and the price per share of
any warrants issued in the transaction. However, if the Company
successfully completes a reverse merger with a public company, where such
public company has raised $10 million in gross proceeds in a private
placement financing prior to the reverse merger, the notes become due and
payable in cash within 10 days of the effective closing date. The call
option expired on October 31, 2001.
In addition, the Company granted fully exercisable warrants to purchase
an aggregate of 50,000 shares of common stock at a price per share equal
to a maximum of $2.25, adjustable for certain events, as defined. The
value of such warrants, calculated using the Black-Scholes option pricing
model, was recorded as a debt discount totaling $43,000 and will be
amortized to interest expense over the life of the note. In addition, the
beneficial conversion feature attributable to the warrants, totaling
$43,000, will be recorded as interest expense upon the occurrence of an
event which will trigger the note's right to convert. Due to the
Company's delay in completing the reverse merger by December 31, 2001,
the Company will have to issue up to an additional aggregate of 50,000
warrants, at the rate of 10,000 warrants for each month the reverse
merger is delayed, with terms identical to the initial grant. The
warrants expire two years from the date of issuance.
In December 2001, the Company received an additional aggregate of
$200,000 from the same two noteholders through issuance of additional
promissory notes, with terms identical to those specified above, except
as noted below. The maximum conversion price of the notes and the
exercise price of the warrants is $2.00 per share, adjustable for certain
events as defined. In addition, the Company granted fully exercisable
warrants to purchase an aggregate of 20,000 shares of common stock at a
price per share equal to a maximum of $2.00, adjustable for certain
events, as defined. If the Company does not complete a reverse merger by
March 31,
103
DIOMED, INC.
Consolidated Notes to Financial Statements
December 31, 2000
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2002, the Company may have to issue up to an additional aggregate of
20,000 warrants, at the rate of 10,000 per month for each month the
reverse merger is delayed, with terms identical to the initial grant.
Under the December 2001 notes, the conversion price of the notes and the
exercise price of the warrants included under the October 2001 notes were
reduced to a maximum of $2.00 to be consistent with the terms of the
December 2001 notes. Such revision creates an additional beneficial
conversion feature attributed to the reduction of the conversion price,
totaling $62,500, to be recorded upon the occurrence of an event which
will trigger the notes' right to convert. Additionally, such revision
creates an additional debt discount, attributed to the establishment of a
new measurement date for the amended warrant, totaling $39,000. In
January 2002, the Company issued an additional aggregate of 10,000
warrants due to the reverse merger not being consummated by December 31,
2001.
(16) MERGER AND PRIVATE OFFERING OF COMMON STOCK
On February 14, 2002, Diomed Acquisition Corp. ("Acquisition"), a
Delaware corporation and a wholly-owned subsidiary of Diomed Holdings,
Inc., a Nevada corporation formerly known as Natexco Corporation (the
"Parent") merged with and into the Company pursuant to an Agreement and
Plan of Merger, dated as of January 29, 2002. In the merger (the
"Merger") that occurred under the Agreement and Plan of Merger, the
stockholders of the Company received shares of Parent. As a condition to
the Merger, Parent raised gross proceeds of $10,000,000 in a private
offering of shares of its common stock. The shares issued in the private
offering are not subject to refund, redemption or rescission and,
accordingly, will be included as a component of stockholders' equity, net
of the applicable costs. The merger agreement provides that the proceeds
of that offering will be available to the Company for payment of its
existing obligations and, subject to the approval of its board of
directors, certain future expenses, including the financing of product
developments and acquisitions. Parent is obligated to use its best
efforts to file a registration statement with the Securities Exchange
Commission to register for resale its common shares that it issued in the
private offering and those of its common shares that it issued to the
Company's former stockholders and to cause the registration statement to
be declared effective. In the event that the Parent fails to file or
cause the registration statement to be declared effective, or remain
effective through the first anniversary of the Merger, the Parent will be
required to issue additional shares of its common stock, up to a maximum
of 12% of the shares held by each party subject to the agreement.
After the Merger, the Company's former stockholders own approximately 51%
of the issued and outstanding shares of Parent (in terms of common share
equivalents). The shares of Parent into which the shares of the Company's
existing common stock and the Company's Series A preferred stock will be
converted in the Merger will thereafter automatically convert into
Parent's common stock in installments beginning after Parent's
registration statement has become effective and continuing, unless
interrupted under certain circumstances, until the second anniversary of
the Merger, at which time all such shares will automatically convert into
shares of Parent's common stock.
The Merger will be accounted for as a recapitalization. The historical
records of the Company will become the historical records of Parent.
Following the Merger, the business conducted by Parent will be the
business conducted by the Company prior to the Merger.
Costs of approximately $1.5 million related to the issuance of Parent's
shares in the offering and its preparation and negotiation of the
documentation for the Merger were paid at the closing of the Merger.
104