As filed with the Securities and Exchange Commission on August 7, 2002.
Registration No. 333-90666
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------
DIOMED HOLDINGS, INC.
(Name of small business issuer)
Delaware 3845 84-140636
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
One Dundee Park
Andover, MA 01810
(978) 475-7771
(Address and Telephone Number of Principal Executive Offices)
----------
Peter Klein
President and Chief Executive Officer
One Dundee Park
Andover, MA 01810
(978) 475-7771
(Name, Address and Telephone Number of Agent for Service)
----------
Copy to:
William A. Newman, Esq.
McGuireWoods LLP
9 West 57th Street
Suite 1620
New York, New York 10019
(212) 548-2100
- ----------
Approximate date of commencement of proposed sale to the public: From time
to time as the selling stockholders may decide.
If any of the securities being registered on this form are to be offered on
a delayed basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
check the following box. [ ]
CALCULATION OF ADDITIONAL REGISTRATION FEE
====================================================================================================================================
TITLE OF EACH CLASS PROPOSED MAXI- PROPOSED MAXI- AMOUNT OF
OF SECURITIES TO BE AMOUNT TO MUM OFFERING MUM AGGREGATE REGISTRATION
REGISTERED (1) BE REGISTERED PRICE PER SHARE (2) OFFERING PRICE (2) FEE
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
Par value, $0.001 per share
issuable upon conversion
of the Company's
Convertible Preferred Stock
In addition to those shares
covered by the registration
statement originally filed 236,444 $1.01 $238,808.44 $21.97
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to Rule 416 under the Securities Act of 1933, the number of shares
of Common Stock registered hereby is subject to adjustment to prevent
dilution resulting from stock splits, stock dividends or similar
transactions.
(2) Estimated solely for the purpose of computing the registration fee, based
on the average of the high and low sales prices of the Common Stock as
reported by the American Stock Exchange on August 2, 2002 in accordance
with Rule 457 under the Securities Act of 1933.
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED AUGUST 7, 2002
DIOMED HOLDINGS, INC.
20,919,470 Shares
Common Stock
($0.001 par value)
----------
All of the shares of the Company's common stock being offered by this
prospectus, are being registered for resale by the selling stockholders. Those
shares of Common Stock include: (i) 5,000,000 shares of Common Stock, (ii)
15,461,749 shares of Common Stock underlying the Company's Class A Convertible
Preferred Stock, (iii) 121,924 shares of Common Stock underlying Warrants,
and (iv) 335,797 shares of Common Stock underlying Options.
We will not receive any of the proceeds from the sale of the shares by the
selling stockholders. However, we may receive proceeds from the exercise of any
outstanding Warrants and Options. We will pay all expenses of registration
incurred in connection with this offering, but the selling stockholders will pay
all of their selling commissions, brokerage fees and related expenses. We will
indemnify the selling stockholders against some liabilities, including
liabilities under the Securities Act.
We believe that the selling stockholders will sell the shares from time to
time in the open market, on the American Stock Exchange, in privately negotiated
transactions or a combination of these methods, at market prices prevailing at
the time of sale, at prices related to the prevailing market prices, at
negotiated prices, or otherwise as described under "Plan of Distribution."
Our Common Stock is traded on the American Stock Exchange under the symbol
"DIO." On August 2, 2002, the closing price of the Common Stock was $1.05 per
share.
----------
Before making any investment in our securities, you should read and
carefully consider risks described in the Risk Factors beginning on page 4 of
this prospectus.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
[__________________], 2002
TABLE OF CONTENTS
Page
----
SUMMARY ................................................................. 1
RISK FACTORS ........................................................... 4
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS............. 14
RECENT DEVELOPMENTS...................................................... 14
USE OF PROCEEDS.......................................................... 14
CAPITALIZATION........................................................... 14
DIVIDEND POLICY.......................................................... 15
BUSINESS................................................................. 15
DESCRIPTION OF PROPERTY.................................................. 43
CERTAIN MARKET INFORMATION............................................... 43
DESCRIPTION OF SECURITIES................................................ 44
MANAGEMENT............................................................... 48
EXECUTIVE COMPENSATION ................................................. 50
RELATED TRANSACTIONS..................................................... 53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 55
SELLING SECURITY HOLDERS................................................. 57
PLAN OF DISTRIBUTION..................................................... 68
TRANSFER AGENT........................................................... 68
LEGAL MATTERS............................................................ 68
EXPERTS.................................................................. 68
WHERE YOU CAN FIND MORE INFORMATION...................................... 69
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS .............................. F-1
SUMMARY
The Company
We specialize in developing and commercializing minimal and micro-invasive
medical procedures that use our laser technologies and disposable products.
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, which also takes time to heal. Doctors can reduce this problem by using
minimal and micro-invasive procedures instead of traditional surgical
treatments. We therefore believe that there will be increased interest and
growth in minimal and micro-invasive procedures. Our objective is to participate
in this growth by providing clinical applications using our lasers and
disposable products that would allow physicians, clinics and hospitals to expand
the use of minimal and micro-invasive techniques to treat their patients'
medical conditions.
In developing and marketing our products, we aim to obtain strong
commercial advantages over our competitors by using proprietary technology, by
gaining governmental approvals for our products' clinical applications in
advance of our competitors and by negotiating exclusive commercial arrangements.
To optimize our revenues, we focus on medical procedures that require the health
care provider to own our equipment and also purchase our disposable products,
such as optical fibers. Disposables are important to our business because they
enable us to generate recurring revenue. We sell our products to hospital and
office-based physicians, including specialists in vascular surgery, oncology,
interventional-radiology, phlebology, gynecology and dermatology.
We currently focus on two distinct product lines: photodynamic therapy (our
PDT product line) for use in treating cancer and other diseases, and endovenous
laser treatment (our EVLT(TM) product line) for use in treating varicose veins.
Our principal executive offices are located at One Dundee Park, Andover, MA
01810, and our telephone number is (978) 475-7771.
The Offering
Common Stock offered by selling stockholders:
Shares of Common Stock that are currently outstanding............................ 5,000,000 shares
Common Stock issuable upon conversion of the Company's
Convertible Preferred Stock that is currently outstanding..................... 15,461,749 shares
Common Stock issuable upon conversion of the Company's
Convertible Preferred Stock issuable upon the exercise of
Warrants...................................................................... 121,924 shares
Common stock issuable upon conversion of the Company's
Convertible Preferred Stock issuable upon exercise of
Options....................................................................... 335,797 shares
Total............................................................................... 20,919,470 shares
Common Stock to be outstanding after this offering.................................. 30,119,470 shares
Selling Stockholders ............ The selling stockholders are the holders of securities representing up to
20,919,470 shares of Common Stock which we are now registering for resale.
The selling stockholders are the holders of the following securities:
5,000,000 shares of Common Stock we sold in a private placement in
February 2002.
The 15,461,749 shares of Convertible Preferred Stock that convert into
15,461,749 shares of our Common Stock on a one-for-one basis.
Warrants to purchase up to 121,924 shares of Convertible Preferred Stock.
These shares in turn convert into shares of our common stock on a
one-for-one basis. 80,000 of these Warrants have an exercise price of
$2.00 per share and the remaining 41,924 have an exercise price of $3.50
per share.
Options to purchase up to 335,797 shares of Convertible Preferred Stock
for an average exercise price of $5.09. These shares in turn convert into
shares of our
1
Common Stock on a one-for-one basis.
Restrictions on Conversion and
Exercise ....................... The conversion of the Company's Convertible Preferred Stock, whether
currently outstanding or issuable in the future upon exercise of Warrants
and Options is subject to restrictions. Under these restrictions, the Convertible
Preferred Stock converts into shares of our Common Stock over the two-year period
ending on February 14, 2004, as described under "Description of Securities--Preferred
Stock".
The Warrants are currently exercisable.
Of the Options, 150,000 become exercisable on a pro rata basis over the
two-year period ending on April 16, 2004. The remaining 185,797 Options
currently are exercisable.
Exclusion of Additional Options ... 30,119,470 of shares of Common Stock will be outstanding after this
offering, assuming the exercise of the above referred Options and Warrants.
This number excludes 1,611,661 shares of Common Stock that underly options held by
directors, employees and consultants, which are in addition to the 335,797
shares underlying Options that we are now registering.
American Stock Exchange Symbol .... DIO
2
Summary Financial Data
The following table summarizes the financial data for our business and
includes our audited consolidated financial data for the years ended December
31, 2000 and 2001, and unaudited consolidated financial data for the three
months ended March 31, 2001 and 2002. You should read the following information
in conjunction with the consolidated financial statements and the related
financial statement notes appearing elsewhere in this prospectus.
Years ended Three months ended
December 31, March 31,
----------------- ---------------------
2000 2001 2001 2002
------- ------- ------- -------
(audited) (unaudited)
(in thousands, except per share data)
Statements of operations data
Revenues ............................................... $ 9,425 $ 7,731 $ 3,485 $ 957
Cost of revenues ....................................... 7,415 6,140 2,233 1,155
------- ------- ------- -------
Gross profit (loss) ................................. 2,010 1,591 1,252 (198)
------- ------- ------- -------
Operating expenses:
Research and development ......................... 1,271 1,216 344 171
Selling and marketing ............................ 1,647 2,520 608 343
General and administrative ....................... 2,229 2,616 612 821
------- ------- ------- -------
Total operating expenses ...................... 5,147 6,352 1,564 1,334
------- ------- ------- -------
Income (loss) from operations .......................... (3,137) (4,761) (311) (1,533)
Interest expense, net .................................. (339) (2,893)(1) (2,785)(1) (264)
------- ------- ------- -------
Net income (loss) from operations ...................... (3,476) (7,654) (3,096) (1,797)
------- ------- ------- -------
Value ascribed to call option .......................... -- (423)(1) -- --
Net income (loss) ...................................... $(3,476) $(8,077) $(3,096) $(1,797)
======= ======= ======= =======
Basic and diluted net income (loss) per share:(2) ...... $ (0.82) $ (0.96) $ (0.51) $ (0.15)
======= ======= ======= =======
Basic and diluted weighted average number of common
shares outstanding used in per share calculations:(2)... 4,246 8,407 6,093 11,771
======= ======= ======= =======
March 31, 2002
Actual
--------------
(in thousands)
Balance sheet data
Cash and cash equivalents ............................................................. $ 4,748
Working capital ....................................................................... 4,488
Total assets .......................................................................... 10,568
Non-current liabilities ............................................................... 963
Accumulated deficit ................................................................... (33,249)
Total stockholders' equity ............................................................ 5,848
- ----------
1) In March 2001, we completed a recapitalization of certain of our
outstanding debt 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.
2) See footnote 3, "Net Loss per Share," in our Consolidated Financial
Statements included in this prospectus.
3
RISK FACTORS
We are an emerging growth business that develops, manufactures and sells
laser-based medical devices and related disposables in the United States and
elsewhere in the world. 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.
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 amount of our
future capital requirements will depend on many factors, including:
. the scope and results of preclinical studies and clinical trials;
. the time and costs involved in obtaining regulatory approvals;
. the costs involved in preparing, filing, prosecuting, maintaining and
enforcing our patents;
. the costs involved in any potential litigation;
. competing technological and market developments;
. our ability to establish additional collaborations;
. changes in existing collaborations;
. our dependence on others for development of our potential products;
. the cost of manufacturing, marketing and distribution; and
. the effectiveness of our activities.
We anticipate that we will have sufficient cash or access to additional
funding sources to fund operations through December 2002, primarily in reliance
on the proceeds of the February 2002 private placement financing related to the
merger of a wholly-owned subsidiary of the Company with Diomed, referred to in
this prospectus as the "Diomed Merger," and depending on the Company's ability
to achieve its business plans pertaining to the commercial success of EVLT(TM)
now that we have obtained FDA clearance. If we are unable to achieve our
business plans, we may 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
of equity or debt financings, may not, however, be available on acceptable terms
or at all. Our 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
products and their clinical applications.
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, and as
of March 31, 2002, we have accumulated operating losses of approximately $33.2
million. We may continue to incur significant operating losses over the next few
years, depending largely upon the commercial success of EVLT(TM). We will need
to earn revenues in excess of our losses to become profitable and we may be
unable to do so. If we do not become profitable, the value of our Common Stock
may decline.
Our operating losses may increase 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 required regulatory clearances and sell our
products at profitable prices.
We may need to expand our existing manufacturing and marketing capabilities.
Our marketing, distribution and sales capabilities, or our current or
future arrangements with third parties for these activities, may not be adequate
for the successful commercialization of our products.
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 "GMPs," of the FDA, and the applicable standards of other
regulators. We currently have the capacity to manufacture products at certain
commercial levels within existing GMPs. Future regulatory clearances by the FDA
and other regulatory agencies could result in the need to expand manufacturing
operations. If
4
we expand our manufacturing capabilities, we would need to spend 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 GMPs, our ability to grow
and to maintain our competitiveness may be significantly hindered.
We rely 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 products and their applications.
We depend on outside suppliers for certain raw materials and other
components for our products. During 2001, our principal supplier of diodes which
we use to manufacture our laser products was HPD, and our principal suppliers of
materials we use to manufacture fibers were Pioneer, Inc. and Laser Peripherals.
During 2002, we replaced HPD with Laser Diodes, Inc., which now serves our diode
supply needs. Raw materials or components that we need may not always be
available at our standards or on acceptable terms, if at all, and we may be
unable to get alternative suppliers or produce needed materials or components on
our own. If we cannot obtain these raw materials and/or components, we may be
unable to produce our products in sufficient quantities to meet our customers'
needs. We may also be unable to develop new products and applications and
conduct clinical trials. This will, in turn, hinder our ability to obtain
regulatory approval of these applications, thereby impairing our ability to
expand our markets or create products for new treatments.
There are substantial concerns regarding safety and health in the U.S. medical
products industry. We may not have adequate protection against product liability
or recall, and we may have to pay a significant amount of money on liability
claims or recalls.
Testing, manufacturing, 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 our
products in connection with clinical trials or sales of treatments offered by
our customers. We currently carry insurance against these risks in an amount we
believe to be adequate.
A successful product liability claim could materially adversely affect our
cash flows and our ability to meet the costs of developing our products and
their clinical applications. Defense of these claims could also entail
significant expense and divert the attention of our management and personnel
from other activities.
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 June 7, 2002, we held 21 patents in the U.S. and foreign
countries. We currently have patents for the following inventions we use in our
laser devices and systems:
. solid state laser diode light source;
. high power light source;
. peltier-cooled apparatus;
. methods for dermatological treatment; and
. medical spacing guide.
These patents expire at various times from 2011 to 2018.
In the second quarter of 2002 we determined that one historical invention
was no longer necessary in our business and that certain country-specific patent
registrations were no longer necessary in our business. As a result we abandoned
patent registrations relating to these inventions in the United States and
abroad resulting in an aggregate reduction of 22 patents.
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
5
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. Third parties may
also 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 and sell products which compete with our products.
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 these 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 and unsuccessful, could result in significant legal
and other costs and may be a distraction to management.
We license some of the technology we use from third parties, and we may lose our
rights to use some or all of this technology.
The termination of licenses we now have for some of the technology we use
could enable competitors to offer products similar to ours, which would reduce
our competitive advantage. We currently have two technology licenses that are
material to our business. The first is a non-exclusive license for patented
process technology that physicians use when performing EVLT(TM) procedures. This
license is royalty free and perpetual for the term of the patent governing this
technology. The licensor has agreed not to license this process technology to
third parties if we do not breach our obligations under the license. The second
is a sublicense for patented technology we currently use in our OPTIGUIDE(R)
fiber optic diffuser. Our sublicense for this technology is non-exclusive, but
the licensor is subject to a non-competition agreement that prohibits the
license of the technology to any third party for a period of three years. The
term of this sublicense is for the term of the primary exclusive license from
the patent owner to our licensor, which is perpetual for the term of the patent.
See "Business - Patents, Trademarks and Proprietary Technology" for more
information regarding these licenses.
These two licenses and others that we hold may be terminated or restricted
by the licensors if we fail to perform or comply with material terms of the
license agreement, such as failing to make royalty payments or, in the case of
the sublicense, meet minimum sales quotas. The termination of these licenses
could have a material adverse effect on our business because we may not have
access to items we need to make and sell our products. If that occurs, we may
need to find alternative sources for the licensed technology, and we may be
unable to do so on reasonable terms, if at all. Additionally, after termination
of a license, or if restrictions on licensing to third parties lapse, the
licensor could grant licenses to our competitors to use the licensed technology.
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 team, key employees, staff and consultants that we
engage from time to time. Competition for this talent is intense, and we may not
be able to continue to attract and retain this talent. The success of our
business will depend in part on the skill of our managers and other professional
personnel. If we are unable to attract and retain skilled personnel, our
business will suffer. The flow of our operations may also be disrupted by
personnel changes and hiring and training new personnel will entail costs and
divert our resources and attention from revenue-generating efforts. Furthermore,
our consultants may be affiliated with or employed by other parties, 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 these persons will not necessarily become our property. If we are
unable to find alternative talent, we will not be in a position to avoid or
negotiate against these conditions.
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, co-branding or other strategic
alliances with other companies. These transactions create risks, such
as:
6
. 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; and
. impairment of relationships with existing employees, customers and
business partners; and, additional losses from any equity investments
we might make or the assumption of liabilities from third parties that
we combine with.
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.
If our products and their applications are not routinely covered by medical
insurance, then we may be unable to achieve market acceptance or generate
revenues.
Various health care providers and third party payors may refuse to cover
our products and/or their particular medical applications. If the patients who
use our treatments do not obtain coverage, patient demand for our applications
may decrease and as a result 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 products, especially innovative technologies. Additionally,
reimbursement coverage, if available, may not be adequate for us to achieve
market acceptance of our products or to maintain price levels sufficient for us
to realize an appropriate return on our products.
We believe that, if the treating physician is knowledgeable about the
reimbursement system and obtains preapproval, then typically health insurance
payors will reimburse patients for PDT and EVLT(TM) procedures. However, we have
formed this view based on a limited amount of experience, in particular with
respect to EVLT(TM) which received FDA clearance only in January 2002. Payors
may also decide not to continue covering our products or the applications of our
products. Payors may also impose more onerous reimbursement procedures that have
the effect of reducing the rates of reimbursement, the amount reimbursed or
both.
Further, our strategy depends on our collaborative partners, for example, a
drug company that uses our lasers in connection with its drug for a PDT
application. As a result, our ability to commercialize our products may be
hindered if cost control initiatives such as reducing reimbursement rates or
amounts adversely affect our collaborators or the clinical applications they
market or are seeking to develop.
Failure to obtain product approvals or comply with ongoing governmental
regulations could adversely affect our ability to market and sell our clinical
applications and could result in negative cash flows.
We have been successful in receiving the clearances for the products listed
below along with their indications for use:
Product Indication for Use
- -------------------------- ---------------------------------------------------
EVLT(TM) kit and D15 plus Closure of the greater saphenous vein with reflux
of the thigh
Diomed 15 plus and 30 plus Open and endoscopic surgical procedures in fields
such as urology, gastroenterology, gynecology and
neurosurgery; applications include treatment of
vascular and pigmented lesions
Diomed 630 PDT Combination PMA for Photofirn used in palliation of
esophageal cancer and endobronchial non-
7
small cell lung cancer
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 use 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 costs and can often take many years. As a result of the required up
front costs for regulatory approval and relatively long time between developing
a product and being able to sell it and generate revenue, we may incur negative
cash flows. Regulations provide that failure to comply with the applicable
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 have limited experience
in performing regulatory activities, we have limited resources available for
handling regulatory matters, and we rely on our collaborative partners and
outside consultants to assist us with our regulatory needs.
We assemble and submit to the FDA new indications of use as we determine
new clinical applications for our products. To date, the FDA has granted to us
conditional approval for an Investigational Device Exemption to expand EVLT(TM)
uses, our portion of a PMA Supplement for a new PDT use and expansion of the
surgical diode laser's indication for use. However, we or our collaborative
partners may be unable to satisfy the conditions imposed by the FDA.
Our most recent FDA clearance relates to the EVLT(TM) procedure, which the
FDA granted in January 2002. Currently a combination preliminary market
application for a new PDT treatment is pending before the FDA. Our collaborator,
Axcan Pharma, filed the application. The application is under review for a new
indication for use of our existing PDT product. As this is a new indication, we
expect that we will not need to modify our laser or our delivery system. In
addition, we continue to review the components of our disposable kits and lasers
to obtain the lowest cost and improved performance. We require regulatory
approval when a change may affect the safety or efficacy of a product. We
believe that we have not reached this threshold in our program and are not now
required to submit an application to the FDA for any changes we have made to our
previously reviewed products. In the future, however, we may decide to alter
certain disposables or lasers in a manner such that the FDA or other applicable
regulator outside the U.S. will review and approve the change.
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 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, we may be
unable to meet our sales goals. Many companies are also seeking to develop new
products and technologies for medical conditions for which we and our
collaborative partners are developing treatments. Our competitors may succeed in
developing products that are safer or more effective than ours and in obtaining
regulatory 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 the treatments we focus on evolves.
Since technology in our industry is constantly changing, we face technological
uncertainty and are at a competitive disadvantage.
We are a relatively new enterprise and are engaged in the development of
novel therapeutic technologies, such as PDT and EVLT(TM). 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 adversely
affected if our competitors or other third parties 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 safer, 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 adversely affect our future
international sales, future revenues and our products' future profitability.
8
International revenues accounted for approximately 67% of our total
revenues in 2000 and 51% of our total revenues in 2001. Our key international
markets are the European Union, Japan, Australia, Korea and Canada. Outside of
the European Union, we must obtain country-by-country approval to import our
products. Fluctuations in currency exchange rates may negatively affect our
ability to compete in terms of price against products denominated in local
currencies. 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.
Business interruptions could keep us from developing our products' clinical
applications and increasing our revenues.
Natural or man-made disasters, such as fires, earthquakes, power losses,
telecommunications failures, terrorist attacks, 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.
Risks arising from federal prosecution of Arthur Andersen LLP, our independent
accountants.
In June 2002, our independent accountants, Arthur Andersen LLP, were found
guilty of certain federal obstruction of justice charges arising from the
government's investigation of Enron Corp. This conviction could adversely affect
us in that the ruling against Arthur Andersen is likely to impair its ability to
satisfy any claims arising from the provision of auditing services to us and
also may impede our access to the capital markets after completion of this
offering.
Arthur Andersen audited our financial statements included in this
prospectus for the years ended December 31, 2000 and 2001. The Securities and
Exchange Commission, or "SEC," stated that it will continue accepting financial
statements audited by Arthur Andersen so long as Arthur Andersen is able to make
specified representations to its clients in connection with these financial
statements It is possible that events arising out of the prosecution of Arthur
Andersen may adversely affect its ability to satisfy any claims arising from its
provision of auditing services to us, including claims that may arise out of
Arthur Andersen's audit of our financial statements included in this prospectus.
Should we seek to access the public capital markets after we complete this
offering, SEC rules will require us to include or incorporate by reference in
any prospectus two years of audited financial statements. The SEC's current
rules would require us to present audited financial statements for one or more
fiscal years audited by Arthur Andersen and obtain their consent and
representations until our audited financial statements for the fiscal year
ending December 31, 2003 become available in the first quarter of 2004. If prior
to that time the SEC ceases accepting financial statements audited by Arthur
Andersen or if Arthur Andersen becomes unable to provide its consent or make the
representations to us required by the SEC, it is possible that our available
audited financial statements for the years ended December 31, 2000 and 2001
audited by Arthur Andersen might not satisfy the SEC's requirements. While the
SEC currently permits companies to include audited financial statements prepared
by Arthur Andersen without including Arthur Andersen's consent if the company is
unable to obtain such consent despite making reasonable efforts, there can be no
assurances that the SEC will continue this policy. In that case, we would be
unable to access the public capital markets unless another independent
accounting firm is able to audit the financial statements originally audited by
Arthur Andersen. Any delay or inability to access the public capital markets
caused by these circumstances could increase our financing costs or cause us to
miss attractive market opportunities.
In connection with the filing of the registration statement of which this
prospectus is a part, we used reasonable efforts to obtain the current consent
of Arthur Andersen to the inclusion of our available audited financial
statements for the years ended December 31, 2001. We were informed by Arthur
Andersen that it was unable to provide such consent. As a result, we have filed
such financial statements in the manner provided for under current SEC
guidelines. Accordingly, you will not be able to sue Arthur Andersen pursuant to
Section 11(a)(4) of the Securities Act, and therefore your right of recovery
under that section may be limited as a result of the lack of consent.
***
The following risks relate principally to our commercialization of our
current and future products and their clinical applications:
Some of our products, such as EVLT(TM), may never be successfully
commercialized, and, therefore, these product lines may never become profitable
or allow us to recoup expenses incurred in their development.
We must be able to effectively develop, market and sell our products in
order to make a profit. Commercialization depends upon:
9
. successfully completing development efforts or those of our
collaborative partners, including finding new clinical applications
for our existing products;
. obtaining the required regulatory approvals;
. manufacturing our products at an acceptable cost and with appropriate
quality;
. favorable acceptance of any products marketed; and
. 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 would be. The time frame necessary to achieve these
goals for any individual clinical 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
effective.
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 that we and our
collaborative partners are currently developing 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 unable to obtain regulatory approval for these applications.
The failure to adequately demonstrate the safety and efficacy of a
particular PDT product or application could delay or prevent regulatory
clearance of the potential product and would materially harm our business in
that our ability to market and sell our products for these applications will be
postponed or prevented.
Our applications may induce adverse side effects that prevent their widespread
adoption or that necessitate withdrawal from the market.
Photodynamic therapy 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 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 explored and evaluated in clinical trials. Even after the FDA and other
regulatory authorities grant us their approvals, our products may later induce
unanticipated 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, and additionally, could create
products liability issues for us.
Market acceptance of our products or their uses is uncertain. Failure to achieve
market acceptance will harm our business' overall chances for profitability.
Even if regulators approve our products 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:
. the establishment and demonstration in the medical community of the
safety and efficacy of our clinical applications and their potential
advantages over existing applications;
. the pricing and reimbursement policies of government and third-party
payors, such as insurance companies, health maintenance organizations
and other plan administrators; and
. the general willingness of physicians, patients, payors or the medical
community 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.
10
If our products and clinical 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 photodynamic
therapy 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 enter into collaborative relationships with PDT drug companies for
research and development, preclinical studies and clinical trials,
manufacturing, sales and distribution of our products and applications.
Currently we have collaborative arrangements with Axcan Pharma, DUSA,
Pharmacyclics, Photocure and QLT. Each of these arrangements is strategic to us
because our applications and related submissions to the FDA for PDT procedures
requires the involvement of one of these collaborators due to the combination of
our and their technology for PDT procedures. See "Business Strategy - 3.
Strategic partnerships to enhance customer reach" for more information. 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 these kinds of arrangements.
Some of the risks and uncertainties related to our reliance on
collaborations are:
. we may not be able to negotiate acceptable collaborative arrangements,
including those based upon existing agreements;
. our future or existing collaborative arrangements may not result in
products that we can market and sell;
. our collaborative relationships may restrict us;
. our collaborative partners may be free to pursue alternative
technologies or products either on their own or with others, including
our competitors, for the medical problems that our applications and
products target;
. our collaborative partners may fail to fulfill their contractual
obligations to us or terminate their relationships o with us, in which
event we may be required to seek other collaborative partners, or
expend substantial resources to pursue these activities independently,
and these efforts may not be successful; and
. we may not be able to manage, interact and coordinate our timelines
and objectives with our collaborative partners successfully.
***
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 emerging
companies and technology-oriented companies have been especially volatile. For
instance, the market price of our Common Stock fluctuated from a high of $9.00
to a low of $1.04 during the period from February 19 to August 2, 2002, and our
trading volume fluctuated from 734,500 to 7,700 during this period. See
"Certain Market Information" for additional historical information. 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 only been publicly traded for a short time, and we expect
that the price of our Common Stock could fluctuate substantially.
Until shortly after the Diomed Merger, there was not any significant public
market for our Common Stock. On February 22, 2002, shares of our Common Stock
became listed for trading on the American Stock Exchange. Nevertheless, we may
be unable to maintain an active public trading market for our Common Stock. We
cannot be certain that the AMEX will maintain our listing
11
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:
. our announcements of new products or new clinical applications for our
products;
. our competitors' announcements of new products or new clinical
applications;
. quarterly variations in our or our competitors' results of operations;
. changes in earnings estimates, recommendations by securities analysts
or our failure to achieve analysts' earning estimates;
. developments in our industry;
. the number of shares of our Common Stock that are available for
trading in the markets at any given time; and
. 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
industry price fluctuations may materially and adversely affect the market price
of our Common Stock.
Sales of our stock by stockholders prior to the Diomed Merger may have a
potential impact on us.
Prior to the Diomed Merger, there was both public and private trading in
the shares of Natexco Corporation, which became Diomed Holdings in the merger
that we completed in February 2002. Although no buyers or sellers in those
transactions have asserted any claims against us, we cannot be certain that
those buyers or sellers will not assert claims arising out of their purchases
and sales of shares, and we cannot predict whether those claims will involve us.
To the extent that we are involved, this may entail expense and diversion of
management's attention, and if we are found to be have done something improper,
then we may have financial liability, or we may be required to issue additional
shares of stock or take other corrective action.
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 29% 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. These stockholders' interests may vary
from yours. 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 investment will only occur if and to the extent that our
stock price appreciates, and if the price of our stock does not appreciate, then
there will be a negative return on investment.
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.
12
All of the shares of Convertible Preferred Stock which are convertible into
the shares of our Common Stock that are covered by this prospectus convert
automatically over a period of time, without any action by the holder or the
Company, at the times and amounts described under "Description of Securities -
Preferred Stock." In addition, our board of directors has discretion to vary the
conversion schedule as described under "Description of Securities - Preferred
Stock."
Certain of the members of our board of directors beneficially own shares of
Convertible Preferred Stock.
In addition to the registration of shares of Common Stock for resale
hereunder, the Company has agreed to file, 45 days after the effectiveness of
the registration statement, of which this prospectus is a part, a second
registration statement that will cover the 1,789,370 shares of its Common Stock
issuable upon conversion of all shares of Convertible Preferred Stock that are
issuable upon the exercise of Diomed options that the Company assumed as part of
the Diomed Merger and assumed as part of the migratory merger under Nevada and
Delaware law of the Company with and into Diomed Holdings (Delaware), Inc., a
wholly-owned subsidiary of the Company incorporated in Delaware, referred to in
this prospectus as the "Migratory Merger." If the registration statement of
which this prospectus is a part 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.
Potential dilution caused by currently outstanding stock options and Warrants
may reduce the market price of our Common Stock.
As we issue more shares of Common Stock, the proportion of our equity that
each share represents will decrease. As a result, the economic value of each
share of our Common Stock may decrease, and the market price of our Common Stock
may also decrease, unless the marketplace has already taken the issuance of
these additional shares into account. As of the date of this prospectus, the
following securities are outstanding:
. Options which may be exercised for approximately 1,950,000 shares of
Common Stock (including 335,797 shares of Common Stock we are
registering under the registration statement of which this prospectus
is a part) and;
. Warrants to purchase approximately 122,000 shares of Common Stock.
These securities represent approximately 2.1 million shares of Common Stock,
which is approximately 7% of our currently-outstanding capital stock. To the
extent that we issue Common Stock due to the exercise of the Options and
Warrants these additional shares will dilute our currently outstanding Common
Stock.
Moreover, we may in the future issue additional shares of Common Stock or
securities that are convertible into or exercisable or exchangeable for Common
Stock. For example, we may issue these securities under our incentive stock
option plans, to raise capital, to satisfy indebtedness or for other reasons.
Issuance of additional securities will have a further dilutive effect, and may
cause lower trading prices for our Common Stock.
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:
. Only our board of directors or the chairman of the board can call
special meetings of stockholders.
. 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.
. Our board of directors has the authority to issue up to 2,000,000
additional shares of preferred stock, in addition to the 18,000,000
shares of Convertible Preferred Stock currently authorized. 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.
These and other provisions of our charter, the certificate of designation
setting forth the terms of our Convertible Preferred Stock and our bylaws, as
well as certain provisions of Delaware 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.
13
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Some statements in this prospectus under the caption "Risk Factors," and
elsewhere may constitute "forward-looking statements" within the meaning of
federal securities laws. Forward-looking statements are based on our
management's beliefs, assumptions, and expectations of our future economic
performance, taking into account the information currently available to them.
These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements. Some of the important factors that
could cause our actual results, performance or financial condition to differ
materially from our expectations are discussed in "Risk Factors" and in our
filings with the SEC.
When used in our documents or presentations, the words "anticipate,"
"estimate," "expect," "objective," "projection," "forecast," "goal" or similar
words are intended to identify forward-looking statements. We qualify any such
forward-looking statements entirely by these cautionary factors.
RECENT DEVELOPMENTS
Migratory Merger
In April 2002, the board of directors of the Company determined that it was in
the best interests of the Company and its stockholders for the Company to change
its state of incorporation from Nevada to Delaware. On May 13, 2002, we
completed the reincorporation by way of a migratory merger under Nevada and
Delaware law of the Company with and into a wholly-owned subsidiary of the
Company incorporated in Delaware that we created for purposes of achieving the
reincorporation. In the migratory merger we converted each share of Common Stock
of the Nevada corporation into one share of the Delaware corporation, and we
converted each share of Class A Convertible Preferred Stock into four shares of
Diomed Holdings' Convertible Preferred Stock, and reduced the number of votes to
which each holder of each of these shares of Class A Convertible Preferred Stock
was entitled to exercise from four to one. As a result, shares of our Common
Stock and our Convertible Preferred Stock now each have one vote. The surviving
Delaware corporation also assumed the obligations of the former Nevada
corporation with respect to outstanding Options and Warrants.
QLT, Inc.
On August 5, 2002, we settled a potential dispute with QLT, Inc. and converted
indebtedness of $835,664 plus accrued interest of $72,691 into Convertible
Preferred Stock. The potential dispute arose from our conversion in January 2002
of convertible debt we had issued to QLT in 2000. We issued this convertible
debt to QLT when we acquired certain assets, primarily manufacturing rights and
inventory related to our OPTIGUIDE/R/ optical fibers product. The total purchase
price was $1.2 million. We paid QLT $25,000 in cash and issued to QLT $1,175,000
of convertible debt in the form of two promissory notes. The principal amounts
of the promissory notes were $339,336 and $835,664, they were payable within two
years from issuance and Diomed had the option of paying them in cash or in
stock.
In January, 2002, Diomed issued 135,735 shares of its common stock in payment of
the first of these notes (in the principal amount of $339,336), based on a
conversion price of $2.50 per share. In February 2002, QLT informed Diomed that
it disagreed with the per share conversion price Diomed had used in calculating
the number of shares issued to QLT. From that time, we engaged in discussions
with QLT to resolve the dispute amicably, and on August 5, 2002, we entered into
an agreement with QLT whereby in effect we re-valued the conversion price of the
first promissory note to $1.50 per share, and converted the second promissory
note into Convertible Preferred Stock at the conversion price of $1.50 per
share. In so doing, the Company (i) issued 90,489 shares of Convertible
Preferred Stock in respect of the first promissory note, and (ii) issued 605,570
shares of Convertible Preferred Stock in satisfaction of the second promissory
note. In consideration for our issuance of these shares, QLT released us from
any claims under both of these promissory notes, as well as a related
registration rights agreement and relevant portions of the 2000 OPTIGUIDE/R/
asset purchase agreement.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered by the
selling stockholders. However, we may receive proceeds from the exercise of the
Warrants and Options. Those proceeds, if any, will be used for general corporate
purposes. General corporate purposes may include expenses for research and
development associated with the development and enhancement of our technology
and products, expenses for sales and marketing and general administrative
expenses associated with salaries and other expenses. General corporate purposes
may also include acquisitions or other capital expenditures. We may invest the
net proceeds temporarily until we use them for their stated purpose.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2002 on
an actual basis. You should read this table in conjunction with our financial
statements and the accompanying notes to our financial statements, "Selected
Financial Information" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" included elsewhere in this prospectus.
March 31, 2002
Actual
--------------
(unaudited)
(in thousands)
Total long-term debt ......................................... $ 963
Stockholders' equity:
Common stock, $0.001 par value ............................ 14
Convertible Preferred stock, $0.001 par value ............. 4
Additional paid-in capital ................................ 39,078
Accumulated other comprehensive loss ...................... 2
Accumulated deficit ....................................... (33,249)
Total stockholders' equity ............................. 5,848
Total Capitalization ................................... 6,811
14
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.
BUSINESS
Overview of Diomed's Business
We carry on our business primarily through our wholly-owned subsidiary,
Diomed, Inc.
Diomed specializes in developing and commercializing minimal and
micro-invasive medical procedures that use its laser technologies and disposable
products. 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, which also takes time to heal. This can be diminished by
using minimal and micro-invasive procedures instead of traditional surgical
treatments. In developing and marketing our clinical 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 develop
medical applications for our laser technology, to incorporate disposable
products into these applications and to sell our products to physicians who
perform medical procedures using our products and the techniques that we
develop. 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, gynecology and dermatology.
Utilizing our proprietary technology in certain methods of synchronizing
diode light sources and in certain optical fibers, we currently focus on
photodynamic therapy (our PDT product line) for use in cancer treatments, and
endovenous laser treatment (our EVLT(TM) product line), for use in varicose vein
treatments and other clinical applications. 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 76% of our revenues from sales of laser devices
and systems and 24% of our revenues from disposable items, such as fibers, and
other accessories. Viewed from the perspective of our product lines for
photodynamic therapy and endovenous laser treatment applications, in 2001,
approximately 39% of our revenues were from PDT, approximately 14% from EVLT(TM)
and the balance from other surgical applications of our products. Historically,
the majority of our revenues are the result of sales outside the United States
(mostly in the United Kingdom and elsewhere in Europe, as well as in the
Asia-Pacific region). For example, in 2001, approximately 51% of our revenues
were generated overseas. In 2001, Diomed developed endovenous laser treatment
(EVLT(TM)), an innovative minimally invasive laser procedure for the treatment
of varicose veins caused by greater saphenous vein reflux, and on January 22,
2002, was the first company to receive FDA clearance with respect to marketing
EVLT(TM) in the U.S. Diomed believes that its percentage of sales generated
domestically should increase as it grows the EVLT(TM) market in the U.S.
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 activities are manufacturing, research and
development, and 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. Our proprietary diode laser
technology has made it possible to simplify and minimize certain medical
procedures. Utilizing its core competency in diode light sources and optical
fibers, Diomed pioneered the development of diode lasers for medical
applications. Our existing EVLT(TM) procedure generates results that are
superior to conventional treatments for varicose veins.
15
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 generate in excess of $100 million of
revenues in a three-to-five year period following governmental approval. This
determination is based upon the number of procedures that may be conducted in a
market during this three-to-five year time period, the revenue the Company
projects it would receive for this type of procedure and an appropriate discount
factor. Currently, EVLT(TM) applications fall within this guideline, and we
believe that PDT has the potential to do so as well.
In November 2000, to enter the disposable market segment of its laser
business, Diomed acquired the medical fiber business of QLT, Inc., 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, Inc., two manufacturers of medical laser devices. In
the fourth quarter of 2000, we also created FibersDirect.com. FibersDirect.com
is a U.S. business unit that acts as a direct marketing conduit by providing
on-line information for available products and an e-mail link to our sales
staff. FibersDirect.com enables distribution of 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.
Overview of Predecessor Business
Diomed is the successor to Diomed Holdings, Inc., a corporation formed
under the laws of the State of Nevada, which we refer to as the "Diomed Holdings
Nevada," on March 3, 1998 under the name Natexco Corporation, known as
"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 "Diomed Merger
Agreement.") Diomed had originally entered into the Diomed Merger Agreement with
Pashleth Investment Ltd., a British Columbia corporation. After entering into
the Diomed Merger Agreement, Pashleth assigned all of its rights and obligations
under the Diomed Merger Agreement to Natexco. As a result, Pashleth had no
continuing relationship with the Diomed Merger. As a result of the Diomed
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 prospectus, the discussion of our
business relates to Diomed's business.
The principal purpose of the Diomed Merger was to enhance our ability to
raise capital for our business by creating a public trading market for shares of
our Common Stock and help us when we negotiate future acquisitions. The fact
that Natexco was a public company that had ceased its previous business
operations provided us with a better opportunity to access capital and negotiate
future acquisitions due to the liquidity afforded by a public trading market.
The Company is also the successor by merger of Diomed Holdings Nevada with
Diomed Holdings (Delaware), Inc., a Delaware corporation. Prior to the Migratory
Merger, Diomed Holdings (Delaware), Inc. did not conduct any business other than
the consummation of the Migratory Merger. Upon consummation of the Migratory
Merger the Company changed its name to Diomed Holdings, Inc.
For financial statement purposes, the Diomed Merger will be treated as a
recapitalization of Diomed. For tax purposes, we believe the Diomed Merger was
structured to qualify as a tax-free exchange of equity securities. We have not,
however, requested any ruling from the Internal Revenue Service in respect of
our treatment of the Diomed Merger.
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., known as "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 Diomed Merger was the operation
of Security Software. We are not pursuing the business of Security Software now
that the Diomed Merger has occurred.
Diomed Merger
On February 14, 2002, pursuant to the Diomed Merger Agreement, Diomed
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Diomed Holdings Nevada, merged with and into Diomed.
Pursuant to the Diomed Merger Agreement, Diomed Holdings Nevada issued:
16
. 2,328,922.50 shares of its Old Class A Stock to the former holders of
Diomed common stock in exchange for 9,315,690 o shares of common stock
of Diomed issued and outstanding as of the effective time of the
Diomed Merger, which 2,328,922.50 shares were convertible into
9,315,690 shares of Diomed Holdings Nevada common stock, and
. 1,362,500 of its Old Class A Stock to the former holders of 2,725,000
shares of Diomed Series A Preferred Stock o issued and outstanding as
of the effective time of the Diomed Merger, which 1,362,500 shares
were convertible into 5,450,000 shares of the Company's common stock.
Immediately prior to the Diomed Merger, we consummated a private placement
transaction, wherein Diomed issued 5,000,000 shares of common stock, at a
purchase price of $2.00 per share, and received aggregate gross proceeds of
$10,000,000. As a result of the Diomed Merger, these shares were exchanged for
an equal number of shares of common stock of Diomed Holdings Nevada. The
proceeds of the private placement were used to pay $700,000 of bridge loans that
we had obtained to fund our operations prior to the merger, to pay
merger-related fees and expenses and to provide funds for our ongoing corporate
needs.
In connection with the Diomed Merger, Diomed Holdings Nevada assumed the
obligations of Diomed with respect to Diomed's outstanding stock options and
warrants. Through December 31, 2001, Diomed had issued options representing
1,854,384 shares of common stock, although of these, 24,144 were cancelled
because they were held by former employees who failed to exercise their options
within the required post-employment exercise period, and an additional 56,500
were cancelled because they were held by former employees who departed from
Diomed's employ prior to vesting. Accordingly, as of December 31, 2001, options
representing 1,773,740 were outstanding. Between January 1, 2002 and the
effective time of the Diomed Merger, Diomed issued an additional 15,630 options
(15,000 to an employee and a total of 630 to two consultants). Accordingly,
immediately prior to the Diomed Merger, options representing 1,789,370 were
outstanding.
Between the effective time of the Diomed Merger and March 31, 2002, Diomed
Holdings Nevada issued options representing 146,500 shares of its common stock
(100,000 to Kim Campbell, a newly-appointed director, and a total of 46,500 to
existing and new employees and two consultants). Accordingly, as of March 31,
2002, options representing 1,804,772 shares of common stock were outstanding. As
of December 31, 2001, Diomed had issued warrants representing 111,924 shares of
its common stock. On January 1, 2002, Diomed issued warrants representing a
total of 10,000 shares of its common stock to two affiliated investors, Winton
Capital Holdings Ltd. and Verus International Group Limited, that provided
$700,000 of bridge financing to Diomed in October, 2001. See Note (15) of the
Notes to Consolidated Financial Statements for a description of the terms of
this bridge financing. Neither Diomed nor Diomed Holdings Nevada issued any
additional warrants between the effective time of the Diomed Merger and March
31, 2002. Accordingly, as of March 31, 2002, Diomed Holdings Nevada warrants
representing 121,924 shares of its common stock were outstanding./1/
The shares issued to the former Diomed stockholders in the Diomed 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 Diomed Merger would represent
approximately 47.8% of the Company's issued and outstanding voting securities
following the Diomed Merger, the shares issued to the option holders would
represent approximately 5.8% of the Company's issued and outstanding voting
securities following the Diomed 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 Diomed Merger.
Before the Diomed 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 stockholders 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. After the Diomed Merger,
except for Mr. Norris, the pre-Diomed Merger directors of the Company resigned,
Mr. Norris appointed the remaining Diomed directors as directors of the Company,
and additionally, in consultation with the remaining Diomed directors, appointed
Kim Campbell as a director of Diomed Holdings Nevada.
- ----------
/1/ The foregoing options and warrants were exercisable for Old Class A Stock,
which in turn were convertible into shares of Diomed Holdings Nevada Common
Stock. The Old Class A Stock, except for voting rights and certain corporate
transaction approval rights which have lapsed, had the same rights as the
Convertible Preferred Stock. See "Description of Securities - Preferred Stock."
These options and warrants became exercisable for Convertible Preferred Stock by
virtue of the Migratory Merger on a one-for-four basis. The number of shares of
Company Common Stock into which the Convertible Preferred Stock represented by
these options and warrants is convertible is the same as the number of shares of
Diomed Holdings Nevada Common Stock into which the Old Class A Stock represented
by the former options and warrants were convertible. All references herein to
the number of options and warrants are on an as-converted basis, unless stated
otherwise or unless the context clearly indicates otherwise.
17
We believe that each stockholder of Diomed that was a U.S. resident at the
time of the merger was an accredited investor, as the term is defined in
Regulation D, and that the offering by means of the merger was exempt from
registration under Section 4(2) of the Securities Act. The shares that we issued
to those persons are subject to restrictions on transfer. Each other stockholder
of Diomed, Inc. was not a U.S. resident at the time of the merger and, as to
those stockholders, the merger was structured to comply with Regulation S under
the Securities Act. The shares issued to non-U.S. residents also are subject to
restrictions on transfer. Accordingly, the issue of shares to non-U.S. residents
did not require registration under the Securities Act.
Migratory Merger
In April 2002, the board of directors of the Company determined that it was
in the best interests of the Company and its stockholders for the Company to
change its state of incorporation from Nevada to Delaware. On May 13, 2002, the
reincorporation was effected by the Migratory Merger. As a result of the
Migratory Merger, each share of common stock of Diomed Holdings Nevada
outstanding as of the date of the consummation of the Migratory Merger was
converted into one share of Common Stock and each share of Old Class A Stock was
converted into four shares of Convertible Preferred Stock. The rights and
privileges of the Common Stock and the Convertible Preferred Stock are virtually
identical to the common stock of Diomed Holdings Nevada and the Old Class A
Stock, other than the one for four exchange of shares of Old Class A Stock for
shares of Convertible Preferred Stock, and a reduction in the number of votes
from four votes per share for Old Class A to one vote per share for Convertible
Preferred Stock.
In connection with the Migratory Merger, the Company assumed the
obligations of Diomed Holdings Nevada with respect to Diomed Holdings Nevada's
outstanding stock options and warrants (formerly the Diomed stock options and
warrants described above).
As a result of the Migratory Merger, the directors and officers of Diomed
Holdings Nevada became the directors and officers of the Company.
In addition to the registration of shares of common stock for resale
hereunder, the Company has agreed to file, 45 days after the effectiveness of
the registration statement, of which this prospectus is a part, a second
registration statement that will cover the 1,611,661 shares of its common stock
issuable upon conversion of all shares of Convertible Preferred Stock that are
issuable upon the exercise of Diomed options that the Company assumed as part of
the Diomed Merger and the Migratory Merger. If the registration statement, of
which this prospectus is a part, 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.
Business Strategy
Our business strategy is based on developing and selling our medical
devices and associated disposable items, 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(TM), 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 an emphasis on new procedures. The
expenditures for the Company's research and development program were
approximately $1.27 million, or, 13% of sales, for the year ended December 31,
2000, and $1.22 million, or, 16% of sales, for the year ended December 31, 2001.
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 photodynamic therapy drug companies,
including Axcan Pharma, Inc., QLT, Inc., Pharmacyclics, Inc. and DUSA
Pharmaceuticals, Inc., to bring new treatments to market. In addition, we
maintain original
18
equipment manufacture, or OEM, relationships with Olympus ProMarketing, Inc. and
Dentek Lasersystems Vertriebs GmbH. We plan to create other long-term and
exclusive working relationships that increase laser applications and revenue
potential. For example, in November, 2000 we entered into a five-year exclusive
agreement with Axcan Pharma, Inc. to supply PDT 630nm lasers and OPTIGUIDE(R)
optical fibers for use in association with Axcan Pharma, Inc.'s product,
Photofrin, which Axcan Pharma, Inc. developed for treatment of late stage lung
cancer and esophageal cancer. In pursuit of this strategy, we will continue to
work with photodynamic therapy drug companies beginning at an early stage to
jointly develop additional new treatments, develop the market and obtain
regulatory clearance in relevant countries.
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. These lasers will be designed to have control mechanisms that will
be adjustable to conform to the type of procedure for which they are being used
on a standard basis, such as EVLT(TM), instead of requiring the technician to
set the separate control mechanisms and other features such as wattage and pulse
for each different procedure. As a result, our laser systems will be easier to
use and will be more precisely calibrated for desired medical procedures. This
is an effort to maintain a "state of the art" product line and avoid
obsolescence. We are currently focusing our research and development capacity to
address this objective.
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 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, 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 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 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 fiber, this
wavelength can be used in various surgical applications to cut, close or
vaporizes 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 and commercialization of minimal and micro
invasive medical procedures employing our laser technology and disposable
products 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 medical procedures that we address with our
19
products are those which we believe are capable of producing a recurring revenue
stream through the 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 Photodynamic Therapy
We are the first diode laser manufacturer to receive FDA clearance for use
of its lasers and optical fibers in photodynamic therapy cancer treatments.
Photodynamic therapy 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
photodynamic therapy in treating cancer: (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 photodynamic
therapy 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 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 PDT product line of photodynamic therapy solutions uses our own
proprietary technology. When used in combination with a photosensitizing drug,
PDT provides the cancer therapy. As indicated, internal application of
photodynamic therapy 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. Our PDT line is a delivery system of laser technology, services and fiber
disposables to the global photodynamic therapy industry.
Photodynamic therapy technology for internal applications is only effective
when these three components are working in concert. We work jointly and early on
with photodynamic therapy 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 or business
relationships with some of the world's other leading photodynamic therapy drug
companies, including Axcan Pharma, Inc., DUSA Pharmaceuticals, Inc., QLT, and
Pharmacyclics Inc., and have sold each of them lasers to be used in clinical
trials for photodynamic therapy 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.
In August 2000, Axcan Pharma, Inc. and Diomed together received regulatory
approval for Diomed's 630nm laser and OPTIGUIDE(R) fiber, and Axcan Pharma,
Inc.'s Photofrin drug used in the cancer treatment for late stage lung and
esophageal cancers. In November 2000, Diomed entered into a 5-year exclusive
supply contract with Axcan Pharma, Inc. for lasers.
Axcan Pharma, Inc. is developing other clinical applications using
Photofrin, including treatment for Barrett's Esophagus, a pre-cursor to cancer
of the esophagus. Axcan Pharma, Inc. is pursuing an application for FDA
clearance for Photofrin and our lasers and fibers for use in the treatment of
Barrett's Esophagus.
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:
. competitive treatments, either existing or those that may arise in the
future;
. our products' performance and subsequent labeling claims; and
. actual patient population at and beyond product launch.
20
Diomed's sales of its PDT product line are dependent to an extent upon the
clinical development process and the commercialization of PDT drugs by PDT drug
companies. As a result, our sales may fluctuate in relation to the timing of PDT
drug companies achieving their strategic initiatives.
2. Endovenous Laser Treatment
On January 22, 2002, we became the first diode laser manufacturer company
to receive FDA clearance for its lasers and disposable fibers for its endovenous
laser treatment, with respect to marketing EVLT(TM) in the United States. 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 commonly 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 report by the University of
Michigan under a comprehensive study of the health characteristics of the
Community of Tecumseh, Michigan, approximately 25% of women in the U.S. 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 to age
and to live longer lives. The Tecumseh study also indicates that 72% of women
over age 60 in the U.S. have varicose veins. According to the American
Association of Retired Persons, approximately 76 million people in the U.S. 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 endovenous laser treatment.
Endovenous laser treatment has several competitive advantages over the current
vein-stripping treatment. Endovenous laser treatment 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. Endovenous
laser treatment also has a quick recovery period, reduced pain and minimal
scarring. In an endovenous laser 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 several weeks,
and possibly post-op scarring from incisions and post-op infections. During
clinical studies, 97% of first-time endovenous laser treatment treatments in
clinical trials have been successful. A second endovenous laser treatment has
successfully resolved the remaining cases.
We developed our EVLT(TM) product line as a complete clinical solution and
marketing model, including a laser, disposable kit, and a training and a
marketing plan, to assist physicians, clinics and hospitals in responding to the
demand for treatment of varicose veins in a minimally invasive manner. EVLT(TM)
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(TM) for treatment of greater saphenous reflex 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 endovenous laser treatment, with
respect to marketing EVLT(TM) in Europe.
Diomed expects that EVLT(TM) will be a primary source of revenue in 2002.
Diomed believes that EVLT(TM) will result in a high-level of commercial
acceptance due to its quick recovery period, an immediate return to one's normal
routine barring vigorous physical activities, reduced pain and minimal scarring,
and reduced costs as compared to vein stripping, the current prevalent clinical
treatment for varicose veins. Also we developed our EVLT(TM) product line as a
complete clinical solution and marketing model, including a laser, disposable
kit, clinical training and a marketing plan, to assist physicians, clinics and
hospitals in responding to the demand for treatment of varicose veins in a
minimally invasive manner. In addition, Diomed has developed a
website--www.evlt.com--to provide patients with education about treatment
options and benefits of EVLT(TM). Diomed expects that as the volume of EVLT(TM)
procedures performed increases so may its disposable sales. Diomed believes that
the US represents the single largest market for EVLT(TM). In May 2002, Diomed
hired, trained and deployed eight direct sales representatives targeting
strategic markets in the U.S. We intend to monitor EVLT(TM)'s sales activities
and evaluate the benefits of expanding our sales force over time.
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, photodynamic
therapy and endovenous laser treatment 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 photodynamic
21
therapy and endovenous laser treatments. As the volume of PDT procedures
increases and as EVLT(TM) replaces the more expensive vein-stripping procedure,
the volume of fibers used in these treatments is projected to increase. As a
result, we believe that our revenue stream from fibers and disposable items is
likely to increase.
4. Other Clinical 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
clinical applications, such as cancer treatment with PDT and varicose vein
treatment with EVLT(TM), other medical applications can be, and are being,
performed with our lasers. To date, for instance, the FDA has also cleared our
diode laser technology for open and endoscopic surgical procedures, which are
used to treat vascular and pigmented lesions. As our laser and fiber
technology is sufficiently versatile, users may employ our technology for other
surgical procedures. Potential clinical applications that we may address
include:
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.
Otological 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.
Gastro-Intestinal Cancer: 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 clinical 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.
There are no pending regulatory applications or clinical studies. We may rely on
third parties, including our collaborative partners, to design and conduct any
required clinical trials. If, we are not 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 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
22
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
the typical OEM 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 work closely with our research and
development, and sales and marketing teams; and 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. 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. Currently, the majority of these suppliers are located in Japan
and Europe. 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. During 2001, our principal supplier of
diodes which we used to manufacture lasers was HPD, and our principal suppliers
of materials which we used to manufacture fibers were Pioneer, Inc. and Laser
Peripherals. In 2002, we replaced HPD with Laser Diodes, Inc. for our diode
requirements. Because most of our raw materials and components are available
from various sources, we are currently developing qualified backup suppliers for
each of these resources.
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 alternative
source of supply. To date, we have not experienced significant delays in
obtaining any of our products.
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 U.S. in 1998, and as a result, the
Company has limited sales and marketing experience in the U.S. market. We sell,
market and distribute our products and services through independent sales
representatives and direct sales representatives. Independent sales
representatives are independent contractors and not employees, whereas direct
sales representatives are employees. Our independent sales representatives
commit to achieving certain minimum sales targets, and we compensate them on a
commission only basis. If an independent sales representative fails to meet its
minimum sales targets, then we have the right to terminate our relationship. We
also sell our products to distributors. We relied primarily on
23
independent sales representatives through early 2002, when the FDA approved our
EVLT(TM) product. When EVLT(TM) was cleared for sale in the U.S. by the FDA in
January 2002, we shifted our strategy to expand our sales force to include
direct sales representatives to supplement our focus on key markets and
customers. In May 2002, we hired, trained and deployed eight direct sales
representatives targeting strategic markets across the U.S. We intend to closely
monitor EVLT(TM) sales activities and evaluate the benefits of expanding our
sales force over time. Diomed will not, however, know the overall effectiveness
of its sales force infrastructure until our independent sales representatives
and direct sales representatives demonstrate whether they can meet or exceed the
minimum sales targets for EVLT(TM), now that the FDA has cleared it.
In November 2000, we formed FibersDirect.com, a U.S. business unit that
acts as a direct marketing conduit by providing on-line information for
available products and access to our sales staff by e-mail. FibersDirect.com
enables distribution of 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 via
FibersDirect.com. When the FDA approved EVLT(TM) in January, 2002,
FibersDirect.com also began to promote fibers used in EVLT(TM) 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
product purchases and we may terminate our relationships with distributors who
do not meet their minimum purchase levels. We have not given our distributors
price protection or product return rights. We do not remotely monitor inventory
levels of our products once we sell them to distributors, but may obtain that
information as needed by our contact with the distributor. We also develop and
maintain strategic marketing alliances for international sales and marketing.
These alliances exist under agreements with companies including Olympus
ProMarketing, Inc., Axcan Pharma, Inc., Dentek Lasersystems Veritriebs GmbH.
Each of these agreements relates to certain products and market segments.
We target our marketing efforts to physicians, clinics and hospitals
through office visits, trade shows and trade journals, and to consumers through
glossy brochures and the Company's websites, the intent being that consumer
awareness will increase demand for the treatment methodologies we address and
for our products. 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 endovenous laser treatment
manufacturer to have peer review articles published in scientific journals, such
as The Journal of Vascular and International Radiology and Dermatologic Survey.
With respect to EVLT(TM), we believe that we have collected more clinical data
regarding our products and their application then any of our competitors in the
endovenous laser treatment market.
In fiscal years 2000 and 2001, approximately one-third of our revenues were
dependent upon a few major customers. In fiscal years 2000 and 2001, Axcan
Pharma and Olympus each accounted for more than 10% each of our revenues. In
2001, approximately 50% of our sales were generated domestically versus
internationally. Going forward, we believe that our annual dependence on any
individual customer or group of customers should decrease as more of our
revenues may derive from sales of EVLT(TM) in the U.S. market directly to
individual physician practices and less to large-scale distributors. In
addition, Diomed believes that its percentage of sales generated domestically
should increase as it grows the EVLT(TM) market in the U.S.
Diomed envisions that by developing and marketing procedures to doctors
that involve selling key components--namely lasers and their related disposables
designed for a single use, including fibers and kits--it will have the potential
to create recurring sales. Diomed's plan is that each future procedure will be
accompanied with a disposable component.
In fiscal 2002, Diomed expects to focus on the development and growth of
EVLT(TM) sales worldwide, to support the development and approval of new
applications for PDT products, and to continue the development of new minimally
invasive medical procedures that offer long-term opportunities to the Company.
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
24
products either in the United States or in international markets. To compete
effectively in the marketplace, we require the financial resources to
effectively support our activities in the following key areas: research and
development, regulatory compliance, quality control, sales and marketing,
distribution and a technical-information and training services.
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 photodynamic therapy market, Lumenis, Laserscope and
Biolitec are our main competitors. However, we currently have the only approved
diode laser in the U.S. for photodynamic therapy 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.
We expect that our principal methods of competition with other photodynamic
therapy support companies will be based upon such factors as:
. the ease of administration of our partners' photodynamic therapy
methodologies;
. the degree of generalized skin sensitivity to light;
. the number of required doses;
. the safety and efficacy profile;
. the selectivity of photodynamic therapy drug for the target lesion or
tissue of interest;
. the type and cost of our light systems; and
. the cost of our partners' drug.
Increased competition could result in:
. price reductions;
. lower levels of third-party reimbursements;
. failure to achieve market acceptance for our PDT product line; and
. 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 endovenous laser treatment market which our EVLT(TM) products serve,
Lumenis, Biolitec A.G. and Dornier MedTech are potentially our main competitors
for surgical diode lasers.
Patents, Trademarks and Proprietary Technology
We hold U.S. and international patents for inventions in the following
areas: solid state laser diode light source, high power light source,
peltier-cooled apparatus and methods for dermatological treatment and medical
spacing guide. These patents expire from 2011 to 2018.
We also license some of the technology that we use in our business. Two of
these licenses are material to our business. One relates to technology that we
rely on in our EVLT(TM) products and the other relates to technology that we use
in our OPTIGUIDE(R) product.
We license technology for the EVLT(TM) process from one of its inventors,
Dr. Robert Min. The patented technology is for the process of using lasers and
fibers to perform endovenous laser treatment procedures. Our license is
non-exclusive, although Dr. Min has agreed not to license the process technology
to any third party if we do not breach our obligations under our agreement with
him. The license continues until the licensed patent rights expire, unless the
licensor terminates the license because we breach our obligations under the
license agreement, such as failing to make required payments or providing
periodic
25
reports of our sales activity. Together with Dr. Min and his associate, Dr.
Stephen Zimmet, we also invented fiber technology that we use with our EVLT(TM)
products. Drs. Min and Zimmet assigned to us their rights to a patent
application regarding this technology. This patent application is currently
pending. We pay a fee for our sale of fibers incorporating this technology.
Doctors Min and Zimmet are also our consultants and they provide services to us
on an ongoing basis to educate physicians on the use of our products and
generally to promote our products. We pay them consulting fees for these
services.
We license technology that we currently use in our OPTIGUIDE(R) fiber optic
diffuser. Health Research, Inc. owns this patented technology, and exclusively
licenses it to QLT, Inc. In turn, QLT sublicenses it to us on a non-exclusive
basis. Although our sublicense is non-exclusive, QLT is subject to a
non-competition agreement wherein QLT effectively agreed not to license the
technology to any third party for three years. The sublicense continues until
the licensed patent rights expire or the license from Health Research to QLT is
terminated, whichever comes first. Health Research may terminate its license to
QLT if QLT breaches its obligations under the license and does not cure the
breach within 90 days, or if QLT becomes insolvent. QLT may terminate our
sublicense if we breach our obligations under the sublicense, such as failing to
pay royalties, and do not cure the breach within 90 days, or if we become
insolvent.
We have received trademark registrations from the U.S. Patent and Trademark
Office for the trademarks "Diomed" and "OPTIGUIDE." We have applied for
trademark registrations for "EVLT" and "Summer Legs" as trademarks and/or
service marks, but we have not yet received registrations for these particular
marks. We registered various domain names, including diomedinc.com,
diomed-lasers.com, fibersdirect.com, fibresdirect.com, summerlegs.com and
evlt.com.
Our proprietary technology includes:
. a device for scanning laser beams in a pre-defined pattern across the
patient's skin;
. an enclosure for protecting laser diodes and modules;
. a low cost method for measuring the light from optical fibers of
differing geometry (under development);
. a common platform for laser diodes of different wavelengths;
. a user interface that is appropriate to the clinical setting;
. a monolithic optical geometry for implementing the patented
technology;
. a means for efficiently removing heat from the diodes thereby allowing
the instrument to operate with standard line power as the only
service.
The patent position of medical device companies generally is highly
uncertain. Some of the risks and uncertainties include:
. the patent applications owned by or licensed to us may not result in
issued patents;
. our issued patents may not provide us with proprietary protection or
competitive advantages;
. our issued patents may be infringed upon or designed around by others;
. our issued patents may be challenged by others and held to be invalid
or unenforceable;
. the patents of others may have a material adverse effect on us; and
. 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 patents, or
otherwise obtain proprietary rights to technology that can be used for 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' patent applications or the invalidation of issued 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 remedies, 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
26
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:
. we may be required to obtain licenses under dominating or conflicting
patents or other proprietary rights of others;
. these licenses may not be made available on terms acceptable to us, if
at all; and
. 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:
. product design and development;
. product testing;
. product manufacturing;
. product labeling;
. product storage;
. premarket clearance or approval;
. advertising and promotion; and
. product sales and distribution.
Unless an exemption applies, each medical device we wish to commercially
distribute in the U.S. will require either prior clearance by the FDA on the
basis of what is called a "510(k) application," or a premarket approval
application, or "PMA." The FDA classifies medical devices that are manufactured
or sold in the U.S. 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. 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 upon a PMA submitted by the applicant.
Our laser devices and disposables 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 lasers in photodynamic therapy cancer
treatments, and the first company to receive FDA clearance for use of lasers and
related applications in endovenous laser treatment . In August 2000, Axcan
Pharma, Inc. and Diomed, Inc. received regulatory approval for our 630nm laser
and OPTIGUIDE(R) fiber, and Axcan Pharma, Inc.'s Photofrin drug used in the
cancer treatment for late stage lung and esophageal cancers. On January 22,
2002, we received FDA clearance for use of endovenous laser treatment in the
U.S., in respect of our EVLT(TM) product line, making Diomed the first company
to receive FDA clearance for this modality and use. Specifically, the FDA
approved Diomed's EVLT(TM) surgical laser and procedure kit as intended for use
in coagulation of the greater saphenous vein of the thigh in patients with
varicose veins, and the FDA specifically found that the FDA 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 (the date that the FDA called for the submission of PMAs).
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.
27
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, under 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 studies, clinical trials, manufacturing and
labeling, to demonstrate the safety and efficacy of the device, to the 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 (known as Good Manufacturing Practices, 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.
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 requires clinical trials 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:
. quality system regulations, which require manufacturers to follow
design, testing, control, documentation and other quality assurance
procedures during the manufacturing process;
. labeling regulations, which prohibit the promotion of products for
uncleared or unapproved (off-label); and
. medical device reporting regulations, which require that manufacturers
report to the FDA if their device may have o 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:
. fines, injunctions and civil penalties;
. recall or seizure of our products;
. operating restrictions, partial suspension or total shutdown of
production;
. refusing our requests for 510(k) clearance or premarket approval of
new products or new intended uses;
. withdrawing 510(k) clearance or premarket approvals that are already
granted; and
28
. 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
reports 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.
Some of the risks and uncertainties of international governmental
regulation include:
. foreign regulatory requirements governing testing, development,
marketing, licensing, pricing and/or distribution of drugs and devices
in other countries;
. 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, or "EU," member states;
. 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
. registration and approval of a photodynamic therapy products in other
countries, such as Japan, may include o 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 that
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 endovenous laser therapy products
in Europe.
Third Party Reimbursement
A patient's ability to secure reimbursement for our existing and future
products is critical to our success. In the U.S., 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(TM), and future products that we develop in connection with photodynamic
therapy, endovenous or other medical and clinical procedures, will be
reimbursed, or that the amounts reimbursed would be adequate to provide us with
acceptable profits.
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(TM) may offer
an opportunity for payors to reduce the costs of treating varicose vein patients
by replacing veinstripping operations performed in hospitals on an in-patient
basis with minimally invasive endovenous laser treatment performed on an
out-
29
patient basis. While we believe that EVLT(TM) possesses economic advantages that
will be attractive to payors, we cannot assure that in the future additional
payors 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 and
recommendations by knowledgeable physicians. In regards to EVLT(TM), 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
related to endovenous laser treatment 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 U.S., 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:
. decreasing the price we, or any of our partners or licensees, receive
for any of our products;
. preventing the recovery of development costs, which could be
substantial; and
. limiting profit margins.
Product Liability Risk
Our development of clinical 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:
. 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;
. if we are required to obtain additional or replacement 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
. 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 June 7, 2002 we employed a total of 59 full-time employees, with 14
employees in sales and marketing, seven employees in research and development,
16 employees in manufacturing, five employees in regulatory and quality control,
six employees in service, and 11 employees in general and administrative.
General and administrative includes finance, information technology, human
resources, order processing and management. Forty one employees are based at
Diomed Ltd, our wholly-owned subsidiary in Cambridge, England, where
manufacturing, research and development and international sales and marketing
operations are conducted. In the US, there are 18 employees, including nine at
our headquarters in Andover, MA, where most of our Senior Management team is
based, and nine 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.
Legal Proceedings
30
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 we disclosed trade-secret information. The trade secrets relate to 'the
development and distribution of information for non-coherent light sources...'
and MBG alleges that we disclosed this information to MBG's competitor, Efos. We
deny these allegations. MBG seeks compensatory and punitive damages in an
unspecified amount, but apparently at least $80,000, and an injunction against
further disclosures by us of MBG's trade secrets. 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 moved to dismiss the action and compel arbitration to address
MBG's allegations. An order granting our motion for arbitration was entered by
the court on May 22, 2002, and accordingly, the dispute will be referred to
arbitration. The court also stayed proceedings on other issues not subject to
arbitration.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OR PLAN OF OPERATION
You should read the following discussion of our financial condition and
results of operations together with the audited consolidated financial
statements and notes to the financial statements included elsewhere in this
prospectus. The terms "Company" and "Diomed Holdings" both refer to Diomed
Holdings, Inc. The term "Diomed" refers to the Company's principal subsidiary,
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.
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"
under "Description of the Business" 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.
In view of our relatively limited operating history, we have limited
experience forecasting our revenues and operating costs. Therefore, we believe
that period-to-period comparisons of financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
To date, the Company has incurred substantial costs to create our products. As
of March 31, 2002, we had an accumulated deficit of approximately $33.2 million.
We may continue to incur operating losses due to spending on research and
development programs, clinical trials, regulatory activities, marketing and
administrative activities. This spending may not correspond with any meaningful
increases in revenues in the near term, if at all. As such, these costs may
result in negative operating cash flows until such time as the Company generates
sufficient revenue to offset such costs.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
Overview
Diomed specializes in developing and commercializing minimal and
micro-invasive medical procedures that use its laser technology and disposable
products. In developing and marketing our clinical 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
31
physicians, including specialists in vascular surgery, oncology,
interventional-radiology, phlebology, gynecology 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(TM), for use in varicose vein treatments and other
clinical applications. If the treating physician is knowledgeable about the
reimbursement system and obtains preapproval, then typically health insurance
payors will reimburse for PDT and EVLT(TM) 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.
Since the beginning of 2001, the composition of Diomed's product line has
changed. In the first half of 2001, Diomed abandoned its Laserlite business when
we withdrew from the aesthetic laser market. Diomed had acquired Laserlite LLC,
the distributor of Diomed's cosmetic laser systems, in May 1998. Diomed
subsequently migrated to its existing laser platform, and this led to a decision
to discontinue the sale of the Laserlite product line.
In 2001, Diomed developed endovenous laser treatment (EVLT(TM)), an
innovative minimally invasive laser procedure for the treatment of varicose
veins caused by greater saphenous vein reflux. In September 2001, Diomed was the
first company to receive the CE mark of the European Economic Union for approval
for endovenous laser treatment, with respect to marketing EVLT(TM) in Europe. On
January 22, 2002, Diomed was the first company to receive FDA clearance for
endovenous laser treatment, with respect to marketing EVLT(TM) in the U.S.
Diomed expects that EVLT(TM) will be a primary source of revenue in 2002.
Diomed believes that EVLT(TM) will result in a high-level of commercial
acceptance due to its quick recovery period, an immediate return to one's normal
routine barring vigorous physical activities, reduced pain and minimal scarring,
and reduced costs as compared to vein stripping, the current prevalent clinical
treatment for varicose veins. Also we developed our EVLT(TM) product line as a
complete clinical solution and marketing model, including a laser, disposable
kit, clinical training and a marketing plan, to assist physicians, clinics and
hospitals in responding to the demand for treatment of varicose veins in a
minimally invasive manner. In addition, Diomed has developed a
website--www.evlt.com--to provide patients with education about treatment
options and benefits of EVLT(TM). Diomed expects that as the volume of EVLT(TM)
procedures performed increases so may its disposable sales. Diomed believes that
the US represents the single largest market for EVLT(TM).
In May 2002, we hired, trained and deployed eight direct sales
representatives targeting strategic markets in the U.S. We intend to monitor
EVLT(TM) sales activities and evaluate the benefits of expanding our sales force
over time.
Diomed's sales of its PDT product line are dependent to an extent upon the
clinical development process and the commercialization of PDT drugs by PDT drug
companies. As a result, our sales may fluctuate in relation to the timing of PDT
drug companies achieving their strategic initiatives.
Diomed works jointly and early on with photodynamic therapy drug (PDT)
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 relationships with some of the world's leading photodynamic
therapy drug companies, including Axcan Pharma, Inc., DUSA, Pharmacyclics and
QLT, and have sold them lasers in support of their clinical trials for
photodynamic therapy applications. In August 2000, Axcan Pharma, Inc. and Diomed
together received regulatory approval for Diomed's 630nm laser and OPTIGUIDE(R)
fiber, and Axcan Pharma, Inc.'s Photofrin drug used in the treatment for late
stage lung and esophageal cancers. Axcan Pharma, Inc. is developing other
clinical applications using Photofrin, including treatment for Barrett's
Esophagus, a pre-cursor to cancer of the esophagus. Axcan Pharma, Inc. is
pursuing an application for FDA clearance for Photofrin and Diomed's lasers and
fibers for use in the treatment of Barrett's Esophagus.
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.
Our PDT line is a delivery system of laser technology, services and fiber
disposables to the global photodynamic therapy industry. 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.
Our technology and manufacturing capability has attracted OEM partners. In
a typical OEM relationship, we produce the laser and other products to the OEM's
specifications, which will then be marketed under the OEM's label. As a result,
sales of our products to OEM partners may fluctuate in relation to the
achievement of their strategic initiatives. 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.
In 2001, approximately one-third of our revenues were dependent upon a few
of our strategic partners and approximately 50% of our sales were generated
domestically versus internationally. Going forward, we believe that our annual
dependence on
32
any individual customer or group of customers should decrease as more of our
revenues may derive from sales of EVLT(TM) in the U.S. market directly to
individual physician practices and less to large-scale distributors. In
addition, Diomed believes that its percentage of sales generated domestically
should increase as it grows the EVLT(TM) market in the U.S.
Diomed envisions that by developing and marketing procedures to doctors
that involve selling key components--namely lasers and their related disposables
designed for a single use, including fibers and kits--it will have the potential
to create recurring sales. Diomed's plan is that each future procedure will be
accompanied with a disposable component.
In fiscal 2002, Diomed expects to focus on the development and growth of
EVLT(TM) sales worldwide, to support the development and approval of new
applications for PDT products, and to continue the development of new minimally
invasive medical procedures that offer long-term opportunities to the Company.
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 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.
Our historic domestic and international product sales were generated
principally through our independent sales representatives, or ISRs, in the U.S.
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 U.S. 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 $33.2 million as of March 31, 2002 and
approximately $31.4 million as of December 31, 2001. 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, marketing and administrative activities.
Results of Operations
Three Months Ended March 31, 2002 Compared to the Three Months Ended March
31, 2001
Revenues
Revenues for the three months ended March 31, 2002 were $1.0 million, a
$2.5 million, or 73%, decrease from $3.5 million for the three months ended
March 31, 2001.
This decrease was principally due to a $2.5 million decrease in laser
sales. The decrease in laser sales was primarily attributable to three factors:
(1) a 93% decrease (or, $1.2 million) in sales of PDT lasers, (2) an 89%
decrease (or, $0.9 million) in
33
OEM sales, and (3) the Company's withdrawal from the aesthetic laser market
(which had represented $460,000 in revenues in the first quarter of 2001).
The decrease in sales of our PDT lasers was principally due to the
additional time needed by Axcan Pharma, Inc. to sell the $1.0 million in lasers
it purchased in the first quarter of 2001 under our exclusive supply agreement.
Axcan Pharma, Inc. purchased these lasers in support of its market launch for
Photofrin, the PDT drug used to treat late stage lung and esophageal cancers.
The remaining portion of the decrease results from the fact that certain
customers who purchased PDT lasers in the first quarter of 2001 for use in their
clinical trials have not required additional lasers while these trials are
ongoing.
The decrease in OEM sales is principally due to the additional time needed
by Olympus Japan to sell the $0.8 million in surgical lasers it purchased in the
first quarter of 2001 to support its market launch.
We abandoned our Laserlite business when we withdrew from the aesthetic
laser market. Diomed had acquired Laserlite, LLC, the distributor of its
cosmetic laser systems, in May 1998. Diomed subsequently migrated to its
existing laser platform, and this led to a decision to discontinue the sale of
the Laserlite product line.
Cost of Revenues
Cost of revenues for the three months ended March 31, 2002 was $1.2
million, a $1.1 million, or 50% decrease from $2.2 million for the three months
ended March 31, 2001. This decrease was principally due to the decreased sales
volume in the first quarter of 2002 as compared to the same time period in 2001,
and a headcount reduction in manufacturing resulting from the restructuring in
December 2001 of our subsidiary operations in the UK, offset by regulatory costs
incurred in the US in the first quarter 2002 that were not incurred in the same
period in 2001.
Gross Profit (Loss)
Gross (Loss) for the three months ended March 31, 2002 was $200,000, a $1.5
million, or 116%, decrease from $1.3 million in gross profit for the three
months ended March 31, 2001. This decrease was principally due to the decreased
sales volume in the first quarter of 2002 as compared to the same time period in
2001, and as a result the Company absorbed fixed costs for production quality,
regulatory and service that otherwise would have been covered.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2002
were $171,000, a $173,000, or 50%, decrease from $344,000 for the three months
ended March 31, 2001. The decrease was principally due to a headcount reduction
resulting from the restructuring in December 2001 of our subsidiary operations
in the UK, offset by costs incurred in the first quarter of 2001 to wind-down
the aesthetic laser business, which was acquired from Laserlite LLC, that was
subsequently abandoned in the first half of 2001.
Selling and Marketing Expenses
Selling and marketing expenses for the three months ended March 31, 2002
were $343,000, a $265,000, or 44%, decrease from $608,000 for the three months
ended March 31, 2001. The decrease was principally due to a headcount reduction
resulting from the restructuring in December 2001 of our subsidiary operations
in the UK, offset by sales and marketing staff costs that were incurred in the
first quarter of 2002 that were not incurred in the same period in 2001.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31,
2002 were $820,000, a $210,000, or 34%, increase from $611,000 for the three
months ended March 31, 2001. The increase was principally due to staffing costs
in the US in the first quarter of 2002 that weren't incurred in the same period
in 2001, and incremental legal, accounting and other professional fees
associated with becoming a public company in the first quarter of 2002, offset
by a headcount reduction resulting from a restructuring in December 2001 of our
subsidiary in the UK.
Interest Expense, net
Interest expense for the three months ended March 31, 2002 was $264,000, a
$2.5 million, or 91%, decrease from $2.8 million in the three months ended March
31, 2001. Interest expense in the three months ended March 31, 2001 reflects a
noncash charge totaling $2.7 million. In March 2001, holders of our 9%
convertible subordinated notes, with a conversion price of $3.50 per 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
34
$3.50 per share to $1.00 per share. At the same time, the holders of the notes
converted $2.475 million of the notes into 2,475,000 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.
Interest expense in the three months ended March 31, 2002 include non-cash
charges totaling approximately $225,000. In 2001, the Company issued Promissory
Notes, in the aggregate principal amount of $700,000, to two stockholders of the
Company in exchange for bridge loans and granted these two stockholders fully
exercisable warrants to purchase an aggregate of 80,000 shares of common stock.
We recorded the value of such warrants, calculated using the Black-Scholes
option pricing model, as a debt discount that would be amortized to interest
expense over the life of the notes. In addition, we recorded the beneficial
conversion feature attributable to the warrants as interest expense upon the
closing of the Diomed Merger, which triggered the right to convert the notes.
Results of Operations
Fiscal Year Ended December 31, 2001 Compared to Fiscal Year Ended December
31, 2000
Revenues
Revenues for the year ended December 31, 2001 were $7.7 million, a $1.7
million, or 18%, decrease from $9.4 million for the year ended December 31,
2000. This decrease was due to an approximately $3.3 million decrease in laser
sales, offset by increases in fiber sales ($1.3 million) and sales of our new
product line, EVLT(TM) ($300,000). The decrease in laser sales was primarily
attributed to three factors: (1) a 50% decrease (or, $800,000) in sales of PDT
lasers, (2) a 56% decrease (or, $1.6 million) in OEM sales, and (3) the
Company's withdrawal from the aesthetic laser market (sales of which decreased
by $900,000 in 2001 over 2000).
The principal reason for the reduction in laser sales is that orders in
2000 were largely by customers who ordered our lasers in connection with
clinical trials they were conducting. The lasers purchased in 2000 were
sufficient for these customers to continue their trials in 2001. The reduced
laser orders by these customers was offset in part by the development of new
customers and increased laser sales to Axcan Pharma, Inc. under our exclusive
supply agreement (Axcan Pharma, Inc. uses our products (specifically, PDT and
OPTIGUIDE(R) fibers) in connection with its product, Photofrin, which is a drug
used to treat late stage lung and esophageal cancer). Our OEM sales decreased
primarily because we shipped fewer units to certain distributors, who did not
need to replenish stock because they experienced delays in obtaining necessary
regulatory approvals. We withdrew from the aesthetic laser market when we
abandoned our Laserlite business. We acquired Laserlite on May 31, 1998./2/ We
subsequently migrated to our existing laser platform, and this led to a decision
to discontinue the sale of the Laserlite product line.
The increase in fiber sales was primarily due to the acquisition of
manufacturing rights from QLT, Inc. for OPTIGUIDE(R) fibers, and the formation
of FibersDirect.com, our direct marketing Internet portal for fibers, both of
which we completed in fiscal year 2001.
Sales under our supply agreement with Axcan Pharma accounted for
approximately 25% of our revenues in the fourth quarter of 2000.
Cost of Revenues
Cost of revenues for the year ended December 31, 2001 was $6.1 million, a
$1.3 million, or 18% decrease from $7.4 million for the year ended December 31,
2000. This decrease was primarily due to the decreased sales volume of our
products.
Gross Profit
Gross profit for year ended December 31, 2001 was $1.6 million, a $0.4
million, or 20%, decrease from $2.0 million for the year ended December 31,
2000. This decrease was primarily due to the increased strategic investment in
our marketing infrastructure, product quality and customer service tools. We
anticipate that this internal investment will result in better financial
performance in the future. As a percentage of revenue, gross profit was 21% for
both of the years ended December 31, 2001 and 2000, respectively.
- ----------
/2/ Laserlite LLC was 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.
35
Research and Development Expenses
Research and development expenses for the year ended December 31, 2001 were
$1.22 million, a $50,000, or 4%, decrease from $1.27 million for the year ended
December 31, 2000.
Selling and Marketing Expenses
Selling and marketing expenses for the year ended December 31, 2001 were
$2.5 million, a $900,000, or 56%, increase from $1.6 million for the year ended
December 31, 2000. This increase reflects an expansion of staffing in sales and
marketing, trade show and promotional expenses, and other expenses related to
the expansion of our sales and marketing infrastructure to support growth.
Additionally, we invested in marketing programs to support EVLT(TM) and other
applications.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2001
were $2.6 million, a $400,000, or 18%, increase from $2.2 million for the year
ended December 31, 2000. The increase was primarily due to an expansion of
staffing in management, finance and information technology to support company
operations and growth.
Interest Expense, net
For the year ended December 31, 2001, interest expense increased from $0.3
million in 2000 to $2.9 million in 2001. The increase in interest expense
reflects a noncash charge totaling approximately $2.7 million. In March 2001,
holders of our 9% convertible subordinated notes, with a conversion price of
$3.50 per 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 stockholders 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 $2.475 million of the notes into 2,475,000
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'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 year ended December 31, 2001, 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 year ended December 31, 2001 was $8.1 million, a $4.6 million, or 132%,
increase from the year ended December 31, 2000.
Results of Operations
Fiscal Year Ended December 31, 2000 Compared to Fiscal Year Ended December
31, 1999
Revenues
Revenues for the year ended December 31, 2000 were $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 the supply agreement with Axcan Pharma, Inc. (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.
36
Cost of Revenues
Cost of revenues for the year ended December 30, 2000 was $7.4 million, a
$700,000, 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 issues related to 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 $300,000, 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 $500,000, 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 $100,000, 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, known as "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 $300,000, a
$200,000 increase from $100,000 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.
Liquidity and Capital Resources
Since our inception through March 31, 2002, we have cumulative losses of
approximately $33.2 million and may continue to incur operating losses in the
future, dependent upon the commercial success of EVLT(TM) 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. Since our inception through March 31,
2002, we have received proceeds from
37
the sale of equity securities, convertible notes and credit arrangements of
approximately $40.0 million. Of this investment capital, we raised $10.0 million
in the three months ended March 31, 2002 (private placement financing in
connection with the Diomed Merger), approximately $3.4 million in 2001 ($2.725
million in the equity private placement during March and $700,000 in bridge loan
financing during the fourth quarter) and approximately $6.4 million in 2000
($2.7 million in convertible notes issued in the second quarter, $2.8 million in
the equity private placements during August and November and $936,000 loaned
from a customer in October), all as described below.
We anticipate that we will have sufficient cash or access to additional
funding sources to fund operations through December 2002, primarily in reliance
on the proceeds of the private placement financing related to the Diomed Merger
and depending on the Company's ability to achieve its business plan pertaining
to the commercial success of EVLT(TM) post-FDA clearance. If we are unable to
achieve our business plans, we may need to continue to rely on external sources
of financing to meet our cash needs for future acquisitions and internal
expansion, and if necessary, defer certain discretionary expenditures in order
to continue operations. 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. We had cash of approximately
$4.7 million as of March 31, 2002 and approximately $323,000 as of December 31,
2001.
Cash used in operations for the three months ended March 31, 2002 was
approximately $2.8 million. This is principally attributable to the paydown of
trade payables of approximately $1.5 million and repayment of a customer advance
of approximately $300,000 subsequent to completing the private placement
offering in connection with the Diomed Merger, and an increase in prepaid
expenses of approximately $500,000 for annual fees.
For 2000 and 2001, we required cash for operations of $5.8 million, and
$869,000, respectively. The decrease in net cash used in operating activities in
2001 compared to 2000 is primarily attributed to a decrease in accounts
receivable ($2.9 million), an increase in accounts payable ($900,000) and an
advance received by a customer as a result of a duplicate payment ($300,000),
offset by a decrease in accrued expenses ($700,000).
Cash used in investing activities for the three months ended March 31, 2002
was approximately $66,000. The net cash used in investing activities was
principally related to the purchase of office equipment, furnishings and
fixtures, and leasehold improvements.
For 2000 and 2001, net cash used in investing activities was $272,000 and
$489,000, respectively. The net cash used in 2000 and 2001 for investing was
directly related to the purchases of computer and manufacturing equipment,
furnishings and fixtures, leasehold improvements for operating activities.
Cash provided by financing activities for the three months ended March 31,
2002, was approximately $7.3 million. Cash provided by financing activities is
attributable to approximately $8.3 million in net proceeds from the sale of
Diomed Holdings common stock sold in the private placement offering in
connection with the Diomed Merger. Subsequent to closing the Diomed Merger, the
Company repaid the Promissory Notes issued to two stockholders in October and
December 2001 in exchange for bridge loans ($700,000), and paid down the
Barclays bank line of credit ($600,000).
For 2000 and 2001, net cash provided by financing activities was $6.2
million and $1.8 million, respectively. Cash provided by financing activities in
2000 was primarily attributed to the $2.7 million provided under the convertible
subordinated notes issued between March and June, the $2.8 million in common
stock sold in August and November, and the $936,000 customer loan, all described
below. Cash provided by financing activities in 2001 was primarily attributed to
$2.5 million in net proceeds from sales of Diomed's Series A Preferred Stock in
the third quarter and $700,000 in bridge financing during the fourth quarter,
all described below, offset by payments of accounts receivable and the Barclays
Bank line of credit (approximately $800,000) and repayment of a portion of the
convertible notes in the course of the March 2001 recapitalization ($225,000),
and deferred costs related to the private placement and the Diomed Merger which
were ultimately consummated on February 14, 2002 ($387,000).
Capital Transactions in 2000
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. (As stated below, we
subsequently adjusted the conversion price to $1.00 per share, converted
$2,475,000 of the notes into 2,475,000 shares of common stock at $1.00 per share
and repaid the remaining $225,000 of notes in cash to certain noteholders.)
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
38
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, Axcan Pharma, a customer, advanced us $936,000 to purchase
630nm diodes.
Capital Transactions in 2001
In March 2001, we completed a recapitalization and financing transaction in
connection with which we did the following:
. issued and sold 2,000,000 shares of Diomed's Series A Preferred Stock
at a purchase price of $1.00 per share;
. 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;
. 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, which we exercised to the
extent of 225,000 shares in May 2001; the balance of the put/call
option expired on May 31, 2001 (as to the put option) and October 31,
2001 (as to the call option);
. converted $2,475,000 of the 9% convertible subordinated notes into
2,475,000 shares of common stock at $1.00 per share (and repaid the
remaining $225,000 of notes in cash to certain noteholders);
. exchanged 571,429 shares of common stock issued in August 2000 at a
purchase price of $3.50 per share into 2,000,001 o 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
. exchanged 202,512 shares of common stock issued in October 2000 at a
purchase price of $3.50 per share for 708,792 o shares of common stock
(for an effective purchase price of $1.00 per share) and cancelled
202,512 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.
Between March and May 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 and net proceeds of $2,533,000.
In September 2001, the Diomed issued a promissory note to a 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 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. We also issued 50,000 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. These notes were repaid in full after the Diomed Merger. The
warrants (plus an additional 10,000 warrants issued in January 2002 in a related
transaction, as described below) remain outstanding.
Capital Transactions in 2002
On January 1, 2002, in accordance with the terms of the bridge financing
provided to us in October 2001, we issued warrants to purchase an additional
10,000 (in the aggregate) shares of common stock to the two stockholders who
provided that bridge financing. The reason for this was that the underlying
agreement required us to issue an additional 10,000 warrants to the stockholders
in that bridge financing for each month after December 31, 2001 where we did not
consummate a reverse-merger. Because the Diomed Merger satisfied that
requirement, no additional warrants are issuable in respect of that financing.
In February 2002, in connection with the Diomed Merger, we conducted a
private placement offering of common stock. In the private placement, investors
subscribed to purchase from Diomed an aggregate of 5 million shares of its
common stock at a
39
price per share of $2.00, which resulted in gross proceeds of $10.0 million and
net proceeds of $8.3 million. As a result of the Diomed Merger, the shares of
Diomed common stock issued in the private placement were exchanged for an equal
number of shares of the Company's common stock. Subsequent to completion of the
Diomed Merger, the Company paid back the $700,000 in convertible promissory
notes issued to two of our stockholders in October and December 2001, including
cumulative interest.
As to our predecessor corporation, Natexco Corporation:
On January 23, 2002, Natexco purchased 400,000 shares of common stock
owned by Anthony Mulhall, a former director of Natexco.
On February 5, 2002 Natexco redeemed all of the shares of preferred stock
owned by R.H. 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.
Bank Line of Credit
During 2001 and 2002, our UK subsidiary had access to a line of credit with
Barclays Bank, which is limited to the lesser of (pound)1,200,000 (approximately
$1,745,000 at December 31, 2001 and approximately $1,729,000 at March 31, 2002)
or 80% of eligible accounts receivable. This line bears interest at 3% above
Barclays Bank's base rate (4% at December 31, 2001 and 4% at March 31, 2002),
and borrowings are due upon collection of receivables from customers. As of
December 31, 2001, borrowings of approximately (pound)601,000 (approximately
$874,000) were outstanding, whereas as of March 31, 2002 borrowings of
approximately (pound)191,000 (approximately $276,000) were outstanding under
this line. The lower balance under the line of credit for the three months ended
March 31, 2002 is largely due to a decrease in accounts receivable and a change
in our customer order policy for financed orders, which we instituted in the
third quarter of 2001. Under this new policy, customer orders are generally be
supported by a letter of credit, advance payment or payment upon installation,
which reduces our reliance on our line of credit.
Prior to 2001, a predecessor line of credit from Barclays Bank was
guaranteed by Konrad Goess-Saurau, to whom we issued options for 7,500 shares of
Diomed common stock (at an exercise price of $2.50 per share) as compensation
for this guarantee.
QLT, Inc.
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(R) Optical fibers product for $1.2
million ($25,000 in cash plus $1,175,000 in the form of two promissory notes,
payable within two years). The promissory notes were 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 (for principal amount of
$339,336), based on a conversion price of $2.50 per share. (The Company has the
right to pay the second QLT promissory note, in the principal amount of $835,664
and due November 8, 2002, representing the balance of the purchase price for the
acquisition, in cash or in shares of common stock.)
On February 11, 2002, QLT wrote to us and stated that it was accepting the
135,735 shares issued to it under protest as it disagreed with the per share
price we used in calculating the number of shares issued to it. It also
asserted that we failed, in connection with the issuance of those shares, to
confirm certain registration rights and deliver a legal opinion. We disputed
this position based on the express terms of the acquisition agreement between
us and QLT and the relevant facts. In its letter, QLT also claimed that Diomed
failed to deliver certain reports. We believed that we had substantially
complied with the report requirements that QLT referenced and were willing to
readily cure any deficiencies that may exist.
Since the time when QLT raised these concerns, we have been engaged in
discussions with QLT in order to amicably resolve the matter. On August 5, 2002,
we settled our potential dispute with QLT. In that connection, we re-valued the
conversion price of the promissory note converted in January 2002 to $1.50 per
share and issued an additional 90,489 shares of Convertible Preferred Stock to
QLT, and we also converted the second promissory note at a conversion price of
$1.50 per share and issued 605,570 shares of Convertible Preferred Stock to QLT.
See "Recent Developments."
Critical Accounting Policies
Our discussion and analysis of the Company's financial condition, results
of operations, and cash flows are based upon Diomed's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the U.S. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate these estimates,
including those related to bad debts, inventory valuation and obsolescence,
intangible assets, income taxes, warranty obligations, contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for
40
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Our critical accounting policies are as follows:
. revenue recognition;
. allowance for doubtful accounts;
. warranty obligation;
. excess and obsolete inventory; and
. valuation of long-lived and intangible assets.
Revenue Recognition. We derive our revenue from primarily two sources (i)
product revenue which includes lasers, instrumentation, and disposables, and
(ii) service revenue. The Company recognizes revenue on products and services
when the persuasive evidence of an arrangement is in place, the price is fixed
or determinable, collectibility is reasonably assured, and title and risk of
ownership has been transferred. Transfer of title and risk of ownership
generally occurs when the product is shipped to the customer or when the
customer receives the product, depending on the nature of the arrangement. The
Company currently provides for the estimated cost to repair or replace products
under warranty at the time of sale. Service revenue is recognized as the
services are performed.
Allowance for Doubtful Accounts. We assess the credit worthiness of our
customers prior to making a sale in order to mitigate the risk of loss from
customers not paying us. However, to account for the inevitability that a
customer may not pay us, we maintain an allowance for doubtful accounts. We
estimate losses based on the overall business climate, our accounts receivable
aging profile, and an analysis of the circumstances associated with specific
accounts which are past due.
Warranty Obligation. We engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of our
component suppliers. In addition to these proactive measures, we also provide
for the estimated cost of product warranties at the time revenue is recognized.
Excess and Obsolete Inventory. We maintain reserves for our estimated
obsolete inventory. The reserves are equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory reserves may be
required.
Valuation of Long-Lived and Intangible Assets. We assess the impairment of
identifiable intangibles and long-lived assets on an annual basis and whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. When we determine that the carrying value of intangibles and
long-lived assets may not be recoverable, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model. If cash generated in the future by the acquired asset is different from
current estimates, or if the appropriate discount rate were to change, then the
net present value of the asset would be impacted, and this could result in a
charge to earnings.
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. Accordingly, we will account for the
Diomed Merger using the purchase method.
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
41
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.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Prior to the Diomed Merger, Spicer, Jeffries & Co. acted as independent
public accountants to Natexco Corporation, and Arthur Andersen LLP acted as
independent public accountants for Diomed. After the Diomed Merger, Spicer,
Jeffries & Co. was not engaged by the Company to prepare audited financial
statements of the Company for 2001, since the business of the Company is
conducted at the Diomed level. Spicer, Jeffries & Co. was dismissed on March 29,
2002 by action of the Company's board of directors. In order to maintain
consistency, Arthur Andersen was designated by the Company's board of directors,
effective as of March 27, 2002, to audit our financial statements for the fiscal
year ended 2001. The reports of Spicer, Jeffries & Co. on Natexco's financial
statements for 2000 did not contain any adverse opinion or disclaimer of
opinion, but were prepared on the assumption that Natexco would continue as a
going concern. To the best of our knowledge, there were no disagreements between
prior management and Spicer, Jeffries & Co. on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures.
Acting through our Audit Committee, our board of directors determined to
change our independent accountants. Accordingly, we have dismissed Arthur
Andersen and appointed BDO Seidman LLP to serve as our independent public
accountants for the fiscal year ending December 31, 2002. Having completed its
standard client acceptance procedures with respect to its engagement by us, BDO
Seidman accepted its appointment.
During the fiscal years ended December 31, 2000 and 2001, and through the
date we appointed BDO Seidman, we did not consult BDO Seidman with respect to
the application of accounting principles to a specified transaction, either
contemplated or proposed, or the type of audit opinion that might be rendered on
our financial statements or any other matters of reportable events as set forth
in Item 304(a)(2) of Regulation S-B.
The report of Arthur Andersen on our financial statements for the fiscal
year ended December 31, 2001 did not contain any adverse opinion or disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope
or accounting principles. There were no disagreements between us and Arthur
Andersen on any matter of accounting principle or practice, financial statement
disclosure or auditing scope or procedure for the fiscal year ended December 31,
2001 which, if not resolved to Arthur Andersen's satisfaction, would have caused
them to make reference to the subject matter in connection with their report on
our financial statements for 2001, and there were no reportable events as
defined in Item 304(a)(1)(iv) of Regulation S-B for 2001 or during the
subsequent interim period through the date of Andersen's dismissal.
As required by Item 304T of Regulation S-B, we provided a copy of this
report to Arthur Andersen, but we received no response from Arthur Andersen
relating to this change of independent accountants. Arthur Andersen has informed
us that it has ceased providing such letters.
During the three month period ending March 31, 2002, and through the date
of this prospectus, there were no disagreements with Arthur Andersen on any
matter of accounting principle or practice, financial statement disclosure, or
auditing scope or procedure which, if not resolved to Arthur Andersen's
satisfaction, would have caused them to make reference to the subject matter in
connection with their report on our consolidated financial statements for such
years; and there were no reportable events as set forth in applicable SEC
regulations.
In June 2002, Arthur Andersen was found guilty of certain federal
obstruction of justice charges arising from the government's investigation of
Enron Corp., prosecuted in an action entitled "In the matter of United States of
America against Arthur Andersen LLP," in the United States District Court of the
Southern District of Texas. The outcome of this prosecution could adversely
affect us in that the ruling against Arthur Andersen could impair its ability to
satisfy any claims arising from the provision of auditing services to us and
also may impede our access to the capital markets after completion of this
offering.
Although we do not believe that the conviction of Arthur Andersen in the
Enron case will materially adversely affect us, should we seek to access the
public capital markets after we complete this offering, SEC rules will require
us to include or incorporate by reference in any prospectus two years of audited
financial statements. The SEC's current rules would require us to present
audited financial statements for one or more fiscal years audited by Arthur
Andersen and obtain their consent and representations until our audited
financial statements for the fiscal year ending December 31, 2003 become
available in the first quarter of 2004. If prior to that time the SEC ceases
accepting financial statements audited by Arthur Andersen or if Arthur Andersen
becomes unable to provide its consent or make the representations to us required
by the SEC, it is possible that our available audited financial statements for
the years ended December 31, 2000 and 2001 audited by Arthur Andersen might not
42
satisfy the SEC's requirements. While the SEC currently permits companies to
include audited financial statements prepared by Arthur Andersen without
including Arthur Andersen's consent if the company is unable to obtain such
consent despite making reasonable efforts, there can be no assurances that the
SEC will continue this policy. In that case, we would be unable to access the
public capital markets unless another independent accounting firm is able to
audit the financial statements originally audited by Arthur Andersen.
In connection with the filing of the registration statement of which this
prospectus is a part, we used reasonable efforts to obtain the current consent
of Arthur Andersen to the inclusion of our available audited financial
statements for the years ended December 31, 2001. We were informed by Arthur
Andersen that it was unable to provide such consent. As a result, we have filed
such financial statements in the manner provided for under current SEC
guidelines. Accordingly, you will not be able to sue Arthur Andersen pursuant to
Section 11(a)(4) of the Securities Act, and therefore your right of recovery
under that section may be limited as a result of the lack of consent.
See the risk factors relating to our business in the section of this
prospectus captioned "Risk Factors."
DESCRIPTION OF PROPERTY
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.
CERTAIN MARKET INFORMATION
Our Common Stock is traded on the American Stock Exchange under the symbol
"DIO". On August 2, 2002, our Common Stock closed at a price of $1.05 per share.
Market for Common Equity and Related Stockholder Matters
Since February 22, 2002, our Common Stock has been listed on the American
Stock Exchange under the symbol "DIO". Between November 2001 and February 22,
2002, our stock was quoted on the OTC Electronic Bulletin Board. Prior to being
quoted on the OTC Bulletin Board, 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 American Stock Exchange and
the Over-the-Counter 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
------ ----- -----
April 1, 2002 to August 2, 2002................................. $5.35 $1.04
February 22 to March 31, 2002................................... $8.85 $3.86
January 1 to February 21, 2002.................................. $9.00 $0.70
Fourth Quarter 2001............................................. $1.00 $0.77
On August 2, 2002, the closing price on the American Stock Exchange for the
Company's Common Stock was $1.05. As of August 2, 2002 there were approximately
100 holders of record of our Common Stock (a substantial number of which are
nominees for other persons).
From February 19, 2002 through August 2, 2002, the average daily trading
volume of our Common Stock was approximately 140,000 shares. During this period,
the highest volume of trading was 734,500 shares, which occurred on February 19,
2002, and the lowest volume of trading was 7,700 shares, which occurred on July
18, 2002. We are not aware of any particular reasons for the disparity of
trading volume, other than general market conditions.
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.
43
DESCRIPTION OF SECURITIES
References in the following description are to securities of Diomed
Holdings, unless otherwise stated or readily indicated by context.
Our authorized capital stock consists of 80,000,000 shares of Common Stock,
par value $.001 per share, and 20,000,000 shares of preferred stock, par value
$.001 per share, of which we have designated 18,000,000 shares as shares of
Convertible Preferred Stock. As of August 6, 2002, there were 14,200,000 shares
of Common Stock issued and outstanding, and 15,461,749 shares of Convertible
Preferred Stock issued and outstanding (which, subject to certain conditions,
will convert into 15,461,749 shares of Common Stock). As of August 6, 2002,
there were also outstanding options to purchase up to 1,947,458 shares of
Convertible Preferred Stock (convertible into 1,947,458 shares of Common Stock),
and outstanding Warrants to purchase up to 121,924 shares of Convertible
Preferred Stock (convertible into 121,924 shares of common stock).
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 Delaware 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. 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 prospectus is validly issued, fully paid and nonassessable.
Preferred Stock
The Company's board of directors is authorized, subject to any limitations
prescribed by Delaware 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 preferred stock outstanding as of the date of this
prospectus 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:
. restricting dividends on Common Stock;
. diluting the voting power of the Common Stock;
. impairing the liquidation rights of the Common Stock; or
. delaying or preventing a change in control without further action by
the stockholders.
The Company has designated 18,000,000 shares of its preferred stock as
Convertible Preferred Stock. The Convertible Preferred Stock is Convertible into
Common Stock at the rate of one share of Common Stock to one share of
Convertible Preferred Stock. The Convertible Preferred Stock has rights that are
identical to the rights of the Company's Common Stock, except as follows:
Conversion
. Each share of Convertible Preferred Stock converts into one share of
our Common Stock based upon the effectiveness of the registration
statement of which this prospectus is a part:
44
. at the end of the second full month after effectiveness, five
percent (5%) of the shares of each holder's Convertible Preferred
Stock will automatically convert into shares of our Common Stock;
. at the end of each month after the second full month after
effectiveness through the twenty-third full month after
effectiveness, an additional five percent (5%) of the shares of
each holder's Convertible Preferred Stock will automatically
convert into shares or our Common Stock; and
. in all events, at the earlier of February 14, 2004 and the end of
the twenty-fourth full month after effectiveness, the balance of
the Convertible Preferred Stock will automatically convert into
shares of our Common Stock.
. subsequent transferees of the Convertible Preferred stock shall
also be subject to the restrictions on conversion.
. The board of directors may change the conversion provisions of the
Convertible Preferred Stock under the following circumstances:
. prior to the end of February 2003, if we make a private or public
offering of our Common Stock or securities convertible into
Common Stock to raise capital or to make an acquisition, the
board of directors may postpone further conversion of Convertible
Preferred Stock for a period the board decides in good faith, up
to the end of February 2004;
. prior to the end of February 2004, if we combine with another
entity whose equity securities are registered under the Exchange
Act, the board of directors may replace the current conversion
provisions for the Convertible Preferred Stock with other
provisions, so long as the business combination is approved by
the board, the new provisions apply equally to all shares of
Convertible Preferred Stock and are not less favorable than the
current conversion provisions for the rate and amount of
conversion;
. after the third month following effectiveness of the registration
statement of which this prospectus is a part or the end of
February 2003, whichever comes later, the board of directors may
accelerate the rate of conversion or increase the amount of
shares of Convertible Preferred Stock being converted, so long as
the change applies equally to all shares of Convertible Preferred
Stock; and
. after the third month following effectiveness of the registration
statement of which this prospectus is a part or the end of
February 2003, whichever comes later, the board may establish
performance objectives as a condition to implementing changes
which accelerate the rate of conversion or increase the amount of
shares to be converted, so long as these changes apply equally to
all shares of Convertible Preferred Stock. The board has not as
yet established any such performance objectives.
The purpose for the conversion feature of the Convertible Preferred Stock
was to permit a staggered increase in the number of shares of common Stock that
are available for trading in order to minimize the market disruption that
otherwise may occur if a large block of shares were to become tradable at once.
Voting
. The holders of the Convertible Preferred Stock shall each be entitled
to vote the number of votes equal to the number of shares of the
Common Stock into which such shares are convertible. Any matter as to
which the holders of Common Stock are entitled to vote shall require
the affirmative vote of the holders of a majority of the issued and
outstanding shares of the Company's capital stock entitled to vote
thereon, including the Convertible Preferred Stock, voting as one
class. The affirmative vote of the holders of a majority of the issued
and outstanding shares of the Convertible Preferred Stock voting as a
separate class, shall be required to change the powers, preferences or
special rights of the shares of the Convertible Preferred Stock in
relation to the shares of the Common Stock.
Each share of Convertible Preferred Stock shares ratably in distributions,
either as dividends are paid or upon liquidations of the Company, with shares of
Common Stock.
Stock Options and Warrants
In connection with the Diomed Merger, the Company assumed the obligations
of Diomed with respect to Diomed's then-outstanding stock options and each of
the two plans under which Diomed had granted these options since 1998, the 1998
Employee Option Plan, referred to as the 1998 Plan, and the 2001 Employee Option
Plan, referred to as the 2001 Plan, as well as stock options Diomed had issued
prior to the adoption of its stock option plans. As a result of the Migratory
Merger, the Company assumed such obligations. Accordingly, the Company assumed
options representing a total of 1,789,370 shares of
45
Common Stock. Under the 1998 Plan, options representing 750,000 shares of Common
Stock were authorized, of which 283,908 options were outstanding as the
effective time of the Diomed Merger and 258,066 options were outstanding as of
June 7, 2002. Under the 2001 Plan, options representing 1,750,000 shares of
Common Stock were authorized, of which 1,015,783 options were outstanding as of
the effective time of the Diomed Merger and 1,052, 613 options were outstanding
as of June 7, 2002. An additional 489,279 options Diomed issued to officers,
other employees and consultants prior to the adoption of the 1998 Plan were
outstanding as of as of the effective time of the Diomed Merger and 486,779 of
these options were outstanding as of June 7, 2002. With respect to these
non-plan options, the Migratory 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.
As a result of the Migratory Merger, the Company assumed Diomed Holdings
Nevada's obligations under the Warrants. The Migratory Merger Agreement also
obligated the Company to perform Diomed's obligations to issue shares upon
exercise of outstanding Warrants. As a result of the Migratory Merger, as June
7, 2002 our Warrants representing a total of 121,924 shares of Convertible
Preferred Stock, convertible into 121,924 shares of Common Stock, were
outstanding.
In April 2002, we entered into an agreement with The Investor Relations
Group, Inc., referred to as "IRG," for investor relations and public relations
services. In connection therewith, we granted to IRG Options to purchase up to
150,000 shares of Convertible Preferred Stock at an exercise price of $5.35 per
share. These Options were not granted under the 2001 Plan, but are subject to
the terms and conditions of the 2001 Plan as if granted thereunder. IRG's
Options shall vest and become exercisable ratably at the end of each month
beginning May 2002, over 24 months (1/24 per month) from April 2002, when IRG
began providing services to us, so long as our agreement with IRG remains in
effect, and these Options shall expire on the earlier of 48 months from the date
of the IRG agreement or 24 months after the termination of the IRG agreement.
Any unvested Options shall terminate upon the termination of the IRG agreement.
Registration of Securities Issued in the Diomed Merger
As to the 5,000,000 shares of Common Stock which were issued by the Company
in the private placement sale which occurred immediately prior to the
effectiveness of the Diomed Merger, certain special provisions apply. First, the
Company agreed to file a registration statement covering these shares, which is
the registration statement of which this prospectus is a part. If said
registration statement is not declared effective by the SEC within 240 days of
the Diomed Merger (or, by October 11, 2002), or if the Company fails to maintain
the effectiveness of said registration statement until the first anniversary of
the Diomed Merger (or, February 14, 2003), then the Company is obligated to pay
a penalty equal to 1% (calculated on a fully-diluted basis) of the shares of
Common Stock issued in this private placement sale, for each month during which
the Company fails to obtain or maintain the effectiveness of the registration
statement. Second, if prior to the first anniversary of the Diomed Merger (or,
February 14, 2003) the Company offers to the public shares of Common Stock or
other securities convertible into Common Stock at a price of at least $2.50 per
share and resulting in aggregate proceeds of at least $20,000,000 to the
Company, the holders of the 5,000,000 shares of Common Stock purchased in the
February 14, 2002 private placement have agreed not to sell or otherwise
transfer their shares without the Company's prior written consent for a period
of up to two years after the date of the Diomed Merger (or, February 14, 2004).
46
In addition to the registration of shares of Common Stock for resale
hereunder, in connection with the Diomed Merger, the Company agreed to file, 45
days after the effectiveness of the registration statement, of which this
prospectus is a part, a second registration statement that will cover the
1,789,370 shares of its Common Stock issuable upon conversion of all shares of
Convertible Preferred Stock that are issuable upon the exercise of Diomed
options that the Company assumed as part of the Diomed Merger and the Migratory
Merger. For sales of such Common Stock not pursuant to this prospectus, 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.
After the closing of the Diomed Merger, 9,200,000 of the Company's
14,200,000 issued and outstanding shares of Common Stock became tradable. The
remaining 5,000,000 shares of Common Stock become tradable on the earlier of (i)
transferability under Rule 144 (which may restrict shares for a period up to two
years after the effective date of the Diomed Merger) and (ii) the effectiveness
of the registration statement of which this prospectus is a part, so long as the
lockup period expiring August 14, 2002 (under agreement with the American Stock
Exchange) has expired. Notwithstanding these restrictions, certain customary
exceptions to restrictions on transfer such as gifts, transfers in interest and
the like may apply.
Delaware Anti-Takeover Law
We and our stockholders are subject to Section 203 of the General
Corporation Law of the State of Delaware, an anti-takeover law. In general, the
law prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in the prescribed
manner. A "business combination" includes merger, asset sale and other
transaction resulting in a financing benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
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 Convertible
Preferred Stock, the Warrants and the options.
47
MANAGEMENT
Executive officers and directors
The following tables set forth certain information concerning our executive
officers and directors serving as of June 7, 2002. For information about
ownership of our Common Stock by the officers and directors named below, see
"Security Ownership of Certain Beneficial Owners and Management."
Name Age Positions and Offices with the Company
- --------------------- --- ------------------------------------------------
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
Kim Campbell......... 55 Director
Kevin Stearn......... 42 General Manager, Diomed Ltd
Lisa M. Bruneau...... 35 Vice President, Finance, Treasurer and Secretary
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). None of
the persons named above are related by blood, marriage or adoption to any of the
Company's other 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:
James Arkoosh, Chairman: Mr. Arkoosh is the former 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 Direct III Marketing, of Del Mar,
California, Metromedia Asia Corporation of New York, e-Sim Ltd., of Jerusalem,
Israel and Bar Equipment Corporation of 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.
Kim Campbell, Director: Ms. Campbell served as Canada's 19th (and first
female) Prime Minister in 1993. She was also Canada's Minister of Justice,
Attorney General, and Minister of National Defense. In 2000, she completed a
four-year term as Consul General of Canada, in which she fostered trade in the
high-tech and biotechnology industries. Currently, Ms. Campbell is a Visiting
Professor of Practice at the John F. Kennedy School of Government at Harvard
University. Ms. Campbell holds a range of prestigious positions, including
Senior Fellow of the Gorbachev Foundation of North America in Boston, and member
of the International Council of the Asia Society of New York. Her best selling
political memoir, Time and Chance, was published in 1996. Ms. Campbell holds a
BA from the University of British Columbia, awarded in 1983.
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.
48
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.
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 executive officers of the Company, in
addition to Mr. Klein and Mr. Arkoosh, and highly-compensated non-executive
officer employees.
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.
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. Mr. Fox resigned from the Company effective July 19,
2002.
Lisa M. Bruneau, Vice President, Finance, Secretary and Treasurer: Ms.
Bruneau has several years of experience in the fields of accounting and finance
in the biopharmaceutical industry. Ms. Bruneau holds a BS from Bridgewater State
College of Massachusetts awarded in 1989 and received her MBA from Suffolk
University of Boston, Massachusetts awarded in 2000. During the last five years,
prior to joining Diomed, she was director of finance at Acambis, Inc. (formerly
OraVax, Inc.), a biopharmaceutical company of Cambridge, Massachusetts.
Section 16(a) of the Securities Exchange Act requires the Company's
directors, executive officers and persons who own more than 10% of any class of
the Company's capital stock to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership and to provide
copies of such reports to the Company. Based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required to be filed during the fiscal year ended December 31,
2001, the Company believes that none of the filing requirements applicable to
its officers, directors and beneficial owners of greater than 10% of its Common
Stock were complied with during the most recent fiscal year (which was completed
prior to the Diomed Merger).
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
$100,000. We refer to these officers of Diomed as the "Named Executive
Officers."
49
EXECUTIVE COMPENSATION
Long-Term
Annual Compensation Compensation
------------------------------- ---------------------
Long-Term
Compensation Awards All Other
Fiscal Annual Compensation Securities Underlying Compensations(2)
Name and Principal Position Year Salary ($) Bonus ($) Options(1) (#) ($)
- --------------------------- -------- ------------------- --------- --------------------- ----------------
Peter Klein................ 12/31/01 $236,611 $51,540 221,263 $ 0
President and Chief 12/31/00 $205,000 $28,460 $ 0 $ 0
Executive Officer 12/31/99 $155,320 $ 0 118,737 $ 0
Gerald A. Mulhall.......... 12/31/01 $ 0 $ 0 $ 0 $ 0
President and Chief 12/31/00 $ 0 $ 0 $ 0 $ 0
Executive Officer 12/31/99 $ 0 $ 0 $ 0 $ 0
prior to the Diomed
Merger
Charles T. Hoepper(3)...... 12/31/01 $ 0 $110,000 $ 0
Chief Financial 12/31/00 $159,069 $ 0 $ 0 $ 0
Officer, Treasurer $ 22,356
and Secretary
Wade Fox(3)................ 12/31/01 $ 67,708 $ 0 110,000 $ 0
Vice President
Marketing and Sales
Lisa M. Bruneau(4)......... 12/31/01 $ 15,000 $ 0 25,000 $ 0
Controller
Kevin Stearn(3)............ 12/31/01 $ 99,209 $ 6,344 140,390 $14,631
General Manager 12/31/00 $ 84,198 $ 0 19,610 $ 0
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) Includes all other annual compensation and all other long-term
compensation. Prerequisites are not included if the aggregate amount is
less than the lesser of $50,000 or 10% of salary and bonus.
(3) Messrs. Hoepper and Stearn began employment in November 2000 and February
2000, respectively. Mr. Fox commenced his employment in June 2001. His
effective annual salary for fiscal year 2001 was $125,000. Mr. Hoepper
resigned from the Company effective May 15, 2002. Mr. Fox resigned from the
Company effective July 19, 2002.
(4) Ms. Bruneau commenced her employment in November 2001, as Controller. Her
effective annual salary for fiscal year 2001 was $90,000. As of March 22,
2002, Ms. Bruneau was appointed Vice President, Finance, Secretary and
Treasurer of the Company, with an effective annual salary of $110,000.
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 Diomed 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 period of between three and
eight months. The offer letters also provide for bonus eligibility.
50
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 Chairman of Diomed with
compensation at the rate of $50,000 per year paid to Verus Support Services,
Inc., known as VSSI, of which Mr. Arkoosh is the former chief operating officer
and chief financial officer, 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 Diomed 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. On March 4, 2002, Kim Campbell received
options to purchase 100,000 shares of the Company's Common Stock at an exercise
price of $2.00 per share. These options vest ratably over two years from the
date of grant.
Mr. Arkoosh has informed the Company of his intention to retire at the end
of this year, and has tendered his resignation as our chairman and a director,
effective December 31, 2002.
Directors who are also our employees serve as directors without
compensation, although we may award stock options or other compensation in our
discretion. Directors are also reimbursed for reasonable out-of-pocket expenses
incurred in attending directors' meetings.
Stock Option Plans
In February 2002, Diomed Holdings Nevada assumed the obligations of Diomed
under its 1998 Plan and its 2001 Plan. The Company did not have any stock option
plans prior to the Diomed Merger. As a result of the Migratory Merger, the
Company assumed Diomed Holdings Nevada's obligations under the plans.
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 Diomed 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 stock option grants to directors, and
eligible employees, including executive officers. Options generally become
exercisable based upon a vesting schedule over 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.
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).
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 June 7,
2002, options for 1,052,613 shares were outstanding under the 2001 Plan, and
options for 697,387 options remain available for
51
future grants. Options for up to 750,000 shares of Common Stock are authorized
for issuance under the 1998 Plan. As of June 7, 2002 , options for 258,066
shares were outstanding under the 1998 Plan, and options for 491,934 shares
remain available for future grants. No options were issued under the 1998 Plan
during fiscal year 2001, and we do not expect to grant additional options under
the 1998 Plan.
Numbers of options described above are expressed in terms of equivalent
shares of the Company's Common Stock. As a result of the Diomed Merger and the
Migratory Merger, each option to purchase one share of Diomed's common stock has
been converted into an option to purchase one share of the Company's Convertible
Preferred Stock. Each share of the Company's Convertible Preferred Stock
converts into one share of the Company's Common Stock.
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
Underlying To Employees Exercise Price
Name and Principal Position Options Granted(1) in Fiscal Year(2)(3) Per Share Expiration Date
- -------------------------------------- ------------------ -------------------- -------------- ----------------
Peter Klein........................... 121,263 23.5% $1.25 May 13, 2011
President and Chief Executive 100,000 $1.25 July 18, 2011
Officer
Charles T. Hoepper (4)................ 110,000 11.7% $1.25 November 8, 2010
Chief Financial Officer,
Treasurer and Secretary
Wade Fox (5).......................... 110,000 11.7% $1.25 June 17, 2011
Vice President, Marketing and Sales
Kevin Stearn.......................... 90,390 14.9% $1.25 May 13, 2011
General Manager, Diomed Ltd 50,000 July 28, 2011
Lisa M. Bruneau....................... 25,000 2.7% $2.25 October 29, 2011
Controller -------
606,653
- ----------
(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 Diomed Merger and
the Migratory Merger, each option to purchase one share of Diomed's common
stock has been converted into an option to purchase one share of the
Company's Convertible Preferred Stock.
(2) During fiscal year 2001, Diomed granted options to purchase an aggregate of
606,653 shares of its common stock to all Named Executive Officers as a
group (5 persons) and directors, and options to purchase 333,500 shares of
its common stock to all employees other than Named Executive Officers and
directors (for a total of 940,153 options to all employees). Diomed also
granted 60,000 options to purchase shares of its common stock to
non-employees during fiscal year 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.
(4) Mr. Hoepper resigned from the Company as of May 15, 2002. These options
terminated as of that date.
(5) Mr. Fox resigned from the Company as of July 19, 2002. These options will
terminate if not exercised within 90 days of that date.
The following table sets forth certain information regarding stock options
that the Named Executive Officers held as of December 31, 2001:
Number of Unexercised
Options at Value of "in the money"
December 31, 2001 Options at
Exercisable/ December 31, 2001
Name and Principal Position Unexercisable(1) Exercisable/Unexercisable(2)
- ------------------------------------------------------- --------------------- ----------------------------
Peter Klein............................................ 118,737/221,263 $237,474/$442,556
President and Chief Executive Officer
52
Charles Hoepper(3)..................................... 34,375/75,625 $ 68,750/$151,250
Chief Financial Officer, Treasurer and Secretary
Wade Fox (4)........................................... 0/110,000 $ 0/$220,000
Vice President, Marketing and Sales
Kevin Stearn........................................... 8,146/151,854 $ 6,292/$303,708
General Manager, Diomed Ltd
Lisa M. Bruneau........................................ 0/25,000 $ 0/$0
Controller
- ----------
(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 Diomed Merger and
the Migratory Merger, each option to purchase one share of Diomed's common
stock has been converted into an option to purchase one share of the
Company's Convertible Preferred Stock.
(2) Based on an estimated fair market value of $2.00 as of December 31, 2001.
(3) Mr. Hoepper resigned from the Company as of May 15, 2002. These options
terminated as of that date.
(4) Mr. Fox resigned from the Company as of July 19, 2002. These options will
terminate if not exercised within 90 days of that date.
No adjustments to the exercise price of any outstanding options were made
during the fiscal year ended December 31, 2001.
RELATED TRANSACTIONS
This section of this prospectus discusses transactions that occurred during
2000, 2001, and 2002 between Diomed, the Company and the following persons:
. Verus Investments Holdings, Inc., a beneficial holder of more than 5%
of the Company's Common Stock;
. Verus International Group Limited, a beneficial holder of more than 5%
of the Company's Common Stock and a subsidiary of Verus Investments
Holdings, Inc.;
. Verus Support Services, Inc., known as VSSI, an affiliate of each of
Verus Investments Holdings, Inc. and Verus International Group
Limited;
. 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 the Company;
. Winton Capital Holdings Ltd., a beneficial holder of more than 5% of
the Company's Common Stock. Mark Belzberg, the owner of Winton, is the
son of Sam Belzberg, one of our directors; and
. James Arkoosh is a director and Chairman of the Company and Diomed.
Mr. Arkoosh was an officer of Verus International Group Limited until
June 30, 2002.
The Company believes that each of these transactions were on terms at least
as favorable to it as those that could have been obtained from independent third
parties.
March 2000, Diomed issued and sold $500,000 principal amount of 9%
convertible subordinated notes to Verus Investments Holdings, Inc. The notes
were due 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 Holdings, Inc.,
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.
53
The investors were granted a one-year option to invest additional funds. The
investors also received approval rights over future equity financings.
In March and April 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 Holdings, Inc., Verus International Group
Limited, Winton Capital Holdings Ltd. and James Arkoosh; (ii) issued a put/call
option under which Winton Capital Holdings and Verus International Group Limited
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
Holdings, Inc. 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 Holdings, Inc., Gibralt Capital Corp. and James Arkoosh at $3.50 per
share into 1,789,484 shares of common stock at $1.00 per share and cancelled
1,022,562 warrants issued to those same investors in August 2000. Investors who
acquired approximately 81% 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.
In May 2001, pursuant to the put/call option issued in connection with the
March 2001 recapitalization, Diomed issued 112,500 shares of its Series A
Preferred Stock to Winton Capital Holdings and a total of 112,500 shares of its
Series A Preferred Stock to three assignees of Versus International Group.
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 Verus Investment Group Limited in exchange for
their providing bridge financing to Diomed. Diomed also issued 50,000 and 20,000
warrants (in the aggregate) to purchase shares of its common stock,
respectively, to these stockholders with an exercise price of $2.00 per share.
See Note 15 of the Notes to Consolidated Financial Statements for information
regarding the terms of these notes. We paid $7,500 in interest to each of these
noteholders when we repaid the notes. On January 1, 2002, 5,000 additional
warrants were issued to each of Winton Capital Holdings and Verus Investment
Group Limited in satisfaction of Diomed's obligation, pursuant to the terms of
the October bridge financing, to issue 10,000 additional warrants if Diomed did
not consummate a transaction in the nature of the Diomed Merger prior to
December 31, 2001. The warrants are fully exercisable for two years from the
date of issuance. The notes provided interest at 7.5% and a maturity date of
January 1, 2003. The notes also provided that at the election of the
noteholders, prior to maturity, the notes were 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. All principal and accrued interest
was repaid by Diomed, with proceeds from the private placement sale of Diomed
common stock which occurred immediately prior to the Diomed Merger on February
14, 2002. Diomed issued 5,000,000 shares of its common stock in the private
placement, at a price of $2.00 per share, and received aggregate gross proceeds
of $10,000,000 from the private placement. Of the 5,000,000 shares of common
stock sold in this private placement, Winton Capital Holdings purchased
1,200,000 shares, at a price of $2.00 per share, for an aggregate purchase price
of $2,400,000.
VSSI has entered into two advisory agreements with Diomed. The first
agreement provides that as an advisor to the Diomed Merger, a fixed advisory fee
of $750,000 was payable to VSSI upon the closing of the Diomed Merger, which was
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 have been
payable on an arm's length basis to an unrelated advisor. The agreement provides
that 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 Diomed Merger was not raised. The
Company did not so request and paid the full amount of the fee in cash.
The second agreement was initially between VSSI and Diomed, and the Company
assumed this separate agreement as part of the Diomed Merger. Under the
agreement, the Company engages VSSI for 18 months, (commencing the first day of
the month succeeding the Diomed Merger, or March 1, 2002) 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. Under this agreement, 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
54
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. The
Company has agreed to indemnify VSSI for claims arising out of VSSI's engagement
under this agreement, except for claims arising from VSSI's bad faith or gross
negligence.
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table lists beneficial ownership of the Company's common
stock for the persons or groups specified therein, which 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 June 7,
2002 (stock options scheduled to vest on June 30, 2002 are included in this
table).
Amount and Nature Approximate
of Beneficial Percent of
Title of Class Name and Address of Beneficial Owner Owner(1) Class(6)
- --------------- ---------------------------------------- ----------------- -----------
Common Stock... Ajmal Khan 4,417,826(2) 14.8%
c/o Verus International Group Limited PO
Box 309 G.T.
South Church Street
Cayman Islands
Common Stock... Winton Capital Holdings Ltd 2,785,000(3) 9.3%
1177 West Hastings, Suite 2000
Vancouver, British Columbia
Common Stock... Sam Belzberg 1,031,249 3.4%
c/o Gibralt Capital Corp
1177 West Hastings, Suite 2000
Vancouver, British Columbia
Common Stock... James Arkoosh(5) 156,750 0.5%
240 East 39th Street
New York, NY 10016
Common Stock... Peter Norris 82,766(7) 0.3%
136-142 Bramley Road
London W10 6SR
United Kingdom
Common Stock... Peter Klein 151,579 0.5%
c/o Diomed
One Dundee Park
55
Andover, MA 01810
Common Stock... Geoffrey Jenkins 25,000 0.1%
UV Solutions
15 Glenbrook Road
Wellesley Hills, MA 02481
Common Stock... A. Kim Campbell 12,500 0%
c/o Harvard University
JFK School of Government
79 John F. Kennedy St.
Cambridge, MA 02138
Common Stock... Wade Fox (8) 27,500 0.01%
c/o Diomed
One Dundee Park
Andover, MA 01810
Amount and Nature Approximate
of Beneficial Percent of
Title of Class Name and Address of Beneficial Owner Owner(1) Class(5)
- --------------- ---------------------------------------- ----------------- -----------
Common Stock... Kevin Stearn 34,251 0.1%
c/o Diomed Ltd.
Cambridge Research Park
Ely Road
Cambridge CB5 9TE
United Kingdom
Common Stock... All officers and directors as a group (8 1,521,605 5.1%
persons)
- ----------
(1) Stated in terms of equivalent shares of the Company's Common Stock.
(2) Includes total of 40,000 warrants issued to Verus International Group
Limited in connection with Diomed's October 2001 and December 2001 bridge
loan financings.
(3) Includes total of 40,000 warrants issued to Winton Capital Holdings Ltd. in
connection with Diomed's October 2001 and December 2001 bridge loan
financings.
(4) Includes 999,999 shares of Convertible Preferred Stock owned by Gibralt
Capital Corp., beneficially owned by Sam Belzberg, and 31,250 shares of
stock options.
(5) Until June 30, 2002 Mr. Arkoosh was 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. Mr. Arkoosh ceased to be an
employee of Verus as of August 2, 2002. Mr. Arkoosh has informed the
Company of his intention to retire at the end of this year, and has
tendered his resignation as our chairman and a director, effective December
31, 2002.
(6) Based on 29,883,026 shares of Common Stock of the Company being issued and
outstanding (assuming the conversion of all outstanding shares of
Convertible Preferred Stock but not assuming the exercise of any
outstanding stock options or Warrants).
(7) Includes 16,402 shares of Convertible Preferred Stock owned by Mr. Norris'
spouse.
(8) Mr. Fox resigned from the Company effective as of July 19, 2002. His
options will terminate if not exercised within 90 days of that date.
56
SELLING SECURITY HOLDERS
Of the 20,919,470 shares of Common Stock being registered for resale by the
selling stockholders, 5,000,000 have been issued in connection with a private
placement in February 2002 in connection with the Diomed Merger. In addition, up
to 15,461,749 shares of Common Stock may be issued upon the conversion of shares
of Convertible Preferred Stock and 121,924 shares may be issued upon the
conversion of Convertible Preferred Stock that are issuable upon the exercise of
the Warrants. The Convertible Preferred Stock and the Warrants were issued to
the former holders of Diomed in connection with the Diomed Merger. In addition,
up to 335,797 shares of common Stock may be issued upon conversion of shares of
Convertible Preferred Stock issuable upon exercise of the Options.
Except as noted on the following tables, the selling stockholders are not
affiliates of us and have not had any position, office or other material
relationship with us within the past three years, except as stockholders. All of
the shares of Common Stock that have been or may be acquired by the selling
stockholders upon the issuance of stock, upon the conversion of convertible
debentures or upon the exercise of the Warrants or the Options are being
registered and offered pursuant to the registration statement of which this
prospectus forms a part.
57
Nunber of Shares of
Common Stock Number of Number of Number of
Beneficially Shares of Shares of Shares of
Owned before Common Stock Common Stock Common Stock
Offering-- Offered: Offered: Offered:
(As of August 6, 2002) issued in Common Stock Common Stock
(Excludes Common Stock February 14, 2002 underlying underlying
Name of Selling Stockholder Equivalents) Private Placement Options Warrants
- ----------------------------------------------- ---------------------- ----------------- ------------ ------------
Winton Capital Holdings(1)..................... 1,200,000/1,200,000 1,200,000 40,000
Verus Investments Holdings Inc.(1)(2).......... 40,591
Verus International Group Limited(1)(2)........ 40,000
Rathbone Jersey Limited re PT635...............
Gibralt Capital Corporation(3).................
Green Cresent Corporation......................
Sofaer Funds/SCI Global Hedge Fund.............
Sofaer Funds/SCI Asian Hedge Fund..............
CMWL Trust.....................................
Semamor Enterprises............................ 500,000/500,000 500,000
QLT, Inc.(4)...................................
David Muller................................... 80,586
Instrumentarium Corporation....................
Steve Shraiberg................................ 300,000/300,000 300,000
Marousa L. Dumaresq............................
The Equitable Life Assurance Society...........
Matthew Bronfman Recipient Pour Off Trust...... 250,000/250,000 250,000
Panamerica Capital Group, Inc.................. 250,000/250,000 250,000
Private Investment Company Ltd................. 250,000/250,000 250,000
Sarah Investments Ltd.......................... 250,000/250,000 250,000
Jack L. Rivkin................................. 100,000/100,000 100,000
South Yorkshire Pension Authority..............
Virtual Winds Capital Inc......................
The Investor Relations Group, Inc.(8).......... 150,000
Charles Diamond................................ 150,000/150,000 150,000
Citifriends Nominee Limited--A/C UTIS..........
Cirpa Inc...................................... 132,500/132,500 132,500
Hyde Park International Holdings Ltd........... 125,000/125,000 125,000
Seneca Ventures................................ 125,000/125,000 125,000
Woodland Ventures Fund......................... 125,000/125,000 125,000
The Generics Group AG..........................
N W Brown Nominees Limited.....................
James Arkoosh(5)...............................
3854973 Canada Inc............................. 100,000/100,000 100,000
Bruce Fogel.................................... 100,000/100,000 100,000
Neil Durazzo...................................
Transatlantic Capital General Partner
C Limited...................................
Percent of
Common Stock
Beneficially
Owned after
Offering
Number of Shares (Approximate)
of Common Stock Assumes
Offered: conversion,
Common Stock issuance
underlying Number of and/or exercise
Preferred Stock Common Stock of all
Issued and Owned after Common Stock
Name of Selling Stockholder Outstanding Offering Equivalents)
--------------------------- ---------------- ------------- ---------------
Winton Capital Holdings(1)..................... 1,545,000.0 2,785,000 9.2%
Verus Investments Holdings Inc.(1)(2).......... 2,337,234.5 2,377,826 7.9%
Verus International Group Limited(1)(2)........ 2,000,000.0 2,040,000 6.8%
Rathbone Jersey Limited re PT635............... 1,035,000.0 1,035,000 3.4%
Gibralt Capital Corporation(3)................. 999,999.0 999,999 3.3%
QLT, Inc.(4)................................... 831,794.0 831,794 2.8%
Green Cresent Corporation...................... 637,000.0 637,000 2.1%
Sofaer Funds/SCI Global Hedge Fund............. 483,046.0 483,046 1.6%
Sofaer Funds/SCI Asian Hedge Fund.............. 483,047.0 483,047 1.6%
CMWL Trust..................................... 500,000.0 500,000 1.7%
Semamor Enterprises............................ 500,000 1.7%
David Muller................................... 446,210.0 526,796 1.7%
Instrumentarium Corporation.................... 429,333.0 429,333 1.4%
Steve Shraiberg................................ 300,000 1.0%
Marousa L. Dumaresq............................ 270,018.0 270,018 0.9%
The Equitable Life Assurance Society........... 263,641.0 263,641 0.9%
Matthew Bronfman Recipient Pour Off Trust...... 250,000 0.8%
Panamerica Capital Group, Inc.................. 250,000 0.8%
Private Investment Company Ltd................. 250,000 0.8%
Sarah Investments Ltd.......................... 250,000 0.8%
Jack L. Rivkin................................. 130,000.0 230,000 0.8%
South Yorkshire Pension Authority.............. 168,872.0 168,872 0.6%
Virtual Winds Capital Inc...................... 165,000.0 165,000 0.6%
The Investor Relations Group, Inc.(8).......... 150,000 0.5%
Charles Diamond................................ 150,000 0.5%
Citifriends Nominee Limited--A/C UTIS.......... 140,000.0 140,000 0.5%
Cirpa Inc...................................... 132,500 0.4%
Hyde Park International Holdings Ltd........... 125,000 0.4%
Seneca Ventures................................ 125,000 0.4%
Woodland Ventures Fund......................... 125,000 0.4%
The Generics Group AG.......................... 107,663.0 107,663 0.4%
N W Brown Nominees Limited..................... 119,478.0 119,478 0.4%
James Arkoosh(5)............................... 100,500.0 100,500 0.3%
3854973 Canada Inc............................. 100,000 0.3%
Bruce Fogel.................................... 100,000 0.3%
Neil Durazzo................................... 100,000.0 100,000 0.3%
Transatlantic Capital General Partner
C Limited................................... 95,815.0 95,815 0.3%
58
Nunber of Shares of
Common Stock Number of
Beneficially Shares of Number of Number of
Owned before Common Stock Shares of Shares of
Offering-- Offerred: Common Stock Common Stock
Direct/Indirect Common Stock Offered: Offered:
(As of August 6, 2002) issued in Common Stock Common Stock
(Excludes Common February 14, 2002 underlying underlying
Name of Selling Stockholder Stock Equivalents) Private Placement Options Warrants
- -------------------------------------------- ---------------------- ----------------- ------------ ------------
Chase Nominees Limited......................
SITRA.......................................
The Bank of New York Nominees Limited....... 18,991
State Street Nominees Limited A/C XCG9......
Antonio Garcia.............................. 75,000/75,000 75,000
Joseph Yanow................................ 74,000/74,000 74,000
James Remington Hobbs(6)....................
Jonathan Cohen..............................
Melvin Fogel................................ 62,500/62,500 62,500
Dr & Mrs David Burns (Raven trust)..........
Elio Cerundolo.............................. 56,000/56,000 56,000
MSS Nominees Ltd--a/c 831183................
HSBC Global Custody Nominee (UK) Ltd A/C
813259...................................
1212855 Ontario Ltd......................... 50,000/50,000 50,000
Alan Dershowitz............................. 50,000/50,000 50,000
Alex Vahabzadeh Money Purchase Plan......... 50,000/50,000 50,000
Bridge Finance Ltd.......................... 50,000/50,000 50,000
Green Mountain Trading, Ltd................. 50,000/50,000 50,000
John Galt Private, L.P...................... 50,000/50,000 50,000
Majedie Investments plc.....................
Philip Winder...............................
Steve Leisher............................... 50,000/50,000 50,000
Orva Harwood................................ 40,000/40,000 40,000
T & C Nominees Limited......................
Jeffrey Evans............................... 12,500/12,500 12,500
Julian Rogers--Coltman...................... 12,500/12,500 12,500
Lord Anthony St. John....................... 37,500/37,500 37,500
Falspar Holdings Limited....................
Sofaer Funds/SCI Global Hedge Fund..........
Renee Schatz Revocable Trust................ 35,000/35,000 35,000
T&J Reilly Revocable Trust.................. 35,000/35,000 35,000
Walter Eeds................................. 35,000/35,000 35,000
Brian Kingham............................... 7,100
Rodney Knight...............................
Mr Robert N Bee and/or Mrs Dolores M Bee....
Makinen Properties Limited..................
Sharon Lee..................................
Number of Shares Percent of
of Common Stock Common Stock
Offered: Beneficially
Common Stock Owned after
underlying Number of Offering
Convertible Shares of (Approximate)
Preferred Stock Common Stock (Excludes
Issued and Owned after Common Stock
Name of Selling Stockholder Outstanding Offering Equivalents)
- -------------------------------------------- ---------------- ------------ -------------
Chase Nominees Limited...................... 95,632.0 95,632 0.3%
SITRA....................................... 83,333.0 83,333 0.3%
The Bank of New York Nominees Limited....... 63,991.0 82,982 0.3%
State Street Nominees Limited A/C XCG9...... 80,267.0 80,267 0.3%
Antonio Garcia.............................. 75,000 0.3%
Joseph Yanow................................ 74,000 0.2%
James Remington Hobbs(6).................... 72,204.0 72,204 0.2%
Jonathan Cohen.............................. 70,000.0 70,000 0.2%
Melvin Fogel................................ 62,500 0.2%
Dr & Mrs David Burns (Raven trust).......... 56,749.0 56,749 0.2%
Elio Cerundolo.............................. 56,000 0.2%
MSS Nominees Ltd--a/c 831183................ 54,524.0 54,524 0.2%
HSBC Global Custody Nominee (UK) Ltd A/C
813259................................... 52,769.0 52,769 0.2%
1212855 Ontario Ltd......................... 50,000 0.2%
Alan Dershowitz............................. 50,000 0.2%
Alex Vahabzadeh Money Purchase Plan......... 50,000 0.2%
Bridge Finance Ltd.......................... 50,000 0.2%
Green Mountain Trading, Ltd................. 50,000 0.2%
John Galt Private, L.P...................... 50,000 0.2%
Majedie Investments plc..................... 50,000.0 50,000 0.2%
Philip Winder............................... 50,000.0 50,000 0.2%
Steve Leisher............................... 50,000 0.2%
Orva Harwood................................ 40,000 0.1%
T & C Nominees Limited...................... 39,620.0 39,620 0.1%
Jeffrey Evans............................... 25,000.0 37,500 0.1%
Julian Rogers--Coltman...................... 25,000.0 37,500 0.1%
Lord Anthony St. John....................... 37,500 0.1%
Falspar Holdings Limited.................... 36,363.0 36,363 0.1%
Sofaer Funds/SCI Global Hedge Fund.......... 35,901.0 35,901 0.1%
Renee Schatz Revocable Trust................ 35,000 0.1%
T&J Reilly Revocable Trust.................. 35,000 0.1%
Walter Eeds................................. 35,000 0.1%
Brian Kingham............................... 26,000.0 33,100 0.1%
Rodney Knight............................... 30,593.0 30,593 0.1%
Mr Robert N Bee and/or Mrs Dolores M Bee.... 29,000.0 29,000 0.1%
Makinen Properties Limited.................. 28,721.0 28,721 0.1%
Sharon Lee.................................. 25,131.0 25,131 0.1%
59
Number of Shares of
Common Stock Number of
Beneficially Shares of Number of Number of
Owned before Common Stock Shares of Shares of
Offering-- Offerred: Common Stock Common Stock
Direct/Indirect Common Stock Offered: Offered:
(As of August 6, 2002) issued in Common Stock Common Stock
(Excludes Common February 14, 2002 underlying underlying
Name of Selling Stockholder Stock Equivalents) Private Placement Options Warrants
- --------------------------------------- ---------------------- ----------------- ------------- ------------
D L G Rowlands......................... 25,000.5
Aslan Ltd.............................. 25,000/25,000 25,000
Charles Savill.........................
Chris Ohlsen...........................
Edward Baxter..........................
Elon Dershowitz........................ 25,000/25,000 25,000
Hugh Moreshead.........................
Jim Fitzgerald......................... 25,000/25,000 25,000
Mark & Amanda Sater....................
Michael May............................
Nick Burge.............................
Nick Robinson..........................
Ray Grimm.............................. 25,000/25,000 25,000
Richard Gray...........................
Ross Jones.............................
Rupert Scott...........................
Thomas Brassil......................... 25,000/25,000 25,000
W.T. Leahy III......................... 25,000/25,000 25,000
Xavier De. La Rochefoncould............
Ilkka Mannonen.........................
John Marshall.......................... 20,571
George M. Lieberman....................
Mr J E Everett......................... 20,000
Topworld Investment Limited............
Mrs T. Norris(7).......................
Paul Banner............................
Richard Bourne......................... 1,862
David John Shaw........................ 2,600
Gerry Nichele.......................... 12,500/12,500 12,500
Nicholas Burge......................... 12,500/12,500 12,500
Patricia Kelly-White................... 12,500/12,500 12,500
Richard Katz...........................
Mr R D A Kelly.........................
Rock (Nominees) Limited--A/C 0222557...
RBSTB Nominees Ltd : A/C 1781..........
A Andrew M Fraser......................
Caryn Bailey...........................
Ernest Holloway........................ 10,000/10,000 10,000
Number of Shares Percent of
of Common Stock Common Stock
Offered: Beneficially
Common Stock Owned after
underlying Number of Offering
Convertible Shares of (Approximate)
Preferred Stock Common Stock (Excludes
Issued and Owned after Common Stock
Name of Selling Stockholder Outstanding Offering Equivalents)
- --------------------------------------- ---------------- ------------ -------------
D L G Rowlands......................... 25,001 0.1%
Aslan Ltd.............................. 25,000 0.1%
Charles Savill......................... 25,000.0 25,000 0.1%
Chris Ohlsen........................... 25,000.0 25,000 0.1%
Edward Baxter.......................... 25,000.0 25,000 0.1%
Elon Dershowitz........................ 25,000 0.1%
Hugh Moreshead......................... 25,000.0 25,000 0.1%
Jim Fitzgerald......................... 25,000 0.1%
Mark & Amanda Sater.................... 25,000.0 25,000 0.1%
Michael May............................ 25,000.0 25,000 0.1%
Nick Burge............................. 25,000.0 25,000 0.1%
Nick Robinson.......................... 25,000.0 25,000 0.1%
Ray Grimm.............................. 25,000 0.1%
Richard Gray........................... 25,000.0 25,000 0.1%
Ross Jones............................. 25,000.0 25,000 0.1%
Rupert Scott........................... 25,000.0 25,000 0.1%
Thomas Brassil......................... 25,000 0.1%
W.T. Leahy III......................... 25,000 0.1%
Xavier De. La Rochefoncould............ 25,000.0 25,000 0.1%
Ilkka Mannonen......................... 24,000.0 24,000 0.1%
John Marshall.......................... 2,739.0 23,310 0.1%
George M. Lieberman.................... 20,500.0 20,500 0.1%
Mr J E Everett......................... 20,000 0.1%
Topworld Investment Limited............ 17,951.0 17,951 0.1%
Mrs T. Norris(7)....................... 16,402.0 16,402 0.1%
Paul Banner............................ 14,360.0 14,360 0.0%
Richard Bourne......................... 11,000.0 12,862 0.0%
David John Shaw........................ 10,160.0 12,760 0.0%
Gerry Nichele.......................... 12,500 0.0%
Nicholas Burge......................... 12,500 0.0%
Patricia Kelly-White................... 12,500 0.0%
Richard Katz........................... 12,000.0 12,000 0.0%
Mr R D A Kelly......................... 11,224.0 11,224 0.0%
Rock (Nominees) Limited--A/C 0222557... 10,980.0 10,980 0.0%
RBSTB Nominees Ltd : A/C 1781.......... 10,750.0 10,750 0.0%
A Andrew M Fraser...................... 10,132.0 10,132 0.0%
Caryn Bailey........................... 10,000.0 10,000 0.0%
Ernest Holloway........................ 10,000 0.0%
60
Number of Shares of
Common Stock Number of
Beneficially Shares of Number of Number of
Owned before Common Stock Shares of Shares of
Offering-- Offerred: Common Stock Common Stock
Direct/Indirect Common Stock Offerred: Offerred:
(As of August 6, 2002) issued in Common Stock Common Stock
(Excludes Common February 14, 2002 underlying underlying
Name of Selling Stockholder Stock Equivalents) Private Placement Options Warrants
- -------------------------------------------- ------------------- ----------------- ------------ ------------
Lorne Neff.................................. 10,000/10,000 10,000
J Beatson-Hird.............................. 4,100
Michael Bourne..............................
Anthony Hamilton, Esq.......................
Alexander Neil Foster.......................
Clifford Sydney Bassett.....................
William Henry Salomon.......................
St John's College, Cambridge................
D L G Rowlands Trust........................
Katie Louise Victoria Bourne................
Douglas Fernie.............................. 8,000
K Goess-Saurau.............................. 7,500
Malzam Investments.......................... 1,749
Mrs Katherine Mary Watts....................
Adrian Grundy............................... 514
Dr & Mrs David Burns........................
Pearl Finance Limited.......................
Peter Ting Chang Lee........................
Charles Michael Orsborn.....................
William Oliver Lane Fox-Pitt................
Gerlach & Co.IRS # 13-6021155...............
Bond of Northolt Ltd........................
Professor Licinio Angelini..................
Richard Kahn................................
Paul Lancelot Banner........................
Malcolm Hacking.............................
Mr Douglas Nation...........................
Julia Investments...........................
James Gerrard Potter........................
Maureen Chalker & T.M. Trustees Limited.....
Mrs V J Cannon..............................
William Stoops..............................
John Robert Sylvester Skinner...............
G R Ian Lowis...............................
David Vivian................................ 1,143
Julian Maughan.............................. 1,143
Bruce Johnson...............................
Mrs Tracy Andrea Howell.....................
Number of Shares Percent of
of Common Stock Common Stock
Offerred: Beneficially
Common Stock Owned after
underlying Number of Offering
Convertible Shares of (Approximate)
Preferred Stock Common Stock (Excludes
Issued and Owned after Common Stock
Name of Selling Stockholder Outstanding Offering Equivalents)
- -------------------------------------------- ---------------- ------------ -------------
Lorne Neff.................................. 10,000 0.0%
J Beatson-Hird.............................. 5,600.0 9,700 0.0%
Michael Bourne.............................. 9,677.5 9,678 0.0%
Anthony Hamilton, Esq....................... 9,500.0 9,500 0.0%
Alexander Neil Foster....................... 9,050.0 9,050 0.0%
Clifford Sydney Bassett..................... 9,050.0 9,050 0.0%
William Henry Salomon....................... 9,000.0 9,000 0.0%
St John's College, Cambridge................ 8,527.0 8,527 0.0%
D L G Rowlands Trust........................ 8,304.0 8,304 0.0%
Katie Louise Victoria Bourne................ 8,152.5 8,153 0.0%
Douglas Fernie.............................. 8,000 0.0%
K Goess-Saurau.............................. 7,500 0.0%
Malzam Investments.......................... 6,050.0 7,799 0.0%
Mrs Katherine Mary Watts.................... 7,500.0 7,500 0.0%
Adrian Grundy............................... 7,465.0 7,979 0.0%
Dr & Mrs David Burns........................ 7,396.0 7,396 0.0%
Pearl Finance Limited....................... 7,180.0 7,180 0.0%
Peter Ting Chang Lee........................ 7,180.0 7,180 0.0%
Charles Michael Orsborn..................... 7,000.0 7,000 0.0%
William Oliver Lane Fox-Pitt................ 7,000.0 7,000 0.0%
Gerlach & Co.IRS # 13-6021155............... 6,675.0 6,675 0.0%
Bond of Northolt Ltd........................ 6,600.0 6,600 0.0%
Professor Licinio Angelini.................. 6,512.0 6,512 0.0%
Richard Kahn................................ 6,500.0 6,500 0.0%
Paul Lancelot Banner........................ 6,300.0 6,300 0.0%
Malcolm Hacking............................. 6,000.0 6,000 0.0%
Mr Douglas Nation........................... 6,000.0 6,000 0.0%
Julia Investments........................... 5,995.0 5,995 0.0%
James Gerrard Potter........................ 5,600.0 5,600 0.0%
Maureen Chalker & T.M. Trustees Limited..... 5,600.0 5,600 0.0%
Mrs V J Cannon.............................. 5,600.0 5,600 0.0%
William Stoops.............................. 5,600.0 5,600 0.0%
John Robert Sylvester Skinner............... 5,516.0 5,516 0.0%
G R Ian Lowis............................... 5,500.0 5,500 0.0%
David Vivian................................ 5,478.0 6,621 0.0%
Julian Maughan.............................. 5,478.0 6,621 0.0%
Bruce Johnson............................... 5,400.0 5,400 0.0%
Mrs Tracy Andrea Howell..................... 5,400.0 5,400 0.0%
61
Number of Shares of
Common Stock Number of
Beneficially Shares of Number of Number of
Owned before Common Stock Shares of Shares of
Offering-- Offerred: Common Stock Common Stock
Direct/Indirect Common Stock Offerred: Offerred:
(As of August 6, 2002) issued in Common Stock Common Stock
(Excludes Common February 14, 2002 underlying underlying
Name of Selling Stockholder Stock Equivalents) Private Placement Options Warrants
- ---------------------------------------------- -------------------- ----------------- ------------ ------------
Lemasco Nominees Limited A/C F112.............
Smith & Williamson Nominees Limited...........
Cheryl More................................... 5,000/5,000 5,000
Dr Robert Alfred John Challiss................
Joan Woodrow.................................. 5,000/5,000 5,000
Mr Timothy Francis Fetherstonhaugh Nixon...... 1,133
Mrs Lucy Elizabeth Muriel Nixon............... 1,133
Ian Sloan Marshall Robertson, Esq.............
Banque Syz & Co S.A...........................
Jack Manning..................................
Shemin Scaranie...............................
Angel Cendan..................................
The M G Tattersall Trust......................
Charles Frederick Melville Rawlinson..........
Damon De Laszlo...............................
Marjorie Davies...............................
Mrs Jill Rosalind Rawlinson...................
Mrs Ruth C Forestier-Walker & Richard E T
Curney.....................................
Patrick Frank Barbour.........................
Eric Leyns, Esq............................... 916
Mr Roderick Connors & Mrs Maureen Connors.....
Alastair Roderick Donald MacLeod..............
Nigel Playford................................
Mr David Edgar Harwood Wagstsaff..............
Richard E W Minors, Esq.......................
Mr John Nugent................................
Geoffrey Miller and Mrs Pauline Miller........
David James Cremin, Esq.......................
Thomas Duncan Stewart Horsey..................
Reads Trustees Limited A/C 6006 Hugo's Fund...
Julian Charles Knight.........................
Emily Anne Jenny Bourne.......................
Thomas James Bourne...........................
Robin James Upton, Esq........................
Charles Graham-Wood, Esq......................
Bryan M Elliott...............................
P N J May.....................................
Number of Shares Percent of
of Common Stock Common Stock
Offerred: Beneficially
Common Stock Owned after
underlying Number of Offering
Convertible Shares of (Approximate)
Preferred Stock Common Stock (Excludes
Issued and Owned after Common Stock
Name of Selling Stockholder Outstanding Offering Equivalents)
- ---------------------------------------------- ---------------- ------------ -------------
Lemasco Nominees Limited A/C F112............. 5,040.0 5,040 0.0%
Smith & Williamson Nominees Limited........... 5,040.0 5,040 0.0%
Cheryl More................................... 5,000 0.0%
Dr Robert Alfred John Challiss................ 5,000.0 5,000 0.0%
Joan Woodrow.................................. 5,000 0.0%
Mr Timothy Francis Fetherstonhaugh Nixon...... 3,819.0 4,952 0.0%
Mrs Lucy Elizabeth Muriel Nixon............... 3,819.0 4,952 0.0%
Ian Sloan Marshall Robertson, Esq............. 4,806.0 4,806 0.0%
Banque Syz & Co S.A........................... 4,400.0 4,400 0.0%
Jack Manning.................................. 4,154.0 4,154 0.0%
Shemin Scaranie............................... 4,152.0 4,152 0.0%
Angel Cendan.................................. 4,012.0 4,012 0.0%
The M G Tattersall Trust...................... 4,005.0 4,005 0.0%
Charles Frederick Melville Rawlinson.......... 4,000.0 4,000 0.0%
Damon De Laszlo............................... 4,000.0 4,000 0.0%
Marjorie Davies............................... 4,000.0 4,000 0.0%
Mrs Jill Rosalind Rawlinson................... 4,000.0 4,000 0.0%
Mrs Ruth C Forestier-Walker & Richard E T
Curney..................................... 4,000.0 4,000 0.0%
Patrick Frank Barbour......................... 3,941.0 3,941 0.0%
Eric Leyns, Esq............................... 3,000.0 3,916 0.0%
Mr Roderick Connors & Mrs Maureen Connors..... 3,800.0 3,800 0.0%
Alastair Roderick Donald MacLeod.............. 3,760.0 3,760 0.0%
Nigel Playford................................ 3,733.0 3,733 0.0%
Mr David Edgar Harwood Wagstsaff.............. 3,644.0 3,644 0.0%
Richard E W Minors, Esq....................... 3,607.0 3,607 0.0%
Mr John Nugent................................ 3,500.0 3,500 0.0%
Geoffrey Miller and Mrs Pauline Miller........ 3,411.0 3,411 0.0%
David James Cremin, Esq....................... 3,300.0 3,300 0.0%
Thomas Duncan Stewart Horsey.................. 3,200.0 3,200 0.0%
Reads Trustees Limited A/C 6006 Hugo's Fund... 3,080.0 3,080 0.0%
Julian Charles Knight......................... 3,000.0 3,000 0.0%
Emily Anne Jenny Bourne....................... 2,905.5 2,906 0.0%
Thomas James Bourne........................... 2,905.5 2,906 0.0%
Robin James Upton, Esq........................ 2,865.0 2,865 0.0%
Charles Graham-Wood, Esq...................... 2,847.0 2,847 0.0%
Bryan M Elliott............................... 2,800.0 2,800 0.0%
P N J May..................................... 2,800.0 2,800 0.0%
62
Number of Shares of
Common Stock Number of
Beneficially Shares of Number of Number of
Owned before Common Stock Shares of Shares of
Offering-- Offerred: Common Stock Common Stock
Direct/Indirect Common Stock Offered: Offered:
(As of August 6, 2002) issued in Common Stock Common Stock
(Excludes Common February 14, 2002 underlying underlying
Name of Selling Stockholder Stock Equivalents) Private Placement Options Warrants
- --------------------------------------- -------------------- ----------------- ------------- -------------
Lady Clare Remington Hobbs.............
Edward Boleza.......................... 571
Richard Nicolazzo...................... 571
Dr Dafydd Geraint Davies...............
Patrick G G Dear.......................
J M A Ferguson.........................
Philip R Davies, Esq...................
Laurent de Cuniac......................
Mr D & Mrs E S M Bendall...............
Miss Nicola Davies.....................
Gareth Richard Hayward................. 960
Mrs P M Upton..........................
David G Parr & Derek E Parr............
Dr Richard William Falla Le Page.......
Thomas Anthony Lewis...................
Mrs Eve Stephanie Merrilees Bendall....
Jennifer Moody......................... 900
Mr Alan James Bonner...................
Mr Clive Richard Atkins................
Mrs Diana Maisie Newton................
Mrs Jacqueline Rose Bratchell..........
Nutraco Nominees Ltd--M2044............
Peter May, Esq.........................
Bruce Richardson Parkes, Esq...........
Christopher Adam John Rothschild.......
Hugo Edward Upton, Esq.................
Mr Ian Craig Hanson....................
Henry Anstey...........................
Carl Strutt............................
Miss Rona C Jarvis.....................
Geoffrey Weiss, Esq....................
Lesley A Lathe.........................
W T Murray.............................
Helen Margaret Skinner.................
Alan Torry.............................
Francis Hugh Kirkpatrick...............
Oughtershaw Hall Trust.................
Alexander M Knight.....................
Number of Shares Percent of
of Common Stock Common Stock
Offered: Beneficially
Common Stock Owned after
underlying Number of Offering
Convertible Shares of (Approximate)
Preferred Stock Common Stock (Excludes
Issued and Owned after Common Stock
Name of Selling Stockholder Outstanding Offering Equivalents)
- --------------------------------------- ---------------- ------------ -------------
Lady Clare Remington Hobbs............. 2,796.0 2,796 0.0%
Edward Boleza.......................... 2,739.0 3,310 0.0%
Richard Nicolazzo...................... 2,739.0 3,310 0.0%
Dr Dafydd Geraint Davies............... 2,690.0 2,690 0.0%
Patrick G G Dear....................... 2,675.0 2,675 0.0%
J M A Ferguson......................... 2,667.0 2,667 0.0%
Philip R Davies, Esq................... 2,667.0 2,667 0.0%
Laurent de Cuniac...................... 2,600.0 2,600 0.0%
Mr D & Mrs E S M Bendall............... 2,590.0 2,590 0.0%
Miss Nicola Davies..................... 2,434.0 2,434 0.0%
Gareth Richard Hayward................. 1,450.0 2,410 0.0%
Mrs P M Upton.......................... 2,388.0 2,388 0.0%
David G Parr & Derek E Parr............ 2,257.0 2,257 0.0%
Dr Richard William Falla Le Page....... 2,200.0 2,200 0.0%
Thomas Anthony Lewis................... 2,185.0 2,185 0.0%
Mrs Eve Stephanie Merrilees Bendall.... 2,184.0 2,184 0.0%
Jennifer Moody......................... 1,167.0 2,067 0.0%
Mr Alan James Bonner................... 2,000.0 2,000 0.0%
Mr Clive Richard Atkins................ 2,000.0 2,000 0.0%
Mrs Diana Maisie Newton................ 2,000.0 2,000 0.0%
Mrs Jacqueline Rose Bratchell.......... 2,000.0 2,000 0.0%
Nutraco Nominees Ltd--M2044............ 2,000.0 2,000 0.0%
Peter May, Esq......................... 2,000.0 2,000 0.0%
Bruce Richardson Parkes, Esq........... 1,960.0 1,960 0.0%
Christopher Adam John Rothschild....... 1,960.0 1,960 0.0%
Hugo Edward Upton, Esq................. 1,960.0 1,960 0.0%
Mr Ian Craig Hanson.................... 1,900.0 1,900 0.0%
Henry Anstey........................... 1,790.0 1,790 0.0%
Carl Strutt............................ 1,700.0 1,700 0.0%
Miss Rona C Jarvis..................... 1,674.0 1,674 0.0%
Geoffrey Weiss, Esq.................... 1,654.0 1,654 0.0%
Lesley A Lathe......................... 1,636.0 1,636 0.0%
W T Murray............................. 1,600.0 1,600 0.0%
Helen Margaret Skinner................. 1,544.0 1,544 0.0%
Alan Torry............................. 1,512.0 1,512 0.0%
Francis Hugh Kirkpatrick............... 1,500.0 1,500 0.0%
Oughtershaw Hall Trust................. 1,500.0 1,500 0.0%
Alexander M Knight..................... 1,467.0 1,467 0.0%
63
Number of Share of
Common Stock Number of
Beneficially Shares of Number of
Owned before Common Stock Shares of
Offering-- Offerred: Common Stock
Direct/Indirect Common Stock Offered:
(As of August 6, 2002) issued in Common Stock
(Excludes Common February 14, 2002 underlying
Name of Selling Stockholder Stock Equivalents) Private Placement Options
- ------------------------------------- -------------------- ----------------- ------------
Richard Angus........................
John Bai.............................
Albert Shackcloth, Esq...............
C C Cannon...........................
Dr Barbara Chalmers Hanson...........
Dr John Kenneth Montague Moody.......
Leigh Carter.........................
Mr Stuart Buchan Douglas.............
Mrs Enid Mary Boston.................
Mrs J B Macintosh....................
Mrs Patricia Anne Money-Coutts.......
Brian Keigan.........................
Maureen O'Connell.................... 286
Michael Moretti...................... 3,143
Ilias George Mavroleon, Esq..........
Robert Hoar..........................
Jeff Dover........................... 284
Dr David Hartley.....................
Dr Clare Foden.......................
Laurent Faure........................
Web Securities & Secretariat Ltd.....
Mr Simon Victor Toynbee..............
Andrew Dames.........................
Ashley H Kent........................
Gwynne Richard Howell, Esq...........
Professor Robert G Edwards...........
Dr Geoffrey P Cubbin.................
R J K Walden.........................
Mrs Perdita Le Marchant Swift........
Dr James Edward Roseblade............
Mr Frederick William Woods...........
Robert James Millington Rawe.........
Jocelyn G H Knight...................
Barry Chesters.......................
Fern E Elbrick.......................
Geraint Davies.......................
Harry Faure Walker...................
J J Durkin...........................
Number of Shares Percent of
of Common Stock Common Stock
Number of Offered: Beneficially
Shares of Common Stock Owned after
Common Stock underlying Number of Offering
Offered: Convertible Shares of (Approximate)
Common Stock Preferred Stock Common Stock (Excludes
underlying Issued and Owned ofter Common Stock
Name of Selling Stockholder Warrants Outstanding Offering Equivalents)
- ------------------------------------- ------------ ---------------- ------------ -------------
Richard Angus........................ 1,447.0 1,447 0.0%
John Bai............................. 1,404.0 1,404 0.0%
Albert Shackcloth, Esq............... 1,400.0 1,400 0.0%
C C Cannon........................... 1,400.0 1,400 0.0%
Dr Barbara Chalmers Hanson........... 1,400.0 1,400 0.0%
Dr John Kenneth Montague Moody....... 1,400.0 1,400 0.0%
Leigh Carter......................... 1,400.0 1,400 0.0%
Mr Stuart Buchan Douglas............. 1,400.0 1,400 0.0%
Mrs Enid Mary Boston................. 1,400.0 1,400 0.0%
Mrs J B Macintosh.................... 1,400.0 1,400 0.0%
Mrs Patricia Anne Money-Coutts....... 1,400.0 1,400 0.0%
Brian Keigan......................... 1,370.0 1,370 0.0%
Maureen O'Connell.................... 1,370.0 1,656 0.0%
Michael Moretti...................... 1,370.0 4,513 0.0%
Ilias George Mavroleon, Esq.......... 1,367.0 1,367 0.0%
Robert Hoar.......................... 1,367.0 1,367 0.0%
Jeff Dover........................... 1,363.0 1,647 0.0%
Dr David Hartley..................... 1,353.0 1,353 0.0%
Dr Clare Foden....................... 1,310.0 1,310 0.0%
Laurent Faure........................ 1,303.0 1,303 0.0%
Web Securities & Secretariat Ltd..... 1,300.0 1,300 0.0%
Mr Simon Victor Toynbee.............. 1,260.0 1,260 0.0%
Andrew Dames......................... 1,200.0 1,200 0.0%
Ashley H Kent........................ 1,200.0 1,200 0.0%
Gwynne Richard Howell, Esq........... 1,200.0 1,200 0.0%
Professor Robert G Edwards........... 1,200.0 1,200 0.0%
Dr Geoffrey P Cubbin................. 1,192.0 1,192 0.0%
R J K Walden......................... 1,180.0 1,180 0.0%
Mrs Perdita Le Marchant Swift........ 1,120.0 1,120 0.0%
Dr James Edward Roseblade............ 1,100.0 1,100 0.0%
Mr Frederick William Woods........... 1,100.0 1,100 0.0%
Robert James Millington Rawe......... 1,060.0 1,060 0.0%
Jocelyn G H Knight................... 1,033.0 1,033 0.0%
Barry Chesters....................... 1,000.0 1,000 0.0%
Fern E Elbrick....................... 1,000.0 1,000 0.0%
Geraint Davies....................... 1,000.0 1,000 0.0%
Harry Faure Walker................... 1,000.0 1,000 0.0%
J J Durkin........................... 1,000.0 1,000 0.0%
64
Number of Shares of
Common Stock Number of
Beneficially Shares of Number of Number of
Owned before Common Stock Shares of Shares of
Offering-- Offerred: Common Stock Common Stock
Direct/Indirect Common Stock Offered: Offered:
(As of August 6, 2002) issued in Common Stock Common Stock
(Excludes Common February 14, 2002 underlying underlying
Name of Selling Stockholder Stock Equivalents) Private Placement Options Warrants
- ---------------------------------------------- -------------------- ----------------- ------------- ------------
Waters Lunniss Nominees Limited--a/c C37720...
John Michael Randolph.........................
Mr David Temple Ramply........................
Mrs Victoria M Gordon.........................
Anthony L Coe, Esq & Miss Anne Jenner.........
C W Squire....................................
Christopher L Russon, Esq.....................
Mrs A M Gilbert...............................
Mr James Murray Burns & Mrs Lynne V Burns.....
John Cyril Adams.............................. 480
Diana J Knight................................
Madeleine S Knight............................
Dr Gillian Rosemary Evans.....................
Frederick Hiscox..............................
Jeremy David Paulson-Ellis Esq................
John Sidney Howard Handley Motion.............
Mr Anthony Wray & Mrs Brenda Wray.............
Ian Edward Boston.............................
Miss Suzanne Cathryn Boston...................
Mrs Florence Mildred Sladden..................
Quentin Puckridge.............................
Jonathan Bartlett.............................
Anthony Winter, Esq...........................
Dr Peter Hutchinson...........................
Mr David Gerald Garton........................
Peter Golob...................................
Susan Tolliday................................
Thomas Geoffrey Lupton, Esq...................
Timothy John Millington Rawe..................
Mr and Mrs Robert Rawe........................
Mr George Barry Jackson.......................
Thomas James Wakeling Esq.....................
Mr Neil Braithwaite...........................
Michael J Halloran............................
Rupert Armitage...............................
Brian Charles Carter..........................
Patricia Mahoney.............................. 114
Stephen Oates.................................
Number of Shares Percent of
of Common Stock Common Stock
Offered: Beneficially
Common Stock Owned after
underlying Number of Offering
Convertible Shares of (Approximate)
Preferred Stock Common Stock (Excludes
Issued and Owned after Common Stock
Name of Selling Stockholder Outstanding Offering Equivalents)
- ---------------------------------------------- ---------------- ------------ -------------
Waters Lunniss Nominees Limited--a/c C37720... 1,000.0 1,000 0.0%
John Michael Randolph......................... 1,000.0 1,000 0.0%
Mr David Temple Ramply........................ 1,000.0 1,000 0.0%
Mrs Victoria M Gordon......................... 1,000.0 1,000 0.0%
Anthony L Coe, Esq & Miss Anne Jenner......... 980.0 980 0.0%
C W Squire.................................... 980.0 980 0.0%
Christopher L Russon, Esq..................... 980.0 980 0.0%
Mrs A M Gilbert............................... 980.0 980 0.0%
Mr James Murray Burns & Mrs Lynne V Burns..... 967.0 967 0.0%
John Cyril Adams.............................. 480.0 960 0.0%
Diana J Knight................................ 933.0 933 0.0%
Madeleine S Knight............................ 933.0 933 0.0%
Dr Gillian Rosemary Evans..................... 900.0 900 0.0%
Frederick Hiscox.............................. 900.0 900 0.0%
Jeremy David Paulson-Ellis Esq................ 900.0 900 0.0%
John Sidney Howard Handley Motion............. 852.0 852 0.0%
Mr Anthony Wray & Mrs Brenda Wray............. 852.0 852 0.0%
Ian Edward Boston............................. 840.0 840 0.0%
Miss Suzanne Cathryn Boston................... 840.0 840 0.0%
Mrs Florence Mildred Sladden.................. 840.0 840 0.0%
Quentin Puckridge............................. 840.0 840 0.0%
Jonathan Bartlett............................. 830.0 830 0.0%
Anthony Winter, Esq........................... 700.0 700 0.0%
Dr Peter Hutchinson........................... 700.0 700 0.0%
Mr David Gerald Garton........................ 700.0 700 0.0%
Peter Golob................................... 700.0 700 0.0%
Susan Tolliday................................ 700.0 700 0.0%
Thomas Geoffrey Lupton, Esq................... 700.0 700 0.0%
Timothy John Millington Rawe.................. 700.0 700 0.0%
Mr and Mrs Robert Rawe........................ 686.0 686 0.0%
Mr George Barry Jackson....................... 600.0 600 0.0%
Thomas James Wakeling Esq..................... 600.0 600 0.0%
Mr Neil Braithwaite........................... 596.0 596 0.0%
Michael J Halloran............................ 590.0 590 0.0%
Rupert Armitage............................... 579.0 579 0.0%
Brian Charles Carter.......................... 560.0 560 0.0%
Patricia Mahoney.............................. 548.0 662 0.0%
Stephen Oates................................. 517.0 517 0.0%
65
Nunber of Shares of
Common Stock Number of
Beneficially Shares of Number of Number of
Owned before Common Stock Shares of Shares of
Offering-- Offerred: Common Stock Common Stock
Direct/Indirect Common Stock Offered: Offered:
(As of August 6, 2002) issued in Common Stock Common Stock
(Excludes Common February 14, 2002 underlying underlying
Name of Selling Stockholder Stock Equivalents) Private Placement Options Warrants
- --------------------------------------- -------------------- ----------------- ------------- -------------
Geoffrey Todd..........................
Kenneth Tait...........................
Andrew Hector Gray Esq.................
Sajeed Sacranie........................ 437
Dr Leslie James Russell................
Mrs M D Rawe...........................
Camilla Mary Knight....................
Mrs Susannah Braithwaite...............
Miss Susannah Wendy Toynbee............
Mrs Elizabeth Julia Toynbee Lang.......
Mrs Goergina Claire Colquhoun..........
Charles Myers..........................
Mrs Raven..............................
CA & CD Bugden.........................
M L & T J Forster......................
N R & I A Hales........................
Stephen B D Lovelace...................
Robert Raywood, Esq....................
Brian Keigan........................... 286
Robert William Raywood.................
Greg Heacock........................... 57
Colin David Robert Manktelow...........
Fred Easthope..........................
Mr R C P Cooper........................
Peter Hiscocks.........................
Peter Maurice Wright, Esq..............
Robin Lee..............................
Nick Wood..............................
Ms Nina Hallowell & Mr Howard Guest....
Gerhard Plasonig.......................
Gideon Senensieb.......................
Andrew Hill............................
Robert Pettigrew.......................
Ruari Watt.............................
Mark Clark.............................
Miss Samantha Keymer...................
Total:.............................. 5,000,000 5,000,000 335,797 121,924
Number of Shares Percent of
of Common Stock Common Stock
Offered: Beneficially
Common Stock Owned after
underlying Number of Offering
Convertible Shares of (Approximate)
Preferred Stock Common Stock (Excludes
Issued and Owned after Common Stock
Name of Selling Stockholder Outstanding Offering Equivalents)(9)
- --------------------------------------- ---------------- ------------ ---------------
Geoffrey Todd.......................... 500.0 500 0.0%
Kenneth Tait........................... 500.0 500 0.0%
Andrew Hector Gray Esq................. 490.0 490 0.0%
Sajeed Sacranie........................ 437 0.0%
Dr Leslie James Russell................ 490.0 490 0.0%
Mrs M D Rawe........................... 490.0 490 0.0%
Camilla Mary Knight.................... 428.0 428 0.0%
Mrs Susannah Braithwaite............... 426.0 426 0.0%
Miss Susannah Wendy Toynbee............ 420.0 420 0.0%
Mrs Elizabeth Julia Toynbee Lang....... 420.0 420 0.0%
Mrs Goergina Claire Colquhoun.......... 420.0 420 0.0%
Charles Myers.......................... 402.0 402 0.0%
Mrs Raven.............................. 387.0 387 0.0%
CA & CD Bugden......................... 362.0 362 0.0%
M L & T J Forster...................... 362.0 362 0.0%
N R & I A Hales........................ 362.0 362 0.0%
Stephen B D Lovelace................... 361.0 361 0.0%
Robert Raywood, Esq.................... 327.0 327 0.0%
Brian Keigan........................... 286 0.0%
Robert William Raywood................. 280.0 280 0.0%
Greg Heacock........................... 274.0 331 0.0%
Colin David Robert Manktelow........... 250.0 250 0.0%
Fred Easthope.......................... 250.0 250 0.0%
Mr R C P Cooper........................ 200.0 200 0.0%
Peter Hiscocks......................... 200.0 200 0.0%
Peter Maurice Wright, Esq.............. 200.0 200 0.0%
Robin Lee.............................. 200.0 200 0.0%
Nick Wood.............................. 150.0 150 0.0%
Ms Nina Hallowell & Mr Howard Guest.... 140.0 140 0.0%
Gerhard Plasonig....................... 100.0 100 0.0%
Gideon Senensieb....................... 100.0 100 0.0%
Andrew Hill............................ 70.0 70 0.0%
Robert Pettigrew....................... 70.0 70 0.0%
Ruari Watt............................. 68.0 68 0.0%
Mark Clark............................. 60.0 60 0.0%
Miss Samantha Keymer................... 54.0 54 0.0%
Total:.............................. 15,461,749.0 20,919,470 100%
66
RELATIONSHIPS OF CERTAIN SELLING STOCKHOLDERS WITH THE COMPANY (CURRENTLY AND
DURING PRIOR THREE YEARS)
- ----------
(1) Beneficially owns over 5% of the Company's equity securities.
(2) Related Party - Company's Chairman of the Board of Directors (James
Arkoosh) is a former executive officer of Verus International Group,
Limited.
(3) Current director of the Company (Sam Belzberg) is a director of Selling
Stockholder.
(4) Counterparty to asset acquisition by the Company; licensor of certain
intellectual property to the Company.
(5) Chairman of the Company's board of directors.
(6) Former director of the Company.
(7) Spouse of current director of the Company.
(8) Provides investor relations and public relations services to the Company.
(9) Based on 30,119,470 shares of Common Stock, as set forth under
"Summary--The Offering" contained in this prospectus.
67
PLAN OF DISTRIBUTION
Selling Stockholders
We believe that the selling stockholders may offer Common Stock at various
times in one or more transactions on the American Stock Exchange, in private
offerings, exchange distributions, secondary distributions, negotiated
transactions or any combination of the foregoing. They may sell at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at fixed prices, which may be changed. We will
not receive any part of the proceeds of sales of shares made hereunder by the
selling stockholders. We may, however, receive proceeds from the exercise of
outstanding Warrants and Options to purchase such shares.
The selling stockholders may also use broker-dealers to sell their shares.
In connection with any sales, the selling stockholders and any brokers or
dealers participating in such sales may be deemed to be underwriters within the
meaning of the Securities Act. Any broker-dealer participating in such
transactions as agent may receive commissions from the selling stockholders or
purchasers of the shares offered hereby (and, if they act as agent for the
purchaser of such shares, from such purchaser). Usual and customary brokerage
fees will be paid by the selling stockholders.
The selling stockholders may indemnify any broker-dealer that participates
in transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act. Any commissions paid or
any discounts or concessions allowed to any such broker-dealers, and any profits
received on the resale of such shares, may be deemed to be underwriting
discounts and commissions under the Securities Act if any such broker-dealers
purchase shares as principals. We have agreed to indemnify the selling
stockholders against certain liabilities, including liabilities under the
Securities Act.
We are responsible for all costs, expenses and fees incurred in registering
the securities offered hereby, except for any brokerage commissions or other
related trading costs payable by the selling stockholders. There can be no
assurance that the selling stockholders will sell any or all of the shares of
Common Stock offered by them hereunder.
TRANSFER AGENT
Our transfer agent and registrar is Corporate Stock Transfer, Inc., 3200
Cherry Creek South Drive, Suite 430, Denver, CO 80209.
LEGAL MATTERS
The validity of the Common Stock being offered hereby is being passed upon
for us by McGuireWoods LLP.
EXPERTS
The audited financial statements incorporated by reference in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing. See "Risk Factors--Risks arising from federal
prosecution of Arthur Andersen LLP., our independent accountants."
68
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act of 1933, as amended, with
respect to the Common Stock, Warrants, Options and shares of Common Stock
underlying the Warrants and Options to be offered hereby. As used herein, the
term "registration statement" means the initial registration statement and any
and all amendments thereto. This prospectus, which is a part of the registration
statement, contains all material information about the contents of any agreement
or other document filed as an exhibit to the registration statement. For further
information with respect to us and our Common Stock, Warrants and Options,
reference is made to the registration statement, including the exhibits and
schedules thereto and Options. Statements contained in this prospectus
concerning the contents of any contract or any other document contain all
material information regarding that contract or other document but are not
necessarily the full text of that contract or document, and reference is made to
such contract or other document filed with the SEC as an exhibit to the
registration statement.
A copy of the registration statement, including the exhibits thereto, may
be inspected without charge at the Public Reference section of the commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the following regional offices of the SEC: Northeast Regional Office, 233
Broadway, New York, New York 10279; and Midwest Regional Office, 175 W. Jackson
Boulevard, Suite 900, Chicago, Illinois 606041. Copies of the registration
statement and the exhibits and schedules thereto can be obtained from the Public
Reference Section of the SEC upon payment of prescribed fees, or at its web site
at http://www.sec.gov.
Our Common Stock is registered under Section 12 of the Securities Exchange
Act of 1934 as amended, and we are therefore subject to the reporting
requirements of Section 13 of the Securities Exchange Act of 1934, as amended.
In accordance therewith, we file periodic reports with the Securities and
Exchange Commission. Our periodic reports are available for inspection and
copying at the public reference facility.
69
DIOMED HOLDINGS, INC.
Index to Consolidated Financial Statements
Report of Independent Public Accountants.............................................................. F-2
Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002 (unaudited).................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
2000, and 2001 and the Three Months Ended March 31, 2001 and 2002 (unaudited)...................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 2000, and 2001 and the Three Months Ended March 31, 2002 (unaudited)............ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000,
and 2001 and the Three Months Ended March 31, 2001 and 2002 (unaudited)............................ F-7
Notes to Consolidated Financial Statements............................................................ F-8
F-1
DIOMED HOLDINGS, INC.
Report of Independent Public Accountants
To Diomed Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Diomed Holdings,
Inc. (a Nevada corporation) and subsidiaries as of December 31, 2000 and 2001,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the two years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diomed Holdings, Inc. and
subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
- -----------------------
Boston, Massachusetts
March 27, 2002
F-2
DIOMED HOLDINGS, INC.
Consolidated Balance Sheets
December 31, December 31, March 31,
ASSETS 2000 2001 2002
------------ ------------ ------------
(unaudited)
Current Assets:
Cash and cash equivalents ..................................................... $ 118,872 $ 322,566 $ 4,747,875
Accounts receivable, net of allowance for doubtful accounts of $300,000,
$217,000 and $225,000 in 2000, 2001 and 2002, respectively .................... 3,574,510 869,231 605,921
Inventories ................................................................... 2,348,594 2,402,182 2,154,960
Prepaid expenses and other current assets ..................................... 219,808 201,429 735,239
------------ ------------ ------------
Total current assets ....................................................... 6,261,784 3,795,408 8,243,995
------------ ------------ ------------
Property and Equipment:
Office equipment and furniture and fixtures ................................... 1,024,529 1,209,649 1,270,190
Manufacturing equipment ....................................................... 746,060 740,000 740,000
Leasehold improvements ........................................................ 605,790 631,900 637,900
------------ ------------ ------------
2,376,379 2,581,549 2,648,090
Less--Accumulated depreciation and amortization ............................... 1,077,933 1,519,607 1,621,295
------------ ------------ ------------
1,298,446 1,061,942 1,026,795
------------ ------------ ------------
Intangible Assets, net of accumulated amortization of $41,000, $221,000 and $270,000
in 2000, 2001 and 2002, respectively ............................................. 940,487 760,542 711,474
------------ ------------ ------------
Other Assets:
Deposits ...................................................................... 451,597 590,600 585,301
Deferred offering costs ....................................................... -- 387,133 --
Deferred acquisition costs .................................................... -- 39,981 --
------------ ------------ ------------
$ 8,952,314 $ 6,635,606 $ 10,567,565
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank loan ..................................................................... $ 1,722,674 $ 874,449 $ 275,557
Convertible loan notes ........................................................ 2,700,000 -- --
Current maturities of convertible debt ........................................ 339,336 1,786,640 835,664
Current maturities of capital lease obligations ............................... 52,528 46,383 46,053
Accounts payable .............................................................. 1,983,206 2,866,346 1,402,383
Accrued expenses .............................................................. 1,584,962 883,769 1,196,692
Customer advance .............................................................. -- 293,463 --
------------ ------------ ------------
Total current liabilities .................................................. 8,382,706 6,751,050 3,756,349
------------ ------------ ------------
Promissory Note Payable ............................................................. 936,000 936,000 936,000
------------ ------------ ------------
Convertible Debt, less current maturities ........................................... 826,339 -- --
------------ ------------ ------------
Capital Lease Obligations, less current maturities .................................. 88,303 39,817 26,747
------------ ------------ ------------
Stockholders' Equity (Deficit):
Series A convertible preferred stock, $0.01 par value
Authorized--3,500,000 shares
Issued and outstanding--2,725,000 shares at December 31, 2001 .............. -- 27,250 --
Class A convertible preferred stock., $0.001 par value
Authorized--5,000,000 shares
Issued and outstanding--3,691,422 shares at March 31, 2002 ................. -- -- 3,692
Common stock, $0.001 par value
Authorized--40,000,000 at December 31, 2000 and December 31, 2001 and
80,000,000 at March 31, 2002
Issued and outstanding--4,770,103, 9,179,955 and 14,200,000 shares at
December 31, 2000, December 31, 2001 and March 31, 2002, respectively ... 4,770 9,180 14,200
Additional paid-in capital .................................................... 22,073,666 30,324,556 39,077,721
Cumulative translation adjustment ............................................. 15,332 130 2,200
Accumulated deficit ........................................................... (23,374,802) (31,452,377) (33,249,344)
------------ ------------ ------------
Total stockholders' equity (deficit) .................................... (1,281,034) (1,091,261) 5,848,469
------------ ------------ ------------
$ 8,952,314 $ 6,635,606 $ 10,567,565
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
DIOMED HOLDINGS, INC.
Consolidated Statements of Operations
Years Ended December 31, Three Months Ended
2000 2001 March 31, 2001 March 31, 2002
----------- ----------- -------------- --------------
Revenues .............................................. $ 9,424,514 $ 7,731,530 $ 3,484,704 $ 956,637
Cost of Revenues ...................................... 7,414,564 6,140,557 2,232,497 1,154,890
----------- ----------- ----------- -----------
Gross profit ................................. 2,009,950 1,590,973 1,252,207 (198,253)
----------- ----------- ----------- -----------
Operating Expenses:
Research and development ........................... 1,270,816 1,216,400 343,561 171,000
Selling and marketing .............................. 1,647,510 2,520,337 608,329 342,728
General and administrative ......................... 2,228,777 2,615,600 611,739 820,647
----------- ----------- ----------- -----------
Total operating expenses ..................... 5,147,103 6,352,337 1,563,629 1,334,375
----------- ----------- ----------- -----------
Loss from operations ......................... (3,137,153) (4,761,364) (311,422) (1,532,628)
Interest Expense, net ................................. (338,843) (2,893,031) (2,784,619) (264,339)
----------- ----------- ----------- -----------
Net loss ..................................... (3,475,996) (7,654,395) (3,096,041) (1,796,967)
Value Ascribed to Call Option and Beneficial Conversion
Feature Related to Preferred Stock ................. -- (423,180) -- --
----------- ----------- ----------- -----------
Net loss applicable to common stockholders ... $(3,475,996) $(8,077,575) $(3,096,041) $(1,796,967)
=========== =========== =========== ===========
Net loss per share (Note 3):
Basic and diluted net loss per share applicable to
common stockholders ............................. $ (0.82) $ (0.96) $ (0.51) $ (0.15)
=========== =========== =========== ===========
Basic and diluted weighted average common shares
outstanding ..................................... 4,246,004 8,406,721 6,093,059 11,771,395
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
DIOMED HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Class A Class A
Convertible Convertible
Series A Convertible Preferred Preferred
Preferred Stock Common Stock Stock Stock
--------------------- ---------------------- ----------- -----------
Number $0.01 Par Number of $0.001 Par Number of $0.001 Par
of Shares Amount Shares Amount Shares Amount
--------- --------- --------- ---------- ----------- -----------
Balance, December 31, 1999 .................... -- -- 3,954,238 $3,954 -- --
Issuance of stock and warrants, net
of offering costs of $71,036 ........... -- -- 815,865 816 -- --
Change in cumulative translation
adjustment .............................. -- -- -- -- -- --
Net loss ................................... -- -- -- -- -- --
--------- ------ --------- ----- --- ---------
Comprehensive loss ......................
Balance, December 31, 2000 .................... -- -- 4,770,103 4,770 -- --
Issuance of Series A convertible
preferred stock, net of issuance
costs of $192,530 ....................... 2,725,000 27,250 -- -- -- --
Value ascribed to call option and
beneficial conversion feature
related to preferred stock .............. -- -- -- -- -- --
Conversion of debt into common
stock, including $2,700,000 related to
beneficial conversion feature ........... -- -- 2,475,000 2,475 -- --
Value ascribed to warrants issued in
connection with issuance of debt
to stockholders equity .................. -- -- -- -- -- --
Compensation expense related to
issuance of stock options to
consultants for services ................ -- -- -- -- -- --
Recapitalization of common stock
held by certain investors ............... -- -- 1,934,852 1,935 -- --
Change in cumulative translation
adjustment .............................. -- -- -- -- -- --
Net loss ................................... -- -- -- -- -- --
--------- ------ --------- ----- --- ---------
Comprehensive loss ...................
Total
Stockholders'
Translation Accumulated Equity Comprehensive
Paid-in Capital Adjustment Deficit (Deficit) Loss
--------------- ----------- ------------ ------------- -------------
Balance, December 31, 1999 .................... $19,289,991 $(38,341) $(19,898,806) $ (643,202)
Issuance of stock and warrants, net
of offering costs of $71,036 ........... 2,783,675 -- -- 2,784,491
Change in cumulative translation
adjustment .............................. -- 53,673 -- 53,673 $ 53,673
Net loss ................................... -- -- (3,475,996) (3,475,996) (3,475,996)
----------- -------- ------------ ----------- -----------
Comprehensive loss ...................... $(3,422,323)
===========
Balance, December 31, 2000 .................... $22,073,666 $ 15,332 $(23,374,802) $(1,281,034)
Issuance of Series A convertible
preferred stock, net of issuance
costs of $192,530 ....................... 2,505,220 -- -- 2,532,470
Value ascribed to call option and
beneficial conversion feature
related to preferred stock .............. 423,180 -- (423,180) --
Conversion of debt into common
stock, including $2,700,000 related to
beneficial conversion feature ........... 5,172,525 -- -- 5,175,000
Value ascribed to warrants issued in
connection with issuance of debt
to stockholders equity .................. 96,900 -- -- 96,900
Compensation expense related to
issuance of stock options to
consultants for services ................ 55,000 -- -- 55,000
Recapitalization of common stock
held by certain investors ............... (1,935) -- -- --
Change in cumulative translation
adjustment .............................. -- (15,202) -- (15,202) $ (15,202)
Net loss ................................... -- -- (7,654,395) (7,654,395) (7,654,395)
----------- -------- ------------ ----------- -----------
Comprehensive loss ................... $(7,669,597)
===========
F-5
DIOMED HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity (Deficit)--(continued)
Class A Class A
Convertible Convertible
Series A Convertible Preferred Preferred
Preferred Stock Common Stock Stock Stock
Number $0.01 Par Number of $0.001 Par Number of $0.001Par
of Shares Amount Shares Amount Shares Amount
---------- --------- ---------- ---------- ----------- -----------
Balance, December 31, 2001................ 2,725,000 $ 27,250 9,179,955 $ 9,180 -- --
========== ======== ========== ======= ========= =====
Conversion of debt into common stock... -- -- 135,735 136 -- --
Conversion of Series A convertible
preferred stock into Class A
convertible preferred stock
(unaudited)......................... (2,725,000) (27,250) -- -- 1,362,500 1,363
Conversion of common stock into
Class A convertible preferred
stock (unaudited)................... -- -- (9,315,690) (9,316) 2,328,923 2,329
Common stock assumed in the Merger
(unaudited)......................... -- -- 9,200,000 9,200 -- --
Issuance of common stock, net of
issuance costs of $1,740,734
(unaudited)......................... -- -- 5,000,000 5,000 -- --
Value ascribes to warrants issued in
connection with issuance of debt
to stockholders equity (unaudited).. -- -- -- -- -- --
Beneficial conversion related to
warrants issued in connection with
issuance of debt to stockholders
equity (unaudited).................. -- -- -- -- -- --
Change in cumulative translation
adjustment (unaudited).............. -- -- -- -- -- --
Net loss............................... -- -- -- -- -- --
---------- -------- ---------- ------- --------- -----
Comprehensive loss
==========
Balance, March 31, 2002 (unaudited)....... -- -- 14,200,000 $14,200 3,691,423 3,692
========== ======== ========== ======= ========= =====
Total
Stockholders'
Paid-in Translation Accumulated Equity Comprehensive
Capital Adjustment Deficit (Deficit) Loss
----------- ----------- ------------ ------------- -------------
Balance, December 31, 2001................ $30,324,556 $ 130 $(31,452,377) $(1,091,261)
=========== ====== ============ ===========
Conversion of debt into common stock... 339,201 -- -- 339,336
Conversion of Series A convertible
preferred stock into Class A
convertible preferred stock
(unaudited)......................... 25,887 -- -- --
Conversion of common stock into
Class A convertible preferred
stock (unaudited)................... 6,987 -- -- --
Common stock assumed in the Merger
(unaudited)......................... (9,200) -- -- --
Issuance of common stock, net of
issuance costs of $1,740,734
(unaudited)......................... 8,254,266 -- -- 8,259,266
Value ascribes to warrants issued in
connection with issuance of debt
to stockholders equity (unaudited).. 8,200 -- -- 8,200
Beneficial conversion related to
warrants issued in connection with
issuance of debt to stockholders
equity (unaudited).................. 127,824 -- -- 127,824
Change in cumulative translation
adjustment (unaudited).............. -- 2,070 -- 2,070 $ 2,070
Net loss............................... -- -- (1,796,967) (1,796,967) (1,796,967)
----------- ------ ------------ ----------- -----------
Comprehensive loss $(1,794,897)
===========
Balance, March 31, 2002 (unaudited)....... 39,077,721 2,070 $(33,249,344) $ 5,848,469
=========== ====== ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements
F-6
DIOMED HOLDINGS, INC.
Consolidated Statements of Cash Flow
Years Ended Three Months Ended
December 31, March 31,
------------------------- -------------------------
2000 2001 2001 2002
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Cash Flows from Operating Activities:
Net loss ............................................................... $(3,475,996) $(7,654,395) $(3,096,041) $(1,796,967)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation and amortization ....................................... 467,566 709,618 133,000 150,756
Noncash interest expense on convertible loan notes .................. -- 2,700,000 2,700,000 225,260
Issuance of stock options to consultants ............................ -- 55,000 -- --
Changes in operating assets and liabilities, net of acquisition-
Accounts receivable .............................................. (1,965,681) 2,910,905 102,510 263,310
Inventories ...................................................... (421,071) 24,779 354,701 247,222
Prepaid expenses and other current assets ........................ 256,583 (35,201) (434,595) (533,810)
Deposits ......................................................... -- (143,478) -- (5,299)
Accounts payable ................................................. 226,307 932,898 (296,206) (1,463,963)
Accrued expenses ................................................. (852,658) (662,378) (272,962) 376,923
Customer advance ................................................. -- 293,463 -- (293,463)
----------- ----------- ----------- -----------
Net cash used in operating activities .......................... (5,764,950) (868,789) (809,593) (2,830,031)
----------- ----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment .................................... (272,414) (489,323) (338,250) (66,541)
Cash Flows from Financing Activities:
Proceeds from issue of common stock, net ............................... 2,784,491 -- -- 8,646,399
Proceeds from issue of preferred stock, net ............................ -- 2,532,470 1,846,365 --
Proceeds from convertible loan notes ................................... 2,700,000 -- -- --
Proceeds from convertible debt ......................................... -- 700,000 --
Promissory note payable ................................................ 936,000 -- -- --
Net proceeds (payments) from bank borrowings ........................... (115,389) (800,766) (338,116) (598,892)
Payments on convertible debt ........................................... (34,325) (225,000) (225,000) (700,000)
Payments on capital lease obligations .................................. (50,388) (50,751) (16,000) (13,000)
Increase in deferred offering costs .................................... -- (387,133) -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities ...................... 6,220,389 1,768,820 1,267,249 7,334,507
----------- ----------- ----------- -----------
Effect of Exchange Rate Changes (127,195) (207,014) 29,849 (12,626)
----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents ...................... 55,830 203,694 149,255 4,425,309
Cash and Cash Equivalents, beginning of period ............................ 63,042 118,872 118,872 322,566
----------- ----------- ----------- -----------
Cash and Cash Equivalents, end of period .................................. $ 118,872 $ 322,566 $ 268,127 $ 4,747,875
=========== =========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest ................................................. $ 332,285 $ 155,438 $ 123,418 $ 48,039
=========== =========== =========== ===========
Supplemental Disclosure of Noncash Investing and Financing Activities:
Acquisition of property and equipment under capital lease obligations .. $ 32,065 $ -- $ -- $ --
=========== =========== =========== ===========
Exchange of convertible debt for QLT intangible assets and inventory ... $ 1,200,000 $ -- $ -- $ --
=========== =========== =========== ===========
Conversion of convertible loan notes into common stock ................. $ -- $ 2,475,000 $ 2,475,000 $ --
=========== =========== =========== ===========
Value ascribed to warrants issued in connection with issuance of debt to
stockholders ......................................................... $ -- $ 96,900 $ -- $ --
=========== =========== =========== ===========
Value ascribed to call option and beneficial conversion feature related
to preferred stock ................................................... $ -- $ 423,180 $ -- $ --
=========== =========== =========== ===========
Reclassification offering costs to additional paid in capital .......... $ -- $ -- $ -- $ 387,133
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
(including data applicable to unaudited periods)
(1) OPERATIONS
Diomed Holdings, Inc. (the Company) and its subsidiaries specialize in
developing and distributing laser-based equipment and disposable items used in
minimal and micro-invasive medical procedures.
Some of the Company's medical laser products and applications 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 Note 16, during the quarter ended March 31, 2002, the
Company merged with another company, raised $10 million in additional funding
through a private placement offering and paid certain of its debt outstanding at
December 31, 2001. Management believes that this additional capital, along with
its cash flows from operations and access to capital, will be sufficient to fund
its operations through December 2002, depending on the Company's ability to
achieve its business plan pertaining to the commercial success of EVLT(TM)
post-FDA clearance. In addition, the Company anticipates seeking a global
banking relationship to support the anticipated commercial success of EVLT(TM).
The accompanying consolidated financial statements at March 31, 2002 and
for the three-month periods ended March 31, 2001 and 2002 are unaudited. In
management's opinion, these unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial statements
included in the Company's Annual Report on Form 10-KSB, as amended, for the year
ended December 31, 2001, and include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the results for such
interim periods. These financial statements should be read in conjunction with
the audited consolidated financial statements included in the Company's Annual
Report on Form 10-KSB, as amended, for the year ended December 31, 2001. The
results of operations for the three-month period ended March 31, 2002 are not
necessarily indicative of the results expected for the fiscal year ending
December 31, 2002.
(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.
(a) Principles of Consolidation
These financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany transactions have
been eliminated.
F-8
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
(b) 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.
(c) 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.
(d) Foreign Currency Translation
Assets and liabilities of the foreign subsidiaries are translated at
the rate of exchange in effect at year-end. Results of operations are
translated using the weighted average exchange rate in effect during the
year. Translation adjustments, resulting from changes in the rate of
exchange between the subsidiaries' functional currency and the U.S. dollar,
are recorded as a separate component of stockholders' equity in the
accompanying consolidated balance sheets. Transaction gains and losses,
resulting from the revaluations of assets and liabilities denominated in
other than the functional currency of the Company or its subsidiaries, are
included in operating expenses for all periods presented.
(e) 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
Company has determined that its existing revenue recognition practices
comply with the requirements of SAB No. 101 for all periods presented.
(f) 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,
-----------------------
2000 2001 March 31, 2002
---------- ---------- --------------
Raw materials .................. $2,022,590 $1,211,870 $ 991,201
Work-in-progress ............... 243,612 1,016,236 1,044,656
Finished goods ................. 82,392 174,076 119,103
---------- ---------- ----------
$2,348,594 $2,402,182 $2,154,960
========== ========== ==========
F-9
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
(g) 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:
Description Estimated Useful Life
------------------------------------------- ----------------------------------
Office equipment and furniture and fixtures 2-5 years
Manufacturing equipment 2-5 years
Lesser of estimated useful life or
Leasehold improvements life of lease
(h) Long-Lived Assets
The Company assesses the realizability of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Under SFAS
No. 144, if qualitative factors suggest that an impairment may have
occurred, the Company is required to assess the valuation of its long-lived
assets. As of December 31, 2001 and March 31, 2002, the Company has
determined that no material adjustment to the carrying value of its
long-lived assets was required.
(i) 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 agreements with banks approximate fair
value as the interest rates on these instruments fluctuate with market
interest rates.
(j) 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 significant 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.
F-10
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
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
Years Ended Three Months
December 31, Ended March 31,
------------ ---------------
2000 2001 2001 2002
---- ---- ---- ----
Customer A .................................... 20% 21% 30% *
Customer B .................................... 18% 13% 22% 13%
Customer C .................................... * * * *
Gross Accounts Receivable
December 31, March 31,
2000 2001 2002
Customer A .................................... 29% 33% 42%
Customer B .................................... * * *
Customer C .................................... 18% 14% *
- ----------
*Less than 10%
(k) 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 Note 11(d).
(l) Research and Development Expenses
The Company charges research and development expenses to operations as
incurred.
(m) 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 the Company's
net loss and changes in cumulative translation adjustment account (see Note
2(d)). The Company has disclosed comprehensive income (loss) for all
periods presented in the accompanying consolidated statements of
stockholders' equity (deficit).
(n) 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.
(o) Recent Accounting Pronouncements
F-11
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
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 of whether the adoption of this new accounting
standard will have a material impact on the Company's financial statements.
As of March 31, 2002, the carrying value of the Company's intangible assets
is $711,474. Related to those intangible assets, the Company recorded
amortization expense of approximately $49,000 and $99,000 for the three
months ended March 31, 2002 and 2001, respectively.
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's adoption of this statement has not had 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, 2000 and 2001,
and the three months ended March 31, 2001 and 2002, all potential common shares
were antidilutive and were excluded from the diluted net loss per share
calculations.
F-12
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
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, March 31,
--------------------- ----------------------
2000 2001 2001 2002
--------- --------- --------- ----------
Common stock options and warrants... 2,248,944 1,885,664 876,994 1,916,696
========= ========= ========= ==========
Convertible preferred stock......... -- 5,450,000 5,450,000 14,765,690
========= ========= ========= ==========
Convertible debt.................... 1,104,479 819,734 1,165,000 167,000
========= ========= ========= ==========
(4) ACCRUED EXPENSES
Accrued liabilities consist of the following:
December 31, March 31,
--------------------- ----------
2000 2001 2002
---------- -------- ----------
Payroll and related costs........... $ 499,254 $194,557 $ 182,503
Warranty and related costs.......... 830,419 103,280 116,334
Deferred rent....................... 151,184 153,907 136,132
Professional fees................... 60,000 258,056 624,502
Others.............................. 44,105 173,969 137,221
---------- -------- ----------
$1,584,962 $883,769 $1,196,692
========== ======== ==========
(5) ACQUISITION 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 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 note 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 earlier. The merger and private offering of common
stock, as discussed in Note 16, does not qualify as an IPO. 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
----------
F-13
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
$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 $180,000 and
$49,000 for the year ended December 31, 2001 and the three months ended March
31, 2002, respectively.
(7) LINE-OF-CREDIT ARRANGEMENT
Diomed, Ltd., the Company's subsidiary in the United Kingdom, has a line of
credit with Barclays Bank, which is limited to the lesser of (pound)1,200,000
and ($1,745,160 at December 31, 2001 and $1,728,840 at March 31, 2002) or 80% of
eligible accounts receivable. This line bears interest at 3% above Barclays
Bank's base rate (4.00% at December 31, 2001 and 4.00% at March 31, 2002) and
borrowings are due upon collection of receivables from customers.
As of March 31, 2002, there were borrowings of (pound)191,289 ($275,557)
outstanding under this line and available future borrowings of approximately
$137,000.
(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 recorded noncash interest
expense totaling approximately $2.7 million in March 2001 due to the adjustment
of the original conversion price.
(9) DEBT
As of December 31, 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. As of March 31,
2002, the second promissory note due to QLT is 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 $339,337 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 $339,337. 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 require senior management of both companies to meet for a period
of 60 days to attempt to resolve disputes arising thereunder.
F-14
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
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, 2001 and March 31, 2002 is as follows:
December 31, 2001 December 31, 2001 March 31, 2002 March 31, 2002
Current Long-Term Current Long-Term
----------------- ----------------- --------------- --------------
Convertible debt--QLT....... $1,175,000 $ -- $835,664 $ --
Promissory note payable..... -- 936,000 -- 936,000
---------- -------- -------- --------
$1,175,000 936,000 $835,664 $936,000
========== ======== ======== ========
(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 $6.7 million at December 31, 2001 to reduce future federal income
taxes, if any. These carryforwards expire through 2021 and are subject to review
and possible adjustment by the Internal Revenue Service (IRS). The Company also
has approximately $16.4 million of foreign net operating loss carryforwards at
December 31, 2001 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 $5.8 million and
$7.7 million as of December 31, 2000 and 2001, 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,
2000 and 2001. The components of the Company's deferred tax assets are as
follows:
December 31,
-------------------------
2000 2001
----------- -----------
Net operating loss carryforwards............ $ 5,581,915 $ 7,605,793
Other temporary differences................. 261,805 66,175
Valuation allowance......................... (5,843,720) (7,671,968)
----------- ----------
Net deferred tax asset................... $ -- $ --
=========== ===========
(11) STOCKHOLDERS' EQUITY
(a) Capitalization of Diomed, Inc.
Effective March 15, 2001, the authorized capital stock of Diomed,
Inc., the principal operating subsidiary 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 by Diomed, Inc.
F-15
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
From March through May 2001, Diomed, Inc. 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 had the following rights, preferences and
privileges:
Voting
Each share of Series A Preferred Stock entitled the holder
thereof to such number of votes equal to the number of shares of
common stock into which each share was then convertible. The holders,
collectively, by a two-thirds vote, had 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 were 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 was not to incur any debt, make any acquisitions
or strategic investments or enter into any contracts or payment
obligations that committed 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 were 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 were 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 was 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 was automatically
convertible 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 could have required 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.
F-16
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
(d) Capitalization of Diomed Holdings, Inc.
Effective February 14, 2002, the authorized capital stock of the
Company was 80,000,000 shares of common stock, par value $0.001 per share,
and 5,000,000 shares of preferred stock, par value $.001 per share, of
which 4,300,000 shares were designated Class A Convertible Preferred Stock
(referred to as "Old Class A Stock").
(e) Issuance of Diomed Holdings, Inc. Class A Convertible Preferred Stock
("Old Class A Stock") in Diomed Merger
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 and the
predecessor of the Company, merged with and into Diomed, Inc. pursuant to
an Agreement and Plan of Merger, dated as of January 29, 2002.
Pursuant to the Diomed Merger Agreement, Diomed Holdings Nevada
issued:
. 2,328,922.50 shares of its Old Class A Stock to the former
holders of Diomed, Inc. common stock in exchange for 9,315,690
shares of common stock of Diomed, Inc. issued and outstanding as
of the effective time of the Diomed Merger, which 2,328,922.50
shares were convertible into 9,315,690 shares of Diomed Holdings
Nevada common stock, and
. 1,362,500 of its Old Class A Stock to the former holders of
2,725,000 shares of Diomed, Inc. Series A Preferred o Stock
issued and outstanding as of the effective time of the Diomed
Merger, which 1,362,500 shares were convertible into 5,450,000
shares of Diomed Holdings Nevada common stock.
(e) Migratory Merger of the Company; Recapitalization of the Company
In April 2002, the board of directors of the Company determined that
it was in the best interests of the Company and its stockholders for the
Company to change its state of incorporation from Nevada to Delaware. At a
stockholders meeting on May 13, 2002 to consider the proposed
reincorporation, the stockholders granted their approval, and the
reincorporation was effected by the merger of the Company into a
newly-formed Delaware corporation (referred to as the "Migratory Merger"),
which occurred on that same date. As a result of the Migratory Merger, each
share of common stock of Diomed Holdings Nevada outstanding as of the date
of the consummation of the Migratory Merger was converted into one share of
Common Stock, and each share of Old Class A Stock was converted into four
shares of Class A Convertible Preferred Stock of the Company (referred to
as the "Convertible Preferred Stock"). The rights and privileges of the
Common Stock and the Convertible Preferred Stock are virtually identical to
the common stock of Diomed Holdings Nevada and the Old Class A Stock, other
than the one for four exchange of shares of Old Class A Stock for shares of
Convertible Preferred Stock, and a reduction in the number of votes from
four votes per share for Old Class A Stock to one vote per share for
Convertible Preferred Stock.
The Convertible Preferred Preferred Stock has the following rights,
preferences and privileges:
Voting
Each share of Convertible 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
of the Convertible Preferred Stock shall each be entitled to vote the
number of votes equal to the number of shares of the Common Stock into
which such shares are to be converted. Any matter as to which the
holders of Common Stock are entitled to vote shall require the
affirmative vote of the holders of a majority of the issued and
outstanding shares of Convertible Preferred Stock, voting as one
class.
F-17
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
The affirmative vote of the holders of a majority of the issued
and outstanding shares of the Convertible Preferred Stock voting as a
separate class, shall be required to change the powers, preferences or
special rights of the shares of the Convertible Preferred Stock in
relation to the shares of the Common Stock.
Liquidation Preference
Upon any liquidation, dissolution or winding-up of the Company or
sales, lease, exchange or other disposition of all or substantially
all of the Company's assets, the holders of each share of Convertible
Preferred Stock and the Common Stock shall be entitled to receive pro
rata an amount equal to the entire assets and funds legally available
for distribution.
Negative Covanents
So long as 250,000 shares of the Convertible Preferred Stock
remain issued and outstanding (appropriately adjusted to take account
of any stock split, stock dividend, combination of shares, or the
like), the Company shall not, without first having obtained the
affirmative vote or written consent of the holders of at least
two-thirds of the shares of the Preferred Stock at the time issued and
outstanding to:
(a) create, authorize or issue any other class or series of capital
stock of the Company senior to or on parity ( with the Preferred
Stock in any respect, or increase the number of authorized shares
of any such class or series of capital stock, or increase the
authorized number of shares of the Convertible Preferred Stock;
(b) create, authorize or issue any bonds, notes or other securities
convertible into, exchangeable for, or ( evidencing the right to
purchase shares of any class or series of capital stock of the
Company senior to or on parity with the Convertible Preferred
Stock in any respect;
(c) pay a dividend on or repurchase any shares of capital stock of
the Company, other than as necessary to satisfy the terms of the
Series A Preferred Stock, or repurchases of shares of Common
Stock issued pursuant to stock ( purchase or stock option plans
or subject to stock repurchase agreements under which the Company
has the option to repurchase such shares upon the occurrence of
certain events, including the termination of employment;
(d) merge with or into or consolidate with any other Company, or
sell, lease, or otherwise dispose of all or substantially all of
its properties or assets, or voluntarily liquidate, dissolve or
wind up;
(e) amend or repeal the Articles of Incorporation or By-laws in any
manner that adversely affects the rights of the holders of the
Convertible Preferred Stock;
(f) reclassify any securities of the Company that are junior to the
Preferred Stock into securities that are senior to or on parity
with the Convertible Preferred Stock in any respect;
(g) incur any debt in excess of $1,000,000 secured by assets of the
Company or its subsidiaries other than debt to ( a commercial
bank or other lending institution which is secured solely by
accounts receivable and/or inventory; or
(h) substantially alter the nature of the business of the Company
from that carried on as of the date of initial original issue of
shares of the Convertible Preferred Stock.
Automatic Conversion
All of the outstanding shares of the Convertible Preferred Stock
shall automatically convert into Common Stock on a one-to-one share
basis, as follows:
F-18
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
On the date which is the last day of the second month, (referred
to as the "Benchmark Month") after the effectiveness of a registration
statement filed by the Company with the Securities and Exchange
Commissions with respect to the shares of Common Stock into which the
Convertible Preferred Stock is convertible, 5% of the shares of the
Convertible Preferred Stock shall automatically convert into Common
Stock;
(ii) thereafter, subject to the following clause (iii), on the
last day of each of the following 23 months, an additional 5% of the
shares of Convertible Preferred Stock shall likewise automatically
convert into Common Stock; and
(iii) in all events, and whether or not the SEC has declared the
Company's registration statement effective, on the last day of the
24th month after the month during which the Diomed Merger became
effective, the balance of the Convertible Preferred Stock not
theretofore converted into Common Stock shall automatically be
converted into Common Stock.
(f) Common Stock
In February 2002, the Company issued 5,000,000 shares of its Common
Stock, $0.001 par value per share, at a price of $2.00 per share in a
private placement financing in connection with the Diomed Merger.
As of March 31, 2002, the Company had authorized 80,000,000 shares of
Common Stock, $0.001 par value, of which 14,200,000 shares are outstanding.
After the Migratory Merger on May 13, 2002, the Company had authorized
80,000,000 shares of Common Stock, $0.001 par value, of which 14,200,000
shares are outstanding (excluding securities which may be converted into or
exercisable for Common Stock), having been automatically issued to the
holders of the Common Stock issued by Diomed Holdings Nevada by virtue of
the Migratory Merger.
(g) 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.
F-19
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
A summary of stock option activity is as follows:
Weighted
Range of Average
Exercise Number of Exercise
Price Shares Price
---------- --------- --------
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 1,056,653 1.33
Forfeited ..................... 3.50-6.36 (123,553 2.75
---------- --------- -----
Outstanding, December 31, 2001 ... 1.25-8.23 1,773,740 2.65
---------- --------- -----
Granted ....................... 2.00-4.18 162,130 2.65
Forfeited ..................... 1.25-5.76 (131,098) 1.80
---------- --------- -----
Outstanding, March 31, 2002 ...... $1.25-8.23 1,804,772 $2.70
---------- --------- -----
Exercisable, December 31, 2000 ... $2.24-8.23 680,621 $4.59
---------- --------- -----
Exercisable, December 31, 2001 ... $1.25-8.23 911,537 $3.83
---------- --------- -----
Exercisable, March 31, 2002 ...... $1.25-8.23 903,364 $3.81
---------- --------- -----
At March 31, 2002, 1,184,507 options were available for future grants
under the Plans.
The following table summarizes information relating to currently
outstanding and exercisable options as of March 31, 2002.
OUTSTANDING EXERCISABLE
----------- -----------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number of Life (in Exercise Number of Exercise
Price Shares Years) Price Shares Price
- ---------- --------- ----------- -------- --------- --------
$ 1.25 805,153 9.2 $1.25 122,500 $1.25
2.00-3.50 544,869 5.2 2.61 372,614 2.75
4.00-6.56 436,350 4.6 5.31 389,850 5.44
7.36-8.23 18,400 4.1 7.61 18,400 7.61
--------- ----- ------- -----
1,804,772 $2.70 903,364 $3.81
========= ===== ------- =====
F-20
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(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, 2000 and 2001 and the three months ended
March 31, 2001 and 2002, the Company's pro forma net loss would have been
as follows:
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------- -------------------------
2000 2001 2001 2002
----------- ----------- ----------- -----------
Net loss applicable to common stockholders, as
Reported ............................................. $(3,475,996) $(8,077,575) $(3,096,300) $(1,796,967)
Net loss applicable to common stockholders, pro forma ... $(3,541,425) $(8,247,499) $(3,113,541) $(1,861,079)
Basic and diluted net loss per share applicable to common
stockholders, as reported ............................ $ (0.82) $ (0.96) $ (0.51) $ (0.15)
Basic and diluted net loss per share applicable to common
stockholders, pro forma .............................. $ (0.83) $ (0.98) $ (0.51) $ (0.16)
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, March 31,
------------ ---------
2000 2001 2001 2002
---------- ---------- --------- ----------
Risk-free interest rate ................... 5.78-6.68% 3.53-4.76% 4.34-4.82% 3.02-4.44%
Expected dividend yield ................... --% --% --% --%
Expected lives ............................ 5 years 5 years 5 years 5 years
Expected volatility ....................... --% --% --% --%
Weighted average grant date fair value per
share .................................. $ 0.95 $ 0.78 -- $ 1.25
Weighted average remaining contractual life
of options outstanding ................. 6.4 years 7.9 years 6.1 years 7.6 years
(h) 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 year ended December 31, 2001.
In January 2002, the Company granted fully exercisable options to
purchase 630 shares of common stock at an exercise price per share equal to
$2.25 to the above-mentioned consultants in exchange for marketing
services.
F-21
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(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,
------------------------
2000 2001 March 31, 2002
-------- --------- --------------
Allowance for doubtful accounts:
Balance, beginning of period .......... $ 7,000 $ 300,000 $217,473
Provision for doubtful accounts .... 293,000 207,240 7,310
Write-offs ......................... -- (289,767) --
-------- --------- --------
Balance, end of period ................ $300,000 $ 217,473 $224,783
======== ========= ========
(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:
Three Months Ended
Years Ended December 31, March 31,
------------------------ ---------------------
2000 2001 2001 2002
---------- ---------- ---------- --------
Laser systems ................... $8,901,906 $5,898,530 $3,043,406 $518,242
Fibers and other accessories .... 522,608 1,833,000 441,299 438,395
---------- ---------- ---------- --------
Total ........................ $9,424,514 $7,731,530 $3,484,705 $956,637
========== ========== ========== ========
F-22
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
The following table represents percentage of revenues by geographic
destination:
Years Ended Three Months
December 31, Ended March 31,
--------------- ----------------
2000 2001 2001 2002
---- ---- ---- ----
North America .................. 33% 49% 47% 48%
Asia/Pacific ................... 30% 25% 27% 25%
Europe ......................... 33% 24% 25% 23%
Other .......................... 4% 2% 1% 4%
--- --- --- ---
Total ....................... 100% 100% 100% 100%
=== === === ===
The following table represents long-lived assets by geographic location:
December 31, March 31,
---------------------------- ----------
2000 2001 2002
---------- ---------- ----------
North America ............ $1,200,955 $1,417,681 $1,005,733
Europe ................... 1,489,575 1,382,536 1,317,837
---------- ---------- ----------
Total ................. $2,690,530 $2,800,217 $2,323,570
========== ========== ==========
(14) COMMITMENTS
(a) 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 United
Kingdom is a 25-year lease through 2024. However, the Company has an
option, at its election, to terminate the lease agreement after 15 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, 2000 and 2001, and the three months ended March 31, 2001 and 2002 was
$454,529, $473,247, $117,425 and $118,199, respectively. Capital lease
obligations bear interest at a rate of 20% per annum. Future minimum lease
payments required under these leases at March 31, 2002 are as follows:
Capital Operating
Leases Leases
2002, nine months....................................... $52,864 $ 361,038
2003.................................................... 26,463 481,383
2004.................................................... 4,213 462,801
2005.................................................... -- 444,219
2006.................................................... -- 444,219
Thereafter.............................................. -- 3,257,607
------- -----------
Total future minimum lease payments.................. 83,539 $5,451,267
------- ==========
Less--Amount representing interest...................... 10,739
-------
Present value of future minimum lease payments....... 72,800
Less--Current portion of capital lease obligations...... 46,053
-------
Capital lease obligations, net of current portion.... $26,747
=======
F-23
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
(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. The
plaintiff seeks compensatory and punitive damages in an unspecified amount
and an injunction against further disclosures. The Company moved to dismiss
the action and compel arbitration. An order granting our motion for
arbitration was entered by the court on May 22, 2002, and accordingly, the
dispute will be referred to arbitration. The court also stayed proceedings
on other issues not subject to arbitration. 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 were 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 did not complete a reverse merger by October 31, 2001, the
noteholders could have exercised their call option issued in the March 2001
Series A Preferred Stock financing (see Note 11(b)) and deliver their notes as
payment, 2) in the event the Company completed a reverse merger, the notes were
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 were 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
were 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 completed 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 would have 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. In January 2002, due to the Company's delay in completing the reverse
merger by December 31, 2001, the Company was required to issue up to an
additional aggregate of 10,000 warrants, with terms identical to the initial
grant. The warrants expire two years from the date of issuance. The value
ascribed to these 10,000 warrants was $8,200 and was calculated using the
Black-Scholes option pricing model. The $8,200 was recorded as a debt discount
and will be amortized to interest expense over the life of the notes. In
addition, the beneficial conversion feature attributable to the warrants
totaling $8,200 will be recorded as interest expense upon the occurrence of an
event which will trigger the note's right to convert.
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. The warrants expire two years from
the date of issuance. The value ascribed to these 20,000 warrants was $15,000
and was calculated using the Black-Scholes option pricing model. The $15,000 was
recorded as a debt discount and will be amortized to interest expense over the
life of the notes. In addition, the beneficial conversion feature attributable
to the warrants totaling $15,000 will be recorded as interest expense upon the
occurrence of an event which will trigger the note's right to convert The
Company completed a reverse merger by March 31, 2002, and accordingly did not
have to issue any contingent warrants. 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
F-24
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
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 created an additional debt discount, attributed to the establishment of
a new measurement date for the amended warrant, totaling $39,000.
In February 2002, subsequent to the closing of the reverse merger, the
$700,000 aggregate principal amount of the promissory notes, issued in October
and December 2001, was repaid to the two stockholders, including cumulative
interest. During the three month period ended March 31, 2002, the Company
recorded $225,260 as additional non-cash interest expense related to warrants
issued in connection with the bridge loan in 2001 and 2002, as well as
beneficial conversion features discussed above which were triggered by the
acquisition discussed in Note 16.
(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 were not subject to refund, redemption or rescission and, accordingly,
were 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 within 240 days of completing the Merger, 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 4%
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 Old Class A Stock were converted in the Merger and
were thereafter automatically convertible into Parent's common stock in
installments beginning 60 days after Parent's registration statement was to
become effective and continuing, unless interrupted under certain circumstances,
until the second anniversary of the Merger, at which time all such shares were
automatically convertible into shares of Parent's common stock.
The Merger was accounted for as a recapitalization. The historical records
of the Company are the historical records of Parent. Following the Merger, the
business conducted by Parent is the business conducted by Diomed prior to the
Merger.
Costs of approximately $1.7 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 by the Company at the closing of the Merger and
subsequent to the Merger.
The unaudited operating results for the Parent are as follows:
Year Ended December 31, 2001
Revenue $ 5,482
Net Loss $(39,565)
Net loss to common stockholders --
(17) MIGRATORY MERGER
In April 2002, the board of directors of the Company determined that it was
in the best interests of the Company and its stockholders for the Company to
change its state of incorporation from Nevada to Delaware. On May 13, 2002, the
reincorporation was effected by the Migratory Merger. As a result of the
Migratory Merger, each share of common stock of Diomed Holdings Nevada
outstanding as of the date of the consummation of the Migratory Merger was
converted into one share of Common Stock and each share of Old Class A Stock was
converted into four shares of Convertible Preferred Stock. The rights and
privileges of the Common Stock and the Convertible Preferred Stock are virtually
identical to the common stock of Diomed Holdings Nevada and the Old Class A
Stock, other than the one for four exchange of shares of Old Class A Stock for
shares of Convertible Preferred Stock, and a reduction in the number of votes
from four votes per share for Old Class A to one vote per share for Convertible
Preferred Stock.
F-25
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(including data applicable to unaudited periods)
In connection with the Migratory Merger, the Company assumed the
obligations of Diomed Holdings Nevada with respect to Diomed Holdings Nevada's
outstanding stock options and warrants (formerly the Diomed stock options and
warrants described above).
As a result of the Migratory Merger, the directors and officers of Diomed
Holdings Nevada became the directors and officers of the Company.
F-26
20,919,470 SHARES
DIOMED HOLDINGS, INC.
COMMON STOCK
----------
PROSPECTUS
----------
AUGUST 7, 2002
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") allows for
the indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. The Ninth Article of the Registrant's certificate of
incorporation and Article VII of the Registrant's bylaws authorize
indemnification of the registrant's directors, officers, employees and other
agents to the extent and under the circumstances permitted by the DGCL. The
Registrant maintains liability insurance for the benefit of its directors and
certain of its officers.
The above discussion of the DGCL and of the Registrant's certificate of
incorporation, bylaws and indemnification agreements is not intended to be
exhaustive and is qualified in its entirety by such statutes, amended and
restated certificate of incorporation, bylaws and indemnification agreements.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of 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 the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of our 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.
Item 25. Other Expenses of Issuance and Distribution
Set forth below is an estimate (except for registration fees, which are
actual) of the approximate amount of the fees and expenses (other than
underwriting commissions and discounts) payable by the Company in connection
with the issuance and distribution of the shares of Common Stock.
Estimated
Expense Amount
- ------- ---------
Securities and Exchange Commission Registration Fee.... $ 5,250
Printing and Engraving Expenses........................ $ 10,000
Legal Fees and Expenses................................ $100,000
Accounting Fees and Expenses........................... $ 0
Transfer Agent Fees and Expenses....................... $ 250
Miscellaneous.......................................... $ 5,000
--------
Total............................................ $120,500
Item 26. Recent Sales of Unregistered Securities
The following describes sales of unregistered securities made by the
Company and by Diomed since January 1, 1999.
As to the Company, since January 1, 1999, the Company sold and issued
unregistered shares of its capital stock as described below:
(1) On March 31, 1999, the Company's predecessor, Natexco Corporation,
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.
II-1
(2) On March 21, 2000 and May 18, 2000, the Company's predecessor, Natexco
Corporation, 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 a director of
Natexco Corporation, 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.
(3) On May 18, 2000, the Company's predecessor, Natexco Corporation, 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 public offering.
(4) In February 2002, simultaneously with the consummation of the Diomed
Merger, the Company's predecessor, Diomed Holdings Nevada, issued shares of Old
Class A Stock to the holders of Diomed Series A Preferred Stock and common
stock, to replace the shares of Diomed Series A Preferred Stock and Diomed
common stock cancelled in the Diomed Merger (other than the 5,000,000 shares of
Common Stock purchased in the private placement immediately prior to the
consummation of the Diomed Merger, as to which Diomed Holdings Nevada issued
Common Stock to replace the Diomed common stock cancelled in the Diomed Merger).
We believe that each stockholder of Diomed that was a U.S. resident at the time
of the merger was an accredited investor, as the term is defined in Regulation D
and that the offering by means of the merger was exempt from registration under
Section 4(2) of the Securities Act. The shares issued to those persons are
subject to restrictions on transfer and each such U.S. person who voted for the
merger also represented in writing that it was an accredited investor. Each
other stockholder of Diomed, Inc. was not a U.S. resident at the time of the
merger and, as to those stockholders, the merger was structured to comply with
Regulation S under the Securities Act. The shares issued to non-U.S. residents
also are subject to restrictions on transfer. Accordingly, the issue of shares
to non-U.S. residents did not require registration under the Securities Act.
(5) In April 2002, the Company's predecessor, Diomed Holdings Nevada,
entered into an agreement, referred to as the "IRG Agreement," with The Investor
Relations Group, Inc., referred to as "IRG," for investor relations and public
relations services. In connection therewith, we granted to IRG 150,000 options,
referred to as the "Awarded Options," to purchase shares of Old Class A Stock,
(which, in connection with the Migratory Merger, became options to purchase the
Company's Convertible Preferred Stock), priced at $5.35 per share. The Awarded
Options were not granted under the 2001 Plan, but are subject to the terms and
conditions of the 2001 Plan as if granted thereunder. The Awarded Options shall
vest and become exercisable ratably at the end of each month beginning May,
2002, over 24 months from the date of the IRG Agreement (1/24 per month) so long
as the IRG Agreement remains in effect, and the Awarded Options shall expire on
the earlier of 48 months from the date of the IRG Agreement or 24 months after
the termination of the IRG Agreement. The Awarded Options may be exercised only
to the extent vested, and any unvested options shall terminate upon the
termination of the IRG Agreement (and options may be exercised only to the
extent vested).
The Company issued and sold the Awarded Options in reliance upon exemptions
from registration under the Securities Act set forth in Section 4(2) thereof or
Regulation D or Regulation S thereunder. IRG represented that it was an
accredited investor and that it was knowledgeable in business matters, capable
of independently evaluating the merits and risks of accepting and exercising the
Awarded Options, independently determined that the investment in the Awarded
Options was a suitable investment for IRG and that IRG had sufficient financial
resources to bear the loss of its investment.
(6) In May 2002, simultaneously with the consummation of the Migratory
Merger, the Company (i) issued shares of Common Stock to the holders of common
stock of Diomed Holdings Nevada to replace the shares of Diomed Holdings Nevada
common stock that were cancelled in the Migratory Merger, and (ii) issued shares
of Convertible Preferred Stock to the holders Old Class A Stock to replace the
shares of Old Class A Stock that were cancelled in the Migratory Merger, and
(iii) issued options and warrants to replace the stock options and warrants
issued by the Company's predecessor which were cancelled in the Migratory
Merger.
(7) In August 2002, the Company issued to QLT, Inc. (i) 90,489 shares of
Convertible Preferred Stock in respect of a promissory note converted into
common stock in January 2002, in satisfaction of a potential dispute with QLT
regarding the conversion rate that the Company used to convert this promissory
note, and (ii) issued 605,570 shares of Convertible Preferred Stock in
satisfaction of a second promissory note held by QLT. In consideration for our
issuance of these shares, QLT released us from any claims under these two
promissory notes and certain related agreements.
The Company issued these shares of Convertible Preferred Stock to QLT in
reliance upon exemptions from registration under the Securities Act set forth in
Section 4(2) thereof or Regulation D thereunder. QLT represented to the Company
that it was an accredited investor, and also acknowledged that unless and until
registered for sale under the Securities Act, QLT may not transfer or sell the
shares of Convertible Preferred Stock we issued to it in the absence of an
applicable exemption from the registration requirements of the Securities Act.
As to Diomed, since January 1, 1999, Diomed. 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:
(1) 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. Hobbs in the above transaction in reliance
upon exemptions
II-2
from registration under the Securities Act, 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.
(2) In July 1999, Diomed sold 1,139,580 shares of its common stock to 148
purchasers (existing and new investors) for an aggregate purchase price of
$2,849,795, or $2.50 per share. The purchasers, the shares they purchased and
the respective purchase prices paid were as follows:
Purchase
Shares 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
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
II-3
Purchase
Shares Price
--------- -----------
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
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
II-4
Purchase
Shares Price
--------- -----------
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
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
II-5
Purchase
Shares Price
--------- -----------
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, 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.
II-6
(3) 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
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 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 purchaser 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.
II-7
(4) 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 Purchase
Stock Warrants 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 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.
II-8
(5) 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:
Purchase
Units 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 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.
II-9
(6) In November 2000, Diomed issued two promissory notes to QLT, Inc. as
part of the payment price for assets it then acquired from QLT. One of these
notes was interest free and in the principal amount of $339,336 and the other
note bore interest at five percent annually and was in the principal amount of
$835,664. Both notes were convertible at Diomed's option into common stock, and
both notes were payable within two years of their issuance.
Diomed issued and sold these notes to QLT in reliance upon exemptions from
registration under the Securities Act set forth in Section 4(2) thereof or
Regulation S thereunder. QLT represented that it was not a U.S. person and
agreed that the notes would not be resold without registration under the
Securities Act or exemption therefrom. QLT also represented it intended to
acquire the notes for investment purposes only and not with a view to the
distribution thereof. Before making any offering of the notes to QLT, Diomed had
reasonable grounds to believe and believed that QLT was capable of evaluating
the merits and risks of the investment and was able to bear the economic risk of
the investment.
(7) 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 could 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:
Purchase
Shares 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 Crescent 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 in March 2001, 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. In May 2001, pursuant to the
put/call option, Diomed issued a total of 225,000 shares of Series A
Preferred Stock, 112,500 of which were issued to Winton Capital Holdings
Ltd. and 112,500 of which were issued to three assignees of Verus
International Group Limited. The put option expired on May 31, 2001 and the
call option expired (unexercised) on October 31, 2001;
II-10
(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). Diomed repaid an aggregate of $225,000 principal
amount of these notes that were not so converted. The 19 noteholders who
converted their notes, the principal amounts of the notes they tendered to
Diomed and the number of shares of Diomed common stock issued upon
conversion of such notes were as follows:
Principal
Amount of
Noteholder 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
(v) Diomed issued 2,000,001 shares of its common stock to the five
purchasers who purchased units on August 31, 2000 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. 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
(rounded to whole numbers):
Shares of Shares of
Common Common Warrants
Stock to Stock to be to be
be Reissued Cancelled Cancelled
----------- ----------- ---------
Verus Investment Holdings, Inc..... 771,985 220,567 441,134
Gibralt Capital.................... 999,999 285,714 571,428
James Arkoosh...................... 17,500 5,000 10,000
George Lieberman................... 10,500 3,000 6,000
Marousa Dumaresq................... 200,018 57,148 114,296
--------- ------- ---------
2,000,001 571,429 1,142,858
II-11
(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--Trustee of The Abe-Sci Venture
Fund.................................................................... 81,350.50 23,243 23,243
Fortis Fund Services (Cayman) Ltd.--Trustee of Sofaer Funds/SCI Global
Hedge Fund.............................................................. 576,093 164,598 164,598
Michael Bourne............................................................. 14,098 4,028 4,028
---------- ------- -------
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 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 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 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.
II-12
(9) On May 31, 2001, Diomed exercised its put rights under the put/call
option issued on March 15, 2001 (described under paragraph 1(iii), above) 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 Purchase
Purchased Price
--------- -----------
Winton Capital Holdings Ltd.......................... 112,500 $112,500.00
Virtual Winds Capital................................ 82,500 $ 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, 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.
(10) 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 Pharma, Inc. in the above transaction in
reliance upon exemptions from registration under the Securities Act set forth in
Section 4(2) thereof or Regulation D thereunder. Axcan Pharma, Inc. 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
Pharma, Inc. also represented its intention to acquire the note for investment
only, and not with a view to the distribution thereof.
(11) 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. The principal and accrued interest payable under these secured
promissory notes was paid in full by the Company after the closing of the
private placement sale of common stock which occurred immediately prior to the
Diomed Merger on February 14, 2002 and after the Diomed Merger became effective.
As a result, these notes are no longer outstanding, although the warrants issued
in conjunction therewith do remain outstanding.
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 set forth in
II-13
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.
(12) 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 Limited 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. The principal and accrued interest payable under these secured
promissory notes was paid in full by the Company after the closing of the
private placement sale of common stock which occurred immediately prior to the
Diomed Merger on February 14, 2002 and after the Diomed Merger became effective.
As a result, these notes are no longer outstanding, although the warrants issued
in conjunction therewith do remain outstanding.
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 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.
(13) On January 1, 2002 Diomed issued 5,000 additional warrants to each of
Verus International Group Limited and Winton Capital Holdings Ltd., pursuant to
the agreements under which Diomed issued warrants to Verus International Group
Limited and Winton Capital Holdings Ltd. on October 5, 2001. The terms and
conditions of the warrants issued in January 2002 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 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.
II-14
(14) In January 2002, Diomed issued 135,735 shares of its common stock in
satisfaction of indebtedness it owed to QLT under a promissory note in the
principal amount of $339,336. Diomed determined this number of shares in
accordance with the provisions of the note regarding the conversion price of the
note.
Diomed issued and sold these securities to QLT in reliance upon exemptions
from registration under the Securities Act set forth in Section 4(2) thereof or
Regulation S thereunder. QLT represented that it was not a U.S. person and
agreed that the securities would not be resold without registration under the
Securities Act or exemption therefrom. QLT also represented that it intended to
acquire the securities for investment purposes only and not with a view to the
distribution thereof. The common stock was not issued in certificated form.
Before making any offering of the securities to QLT, Diomed had reasonable
grounds to believe and believed that QLT was capable of evaluating the merits
and risks of the investment and was able to bear the economic risk of the
investment.
(15) On February 14, 2002, immediately prior to the taking effect of the
Diomed Merger, Diomed issued 5,000,000 shares of common stock at a purchase
price of $2.00 per share in a private placement offering made to 46 purchasers,
and received aggregate gross proceeds of $10,000,000 from this offering. The
purchasers and the respective numbers of shares of common stock they purchased
are as follows:
Shares
Shareholder Issued
- ----------- ---------
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 Private, 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
---------
5,000,000
II-15
Diomed issued and sold the securities in the above transaction in reliance
upon exemptions from registration under the Securities act, 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. The
shares of common stock issued by Diomed in the private placement on February 14,
2002 became shares of common stock of the Company when the Company Merger became
effective.
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.
Item 27. Exhibits
Exhibit No. Identification of Exhibit
----------- -------------------------
2.1 Agreement and Plan of Merger for Diomed Merger*
2.2 Certificate of Amendment of Articles of Incorporation of
Natexco Corporation*
2.3 Agreement and Plan of Merger for Migratory Merger**
2.4 Articles of Merger for Migratory Merger (Nevada)**
2.5 Certificate of Merger for Migratory Merger (Delaware)**
3.1 Diomed Holdings, Inc. (Nevada) Articles of Incorporation*
3.2 Diomed Holdings, Inc. (Nevada) Amendment to the Articles of
Incorporation*
3.3 Certificate of Incorporation of Diomed Holdings, Inc.
(Delaware)**
3.4 Restated By-laws of Diomed Holdings, Inc. (Nevada)*
3.5 By-laws of Diomed Holdings, Inc. (Delaware)**
4.2 Diomed Holdings, Inc. (Nevada) Certificate of Designation
for Class A Convertible Preferred Stock*
4.3 Diomed Holdings, Inc. (Delaware) Certificate of Designation
for Class A Convertible Preferred Stock**
4.4 1998 Incentive Stock Plan*
4.5 Diomed 2001 Employee Stock Option Plan*
5.1 Legality Opinion rendered by the Registrant's legal counsel,
McGuireWoods LLP
10.1 Form of Subscription Agreement and Investment
Representation*
10.2 Escrow Agreement*
10.3 Consulting Agreement between the Company and Verus Support
Services Inc.*
10.4 Agreement between James Arkoosh and Diomed*
10.5 Employment Agreement with Peter Klein, dated July 24, 1999*
10.6 Lock-up Agreement Applicable to Private Placement Investors*
10.7 Cambridge Facility Lease***
10.8 Axcan Pharma, Inc.--Diomed PDT Laser Development and Supply
Agreement***
II-16
Exhibit No. Identification of Exhibit
----------- -------------------------
10.9 HRI Sub-License Agreement between QLT and Diomed***
10.10 EVLT(TM)Marketing and Promotion Agreement with Dr. Robert
Min***
10.11 EVLT(TM)Marketing and Promotion Agreement with Dr. Steven E.
Zimmet***
21.1 Subsidiaries of Diomed Holdings, Inc.****
23.2 Consent of McGuireWoods LLP in respect of Legality Opinion
(included with Exhibit 5.1)****
99.1 Descriptive Memorandum of Diomed Holdings, Inc.*
99.2 Report of Atlas Capital Services dated February 4, 2002*
99.3 Letter from the Company to SEC regarding Arthur Andersen LLP
(pursuant to Temporary Note 2T)***
- ----------
* Filed with the Company's Current Report on SEC Form 8-K dated February
14, 2002.
** Filed with the Company's Current Report on SEC Form 8-K dated May 14,
2002.
*** Filed with the Company's Annual Report on Form 10-KSB/A dated April 29,
2002.
**** Previously filed.
During the last quarter of the fiscal year ended December 31, 2001, the
Company filed a report on Form 8-K dated December 17, 2001, reporting under Item
5 that, pursuant to the written consent of directors in accordance with Section
78.207 of the Nevada General Corporation Law, as of the opening of business on
Friday, December 28, 2001, the Company would multiply its authorized shares of
common stock by four, from 20,000,000 to 80,000,000, and correspondingly
multiply the outstanding number of shares of common stock by four, from
2,400,000 to 9,600,000. No financial statements were filed in connection with
that Form 8-K.
During the first quarter of fiscal year 2002, the Company filed a report on
Form 8-K dated February 14, 2002, reporting under Item 5 that, on February 14,
2002, Diomed Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of the Company formerly known as Natexco Corporation, merged with and
into Diomed, pursuant to the Diomed Merger Agreement.
During the second quarter of fiscal year 2002, the Company filed a report
on Form 8-K dated May 14, 2002, reporting under Item 5 that, on May 13, 2002 the
Company merged with and into a Diomed Holdings (Delaware), Inc., a Delaware
corporation and a wholly-owned subsidiary of the Company and that the Diomed
Holdings (Delaware), Inc. changed its name to Diomed Holdings, Inc. as of the
effective time of the merger, pursuant to the Migratory Merger Agreement.
During the third quarter of fiscal year 2002, the Company filed a report on
Form 8-K dated August 6, 2002, reporting under Item 4 that, on August 5, 2002,
the Company dismissed its auditors, Arthur Andersen LLP, and appointed
new independent auditors, BDO Seidman LLP.
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) to reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the most
recent post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b), if in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
II-17
(c) to include any material information with respect to the plan
of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of 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 the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of our 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.
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of New York, state of New York, on August 7, 2002. Each
person whose signature appears below hereby appoints Peter Klein as such
person's true and lawful attorney, with full power for him to sign, for such
person and in such person's name and capacity indicated below, any and all
amendments to this registration statement, hereby ratifying and confirming such
person's signature as it may be signed by said attorney to any and all
amendments.
Diomed Holdings, Inc.
By: /s/ Peter Klein
-------------------------------------
Peter Klein
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Peter Klein President, Chief Executive Officer and August 7, 2002
- -------------------------- Director
(Peter Klein)
/s/ Lisa M. Bruneau Principal Financial Officer, Vice President, August 7, 2002
- -------------------------- Finance, Secretary and Treasurer
(Lisa M. Bruneau)
/s/ James Arkoosh Chairman of the Board, Director August 7, 2002
- --------------------------
(James Arkoosh)
/s/ Samuel Belzberg Director August 7, 2002
- --------------------------
(Samuel Belzberg)
/s/ A. Kim Campbell Director August 7, 2002
- --------------------------
(A. Kim Campbell)
/s/ Geoffrey Jenkins Director August 7, 2002
- --------------------------
(Geoffrey Jenkins)
/s/ Peter Norris Director August 7, 2002
- --------------------------
(Peter Norris)
II-19
INDEX TO EXHIBITS
Exhibit No. Identification of Exhibit
- ----------- -------------------------
2.1 Agreement and Plan of Merger for Diomed Merger*
2.2 Certificate of Amendment of Articles of Incorporation of Natexco Corporation*
2.3 Agreement and Plan of Merger for Migratory Merger**
2.4 Articles of Merger for Migratory Merger (Nevada)**
2.5 Certificate of Merger for Migratory Merger (Delaware)**
3.1 Diomed Holdings, Inc. (Nevada) Articles of Incorporation*
3.2 Diomed Holdings, Inc. (Nevada) Amendment to the Articles of Incorporation*
3.3 Certificate of Incorporation of Diomed Holdings, Inc. (Delaware)**
3.4 Restated By-laws of Diomed Holdings, Inc. (Nevada)*
3.5 By-laws of Diomed Holdings, Inc. (Delaware)**
4.2 Diomed Holdings, Inc. (Nevada) Certificate of Designation for Class A Convertible Preferred Stock*
4.3 Diomed Holdings, Inc. (Delaware) Certificate of Designation for Class A Convertible Preferred Stock**
4.4 1998 Incentive Stock Plan*
4.5 Diomed 2001 Employee Stock Option Plan*
5.1 Legality Opinion rendered by the Registrant's legal counsel, McGuireWoods LLP****
10.1 Form of Subscription Agreement and Investment Representation*
10.2 Escrow Agreement*
10.3 Consulting Agreement between the Company and Verus Support Services Inc.*
10.4 Agreement between James Arkoosh and Diomed*
10.5 Employment Agreement with Peter Klein, dated July 24, 1999*
10.6 Lock-up Agreement Applicable to Private Placement Investors*
10.7 Cambridge Facility Lease***
10.8 Axcan Pharma, Inc.--Diomed PDT Laser Development and Supply Agreement***
10.9 HRI Sub-License Agreement between QLT and Diomed***
10.10 EVLT(TM)Marketing and Promotion Agreement with Dr. Robert Min***
10.11 EVLT(TM)Marketing and Promotion Agreement with Dr. Steven E. Zimmet***
21.1 Subsidiaries of Diomed Holdings, Inc.****
23.2 Consent of McGuireWoods LLP in respect of Legality Opinion (included with Exhibit 5.1)
99.1 Descriptive Memorandum of Diomed Holdings, Inc.*
99.2 Report of Atlas Capital Services dated February 4, 2002*
99.3 Letter from the Company to SEC regarding Arthur Andersen LLP (pursuant to Temporary Note 2T)***
- ----------
* Filed with the Company's Current Report on SEC Form 8-K dated February 14,
2002.
** Filed with the Company's Current Report on SEC Form 8-K dated May 14, 2002.
*** Filed with the Company's Annual Report on Form 10-KSB/A dated April 29,
2002.
**** Previously filed.