<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1996.
REGISTRATION NO. 333-6607
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------
HUMASCAN INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 3841 22-3345046
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
514 Centennial Avenue
Cranford, New Jersey 07016
(908) 709-3434 (Phone)
(908) 709-4646 (Telecopy)
(Address and Telephone Number of Principal Executive Offices)
------
514 Centennial Avenue
Cranford, New Jersey 07016
(Address of Principal Place of Business or Intended Principal Place of
Business)
------
Donald B. Brounstein, President
HumaScan Inc.
514 Centennial Avenue
Cranford, New Jersey 07016
(908) 709-3434 (Phone)
(908) 709-4646 (Telecopy)
(Name, Address and Telephone Number of Agent for Service)
------
Copies to:
David Alan Miller, Esq. Lawrence B. Fisher, Esq.
Graubard Mollen & Miller Orrick, Herrington & Sutcliffe
600 Third Avenue 666 Fifth Avenue
New York, New York 10016 New York, New York 10103
(212) 818-8800 (Phone) (212) 506-5000 (Phone)
(212) 687-6989 (Telecopy) (212) 506-5151 (Telecopy)
------
Approximate Date of Proposed Sale to the Public: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
---------------
If 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
--------------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box: [X]
------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
<PAGE>
CALCULATION OF REGISTRATION FEE
===============================================================================
<TABLE>
<CAPTION>
Proposed Proposed Maximum
Maximum Aggregate Amount of
Title of Each Class of Securities Amount to be Offering Price Offering Registration
to be Registered Registered Per Share (1) Price Fee
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock(2) ...................... 2,875,000 $ 8.00 $23,000,000.00 $7,931.03
- -------------------------------------------------------------------------------------------------------------------
Representative's Warrants(3) ......... 250,000 $ 0.0001 $ 25.00 --(4)
- -------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of
Representative's Warrants ........... 250,000(5) $10.40(6) $2,600,000.00 $ 896.55
- -------------------------------------------------------------------------------------------------------------------
TOTALS ................................................................... $25,600,025.00 $8,827.58(7)
===================================================================================================================
</TABLE>
- ------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Includes 375,000 shares of Common Stock which the Underwriters have the
option to purchase to cover over-allotments, if any.
(3) In connection with the Registrant's sale of the Common Stock offered
hereby, the Registrant is granting to the Representative of the several
Underwriters warrants (the "Representative's Warrants") to purchase
250,000 shares of Common Stock. The purchase price per Representative's
Warrant is $0.0001.
(4) Pursuant to Rule 457(g), no fee is payable.
(5) Pursuant to Rule 416, there are also being registered such indeterminable
number of additional shares of Common Stock as may become issuable
pursuant to the anti-dilution provisions of the Representative's
Warrants.
(6) Represents the exercise price of the Representative's Warrants.
(7) $8,758.62 previously paid; pursuant to Rule 457(a) no additional fee is
due as a result of the increased exercise price of the Representative's
Warrants.
<PAGE>
HUMASCAN INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item in Form SB-2 Location or Caption in Prospectus
---------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front
Cover Page of Prospectus ........................... Facing Page of Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus ......................................... Inside Front and Outside Back Cover Pages of Prospectus
3. Summary Information and Risk Factors................ Prospectus Summary; Risk Factors
4. Use of Proceeds .................................... Use of Proceeds
5. Determination of Offering Price .................... Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
6. Dilution ........................................... Risk Factors; Dilution
7. Selling Security Holders ........................... *
8. Plan of Distribution ............................... Outside Front and Outside Back Cover Pages of Prospectus;
Underwriting
9. Legal Proceedings .................................. Business
10. Directors, Executive Officers, Promoters and Control
Persons ............................................ Management; Principal Stockholders
11. Security Ownership of Certain Beneficial Owners and
Management ......................................... Principal Stockholders
12. Description of Securities .......................... Outside Front Cover Page of Prospectus; Description of
Securities
13. Interests of Named Experts and Counsel ............. Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities ..................... Management
15. Organization Within Last Five Years ................ Prospectus Summary; Management's Discussion and Analysis
of Financial Condition and Plan of Operation; Certain
Transactions
16. Description of Business ............................ Prospectus Summary; Risk Factors; Management's
Discussion and Analysis of Financial Condition and Plan
of Operation; Business
17. Management's Discussion and Analysis or Plan of
Operation .......................................... Management's Discussion and Analysis of Financial
Condition and Plan of Operation
18. Description of Property ............................ Business
19. Certain Relationships and Related Transactions...... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters ............................................ Outside Front Cover Page of Prospectus; Risk Factors;
Description of Securities; Shares Eligible for Future
Sale; Underwriting
21. Executive Compensation ............................. Management
22. Financial Statements................................ Financial Statements
23. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ................ *
</TABLE>
- ------
* Not applicable or answer is negative.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
SUBJECT TO COMPLETION, DATED JULY 26, 1996
PROSPECTUS
2,500,000 SHARES
HUMASCAN INC.
LOGO
Common Stock
$.01 par value
------
HumaScan Inc. ("HumaScan" or the "Company") hereby offers 2,500,000 shares
of common stock, $.01 par value per share (the "Common Stock"). Prior to this
Offering, there has been no public market for the Common Stock and there can
be no assurance that a trading market will develop after the completion of
this Offering or, if developed, that it will be sustained. It is currently
anticipated that the initial public offering price will be $8.00 per share.
For information regarding the factors considered in determining the initial
public offering price, see "Risk Factors" and "Underwriting." It is
anticipated that upon consummation of the Offering, the Common Stock will be
approved for quotation on the Nasdaq SmallCap Market ("Nasdaq") under the
symbol "HMSC."
Certain existing stockholders, directors and officers of the Company and
their affiliates or designees intend to purchase 10% of the shares of Common
Stock being offered hereby. See "Underwriting."
------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 9 AND
"DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- -------------------------------------------------------------------------------
Per Share ..... $ $ $
- -------------------------------------------------------------------------------
Total(3) ..... $ $ $
===============================================================================
(1) Does not include additional compensation payable to Keane Securities Co.,
Inc., the representative of the several Underwriters (the
"Representative"), in the form of (i) a non-accountable expense allowance
equal to 2% of the gross proceeds of this Offering and (ii) warrants,
issued for nominal consideration, to purchase 250,000 shares of Common
Stock at a price of $------ per share [130% of the initial public offering
price per share of Common Stock] ("Representative's Warrants"). In addition,
see "Underwriting" for information concerning indemnification and
contribution arrangements with the Underwriters and other compensation
payable to the Representative.
(2) Before deducting estimated expenses of $900,000 payable by the Company
($960,000 if the Underwriters' over-allotment option is exercised in
full), including the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option exercisable within
45 days after the date of this Prospectus to purchase up to an aggregate
of 375,000 additional shares of Common Stock upon the same terms and
conditions as set forth above, solely to cover over-allotments, if any.
If such over-allotment option is exercised in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $------,
$------ and $------, respectively. See "Underwriting."
------
<PAGE>
The shares of Common Stock are being offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to approval of certain legal matters by their counsel and subject
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify this Offering and to reject any order in whole or in part.
It is expected that delivery of the shares of Common Stock offered hereby
will be made on or about _______________, 1996, at the offices of Keane
Securities Co., Inc. in New York, New York against payment therefor.
------
Keane Securities Co., Inc.
The date of this Prospectus is _______________, 1996.
<PAGE>
BreastAssure(TM) Thermal Activity Sensor
[INSERT]
The BreastAssure(TM) Thermal Activity Sensor, which has received marketing
clearance under Section 510(k) of the Food, Drug and Cosmetic Act from FDA, is a
device to be used adjunctively by physicians as part of a breast disease
monitoring program. When placed over a woman's breasts inside her brassiere for
a period of 15 minutes, the device registers skin temperature variations due to
heat conducted from within the breast tissue, thus indicating the possibility of
either proliferating thermally active breast cancer cells or certain types of
thermally active breast disease.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent certified public
accountants and such other reports as the Company may determine to be
appropriate or as may be required by law.
------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option to
purchase up to an additional 375,000 shares of Common Stock and no exercise
of the Representative's Warrants. Unless otherwise indicated, all financial
information, references to number of shares and per share data set forth in
this Prospectus give retroactive effect to the 4 to 3 reverse stock split
effected on July 23, 1996.
THE COMPANY
HumaScan, a development stage company, owns under license the exclusive
rights in the United States and Canada to manufacture and market a breast
thermal activity indicator ("BTAI") device called the "BreastAssure(TM)
Thermal Activity Sensor" ("the BreastAssure device"). The BreastAssure device
is a non-invasive, easy to use, low cost, adjunctive test to be used by
primary care physicians, gynecologists and other medical specialists as part
of a breast disease monitoring program along with breast self- examination
("BSE"), palpation and (depending on a patient's age, family history and
other factors) mammography and other established clinical procedures
including ultrasound and/or biopsy. An important feature of the BreastAssure
device is that the results will be immediately available to the physician
while the patient is "on site" at the point of care in the physician's
office, clinic, hospital and/or mammography center. If the BreastAssure
device indicates that there is unilateral breast thermal activity (i.e., in
one breast only), the physician is alerted to the possibility of a
physiological condition, including thermally active cancer. The BreastAssure
device has received marketing clearance under Section 510(k) of the Food,
Drug and Cosmetic Act (the "FDC Act" ) from the United States Food and Drug
Administration ("FDA").
As breast cancer cells multiply, excessive heat is often generated. This
heat is most often conveyed to the surface of the breast resulting in the
temperature of the skin of a particular area of one breast being elevated
from between 2o and 6o Fahrenheit versus the temperature of the same area of
the other breast. The BreastAssure device permits the measurement and
comparison of temperature variances between three mirror-image sections of
each breast, thus indicating the possibility of either proliferating
thermally active breast cancer cells or certain types of thermally active
breast disease which may require medical treatment.
The Company intends initially to market the BreastAssure device to primary
care physicians, gynecologists and other medical specialists throughout the
United States. Pursuant to this strategy, in February 1996, the Company
entered into an exclusive supply and distribution agreement (as amended, the
"Distribution Agreement") with Physician Sales & Service, Inc. ("PSS"), a
publicly traded company and one of the leading distributors of medical
supplies, diagnostic equipment and pharmaceuticals to office-based medical
professionals in the United States. PSS, with a reported distribution network
of approximately 780 full-time sales representatives and 64 company-owned and
operated service/distribution centers serving more than 88,000
physician-based offices throughout the United States, has agreed to
distribute the BreastAssure device. Pursuant to the Distribution Agreement,
PSS's President, John F. Sasen, Sr., has joined HumaScan's Board of Directors
and the Company has been designated a "Platinum Level Manufacturer." PSS has
informed the Company that this status currently has been reserved for only 15
manufacturers out of approximately 3,000 manufacturers represented by PSS and
means that PSS will assign specific sales quotas to its sales force and give the
Company priority access to the sales force for product training. Also, pursuant
to the Distribution Agreement, PSS purchased an aggregate of 56,250 shares of
Common Stock and Private Warrants (as hereinafter defined) to purchase an
additional 11,250 shares of Common Stock at $2.93 per share and was issued
warrants (the "PSS Warrants") to purchase 125,000 shares of Common Stock at
$4.00 per share. See "Business--Marketing and Distribution," "Management,"
"Principal Stockholders" and "Certain Transactions."
Under the Distribution Agreement, over a two-year period beginning in
1997, PSS is to receive volume discount price incentives from HumaScan to the
extent PSS exceeds sales targets of 1.0 million BreastAssure device pairs
("units") in 1997 and 3.5 million units in 1998. If sales by PSS are less
than
3
<PAGE>
50% of such targets, the Company and PSS will each have the right to
terminate the Distribution Agreement upon three months' notice. PSS and the
Company have agreed to work together to prepare for the BreastAssure device
sales and marketing launch, which the Company anticipates will occur in the
second quarter of 1997.
The BreastAssure device consists of a pair of mirror-image, non-invasive,
lightweight, disposable soft pads, each of which has three wafer-thin
segments containing columns of heat sensitive chemical sensor dots that
change color from blue to pink reflecting an 8.5 degree temperature range
from 90o to 98.5o Fahrenheit. When placed over a woman's breasts inside her
brassiere for a period of 15 minutes, the BreastAssure device registers skin
temperature variations due to heat conducted from within the breast tissue to
the surface of the skin. By comparing the mirror-image temperature
differences between the two breasts registered by the BreastAssure device,
the physician can objectively quantify if there is abnormal unilateral breast
thermal activity, which is considered significant if there is a 2o Fahrenheit
or more temperature difference between each breast in the same mirror-image
location. Based on clinical studies at major medical centers, the threshold
tumor size that resulted in significant skin temperature differences
detectable with the BreastAssure device was as small as five millimeters in
size. In contrast, according to industry sources, the majority of breast
tumors are, on average, at least 15 millimeters or larger before they are
palpable by most experienced clinicians.
The machinery that the Company will use to manufacture the BreastAssure
device is currently being constructed by Zigmed, Inc. ("Zigmed"), a medical
engineering contractor, and is on schedule for completion by the end of 1996.
The agreement between Zigmed and the Company (the "Turnkey Construction
Contract") provides for the turnkey construction of the production machinery
(the "Production Line") at a fixed price of $1,750,680, with payments to
Zigmed in stages over a 15-month period. $720,000 has been paid to Zigmed
pursuant to the Turnkey Construction Contract as of the date of this
Prospectus. The Company has also agreed to pay Zsigmond G. Sagi, the chief
executive officer and a principal of Zigmed, certain completion bonuses. See
"Business--Manufacturing."
The Company presently plans to sell the BreastAssure device to physicians
and other medical specialists for approximately $25 per unit and will
recommend that the BreastAssure unit be made available to patients by
physicians and other medical specialists for a cost ranging from $40 to $50.
Breast cancer is one of the most common cancers among women and,
notwithstanding existing methods of detection, is currently the leading cause
of death among women between the ages of 35 and 54 in the United States. The
American Cancer Society estimates that in 1996 approximately 184,300 new
cases of breast cancer are expected to be diagnosed and approximately 44,300
women are expected to die from the disease. Although the causes of breast
cancer are unknown and there is no known method of prevention, survival rates
are highest, and the likelihood of recurrence is lowest, if the cancer is
diagnosed and treated at its earliest stages. According to the National
Cancer Institute, the five-year survival rate decreases from more than 90% to
72% after the cancer has spread to the lymph nodes and to 18% after it has
spread to other soft-tissue organs. Government spending for, and public
awareness of, early screening and diagnosis of breast cancer has increased
substantially in recent years. In fact, breast cancer screening is generally
recommended as a routine part of preventive health care for over 90 million
women in the United States. Industry sources estimate that approximately 11.3
million mammograms and 800,000 surgical biopsies were performed in the United
States in 1994 (the last year for which such data is available from the
Centers For Disease Control). Moreover, the Physicians' Insurers Association
report for 1995 indicated that, during such year, failure to diagnose breast
cancer was the most common source of malpractice complaint among patients
with breast cancer and the second most expensive type of claim, with an
average indemnity payment of $301,460 during the six months preceding such
report.
From 1980 to 1984, clinical data from the use of the BreastAssure device
was collected on 3,262 women of all ages in five separate clinical trials at
six institutions and hospitals, including M.D. Anderson
4
<PAGE>
Hospital and Tumor Institute ("M.D. Anderson"), Brottman Memorial Hospital
(UCLA) ("Brottman"), Georgetown University School of Medicine, Memorial
Sloan-Kettering Hospital ("Sloan-Kettering") and Guttman Cancer Diagnostic
Institute ("Guttman Diagnostic"). The key results of the two principal
trials, one involving multiple sites, were as follows:
TRIAL 1 (M.D. ANDERSON, BROTTMAN, SLOAN KETTERING)
o BreastAssure Positives and Biopsy Correlation - The trial involved 145
women who underwent unilateral biopsy, 84 of whom were confirmed to
have cancer. The BreastAssure device tested positive for 74 of these 84
women for an 88.1% sensitivity index (agreement on positives with
biopsy).
TRIAL 2 (GUTTMAN DIAGNOSTIC)
o The BreastAssure device versus Clinical Screening for "Suspicion of
Cancer" (using mammography and clinical breast examination) - The trial
involved 2,805 women:
o 99 women were judged positive for "suspicion of cancer" based solely
on the standard screening methods, i.e., mammography and clinical
breast examination. Of the 99 women, 86 had positive breast thermal
activity based on the BreastAssure device results, for a sensitivity
index (agreement on positives with the standard clinical screening
methods) of 86.9%.
o Biopsy results confirmed cancer in 15 women, 13 of whom had positive
breast thermal activity based on the BreastAssure device results, for
a sensitivity index (agreement on positives with biopsy) of 86.7%.
o 2,706 women were judged negative using the standard clinical
screening methods. 2,340 women were found to have no breast thermal
activity based on the BreastAssure device results, for a specificity
index (agreement on negatives with the standard screening methods) of
86.5% for no "suspicion of cancer." Comparatively, in clinical
screening for "suspicion of breast cancer," mammography has a
reported specificity of 90.0% and sensitivity of 78.0% to 96.0%,
while clinical breast examination has a reported specificity of 57.0%
to 70.0% and BSE has a reported specificity of 20.0% to 30.0%.
The BTAI was patented in 1980 by Zsigmond L. Sagi, Ph.D. ("Dr. Sagi"), who
assigned the patents relating to the device, then called the "Breast Cancer
Screening Indicator," to a private company called BCSI Laboratories, Inc.
("BCSI"). In 1980, BCSI was acquired by Faberge, Incorporated ("Faberge") and
work on the BTAI continued. FDA authorization to market the BTAI was granted
in 1984. By that time, Faberge had constructed a plant and the necessary
machinery to commence commercial production of the BTAI. In 1985, Faberge was
acquired in a hostile takeover by McGregor Industries ("McGregor"). Following
the acquisition, McGregor reportedly discontinued work on many of the new
business projects Faberge had been pursuing, including the BTAI, but retained
ownership of the patent to, and regulatory approvals for, the BTAI. In 1986
Scantek Medical Corp. ("SMC") was formed by Dr. Sagi and purchased all of the
equity of BCSI (which still owned the patent rights and regulatory approvals
for the BTAI) from McGregor for approximately $500,000. In 1991, the assets
of SMC (including the patent rights and regulatory approvals for the
BreastAssure device) were acquired by Scantek Medical, Inc. ("Scantek"). In
October 1995, Scantek granted a license to the Company to manufacture and
market the BreastAssure device in the United States and Canada. See
"Business--License Agreement."
Certain stockholders, directors and officers of the Company and their
affiliates or designees intend to purchase 10% of the shares of Common Stock
offered hereby. See "Principal Stockholders" and "Underwriting."
The Company was incorporated in the State of Delaware on December 27,
1994. Its principal executive offices are located at 514 Centennial Avenue,
Cranford, New Jersey 07016 and its telephone number is (908) 709-3434.
5
<PAGE>
THE OFFERING
Common Stock offered by the
Company ..................... 2,500,000 shares
Common Stock outstanding prior
to the Offering ............. 5,020,313 shares(1)(2)
Common Stock to be outstanding
after the Offering .......... 7,520,313 shares(1)(2)
Use of Estimated Proceeds ..... Approximately $4,700,000 for sales and
marketing expenses; approximately $3,000,000
for clinical studies; approximately
$1,725,000 for capital equipment and
facility costs; approximately $1,050,000 for
licensing fees; approximately $1,000,000 for
inventory; and the balance, approximately
$6,025,000, for working capital and other
general corporate purposes. See "Use of
Proceeds" and "Certain Transactions."
Risk Factors and Dilution ..... An investment in the shares of Common Stock
offered hereby involves a high degree of
risk and immediate and substantial dilution.
Prospective investors should carefully
consider the matters set forth under the
captions "Risk Factors" and "Dilution."
Proposed Nasdaq Symbol ........ "HMSC"
- ------
(1) Excludes (i) 700,000 shares of Common Stock reserved for issuance under
the Company's 1996 Stock Incentive Plan (the "1996 Plan"), including (x)
128,000 shares issuable upon exercise of currently outstanding options
with an exercise price equal to the initial public offering price per
share in this Offering and (y) 572,000 shares available for issuance
subject to future grants; (ii) 142,500 shares issuable upon exercise of
options granted to certain officers and directors of the Company outside
of the 1996 Plan at an exercise price of $5.33 per share; (iii) 4,000
shares issuable upon exercise of options granted to three former
directors of the Company, all of which options are exercisable at $2.93
per share; (iv) 125,000 shares issuable upon exercise of the PSS Warrants
at an exercise price of $4.00 per share; (v) 536,250 shares issuable upon
exercise of warrants sold to investors in a private placement in May 1996
(the "May Private Placement"), which warrants ("Private Warrants") are
exercisable at $2.93 per share; (vi) 400,000 shares issuable to Burnham
Securities Inc. ("Burnham") upon exercise of Private Warrants issued to
Burnham in partial consideration of Burnham's services as placement agent
of the May Private Placement; (vii) 37,500 shares, issuable to Smith
Barney Inc. upon exercise of Private Warrants issued in connection with
the May Private Placement; (viii) an aggregate of 161,250 shares issuable
to Udi Toledano and members of his family and Herbert V. Turk and members
of his family upon exercise of warrants issued in connection with the May
Private Placement, all of which are exercisable at $2.93 per share (the
"Toledano Group Warrants"); (ix) 52,500 shares issuable upon exercise of
Private Warrants issued in connection with the May Private Placement upon
conversion of certain November Bridge Notes (as hereinafter defined); (x)
224,250 shares issuable upon exercise of warrants sold in a private
placement in March 1996, which warrants are exercisable at a price of
$0.67 per share; and (xi) options to purchase up to 18,750 shares which
may be issued to Zigmed pursuant to the Turnkey Construction Contract,
which options will be exercisable at $5.33 per share. See
"Business--Marketing and Distribution," "Management," "Certain
Transactions," "Principal Stockholders" and "Description of Securities."
(2) Includes 2,943,750 shares of Common Stock issuable upon automatic
conversion upon consummation of this Offering of the same number of
shares of Series A Convertible Preferred Stock ("Series A Preferred
Stock") currently outstanding, which were issued in connection with the
May Private Placement. See "Description of Securities."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months
ended March 31,
---------------------
December 27, 1994 December 27, 1994
(inception) to (inception) to
December 31, 1995 1996 1995 March 31, 1996
----------------- ---------- ------- -----------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Interest income ............... $ 1 $ 1 $ -- $ 2
Operating expenses ............ 212 239 49 452
------------- ---------- ----- -----
Net loss ........................ $ (211) $ (238) $(49) $(450)
============= ========== ===== =====
Pro forma net loss per share (1) . $ (.05) $ (.05)
============= ==========
Pro forma weighted average common
shares outstanding (1) ........ 4,618,033 4,831,917
============ ==========
</TABLE>
<TABLE>
<CAPTION>
As of
March 31, 1996
--------------------------------------------
As of Pro Forma,
December As
31, 1995 Actual Pro Forma(2) Adjusted(2)(3)
---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) ........... $(1,745) $(1,996) $ (618) $16,857
Current assets ...................... 224 229 611 18,008
Total assets ........................ 373 777 1,384 18,780
Notes payable ....................... 350 540 -- --
Due to officer ...................... 125 125 -- --
Long-term debt ...................... -- 42 42 42
Preferred stock (redeemable) (4) .... -- -- 1,873 --
Deficit accumulated during the
development stage .................. (211) (450) (720) (720)
Total stockholders' equity (deficit) . (1,596) (1,491) (1,760) 17,588
</TABLE>
- ------
(1) See Notes to Financial Statements for information concerning computation
of pro forma net loss per share and "Capitalization."
(2) Gives effect to the May Private Placement and the following transactions
(collectively, with the May Private Placement, the "Prior Transactions"):
(i) the conversion, in connection with the May Private Placement, of
$350,000 aggregate principal amount of certain bridge notes issued in
November 1995 (the "November Bridge Notes") into shares of Series A
Preferred Stock and Private Warrants and the payment of $16,488 of
accrued interest thereon; (ii) the exchange, in connection with the May
Private Placement, of $460,000 aggregate principal amount of certain
bridge notes issued in March 1996 (the "March Bridge Notes") into shares
of Series A Preferred Stock and Private Warrants, the payment of $8,171
of accrued interest thereon and a charge directly to deficit accumulated
during the development stage of $269,881 representing the unaccreted
discount on the March Bridge Notes as of March 31, 1996; (iii) the
exchange, in connection with the May Private Placement, of $74,000 due to
Donald B. Brounstein, the Company's President and Chief Executive
Officer, (including $40,000 in aggregate principal amount of March Bridge
Notes) for shares of Series A Preferred Stock and Private Warrants and
the payment of $91,000 (plus accrued interest on such March Bridge Notes
of $711 due to Mr. Brounstein) from the proceeds of the May Private
Placement; and (iv) the payment to Scantek and Zigmed of an aggregate of
$640,000 required by the terms of the License Agreement (as hereinafter
defined) and the Turnkey Construction Contract. Prior to the conversion
of the November Bridge
7
<PAGE>
Notes, and the exchange of the March Bridge Notes, into shares of Series
A Preferred Stock and warrants to purchase Common Stock in connection
with the May Private Placement, the November Bridge Notes and March
Bridge Notes each bore interest at the rate of 10% per annum.
(3) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $8.00 per share and
the initial application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
(4) Net of stock subscriptions receivable, which represents the portion of
the purchase price of the securities sold in the May Private Placement
still to be paid by the purchasers, which are to be paid in installments
in accordance with the terms of the May Private Placement. The obligation
of such purchasers to make such installment payments will cease upon
consummation of this Offering; no further installments will be due in the
event this Offering is consummated by August 15, 1996. See "Description
of Securities--Private Placements."
8
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk and immediate and substantial dilution and should be made only
by persons who can afford a loss of their entire investment. In addition to
the other information in this Prospectus, the following risk factors should
be considered carefully in evaluating an investment in the shares of Common
Stock offered hereby.
Absence of Operating History; Development Stage; Continuing Losses. The
Company was incorporated in December 1994, has no operating history and is in
the development stage. As such, the Company is subject to all of the business
risks associated with a new enterprise, including constraints on the Company's
resources, lack of established creditor relationships and uncertainties
regarding product development and future revenues. Since its inception, the
Company has been engaged only in development activities including negotiating
the License Agreement, Distribution Agreement and Turnkey Construction Contract,
hiring key employees and raising capital. As of December 31, 1995 and March 31,
1996, the Company had a stockholders' deficit of $1,595,651 and $1,490,528,
respectively. The Company has not derived any revenue from operations and has
incurred losses since inception. The Company does not anticipate deriving any
revenue from operations until such time as the BreastAssure device is available
for commercial delivery. The Company anticipates incurring significant costs in
connection with bringing the BreastAssure device to market, and has presently
allocated in "Use of Proceeds" approximately $6,425,000, to the establishment of
its manufacturing facility and marketing program. See "Use of Proceeds" and
"Business--Marketing and Distribution" and "--Manufacturing." The Company's
ability to operate its business successfully will depend, in part, on a variety
of factors, many of which are outside the Company's control, including changes
in governmental programs and requirements or in physician or consumer
preferences, changes in FDA and similar regulatory requirements, plant and
equipment repair and maintenance requirements, competition and changes in raw
material supplies and suppliers. The likelihood of success of the Company must
be considered in light of the expenses, difficulties and delays frequently
encountered in connection with the formation and early phase of operation of a
new business and the competitive environment in which it will operate. There can
be no assurance regarding whether or when the Company will successfully
implement its business plan or that the Company will achieve profitability by
generating sufficient revenues to offset anticipated costs. See "Management's
Discussion and Analysis of Financial Condition and Plan of Operation" and Note 1
of Notes to Financial Statements.
Significant Capital Requirements; Dependence on Offering Proceeds; Need
for Additional Financing. The Company's capital requirements in connection
with its product development and marketing activities will be significant.
The Company has been dependent upon the proceeds of sales of its securities
to private investors to fund its initial development activities. Since the
Company is not currently generating any revenue from operations, it is
dependent on the proceeds of this Offering to continue development
activities. The Company anticipates, based on its currently proposed plans
and assumptions relating to its operations, that the proceeds of this
Offering will be sufficient to satisfy its contemplated cash requirements for
at least 18 months following the consummation of this Offering. The Company's
future liquidity and capital funding requirements will depend on numerous
factors, including the results of clinical studies, the extent to which the
BreastAssure device gains market acceptance, the costs and timing of
expansion of sales, marketing and manufacturing activities and competition.
There can be no assurance that additional capital, if needed, will be
available on terms acceptable to the Company, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, will likely include restrictive covenants, including
financial maintenance covenants restricting the Company's ability to incur
additional indebtedness and to pay dividends. The failure of the Company to
raise capital on acceptable terms when needed could have a material adverse
effect on the Company. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Plan of Operation--Liquidity and Capital
Resources."
Dependence Upon a Single Product. The BreastAssure device is currently the
Company's only product and will account for substantially all of the
Company's revenue, if any, for the foreseeable future. The BreastAssure
device was approved by FDA in January 1984 under Section 510(k) of the FDC
Act ("510(k) Market Rights") to be marketed for use by physicians as an
adjunct to routine physical examination, including palpation, mammography and
other established procedures for the detection of breast disease, but has not
yet been commercially introduced. There can be no assurance that, when
manufactured, the BreastAssure device will be effective
9
<PAGE>
or that it will be more effective than competing products or technologies,
capable of being manufactured in commercial quantities at acceptable costs or
successfully marketed. If the BreastAssure device is not successfully
commercialized, it is likely that the Company's business operations would
cease. See "Business--The BreastAssure Device."
Uncertainty of Market Acceptance; Certain Thermographic Applications Not
Accepted. The Company's success will be substantially dependent upon, among
other factors, the market acceptance of the BreastAssure device. The Company
has not yet commenced marketing activities or conducted market or feasibility
studies with respect to the BreastAssure device. The Company believes that
market acceptance of the BreastAssure device will depend, in part, upon the
Company's ability to demonstrate to physicians the clinical benefits, safety,
efficacy and cost-effectiveness of the BreastAssure device. Prior
thermographic devices which, unlike the BreastAssure device, involved imaging
rather than measurement of temperature differences, did not perform as
intended. In 1983, the Office of Health Technology Assessment ("OHTA") of the
Department of Health and Human Services issued a report stating that
thermography needed further development and should not be used alone for
diagnostic screening. In 1984, the Health Care Financing Administration ("HCFA")
withdrew coverage for thermography under Medicare and Medicaid as a diagnostic
screening method. In 1991, based upon reports which addressed the use of
thermography in neurological and musculoskeletal conditions, the American
Medical Association ("AMA") passed a resolution stating that thermography had
not been proven to have value as a medical diagnostic test. In 1992, HCFA
withdrew Medicare and Medicaid reimbursement for all other uses of thermography.
In 1993, the AMA adopted a resolution stating that the use of thermography for
diagnostic purposes could not be recommended at that time. Although the
BreastAssure device is adjunctive and is not to be used for diagnosis of breast
disease, the OHTA, HCFA and AMA positions against the use of thermography as a
diagnostic tool may cause confusion among physicians. The Company will need to
demonstrate that the BreastAssure device is an effective adjunct to diagnostic
procedures. In the event that the BreastAssure device fails to achieve
significant market acceptance, it is likely that the Company's business
operations would cease. See "Management's Discussion and Analysis of Financial
Condition and Plan of Operation," "Business--The BreastAssure Device,"
"--Marketing and Distribution" and "--Reimbursement."
No Manufacturing Experience; Dependence on Zigmed, Inc. The Company has no
experience in manufacturing the BreastAssure device and has not yet
manufactured it. If the Company is unable to manufacture the BreastAssure
device, the Company would not be able to commercialize it, in which event, it
is likely that the Company's business operations would cease. If the Company
encounters manufacturing difficulties, including problems involving
production yields, quality control and assurance, shortages of components or
shortages of qualified personnel, it could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, there is no assurance that the Company will be able to manufacture
the BreastAssure device in accordance with FDA's current Good Manufacturing
Practice ("cGMP") regulations, which require that medical device
manufacturers comply with various requirements pertaining to organization and
personnel; buildings, environmental control, cleaning and sanitation;
equipment and calibration of equipment; medical device components;
manufacturing specifications and processes; reprocessing of devices; labeling
and packaging; finished device inspection; device failure investigations, and
recordkeeping requirements including complaint files. The Company has entered
into the Turnkey Construction Contract with Zigmed for the turnkey
construction of the Production Line and is dependent on Zigmed for the
construction of the Production Line. In the event Zigmed fails to complete
the Production Line, the Company would be forced to complete the Production
Line itself or pay another contractor to complete it. Unless the Production
Line is substantially completed by Zigmed, it is unlikely that the Company
could complete the Production Line itself, and there can be no assurance that
the Company could find another contractor willing to complete the Production
Line or complete it at a cost acceptable to the Company. Failure by Zigmed to
complete the Production Line would, and failure by Zigmed to complete it as
scheduled could, have a material adverse effect on the Company. Zigmed is
controlled by Zsigmond G. Sagi, the son of Dr. Sagi, the Chairman of the
Board of Scantek. The Company has agreed to pay Zsigmond G. Sagi certain
bonuses for timely completion of the Production Line and Mr. Sagi has agreed
to pay the Company damages in the event the Production Line is not completed
by the scheduled delivery date. In addition, Scantek has agreed to pay
damages to the Company if the Production Line is not accepted by the Company
pursuant to the Turnkey Construction Contract by the scheduled delivery date.
See "Business-- Manufacturing" and "--Government Regulation."
10
<PAGE>
Termination of License Agreement if Certain Threshold Royalties are not
Earned. The Company has licensed the rights to the BreastAssure device from
Scantek pursuant to a license agreement dated as of October 20, 1995, as
amended (the "License Agreement"). The License Agreement provides that the
Company is to pay minimum royalties of $150,000, $300,000, $400,000 and
$500,000, respectively, in the first four years in which the BreastAssure
device is sold and $600,000 in the fifth and subsequent years. It also
provides for the automatic termination of the License Agreement if earned
royalties for the first three years in which product is sold do not exceed an
aggregate of $950,000. There is no assurance that the BreastAssure device
will be commercialized successfully, or that threshold royalties will be
earned. Any such termination of the License Agreement for failure to earn
threshold royalties would be likely to cause the Company's business
operations to cease. See "Business--License Agreement."
Lack of Marketing Experience; Dependence on Physician Sales & Services,
Inc. The Company currently has no marketing experience and limited financial,
personnel and other resources to undertake the extensive marketing activities
necessary to market the BreastAssure device. The Company's ability to
generate revenue from the sale of the BreastAssure device will be dependent
upon, among other things, its ability to manage an effective sales
organization. The Company will need to develop a sales force and a marketing
group with technical expertise to coordinate marketing efforts with PSS. The
Company has entered into an exclusive distribution agreement with PSS and
will be significantly dependent on PSS for distribution and sales. Failure by
PSS to perform as anticipated would have a material adverse effect on the
Company's operations. In addition, there can be no assurance that the Company
will be able to market or sell its products effectively through independent
sales representatives, through arrangements with some other outside sales
force, or through strategic partners. See "Business--Marketing and
Distribution."
Government Regulation. The Company's products and manufacturing activities
are subject to extensive government regulation, both in the United States and
abroad. In the United States, the development, manufacture, marketing and
promotion of medical devices are regulated by FDA under the FDC Act. Unless
exempted by regulation, the FDC Act and the regulations implemented
thereunder require that all products meeting the statutory definition of
"device" receive FDA clearance or approval prior to marketing in the United
States. The BreastAssure device obtained 510(k) Market Rights from FDA in
1984. The Company has not obtained clearance or approval to market its
products in any foreign country. See "Business--Government Regulation."
Based upon reservations about the use of thermography for diagnostic
purposes expressed by OHTA, HCFA and AMA (see "Risk Factors--Uncertainty of
Market Acceptance; Certain Thermographic Applications Not Accepted"), there
is a risk that FDA could reevaluate the bases upon which it granted the
Company's 510(k) Market Rights in 1984 and classified devices such as the
BreastAssure device as Class I devices in 1988. If FDA were to reevaluate
these decisions and conclude that additional data were necessary to support
authorization to market the BreastAssure device, it could rescind previous
510(k) Market Rights for breast thermographic devices and/or reclassify these
devices from Class I medical devices to Class III medical devices (which
would effectively vitiate the Company's 510(k) Market Rights and require
filing of a new application for premarket approval prior to marketing). In
either event, the Company would be required to cease marketing the
BreastAssure device until it filed a premarket approval application ("PMA")
with FDA and received a new approval to market the BreastAssure device.
The FDC Act requires manufacturers to obtain new FDA clearance or approval
when, among other things, there is a major change in the intended use of a
legally marketed device or a modification, including product enhancements, to
a legally marketed device that could significantly affect its safety or
effectiveness. Manufacturers are responsible for making the initial
determination regarding the significance of these changes. There can be no
assurance that FDA will agree with a decision that changes to a device are
not significant and, thus, do not require FDA review and approval. In the
event FDA were to require the filing of a new 510(k) notification or a PMA
for a change it regarded as significantly affecting the safety or
effectiveness of the device, the Company may be prohibited from marketing the
modified device until FDA reviews and approves the new 510(k) notification or
PMA. FDA also requires that manufacturing conform to strict quality assurance
standards required by cGMP regulations. FDA's cGMP regulations require that
medical device manufacturers comply with various requirements pertaining to
organization and personnel; buildings, environmental control, cleaning and
sanitation;
11
<PAGE>
equipment and calibration of equipment; medical device components;
manufacturing specifications and processes; reprocessing of devices; labeling
and packaging; finished device inspection; device failure investigations, and
recordkeeping requirements including complaint files. There can be no
assurance that the Company will attain and maintain compliance with cGMP
standards.
Noncompliance with applicable FDA requirements can result in, among other
things, rejection or withdrawal of premarket clearance or approval for
devices, recall or seizure of products, total or partial suspension of
production, fines, injunctions and civil and criminal penalties. FDA also has
the authority to request repair, replacement or refund of the cost of any
devices manufactured or sold by the Company. Any of these sanctions may have
a material adverse effect on the Company's business, financial condition or
results of operations. See "Business--Government Regulation."
Under Canada's current Food and Drugs Act and Medical Devices Regulations,
the vast majority of medical devices enter the Canadian market without any
type of premarket approval; device manufacturers are required only to notify
the government that the device will be marketed in Canada.
The Canadian government has announced its intention to promulgate new
regulations in the immediate future which will establish four classes of
devices. These new regulations (assuming they are published in September 1996)
are intended to be effective in September 1997. It is not clear how the
BreastAssure device would be classified and regulated under the new Canadian
regulations. See "Business--Government Regulation."
Patents and Proprietary Information; Effect of Expiration of Patents on
Competitive Pricing. Scantek, the licensor of the BreastAssure device, holds
two United States patents and one Canadian patent (the "Patents") covering
the use of the BreastAssure device as a device for adjunctive use in the
early detection of breast cancer. Although the Patents are licensed to the
Company for the United States and Canada pursuant to the License Agreement,
both United States patents expire on May 22, 1998 and the Canadian patent
expires on August 24, 1999. There can be no assurance that the Patents will
provide meaningful protection from competition. The Company's policy is to
attempt to protect its technology by, among other things, obtaining patent
rights for technology that it considers important to the development of its
business and requiring each employee and key consultant to execute a
confidentiality agreement. There can be no assurance that the Company's
confidentiality agreements and other safeguards will protect its proprietary
information and trade secrets or provide adequate remedies for the Company in
the event of unauthorized use or disclosure of such information, or that
others will not be able independently to develop such information. In
addition, in the event that the Company becomes involved in litigation to
enforce its proprietary rights, such litigation can be a lengthy and costly
process causing diversion of effort and resources by the Company and its
management with no guarantee of success. Other parties may be issued patents
that may prevent the sale of the Company's products or require licenses and
the payment of royalties by the Company. It is possible that after the
Patents expire, other companies, inside and outside the United States, may
adopt the concept and/or design embodied in the BreastAssure device and seek
to compete with the Company. In the event such competition is encountered,
the Company would have to rely on name recognition, product acceptance,
quality and the distribution network of PSS in order to compete successfully,
and there can be no assurance that the Company will be able to so compete.
Moreover, the Company could be put at a competitive disadvantage by the
payment of any royalties, which may have a material adverse effect on its
ability to market its product successfully.
Although to date no claims have been brought against the Company alleging
that the BreastAssure device infringes intellectual property rights of
others, there can be no assurance that such claims will not be brought
against the Company in the future, or that, if made, such claims will not be
successful. In addition to any potential monetary liability for damages, the
Company could be required to obtain a license in order to continue to
manufacture or market the BreastAssure device or could be enjoined from
making or selling the BreastAssure device if such a license were not made
available on acceptable terms. If the Company becomes involved in such
litigation, it may require the expenditure of significant Company resources
and, if such a claim were successful, the Company's business could be
materially adversely affected. See "Business--Patents; Proprietary
Information."
Competition. The Company is not aware of any low-cost devices currently on
the market which compete with the BreastAssure device. Nevertheless, the
Company's potential competitors may succeed in developing
12
<PAGE>
products that are more effective or less costly than the Company's products,
and such competitors may also prove to be more successful than the Company in
manufacturing, marketing and sales. Some of the Company's potential
competitors may be large, well-financed and established companies that have
greater resources for research and development, manufacturing and marketing
than the Company and, therefore, may be better able than the Company to
compete for a share of the market even in areas in which the Company may have
superior technology. The Company's potential competitors may include one or
more of the approximate 3,000 other manufacturers represented by PSS.
Pursuant to the Distribution Agreement, PSS has agreed not to distribute a
product substantially identical to the BreastAssure device during the term of
the agreement unless PSS determines that the BreastAssure device is not
competitive with such other products on the basis of sales, pricing,
quantity, verifiable results or customer acceptance. The Company is also
aware of a diagnostic device being developed by Biofield Corp. which is
intended to measure the differential in the electric potential between normal
and cancerous tissue. The Company believes the marketing of this device will
be subject to authorization by FDA and that it therefore is not yet
competitive with the BreastAssure device. See "Business--Competition."
Technological Obsolescence. The market for products such as the
BreastAssure device is characterized by rapid changes and evolving industry
standards often resulting in product obsolescence or short product
lifecycles. Accordingly, the ability of the Company to compete will depend on
its ability to introduce the BreastAssure device to the marketplace in a
timely manner, and to enhance and improve it. There can be no assurance that
the Company's competitors or future competitors will not develop technologies
or products that render the BreastAssure device obsolete or less marketable
or that the Company will be able to successfully enhance its proposed
products or technology or adapt them satisfactorily. See
"Business--Competition."
Dependence on Qualified Personnel. The success of the Company is dependent
on the continued efforts of Donald B. Brounstein, James J. Whidden and
Kenneth S. Hollander, the Company's President and Chief Executive Officer,
Senior Vice President of Clinical Development and Chief Financial Officer,
respectively. The loss of Mr. Brounstein's, Mr. Whidden's and/or Mr.
Hollander's services could have a material adverse effect on the Company's
operations. The Company has employment agreements with Messrs. Brounstein,
Whidden and Hollander, each of which agreements prohibits any such employee
from (i) competing with the Company for one year following his termination of
employment with the Company and (ii) disclosing confidential information or
trade secrets in any unauthorized manner. The Company plans to obtain
$8,000,000 of key person life insurance on Mr. Brounstein upon completion of
this Offering. The success of the Company is also dependent upon its ability
to hire and retain additional qualified scientific, managerial and
manufacturing personnel. The Company intends to utilize professional
recruiters to locate qualified personnel and to offer appropriate
compensation packages to attract and retain such personnel. Competition for
personnel is intense in the medical device manufacturing industry. There can
be no assurance that the Company will be able to attract and retain qualified
personnel. See "Business--Employees" and "Management."
Uncertainties Regarding Third-Party Reimbursement and Health Care Reform.
Hospitals, medical clinics and physicians' offices that purchase medical
devices like the BreastAssure device generally rely on third-party payors,
such as Medicare, Medicaid and private health insurance plans, to pay for
some or all of the costs of the screening and diagnostic procedures performed
with these devices. Whether a particular procedure qualifies for third-party
reimbursement depends upon such factors as the safety and effectiveness of
the procedure, and reimbursement may be denied if the medical device is
experimental or was used for a non-approved indication. In 1984, HCFA
withdrew coverage for thermography under Medicare and Medicaid as a
diagnostic screening method. In 1992, HCFA withdrew Medicare and Medicaid
reimbursement for all other uses of thermography. There can be no assurance
that third-party reimbursement will be available for the BreastAssure device
or that the full or any part of the cost of the BreastAssure device would be
covered by such reimbursement. During the past several years, the major
third-party payors for hospital services have substantially revised their
payment methodologies to contain healthcare costs. The Company believes that
the current pressures for medical cost containment have resulted in
uncertainty in the healthcare industry. Reimbursement standards and rates may
change in the future. The failure of users of the BreastAssure device to
obtain adequate reimbursement from third-party payors could have a material
adverse effect on the Company. Several states and the United States
government are investigating a variety of alternatives to reform the health
care delivery system and further reduce and control health care spending.
These reform efforts include proposals to limit spending on health care
13
<PAGE>
items and services, limit coverage for new technology and limit or control
the price health care providers and drug and device manufacturers may charge
for their services and products, respectively. If adopted and implemented,
such reforms could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Reimbursement."
Risk of Product Liability Claims. The nature of the Company's products may
expose the Company to product liability risks. The Company currently does not
maintain product liability insurance coverage. Although the Company plans to
obtain at least $5,000,000 of product liability insurance coverage before
sales of the Breast- Assure device begin, such insurance is becoming
increasingly expensive and there can be no assurance that the Company will be
able to obtain or maintain such insurance on acceptable terms or that such
insurance, if obtained, will provide adequate coverage against product
liability claims. While no product liability claims have been brought against
the Company to date, a successful product liability claim against the Company
in excess of its insurance coverage could have a material adverse effect on
the Company. See "Business--Product Liability and Insurance."
Dependence on Third-Party Suppliers. The Company believes that there are
several sources from which it may purchase the components of the BreastAssure
device. The Company anticipates that it will obtain certain of the components
of the BreastAssure device from a single or limited number of sources of
supply. Although the Company believes it will be able to negotiate
satisfactory supply agreements, failure to do so may have a material adverse
effect on the Company. Furthermore, there can be no assurance that suppliers
will dedicate sufficient production capacity to satisfy the Company's
requirements within scheduled delivery times or at all. Failure or delay by
the Company's suppliers in fulfilling its anticipated needs may adversely
affect the Company's ability to market the BreastAssure device. See
"Business--Raw Materials."
Potential Conflicts of Interest. In connection with its acquisition of the
technology relating to the BreastAssure device, the Company entered into the
License Agreement with Scantek, the Distribution Agreement with PSS and the
Turnkey Construction Contract with Zigmed. Upon completion of this Offering,
Scantek will own beneficially approximately 13.5%, and PSS will own
beneficially approximately 2.7%, of the Company's outstanding Common Stock.
John F. Sasen, Sr., the President of PSS, is a director of the Company.
Zigmed is controlled by Zsigmond G. Sagi, the son of Dr. Sagi, the Chairman
of the Board of Scantek. The Company believes that the terms of the License
Agreement, Distribution Agreement and Turnkey Construction Contract are at
least as favorable to the Company as could be obtained from third parties in
arms' length transactions. Nevertheless, these relationships could result in
conflicts of interest and none of PSS, Mr. Sasen, Scantek, Dr. Sagi or Zigmed
is under any obligation to resolve such conflicts in favor of the Company. In
connection with this Offering, the Company has adopted a policy whereby all
future transactions between the Company and its officers, directors,
principal stockholders or affiliates, will be approved by a majority of the
Board of Directors, including a majority of the independent and disinterested
members of the Board of Directors or, if required by law, a majority of
disinterested stockholders, and will be on terms no less favorable to the
Company than could be obtained in arm's length transactions from unaffiliated
third parties. See "Business--Marketing and Distribution-- Distribution
Agreement with PSS," "--License Agreement" and "--Manufacturing" and "Certain
Transactions."
Broad Discretion of Management and the Board of Directors in Use of
Proceeds. Although the Company intends to apply the net proceeds of this
Offering in the manner described under "Use of Proceeds," the Company's
management and the Board of Directors have broad discretion within such
proposed uses as to the precise allocation of the net proceeds, the timing of
expenditures and all other aspects of the use thereof. In addition,
approximately 34.4% (43.2% if the Underwriters' over-allotment option is
exercised in full) of the net proceeds of this Offering will be allocated and
used for working capital and other general corporate purposes. The Company
reserves the right to reallocate the net proceeds of this Offering among the
various categories set forth under "Use of Proceeds" as it, in its sole
discretion, deems necessary or advisable based upon prevailing business
conditions and circumstances. See "Use of Proceeds."
Immediate and Substantial Dilution; Disparity of Consideration. Purchasers
of the shares of Common Stock offered hereby (at an assumed initial public
offering price of $8.00 per share) will incur an immediate dilution in net
tangible book value per share of Common Stock of $5.66 (70.7%) per share
($5.43 per share (67.9%) if the Underwriters' over-allotment option is
exercised in full). Additional dilution to future net tangible book value per
share may occur upon the exercise of the Representative's Warrants and
options and warrants that are out-
14
<PAGE>
standing or to be issued under the Company's option plans or otherwise. The
current stockholders of the Company, including the Company's officers and
directors, acquired their shares of Common Stock for nominal consideration or
for consideration substantially less than the initial public offering price
of the shares of Common Stock offered hereby. See "Capitalization,"
"Dilution" and "Certain Transactions."
Absence of Dividends. The Company has never paid a dividend on the Common
Stock and does not expect to pay any dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
Arbitrary Offering Price. The initial public offering price of the Common
Stock has been determined arbitrarily by negotiations between the Company and
the Representative. Factors considered in such negotiations, in addition to
prevailing market conditions, included the history and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure, the market
for initial public offerings and certain other factors as were deemed
relevant. Consequently, the initial public offering price of the Common Stock
does not necessarily bear any relationship to the Company's asset value, net
worth or other established valuation criteria and may not be indicative of
prices that may prevail at any time or from time to time in the public market
for the Common Stock. See "Underwriting."
No Prior Public Trading Market; Potential Volatility of Stock Price. Prior
to this Offering, there has been no public market for the Company's Common
Stock and there can be no assurance that an active trading market will
develop or be sustained after this Offering. The initial public offering
price negotiated between the Company and the Representative may not be
indicative of prices that will prevail in the trading market. The market
prices for securities of companies engaged primarily in medical technology
have at times in the past been volatile. The announcement of technological
innovations or new commercial products by the Company or its competitors,
governmental regulations, regulatory approvals or developments relating to
patents or proprietary rights, publicity regarding actual or potential
clinical results with respect to products under development by the Company or
others, as well as period-to-period fluctuations in financial results and
general economic, political and market conditions, may have a significant
impact on the market price of the Common Stock. See "Underwriting."
No Assurance of Continued Nasdaq Listing. The Board of Governors of the
National Association of Securities Dealers, Inc. has established certain
standards for the initial listing and continued listing of a security on
Nasdaq. The standards for initial listing require, among other things, that
an issuer have total assets of $4,000,000 and capital and surplus of at least
$2,000,000; that the minimum bid price for the listed securities be $3.00 per
share; that the minimum market value of the public float (the shares held by
non-insiders) be at least $2,000,000, and that there be at least two market
makers for the issuer's securities. The maintenance standards require, among
other things, that an issuer have total assets of at least $2,000,000 and
capital and surplus of at least $1,000,000; that the minimum bid price for
the listed securities be $1.00 per share; that the minimum market value of
the "public float" be at least $1,000,000 and that there be at least two
market makers for the issuer's securities. A deficiency in either the market
value of the public float or the bid price maintenance standard will be
deemed to exist if the issuer fails the individual stated requirement for ten
consecutive trading days. If an issuer falls below the bid price maintenance
standard, it may remain on Nasdaq if the market value of the public float is
at least $1,000,000 and the issuer has $2,000,000 in equity. There can be no
assurance that the Company will continue to satisfy the requirements for
maintaining a Nasdaq listing. If the Company's securities were to be excluded
from Nasdaq, it would adversely affect the prices of such securities and the
ability of holders to sell them, and the Company would be required to comply
with the initial listing requirements to be relisted on Nasdaq.
If the Company is unable to satisfy Nasdaq's maintenance requirements and
the price per share were to drop below $5.00, then unless the Company
satisfied certain net asset tests, the Company's securities would become
subject to certain penny stock rules promulgated by the Securities and
Exchange Commission. The penny stock rules require a broker-dealer, prior to
a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document prepared by the Commission
that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held
in the customer's account. In addition, the penny stock rules require that
prior to a transaction in a penny stock not otherwise exempt from such rules,
the broker-dealer must make a special written determination
15
<PAGE>
that the penny stock is a suitable investment for the purchaser and receive
the purchaser's written agreement to the transaction. These disclosure
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that becomes subject to the penny stock
rules. If the Company's Common Stock becomes subject to the penny stock
rules, investors in the Offering may find it more difficult to sell their
shares.
Shares Eligible for Future Sale. Future sales of shares of Common Stock by
existing stockholders, or optionholders or warrantholders upon exercise of their
options or warrants, pursuant to Rule 144 ("Rule 144") promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), or otherwise, could
have an adverse effect on the price of shares of Common Stock. Sales of
substantial amounts of Common Stock or the perception that such sales could
occur could adversely affect prevailing market prices for the Common Stock. Each
of the Company and the current stockholders and holders of options, warrants or
other securities exercisable or exchangeable for or convertible into Common
Stock who hold more than 1% of the Common Stock (including Common Stock
underlying options, warrants or other securities exercisable or exchangeable for
or convertible into Common Stock) have entered into certain lock-up agreements
with the Representative. See "Description of Securities," "Shares Eligible for
Future Sale" and "Underwriting."
Anti-Takeover Provisions. The Company's Board of Directors has the
authority to issue up to 1,825,000 shares of undesignated preferred stock and
to determine the price, rights, preferences and privileges of those shares
without any further vote or action by the stockholders. The rights of holders
of Common Stock will be subject to, and may be adversely affected by, the
rights of holders of any preferred stock that may be issued in the future.
There are presently no shares of undesignated preferred stock outstanding.
Although the Company has no present intention to issue shares of undesignated
preferred stock after consummation of this Offering, any issuance of
undesignated preferred stock, while potentially providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company.
Additionally, following this Offering, the Company will become subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which will prohibit the Company 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 a prescribed
manner. Section 203 could have the effect of delaying or preventing a change
of control of the Company. See "Description of Securities-- Limitations Upon
Transactions with 'Interested Stockholders.' "
Limitation of Liability and Indemnification. The Company's Certificate of
Incorporation limits, to the maximum extent permitted by the Delaware General
Corporation Law ("Delaware Law"), the personal liability of directors for
monetary damages for breach of their fiduciary duties as a director, and
provides that the Company shall indemnify its officers and directors and may
indemnify its employees and other agents to the fullest extent permitted by
law. The Company has entered into indemnification agreements with its
directors which may require the Company, among other things, to indemnify
such directors against liabilities that may arise by reason of their status
or service as directors or officers (other than liabilities arising from
willful misconduct of a culpable nature), to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance, if available
on reasonable terms. The Company intends to purchase approximately $5,000,000
of directors' and officers' liability insurance after the completion of this
Offering and expects to pay annual premiums of between $150,000 and $200,000
for such insurance. Section 145 of the Delaware Law provides that a
corporation may indemnify a director, officer, employee or agent made or
threatened to be made a party to an action by reason of the fact that he was
a director, officer, employee or agent of the corporation or was serving at
the request of the corporation against expenses actually and reasonably
incurred in connection with such action if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding,
if he had no reasonable cause to believe his conduct was unlawful. Delaware
Law does not permit a corporation to eliminate a director's duty of care, and
the provisions of the Company's Certificate of Incorporation have no effect
on the availability of equitable remedies, such as injunction or rescission,
for a director's breach of the duty of care. See "Description of
Securities--Limitation of Liability and Indemnification."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$8.00 per share are estimated to be $17,500,000 ($20,200,000 if the
Underwriters' over-allotment option is exercised in full), after deducting
the underwriting discount of $1,600,000 ($1,840,000 if the Underwriters'
over-allotment option is exercised in full) and estimated Offering expenses
of $900,000 ($960,000 if the Underwriters' over-allotment option is exercised
in full) payable by the Company (including the $400,000 non-accountable
expense allowance ($460,000 if the Underwriters' over-allotment option is
exercised in full) payable to the Representative). The Company currently
intends to utilize the net proceeds of this Offering approximately as
follows:
Sales and Marketing Expenses ................. $ 4,700,000 26.9%
Clinical Studies ............................. 3,000,000 17.1%
Capital Equipment and Facility Costs ......... 1,725,000 9.9%
Licensing Fees ............................... 1,050,000 6.0%
Inventory .................................... 1,000,000 5.7%
Working Capital and General Corporate Purposes . 6,025,000 34.4%
----------- ------
Total ...................................... $17,500,000 100.0%
Sales and Marketing Expenses. The Company plans to allocate approximately
$4,700,000 of the net proceeds of this Offering to sales and marketing
expenses and the establishment of its sales and marketing capabilities, which
will include participation in trade shows, business travel, advertising in
professional magazines, the preparation of sales materials, market research,
and development of a sales force. See "Business--Marketing and Distribution."
Clinical Studies. The Company plans to allocate approximately $3,000,000
of the net proceeds of this Offering to product enhancement, which includes
amounts required to conduct additional clinical trials of the BreastAssure
device. See "Business--Clinical Trials."
Capital Equipment and Facility Costs. The Company plans to allocate
approximately $1,725,000 of the net proceeds of this Offering to capital
equipment and facility costs, which will include the balance due under the
Turnkey Construction Contract for the construction of the Production Line
($1,030,680), costs for warehouse equipment, rental of the Company's
headquarters and manufacturing facility and costs for related leasehold
improvements ($250,000). See "Business--Manufacturing."
Licensing Fees. The Company plans to allocate approximately $1,050,000 of
the net proceeds of this Offering to additional product license payments
required under the License Agreement with Scantek. See "Business--License
Agreement."
Inventory. The Company plans to allocate approximately $1,000,000 of the net
proceeds of this Offering to the production of inventory. The production of
inventory will consist of the purchase of raw materials and the assembly of such
raw materials into the BreastAssure device using the Production Line.
Working Capital and General Corporate Purposes. The Company plans to
allocate the balance of the net proceeds of this Offering, approximately
$6,025,000 (plus any proceeds received from the exercise of the Underwriters'
over-allotment option), to working capital and general corporate purposes.
The foregoing represents the Company's current best estimate of its
allocation of the net proceeds of this Offering based on the current state of
its business operations, its current plans and current economic and industry
conditions. Although the Company does not contemplate material changes in the
proposed allocation of the use of proceeds, to the extent the Company finds
that adjustment is required by reason of business conditions or otherwise,
the amounts shown may be adjusted among the uses indicated above.
Additionally, it is the Company's policy regularly to review potential
opportunities to acquire technologies and products compatible with its
existing business and it may use a portion of the net proceeds of this
Offering to make such acquisitions, although the Company does not currently
have any arrangements, understandings or agreements with respect thereto. See
"Risk Factors--Broad Discretion of Management and the Board of Directors in
Use of Proceeds."
17
<PAGE>
The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that the net proceeds of this
Offering will be sufficient to satisfy its contemplated cash requirements for
at least 18 months following the consummation of this Offering. The Company's
future liquidity and capital funding requirements will depend on numerous
factors, including the results of clinical trials, the extent to which the
BreastAssure device gains market acceptance, the costs and timing of
expansion of sales, marketing and manufacturing activities and competition.
There can be no assurance that additional capital, if needed, will be
available on terms acceptable to the Company, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, will likely include restrictive covenants and
provide for security interests in the Company's assets. The failure of the
Company to raise capital on acceptable terms when needed could have a
material adverse effect on the Company. See "Risk Factors--Significant
Capital Requirements; Dependence on Offering Proceeds; Need for Additional
Financing." Pending the aforementioned uses, the net proceeds of this
Offering will be invested in interest-bearing government securities or
short-term, investment grade securities.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since its
inception and does not intend to pay any dividends on its Common Stock in the
foreseeable future. The payment of any dividends in the future will depend on
the evaluation by the Company's Board of Directors of such factors as it
deems relevant at the time and restrictions imposed by the terms of the
Company's debt obligations, if any. As of the date of this Prospectus, the
Company has no debt obligations that impose restrictions on the payment of
dividends. Currently, the Board of Directors believes that all of the
Company's earnings, if any, should be retained for the development of the
Company's business.
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and the capitalization
of the Company as of March 31, 1996: (i) on an actual basis; (ii) on a pro
forma basis to give effect to the issuance to Scantek of an aggregate of
329,063 shares of Common Stock pursuant to the License Agreement and the
Prior Transactions subsequent to March 31, 1996; and (iii) on a pro forma, as
adjusted basis to give effect to the sale of 2,500,000 shares of Common Stock
(assuming an initial public offering price of $8.00 per share) offered hereby
less the underwriting discount, the non-accountable expense allowance and the
other estimated Offering expenses payable by the Company and the initial
application of the estimated net proceeds from this Offering in the manner
set forth under the caption "Use of Proceeds" and the conversion of the
2,943,750 shares of Series A Preferred Stock into shares of Common Stock on a
share-for-share basis upon consummation of this Offering. See "Use of
Proceeds" and "Description of Securities--Preferred Stock--Series A
Convertible Preferred Stock."
<TABLE>
<CAPTION>
March 31, 1996
--------------------------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
---------- -------------------- -------------
(dollars in
thousands)
<S> <C> <C> <C>
Short-term debt(1) ............................. $ 665 $ -- $ --
========== ========== =========
Long-term debt(2) .............................. $ 42 $ 42 $ 42
---------- ---------- ---------
Preferred Stock (redeemable), $.01 par value,
6,000,000 shares authorized; no shares issued and
outstanding, actual; 2,943,750 shares issued and
outstanding (net of stock subscriptions receivable
of $4,479,300(3), pro forma; no shares issued and
outstanding, pro forma, as adjusted. .......... -- 1,873 --
---------- ---------- ---------
Stockholders' equity (deficit):
Common Stock, $.01 par value, 25,000,000 shares
authorized; 1,747,500 shares issued and
outstanding, actual; 2,076,563 shares issued
and outstanding, pro forma; 7,520,313 shares
issued and outstanding, pro forma, as adjusted 17 21 75
Additional paid-in capital .................... (1,058) (1,062) 18,232
Deficit accumulated during the development stage (450) (720) (720)
---------- ---------- ---------
Total stockholders' equity (deficit) ...... (1,491) (1,760) 17,588
---------- ---------- ---------
Total capitalization ....................... $(1,449) $ 155 $17,630
========== ========== =========
</TABLE>
- ------
(1) Represents November Bridge Notes and March Bridge Notes payable, net of
discount, and amounts due to officer.
(2) Represents capital lease obligations.
(3) Stock subscriptions receivable represent the portion of the purchase
price of the securities sold in the May Private Placement still to be
paid by the purchasers, which are to be paid in installments in
accordance with the terms of the May Private Placement. The obligation of
such purchasers to make such installment payments will cease upon
consummation of this Offering; no further installments will be due in the
event this Offering is consummated by August 15, 1996. See "Description
of Securities--Private Placements."
19
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996
(after giving effect to the issuance to Scantek of an aggregate of 329,063
shares of Common Stock pursuant to the License Agreement and the Prior
Transactions) was $112,885 or $0.05 per share of Common Stock. For purposes
of this discussion, the redeemable Series A Convertible Preferred Stock was
considered as equity. Pro forma net tangible book value per share represents
the amount of total tangible assets less total liabilities divided by the
number of shares of Common Stock outstanding. After giving effect to the
receipt of the net proceeds from the sale of the 2,500,000 shares of Common
Stock offered hereby (assuming an initial public offering price of $8.00 per
share) and the conversion of the 2,943,750 shares of Series A Preferred Stock
outstanding into shares of Common Stock on a share-for-share basis upon
consummation of this Offering, the pro forma net tangible book value of the
Company as of March 31, 1996 would have been $17,587,685, or $2.34 per share.
This represents an immediate increase in such pro forma net tangible book
value of $2.29 per share to existing stockholders and an immediate dilution
of $5.66 per share (70.7%) to the persons purchasing shares of Common Stock
at the initial public offering price. The following table illustrates this
per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share ........................... $8.00
Pro forma net tangible book value per share as of March 31, 1996 after
giving effect to the Prior Transactions ............................ $0.05
Increase per share attributable to new investors ..................... $2.29
-----
As adjusted pro forma net tangible book value per share as of March 31,
1996 after this Offering ........................................... $2.34
-------
Dilution per share to new investors ....................................... $5.66
=======
</TABLE>
If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share of Common Stock after this Offering
would be $2.57 per share, which would result in dilution to new investors in
this Offering of $5.43 per share of Common Stock (67.9%).
The following table summarizes on a pro forma basis as of March 31, 1996
(after giving effect to the issuance to Scantek of an aggregate of 329,063
shares of Common Stock pursuant to the License Agreement and the Prior
Transactions), the total consideration paid and the average price paid per
share by the existing stockholders and by the new investors who purchase
pursuant to this Offering (before deducting the underwriting discount, the
non-accountable expense allowance and estimated Offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
--------------------------- --------------------------- Price
Average Number Percent Amount Percent Per Share
--------------- --------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1) . 5,020,313 66.8% $ 2,432,379 10.8% $0.48
New Investors. .......... 2,500,000 33.2% $20,000,000 89.2% $8.00
-------------- --------- -------------- ---------
Total ................. 7,520,313 100.0% $22,432,379 100.0%
============== ========= ============== =========
</TABLE>
- ------
(1) See footnotes (1) and (2) to "Prospectus Summary--The Offering."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION
This Management's Discussion and Analysis of Financial Condition and Plan
of Operation and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements. Factors that may cause such differences include, but are not
limited to, those discussed under "Risk Factors" and elsewhere in this
Prospectus.
INTRODUCTION
HumaScan, a development stage medical device technology company, owns the
exclusive rights in the United States and Canada to manufacture and market a
BTAI device called the "BreastAssure(TM) Thermal Activity Sensor." The
Company intends initially to market the BreastAssure device to primary care
physicians, gynecologists and medical specialists throughout the United
States and to expand its marketing activities to Canada if and when
management determines such expansion is appropriate. See "Business--Marketing
and Distribution."
Under Canada's current Food and Drugs Act and Medical Devices Regulations,
the vast majority of medical devices enter the Canadian market without any
type of premarket approval; device manufacturers are required only to notify
the government that the device will be marketed in Canada.
The Canadian government has announced its intention to promulgate new
regulations in the immediate future which will establish of four classes of
devices. These new regulations (assuming they are published in September 1996)
are intended to be effective in September 1997. It is not clear how the
BreastAssure device would be classified and regulated under the new Canadian
regulations. See "Business--Government Regulation."
Since its inception, the Company has devoted substantially all of its
efforts to various organizational activities. These activities included the
execution of the License Agreement, the development of a business strategy,
the execution of the Distribution Agreement and the execution of the Turnkey
Construction Contract. The Production Line is under construction and
scheduled for delivery to the Company in the first quarter of 1997. As a
result, the Company believes it can begin marketing the BreastAssure device
in the second quarter of 1997.
When the Company becomes operational, its revenues, and hence
profitability, if any, may vary significantly from fiscal quarter to fiscal
quarter as well as in comparison to the corresponding quarter of the previous
year as a result, among other factors, of the timing of any significant
initial shipments and the inventory requirements of PSS.
The Company does not anticipate concentrations in the availability of raw
materials and labor or in the geographical area in which the Company will
sell the BreastAssure device. Concentrations could arise in one or more of
those areas as the Company gains actual experience, however, and
concentrations regarding raw materials and sales locales are more likely in
the early stages of the Company's operations before it can build a base of
business. The principal risks facing the Company in the next year are
dependence on a single product, uncertainty of market acceptance, lack of
manufacturing experience, reliance on a single distributor, technological
factors, uncertainty of ongoing regulatory approval and competition.
The Company expects to incur substantial additional costs, including
additional marketing expenses, research and development expenses,
manufacturing cost expenditures and administrative expenditures as it
prepares to commence operations. The Company does not expect, however, to
incur substantial additional costs for raw materials.
In 1983, OHTA issued a report stating that thermography needed further
development and should not be used alone for diagnostic screening. In 1984, HCFA
withdrew coverage for thermography under Medicare and Medicaid as a diagnostic
screening method. In 1991, based upon reports which addressed the use of
thermography in neurological and musculoskeletal conditions, the AMA passed a
resolution stating that thermography had not been proven to have value as a
medical diagnostic test. In 1992, HCFA withdrew Medicare and Medicaid
reimbursement for all other uses of thermography. In 1993, the AMA adopted a
resolution stating that the use of thermography for diagnostic purposes could
not be recommended at
21
<PAGE>
that time. Although the BreastAssure device is adjunctive and is not to be
used for diagnosis of breast disease, the OHTA, HCFA and AMA positions
against the use of thermography as a diagnostic tool may cause confusion
among physicians. The Company will need to demonstrate that the BreastAssure
device is an effective adjunct to diagnostic procedures. In the event that
the BreastAssure device fails to achieve significant market acceptance, it is
likely that the Company's business operations would cease. See "Risk
Factors--Uncertainty of Market Acceptance; Certain Thermographic Applications
Not Accepted."
PLAN OF OPERATION
The Company has generated no revenues to date and, from inception
(December 27, 1994) until March 31, 1996, the Company accumulated a deficit
of $449,613.
The following discussion should be read in conjunction with the Company's
financial statements and related notes appearing elsewhere in this
Prospectus. In the opinion of the Company, the results of operations for the
three months ended March 31, 1996 and 1995, respectively, include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the results for the interim periods. Although the
Company does not expect to derive any revenues from operations during the
year ending December 31, 1996, the Company expects that its expenses and
interest and/or dividend income will vary from the level of expenses and
interest income experienced during the three months ended March 31, 1996, due
primarily to additional salary expense and reduced interest expense (due to
the conversion of the November Bridge Notes into, and the exchange of the
March Bridge Notes for, Series A Preferred Stock and Private Warrants) and
the anticipated temporary investment of a portion of the net proceeds of this
Offering. Therefore, the results of operations for the three months ended
March 31, 1996 are not necessarily indicative of the results to be expected
for the year ended December 31, 1996.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
The Company's net loss for the three months ended March 31, 1996 was
$238,362 as compared to $49,374 in the same period in 1995. Such losses are
attributable to the fact that the Company is still in the development stage
and accordingly has not derived any revenues from operations to offset the
development stage expenses. The Company generated $1,246 in interest income
during the period.
Operating expenses were $239,608 in the three months ended March 31, 1996
as compared to $49,374 during the same period in 1995 primarily due to the
increased salary expenses related to the hiring of personnel, increased legal
and professional fees, and interest expenses related to bridge financings.
PERIOD FROM INCEPTION (DECEMBER 27, 1994) THROUGH DECEMBER 31, 1995
The Company's net loss was $211,251 for the period from December 27, 1994
(date of inception) to December 31, 1995. The Company generated $899 in
interest income during the period.
Operating expenses were $212,150 for the period from December 27, 1994
(date of inception) to December 31, 1995 and consisted primarily of
consulting, legal and professional fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the issuance of promissory notes and proceeds from the private placement of
its equity securities.
During 1995, Donald Brounstein, the Company's President and Chief Executive
Officer, loaned the Company an aggregate of $125,000 on an interest-free basis
(the "1995 Loans"). Mr. Brounstein received no consideration from the Company
for the 1995 Loans. Mr. Brounstein also purchased $40,000 in March Bridge Notes
from the Company in 1996, which March Bridge Notes bore interest at the rate of
10% per annum. In connection with the May Private Placement, Mr. Brounstein
surrendered his March Bridge Note and $34,000 in principal amount of the 1995
Loans in payment of the purchase price for two Units. The remaining $91,000 of
the 1995 Loans were repaid to Mr. Brounstein from the proceeds of the May
Private Placement. See "Description of Securities--Private Placements" and
"Certain Transactions."
22
<PAGE>
In November 1995, the Company sold an aggregate of $350,000 principal
amount of November Bridge Notes to 14 accredited investors (the "November
Bridge Investors") for an aggregate consideration of $350,000. The November
Bridge Notes bore interest at the rate of 10% per annum, were to mature on
August 30, 1996, and were secured by all of the assets of the Company.
Certain of the November Bridge Notes were also secured by the shares of the
Company's Common Stock owned by Mr. Brounstein. In connection with the May
Private Placement, the November Bridge Notes were converted into shares of
Series A Preferred Stock and Private Warrants at the rate of one share of
Series A Preferred Stock and one fifth of a Private Warrant for each $1.33
principal amount of November Bridge Notes, resulting in the issuance of
262,500 shares of Series A Preferred Stock and 52,500 Private Warrants. The
November Bridge Investors also received payment from the Company of an
aggregate of $16,488 in accrued interest on such notes.
In March 1996, the Company sold an aggregate of $460,000 principal amount
of March Bridge Notes and warrants to purchase 224,250 shares of the
Company's Common Stock at $0.67 per share to 15 accredited investors (the
"March Bridge Investors") for an aggregate consideration of $460,000. The
proceeds received from the March Bridge Investors were allocated between the
March Bridge Notes and March Bridge Warrants. The $343,485 difference between
the principal amount of the March Bridge Notes and the amount allocated was
accreted and charged to operations over the term of the March Bridge Notes.
The March Bridge Notes bore interest at the rate of 10% per annum, were to
mature on the earlier of the Initial Closing (as hereinafter defined) or May
31, 1996 and were secured by all of the assets of the Company. In connection
with the May Private Placement, $434,800 in principal amount of March Bridge
Notes (plus an additional $25,200 in principal amount, representing
subscription funds in excess of the initial subscription amounts due from
four March Bridge Investors, which will be refunded to such four March Bridge
Investors if this Offering closes before August 15, 1996) was canceled and
applied to the initial purchase price of an aggregate of 11.75 Units. The
March Bridge Investors also received payment from the Company of an aggregate
of $8,171 in accrued interest on such notes.
The Company sold 71.5 Units in the May Private Placement, each Unit
consisting of 37,500 shares of Series A Preferred Stock and 7,500 Private
Warrants, for an aggregate initial payment of $2,645,500, representing 37% of
the total purchase price for the Units which includes $434,800 aggregate
principal amount of March Bridge Notes surrendered in payment of the initial
purchase price for 11.75 Units (including $40,000 in aggregate principal
amount of March Bridge Notes exchanged by Mr. Brounstein in partial
consideration for two Units purchased by him) and the cancellation of $34,000
in principal amount of certain loans made by Mr. Brounstein to the Company in
1995 in payment of the balance of the purchase price for the Units purchased
by him, but not including $350,000 aggregate principal amount of November
Bridge Notes converted into one share of Series A Preferred Stock and one
fifth of a Private Warrant for each $1.33 principal amount of November Bridge
Warrants so converted. The Company issued one quarter of one Unit to Haythe &
Curley, the law firm that represented Burnham in the May Private Placement,
and one tenth of one Unit to James J. Whidden, the Company's Senior Vice
President of Clinical Development (who was a consultant to the Company at the
time of such issuance), in exchange for services rendered. The balance of the
purchase price of such Units is to be paid in unequal installments of 13%,
21%, 20% and 9% on August 15, 1996, October 15, 1996, January 15, 1997 and
March 15, 1997. If, prior to March 1, 1997, there occurs a Qualified Initial
Public Offering, as defined in the Company's Certificate of Incorporation (a
"Qualified IPO"), then at the time of closing of the Qualified IPO (i) the
purchase price of the Units will be automatically reduced by an amount equal
to any installments not yet due and payable at the time the registration
statement relating to such Qualified IPO is declared effective under the
Securities Act, (ii) the Series A Preferred Stock will convert automatically
into Common Stock on a share-for- share basis, and (iii) the shares of Common
Stock issued upon conversion of the Series A Preferred Stock will be deemed
fully paid and nonassessable. See "Description of Securities--Private
Placements."
The net proceeds from the loans and the private placements were used for
product license fees, capital expenditures, marketing expenses and general
working capital purposes, including the repayment to Mr. Brounstein of
$91,000 in principal amount of the 1995 Loans (plus accrued interest relating
to his March Bridge Notes of $711).
In July 1995, the Company and Scantek entered into the License Agreement,
pursuant to which Scantek granted the Company the exclusive license to
manufacture and market the BreastAssure device in the United
23
<PAGE>
States and Canada for a cash payment of $1,600,000, $550,000 of which has
already been funded. Of the balance, $175,000 is payable on December 31,
1997, $175,000 on March 31, 1998, $350,000 on October 31, 1998 and $350,000
on January 31, 1999. Surplus Cash Flow, as defined in the License Agreement,
is to be applied to unpaid installments of the Cash Portion of the Licensing
Fee (as defined in the License Agreement) in inverse order of maturity.
Approximately $1,050,000 of the net proceeds of this Offering will be used to
pay a portion of the Cash Portion of the Licensing Fee. See "Use of Proceeds"
and "Business--License Agreement."
In November 1995, the Company arranged for the construction of the
automated Production Line for the assembly of the BreastAssure device at a
fixed price of $1,750,680 pursuant to the Turnkey Construction Contract with
Zigmed. The contract provides for payments to Zigmed in stages over a
15-month period, of which $720,000 has been paid to Zigmed as of the date of
this Prospectus. $1,030,680 of the net proceeds of this Offering will be used
to pay the balance due under the Turnkey Construction Contract. See "Use of
Proceeds." The Company has also agreed to pay Zsigmond G. Sagi, the chief
executive officer and a principal of Zigmed, certain completion bonuses. See
"Business--Manufacturing." The Company has leased a facility of approximately
30,000 square feet to house the Production Line and anticipates that
approximately $250,000 of additional leasehold improvements will be required.
See "Business--Manufacturing" and "--Facilities."
The Company has entered into a placement agreement (as subsequently
amended, the "Placement Agreement") with Burnham pursuant to which Burnham
acted as placement agent for the Company in connection with the May Private
Placement. Pursuant to the Placement Agreement, the Company paid Burnham
$570,000 in commissions and $12,000 in expense reimbursement and issued to
Burnham warrants to purchase 400,000 shares of Common Stock at $2.93 per
share. See "Description of Securities--Private Placements."
The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that the net proceeds of this
Offering will be sufficient to satisfy its contemplated cash requirements for
at least 18 months following the consummation of this Offering. The Company's
future liquidity and capital funding requirements will depend on numerous
factors, including results of clinical trials, the extent to which the
BreastAssure device gains market acceptance, the costs and timing of
expansion of sales, marketing and manufacturing activities and competition.
There can be no assurance that additional capital, if needed, will be
available on terms acceptable to the Company, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, will likely include restrictive covenants and
provide for security interests in the Company's assets. The failure of the
Company to raise capital on acceptable terms when needed could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
which established financial accounting and reporting standards for
stock-based employee compensation plans. Companies are encouraged, but not
required, to adopt a new method that accounts for stock compensation awards
based on their fair value using an option pricing model. Companies that adopt
this new standard are required to make pro forma disclosures of net income as
if the fair value-based method of accounting required by this standard had
been applied. The requirements of this standard are effective for fiscal year
1996. The Company expects to adopt the pro forma disclosure requirements. The
Company cannot at this time predict the impact of the adoption of such
requirements.
24
<PAGE>
BUSINESS
GENERAL
HumaScan, a development stage company, owns under license the exclusive
rights in the United States and Canada to manufacture and market a BTAI
device called the "BreastAssure(TM) Thermal Activity Sensor." The
BreastAssure device is a non-invasive, easy to use, low cost, adjunctive test
to be used by primary care physicians, gynecologists and other medical
specialists as part of a breast disease monitoring program along with BSE,
palpation and (depending on a patient's age, family history and other
factors) mammography and other established clinical procedures including
ultrasound and/or biopsy. An important feature of the BreastAssure device is
that the results will be immediately available to the physician while the
patient is "on site" at the point of care in the physician's office, clinic,
hospital and/or mammography center. If the BreastAssure device indicates that
there is unilateral breast thermal activity, the physician is alerted to the
possibility of a physiological condition, including thermally active cancer.
The BreastAssure device has received marketing clearance under Section 510(k)
of the FDC Act from FDA.
As breast cancer cells multiply, excessive heat is often generated. This
heat is most often conveyed to the surface of the breast, resulting in the
temperature of the skin of a particular area of one breast being elevated
from between 2o and 6o Fahrenheit versus the temperature of the same area of
the other breast. The BreastAssure device permits the measurement and
comparison of temperature variances between three mirror-image sections of
each breast, thus indicating the possibility of either proliferating
thermally active breast cancer cells, or certain types of thermally active
breast disease which may require medical treatment.
BREAST CANCER
Breast cancer is one of the most common cancers among women and,
notwithstanding existing methods of detection, is currently the leading cause
of death among women between the ages of 35 and 54 in the United States. The
American Cancer Society estimates that in 1996 approximately 184,300 new
cases of breast cancer are expected to be diagnosed and approximately 44,300
women are expected to die from the disease. Although the causes of breast
cancer are unknown and there is no known method of prevention, survival rates
are highest, and the likelihood of recurrence is lowest, if the cancer is
diagnosed and treated at its earliest stages. According to the National
Cancer Institute, the five-year survival rate decreases from more than 90% to
72% after the cancer has spread to the lymph nodes, and to 18% after it has
spread to other soft-tissue organs. Government spending for, and public
awareness of, early screening and diagnosis of breast cancer has increased
substantially in recent years. In fact, breast cancer screening is generally
recommended as a routine part of preventive health care for over 90 million
women in the United States. Industry sources estimate that approximately 11.3
million mammograms and 800,000 surgical biopsies were performed in the United
States in 1994 (the last year for which such data is available from the
Centers For Disease Control). Moreover, the Physicians' Insurers Association
report for 1995 indicated that, during such year, failure to diagnose breast
cancer was the most common source of malpractice complaint among patients
with breast cancer and the second most expensive type of claim, with an
average indemnity payment of $301,460 during the six months preceding such
report.
The most favorable prognosis usually results from treating an early
"preclinical" or "occult" breast lesion, that is, a malignancy not yet
detectable by touch or sight in a physical examination but detectable by
mammographic or other imaging techniques. In contrast, treatment of a
malignancy after its clinical appearance is usually much less effective.
Cancerous or malignant tumors diagnosed by physical examination, especially
the most thermally active ones, are frequently associated with metastatic
cancer invasion. Once a cancer has grown to one and a half centimeters, it
usually has metastasized (spread) to other portions of the woman's body.
Cancers one centimeter or less may already display significant lymph nodal
involvement.
Currently there are two cost-effective ways to screen for breast cancer:
physical examination, including breast palpation (examination by touch), and
mammography, an x-ray type of imaging technique. Biopsy is performed for
definite diagnosis of cancer if a suspicious area is discovered. For the 27
million women above the age of 50 in the United States, regularly performed
mammography reduces disease-specific mortality by 25%. For 16 million women
in the United States between 40 and 50 years of age, mammography regularly
performed every one to two years was accepted until recently as a reasonable
way to reduce deaths due to cancer. How-
25
<PAGE>
ever, because recent studies suggest that mammography is ineffective in
reducing deaths in the absence of suspicious symptoms or a high risk factor,
the American Cancer Society now recommends that women wait until age 40 to
have their first mammogram, and the National Cancer Institute now recommends
that women wait until age 50.
Most cancers occur in older women, but the most aggressive cancers are
more thermally active (and have shorter doubling times and the highest
mortality rate) and occur mostly in younger women. In women over 50, the
doubling of the tumor volume generally occurs more slowly. By contrast,
breast cancers in younger pre- menopausal women tend to grow rapidly. The
fast-growing tumors that occur in these women may have measured doubling
times of 30 to 100 days. Typically, there is only a short period of time
between the point when the disease can be detected and clinical manifestation
of disease, and failure to intervene during this period may significantly
reduce the likelihood that the woman will survive the disease because the
cancer metastasizes.
Existing methods of detecting breast abnormalities include non-invasive
methods such as BSE, clinical examination, mammography, ultrasound,
transillumination, diaphanography, magnetic resonance imaging ("MRI") and
thermography and invasive methods such as surgical breast biopsy and
stereotactic fine needle aspiration biopsy ("SFNA").
Breast Self-Examination and Clinical Examination. BSE is a method by which
a woman examines her own breasts. BSE is both inexpensive and accessible at
any time to women who understand the method. Nevertheless, while many primary
breast cancers currently are found through BSE, the stage at which they are
found is often too advanced for treatment to be as effective as it
potentially could have been at earlier stages of detection. In clinical
examination, the physician uses a process similar to BSE, methodically
feeling for any abnormalities or unusual changes in the breasts.
Mammography. In mammography, breast X-rays are taken by special equipment
called mammography systems. Microcalcifications, which can indicate a future
cancer, are visualized on mammography film. Non- palpable lesions are
visualized well by mammography except in dense breasts, which due to their
opacity may require other methods of imaging because the cancer may be
obscured. Mammographic equipment is expensive to purchase and use, and
because of these cost factors, is generally not available for use as a
primary office care procedure except in larger group practices.
Ultrasound. Ultrasound complements mammography and in some female age
groups it images better than mammography because it defines dense, cystic
breasts very effectively. An ultrasonic transducer (probe) utilizes sonic
beams reflected by varying breast tissue types and sends reflected echoes to
a capture device in the transducer for conversion into a digitized image of
the breast. Complete assessment and diagnosis requires a diagnostic mammogram
in conjunction with the ultrasound study.
Transillumination and Diaphanography. Transillumination is an examination
in a dark room using ordinary light and diaphanography is a more
sophisticated method of transillumination which utilizes a transducer-like
wand similar to the probe used for ultrasound. When the wand is held against
the breast in a darkened room, fat, blood vessels and fluid filled cysts can
often be seen.
Magnetic Resonance Imaging. MRI attempts to get axial views of the body as
it passes through a tunnel- like device or ring housing a powerful magnetic
field and surface radio frequency ("RF") coils. Within the walls of the
tunnel, RF frequencies measure how hydrogen ions react in protons of
microcellular body tissue and reflect information in RF signals emitted from
the ions in response to the magnets' influence. The RF measurements are then
converted by a powerful computer to cross section axis-oriented and three
dimensional images. MRI is expensive compared to standard film-screen
mammography and generally is used for breast cancer diagnostics and further
assessment only when other modalities are not as effective.
Thermography. Thermography operates on the premise that an area affected
by an abnormality generally differs in temperature from the area around it.
It is also based on the premise that the temperature patterns of the two
breasts of one woman are generally symmetrical. Prior thermographic devices,
such as contact thermography, telethermography and computer-assisted
thermography, were based on these premises. These prior thermographic
systems, which, unlike the BreastAssure device, involved imaging rather than
measurement of temperature, required expensive facilities and equipment
and/or subjective interpretation of test results, and did not
26
<PAGE>
perform as intended. In 1983, OHTA issued a report stating that thermography
needed further development and should not be used alone for diagnostic
screening as an alternative to mammography. In 1984, HCFA withdrew coverage
for thermography under Medicare and Medicaid as a sole diagnostic screening
method. In 1991, based upon reports which addressed the use of thermography
in neurological and musculoskeletal conditions, the AMA passed a resolution
stating that thermography had not been proven to have value as a medical
diagnostic test. In 1992, HCFA withdrew Medicare and Medicaid reimbursement
for all other uses of thermography. In 1993, the AMA adopted a resolution
stating that the use of thermography for diagnostic purposes could not be
recommended at that time. Although the BreastAssure test is adjunctive and is
not to be used alone for diagnosis of breast cancer, the OHTA, HCFA and AMA
positions against the use of thermography as a diagnostic tool may cause
confusion among physicians. The Company believes the OHTA, HCFA and AMA
positions do not apply to the BreastAssure device because it is an
adjunctive, rather than diagnostic, device and because some of these
positions related solely to neurological and musculoskeletal conditions.
Early thermographic devices were designed initially for diagnosis of
cancer and only secondarily for adjunctive usage. Although good sensitivity
and specificity often were obtained in controlled clinical trials, poor
results were often obtained in non-controlled practice settings due to the
design of the equipment, methodology used and subjective interpretation of
the results. Unlike these early devices, the BreastAssure device does not
rely on any mechanical equipment and the BreastAssure test involves no
special methodology or subjective interpretation. Like a thermometer, the
BreastAssure device merely measures temperature--specifically, the skin
temperature of a woman's breasts. If the BreastAssure device signals the
presence of abnormal thermal activity in a woman's breast, the physician is
alerted to the probability of some type of physiological condition which may
be due to various pathologies, including thermally active cancers.
Surgical Breast Biopsy. Although open surgical biopsy is a relatively safe
procedure and the most accurate means of diagnosis, it is invasive, may
produce cosmetic deformity and is often psychologically traumatic, as well as
costly.
Stereotactic Fine Needle Aspiration Biopsy. SFNA, or core biopsy, which
involves the evaluation of small tissue samples drawn from the breast through
a needle, can be used to confirm that a lesion is benign. SFNA can also be
used to evaluate mammographic lesions that are highly suspicious for
malignancy. Although charges may vary, stereotactic biopsy is roughly 30% of
the cost of excisional surgical biopsy.
THE BREASTASSURE DEVICE
One of the important biological activities of malignant tumors is the
increased rate of growth as compared to the surrounding or "host" tissue. The
malignant propensities of cancer are directly related to the speed of cell
division, and this is in turn reflected by accelerated local metabolism which
is supported by increased blood and lymph flow. Heat is a byproduct of the
increased metabolism and most often is conducted to the skin where it is
emitted from the body. These biological alterations usually can be detected
by measuring temperature differences between the area containing the tumor
and other segments of the same breast or the same area of the other breast.
The BreastAssure device measures the highest skin surface temperature by
recording the conducted heat under each of three segmental areas when the
BreastAssure device is placed against the breast. By detecting and recording
the thermal differences in a breast or between the breasts, it can provide a
signal to alert the physician before diagnosis to the probable existence of
an unusual physiological state which may be due to various pathological
conditions, one of which may be thermally active cancers. The BreastAssure
device does not diagnose the presence of breast disease, but is an adjunct to
existing diagnostic methods.
The BreastAssure device consists of a pair of mirror-image, non-invasive,
lightweight, disposable soft pads, each of which has three wafer-thin segments
containing columns of heat sensitive chemical sensor dots that change color from
blue to pink reflecting an 8.5 degree temperature range from 90o to 98.5o
Fahrenheit. When placed over a woman's breasts inside her brassiere for a period
of 15 minutes, the BreastAssure device registers skin temperature variations due
to heat conducted from within the breast tissue to the surface of the skin. By
comparing the mirror-image temperature differences between the two breasts
registered by the BreastAssure device, the physician can objectively quantify if
there is abnormal unilateral breast thermal activity, which is considered
significant if there is a 2o Fahrenheit or more temperature difference between
each breast in the same mirror-image location. This, in turn, alerts the
physician to the possibility of a physiological condition, includ-
27
<PAGE>
ing the pathology of thermally active cancer. Based on clinical studies at
major medical centers, the threshold tumor size that resulted in significant
skin temperature differences detectable with the BreastAssure device was as
small as five millimeters in size. In contrast, according to industry
sources, the majority of breast tumors are, on average, at least 15
millimeters or larger before they are palpable by most experienced
clinicians.
CLINICAL TRIALS
The BreastAssure device is non-invasive and clinically proven to be safe,
and, the Company believes, an effective adjunctive test for the detection of
abnormal thermal activity in the breast and an effective tool for determining
the presence of some type of abnormal physiological condition which may be
due to various pathological conditions, including thermally active cancers.
The BreastAssure device can be utilized and the results evaluated by health
care professionals after minimal instruction.
Two key clinical trials of the BreastAssure device versus biopsy and
breast cancer screening were conducted between 1980 and 1984 to assess and
validate the BreastAssure device's correlation against such diagnostic
procedures. The clinical trials were undertaken at Georgetown University
School of Medicine, Memorial Sloan-Kettering Hospital in New York City, M.D.
Anderson Hospital and Tumor Institute in Houston, Brotman Memorial Hospital
at University of California at Los Angeles and Guttman Cancer Diagnostic
Institute in New York City. The BreastAssure device was found to correlate
well in terms of the device's documented sensitivity and specificity
correlation indices. Sensitivity measures the percentage of positive
BreastAssure device results against positive results of specified methods, in
this case clinical examination for suspicion of malignancy or biopsy.
Specificity measures the percentage of negative BreastAssure device results
against negative results of a specified method. A positive BreastAssure
device result is a "false positive" if the BreastAssure device renders a
positive result and the result of the method against which the BreastAssure
device is being measured is negative. A negative BreastAssure device result
is a "false negative" if the BreastAssure device result is negative but the
result of the other method is positive.
The BreastAssure device versus Biopsy. After initial clinical trials at
Georgetown University School of Medicine involving 200 women, the
BreastAssure device was the focus of a clinical trial involving 179 women who
underwent unilateral (single breast) biopsy. This multicenter study was
conducted at Memorial Sloan-Kettering Hospital, M.D. Anderson Hospital and
Tumor Institute and Brotman Memorial Hospital at UCLA. The BreastAssure
device tested positive in 74 of the 84 women who were diagnosed with cancer
by unilateral biopsy, for an overall sensitivity index of 88.1% (that is, the
BreastAssure device results were positive for 74 of the 84 unilateral cancers
diagnosed). More than 97.0% of breast cancers are believed to be unilateral
if discovered at an early stage.
The biopsy results were subjected to a breakdown by the size of cancer
detected. The threshold tumor size that resulted in skin temperature variance
detectable with the BreastAssure device was five millimeters. Seven out of
eight cancers under one centimeter diagnosed during the screening study
tested positive using the device.
The BreastAssure device versus Breast Cancer Screening for Suspicion of
Malignancy (using mammography and clinical breast examination). In the second
major clinical trial, at Guttman Cancer Diagnostic Institute, the
BreastAssure device was used on 2,805 asymptomatic women. The BreastAssure
device data were compared to the staff's clinical judgment for suspicion of
malignancy or cancer. Of the 2,805 women screened, 99 were recommended for
biopsy based on either suspicious mammogram and/or clinical breast
examinations. The BreastAssure device results were positive in 86 of the 99
women recommended for biopsy (a sensitivity correlation index of 86.9%).
Fifty-nine biopsies were subsequently performed, and 13 of the 15 cancers
diagnosed were positive for the BreastAssure device (a sensitivity
correlation index of 86.7% against biopsy). Of the 2,706 women who had no
suspicion of cancer based on mammogram and/or clinical breast examinations,
2,340 had negative BreastAssure device results (a specificity correlation
index of 86.5%).
The false positive rate of 13.5% obtained for the initial screening trial
assumes that (1) no mammographically undetectable cancers occurred; and (2) the
rate of subsequent cancer occurrence within the false positive group was not
statistically higher than that of the population of women as a whole. If, as
several publications have suggested, abnormal thermal distribution is a risk
marker for future disease incidence, the BreastAssure device's false positive
rate may be lower.
28
<PAGE>
The Company intends to commence additional clinical studies utilizing the
BreastAssure device within the next 12 to 18 months. The new studies will
have two principal goals: to obtain age-related data in tests of the
BreastAssure device against biopsy in order to gauge the ability of the
BreastAssure device to detect the fast-growing cancers that typically attack
younger women and to follow up "false positive" test results over a period of
time to determine whether such results presage future breast disease. See
"Use of Proceeds."
MARKETING AND DISTRIBUTION
General. The Company believes that the target market for the BreastAssure
device will be primary care physicians such as gynecologists, internists and
general practitioners, both in their own practices and as participants in
groups such as health maintenance organizations ("HMOs") and preferred
provider organizations ("PPOs"). Because interpretation of existing
diagnostic imaging modalities for breast cancer is difficult and subjective,
additional target market segments include other health care providers who can
legally order and perform clinical tests, such as mammographers, physician
groups that have mammography systems and breast cancer surgeons.
The Company believes that market acceptance of the BreastAssure device
will depend, in part, upon the Company's ability to demonstrate to physicians
the clinical benefits (including ease of use and utility), safety and
cost-effectiveness of the BreastAssure device. To achieve this, the Company
will seek to (i) arrange for the publication of articles summarizing actual
test results to appear in selected medical journals, (ii) present papers and
make presentations at large medical symposiums and (iii) produce and
distribute videos describing the BreastAssure device and videos containing
instructions on how to use the BreastAssure device for testing. The Company's
marketing plans are in the early stages of development. The Company has not
yet selected the medical journals in which it will advertise, but expects to
advertise in several journals with national circulation. The Company
anticipates that the production of training videos will commence prior to
delivery of the Production Line in the first quarter of 1997 and distribution
of such videos will commence in the second quarter of 1997 when the Company
begins marketing the BreastAssure device. The Company will also seek to
publish the 1984 clinical results. In addition, the Company will utilize
public relations and advertise in selected magazines commonly read by women
to develop recognition of and curiosity about the BreastAssure device to
encourage women to request the test from their doctors.
The Company will first introduce the BreastAssure device to radiologists
at mammography screening centers and to breast cancer surgeons and doctors'
group practices with American College of Radiologists ("ACR") or FDA
accredited mammographic equipment. These physicians often use fine needle
aspiration, an office-based biopsy which is less accurate than excisional
biopsy, which is performed only in hospitals.
The Company will market the BreastAssure device to physicians as an
adjunctive test indicator which can alert the physicians before diagnosis to
the probable existence of some type of physiological state which may be due
to various pathological conditions, including thermally active cancers.
Distribution Agreement with PSS. In February 1996, the Company entered into
the Distribution Agreement with PSS, a publicly traded company and one of the
leading distributors of medical supplies, diagnostic equipment and
pharmaceuticals to office-based medical professionals in the United States. PSS,
with a reported distribution network of approximately 780 full-time sales
representatives and 64 company-owned and operated service/distribution centers
serving more than 88,000 physician-based offices throughout the United States,
has agreed to distribute the BreastAssure device. Pursuant to the Distribution
Agreement, PSS has agreed to designate the Company as a "Platinum Level
Manufacturer." PSS has informed the Company that this status currently has been
reserved for only 15 manufacturers out of approximately 3,000 manufacturers
represented by PSS and means that PSS will assign specific sales quotas to its
sales force and give the Company priority access to the sales force for product
training. One or more of such other manufacturers may in the future introduce a
product designed to compete with the BreastAssure device. Pursuant to the
Distribution Agreement, PSS has agreed not to distribute a product substantially
identical to the BreastAssure device during the term of the agreement unless PSS
determines that the BreastAssure device is not competitive with such other
products on the basis of sales, pricing, quantity, verifiable results or
customer acceptance.
PSS has agreed to assist the Company in developing marketing collaterals
such as training videos and sales materials (with all costs of materials to
be paid by the Company) and to coordinate attendance at medical device
29
<PAGE>
conventions with the goal of (i) locating the Company's booth near the PSS
booth or sponsoring the BreastAssure device at the PSS booth and (ii) as
agreed to on a case by case basis, helping the Company at conventions not
normally attended by PSS by having local sales representatives attend and
staff the Company's booth during convention hours. PSS has also agreed to
devote a full-time management level marketing executive designated as a
"Product Champion" to work exclusively with the Company and assist with the
launch of the BreastAssure device. PSS and the Company have agreed to work
together to prepare for the BreastAssure device sales and marketing launch,
which the Company anticipates will occur in the second quarter of 1997.
The Distribution Agreement grants to PSS exclusive distribution rights
only in the United States and provides that it is expected that the territory
of Canada will be discussed and awarded to PSS at some future date. PSS will
be responsible for selling the BreastAssure device directly to physicians at
their offices. The Company will focus its own efforts on marketing the
BreastAssure device to physicians at hospitals, to breast cancer
organizations, to government organizations, to insurance company convention
activities and in similar promotional venues.
Under the Distribution Agreement, over a two-year period beginning in
1997, PSS is to receive volume discount price incentives from HumaScan to the
extent PSS exceeds sales targets of 1.0 million units in 1997 and 3.5 million
units in 1998. If sales by PSS are less than 50% of such targets, the Company
and PSS will each have the right to terminate the Distribution Agreement upon
three months' notice. The term of the Distribution Agreement continues until
terminated by either party for failure to meet such sales targets or for
certain material breaches which are not cured within prescribed time limits.
The equipment that the Company will use to manufacture the BreastAssure
device is currently being constructed by Zigmed and is on schedule for
completion by the end of 1996, although there is no assurance that such
equipment will be completed and operational by such time or at all. The
Turnkey Construction Contract between Zigmed and the Company provides for the
turnkey construction of the equipment at a fixed price of $1,750,680, with
payments to Zigmed in stages over a 15-month period. $720,000 has been paid
to Zigmed pursuant to the Turnkey Construction Contract as of the date of
this Prospectus. The Company has also agreed to pay Zsigmond G. Sagi, the
chief executive officer and a principal of Zigmed, certain completion
bonuses. See "Business--Manufacturing."
The Company presently plans to sell the BreastAssure device to physicians
and other medical specialists for approximately $25 per unit and will
recommend that the BreastAssure unit be made available to patients by
physicians and other medical specialists for a cost ranging from $40 to $50.
Pursuant to the Distribution Agreement, John F. Sasen, Sr., the President
of PSS, was elected to the Company's Board of Directors in May 1996. Pursuant
to the Distribution Agreement, and as part of the May Private Placement, PSS
purchased an aggregate of 56,250 shares of the Company's Series A Preferred
Stock and the Private Warrants to purchase 11,250 shares of the Company's
Common Stock. The Series A Preferred Stock converts automatically into Common
Stock on a share-for-share basis upon the closing of a Qualified IPO. The
Private Warrants are exercisable at a price of $2.93 per share and expire on
May 15, 2001. Also, pursuant to the Distribution Agreement, the Company
issued the PSS Warrants to PSS, which warrants give PSS the right to purchase
125,000 shares of Common Stock at an exercise price of $4.00 per share
(aggregating $500,000). The Distribution Agreement restricts such $500,000
solely for use by the Company for advertising and promotion of the
BreastAssure device.
LICENSE AGREEMENT
In July 1995, the Company and Scantek entered into the License Agreement
pursuant to which Scantek granted the Company an exclusive license (the
"License") to manufacture and sell the BreastAssure device in the United
States and Canada. The License Agreement covers the 510(k) Market Rights and
Scantek's know- how, trade secrets, patent rights and trademarks relating to
the BreastAssure device. The BreastAssure device is the subject of two United
States patents expiring February 26, 1997 and a Canadian patent expiring
August 24, 1999. The License Agreement provides for a cash payment (the "Cash
Portion of the Licensing Fee") to Scantek of $1,600,000, $550,000 of which
has already been funded. Subject to the Company's acceptance of the
Production Line, $175,000 of the balance is payable on December 31, 1997,
$175,000 on March 31, 1998, $350,000
30
<PAGE>
on October 31, 1998 and $350,000 on January 31, 1999, provided, however, that
any Surplus Cash Flow (one half of net income, as defined in the License
Agreement, subject to certain adjustments) after the Company begins
operations is to be applied as prepayments to unpaid installments of the Cash
Portion of the Licensing Fee in inverse order of maturity. See "Use of
Proceeds." Contemporaneously with the execution of the License Agreement, the
Company issued to Scantek 675,000 shares of Common Stock. Scantek received an
additional 329,063 shares of Common Stock upon the closing of the May Private
Placement in exchange for the termination of its right, pursuant to the
License Agreement, to maintain a specified ownership interest in the Company.
Pursuant to the License Agreement, Scantek is entitled to additional
payments as follows: (i) $100,000 (to be applied to unpaid installments of
the Cash Portion of the Licensing Fee in order of maturity) upon the later of
(x) the investment at any time by PSS of $500,000 in the Company by
exercising the PSS Warrant and (y) the shipment by the Company of the first
order of the BreastAssure device to PSS; (ii) $300,000 (of which $100,000 is
to be applied to unpaid installments of the Cash Portion of the Licensing Fee
in order of maturity and $200,000 is to be applied to unpaid installments of
the Cash Portion of the Licensing Fee in inverse order of maturity) upon the
earlier to occur of (a) the extension of the relevant patents at least
through January 1, 2003 or (b) Scantek's obtaining a new United States patent
on the product; and (iii) if the circumstances described in the preceding
clause (ii) have not occurred, Scantek is entitled to payment of $100,000
from the proceeds of this Offering (which shall be deemed a partial advance
of the $300,000 payable pursuant to such clause (ii) and which is to be
applied to the unpaid installments of the Cash Portion of the Licensing Fee
in direct order of maturity). The License Agreement also provides for minimum
annual royalty payments of $150,000, $300,000, $400,000 and $500,000,
respectively, in the first four years in which the product is sold and
$600,000 in the fifth and subsequent years (the "Minimum Royalties") and
maximum royalty payments ranging from 3% of annual net product sales of up to
$2,000,000 to 10% of the annual net product sales if annual net product sales
exceed $10,000,000 (the "Percentage Royalties"). In addition, the License
Agreement will terminate automatically if the aggregate earned royalties for
the first three years the product is sold do not exceed $950,000 (the
"Threshold Earned Royalties"). The Minimum Royalties and Threshold Earned
Royalties terminate automatically at any time after February 26, 1997 (the
date the relevant patents expire) if a competitor introduces a product which
would have infringed upon such patents. In addition, the Percentage Royalties
are reduced or eliminated if the Company reduces the price of its product
below certain preset amounts. The License Agreement also provides that, if
Scantek places an order with the Company prior to the date which is 60 days
prior to the Company's acceptance of the Production Line from Zigmed, Scantek
may purchase from the Company $1,000,000 worth of BreastAssure devices at a
per unit price equal to the greater of 150% of the Company's Costs of
Production (as defined in the License Agreement) or $2.50.
Pursuant to the License Agreement, Scantek is obligated to render
consulting services (the "Consulting Services") to the Company through July
1997 in connection with bringing the BreastAssure device to market and Dr.
Sagi must devote up to one day per week or 90 hours per calendar quarter of
his time to the development and marketing of the BreastAssure device (the
"Minimum Services"). In the event Consulting Services are requested in excess
of the Minimum Services, Scantek will be compensated at the rate of $100 per
hour. Dr. Sagi is also required to render advisory and supervisory services
on behalf of the Company in connection with the Production Line being
constructed by Zigmed. Scantek is responsible for all expenses of training
the Company's manufacturing personnel. The Company is obligated to reimburse
Scantek for all reasonable out-of-pocket expenses.
MANUFACTURING
The Company intends to establish a facility to produce the BreastAssure
device, with a maximum capacity of ten million units annually, based upon two
shifts per day. The Company's production facility will be based on a
prototype plant built by BCSI and Faberge.
The Company has leased a fully air-conditioned facility of approximately
30,000 square feet to house the Production Line and provide warehouse space
and anticipates that approximately $250,000 of leasehold improvements will be
required. The Company plans also to relocate its executive offices into such
facility. See "Business--Facilities." Specifications for the production
equipment to be installed in the facility were prepared by Scantek. The
Company has arranged for the construction of the automated Production Line
for the assembly
31
<PAGE>
of the BreastAssure device pursuant to the $1,750,680 fixed-price Turnkey
Construction Contract with Zigmed. The Turnkey Construction Contract provides
payments to Zigmed in stages over a 15-month period that began November 30,
1995. $720,000 has been paid to Zigmed as of the date of this Prospectus. The
Turnkey Construction Contract provides that a working Production Line will be
installed by Zigmed, subject to acceptance by the Company, by March 31, 1997
(the "Delivery Date"). Zsigmond G. Sagi, the chief executive officer and a
principal of Zigmed, is the son of Dr. Sagi, Chairman of the Board of
Scantek.
The Company has agreed to pay Zsigmond G. Sagi a two-part completion
bonus, payable on May 31, 1997, if certain conditions are met in connection
with the manufacturing of production equipment for the BreastAssure device.
Specifically, such bonus consists of: (1) $10,000 plus warrants to purchase
7,500 shares of Common Stock at an exercise price of $5.33 per share, if
workable and acceptable samples are produced within five months after the
closing of the May Private Placement; and (2) an additional $15,000 plus
warrants to purchase an additional 11,250 shares of Common Stock at an
exercise price of $5.33 per share if the manufacturing machine and the
assembly and packaging machine are complete and fully operational within ten
months after the closing of the May Private Placement.
Zsigmond G. Sagi has agreed to pay the Company damages of $100,000 per
month for three months commencing at the end of the fourth month following
the Delivery Date if Zigmed is unable to deliver the Production Line by the
Delivery Date. In addition, as part of the License Agreement, Scantek has
agreed to pay the Company $75,000 per month if the Production Line is not
accepted by the Company pursuant to the terms of the Turnkey Construction
Contract by the Delivery Date. Furthermore, Scantek has guaranteed that
BreastAssure device manufactured costs will not exceed $2.25 for each unit,
excluding depreciation, assuming production at the rate of 1,000,000 units or
more per year for two consecutive quarters. If the Company's manufactured
cost is greater than $2.25 per unit, royalties due to Scantek will be offset
by the product of (x) the number of units manufactured during the relevant
year multiplied by (y) the manufactured cost of the unit less $2.25.
Zigmed began construction of the Production Line in February 1996. As of
the date of this Prospectus, the Company believes that Zigmed has received
all of the principal components of the Production Line and is on schedule to
complete the Production Line by the Delivery Date.
RAW MATERIALS
The Company believes that there are several sources from which it may
purchase the components of the BreastAssure device. Although the Company has
not yet begun to negotiate with potential suppliers, Zigmed has identified
several potential sources of supply of the raw materials for the BreastAssure
device. The Company anticipates that it will obtain certain of the components
of the BreastAssure device from a single or limited number of sources of
supply. Although the Company believes it will be able to negotiate
satisfactory supply agreements, failure to do so may have a material adverse
effect on the Company. Furthermore, there can be no assurance that suppliers
will dedicate sufficient production capacity to satisfy the Company's
requirements within scheduled delivery times or at all. Failure or delay by
the Company's suppliers in fulfilling its anticipated needs may adversely
affect the Company's ability to market the BreastAssure device.
PATENTS; PROPRIETARY INFORMATION
Scantek, the licensor of the BreastAssure device, holds two United States
patents and one Canadian patent covering the use of the BreastAssure device
as a device for adjunctive use in the early detection of breast cancer.
Although the Patents are licensed to the Company for the United States and
Canada pursuant to the License Agreement, both United States patents expire
on May 22, 1998 and the Canadian patent expires on August 24, 1999. There can
be no assurance that the Patents will provide meaningful protection from
competition. The Company's policy is to attempt to protect its technology by,
among other things, obtaining patent rights for technology that it considers
important to the development of its business and requiring each employee and
key consultant to execute a confidentiality agreement. There can be no
assurance that the Company's confidentiality agreements and other safeguards
will protect its proprietary information and trade secrets or provide
adequate remedies for the Company in the event of unauthorized use or
disclosure of such information, or that others will not be able to
independently develop such information. In addition, in the event that the
Company becomes involved in litigation to enforce its proprietary rights,
such litigation can be a lengthy and costly process caus-
32
<PAGE>
ing diversion of effort and resources by the Company and its management with
no guarantee of success. Other parties may be issued patents that may prevent
the sale of the Company's products or require licenses and the payment of
royalties by the Company. It is possible that after the Patents expire, other
companies, inside and outside the United States, may adopt the concept and/or
design embodied in the BreastAssure device and seek to compete with the
Company. In the event such competition is encountered, the Company would have
to rely on name recognition, product acceptance, quality and the distribution
network of PSS in order to compete successfully, and there can be no
assurance that the Company will be able to so compete. Moreover, the Company
could be put at a competitive disadvantage by the payment of any royalties,
which may have a material adverse effect on its ability to market its product
successfully.
Although to date no claims have been brought against the Company alleging
that the BreastAssure device infringes intellectual property rights of
others, there can be no assurance that such claims will not be brought
against the Company in the future, or that, if made, such claims will not be
successful. In addition to any potential monetary liability for damages, the
Company could be required to obtain a license in order to continue to
manufacture or market the BreastAssure device or could be enjoined from
making or selling the BreastAssure device if such a license were not made
available on acceptable terms. If the Company becomes involved in such
litigation, it may require the expenditure of significant Company resources
and, if such a claim were successful, the Company's business could be
materially adversely affected.
Scantek has filed an application with the United States Patent and
Trademark Office for a trademark for the term "BreastAssure." The Company has
filed an application with the United States Patent and Trademark Office for a
service mark for the HumaScan Inc. logo.
GOVERNMENT REGULATION
The Company's products and manufacturing activities are subject to
extensive regulation by the FDA and, in some instances, by state, local, and
foreign authorities. Pursuant to the FDC Act and the regulations promulgated
thereunder, FDA regulates the development, clinical testing, manufacture,
packaging, labeling, storage, distribution and promotion of medical devices.
In the United States, medical devices intended for human use are
classified into three categories (Class I, II or III), on the basis of the
controls deemed necessary by FDA reasonably to assure their safety and
effectiveness. Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to cGMP regulations) and Class
II devices are subject to general and special controls (for example,
performance standards, postmarket surveillance, patient registries and FDA
guidelines). Generally, Class III devices are those which must receive
premarket approval from FDA to ensure their safety and effectiveness (for
example, life-sustaining, life-supporting and implantable devices, or new
devices which have not been found substantially equivalent to legally
marketed devices).
Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance or approval through either a 510(k)
notification or a PMA. FDA will grant 510(k) Market Rights if the submitted
information establishes that the proposed device is "substantially equivalent"
to a legally marketed Class I or II medical device, or to a Class III medical
device for which FDA has not called for a PMA. Commercial distribution of a
device for which a 510(k) notification is required can begin only after FDA
issues an order of "substantial equivalence." FDA has recently been requiring a
more rigorous demonstration of substantial equivalence than in the past. It
generally takes from four to 12 months to obtain clearance of 510(k) Market
Rights, but it may take longer. FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device, in which case a PMA may
be required to market the device, or that additional information or data are
needed before a substantial equivalence determination can be made. A request for
additional data may require that clinical studies of the device's safety and
efficacy be performed.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device or if it is a
Class III device for which FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence which typically includes extensive
data, including preclinical and clinical trial data, to demonstrate the
safety and effectiveness of the device. If human clinical trials of a device
33
<PAGE>
are required, and the device presents a "significant risk," the sponsor
(usually the manufacturer or the distributor of the device) must obtain FDA
approval of an investigational device exemption application prior to
commencing human clinical trials. If the device presents a "nonsignificant
risk" to the patient, a sponsor may begin the clinical trial after obtaining
approval for the study by one or more appropriate Institutional Review
Boards, but not FDA. Sponsors of clinical trials are permitted to sell those
devices distributed in the course of the study provided such compensation
does not exceed recovery of the costs of manufacture, research, development
and handling.
Upon receipt of a PMA application, FDA makes a threshold determination as to
whether the application is sufficiently complete to permit a substantive review.
If FDA determines that the PMA application is sufficiently complete to permit a
substantive review, FDA will accept the application for filing. An FDA review of
a PMA application generally takes one to two years from the date the PMA
application is accepted for filing, but may take significantly longer. During
the review period, an advisory committee, typically a panel of clinicians,
ordinarily will evaluate the application and provide recommendations to FDA as
to whether the device should be approved. FDA is not bound by the
recommendations of the advisory panel. FDA also will conduct an inspection of
the manufacturer's facilities prior to PMA approval to ensure that the
facilities are in compliance with applicable cGMP requirements. If FDA's
evaluations are favorable, FDA will issue an approval letter authorizing
commercial marketing of the device for certain indications. If FDA's evaluations
are not favorable, FDA will deny approval and may require additional clinical
trials. The PMA process can be expensive, uncertain, and lengthy, and a number
of devices for which FDA approval has been sought by other companies have never
been approved for marketing.
The FDC Act requires device manufacturers to obtain new FDA clearance or
approval when, among other things, there is a major change or modification in
the intended use of a legally marketed device or a change or modification,
including product enhancements, to a legally marketed device that could
significantly affect its safety or effectiveness. For devices marketed
pursuant to 510(k) Market Rights, the manufacturer must obtain FDA clearance
of a new 510(k) notification prior to marketing the modified device; for
devices marketed pursuant to an approved PMA, the manufacturer must obtain
FDA approval of a supplement to the PMA (a "PMA supplement") prior to
marketing the modified device.
A device manufacturer is responsible for making the initial determination
as to whether a proposed change to a cleared or approved device or to its
intended use necessitates the filing of a new 510(k) notification or a PMA
supplement. If the Company determines that any modification to a device would
not require the submission of a new 510(k) notification (or a PMA supplement,
for devices marketed pursuant to an approved PMA), there can be no assurance
that FDA would agree with the Company's determinations and would not require
the Company to submit a new 510(k) notification (or PMA supplement) for any
modifications made to the device. If FDA requires the Company to submit a new
510(k) notification (or PMA supplement) for any modification to the device,
the Company may be prohibited from marketing the device as modified until FDA
clears the 510(k) notification (or approves the PMA supplement). There can be
no assurance that the Company will obtain 510(k) Market Rights (or approval
of a PMA supplement) on a timely basis, or at all, for modifications to a
device for which it files a future 510(k) notification (or a future PMA
supplement). Moreover, the clearances or approvals, if granted, could limit
the uses for which the product could be marketed. Failure to obtain, or
delays caused by, regulatory clearances or approvals could have a material
adverse affect on the Company's business, financial condition and results of
operations.
Breast thermographic devices (such as the BreastAssure device) intended to
be used by physicians as an adjunct to other established clinical detection
methods for breast disease are currently classified as Class I devices. On
January 17, 1984, FDA granted 510(k) Market Rights to the then owner of the
BTAI technology. The BreastAssure device may be marketed by the owner of the
510(k) Market Rights without further FDA authorization as a BTAI when used
adjunctively by the physician. Scantek assigned the 510(k) Market Rights for
the BreastAssure device to the Company in October 1995.
Based upon reservations about the use of thermography for diagnostic
purposes expressed by OHTA, HCFA and AMA (see "Risk Factors--Uncertainty of
Market Acceptance; Certain Thermographic Applications Not Accepted"), there
is a risk that FDA could reevaluate the bases upon which it granted the
Company's 510(k) Market Rights in 1984 and classified devices such as the
BreastAssure device as Class I devices in 1988. If FDA were to reevaluate
these decisions and conclude that additional data were necessary to support
authorization to
34
<PAGE>
market the BreastAssure device, it could rescind previous 510(k) Market
Rights for breast thermographic devices and/or reclassify these devices from
Class I medical devices to Class III medical devices (which would effectively
vitiate the Company's 510(k) Market Rights and require filing of a new
application for premarket approval prior to marketing). In either event, the
Company would be required to cease marketing the BreastAssure device until it
filed a PMA with FDA and received a new approval to market the BreastAssure
device.
The process of obtaining premarket approval can be lengthy, expensive and
uncertain, and no assurance can be given that premarket approval of the
BreastAssure device can or will be obtained. Among the factors which may
negatively impact upon the Company's ability to obtain FDA approval is the
possibility that FDA may reject or invalidate, in whole or in part, clinical
data previously submitted by the Company. In such event, the Company may be
required to conduct additional clinical trials prior to submission of a PMA.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
FDA. Device manufacturers are required to register their establishments and list
their devices with FDA, and are subject to periodic inspections by FDA and
certain state agencies. FDA has authorized the states of California, Colorado
and Texas to conduct medical device inspections on behalf of FDA. There are
certain states that perform their own separate inspections of medical device
facilities and some have the authority to force the seller to cease the
marketing and manufacturing of medical devices, but any such state inspections
generally should not seek to enforce standards that are different from or in
addition to the requirements of the FDC Act and regulations promulgated
thereunder.
The FDC Act requires device manufacturers to comply with cGMP regulations.
The regulations require that medical device manufacturers comply with various
requirements pertaining to organization and personnel; buildings,
environmental control, cleaning and sanitation; equipment and calibration of
equipment; medical device components; manufacturing specifications and
processes; reprocessing of devices; labeling and packaging; finished device
inspection; device failure investigations; and recordkeeping requirements
including complaint files. FDA enforces these requirements through periodic
inspections of medical device manufacturing facilities. The agency has been
in the process of repromulgating its cGMP regulations for some time, and it
is possible that a new final regulation will be published in the Federal
Register within a few months. The new regulation will, among other things,
clarify current requirements for such things as device failure and complaint
investigations and add new provisions such as the requirement for design
validation.
In addition, the Medical Device Reporting ("MDR") regulation obligates the
Company to inform FDA whenever there is reasonable evidence to suggest that
one of its devices may have caused or contributed to death or serious injury,
or when one of its devices malfunctions and, if the malfunction were to
recur, the device would be likely to cause or contribute to a death or
serious injury.
Labeling and promotion activities are also subject to scrutiny by FDA and,
in certain instances, by the Federal Trade Commission. FDA actively enforces
regulations prohibiting marketing of products for unapproved uses.
If, as a result of FDA inspections, MDR reports or information derived
from any other source, FDA believes the Company is not in compliance with the
law, FDA can refuse to clear or approve pending 510(k) notifications or PMA
applications; withdraw 510(k) Market Rights or PMA approvals; require
notification to users regarding newly found unreasonable risks; request
repair, refund or replacement of faulty devices; request corrective
advertisements, formal recalls or temporary marketing suspension; impose
civil penalties; or institute legal proceedings to detain or seize products,
enjoin future violations, or seek criminal penalties against the Company, its
officers and/or employees.
The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products
are or will be marketed. Any applicable state or local laws or regulations
may hinder the Company's ability to market its products in those states or
localities.
35
<PAGE>
The FDC Act generally prohibits states and their political subdivisions from
issuing or enforcing regulations that are different from, or in addition to, the
requirements of the FDC Act. However, the FDC Act permits the FDA to grant state
and local governments the authority to implement laws or issue regulations
applicable to medical devices that are stricter than or different from the FDC
Act and the regulations thereunder. The Company is not aware of any state or
local provisions that would impact the Company.
Manufacturers are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. Although the Company is not aware of any
specific, material costs it may incur in order to comply with environmental
laws and believes the effect of compliance with environmental laws and
regulations on its operations will be negligible, there can be no assurance
that the Company will not be required to incur significant costs to comply
with such laws and regulations.
Products for export are subject to foreign countries import requirements
and FDA's exporting requirements. The introduction of the Company's products
in foreign markets may subject the Company to foreign regulatory clearances,
which may impose additional substantial costs and burdens. The regulatory
review process varies from country to country. Many countries impose product
standards, packaging and labeling requirements, and import restrictions on
devices. In addition, each country has its own tariff regulations, duties and
tax requirements. The Company has not obtained clearance or approval to
market its products in any foreign country. Approval by foreign government
authorities is unpredictable and uncertain, and no assurance can be given
that the necessary approvals or clearances will be granted on a timely basis
or at all. Delays in receipt of, or a failure to receive, such approvals or
clearances could have a material adverse effect on the Company.
Under Canada's current Food and Drugs Act and Medical Devices Regulations,
the vast majority of medical devices enter the Canadian market without any type
of premarket approval; device manufacturers are required only to notify the
government that the device will be marketed in Canada. Only approximately 5% of
medical devices (those generally considered to be high-risk products) are
subject to premarket review before they can be marketed in Canada. Devices that
are clinically tested (i.e. used in studies involving human subjects) in Canada
are subject to review by the Canadian government prior to initiation of the
study. The Company has been advised that it is likely that the BreastAssure
device can be marketed in Canada via notification without any type of premarket
approval.
The Canadian government has announced its intention to promulgate new
regulations in this area in the immediate future which will establish four
classes of devices. Class IV devices will be required to demonstrate safety and
effectiveness and manufacturers must have quality systems including controls for
both product design and performance. Although manufacturers of Class III and
Class II devices must also demonstrate safety and effectiveness and have quality
systems, the requirements and level of substantiation are fewer and less
stringent for each progressively lower level. Class I devices will not be
regulated until the year 2000. The Company has been advised that these new
regulations (assuming they are published in September 1996) are intended to be
effective in September 1997. It is not clear how the BreastAssure device would
be classified and regulated under the new Canadian regulations.
In addition to the import requirements of foreign countries, the Company
must also comply with United States laws governing the export of products
regulated by FDA. Devices that have obtained 510(k) Market Rights or PMA
approval may be exported, under certain circumstances, without further FDA
authorization. However, foreign countries often require, among other things,
an FDA certificate for products for export (a "CPE"). To obtain a CPE, the
device manufacturer must certify to FDA that the product has been granted
clearance or approval in the United States and that the manufacturing
facilities appeared to be in compliance with cGMPs at the time of the last
FDA inspection. FDA will refuse to issue a CPE if significant outstanding
cGMP violations exist.
36
<PAGE>
The FDA Export Reform and Enhancement Act of 1996 has relaxed the
exportation requirements governing unapproved devices under certain
circumstances. Pursuant to this new law, a Class III device that has not
obtained FDA approval may be exported to any country in the world without FDA
authorization if the product complies with the laws of that country and has
valid marketing authorization in one of the following countries: Australia,
Canada, Israel, Japan, New Zealand, Switzerland, South Africa, the European
Union, or a country in the European economic area (FDA is authorized to add
countries to this list in the future). In general, a device may be exported
under this provision only if it is not adulterated, accords to the
specifications of the foreign purchaser, complies with the laws of the
importing country, is labeled for export, is manufactured in substantial
compliance with cGMP regulations or recognized international standards, is
not sold in the United States and meets other conditions.
In order to export an unapproved Class III device for which a PMA would be
required to market the product in the United States and which has not
obtained valid marketing authorization in one of the countries listed above,
the Company must obtain prior FDA authorization and the following
requirements must be satisfied: (i) the device accords to the specifications
of the foreign purchaser, (ii) the device is not in conflict with the laws of
the country to which it is intended for export, (iii) the device is labeled
that it is intended for export; (iv) the device is not sold or offered for
sale in domestic commerce, and (v) FDA determines that the exportation of the
device is not contrary to the public health and has the approval of the
country to which it is intended for export.
The Company is aware of a number of health care reform alternatives being
investigated by several states and the United States. On the federal level,
the Senate passed the "Health Insurance Reform Act of 1996" and the House of
Representatives passed the "Health Care Coverage Availability and
Affordability Act of 1996" this session. Both measures endeavor to improve
portability and continuity of health insurance coverage, promote the use of
medical savings accounts, combat waste, fraud and abuse in health insurance
and health delivery, and simplify the administration of health insurance.
Various forms of health care and insurance reform legislation also are
pending or have been considered during the past several years in a number of
states, including, for example, the Maine Health Care Reform Act of 1996,
which was signed by the Governor of Maine on April 11, 1996, and the New York
Health Care Reform Act of 1996, which passed the New York Senate on July 13,
1996. A few items of pending health care or insurance related legislation are
directed specifically at women's health care issues, including coverage for
breast cancer treatments or diagnostic tests. For example, the Connecticut
legislature currently is considering legislation which would prohibit rate
discrimination by insurance companies against women with a genetic
predisposition to breast cancer. In addition, the New York state legislature
is considering a bill relating to insurance coverage for the use of
experimental or investigational drugs in the treatment of breast cancer. As
of December 1995, ten states had enacted laws requiring insurers to cover an
"experimental" treatment for breast cancer, autologous bone marrow
transplant.
Changes in existing requirements or adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company. There can be no assurance that
the Company will not be required to incur significant costs to comply with
laws and regulations in the future or that laws or regulations will not have
a material adverse effect upon the Company.
Subject to the potential changes in regulatory status discussed above, the
Company believes that it is in substantial compliance with Section 510(k) of
the FDC Act and that its ownership of the 510(k) Market Rights permits
immediate marketing of the BreastAssure device once the Production Line is
operational. See "Risk Factors--Government Regulation."
COMPETITION
The Company is not aware of any low-cost devices currently on the market
which compete with the BreastAssure device. Nevertheless, the Company's
potential competitors may succeed in developing products that are more
effective or less costly than the Company's products and such competitors may
also prove to be more successful than the Company in manufacturing, marketing
and sales. Some of the Company's potential competitors may be large,
well-financed and established companies that have greater resources for
research and
37
<PAGE>
development, manufacturing and marketing than the Company and, therefore, may
be better able than the Company to compete for a share of the market even in
areas in which the Company may have superior technology. The Company's
potential competitors may include one or more of the approximately 3,000
other manufacturers represented by PSS. Pursuant to the Distribution
Agreement, PSS has agreed not to distribute a product substantially identical
to the BreastAssure device during the term of the agreement unless PSS
determines that the BreastAssure device is not competitive with such other
products on the basis of sales, pricing, quantity, verifiable results or
customer acceptance.
The Company is also aware of a diagnostic device being developed by
Biofield Corp. which is intended to measure the differential in the electric
potential between normal and cancerous tissue. The Company believes the
marketing of this device will be subject to authorization by FDA. The Company
believes that the BreastAssure device incorporates a unique combination of
features and benefits that are not found in any other single product
available in the marketplace today. The Company believes that, when
introduced, the BreastAssure device will augment BSE, clinical examination
and screening and diagnostic techniques such as mammography, ultrasound,
transillumination, diaphanography, MRI, surgical biopsy and SFNA. The market
for products such as the BreastAssure device is characterized by rapid
changes and evolving industry standards often resulting in product
obsolescence or short product lifecycles. Accordingly, the ability of the
Company to compete will depend on its ability to introduce the BreastAssure
device to the marketplace in a timely manner, and to enhance and improve it.
There can be no assurance that the Company will be able to compete
successfully, that its competitors or future competitors will not develop
technologies or products that render the BreastAssure device obsolete or less
marketable or that the Company will be able to successfully enhance its
proposed products or technology or adapt them satisfactorily.
PRODUCT LIABILITY AND INSURANCE
The nature of the Company's products may expose the Company to product
liability risks. The Company currently does not maintain product liability
insurance coverage. Although the Company plans to obtain at least $5,000,000
of product liability insurance coverage before sales of the BreastAssure
device begin, such insurance is becoming increasingly expensive and there can
be no assurance that the Company will be able to obtain or maintain such
insurance on acceptable terms or that such insurance, if obtained, will
provide adequate coverage against product liability claims.
The BreastAssure device has received 510(k) Market Rights from FDA. The
grant of such rights reflects FDA's determination that the BreastAssure
device was substantially equivalent to other medical devices marketed prior
to May 28, 1976, the date the Medical Device Amendments Act of 1976 was
enacted. The fact that the BreastAssure device received 510(k) Market Rights
from FDA may not be sufficient to defend successfully against product
liability lawsuits. While no product liability claims have been brought
against the Company to date, a successful product liability claim against the
Company in excess of its insurance coverage could have a material adverse
effect on the Company.
REIMBURSEMENT
Hospitals, medical clinics and physicians' offices that purchase medical
devices like the BreastAssure device generally rely on third-party payors,
such as Medicare, Medicaid and private health insurance plans, to pay for
some or all of the costs of the screening and diagnostic procedures performed
with these devices. Whether a particular procedure qualifies for third-party
reimbursement depends upon such factors as the safety and effectiveness of
the procedure, and reimbursement may be denied if the medical device is
experimental or was used for a non-approved indication. In some cases,
reimbursement amounts are based on the provider's costs associated with the
procedure, including materials costs. In such a situation, the cost of an
instrument used in the procedure likely would be covered by the reimbursement
payment. In other cases, payment is a fixed amount per procedure, per
hospital day or per hospital stay. Such a payment might not specifically
cover the cost of materials such as a device used in the procedure. In 1984,
HCFA withdrew coverage for thermography under Medicare and Medicaid as a
diagnostic screening method. In 1992, HCFA withdrew Medicare and Medicaid
reimbursement for all other uses of thermography.
38
<PAGE>
There can be no assurance that third-party reimbursement will be available
for BreastAssure tests or that the full or any part of the cost of the
BreastAssure device would be covered by such reimbursement. During the past
several years, the major third-party payors for hospital services have
revised substantially their payment methodologies to contain healthcare
costs. The Company believes that the current pressures for medical cost
containment have resulted in uncertainty in the healthcare industry.
Reimbursement standards and rates may change in the future. The failure of
users of the BreastAssure device to obtain adequate reimbursement from
third-party payors could have a material adverse effect on the Company.
Several states and the United States government are investigating a
variety of alternatives to reform the health care delivery system and further
reduce and control health care spending. These reform efforts include
proposals to limit spending on health care items and services, limit coverage
for new technology and limit or control the price health care providers and
drug and device manufacturers may charge for their services and products,
respectively. If adopted and implemented, such reforms could have a material
adverse effect on the Company's business, financial condition and results of
operations.
EMPLOYEES
As of the date of this Prospectus, the Company employed five full-time
persons in connection with its development stage activities, all of whom are
administrative and professional personnel. The Company will require a
significant number of additional persons at virtually every level below
senior management before it can commence full operations. The Company intends
to utilize professional recruiters to locate qualified personnel and to offer
appropriate compensation packages to attract and retain such personnel. When
fully staffed, the Company expects to have approximately 40 full-time
employees. The Company may also employ part-time personnel from time to time
to meet specific demands of its business should they arise. None of the
Company's employees are expected to be subject to collective bargaining
agreements with labor unions. Management believes that its relations with the
Company's current employees are satisfactory.
FACILITIES
The Company's principal executive offices are located at 514 Centennial
Avenue, Cranford, New Jersey 07016. Such offices are leased by the Company
under a one-year lease, commencing January 1, 1996, for approximately 1,500
square feet of office space. Annual rent payments under the lease are
approximately $15,000 for the first year, subject to certain annual
escalations in each year thereafter. The Company has also leased a facility
of approximately 30,000 square feet at 125 Moen Avenue, Cranford, New Jersey
07016 under a six-year lease commencing October 1, 1996 to house the
Production Line and provide warehouse space. The Company plans also to
relocate its executive offices into such facility. The annual rental under
such lease is $124,015 for the first two years, $145,900 for the third year
of the lease and $160,490 for each of the fourth through sixth years of the
lease. See "Business--Manufacturing."
LEGAL PROCEEDINGS
There are no legal proceedings pending or, to the Company's knowledge,
threatened against the Company.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
--------------------------- ----- -----------------------------------------------
<S> <C> <C>
Donald B. Brounstein(1)(3) . 44 President, Chief Executive Officer and Director
James J. Whidden .......... 60 Senior Vice President of Clinical Development
Kenneth S. Hollander ...... 31 Chief Financial Officer
Steven S. Elbaum(2) ....... 47 Director
Jack L. Rivkin(1)(2)(3) ... 55 Director
John F. Sasen, Sr. ........ 54 Director
Udi Toledano(1)(2)(3) ..... 45 Director
</TABLE>
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
- ------
Donald B. Brounstein has served as President and Chief Executive Officer
of the Company since its inception and was Chairman of the Board of Directors
from the Company's inception on December 27, 1994 until May 1996. In 1978,
Mr. Brounstein founded Lee Surgical Co., Inc. ("Lee Surgical"), a company
which specialized in sales and service of medical supplies and equipment to
physicians throughout New Jersey and New York. He was Chief Executive Officer
of Lee Surgical until February 1994 when Lee Surgical was acquired by PSS.
Mr. Brounstein served as General Manager of Lee Surgical for PSS until
January 1995. In 1989, Mr. Brounstein founded BBU Leasing Inc., a medical
equipment finance company, of which he remains a director. Mr. Brounstein
devotes all of his business time to the Company's affairs.
James J. Whidden has served as Senior Vice President of Clinical
Development of the Company since May 1996. From the Company's inception until
May 1996, he was a consultant to the Company. From 1985 to 1994, Mr. Whidden
was a consultant for various private and public companies in the health care
field, as well as president of two development stage medical companies. From
1989 to 1990, he was President of Biomonitor, Inc., a development stage
biotechnology company and from 1988 to 1989, he was President of Humagen,
Inc., a development stage biotechnology company. In 1983 and 1984, he was
Senior Vice President, Business Development at Technicon Corporation, a
manufacturer of clinical instruments and diagnostic chemicals and had
responsibility for new clinical systems. From 1981 to 1982, he was an
independent consultant in the healthcare industry and from 1975 to 1981, he
was President of two divisions of Becton, Dickinson & Co., a manufacturer of
health care products.
Kenneth S. Hollander has been Chief Financial Officer of the Company since
June 1996. From 1989 to May 31, 1996, Mr. Hollander was Controller of Sidmak
Laboratories, Inc., a company engaged in the generic pharmaceutical industry.
From 1987 to 1989, Mr. Hollander was employed by the accounting firm of
Arthur Andersen and Co. Mr Hollander serves as Treasurer of the Board of
Trustees of The Richmond Fellowship, a private, non-profit, psychiatric
transitional residence.
Steven S. Elbaum has been a director of the Company since June 1996. Mr.
Elbaum has been the Chairman and Chief Executive Officer of The Alpine Group,
Inc., a public, diversified holding company which owns several companies
engaged in various manufacturing businesses, since 1984. He was a partner in
the law firm of Gifford, Woody, Palmer & Serles from 1979 to 1984 and was an
associate with such firm from 1974 to 1979. Mr. Elbaum is also a director of
Interim Services, Inc., one of the nation's largest providers of value added
staffing and health care services, and Polyvision Corporation, a manufacturer
of information display systems, each of which is a public company.
Jack L. Rivkin has been a director of the Company since May 1996. Mr.
Rivkin has been a Senior Vice President of Travelers Group Inc., the parent
company of The Travelers Insurance Companies, Commercial
40
<PAGE>
Credit Co. and Smith Barney Inc., since October 1995. He is currently
responsible for the management of venture capital and public equity partnerships
for several of The Travelers Insurance Companies. He is also a director and
member of the Investment Committee of Greenwich Street Capital, a merchant
banking fund affiliated with Travelers Group Inc. From May 1993 to October 1995,
he was Vice Chairman and Director of Global Research at Smith Barney Inc. From
August 1992 to May 1993, he was an independent consultant. From 1990 to August
1992, Mr. Rivkin was Director of the Equities Division and Director of Research
of Lehman Brothers. From 1987 to 1990, he was Director of Research at Shearson
Lehman Brothers. From 1984 to 1987, Mr. Rivkin was President of PaineWebber
Capital, Inc., the merchant banking arm of PaineWebber Group, and Chairman of
Mitchell Hutchins Asset Management. He is a director of a number of private
venture companies in which Travelers Group Inc. has an investment. He is the
co-author of a book on the venture capital industry, "Risk and Reward, Venture
Capital and the Making of America's Great Industries," published by Random
House. He is also a guest lecturer on venture capital at Columbia University.
Mr. Rivkin is a designee of The Travelers Insurance Company pursuant to the
Voting Rights Agreement (as hereinafter defined).
John F. Sasen, Sr. has been a director of the Company since May 1996. Mr.
Sasen has been President of PSS since August 1995, Chief Operating Officer of
PSS since December 1993 and a director of PSS since July 1993. Mr. Sasen also
was Executive Vice President of PSS from August 1993 to August 1995. From
August 1990 to December 1992, he was Vice President--Sales and Marketing of
PSS, and from January 1993 to July 1993, he was Regional Vice President of
PSS. Prior to joining PSS, Mr. Sasen was Vice President--Sales, Marketing and
Distributor Relations of Becton, Dickinson & Co., a manufacturer of health
care products. Mr. Sasen was employed by Becton, Dickinson & Co. for over 20
years.
Udi Toledano has been a director of the Company since May 1996. Mr.
Toledano has been the President of Andromeda Enterprises, Inc., a private
investment company, since December 1993. He has been the President of CR
Capital Inc., a private investment company, since 1983. He has also been an
advisor to various public and private corporations, none of which is
affiliated with or competes with the Company. Since April 1995, Mr. Toledano
has been a director of Global Pharmaceutical Corporation, a publicly traded
generic pharmaceuticals manufacturer; since July 1994, he has been a director
of Universal Stainless & Alloy Products, Inc., a publicly traded specialty
steel producer, and since February 1993, he has been a director of Pudgie's
Chicken, Inc., a publicly traded national fast food chain.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Executive officers
are elected by the Board of Directors to hold office for such term as may be
prescribed by the Board of Directors.
COMMITTEES
The Executive Committee, established in June 1996, currently consists of
Mr. Brounstein, as Chairman, and Messrs. Rivkin and Toledano. The Executive
Committee has all the powers of the Company's Board of Directors except that
it is not authorized to amend the Company's Certificate of Incorporation,
declare any dividends or issue shares of the capital stock of the Company.
The Audit Committee, established in June 1996, currently consists of Mr.
Elbaum as Chairman, and Messrs. Rivkin and Toledano. The Audit Committee
reviews with the Company's independent accountants the scope and timing of
their audit services, any other services they are asked to perform, the
report of independent accountants on the Company's financial statements
following completion of their audit and the Company's policies and procedures
with respect to internal accounting and financial controls. In addition, the
Audit Committee makes an annual recommendation to the Board of Directors
concerning the appointment of independent accountants for the ensuing year.
The Compensation Committee, established in June 1996, currently consists
of Mr. Toledano, as Chairman, and Messrs. Brounstein and Rivkin. The
Compensation Committee reviews the compensation and benefits of all officers
of the Company and makes recommendations to the Board of Directors, reviews
general policy matters relating to compensation and benefits of employees of
the Company. See "Management--Executive Compensation."
EXECUTIVE COMPENSATION
Compensation of Executive Officers. None of the Company's executive
officers was paid any compensation for services to the Company as an
executive officer during the fiscal year ended December 31, 1995.
41
<PAGE>
Employment Agreements. Donald B. Brounstein, James J. Whidden and Kenneth
S. Hollander have entered into employment agreements with the Company for the
position of President and Chief Executive Officer, in the case of Mr.
Brounstein, Senior Vice President of Clinical Development, in the case of Mr.
Whidden, and Chief Financial Officer, in the case of Mr. Hollander. Mr.
Brounstein's employment agreement provides for a base annual salary of
$145,000 with annual cost of living increases and a customary benefits
package. The agreement has a term of three years, ending December 31, 1999,
with automatic one-year extensions thereafter unless either party gives
notice of termination. Mr. Whidden's and Mr. Hollander's employment
agreements provide for a base annual salary of $120,000 and $90,000,
respectively, which may be increased annually at the discretion of the Board
of Directors, and a customary benefits package. Mr. Whidden's and Mr.
Hollander's employment agreements continue until canceled by the Company or
the employee. The Company may terminate Mr. Brounstein's employment agreement
for cause (as defined in the agreement), in which case Mr. Brounstein will be
entitled to receive all accrued and unpaid salary and benefits through the
termination date and an additional amount equal to one semi-monthly
installment of salary. The Company may terminate the respective employment
agreements of Messrs. Whidden and Hollander for cause (as defined in such
agreements) at any time, and with no further obligation to pay salary or
benefits. If either Mr. Whidden or Mr. Hollander were terminated without
cause, he would be entitled to receive six months severance pay. Each of the
employment agreements of Messrs. Brounstein, Whidden and Hollander prohibits
any such employee from (i) competing with the Company for one year following
his termination of employment with the Company and (ii) disclosing
confidential information or trade secrets in any unauthorized manner. The
Company has agreed to purchase a key person insurance policy on the life of
Mr. Brounstein in the amount of $8,000,000, with $600,000 of the death
benefit payable to a beneficiary selected by Mr. Brounstein and the remaining
$7,400,000 payable to the Company.
Under his employment agreement, Mr. Brounstein is eligible to receive a
bonus during calendar year 1996 as determined by the Compensation Committee.
Mr. Brounstein is eligible to receive in 1997 an annual bonus of up to 100%
of his base compensation, subject to the Company achieving certain after-tax
net income levels during the 1997 calendar year.
The following table sets forth for 1997 only the additional percentage of
base salary that will be paid to Mr. Brounstein as a bonus, and the target
after-tax net income that must be achieved by the Company in order for Mr.
Brounstein to be entitled to the corresponding bonus award:
Additional Percentage
Targeted 1997 After Tax Net Income of Salary Paid as Bonus
------------------------------------------------------- -----------------------
$3.0 million or greater but less than $3.7 million .... 10%
$3.7 million or greater but less than $4.4 million .... 20%
$4.4 million or greater but less than $4.7 million .... 30%
$4.7 million or greater but less than $5.0 million .... 40%
$5.0 million or greater ............................... 100%
Mr. Brounstein will be eligible to receive performance-based annual
bonuses for each year after calendar year 1997 modeled on a similar formula
as determined and agreed to by the Compensation Committee.
Mr. Whidden may, at the Company's option, receive an annual discretionary
bonus in an amount to be determined by the Compensation Committee. Mr.
Hollander will receive an annual bonus equal to a minimum of one month's
salary or such larger amount determined by the Company in its discretion.
Other than as described above and except for $30,000 paid to Mr. Whidden
as consulting fees during fiscal year 1995 before he was appointed an officer
of the Company, none of the Company's executive officers was paid any
compensation.
Stock Incentive Plan. The Company's 1996 Stock Incentive Plan (the "1996
Plan") was adopted by the Company's Board of Directors in June 1996 for the
purpose of securing for the Company and its stockholders the benefits arising
from the ownership of restricted shares of Common Stock ("Restricted Stock"),
stock appreciation rights ("SARs") and options to purchase Common Stock
("Options") by directors who are not employees ("Eligible Directors")
(Messrs. Elbaum, Rivkin, Sasen and Toledano are currently Eligible
Directors), officers, other key employees and consultants (the "Key
Employees") of the Company (and any subsidiary
42
<PAGE>
companies) who are expected to contribute to the Company's future growth and
success. No shares of Restricted Stock or SARs have been granted under the
1996 Plan. Options for 128,000 shares have been issued under the 1996 Plan as
of the date of this Prospectus. No award may be granted under the 1996 Plan
after June 2006.
Under the 1996 Plan, the maximum number of shares with respect to which
Options or SARs may be granted or which may be awarded as restricted stock is
700,000 shares of Common Stock. The Company may in its sole discretion grant
shares of Restricted Stock, SARs and Options to Key Employees and shall grant
Options to the Company's Eligible Directors subject to specified terms and
conditions and in accordance with a specified formula ("Formula") as
discussed below. Options granted to Key Employees may be either incentive
stock options ("ISOs") meeting the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified
stock options ("NQSOs") not meeting the requirements of Section 422 of the
Code. SARs are rights to receive the appreciation in value, or a portion of
the appreciation in value, of a specified number of shares of Common Stock,
and may be granted in conjunction with, or independently of, Options.
Restricted Stock is Common Stock that is subject to restrictions against
transfer and forfeiture upon termination of employment. Options granted to
Eligible Directors shall be NQSOs.
The 1996 Plan provides that the Plan will be administered by the Board of
Directors. Subject to the terms of the 1996 Plan, the Board of Directors will
determine the Key Employees who will receive grants of Options, SARs or
Restricted Stock, the number of shares of Common Stock subject to each Option
or SAR or awarded as Restricted Stock, the grant date, the expiration date,
and other terms and conditions. Options granted to Eligible Directors are
governed by the Formula discussed below. The Board of Directors has the
authority to construe and interpret the provisions of the 1996 Plan or the
grants made thereunder. Each grant will be evidenced by a written agreement
executed by the Company and the Eligible Director or Key Employee, as the
case may be, at the time of grant, in accordance with the terms and
conditions of the 1996 Plan.
An Option or SAR granted to a Key Employee shall expire on the date
determined by the Board of Directors, which date may not exceed ten years
from the date the Option or SAR is granted, or five years, in the case of
NQSOs granted to Key Employees who at the time of grant own more than ten
percent of the combined voting power of all classes of stock of the Company
or any subsidiary (a "Ten Percent Stockholder"). Options and SARs granted to
Key Employees are exercisable, and restrictions on Restricted Stock lapse, at
such time or times and in such installments as determined by the Board of
Directors at the time of grant, but not earlier than six months, or later
than ten years (in the case of Restricted Stock and ISOs to Ten Percent
Stockholders, five years) from the date of grant.
If a Key Employee's employment with the Company terminates, the Board of
Directors may, in its discretion, permit the exercise of Options and SARs
granted to such Key Employee (i) for a period not longer than three months
following a termination other than for death or permanent disability, (ii)
for a period not longer than one year following a termination due to death or
permanent disability, and (iii) for a period not to extend beyond the
expiration date of any NQSOs or related or independently granted SARs,
provided, however, that the Board of Directors may not extend any Option or
SAR beyond its expiration date. If the employment of a Key Employee who holds
Restricted Stock terminates for any reason other than death or permanent
disability, any shares of Restricted Stock still subject to restrictions are
forfeited and must be transferred back to the Company for no consideration.
If such employment is terminated by the Company or any subsidiary without
cause or by agreement between the Company or a subsidiary and the Key
Employee, the Board of Directors may, in its discretion, release some or all
of the Restricted Stock from the restrictions. If the employment of a Key
Employee who holds Restricted Stock terminates by reason of death or
permanent disability, the restrictions on such Restricted Stock lapse unless
the Board of Directors determines otherwise.
In connection with his employment agreement, the Company granted Mr.
Hollander Options under the 1996 Plan to purchase 35,000 shares of Common
Stock at the initial public offering price per share (contingent upon the
closing of this Offering). The Options will vest in increments of 1,750 per
month for 20 months beginning April 30, 1997, subject to Mr. Hollander's
continued employment. The Company granted Mr. Whidden Options under the 1996
Plan to purchase 24,000 shares of Common stock at the initial public offering
price per share (contingent upon the closing of this Offering). The options
vest 33 1/3% upon the grant of such Options, 66 2/3% one year after the
date of grant and 100% two years after the date of grant, subject to Mr.
Whidden's continued employment.
43
<PAGE>
Under the Formula, each Eligible Director will be granted immediately
prior to the Offering Options to purchase 15,000 shares of Common Stock at an
exercise price equal to the initial public offering price per share, all of
which vest immediately (the "Initial Director Options"). On the first
business day following the annual meeting of stockholders of the Company to
elect directors in 1997, and thereafter on the first business day following
each successive annual meeting of stockholders, so long as Options remain
available to grant to Eligible Directors, each person who is elected as a
director after that meeting and is an Eligible Director, and each person who
continues to serve as a director after that meeting and is an Eligible
Director, shall be granted 10,000 Options ("Director Options") in recognition
of service as a director, subject to vesting, for the year ending on the day
prior to the next annual meeting of stockholders of the Company to elect
directors. Director Options expire ten years from the date of grant and vest
as follows (except for the Initial Director Options, which vest immediately
upon grant): 33 1/3% upon the grant of such Options, 66 2/3 % one year after
the date of grant and 100% two years after the date of grant, in each case
assuming the recipient continuously serves as a director during that time.
Options that have vested as of the date on which an Eligible Director ceases
to serve as a director remain exercisable for 60 days or, if termination was
due to death or disability, 12 months.
The exercise price for each Option granted under the 1996 Plan shall be
not less than the fair market value (the "Fair Value") per share of Common
Stock on the date such Option is granted. For ISOs granted to a Ten Percent
Stockholder, the exercise price shall not be less than 110% of the Fair Value
per share of Common Stock. The exercise price may be paid in cash or by
transferring shares of Common Stock owned by the Option holder and having a
Fair Value on the date of surrender equal to the aggregate exercise price of
the Option, by the Company retaining from the shares to be delivered upon
exercise of the Option that number of shares having a Fair Value on the date
of exercise equal to the aggregate exercise price of the Option, pursuant to
a promissory note, and in any case, upon the terms and conditions as the
Board of Directors shall determine. Upon the exercise of any Option, the
Company is required to comply with all applicable withholding tax
requirements.
The Board of Directors may amend or terminate the 1996 Plan at any time
and in any respect except that the Board cannot, without the approval of a
majority of the Company's stockholders, amend the 1996 Plan to (i) increase
the maximum number of shares which are subject to the 1996 Plan, (ii)
increase the maximum number of shares for which any Key Employee may be
granted Options or SARs or which may be awarded to such Key Employee as
Restricted Stock, or (iii) change the class of persons eligible to
participate in the 1996 Plan. No amendment to the 1996 Plan may, without the
Option holder's consent, adversely affect any Options, SARs or Restricted
Stock previously granted to him or her.
Other Options. The Company has issued options outside of the 1996 Plan to
certain officers, employees and consultants to purchase a total of 142,500
shares of Common Stock. Options for 131,250 shares are dated February 9, 1996
and have a five-year term and an exercise price of $5.33 per share. The
holders of and the number of shares of Common Stock represented by the
options dated February 9, 1996 are as follows: Donald B. Brounstein, the
Company's President, Chief Executive Officer and a director, 37,500 shares;
James J. Whidden, the Company's Senior Vice President of Clinical Development
(who was a consultant to the Company at the time of grant), 37,500 shares;
Whidden & Associates, Inc., a corporation wholly owned by Mr. Whidden, 18,750
shares; Amy Lewis, director of sales of the Company, 18,750 shares; and
Everett M. Lautin, M.D., a consultant to the Company, 18,750 shares. All of
such options were fully vested on the date of grant. Options for 11,250
shares issued to Kenneth S. Hollander, the Company's Chief Financial Officer,
are dated June 3, 1996, have an exercise price of $5.33 per share and vest
April 30, 1997.
DIRECTOR COMPENSATION
Members of the Board of Directors of the Company presently receive no
additional remuneration for acting in that capacity. The Company anticipates
its nonemployee directors will be paid $500 (plus reasonable expenses) for
each attended meeting of the Board of Directors or committee thereof. Members
of the Board of Directors of the Company will also be eligible for the grant
of Options under the 1996 Plan which currently provides for each Eligible
Director (currently Messrs. Elbaum, Rivkin, Sasen and Toledano) to receive
the Initial Director Options and the Director Options. Mr. Rivkin is a
nominee of The Travelers Insurance Company. Mr. Rivkin has waived the $500
fee for attendance at meetings of the Board of Directors or committees
thereof and the Initial Director Options. In lieu thereof, the Board of
Directors has determined to grant The Travelers Insurance Company options
outside the 1996 Plan to purchase 15,000 shares of Common Stock at an
exercise price equal to the initial public offering price. See
"Management--Executive Compensation--Stock Incentive Plan." Four former
directors of the Company each received Options for 1,500 shares under the
Company's Nonemployee Director Stock Incentive Plan (the "Nonemployee
Director Plan"), which was adopted by the Company in January 1996 and
terminated upon the adoption of the 1996 Plan. Options held by one former
director expired unexercised in May 1996, 60 days after such director's
resignation from the Board.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the date of this Prospectus,
and as adjusted to reflect the sale of the Common Stock offered hereby, by
(i) each stockholder known by the Company to be the beneficial owner of 5% or
more of the outstanding Common Stock, (ii) each of the Company's directors,
(iii) each of the named executive officers (as such term is defined in Rule
402(a)(2) of Regulation S-B) and (iv) all directors and executive officers of
the Company as a group. Except as otherwise indicated, the Company believes
that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power
with respect to such shares, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
Percentage
Beneficially Owned
---------------------------
Number of Shares of Common Before After
Name and Address Stock Beneficially Owned Offering(1) Offering(2)(3)
------------------------------------- -------------------------- ----------- ------------
<S> <C> <C> <C>
Donald Brounstein(4)(5) ............. 897,000 40.3% 11.8%
Steven S. Elbaum(6)
1790 Broadway
New York, NY 10019 ................. 37,500 1.8% *
Jack L. Rivkin
388 Greenwich Street
New York, NY 10013 ................. 0 * *
John F. Sasen, Sr.(7)
7800 Belfort Parkway, Suite 250
Jacksonville, FL 32256 ............. 207,500 9.1% 2.7%
Udi Toledano(8)
545 Madison Avenue, Suite 800
New York, NY 10022 ................. 271,271 11.6% 3.5%
Travelers Group Inc.(9)
388 Greenwich Street
New York, NY 10013 ................. 1,732,020 45.5% 21.8%
Zsigmond L. Sagi, Ph.D.
Scantek Medical, Inc.(10)
26 Merry Lane
East Hanover, NJ 07936 ............. 1,014,938 48.6% 13.5%
Burnham Securities Inc.(11)
1325 Avenue of the Americas
New York, NY 10018 ................. 400,000 16.2% 5.1%
Herbert V. Turk(12)
2132 Cedarwood Lane
San Jose, CA 95125 ................. 256,271 11.0% 3.4%
All Officers and Directors as a group
(7 persons)(5)(6)(7)(8)(13) ........ 1,482,021 52.8% 18.6%
</TABLE>
- ------
* Less than 1%.
(1) Based upon 2,076,563 shares of Common Stock outstanding before Offering,
not including 2,943,750 shares issuable upon conversion of the Series A
Preferred Stock.
(2) Based upon 7,520,313 shares of Common Stock outstanding, including
2,943,750 shares issuable upon conversion of the Series A Preferred
Stock.
(3) Certain directors, officers and affiliates of the Company intend to
purchase 250,000 of the shares of Common Stock offered hereby. The
intended allocation of such shares has not yet been determined and, as a
result, has not been reflected in this table.
45
<PAGE>
(4) c/o HumaScan Inc., 514 Centennial Avenue, Cranford, New Jersey 07016.
(5) Includes 75,000 shares of Common Stock issuable upon conversion of
Series A Preferred Stock, 15,000 shares issuable upon exercise of
Private Warrants, 19,500 shares issuable upon exercise of March Bridge
Warrants and 37,500 shares issuable upon exercise of options issued to
Mr. Brounstein on February 9, 1996. See "Management--Executive
Compensation."
(6) Includes 18,750 shares of Common Stock issuable upon conversion of
Series A Preferred Stock, 3,750 shares issuable upon exercise of Private
Warrants and 15,000 shares issuable upon exercise of Options issued to
Mr. Elbaum in June 1996 under the 1996 Plan.
(7) Includes 15,000 shares of Common Stock issuable upon exercise of Options
issued to Mr. Sasen in June 1996 under the 1996 Plan. Also includes
56,250 shares of Common Stock issuable upon conversion of Series A
Preferred Stock, 125,000 shares issuable upon exercise of the PSS
Warrants, and 11,250 shares issuable upon exercise of Private Warrants,
all of which securities are held by PSS. Mr. Sasen disclaims beneficial
ownership of all of the securities held by PSS.
(8) Includes 46,875 shares issuable upon conversion of Series A Preferred
Stock, 9,375 shares issuable upon exercise of Private Warrants, 11,250
shares issuable upon exercise of Toledano Group Warrants and 10,646
shares issuable upon conversion of March Bridge Warrants owned by Mr.
Toledano, as well as 15,000 shares issuable upon exercise of Options
issued to Mr. Toledano in June 1996 under the 1996 Plan. Also includes
75,000 shares of Common Stock issuable upon conversion of Series A
Preferred Stock, 15,000 shares issuable upon the exercise of Private
Warrants, 51,375 shares issuable upon exercise of Toledano Group
Warrants owned by Mr. Toledano's wife and a certain trust for the
benefit of their minor children (the "Toledano Trust"), an aggregate of
18,000 shares underlying Toledano Group Warrants owned by certain other
members of Mr. Toledano's family and 18,750 shares underlying March
Bridge Warrants held by the Toledano Trust. Mr. Toledano disclaims
beneficial ownership of all of the Private Warrants and Toledano Group
Warrants held by members of his family other than his wife and the
Toledano Trust, as well as the Common Stock issuable upon exercise of
such Private Warrants and Toledano Group Warrants.
(9) Includes 1,125,000 shares of Common Stock issuable upon conversion of
Series A Preferred Stock held by The Travelers Insurance Company,
225,000 shares issuable upon exercise of Private Warrants held by The
Travelers Insurance Company, 159,375 shares issuable upon conversion of
Series A Preferred Stock held by Smith Barney Worldwide Special Fund,
N.V. ("Smith Barney Fund"), 31,875 shares issuable upon exercise of
Private Warrants held by Smith Barney Fund, 28,125 shares issuable upon
conversion of Series A Preferred Stock held by Smith Barney Worldwide
Securities, Ltd. ("Smith Barney Securities"), 5,625 shares issuable upon
exercise of Private Warrants held by Smith Barney Securities, 37,500
shares issuable upon exercise of Private Warrants held by Smith Barney
Inc., 2,438 shares issuable upon exercise of March Bridge Warrants held
by Smith Barney Securities, 12,260 shares issuable upon exercise of
March Bridge Warrants held by Smith Barney Fund and 89,822 shares
issuable upon exercise of March Bridge Warrants held by The Travelers
Insurance Company. Smith Barney Inc. and The Travelers Insurance Company
are both subsidiaries of Travelers Group Inc., and Smith Barney
Worldwide Securities, Ltd. and Smith Barney Worldwide Fund, N.V. are
investment funds domiciled outside the United States for which Smith
Barney Inc. acts as sponsor and adviser. Also includes 15,000 shares
issuable upon exercise of options issued to The Travelers Insurance
Company in June 1996. See "Management--Director Compensation."
(10) Includes 1,004,063 shares of Common Stock owned by Scantek, of which Dr.
Sagi is the Chairman of the Board and a principal stockholder, and 3,750
shares issuable upon conversion of Series A Preferred Stock, 750 shares
issuable upon exercise of Private Warrants, 4,875 shares issuable upon
exercise of March Bridge Warrants owned by Dr. Sagi and 1,500 shares
issuable upon exercise of options issued to Dr. Sagi under the
Nonemployee Director Plan.
(11) Includes 400,000 shares of Common Stock issuable upon exercise of
Private Warrants owned by Burnham.
(12) Includes 65,625 shares issuable upon conversion of Series A Preferred
Stock, 13,125 shares issuable upon exercise of Private Warrants owned
jointly by Mr. Turk and his wife, 50,625 shares issuable upon exercise
of Toledano Group Warrants owned jointly by Mr. Turk and his wife and
29,396 shares issuable upon con
46
<PAGE>
version of March Bridge Warrants owned by Mr. Turk. Also includes an
aggregate of 56,250 shares of Common Stock issuable upon conversion of
Series A Preferred Stock, 11,250 shares issuable upon the exercise of
Private Warrants and 30,000 shares issuable upon exercise of Toledano
Group Warrants owned by Mr. Turk's two adult daughters. Mr. Turk
disclaims beneficial ownership of all of the Series A Preferred Stock,
Private Warrants and Toledano Group Warrants owned by his daughters as
well as the Common Stock issuable upon conversion of such Series A
Preferred Stock and exercise of such Private Warrants and Toledano Group
Warrants.
(13) Includes 3,750 shares of Common Stock issuable upon conversion of Series
A Preferred Stock, 750 shares issuable upon exercise of Private Warrants
and 64,250 shares issuable upon exercise of options held by James J.
Whidden, the Company's Senior Vice President of Clinical Development.
Does not include 16,000 shares issuable upon exercise of options held by
Mr. Whidden and 46,250 shares issuable upon exercise of options held by
Kenneth S. Hollander, the Company's Chief Financial Officer, which
options are not currently exercisable.
47
<PAGE>
CERTAIN TRANSACTIONS
Scantek Medical, Inc. The Company entered into the License Agreement with
Scantek in October 1995. Scantek owns beneficially 1,013,438 shares of the
Company's Common Stock, or 13.5% of the Common Stock to be outstanding after
this Offering. See "Business--License Agreement" and "Principal
Stockholders."
Zigmed, Inc. The Company entered into the Turnkey Construction Contract
with Zigmed as of October 31, 1995, and is obligated to purchase the
Production Line from Zigmed for a price of $1,750,680. Zsigmond G. Sagi, the
Chief Executive Officer and a principal stockholder of Zigmed, is the son of
Dr. Zsigmond L. Sagi, the Chairman of the Board of Scantek. See
"Business--Manufacturing."
Physician Sales & Service, Inc. The Company entered into the Distribution
Agreement with PSS as of February 27, 1996, pursuant to which PSS was
appointed the exclusive United States distributor of the BreastAssure device.
PSS owns 56,250 shares of Series A Preferred Stock, 11,250 Private Warrants
and 125,000 PSS Warrants. John F. Sasen, Sr., the President of PSS, is a
director of the Company. See "Business--Marketing and Distribution" and
"Principal Stockholders."
Donald B. Brounstein. During 1995, Donald B. Brounstein, the Company's
President, Chief Executive Officer and a director, loaned the Company an
aggregate of $125,000 on an interest-free basis (the "1995 Loans"), none of
which was repaid prior to the May Private Placement. Mr. Brounstein received
no consideration for the 1995 Loans. Mr. Brounstein also purchased $40,000
principal amount of the March Bridge Notes, which March Bridge Notes bore
interest at the rate of 10% per annum. In connection with the May Private
Placement, Mr. Brounstein exchanged such $40,000 principal amount of March
Bridge Notes and $34,000 of the 1995 Loans in payment of the initial purchase
price for two Units. The remaining $91,000 of the 1995 Loans, plus accrued
interest on Mr. Brounstein's March Bridge Notes of $711, was repaid to Mr.
Brounstein from the proceeds of the May Private Placement.
In connection with the May Private Placement, Mr. Brounstein granted the
holders of Series A Preferred Stock (or the underlying Common Stock if the
Series A Preferred Stock is converted) the right to participate on a pro rata
basis in the sale of any Common Stock or common stock equivalents owned by
him or his successors or assigns, based on the number of shares of Common
Stock into which the Series A Preferred Stock owned by such holder is
convertible or has been converted, the number of such shares held by such
other holders electing to participate, and the number of such shares of
Common Stock and common stock equivalents owned by him. Such right terminates
upon consummation of a Qualified IPO.
Private Warrants. In connection with the May Private Placement, the
Company issued Private Warrants to purchase 400,000 shares of Common Stock at
$2.93 per share to Burnham pursuant to the Placement Agreement and Private
Warrants to purchase 37,500 shares of Common Stock to Smith Barney Inc. See
"Principal Stockholders" and "Description of Securities--Private Placements."
Toledano Group Warrants. In connection with the May Private Placement, the
Company issued an aggregate of 161,250 Toledano Group Warrants to Udi
Toledano, a director of the Company, and members of his family, and Herbert
V. Turk and members of his family. The Toledano Group Warrants (i) may be
exercised in full if the Common Stock has been trading in the public market
at a price per share of at least $7.33 before a date which is six months
after the Initial Closing (as hereinafter defined), (ii) may be exercised for
an aggregate of only 52,500 shares of Common Stock if the Common Stock has
been trading publicly at a price per share of at least $7.33 more than six
months but less than nine months from the Initial Closing and (iii) may not
be exercised at all if the Common Stock does not trade in the public market
at a price per share of at least $7.33 within nine months after the Initial
Closing. See "Description of Securities--Private Placements."
James J. Whidden. In connection with the May Private Placement, for
clinical and business services rendered, the Company issued one tenth of a
Unit to James J. Whidden, the Company's Senior Vice President of Clinical
Development (who was a consultant to the Company at the time of such
issuance).
Conversion of Series A Preferred Stock. Upon consummation of this
Offering, all 2,943,750 outstanding shares of Series A Preferred Stock will
convert automatically into shares of Common Stock on a share-for-share basis.
Of the 2,943,750 shares of Series A Preferred Stock to be so converted,
Donald B. Brounstein, the Company's President, Chief Executive Officer and a
director, holds 75,000 shares, PSS holds 56,250 shares, Udi
48
<PAGE>
Toledano, a director of the Company, holds 121,875 shares (including 75,000
shares held by his wife), The Travelers Insurance Company holds 1,125,000
shares, Smith Barney Fund holds 159,375 shares, Smith Barney Securities holds
28,125 shares, Dr. Sagi holds 37,500 shares and Herbert V. Turk holds 121,875
shares (including an aggregate of 56,250 shares held by his two adult
daughters, as to which he disclaims beneficial ownership).
Voting and Stockholder Rights Agreement. The Company, Burnham, The
Travelers Insurance Company, Smith Barney Securities, Smith Barney Fund and a
consortium of investors led by Udi Toledano entered into a Voting and
Stockholder Rights Agreement dated as of May 15, 1996 (the "Voting Rights
Agreement") pursuant to which the parties agreed that in connection with the
exercise of the voting rights of the holders of Series A Preferred Stock to
elect three of the Company's directors, one of such three directors will be
nominated by each of Burnham, The Travelers Insurance Company (or an
affiliate) and Mr. Toledano, and each of the parties other than the Company
will vote their shares of Series A Preferred Stock to elect such nominees.
The Voting Rights Agreement also provides that the Company will give each of
the other parties to the agreement certain monthly financial statements and
annual budgets and projections. In addition, parties to the Voting Rights
Agreement that have not designated a nominee for election to the Company's
Board of Directors have certain rights to inspect the Company's properties
and examine its books, and are entitled to have a representative attend and
participate (but not vote) at meetings of the Company's Board of Directors.
The Voting Rights Agreement terminates upon the automatic conversion of the
Series A Preferred Stock into Common Stock upon consummation of this
Offering.
The Company believes that the terms of each of the foregoing transactions
are at least as favorable to the Company as could be obtained from third
parties in arms' length transactions. In connection with this Offering, the
Company has adopted a policy whereby all future transactions between the
Company and its officers, directors, principal stockholders or affiliates
will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested members of the Board of
Directors or, if required by law, a majority of disinterested stockholders,
and will be on terms no less favorable to the Company than could be obtained
in arm's length transactions from unaffiliated third parties.
49
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 25,000,000 shares of
Common Stock, $.01 par value per share, 4,175,000 shares of Series A Convertible
Preferred Stock, $.01 par value per share (the "Series A Preferred Stock"), and
1,825,000 shares of undesignated preferred stock (the "Undesignated Preferred
Stock"). As of the date of this Prospectus, there are 2,076,563 shares of Common
Stock issued and outstanding and held of record by 16 persons and 2,943,750
shares of Series A Preferred Stock issued and outstanding and held of record by
81 persons. Upon the closing of this Offering, the 2,943,750 outstanding shares
of Series A Preferred Stock will convert automatically into shares of Common
Stock on a share-for-share basis, and there will be no shares of Series A
Preferred Stock outstanding. There are presently no shares of Undesignated
Preferred Stock outstanding.
COMMON STOCK
The shares of Common Stock currently outstanding are, and the shares of
Common Stock that will be outstanding upon the consummation of this Offering
will be, validly issued, fully paid and non-assessable. Each holder of Common
Stock is entitled to one vote for each share owned of record on all matters
voted upon by the stockholders. In the event of a liquidation, dissolution or
winding-up of the Company, the holders of Common Stock are entitled to share
equally and ratably in the assets of the Company, if any, remaining after the
payment of all debts and liabilities of the Company and the liquidation
preference of any outstanding Preferred Stock. The holders of the Common
Stock have no preemptive rights or cumulative voting rights and there are no
redemption, sinking fund or conversion provisions applicable to the Common
Stock.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Board of Directors, out of funds legally available for such
purpose, subject to the dividend and liquidation rights of any Preferred
Stock that may be issued. See "Dividend Policy."
PREFERRED STOCK
Series A Convertible Preferred Stock. Each share of Series A Preferred
Stock is convertible into a share of Common Stock on a share-for-share basis
and is automatically converted into Common Stock upon an underwritten public
offering of the Company's securities registered pursuant to the Securities
Act in which the Company receives gross proceeds of at least $10,000,000 or
such lesser amount as may be determined by a majority of the three directors
elected by the holders of the Series A Preferred Stock pursuant to the voting
rights described below (a "Qualified IPO").
The holders of shares of Series A Preferred Stock are entitled to vote on
all matters for which holders of Common Stock are entitled to vote on an
as-if-converted basis. In addition, they have special voting rights with
respect to the election of directors as provided in the terms of such Series
A Preferred Stock. So long as at least one third of the shares of the Series
A Preferred Stock remain outstanding: (i) the holders of Series A Preferred
Stock, voting as a class, will be entitled to elect at least three directors
to the Company's Board of Directors, and (ii) notwithstanding clause (i)
above, until the completion of a Qualified IPO, the holders of a majority of
the Series A Preferred Stock will be entitled by written notice to the
Company at any time to determine the size of and to elect the entire Board of
Directors of the Company (other than one director to be specified by PSS
pursuant to the Distribution Agreement and one director to be designated by
Burnham pursuant to the Placement Agreement; Burnham has waived its right to
designate a director in contemplation of this Offering). Such Board of
Directors must approve, by affirmative vote, the payment of dividends, the
issuance of any capital stock, the issuance of debt and certain other
activities of the Company.
The holders of Series A Preferred Stock will be entitled to receive, on a
share-for-share basis with the holders of Common Stock, dividends when and as
declared by the Board of Directors of the Company.
In the event of any liquidation, dissolution or winding-up of the Company,
holders of the Series A Preferred Stock will be entitled to an amount equal
to $2.67 per share, subject to adjustment in connection with the antidilution
provisions described below, plus the amount of any dividend previously
declared with respect to the Series A Preferred Stock and remaining unpaid,
before any payments are made to the holders of Common Stock.
50
<PAGE>
After such amount has been paid to the holders of Series A Preferred Stock,
any additional funds available for distribution to the Company's stockholders
will be allocated equally among the holders of Series A Preferred Stock and
the holders of Common Stock, on a share-for-share basis (deeming each share
of Series A Preferred Stock to equal the number of shares of Common Stock
into which it is convertible). In the event that the Company has insufficient
funds to pay the full liquidation preference payable to the holders of Series
A Preferred Stock, the existing funds will be allocated among the holders of
all such shares pro rata in proportion to the full amounts to which they
would respectively be entitled.
The holders of Series A Preferred Stock are entitled to weighted average
anti-dilution protection for issuances or sales of Common Stock, or any
security convertible or exercisable into or exchangeable for shares of Common
Stock, to the extent that the Company sells such securities for less than the
Conversion Value (as defined in the Company's Certificate of Incorporation)
of the Series A Preferred Stock in effect on the date of such issuance
(initially, $2.67), subject to exclusions for the Common Stock issuable: (i)
upon exercise of Private Warrants issued as part of the Units sold in the May
Private Placement; (ii) to the November Bridge Investors upon conversion of
their November Bridge Notes; (iii) to Burnham upon exercise of the 400,000
Private Warrants held by Burnham; (iv) to certain officers, employees and
consultants upon exercise of options issued on February 9, 1996 and June 3,
1996 for up to 142,500 shares; (v) to PSS upon exercise of the PSS Warrants;
(vi) to Udi Toledano and family and Herbert V. Turk and family upon exercise
of an aggregate of 161,250 Private Warrants; (vii) to Smith Barney Inc. upon
exercise of an aggregate of 37,500 Private Warrants; and to the holders of
the March Bridge Warrants upon exercise of such March Bridge Warrants.
Any outstanding shares of Series A Preferred Stock will be redeemed by the
Company, at the option of the holder, during the 12-month period following
(i) the date of death of Donald B. Brounstein, the President and Chief
Executive Officer of the Company, or (ii) the third anniversary of the
initial closing of the May Private Placement if a Qualified IPO has not been
completed prior to such date for an amount equal to the Conversion Value of
such stock plus any accrued but unpaid dividends.
The holders of shares of Series A Preferred Stock have certain rights to
require the Company to register such shares and the underlying shares of
Common Stock for resale under the Securities Act. Such holders have waived
any and all rights they may have to register such shares in connection with
this Offering. See "Shares Eligible for Future Sale."
Undesignated Preferred Stock. The Company's Certificate of Incorporation
provides that the Company may, by vote of its Board of Directors, issue the
Undesignated Preferred Stock in one or more series having the rights,
preferences, privileges and restrictions thereon, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or designation of such series, without further vote
or action by the stockholders. The issuance of Undesignated Preferred Stock
may have the effect of delaying, deferring or preventing a change in control
of the Company without further action by the stockholders and may adversely
affect the voting and other rights of the holders of Common Stock.
PRIVATE PLACEMENTS
On November 30, 1995, the Company sold an aggregate of $350,000 principal
amount of November Bridge Notes to 14 accredited investors (the "November
Bridge Investors") for an aggregate consideration of $350,000. The November
Bridge Notes bore interest at the rate of 10% per annum, were to mature on
August 30, 1996, and were secured by all of the assets of the Company.
Certain of the November Bridge Notes were also secured by the shares of the
Company's Common Stock owned by Donald B. Brounstein. $230,000 of the
proceeds of the November Bridge Notes was paid to Zigmed pursuant to the
Turnkey Construction Contract and the balance was used for working capital
and general corporate purposes. At the closing of the May Private Placement
(the "Initial Closing"), November Bridge Investors holding all $350,000 in
principal amount of the November Bridge Notes converted their November Bridge
Notes into one share of Series A Preferred Stock and one fifth of a Private
Warrant for each $1.33 principal amount of November Bridge Notes (resulting
in the issuance of 262,500 shares of Series A Preferred Stock and 52,500
Private Warrants) and received payment from the Company of an aggregate of
$16,488 in accrued interest due on such November Bridge Notes.
51
<PAGE>
In connection with the May Private Placement, the Company offered each
November Bridge Investor the option, exercisable through May 22, 1996, to (i)
reaffirm their purchase of the November Bridge Notes, in which event the
November Bridge Notes would be converted in accordance with their terms into
fully paid shares of Series A Preferred Stock and Private Warrants, or (ii)
redeem the November Bridge Notes from the proceeds of the May Private
Placement for the amount of such investment plus applicable interest on the
November Bridge Notes, in which event all of the November Bridge Notes
purchased by such November Bridge Investor would be canceled. None of the
November Bridge Investors elected to redeem their purchases of November
Bridge Notes although one November Bridge Investor transferred a portion of
its November Bridge Note to another investor.
On March 19, 1996, the Company sold an aggregate of $460,000 principal
amount of March Bridge Notes and warrants to purchase 224,250 shares of
Common Stock at $0.67 per share to 15 accredited investors (the "March Bridge
Investors") for an aggregate consideration of $460,000. The March Bridge
Notes bore interest at the rate of 10% per annum, were to mature on the
earlier of the Initial Closing or May 31, 1996, were secured by all of the
assets of the Company and were senior in right of payment and security to the
November Bridge Notes. $50,000 of the proceeds of the March Bridge Notes was
paid to Zigmed pursuant to the Turnkey Construction Contract. $25,000 was
paid to Scantek pursuant to the License Agreement and $385,000 was used for
working capital and general corporate purposes.
At the Initial Closing, $434,800 in principal amount of the March Bridge
Notes (plus an additional $25,200 of the March Bridge Notes, representing
subscription funds in excess of the initial subscription amounts due from
four March Bridge Investors, which will be refunded to such four March Bridge
Investors if this Offering is consummated before August 15, 1996) were
canceled and applied to the initial purchase price of an aggregate of 11.75
Units.
In connection with the May Private Placement, the Company offered March
Bridge Investors whose March Bridge Notes had face amounts less than $50,000
the right, exercisable through May 23, 1996, to rescind the purchase of their
March Bridge Notes and March Bridge Warrants and be paid in full the
principal amounts of such March Bridge Notes from the proceeds of the May
Private Placement plus any accrued and unpaid interest on such March Bridge
Notes in lieu of applying such principal amount toward the purchase of Units,
in which event the March Bridge Notes and March Bridge Warrants purchased by
such March Bridge Investors would be canceled. None of the March Bridge
Investors elected to rescind their purchases of March Bridge Notes and March
Bridge Warrants.
In the May Private Placement, the Company sold 71.5 units ("Units") for
gross proceeds of $2,645,500 (representing 37% of the aggregate purchase
price of the Units) before commissions and related expenses. $434,800 of such
amount represented the aggregate principal amount of March Bridge Notes that
were exchanged for Units (including $40,000 in principal amount of March
Bridge Notes exchanged by Donald B. Brounstein, the Company's President and
Chief Executive Officer, in partial consideration for two Units purchased by
him), $2,163,750 was received in cash from other purchasers and $34,000
represented the principal amount of 1995 Loans surrendered by Mr. Brounstein
in payment of the balance of the purchase price for the Units purchased by
him. The Company issued one quarter of one Unit to Haythe & Curley, the law
firm that represented Burnham in the May Private Placement, and one tenth of
one Unit to James J. Whidden, the Company's Senior Vice President of Clinical
Development (who was a consultant to the Company at the time of such
issuance), in exchange for services rendered. Each Unit consisted of 37,500
shares of the Company's Series A Preferred Stock, which are convertible into
shares of Common Stock on a one-for-one basis, and Private Warrants to
purchase 7,500 shares of the Company's Common Stock for $2.93 per share. The
Private Warrants expire on the fifth anniversary of the Initial Closing. The
balance of the purchase price for each Unit is to be paid in unequal
installments of 13%, 21%, 20% and 9%, on August 15, 1996, October 15, 1996,
January 15, 1997 and March 15, 1997, respectively. If, prior to March 1,
1997, there occurs a Qualified IPO, then at the time of the closing of the
Qualified IPO: (i) the purchase price of the Units will be automatically
reduced by an amount equal to any installments not yet due and payable at the
time the registration statement relating to such Qualified IPO is declared
effective under the Securities Act, (ii) the Series A Preferred Stock will
convert automatically into Common Stock on a share for share basis, and (iii)
the shares of Common Stock issued upon conversion of the Preferred Stock will
be deemed fully paid and nonassessable. As currently contemplated, this
52
<PAGE>
Offering will be a Qualified IPO. $215,000 of the net proceeds of the May
Private Placement was paid to Zigmed pursuant to the Turnkey Construction
Contract, $375,000 was paid to Scantek pursuant to the License Agreement,
$91,000 (plus $711 in accrued interest on March Bridge Notes) was paid to
Donald B. Brounstein in payment of the balance of the 1995 Loans and
approximately $430,000 is being used for working capital and general
corporate purposes.
In connection with the May Private Placement, the Company issued
additional Private Warrants to Smith Barney Inc. to purchase 37,500 shares of
Common Stock at $2.93 per share. Also in connection with the May Private
Placement, the Company issued the Toledano Group Warrants to Udi Toledano, a
director of the Company, and members of his family and Herbert V. Turk and
members of his family. The Toledano Group Warrants (i) may be exercised in
full if the Common Stock has been trading in the public market at a price per
share of at least $7.33 before a date which is six months after the Initial
Closing, (ii) may be exercised for an aggregate of only 52,500 shares of
Common Stock if the Common Stock has been trading publicly at a price per
share of at least $7.33 more than six months but less than nine months from
the Initial Closing, and (iii) may not be exercised at all if the Common
Stock does not trade in the public market at a price per share of at least
$7.33 within nine months after the Initial Closing. See "Certain
Transactions."
The Company entered into the Placement Agreement with Burnham as of
November 16, 1995 pursuant to which Burnham acted as placement agent in
connection with the May Private Placement. Pursuant to the Placement
Agreement, the Company paid Burnham an aggregate of $570,000 in commissions
and $12,000 in expense reimbursement and issued to Burnham Private Warrants
to purchase 400,000 shares of Common Stock at $2.93 per share.
The Company granted certain demand and piggyback registration rights to
the holders of securities issued in connection with the May Private
Placement. Such holders have waived any and all rights they may have to
register such securities (and securities issuable upon conversion or exchange
of such securities) in connection with this Offering. See "Shares Eligible
for Future Sale."
LIMITATIONS UPON TRANSACTIONS WITH "INTERESTED STOCKHOLDERS"
Section 203 of the Delaware General Corporation Law prohibits a publicly
held 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 (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the 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. The restrictions of Section 203 do not apply,
among other things, if a corporation, by action of its stockholders, adopts
an amendment to its certificate of incorporation or by-laws expressly
electing not to be governed by Section 203, provided that, in addition to any
other vote required by law, such amendment to the certificate of
incorporation or by-laws must be approved by the affirmative vote of a
majority of the shares entitled to vote. Moreover, an amendment so adopted is
not effective until 12 months after its adoption and does not apply to any
business combination between the corporation and any person who became an
interested stockholder of such corporation on or prior to such adoption. The
Company's Certificate of Incorporation and By-Laws do not currently contain
any provisions electing not to be governed by Section 203 of the Delaware
General Corporation Law. The provisions of Section 203 of the Delaware
General Corporation Law may have a depressive effect on the market price of
the Common Stock because they could impede any merger, consolidating takeover
or other business combination involving the Company, or discourage a
potential acquiror from making a tender offer or otherwise attempting to
obtain control of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by Delaware Law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director, and pro-
53
<PAGE>
vides that the Company shall indemnify its officers and directors and may
indemnify its employees and other agents to the fullest extent permitted by
law. The Company has entered into indemnification agreements with its
directors which may require the Company, among other things, to indemnify
such directors against liabilities that may arise by reason of their status
or service as directors (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to obtain directors' and officers' insurance, if available on reasonable
terms. The Company intends to purchase directors' and officers' liability
insurance after the completion of this Offering. Section 145 of the Delaware
Law provides that a corporation may indemnify a director, officer, employee
or agent made or threatened to be made a party to an action by reason of the
fact that he was a director, officer, employee or agent of the corporation or
was serving at the request of the corporation against expenses actually and
reasonably incurred in connection with such action if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe his conduct was
unlawful. Delaware Law does not permit a corporation to eliminate a
director's duty of care, and the provisions of the Company's Certificate of
Incorporation have no effect on the availability of equitable remedies, such
as injunction or rescission, for a director's breach of the duty of care.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company has been appointed as the
transfer agent and registrar for the Common Stock.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have a total of
7,520,313 shares of Common Stock outstanding. Of these shares of Common
Stock, the 2,500,000 shares of Common Stock sold in this Offering (2,875,000
if the Underwriters' over-allotment option is exercised in full) will be
freely tradable by persons other than "affiliates" of the Company without
restriction under the Securities Act and the remaining 5,020,313 shares of
Common Stock outstanding will be "restricted" securities within the meaning
of Rule 144 ("Restricted Shares of Common Stock") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, the existing
stockholders and their transferees will, at various dates between March 1997
and May 1999, be entitled to sell in brokers' transactions or to market
makers some portion of the Restricted Shares of Common Stock which they
currently own. The number of Restricted Shares of Common Stock which may be
sold within any three-month period may not exceed the greater of (i) 1% of
the then outstanding shares of the Company's Common Stock (75,203 shares,
based on the number of shares of Common Stock outstanding immediately after
this Offering) or (ii) the average weekly trading volume of the Common Stock
on Nasdaq during the four calendar weeks preceding the date on which notice
of such sale is filed with the Securities and Exchange Commission. Sales
under Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company.
A person who is not an affiliate of the Company at any time during the 90
days preceding a sale and who has beneficially owned Restricted Shares of
Common Stock for at least three years is entitled to sell such Restricted
Shares of Common Stock under Rule 144(k) without regard to the availability
of current public information, volume limitations, manner of sale provisions
or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 generally may be relied upon with
respect to the sale of shares purchased from the Company by its employees,
directors, officers or consultants prior to the date of this Prospectus
pursuant to written compensatory benefit plans such as the 1996 Plan and
written contracts such as option agreements. Rule 701 is also available for
sales of shares acquired by persons pursuant to the exercise of options
granted prior to the effective date of this Prospectus, regardless of whether
the option exercise occurs before or after the effective date of this
Prospectus. Securities issued in reliance on Rule 701 are "restricted
securities" within the meaning of Rule 144 and, beginning 90 days after the
date of this Prospectus, may be sold by persons other than affiliates of the
Company subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its two-year minimum
holding period requirement.
Options granted outside the 1996 Plan to purchase a total of 142,000
shares of Common Stock, options granted under the 1996 Plan to purchase a
total of 128,000 shares of Common Stock and options granted under the
Nonemployee Director Plan to purchase 4,000 shares of Common Stock are
currently outstanding. 71,000 of the options granted under the 1996 Plan are
currently exercisable, 35,000 become exercisable at the rate of 1,750 per
month beginning in April 1997, 11,000 become exercisable in June 1998 and
11,000 become exercisable in June 1999. 131,250 of the options issued outside
the 1996 Plan are currently exercisable and 11,250 become exercisable in
April 1997. All of the options issued under the Nonemployee Director Plan
will expire before any of such options become exercisable. Shares of Common
Stock issued upon the exercise of outstanding options will be Restricted
Shares of Common Stock and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available.
Potential exemptions include those available under Rule 144 and Rule 701.
In connection with the May Private Placement, the Company granted certain
registration rights to the holders of the Series A Preferred Stock and the
Common Stock issuable upon conversion of the Series A Preferred Stock and
upon exercise of the Private Warrants, including the Series A Preferred Stock
and Private Warrants issued upon conversion of the November Bridge Notes and
in exchange for the March Bridge Notes, and issuable upon exercise of the PSS
Warrants, the Private Warrants issued to Smith Barney Inc. and Burnham and
the Toledano Group Warrants (the "Registrable Securities"). The Company has
granted the holders of the Registrable Securities unlimited demand and
piggyback registration rights exercisable at any time after the earlier to
occur
55
<PAGE>
of the consummation of this Offering or the date that is three years after the
closing of the May Private Placement upon written request by a majority of such
holders. If the registration rights are exercised and the Company files a
registration statement which is declared effective covering the Registrable
Securities, those shares of Common Stock will be registered and as such, to the
extent they are offered and sold pursuant to the registration statement, will be
available for immediate sale in the public market. The Company has also granted
piggyback registration rights to stockholders holding an aggregate of 75,000
shares of Common Stock (the "Registrable Stock"). The sale of the Registrable
Securities or the Registrable Stock may have a negative effect on the market
price of the Common Stock and may adversely affect the Company's ability to
raise additional capital. See "Risk Factors--Shares Eligible for Future Sale."
The Company has agreed to pay all registration expenses incurred by the Company
in complying with the registration rights pertaining to the Registrable
Securities. Notwithstanding the foregoing, the Company has agreed not to,
without the prior written consent of the Representative and for a period of 24
months following the effective date of the Registration Statement, issue, sell,
agree or offer to sell, grant an option for the purchase or sale of, or
otherwise transfer or dispose of (i) more than an aggregate of 700,000 shares of
Common Stock (including 128,000 shares issuable upon exercise of currently
outstanding options granted under the 1996 Plan and including securities with
equivalent rights as the Common Stock and shares of Common Stock, or such
equivalent securities, issuable upon exercise of any and all options, warrants
and other contract rights and securities convertible directly or indirectly into
shares of Common Stock or such equivalent securities) or (ii) any such shares of
Common Stock (including securities with equivalent rights as the Common Stock
and shares of Common Stock, or such equivalent securities, issuable upon
exercise of any and all options, warrants and other contract rights and
securities convertible directly or indirectly into shares of Common Stock or
such equivalent securities) at a price less than the higher of the market value
of such shares of Common Stock or equivalent securities at the date of grant (or
issuance, as the case may be) or the initial public offering price of the shares
of Common Stock offered hereby; provided, however, that the Company may (a)
issue securities in connection with an underwritten public offering on behalf of
the Company, (b) authorize and issue a class or classes of preferred stock,
including convertible preferred stock, (c) issue employee and director options
to purchase up to 200,000 shares of Common Stock (out of the aforesaid 700,000
shares) at fair market value on the date of grant (even if such fair market
value is less than the initial public offering price of the shares of Common
Stock offered hereby), (d) issue securities upon the exercise of options,
warrants and convertible securities currently outstanding and (e) effect private
placements of shares of Common Stock at a per share price equal to or exceeding
the initial public offering price of the shares of Common Stock offered hereby
(even if less than the fair market value of the shares). All current
stockholders of the Company and holders of options, warrants or other
securities exercisable or exchangeable for or convertible into Common Stock who
hold more than 1% of the Common Stock (including Common Stock underlying
options, warrants or other securities exercisable or exchangeable for or
convertible into Common Stock), have agreed (i) not to, directly or indirectly,
issue, offer, agree or offer to sell, sell, transfer, assign, grant an option
for purchase or sale of, pledge, hypothecate or otherwise encumber or dispose of
any beneficial interest in such securities for a period of 12 months following
the date of this Prospectus without the prior written consent of the Company and
the Representative and (ii) not to exercise their registration rights for a
period of 12 months from the date of this Prospectus without the prior written
consent of the Company and the Representative.
Prior to this Offering, there has been no public market for the Common
Stock and no predictions can be made as to the effect, if any, that future
sales of shares of Common Stock or the availability of shares of Common Stock
for future sale will have on the market price prevailing from time to time.
Sales of substantial amounts of Common Stock or the perception that such
sales could occur could adversely affect the prevailing market price for the
Common Stock.
56
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Keane
Securities Co., Inc. is acting as representative (in such capacity, the
"Representative"), have severally and not jointly agreed, subject to the
terms and conditions of the Underwriting Agreement among the Company and the
Underwriters (the "Underwriting Agreement") to purchase from the Company and
the Company has agreed to sell to the Underwriters on a firm commitment
basis, the respective number of shares of Common Stock set forth opposite
their names below:
Number
Shares of
Underwriter Common Stock
- ----------- --------------
Keane Securities Co., Inc ..................................
--------------
Total ..................................................... 2,500,000
==============
The Underwriters are committed to purchase all the shares of Common Stock
offered hereby, if any of such shares of Common Stock are purchased. The
Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by their
counsel and various other conditions precedent specified therein.
The Representative has advised the Company that the Underwriters propose
initially to offer the Common Stock directly to the public at the initial
public offering price set forth on the cover page of this Prospectus and that
the Underwriters may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. (the "NASD") a selling concession not
in excess of $____ per share of Common Stock. Such dealers may reallow a
concession not in excess of $____ per share of Common Stock to certain other
dealers who are NASD members. After the commencement of the Offering, the
public offering price, concession and reallowance may be changed by the
Representative.
The Representative has advised the Company that it does not expect sales
to discretionary accounts by the Underwriters to exceed 5% of the total
number of shares of Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make. The Company has
also agreed to pay to the Representative a non-accountable expense allowance
equal to 2% of the gross proceeds derived from the sale of the Common Stock
underwritten, of which $50,000 has been paid to date.
The Company has granted to the Underwriters an over-allotment option,
exercisable during the 45-day period from the date of this Prospectus, to
purchase from the Company up to an additional 375,000 shares of Common Stock
at the initial public offering price per share of Common Stock offered
hereby, less the underwriting discount and the non-accountable expense
allowance. The Underwriters may exercise such option only for the purpose of
covering over-allotments, if any, incurred in the sale of the Common Stock
offered hereby. To the extent the Underwriters exercise such option in whole
or in part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional shares of Common Stock
proportionate to its initial commitment and the Company will be obligated to
sell such shares of Common Stock to the Underwriters.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the
Company up to 250,000 shares of Common Stock (the "Representative's
Warrants"). The Representative's Warrants are initially exercisable at a
price of $____ per share of Common Stock [130% of the initial public offering
price per share of Common Stock] for a period of four years, commencing at
the beginning of the second year after their issuance and sale, and are
restricted from sale, trans-
57
<PAGE>
fer, assignment or hypothecation for a period of 12 months from the date
hereof, except to officers of the Representative. The Representative's
Warrants provide for adjustment in the number of shares of Common Stock
issuable upon the exercise thereof and in the exercise price of the
Representative's Warrants as a result of certain events, including
subdivisions and combinations of the Common Stock. The Representative's
Warrants grant to the holders thereof certain rights of registration with
regard to the Common Stock issuable upon exercise thereof.
All officers and directors of the Company, and all current stockholders of
the Company and holders of options, warrants or other securities exercisable or
exchangeable for or convertible into Common Stock who hold more than 1% of the
Common Stock (including Common Stock underlying options, warrants or other
securities exercisable or exchangeable for or convertible into Common Stock)
have agreed not to, directly or indirectly, issue, offer, agree or offer to
sell, sell, transfer, assign, encumber, grant an option for the purchase or sale
of, pledge, hypothecate or otherwise dispose of any beneficial interest in such
securities for a period of 12 months following the effective date of the
Registration Statement without the prior written consent of the Company and the
Representative. An appropriate legend shall be marked on the face of
certificates representing all such securities.
The Company has agreed not to, without the prior written consent of the
Representative and for a period of 24 months following the effective date of the
Registration Statement, issue, sell, agree or offer to sell, grant an option for
the purchase or sale of, or otherwise transfer or dispose of (i) more than an
aggregate of 700,000 shares of Common Stock (including 128,000 shares issuable
upon exercise of currently outstanding options granted under the 1996 Plan and
including securities with equivalent rights as the Common Stock and shares of
Common Stock, or such equivalent securities, issuable upon exercise of any and
all options, warrants and other contract rights and securities convertible
directly or indirectly into shares of Common Stock or such equivalent
securities) or (ii) any such shares of Common Stock (including securities with
equivalent rights as the Common Stock and shares of Common Stock, or such
equivalent securities, issuable upon exercise of any and all options, warrants
and other contract rights and securities convertible directly or indirectly into
shares of Common Stock or such equivalent securities) at a price less than the
higher of the market value of such shares of Common Stock or equivalent
securities at the date of grant (or issuance, as the case may be) or the initial
public offering price of the shares of Common Stock offered hereby; provided,
however, that the Company may (a) issue securities in connection with an
underwritten public offering on behalf of the Company, (b) authorize and issue a
class or classes of preferred stock, including convertible preferred stock, (c)
issue employee and director options to purchase up to 200,000 shares of Common
Stock (out of the aforesaid 700,000 shares) at fair market value on the date of
grant (even if such fair market value is less than the initial public offering
price of the shares of Common Stock offered hereby), (d) issue securities upon
the exercise of options, warrants and convertible securities currently
outstanding and (e) effect private placements of shares of Common Stock at a
price per share equal to or exceeding the initial public offering price of the
shares of Common Stock offered hereby (even if less than the fair market value
of the shares).
Certain existing stockholders, directors and officers of the Company and
their affiliates or designees intend to purchase an aggregate of 10% of the
shares of Common Stock offered hereby.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock
has been determined arbitrarily by negotiation between the Company and the
Representative and does not necessarily bear any relationship to the
Company's asset value, net worth, or other established criteria of value. The
factors considered in such negotiations, in addition to prevailing market
conditions, included the history of and prospects for the industry in which
the Company competes, an assessment of the Company's management, the
prospects of the Company, its capital structure, the market for initial
public offerings and certain other factors as were deemed relevant.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
58
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Graubard Mollen & Miller, New York, New York. Orrick,
Herrington & Sutcliffe, New York, New York has acted as counsel to the
Underwriters in connection with this Offering.
EXPERTS
The financial statements of HumaScan Inc. (a development stage enterprise)
as of December 31, 1995 and for the period from December 27, 1994 (inception)
to December 31, 1995 have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and exhibits and schedules thereto, certain parts
of which having been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement and the
exhibits and schedules thereto which may be inspected and copied at the
public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, 7 World Trade Center, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained from the Commission's Public
Reference Section at prescribed rates. Descriptions contained in this
Prospectus as to the contents of any contract or other documents filed as an
exhibit to the Registration Statement are not necessarily complete and each
such description is qualified by reference to such contract or document.
The Company intends to furnish its stockholders with annual reports
containing financial statements examined by an independent public accounting
firm and such other reports as the Company may determine to be appropriate or
as may be required by law. The Company's fiscal year ends on December 31. The
Company will become a reporting company under the Securities Exchange Act of
1934 after this Offering.
59
<PAGE>
HUMASCAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ............................................................................... F-2
Financial Statements:
Balance Sheet as of December 31, 1995 .................................................................... F-3
Statement of Operations for the period from December 27, 1994 (date of inception) to
December 31, 1995 ..................................................................................... F-4
Statement of Stockholders' Deficit for the period from December 27, 1994 (date of inception) to December..
31, 1995 .............................................................................................. F-5
Statement of Cash Flows for the period from December 27, 1994 (date of inception) to
December 31, 1995 ..................................................................................... F-6
Notes to Financial Statements ............................................................................ F-7
Financial Statements (unaudited):
Condensed Balance Sheets as of March 31, 1996 (unaudited) ................................................ F-15
Condensed Statements of Operations for the three months ended March 31, 1996 and 1995 and for the
period from December 27, 1994 (date of inception) to March 31, 1996 (unaudited) ....................... F-16
Condensed Statements of Stockholders' Deficit for the period from December 27, 1994 (date of inception)
to December 31, 1995 and for the three months ended March 31, 1996 (unaudited) ........................ F-17
Condensed Statements of Cash Flows for the three months ended March 31, 1996 and 1995 and for the
period from December 27, 1994 (date of inception) to March 31, 1996 (unaudited) ....................... F-18
Notes to Condensed Financial Statements (unaudited) ...................................................... F-19
</TABLE>
All schedules are omitted for the reason that they are not required or are
not applicable, or the required information is shown in the financial
statements or notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of HumaScan Inc. (a
development stage enterprise) as of December 31, 1995, and the related
statements of operations, stockholders' deficit, and cash flows for the
period from December 27, 1994 (date of inception) to December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 HumaScan Inc. (a development
stage enterprise) as of December 31, 1995, and the results of its operations
and its cash flows for the period from December 27, 1994 (date of inception)
to December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
February 9, 1996, except as to
note 9, which is as of July 23, 1996
F-2
<PAGE>
HUMASCAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
DECEMBER 31, 1995
Assets
------
Current assets:
Cash ..................................................... $ 218,520
Prepaid expenses ......................................... 5,000
-----------
Total current assets .............................. 223,520
Property, plant and equipment ............................... 4,400
Other assets (note 6) ....................................... 145,000
-----------
Total assets ...................................... $ 372,920
===========
Liabilities and Stockholders' Deficit
-------------------------------------
Notes payable (note 8) ...................................... 350,000
Accrued expenses (note 2) ................................... 1,493,571
Due to officer (note 3) ..................................... 125,000
-----------
Total current liabilities ......................... 1,968,571
-----------
Stockholders' deficit (notes 2 and 4):
Common stock, $0.01 par value, 25,000,000 shares authorized;
1,747,500 shares issued and outstanding ................ 17,475
Additional paid-in capital ............................... (1,401,875)
Deficit accumulated during the development stage ....... (211,251)
-----------
Total stockholders' deficit ....................... (1,595,651)
-----------
Commitments (note 6)
Total liabilities and stockholders' deficit ....... $ 372,920
===========
See accompanying notes to financial statements.
F-3
<PAGE>
HUMASCAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 27, 1994
(DATE OF INCEPTION) TO DECEMBER 31, 1995
Interest income ............................................ $ 899
----------
Operating expenses:
Consulting fees .......................................... 92,842
Legal and professional fees .............................. 99,972
Interest ................................................. 7,041
Other .................................................... 12,295
----------
212,150
----------
Net loss ................................................... $ (211,251)
==========
Pro forma net loss per share (note 1) (unaudited) ........... $ (.05)
==========
Shares used in computing pro forma net loss
per share (note 1) (unaudited) ........................... 4,618,033
==========
See accompanying notes to financial statements.
F-4
<PAGE>
HUMASCAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM DECEMBER 27, 1994
(DATE OF INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
Deficit
Common stock accumulated
------------------------ Additional during
Shares paid-in development
issued Amount capital stage Total
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Issuance of shares of common stock
upon incorporation ................ 825,000 $ 8,250 $ 53,750 $ -- $ 62,000
Issuance of shares of common stock
pursuant to subscription
agreements ........................ 247,500 2,475 151,125 -- 153,600
Issuance of shares of common stock
in connection with license
agreement (note 2) ................ 675,000 6,750 (1,606,750) -- (1,600,000)
Net loss ........................... -- -- -- (211,251) (211,251)
--------- ------- ----------- --------- -----------
Balance, December 31, 1995 ......... 1,747,500 $17,475 $(1,401,875) $(211,251) $(1,595,651)
========= ======= =========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
HUMASCAN INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 27, 1994
(DATE OF INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss ................................................................... $ (211,251)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash miscellaneous expenses .......................................... 40,350
Noncash interest expense ................................................ 7,041
Changes in operating assets and liabilities:
Increase in prepaid expenses .......................................... (5,000)
Increase in accrued expenses .......................................... 3,180
----------
Net cash used in operating activities .............................. (165,680)
----------
Cash flows from investing activities:
Purchase of property, plant and equipment .................................. (4,400)
Payments for production line ............................................... (105,000)
Payments in connection with license agreement .............................. (150,000)
----------
Net cash used in investing activities .............................. (259,400)
----------
Cash flows from financing activities:
Increase in other assets ................................................... (40,000)
Proceeds from issuance of common stock ..................................... 208,600
Proceeds from officer loan ................................................. 125,000
Proceeds from borrowings of notes payable .................................. 350,000
----------
Net cash provided by financing activities .......................... 643,600
----------
Net increase in cash ......................................................... 218,520
Cash, beginning of period .................................................... --
----------
Cash, end of period .......................................................... $ 218,520
==========
Supplemental disclosure of noncash transactions:
Amounts due in connection with license agreement ........................... $1,450,000
==========
Common stock issued in connection with license agreement ................... $ 9,000
==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1995
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
HumaScan Inc. (the Company) is a development stage company which owns under
license the exclusive rights in the United States and Canada to manufacture and
market a breast thermal activity indicator (BTAI) device called the
"BreastAssure(TM) Thermal Activity Sensor" (the BreastAssure device). The
BreastAssure device is a non-invasive, easy to use, low cost, adjunctive test to
be used by primary care physicians, gynecologists and other medical specialists
as part of a breast disease monitoring program along with breast
self-examination, palpation and (depending on a patient's age, family history
and other factors) mammography and other established clinical procedures
including ultrasound and/or biopsy. The BreastAssure device has received
marketing clearance under Section 510(k) of the Food, Drug and Cosmetic Act from
the United States Food and Drug Administration.
The Company is currently devoting substantially all of its efforts to raising
capital and other organizational activities. There are no operating revenues to
date and there have been no product sales from inception of the Company through
December 31, 1995. The Company plans to finance its operations through a private
placement of its equity securities (see note 9) and the initial public offering
contemplated herein (the Offering). To date, the Company has not manufactured or
sold any product and there can be no assurance that the Company will be able to
manufacture or market its product in the future, that future revenues will be
significant, that any sales will be profitable, or that the Company will have
sufficient funds available to manufacture or market its product. The Company's
product and manufacturing facility are also subject to extensive government
regulations. Further, the Company's future operations are dependent on the
success of the Company's commercialization efforts and market acceptance of its
product.
BASIS OF PRESENTATION:
As no operations occurred in fiscal 1994, a separate statement of operations
for that period has not been presented.
INCOME TAXES:
Certain expense items are included in one reporting period for financial
reporting purposes and another for income tax purposes. Deferred income taxes
are provided in recognition of these temporary differences which relate
primarily to organization costs.
ORGANIZATION COSTS:
All organization costs are expensed as incurred.
OTHER ASSETS:
Costs paid to a placement agent and its attorneys associated with the
Company's private placement transaction (see note 9) are deferred and will be
recorded as a reduction of the proceeds received upon consummation of the
private placement.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of computer
equipment. The computer equipment will be depreciated using the straight-line
method over five years upon being placed in service.
F-7
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
(1) Organization and Significant Accounting Policies - (Continued)
REVERSE STOCK SPLIT:
The Company effected a four-to-three reverse stock split of its common stock
on July 23, 1996 (see note 9). All common share, per share and pro forma per
share amounts in the accompanying financial statements have been retroactively
adjusted to reflect this reverse stock split.
CONCENTRATION OF CREDIT RISKS:
The Company invests its excess cash in deposits with major U.S. financial
institutions and money market funds. To date, the Company has not experienced
any losses on its cash equivalents and money market funds.
PRO FORMA NET LOSS PER SHARE (UNAUDITED):
Pro forma net loss per share was calculated by dividing the net loss by the
weighted average number of common shares outstanding for the period adjusted for
the dilutive effect of common stock equivalents which consist of stock options
and warrants using the treasury stock method. Pro forma net loss per share gives
effect to certain adjustments described below including the aforementioned
reverse stock split.
Pursuant to Securities and Exchange Commission (SEC) Staff Accounting
Bulletins and SEC Staff policy, common equivalent shares issued during the
twelve-month period prior to the proposed initial public offering at prices
below the anticipated initial public offering price are presumed to have been
issued in contemplation of the initial public offering and have been included in
the calculation as if they were outstanding for all periods presented (using the
treasury stock method and an assumed initial public offering price of $8.00 per
share).
Pursuant to the policy of the SEC Staff, the calculation of shares used in
computing pro forma net loss per share also includes all of the preferred stock
that will convert into shares of common stock upon completion of the Offering
(using the treasury stock method and an assumed initial public offering price of
$8.00 per share) as if they were outstanding for all periods presented (see note
9).
(2) LICENSE AGREEMENT
In July 1995, the Company entered into an exclusive license agreement, as
amended, with Scantek which grants the Company the right to manufacture and sell
in the United States and Canada the BTAI test. The test is protected by United
States patents expiring February 26, 1997. The license agreement, as amended, in
addition to providing for the issuance of 675,000 shares of common stock (see
note 4), provides for a cash payment to Scantek of $1,600,000, $150,000 of which
has already been paid at December 31, 1995 and $400,000 of which is to be funded
from the proceeds of additional bridge financings or the private placement, but
no later than May 31, 1996 (see note 9). Thereafter (subject to the Company
accepting the production line described in note 6), $175,000 is payable on
December 31, 1997, $175,000 on March 31, 1998, $350,000 on October 31, 1998 and
$350,000 on January 31, 1999. Surplus cash flow (one half of net income, as
defined in the license agreement, subject to certain adjustments) after the
Company begins operations is to be applied to unpaid installments of the cash
portion of the licensing fee in inverse order of maturity. Scantek is entitled
to advance payments as follows: (i) $100,000 (applied to unpaid installments of
the cash portion of the licensing fee in direct order of maturity) upon the
later of (x) the investment at any time by a distributor of $500,000 in the
Company by exercising its warrant for 125,000 shares of the Company's common
stock (see note 6) and (y) the shipment by the Company of the first order of the
BTAI test to the distributor; (ii) $300,000 (of which $100,000 is to be applied
to unpaid installments of the cash portion of the licensing fee in direct order
of maturity and the other $200,000 to be applied in inverse order of maturity)
upon the earlier to occur of (a) the extension of the relevant patents at least
through January 1, 2003 or (b) Scantek's obtaining a new United States patent on
the product; and (iii) if the circumstances described in the preceding clause
(ii) have not occurred and if Scantek has filed an application for a new United
States patent on the product at least one week prior to the first road show for
an initial public offering of the Company's securities, Scantek is entitled to
an advance payment of $100,000 from the proceeds of the closing of the public
F-8
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
(2) License Agreement - (Continued)
offering (which shall be deemed a partial advance of the $300,000 payable
pursuant to such clause (ii) and which is to be applied to the unpaid
installments of the cash portion of the licensing fee in direct order of
maturity). The license agreement also provides for minimum annual royalty
payments ranging from $150,000 in the first year in which the product is sold
to $600,000 in the fifth and subsequent years (the Minimum Royalties) and
maximum royalty payments ranging from 3% of annual net product sales of up to
$2,000,000 to 10% of the annual net product sales if annual net product sales
exceed $10,000,000 (the Percentage Royalties). In addition, the license
agreement will automatically terminate if the aggregate earned royalties for the
first three years the product is sold do not exceed $950,000 (the Threshold
Earned Royalties). The Minimum Royalties and Threshold Earned Royalties
automatically terminate after February 26, 1997 (the date the relevant patents
expire) if a competitor introduces a product which would have infringed upon
such patents. In addition, the Percentage Royalties are reduced or eliminated
if the Company reduces the price of its product below certain preset amounts.
At December 31, 1995, the Company has accrued the remaining $1,450,000 of
license fees due to Scantek and has charged the entire consideration for the
license, in accordance with published SEC rules and regulations regarding
transfers of nonmonetary assets by promoters and shareholders, against
additional paid-in capital in the accompanying financial statements. The
reduction in paid-in capital reflects the equivalent of a return of capital to
be paid in accordance with the terms of the license out of the proceeds of
future equity offerings (see note 9). The Chairman of the Board of Directors and
majority owner of Scantek, who is the principal inventor of the BTAI test, is
also a member of the Board of Directors of the Company.
(3) DUE TO OFFICER
The majority stockholder and chief executive officer of the Company has
agreed to loan the Company up to $200,000 prior to the initial closing of the
private placement (see note 9), at which time he has agreed to purchase two of
the units offered, and any outstanding amount due from the Company pursuant to
the loans will be applied to such purchase and any amounts in excess of the
first installment (which aggregates $74,000) of the purchase price for the units
(which aggregates $200,000) will be repaid to him. Amounts advanced as of
December 31, 1995 totalled $125,000.
(4) STOCKHOLDERS' DEFICIT
At December 31, 1995, the Company was authorized to issue 5,000,000 shares of
common stock, par value $.01 per share (see note 9). The holders of common stock
are entitled to one vote for each share held of record on all matters to be
voted on by the common stockholders. The holders of common stock are entitled to
receive dividends when, as, and if declared by the Board of Directors out of
funds legally available for them. In the event of liquidation, dissolution or
winding-up of the Company, the holders of common stock are entitled to share
ratably together with the holders of the Series A Convertible Preferred Stock to
be issued in connection with the private placement (see note 9) in all assets
remaining which are available for distribution to them after payment of
liabilities and after provision has been made for each class of stock having
preference over the common stock. Holders of shares of common stock, as such,
have no conversion, preemptive or other subscription rights, and there are no
redemption provisions applicable to the common stock.
Upon completion of the private placement (see note 9), the Company will be
authorized to issue 4,175,000 shares of preferred stock, which may have such
preferences and rights as the Board of Directors may designate, and the Company
will have one class of preferred stock designated as Series A Convertible
Preferred Stock, up to 4,175,000 shares of which will be outstanding (assuming
the maximum number of units provided for in the private placement are sold and
all of the November bridge promissory notes are converted into 262,500 shares of
Series A Convertible Preferred Stock (see note 8)).
F-9
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
(4) Stockholders' Deficit - (Continued)
Each share of Series A Convertible Preferred Stock is convertible into shares
of common stock on a one-for-one basis and is automatically converted into
common stock upon an underwritten public offering of the Company's securities
registered pursuant to the Securities Act of 1933 in which the Company receives
gross proceeds of at least $10,000,000 or such lesser amount as may be
determined by a majority of certain preferred stock directors (a Qualified IPO
(see note 9)).
The holders of shares of Series A Convertible Preferred Stock will be
entitled to vote on all matters for which holders of common stock are entitled
to vote on an as-if-converted basis. In addition, they will have special voting
rights with respect to the election of directors and as otherwise provided by
law or in the terms of such preferred stock. As long as at least one-third of
the shares of the Series A Convertible Preferred Stock issued in connection with
the private placement (see note 9) remain outstanding: (i) the holders of Series
A Convertible Preferred Stock, voting as a class, will be entitled to elect at
least three directors to the Company's Board of Directors and (ii)
notwithstanding clause (i) above, until the completion of a Qualified IPO, the
holders of a majority of the Series A Convertible Preferred Stock will be
entitled by written notice to the Company at any time to determine the size of
and to elect the entire Board of Directors of the Company (other than two
individuals entitled to be designated pursuant to separate agreements). Such
Board of Directors must approve, by affirmative vote, the payment of dividends,
the issuance of any capital stock, the issuance of debt and certain other
activities of the Company.
The holders of Series A Convertible Preferred Stock and the holders of common
stock will be entitled to receive, on a share-for-share basis, dividends when
and as declared by the Board of Directors of the Company.
In the event of any liquidation, dissolution or winding-up of the Company,
holders of the Series A Convertible Preferred Stock will be entitled to an
amount equal to $2.67 per share, subject to adjustment in connection with
certain anti-dilution provisions, plus the amount of any dividend previously
declared with respect to such Preferred Stock and remaining unpaid, before any
payments are made to the holders of common stock. After such amount has been
paid to the holders of Series A Convertible Preferred Stock, any additional
funds available for distribution to the Company's shareholders will be allocated
equally among the holders of Series A Convertible Preferred Stock and the
holders of common stock, on a share-for-share basis (deeming each share of
Series A Convertible Preferred Stock to equal the number of shares of common
stock into which it is convertible). In the event that the Company has
insufficient funds to pay the full liquidation preference payable to the holders
of Series A Convertible Preferred Stock, the existing funds will be allocated
among the holders of all such shares pro rata in proportion to the full amounts
to which they would respectively be entitled.
Any outstanding shares of Series A Convertible Preferred Stock will be
redeemed by the Company, at the option of the holder, during the 12-month period
following (i) the date of death of the Company's president; or (ii) the third
anniversary of the initial closing date of the private placement if a Qualified
IPO has not been completed prior to such date for an amount equal to the
conversion value of such stock plus any accrued but unpaid dividends (currently
$2.67 per share).
Although no assurance can be given that the Company will ever become publicly
traded, the Company has agreed (at any time during the five-year period
following the earlier to occur of (i) the date on which the Company receives the
net proceeds from a Qualified IPO; or (ii) the third anniversary of the initial
closing date of the private placement) to give holders of the common stock
issuable upon conversion of the Series A Convertible Preferred Stock and upon
exercise of warrants included in the units and conversion of certain bridge
loans (see notes 8 and 9) and issuable pursuant to certain warrant arrangements
(collectively such common stock is called the Registrable Securities) unlimited
"piggy-back" and demand registration rights, with respect to the inclusion of
any Registrable Securities owned by such holders or issuable to them in any
registration statement filed with the SEC pursuant to the Securities Act of
1933, as amended, relating to an offering of its securities to the public,
provided that a majority vote of the holders of Registrable Securities (or
securities exercisable for or convertible into Registrable Securities, treating
for purposes of this calculation all such securities as having been exercised
for or converted into Registrable Securities) is required to exercise any such
demand right, and subject to the provisions relating to a lock-up period, as
defined.
F-10
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
(4) Stockholders' Deficit - (Continued)
In connection with the private placement and prior to a Qualified IPO, the
chief executive officer of the Company has granted the holders of Series A
Convertible Preferred Stock (or the underlying common stock if in the event of a
conversion) the right to participate on a pro rata basis in the sale of any
common stock or common stock equivalents owned by him or his successors or
assigns, based on the number of common shares into which the preferred stock
owned by such holder is convertible or has been converted, the number of such
shares held by such other holders electing to participate, and the number of
such shares of common stock and common stock equivalents owned by him.
As of inception, the Company issued 750,000 shares of its common stock at
$.067 per share to its chief executive officer and 75,000 shares at $.16 per
share to certain other investors. The Company also issued 22,500 and 225,000
shares of its common stock at $.16 and $.67 per share, respectively, in March
1995 pursuant to various subscription agreements.
In March 1995, the Company issued 675,000 shares of its common stock, valued
at $.067 per share, in conjunction with a license agreement with Scantek (see
note 2). The agreement requires the Company to increase or decrease the number
of shares upon the occurrence of a private placement offering so that Scantek
owns 20% of the issued and outstanding shares of the Company's common stock at
the completion of the private placement (see note 9). If the Company completes a
second offering which would result in proceeds to the Company that aggregate at
least $10,000,000 ($15,000,000 if Scantek gives the Company a Qualified Purchase
Order (QPO) as defined in the License Agreement of at least $1,000,000) when
combined with the first private placement offering which results in Scantek's
ownership of less than 15% of the issued and outstanding shares of the Company's
common stock, Scantek will receive warrants to purchase shares of the Company's
common stock at an exercise price of $5.33 ($3.33 if the Company receives the
QPO) per share on a one-for-one basis so that the sum of the common stock and
warrants issued to Scantek aggregate 15% of the issued and outstanding shares of
the Company's common stock. The aforementioned warrants expire five years from
the date of issuance.
(5) STOCK OPTION PLANS
As of January 12, 1996, the Company adopted its 1995 Stock Incentive Plan
(the Plan) permitting the Board of Directors to grant options to purchase shares
of common stock to certain persons. The Plan provides the Company's Compensation
Committee of the Board of Directors with the discretion to grant or award to
participants incentive stock options and nonqualified stock options together
with stock appreciation rights and/or restricted stock. Pursuant to the grant of
incentive stock options, nonqualified stock options, and stock appreciation
rights, the maximum number of shares of common stock which may be awarded under
the Plan is 750,000 shares. The maximum number of shares issuable pursuant to
the Plan will be increased by the number of shares with respect to which rights
previously granted have expired.
As of January 12, 1996, the Company also adopted a Nonemployee Director Stock
Option Plan (the Director's Plan) in which certain directors of the Company, as
defined, are eligible to participate. Two thousand shares are automatically
granted at an exercise price equal to the fair market value of the Company's
common stock to each eligible director upon the adoption of the Director's Plan
and on the date of the annual meeting of the Company (6,000 such options were
granted on January 12, 1996 at an exercise price of $2.93). Such options vest at
a rate of 25% per year from the date of grant. The maximum number of shares with
respect to which options may be granted under the Director's Plan is 75,000
shares.
In addition to the options provided for in the aforementioned Plans, in
February 1996, 93,750 options were issued to certain officers, employees and
consultants at an exercise price of $5.33 per share, each with a five-year
term.
F-11
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
(6) COMMITMENTS
The Company has arranged for the construction of an automated production line
for the assembly of the BTAI test pursuant to a $1,750,680 fixed-price turnkey
construction contract (the Turnkey Construction Contract). The Turnkey
Construction Contract provides payments in stages over a 15-month period.
Payments in accordance with the terms of this agreement aggregated $105,000 as
of December 31, 1995. Such amount is included in other assets in the
accompanying balance sheet. An additional $615,000 will be paid from the
proceeds of the private placement or additional bridge financings in 1996 (see
note 9). The vendor's president is the son of the Chairman of the Board of
Scantek. The Company has agreed to pay the vendor a bonus of up to $25,000 and
18,750 warrants to purchase the Company's common stock at an exercise price of
$5.33 per share upon the timely completion of the production line.
Pursuant to an agreement dated November 15, 1995, the Company entered into an
agreement with a placement agent to sell its securities on a best efforts basis
through a private placement (the Placement Agreement) (see note 9). Fees for the
agent will be 7% of the gross proceeds received by the Company in the private
placement and certain other financings. The Company will also reimburse the
placement agent for its expenses, including legal fees, incurred in connection
with the private placement. Additionally, the Company has agreed to issue to the
placement agent one warrant to purchase one share of common stock for each $15
of units sold pursuant to the private placement and certain other financings,
but for not less than 300,000 shares of common stock, all exercisable at $2.93
per share. Amounts advanced to the placement agent and its attorneys aggregated
$40,000 as of December 31, 1995 which is included in other assets in the
accompanying balance sheet.
The Company has signed, effective January 1, 1996, a three-year employment
agreement with its chief executive officer, with a rolling one-year renewal.
Annual compensation under the agreement includes a base salary of $145,000 and a
bonus, pursuant to a formula based on net earnings of the Company, of up to 100%
of such salary. In addition, options to purchase 37,500 shares of common stock
at an exercise price of $5.33 per share were issued in connection with the
signing of the agreement. Such options expire in five years.
The Company entered into an exclusive distribution agreement (Distribution
Agreement) in February 1996. The Distribution Agreement covers exclusive United
States rights and provides for the parties to cooperate on plans and
preparations for the regional and national introduction of the BTAI test prior
to the first production, sales and deliveries to physicians. The term of the
Distribution Agreement continues until terminated by either party for certain
material breaches which are not cured within prescribed time limits. A
representative of the distributor shall be nominated to the Board of Directors
of the Company. In connection with the Distribution Agreement, the Company also
has issued to the distributor warrants to purchase 125,000 shares of common
stock at an exercise price of $4.00 per share (aggregating $500,000), and the
distributor is obligated to exercise such warrants within 90 days after both (i)
the first 50,000 saleable BTAI test units have been provided to the distributor
and (ii) an officer of the Company certifies in good faith to the distributor
that the Company has no reason to believe it will be unable to supply sufficient
product to the distributor to achieve the Distribution Agreement's first
operating year objective. The Distribution Agreement restricts such $500,000
solely for use by the Company for advertising and promotion of the BTAI test. In
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," $10,000 of expense will be recorded upon the
signing of the agreement as an estimate of the value of such warrants.
(7) INCOME TAXES
No income tax expense has been recorded by the Company as the majority of
costs incurred as a development stage enterprise are capitalized for income tax
purposes. Such costs will be amortized over 60 months upon the commencement of
operations.
F-12
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
(7) Income Taxes - (Continued)
At December 31, 1995, under Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (Statement 109), the Company has a deferred
tax asset relating to the future tax deductibility of such start-up,
organizational and deferred offering costs. There are no assurances that the
Company will be profitable in the future and, accordingly, a 100% provision
against the deferred tax asset has been recorded.
(8) BRIDGE FINANCING
On November 30, 1995, the Company sold an aggregate of $350,000 principal
amount of secured convertible promissory notes (November Bridge Notes) to
certain accredited investors (November Bridge Investors). The notes bear
interest at the rate of 10% per annum, mature on August 30, 1996, and are
secured by all of the assets of the Company. Certain of the notes are also
secured by the shares of the Company's common stock owned by the Company's chief
executive officer and one of its founders. The notes will be automatically
converted into .75 share of Series A Convertible Preferred Stock and one fifth
of a warrant to purchase a share of common stock at $2.93 for each $1.00
principal amount of such note if the Company issues and sells the minimum number
of units provided for in the private placement (see note 9).
(9) SUBSEQUENT EVENTS
On May 15, 1996, the Company completed a private placement for 71.5 units
(Units) for committed gross proceeds of $7,150,000 before commissions and
related expenses of approximately $1,000,000. Each Unit consists of 37,500
shares of the Company's Series A Convertible Preferred Stock, which are
convertible into shares of common stock on a one-for-one basis, and warrants to
purchase 7,500 shares of the Company's common stock for $2.93 per share. The
warrants expire on the fifth anniversary of the closing of the sale of the
Units. Such amount includes 37% of the purchase price for each Unit which was
paid at the time the Unit was purchased (the Initial Closing), and the balance
of the purchase price is to be paid thereafter in unequal installments of 13%,
21%, 20% and 9%, on August 15, 1996, October 15, 1996, January 15, 1997 and
March 15, 1997, respectively, subject to certain consequences of failure to pay
any installment of the purchase price. If prior to March 1, 1997 there occurs a
Qualified IPO, then at the time of the closing of the Qualified IPO: (i) the
purchase price of the Units will be automatically reduced by an amount equal to
any installments not yet due and payable at the time the registration statement
relating to such offering is declared effective under the Securities Act of
1933; and (ii) the shares included therein will be deemed fully paid and
nonassessable.
In connection with the closing of the private placement, the Company issued
329,063 additional shares of common stock to Scantek in exchange for the
termination of its right, pursuant to the license agreement, to maintain a 15%
beneficial ownership interest in the Company if the Company completes an initial
public offering, as defined in the license agreement, by December 31, 1996 (see
note 4).
On March 19, 1996, the Company issued an aggregate of $460,000 principal
amount of secured promissory notes (the March Bridge Notes) and warrants for
224,250 shares of the Company's common stock (at $0.67 per share exercise price)
(the March Bridge Warrants) to 15 accredited investors (the March Bridge
Investors). The March Bridge Notes bore interest at the rate of 10% per annum,
were to mature on the earlier of the Initial Closing or May 31, 1996, were
secured by all of the assets of the Company and were senior in right of payment
and security to the November Bridge Notes. The proceeds received from the March
Bridge Investor were allocated between the March Bridge Notes and the March
Bridge Warrants. The $343,485 difference between the principal amount of the
March Bridge Notes and the amount allocated is to be accreted and charged to
operations over the term of the March Bridge Notes. The March Bridge Notes were
converted into the initial 37% purchase price of 11.75 Units at the initial
closing. Accrued interest through May 15, 1996 was paid to the March Bridge
Investors.
Also at the Initial Closing, all of the November Bridge Notes to the Company
were converted in exchange for a total of 262,500 shares of Series A Convertible
Preferred Stock.
F-13
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
(9) Subsequent Events - (Continued)
In connection with the private placement, the Company also issued additional
private warrants to certain investors totalling 198,750 shares of common stock
at a price of $2.93 per share. These include 161,250 warrants which (i) may be
exercised in full if the common stock has been trading in the public market at a
price per share of at least $7.33 before a date which is six months after the
Initial Closing, (ii) may be exercised for an aggregate of only 52,500 shares of
common stock if the common stock has been trading publicly at a price per share
of at least $7.33 more than six months but less than nine months from the
Initial Closing, and (iii) may not be exercised at all if the common stock does
not trade in the public market at a price per share of at least $7.33 within
nine months after the Initial Closing. Pursuant to the Placement Agreement, the
Company also issued to the placement agent warrants to purchase 400,000 shares
of common stock at $2.93 per share. Also in connection with the private
placement, the Company's chief executive officer exchanged $34,000 of amounts
due to him in payment of the purchase price for two Units, together with $40,000
of March Bridge Notes. The remaining $91,000 of such loan was repaid from the
proceeds of the private placement together with accrued interest on such March
Bridge Notes. The Company signed an agreement with the placement agent for
consulting services for 36 months at a rate of $2,000 per month (beginning May
1996).
On July 23, 1996, the Company effected a four-to-three reverse stock split of
all outstanding shares of common stock including shares issuable under any share
option plan. All common share, per share and pro forma per share amounts in the
accompanying financial statements have been retroactively restated to reflect
this reverse stock split.
In May 1996, the authorized capital stock of the Company was increased to
14,000,000 shares of common stock, 4,175,000 shares of Series A Convertible
Preferred Stock and 1,825,000 shares of undesignated preferred stock (the
Undesignated Preferred Stock). On July 23, 1996, in connection with the
aforementioned stock split, the authorized common stock was increased to
25,000,000 shares.
The Company's certificate of incorporation now provides that the Company may,
by vote of its Board of Directors, issue the Undesignated Preferred Stock in one
or more series having the rights, preferences, privileges and restrictions
thereon, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or designation of such series, without
further vote or action by the stockholders. The issuance of Undesignated
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of common stock.
The issuance of Undesignated Preferred Stock with voting and conversion rights
may adversely affect the voting power of the holders of common stock, including
the loss of voting control to others.
F-14
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
CONDENSED BALANCE SHEETS
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
March 31, March 31,
Assets 1996 1996
------ --------- ---------
<S> <C> <C>
Cash ......................................................................... $ 229,294 $ 611,148
Property, plant and equipment, net ........................................... 52,503 52,503
Other assets ................................................................. 495,000 720,000
----------- -----------
Total assets ....................................................... $ 776,797 $ 1,383,651
=========== ===========
Liabilities and Stockholders' Deficit
-------------------------------------
Notes payable ................................................................ $ 540,119 $ --
Accrued expenses ............................................................. 1,552,790 1,221,350
Due to officer ............................................................... 125,000 --
Obligations under capital lease .............................................. 7,436 7,436
----------- -----------
Total current liabilities .......................................... 2,225,345 1,228,786
Obligations under capital lease, noncurrent portion .......................... 41,980 41,980
Series A Convertible Preferred Stock (redeemable), $0.01 par value, 6,000,000
shares authorized, no shares issued and outstanding (2,943,750 pro forma
shares issued and outstanding shown net of stock subscriptions receivable
of $4,479,300) ............................................................. -- 1,873,294
Stockholders' deficit:
Common stock, $0.01 par value, 25,000,000 shares authorized; 1,747,500
shares issued and outstanding (2,076,563 pro forma shares issued and
outstanding) ............................................................... 17,475 20,766
Additional paid-in capital ................................................... (1,058,390) (1,061,681)
Deficit accumulated during the development stage ............................. (449,613) (719,494)
-----------
Total stockholders' deficit ........................................ (1,490,528) (1,760,409)
----------- -----------
Commitments
Total liabilities and stockholders' deficit ........................ $ 776,797 $ 1,383,651
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-15
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
AND FOR THE PERIOD FROM DECEMBER 27, 1994
(DATE OF INCEPTION) TO MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
December 27,
Three months 1994 (date of
ended March 31, inception) to
--------------- --------------
1996 1995 March 31, 1996
---- ---- --------------
<S> <C> <C> <C>
Interest income ........................................ $ 1,246 $ -- $ 2,145
--------- -------- ---------
Operating expenses:
Salaries ............................................. 55,589 -- 55,589
Consulting fees ...................................... 21,892 26,500 114,734
Legal and professional fees .......................... 39,323 20,683 139,295
Interest ............................................. 87,605 -- 94,646
Other ................................................ 35,199 2,191 47,494
---------- -------- ---------
239,608 49,374 451,758
---------- -------- ---------
Net loss ............................................... $ (238,362) $(49,374) $(449,613)
========== ======== =========
Pro forma net loss per share ........................... $ (.05)
==========
Shares used in computing pro forma net loss per share ... 4,831,917
==========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-16
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
FOR THE PERIOD FROM DECEMBER 27, 1994
(DATE OF INCEPTION) TO DECEMBER 31, 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Deficit
Common stock accumulated
------------------------- Additional during
Shares paid-in development
issued Amount capital stage Total
------ ---------- ---------- ------------- -----
<S> <C> <C> <C> <C> <C>
Issuance of shares of common stock
upon incorporation .................. 825,000 $ 8,250 $ 53,750 $ -- $ 62,000
Issuance of shares of common stock
pursuant to subscription agreements.. 247,500 2,475 151,125 -- 153,600
Issuance of shares of common stock
in connection with license
agreement ........................... 675,000 6,750 (1,606,750) -- (1,600,000)
Net loss ............................. -- -- -- (211,251) (211,251)
--------- ------- ----------- --------- -----------
Balance, December 31, 1995 ........... 1,747,500 $17,475 (1,401,875) (211,251) (1,595,651)
Issuance of common stock warrants in
connection with bridge financing
(unaudited) ......................... -- -- 343,485 -- 343,485
Net loss (unaudited) ................. -- -- -- (238,362) (238,362)
--------- ------- ----------- --------- -----------
Balance, March 31, 1996 (unaudited).... 1,747,500 $17,475 $(1,058,390) $(449,613) $(1,490,528)
========= ======= =========== ========= ===========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-17
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
AND FOR THE PERIOD FROM DECEMBER 27, 1994
(DATE OF INCEPTION) TO MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
Three months December 27,
ended March 31, 1994 (date of
------------------ inception) to
1996 1995 March 31, 1996
---- ---- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(238,362) $ (49,374) $ (449,613)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash miscellaneous expenses ...................... 10,000 -- 50,350
Noncash interest expense ............................ 87,605 -- 94,646
Depreciation expense ................................ 1,886 -- 1,886
Changes in operating assets and liabilities:
Decrease in prepaid expenses ...................... 5,000 -- --
Increase in accrued expenses ...................... 35,218 -- 38,398
--------- ---------- ----------
Net cash used in operating activities .......... (98,653) (49,374) (264,333)
--------- ---------- ----------
Cash flows from investing activities:
Increase in other assets ............................... (350,000) -- (350,000)
Purchases of property, plant and equipment ............. -- -- (4,400)
Payments for production line ........................... -- -- (105,000)
Payments in connection with license agreement .......... -- (100,000) (150,000)
--------- ---------- ----------
Net cash used in investing activities .......... (350,000) (100,000) (609,400)
--------- ---------- ----------
Cash flows from financing activities:
Increase in other assets ............................... -- -- (40,000)
Proceeds from issuance of common stock ................. -- 203,600 208,600
Proceeds from officer loan ............................. -- -- 125,000
Proceeds from borrowings of notes payable .............. 460,000 -- 810,000
Principal payments on obligation under capital lease (573) -- (573)
--------- ---------- ----------
Net cash provided by financing activities ...... 459,427 203,600 1,103,027
--------- ---------- ----------
Net increase in cash ..................................... 10,774 54,226 229,294
Cash, beginning of period ................................ 218,520 -- --
--------- ---------- ----------
Cash, end of period ...................................... $ 229,294 $ 54,226 $ 229,294
========= ========== ==========
Supplemental disclosure of noncash transactions:
Amounts due in connection with license agreement...... $ -- $1,500,000 $1,450,000
========= ========== ==========
Common stock issued in connection with license
agreement ......................................... $ -- $ 9,000 $ 9,000
========= ========== ==========
Equipment acquired under capital lease .............. $ 49,989 $ -- $ 49,989
========= ========== ==========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-18
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
Notes to Condensed Financial Statements
March 31, 1996 and 1995
(UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been
prepared by HumaScan Inc. (the Company), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission and in accordance with
generally accepted accounting principles. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These unaudited financial statements
should be read in conjunction with the 1995 financial statements and notes
thereto.
In the opinion of the Company's management, the accompanying unaudited
condensed financial statements have been prepared on a basis substantially
consistent with the audited financial statements and contain adjustments, all of
which are of a normal recurring nature, necessary to present fairly its
financial position as of March 31, 1996 and its results of operations and cash
flows for the three months ended March 31, 1996 and 1995 and for the period
December 27, 1994 (date of inception) to March 31, 1996. Interim results are not
necessarily indicative of results for the full fiscal year.
The Company effected a four-to-three reverse stock split of its common stock
on July 23, 1996. All common share, per share and pro forma per share amounts in
the accompanying financial statements have been retroactively adjusted to
reflect this reverse stock split.
(2) BRIDGE FINANCING
On March 19, 1996, the Company sold an aggregate of $460,000 principal amount
of secured promissory notes (the March Bridge Notes) and warrants for 224,250
shares of the Company's common stock (at $.67 per share exercise price) (the
March Bridge Warrants) to 15 accredited investors (the March Bridge Investors)
for an aggregate consideration of $460,000. The March Bridge Notes bear interest
at the rate of 10% per annum, mature on the earlier of the initial closing of
the May 1996 private placement or May 31, 1996, are secured by all of the assets
of the Company and are senior in right of payment and security to a prior
issuance of secured convertible promissory notes. The March Bridge Notes were
converted into the initial 37% purchase price of 11.75 units at the initial
closing of the May 1996 private placement.
The proceeds received from the March Bridge Investors were allocated between
the March Bridge Notes and the March Bridge Warrants. The $343,485 difference
between the principal amount of the March Bridge Notes and the amount allocated
is to be accreted and charged to operations over the term of the March Bridge
Notes. As such, $73,604 was recorded as additional interest expense during the
three months ended March 31, 1996.
(3) AMENDMENT TO STOCK OPTION PLANS
In June 1996, the Company terminated its 1995 Stock Incentive Plan and the
Nonemployee Director Stock Option Plan and reserved an aggregate of 700,000
shares for the 1996 Stock Incentive Plan.
(4) COMMON STOCK OPTIONS
In June 1996, the Company agreed to grant to a recently hired officer the
following stock options to purchase shares of common stock:
o 11,250 options at an exercise price of $5.33 per share which vest in
April 1997; and,
o 35,000 options at an exercise price equal to the initial public offering
price per share (contingent upon the closing of the proposed offering)
which vest on a monthly basis over 20 months, beginning in April 1997.
F-19
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Condensed Financial Statements - (Continued)
In addition, the Company agreed to grant an officer 24,000 and a consultant
9,000 stock options, vesting ratably over two years, at the initial public
offering price per share (contingent upon the closing of the proposed offering).
(5) APPROVAL OF INITIAL PUBLIC OFFERING
In June 1996, the Board of Directors authorized the Company to file a
registration statement with the Securities and Exchange Commission permitting
the Company to sell approximately 2,500,000 shares (2,875,000 shares if the
underwriters' over-allotment option is exercised in full) of its common stock at
a price per share to be negotiated.
(6) LEASE COMMITMENT
In June 1996, the Company leased a facility under a six year lease with
aggregate rental payments of $875,400.
(7) PRO FORMA BALANCE SHEET
The unaudited pro forma March 31, 1996 balance sheet has been prepared using
the unaudited March 31, 1996 historical balance sheet of the Company and
reflects the effects of the following transactions (all of which are assumed to
have occurred at March 31, 1996):
o The conversion/partial repayment of amounts due to the chief executive
officer.
o The conversion of the $350,000 November Bridge Notes into 262,500
shares of Series A Convertible Preferred Stock.
o The issuance of an additional 329,063 shares of common stock to Scantek
in connection with the terms of the 1995 license agreement.
o The conversion of the $460,000 March Bridge Notes in connection with
the sale of 71.5 units in a private placement, resulting in the
issuance of 2,681,250 shares of Series A Convertible Preferred Stock.
The unamortized debt discount described in note 2 above, which totalled
$269,881 at March 31, 1996, was recorded as a charge directly to the
deficit accumulated during the development stage. Immediate proceeds of
such sale represent 37% of the total $7,150,000 consideration for all
the units, less the $460,000 March Bridge Financing amount, in
accordance with the terms of the private placement. Remaining amounts
are due in the next 12 months unless a Qualified IPO is completed, as
defined.
o Cash payments made at closing for interest on various previous financings,
private placement expenses, including the placement agent fee, required
license payments to Scantek ($375,000) and payments to the vendor in
accordance with the terms of the Turnkey Construction Contract ($265,000)
have also been reflected.
The unaudited pro forma balance sheet should be read in conjunction with the
Company's historical financial statements and accompanying notes thereto.
F-20
<PAGE>
BreastAssure Method of Use
FIGURE A
The thermal dots on the BreastAssure[TM] device are blue when removed from the
package.
[Artwork depicting BreastAssure device prior to use]
Each column of thermal dots will change color at a pre-set temperature.
Column 1 starts at 90 degrees F and each adjacent column is 0.5 degrees higher,
so that column 18 reads 98.5 degrees F.
FIGURE B
After the device is worn by the patient for 15 minutes, some of the columns of
thermal dots will turn pink due to heat emitted from the breast. A 4 column
difference between opposite segments is a positive test result.
[Artwork depicting BreastAssure device after use
with results as indicated below]
On the orange segement of the left breast, 7 columns of dots have turned pink.
On the orange segement of the right breast, 12 columns of dots have turned pink.
Since a 4 column difference (2 degrees F) between opposite segments is a
positive test result, the above example, which shows a difference of 5 columns
(a 2.5 degrees F higher temperature on the right side) is a positive result.
<PAGE>
===============================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations in connection with this Offering
other than those contained in this Prospectus, and, if given or made, such
information or representation must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby by anyone in any jurisdiction in which such offer
or solicitation is not authorized, or in which the person making such offer
or solicitation is not qualified to do so or to anyone to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of the Company since
the date hereof or that the information contained herein is correct as of any
time subsequent to the date hereof as of which such information is furnished.
------
TABLE OF CONTENTS
Page
----
Prospectus Summary ...................................... 3
Risk Factors ............................................ 9
Use of Proceeds ......................................... 17
Dividend Policy ......................................... 18
Capitalization .......................................... 19
Dilution ................................................ 20
Management's Discussion and Analysis of Financial
Condition and Plan of Operation ........................ 21
Business ................................................ 25
Management .............................................. 40
Principal Stockholders .................................. 45
Certain Transactions .................................... 48
Description of Securities ............................... 50
Shares Eligible for Future Sale ......................... 55
Underwriting ............................................ 57
Legal Matters ........................................... 59
Experts ................................................. 59
Additional Information .................................. 59
Index to Financial Statements ........................... F-1
Until ________, 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
===============================================================================
<PAGE>
===============================================================================
2,500,000 SHARES
HUMASCAN INC.
[LOGO]
COMMON STOCK
----------
PROSPECTUS
----------
KEANE SECURITIES CO., INC.
________, 1996
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware, as amended ("GCL"),
authorizes a Delaware corporation to indemnify its officers, directors,
employees and agents against expenses and liabilities incurred in legal
proceedings involving such persons because of their holding or having held such
positions with the corporation and to purchase and maintain insurance for such
indemnification. The Company's By-Laws and Article Tenth of its Certificate of
Incorporation, as amended, substantively provide that the Company indemnify its
officers, directors, employees and agents to the fullest extent permitted by
Section 145 of the GCL, and the Company intends to purchase insurance for such
indemnification upon consummation of this Offering.
Paragraph 7 of Section 102(b) of the GCL permits a Delaware corporation, by
so providing in its Certificate of Incorporation, to eliminate or limit the
personal liability of a director to the corporation for damages arising out of
certain alleged breaches of the director's duties to the corporation. The GCL,
however, provides that no such limitation of liability may affect a director's
liability with respect to any of the following: (i) for breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payment of dividends or unlawful purchase
or redemption of its capital stock, or (iv) for any transaction from which the
director derived an improper personal benefit. Article Ninth of the Company's
Certificate of Incorporation, as amended, eliminates the personal liability of
the directors of the Company to the fullest extent permitted by Paragraph 7 of
Section 102(b) of the GCL.
The form of Underwriting Agreement to be entered into by the Company and
Keane Securities Co., Inc. ("Keane"), as representative of the several
Underwriters of the Company's initial public offering (the "Representative"),
provides for indemnification of the Company's officers, directors and
controlling persons by the Underwriters against certain liabilities in
connection with the Company's initial public offering, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by it in connection with the
Offering described in this Registration Statement (other than the underwriting
discount and and the non-accountable expense allowance) will be as follows:
SEC registration fee ....................................... $ 8,758.62
NASD filing fee ............................................ 3,040.00
Printing and engraving expenses ............................ 100,000.00
Accounting fees and expenses ............................... 125,000.00
Legal fees and expenses (other than Blue Sky) .............. 150,000.00
Nasdaq filing fees ......................................... 10,000.00
Blue sky fees and expenses (including legal and filing fees). 50,000.00
Miscellaneous .............................................. 53,201.38
-------------
Total ................................................... $500,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following securities were issued by the Company within the past three
years and were not registered under the Securities Act. Each of the transactions
are claimed to be exempt from registration pursuant to Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering or
Sections 4(6) or 3(b) of the Securities Act. All of such securities are deemed
to be restricted securities for the purposes of the Securities Act. All
II-1
<PAGE>
HUMASCAN INC.
(A Development Stage Enterprise)
Notes to Condensed Financial Statements - (Continued)
certificates representing such issued and outstanding restricted securities
of the Company have been properly legended and the Company has issued "stop
transfer" instructions to its transfer agent with respect to such securities,
which legends and stop transfer instructions are presently in effect unless such
securities have been registered under the Securities Act or have been
transferred pursuant to an appropriate exemption from the registration
provisions of the Securities Act.
1. At inception, in December 1994, the Company sold 750,000 shares of
Common Stock to Donald B. Brounstein, the Company's President and Chief
Executive Officer, for $50,000, 7,500 shares to each of Burton L. Eichler,
Leonard B. Brown and Robert Lane, its then directors, for an aggregate of
$36,000 and another 75,000 shares to Robert Lane for $12,000, 225,000 shares
to certain accredited investors for an aggregate of $150,000 and 75,000
shares to nine other accredited investors for certain pre-incorporation
services provided by such persons.
2. In July 1995, the Company issued to Scantek Medical, Inc. ("Scantek")
675,000 shares of Common Stock in connection with a License Agreement between
Scantek and the Company dated as of October 20, 1995, as amended (the
"License Agreement"). Scantek received an additional 329,063 shares of Common
Stock upon the closing of the May Private Placement (as hereinafter defined)
in exchange for the termination of Scantek's right, pursuant to the License
Agreement, to maintain a 15% beneficial ownership interest in the Company.
3. On November 30, 1995, the Company sold an aggregate of $350,000
principal amount of secured convertible promissory notes which bore interest
at the rate of 10% per annum (the "November Bridge Notes") to 14 accredited
investors in a private placement. In connection with the May Private
Placement, all the November Bridge Notes were converted into shares of Series
A Convertible Preferred Stock ("Series A Preferred Stock") and warrants to
purchase shares of Common Stock at $2.93 per share ("Private Warrants") at
the rate of one share of Series A Preferred Stock and one-fifth of a Private
Warrant for each $1.33 principal amount of November Bridge Notes, resulting
in the issuance of 262,500 Shares of Series A Preferred Stock and Private
Warrants to purchase 52,500 shares of Common Stock, plus payment of accrued
interest on such November Bridge Notes.
4. On February 27, 1996, in connection with a Distribution Agreement
entered into between the Company and Physician Sales & Service, Inc. ("PSS")
as of February 27, 1996, the Company issued to PSS five-year warrants to
purchase 125,000 shares of Common Stock at an exercise price of $4.00 per
share.
5. On March 19, 1996, the Company sold an aggregate of $460,000 principal
amount of secured promissory notes which bore interest at the rate of 10% per
annum (the "March Bridge Notes") and warrants to purchase 224,250 shares of
Common Stock at $0.67 per share to 15 accredited investors in a private
placement ("March Bridge Investors"). In connection with the May Private
Placement, $434,800 in principal amount of the March Bridge Notes (and
$25,200 in principal amount, representing subscription funds in excess of the
initial subscription amounts due from four purchasers of March Bridge Notes,
which will be refunded to such purchasers if this Offering closes before
August 15, 1996) were canceled and applied to the purchase price of an
aggregate of 11.75 Units. Each Unit consisted of 37,500 shares of Series A
Preferred Stock and Private Warrants to purchase 7,500 shares of Common Stock
at $2.93 per share. The March Bridge Investors also received payment of
accrued interest on such notes.
6. In May 1996, the Company completed a private placement (the "May
Private Placement") in which it issued to 71 accredited investors an
aggregate of 71.5 Units, each Unit consisting of 37,500 shares of Series A
Preferred Stock and Private Warrants to purchase 7,500 shares of Common Stock
at $2.93 per share. The Company received gross initial proceeds of $2,645,000
from the May Private Placement (including $434,800 aggregate principal amount
of March Bridge Notes surrendered in payment of the initial purchase price
for 11.75 Units (including $40,000 in aggregate principal amount of March
Bridge Notes exchanged by Mr. Brounstein in partial consideration for two
Units purchased by him) and the cancellation $34,000 in principal amount of
certain loans made to the Company in 1995 by Mr. Brounstein in payment of the
balance of the purchase price for the Units purchased by him, but not
including $360,000 aggregate principal amount of November Bridge Notes
converted into one share of Series A Preferred Stock and one fifth of a
Private Warrant for each $1.33 principal amount of November Bridge Warrants
so converted. The Company issued one quarter of one Unit to Haythe & Curley,
the law firm that represented Burnham Securities Inc. ("Burnham"), the
placement agent in the May Private Placement, and one tenth of a Unit to
James J. Whidden, the Company's Senior Vice President of Clinical Development
(who was a consultant to the Company at the time of such issuance), in
exchange for services rendered). Such initial proceeds represented 37% of the
II-2
<PAGE>
purchase price of such Units. The balance of the purchase price is to be paid
in unequal installments of 13%, 21%, 20% and 9%, on August 15, 1996, October 15,
1996, January 15, 1997 and March 15, 1997, respectively. If a Qualified Initial
Public Offering (as defined in the Company's Certificate of Incorporation)
occurs prior to March 1, 1997, then upon consummation of such Qualified Initial
Public Offering (i) the purchase price of the Units will be automatically
reduced by an amount equal to any installments not yet due and payable at the
time the registration statement relating to the Qualified Initial Public
Offering is declared effective under the Securities Act, (ii) the Series A
Preferred Stock will convert automatically into Common Stock on a share for
share basis, and (iii) the shares of Common Stock issued upon conversion of the
Series A Preferred Stock will be deemed fully paid and nonassessable. As
currently contemplated, this Offering will be a Qualified Initial Public
Offering.
7. In connection with the May Private Placement, the Company issued
Private Warrants to Burnham, pursuant to a placement agreement between the
Company and Burnham dated as of November 16, 1995, to purchase 400,000 shares
of Common Stock at $2.93 per share, and Smith Barney Inc. to purchase 37,500
shares of Common Stock at $2.93 per share. All of such Private Warrants are
exercisable for a period of five years from the effective date of this
Registration Statement. Also in connection with the May Private Placement,
the Company issued warrants to purchase an aggregate of 161,250 shares of
Common Stock at $2.93 per share to Udi Toledano and members of his family and
Herbert V. Turk and members of his family. Such warrants (i) may be exercised
in full if the Common Stock has been trading in the public market at a price
per share of at least $7.33 before a date which is six months after the
closing of the May Private Placement (the "Initial Closing"), (ii) may be
exercised for an aggregate of only 52,500 shares of Common Stock if the
Common Stock has been trading publicly at a price per share of at least $7.33
more than six months but less than nine months from the Initial Closing, and
(iii) may not be exercised at all if the Common Stock does not trade in the
public market at a price per share of at least $7.33 within nine months after
the Initial Closing.
8. The Company has issued options to certain directors, officers, employees
and consultants to purchase a total of 274,500 shares of Common Stock. Options
for 131,250 of such shares are dated February 9, 1996, have a five-year term and
a purchase price of $5.33 per share, options for 11,250 shares are dated June 3,
1996, have a five-year term and an exercise price of $5.33 per share, options
for 128,000 shares are dated June 20, 1996, have a five-year term and an
exercise price equal to the initial public offering price per share in this
Offering, and options for 4,000 shares are dated as of January 12, 1996, have a
five-year term and an exercise price equal to the fair market value on January
9, 1996 (but will expire prior to becoming exercisable, because such options are
not exercisable until January 9, 1997 and are held by former directors under the
Company's Nonemployee Director Stock Incentive Plan, which provides that
options issued thereunder expire 60 days after directors resign from the
Company's Board of Directors).
ITEM 27. EXHIBITS
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Company, as amended.
3.2 By-Laws of the Company.
4.1* Form of Common Stock Certificate.
4.2* Form of Series A Preferred Stock Certificate.
4.3* Form of Representative's Warrant Agreement between the Company and the Representative,
including Form of Representative's Warrant Certificate.
4.4 Form of Warrant Certificate for March Bridge Warrants.
4.5 Form of Private Warrants issued in connection with May Private Placement.
4.6* Options issued to Certain Officers on February 9, 1996 and June 3, 1996.
5.1* Opinion of Graubard Mollen & Miller.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1* Distribution Agreement, dated as of February 27, 1996, between the Company and
Physician Sales & Service, Inc., as amended.((1))
10.2 License Agreement, dated as of October 20, 1995, between the Company and Scantek Medical, Inc.,
as amended.
10.3 Turnkey Construction Contract, dated as of October 31, 1995, between the Company and Zigmed, Inc.
10.4 Voting and Stockholder Rights Agreement, dated as of May 15, 1996, among the Company, Burnham
Securities Inc., a consortium of individual investors led by Udi Toledano, The Travelers Insurance
Company, Smith Barney Worldwide Securities, Ltd. and Smith Barney Worldwide Fund, N.V.
10.5 Agreement, dated March 19, 1996, between the Company and Udi Toledano.
10.6 Agreement, dated March 19, 1996, between the Company and Herbert V. Turk.
10.7 Warrant Agreement between the Company and Physician Sales & Service, Inc.
10.8 Employment Agreement between the Company and Donald B. Brounstein, dated as of January 1, 1996.
10.9 Employment Agreement between the Company and James J. Whidden, dated as of May 1, 1996.
10.10 Employment Agreement between the Company and Kenneth S. Hollander, dated as of June 3, 1996.
10.11* 1996 Stock Incentive Plan.
10.12 Nonemployee Director Stock Incentive Plan.
10.13* Financial Services Agreement, dated as of November 16, 1995, between the Company and Burnham
Securities Inc., as amended.
10.14 Lease, dated June 11, 1996, between the Moen Organization, Inc. and the Company.
10.15* Form of Indemnification Agreement.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 * Consent of Graubard Mollen & Miller (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page to this Registration Statement).
27 Financial Data Schdule.
</TABLE>
- -----------
* Filed herewith.
(1) Confidential treatment has been requested for portions of this exhibit.
ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes:
1. (a) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events, which
individually or together, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end
II-4
<PAGE>
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.
(iii) To include any additional information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(b) 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.
(c) 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.
2. To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
3. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions referred to under Item 24 of this
Registration Statement, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission 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 Company of expenses incurred or paid by a director,
officer or a controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or a
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of competent 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.
4. (a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1), or (4), or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time the Commission declared it effective.
(b) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all the requirements for filing on Form SB-2 and authorized
this Amendment No. 1 to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Cranford, State
of New Jersey, on July 26, 1996.
HUMASCAN INC.
By: /s/ Donald B. Brounstein
-------------------------------
Donald B. Brounstein, President,
Chief Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons
in the capacities and on the dates stated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ DONALD B. BROUNSTEIN President, Chief Executive Officer and July 26, 1996
- --------------------------------- Director
Donald B. Brounstein
/s/ KENNETH S. HOLLANDER Chief Financial Officer (and principal
- --------------------------------- accounting officer) July 26, 1996
Kenneth S. Hollander
/s/ DONALD B. BROUNSTEIN, as Attorney-in-Fact Director July 26, 1996
- -------------------------------------------------
Steven S. Elbaum
/s/ DONALD B. BROUNSTEIN, as Attorney-in-Fact Director July 26, 1996
- -------------------------------------------------
Jack L. Rivkin
/s/ DONALD B. BROUNSTEIN, as Attorney-in-Fact Director July 26, 1996
- -------------------------------------------------
John F. Sasen, Sr.
/s/ DONALD B. BROUNSTEIN, as Attorney-in-Fact Director July 26, 1996
- -------------------------------------------------
Udi Toledano
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <C>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Company, as amended.
3.2 By-Laws of the Company.
4.1* Form of Common Stock Certificate.
4.2* Form of Series A Preferred Stock Certificate.
4.3* Form of Representative's Warrant Agreement between the Company and the Representative,
including Form of Representative's Warrant Certificate.
4.4 Form of Warrant Certificate for March Bridge Warrants.
4.5 Form of Private Warrants issued in connection with May Private Placement.
4.6* Options issued to Certain Officers on February 9, 1996 and June 3, 1996.
5.1* Opinion of Graubard Mollen & Miller.
10.1* Distribution Agreement, dated as of February 27, 1996, between the Company and Physician
Sales & Service, Inc., as amended.((1))
10.2 License Agreement, dated as of October 20, 1995, between the Company and Scantek Medical,
Inc., as amended.
10.3 Turnkey Construction Contract, dated as of October 31, 1995, between the Company and Zigmed,
Inc.
10.4 Voting and Stockholders' Rights Agreement, dated as of May 15, 1996, among the Company,
Burnham Securities, Inc., a consortium of individual investors led by Udi Toledano, The
Travelers Insurance Company, Smith Barney Worldwide Securities, Ltd. and Smith Barney Worldwide
Fund, N.V.
10.5 Agreement, dated March 19, 1996, between the Company and Udi Toledano.
10.6 Agreement, dated March 19, 1996, between the Company and Herbert V. Turk.
10.7 Warrant Agreement between the Company and Physician Sales & Service, Inc.
10.8 Employment Agreement between the Company and Donald B. Brounstein, dated as of January
1, 1996.
10.9 Employment Agreement between the Company and James J. Whidden, dated as of May 1, 1996.
10.10 Employment Agreement between the Company and Kenneth S. Hollander, dated as of June 3,
1996.
10.11 * 1996 Stock Incentive Plan.
10.12 Nonemployee Director Stock Incentive Plan.
10.13* Financial Services Agreement, dated as of November 16, 1995, between the Company and Burnham
Securities Inc., as amended.
10.14 Lease, dated June 11, 1996, between the Moen Organization, Inc. and the Company.
10.15* Form of Indemnification Agreement.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 * Consent of Graubard Mollen & Miller (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page to this Registration Statement).
27 Financial Data Schedule.
</TABLE>
- -----------
* Filed herewith.
(1) Confidential treatment has been requested for portions of this exhibit.
<PAGE>
Exhibit 1.1
OHS DRAFT
7/16/96
[Form of Underwriting Agreement - Subject to Additional Review]
2,500,000 Shares of Common Stock
HUMASCAN INC.
UNDERWRITING AGREEMENT
New York, New York
, 1996
KEANE SECURITIES CO., INC.
As Representative of the
Several Underwriters listed on Schedule A hereto
50 Broadway
New York, New York 10004
Ladies and Gentlemen:
HumaScan Inc., a Delaware corporation (the "Company"), confirms its
agreement with Keane Securities Co., Inc. ("Keane") and each of the underwriters
named in Schedule A hereto (collectively, the "Underwriters," which term shall
also include any underwriter substituted as hereinafter provided in Section 11),
for whom Keane is acting as representative (in such capacity, Keane shall
hereinafter be referred to as "you" or the "Representative"), with respect to
the sale by the Company and the purchase by the Underwriters, acting severally
and not jointly, of the respective numbers of shares ("Shares") of the Company's
common stock, $.01 par value per share ("Common Stock"), set forth in Schedule A
hereto. Such Shares are hereinafter referred to as the "Firm Securities."
The Company shall issue and sell to the Underwriters, acting severally
and not jointly, up to an additional 375,000 shares of Common Stock for the
purpose of covering over-allotments, if any (the "Option Securities"). The
Company also proposes to issue and sell to you warrants (the "Representative's
Warrants") pursuant to the Representative's Warrant Agreement (the
"Representative's Warrant Agreement") for the purchase of an additional 250,000
shares of Common Stock. The shares of Common Stock issuable upon exercise of the
Representative's Warrants are hereinafter referred to as the "Representative's
Securities." The Firm Securities, the Option Securities, the Representative's
Warrants and the Representative's Securities (collectively, hereinafter referred
to as the "Securities") are more fully described in the Registration Statement
and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, each of the Underwriters as of the date
hereof, and as of the Closing Date (hereinafter defined) and the Option Closing
Date (hereinafter defined), if any, as follows:
<PAGE>
a. The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. 333-_________), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Securities under the Securities Act of 1933, as amended (the "Act"),
which registration statement and amendment or amendments have been prepared by
the Company in conformity with the requirements of the Act, and the rules and
regulations (the "Regulations") of the Commission under the Act. The Company
will promptly file a further amendment to said registration statement in the
form heretofore delivered to the Underwriters and will not file any other
amendment thereto to which the Underwriters shall have objected in writing after
having been furnished with a copy thereof. Except as the context may otherwise
require, such registration statement, as amended, on file with the Commission at
the time the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein (including, but not limited to those
documents or information incorporated by reference therein) and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430(A) of the Regulations)), is hereinafter called the "Registration Statement",
and the form of prospectus in the form first filed with the Commission pursuant
to Rule 424(b) of the Regulations is hereinafter called the "Prospectus." For
purposes hereof, "Rules and Regulations" mean the rules and regulations adopted
by the Commission under either the Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as applicable.
b. Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or threatened. Each of the Preliminary Prospectus, the Registration Statement
and Prospectus at the time of filing thereof conformed with the requirements of
the Act and the Rules and Regulations, and none of the Preliminary Prospectus,
the Registration Statement or Prospectus at the time of filing thereof contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein and necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements made in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriters by or on behalf of the Underwriters
expressly for use in such Preliminary Prospectus, Registration Statement or
Prospectus.
c. When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined herein) and each
Option Closing Date (as defined herein), if any, and during such longer period
as the Prospectus may be required to be delivered in connection with sales by
the Underwriters or a dealer, the Registration Statement and the Prospectus will
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and will conform in all material
respects to the requirements of the Act and the Rules and Regulations; neither
the Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided, however, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
strict conformity with information furnished to the Company in writing by or on
behalf of any Underwriter expressly for use in the Preliminary Prospectus,
Registration Statement or Prospectus or any amendment thereof or supplement
thereto.
2
<PAGE>
d. The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the state of its incorporation.
Except as set forth in the Prospectus, the Company does not own an interest in
any corporation, partnership, trust, joint venture or other business entity. The
Company is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such qualification or
licensing. The Company has all requisite power and authority (corporate and
other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without limitation,
those having jurisdiction over environmental or similar matters), to own or
lease its properties and conduct its business as described in the Prospectus;
the Company is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all applicable federal, state, local and foreign laws, rules and
regulations; and the Company has not received any notice of proceedings relating
to the revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
position, prospects, value, operation, properties, business or results of
operations of the Company. The disclosures in the Registration Statement
concerning the effects of federal, state, local, and foreign laws, rules and
regulations on the Company's business as currently conducted and as contemplated
are correct in all material respects and do not omit to state a material fact
necessary to make the statements contained therein not misleading in light of
the circumstances in which they were made.
e. The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set forth
therein on the Closing Date and each Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the Representative's Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all respects to all statements
with respect thereto contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of the Company have been duly authorized
and validly issued and are fully paid and non-assessable and the holders thereof
have no rights of rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none of such securities
were issued in violation of the preemptive rights of any holders of any security
of the Company or similar contractual rights granted by the Company. The
Securities are not and will not be subject to any preemptive or other similar
rights of any stockholder, have been duly authorized and, when issued, paid for
and delivered in accordance with the terms hereof, will be validly issued, fully
paid and non-assessable and will conform to the description thereof contained in
the Prospectus; the holders thereof will not be subject to any liability solely
as such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and validly taken;
and the certificates representing the Securities will be in due and proper form.
Upon the issuance and delivery pursuant to the terms hereof of the Securities to
be sold by the Company hereunder, the Underwriters or the Representative, as the
case may be, will acquire good and marketable title to such Securities free and
clear of any lien, charge, claim, encumbrance, pledge, security interest, defect
or other restriction or equity of any kind whatsoever.
3
<PAGE>
f. The financial statements of the Company together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, income, changes in cash flow, changes in stockholders' equity and the
results of operations of the Company at the respective dates and for the
respective periods to which they apply and such financial statements have been
prepared in conformity with generally accepted accounting principles and the
Rules and Regulations, consistently applied throughout the periods involved and
such financial statements as are audited have been examined by KPMG Peat Marwick
LLP who are independent public accountants within the meaning of the Act and the
Rules and Regulations, as indicated in their reports filed therewith. There has
been no adverse change or development involving a material prospective change in
the condition, financial or otherwise, or in the earnings, position, prospects,
value, operation, properties, business, or results of operations of the Company,
whether or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus
and the outstanding debt, the property, both tangible and intangible, and the
business of the Company conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus. Financial
information (including, without limitation, any pro forma financial information)
set forth in the Prospectus under the headings "Summary Financial Information,"
"Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Plan of Operation," fairly present, on the basis stated in the
Prospectus, the information set forth therein, and have been derived from or
compiled on a basis consistent with that of the audited financial statements
included in the Prospectus; and, in the case of pro forma financial information,
if any, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions and
circumstances referred to therein. The amounts shown as accrued for current and
deferred income and other taxes in such financial statements are sufficient for
the payment of all accrued and unpaid federal, state, local and foreign income
taxes, interest, penalties, assessments or deficiencies applicable to the
Company, whether disputed or not, for the applicable period then ended and
periods prior thereto; adequate allowance for doubtful accounts has been
provided for unindemnified losses due to the operations of the Company; and the
statements of income do not contain any items of special or nonrecurring income
not earned in the ordinary course of business, except as specified in the notes
thereto.
g. The Company (i) has paid all federal, state, local, and foreign
taxes for which it is liable, including, but not limited to, withholding taxes
and amounts payable under Chapters 21 through 24 of the Internal Revenue Code of
1986, as amended (the "Code"), and has furnished all information returns it is
required to furnish pursuant to the Code, (ii) has established adequate reserves
for such taxes which are not due and payable, and (iii) does not have any tax
deficiency or claims outstanding, proposed or assessed against it.
h. No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriters in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase by the Underwriters of the Firm
Securities and the Option Securities from the Company and the purchase by the
Representative of the Representative's Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Firm Securities and the Option Securities in connection with
the distribution contemplated hereby.
i. The Company maintains insurance policies, including, but not
limited to, general liability, product and property insurance, which insures the
Company, and its employees, against such losses and risks generally insured
against by comparable businesses. The Company (A) has not failed to give notice
or present any insurance claim with respect to any matter, including but not
limited to the Company's business, property or employees, under any insurance
policy or surety bond in a due and timely manner, (B) does not have any disputes
or claims against any underwriter of such insurance policies or surety bonds or
has not failed to pay any premiums due and payable thereunder, or (C) has not
failed to comply with all conditions contained in such insurance policies and
surety bonds. There are no facts or circumstances under any such insurance
policy or surety bond which would relieve any insurer of its obligation to
satisfy in full any valid claim of the Company.
4
<PAGE>
j. There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of, the Company
which (i) questions the validity of the capital stock of the Company, this
Agreement or the Representative's Warrant Agreement, or of any action taken or
to be taken by the Company pursuant to or in connection with this Agreement or
the Representative's Warrant Agreement, (ii) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in all
material respects), or (iii) might materially and adversely affect the
condition, financial or otherwise, or the earnings, position, prospects,
stockholders' equity, value, operation, properties, business or results of
operations of the Company.
k. The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, enter into this Agreement and
the Representative's Warrant Agreement and to consummate the transactions
provided for in this Agreement and the Representative's Warrant Agreement; and
this Agreement and the Representative's Warrant Agreement have each been duly
and properly authorized, executed and delivered by the Company. Each of this
Agreement and the Representative's Warrant Agreement constitutes a legal, valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms, and none of the Company's issue and sale of the
Securities, execution or delivery of this Agreement or the Representative's
Warrant Agreement its performance hereunder and thereunder, its consummation of
the transactions contemplated herein and therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and any amendments
or supplements thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon, any property
or assets (tangible or intangible) of the Company pursuant to the terms of, (i)
the certificate of incorporation or by-laws of the Company, (ii) any license,
contract, collective bargaining agreement, indenture, mortgage, deed of trust,
lease, voting trust agreement, stockholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is a party
or by which the Company is or may be bound or to which either of its properties
or assets (tangible or intangible) is or may be subject, or any indebtedness, or
(iii) any statute, judgment, decree, order, rule or regulation applicable to the
Company of any arbitrator, court, regulatory body or administrative agency or
other governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
l. No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement and
the Representative's Warrant Agreement and the transactions contemplated hereby
and thereby, including without limitation, any waiver of any preemptive, first
refusal or other rights that any entity or person may have for the issue and/or
sale of any of the Securities, except such as have been or may be obtained under
the Act or may be required under state securities or Blue Sky laws in connection
with the Underwriters' purchase and distribution of the Firm Securities and the
Option Securities, and the Representative's Warrants to be sold by the Company
hereunder.
5
<PAGE>
m. All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or business may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company, enforceable
against the Company, in accordance with its terms. The descriptions in the
Registration Statement of agreements, contracts and other documents are accurate
in all material respects and fairly present the information required to be shown
with respect thereto by Form SB-2, and there are no contracts or other documents
which are required by the Act to be described in the Registration Statement or
filed as exhibits to the Registration Statement which are not described or filed
as required, and the exhibits which have been filed are in all material respects
complete and correct copies of the documents of which they purport to be copies.
n. Subsequent to the respective dates as of which information is
set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money, (ii) entered into any transaction other than in
the ordinary course of business, or (iii) declared or paid any dividend or made
any other distribution on or in respect of its capital stock of any class, and
there has not been any change in the capital stock, or any change in the debt
(long or short term) or liabilities or material adverse change in or affecting
the general affairs, management, financial operations, stockholders' equity or
results of operations of the Company.
o. No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, collective bargaining
agreement, indenture, mortgage, installment sale agreement, lease, deed of
trust, voting trust agreement, stockholders agreement, partnership agreement,
note, loan or credit agreement, purchase order, or any other agreement or
instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company is a party or by which the Company
may be bound or to which the property or assets (tangible or intangible) of the
Company is subject or affected.
p. The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance with all
federal, state, local, and foreign laws and regulations respecting employment
and employment practices, terms and conditions of employment and wages and
hours. There are no pending investigations involving the Company by the U.S.
Department of Labor, or any other governmental agency responsible for the
enforcement of such federal, state, local, or foreign laws and regulations.
There is no unfair labor practice charge or complaint against the Company
pending before the National Labor Relations Board or any lockout, strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or involving the Company, or any predecessor entity, and none has ever occurred.
No representation question exists respecting the employees of the Company, and
no collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists, or, is imminent.
q. Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
6
<PAGE>
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or
at any time previously, to a defined benefit plan, as defined in Section 3(35)
of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, which could subject the Company to any tax penalty on
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all reporting, disclosure and other requirements of
the Code and ERISA as they relate to any such ERISA Plan. Determination letters
have been received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a), stating that such
ERISA Plan and the attendant trust are qualified thereunder. The Company has
never completely or partially withdrawn from a "multiemployer plan."
r. Neither the Company, nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
s. Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company, are in dispute so far as known by the Company or are in any
conflict with the right of any other person or entity. The Company (i) owns or
has the right to use, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, all patents, trademarks, service marks, trade
names and copyrights, technology and licenses and rights with respect to the
foregoing, used in the conduct of its business as now conducted or proposed to
be conducted without infringing upon or otherwise acting adversely to the right
or claimed right of any person, corporation or other entity under or with
respect to any of the foregoing and (ii) is not obligated or under any liability
whatsoever to make any payment by way of royalties, fees or otherwise to any
owner or licensee of, or other claimant to, any patent, trademark, service mark,
trade name, copyright, know-how, technology or other intangible asset, with
respect to the use thereof or in connection with the conduct of its business or
otherwise.
t. The Company owns and has the unrestricted right to use all
trade secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
designs, processes, works of authorship, computer programs and technical data
and information (collectively herein "intellectual property") that are material
to the development, manufacture, operation and sale of all products and services
sold or proposed to be sold by the Company, free and clear of and without
violating any right, lien, or claim of others, including without limitation,
former employers of its employees; provided, however, that the possibility
exists that other persons or entities, completely independently of the Company,
or its employees or agents, could have developed trade secrets or items of
technical information similar or identical to those of the Company. The Company
is not aware of any such development of similar or identical trade secrets or
technical information by others.
u. The Company has taken reasonable security measures to protect
the secrecy, confidentiality and value of its intellectual property in all
material respects.
7
<PAGE>
v. The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus, to be owned or leased by it free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
w. KPMG Peat Marwick LLP, whose report is filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
x. The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which each of the Company's stockholders and
holders of securities exchangeable or exercisable for or convertible into shares
of Common Stock has agreed for a period of not less than 12 months following the
effective date of the Registration Statement (i) not to, directly or indirectly,
issue, offer, agree or offer to sell, sell, grant any option for the purchase or
sale of, assign, transfer, pledge, hypothecate or otherwise encumber or dispose
of any shares of Common Stock or securities convertible into, exercisable or
exchangeable for or evidencing any right to purchase or subscribe for any shares
of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or
otherwise) or dispose of any beneficial interest therein without the prior
written consent of the Representative and the Company and (ii) to waive all
rights to request or demand the registration pursuant to the Act of any
securities of the Company which are registered in the name of or beneficially
owned by any such holder. The Company will cause the Transfer Agent, as defined
below, to mark an appropriate legend on the face of stock certificates
representing all of such securities and to place "stop transfer" orders on the
Company's stock ledgers.
y. There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company, or any of its officers, directors, stockholders,
partners, employees or affiliates, including, without limitation, any and all
rights and compensation granted to Burnham Securities Inc. ("Burnham") pursuant
to that certain Financial Services Agreement dated as of November 16, 1995
between the Company and Burnham, that may affect the Underwriters' compensation,
as determined by the National Association of Securities Dealers, Inc. ("NASD");
provided, however, [to be completed upon finalization of compensation issues
with NASD].
z. The Common Stock has been approved for quotation on the Nasdaq
SmallCap Market ("Nasdaq").
aa. Neither the Company, nor any of its officers, employees,
agents or any other person acting on behalf of the Company has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
or employee of any governmental agency (domestic or foreign) or instrumentality
of any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (a) might subject the
Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (b) if
not given in the past, might have had a materially adverse effect on the assets,
business or operations of the Company, or (c) if not continued in the future,
might adversely affect the assets, business, operations or prospects of the
Company. The Company's internal accounting controls are sufficient to cause the
Company to comply with the Foreign Corrupt Practices Act of 1977, as amended.
8
<PAGE>
bb. Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any of the foregoing persons or entities has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company, or (B) purchases from or sells or furnishes to the
Company any goods or services, or (ii) a beneficiary interest in any contract or
agreement to which the Company is a party or by which it may be bound or
affected. Except as set forth in the Prospectus under "Certain Transactions,"
there are no existing agreements, arrangements, understandings or transactions,
or proposed agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, or 5% or greater securityholder of
the Company, or any partner, affiliate or associate of any of the foregoing
persons or entities.
cc. Any certificate signed by any officer of the Company, and
delivered to the Underwriters or to Underwriters' Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
dd. The minute books of the Company have been made available to
the Underwriters and contain a complete summary of all meetings and actions of
the directors and stockholders of the Company, since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all material respects.
ee. Except and to the extent described in the Prospectus, no
holders of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
ff. (A) The Company is in compliance with all federal, state,
local or foreign laws, common law, rules, codes, administrative orders or
regulations relating to pollution or protection of human health, the environment
(including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata) or wildlife, including without limitation, laws,
common law, rules, codes, administrative orders and regulations relating to the
release or threatened release of chemicals, pollutants, contaminants, wastes,
toxic substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials (collectively, "Environmental Laws") and (B) to the best of
the Company's knowledge, there are no events or circumstances that could form
the basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency, against or
affecting the Company relating to any Hazardous Materials or the violation of
any Environmental Laws.
gg. In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business, operations
and properties of the Company, in the course of which it identifies and
evaluates associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of properties
or compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties). On the basis of such review, the Company has reasonably
concluded that such associated costs and liabilities would not, singly or in the
aggregate, have a material adverse effect on the Company.
9
<PAGE>
hh. The Company is in compliance in all material respects with all
federal, state, local and foreign laws, rules, orders, regulations (including,
but not limited to, the Federal Food, Drug and Cosmetic Act and rules and
regulations promulgated thereunder and otherwise by the United States Food and
Drug Administration ("FDA") and/or comparable foreign regulatory bodies)
respecting the production, use, testing, manufacturing and marketing of
products, compounds or drugs; and there is no action, suit, proceeding, inquiry,
investigation, litigation, or governmental proceeding, domestic or foreign,
pending or threatened (or circumstances that may give rise to the same)
involving the Company's production, use, testing, manufacturing or marketing of
any products, compounds or drugs, which (i) questions the authority of the
Company to produce, use, test, manufacture or market any products, compounds, or
drugs, (ii) questions the completeness or accuracy of data generated by any
clinical trials being conducted by or on behalf of the Company, (iii) is
required to be disclosed in the Prospectus which is not so disclosed, or (iv)
might materially and adversely affect the condition, financial or otherwise, or
the earnings, prospects, value, operations or business of the Company. The
Company has no reason to believe that it will not receive all necessary and
required approvals, authorizations, validations and certifications from the FDA
and other applicable regulatory authorities to enable the Company to conduct its
business as contemplated in the Registration Statement and the Prospectus.
ii. As of the date hereof, (i) any and all rights, pursuant to
that certain License Agreement dated as of October 20, 1995 (the "Scantek
Agreement") between the Company and Scantek Medical, Inc. ("Scantek") or
otherwise, of Scantek to maintain a fixed equity interest in the Company has
been terminated and is of no further force or effect; and (ii) the Company has
entered into a distribution agreement (the "PSS Agreement") with Physician Sales
& Service, Inc. ("PSS") in form and substance reasonably satisfactory to the
Representative and neither the Company nor PSS is in breach of or default under
the PSS Agreement.
jj. The Company has as of the effective date of the Registration
Statement (i) entered into an employment agreement with each of Donald B.
Brounstein, James J. Whidden and Kenneth S. Hollander in the forms filed as
Exhibits ___, ___ and ___, respectively, to the Registration Statement and (ii)
purchased term key person insurance on the life of Mr. Brounstein in the amount
of $ , which policy names the Company as the sole beneficiary thereof.
kk. The Company has as of the effective date of the Registration
Statement (i) employed a qualified Chief Financial Officer, (ii) retained a firm
of independent public accountants reasonably satisfactory to the Representative
and (iii) elected a Board of Directors reasonably satisfactory to the
Representative.
ll. [As of the date hereof, the Company has prepared and submitted
for peer review publication, in an industry or trade publication addressing
breast cancer or cancer generally, a scientific article (the "Article")
analyzing the results of the clinical studies conducted between 1980 and 1984 on
the BreastAssure(TM) technology and device (the "Prior Clinical Studies") and
shall have commenced updating such studies to the present.]
mm. As of the date hereof, the Company does not have more than
shares of Common Stock issued and outstanding (including securities
with equivalent rights as the Common Stock and shares of Common Stock, or such
equivalent securities, issuable upon exercise of any and all options, warrants
and other contract rights and securities convertible directly or indirectly into
shares of Common Stock or such equivalent securities, but excluding up to
shares of Common Stock issuable upon the exercise of options or warrants
at prices not less than the higher of the market value of the shares at the date
of the grant or the offering price per share).
10
<PAGE>
nn. The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
An Act Relating to Disclosure of Doing Business with Cuba, and the Company
further agrees that if it or any affiliate commences engaging in business with
the government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's or
any affiliate's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide the Department notice
of such business or change, as appropriate, in a form acceptable to the
Department.
oo. The Company is not, and upon the issuance and sale of the
Securities as herein contemplated and the application of the net proceeds
therefrom as described in the Prospectus under the caption "Use of Proceeds"
will not be, an "investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of 1940, as
amended (the "1940 Act").
pp. The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general and specific authorizations; (ii)
transactions are recorded as necessary to permit preparations of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
qq. As of the date hereof, (i) that certain Voting and Stockholder
Rights Agreement dated as of May 15, 1996 (the "Stockholders' Agreement") by and
among the Company and certain holders of the Company's outstanding shares of
Series A Convertible Preferred Stock, $.01 par value per share (the "Series A
Preferred Stock") has been terminated by the parties to the Stockholders'
Agreement and is of no further force and effect and each such party has waived
(in a duly and validly authorized and executed written agreement) any and all
rights which such party may have under the Stockholders' Agreement in connection
with the public offering contemplated by this Agreement and any and all
transactions described in the Registration Statement and the Prospectus, (ii)
all outstanding shares of Series A Preferred Stock have been converted into
Common Stock on a per share basis pursuant to the terms of the Stockholders'
Agreement and (iii) any outstanding indebtedness or liability of the Company
owed to any officers, directors or stockholders of the Company or any affiliates
thereof has been converted into shares of Common Stock on terms and conditions
acceptable to the Representative and at a conversion ratio equal to the initial
public offering price per Share as contemplated by the Prospectus; provided,
however, that any outstanding indebtedness or liability of the Company owed to
Scantek is excluded from the terms of this provision.
2. Purchase, Sale and Delivery of the Securities.
a. On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$ [92% of the public offering price] per Share, that number of Firm
Securities set forth in Schedule A opposite the name of such Underwriter,
subject to such adjustment as the Representative in its sole discretion shall
make to eliminate any sales or purchases of fractional shares, plus any
additional number of Firm Securities which such Underwriter may become obligated
to purchase pursuant to the provisions of Section 11 hereof.
11
<PAGE>
b. In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 375,000 shares of Common Stock at a price of $ ____ [92% of the
public offering price] per Share. The option granted hereby will expire 45 days
after (i) the date the Registration Statement becomes effective, if the Company
has elected not to rely on Rule 430A under the Rules and Regulations, or (ii)
the date of this Agreement if the Company has elected to rely upon Rule 430A
under the Rules and Regulations, and may be exercised in whole or in part from
time to time only for the purpose of covering over-allotments which may be
made in connection with the offering and distribution of the Firm Securities
upon notice by the Representative to the Company setting forth the number of
Option Securities as to which the several Underwriters are then exercising the
option and the time and date of payment and delivery for any such Option
Securities. Any such time and date of delivery (an "Option Closing Date") shall
be determined by the Representative, but shall not be later than five (5) full
business days after the exercise of said option, nor in any event prior to the
Closing Date, as hereinafter defined, unless otherwise agreed upon by the
Representative and the Company. Nothing herein contained shall obligate the
Underwriters to make any over-allotments. No Option Securities shall be
delivered unless the Firm Securities shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
c. Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of the Representative at
50 Broadway, New York, New York 10004, or at such other place as shall be agreed
upon by the Representative and the Company. Such delivery and payment shall be
made at 10:00 a.m. (New York City time) on , 1996 or at such other
time and date as shall be agreed upon by the Representative and the Company, but
not less than three (3) nor more than five (5) full business days after the
effective date of the Registration Statement (such time and date of payment and
delivery being herein called the "Closing Date"). In addition, in the event that
any or all of the Option Securities are purchased by the Underwriters, payment
of the purchase price for, and delivery of certificates for, such Option
Securities shall be made at the above mentioned office of the Representative or
at such other place as shall be agreed upon by the Representative and the
Company on each Option Closing Date as specified in the notice from the
Representative to the Company. Delivery of the certificates for the Firm
Securities and the Option Securities, if any, shall be made to the Underwriters
against payment by the Underwriters, severally and not jointly, of the purchase
price for the Firm Securities and the Option Securities, if any, to the order of
the Company for the Firm Securities and the Option Securities, if any, by New
York Clearing House funds. In the event such option is exercised, each of the
Underwriters, acting severally and not jointly, shall purchase that proportion
of the total number of Option Securities then being purchased which the number
of Firm Securities set forth in Schedule A hereto opposite the name of such
Underwriter bears to the total number of Firm Securities, subject in each case
to such adjustments as the Representative in its discretion shall make to
eliminate any sales or purchases of fractional shares. Certificates for the Firm
Securities and the Option Securities, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Underwriters may request in
writing at least two (2) business days prior to the Closing Date or the relevant
Option Closing Date, as the case may be. The certificates for the Firm
Securities and the Option Securities, if any, shall be made available to the
Representative at such office or such other place as the Representative may
designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to the Closing Date or the relevant Option Closing Date,
as the case may be.
12
<PAGE>
d. On the Closing Date, the Company shall issue and sell to the
Representative Representative's Warrants at a purchase price of $.0001 per
warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 250,000 shares of Common Stock. The Representative's Warrants shall
be exercisable for a period of four (4) years commencing one (1) year from the
effective date of the Registration Statement at a price equaling one hundred
twenty percent (120%) of the initial public offering price of the Shares. The
Representative's Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit [ ] to the Registration Statement.
Payment for the Representative's Warrants shall be made on the Closing Date.
3. Public Offering of the Shares. As soon after the Registration
Statement becomes effective as the Representative deems advisable, the
Underwriters shall make a public offering of the Shares (other than to residents
of or in any jurisdiction in which qualification of the Shares is required and
has not become effective) at the price and upon the other terms set forth in the
Prospectus. The Representative may from time to time increase or decrease the
public offering price after distribution of the Shares has been completed to
such extent as the Representative, in its sole discretion deems advisable. The
Underwriters may enter into one of more agreements as the Underwriters, in each
of their sole discretion, deem advisable with one or more broker-dealers who
shall act as dealers in connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants
and agrees with each of the Underwriters as follows:
a. The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the Shares
by the Underwriters of which the Representative shall not previously have been
advised and furnished with a copy, or to which the Representative shall have
objected or which is not in compliance with the Act, the Exchange Act or the
Rules and Regulations.
b. As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative and confirm the notice in writing,
(i) when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission authority shall enter a
stop order or suspend such qualification at any time, the Company will make
every effort to obtain promptly the lifting of such order.
13
<PAGE>
c. The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifth business day after the effective date of the
Registration Statement.
d. The Company will give the Representative notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
by the Underwriters in connection with the offering of the Securities which
differs from the corresponding prospectus on file at the Commission at the time
the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Rules and
Regulations), and will furnish the Representative with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such prospectus to
which the Representative or Orrick, Herrington & Sutcliffe ("Underwriters'
Counsel") shall object.
e. The Company shall endeavor in good faith, in cooperation with
the Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
f. During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities is required to be delivered under the Act, any event shall
have occurred as a result of which, in the opinion of counsel for the Company or
Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representative promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section 10
of the Act, each such amendment or supplement to be satisfactory to
Underwriters' Counsel, and the Company will furnish to the Underwriters copies
of such amendment or supplement as soon as available and in such quantities as
the Underwriters may request.
14
<PAGE>
g. As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Representative, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the effective date of
the Registration Statement.
h. During a period of seven years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:
i. concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in
the form furnished to the Company's stockholders and certified by the
Company's principal financial or accounting officer;
ii. concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of independent
certified public accountants;
iii. as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
iv. as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD
or any securities exchange;
v. every press release and every material news item or article of
interest to the financial community in respect of the Company, or its
affairs which was released or prepared by or on behalf of the Company;
and
vi. any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the
Representative may request.
During such seven-year period, if the Company has an active subsidiary,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiary are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
i. The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which may
be the same entity as the Transfer Agent) for its Common Stock.
j. The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
15
<PAGE>
k. On or before the effective date of the Registration Statement,
the Company shall provide the Representative with true copies of duly executed,
legally binding and enforceable agreements pursuant to which for a period of 12
months from the effective date of the Registration Statement, each of the
Company's stockholders and holders of securities exchangeable or exercisable for
or convertible into shares of Common Stock agrees that it or he or she (i) will
not directly or indirectly, issue, offer, offer to sell, sell, grant an option
for the purchase or sale of, assign, transfer, pledge, hypothecate or otherwise
encumber or dispose of any shares of Common Stock or securities convertible
into, exercisable or exchangeable for or evidencing any right to purchase or
subscribe for any shares of Common Stock (either pursuant to Rule 144 of the
Rules and Regulations or otherwise) or dispose of any beneficial interest
therein without the prior consent of the Representative and the Company
(collectively, the "Lock-up Agreements") and (ii) waives, during such 12 month
period, any and all rights to request or demand the registration pursuant to the
Act, of any securities of the Company which are registered in the name of or
beneficially owned by it or he or she, respectively. During the 12 month period
commencing with the effective date of the Registration Statement, the Company
shall not, without the prior written consent of the Representative, sell,
contract or offer to sell, issue, transfer, assign, pledge, distribute, or
otherwise dispose of, directly or indirectly, any shares of Common Stock or any
options, rights or warrants with respect to any shares of Common Stock. On or
before the Closing Date, the Company shall deliver instructions to the Transfer
Agent authorizing it to place appropriate legends on the certificates
representing the securities subject to the Lock-up Agreements and to place
appropriate stop transfer orders on the Company's ledgers.
l. Neither the Company, nor any of its officers, directors,
stockholders, nor any of its affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in, stabilization
or manipulation of the price of any securities of the Company.
m. The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
n. The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
o. The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in their letters to be
furnished pursuant to Sections 6(k) and 6(l) hereof.
p. The Company shall cause the Common Stock to be quoted on Nasdaq
and for a period of seven (7) years from the date hereof, use its best efforts
to maintain the Nasdaq quotation of the Common Stock to the extent outstanding.
q. For a period of five (5) years from the Closing Date, the
Company shall furnish to the Representative at the Representative's request and
at the Company's sole expense, (i) daily consolidated transfer sheets relating
to the Common Stock (ii) the list of holders of all of the Company's securities
and (iii) a Blue Sky "Trading Survey" for secondary sales of the Company's
securities prepared by counsel to the Company.
16
<PAGE>
r. As soon as practicable, (i) but in no event more than 5
business days before the effective date of the Registration Statement, file a
Form 8-A with the Commission providing for the registration under the Exchange
Act of the Securities and (ii) but in no event more than 30 days from the
effective date of the Registration Statement, take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions and
Moody's OTC Manual and to continue such inclusion for a period of not less than
seven (7) years.
s. The Company hereby agrees that it will not, for a period of
twenty-four (24) months from the effective date of the Registration Statement,
adopt, propose to adopt or otherwise permit to exist any employee, officer,
director, consultant or compensation plan or similar arrangement permitting (i)
the grant, issue, sale or entry into any agreement to grant, issue or sell any
option, warrant or other contract right (x) at an exercise price that is less
than the greater of the public offering price of the Shares set forth herein and
the fair market value on the date of grant or sale or (y) to any of its
executive officers or directors or to any holder of 5% or more of the Common
Stock, except as provided in subsection (ii) of this subparagraph and
subparagraph (t) of this Section 4; and (ii) the maximum number of shares of
Common Stock or other securities of the Company purchasable at any time pursuant
to options or warrants issued by the Company to exceed the aggregate 700,000
shares reserved for future issuance under the Company's 1996 Stock Incentive
Plan described in footnote one (1) to the "Prospectus Summary - This Offering"
section of the Prospectus; and (iii) the payment for such securities with any
form of consideration other than cash, or (iv) the existence of stock
appreciation rights, phantom options or similar arrangements.
t. The Company hereby agrees that it will not, for a period of
twenty-four (24) months from the effective date of the Registration Statement
without the prior written consent of the Representative, issue, sell, agree or
offer to sell, grant an option for the purchase or sale of, or otherwise
transfer or dispose of (i) more than an aggregate of 700,000 shares of Common
Stock (including securities with equivalent rights as the Common Stock and
shares of Common Stock, or such equivalent securities, issuable upon exercise of
any and all options, warrants and other contract rights and securities
convertible directly or indirectly into shares of Common Stock or such
equivalent securities) or (ii) any such shares of Common Stock (including
securities with equivalent rights as the Common Stock and shares of Common
Stock, or such equivalent securities, issuable upon exercise of any and all
options, warrants and other contract rights and securities convertible directly
or indirectly into shares of Common Stock or such equivalent securities) at a
price less than the higher of the market value of such shares of Common Stock or
equivalent securities at the date of grant (or issuance, as the case may be) or
the initial public offering price of the Shares; provided, however, that the
Company may (A) issue securities in connection with an underwritten public
offering on behalf of the Company, (B) authorize and issue a class or classes of
preferred stock, including convertible preferred stock, (C) issue employee and
director options to purchase up to 200,000 shares of Common Stock (out of the
aforesaid 700,000 shares) at fair market value on the date of grant (even if
such fair market value is less than the initial public offering price of the
shares of Common Stock offered hereby), (D) issue securities upon the exercise
of options, warrants and convertible securities currently outstanding and (E)
effect private placements of shares of Common Stock at a price per share equal
to or exceeding the initial public offering price of the shares of Common Stock
offered hereby (even if less than the fair market value of the shares).
u. Until the completion of the distribution of the Securities, the
Company shall not without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
17
<PAGE>
v. For a period equal to the lesser of (i) seven (7) years from
the date hereof, and (ii) the sale to the public of the Representative's
Securities, the Company will not take any action or actions which may prevent or
disqualify the Company's use of Form S-1 (or other appropriate form) for the
registration under the Act of the Representative's Securities.
w. The Company shall use its best efforts to have the Article
published in a peer review scientific journal or trade or industry publication
and shall further agree to commence and complete any and all additional clinical
studies which are necessary or required to fully update the Prior Clinical
Studies.
5. Payment of Expenses.
a. The Company hereby agrees to pay on each of the Closing Date
and the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement and the Representative's Warrant Agreement, including,
without limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing (including mailing and handling charges),
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreements, and related documents, including
the cost of all copies thereof and of the Preliminary Prospectuses and of the
Prospectus and any amendments thereof or supplements thereto supplied to the
Underwriters and such dealers as the Underwriters may request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of the
Securities including, but not limited to, (x) the purchase by the Underwriters
of the Firm Securities and the Option Securities and the purchase by the
Representative of the Representative's Warrants from the Company, (y) the
consummation by the Company of any of its obligations under this Agreement and
the Representative's Warrant Agreement, and (z) resale of the Firm Securities
and the Option Securities by the Underwriters in connection with the
distribution contemplated hereby, (iv) the qualification of the Securities under
state or foreign securities or "Blue Sky" laws and determination of the status
of such securities under legal investment laws, including the costs of printing
and mailing the "Preliminary Blue Sky Memorandum", the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith, (v) sales and marketing costs and expenses,
including but not limited to costs and expenses in connection with the "road
show", information meetings and presentations, bound volumes and prospectus
memorabilia and "tomb-stone" advertisement expenses, (vi) costs and expenses in
connection with due diligence investigations, including but not limited to the
fees of any independent counsel, expert or consultant retained; provided,
however, that the aggregate fees of any such independent counsel, expert or
consultant retained shall not exceed $10,000, (vii) fees and expenses of the
transfer agent and registrar, (viii) applications for assignments of a rating of
the Securities by qualified rating agencies, (ix) the fees payable to the
Commission and the NASD, and (x) the fees and expenses incurred in connection
with the quotation of the Securities on Nasdaq and any other exchange.
b. If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 6 or Section 12, the Company shall
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of Underwriters' Counsel, less
any amounts already paid pursuant to Section 5(c) hereof.
18
<PAGE>
c. The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to two
percent (2%) of the gross proceeds received by the Company from the sale of the
Firm Securities, $50,000 of which has been paid to date. In the event the
Representative elects to exercise the over-allotment option described in Section
2(b) hereof, the Company agrees to pay to the Representative on the Option
Closing Date (by certified or bank cashier's check or, at the Representative's
election, by deduction from the proceeds of the offering) a non-accountable
expense allowance equal to two percent (2%) of the gross proceeds received by
the Company from the sale of the Option Securities.
6. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date with respect to the Company and each Option Closing Date,
if any, with respect to the Company as if it had been made on and as of the
Closing Date or each Option Closing Date, as the case may be; the accuracy on
and as of the Closing Date or Option Closing Date, if any, of the statements of
the officers of the Company made pursuant to the provisions hereof; and the
performance by the Company on and as of the Closing Date and each Option Closing
Date, if any, of its covenants and obligations hereunder and to the following
further conditions:
a. The Registration Statement shall have become effective not
later than 12:00 P.M., New York time, on the date of this Agreement or such
later date and time as shall be consented to in writing by the Representative,
and, at the Closing Date and each Option Closing Date, if any, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending or contemplated by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Underwriters' Counsel. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, the price of the Shares and
any price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Representative of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
b. The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that the
Prospectus, or any supplement thereto, contains an untrue statement of fact
which, in the Representative's opinion, is material, or omits to state a fact
which, in the Representative's opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
c. On or prior to each of the Closing Date and each Option Closing
Date, if any, the Representative shall have received from Underwriters' Counsel
such opinion or opinions with respect to the organization of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
19
<PAGE>
d. At the Closing Date, the Underwriters shall have received the
favorable opinion of Graubard Mollen & Miller, counsel to the Company, dated the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
i. The Company (A) has been duly organized and is validly existing
as a corporation in good standing under the laws of its jurisdiction,
(B) is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of
any properties or the character of its operations requires such
qualification or licensing, and (C) has all requisite corporate power
and authority, and has obtained any and all necessary authorizations,
approvals, orders, licenses, certificates, franchises and permits of and
from all governmental or regulatory officials and bodies (including,
without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, to own or lease its properties
and conduct its business as described in the Prospectus; the Company is
and has been doing business in material compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises
and permits and all federal, state, local and foreign laws, rules and
regulations; and, the Company has not received any notice of proceedings
relating to the revocation or modification of any such authorization,
approval, order, license, certificate, franchise, or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the business,
operations, condition, financial or otherwise, or the earnings, business
affairs, position, prospects, value, operation, properties, business or
results of operations of the Company. The disclosures in the
Registration Statement concerning the effects of federal, state, local
and foreign laws, rules and regulations on the Company's business as
currently conducted and as contemplated are correct in all material
respects and do not omit to state a fact necessary to make the
statements contained therein not misleading in light of the
circumstances in which they were made.
ii. the Company does not own an interest in any other corporation,
partnership, joint venture, trust or other business entity;
iii. the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "CAPITALIZATION", and the Company is not a
party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options
or other securities, except for this Agreement and the Representative's
Warrant Agreement and as described in the Prospectus. The Securities and
all other securities issued or issuable by the Company conform in all
material respects to all statements with respect thereto contained in
the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; the holders
thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of
any holders of any security of the Company. The Securities to be sold by
the Company hereunder and under the Representative's Warrant Agreement
are not and will not be subject to any preemptive or other similar
rights of any stockholder, have been duly authorized and, when issued,
paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable and conform to the
description thereof contained in the Prospectus; the holders thereof
will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and
sale of the Securities has been duly and validly taken; and the
certificates representing the Securities are in due and proper form. The
Representative's Warrants constitute valid and binding obligations of
the Company to issue and sell, upon exercise thereof and payment
20
<PAGE>
therefor, the number and type of securities of the Company called for
thereby. Upon the issuance and delivery pursuant to this Agreement of
the Firm Securities and the Option Securities and the Representative's
Warrants to be sold by the Company, the Underwriters and the
Representative, respectively, will acquire good and marketable title to
the Firm Securities and the Option Securities and the Representative's
Warrants free and clear of any pledge, lien, charge, claim, encumbrance,
pledge, security interest, or other restriction or equity of any kind
whatsoever. No transfer tax is payable by or on behalf of the
Underwriters in connection with (A) the issuance by the Company of the
Securities, (B) the purchase by the Underwriters and the Representative
of the Firm Securities and the Option Securities and the
Representative's Securities, respectively, from the Company, (C) the
consummation by the Company of any of its obligations under this
Agreement or the Representative's Warrant Agreement, or (D) resales of
the Firm Securities and the Option Securities in connection with the
distribution contemplated hereby.
iv. the Registration Statement is effective under the Act, and, if
applicable, filing of all pricing information has been timely made in
the appropriate form under Rule 430A, and no stop order suspending the
use of the Preliminary Prospectus, the Registration Statement or
Prospectus or any part of any thereof or suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or, to the best of such
counsel's knowledge, threatened or contemplated under the Act;
v. each of the Preliminary Prospectus, the Registration Statement,
and the Prospectus and any amendments or supplements thereto (other than
the financial statements and other financial and statistical data
included therein, as to which no opinion need be rendered) comply as to
form in all material respects with the requirements of the Act and the
Rules and Regulations.
vi. to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement (or required to be filed under the Exchange Act
if upon such filing they would be incorporated, in whole or in part, by
reference therein) and the Prospectus and filed as exhibits thereto, and
the exhibits which have been filed are correct copies of the documents
of which they purport to be copies; (B) the descriptions in the
Registration Statement and the Prospectus and any supplement or
amendment thereto of contracts and other documents to which the Company
is a party or by which it is bound, including any document to which the
Company is a party or by which it is bound, incorporated by reference
into the Prospectus and any supplement or amendment thereto, are
accurate in all material respects and fairly represent the information
required to be shown by Form SB-2; (C) there is not pending or
threatened against the Company any action, arbitration, suit,
proceeding, inquiry, investigation, litigation, governmental or other
proceeding (including, without limitation, those having jurisdiction
over environmental or similar matters), domestic or foreign, pending or
threatened against (or circumstances that may give rise to the same), or
involving the properties or business of the Company which (x) is
required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), (y)
questions the validity of the capital stock of the Company or this
21
<PAGE>
Agreement or the Representative's Warrant Agreement, or of any action
taken or to be taken by the Company pursuant to or in connection with
any of the foregoing; (D) no statute or regulation or legal or
governmental proceeding required to be described in the Prospectus is
not described as required; and (E) there is no action, suit or
proceeding pending, or threatened, against or affecting the Company
before any court or arbitrator or governmental body, agency or official
(or any basis thereof known to such counsel) in which there is a
reasonable possibility of an adverse decision which may result in a
material adverse change in the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company, which
could adversely affect the present or prospective ability of the Company
to perform its obligations under this Agreement or the Representative's
Warrant Agreement or which in any manner draws into question the
validity or enforceability of this Agreement or the Representative's
Warrant Agreement;
vii. the Company has full legal right, power and authority to
enter into each of this Agreement and the Representative's Warrant
Agreement, and to consummate the transactions provided for therein; and
each of this Agreement and the Representative's Warrant Agreement has
been duly authorized, executed and delivered by the Company. Each of
this Agreement and the Representative's Warrant Agreement, assuming due
authorization, execution and delivery by each other party thereto
constitutes a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating
to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as
rights to indemnity or contribution may be limited by applicable law),
and none of the Company's execution or delivery of this Agreement and
the Representative's Warrant Agreement, its performance hereunder or
thereunder, its consummation of the transactions contemplated herein or
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto,
conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes
or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever
upon, any property or assets (tangible or intangible) of the Company
pursuant to the terms of, (A) the certificate of incorporation or
by-laws of the Company, (B) any license, contract, collective bargaining
agreement, indenture, mortgage, deed of trust, lease, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any
other agreement or instrument to which the Company is a party or by
which it is or may be bound or to which any of its properties or assets
(tangible or intangible) is or may be subject, or any indebtedness, or
(C) any statute, judgment, decree, order, rule or regulation applicable
to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including,
without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the
Company or any of its activities or properties.
22
<PAGE>
viii. no consent, approval, authorization or order, and no filing
with, any court, regulatory body, government agency or other body (other
than such as may be required under Blue Sky laws, as to which no opinion
need be rendered) is required in connection with the issuance of the
Firm Securities and the Option Securities pursuant to the Prospectus,
the issuance of the Representative's Warrants, and the Registration
Statement, the performance of this Agreement and the Representative's
Warrant Agreement, and the transactions contemplated hereby and thereby;
ix. the properties and business of the Company conform in all
material respects to the description thereof contained in the
Registration Statement and the Prospectus; and the Company has good and
marketable title to, or valid and enforceable leasehold estates in, all
items of real and personal property stated in the Prospectus to be owned
or leased by it, in each case free and clear of all liens, charges,
claims, encumbrances, pledges, security interests, defects or other
restrictions or equities of any kind whatsoever, other than those
referred to in the Prospectus and liens for taxes not yet due and
payable;
x. the Company is not in breach of, or in default under, any term
or provision of any license, contract, collective bargaining agreement,
indenture, mortgage, installment sale agreement, deed of trust, lease,
voting trust agreement, stockholders' agreement, partnership agreement,
note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company may
be bound or to which the property or assets (tangible or intangible) of
the Company is subject or affected; and the Company is not in violation
of any term or provision of its Articles of Incorporation or By-Laws or
in violation of any franchise, license, permit, judgment, decree, order,
statute, rule or regulation;
xi. the statements in the Prospectus under "THE COMPANY,"
"BUSINESS," "MANAGEMENT," "PRINCIPAL STOCKHOLDERS," "CERTAIN
TRANSACTIONS," "DESCRIPTION OF SECURITIES," and "SHARES ELIGIBLE FOR
FUTURE SALE" have been reviewed by such counsel, and insofar as they
refer to statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions, are correct in all material respects;
xii. the Securities have been accepted for quotation on Nasdaq;
xiii. the persons listed under the caption "PRINCIPAL
STOCKHOLDERS" in the Prospectus are the respective "beneficial owners"
(as such phrase is defined in regulation 13d-3 under the Exchange Act)
of the securities set forth opposite their respective names thereunder
as and to the extent set forth therein;
xiv. except as described in the Prospectus, no person,
corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
xv. except as described in the Prospectus, there are no claims,
payments, issuances, arrangements or understandings for services in the
nature of a finder's or origination fee with respect to the sale of the
Securities hereunder or financial consulting arrangement or any other
arrangements, agreements, understandings, payments or issuances that may
affect the Underwriters' compensation, as determined by the NASD;
23
<PAGE>
xvi. assuming due execution by the parties thereto other than the
Company, the Lockup Agreements are legal, valid and binding obligations
of the parties thereto, enforceable against the party and any subsequent
holder of the securities subject thereto in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or
equitable, and except as rights to indemnity or contribution may be
limited by applicable law);
xvii. except as described in the Prospectus, the Company does not
(A) maintain, sponsor or contribute to any ERISA Plans, (B) maintain or
contribute, now or at any time previously, to a defined benefit plan, as
defined in Section 3(35) of ERISA, and (C) has never completely or
partially withdrawn from a "multiemployer plan";
xviii. The Company is not, and upon the issuance and sale of the
Securities as herein contemplated and the application of the net
proceeds therefrom as described in the Prospectus under the caption "Use
of Proceeds" will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended;
xix. the minute books of the Company have been made available to
the Underwriters and contain a complete summary of all meetings and
actions of the directors and stockholders of the Company since the time
of its incorporation and reflect all transactions referred to in such
minutes accurately in all material respects;
xx. except as set forth in the Prospectus and to the best
knowledge of such counsel, no officer, director or stockholder of the
Company, or any "affiliate" or "associate" (as these terms are defined
in Rule 405 promulgated under the Rules and Regulations) of any of the
foregoing persons or entities has or has had, either directly or
indirectly, (A) an interest in any person or entity which (x) furnishes
or sells services or products which are furnished or sold or are
proposed to be furnished or sold by the Company, or (y) purchases from
or sells or furnishes to the Company any goods or services, or (B) a
beneficial interest in any contract or agreement to which the Company is
a party or by which it may be bound or affected. Except as set forth in
the Prospectus under "CERTAIN TRANSACTIONS," there are no existing
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, or 5% or greater
securityholder of the Company, or any affiliate or associate of any such
person or entity;
xxi. except as set forth in the Prospectus, none of the patents,
patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or
held by the Company, are in dispute so far as known by the Company or
are in any conflict with the right of any other person or entity. The
Company (i) owns or has the right to use, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever, all patents,
trademarks, service marks, trade names and copyrights, technology and
licenses and rights with respect to the foregoing, used in the conduct
of its business as now conducted or proposed to be conducted without
infringing upon or otherwise acting adversely to the right or claimed
right of any person, corporation or other entity under or with respect
to any of the foregoing and (ii) is not obligated or under any liability
whatsoever to make any payment by way of royalties, fees or otherwise to
any owner or licensee of, or other claimant to, any patent, trademark,
service mark, trade name, copyright, know-how, technology or other
intangible asset, with respect to the use thereof or in connection with
the conduct of its business or otherwise;
24
<PAGE>
xxii. the Company owns and has the unrestricted right to use all
trade secrets, know-how (including all other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), inventions, designs, processes, works of authorship,
computer programs and technical data and information (collectively
herein "intellectual property") that are material to the development,
manufacture, operation and sale of all products and services sold or
proposed to be sold by the Company, free and clear of and without
violating any right, lien, or claim of others, including without
limitation, former employers of its employees. To the best of such
counsel's knowledge, no other person or entity has developed trade
secrets or items of technical information similar or identical to those
of the Company;
xxiii. as of the date hereof, the Company is in compliance with
all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act
Relating to Disclosure of Doing Business with Cuba;
xxiv. assuming due execution by the parties thereto other than the
Company, each of the PSS Agreement and the Scantek Agreement are legal,
valid and binding obligations of the parties thereto, enforceable
against the party subject thereto in accordance with its terms (except
as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or
equitable, and except as rights to indemnity or contribution may be
limited by applicable law), except that any and all rights, contractual
or otherwise, of Scantek to maintain a fixed equity interest in the
Company has been terminated and is of no further force or effect; and
xxv. As of the date hereof, (i) the Stockholders' Agreement has
been terminated by the parties to the Stockholders' Agreement and is of
no further force or effect and each such party has waived (in a duly and
validly authorized and executed written agreement) any and all rights
which such party may have under the Stockholders' Agreement in
connection with the public offering contemplated by this Agreement and
any and all transactions described in the Registration Statement and the
Prospectus, (ii) all outstanding shares of Series A Preferred Stock have
been converted into Common Stock on a per share basis pursuant to the
terms of the Stockholders' Agreement and (iii) any outstanding
indebtedness or liability of the Company owed to any officers, directors
or stockholders of the Company or any affiliates thereof (excluding any
outstanding indebtedness or liability of the Company owed to Scantek)
has been converted into shares of Common Stock [describe terms and
conditions] at a conversion price equal to the initial public offering
price per Share as contemplated by the Prospectus.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company, and
representatives of the independent public accountants for the Company, at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and related matters and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or the Prospectus).
25
<PAGE>
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Representative and they are
justified in relying thereon. Any opinion of counsel for the Company shall not
state that it is to be governed or qualified by, or that it is otherwise subject
to, any treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991) or any comparable state accord.
e. At the Closing Date, the Underwriters shall have received the
favorable opinion of King & Spalding, special counsel to the Company, dated the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
i. the statements in the Prospectus under "RISK FACTORS -
Government Regulation" and "BUSINESS - Government Regulation" have been
reviewed by such counsel, and insofar as they refer to statements of
law, descriptions of statutes, licenses, rules or regulations or legal
conclusions, are correct in all material respects, do not contain any
untrue statement of a material fact and do not omit to state a fact
required to be stated therein or necessary to make the statements
contained therein not misleading;
ii. to the best of such counsel's knowledge, after due inquiry,
the Company is in compliance in all material respects with all federal,
state, local and foreign laws, rules, orders, regulations (including,
but not limited to, the Federal Food, Drug and Cosmetic Act and rules
and regulations promulgated thereunder and otherwise by the FDA or
comparable foreign government regulatory agencies) respecting the
production, use, testing, manufacturing and marketing of products,
compounds or drugs;
iii. the Company has obtained all necessary and required
approvals, authorizations, franchises, licenses, orders, permits,
validations and certifications from the FDA and other regulatory
authorities, domestic and foreign, to permit the commencement of its
commercial operations as contemplated in the Prospectus, and none of
such approvals, authorizations, franchises, licenses, orders, permits,
validations and certifications have been revoked, restricted or limited
in any manner and all of such approvals, authorizations, franchises,
licenses, orders, permits, validations and certifications are in full
force and effect; and
iv. to the best of such counsel's knowledge, after due inquiry,
there is no action, suit, proceeding, inquiry, investigation, litigation
or governmental proceeding, domestic or foreign, pending or threatened
(or circumstances that may give rise to the same) involving the
Company's production, use, testing, manufacturing or marketing of any
products, compounds or drugs, which (i) questions the authority of the
Company to produce, use, test, manufacture or market any products,
compounds, or drugs, (ii) questions the completeness or accuracy of data
generated by any clinical trials being conducted by or on behalf of the
Company, (iii) is required to be disclosed in the Prospectus which is
not so disclosed, or (iv) might materially and adversely affect the
condition, financial or otherwise, or the earnings, prospects, value,
operations or business of the Company.
26
<PAGE>
f. At each Option Closing Date, if any, the Underwriters shall
have received the favorable opinions of each of Graubard Mollen & Miller,
counsel to the Company, and King & Spalding, special counsel to the Company,
dated the Option Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel confirming as of Option Closing
Date the statements made by each of Graubard Mollen & Miller and King & Spalding
in their respective opinions delivered on the Closing Date.
g. On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
h. Prior to each of the Closing Date and each Option Closing Date,
if any, (i) there shall have been no adverse change nor development involving a
prospective change in the condition, financial or otherwise, prospects,
stockholders' equity or the business activities of the Company, whether or not
in the ordinary course of business, from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus; (ii) there
shall have been no transaction, not in the ordinary course of business, entered
into by the Company, from the latest date as of which the financial condition of
the Company is set forth in the Registration Statement and Prospectus which is
adverse to the Company; (iii) the Company shall not be in default under any
provision of any instrument relating to any outstanding indebtedness; (iv) the
Company shall not have issued any securities (other than the Securities) or
declared or paid any dividend or made any distribution in respect of its capital
stock of any class and there has not been any change in the capital stock or any
change in the debt (long or short term) or liabilities or obligations of the
Company (contingent or otherwise); (v) no material amount of the assets of the
Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vi) no action, suit or proceeding, at
law or in equity, shall have been pending or threatened (or circumstances giving
rise to same) against the Company, or affecting any of its properties or
business before or by any court or federal, state or foreign commission, board
or other administrative agency wherein an unfavorable decision, ruling or
finding may adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus; and (vii) no stop order shall have been issued under
the Act and no proceedings therefor shall have been initiated, threatened or
contemplated by the Commission.
i. At each of the Closing Date and each Option Closing Date, if
any, the Underwriters shall have received a certificate of the Company signed by
the principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
i. The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date
or the Option Closing Date, as the case may be, and the Company has
complied with all agreements and covenants and satisfied all conditions
contained in this Agreement on its part to be performed or satisfied at
or prior to such Closing Date or Option Closing Date, as the case may
be;
ii. No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued, and no proceedings for
that purpose have been instituted or are pending or, to the best of each
of such person's knowledge, after due inquiry, are contemplated or
threatened under the Act;
27
<PAGE>
iii. The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading and neither the Preliminary Prospectus or
any supplement thereto included any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and
iv. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (a) the Company
has not incurred up to and including the Closing Date or the Option
Closing Date, as the case may be, other than in the ordinary course of
its business, any material liabilities or obligations, direct or
contingent; (b) the Company has not paid or declared any dividends or
other distributions on its capital stock; (c) the Company has not
entered into any transactions not in the ordinary course of business;
(d) there has not been any change in the capital stock or long-term debt
or any increase in the short-term borrowings (other than any increase in
the short-term borrowings in the ordinary course of business) of the
Company; (e) the Company has not sustained any loss or damage to its
property or assets, whether or not insured; (f) there is no litigation
which is pending or threatened (or circumstances giving rise to same)
against the Company or any affiliated party of any of the foregoing
which is required to be set forth in an amended or supplemented
Prospectus which has not been set forth; and (g) there has occurred no
event required to be set forth in an amended or supplemented Prospectus
which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(i) are to such documents as amended and supplemented at the date of such
certificate.
j. By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, as described in the Registration Statement.
k. At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from KPMG Peat Marwick LLP:
i. confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the applicable Rules and Regulations;
ii. stating that it is their opinion that the financial statements
and supporting schedules of the Company included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations
thereunder and that the Representative may rely upon the opinion of KPMG
Price Marwick LLP with respect to the financial statements and
supporting schedules included in the Registration Statement;
iii. stating that, on the basis of a limited review which included
a reading of the latest available unaudited interim financial statements
of the Company, a reading of the latest available minutes of the
stockholders and board of directors and the various committees of the
boards of directors of the Company, consultations with officers and
other employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come
to their attention which would lead them to believe that (A) the
unaudited financial statements and supporting schedules of the Company
included in the Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the Rules and Regulations or are not fairly presented in conformity
with generally accepted accounting principles applied on a basis
28
<PAGE>
substantially consistent with that of the audited financial statements
of the Company included in the Registration Statement, or (B) at a
specified date not more than five (5) days prior to the effective date
of the Registration Statement, there has been any change in the capital
stock or long-term debt of the Company, or any decrease in the
stockholders' equity or net current assets or net assets of the Company
as compared with amounts shown in the December 31, 1995 balance sheet
included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any change
or decrease, setting forth the amount of such change or decrease, and
(C) during the period from January 1, 1996 to a specified date not more
than five (5) days prior to the effective date of the Registration
Statement, there was any decrease in net revenues, net earnings or
increase in net earnings per common share of the Company, in each case
as compared with the corresponding period beginning January 1, 1995,
other than as set forth in or contemplated by the Registration
Statement, or, if there was any such decrease, setting forth the amount
of such decrease;
iv. setting forth, at a date not later than five (5) days prior to
the date of the Registration Statement, the amount of liabilities of the
Company (including a break-down of commercial paper and notes payable to
banks);
v. stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and excluding
any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards)
set forth in the letter and found them to be in agreement;
vi. statements as to such other matters incident to the
transaction contemplated hereby as the Representative may request.
l. At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from KPMG Peat Marwick LLP a letter, dated as
of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm that statements made in the letter furnished pursuant
to subsection (k) of this Section, except that the specified date referred to
shall be a date not more than five days prior to the Closing Date or the Option
Closing Date, as the case may be, and, if the Company has elected to rely on
Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (k) of this
Section with respect to certain amounts, percentages and financial information
as specified by the Representative and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
m. On each of the Closing Date and each Option Closing Date, if
any, there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Firm Securities and Option
Securities.
n. No order suspending the sale of the Firm Securities and Option
Securities in any jurisdiction designated by the Representative pursuant to
subsection (e) of Section 4 hereof shall have been issued on either the Closing
Date or the Option Closing Date, if any, and no proceedings for that purpose
shall have been instituted or shall be contemplated.
o. On or before the Closing Date, the Company shall have executed
and delivered to the Representative, (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit [ ] to the Registration Statement
in final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
29
<PAGE>
p. On or before the Closing Date, the Firm Securities and Option
Securities shall have been duly approved for quotation on Nasdaq, subject to
official notice of issuance.
q. On or before the Closing Date, there shall have been delivered
to the Representative all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
a. The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions in
respect thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), as such are
incurred, to which the Underwriter or such controlling person may become subject
under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained
(i) in any Preliminary Prospectus, the Registration Statement or the Prospectus
(as from time to time amended and supplemented); (ii) in any post-effective
amendment or amendments or any new registration statement and prospectus in
which is included securities of the Company issued or issuable upon exercise of
the Securities; or (iii) in any application or other document or written
communication (in this Section 7 collectively called "application") executed by
the Company or based upon written information furnished by the Company in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
Nasdaq or any other securities exchange; or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading (in the case of the Prospectus, in the
light of the circumstances under which they were made), unless such statement or
omission was made in reliance upon and in strict conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be. The indemnity agreement in
this subsection (a) shall be in addition to any liability which the Company may
have at common law or otherwise.
b. Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
30
<PAGE>
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Firm Securities and the Option Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriters expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in the Prospectus.
c. Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party or parties
of the commencement thereof, the indemnifying party or parties will be entitled
to participate therein, and to the extent it may elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ its
or their own counsel in any such case but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses of one additional
counsel shall be borne by the indemnifying parties. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. Anything in this Section 7 to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
that such consent was not unreasonably withheld. An indemnifying party will not,
without the prior written consent of the indemnified parties, settle, compromise
or consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
or contribution may be sought hereunder (whether or not the indemnified parties
are actual or potential parties to such claim or action), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such claim, action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
31
<PAGE>
d. In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Firm Securities and the Option Securities or (B) if the allocation provided
by clause (A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable considerations.
In any case where the Company is the contributing party and the Underwriters are
the indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Firm Securities
and the Option Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, or by the
Underwriters, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subdivision (d) the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Firm Securities and the Option Securities purchased by the Underwriters
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person, if any, who controls the Company within the meaning of
the Act, each officer of the Company who has signed the Registration Statement,
and each director of the Company shall have the same rights to contribution as
the Company, subject in each case to this subparagraph (d). Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this
subparagraph (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this subparagraph (d), or to
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
32
<PAGE>
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter, the
Company, any controlling person of any Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters and the Representative, as the case may be.
9. Effective Date.
a. This Agreement shall become effective at 10:00 a.m., New York
City time, on the next full business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Firm Securities and the Option Securities to be purchased hereunder shall be
deemed to have been so released upon the earlier of dispatch by the
Representative of telegrams to securities dealers releasing such shares for
offering or the release by the Representative for publication of the first
newspaper advertisement which is subsequently published relating to the Firm
Securities and the Option Securities.
10. Termination.
a. Subject to subsection (b) of this Section 10, the
Representative shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has disrupted, or in the
Representative's opinion will in the immediate future disrupt, the financial
markets; or (ii) if any material adverse change in the financial markets shall
have occurred; or (iii) if trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the NASD, the Boston Stock Exchange, any
over-the-counter market, the Commission or any other government authority having
jurisdiction, or if minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been required on the
over-the-counter market, by the NASD or by order of the Commission or any other
government or other authority having jurisdiction; or (iv) if trading of any of
the securities of the Company shall have been suspended, or any of the
securities of the Company shall have been delisted, on any exchange or in any
over-the-counter market; or (v) if the United States shall have become involved
in a war or major hostilities, or if there shall have been an escalation in an
existing war or major hostilities or a national emergency shall have been
declared in the United States; or (vi) if a banking moratorium has been declared
by a state or federal authority; or (vii) if a moratorium in foreign exchange
trading has been declared; or (viii) if the Company shall have sustained a loss
material or substantial to the Company by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether or
not such loss shall have been insured, will, in the Representative's opinion,
make it inadvisable to proceed with the offering, sale and/or delivery of the
Securities; or (ix) if there shall have been such a material adverse change in
the conditions or prospects of the Company, or such material adverse change in
the general market, political or economic conditions, in the United States or
elsewhere, that, in each case, in the Representative's judgment, would make it
inadvisable to proceed with the offering, sale and/or delivery of the Securities
or (x) if Donald B. Brounstein shall no longer serve the Company in his present
capacity.
33
<PAGE>
b. If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a) the Company shall promptly
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters
(less amounts previously paid pursuant to Section 5(c) above). Notwithstanding
any contrary provision contained in this Agreement, if this Agreement shall not
be carried out within the time specified herein, or any extension thereof
granted to the Representative, by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied (including, without limitation, pursuant to
Section 6 or Section 12) then, the Company shall promptly reimburse and
indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to Section 5(c) above). In addition, the
Company shall remain liable for all Blue Sky counsel fees and disbursements,
expenses and filing fees. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof),
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Substitution of the Underwriters. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the total number of Firm Securities to be purchased on such date, the
non-defaulting Underwriters shall be obligated to purchase the full
amount thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Securities, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriters (or, if such
default shall occur with respect to any Option Securities to be
purchased on an Option Closing Date, the Underwriters may at the
Representative's option, by notice from the Representative to the
Company, terminate the Underwriters' obligation to purchase Option
Securities from the Company on such date).
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a termination
of this Agreement, the Representative shall have the right to postpone the
Closing Date for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements.
34
<PAGE>
12. Default by the Company. If the Company shall fail at the Closing
Date or at any Option Closing Date, as applicable, to sell and deliver the
number of Securities which it is obligated to sell hereunder on such date, then
this Agreement shall terminate (or, if such default shall occur with respect to
any Option Securities to be purchased on an Option Closing Date, the
Underwriters may at the Representative's option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date) without any liability
on the part of any non-defaulting party other than pursuant to Section 5,
Section 7 and Section 10 hereof. No action taken pursuant to this Section shall
relieve the Company from liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative at Keane Securities Co., Inc., 50 Broadway, New York, New York
10004, Attention: Walter D. O'Hearn, Jr. with a copy to Orrick, Herrington &
Sutcliffe, 666 Fifth Avenue, New York, New York 10103, Attention: Lawrence B.
Fisher, Esq. Notices to the Company shall be directed to the Company at 514
Centennial Avenue, Cranford, New Jersey 07016, Attention: Donald B. Brounstein,
President and Chief Executive Officer, with a copy to Graubard Mollen & Miller,
600 Third Avenue, New York, New York 10016, Attention: David A. Miller, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement and the
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
35
<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
HUMASCAN INC.
By:
-----------------------------------
Donald B. Brounstein
President and Chief Executive Officer
Confirmed and accepted as of
the date first above written.
KEANE SECURITIES CO., INC.
For itself and as Representative
of the several Underwriters named
in Schedule A hereto.
By:
--------------------------------
Walter D. O'Hearn, Jr.
Senior Vice President
36
<PAGE>
SCHEDULE A
Number of Shares
Underwriters to be Purchased
- ------------ ----------------
Keane Securities Co., Inc. . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000
=========
37
<PAGE>
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "HUMASCAN, INC.", FILED IN THIS OFFICE ON THE TWENTY-SEVENTH
DAY OF DECEMBER, A.D. 1994, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT
COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
------------------------------------
Edward J. Freel, Secretary of State
[SEAL]
AUTHENTICATION: 7354019
DATE: 12-27-94
<PAGE>
CERTIFICATE OF INCORPORATION
OF
HUMASCAN, INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of
the State of Delaware (particularly chapter 1, Title 8 of the Delaware Code
and the acts amendatory thereof and supplemental thereto, and known,
identified and referred to as the "General Corporation Law of the State of
Delaware"), hereby certifies that:
FIRST: The name of the corporation (hereinafter called the
"corporation") is
HUMASCAN, INC.
SECOND: The address, including street, number, city, and county, of
the registered office of the corporation in the State of Delaware is 32
Loockerman Square, Suite L-100, City of Dover, County of Kent; and the name of
the registered agent of the corporation in the State of Delaware is The
Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is One Thousand (1,000). The par value of each of
such shares is Ten Cents ($.10). All such shares are of one class and are
shares of Common Stock.
FIFTH: The name and the mailing address of the incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
N. S. Truax 32 Loockerman Square, Suite L-100
Dover, Delaware 19904
<PAGE>
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of Section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stock holders or class of stockholders of this corporation, as
the case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may
be, and also on this corporation.
EIGHTH: For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation and
regulation of the powers of the corporation and of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the
affairs of the corporation shall be vested in its Board of
Directors. The number of directors which shall constitute the whole
Board of Directors shall be fixed by, or in the manner provided in,
the By-Laws. The phrase "whole Board" and the phrase "total number of
directors" shall be deemed to have the same meaning, to wit, the total
number of directors which the corporation would have if there were
no vacancies. No election of directors need be by written ballot.
-2-
<PAGE>
2. After the original or other By-Laws of the corporation have
been adopted, amended, or repealed, as the case may be, in
accordance with the provisions of Section 109 of the General
Corporation Law of the State of Delaware, and, after the corporation
has received any payment for any of its stock, the power to adopt,
amend, or repeal the By-Laws of the corporation may be exercised by
the Board of Directors of the corporation; provided, however, that
any provision for the classification of directors of the corporation
for staggered terms pursuant to the provisions of subsection (d) of
Section 141 of the General Corporation Law of the State of Delaware
shall be set forth in an initial By-Law or in a By-Law adopted by
the stockholders entitled to vote of the corporation unless
provisions for such classification shall be set forth in this
certificate of incorporation.
3. Whenever the corporation shall be authorized to issue only
one class of stock, each outstanding share shall entitle the holder
thereof to notice of, and the right to vote at, any meeting of
stockholders. Whenever the corporation shall be authorized to issue
more than one class of stock, no outstanding share of any class of
stock which is denied voting power under the provisions of the
certificate of incorporation shall entitle the holder thereof to the
right to vote at any meeting of stockholders except as the
provisions of paragraph (2) of subsection (b) of section 242 of the
General Corporation Law of the State of Delaware shall otherwise
require; provided, that no share of any such class which is
otherwise denied voting power shall entitle the holder thereof to
vote upon the increase or decrease in the number of authorized
shares of said class.
NINTH: The personal liability of the directors of the corporation is
hereby eliminated to the fullest extent permitted by the provisions of
paragraph (7) of subsection (b) of Section 102 of the General Corporation Law
of the State of Delaware, as the same may be amended and supplemented.
TENTH: The corporation shall, to the fullest extent permitted by the
provisions of Section 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred to
in or covered by said section, and the indemnification provided for herein
-3-
<PAGE>
shall not be deemed exclusive of any other rights to which those indemnified
may be entitled under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ELEVENTH: From time to time any of the provisions of this certificate
of incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and
all rights at any time conferred upon the stockholders of the corporation by
this certificate of incorporation are granted subject to the provisions of
this Article ELEVENTH.
Signed on December 27, 1994.
/s/ N. S. Truax
--------------------------
N. S. Truax
Incorporator
-4-
<PAGE>
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
CORRECTION OF "HUMASCAN, INC.", CHANGING ITS NAME FROM "HUMASCAN, INC. "TO
"HUMASCAN INC.", FILED IN THIS OFFICE ON THE TWENTIETH DAY OF JANUARY, A.D.
1995, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT
COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
[SEAL]
AUTHENTICATION: 7380596
DATE: 01-20-95
<PAGE>
CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF INCORPORATION
OF
HUMASCAN, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation")
is
HUMANSCAN, INC.
2. The Certificate of Incorporation of the corporation, which was
filed by the Secretary of State of Delaware on December 27, 1994, is hereby
corrected.
3. The inaccuracy to be corrected in said instrument is as follows:
Article First contains the name of the corporation spelled with a
comma which is incorrect.
4. The portion of the instrument in corrected form is as follows:
FIRST: The name of the corporation (hereinafter called the
"corporation") is
HUMASCAN INC.
Signed on January 18, 1995.
/s/ Morris C. Brown
----------------------------
Morris C. Brown, Secretary
<PAGE>
State of Delaware
Office of the Secretary of State
----------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "HUMANSCAN INC.", FILED IN THIS OFFICE ON THE TWENTY-FORTH DAY OF
MARCH, A.D. 1995, AT 3:30 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT
COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
[SEAL]
AUTHENTICATION: 7451013
DATE: 03-27-95
<PAGE>
CERTIFICATE OF AMENDMENT OF CERTIFICATE
OF INCORPORATION BEFORE PAYMENT OF
ANY PART OF THE CAPITAL OF
HUMASCAN INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
HUMASCAN INC.
2. The corporation has not received any payment for any of its stock.
3. The certificate of incorporation of the Corporation is hereby amended
by striking out the Fourth Article thereof and by substituting in lieu of said
Article the following new Article:
"FOURTH: The total number of shares of stock which the
corporation shall have authority to issue is Five Million
(5,000,000). The par value of each of such shares is one cent ($.01).
All such shares are of one class and are shares of Common Stock."
4. The amendment of the Certificate of Incorporation of the Corporation
herein certified was duly adopted, pursuant to the provisions of Section 241
of the General Corporation Law of the State of Delaware, by all of the
Directors of the Corporation, who have been elected and qualified.
Signed on March 23, 1995 By /s/ Morris C. Brown
----------------------------
Morris C. Brown, Secretary
<PAGE>
State of Delaware
Office of the Secretary of State
----------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "HUMASCAN INC.", FILED IN THIS OFFICE ON THE SEVENTH DAY OF MAY,
A.D. 1996, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
[SEAL]
AUTHENTICATION: 7940800
DATE: 05-10-96
<PAGE>
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF
HUMASCAN INC.
Pursuant to Section 242 of
the General Corporation Law of
the State of Delaware
------------------------------
Humascan Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
The Certificate of Incorporation of the corporation is
hereby amended by deleting ARTICLE FOURTH of the Certificate of Incorporation
in its present form and substituting therefor a new ARTICLE FOURTH to read as
follows:
FOURTH: The total number of shares of stock which the
corporation shall have authority to issue shall be as follows:
(A) 14,000,000 shares of Common Stock, $.01 par value per
share (the "Common Stock"), the voting powers, full or limited, or no voting
powers, and the designations, preferences and relative, participating,
optional or other special rights, and qualifications, or restrictions of
which Common Stock shall be as set forth in subparagraphs (B) and (C) of this
ARTICLE FOURTH.
(B) 4,175,000 shares of preferred stock to be designated
Series A Convertible Preferred Stock, $.01 par value per share (the "Series A
Preferred Stock"), and the voting powers, full or limited, or no voting
powers, and the designations,
<PAGE>
preferences and relative, participating, optional or other special rights,
and qualifications, or restrictions of the Series A Preferred Stock shall be
as follows:
1. Dividends. The holders of the Series A preferred Stock
and Common Stock, as one class, shall be entitled to receive, for each share
of Common Stock or for each share of Common Stock into which the series A
Preferred Stock in convertible in accordance with the terms hereof, as the
case may be, dividends, in cash or in kind, when and as declared by the Board
of Directors of the Corporation, out of any assets of the Corporation
available for dividends pursuant to the laws of the State of Delaware. "Common
Stock" shall mean the Corporation's Common Stock, par value $0.01 per share,
and, in connection with determining whether the issuance of Common Stock shall
have occurred for purposes of adjusting the Series A Preferred Stock
Conversion Value (as provided in Paragraph 7 hereof), "Common Stock" shall
also include any capital stock of any class of the Corporation hereafter
authorized, which is entitled to unlimited dividend rights.
2. Restrictions on Transfer. Each certificate for shares of
Series A Preferred Stock (and any Common Stock issuable upon the conversion of
the Series A Preferred Stock) shall bear the following legend (and any
additional legend required by applicable law or rule) on the face thereof:
THE SHARES OF SERIES A PREFERRED STOCK HAVE NOT BEEN, AND
THE SHARES OF COMMON STOCK TO BE ISSUED UPON CONVERSION HEREOF, WHEN
ISSUED, WILL NOT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR QUALIFIED UNDER STATE
SECURITIES LAWS AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
UNLESS (A) COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS,
OR (B) THE CORPORATION HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL
ACCEPTABLE TO THE CORPORATION TO THE EFFECT THAT NO REGISTRATION AND
QUALIFICATION IS LEGALLY REQUIRED FOR SUCH TRANSFER.
<PAGE>
3. Limitations on Corporate Action: Financial Statements.
(a) So long as shares of Series A Preferred Stock are outstanding, the
Corporation (except upon the affirmative vote of the holders of a majority of
the then outstanding shares of the Series A Preferred Stock) will not:
(i) issue an equity security (or a debt
instrument convertible into equity or with a participation in the profits of
the Corporation) senior to the Series A Preferred Stock with respect to
dividends or liquidation rights: and
(ii) amend or repeal any provision of, or add
any provision to, the certificate of incorporation (including, without
limitation, increasing or decreasing the authorized number of shares of Series
A Preferred Stock) or by-laws, in each case if such action would adversely
alter the relative voting powers, preferences, rights and privileges of, or
the qualifications, limitations and restrictions provided for the benefit of,
the Series A Preferred Stock, or otherwise adversely alter the powers,
preferences, rights and privileges of or the qualifications, limitations and
restrictions provided for the benefit of, the Series A Preferred Stock.
(b) So long as at least one-third of the shares of Series A
Preferred stock at any time issued by the Corporation on or before June 30,
1996 remain issued and outstanding, the Corporation (except upon the
affirmative vote of a majority of the Required Preferred Stock Directors (as
defined below)) will not:
(i) within any twelve (12) month period pay
any cash dividend with respect to the Common Stock that would exceed twenty
percent (20%) of the Corporation's net income, as determined in accordance with
generally accepted accounting principles, consistently applied, for the
immediately preceding full fiscal year of the Corporation;
(ii) dispose of all or substantially all the
Corporation's assets, or of assets representing more than thirty percent (30%)
of the Corporation's Capital (as defined in subparagraph (iii) below), or
merge or consolidate with another company (other than the merger of a
wholly-owned subsidiary into the Corporation or a consolidation of the
Corporation and a wholly-owned subsidiary);
<PAGE>
(iii) incur indebtedness or permit the existence
of any liens, mortgages or encumbrances on the Corporation's assets in an
amount in excess of thirty percent (30%) of the Corporation's Capital, or make
a capital expenditure involving in excess of thirty (30%) of the
Corporation's Capital or acquire any material amount of securities of another
business entity, or purchase a material amount of the assets of another
entity except in the ordinary course of business. For the purposes of this
paragraph 3, "Capital" means the lesser of (i) the amount raised from the sale
of the Series A Preferred Stock and (ii) the amount equal to the sum of (x)
stockholders' equity and (y) any debt subordinated to the claims of all other
creditors of the Corporation;
(iv) other than with respect to (x) the issuance
of the Series A Preferred Stock and the Common Stock issuable upon conversion
of the Series A Preferred Stock, (y) the Common Stock issuable, and the Common
Stock issuable upon exercise of Warrants (as defined in paragraph 7 (a) below)
issuable, to Scantek Medical, Inc. ("Scantek") pursuant to that certain Second
Amended License Agreement dated as of October 20,1995 (the "License"),
between the Corporation and Scantek, and (z) the Warrants and
the shares of Common Stock issuable upon the exercise of the Warrants
(subclauses (x), (y) and (z) being herein referred to collectively as
"Permitted Issuances"), issue any shares of Common Stock or any other capital
stock of the Corporation, or any Options (as defined below) or any Convertible
Securities (as defined below);
(v) purchase, retire or otherwise acquire,
directly or indirectly, through its subsidiaries or otherwise, any securities
of the Corporation or any Options to purchase securities of the Corporation
other than on terms or in accordance with any agreements hereafter approved
by the Required Preferred Stock Directors; and except with respect to the (A)
purchase and redemption of Series A Preferred Stock in accordance with
paragraph 9 hereof, and (B) the conversion, exercise or exchanges of any
Warrants;
(vi) engage in any transaction with an affiliate
(as such term is defined in Rule 144 promulgated under the Securities Act of
1933, as amended (the "Securities Act"); provided, that for purposes hereof,
such definition shall be deemed to include, without limitation, any holder of
(or any person with the right to vote) more than 10% of the outstanding
capital stock of the Corporation) of the Corporation (excluding entering into
employment agreements, expense reimbursement arrangements for
<PAGE>
employees and/or directors of the Corporation or other similar, nonmaterial,
transactions with the employees of the Corporation);
(vii) except as otherwise provided in paragraph 5,
permit an amendment to its certificate of incorporation or by-laws that would
alter the number of directors constituting its board or directors to other
than nine (9) members;
(viii) appoint, reappoint or change the auditors
of the Corporation;
(ix) adopt, alter or implement any and all
employee compensation, bonus, benefit, stock or similar plans or programs of
the Corporation, other than the 1995 Performance Incentive Plan and the
Nonemployee Director Stock Option Plan adopted by the Corporation as of
October 31, 1995 (subject, however, to the clause (iv) above); and
(x) engage in any business in any industry other
than the development, manufacture, sale and marketing of equipment or products
which indicate thermal activity to be used adjunctively with other clinical
detection methods such as clinical examination and mammography, for the
detection of breast abnormalities.
(c) For purposes hereof, the "Required Preferred Stock
Directors" shall be the three (3) directors elected by the holders of the
outstanding shares of Preferred Stock pursuant to paragraph 5(b) unless or
until such time as the holders of Series A Preferred Stock shall exercise the
Board Election Option (as defined below) in accordance with the procedures set
forth in paragraph 5(c) below, in which event the Required Preferred Stock
Directors shall be the individuals set forth in the Board Election Notice (as
defined below).
4. Preference. (a) In the event of any liquidation,
dissolution, or winding up of the affairs of the Corporation, whether
voluntary or involuntary except as set forth in subparagraph (b) below, the
holders of the Series A Preferred Stock shall be entitled, before any assets
of the Corporation shall be distributed among or paid over to the holders of
the Common Stock, to be paid $2.00 per share plus the amount of any dividend
previously declared with respect to the Series A Preferred Stock and remaining
unpaid. After payment to the holders of the Series A Preferred Stock as set
forth in the
<PAGE>
previous sentence and as provided in subparagraph (b) below, any additional
amount available for distribution to the shareholders of the Corporation
shall, subject to subparagraph (b) below, be shared by the holders of the
Series A Preferred Stock and the Common Stock on a share-for-share basis (with
each share of Series A Preferred Stock being deemed to be equal to the number
of shares of Common Stock (including fractions of a share) into which such
Series A Preferred Stock is convertible immediately prior to the close of
business on the business day fixed for such distribution.
(b) If, upon such liquidation, dissolution or winding up,
the assets of the Corporation distributable as aforesaid among the holders of
the Series A Preferred Stock shall be insufficient to permit the payment to
such holders of at least the amounts provided in subparagraph (a) above, plus
the amount of any unpaid dividend, as aforesaid, the entire assets shall be
distributed pro rata among the holders of the series A Preferred Stock based
upon their respective liquidation preferences as set forth in subparagraph (a)
above. The amounts distributable to the holders of Series A Preferred Stock
under subparagraph (a) above shall be adjusted for subdivisions (by stock
splits, stock dividends or otherwise), combinations (by reverse stock splits
or otherwise) or other recapitalizations of the Series A Preferred Stock and
otherwise in accordance with paragraph 7 below.
(c) Written notices of such liquidation, dissolution or
winding up, stating a payment date and the place where said payments shall be
made, shall be given not less than twenty (20) days prior to the payment date
stated therein, to the holders of record of the Series A Preferred Stock as
provided in paragraph 9 hereof.
(d) The consolidation or merger of the Corporation into or
with any other entity or entities (other than the merger of a wholly-owned
subsidiary into the Corporation or a consolidation of the Corporation and a
wholly-owned subsidiary) and the sale or transfer by the Corporation of all or
substantially all of its assets, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of the
provisions of this paragraph 4, unless a majority of the Required Preferred
Stock Directors shall, prior to the effective date of such consolidation,
merger, sale or transfer, consent in writing or by vote at a meeting to such
transaction as provided in paragraph 3(b) above and to the treatment of such
transaction as other than a liquidation, dissolution or winding up.
<PAGE>
5. Voting Rights. (a) The holders of the Series A Preferred
Stock shall be entitled to notice of any shareholders' meeting and, except as
provided in subparagraph (b) below and as otherwise provided herein, or as
otherwise required by law, to vote upon any matter submitted to shareholders
for a vote as one class together with the holders of Common Stock and shall
have one vote per share, provided, however, that if the number of shares of
Common Stock into which the Series A Preferred Stock is convertible is
increased or decreased as a result of an adjustment of the Preferrred Stock
Conversion Value, all as set forth below, the holders of the Series A
Preferred Stock shall have that number of votes equal to the number of shares
of Common Stock into which the Series A Preferred Stock is convertible.
(b)(i) In additon to the voting rights of the holders of
Seireis A Preferred Stock pursuant to subparagraph 5(a) above, so long as at
least one-third of the shares of Series A Preferred Stock at any time issued
by the Corporation on or before June 30, 1996 remain issued and outstanding,
the holders thereof shall be entitled to vote as a class (exclusive of the
holders of Common Stock or any other security of the Corporation) for the
election of three (3) directors to the Board of Directors of the Corporation;
provided that the Board of Directors shall be comprised of not more than nine
(9) directors.
(ii) The foregoing notwithstanding, so long as at least
one-third of the shares of Series A Preferred Stock at any time issued by the
Corporation on or before June 30, 1996 remain issued and outstanding, from the
date of the initial issuance of Series A Preferred Stock hereunder and until
such time as the Corporation consummates a Qualified Initial Public Offering
(as defined below), the holders of the Series A Preferred Stock shall have the
option, exercisable as set forth in subparagraph (c) below (the "Board
Election Option") to vote as a class (exclusive of the holders of Common Stock
or any other secruity of the Corporation) to determine the size of the Board
of Directors and to elect the entire Board of Directors; provided, that, for
so long as the Exclusive Supply Agreement (as defined in paragraph 7(a)
below) shall not have been terminated or expired in accordance with its terms
and no default with respect thereto has occured and has continued beyond any
applicable cure and/or notice periods, the holders of the Series A Preferred
Stock shall honor the commitment of the Corporation thereunder with respect to
the election of directors.
<PAGE>
(c) The Board Election Option referred to in subparagraph
(b)(ii) may be exercised by the majority vote of the holders of shares of
Series A Preferred Stock then outstanding at any time until such time as the
Corporation consummates a Qualified Initial Public Offering. The exercise of
such option shall be deemed effective automatically upon receipt by the
Corporation of written notice (the "Board Election Notice") signed by the
holders of a majority of the issued and outstanding shares of Series A
Preferred Stock on the date thereof, as of the effective date set forth
therein, (i) stating that a majority of the holders of the outstanding shares
of Series A Preferred Stock have so elected to exercise such option, (ii)
setting forth the number of directors which shall constitute the replacement
Board of Directors, and (iii) setting forth the names of the individuals who
shall be the directors on such board.
6. Conversion. (a) Subject to paragraph 7 hereof, the
Series A Preferred Stock shall be convertible into shares of Common Stock upon
the following terms and conditons:
(i) Each share of Series A Preferred Stock, at
the option of the holder thereof and without any additonal consideration by
the holder therefor, shall be convertible into one share of Common Stock,
subject to the provisions of paragraph 7, at any time after the earlier of the
date which is twelve (12) months from the date any shares of Series A
Preferred Stock are first issued by the Corporation and the date upon which a
registration statement is declared effective under the Securities Act with
respect to a Qualified Initial Public Offering;
(ii) Each share of Series A Preferred Stock,
without the necessity of any action on the part of the holder therof, shall be
automatically converted, subject to the provisions of paragrah 7, into one
share of Common Stock upon a Qualified Initial Public Offering (for purposes
of this paragraph 6(a)(ii), the holders of the Seiries A Preferred Stock
shall be deemed to have surrendered their shares of Series A Preferred Stock
on the date of the closing of such Qualified Initial Public Offering);
(iii) All shares of Common Stock acquired by
conversion of Series A Preferred Stock ("Conversion Shares"), upon issuance,
will be duly authorized, validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with resepct to the issue thereof,
provided that the Corporation shall not be required to pay any tax which may
be payable in respect of any transfer involved in the issuance and delivery
<PAGE>
of any certificate in a name other than that of the holder of the Series A
Preferred Stock which is being converted;
(iv) So long as any shares of Series A Preferred
Stock are outstanding, the Corporation will have at all times authorized, and
reserved (free from pre-emptive rights)for the purpose of issue or transfer
upon exercise of the rights evidenced by the Series A Preferred Stock, a
sufficient number of shares of its Common Stock to provide therfor;
(v) A "Qualified Initial Public Offering" is
the closing of the first sale to the public of Common Stock of the Corporation
in a public offering pursuant to an effective registration statement under
the Securities Act or any similar statute then in effect, in which sale the
aggregate price to the public of the securities sold is at least $10,000,000;
provided that, the foregoing notwithstanding, the aggregate price to the public
required for an initial public offering to constitute a Qualified Initial
Public Offering may be decreased by a majority vote of the Required Preferrred
Stock Directors.
(b) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series A Preferred Stock. In lieu of
any fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to the then effective current market price of
such fractional shares as determined in good faith by the Board of Directors of
the Corporation.
(c) Mechanics of Optional Conversion. Before any holder of
Series A Preferred Stock shall be entitled to convert the same into full
shares of Common Stock pursuant to paragraph 6(a)(i) above, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the Series A Preferred
Stock (or the holder shall notify the Corporation or its transfer agent that
such certificate has been lost, stolen or destroyed and execute an agreement
in form and substance reasonably satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection therewith), and
shall give written notice to the Corporation at such office that he elects to
convert the same and shall state therein his name or the name or names of his
nominees in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Series A Preferred Stock, or to such holder's nominee or nominees, a
<PAGE>
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid, together with cash in lieu of any
fraction of a share. In case the numher of shares of Series A Preferred Stock
represented by the certificate or certificates surrendered exceeds the number
of shares converted, the Corporation shall, upon such conversion, execute and
deliver to the holder, at the expense of the Corporation, a new certificate or
certificates for the number of shares of Series A Preferred Stock represented
by the certificate or certificates surrendered which are not to be converted.
Such conversion shall be deemed to have been made immediately prior to the
close of business on the date of such surrender of the shares of Series A
Preferred Stock to be converted (or the agreement referred to above), and the
person or persons entitled to receive the shares of Common Stock issuable
upon conversion shall at that time cease to be a holder of the shares of Series
A Preferred Stock for any purpose whatsoever and shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on
such date.
7. Anti-Dilution Provisions. Upon each adjustment of the
Preferred Stock Conversion Value, the holders of Series A Preferred Stock shall
thereafter be entitled to receive upon conversion of each share of Series A
Preferred Stock (utilizing the Preferred Stock Conversion Value resulting from
such adjustment) the number of shares of Common Stock obtained by dividing the
Preferred Stock Conversion Value in effect immediately prior to such
adjustment by the Preferred Stock Conversion Value resulting from such
adjustment. "Preferred Stock Conversion Value" shall mean the initial
Preferred Stock Conversion Value of $2.00 per share of Common Stock, as
adjusted from time to time as provided herein.
(a) Preferred Stock Conversion Value Adjustments. If and
whenever after the date hereof the Corporation shall issue or sell any shares
of its Common Stock (except for Permitted Issuances) for a consideration per
share less than the Preferred Stock Conversion Value in effect immediately
prior to the time of such issue or sale, or shall be deemed under the
provisions of this paragraph 7 to have effected any such issuance or sale,
then, forthwith upon such issue or sale or deemed issue or sale, the Preferred
Stock Conversion Value shall be reduced to a price equal to (calulated to the
nearest $0.00001):
the price determined by dividing (i) an amount equal to the sum of
(A) the number of shares of Common Stock
<PAGE>
outstanding immediately prior to such issue or sale multiplied by
the then existing Preferred Stock Conversion Value and (B) the
aggregate consideration, if any, received by the Corporation upon
such issue or sale by (ii) the total number of shares of Common
Stock outstanding immediately after such issue or sale;
Notwithstanding the foregoing, no adjustment of the
Preferred Stock Conversion Value shall be made in an amount less than $0.00001
per share, but any such lesser adjustment shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment which
together with any adjustments so carried forward shall amount to $0.00001 per
share or more.
"Warrants" as used herein shall mean any options or
warrants issued by the Corporation for the purchase of Common stock (i) to
holders of Series A Preferred Stock on the date of issuance of the Series A
Preferred Stock, (ii) to the Bridge Note Holders upon conversion of the Bridge
Notes to shares of Series A Preferred Stock for up to 70,000 shares of Common
Stock at an exercise price of $2.20 per share, (iii) to Burnham Securities
Inc. for up to 533,333 shares of Common Stock at an exercise price of $2.20
per share, (iv) to certain officers, employees and consultants for up
to 225,000 shares of Common Stock at an exercise price of no less than $4.00
per share, (v) to Physician Sales & Service, Inc. ("PSS") for up to 166,667
shares of Common Stock at an exercise price of $3.00 per share issued pursuant
to that certain Exclusive Supply and Distribution Agreement dated February,
1996 (the "Exclusive Supply and Distribution Agreement"), between PSS and the
Corporation, (vi) to Scantek pursuant to the License, (vii) to Udi Toledano
pursuant to that certain letter agreement dated March 19, 1996 between Mr.
Toledano and the Corporation for up to 107,500 shares of Common Stock at an
exercise price of $2.20 per share, (viii) to Herbert V. Turk pursuant to that
certain letter agreement dated March 19, 1996 between Mr. Turk and the
Corporation for up to 107,500 shares of Common Stock at an exercise price of
$2.20 per share, (ix) to Smith Barney Worldwide Securities, Ltd. and Smith
Barney Worldwide Fund, N.V. or their designee for 50,000 shares of Common Stock
at an exercise price of $2.20 per share, and (x) to the holders of the Secured
Senior Promissory Notes of the Corporation due April 30, 1996 for an aggregate
of 299,000 shares of Common Stock at an exercise price of $.50 per share.
<PAGE>
For the purposes of this paragraph 7(a), the
following subparagraphs (a)(i) to (a)(vii) inclusive, shall also be
applicable:
(i) In the event that at any time the Corporation
shall in any manner grant (directly, by assumption in a merger or otherwise)
any rights to subscribe for or to purchase, or any options or warrants (except
for Permitted Issuances) for the purchase of, (x) Common Stock or (y) any
stock or securities convertible into or exchangeable for Common Stock (such
rights or options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible Securities"),
or shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options, whether or not such Options or
the right to convert or exchange any such Convertible Securities are
immediately exercisable, and whether or not the price per share for which
Common Stock is issuable upon the exercise of such Options or upon conversion
or exchange of such Convertible Securities (determined by dividing (A) the
total amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon the exercise
of all such Options, plus, in the case of any such Options that relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (B) the total
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities issuable
upon the exercise of such Options) shall be less than the Preferred Stock
Conversion Value in effect immediately prior to the time of the granting of
such Options, then the total number of shares of Common Stock issuable upon
the exercise of such Options or upon conversion or exchange of the total
amount of such Convertible Securities issuable upon the exercise of such
Options (as of the date of granting such Options) shall be deemed to be
outstanding and to have been issued for such price per share. Except as
otherwise provided in subparagraph (a)(iii), no further adjustment of the
Preferred Stock Conversion Value shall be made upon the actual issue of such
Common Stock or of such Convertible Securities upon exercise of such Options
or upon the actual issue of such Common Stock upon conversion or exchange of
such Convertible Securities.
(ii) In the event that the Corporation shall in
any manner issue (directly, by assumption in a merger or otherwise) or sell
any Convertible Securities
<PAGE>
(other than pursuant to the exercise of Options to purchase such Convertible
Securities covered by subparagraph (a)(i)), or shall fix a record date for the
determination of holders of any class of securities entitled to receive any
such Convertible Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and whether or not the price per share
for which Common Stock is issuable upon such conversion or exchange or
exchange (determined by dividing (A) the total amount received or receivable
by the Corporation as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereof, by
(B) the total maximum number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities) shall be less than
the Preferred Stock Conversion Value in effect immediately prior to the time
of such issue, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible Securities) be
deemed to be outstanding and to have been issued for such price per share,
provided that, except as otherwise provided in subparagraph (a)(iii), no
further adjustment of the Preferred Stock Conversion Value shall be made upon
the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.
(iii) In connection with any change in, or the
expiration or termination of, the purchase rights under any Option or the
conversion or exchange rights under any Convertible Securities, the following
provisions shall apply:
(A) If the purchase price provided for in any
Option referred to in subparagraph (a)(i), the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities
referred to in subparagraph (a)(i) or (a)(ii), or the rate at which any
Convertible Securities referred to in subparagraph (a)(i) or (a)(ii) are
convertible into or exchangeable for Common Stock shall change at any time
(other than under or by reason of provisions designed to protect against
dilution), then the Preferred Stock Conversion Value in effect at the time of
such change shall forthwith be increased or decreased to the Preferred Stock
Conversion Value that would be in effect immediately after such change if (a)
the adjustments that were made upon the issuance of such Options or
Convertible Securities had been made upon the basis of (and taking into account
the total consideration received for) (i) the issuance at that time of the
Common Stock, if any, actually issued upon the exercise of any such Options or
upon the conversion or exchange of any such Convertible Securities before such
change, and (ii)
<PAGE>
the issuance at that time of all such Options or Convertible Securities, with
terms and provisions reflecting such change that are still outstanding after
such change, and (b) the Preferred Stock Conversion Value as adjusted pursuant
to clause (a) preceding had been used as the basis for the adjustments
required hereunder in connection with all other issues or sales of Common
Stock, Options or Convertible Securities by the Corporation subsequent to the
issuance of such Options or Convertible Securities.
(B) On the partial or complete expiration of any
Options or termination of any right to convert or exchange Convertible
Securities which have not been fully exercised, the Preferred Stock
Conversion Value then in effect hereunder shall be forthwith increased or
decreased to the Preferred Stock Conversion Value that would be in effect
at the time of such expiration or termination if (a) the adjustments that
were made upon the issuance of such Options or Convertible Securities had
been made upon the basis of (and taking into account the total
consideration received for) (i) the issuance at that time of the Common
Stock, if any, actually issued upon the exercise of such Options or upon
the conversion or exchange of such Convertible Securities before such
expiration or termination, and (ii) the issuance at that time of only those
such Options or Convertible Securities that remain outstanding after such
expiration or termination, and (b) the Preferred Stock Conversion Value
as adjusted pursuant to clause (a) preceding had been used as the basis
for adjustments required hereunder in connection with all other issues or
sales of Common Stock, Options or Convertible Securities by the
Corporation subsequent to the issuance of such Options or Convertible
Securities.
(C) If the purchase price provided for in any Option
referred to in subparagraph (a)(i) or the rate at which any Convertible
Securities referred to in subparagraph (a)(i) or (a)(ii) are convertible
into or exchangeable for Common Stock shall be reduced at any time under
or by reason of provisions with respect thereto designed to protect
against dilution, and the event causing the reduction is one that did not
also require an adjustment in the Preferred Stock Conversion Value under
other provisions of this paragraph 7 (a), then in case of the delivery of
shares of Common Stock upon the exercise of any such Option or upon
conversion or exchange of any such Convertible Securities, the Preferred
Stock Conversion Value then in effect hereunder shall forthwith be
adjusted to such amount as would have obtained if such Option or
Convertible Securities had never been issued and if the adjustments made
upon the issuance of such Option or Convertible Securities had been made
upon the basis of the issuance of (and taking into account the total
consideration received for) the shares of Common Stock
<PAGE>
delivered as aforesaid; provided that no such adjustment shall be made unless
the Preferred Stock Conversion Value then in effect would be reduced thereby.
(D) if a record date for the issuance of any
Options or Convertible Securities shall have been fixed and such Options or
Convertible Securities are not issued on the date fixed therefor, the
adjustment previously made as provided in subparagraphs (a)(i) and (ii) above
to the relevant Preferred Stock Conversion Value which becomes effective on
such record date shall be cancelled as of the close of business on such record
date, and thereafter such Preferred Stock Conversion Value shall be adjusted
pursuant to subparagraph (a)(i) or (ii), as the case may be, as of the actual
date of their issuance.
(iv) In the event that the Corporation declares
a dividend or makes any other distribution upon any stock of the Corporation
payable in Common Stock, Options or Convertible Securities, any Common Stock.
Options or Convertible Securities, as the case may be, issuable in payment of
such dividend or distribution shall be deemed to have been issued or sold
without consideration. In the event the Corporation shall grant the holders of
Common Stock the right to subscribe for or purchase shares of Common Stock or
any other security, whether pursuant to pre-emptive rights set forth in the
Certificate of Incorporation of the Corporation or in an agreement or
otherwise, the Corporation, from time to time, shall be deemed to have
received the amount actually received upon exercise of the rights.
(v) For purposes of this paragraph 7(a), the
amount of consideration received by the Corporation in connection with the
issuance or sale of Common Stock, Options or Convertible Securities shall be
determined in accordance with the following:
(A) In the event that shares of Common Stock,
Options or Convertible Securities are issued or sold for cash, the
consideration received therefor shall be deemed to be the amount payable to the
Corporation therefor, after deduction therefrom of any dividends or interest
accrued in respect thereof and any underwriting commissions or concessions or
discounts paid or allowed by the Corporation in connection therewith.
<PAGE>
(B) In the event that shares of Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of the consideration other than cash payable to the
Corporation shall be deemed to be the fair value of the consideration (after
deduction of any dividends or interest accrued in respect thereof and any
underwriting commissions or concessions or discounts paid or allowed by the
Corporation in connection therewith) as determined in good faith by the Board
of Directors, including, without limitation, cancellation or satisfaction of
amounts payable to the purchaser for accrued interest or accrued dividends on
obligations or securities other than the Common Stock Options or Convertible
Securities then being issued.
(C) The amount of consideration deemed to be
received by the Corporation pursuant to the foregoing provisions of this
subparagraph (a)(v) upon any issuance or sale, pursuant to an established
compensation plan of the Corporation, to directors, officers or employees of
the Corporation in connection with their employment, of shares of Common Stock,
Options or Convertible Securities, shall be increased by the amount of any tax
benefit realized by the Corporation as a result of the issuance or sale, the
amount of the tax benefit being the amount by which the federal or state
income or other tax liability of the Corporation shall be reduced by reason of
any deduction or credit in respect of the issuance and/or sale.
(D) In the event that shares of Common Stock,
Options or Convertible Securities are issued in connection with any merger in
which the Corporation is the surviving corporation, the amount of
consideration therefor shall be deemed to be the fair value of such portion of
the assets and business of the nonsurviving corporation as shall be
attributable to the Common Stock, Options or Convertible Securities, as the
case may be, as determined in good faith by the Board of Directors.
(E) In the event that Options shall be issued
in connection with the issue and sale of other securities of the Corporation,
together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options shall be deemed to have been issued without consideration.
(F) In the event of consolidation or merger
of the Corporation in which stock or securities of another corporation are
issued in exchange for Common Stock of the Corporation or in the event of any
sale of all or substantially all of the assets
<PAGE>
of the Corporation for stock or other securities of any corporation, the
Corporation shall be deemed to have issued a number of shares of its Common
Stock for stock or securities of the other corporation computed on the basis
of the actual exchange ratio on which the transaction was predicated and for a
consideration equal to the fair market value on the date of the transaction of
such stock or securities of the other corporation, and if the
calculation results in adjustment of the Preferred Stock Conversion Value, the
determination of the number of shares of common Stock receivable upon
conversion of the Series A Preferred stock immediately prior to such merger,
consolidation or sale, for purposes of paragraph 7(c), shall be made after
giving effect to the adjustment of the Preferred Stock Conversion Value;
provided that no such adjustment shall be made unless the Preferred Stock
Conversion Value then in effect shall be reduced thereby.
(vi) (A) In the event the Corporation fixes a
record date with respect to the holders of its Common Stock for the purpose of
entitling them (i) to receive a dividend or other distribution payable in
Common Stock, Options or Convertible Securities or (ii) to subscribe for or
purchase Common Stock, Options or Convertible Securities (whether pursuant to
pre-emptive rights granted by the Certificate of Incorporation of the
Corporation, by agreement, or otherwise), then the record date shall be deemed
to be the date of the issue or sale of the shares of common Stock deemed to
have been issued or sold upon the declaration of the dividend or the making of
the distribution or the date of the granting of the right of subscription or
purchase, as the case may be.
(B) If such record date shall have been fixed
and such dividend or distribution shall not have been paid or right of
subscription or purchase fulfilled on the date fixed therefor, the adjustment
previously made to the relevant Preferred Stock Conversion Value which became
effective on such record date shall be cancelled as of the close of business
on such record date, and thereafter such Preferred Stock Conversion Value
shall be adjusted as provided herein as of the time of actual payment of such
dividend, distribution or subscription of Common Stock, Options or Convertible
Securities.
(vii) The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation or any subsidiary thereof, and the disposition
of any such shares shall be considered an issue or sale of Common Stock for
the purpose of this paragraph 7(a).
<PAGE>
(b) Stock Splits and Reverse Splits. In the
event the Corporation subdivides its outstanding shares of Common Stock into a
greater number of shares, the Preferred Stock Conversion Value in effect
immediately prior to the subdivision shall be proportionally reduced and the
number of Conversion Shares purchaseable pursuant to each share of Series A
Preferred Stock immediately prior to the subdivision shall be proportionately
increased, and conversely, in the event that the outstanding shares of Common
Stock of the Corporation shall at any time be combined into a smaller number
of shares, the Preferred Stock Conversion Value in effect immediately prior to
the combination shall be proportionately increased and the number of Conversion
Shares purchaseable upon the conversion of each share of Series A Preferred
Stock immediately prior to the combination shall be proportionately reduced.
Except as provided in this paragraph 7(b), no adjustment in the Preferred
Stock Conversion Value and no change in the number of Conversion Shares
purchasable shall be made under this paragraph 7 as a result, or by reason, of
any subdivision or combination.
(c) Reorganizations and Asset Sales. If any
capital reorganization or reclassification of the capital stock of the
Corporation, or any consolidation or merger of the Corporation with another
corporation, or the sale of all or substantially all its assets to another
corporation, shall be effected in such a way that holders of Common Stock
shall be entitled to receive stock, securities or assets with respect to, or
in exchange for, Common Stock (and which shall not constitute a dividend
subject to paragraph 7(c)), then the following provisions shall apply:
(i) Subject to paragraph 4(d) above, as a
condition of the reorganization, reclassification, consolidation, merger or
sale (except as otherwise provided below in this paragraph 7(c), lawful and
adequate provisions shall be made whereby each holder of Series A Preferred
Stock shall thereafter have the right to receive upon the terms and conditions
specified herein and in lieu of the Conversion Shares immediately theretofore
receivable upon the exercise of the rights represented by the Series A
Preferred Stock, the shares of stock, securities or assets as may be issued or
payable with respect to, or in exchange for, a number of outstanding shares of
the Common Stock equal to the number of Conversion Shares immediately
theretofore so receivable had the reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case
appropriate provision shall be made with respect to the rights and interests
of such holder to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Preferred Stock Conversion Value
<PAGE>
and of the number of shares receivable upon the exercise) shall thereafter be
applicable, as nearly as may be practicable, in relation to any shares of
stock, securities or assets thereafter deliverable upon the conversion of
Series A Preferred stock (including an immediate adjustment, by reason of the
consolidation or merger, of the Preferred Stock Conversion Value to the value
for the Common Stock reflected by the terms of the consolidation or merger if
the value so reflected is less than the Preferred Stock Conversion Value in
effect immediately prior to the consolidation or merger.
(ii) In the event of a merger or consolidation
of the corporation with or into another corporation as a result of which a
number of shares of Common Stock of the surviving corporation are greater or
lesser than the number of shares of Common Stock of the Corporation
outstanding immediately prior to the merger or consolidation are issuable
to holders of Common Stock of the Corporation, then the Preferred Stock
Conversion Value in effect immediately prior to the merger or consolidation
shall be adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock of the Corporation.
8. Put Option. (a) At the option of the holders
of Series A Preferred Stock, upon the occurrence of either of the events set
forth in the next succeeding sentence, each such holder shall have the right
and option (the "Put Option") for a period of twelve (12) months thereafter to
sell to the Corporation and require the Corporation to redeem, and, if any such
holder shall exercise such Put Option, the Corporation shall have the
obligation to redeem and repurchase the Series as Preferred Stock held by any
such holder at the Preferred Stock Conversion Value in effect on the date
hereof plus any accrued and unpaid dividends thereon to the date of such
redemption (the "Put Price"). The Put Option may be exercised by any holder of
Series A Preferred Stock (i) upon the death of Donald Brounstein, or (ii) in
the event a Qualified Initial Public Offering is not completed on or prior to
the third anniversary of the date on which shares of Series A Preferred Stock
are first issued by the Corporation.
(b) The Corporation will maintain in effect
until the earlier to occur of (x) the date on which no Series A Preferred
stock shall remain outstanding, or (y) the date which is twelve (12) months
following the death of Donald Brounstein, for the exclusive benefit of the
holders of the Series A Preferred Stock, and pay all premiums with respect to,
insurance on the life of Donald Brounstein in an amount sufficient to redeem
all outstanding Series A Preferred Stock at a redemption price equal to the
<PAGE>
Preferred Stock Conversion Value in effect on the date hereof. In the event of
the death of Donald Brounstein, the Corporation shall hold all proceeds of
such policy in trust for the benefit of the holders of Series A Preferred
Stock for a period of twelve (12) months or until such earlier date as no
Series A Preferred Stock shall be outstanding; provided that, notwithstanding
the foregoing, upon the written direction of either the Required Preferred
Stock Directors or the holders of more than fifty percent (50%) of the shares
of Series A Preferred Stock then outstanding, the Corporation shall direct the
insurance company with which such policy is held to place the proceeds
thereof, when and as disbursed in accordance with the terms thereof, with such
banking, securities or other financial institution as the Required Preferred
Stock Directors or such holders of Series A Preferred Stock, as the case may
be, in such notice to the Corporation shall direct.
(c) The Put Option shall be exerciseable by
notice in writing signed by the holder of Series A Preferred Stock exercising
such right and delivered to the Corporation in accordance with paragraph 9
hereof advising the Corporation of such holder's election to exercise the Put
Option. The exercise of the Put Option by any such holder shall constitute an
unconditional and irrevocable commitment by such holder, on the one hand, and
the Corporation, on the other hand, to sell and purchase, the Series A
Preferred Stock held by such holder. Any closing in connection with the
exercise of the Put Option hereunder shall take place at the offices of the
Corporation, or at such other place as such holder and the Corporation shall
agree, and shall occur no less than two (2) weeks and no more than thirty (30)
days after the date of any written notice of such holder's intention to
exercise the Put Optional. The Put Price shall be payable at the closing by
certified or official bank check made out to the order of such holder. Upon
any such closing of the Put Option, the obligations of the Corporation and the
rights of the holder exercising such Put Option with respect to such shares of
Series A Preferred Stock purchased by the Corporation pursuant thereto shall
terminate.
9. Notices. Any notice required or given hereunder shall be
mailed by first-class mail, postage prepaid or by facsimile, by hand or by
recognized courier (a) if to the Corporation, at its main offices in Cranford,
New Jersey and (b) if to a shareholder, at the shareholder's address appearing
in the records of the Corporation, and shall be deemed given five days after
such mailing if sent by mail, or upon receipt if sent by facsimile or courier.
<PAGE>
10. No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation or through an by reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Corporation
but will at all times in good faith assist in the carrying out of all the
provisions hereof and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the holders of the Series A
Preferred Stock against impairment.
11. Headings. The headings herein are for purposes of
reference only and shall not affect the meaning or construction of any of the
provisions hereof.
12. General. Notwithstanding anything to the contrary
contained herein, no provision contained herein shall be deemed to limit,
restrict, cancel or otherwise impair any rights of the holders of the Series A
Preferred Stock as provided for by the General Corporation Law of the State of
Delaware.
(C) 1,825,000 shares in additional series of preferred stock as the
Board of Directors of the Corporation by vote of a majority of its members,
subject to limitations prescribed by law and the provisions of Section (B)3(a)
of this Article FOURTH, may designate for issuance by resolution or
resolutions thereof establishing and setting forth the number of shares to be
included in each such series, the voting powers, full or limited, or no voting
powers, and the designations, preferences and relative, participating, option
or other special rights, and qualifications, or restrictions of such
additional series of preferred stock.
The amendment to the Certificate of Incorporation of the
Corporation set forth in this Certificate of Amendment of Certificate of
Incorporation has been duly adopted in accordance with the applicable
provisions of Section 242 of the General Corporation Law of the State of
Delaware, (a) the Board of Directors of the Corporation having duly adopted a
resolution setting forth such amendment and declaring its advisability by
<PAGE>
unanimous Written Consent of the Board of Directors in accordance with Section
141(f) of the General Corporation Law of the State of Delaware, and (b) the
stockholders of the Corporation having duly adopted a resolution setting forth
and approving such amendment by Written Consent of a majority of the
stockholders of the Corporation in accordance with Section 228 of the General
Corporation Law of the State of Delaware, and written notice of such action
has been given as provided in Section 228(d) of the General Corporation Law of
the State of Delaware.
* * *
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this
Certificate of Amendment of Certificate of Incorporation as of the 6th day of
May, 1996.
HUMASCAN INC.
By____________________________
Name:
Title:
ATTEST:
______________________________
Name:
Title:
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
HumaScan Inc. (the "Company"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
does hereby certify:
FIRST: That the Certificate of Incorporation of the Corporation is
hereby amended by deleting Paragraph A of Article FOURTH of the Certificate of
Incorporation of the Corporation and substituting therefor a new Paragraph A of
Article FOURTH to read as follows:
(A) 25,000,000 shares of Common Stock, $.01 par value per share (the
"Common Stock"), the voting powers, full or limited, or no voting
powers, and the designations, preferences and relative, participating,
optional or other special rights, and qualifications, or restrictions
of which Common Stock shall be as set forth in subparagraphs (B) and
(C) of this Article FOURTH.
SECOND: That Article FOURTH of the Company's Certificate of
Incorporation is hereby amended by addition of the following provision:
On the date this amendment is filed with the Secretary of State of the
State of Delaware (the "Effective Date"), the authorized shares of the
Company's Common Stock, par value $.01 per share, and each share of
such Common Stock issued and outstanding immediately prior to the
Effective Date (the "Old Common Stock"), shall automatically and
without any action on the part of the holder thereof be reclassified as
and changed into three-fourths (3/4) of a share of the Company's Common
Stock, par value equal to the par value of the Old Common Stock (the
"New Common Stock"). No fractional shares of New Common Stock will be
issued as a result of the foregoing change in capitalization; in lieu
thereof, any fractional shares of New Common Stock resulting from such
change shall be rounded up to the nearest whole share of New Common
Stock. Each holder of a certificate or certificates which immediately
prior to the Effective Date represented outstanding shares of Old
Common Stock (the "Old Certificates," whether one or more) shall be
entitled to receive upon surrender of such Old Certificates to the
Company's transfer agent for cancellation, a certificate or
certificates (the "New Certificates," whether one or more) representing
the number of whole shares of the New Common Stock into which and for
which the shares of the Old Common Stock formerly represented by such
Old Certificates so surrendered, are reclassified under the terms
hereof. From and after the Effective Date, Old Certificates shall
represent only the right to receive New Certificates pursuant to the
provisions hereof. No certificates or scrip representing fractional
share interests in New Common Stock will be issued, and no such
fractional share interest will entitle the holder thereof to vote, or
to any rights of a shareholder of the Company. If any New Certificate
is to be issued in a name other than that in which the Old Certificates
surrendered for exchange are issued, the Old Certificates so
surrendered shall be properly endorsed and otherwise in proper form for
transfer, and the person or persons requesting such exchange shall
<PAGE>
affix any requisite stock transfer tax stamps to the Old Certificates
surrendered, or provide funds for their purchase, or establish to the
satisfaction of the transfer agent that such taxes are not payable.
From and after the Effective Date the amount of capital represented by
the shares of the New Common Stock into which and for which the shares
of the Old Common Stock are reclassified under the terms hereof shall
be the same as the amount of capital represented by the shares of Old
Common Stock so reclassified, until thereafter reduced or increased in
accordance with applicable law.
THIRD: That in lieu of a meeting and vote of stockholders, stockholders
representing more than a majority of the outstanding voting stock of the
Corporation and more than a majority of the outstanding Common Stock of the
Corporation have given written consent to said amendment in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware and written notice of the adoption of the amendment has been given as
provided in Section 228 of the General Corporation Law of the State of Delaware
to every stockholder entitled to such notice.
FOURTH: That the aforesaid amendment was duly adopted in accordance
with applicable provisions of Sections 242 and 228 of the General Corporation
Law of the State of Delaware.
IN WITNESS WHEREOF, said corporation has caused this
certificate to be signed by Donald B. Brounstein, its President, and attested by
Kenneth S. Hollander, its Secretary, this 23rd day of July, 1996.
HUMASCAN INC.
By: /s/ Donald B. Brounstein
---------------------------------------
Donald B. Brounstein, President
ATTEST:
By: /s/ Kenneth S. Hollander
-----------------------------------
Kenneth S. Hollander, Secretary
<PAGE>
COMMON STOCK COMMON STOCK
- ---------------- ----------------
| NUMBER | LOGO HUMASCAN(TM) INC. | SHARES |
| | SM | |
| HS | | |
| | INCORPORATED UNDER THE LAWS OF THE | |
- --------------- STATE OF DELAWARE ----------------
THIS IS TO CERTIFY THAT CUSIP 444882 10 4
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01, OF
----------------------------HUMASCAN INC.----------------------------
transferable on the books of the corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed.
This Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
Witness the facsimile seal and facsimile signatures of its duly authorized
officers.
Dated:
CERTIFICATE OF STOCK
Countersigned and Registered
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, N.J.)
By Transfer Agent
and Registrar
Authorized Officer
HUMASCAN INC.
CORPORATE
SECRETARY SEAL PRESIDENT
1994
DELAWARE
<PAGE>
HumaScan Inc.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -______Custodian_______
TEN ENT - as tenants by the (Cust) (Minor)
entireties
JT TEN - as joint tenants with right under Uniform Gifts to
of survivorship and not as Minors Act___________
tenants in common (State)
Additional abbreviations may also be used though not in the above list.
For value received,....................hereby sell, assign and transfer unto
PLEASE INSERT SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
| |
| |
- --------------------------------------........................................
..............................................................................
Please print or typewrite name and address including postal zip code of assignee
...............................................................................
...............................................................................
.........................................................................Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint.............................................
...............................................................................
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated,................................
.........................................
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.
SIGNATURE(S) GUARANTEED:.......................................................
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
- ---------------- ----------------
| NUMBER | | SHARES |
| | | |
| | | |
| | INCORPORATED UNDER THE LAWS OF THE | |
- --------------- STATE OF DELAWARE ----------------
SEE RESTRICTIONS ON REVERSE SIDE
SERIES A CONVERTIBLE PREFERRED
HUMANSCAN INC.
TOTAL AUTHORIZED ISSUE 20,000,000 SHARES WITH A PAR VALUE OF $0.01 EACH
4,175,000 Series A Convertible Preferred Shares
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS
THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCE AND/OR RIGHTS AND
A COPY OF THE SUBSCRIPTION AGREEMENT DEFINED BELOW.
This is to Certify that is the owner of SERIES A CONVERTIBLE
PREFERRED shares of HUMASCAN INC. The Shares represented by this certificate are
not fully paid or non-assessable. The full purchase price of $2.00 per share
(the "Purchase Price") is payable in installments as provided for in a
subscription agreement (the "Subscription Agreement") between HUMASCAN INC. and
the original purchaser of the shares. At the time of issuance, $.74 of the
Purchase Price was paid with respect to each such share. Of the remaining
Purchase Price an additional $.26 per share, $.42 per share, $.46 per share and
$.12 per share become due on August 15, 1996, November 15, 1996, January 15,
1997 and May 15, 1997, respectively, and, under certain circumstances, the
purchaser of such shares may be assessable for such unpaid amounts pursuant to
Section 162 of the Delaware General Corporation Law. The shares are subject to
repurchase for nominal consideration if such payments are not made. The shares
are transferable only on the books of the Corporation by the holder hereof in
person or by the duly authorized Attorney upon surrender of this certificate
properly endorsed. Witness, the seal of the Corporation and the signatures of
its duly authorized officers.
Dated May __, 1996
/s/ /s/
Secretary President
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -______Custodian_______
TEN ENT - as tenants by the (Cust) (Minor)
entireties
JT TEN - as joint tenants with right under Uniform Gifts to
of survivorship and not as Minors Act___________
tenants in common (State)
Additional abbreviations may also be used though not in the above list.
For value received........... hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
| |
| |
- --------------------------------------........................................
..............................................................................
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESSS INCLUDING POSTAL ZIP CODE
OF ASSIGNEE)
..............................................................................
..............................................................................
.........................................................................Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint................................................................Attorney
to transfer the said Shares on the books of the within named Corporation
with full power of substitution in the premises.
Dated...................... 19.......
In presence of
---------------------------------------
- ---------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SHARES OF PREFERRED STOCK HAVE NOT BEEN, AND THE SHARES OF COMMON STOCK TO
BE ISSUED UPON CONVERSION HEREOF, WHEN ISSUED, WILL NOT HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR QUALIFIED UNDER
STATE SECURITIES LAWS AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
UNLESS (A) COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND
QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS, OR (B) THE CORPORATION HAS
BEEN FURNISHED WITH AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION TO THE
EFFECT THAT NO REGISTRATION AND QUALIFICATION IS LEGALLY REQUIRED FOR SUCH
TRANSFER.
IN ADDITION, $.74 OF THE TWO DOLLAR ($2.00) TOTAL CONSIDERATION CONTEMPLATED TO
BE PAID FOR EACH OF THE SHARES OF PREFERRED STOCK REPRESENTED BY THIS
CERTIFICATE HAS BEEN PAID AND THE REMAINDER OF SUCH CONSIDERATION FOR EACH SUCH
SHARE IS SUBJECT TO THE PAYMENT REQUIREMENTS OF THE SUBSCRIPTION AGREEMENT
DATED ON OR ABOUT THE DATE HEREOF BETWEEN THE CORPORATION AND THE INITIAL
REGISTERED HOLDER OF THIS CERTIFICATE, A COPY OF WHICH IS ON FILE IN THE OFFICE
OF THE CORPORATION. IN THE EVENT OF NONPAYMENT OF THE REMAINING INSTALLMENTS OF
THE PURCHASER PRICE WHEN DUE, A PORTION OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO REPURCHASE BY THE CORPORATION FOR ONE DOLLAR ($1.00)
IN ACCORDANCE WITH THE SUBSCRIPTION AGREEMENT.
<PAGE>
EXHIBIT 4.3
OH&S DRAFT
6/21/96
[FORM OF REPRESENTATIVE'S WARRANT AGREEMENT]
[SUBJECT TO ADDITIONAL REVIEW]
- -------------------------------------------------------------------------------
HUMASCAN INC.
AND
KEANE SECURITIES CO., INC.
----------
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of ________, 1996
- -------------------------------------------------------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______, 1996 between
HUMASCAN INC., a Delaware corporation (the "Company"), and KEANE SECURITIES CO.,
INC. (hereinafter referred to variously as the "Holder" or the
"Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative warrants
("Warrants") to purchase up to an aggregate 250,000 shares of Common Stock, $.01
par value, of the Company; and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Company and the several Underwriters listed therein to act as the Representative
in connection with the Company's proposed public offering of up to 2,500,000
shares of Common Stock at a public offering price of $____ per share of Common
Stock (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate twenty dollars ($25.00), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
1. Grant. The Holder is hereby granted the right to purchase, at any
time from _______, 1997 [one year from the effective date of the Registration
Statement], until 5:30 P.M., New York time, on _______, 2001 [five years from
the effective date of the Registration Statement], up to an aggregate of 250,000
shares of Common Stock (the "Shares") at an initial exercise price (subject to
adjustment as provided in Section 8 hereof) of $____ per share of Common Stock
[120% of the initial public offering price per share] subject to the terms and
conditions of this Agreement. Except as set forth herein, the Shares issuable
upon exercise of the Warrants are in all respects identical to the shares of
Common Stock being purchased by the Underwriters for resale to the public
pursuant to the terms and provisions of the Underwriting Agreement.
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
ss.3.1 Method of Exercise. The Warrants initially are exercisable at an
aggregate initial exercise price (subject to adjustment as provided in Section 8
hereof) per share of Common Stock set forth in Section 6 hereof payable by
certified or official bank check in New York Clearing House funds, subject to
adjustment as provided in Section 8 hereof. Upon surrender of a Warrant
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price (as hereinafter defined) for the
shares of Common Stock purchased at the Company's principal executive offices in
New Jersey (presently located at 514 Centennial Avenue, Cranford, New Jersey
07016) the registered holder of a Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the shares of
Common Stock so purchased. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional shares of the Common Stock underlying the
Warrants). Warrants may be exercised to purchase all or part of the shares of
Common Stock represented thereby. In the case of the purchase of less than all
the shares of Common Stock purchasable under any Warrant Certificate, the
Company shall cancel said Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the shares of Common Stock purchasable thereunder.
2
<PAGE>
ss.3.2 Exercise by Surrender of Warrant. In addition to the method of
payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in full or in part by surrendering
the Warrant Certificate in the manner specified in Section 3.1 as payment of the
aggregate Exercise Price. The number of Warrants to be surrendered in payment of
the aggregate Exercise Price for the Warrants to be exercised shall be
determined by multiplying the number of Warrants to be exercised by the Exercise
Price per share of Common Stock, and then dividing the product thereof by an
amount equal to the Market Price (as hereinafter defined) minus the Exercise
Price. Solely for the purposes of this paragraph, Market Price shall be
calculated either (i) on the date which the form of election attached hereto is
deemed to have been sent to the Company pursuant to Section 13 hereof ("Notice
Date") or (ii) as the average of the Market Prices for each of the five trading
days preceding the Notice Date, whichever of (i) or (ii) is greater.
ss.3.3 Definition of Market Price. As used herein, the phrase "Market
Price" at any date shall be deemed to be the last reported sale price, or, in
case no such reported sale takes place on such day, the average of the last
reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or by the Nasdaq National Market ("NNM")
or the Nasdaq Small Cap Market ("Nasdaq"), or, if the Common Stock is not listed
or admitted to trading on any national securities exchange or quoted by NNM or
Nasdaq, the average closing bid price as furnished by the NASD through NNM or
Nasdaq or similar organization if NNM or Nasdaq is no longer reporting such
information, or if the Common Stock is not quoted on NNM or Nasdaq, as
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it.
4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock and/or other securities,
properties or rights underlying such Warrants, shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder, and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the Shares
underlying the Warrants (and/or other securities, property or rights issuable
upon the exercise of the Warrants) shall be executed on behalf of the Company by
the manual or facsimile signature of the then Chairman or Vice Chairman of the
Board of Directors or President or Vice President of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representative.
6. Exercise Price.
ss.6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant shall
be $____ [120% of the initial public offering price] per share of Common Stock.
The adjusted exercise price shall be the price which shall result from time to
time from any and all adjustments of the initial exercise price in accordance
with the provisions of Section 8 hereof.
ss.6.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context.
3
<PAGE>
7. Registration Rights.
ss.7.1 Registration Under the Securities Act of 1933. The Warrants, the
Shares, and any of the other securities issuable upon exercise of the Warrants
(collectively, the "Warrant Securities") have been registered under the
Securities Act of 1933, as amended (the "Act"), pursuant to the Company's
Registration Statement on Form SB-2 (Registration No. 333- ________) (the
"Registration Statement"). All of the representations and warranties of the
Company contained in the Underwriting Agreement relating to the Registration
Statement, the Preliminary Prospectus and Prospectus (as such terms are defined
in the Underwriting Agreement) and made as of the dates provided therein, are
incorporated by reference herein. The Company agrees and covenants promptly to
file post-effective amendments to such Registration Statement as may be
necessary in order to maintain its effectiveness and otherwise to take such
action as may be necessary to maintain the effectiveness of the Registration
Statement as long as any Warrants are outstanding. In the event that, for any
reason, whatsoever, the Company shall fail to maintain the effectiveness of the
Registration Statement, the certificates representing the Warrant Securities
shall bear the following legend:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("Act"), and may not be
offered or sold except pursuant to (i) an effective registration
statement under the Act, (ii) to the extent applicable, Rule 144 under
the Act (or any similar rule under such Act relating to the disposition
of securities), or (iii) an opinion of counsel, if such opinion shall
be reasonably satisfactory to counsel to the issuer, that an exemption
from registration under such Act is available.
ss.7.2 Piggyback Registration. If, at any time commencing after the
date hereof and expiring seven (7) years thereafter, the Company proposes to
register any of its securities under the Act (other than pursuant to Form S-4,
S-8 or a comparable registration statement) it will give written notice by
registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to the Representative and to all other Holders of the
Warrants and/or the Warrant Securities of its intention to do so. If the
Representative or other Holders of the Warrants and/or Warrant Securities notify
the Company within twenty (20) business days after receipt of any such notice of
its or their desire to include any such securities in such proposed registration
statement, the Company shall afford the Representative and such Holders of the
Warrants and/or Warrant Securities the opportunity to have any such Warrant
Securities registered under such registration statement (sometimes referred to
herein as a "Piggyback Registration").
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
If a Piggyback Registration is an underwritten primary registration on
behalf of the Company, and the managing underwriters advise the Company in
writing that in their good faith opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in such
offering, the Company will include in such registration (i) first, the
securities the Company proposes to sell, (ii) second, the Warrant Securities
requested to be included in such registration, pro rata among the Holders of
such Warrant Securities on the basis of the number of Warrant Securities of such
Holders requested to be included in such registration, and (iii) third, other
securities requested to be included in such registration.
4
<PAGE>
If a Piggyback Registration is an underwritten secondary registration
on behalf of holders of the Company's Common Stock, and the managing
underwriters advise the Company in writing that in their good faith opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in such offering, the Company will include in such
registration (i) first, the securities requested to be included therein by the
holders requesting such registration pursuant to a demand registration right,
pro rata among such holders, (ii) second, the Warrant Securities requested to be
included by Holders under this Section 7.2 on a pro rata basis based upon the
number of Warrant Securities of such Holders requested to be included in such
registration and (iii) third, other securities requested to be included in such
registration.
ss.7.3 Demand Registration.
(a) At any time commencing after the date hereof and expiring five (5)
years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities (assuming
the exercise of all of the Warrants) shall have the right (which right is in
addition to the registration rights under Section 7.2 hereof), exercisable by
written notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Representative and Holders, in order to comply with the provisions of the Act,
so as to permit a public offering and sale of their respective Warrant
Securities for nine (9) consecutive months by such Holders and any other Holders
of the Warrants and/or Warrant Securities who notify the Company within ten (10)
days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) Intentionally omitted.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Securities
within the time period specified in Section 7.4(a) hereof pursuant to the
written notice specified in Section 7.3(a) of a Majority of the Holders of the
Warrants and/or Warrant Securities, the Company shall have the option, upon the
written notice of election of a Majority of the Holders of the Warrants and/or
Warrant Securities, to repurchase (i) any and all Warrant Securities at the
higher of the Market Price per share of Common Stock on (x) the date of the
notice sent pursuant to Section 7.3(a) or (y) the expiration of the period
specified in Section 7.4(a) and (ii) any and all Warrants at such Market Price
less the Exercise Price of such Warrant. Such repurchase shall be in immediately
available funds and shall close within two (2) days after the later of (i) the
expiration of the period specified in Section 7.4(a) or (ii) the delivery of the
written notice of election specified in this Section 7.3(d).
ss.7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Securities such number of prospectuses as shall reasonably be requested.
5
<PAGE>
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3 hereof including, without limitation, the Company's legal
and accounting fees, printing expenses, blue sky fees and expenses.
(c) The Company will take all necessary action which may be required in
qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Securities
to be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify each of the Underwriters contained in Section 7 of the
Underwriting Agreement.
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 7 of the Underwriting
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Warrant Securities to be included in any registration statement filed
pursuant to Section 7.3 hereof, or permit any other registration statement to be
or remain effective during the effectiveness of a registration statement filed
pursuant to Section 7.3 hereof, without the prior written consent of the Holders
of the Warrants and Warrant Securities representing a Majority of such
securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
6
<PAGE>
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within 15 months thereafter,
make "generally available to its security holders" (within the meaning of Rule
158 under the Act) an earnings statement (which need not be audited) complying
with Section 11(a) of the Act and covering a period of at least 12 consecutive
months beginning after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder participating in
the offering requesting the correspondence and memoranda described below and to
the managing underwriters, copies of all correspondence between the Commission
and the Company, its counsel or auditors and all memoranda relating to
discussions with the Commission or its staff with respect to the registration
statement and permit each Holder and underwriter to do such investigation, upon
reasonable advance notice, with respect to information contained in or omitted
from the registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such Holder or underwriter shall
reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested to be included in such
underwriting, which may be the Representative. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriter(s), and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter(s). The Holders shall be parties
to any underwriting agreement relating to an underwritten sale of their Warrant
Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such underwriter(s) shall also be made to and for the benefit of such
Holders. Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriter(s) except as
they may relate to such Holders and their intended methods of distribution.
(l) In addition to the Warrant Securities, upon the written request
therefor by any Holder(s), the Company shall include in the registration
statement any other securities of the Company held by such Holder(s) as of the
date of filing of such registration statement, including without limitation
restricted shares of Common Stock, options, warrants or any other securities
convertible into shares of Common Stock.
(m) For purposes of this Agreement, the term "Majority" in reference to
the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
percent (50%) of the then outstanding Warrants or Warrant Securities that (i)
are not held by the Company, an affiliate, officer, creditor, employee or agent
thereof or any of their respective affiliates, members of their family, persons
acting as nominees or in conjunction therewith and (ii) have not been resold to
the public pursuant to a registration statement filed with the Commission under
the Act.
7
<PAGE>
8. Adjustments to Exercise Price and Number of Securities.
ss.8.1 Subdivision and Combination. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Price shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
ss.8.2 Stock Dividends and Distributions. In case the Company shall pay
a dividend in, or make a distribution of, shares of Common Stock or of the
Company's capital stock convertible into Common Stock, the Exercise Price shall
forthwith be proportionately decreased. An adjustment made pursuant to this
Section 8.2 shall be made as of the record date for the subject stock dividend
or distribution.
ss.8.3 Adjustment in Number of Securities. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 8, the number of
Warrant Securities issuable upon the exercise at the adjusted exercise price of
each Warrant shall be adjusted to the nearest full amount by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
ss.8.4 Definition of Common Stock. For the purpose of this Agreement,
the term "Common Stock" shall mean (i) the class of stock designated as Common
Stock in the Certificate of Incorporation of the Company as may be amended as of
the date hereof, or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value. In the event that the Company shall after the date hereof issue
securities with greater or superior voting rights than the shares of Common
Stock outstanding as of the date hereof, the Holder, at its option, may receive
upon exercise of any Warrant either shares of Common Stock or a like number of
such securities with greater or superior voting rights.
ss.8.5 Merger or Consolidation. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such Warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
subsection shall similarly apply to successive consolidations or mergers.
ss.8.6 No Adjustment of Exercise Price in Certain Cases. No adjustment
of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Warrants or the Warrant
Securities issuable upon the exercise of the Warrants;
(b) If the amount of said adjustment shall be less than two
cents (2(cent)) per Warrant Security, provided, however, that in such
case any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together
with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least two cents
(2(cent)) per Warrant Security.
8
<PAGE>
9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
11. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject to
the preemptive rights of any stockholder. As long as the Warrants shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Warrants to be listed (subject to
official notice of issuance) on all securities exchanges on which the Common
Stock issued to the public in connection herewith may then be listed and/or
quoted on NNM or Nasdaq.
12. Notices to Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock
of the Company, or any option, right or warrant to subscribe therefor;
or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
9
<PAGE>
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made and sent when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
hereof or to such other address as the Company may designate by notice
to the Holders.
14. Supplements and Amendments. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of any
Holders of Warrant Certificates (other than the Representative) in order to cure
any ambiguity, to correct or supplement any provision contained herein which may
be defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Representative may deem necessary or desirable and which the Company and
the Representative deem shall not adversely affect the interests of the Holders
of Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of
business on _______, 2003. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on _______, 2009.
17. Governing Law; Submission to Jurisdiction. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The Company, the Representative and the Holders hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representative and the Holders hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the Representative
and the Holders (at the option of the party bringing such action, proceeding or
claim) may be served by transmitting a copy thereof, by registered or certified
mail, return receipt requested, postage prepaid, addressed to it at the address
set forth in Section 3 hereof. Such mailing shall be deemed personal service and
shall be legal and binding upon the party so served in any action, proceeding or
claim. The Company, the Representative and the Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
10
<PAGE>
18. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
19. Severability. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Warrant Certificates or
Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
the Representative and any other registered Holders of Warrant Certificates or
Warrant Securities.
22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
HUMASCAN INC.
By:
--------------------------------------------
Name: Donald B. Brounstein
Title: President and Chief Executive Officer
Attest:
- ----------------------
Secretary
KEANE SECURITIES CO., INC.
By:
--------------------------------------------
Name: Walter D. O'Hearn, Jr.
Title: Senior Vice President
12
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, __________, 2001
No. W- Warrants to Purchase
____ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that , or registered assigns,
is the registered holder of Warrants to purchase initially, at any time from
__________, 1997 [one year from the effective date of the Registration
Statement] until 5:30 p.m. New York time on ___________, 2001 [five years from
the effective date of the Registration Statement] ("Expiration Date"), up to
__________ fully-paid and non-assessable shares of common stock, $.01 par value
("Common Stock"), of HUMASCAN INC., a Delaware corporation (the "Company"), at
the initial exercise price, subject to adjustment in certain events (the
"Exercise Price"), of $______ [120% of the initial public offering price] per
share of Common Stock upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Representative's Warrant Agreement dated
as of _______, 1996 between the Company and KEANE SECURITIES CO., INC. (the
"Warrant Agreement"). Payment of the Exercise Price shall be made by certified
or official bank check in New York Clearing House funds payable to the order of
the Company or by surrender of this Warrant Certificate.
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a
duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by
this Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in
the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ___________, 1996
HUMASCAN INC.
By:
--------------------------------------------
Name: Donald B. Brounstein
Title: President and Chief Executive Officer
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
|_| shares of Common Stock;
----------------------------------
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of HumaScan Inc. in
the amount of $ , all in accordance with the terms of
Section 3.1 of the Representative's Warrant Agreement dated as of ,
1996 between HumaScan Inc. and Keane Securities Co., Inc. The undersigned
requests that a certificate for such securities be registered in the name of
whose address is
and that such Certificate be delivered to
whose address is .
Dated:
Signature
----------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
------------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
|_| shares of Common Stock;
-----------------------------------
and herewith tenders in payment for such securities Warrants all in
accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of , 1996 between HumaScan Inc. and Keane
Securities Co., Inc. The undersigned requests that a certificate for such
securities be registered in the name of
whose address is and that such
Certificate be delivered to whose address
is .
Dated:
Signature
-----------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
--------------------------------------------
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED hereby sells, assigns and
transfers unto
- -------------------------------------------------------------------------------
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated:
---------------------
Signature:
-------------------------------
\ (Signature must conform in all respects to
name of holder as specified on the face
of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
TO: Donald S. Brounstein Dated as of: February 9, 1996
HumaScan Inc. (the "Corporation"), hereby grants to you an option (the
"Option") to purchase up to fifty thousand (50,000) shares of the
Corporation's Common Stock, par value $.Ol per share (the "Shares"), at a
price of Four and No/l00 Dollars ($4.00) per Share (the "Option Price"), upon
the terms and conditions contained herein.
1. The Option may not be transferred or assigned by you during your
lifetime.
2. (a) The Option to purchase the Shares vests immediately.
(b) The Option shall expire (to the extent not previously exercised)
on the fifth anniversary of the date of this Agreement.
3. The Option may be exercised by giving a written notice of exercise
to the Chief Financial Officer of the Corporation. Such notice shall specify
the number of Shares to be purchased and shall be accompanied by payment in
full of the aggregate Option Price for the number of Shares. purchased and,
unless a current Registration Statement is in affect covering the resale of
Shares acquired upon exercise of the Option, by a representation that the
Shares are being acquired for your own account, for investment purposes and
not with a view to the resale or distribution of the Shares and that any
subsequent offer for sale or sale of such Shares shall be made either pursuant
to (a) a Registration Statement on an appropriate form under the Securities
Act of 1933, as amended (the 'Securities Act"), which Registration Statement
has become effective and is current with respect to the Shares being offered
and sold, or (b) a specific exemption from the registration requirements of
the Securities Act, but in claiming such exemption you shall, prior to any
offer for sale of such Shares, obtain a favorable written opinion from counsel
for or approved by the Corporation as to the availability of such exemption.
The Corporation shall endorse an appropriate legend referring to the foregoing
restriction upon the certificate or certificates representing any Shares
issued or transferred upon exercise of the Option. Such exercise shall be
effective only upon the actual receipt of such written notice, of the
aggregate Option Price and of the representation described above, and no
rights or privileges of a shareholder of the Corporation in respect of any of
the Shares issuable upon the exercise of any part of the Option shall inure to
you, or to any other person entitled to exercise the Option, unless and until
certificates representing such Shares shall have been issued.
<PAGE>
4. It is understood and agreed that nothing contained in this
Agreement shall confer upon you any right with respect to the continuation of
your employment by the Corporation, nor interfere in any way with the right of
the Board of Directors to terminate such employment at any time.
5. Cashless Exercise. The Option is initially exercisable at a price
of $4.00 per share, payable in cash or by check to the order of the
Corporation, or any combination of cash or check. At any time subsequent to
the time the Corporation first offers its securities to the public pursuant to
the Securities Act prior to the expiration date, the Option Holder may, at his
option, exchange the Option, in whole or in part (an 'Option Exchange") into
the number of shares determined in accordance with this paragraph, by
surrendering the Option Agreement at the principal office of the Corporation,
accompanied by a notice stating the Option Holder's intent to effect such
exchange, the total number of shares to be involved in the exchange and the
date on which the Option Holder requests that such Option Exchange occur (the
"Notice of Exchange"). The Option Exchange shall take place on the date
specified in the Notice of Exchange, or, if later, the date the Notice of
Exchange is received by the Corporation (the "Exchange Date'). Certificates
for the shares issuable upon such Option Exchange and, if applicable, a now
Option Agreement of like tenor evidencing the balance of the shares remaining
subject to the Option Agreement, shall be issued as of the Exchange Date and
delivered to the Option Holder within seven (7) days following the Exchange
Date. In connection with any Option Exchange, the Option Agreement shall
represent the right to subscribe for and acquire the number of shares (rounded
to the next highest integer) equal to (A) the number of shares Specified by
the Option Holder in his Notice of Exchange (the 'Total Share Number") less
(B) the number of shares equal to the quotient obtained by dividing (i) the
product of the Total Share Number and the Option Price per share by (ii) the
current fair market value of the Common Stock as reported at the close of
business on the business day immediately prior to the date of the Notice of
Exchange minus the Option Price per share. As used herein "current fair market
value" of Common Stock shall mean with respect to each share of Common Stock:
(i) If the exercise is in connection with on initial public offering,
and if the Corporation's Registration Statement relating to such public
offering has been declared effective by the Securities and Exchange
Commission, then the initial "Price to Public" specified in the final
prospectus with respect to the offering.
(ii) If this Option is exercised after, and not in connection with,
the Corporation's initial public offering, and:
a) if traded on a securities exchange, the fair market value shall
be deemed to be the average of the daily closing prices over the
shorter of (x) the period between the closing of the sale of shares of
Common Stock in such public offering and the date the current fair
market value of the securities is being determined or (y) a fourteen
day period ending three days before the date the current fair market
2
<PAGE>
value of the securities is being determined;
b) If actively traded over-the-counter, the current fair market
value shall be deemed to be the average of the closing bid and asked
prices quoted on the NASDAQ System (or similar system) over the
shorter of (x) the period between the closing of the sale of shares of
Common Stock in such public offering and the date the current fair
market value of the securities is being determined or (y) a fourteen
day period ending three days before the date the current fair market
value of the securities is being determined.
(iii) If at any time the Common Stock Is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
current fair market value of Common Stock shall be the highest pride per share
which the Corporation could obtain from a willing buyer (not a current
employee or directory. for shares of Common Stock sold by the Corporation,
from authorized but unissued: shares, as determined in good faith by its Board
of Directors (and promptly upon any request therefor by the Option Holder),
unless the Corporation shall become subject to a merger, acquisition or other
consolidation pursuant to which the Corporation is not the surviving party, in
which case the fair market value of Common Stock shall be deemed to be the
value received by the holders of the Corporation's Common Stock on a common
equivalent basis pursuant to such merger or acquisition.
6. If upon the exercise of the Option there shall be payable by the
Corporation any amount for income tax withholding, either you shall pay such
amount to the Corporation, or the amount of Common Stock delivered by the
Corporation upon exercise of the Option shall be appropriately reduced, to
reimburse the Corporation for such payment.
Very truly yours,
HUMASCAN,INC.
BY: /s/ Leonard B. Brown
-----------------------------------------
Authorized Signatory
Leonard B. Brown
AGREED TO AND ACCEPTED:
/s/ Donald B. Brounstein
- ---------------------------
Donald B. Brounstein
Dated:
---------------------
3
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
TO: James J. Whidden Dated as of: February 9, 1996
HumaScan Inc. (the "Corporation"), hereby grants to you an option (the
"Option") to purchase up to fifty thousand (50,000) shares of the
Corporation's Common Stock, par value $.0l per share (the "Shares"), at a
price of Four and No/l00 Dollars ($4.00) per Share (the "Option Price"), upon
the terms and conditions contained herein.
1. The Option may not be transferred or assigned by you during your
lifetime.
2. (a) The Option to purchase the Shares vests immediately.
(b) The Option shall expire (to the extent not previously exercised)
on the fifth anniversary of the date of this Agreement.
3. The Option may be exercised by giving a written notice of exercise
to the Chief Financial Officer of the Corporation. Such notice shall specify
the number of Shares to be purchased and shall be accompanied by payment in
full of the aggregate Option Price for the number of Shares purchased and,
unless a current Registration Statement is in effect covering the resale of
Shares acquired upon exercise of the Option, by a representation that the
Shares are being acquired for your own account, for investment purposes and
not with a view to the resale or distribution of the Shares and that any
subsequent offer for sale or sale of such Shares shall be made either pursuant
to (a) a Registration Statement on an appropriate form under the Securities
Act of 1933, as amended (the 'Securities Act"), which Registration Statement
has become effective and is current with respect to the Shares being offered
and sold, or (b) a specific exemption from the registration requirements of
the Securities Act, but in claiming such exemption you shall, prior to any
offer for sale of such Shares, obtain a favorable written opinion from counsel
for or approved by the Corporation as to the availability of such exemption.
The Corporation shall endorse an appropriate legend referring to the foregoing
restriction upon the certificate or certificates representing any Shares
issued or transferred upon exercise of the Option. Such exercise shall be
effective only upon the actual receipt of such written notice, of the
aggregate Option Price and of the representation described above, and no
rights or privileges of a shareholder of the Corporation in respect of any of
the Shares issuable upon the exercise of any part of the Option shall inure to
you, or to any other person entitled to exercise the Option, unless and until
<PAGE>
certificates representing such Shares shall have been issued.
4. The Option is initially exercisable at a price of $4.00 per share,
payable in cash or by check to the order of the Corporation, or any
combination of cash or check. At any time subsequent to the time the
Corporation first offers its securities to the public pursuant to the
Securities Act prior to the expiration date, the Option Holder may, at his
option, exchange the Option, In whole or in part (an "Option Exchange") into
the number of shares determined in accordance with this paragraph, by
surrendering the Option Agreement at the principal office of the Corporation,
accompanied by a notice stating the Option Holder's intent to effect such
exchange, the total number of shares to be involved in the exchange and the
date on which the Option Holder requests that such Option Exchange occur (the
"Notice of Exchange"). The Option Exchange shall take place on the date
specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Corporation (the "Exchange Date"). Certificates
for the shares issuable upon such Option Exchange and, if applicable, a new
Option Agreement of like tenor evidencing the balance of the shares remaining
subject to the Option Agreement, shall be issued as of the Exchange Date and
delivered to the Option Holder within seven (7) days following the Exchange
Date. In connection with any Option Exchange, the Option Agreement shall
represent the right to subscribe for and acquire the number of shares (rounded
to the next highest integer) equal to (A) the number of shares specified by
the Option Holder in his Notice of Exchange (the 'Total Share Number') less
(B) the number of shares equal to the quotient obtained by dividing (I) the
product of the Total Share Number and the Option Price per share by (ii) the
current fair market value of the Common Stock as reported at the close of
business on the business day immediately prior to the date of the Notice of
Exchange minus the Option Price per share. As used herein is current fair
market value' of Common Stock shall mean with respect to each share of Common
Stock:
(i) If the exercise is in connection with an initial public offering,
and if the Corporation's Registration Statement relating to such public
offering has been declared effective by the Securities and Exchange
Commission, then the initial "Price to Public' specified in the final
prospectus with respect to the offering.
(ii) If this Option is exercised after, and not in connection with,
the Corporation's initial public offering, and:
a) if traded on a securities exchange, the fair market value shall
be deemed to be the average of the daily closing prices over the
shorter of (x) the period between the closing of the sale of shares of
Common Stock in such public offering and the date the current fair
market value of the securities is being determined or (y) a fourteen
day period ending three days before the date the current fair market
value of the securities is being determined;
2
<PAGE>
b) If actively traded over-the-counter, the current fair market
value shall be deemed to be the average of the closing bid and asked
prices quoted on the NASDAQ System (or similar system) over the
shorter of (x) the period between the closing of the sale of shares of
Common Stock in such public offering and the date the current fair
market value of the securities is being determined or (y) a fourteen
day period ending three days before the date the current fair market
value of the securities is being determined.
(iii) If at any time the Common Stock is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
current fair market value of Common Stock shall be the highest price per share
which the Corporation could obtain from a willing buyer (not a current
employee or director) for shares of Common Stock sold by the Corporation, from
authorized but unissued shares, as determined in good faith by its Board of
Directors land promptly upon any request therefor by the Option Holder),
unless the Corporation shall become subject to a merger, acquisition or other
consolidation pursuant to which the Corporation is not the surviving party, in
which case the fair market value of Common Stock shall be deemed to be the
value received by the holders of the Corporation's Common Stock on a common
equivalent basis pursuant to such merger or acquisition.
5. If upon the exercise of the Option there shall be payable by the
Corporation any amount for income tax withholding, either you shall pay such
amount to the Corporation, or the amount of Common Stock delivered by the
Corporation upon exercise of the Option shall be appropriately reduced, to
reimburse the Corporation for such payment.
Very truly yours,
HUMASCAN INC.
By: /s/ Donald B. Brounstein
---------------------------------------
DONALD B. BROUNSTEIN, President
AGREED TO AND ACCEPTED:
/s/ James J. Whidden
- -----------------------
James J. Whidden
Dated: 4/8/96
-----------------
3
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
TO: Whidden & Associates, Inc. Dated as of: February 9, 1996
HumaScan Inc. (the "Corporation"), hereby grants to you an option (the
"Option") to purchase up to twenty-five thousand (25,000) shares of the
Corporation's Common Stock, par value $.Ol per share (the "Shares"), at a
price of Four and No/100 Dollars ($4.00) per $here (the "Option Price"), upon
the terms and conditions contained herein.
1. The Option may not be transferred or assigned by you without the
prior written consent of the Corporation.
2. (a) The Option to purchase the Shares vests immediately.
(b) The Option shall expire (to the extent not previously exercised)
on the fifth anniversary of the date of this Agreement.
3. The Option may be exercised by giving a written notice of exercise
to the Chief Financial Officer of the Corporation. Such notice shall specify
the number of Shares to be purchased and shall be accompanied by payment in
full of the aggregate Option Price for the number of Shares purchased and,
unless a current Registration Statement is in effect covering the resale of
Shares acquired upon exercise of the Option, by a representation that the
Shares are being acquired for your own account, for investment purposes and
not with a view to the resale or distribution of the Shares and that any
subsequent offer for sale or sale of such Shares shall be made either pursuant
to (a) a Registration Statement on an appropriate form under the Securities
Act of 1933, as amended (the "Securities Act"), which Registration Statement
has become effective and is current with respect to the Shares being offered
and sold, or (b) a specific exemption from the registration requirements of
the Securities Act, but in claiming such exemption you shall, prior to any
offer for sale of such Shares, obtain a favorable written opinion from counsel
for or approved by the Corporation as to the availability of such exemption.
The Corporation shall endorse an appropriate legend referring to the foregoing
restriction upon the certificate or certificates representing any Shares
issued or transferred upon exercise of the Option. Such exercise shall be
effective only upon the actual receipt of such written notice, of the
aggregate Option Price and of the representation described above, and no
rights or privileges of a shareholder of the Corporation in respect of any of
the Shares issuable upon the exercise of any part of the Option shall inure to
you, or to any other person entitled to exercise the Option, unless and until
certificates representing such Shares shall have been issued.
<PAGE>
4. The Option is initially exercisable at a price of $4.00 per share,
payable in cash or by check to the order of the Corporation, or any
combination of cash or check. At any time subsequent to the time the
Corporation first offers its securities to the public pursuant to the
Securities Act prior to the expiration date, the Option Holder may, at its
option, exchange the Option, in whole or in part (an "Option Exchange") into
the number of shares determined in accordance with this paragraph, by
surrendering the Option Agreement at the principal office of the Corporation,
accompanied by a notice stating the Option Holder's intent to effect such
exchange, the total number of shares to be involved in the exchange and the
date on which the Option Holder requests that such Option Exchange occur (the
"Notice of Exchange"). The Option Exchange shall take place on the date
specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Corporation (the "Exchange Date"). Certificates
for the shares issuable upon such Option Exchange and, If applicable, a new
Option Agreement of like tenor evidencing the balance of the shares remaining
subject to the Option Agreement, shall be issued as of the Exchange Date and
delivered to the Option Holder within seven (7) days following the Exchange
Date. In connection with any Option Exchange, the Option Agreement shall
represent the right to subscribe for and acquire the number of shares (rounded
to the next highest integer) equal to (A) the number of shares specified by
the Option Holder in its Notice of Exchange (the "Total Share Number") less
(B) the number of shares equal to the quotient obtained by dividing (i) the
product of the Total Share Number and the Option Price per share by (ii) the
current fair market value of the Common Stock as reported at the close of
business on the business day immediately prior to the date of the Notice of
Exchange minus the Option Price per share. As used herein "current fair market
value" of Common Stock shall mean with respect to each share of Common Stock:
(i) If the exercise is in connection with an initial public offering,
and if the Corporation's Registration Statement relating to such public
offering has been declared effective by the Securities and Exchange
Commission, then the initial "Price to Public" specified in the final
prospectus with respect to the offering.
(ii) If this Option is exercised after, and not in connection with,
the Corporation's initial public offering, and:
a) if traded on a securities exchange, the fair market value shall
be deemed to be the average of the daily closing prices over the
shorter of (x) the period between the closing of the sale of shares of
Common Stock in such public offering and the date the current fair
market value of the securities is being determined or (y) a fourteen
day period ending three days before the date the current fair market
value of the securities is being determined;
b) If actively traded over-the-counter, the current fair market
value shall be deemed to be the average of the closing bid and asked
prices quoted on the NASDAQ System (or similar system) over the shorter
2
<PAGE>
of (x) the period between the closing of the sale of shares of Common
Stock in such public offering and the date the current fair market
value of the securities is being determined or (y) a fourteen day
period ending three days before the date the current fair market value
of the securities is being determined.
(iii) If at any time the Common Stock is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
current fair market value of Common Stock shall be the highest price per share
which the Corporation could obtain from a willing buyer (not a current
employee or director) for shares of Common Stock sold by the Corporation, from
authorized but unissued shares, as determined in good faith by its Board of
Directors (and promptly upon any request therefor by the Option Holder),
unless the Corporation shall become subject to a merger, acquisition or other
consolidation pursuant to which the Corporation is not the surviving party, in
which case the fair market value of Common Stock shall be deemed to be the
value received by the holders of the Corporation's Common Stock on a common
equivalent basis pursuant to such merger or acquisition.
5. If upon the exercise of the Option there shall be payable by the
Corporation any amount for income tax withholding, either you shall pay such
amount to the Corporation, or the amount of Common Stock delivered by the
Corporation upon exercise of the Option shall be appropriately reduced, to
reimburse the Corporation for such payment.
Very truly yours,
HUMASCAN INC.
By: /s/ Donald S. Brounstein
--------------------------------------
DONALD S. BROUNSTEIN, President
AGREED TO AND ACCEPTED:
WHIDDEN & ASSOCIATES, INC.
/s/ James J. Whidden
- --------------------------
Whidden, President
Dated: 4/8/96
--------------------
3
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
TO: Amy P. Lewis Dated as of: February 9, 1996
HumaScan Inc. (the "Corporation"), hereby grants to you an option (the
"Option") to purchase up to twenty-five thousand (25,000) shares of the
Corporation's Common Stock, par value $.Ol per share (the "Shares"), at a
price of Four and No/l00 Dollars ($4.00) per Share (the "Option Price"), upon
the terms and conditions contained herein.
1. The Option may not be transferred or assigned by you during your
lifetime.
2. (a) The Option to purchase the Shares vests immediately.
(b) The Option shall expire (to the extent not previously exercised)
on the fifth anniversary of the date of this Agreement.
3. The Option may be exercised by giving a written notice of exercise
to the Chief Financial Officer of the Corporation. Such notice shall specify
the number of Shares to be purchased and shall be accompanied by payment in
full of the aggregate Option Price for the number of Shares purchased and,
unless a current Registration Statement is in effect covering the resale of
Shares acquired upon exercise of the Option, by a representation that the
Shares are being acquired for your own account, for investment purposes and
not with a view to the resale of distribution of the Shares and that any
subsequent offer for sale or sale of such Shares shall be made either pursuant
to (a) a Registration Statement on an appropriate form under the Securities
Act of 1933, as amended (the "Securities Act"), which Registration Statement
has become effective and is current with respect to the Shares being offered
and sold, or (b) a specific exemption from the registration requirements of
the Securities Act, but in claiming such exemption you shall, prior to any
offer for sale of such Shares, obtain a favorable written opinion from counsel
for or approved by the Corporation as to the availability of such exemption.
The Corporation shall endorse an appropriate legend referring to the foregoing
restriction upon the certificate or certificates representing any Shares
issued or transferred upon exercise of the Option. Such exercise shall be
effective only upon the actual receipt of such written notice, of the
aggregate Option Price and of the representation described above, and no
rights or privileges of a shareholder of the Corporation in respect of any of
the Shares issuable upon the exercise of any part of the Option shall inure to
you, or to any other person entitled to exercise the Option, unless and until
<PAGE>
certificates representing such Shares shall have been issued.
4. It is understood and agreed that nothing contained in this
Agreement shall confer upon you any right with respect to the continuation of
your employment by the Corporation, not interfere in any way with the right of
the Board of Directors to terminate such employment at any time.
5. If upon the exercise of the Option there shall be payable by the
Corporation any amount for income tax withholding, either you shall pay such
amount to the Corporation, or the amount of Common Stock delivered by the
Corporation upon exercise of the Option shall be appropriately reduced, to
reimburse the Corporation for such payment.
Very truly yours,
HUMASCAN INC.
By: /s/ Donald S. Brounstein
------------------------------------
DONALD S. BROUNSTEIN, President
AGREED TO AND ACCEPTED,
/s/ Amy P. Lewis
- -----------------------
Amy P. Lewis
Dated: 2/19/96
-----------------
2
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
TO: Everett M. Lautin, M.D. Dated as of: February 9, 1996
HumaScan Inc. (the "Corporation"), hereby grants to you an option (the
"Option") to purchase up to twenty-five thousand (25,000) shares of the
Corporation's Common Stock, par value $.Ol per share (the "Shares"), at a
price of Four and No/l00 Dollars ($4.00) per Share (the "Option Price"), upon
the terms and conditions contained herein.
1. The Option may not be transferred or assigned by you during your
lifetime.
2. (a) The Option to purchase the Shares vests immediately.
(b) The Option shall expire (to the extent not previously exercised)
on the fifth anniversary of the date of this Agreement.
3. The Option may be exercised by giving a written notice of exercise
to the Chief Financial Officer of the Corporation. Such notice shall specify
the number of Shares to be purchased and shall be accompanied by payment in
full of the aggregate Option Price for the number of Shares purchased and,
unless a current Registration Statement is in effect covering the resale of
Shares acquired upon exercise of the Option, by a representation that the
Shares are being acquired for your own account, for investment purposes and
not with a view to the resale or distribution of the Shares and that any
subsequent offer for sale or sale of such Shares shall be made either pursuant
to (a) a Registration Statement on an appropriate form under the Securities
Act of 1933. as amended (the "Securities Act"), which Registration Statement
has become effective and is current with respect to the Shares being offered
and sold, or (b) a specific exemption from the registration requirements of
the Securities Act, but in claiming such exemption you shall, prior to any
offer for sale of such Shares, obtain a favorable written opinion from counsel
for or approved by the Corporation as to the availability of such exemption.
The Corporation, shall endorse an appropriate legend referring to the
foregoing restriction upon the certificate or certificates representing any
Shares issued or transferred upon exercise of the Option. Such exercise shall
be effective only upon the actual receipt of such written notice, of the
aggregate Option Price and of the representation described above, and no
rights or privileges of a shareholder of the Corporation in respect of any of
the Shares issuable upon the exercise of any part of the Option shall inure to
you, or to any other person entitled to exercise the Option, unless and until
<PAGE>
certificates representing such Shares shall have been issued.
4. If upon the exercise of the Option there shall be payable by the
Corporation any amount for income tax withholding, either you shall pay such
amount to the Corporation, or the amount of Common Stock delivered by the
Corporation upon exercise of the Option shall be appropriately reduced, to
reimburse the Corporation for such payment.
Very truly yours,
HUMASCAN INC.
By: /s/ Donald B. Brounstein
---------------------------------------
DONALD B. BROUNSTEIN, President
AGREED TO AND ACCEPTED:
/s/ Everett M. Loutin
- ---------------------------
Everett M. Loutin, M.D.
Dated. 2/24/96
---------------------
2
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
TO: Kenneth S. Hollander Dated as of: June 3, 1996
HumaScan Inc. (the "Corporation"), hereby grants to you an option (the
"Option") to purchase up to fifteen thousand (15,000) shares of the
Corporation's Common Stock, par value $.01 per share (the "Shares"), at a price
of Four and No/100 Dollars ($4.00) per Share (the "Option Price"), upon the
terms and conditions contained herein.
1. The Option may not be transferred or assigned by you during your
lifetime.
2. (a) The Option to purchase the Shares vests immediately.
(b) The Option shall expire (to the extent not previously
exercised) on the fifth anniversary of the date of this Agreement.
3. The Option may be exercised by giving a written notice of
exercise to the Chief Financial Officer of the Corporation. Such notice shall
specify the number of Shares to be purchased and shall be accompanied by payment
in full of the aggregate Option Price for the number of Shares purchased and,
unless a current Registration Statement is in effect covering the resale of
Shares acquired upon exercise of the Option, by a representation that the Shares
are being acquired for your own account, for investment purposes and not with a
view to the resale or distribution of the Shares and that any subsequent offer
for sale or sale of such Shares shall be made either pursuant to (a) a
Registration Statement on an appropriate form under the Securities Act of 1933,
as amended (the "Securities Act"), which Registration Statement has become
effective and is current with respect to the Shares being offered and sold, or
(b) a specific exemption from the registration requirements of the Securities
Act, but in claiming such exemption you shall, prior to any offer for sale of
such Shares, obtain a favorable written opinion from counsel for or approved by
the Corporation as to the availability of such exemption. The Corporation shall
endorse an appropriate legend referring to the foregoing restriction upon the
certificate or certificates representing any Shares issued or transferred upon
exercise of the Option. Such exercise shall be effective only upon the actual
receipt of such written notice, of the aggregate Option Price and of the
representation described above, and no rights or privileges of a shareholder of
the Corporation in respect of any of the Shares issuable upon the exercise of
any part of the Option shall inure to you, or to any other person entitled to
exercise the Option, unless and until certificates representing such Shares
shall have been issued.
4. It is understood that nothing contained in this Agreement
shall confer upon you any right with respect to the continuation of your
employment by the Corporation, nor interfere in any way with the right of the
Board of Directors to terminate such employment at any time.
<PAGE>
5. If upon the exercise of the Option there shall be payable
by the Corporation any amount for income tax withholding, either you shall pay
such amount to the Corporation, or the amount of Common Stock delivered by the
Corporation upon exercise of the Option shall be appropriately reduced, to
reimburse the Corporation for such payment.
Very truly yours,
HUMASCAN INC.
By: ---------------------------------
DONALD B. BROUNSTEIN, President
AGREED TO AND ACCEPTED:
- -------------------------------
Kenneth S. Hollander
Dated: ________________________
2
<PAGE>
GRAUBARD MOLLEN & MILLER
600 Third Avenue
New York, New York 10016-2097
July 23, 1996
HumaScan Inc.
514 Centennial Avenue
Cranford, New Jersey 07016
Gentlemen:
Reference is made to the Registration Statement on Form SB-2
("Registration Statement") filed by HumaScan Inc. ("Company") under the
Securities Act of 1933, as amended ("Securities Act"), with respect to: (i) up
to an aggregate of 2,875,000 shares of common stock, par value $.01 per share
("Common Stock"), to be offered by the Company in the Company's initial public
offering ("IPO"); (ii) warrants (the "Representative's Warrants") to purchase up
to an aggregate of 250,000 shares of Common Stock to be issued by the Company to
Keane Securities Co., Inc., the representative of the underwriters of the
Company's IPO ("Representative"); and (iii) up to 250,000 shares of Common Stock
to be issued upon exercise of the Representative's Warrants.
We have examined such documents and considered such legal
matters as we have deemed necessary and relevant as the basis for the opinion
set forth below. With respect to such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as reproduced or certified copies, and the authenticity of the originals of
those latter documents. As to questions of fact material to this opinion, we
have, to the extent deemed appropriate, relied upon certain representations of
certain officers and employees of the Company.
Based upon the foregoing, it is our opinion that:
1. The shares of Common Stock to be issued by the Company in
its IPO, when sold in the manner provided in the Registration Statement, will be
legally issued, fully paid and nonassessable.
2. The Representative's Warrants, when issued by the Company
to the Representative in the manner provided in the Registration Statement, will
be legally issued, fully paid and nonassessable.
<PAGE>
HumaScan Inc.
July 23, 1996
Page 2
3. The shares of Common Stock to be issued by the Company to
the Representative upon the exercise of the Representative's Warrants, when
issued in accordance with the terms of the Representative's Warrants and in the
manner provided in the Registration Statement, will be legally issued, fully
paid and nonassessable.
In giving this opinion, we have assumed that all certificates
for the Company's shares of Common Stock and the Representative's Warrants will,
prior to their issuance, be duly executed on behalf of the Company by the
Company's transfer and/or warrant agent and registered by the Company's
registrar, if necessary, and will conform, except as to denominations, to
specimens which we have examined.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement, to the use of our name as your counsel, and to all
references made to us in the Registration Statement and in the Prospectus
forming a part thereof. In giving this consent, we do not hereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act, or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ Graubard Mollen & Miller
2
<PAGE>
Execution A
EXCLUSIVE SUPPLY AND DISTRIBUTION AGREEMENT
THIS AGREEMENT dated , 1996 is between HumaScan Inc., a Delaware
corporation ("HSI"), and Physician Sales & Service, Inc., a Florida
corporation ("PSS").
RECITALS
PSS is in the business of selling, warehousing and shipping medical
products and equipment directly to physicians at their offices in the United
States.
HSI has the exclusive United States and Canadian license to
manufacture, market, sell, appoint distributors to sell, warehouse and ship
BreastAssure(TM); and HSI's rights to BreastAssure(TM) and its status are
described in the Confidential Private Offering Memorandum, a draft of which
marked "HUMASCAN\PPM\DRAFT.022" has been previously supplied to HSI (the
"CPOM"), the Second Amended License Agreement between Scantek Medical, Inc.
and HSI (the "Licensing Agreement") and a contract between Zigmed, Inc. and
HSI (the "Zigmed Contract") (both of which all are attachments to this
Agreement).
HSI wishes to appoint PSS as the exclusive United States distributor
of BreastAssure(TM) under the terms and conditions set forth below.
AGREEMENTS
I. HSI and PSS mutually agree as follows:
A. With regard to the term of this Agreement:
1. It begins as of the date in the first paragraph above
and will continue until terminated in accordance
with Section I.A.4. below. Until HSI shall
manufacture, sell and ship commercial product,
BreastAssure(TM), to PSS for sale to physicians,
PSS and HSI will work together to prepare for
regional
<PAGE>
Execution A
and national introduction of BreastAssure(TM) (this
"Preparatory Period" is expected to end in December
1996 or January 1997).
2. During the first year following the first sale of
BreastAssure(TM) by PSS, both parties will
frequently review their progress and mutually agree
to cooperate with each other, as necessary. (This
"First Year Period" is expected to be calendar year
1997.)
3. At any time after the end of the first year following
the first sale of BreastAssure(TM)by PSS (with
respect to subparagraph a. or b. below), and at any
time after the first sale of BreastAssure(TM)by PSS
(with respect to subparagraph c. below), either
party may give the other written notice of a
material breach of this Agreement, and such other
party will have six (6) months after receipt of
such notice in which to cure the problem ("Six-
Month (6) Probation Period"). Probation incidents
are:
a. HSI to PSS: Untimely PSS deliveries to
physicians (a minimum of 94% on-time
deliveries is required, with a goal
of 98%).
b. PSS to HSI: (i) Failure by HSI to fill
product orders within ten (10) business days
(although the parties agree that their goal
is to fill such orders within five (5)
business days); (ii) Food and Drug
Administration ("FDA") problem or recall;
or (iii) acquisition of HSI by a competitor
of PSS unless PSS receives a two-year (2)
2
<PAGE>
Execution A
supply agreement with the acquiring entity
on the then prevailing terms of this
Agreement.
c. Any material default or violation of this
Agreement.
4. Both parties will cooperate in good faith as
appropriate to cure the applicable problem during
any Six-Month (6) Probation Period. If the problem
cannot be resolved during the Six-Month (6)
Probation Period, then either party may terminate
this Agreement, by written notice of intended
termination to the other party, which termination
will be effective three (3) months after such
notice is given; and PSS agrees to continue
distribution of BreastAssure(TM) during the
three-month (3) period following such notice of
termination. In addition, if any material violation
of this Agreement by either party shall occur prior
to the first sale of BreastAssure(TM) by PSS and
continue uncured for three (3) months after notice
thereof from the other party, the nondefaulting
party at its option may immediately terminate this
Agreement by written notice to the other.
5. This Agreement will remain in full force and effect
until the effective date of termination as provided
in this Agreement.
B. With regard to distributor renumeration:
1. The basis of the First Year Period is one million
(1,000,000) units to be sold by PSS with appropriate
marketing support by HSI.
3
<PAGE>
Execution A
a. The suggested "List Price" is Twenty-five
Dollars ($25.00) to the physician's
office, unless otherwise modified as
provided below.
b. The distributor discount is [REDACTED].
The net price to PSS is [REDACTED] per unit.
A portion of such distributor discount equal
to [REDACTED] will be allocated as a bonus
for PSS incentives and a portion of such
distributor discount equal to [REDACTED]
will be allocated for a Corporate Rebate
as specified below.
C. With regard to List Price: HSI and PSS will conduct focus
group sessions relative to the List Price to physicians and
the physician's charge to patients. Based upon the outcome
of these focus group sessions, HSI and PSS may agree to
change the List Price to the physicians [REDACTED].
D. With regard to territory:
1. The exclusive territory for PSS sales is the United
States and its possessions.
2. It is expected that the territory of Canada will be
discussed and awarded to PSS later, based upon
a mutually acceptable agreement.
4
<PAGE>
Execution A
E. With regard to customers:
1. PSS will sell and ship to all physicians at their
offices and physicians at hospitals or ancillary
hospital sites provided that PSS delivers the
BreastAssure(TM) directly to the physician's office
(the "Physician's Office Market"). The initial
targeted market segment will be OB/GYNs.
2. HSI will sell and ship:
a. to physicians at hospitals wherein the
BreastAssure(TM) is shipped to
the hospital for use in the hospital; and
b. BreastAssure(TM) at substantially
discounted prices for community or breast
cancer organizational screenings,
government sales, insurance company health
fair activities or any similar sale which
HSI and PSS mutually deem to be beneficial
to the promotion of BreastAssure(TM); and
HSI will advise PSS in writing of such
activities in advance.
F. With regard to shipments:
1. HSI will ship FOB Destination to each PSS Service
Distribution Center via standard United Parcel
Service (UPS) or an equivalent delivery service.
2. Product has a two-year shelf life and the
manufacturing date will be marked on each individual
box.
a. HSI will not ship product to PSS with
dating more than six (6) months after
the manufactured date.
5
<PAGE>
Execution A
b. PSS will insure rotation of inventory on a
First In, First Out basis.
3. HSI and PSS will abide by the Returned Goods Policy
in attached Appendix A.
4. PSS will pre-stock each Service Distribution Center
with a thirty-day initial supply of product, the
amount to be mutually agreed upon based upon the
number of sales representatives at each branch. The
initial stocking order will be determined after HSI
and PSS mutually agree upon a non-binding Roll-Out
Schedule, but at least ninety (90) days before the
beginning of the First Year Period.
5. If PSS determines in good faith that any Service
Distribution Center has an excessive supply of
product, it will promptly use its best efforts to
transfer such excess to one or more other Service
Distribution Centers that can use it promptly and
PSS may return to HSI any excessive supply of
product remaining thereafter.
6. Payment terms are Net Forty-five (45) Days, or one
percent (1%) Net Fifteen (15) Days from date of
shipment from the HSI plant.
G. With regard to forecasts:
1. HSI and PSS will prepare and mutually agree on
non-binding rolling forecasts by quarter for four
(4) quarters, with the first two (2) quarters
detailed by Service Distribution Center and the
last two (2) quarters
6
<PAGE>
Execution A
detailed by region. The first quarter will be used
by HSI to plan its shipments to PSS.
2. The forecasts will be based upon the PSS fiscal year
ending March 31.
H. With regard to any FDA problem or recall:
1. PSS will use its reasonable best efforts to
cooperate with HSI in the resolution of the matter
and supply all information requested by FDA or
necessary and which HSI needs to resolve the
matter.
II. PSS agrees that:
A. A BreastAssure(TM) Product Champion Specialist (the "PCS")
position in the PSS marketing department will be created,
and in connection therewith:
1. The individual will be an existing PSS employee who
will be selected by PSS and approved by HSI before
June 1996.
2. The expenses for salary, fringe benefits, bonuses,
travel and all other expenses (except training
expenses referred to in subparagraph 3 below) will
be paid by PSS.
3. The PCS will be trained at HSI for a minimum of four
weeks at HSI's expense.
4. The PCS will report directly to the PSS Vice
President of Marketing and report indirectly to the
HSI Director of Sales.
B. A bonus plan will be developed for PSS incentives, as follows:
7
<PAGE>
Execution A
1. The First Year Period will be [REDACTED].
2. The bonus will begin at [REDACTED].
3. The Corporate Rebate will be allocated at [REDACTED].
4. An additional rebate will be allocated to PSS, as
follows:
a. With respect to units sold in the First
Year Period:
i. None for the first one million
(1,000,000) units sold;
[REDACTED]
b. With respect to units sold in the year
immediately following the First Year Period:
i. None for the first three and a half
million (3,500,000) units sold;
[REDACTED]
8
<PAGE>
Execution A
c. With respect to units sold in periods
subsequent to those set forth above,
[REDACTED].
C. PSS will report monthly sales of BreastAssure(TM) by Service
Distribution Center by region to HSI.
D. PSS will designate HSI as a Platinum Level Manufacturer,
with all privileges and courtesies normally accorded to such
manufacturers and with HSI proportionately responsible for
all normally assumed costs that all other Platinum Level
Manufacturers must similarly bear.
E. PSS will assist HSI in developing marketing collaterals such
as training videos and sales materials, with all costs of
materials to be paid by HSI.
F. PSS will coordinate conventions with HSI, with the goal of:
1. locating the HSI booth area near the PSS booth, or
sponsoring BreastAssure(TM) at the PSS booth if HSI
does not attend the national and regional conventions
at which PSS exhibits; and
2. as agreed to by PSS on a case-by-case basis, helping
HSI at regional or national conventions not normally
attended by PSS by having local sales
9
<PAGE>
Execution A
representatives attend and cover the booth activities
during convention hours.
G. PSS will invest in HSI as follows:
1. It will purchase one and one-half (1 1/2) Units (as
such terms are defined in the CPOM, such units
being called the "PSS Units") upon the same terms
and conditions as other investors in the offering
described in the attached CPOM (and concurrently
herewith, PSS is delivering its check in the amount
of Fifty-five Thousand Five Hundred Dollars
($55,500) representing the first installment of
such purchase in escrow to Honigman Miller Schwartz
and Cohn, as escrow agent, payable to the order of
Honigman Miller Schwartz and Cohn for deposit in
its escrow trust account, which amount such escrow
agent shall either pay to HSI after the Minimum
Offering provided for in the CPOM is completed or,
if such closing does not occur and such offering is
abandoned, return such amount to PSS), and in
connection with such purchase, HSI represents and
warrants to PSS that the PSS Units will be
identical to the Units issued in connection with
the Minimum Offering, except to the extent the
Institutional Investors described in the CPOM may
have rights provided for in a Voting and
Stockholders's Rights Agreement providing for the
election of directors, specific reporting
requirements and certain other matters in
substantially the form previously provided to PSI
and the final
10
<PAGE>
Execution A
form of which shall be provided PSI within a
reasonable time following its execution and delivery,
and
2. Subject to the terms and condition of the Warrant
Certificate, Five Hundred Thousand Dollars
($500,000) by exercising a special warrant issued
by HSI to PSS concurrently herewith (the "PSS
Warrant") at Three Dollars ($3.00) per share for
one hundred sixty-six thousand six hundred
sixty-seven (166,667) HSI common shares, provided,
that:
i. the Five Hundred Thousand Dollars
($500,000) will be solely used by
HSI for advertising and promotion
of BreastAssure(TM); and
ii. the holder of the warrant will have
the same rights with respect to Tag
Along privileges and Registration
Rights as the holders of the Units
described in the CPOM.
H. In addition and notwithstanding anything to the contrary in
Section II.G.2. hereof, HSI shall have the right, in its
sole discretion, at any time that it in good faith
anticipates an offering of its equity securities to be
registered pursuant to the provisions of the Securities Act
of 1933 within the next ninety (90) days or the acquisition
of HSI by a third party within the next sixty (60) days (or
such shorter period as may be applicable in the event HSI
first becomes aware of such anticipated acquisition less
than sixty (60) days prior thereto), to give to PSS thirty
(30) days' prior written notice of termination of the PSS
Warrant, whereupon PSS
11
<PAGE>
Execution A
at its option may either exercise the PSS Warrant before the
expiration of such thirty-day (30) period or allow the PSS
Warrant to automatically terminate in accordance with its
terms at the end of such thirty-day period.
I. The PSS President and Chief Operating Officer, John Sasen,
Jr., will join the HSI Board of Directors (in accordance
with and subject to Section III.A. below).
J. PSS will be bound by all the terms and conditions of the
attached Licensing Agreement.
III. HSI agrees that:
A. During the term of this Agreement, HSI will nominate and use
its best efforts to secure the election to the HSI Board of
Directors of one director specified by PSS who shall be an
officer and employee of PSS;
B. HSI will budget a quantity of BreastAssure(TM) samples deemed
by HSI and PSS to be fair and reasonable for the initial
product launch, and will develop a Sample Policy and
Strategy to be administered by its BreastAssure(TM) PSC.
This will have quantities of BreastAssure(TM) with:
1. no charge samples initially; and
2. then, samples at HSI's factory cost of goods.
C. PSS and HSI will develop a non-binding regional/national
Roll-out Schedule for the First Year Period. This Schedule,
based upon the HSI Business Plan, is shown in Appendix B.
12
<PAGE>
Execution A
D. HSI will hire and employ the personnel and allocate the
monies specified in the HSI budget (including but not
limited to the Director of Sales, Marketing Director, Vice
President of Sales & Marketing and six Regional Sales
Managers), the Advertising & Promotional budget and the
Clinical budget.
E. HSI will hire a packaging engineer as budgeted and, during
the second calendar quarter of 1996, will complete the
packaging design for individual boxes as well as the
shipping carton. The target for the minimum shipment to PSS
is one hundred (100) units [REDACTED]
IV. Miscellaneous
A. All notices, demands and communications shall be in writing
and shall be deemed to have been duly given if delivered by
personal delivery, overnight courier, or certified mail with
return receipt requested, prepaid, as follows:
To HSI:
HumaScan Inc.
514 Centennial Avenue
Cranford, New Jersey 07016
Attn.: Donald Brounstein
With a copy to:
Honigman Miller Schwartz and Cohn
222 Lakeview Avenue, Suite 800
West Palm Beach, Florida 33401
Attn.: Morris C. Brown, Esq.
13
<PAGE>
Execution A
To PSS:
Physician Sales & Service, Inc.
7800 Belfort Parkway, S-250
Jacksonville, Florida 32256
Attn.: Patrick Kelly
With a copy to:
Alston & Bird
1201 W. Peachtree Street
Atlanta, Georgia 30309
Attn.: J. Vaughan Curtis, Esq.
B. This Agreement (with the documents referred to herein or
delivered pursuant hereto) embodies the entire agreement and
understanding between the parties hereto and supersedes all
prior agreements and understandings relating to the subject
matter hereof.
C. This Agreement shall be construed and enforced in accordance
with and governed by the laws of the State of New Jersey
without giving effect to the conflicts of law principles
thereof.
The parties have executed this Agreement as of the date first written
above.
PHYSICIAN SALES & SERVICE, INC.,
a Florida corporation
By:______________________________
Name:______________________
Its:_______________________
HUMASCAN INC.,
a Delaware corporation
By:______________________________
Name:______________________
Its:_______________________
14
<PAGE>
Execution A
APPENDIX A
Returns and Recall Policy
Products may be returned only under one of the following conditions:
o Company recall. HSI will, for all products recalled at its request, at
its option: (a) reimburse PSS at the net invoice price paid or
(b) replace the affected products within thirty (30) days after such
recall.
o Merchandise damaged in transit or defective upon receipt. Claims must
be filed with HSI within ten (10) days of delivery. In the event of
delivery of products in damaged or defective condition, HSI's only
liability shall be replacement of such items on a priority basis but
in any event within thirty (30) days after such claim.
o No product shall be returned unless accompanied by a Returned Goods
Authorization Request available from HSI Customer Service.
PSS's exclusive remedy and HSI's sole liability for returned or recalled
product shall be limited, at HSI's option, to reimbursement for, or
replacement within thirty (30) days of, the affected product.
Product Liability Indemnification. HSI hereby agrees to indemnify PSS for
third party claims and the reasonable expenses of PSS incurred in connection
therewith arising from the use of the product supplied by HSI to PSS except
for:
A. Any act or failure to act on the part of PSS or its employees,
representatives, agents or assigns in handling, storing or
otherwise distributing the product;
B. the sale of outdated product by PSS; or
C. relabeling or repackaging of the product by PSS;
and except that HSI shall have the right to assume the defense of PSS against
any such claims and HSI shall not be liable for any settlement made without
its consent (which will not be unreasonably withheld).
PSS must notify HSI within fifteen (15) business days of any alleged
indemnifying claims by third parties.
Returnable product claims by PSS customers will be resolved by HSI on a
case-by-case basis with each customer (so long as outdated product is returned
within ninety (90) days after the expiration date).
15
<PAGE>
Execution A
Appendix B
Tentative Roll-out Schedule
<TABLE>
<CAPTION>
==========================================================================================================
PSS QUARTER BREASTASSURE(TM) ROLL-OUT
& FISCAL YEAR UNITS (in thousands) TERRITORY
- ----------------------------------------------------------------------------------------------------------
Quarter Year Quarterly Cumulative
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4 (1/1 - 3/31) 1997 190 190 New Jersey/Northeast
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
1 (4/1 - 6/30) 1998 230 420 Northeast/National
- ----------------------------------------------------------------------------------------------------------
2 (7/1 - 9/30) 1998 280 700 National
- ----------------------------------------------------------------------------------------------------------
3 (10/1 - 12/31) 1998 300 1,000 National
- ----------------------------------------------------------------------------------------------------------
4 (1/1 - 3/31) 1998 500 1,500 National
- ----------------------------------------------------------------------------------------------------------
Total, FY 1998 1,310
- ----------------------------------------------------------------------------------------------------------
1 (4/1 - 6/30) 1999 700 National
- ----------------------------------------------------------------------------------------------------------
2 (7/1 - 9/30) 1999 1,000 National
- ----------------------------------------------------------------------------------------------------------
3 (10/1 - 12/31) 1999 1,300 National
- ----------------------------------------------------------------------------------------------------------
4 (1/1 - 3/31) 1999 1,500 National
- ----------------------------------------------------------------------------------------------------------
Total, FY 1999 4,500
==========================================================================================================
</TABLE>
16
<PAGE>
Execution A
INDEX OF ATTACHMENTS
Confidential Private Offering Memorandum with attachments.
Licensing Agreement with attachments
Zigmed Agreement with attachments
Warrant Agreement
WPB/77442.9
17
<PAGE>
HumaScan Inc.
514 Centennial Avenue
Cranford, NJ 07016
June 11, 1996
Mr. David A. Smith
Executive Vice President & CEO
Physician Sales & Service, Inc.
7800 Belfort Parkway, Suite 250
Jacksonville, FL 32266
Dear Dave:
This letter will constitute and amendment to the Exclusive Supply and
Distribution Agreement between Physician Sales & Service, Inc. ("PSS") and
HumaScan Inc. ("HSI") dated February 27, 1996.
PSS and HIS mutually agree as follows:
1. PSS will not distribute a competitive product substantially identical to
BreastAssure(TM) during the term of the Agreement unless: due to
competitive product end user sales pricing, quality, verifiable results or
customer acceptance, the BreastAssure(TM) is not, after 90 days of
receiving a notice from PSS deemed competitive by PSS.
2. PSS and HSI have selected the volume number of one million (1,000,000)
BreastAssure(TM) units in 1997 and three and a half million (3,500,000)
units in 1998 as the targets for sales in 1997 and 1998.
If sales during such periods are less than fifty percent (50%) of such
targets, PSS and HSI will each have the right to terminate the Agreement
upon three (3) months notice. During such three (3) month period, PSS and
HSI will negotiate in good faith to continue the agreement by establishing
revised sales targets.
Please sign below to signify your agreement to the above changes.
Sincerely,
/s Don Brounstein
- ------------------------------
Don Brounstein
President
Agreed and Accepted
Physician Sales and Services, Inc.
By: /s/ David A. Smith
--------------------------
David A. Smith
EVP, CFO
<PAGE>
HUMASCAN INC.
1996 STOCK INCENTIVE PLAN
1. Definitions: As used herein, the following definitions shall apply:
(a) "Board of Directors" shall mean the Board of Directors of
the Corporation.
(b) "Corporation" shall mean HumaScan Inc., a Delaware
corporation, or any successor thereof.
(c) "Discretion" shall mean in the sole discretion of the
Board of Directors, with no requirement whatsoever that the Board of
Directors follow past practices, act in a manner consistent with past
practices, or treat an employee or consultant in a manner consistent
with the treatment afforded other employees or consultants with respect
to the Plan.
(d) "Incentive Option" shall mean an option to purchase Common
Stock of the Corporation which meets the requirements set forth in the
Plan and also meets the definition of an incentive stock option within
the meaning of Section 422 of the Code. The stock option agreement for
an Incentive Option shall state that the option is intended to be an
Incentive Option.
(e) "Nonemployee Director" shall mean any member of the Board
of Directors of the Corporation who otherwise (i) is not presently an
employee of the Corporation, (ii) is not a former employee still
receiving compensation for prior services (other than benefits under a
tax-qualified pension plan), (iii) was not an officer of the
Corporation at any time, and (iv) is not currently receiving
remuneration from the Corporation in any capacity other than as a
director.
(f) "Nonqualified Option" shall mean an option to purchase
Common Stock of the Corporation which meets the requirements set forth
in the Plan but does not meet the definition of an incentive stock
option within the meaning of Section 422 of the Code. The stock option
agreement for a Nonqualified Option shall state that the option is
intended to be a Nonqualified Option.
(g) "Participant" shall mean any employee or consultant
designated by the Board of Directors under Paragraph 6 for
participation in the Plan.
(h) "Plan" shall mean this HumaScan Inc. 1996 Stock Incentive
Plan.
(i) "Restricted stock award" shall mean a grant of Common
Stock of the Corporation which is subject to forfeiture, restrictions
against transfer, and such other terms and conditions determined by the
Board of Directors, as provided in Paragraph 20.
-1-
<PAGE>
(j) "Stock appreciation right" shall mean a right to receive
the appreciation in value, or a portion of the appreciation in value,
of a specified number of shares of the Common Stock of the Corporation,
as provided in Paragraph 13.
(k) "Subsidiary" shall mean any corporation or similar entity
in which the Corporation owns, directly or indirectly, stock or other
equity interest ("Stock") possessing more than 25% of the combined
voting power of all classes of Stock; provided, however, that an
Incentive Option may be granted to an employee of a Subsidiary only if
the Subsidiary is a corporation and the Corporation owns, directly or
indirectly, 50% or more of the total combined voting power of all
classes of Stock of the Subsidiary.
2. Purpose of Plan: The purpose of the Plan is to provide employees and
consultants of the Corporation and its Subsidiaries and Nonemployee Directors
with an increased incentive to make significant and extraordinary contributions
to the long-term performance and growth of the Corporation and its Subsidiaries,
to join the interests of employees, consultants and Nonemployee Directors with
the interests of the shareholders of the Corporation, and to facilitate
attracting and retaining employees, consultants and Nonemployee Directors of
exceptional ability.
3. Administration: The Plan shall be administered by the Board of
Directors. Subject to the provisions of the Plan, the Board of Directors shall
determine, from those eligible to be Participants under the Plan, the persons to
be granted stock options, stock appreciation rights and restricted stock, the
amount of stock or rights to be optioned or granted to each such person, and the
terms and conditions of any stock options, stock appreciation rights and
restricted stock. Subject to the provisions of the Plan, the Board of Directors
is authorized to interpret the Plan, to make, amend and rescind rules and
regulations relating to the Plan and to make all other determinations necessary
or advisable for the Plan's administration. Interpretation and construction of
any provision of the Plan by the Board of Directors shall be final and
conclusive.
4. Indemnification of Board Members: In addition to such other rights
of indemnification as they may have, the members of the Board of Directors shall
be indemnified by the Corporation in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in connection
with the Plan or any option, stock appreciation right or restricted stock
granted hereunder to the full extent permitted by applicable law or provided for
under the Corporation's Articles of Incorporation or Bylaws with respect to
indemnification of directors of the Corporation.
5. Maximum Number of Shares Subject to Plan: The maximum number of
shares with respect to which stock options or stock appreciation rights may be
granted or which may be awarded as restricted stock under the Plan shall be
700,000 shares in the aggregate of Common Stock of the Corporation. The number
of shares with respect to which a stock appreciation right is granted, but not
the number of shares which the Corporation delivers or could deliver to a
Participant upon exercise of a stock appreciation right, shall be charged
against the aggregate number of shares remaining available under the Plan;
provided, however,
-2-
<PAGE>
that in the case of a stock appreciation right granted in conjunction with a
stock option under circumstances in which the exercise of the stock appreciation
right results in termination of the stock option and vice versa, only the number
of shares subject to the stock option shall be charged against the aggregate
number of shares remaining available under the Plan. If a stock option or stock
appreciation right expires or terminates for any reason (other than termination
as a result of the exercise of a related right) without having been fully
exercised, or if shares of restricted stock are forfeited, the number of shares
with respect to which the stock option or stock appreciation right was not
exercised at the time of its expiration or termination, and the number of
forfeited shares of restricted stock, shall again become available for the grant
of stock options or stock appreciation rights, or the award of restricted stock,
under the Plan, unless the Plan shall have been terminated.
The number of shares subject to each outstanding stock option, stock
appreciation right or restricted stock award, the option price with respect to
outstanding stock options, the grant value with respect to outstanding stock
appreciation rights and the aggregate number of shares remaining available under
the Plan shall be subject to such adjustment as the Board of Directors, in its
Discretion, deems appropriate to reflect such events as stock dividends, stock
splits, recapitalizations, mergers, consolidations or reorganizations of or by
the Corporation; provided, however, that no fractional shares shall be issued
pursuant to the Plan, no rights may be granted under the Plan with respect to
fractional shares, and any fractional shares resulting from such adjustments
shall be eliminated from any outstanding stock option, stock appreciation right,
or restricted stock award.
6. Participants: The Board of Directors shall determine and designate
from time to time, in its Discretion, those employees and consultants of the
Corporation or any Subsidiary to receive stock options, stock appreciation
rights, or restricted stock who, in the judgment of the Board of Directors, are
or will become responsible for the direction and financial success of the
Corporation or any Subsidiary; provided, however, that Incentive Options may be
granted only to employees of the Corporation or of a Subsidiary and, in the case
of employees of a Subsidiary, only if (i) the Corporation owns, directly or
indirectly, 50% or more of the total combined voting power of all classes of
Stock of the Subsidiary, and (ii) the Subsidiary is a corporation. For the
purposes of the Plan, employees shall include officers and directors who are
also employees of the Corporation or any Subsidiary.
7. Written Agreement: Each stock option, stock appreciation right and
restricted stock award shall be evidenced by a written agreement (each an "Award
Agreement") containing such provisions as may be approved by the Board of
Directors. Each such Award Agreement shall constitute a binding contract between
the Corporation and the Participant or Nonemployee Director and every
Participant or Nonemployee Director, upon acceptance of such Award Agreement,
shall be bound by the terms and restrictions of the Plan and of such Award
Agreement. The terms of each such Award Agreement shall be in accordance with
the Plan, but each Award Agreement may include additional provisions and
restrictions determined by the Board of Directors, in its Discretion, provided
that such additional provisions and restrictions are not inconsistent with the
terms of the Plan.
8. Allotment of Shares: The Board of Directors shall determine and fix,
in its Discretion, the number of shares of Common Stock with respect to which a
Participant may be
-3-
<PAGE>
granted stock options and stock appreciation rights and the number of shares of
restricted stock which a Participant may be awarded; provided, however, that no
Incentive Option may be granted under the Plan to any one Participant which
would result in the aggregate fair market value, determined as of the date the
option is granted, of underlying stock with respect to which incentive stock
options are exercisable for the first time by such Participant during any
calendar year under any plan maintained by the Corporation (or any parent or
subsidiary corporation of the Corporation) exceeding $100,000.
9. Nonemployee Director Awards: Each Nonemployee Director who was
serving as a member of the Board of Directors on the date the Plan was adopted
shall automatically be granted on such date an option to purchase 15,000 shares
of Common Stock of the Corporation (subject to adjustment as provided in
Paragraph 5) ("Initial Nonemployee Director Options"). Moreover, beginning with
the first annual meeting of the stockholders of the Corporation after the date
the Plan is adopted by the Board and provided that a sufficient number of shares
remain available under the Plan, each year on the date of the annual meeting of
the stockholders of the Corporation there shall automatically be granted to each
Nonemployee Director who is serving on or elected to the Board of Directors on
such date an option to purchase 10,000 shares of Common Stock of the Corporation
(subject to adjustment as provided in Paragraph 5) ("Regular Nonemployee
Director Options"). The options to be issued to Nonemployee Directors under the
Plan shall be Nonqualified Options.
10. Stock Options: Subject to the terms of the Plan, the Board of
Directors, in its Discretion, may grant to Participants either Incentive Options
or Nonqualified Options or any combination thereof. Each option granted under
the Plan shall designate the number of shares covered thereby, if any, with
respect to which the option is an Incentive Option, and the number of shares
covered thereby, if any, with respect to which the option is a Nonqualified
Option.
11. Stock Option Price: Subject to the rules set forth in this
Paragraph 11, at the time any stock option is granted, the Board of Directors,
in its Discretion, shall establish the price per share for which the shares
covered by the option may be purchased. With respect to an Incentive Option,
such option price shall not be less than 100% of the fair market value of the
stock on the date on which such option is granted; provided, however, that with
respect to an Incentive Option granted to an employee who at the time of the
grant owns (after applying the attribution rules of Section 424(d) of the Code)
more than 10% of the total combined voting stock of the Corporation or of any
parent or subsidiary, the option price shall not be less than 110% of the fair
market value of the stock on the date such option is granted. With respect to a
Nonqualified Option, the option price shall not be less than 100% of the fair
market value of the stock on the date upon which such option is granted. Fair
market value of a share shall be determined by the Board of Directors and, if
and when the Common Stock of the Corporation becomes publicly traded, may be
determined by taking the mean between the highest and lowest quoted selling
prices of the Corporation's Common Stock on any exchange or other market on
which the shares of Common Stock of the Corporation shall be traded on such
date, or if there are no sales on such date, on the next following day on which
there are sales. The option price of Initial Nonemployee Director Options shall
be equal to the initial public offering price of the Common Stock. The option
price shall be subject to adjustment in accordance with the provisions of
paragraph 5 of the Plan.
-4-
<PAGE>
12. Payment of Stock Option Price: To exercise in whole or in part any
stock option granted hereunder, payment of the option price in full in cash or,
with the consent of the Board of Directors, in Common Stock of the Corporation
or by a promissory note payable to the order of the Corporation in a form
acceptable to the Board of Directors, shall be made by the Participant or
Nonemployee Director for all shares so purchased. Such payment may, with the
consent of the Board of Directors, also consist of a cash down payment and
delivery of such promissory note in the amount of the unpaid exercise price. In
the Discretion of and subject to such conditions as may be established by the
Board of Directors, payment of the option price may also be made by the
Corporation retaining from the shares to be delivered upon exercise of the stock
option that number of shares having a fair market value on the date of exercise
equal to the option price of the number of shares with respect to which the
Participant or Nonemployee Director exercises the stock option. Such payment may
also be made in such other manner as the Board of Directors determines is
appropriate, in its Discretion. No Participant or Nonemployee Director shall
have any of the rights of a shareholder of the Corporation under any stock
option until the actual issuance of shares to said Participant or Nonemployee
Director, and prior to such issuance no adjustment shall be made for dividends,
distributions or other rights in respect of such shares, except as provided in
Paragraph 5.
13. Stock Appreciation Rights: Subject to the terms of the Plan, the
Board of Directors may grant stock appreciation rights to Participants either in
conjunction with, or independently of, any stock options granted under the Plan.
A stock appreciation right granted in conjunction with a stock option may be an
alternative right wherein the exercise of the stock option terminates the stock
appreciation right to the extent of the number of shares purchased upon exercise
of the stock option and, correspondingly, the exercise of the stock appreciation
right terminates the stock option to the extent of the number of shares with
respect to which the stock appreciation right is exercised. Alternatively, a
stock appreciation right granted in conjunction with a stock option may be an
additional right wherein both the stock appreciation right and the stock option
may be exercised. A stock appreciation right may not be granted in conjunction
with an Incentive Option under circumstances in which the exercise of the stock
appreciation right affects the right to exercise the Incentive Option or vice
versa, unless the stock appreciation right, by its terms, meets all of the
following requirements:
(a) the stock appreciation right will expire no later than the
Incentive Option;
(b) the stock appreciation right may be for no more than the
difference between the option price of the Incentive Option and the
fair market value of the shares subject to the Incentive Option at the
time the stock appreciation right is exercised;
(c) the stock appreciation right is transferable only when the
Incentive Option is transferable, and under the same conditions;
(d) the stock appreciation right may be exercised only when
the Incentive Option is eligible to be exercised; and
(e) the stock appreciation right may be exercised only when
the fair market value of the shares subject to the Incentive Option
exceeds the option price of the Incentive Option.
-5-
<PAGE>
Upon exercise of a stock appreciation right, a Participant shall be
entitled to receive, without payment to the Corporation (except for applicable
withholding taxes), an amount equal to the excess of or, in the Discretion of
the Board of Directors if provided in the Award Agreement, a portion of the
excess of (i) the then aggregate fair market value of the number of shares with
respect to which the Participant exercises the stock appreciation right, over
(ii) the aggregate fair market value of such number of shares at the time the
stock appreciation right was granted. This amount shall be payable by the
Corporation, in the Discretion of the Board of Directors, in cash or in shares
of Common Stock of the Corporation or any combination thereof.
14. Granting and Vesting of Stock Options and Stock Appreciation
Rights:
(a) Subject to the provisions of this Paragraph 14, each stock
option and stock appreciation right granted hereunder to a Participant
shall be exercisable at any such time or times or in any such
installments as may be determined by the Board of Directors at the time
of the grant; provided, however, no such stock option or stock
appreciation right may be exercisable prior to the expiration of six
months from the date of grant unless the Participant dies or becomes
disabled prior thereto.
(b) Subject to the provisions of this Paragraph 14, (i)
Initial Nonemployee Director Options shall become exercisable with
respect to 100% of the underlying shares on the date of grant. Regular
Nonemployee Director Options shall become exercisable with respect to
33-1/3% of the underlying shares on the date of grant, 66-2/3% of the
underlying shares one year after the date of grant and 100% of the
shares underlying shares two years after the date of grant; provided,
however, that if a Nonemployee Director's service as a member of the
Board of Directors terminates by reason of death or disability, then a
stock option granted to such Nonemployee Director shall become
exercisable in full as of the date of such termination.
(c) A Participant may exercise a stock option or stock
appreciation right, if then exercisable, and a Nonemployee Director may
exercise a stock option, if then exercisable, in whole or in part by
delivery to the Corporation of written notice of the exercise, in such
form as the Board of Directors may prescribe, accompanied, in the case
of a stock option, by (i) payment for the shares with respect to which
the stock option is exercised in accordance with Paragraph 12, or (ii)
in the Discretion of the Board of Directors, irrevocable instructions
to a stockbroker to promptly deliver to the Corporation full payment
for the shares with respect to which the stock option is exercised from
the proceeds of the stockbroker's sale of or loan against the shares.
(d) Successive stock options and stock appreciation rights may
be granted to the same Participant, whether or not the stock option(s)
and stock appreciation right(s) previously granted to such Participant
remain unexercised. A Participant may exercise a stock option or a
stock appreciation right, if then exercisable, notwithstanding that
stock options and stock appreciation rights previously granted to such
Participant remain unexercised. Successive stock options may be granted
to the same Nonemployee Director, whether or not the stock option(s)
previously granted to such Nonemployee Director remain unexercised. A
Nonemployee Director may exercise a stock option, if
-6-
<PAGE>
then exercisable, notwithstanding that stock options previously granted
to such Nonemployee Director remain unexercised.
15. Nontransferability of Stock Options and Stock Appreciation Rights:
No stock option or stock appreciation right granted under the Plan to a
Participant or Nonemployee Director shall be transferable by such Participant or
Nonemployee Director otherwise than by will or by the laws of descent and
distribution, and stock options and stock appreciation rights shall be
exercisable, during the lifetime of the Participant or Nonemployee Director,
only by the Participant or Nonemployee Director.
16. Term of Stock Options and Stock Appreciation Rights: If not sooner
terminated, each stock option and stock appreciation right granted hereunder
shall expire not more than 10 years from the date of the granting thereof;
provided, however, that with respect to an Incentive Option or a related stock
appreciation right granted to a Participant who, at the time of the grant, owns
(after applying the attribution rules of Section 424(d) of the Code) more than
10% of the total combined voting stock of all classes of stock of the
Corporation or of any parent or subsidiary, such option and stock appreciation
right (if any) shall expire not more than five (5) years after the date of
granting thereof.
17. Continuation of Employment or Service: The Board of Directors may
require, in its Discretion, that any Participant or Nonemployee Director to whom
a stock option or stock appreciation right shall be granted shall agree in
writing as a condition of the granting of such stock option or stock
appreciation right to remain in the employ or as a consultant of the Corporation
or a Subsidiary, or continue serving on the Board of Directors, for a designated
minimum period from the date of grant of such stock option or stock appreciation
right as shall be fixed by the Board of Directors.
18. Termination of Employment of Participants: Except as provided
below, stock options and stock appreciation rights granted to a Participant may
be exercised only while the Participant is an employee or consultant of the
Corporation or a Subsidiary. If the employment or consultancy of a Participant
by the Corporation or a Subsidiary shall terminate, the Board of Directors may,
in its Discretion, permit the exercise of stock options and stock appreciation
rights granted to such Participant (i) for a period not to exceed three months
following termination of employment with respect to Incentive Options or related
stock appreciation rights if termination of employment is not due to death or
permanent disability of the Participant, (ii) for a period not to exceed one
year following termination of employment with respect to Incentive Options or
related stock appreciation rights if termination of employment is due to the
death or permanent disability of the Participant, and (iii) for a period not to
extend beyond the expiration date with respect to Nonqualified Options or
related or independently granted stock appreciation rights. In no event,
however, shall a stock option or stock appreciation right be exercisable
subsequent to its expiration date and, furthermore, unless the Board of
Directors in its Discretion determines otherwise, a stock option or stock
appreciation right may be exercised after termination of a Participant's
employment or consultancy only to the extent exercisable on the date of
termination of employment or consultancy or to the extent exercisable as a
result of the reason for termination of employment or consultancy. The period of
time, if any, a Participant shall have to exercise stock options or stock
appreciation rights upon termination of employment or consultancy shall be set
forth in the Award Agreement.
-7-
<PAGE>
19. Termination of Service of Nonemployee Directors: If the membership
of a Nonemployee Director on the Board of Directors terminates by reason of
death or disability, a stock option granted to such Nonemployee Director may be
exercised for a period of twelve months after such termination. If the
membership of a Nonemployee Director on the Board of Directors terminates for
any reason other than death or disability, a stock option granted to such
Nonemployee Director may be exercised for a period of sixty days after such
termination. In no event, however, shall a stock option be exercisable
subsequent to its expiration date and, furthermore, a stock option may be
exercised after termination of a Nonemployee Director's membership on the Board
of Directors only to the extent exercisable on the date of such termination.
20. Restricted Stock Awards: Subject to the terms of the Plan, the
Board of Directors may award shares of restricted stock to Participants. All
shares of restricted stock granted to Participants under the Plan shall be
subject to the following terms and conditions (and to such other terms and
conditions prescribed by the Board of Directors):
(a) At the time of each award of restricted shares, there
shall be established for the shares a restricted period, which shall be
no less than six months and no greater than five years. Such restricted
period may differ among Participants and may have different expiration
dates with respect to portions of shares covered by the same award.
(b) Shares of restricted stock awarded to Participants may not
be sold, assigned, transferred, pledged, hypothecated or otherwise
encumbered during the restricted period applicable to such shares.
Except for such restrictions on transfer, a Participant shall have all
of the rights of a shareholder in respect of restricted shares awarded
to him or her including, but not limited to, the right to receive any
dividends on, and the right to vote, the shares.
(c) If a Participant ceases to be an employee or consultant of
the Corporation or a Subsidiary for any reason (voluntary or
involuntary, and with or without cause) other than death or permanent
disability, all shares theretofore awarded to the Participant which are
still subject to the restrictions imposed by Paragraph 20(b) shall upon
such termination of employment or consultancy be forfeited and
transferred back to the Corporation, without payment of any
consideration by the Corporation. In the event such employment or
consultancy is terminated by action of the Corporation or a Subsidiary
without cause or by agreement between the Corporation or a Subsidiary
and the Participant, however, the Board of Directors may, in its
Discretion, release some or all of the shares from the restrictions.
(d) If a Participant ceases to be an employee or consultant of
the Corporation or a Subsidiary by reason of death or permanent
disability, the restrictions imposed by Paragraph 20(b) shall lapse
with respect to shares then subject to such restrictions, unless
otherwise determined by the Board of Directors.
(e) Stock certificates shall be issued in respect of shares of
restricted stock awarded hereunder and shall be registered in the name
of the Participant. Such
-8-
<PAGE>
certificates shall be deposited with the Corporation or its designee,
together with a stock power endorsed in blank, and, in the Discretion
of the Board of Directors, a legend shall be placed upon such
certificates reflecting that the shares represented thereby are subject
to restrictions against transfer and forfeiture.
(f) At the expiration of the restricted period applicable to
the shares, the Corporation shall deliver to the Participant or the
legal representative of the Participant's estate the stock certificates
deposited with it or its designee and as to which the restricted period
has expired. If a legend has been placed on such certificates, the
Corporation shall cause such certificates to be reissued without the
legend.
In the case of events such as stock dividends, stock splits,
recapitalizations, mergers, consolidations or reorganizations of or by the
Corporation, any stock, securities or other property which a Participant
receives or is entitled to receive by reason of his or her ownership of
restricted shares shall, unless otherwise determined by the Board of Directors,
be subject to the same restrictions applicable to the restricted shares and
shall be deposited with the Corporation or its designee.
21. Investment Purpose: If the Board of Directors in its Discretion
determines that as a matter of law such procedure is or may be desirable, it may
require a Participant or Nonemployee Director, upon any acquisition of Common
Stock hereunder (whether by reason of the exercise of stock options or stock
appreciation rights or the award of restricted stock) and as a condition to the
Corporation's obligation to issue or deliver certificates representing such
Common Stock, to execute and deliver to the Corporation a written statement, in
form satisfactory to the Board of Directors, representing and warranting that
the Participant's or Nonemployee Director's acquisition of shares of stock shall
be for such person's own account, for investment and not with a view to the
resale or distribution thereof and that any subsequent offer for sale or sale of
any such shares shall be made either pursuant to (a) a registration statement on
an appropriate form under the Securities Act of 1933, as amended (the
"Securities Act"), which registration statement has become effective and is
current with respect to the shares being offered and sold, or (b) a specific
exemption from the registration requirements of the Securities Act, but in
claiming such exemption the Participant or Nonemployee Director shall, prior to
any offer for sale or sale of such shares, obtain a favorable written opinion
from counsel for or approved by the Corporation as to the availability of such
exemption. The Corporation may endorse an appropriate legend referring to the
foregoing restriction upon the certificate or certificates representing any
shares issued or transferred to a Participant or Nonemployee Director under the
Plan.
22. Rights to Continued Employment or Membership on Board of Directors:
Nothing contained in the Plan or in any stock option, stock appreciation right
or restricted stock granted or awarded pursuant to the Plan, nor any action
taken by the Board of Directors hereunder, shall confer upon any Participant or
Nonemployee Director any right with respect to continuation of employment or
consultancy, in the case of Participants, or membership on the Board of
Directors, in the case of Nonemployee Directors. Nothing contained in the Plan
or in any stock option granted pursuant to the Plan, nor any action taken by the
Board of Directors hereunder, shall interfere in any way with the right of the
Corporation to terminate such person's employment, consultancy or membership on
the Board of Directors, as the case may be, at any
-9-
<PAGE>
time, subject to the provisions of any employment or consulting agreement
between such person and the Corporation.
23. Withholding Payments: If upon the exercise of a Nonqualified Option
or stock appreciation right, or upon the award of restricted stock or the
expiration of restrictions applicable to restricted stock, or upon a
disqualifying disposition (within the meaning of Section 422 of the Code) of
shares acquired upon exercise of an Incentive Option, there shall be payable by
the Corporation or a Subsidiary any amount for income tax withholding, in the
Board of Directors's Discretion, either the Corporation shall reduce the amount
of Common Stock or cash to be delivered or paid to the Participant or
Nonemployee Director by an appropriate amount or the Participant or Nonemployee
Director shall pay an amount equal to the amount required to be paid for income
tax withholding to the Corporation or Subsidiary to reimburse it for such income
tax withholding. The Board of Directors may, in its Discretion, permit
Participants and Nonemployee Directors to satisfy such withholding obligations,
in whole or in part, by electing to have the amount of Common Stock delivered or
deliverable by the Corporation upon exercise of a stock option or stock
appreciation right or upon award of restricted stock reduced, or by electing to
tender Common Stock back to the Corporation subsequent to exercise of a stock
option or stock appreciation right or award of restricted stock, to reimburse
the Corporation or a Subsidiary for such income tax withholding, subject to such
rules and regulations as the Board of Directors may adopt. The Board of
Directors may make such other arrangements with respect to income tax
withholding as it shall determine.
24. Effectiveness of Plan: The Plan shall be effective as of the date
the Board of Directors of the Corporation adopts the Plan, provided that the
shareholders of the Corporation approve the Plan within 12 months of its
adoption by the Board of Directors. Stock options, stock appreciation rights and
restricted stock may be granted or awarded prior to shareholder approval of the
Plan, but each such stock option, stock appreciation right or restricted stock
grant or award shall be subject to shareholder approval of the Plan. No stock
option or stock appreciation right may be exercised prior to shareholder
approval, and any restricted stock awarded is subject to forfeiture if such
shareholder approval is not obtained.
25. Termination, Duration and Amendments of Plan: The Plan may be
abandoned or terminated at any time by the Board of Directors of the
Corporation. Unless sooner terminated, the Plan shall terminate on the date ten
years after its adoption by the Board of Directors, and no stock options, stock
appreciation rights or restricted stock may be granted or awarded thereafter.
The termination of the Plan shall not affect the validity of any stock option,
stock appreciation right or restricted stock outstanding on the date of
termination.
The Board of Directors shall have the right, with or without approval
of the shareholders of the Corporation, to amend or revise the terms of the Plan
for any lawful purpose and at any time, but not more frequently than once in any
six month period, except to comport with changes in the Code, the Employee
Retirement Income Security Act, or the rules thereunder; provided, however, that
no such amendment or revision shall (i) without approval or ratification of the
shareholders of the Corporation (A) increase the maximum number of shares in the
aggregate which are subject to the Plan (subject, however, to the provisions of
Paragraph 5), (B) increase the maximum number of shares for which any
Participant or Nonemployee Director may be granted stock options, stock
appreciation rights or awarded restricted stock under the
-10-
<PAGE>
Plan (except as contemplated by Paragraph 5), (C) change the class of persons
eligible to participate in the Plan, or (D) materially increase the benefits
accruing to Participants or Nonemployee Directors under the Plan, or (ii)
without the consent of the holder thereof, change the stock option price (except
as contemplated by Paragraph 5) or alter or impair any stock option, stock
appreciation right or restricted stock which shall have been previously granted
or awarded under the Plan.
As adopted by the Board of Directors as of June 20, 1996.
-11-
<PAGE>
As of November 16, 1995
Mr. Donald Brounstein
Chief Executive Officer
HumaScan Inc.
89 Summit Avenue
Suite 129
Summit, NJ 07901
Re: Terms of Financial Services Agreement between Burnham Securities and
HumaScan Inc.
--------------------------------------------------------------------
Dear Don:
You have informed us that HumaScan Inc. ("HumaScan" or the "Company") would
like to raise (the "Financing") up to $8,000,000 (the "Maximum") of capital
from accredited investors with a minimum of $5,000,000 (the "Minimum"), or
such other amount as may be agreed upon by the parties, in order to fund the
construction of a production facility, plant leasehold improvements and other
start-up and working capital costs, through a private placement of the
Company's securities, as further described below.
This letter, when countersigned by you, will confirm that the Company has
engaged Burnham Securities Inc. (the "Advisor") as the Company's exclusive
financial agent to assist the Company in arranging the Financing and to advise
the Company on the terms of the Financing, subject to the following terms and
conditions:
1. Engagement.
(a) The Company hereby engages the Advisor to act as the exclusive
financial agent of the Company, for an initial period commencing on the
date hereof and terminating 180 days thereafter, to assist in arranging the
Financing, and the Advisor hereby accepts such engagement. The Company will
extend full cooperation to the Advisor and any prospective investor in
connection with its due diligence investigation.
(b) In the event that the Minimum amount of Financing is closed within 180
days hereof, the Company agrees that the compensation to which the Advisor
shall be entitled for any additional amounts raised by the Company between
the Minimum and Maximum amount shall be based upon the same schedule of
compensation to the Advisor as outlined in sections 3(a), (b), (c), (d),
and (f) of this Agreement. The parties shall negotiate in good faith the
Advisor's compensation for any amount of financing in excess of the Maximum
based on market compensation levels.
<PAGE>
(c) The Advisor shall also have the exclusive right (the "Exclusive Right")
to provide to the Company investment banking and corporate finance services
in connection with any public or private financings, mergers or
acquisitions or other similar transactions, such exclusive rights to remain
in effect from the date on which the closing of the first sale of Preferred
Stock pursuant to section 2(a)(ii) occurs (the "Exclusivity Commencement
Date"), until 36 months thereafter (the "Exclusivity Period").
Notwithstanding the foregoing, subject to the Company paying the Advisor
the fee referred to in Section 3(f) below, in the event that the Company
consummates an offering of its securities registered pursuant to the
Securities Act of 1933 (an "IPO") during the twelve (12) months following
the Exclusivity Commencement Date, the Advisor shall not have the exclusive
right to arrange for such IPO and thereafter the Exclusivity Period shall
terminate. In the event that the Company shall not have consummated an IPO
during such 12 months, and thereafter during the Exclusivity Period the
Company consummates an IPO, the Company shall, at the Advisor's option,
either (x) pay to the Advisor a fee of 1% of the gross proceeds of such
public offering, in which event the Exclusive Right shall not apply, and
the Exclusivity Period shall terminate, or (y) the Advisor shall have the
right to manage of co-manage such IPO, provided that at the election of the
Company's lead underwriter, the Company shall have the right to terminate
the Exclusivity Period conditional upon payment to the Advisor of a fee of
1% of the gross proceeds of such offering. Upon the termination of the
Exclusivity Period, as aforesaid, the Company agrees, nevertheless, to
consider the Advisor in good faith for any corporate finance or investment
banking services during the remaining portion of the Exclusivity Period,
and agrees that it shall not grant exclusive investment banking or
corporate finance rights to any other party.
2. Securities.
(a) The Advisor will use its "best efforts" to:
(i) within 30 days hereof, arrange a $350,000, 10% interest bearing
bridge loan (the "Notes"), convertible into 350,000 shares of Preferred
Stock, described below, with a nine month maturity. Upon the closing of
the Minimum amount of the Financing, the Notes will automatically
convert into shares of Preferred Stock and all accrued interest will be
paid by the Company. The Notes will be collateralized by all of Don
Brounstein's stock in HumaScan and a first lien on all of the Company's
assets, or other collateral acceptable to the Note holders. Upon the
conversion of the Notes into Preferred Stock or the repayment of the
Notes, such stock pledge shall be released. The holders of the Notes
shall also receive warrants for an aggregate of 70,000 shares of Common
Stock exercisable at any time until the fifth anniversary date of the
closing at an exercise price of $2.20 per share.
(ii) place between 2,325,000 (Minimum) and 3,825,000 shares of
Convertible Preferred Stock (the "Preferred Stock") at a price of
$2.00/share for total cash proceeds of between $4,650,000 and $7,650,000
(excluding the conversion of the Notes). Of this amount, investors will
pay a mutually agreed upon portion of the subscription price at the
closing and will pay the balance in increments over an agreed upon
subsequent period. Defaulting subscribers will forfeit any shares for
which full payment has not been received and, under certain
circumstances to be agreed upon, a portion of such subscribers' shares
for which full payment has been received. The purchasers of the
Preferred Stock will receive one warrant for every five shares (the
"Warrants") to
2
<PAGE>
purchase between 465,000 (Minimum) and 765,000 (Maximum) additional
shares of the common stock, exercisable at any time until the fifth
anniversary date of the closing at an exercise price of $2.20/share.
(b) Holders of the Preferred Stock will be entitled to a liquidation
preference and will have the right to convert each share into shares of
Common Stock as agreed upon. In addition, holders of the Preferred Stock
will have voting rights, based upon the number of shares held, provided
that before conversion they can vote as a class to elect Directors as
provided in paragraph 2(d) and as otherwise mutually agreed upon.
Conversion will be required upon an IPO and the holders of Preferred Stock,
or shares of common stock if converted before an IPO, would be subject to a
maximum of a 12 month lockup restriction if requested by the underwriter.
(c) The terms of the securities shall contain other customary terms and
provisions including approval rights, piggy-back and mandatory registration
rights, anti-dilution rights (excluding options and warrants in an amount
not to exceed 400,000 of underlying common stock at a minimum exercise
price of $4.00 per share to be used for employees and consultants subject
to approval by the HumaScan Board of Directors), redemption rights upon the
occurrence of certain events and other terms and conditions.
(d) Holders of the Preferred Stock will be entitled to elect the Board of
Directors until the occurrence of an IPO and as otherwise agreed upon.
(e) It is understood that while the Advisor will attempt to place the
Securities as described above, it may be necessary, upon mutual consent of
the Advisor and the Company, to modify such terms to meet investors' demand
and market conditions. The term Financing, for the purposes of this
Agreement, shall refer to such modified terms.
(f) An acceptable budget must be presented to the Advisor demonstrating a
maximum use of funds during the first year after closing of $4.8 million.
(g) The Financing is subject, inter alia to due diligence satisfactory to
the Advisor.
(h) The Financing is subject, inter alia, to placement of the securities.
3. Compensation To The Advisor.
(a) Reimbursement of Expenses. The Company agrees to pay all reasonable
out-of-pocket expenses, including disbursements and legal fees incurred by
the Advisor in acting on the Company's behalf hereunder, and in addition to
the fees payable under Sections 3(b), 3(c), 3(d) and 3(e).
(b) Retainer. A retainer fee of $20,000, payable to the Advisor in advance,
$10,000 of which will be applied against the Transaction Fee if the
Financing is completed. In addition, $20,000 initial retainer fee will be
required for counsel.
(c) Transaction Fee. As compensation for assisting in the arrangement of
the Financing, the Company agrees to pay the Advisor at the closing of the
transaction (or at each closing, if the
3
<PAGE>
financing is closed in two or more tranches) a cash fee (the "Transaction
Fee") equal to 7% of the gross subscriptions committed to at such closing
or closings, as the case may be, including the bridge loan and any financing
related to the Financing, such as any financing (whether actually paid in
or whether a commitment to pay) to be provided by PSS (collectively the
"Commitments"). The Transaction Fees shall be payable at each closing. You
agree that you will refer or identify investors accounting for a minimum of
$1,750,000 and that Don Brounstein will purchase at least $200,000
aggregate principal amount of Notes and securities pursuant to Section
2(a)(ii) of this Agreement. Any loans or advances made by Donald Brounstein
to HumaScan after August 1, 1995 and prior to the Exclusivity Commencement
Date will be applied to the purchase of the securities.
(d) Stock Purchase Warrants. As further compensation for arranging the
Financing, at each closing of the Financing, the Company agrees to issue
the Advisor warrants (the "Warrants") to purchase a number of shares of
common stock of the Company equal to one share for every fifteen dollars of
Commitments closed on but no less than 400,000 (for example, 533,333
Warrants for a $8,000,000 Financing). The Warrants will be issued at each
closing of the Financing based on the Commitments received, will be
exercisable for a period of five (5) years from the date of issue at a
price of $2.20/share and will be subject to other customary terms and
conditions, which the parties hereto agree to negotiate in good faith,
including anti-dilution provisions.
(e) Other. The Company agrees to nominate and use its best efforts to elect
one designee of Burnham Securities Inc. to the Board of Directors of the
Company, for so long as at least one-third of the Preferred Stock issued in
connection with the Financing is outstanding. A monthly advisory fee (the
"Advisory Fee") equal to $4,000/month will be paid to the Advisor, in
consideration of their providing advisory services, for a minimum of 36
months after the Exclusivity Commencement Date.
(f) The Company shall pay the Advisor a further fee of 1% of the gross
proceeds of any IPO of the Company undertaken during the twelve (12) month
period following the Exclusivity Commencement Date in accordance with
section 1(c).
4. Termination.
(a) This Agreement may be terminated by the Advisor at any time or by the
Company at any time prior to completion of the Financing. Termination shall
be effective upon giving of a written notice to that effect. After the
completion of the Minimum Financing, this Agreement may not be terminated
by the Company without the Advisor's written consent, except that the
Company shall have the right to terminate this agreement at such time, if
ever, that more than 10% of the Preferred Stock issued by the Company is
repurchased by the Company in accordance with the provisions of the
subscription agreements (to be executed in connection with the sale of the
Securities) due to the subscribers' failure to make installments on the
subscription price of the Securities notwithstanding the delivery by the
Company to such subscribers of a certificate signed by the chief executive
officer of the Company stating that there has been no adverse change in the
business of the Company since the last installment date (the "Minimum
Repurchase"), which right may be exercised by the Company during the 30 day
period following the date the Minimum Repurchase is met, provided that any
repurchased shares resold shall not be included in the calculation of the
Minimum Repurchase.
4
<PAGE>
(b) If, during the next 180 days from the date hereof and prior to the
completion of the Minimum Financing, the Company (i) terminates this
Agreement or (ii) decides not to follow through with the Financing (each a
"Non-Financing Determination") then, in either of such events, the Advisor
will be entitled to full fees (including Warrants) pursuant to Section 3
hereof calculated as if the Maximum proceeds were raised. In addition, the
event the Company makes a Non-Financing Determination and during such 180
days the Company enters into a letter of intent or a commitment for
financing with a party other than the Advisor, and closes a financing
within 24 months after the expiration of such 180 days, then the Advisor
shall also be entitled to full fees under Section 3 calculated as if the
Maximum Financing was raised. Furthermore, if the Company makes a
Non-Financing Determination and during the 24 month period following the
termination or the expiration of this Agreement, the Company shall complete
a financing with any party which was contacted by the Advisor during the
term hereof, the Advisor shall receive compensation from the Company based
on the compensation schedule set forth in Sections 3(c) and 3(d) applied to
the gross amount raised from such investors. The provisions of this section
4(b) should be subject to the terms and provisions of section 1(c) above.
(c) The provisions of Sections 3, 4, 6, 7, 8, and 9 hereof shall survive
the termination of this Agreement and closing of the Financing.
5. Progress Reports. Advisor shall give monthly oral progress updates.
6. Arbitration. Any controversy among the parties arising out of or relating to
this Agreement or the alleged breach thereof shall be determined by arbitration
in accordance with the rules existing at the time of election of arbitration
under this paragraph provided by the Board of Arbitration of the NASD or the
American Arbitration Association. The Company may elect the set of the
foregoing rules to apply by notice to the Advisor given within five (5) days
after notice to the Company requesting such election. If the Company does not
so elect the applicable rules within such five day period, the Advisor is
hereby authorized to make such election. In all events, any arbitration
hereunder shall be before at least three arbitrators, and the award of the
arbitrators, or majority of them, shall be final. Judgment upon such award may
be entered in any state or federal court having jurisdiction.
7. Indemnification. In connection with engagements such as these, it is a policy
of the Firm to receive indemnification. The Company agrees to the provisions
with respect to the indemnity and other matters set forth in Schedule B which
is incorporated by reference into this Agreement.
8. Governing Law. This Agreement shall be interpreted in accordance with its
terms and otherwise in accordance with the laws of the State of New York,
applicable to contracts entered into and to be performed entirely within such
State.
9. Entire Agreement. This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof, and supersedes all
prior agreements, understandings, representations and statements, if any,
whether oral or written, with respect to the subject matter hereof. No
modification of this Agreement shall be valid or binding upon the parties
hereto unless made in writing and signed on behalf of each party hereto by its
respective authorized officer.
5
<PAGE>
If the foregoing is in accordance with the Company's understanding, please sign
and return the enclosed copy of this letter, whereupon this Agreement shall
constitute a binding agreement between the Company and the Advisor.
Very truly yours,
Burnham Securities, Inc.
/s/ RANDALL P. STERN
--------------------------------
Randall P. Stern
Managing Director
ACCEPTED AND AGREED TO AS
OF THIS 16TH DAY OF November, 1995
HumaScan Inc.
By: /s/ DONALD BROUNSTEIN
-----------------------------
Name: Donald Brounstein
Title: President
6
<PAGE>
Schedule B
The Company agrees to indemnify Burnham Securities Inc. ("Burnham") and/or any
controlling person, director, officer, employee or agent of Burnham and hold
them harmless against any losses, claims, damages, expenses or liabilities to
which Burnham and/or such other indemnified parties may become subject arising
in any manner out of or in connection with the rendering of services by
Burnham hereunder, except to the extent that it is finally judicially determined
that such losses, claims, damages, expenses (including reasonable fees and
expenses of counsel), liabilities, actions, proceedings, investigations (formal
and informal) or inquiries are caused by gross negligence or willful misconduct
of Burnham and/or any controlling person, director, officer, employee or agent
of Burnham; and in case any action shall be brought against Burnham and/or any
other party indemnified hereunder with respect to which indemnity may be
sought against the Company, Burnham shall promptly notify the Company in
writing and the Company shall assume the defense thereof, including the
employment of counsel selected by the Company reasonably satisfactory to
Burnham and payment of all fees and expenses. Burnham and/or any party
indemnified hereunder shall have the right to retain separate counsel, but the
fees and expenses of such counsel shall be at the expense of Burnham or such
other indemnified party, as the case may be, unless (i) the expenses of such
counsel have been expressly assumed in writing by the Company, (ii) the Company
has failed to assume the defense or employ counsel satisfactory to Burnham, or
(iii) the named parties to any such action (including any impeaded parties)
include both (a) Burnham or any other indemnified party and (b) the Company
or any controlling person, director, officer, employee, or agent of the Company,
and Burnham or such other indemnified party shall have been advised by legal
counsel that there may be one or more legal defenses available to is which are
different from or additional to those available to the Company or the
Company's agents (in which case the Company shall not have the right to assume
the defense of such action on behalf of Burnham and/or such other indemnified
party), it being understood that if Burnham elects not to have the Company
defend any claim pursuant to this clause (iii), Burnham shall give the Company
the opportunity to be defended by the legal counsel selected by Burnham, and;
it being understood, further, that the Company shall not, in connection with
any one such action or separate, substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable for the reasonable fees and expenses of more than one separate firm
of attorneys for Burnham all all such other indemnified parties, which firm
shall be designated in writing by Burnham. For actions brought against Burnham
or such other indemnified party for which the Company has assumed the defense,
the Company agrees that it will not, without the prior consent of Burnham,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action or preceding relating to the matters contemplated by
Burnham's engagement unless such settlement, compromise or consent (i) includes
an unconditional release of Burnham and such indemnified parties from all
liability arising of that may arise out of such claim, and (ii) provides for the
payment of an amount that the Company is willing and able to pay.
The Company and Burnham agree that if any indemnification or reimbursement
sought pursuant to the preceding paragraph is finally judicially determined to
be unavailable (except by reason of the gross negligence or willful misconduct
of Burnham or its controlling persons, directors, officers, employees or
agents, as the case may be), then the Company and Burnham shall contribute to
the Liabilities for which such indemnification or reimbursement is held
unavailable in such proportion as is appropriate to reflect (a) the relative
benefits to the Company on the one hand, and Burnham on the other hand, in
connection with the transactions to which such indemnification or
reimbursement relates, (b) the relative fault of the parties, and (c) other
equitable considerations; provided, however, that in no event shall the amount
to be contributed by Burnham exceed the amount of the fees actually received by
Burnham hereunder.
The reimbursement, indemnity and contribution obligations of the Company under
the preceding paragraphs shall be in addition to any right that Burnham and/or
any shall be binding upon and inure controlling person, director, officer,
employee, or have agent of Burnham may otherwise, and to the benefit of any
successors, assigns, heirs, and personal representatives of the Company,
Burnham or such other persons.
<PAGE>
HUMASCAN INC.
514 CENTENNIAL AVENUE
CRANFORD, NEW JERSEY 07016
June 20, 1996
Burnham Securities Inc.
1323 Avenue of the Americas
New York, New York 10019
Re: Financial Services Agreement,
dated November 16, 1995 ("Services Agreement")
----------------------------------------------
Gentlemen:
You are aware that we intend to file a registration statement with the
Securities and Exchange Commission in connection with the Company's initial
public offering of its common shares, with Keane Securities Co., Inc., acting
as representative of the several underwriters ("Offering").
This will confirm our understanding that the Services Agreement is
hereby amended as follows:
1. Paragraph 1(c) of the Services Agreement is deleted in its entirety;
2. Paragraph 3(f) of the Services Agreement is deleted in its entirety;
and
3. Paragraph 3(e) of the Services Agreement is amended in its entirety
to read as follows:
"(e) A monthly advisory fee (the "Advisory Fee") equal to
$2,000/month will be paid to the Advisor, in consideration of
their providing advisory services, for 36 months after the date on
which the closing of the first sale of Preferred Stock pursuant to
Section 2(a)(ii) occurs."
The foregoing amendments to the Services Agreement shall be null and
void if the Offering is not consummated by September 30, 1996.
<PAGE>
Concurrently herewith, we are delivering to you the balance of $100,000
owed to you as commissions in connection with our private placements for which
you acted as exclusive placement agent.
You also agree to waive your rights under paragraphs 2, 5, 6 and 7 of
the Voting and Stockholders' Rights Agreement. This waiver shall be null and
void if the Offering is not consummated by September 30, 1996.
Please indicate your agreement with the foregoing by signing in the
space provided below and returning a copy of this letter to us.
Very truly yours,
HUMASCAN INC.
By: /s/ Donald Brounstein
-------------------------
DONALD BROUNSTEIN
PRESIDENT
ACCEPTED AND AGREED TO:
BURNHAM SECURITIES INC.
By: /s/ Randall P. Stern
-----------------------------
RANDALL P. STERN
MANAGING DIRECTOR
2
<PAGE>
HUMASCAN INC.
514 CENTENNIAL AVENUE
CRANFORD, NEW JERSEY 07016
July 19, 1996
Burnham Securities Inc.
1323 Avenue of the Americas
New York, New York 10019
Re: Financial Services Agreement,
dated November 16, 1995, as amended ("Services Agreement")
-----------------------------------------------------------
Gentlemen:
You are aware that we have filed a registration statement with
the Securities and Exchange Commission in connection with the Company's initial
public offering of its common shares, with Keane Securities Co., Inc., acting as
representative of the several underwriters ("Offering").
This will confirm our understanding that the Services
Agreement is hereby amended by deleting paragraph 3(e) thereof in its entirety.
The foregoing amendment to the Services Agreement shall be
null and void if the Offering is not consummated by September 30, 1996.
Please indicate your agreement with the foregoing by signing
in the space provided below and returning a copy of this letter to us.
Very truly yours,
HUMASCAN INC.
By: /s/ Donald Brounstein
--------------------------------
DONALD BROUNSTEIN
PRESIDENT
ACCEPTED AND AGREED TO:
BURNHAM SECURITIES INC.
By: /s/ Randall P. Stern
-------------------------------
RANDALL P. STERN
MANAGING DIRECTOR
<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of
___________________, between HUMASCAN INC., a Delaware corporation
("Corporation"), and ____________________ ("Director").
Recitals
A. Director is a member of Corporation's Board of Directors and
Corporation desires Director to continue in such capacity. Director is willing
to continue to serve on Corporation's Board of Directors if Director receives
the protections provided by this Agreement.
B. Corporation's Articles of Incorporation obligate it to indemnify its
directors and officers to the maximum extent authorized by Section 145 of the
General Corporation Law of the State of Delaware, as the same may be amended and
supplemented.
C. Corporation intends to secure, at its expense, directors' and
officers' liability insurance ("D&O Insurance") protecting its directors in
connection with their performance of services for Corporation.
D. Corporation believes that (1) litigation against corporate
directors, regardless of whether meritorious, is expensive and time-consuming
for the director to defend; (2) there is a substantial risk of a large judgment
or settlement in litigation in which a corporate director was neither culpable
nor profited personally to the detriment of the corporation; (3) it is
increasingly difficult to attract and keep qualified directors because of such
potential liabilities; and (4) it is important for a director to have assurance
that indemnification will be available if the director acts in accordance with
reasonable business standards to the fullest extent permitted by applicable law,
it is in the best interests of Corporation and its shareholders for Corporation
to contractually obligate itself to indemnify its directors and to set forth the
details of the indemnification process.
E. Based upon the conclusions stated in Recital D above, to induce
Director to continue to serve on Corporation's Board of Directors and in
consideration of Director's continued service as a director, Corporation wishes
to enter into this Agreement with Director.
Therefore, Corporation and Director agree as follows:
1 . Agreement to Serve. Director will serve as a member of the Board of
Directors of Corporation so long as Director is duly elected and qualified to so
serve or until Director resigns or is removed from Corporation's Board of
Directors.
<PAGE>
2. Indemnification.
(a) Corporation will indemnify Director to the fullest extent permitted
under the governing law in effect on the date hereof or as such laws may from
time to time hereafter be amended to increase the scope of such permitted
indemnification if Director was or is a party or threatened to be made a party
to any threatened, pending or completed action, arbitration, alternative dispute
resolution mechanism, investigation, administrative hearing, or any other suit
or proceeding of any kind, whether civil, criminal, administrative or
investigative and whether formal or informal (including actions by or in the
right of Corporation and any preliminary inquiry or claim by any person or
authority) (collectively, a "Proceeding"), by reason of the fact that Director
is or was a director, officer, employee or agent of Corporation or is or was
serving at Corporation's request as a director, officer, employee or agent of
another corporation (including a Subsidiary), partnership, joint venture, trust
or other enterprise against liability incurred in connection with such
proceeding, including any appeal thereof (collectively, "Covered Matters"). Such
indemnification will cover all Expenses (as defined in paragraph 5(a) below),
liabilities, judgments (including punitive and exemplary damages), penalties,
fines (including excise taxes relating to employee benefit plans and civil
penalties) and amounts paid in settlement which are incurred or imposed upon
Director in connection with a Covered Matter (collectively, "Indemnified
Amounts").
(b) Notwithstanding the foregoing provisions of paragraph 2(a) above,
no such indemnification shall be made in respect of any claim, issue, or matter
as to which the governing law expressly prohibits such indemnification by reason
of an adjudication of liability of Director to the Corporation; provided,
however, that in such event such indemnification shall nevertheless be made by
the Corporation to the extent that the court in which such action or suit was
brought shall determine equitable under the circumstances.
(c) Notwithstanding any provision of this Agreement, to the extent that
Director has been wholly successful on the merits or otherwise absolved in any
proceeding on any claim, issue or matter, Director shall be indemnified against
all Expenses incurred by Director or on Director's behalf in connection
therewith. If Director is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all
claims, issues or matters in such Proceeding, the Corporation shall indemnify
Director to the maximum extent permitted by law, against all Expenses,
judgments, penalties, fines and amounts paid in settlement, incurred by Director
in connection with each successfully resolved claim, issue, or matter. For
purposes of this paragraph 2, and without limitation, the termination of any
such claim, issue or matter by dismissal with or without prejudice shall be
deemed to be a successful resolution as to such claim, issue or matter.
3. Claims for Indemnification. Director will give Corporation written
notice of any claim for indemnification under this Agreement. Payment requests
will include a schedule setting forth in reasonable detail the amount requested
and will be accompanied (or, if necessary, followed) by copies of the relevant
invoices or other documentation. Upon Corporation's request, Director will
provide Corporation with a copy of the document or pleading, if any, notifying
Director of the
-2-
<PAGE>
Covered Matter. To the extent practicable, Corporation will pay
Indemnified Amounts directly without requiring Director to make any prior
payment.
4. Determination of Right to Indemnification.
(a) Director will be presumed to be entitled to indemnification
under this Agreement and will receive such indemnification, subject to paragraph
4(b) below, irrespective of whether the Covered Matter involves allegations of
intentional misconduct, alleged violations of Section 16(b) of the Securities
Exchange Act of 1934, alleged violations of Section 10(b) of the Securities
Exchange Act of 1934 (including Rule l0b-5 thereunder), breach of Director's
fiduciary duties (including duties of loyalty or care) or any other claim.
(b) If, in the opinion of counsel to Corporation, applicable law
permits indemnification in a Covered Matter only as authorized in the specific
case upon a determination that indemnification is proper in the circumstances
because Director has met a standard of conduct established by applicable law,
and upon an evaluation of Indemnified Amounts to be paid in connection with such
Covered Matter, the following will apply:
(1) Corporation will give Director notice that a determination
and evaluation will be made under this paragraph 4(b); such notice will
be given immediately after receipt of counsel's opinion that such a
determination and evaluation is necessary and will include a copy of
such opinion.
(2) Such determination and evaluation will made in good
faith, as follows:
(A) by a majority vote of a quorum of Corporation's
Board of Directors who are not parties or threatened to be
made parties to the Covered Matter in question ("Disinterested
Directors") or, if such a quorum is not obtainable or, even if
obtainable, by a majority vote of a committee of two or more
Disinterested Directors who are selected by the entire Board;
or
(B) by an attorney or firm of attorneys, having no
previous relationship with Corporation or Director, which is
selected by the Board of Directors or Committee as prescribed
in clause (A) above; or
(C) by the shareholders by a majority vote of a
quorum consisting of shareholders who were not parties to such
proceeding, or, if no such quorum is obtainable, by a majority
vote of shareholders who were not parties to such proceeding.
(3) Director will be entitled to a hearing before the entire
Board of Directors of Corporation and any other person or persons
making the determination and
-3-
<PAGE>
evaluation under clause (2) above. Director will be entitled to be
represented by counsel at such hearing.
(4) The cost of a determination and evaluation under this
paragraph 4(b) (including attorneys' fees and other expenses incurred
by Director in preparing for and attending the hearing contemplated by
clause (3) above and otherwise in connection with the determination and
evaluation under this paragraph 4(b)) will be borne by Corporation.
(5) The determination will be made as promptly as reasonably
possible after notice from counsel to Corporation of the need therefor
and, in any case, promptly as possible after final adjudication of the
Covered Matter.
(6) Evaluation of the reasonableness of expenses and
authorization of indemnification shall be made in the same manner as
the determination that indemnification is permissible. If the
determination of permissibility is made under clause 2(B) above, the
same persons shall evaluate the reasonableness of expenses and may
authorize indemnification.
(7) Director will be presumed to have met the required
standard of conduct under this paragraph 4(b) unless it is clearly
demonstrated to the determining body that Director has not met the
required standard of conduct.
(c) Notwithstanding the failure of Corporation to provide
indemnification, and despite any contrary determination of the Board of
Directors or of the shareholders in the specific case, Director may apply for
indemnification or advancement of expenses, or both, to the court conducting the
proceeding, to the circuit court, or to another court of competent jurisdiction.
5. Indemnification for Expenses of a Witness.
Notwithstanding any other provision of this Agreement, to the extent
that Director, by reason of the fact that Director is or was a director,
officer, employee or agent of Corporation or any other entity which Director is
or was serving at the request of Corporation, a witness in any Proceeding,
Director shall be indemnified by the Corporation against all Expenses actually
incurred by Director or on Director's behalf in connection therewith.
6. Advance of Expenses.
(a) Before final adjudication of a Covered Matter, upon Director's
request pursuant to paragraph 3 above, Corporation will promptly either advance
Expenses directly or reimburse Director for all Expenses. As used in this
Agreement, "Expenses" means all costs and expenses (including attorneys' fees,
expert fees, other professional fees and court costs) incurred by Director in
connection with a Covered Matter other than judgments, penalties, fines and
settlement amounts.
-4-
<PAGE>
(b) Expenses incurred by Director in defending a civil or criminal
proceeding may be paid by Corporation in advance of the final disposition of
such proceeding, only upon receipt of an undertaking by or on behalf of Director
to repay such amount if Director is ultimately found by the court not to be
entitled to indemnification by Corporation.
7. Defense of Claim.
(a) Except as provided in paragraph 7(c) below, Corporation, jointly
with any other indemnifying party, will be entitled to assume the defense of any
Covered Matter as to which Director requests indemnification.
(b) Counsel selected by Corporation to defend any Covered Matter
will be subject to Director's advance written approval, which will not be
unreasonably withheld.
(c) Director may employ Director's own counsel in a Covered Matter
and be fully reimbursed therefor if (1) Corporation approves, in writing, the
employment of such counsel or (2) either (A) Director has reasonably concluded
that there may be a conflict of interest between Corporation and Director or
between Director and other parties represented by counsel employed by
Corporation to represent Director in such action or (B) Corporation has not
employed counsel reasonably satisfactory to Director to assume the defense of
such Covered Matter promptly after Director's request.
(d) Neither Corporation nor Director will settle any Covered Matter
without the other's written consent, which will not be unreasonably withheld.
(e) If Director is required to testify (in court proceedings,
depositions, informal interviews or otherwise), consult with counsel, furnish
documents or take any other reasonable action in connection with a Covered
Matter, Corporation will pay Director a fee for Director's efforts at a rate
equal to the amount payable to Director for attending Board and Board committee
meetings, plus reimbursement for all reasonable expenses incurred by Director in
connection therewith.
8. Disputes: Enforcement.
(a) If there is a dispute relating to the validity or enforceability
of this Agreement or a denial of indemnification, Advance of Expenses or payment
of any other amounts due under this Agreement or Corporation's Articles of
Incorporation or Bylaws, Corporation will provide such idemnification, Advance
of Expenses or other payment until a final, non-appealable judgment that
Director is not entitled to such indemnification, Advance of Expenses or other
payment has been rendered by the court of last resort (or by a lower court if
not timely appealed). Director will repay such amounts if such final,
non-appealable judgment so requires.
(b) Corporation will reimburse all of Director's reasonable expenses
(including attorneys' fees) in pursuing an action to enforce Director's rights
under this Agreement unless a final, non-appealable judgment against Director
has been rendered in such action by the court of last
-5-
<PAGE>
resort (or by a lower court if not timely appealed). At Director's request, such
expenses will be advanced by Corporation to Director as incurred before final
resolution of such action by the court of last resort; such expenses will be
repaid by Director if a final, non-appealable judgment in Corporation's favor is
rendered in such action by the court of last resort (or by a lower court if not
timely appealed).
9. D&O Insurance.
(a) Corporation currently has no D&O Insurance in effect.
(b) Subject to the provisions of paragraph 9(c) below, as soon as is
reasonably practical in the sole judgment of the Board of Directors, the
Corporation will purchase and maintain D&O Insurance in such amount as its Board
of Directors determines appropriate, insuring Director against any liability
arising out of Director's status as a director of Corporation, regardless of
whether Corporation has the power to indemnify Director against such liability
under applicable law.
(c) Corporation will not be required to purchase and maintain D&O
Insurance if the Board of Directors of Corporation determines, after diligent
inquiry, that (1) such insurance is not available; or (2) the premiums for
available insurance are disproportionate to the amount of coverage and to the
premiums paid by other corporations similarly situated. The Board of Directors
of Corporation will, at least annually, in good faith review its decision not to
maintain D&O Insurance and will purchase such insurance at any time that the
conditions of this paragraph 9(c) cease to apply.
(d) The parties will cooperate to obtain advances of Expenses,
indemnification payments and consents from D&O Insurance carriers in any Covered
Matter to the full extent of applicable D&O Insurance. The existence of D&O
Insurance coverage will not diminish or limit Corporation's obligation to make
indemnification payments to Director. Amounts paid directly to Director with
respect to a Covered Matter by Corporation's D&O Insurance carriers will be
credited to the amounts payable by Corporation to Director under this Agreement.
10. Limitations of Actions: Limitation of Liability. No action will
be brought by or on behalf of Corporation against Director or Director's heirs
or personal representatives relating to Director's service as a director, after
the expiration of one year from the date Director ceases (for any reason) to
serve as a Director of Corporation, and any claim or cause of action of
Corporation will be extinguished and deemed released unless asserted by the
filing of a legal action before the expiration of such period.
11. Rights Not Exclusive. The indemnification provided to Director
under this Agreement will be in addition to any indemnification provided to
Director by any law, agreement, Board resolution, provision of the Amended and
Restated Articles of Incorporation or Bylaws of Corporation or otherwise.
-6-
<PAGE>
12. Subrogation. Upon payment of any Indemnified Amount under this
Agreement, Corporation will be subrogated to the extent of such payment to all
of Director's rights of recovery therefor and Director will take all reasonable
actions requested by Corporation (at no cost or penalty to Director) to secure
Corporation's rights under this paragraph 12 including executing documents.
13. Continuation of Indemnity. All of Corporation's obligations under
this Agreement will continue as long as Director is subject to any actual or
possible Covered Matter, notwithstanding Director's termination of service as a
director.
14. Amendments. Neither Corporation's Articles of Incorporation nor its
Bylaws will be changed to increase liability of directors or to limit Director's
indemnification. Any repeal or modification of Corporation's Articles of
Incorporation or Bylaws or any repeal or modification of the relevant provisions
of any applicable law will not in any way diminish any of Director's rights or
Corporation's obligations under this Agreement. This Agreement cannot be amended
except with the written consent of Corporation and Director.
15. Governing Law. This Agreement will be governed by Delaware or
Florida law.
16. Duration: Successors.
(a) This Agreement shall apply to any claim asserted and any
Expenses incurred in connection with any claim asserted on or after the
effective date of this Agreement and shall continue until and terminate upon the
later of: (a) 10 years after Director has ceased to occupy any of the positions
or have any of the relationships described in Section 2(a) of this Agreement, or
(b) one year after the final termination of all Proceedings of the kind
described herein with respect to Director which are pending or threatened as of
the date this Agreement would otherwise terminate. This Agreement will be
binding upon and inure to the benefit of the parties and their respective heirs,
legal representatives and assigns.
(b) Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Corporation to assume all of
Corporation's obligations under this Agreement. Such assumption will not release
Corporation from its obligations under this Agreement.
17. Severability. The provisions of this Agreement will be deemed
severable, and if any part of any provision is held illegal, void or invalid
under applicable law, such provision may be changed to the extent reasonably
necessary to make the provision, as so changed, legal, valid and binding. If any
provision of this Agreement is held illegal, void or invalid in its entirety,
the remaining provisions of this Agreement will not in any way be affected or
impaired but will remain binding in accordance with their terms.
-7-
<PAGE>
18. Notices. All notices given under this Agreement will be in writing
and delivered either personally, by registered or certified mail (return receipt
requested, postage prepaid), by recognized overnight courier or by telecopy (if
promptly followed by a copy delivered personally, by registered or certified
mail or overnight courier), as follows:
If to Director:
If to Corporation: HumaScan Inc.
514 Centennial Avenue
Cranford, New Jersey 07016
Attention: Mr. Donald B. Brounstein
or to such other address as either party furnishes to the other in writing.
19. Counterparts. This Agreement may be signed in counterpart.
20. Subsidiaries. As used in this Agreement, the term "Subsidiary"
means any corporation in which Corporation owns a majority interest.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date written above.
HUMANSCAN INC., a Delaware corporation
By:__________________________________
Its:_________________________________
_____________________________________
("Director")
-8-
<PAGE>
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
Humascan Inc.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Short Hills, New Jersey
July 26, 1996
