UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1999
Commission File Number: 333-37441
MEDICAL SCIENCE SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
TEXAS 94-3123681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N.E. LOOP 410, SUITE 820
SAN ANTONIO, TX 78216
(Address of principal executive offices)(Zip Code)
Issuer's Telephone Number: (210) 349-6400
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES (X) NO ( )
Title of Each Class Outstanding at Aug 10, 1999
--------------------- ---------------------------
Common stock, no par value 5,558,835
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
================================================================================
MEDICAL SCIENCE SYSTEMS, INC.
Form 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets (Unaudited) at
June 30,1999 and December 31, 1998....................... 1
Condensed Consolidated Statements of Operations
(Unaudited) for the three and six months ended June 30,
1999 and June 30, 1998................................... 2
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the six months ended June 30, 1999
and June 30, 1998........................................ 3
Notes to Condensed Consolidated (Unaudited)
Financial Statements..................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 17
Item 2. Changes in Securities and Use of Proceeds.................. 17
Item 3. Default Upon Senior Securities............................. 18
Item 4. Submission of Matters to a Vote of Security Holders........ 18
Item 5. Other Information.......................................... 18
Item 6. Exhibits and Reports on Form 8-K........................... 18
i
<PAGE>
PART I
FINANCIAL INFORMATION
MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
-------------- -----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents ............................ $ 4,912,878 $ 2,432,271
Accounts receivable, net of reserves of $38,351 at
June 30, 1999 and $20,959 at December 31, 1998 .. 84,975 125,086
Prepaid Expenses ..................................... 81,353 127,426
------------ ------------
Total current assets ................................. 5,079,206 2,684,783
Furniture and equipment, net ......................... 363,720 458,107
Other Assets ......................................... 0 530,000
------------ ------------
TOTAL ASSETS ......................................... $ 5,442,926 $ 3,672,890
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ..................................... $ 143,870 $ 278,773
Notes payable ........................................ 16,837 47,813
Accrued expenses ..................................... 438,826 433,859
Deferred income ...................................... 370,609 275,321
Current portion of long-term debt .................... 0 81,432
Current portion of capitalized lease obligations ..... 94,610 104,837
------------ ------------
Total current liabilities ............................ 1,064,752 1,222,035
Long-term debt, net .................................. 0 447,856
Capitalized lease obligations, net ................... 119,606 156,651
------------ ------------
Total liabilities .................................... 1,184,358 1,826,542
------------ ------------
Preferred stock, no par value
5,000,000 shares authorized
2,200,000 issued and outstanding at June 30, 1999,
none at December 31, 1998 ......................... 1,234,854 0
Common stock, no par value
10,000,000 shares authorized
5,558,835 shares issued and outstanding at June 30,
1999, 5,548,470 at December 31, 1998 .............. 20,244,111 16,719,933
Retained earnings (Accumulated deficit) .............. (17,220,397) (14,873,585)
------------ ------------
Total shareholders' equity ........................... 4,258,568 1,846,348
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........... $ 5,442,926 $ 3,672,890
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 1
<PAGE>
MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30,1998
------------- ------------- ------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales .................................. $ 129,335 $ 102,616 $ 222,073 $ 161,510
Cost of sales .......................... 43,206 84,005 76,117 114,092
----------- ----------- ----------- -----------
Gross profit ........................... 86,129 18,611 145,956 47,418
Expenses:
Research &
Development .......................... 545,819 349,810 1,100,944 866,732
Selling, General &
Administrative ....................... 693,418 2,035,447 1,402,571 3,820,965
----------- ----------- ----------- -----------
Total expenses ......................... 1,239,237 2,385,257 2,503,515 4,687,697
----------- ----------- ----------- -----------
Loss from operations ................... (1,153,108) (2,366,646) (2,357,559) (4,640,279)
Other income (expense):
Interest income ........................ 26,744 106,691 44,336 252,340
Interest expense ....................... (17,966) (23,135) (40,547) (47,425)
Other income ........................... 2,642 2,436 6,957 2,436
----------- ----------- ----------- -----------
Total other ............................ 11,420 85,992 10,746 207,351
----------- ----------- ----------- -----------
Loss before provision
for income taxes ..................... (1,141,688) (2,280,654) (2,346,813) (4,432,928)
Provision for taxes .................... 0 0 0 850
----------- ----------- ----------- -----------
NET LOSS ............................... $(1,141,688) $(2,280,654) $(2,346,813) $(4,433,778)
=========== =========== =========== ===========
Reconciliation of net loss to net loss applicable to common stock:
Net loss ............................. $(1,141,688) $(2,280,654) $(2,346,813) $(4,433,778)
Amortization of the
value of the bene-
ficial conversion
feature of the
preferred stock ..................... (1,234,854) 0 (1,234,854) 0
----------- ----------- ----------- -----------
Net loss applicable
to common stock ...................... $(2,376,542) $(2,280,654) $(3,581,667) $(4,433,778)
=========== =========== =========== ===========
Basic and diluted
loss per share ....................... (0.43) (0.41) (0.64) (0.80)
=========== =========== =========== ===========
Weighted average common
shares outstanding ................... 5,558,668 5,540,895 5,553,569 5,540,895
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 2
<PAGE>
MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ............................................ $(2,346,813) $(4,433,778)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................. 99,562 71,907
Accretion of investments ....................... 0 (157,036)
(Increase) decrease in
Accounts receivable ............................ 40,111 (21,358)
Inventories .................................... 0 5,156
Prepaid expenses ............................... 46,073 (110,635)
Increase (decrease) in
Accounts payable ............................... (134,903) (269,236)
Accrued expenses ............................... 4,967 415,011
Deferred income ................................ 95,288 126,893
----------- -----------
Net cash used in operating activities ............... (2,195,715) (4,373,076)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment ................ (5,175) (318,361)
Decreases (Increases) in patents .................... 0 (144,811)
Maturity of investments ............................. 0 2,052,000
Decreases (Increases) in Other Assets ............... 530,000 0
----------- -----------
Net cash provided by investing activities ........... 524,825 1,588,828
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock ................................ 10,613 0
Sale of preferred stock ............................. 5,000,000 0
Offering costs of preferred stock issuance .......... (251,580) 0
Proceeds from capitalized lease obligations ......... 0 79,454
Principal payments of notes payable ................. (30,976) 0
Retirement of long-term debt ........................ 0 (558,538)
Proceeds from long-term borrowings .................. 0 570,000
Principal payments of long-term debt ................ (529,288) (73,762)
Principal payments of capitalized lease obligations . (47,272) (30,966)
----------- -----------
Net cash provided by (used in) financing activities . 4,151,497 (13,812)
----------- -----------
Net increase (decrease) in cash and equivalents ..... 2,480,607 (2,798,060)
Cash and equivalents, beginning of period ........... 2,432,271 6,005,059
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD ................. $ 4,912,878 $ 3,206,999
=========== ===========
Interest paid ....................................... $ 40,547 $ 24,290
Income taxes paid ................................... $ 0 $ 1,600
NON-CASH ITEMS
Stock issued to placement agent ..................... $ 500,000 $ 0
Common Stock warrants issued to placement agent ..... $ 3,080,000 $ 0
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3
<PAGE>
NOTE 1 - PRESENTATION OF INTERIM INFORMATION
As contemplated by the Securities and Exchange Commission under Item
310(b) of Regulation S-B, the accompanying consolidated financial
statements and footnotes have been condensed and therefore do not
contain all disclosures required by generally accepted accounting
principles. It is recommended that these interim consolidated financial
statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1998. The interim
financial data are unaudited; however, in the opinion of the management
of Medical Science Systems, Inc. and subsidiaries (the "Company"), the
accompanying unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary
to make the interim financial information not misleading. All
significant intercompany transactions and accounts have been eliminated
in consolidation. Results for interim periods are not necessarily
indicative of those to be expected for the full year. Certain
classifications have been made in prior period financial statements to
conform with the current period presentation.
The accompanying financial statements of the Company have been prepared
on the basis of accounting principles applicable to a going concern.
Since its inception, the Company has incurred cumulative net losses of
approximately $17.2 million, including losses of approximately $1.1
million during the second quarter of 1999 and $2.3 million for the six
months ended June 30, 1999. Additionally, for the six months ended June
30, 1999, the Company experienced negative cash flows from operating
activities of approximately $2.2 million. As a result of these losses,
available cash resources are limited. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might result
from the outcome of these uncertainties. The ability of the Company to
continue as a going concern is dependent upon the Company achieving
significant revenue increases from their existing genetic products,
developing new products, successfully marketing its products to
customers at profitable prices and obtaining significant levels of new
capital. If the Company is not successful in these efforts, the Company
would likely be unable to continue operating as a going concern.
As discussed in footnote 4, the Company issued $5 million of preferred
stock during the second quarter, which generated approximately $4.7
million in net proceeds. Management is in discussions with a number of
potential strategic partners and, if discussions are successfully
completed, believes there should be up-front funding of some of the
Company's development programs. There can be no assurance that any of
the partnering discussions will be completed, or if such discussions are
complete, that there will be up-front funding of the Company's programs.
Management anticipates the current cash resources, absent additional
capital or financings, will be sufficient to conduct its operations as
planned through January 2001.
Page 4
<PAGE>
Commercial success of genetic susceptibility tests will depend upon
their acceptance as medically useful and cost-effective by patients,
physicians, dentists, other members of the medical and dental community,
and third-party payers. It is uncertain whether current genetic
susceptibility tests or others that the Company may develop will gain
commercial acceptance on a timely basis.
Research in the field of disease predisposing genes and genetic markers
is intense and highly competitive. The Company has many competitors in
the United States and abroad which have considerably greater financial,
technical, marketing, and other resources available. If the Company does
not discover disease predisposing genes or genetic markers and develop
susceptibility tests and launch such services or products before their
competitors, then revenues may be reduced or eliminated.
The Company's ability to successfully commercialize genetic
susceptibility tests depends on obtaining adequate reimbursement for
such products and related treatment from government and private health
care insurers and other third-party payers. Doctors' decisions to
recommend genetic susceptibility tests will be influenced by the scope
and reimbursement for such tests by third-party payers. If both
third-party payers and individuals are unwilling to pay for the test,
then the number of tests performed will significantly decrease,
therefore resulting in a reduction of revenues.
The Company has entered into an agreement with Sheffield University,
whereby the Company will undertake the development and commercialization
of certain discoveries resulting from Sheffield University's research.
The agreement is non-cancelable for discoveries on which the parties
have reached a specific agreement, but may be terminated with or without
cause by either party upon six-months notice with respect to new
discoveries on which the parties have not yet reached agreement. If
Sheffield University terminated the agreement, such termination could
make the discovery and commercial introduction of new products more
difficult or unlikely.
NOTE 2 - DISTRIBUTOR AGREEMENTS
During the second quarter of 1999 the Company signed distribution
agreements with two separate distributors. The Company received payments
in connection with exclusive territorial rights which is included in
deferred income net of direct expenses and will be amortized over the
life of the contract.
NOTE 3 - EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share," outlines methods for computing and presenting
earnings per share. SFAS 128 requires a calculation of basic and diluted
weighted average shares outstanding for all periods presented. As the
company had losses for the three and six months ended June 30, 1999 and
1998, convertible preferred stock, options and warrants have been
excluded as they are antidilutive in loss periods.
Page 5
<PAGE>
NOTE 4 - EQUITY
During the quarter ended June 30, 1999, the Company granted stock options
to the interim CEO and Chairman of the Board of Directors for the
purchases of 240,000 shares. The options entitle the holder to purchase
shares of the Company's common stock at $0.50 per share and expire ten
years from the date of issuance.
Pursuant to a Private Placement which occurred in June 1999, the Company
issued 2,200,000 shares of its Series A Preferred Stock, no par value
("Series A Stock"), for $5 million. Each share of the Series A Stock is
automatically converted into five shares of the Company's common stock at
a conversion price of $0.50 per share upon the approval of the private
placement by the Company's shareholders. The Company anticipates receiving
such approval at the Annual Meeting of Shareholders on August 20, 1999.
The Company filed a Registration Statement registering the resale of the
shares of the common stock underlying the Series A Stock on July 23,
1999. The Company anticipates that it will request that the SEC declare
the registration statement effective following approval of the private
placement by the Company's shareholders. On the closing date of the
private placement, the conversion price of the Series A Stock was less
than the market price of the common stock. As a result, there was a
beneficial conversion of approximately $5 million. The beneficial
conversion was recorded as common stock and is being accreted to preferred
stock ratably from the closing date of the preferred stock to the earliest
conversion date, August 20, 1999. In conjunction with this offering, the
placement agent received a warrant to purchase 1,000,000 shares of common
stock at a price of $0.50 per share, and 200,000 shares of preferred
stock. This warrant expires on June 16, 2004.
NOTE 5 - SEGMENT INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes new
standards for reporting information about operating segments in annual and
interim financial statements, requiring that public business enterprises
report financial and descriptive information about its reportable segments
based on a management approach. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and
major customers. In applying the requirements of this statement, each of
the Company's geographic areas described below were determined to be an
operating segment as defined by the statement, but have been aggregated as
allowed by the statement for reporting purposes. As a result, the Company
continues to have one reportable segment, which is the development of
genetic susceptibility tests and therapeutic targets for common diseases.
Page 6
<PAGE>
The following table presents information about the Company by geographic
area.
FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998
----------- -----------
Total Revenues:
United States .................. $ 169,427 $ 136,718
France ......................... 20,910 4,920
Other foreign .................. 31,736 19,872
----------- -----------
Total .................... $ 222,073 $ 161,510
=========== ===========
Operating Income:
United States .................. $(1,791,745) $(3,944,237)
France ......................... (212,180) (139,208)
Other foreign .................. (353,634) (556,834)
----------- -----------
Total .................... $(2,357,559) $(4,640,279)
=========== ===========
Assets:
United States .................. $ 5,442,925 $ 8,648,454
France ......................... 0 0
Other foreign .................. 0 0
----------- -----------
Total .................... $ 5,442,925 $ 8,648,454
=========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Form 10-QSB are "forward-looking
statements" within the meaning of the Section 27A of the Securities Act and
Section 21E of the Exchange Act. Specifically, all statements other than
statements of historical fact included in this Form 10-QSB regarding the
Company's financial position, business strategy and plans and objectives of
management of the Company for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect" and "intend" and words or phrases of similar
import, as they relate to the Company or its subsidiaries or Company management,
are intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions related to certain factors
including, without limitation, risks inherent to developing genetic tests once
genes have been discovered, the Company's limited sales and marketing
experience, risk of market acceptance of the Company's products, risk of
technology and products obsolescence, delays in development of products,
reliance on partners, risks related to third-party reimbursement, risks
regarding government regulation, competitive risks and those risks and
uncertainties described in the Company's Registration Statement on Form S-3
filed July 23, 1999 (File No. 333-83631) and in other filings made by the
Company with the Securities and
Page 7
<PAGE>
Exchange Commission (collectively, "cautionary statements"). Although the
Company believes that its expectations are reasonable, it can give no assurance
that such expectations will prove to be correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected, or
intended. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary statements. The Company
does not intend to update these forward-looking statements.
The following comments should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-QSB.
GENERAL OVERVIEW
Medical Science Systems, Inc., a Texas corporation ("MSSI" or the
"Company") develops and commercializes genetic diagnostic tests and
medical research tools. The Company's efforts are focused on genetic
factors that affect the rate of progression of clinical disease through
their influence on common host systems. The Company's first genetic test,
PST(R), a test predictive of risk for periodontal disease, is currently
marketed in the United States, Europe and Israel. Products under
development include tests predictive of risk for osteoporosis, coronary
artery disease, diabetic retinopathy, asthma, pulmonary fibrosis, and
meningitis/sepsis.
The Company believes by combining genetic risk assessment with specific
therapeutic strategies, improved clinical outcomes and more cost-effective
management of these common diseases are achieved. MSSI also develops and
licenses its medical research tools, including BioFusion(R), to
pharmaceutical companies. BioFusion, a proprietary enabling system for
diagnostic and drug discovery and development, is a computer modeling
system that integrates genetic and other sub-cellular behavior, system
functions, and clinical symptoms to simulate complex diseases. This system
allows useful information to be derived from rapidly increasing databases
of gene expression being generated in companies and academic centers
worldwide.
The Company successfully completed a private placement in June 1999. The
offering of $5 million of preferred stock raised $4.7 million in net
proceeds. Such preferred stock will be automatically converted to common
stock upon approval of the private placement by the shareholders of the
Company. The Company anticipates receiving such approval at the Company's
annual meeting of shareholders on August 20, 1999.
The Company is in discussions with a number of potential strategic
partners and, if such discussions are successfully completed, the Company
believes this will result in the up-front funding of some of its programs.
There can be no assurance that any of the partnering discussions will be
completed, or if such discussions are complete, that there will be
up-front funding of the Company's programs.
Page 8
<PAGE>
The Company has followed a strategy of working with strategic partners at
the fundamental discovery stage. This strategy has given the Company
access to discoveries while reducing up-front research expenses. Since
1994, the Company has had a strategic alliance with the Department of
Molecular and Genetic Medicine at Sheffield University in the United
Kingdom ("Sheffield"). Under this alliance, Sheffield has provided to the
Company the fundamental discovery and genetic analysis from Sheffield's
research laboratories and the Company has focused on product development,
including clinical trials, and the commercialization of these discoveries.
The Company has entered into multiple joint development and
commercialization project agreements with Sheffield, and anticipates
entering into additional collaborative arrangements with Sheffield and
other parties in the future.
In April 1999, the Company entered into an agreement with Dumex, a
subsidiary of AlPharma, a pharmaceutical manufacturer, to market and sell
PST in nine European countries (Austria, Denmark, Finland, Germany,
Ireland, Norway, Sweden, Switzerland and the U.K.). Dumex is well-known in
Europe as a manufacturer of oral health care products used by
periodontists.
In March 1999, the Company entered into an agreement with the Straumann
Company, a leading supplier of dental implants, to market and sell PST in
the United States and Puerto Rico. Straumann launched its PST promotional
activities in April 1999.
In December 1998, the Company signed an agreement with Washington Dental
Service, a member of the Delta Dental Plans Association, for the purchase
of 1,200 PST tests. The tests will be used in a study, sponsored by
Washington Dental Service, in collaboration with the University of
Washington School of Dentistry and Medical Science Systems. The study will
provide scientific and financial information about PST in a reimbursement
system. This study is expected to provide scientific and financial data
regarding the use of PST as a treatment-planning tool to assess risk. The
data from the study is anticipated to be available for analysis in the
last quarter of 1999.
In December 1997, the Company entered into an agreement with Medicadent, a
French corporation ("Medicadent"), to market and sell PST in France. In
August 1998, the Company entered into an agreement with H.A. Systems, Ltd.
to market and sell PST in Israel. Medicadent commenced offering PST in
France in June 1998, and H.A. Systems commenced offering PST in Israel in
April 1999. No assurances can be made regarding the commercial acceptance
of PST.
The Company has been awarded four U.S. patents, and has sixteen U.S.
patent applications pending. The U.S. Patent & Trademark Office awarded
patents to the Company for its osteoporosis and periodontal disease
susceptibility tests and two patent awards for its biologic modeling
technology called BioFusion(R). BioFusion is used by the Company in the
discovery, development and commercialization process. The Company's
disease susceptibility patents seek to protect the use of its various
genetic markers as an indicator of risk for the
Page 9
<PAGE>
specific disease covered, as well as protecting various therapeutic
applications which these markers may have.
The Company has been granted a number of corresponding foreign patents
and has filed foreign counterparts of its U.S. applications. Where the
Company has originally filed in another country, it has filed and plans
to continue to file U.S. and other foreign counterparts.
CURRENT FINANCIAL CONDITION
Since its inception, the Company has incurred cumulative net losses of
approximately $17.2 million including losses of approximately $1.1 million
during the second quarter of 1999 and $2.3 million for the six months
ended June 30, 1999. As a result of these losses, available cash resources
are limited and will be depleted in January 2001 absent additional debt or
equity funding or a strategic alliance which provides operating capital.
The ability of the Company to continue as a going concern is dependent
upon the Company achieving significant revenue increases from its existing
genetic products, developing new products, successfully marketing its
products to customers at profitable prices and obtaining significant
levels of new capital. If the Company is not successful in these efforts,
the Company would likely be unable to continue operating as a going
concern. See Note 1 to the Financial Statements included herein.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO THREE MONTHS ENDED
JUNE 30, 1998
Gross revenue for the three months ended June 30, 1999 was $129,335
compared to $102,616 for the same period ended June 30, 1998, an increase
of 26%. In June 1999 the Company received an up-front payment of $150,000
from Dumex-Alpharma A/S for the rights to distribute the Company's genetic
susceptibility test for periodontal disease, PST(R), in ten European
countries. $50,000 of this payment was recognized as revenue during the
three months ended June 30, 1999 to offset direct expenses associated with
the agreement, with the balance of $100,000 being reflected as a current
liability under the caption, deferred income. In the three months ended
June 30, 1999, the Company conducted 404 PST tests compared to 623 tests
in the same period in 1998. The results for the three months ended June
30, 1998, reflect the activity of the Company's direct sales force during
such period. The Company disbanded its sales force and discontinued its
direct marketing efforts in late 1998, and opted to pursue collaborative
partners to market the PST test in lieu of its direct sales force. Due to
the absence of a direct sales force and its marketing partners only just
beginning to market the PST test during the quarter ended June 30, 1999,
the results for such quarter were lower than the corresponding previous
year's quarter. Cost of sales was $43,206 for the three months ended June
30, 1999 compared to $84,005 for 1998. Gross profit margin was 66.6% in
the three months ended June 30, 1999 compared to 18.1% for the year
earlier period, reflecting lower unit laboratory costs for the Company's
genetic tests.
Page 10
<PAGE>
For the three months ended June 30, 1999, the Company had R&D expenses of
$545,819 as compared to $349,810 for the second quarter of 1998. The
year-earlier expense was lower due to an abnormally low level of
expenditures during that quarter for clinical trials.
Selling, general and administrative expenses were $693,418 in the second
quarter of 1999 compared to $2,035,447 in the second quarter of 1998, a
decrease of 65.9%. This decrease is a result of the Company's ongoing
cost-cutting initiatives and change in strategy to utilize collaborative
partners for its direct sales of its genetic tests. As a result of the
Company's effort to reduce costs, the Company had 18 full time employees
as of June 30, 1999 compared to 48 one year earlier.
Interest income in the second quarter of 1999 was $26,744 compared to
$106,691 in the half quarter half of 1998. This decrease reflects lower
balances of cash in the second quarter of 1999 compared to the year
earlier period, as cash was utilized throughout 1998 to cover the
Company's operating losses. Interest expense of $17,966 was incurred
during the period ended June 30, 1999, compared to $23,135 in the same
period in 1998. The reduction in interest expense was due to the reduction
in the principal amount of the bank debt and lower interest rate on that
debt.
Net loss was $1,141,688 for the second quarter of 1999 compared to a net
loss of $2,280,654 for the second quarter of 1998, a decrease of 49.9%.
This decrease reflects the reduction in sales and marketing expense as the
Company shifted to a collaborative partnering strategy. The Company
anticipates that it will continue to experience losses unless its genetic
testing revenues grow substantially from current levels and its efforts to
develop revenue from licensing its biologic modeling research tools are
successful. In addition, if the Company is successful in reaching
agreements with strategic partners on developing additional genetic tests,
milestone payments, if any, from these strategic partners to help cover
the Company's research and development expense could also reduce the net
loss. No assurances can be made that the Company will be able to increase
its revenues, either from genetic tests or licensing revenue, or that it
will be able to reach collaborative partnering agreements.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED JUNE 30,
1998
Gross revenue for the six months ended June 30, 1999 was $222,073 compared
to $161,510 for the same period ended June 30, 1998, an increase of 37%.
In the six months ended June 30, 1999, the Company conducted 914 tests
compared to 978 tests in the same period in 1998. The results for the six
months ended June 30, 1998, reflect the activity of the Company's direct
sales force during such period. Such activity was discontinued late in
1998. The results for the six months ended June 30, 1999, were lower than
the year earlier period due to the lack of a direct sales force during
such period and due to the fact that the Company's two major PST
distributors were just
Page 11
<PAGE>
beginning distribution of PST during the second quarter of 1999. Cost of
sales was $76,117 for the six months ended June 30, 1999 compared to
$114,092 for 1998. Gross profit margin was 65.7% in the six months ended
June 30, 1999 compared to 29.4% for the year earlier period, reflecting
lower unit laboratory costs for the Company's genetic tests.
For the six months ended June 30, 1999, the Company had R&D expenses of
$1,100,944 compared to $866,732 for the first half of 1998.
Selling, general and administrative expenses were $1,402,571 in the first
half of 1999 compared to $3,820,965 in the first half of 1998, a decrease
of 63.3%. This decrease is a result of the Company's ongoing cost-cutting
initiatives and change in strategy to utilize collaborative partners for
its direct sales of its genetic tests.
Interest income in the first half of 1999 was $44,336 compared to $252,340
in the first half of 1998. This decrease reflects lower balances of cash
in the first half of 1999 compared to the year earlier period, as cash was
utilized throughout 1998 to cover the Company's operating losses. Interest
expense of $40,547 was incurred during the six month period ended June 30,
1999, compared to $47,425 in the same period in 1998. The reduction in
interest expense was due to the reduction in the principal amount of the
bank debt and lower interest rate on that debt.
Net loss was $2,346,813 for the first half of 1999 compared to a net loss
of $4,433,778 for the first half of 1998, a decrease of 47.0%. This
decrease reflects the reduction in sales and marketing expense as the
Company shifts to a collaborative partnering strategy.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to a $5 million private placement in June 1999, the Company
issued 2,200,000 shares of Series A Preferred Stock, no par value, which
generated net proceeds of $4.7 million. Each share of the Series A Stock
is automatically converted into 5 shares of the Company's common stock at
a conversion price of $0.50 per share upon the approval of the private
placement by the Company's shareholders.
Net cash used in operating activities was $2,195,714 during the six months
ended June 30, 1999 and $4,373,076 during the same period of the prior
fiscal year. As of June 30, 1999, the Company had cash and cash
equivalents of $4,912,878.
The Company currently does not have any commitments for material capital
expenditures. The Company's obligation at June 30, 1999 for capitalized
lease obligations totaled $214,216, of which $119,606 is classified as
long-term and $94,610 is classified as current.
In June 1999 the Company repaid a bank loan which had a principal balance
of $495,358. The Company had provided a $530,000 certificate-of-deposit as
security for this loan, which was released upon the repayment of the loan.
Page 12
<PAGE>
The Company anticipates that its existing cash and cash equivalents,
together with anticipated interest income and revenue, will be sufficient
to conduct its operations as planned through January 2001. However, the
Company's future capital requirements are anticipated to be substantial,
and the Company does not have commitments for additional capital at this
time. Such capital requirements are expected to arise from the commercial
launch of additional genetic tests, continued marketing and sales efforts
for PST, continued research and development efforts, the protection of the
Company's intellectual property rights (including preparing and filing of
patent applications), as well as operational, administrative, legal and
accounting expenses. THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE
ABLE TO RAISE ANY ADDITIONAL NECESSARY CAPITAL. IF ADDITIONAL AMOUNTS
CANNOT BE RAISED, THE COMPANY WOULD SUFFER MATERIAL ADVERSE CONSEQUENCES
TO ITS BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND WOULD
LIKELY BE REQUIRED TO SEEK PROTECTION UNDER THE UNITED STATES BANKRUPTCY
LAWS. SEE "Current Financial Condition" on page 10 hereof and Note 1 of
the Financial Statements included herein.
The Company's Common Stock is currently listed on The NASDAQ SmallCap
Market and the Boston Stock Exchange. If the Company fails to maintain the
qualification for its Common Stock to trade on the NASDAQ SmallCap Market
or the Boston Stock Exchange, its Common Stock could be subject to
delisting. The NASDAQ Stock Market announced increases in the quantitative
standards, which became effective in February 1998, for maintenance of any
of (x) $2,000,000 of net tangible assets, (y) $35,000,000 of market
capitalization or (z) $500,000 of net income for two of the last three
years and a minimum bid price per share of $1.00. On February 3, 1999, we
received notice from NASDAQ that we were in violation of NASDAQ's minimum
bid price requirement and that if our Common Stock did not have a closing
bid price of at least $1.00 for ten consecutive trading days during the
90-day period ending May 3, 1999, our Common Stock was subject to
delisting on May 3, 1999. The Company believes it satisfied this
requirement by having a closing bid price of at least $1.00 for the ten
consecutive trading days ending March 29, 1999; however the Company has
not yet received notice from NASDAQ that such requirement was satisfied.
Furthermore, there can be no assurance that our stock price will maintain
such $1.00 minimum bid price. If the market price for our Common Stock
does fall below the $1.00 bid price, our Common Stock could be subject to
delisting from The NASDAQ SmallCap Market.
On April 19, 1999, the Company received notice from the NASDAQ SmallCap
Market that the Company was in violation of NASDAQ's $2,000,000 minimum
net tangible asset requirement. As a result of the Private Placement,
management believes that the Company is in compliance with NASDAQ's
minimum net tangible asset requirement; however, the Company has not yet
received notice from NASDAQ that such requirement was satisfied. The
Company filed a Current Report on Form 8-K dated June 25, 1999, containing
the Company's pro forma balance sheet at May 31, 1999, adjusted to reflect
the results of the Private Placement. Such balance sheet reflects net
tangible assets in excess of $2,000,000. If the Company is unable to
maintain compliance with NASDAQ's minimum net tangible asset requirement,
the Company would likely be delisted from The NASDAQ SmallCap Market and
may also suffer
Page 13
<PAGE>
material adverse consequences to its business, financial condition and
results of operations.
On April 26, 1999, the Company received a letter from NASDAQ
expressing concern regarding the "going concern" opinion of Arthur
Andersen LLP, the Company's independent public accountant, given in Arthur
Andersen LLP's report contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998. While NASDAQ did not notify
the Company that its Common Stock was subject to delisting due to such
opinion, NASDAQ does have the discretion to so delist the Company's Common
Stock for any number of reasons, including the "going concern" opinion of
Arthur Andersen LLP. There can be no assurance that the Company will be
able to address this issue in a manner satisfactory to NASDAQ, or that
that the Company's Common Stock will not be delisted from The NASDAQ
SmallCap Market.
On August 3, 1999, the Company received a letter from NASDAQ questioning
whether the Company had violated the shareholder approval provisions of
the NASDAQ Marketplace Rules due to an alleged change-in-control resulting
from the private placement of the Series A Preferred Stock completed by
the Company in June 1999. As a result, NASDAQ is reviewing the Company's
eligibility for continued listing on The NASDAQ SmallCap Market. The
Company does not believe that a change-of-control occurred and is engaged
in discussions with NASDAQ to resolve this matter. There can be no
assurance that the Company will be able to address this issue in a manner
satisfactory to NASDAQ, or that the Company's Common Stock will not be
delisted from The NASDAQ SmallCap Market.
If the Company's shares are not listed as intended, trading, if any, would
be conducted in the over-the-counter market in the so-called "pink sheets"
or the OTC Bulletin Board, which was established for securities that do
not meet The NASDAQ SmallCap Market's listing requirements. Consequently,
selling the Common Stock of the Company would be more difficult because
smaller quantities of shares could be bought and sold, transactions could
be delayed, and security analysts' and new media's coverage of the Company
may be reduced. These factors could result in lower prices and larger
spreads in the bid and ask prices for shares of Common Stock. Such NASDAQ
delisting would also greatly impair the Company's ability to raise
additional necessary capital through equity or debt financing.
If the Common Stock of the Company is not listed on The NASDAQ SmallCap
Market and/or the Boston Stock Exchange, it may become subject to Rule
15g-9 under the Exchange Act. That rule imposes additional sales practice
requirements on broker-dealers that sell low-priced securities to persons
other than established customers and institutional accredited investors.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale.
Consequently, the rule may affect the ability of broker-dealers to sell
the Common Stock and affect the ability of holders to sell their shares of
Common Stock of the Company in the secondary market.
Page 14
<PAGE>
The SEC's regulations define a "penny stock" to be any equity security
that has a market price less than $5.00 per share or with an exercise
price of less than $5.00 per share, subject to certain exceptions. The
penny stock restrictions will not apply to our shares if they are listed
on The NASDAQ SmallCap Market or the Boston Stock Exchange and we provide
certain price and volume information on a current and continuing basis, or
meet required minimum net tangible assets or average revenue criteria.
There can be no assurance that the shares of Common Stock of the Company
will qualify for exemption from these restrictions. If such shares were
subject to the penny stock rules, the market liquidity for the shares
could be adversely affected.
Historically, the Common Stock of the Company has experienced low trading
volumes. The market price of the Common Stock also has been highly
volatile and it may continue to be highly volatile as has been the case
with the securities of other public biotechnology companies. Factors such
as announcements by the Company or its competitors concerning
technological innovations, new commercial products or procedures, proposed
government regulations and developments or disputes relating to patents or
proprietary rights may substantially affect the market price of the
Company's securities. Changes in the market price of the common Stock may
bear no relation to the Company's actual operational or financial results.
YEAR 2000 COMPLIANCE
The efficient operation of the Company's business is dependent on its
computer software programs and operating systems (collectively, "Programs
and Systems"). These Programs and Systems are used in several key areas of
the Company's business, including financial reporting, as well as in
various administrative functions. The Company has evaluated its Programs
and Systems to identify potential year 2000 compliance problems, as well
as manual processes, external interfaces with customers, and services
supplied by vendors to coordinate year 2000 compliance and conversion. The
year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date sensitive information
for the year 2000 and beyond. Unless modified prior to the year 2000, such
systems may not properly recognize such information and could generate
erroneous data or cause a system to fail to operate properly. Based on
current information, the Company believes its Programs and Systems are
year 2000 compliant. However, because most computer systems are, by their
very nature, interdependent, it is possible that non-compliant third party
computers may not interface properly with the Company's computer systems.
The Company could be adversely affected by the year 2000 problem if it or
unrelated parties fail to successfully address this issue.
In the event the Company determines following the year 2000 date change
that its Programs and Systems are not year 2000 compliant, the Company
will likely experience considerable delays in compiling information
required for financial reporting and performing various administrative
functions. In the event of such occurrence, the Company's contingency
plans call for it to switch vendors to obtain
Page 15
<PAGE>
hardware and/or software that is 2000 compliant, and until such hardware
and/or software can be obtained, the company will plan to use non-computer
systems for its business, including information management services and
financial reporting, as well as its various administrative functions.
Year 2000 Information and Readiness Disclosure Act
To the maximum extent permitted by applicable law, the above information
is being designated as "Year 2000 Readiness Disclosure" pursuant to the
"Year 2000 Information and Readiness Disclosure Act" which was signed into
law on October 19, 1998.
Page 16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 2, 1999, Entelos, Inc. filed an action against the Company in
United States District Court for the Northern District of California,
alleging that two of Entelos' principals, Samuel Holtzman and Thomas
Paterson, are co-inventors of the inventions claimed in two of the
Company's software patents - U.S. Pat. Nos. 5,657,255 and 5,808,918. In
the suit, Entelos was seeking a declaratory judgment that Entelos is the
co-owner of all rights under the foregoing patents, an order correcting
the inventorship of the patents to list Holtzman and Paterson as
co-inventors, and restitution to Entelos of its share of the profits
obtained from the patents. The complaint also asserted an unfair
competition claim. In June 1999 the Company entered into a settlement
agreement with Entelos, that, among other things, granted Entelos a
non-exclusive, fully paid-up, royalty-free world-wide license to make,
have made, use, import, offer to sell and sell products and practice any
systems, methods or other inventions covered by the patents. Pursuant to a
stipulation and order of dismissal issued by the United States District
Court for the Northern District of California, all claims and
counterclaims in the above-described action were dismissed with prejudice.
The Company did not pay any money to Entelos as part of the agreement, and
management does not believe that the settlement will have a material
adverse affect on future business activities of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
In June 1999, the Company completed a private placement (the "Private
Placement") whereby the Company sold 2,000,000 shares of Series A
Preferred Stock, no par value ("Series A Preferred"), at a per share
purchase price of $2.50 for a total offering price of $5,000,000. In
connection with the Private Placement, the Company issued an additional
200,000 shares of Series A Preferred to Fine Equities, Inc. (the
"Placement Agent") as its fee. The Company also issued to the Placement
Agent, a warrant to purchase up to 1,000,000 shares of Common Stock of the
Company at a per share purchase price of $.50. Each share of Series A
Preferred will automatically convert into five (5) shares of Common Stock
upon shareholder ratification of the issuance of the Series A Preferred
issued pursuant to the Private Placement, which ratification is required
to comply with certain NASDAQ requirements. The shares of Series A
Preferred (the "Shares") issued pursuant to the Private Placement were not
registered under the Securities Act of 1993, as amended (the "Securities
Act"), pursuant to the exemptions of such registration provided under
Regulation D ("Regulation D") of the rules and regulations promulgated
under the Securities Act by the Securities and Exchange Commission and
Section 4(2) of the Securities Act. The Company relied on certain
representations and warranties of the Private Placement investors,
including, among other things, each of such investors' ability to evaluate
the merits and risks of an investment in the Shares, each of such
investors' status as an
Page 17
<PAGE>
"accredited investor" (as that term is defined in Rule 501(a) of
Regulation D) and that the Shares were acquired solely for each of such
investors' own account for investment and not with a view to distribution.
Use of Proceeds from Sales of Registered Securities. On November 26, 1997,
the Company completed an initial public offering of its Common Stock, no
par value (the "Offering"). Aggregate proceeds from the Offering were
$16,200,000, and the net proceeds were $14,904,000. All of the net
proceeds of the Offering have been used by the Company for expenses and
general working capital requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the three months ended June
30, 1999.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Amended and Restated Articles of Incorporation of the Company (filed
herewith).
4.1 Statement Establishing Relative Rights and Preferences of Preferred
Stock (filed herewith).
4.2 Warrant dated June 15, 1999, granted to Fine Equities, Inc. (filed
herewith).
10.1 Consulting Services Agreement dated June 1, 1999, between the
Company and Philip R. Reilly (filed herewith).
10.2 Non-Qualified Stock Option Agreement dated June 1, 1999, between the
Company and Philip R. Reilly (filed herewith).
10.3 Form of Subscription Agreement (filed herewith).
10.4 Agency Agreement dated June 15, 1999, between the Company and Fine
Equities, Inc. (filed herewith).
27 Financial Data Schedule (filed herewith)
Page 18
<PAGE>
(b) Reports on Form 8-K
Form 8-K dated June 16, 1999 and filed June 25, 1999 reporting the private
placement of Series A Preferred Stock and containing the Company's Pro
Forma Balance Sheet as of May 31, 1999.
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
3.1 Amended and Restated Articles of Incorporation of the Company (filed
herewith).
4.1 Statement Establishing Relative Rights and Preferences of Preferred
Stock (filed herewith).
4.2 Warrant dated June 15, 1999, granted to Fine Equities, Inc. (filed
herewith).
10.1 Consulting Services Agreement dated June 1, 1999, between the
Company and Philip R. Reilly (filed herewith).
10.2 Non-Qualified Stock Option Agreement dated June 1, 1999, between the
Company and Philip R. Reilly (filed herewith).
10.3 Form of Subscription Agreement (filed herewith).
10.4 Agency Agreement dated June 15, 1999, between the Company and Fine
Equities, Inc. (filed herewith).
27 Financial Data Schedule (filed herewith)
Page 19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICAL SCIENCE SYSTEMS, INC.
Date: August 16, 1999 By: /s/ U. Spencer Allen
U. Spencer Allen
Chief Financial Officer,
Secretary & Treasurer
Duly authorized signatory and
Principle Financial and
Accounting Officer)
Page 20
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
MEDICAL SCIENCE SYSTEMS, INC.
ARTICLE ONE
Medical Science Systems, Inc., a Texas corporation (the
"Corporation"), pursuant to the provisions of Article 4.07 of the Texas Business
Corporation Act, hereby adopts these Amended and Restated Articles of
Incorporation, which accurately copy the Articles of Incorporation of the
Corporation, as amended through, and in effect on the date hereof, as further
amended by these Amended and Restated Articles of Incorporation as hereinafter
set forth, and contain no other change in any provisions thereof.
ARTICLE TWO
The Articles of Incorporation, as amended, of the Corporation are
amended by these Amended and Restated Articles of Incorporation as follows:
The amendments made by these Amended and Restated Articles of
Incorporation (the "Amendments") alter or change Articles ONE through EIGHT of
the Articles of Incorporation and add Articles NINE, TEN and ELEVEN. The full
text of each provision altered or added is as set forth in Article FIVE hereof.
The Amendments confirm the reclassification and split effected
pursuant to the Articles of Amendment dated July 29, 1996 to the Articles of
Incorporation of the Company filed with the Secretary of State of Texas on
August 2, 1996 (the "First Amendment"), whereby simultaneously with the
effective date of the First Amendment, each issued and outstanding share of
previously authorized Class A Common Voting Stock, no par value, of the
Corporation, was thereby and thereupon reclassified, changed and split up into
1,083.333 validly issued, fully-paid and nonassessable shares of common shares,
no par value, of the Corporation. Upon the filing of these Amended and Restated
Articles of Incorporation, all issued and outstanding shares of previously
authorized common shares of the Corporation shall remain outstanding without any
change thereto, but such shares and all other authorized shares of common shares
shall thereafter be designated as shares of common stock.
<PAGE>
ARTICLE THREE
The Amendments have been effected in conformity with the provisions
of the Texas Business Corporation Act, and the Amended and Restated Articles of'
Incorporation were duly adopted by all of the shareholders of the Corporation
pursuant to a consent dated September 27, 1996.
ARTICLE FOUR
On that date there were 3,254,999 common shares of the Corporation
outstanding, all of which were entitled to vote on the Amendments. All 3,254,999
shares of the Corporation were voted in favor of the Amendments.
ARTICLE FIVE
The Articles of Incorporation of the Corporation filed with the
Secretary of State of the State of Texas on August 2, 1996 are hereby superseded
by the following Amended and Restated Articles of Incorporation, which
accurately copy the entire text thereof as amended hereby:
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
MEDICAL SCIENCE SYSTEMS, INC.
ARTICLE ONE
The name of the Corporation is Medical Science Systems, Inc.
ARTICLE TWO
The period of its duration is perpetual.
ARTICLE THREE
The purpose or purposes for which the Corporation is organized is
the transaction of all lawful business for which a corporation may be
incorporated under the corporation laws of the State of Texas.
ARTICLE FOUR
The aggregate number of shares that the Corporation shall have the
authority to issue is 15,000,000 shares, consisting of 10,000,000 shares of
common stock, no par value per share (the
-2-
<PAGE>
"Common Stock"), and 5,000,000 shares of preferred stock, no par value per share
(the "Preferred Stock").
The descriptions of the different classes of capital stock of the
Corporation and the preferences, designations, relative rights, privileges and
powers, and the restrictions, limitations and qualifications thereof, of said
classes of stock are as follows:
Division A
The shares of Preferred Stock may be divided into and issued in one
or more series, the relative rights and preferences of which series may vary in
any and all respects. The board of directors of the Corporation is hereby vested
with the authority to establish series of Preferred Stock by fixing and
determining all the preferences, limitations and relative rights of the shares
of any series so established, to the extent not provided for in these Amended
and Restated Articles of Incorporation or any amendment hereto, and with the
authority to increase or decrease the number of shares within each such series;
provided, however, that the board of directors may not decrease the number of
shares within a series below the number of shares within such series that is
then issued. The authority of the board of directors with respect to each such
series shall include, but not be limited to, determination of the following:
1. the distinctive designation and number of shares of that series;
2. the rate of dividend (or the method of calculation thereof) payable with
respect to shares of that series, the dates, terms and other conditions
upon which such dividends shall be payable, and the relative rights of
priority of such dividends to dividends payable on any other class or
series of capital stock of the Corporation;
3. the nature of the dividend payable with respect to shares of that series
as cumulative, noncumulative or partially cumulative, and if cumulative or
partially cumulative, from which date or dates and under what
circumstances;
4. whether shares of that series shall be subject to redemption, and, if made
subject to redemption, the times, prices, rates, adjustments and other
terms and conditions of such redemption (including the manner of selecting
shares of that series for redemption if fewer than all shares of such
series are to be redeemed);
5. the rights of the holders of shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation (which rights may be different if such action is voluntary
than if it is involuntary), including the relative rights of priority in
such event as to the rights of the holders of any other class or series of
capital stock of the Corporation;
6. the terms, amounts and other conditions of any sinking or similar purchase
or other fund provided for the purchase or redemption of shares of that
series;
-3-
<PAGE>
7. whether shares of that series shall be convertible into or exchangeable
for shares of capital stock or other securities of the Corporation or of
any other corporation or entity, and, if provision be made for conversion
or exchange, the times, prices, rates, adjustments and other terms and
conditions of such conversion or exchange;
8. the extent, if any, to which the holders of shares of that series shall be
entitled (in addition to any voting rights provided by law) to vote as a
class or otherwise with respect to the election of directors or otherwise;
9. the restrictions and conditions, if any, upon the issue or reissue of any
additional Preferred Stock ranking on a parity with or prior to shares of
that series as to dividends or upon liquidation, dissolution or winding
up;
10. any other repurchase obligations of the Corporation, subject to any
limitations of applicable law; and
11. notwithstanding their failure to be included in (1) through (10) above,
any other designations, preferences, limitations or relative rights of
shares of that series.
Any of the designations, preferences, limitations or relative rights (including
the voting rights) of any series of Preferred Stock may be dependent on facts
ascertainable outside these Amended and Restated Articles of Incorporation.
Shares of any series of Preferred Stock shall have no voting rights
except as required by law or as provided in the preferences, limitations and
relative rights of such series.
Division B
1. DIVIDENDS. Dividends may be paid on the Common Stock out of any assets of
the Corporation available for such dividends subject to the rights of all
outstanding shares of capital stock ranking senior to the Common Stock in
respect of dividends.
2. DISTRIBUTION OF ASSETS. In the event of any liquidation, dissolution or
winding up of the Corporation, after there shall have been paid to or set
aside for the holders of capital stock ranking senior to the Common Stock
in respect of rights upon liquidation, dissolution or winding up the full
preferential amounts to which they are respectively entitled, the holders
of the Common Stock shall be entitled to receive, pro rata, all of the
remaining assets of the Corporation available for distribution to its
shareholders.
3. VOTING RIGHTS. The holders of the Common Stock shall be entitled to one
vote per share for all purposes upon which such holders are entitled to
vote.
Division C
1. NO PREEMPTIVE RIGHTS. No shareholder of the Corporation shall by reason of
his holding shares of any class have any preemptive or preferential right
to acquire or subscribe for any additional, unissued or treasury shares of
any class of the Corporation now or hereafter to be
-4-
<PAGE>
authorized, or any notes, debentures, bonds or other securities
convertible into or carrying any right, option or warrant to subscribe to
or acquire shares of any class now or hereafter to be authorized, whether
or not the issuance of any such shares, or such notes, debentures, bonds
or other securities, would adversely affect the dividends or voting or
other rights of such shareholder, and the board of directors may issue or
authorize the issuance of shares of any class, or any notes, debentures,
bonds or other securities convertible into or carrying rights, options or
warrants to subscribe to or acquire shares of any class, without offering
any such shares of any class, either in whole or in part, to the existing
shareholders of any class.
2. SHARE DIVIDENDS. Subject to any restrictions in favor of any series of
Preferred Stock provided in the relative rights and preferences of such
series, the Corporation may pay a share dividend in shares of any class or
series of capital stock of the Corporation to the holders of shares of any
class or series of capital stock of the Corporation.
3. NO CUMULATIVE VOTING. Cumulative voting for the election of directors is
expressly prohibited as to all shares of any class or series.
ARTICLE FIVE
The Corporation shall not commence business until it has received
for the issuance of its shares consideration of at least the value of One
Thousand Dollars ($ 1,000.00), consisting of money, labor done or property
actually received.
ARTICLE SIX
The address of the Corporation's registered office is 100 N.E. Loop
410, Suite 1350, San Antonio, Texas 78216, and the name of its registered agent
at such address is Medical Science Systems, Inc., c/o Dr. Kenneth S. Kornman.
ARTICLE SEVEN
1. NUMBER AND TERMS OF DIRECTORS. The number of directors of the Corporation
shall be fixed by, or in the manner provided in, the Amended and Restated
Bylaws of the Corporation; provided that the maximum number of directors
shall be nine (9). The number of directors constituting the current board
of directors is three (3), and the name and address of the persons who are
to serve as directors until their successors are elected and qualified
are:
Paul J. White
4400 MacArthur Blvd., Suite 980
Newport Beach, CA 92660
Michael G. Newman
4400 MacArthur Blvd., Suite 980
Newport Beach, CA 92660
Kenneth S. Kornman
-5-
<PAGE>
100 N.E. Loop 410, Suite 1350
San Antonio, Texas 78216
2. REMOVAL OF DIRECTORS. No director of the Corporation shall be removed from
such office by vote or other action of the shareholders of the Corporation or
otherwise, except by the affirmative vote of holders of at least a majority of
the then outstanding Voting Stock (as defined below), voting together as a
single class. The term "Voting Stock" shall mean all outstanding shares of all
classes and series of capital stock of the Corporation entitled to vote
generally in the election of directors of the Corporation, considered as one
class; and, if the Corporation shall have shares of Voting Stock entitled to
more or less than one vote for any such share, each reference in the Amended and
Restated Articles of Incorporation to a proportion or percentage of Voting Stock
shall be calculated by reference to the portion or percentage of votes entitled
to be cast by holders of such shares generally in the election of directors of
the Corporation. Prior to the first date (the "Public Status Date") on which the
Corporation has outstanding a class of equity securities registered under the
Securities Exchange Act of 1934, as may be amended from time to time (the
"Exchange Act"), any such removal of a director of the Corporation may be with
or without cause. On and after the Public Status Date, no director of the
Corporation shall be removed from such office by vote or other action of the
shareholders of the Corporation or otherwise, except for cause, which shall be
deemed to exist only if: (i) such director has been convicted, or such director
is granted immunity to testify where another has been convicted, of a felony by
a court of competent jurisdiction (and such conviction is no longer subject to
direct appeal); (ii) such director has been found by a court of competent
jurisdiction (and such finding is no longer subject to direct appeal) or by the
affirmative vote of at least a majority of the Whole Board (as defined below) at
any regular or special meeting of the board of directors called for such purpose
to have been grossly negligent or guilty of willful misconduct in the
performance of his duties to the Corporation in a matter of substantial
importance to the Corporation; (iii) such director has been adjudicated by a
court of competent jurisdiction to be mentally incompetent, which mental
incompetency directly affects his ability to perform as a director of tile
Corporation; (iv) such director has been found by a court of competent
jurisdiction (and such finding is no longer subject to direct appeal) or by the
affirmative vote of at least a majority of the Whole Board at any regular or
special meeting of the board of directors called for such purpose to have
breached such director's duty of loyalty to the Corporation or its shareholders
or to have engaged in any transaction with the Corporation from which such
director derived an improper personal benefit; or (v) "cause" for removal
otherwise exists under Article 2.32.A. of the Texas Business Corporation Act
(the "TBCA"). No director of the Corporation so removed may be nominated,
re-elected or reinstated as a director of the Corporation so long as the cause
for removal continues to exist. The term "Whole Board" shall mean the total
number of authorized directors of tile Corporation whether or not there exist
any vacancies in previously authorized directorships. This paragraph shall be
subject to the rights, if any, of holders of any class or series of stock to
elect directors and remove directors elected by them.
ARTICLE EIGHT
No director of the Corporation shall be liable to the Corporation or
its shareholders for monetary damages for an act or omission in the director's
capacity as a director, except that this article does not eliminate or limit the
liability of a director for: (1) a breach of a director's duty of loyalty to the
Corporation or its shareholders; (2) an act or omission not in good faith that
constitutes
-6-
<PAGE>
a breach of duty of that director to the Corporation or an act or omission that
involves intentional misconduct or a knowing violation of the law; (3) a
transaction from which a director received an improper benefit, whether or not
the benefit resulted from an action taken within the scope of the director's
office; or (4) an act or omission for which the liability of a director is
expressly provided for by an applicable statute.
If the Texas Miscellaneous Corporation Laws Act or the Texas
Business Corporation Act ("TBCA") is amended to authorize action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the corporation shall be eliminated or limited to the fullest
extent permitted by such statutes, as so amended. Any amendment, repeal or
modification of this Article EIGHT shall be prospective only and shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such amendment, repeal or modification.
ARTICLE NINE
On and after the Public Status Date, the vote of shareholders
required for approval of (1) any plan of merger, consolidation, or exchange for
which the TBCA requires a shareholder vote, (2) any disposition of assets for
which the TBCA requires a shareholder vote, (3) any dissolution of the
corporation for which the TBCA requires a shareholder vote, and (4) any
amendment of the Restated Articles of Incorporation of the Corporation for which
the TBCA requires a shareholder vote, shall be (in lieu of any greater vote
required by the TBCA) the affirmative vote of the holders of a majority of the
outstanding Voting Stock entitled to vote thereon, unless any class or series of
shares is entitled to vote as a class thereon, in which event the vote required
shall be the affirmative vote of the holders of a majority of the outstanding
shares within each class or series of shares entitled to vote thereon as a class
and at least a majority of the outstanding Voting Stock otherwise entitled to
vote thereon.
ARTICLE TEN
Special meetings of shareholders may be called by the Corporation's
chairman of the board, the president or the board of directors. Subject to the
provisions of the Corporation's Amended and Restated Bylaws governing special
meetings, holders of not less than 50% of the outstanding shares of stock
entitled to vote at the proposed special meeting may also call a special meeting
of shareholders by furnishing the Corporation with a written request which
states the purpose or purposes of the proposed meeting in the manner set forth
in the Amended and Restated Bylaws.
ARTICLE ELEVEN
Prior to the Public Status Date, any action required or permitted to
be taken at any annual or special meeting of shareholders of the Corporation may
be taken without a meeting, without prior notice and without a vote, if a
consent or counterpart consents in writing, setting forth the action so taken,
shall be signed by the holder or holders of shares having not less than the
minimum number of votes that would be necessary to take such action at a meeting
at which the holders of all shares entitled to vote on the action were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those shareholders who
did not consent in writing to the action.
-7-
<PAGE>
EXECUTED AND EFFECTIVE this _____ day of ____________________ 1996.
MEDICAL SCIENCE SYSTEMS, INC.
By: __________________________________
Paul J. White
President
-8-
EXHIBIT 4.1
STATEMENT ESTABLISHING RELATIVE
RIGHTS AND PREFERENCES OF PREFERRED STOCK
MEDICAL SCIENCE SYSTEMS, INC.
CERTIFICATE
Providing for the Issuance of Series A Preferred Stock
Pursuant to Article 2.13 of the
Texas Business Corporation Act
Medical Science Systems, Inc., a Texas corporation (the "Company"),
certifies that pursuant to the authority contained in Article Four of its
Articles of Incorporation, and in accordance with the provisions of Article 2.13
of the Texas Business Corporation Act, its Board of Directors has adopted, by
unanimous written consent of directors dated April 8, 1999, as amended, the
following resolutions creating and providing for the issuance of a series of
shares of Preferred Stock as hereinafter described, and further providing for
the voting powers, designations, preferences, and relative, participating,
optional or other rights thereof, and the qualifications, limitations or
restrictions thereof, in addition to those set forth in said Articles of
Incorporation, all in accordance with the provisions of Article 2.13 of the
Texas Business Corporation Act:
RESOLVED, that pursuant to Article Four of the Articles of Incorporation,
which creates and authorizes 5,000,000 shares of Preferred Stock of no par value
per share ("Preferred Stock"), the Board of Directors hereby provides for the
issuance of a series of 2,200,000 shares of Preferred Stock designated as Series
A Preferred Stock (hereinafter referred to as the "Series A Preferred Stock"),
which shares shall be convertible into shares of Common Stock, no par value (the
"Common Stock"), of the Company, pursuant to the terms and conditions of this
certificate.
RESOLVED, that the preferences and relative, participating, optional,
conversion and other rights of the shares of the Series A Preferred Stock, and
the qualifications, limitations or restrictions thereof, in addition to those
set forth in said Article Four, are as follows:
1. DESIGNATION. The designation of the series shall be "Series A
Preferred Stock" (the "Series A Preferred Stock").
2. NUMBER. The number of shares constituting the Series A Preferred
Stock shall be 2,200,000.
3. VOTING RIGHTS.
a. Except as required by law or Section 3(b) of this
Certificate, the holders of shares of Series A Preferred Stock shall
not have any right or power to vote on any question or in any
proceeding or to be represented at or to receive notice of any
meeting or consent of stockholders. On any matters on which the
holders of
<PAGE>
the Series A Preferred Stock shall be entitled to vote, each share
of Series A Preferred Stock shall entitle the holder thereof to one
vote multiplied by the number of shares of Common Stock into which
such share of Series A Preferred Stock is convertible on the record
date for such vote.
b. Without the vote or consent of the holders of at least a
majority of the shares of Series A Preferred Stock then outstanding,
the Corporation may not (i) authorize, create or issue, or increase
the authorized number of shares of, any class or series of capital
stock ranking prior to or on a parity with the Series A Preferred
Stock either as to dividends or liquidation, (ii) authorize, create
or issue any class or series of common stock of the Corporation
other than the Common Stock, (iii) authorize any reclassification of
the Series A Preferred Stock, (iv) authorize, create or issue any
securities convertible into or exercisable for capital stock
prohibited by Section 3(b)(i) or (ii), or (v) amend this
Certificate.
4. LIQUIDATION.
a. PREFERENCE. Subject to the rights of the holders of any
other series of Preferred Stock ranking senior to or on a parity
with the Series A Preferred Stock with respect to liquidation and
any other class or series of capital stock of the Corporation
ranking senior to or on a parity with the Series A Preferred Stock
with respect to liquidation, in the event of any liquidation,
dissolution or winding up of the affairs of the Corporation, whether
voluntary or involuntary, the holders of record of the issued and
outstanding shares of Series A Preferred Stock shall be entitled to
receive, out of the assets of the Corporation available for
distribution to the holders of shares of Series A Preferred Stock,
prior and in preference to any distribution of any of the assets of
the Corporation to the holders of Common Stock and any other series
of Preferred Stock ranking junior to the Series A Preferred Stock
with respect to liquidation and any other class or series of capital
stock of the Corporation ranking junior to the Series A Preferred
Stock with respect to liquidation, an amount in cash per share equal
to $2.50, plus an amount equal to all dividends accrued and unpaid
on each such share (whether or not declared) up to the date fixed
for distribution. If, upon such liquidation, dissolution or winding
up of the affairs of the Corporation, the assets of the Corporation
distributable among the holders of Series A Preferred Stock and any
other series of Preferred Stock ranking on a parity therewith in
respect thereto or any class or series of capital stock of the
Corporation ranking on a parity therewith in respect thereto shall
be insufficient to permit the payment in full to all such holders of
shares of the preferential amounts payable to them, then the entire
assets of the Corporation available for distribution to such holders
of shares shall be distributed ratably among such holders in
proportion to the respective amounts that would be payable per share
if such assets were sufficient to permit payment in full. After
payment of the full amount to which they are entitled upon
liquidation pursuant to this Section 4(a), the holders of shares of
Series A Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Corporation.
Neither a consolidation or merger of the Corporation with another
corporation or other entity nor a sale, transfer, lease or exchange
of all or part of the Corporation's
-2-
<PAGE>
assets will be considered a liquidation, dissolution or winding up
of the affairs of the Corporation for purposes of this Section 4(a).
b. ADJUSTMENTS. The liquidation preference provided for herein
with respect to the Series A Preferred Stock shall be equitably
adjusted to reflect any stock dividend, stock distribution, stock
split or reverse stock split, combination of shares, subdivision of
shares or reclassification of shares with respect to the Series A
Preferred Stock.
5. CONVERSION RIGHTS. The Series A Preferred Stock shall be convertible
as follows:
a. NO OPTIONAL CONVERSION. The holder of any shares of Series
A Preferred Stock shall not have the right to convert any of such
shares of Series A Preferred Stock into Common Stock, and the Series
A Preferred Stock will not be convertible other than as set forth in
Section 5(b) below.
b. AUTOMATIC CONVERSION. Each outstanding share of Series A
Preferred Stock shall automatically be converted, without any
further act of the Corporation or its stockholders, at the
Conversion Price (as defined below) then in effect, into fully paid
and nonassessable shares of Common Stock on the first to occur of
either of the following events (i) upon the Corporation obtaining
such vote of its shareholders (the "Shareholder Approval") as the
rules and regulations of The Nasdaq Stock Market (or successor
thereto) may require to approve the issuance in a private placement
of shares of Common Stock that would equal or exceed 20% of the
number of shares of Common Stock outstanding on the issuance date of
the Series A Preferred Stock at a price per share less than the
greater of book or fair market value of the Common Stock, or (ii)
the Company's Common Stock is no longer listed or quoted on any of
the Nasdaq SmallCap Market, the New York Stock Exchange, or the
Nasdaq National Market, and, in the case of either (i) or (ii)
above, (iii) the Company's Articles of Incorporation have been
amended to increase the Company's authorized number of shares of
Common Stock to a number greater than the shares of Common Stock the
Company has reserved for issuance, including the shares reserved for
issuance upon conversion of the Series A Preferred Stock.
c. NUMBER OF CONVERSION SHARES. Each share of Series A
Preferred Stock shall be convertible pursuant to Section 5(b) into a
number of shares of Common Stock determined by dividing (x) $2.50 by
(y) the Conversion Price in effect on any Conversion Date. For the
purposes of this Section 5, the term "Conversion Price" shall
initially mean $.50; provided, however, in the event that the
Shareholder Approval is not obtained on or before 180 days after the
issuance of the Series A Preferred Stock, then, in such event, the
Conversion Price shall decrease by 1.5% on such 180th day and each
90 day anniversary of the expiration date of such 180 day period,
until such Shareholder Approval is obtained.
-3-
<PAGE>
d. MECHANICS OF CONVERSION. Upon the occurrence of automatic
conversion pursuant to Section 5(b), the outstanding shares of
Series A Preferred Stock shall be converted automatically without
any further action by the holders of such shares and whether or not
the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided that the Corporation
shall not be obligated to issue to any holder certificates
evidencing the shares of Common Stock issuable upon such conversion
unless certificates evidencing such shares of Series A Preferred
Stock are delivered either to the Corporation or any transfer agent
of the Corporation. Conversion shall be deemed to have been effected
on the date of the occurrence of the applicable event specified in
Section 5(b) and such date is referred to herein as the "Conversion
Date". Subject to the provisions of Section 5(f)(iii), as promptly
as practicable thereafter (and after surrender of the certificate or
certificates representing shares of Series A Preferred Stock to any
transfer agent of the Corporation) the Corporation shall issue and
deliver to or upon the written order of such holder a certificate or
certificates for the number of full shares of Common Stock to which
such holder is entitled and a check or cash with respect to any
fractional interest in a share of Common Stock as provided in
Section 5(e). Subject to the provisions of Section 5(f)(iii), the
person in whose name the certificate or certificates for Common
Stock are to be issued shall be deemed to have become a holder of
record of such Common Stock on the applicable Conversion Date.
e. FRACTIONAL SHARES. No fractional shares of Common Stock or
scrip shall be issued upon conversion of shares of Series A
Preferred Stock. If more than one share of Series A Preferred Stock
shall be held by the same holder at the time of any automatic
conversion, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate
number of shares so surrendered or held. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Series A Preferred Stock, the
Corporation shall pay out of funds legally available therefor a cash
adjustment in respect of such fractional interest, rounded to the
nearest one hundredth (1/100th) of a share, in an amount equal to
that fractional interest of the then Current Market Price (as
defined in Section 5(g) below), rounded to the nearest cent ($.01).
f. COMMON STOCK CONVERSION PRICE ADJUSTMENTS. The Conversion
Price shall be subject to adjustment from time to time as follows:
i. STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS OR
COMBINATIONS. If the Corporation shall (x) declare a dividend
or make a distribution on its Common Stock in shares of its
Common Stock, (y) subdivide or reclassify the outstanding
shares of Common Stock into a greater number of shares of
Common Stock or (z) combine or reclassify the outstanding
shares of Common Stock into a smaller number of shares of
Common Stock, then the Conversion Price in effect at the time
of the record date for such dividend or distribution or the
effective date of such subdivision, combination or
reclassification shall be adjusted to equal that price
determined
-4-
<PAGE>
by multiplying the Conversion Price in effect by a fraction
(x) the numerator of which shall be the total number of issued
and outstanding shares of Common Stock immediately prior to
such dividend, distribution, subdivision, combination or
reclassification and (y) the denominator of which shall be the
total number of issued and outstanding shares of Common Stock
immediately after such dividend, distribution, subdivision,
combination or reclassification. Successive adjustments in the
Conversion Price shall be made whenever any event specified
above shall occur.
ii. ROUNDING OF CALCULATIONS; MINIMUM ADJUSTMENT. All
calculations under this Section 5(f) shall be made to the
nearest cent ($.01) or to the nearest one hundredth (1/100th)
of a share, as the case may be. Any provision of this Section
5 to the contrary notwithstanding, no adjustment in the
Conversion Price shall be made if the amount of such
adjustment would be less than 1% of the then current
Conversion Price until the end of one year after such
adjustment would otherwise have been required; but any such
amount shall be carried forward and an adjustment with respect
thereto shall be made at the time of and together with any
subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate 1%
of the then current Conversion Price or more, provided that if
the events giving rise to such adjustments occur within three
months of each other, then such adjustments shall be
calculated as if these events giving rise to them had occurred
simultaneously on the date of the first such event.
iii. TIMING OF ISSUANCE OF ADDITIONAL COMMON STOCK UPON
CERTAIN ADJUSTMENTS. In any case in which the provisions of
this Section 5(f) shall require that an adjustment shall
become effective immediately after a record date for an event,
the Corporation may defer until the occurrence of such event
(x) issuing to the holder of any share of Series A Preferred
Stock converted after such record date and before the
occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment
required by such event over and above the shares of Common
Stock issuable upon such conversion before giving effect to
such adjustment and (y) paying to such holder any amount of
cash in lieu of a fractional share of Common Stock pursuant to
Section 5(e); provided that the Corporation upon request shall
deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such
additional shares, and such cash, upon the occurrence of the
event requiring such adjustment.
g. CURRENT MARKET PRICE. The "Current Market Price" at any
date shall mean, in the event the Common Stock is publicly traded,
the average of the daily closing prices per share of such equity
security for the 20 consecutive trading days ending on the trading
day immediately before such date (as adjusted for any stock
dividend, split, combination or reclassification that took effect
during such 20 trading
-5-
<PAGE>
day period). The closing price for each day shall be the last
reported sale price or, in case no such reported sale takes place on
such day, the average of the last reported closing bid prices, in
either case on the principal national securities exchange on which
such equity security is listed or admitted to trading, or if not
listed or admitted to trading on any national securities exchange,
the closing bid price for such day reported by NASDAQ, if such
equity security is traded over-the-counter and quoted in the
National Market System, or if such equity security is so traded, but
not so quoted, the average of the closing bid prices of such equity
security as reported by NASDAQ or any comparable system or, if such
equity security is not listed on NASDAQ or any comparable system,
the average of the closing bid prices as furnished by two members of
the National Association of Securities Dealers, Inc., selected in
good faith from time to time by the Board of Directors of the
Corporation for that purpose. If such equity security is not traded
in such manner that the quotations referred to above are available
for the period required hereunder, Current Market Price per share of
such equity security shall be deemed to be the fair value as
determined in good faith by the Board of Directors of the
Corporation, irrespective of any accounting treatment.
h. STATEMENT REGARDING ADJUSTMENTS. Whenever the Conversion
Price shall be adjusted as provided in Section 5(f), the Corporation
shall forthwith file, at the office of any transfer agent for the
Series A Preferred Stock and at the principal office of the
Corporation, a statement showing in detail the method of calculation
of such adjustment, the facts requiring such adjustment and the
Conversion Price that shall be in effect after such adjustment, and
the Corporation shall also cause a copy of such statement to be sent
by mail, first class postage prepaid, to each holder of shares of
Series A Preferred Stock at its address appearing on the
Corporation's records. Each such statement shall be signed by the
Corporation's chief financial officer. Where appropriate, such copy
may be given in advance and may be included as part of a notice
required to be mailed under the provisions of Section 5(i).
i. NOTICE TO HOLDERS. In the event the Corporation shall
propose to take any action of the type described in Section 5(f)(i)
or 5(j), the Corporation shall give notice to each holder of shares
of Series A Preferred Stock in the manner set forth in Section 5(h),
which notice shall specify the record date, if any, with respect to
any such action and the approximate date on which such action is to
take place. Such notice shall also set forth such facts with respect
thereto as shall be reasonably necessary to indicate the effect of
such action (to the extent such effect may be known at the date of
such notice) on the Conversion Price and the number, kind or class
of shares or other securities or property which shall be deliverable
upon conversion of shares of Series A Preferred Stock. In the case
of any action which would require the fixing of a record date, such
notice shall be given at least ten calendar days prior to the date
so fixed, and in the case of all other action, such notice shall be
given at least 15 calendar days prior to the taking of such proposed
action. Failure to give such notice, or any defect therein, shall
not affect the legality or validity of any such action.
-6-
<PAGE>
j. MERGERS, ETC. In the event the Corporation shall be a party
to any transaction (including, without limitation, a merger,
consolidation, sale, lease or transfer of all or substantially all
of its assets, reclassification of the Common Stock or
reorganization of the Company) as a result of which shares of Common
Stock shall be converted into the right to receive stock, securities
or other property (including cash or any combination thereof), each
share of Series A Preferred Stock shall thereafter be convertible
into the kind and amount of shares of stock and other securities and
property receivable (including cash) upon the consummation of such
transaction by a holder of that number of shares of Common Stock, or
fraction thereof, into which one share of Series A Preferred Stock
would have been convertible immediately prior to such transaction,
assuming the occurrence at such time of an event described in
Section 5(b).
k. TREASURY STOCK. For the purposes of this Section 5, the
sale or other disposition of any shares of Common Stock theretofore
held in the Corporation's treasury shall be deemed to be an issuance
thereof.
l. COSTS. The Corporation shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance
or delivery of shares of Common Stock upon conversion of any shares
of Series A Preferred Stock; provided that the Corporation shall not
be required to pay any taxes which may be payable in respect of any
transfer involved in the issuance or delivery of any certificate for
such shares in a name other than that of the holder of the shares of
Series A Preferred Stock in respect of which such shares are being
issued.
m. DIVIDENDS UPON CONVERSION. In connection with any
conversion of shares of Series A Preferred Stock, the Corporation
shall pay accrued and unpaid dividends thereon in accordance with
the provisions of Section 6(d).
6. DIVIDENDS.
a. GENERAL.
i. Subject to the rights of the holders of any other
series of Preferred Stock ranking senior to or on a parity
with the Series A Preferred Stock with respect to dividends
and any other class or series of capital stock of the
Corporation ranking senior to or on a parity with the Series A
Preferred Stock with respect to dividends, other than the
Common Stock, and in the event that the Series A Preferred
Stock has not converted into Common Stock pursuant to Section
5(b) herein within 180 days of the original issuance of the
Series A Preferred Stock, the holders of the Series A
Preferred Stock shall be entitled to receive, beginning 180
days after the original issuance of the Series A Preferred
Stock, when and as declared by the Board of Directors,
cumulative dividends per share of Series A Preferred Stock at
the rate per annum of $0.375, during the period commencing 180
days after the date of
-7-
<PAGE>
original issuance of any shares of Series A Preferred Stock
until converted pursuant to Section 5(b) above.
ii. Dividends on the Series A Preferred Stock will
accrue on each December 15, March 15, June 15, and September
15, occurring 180 days after the date of original issuance
(each such date being referred to herein as an "Accrual Date"
and the three-month period or portion thereof, as the case may
be, ending on an Accrual Date being referred to herein as an
"Accrual Period"). Dividends will accrue 180 days from the
date of original issuance. Dividends will be paid (when and as
declared by the Board of Directors of the Corporation)
annually, in the arrears, on January 1, April 1, July 1, and
October 1. Each such dividend shall be paid to the holders of
record of shares of the Series A Preferred Stock as they
appear on the stock register of the Corporation on the date
ten calendar days preceding the payment date thereof.
Dividends on account of arrears for any past dividend periods
may be declared and paid at any time, without reference to any
regular dividend payment date, to holders of record on such
date, not exceeding 45 nor less than ten calendar days
preceding the payment date thereof, as may be fixed by the
Board of Directors of the Corporation. Holders of shares of
Series A Preferred Stock at the close of business on a
dividend payment record date will be entitled to receive the
dividend payable with respect to such shares on the
corresponding dividend payment date notwithstanding the
conversion thereof or the Corporation's default on payment of
the dividend due on such dividend payment date. However, for
shares of Series A Preferred Stock surrendered for conversion
during the period from the close of business on any dividend
payment record date to the opening of business on the
corresponding dividend payment date, the Corporation shall
only be required to pay the dividend to the holder of such
shares on the dividend payment record date. Except as so
provided above and in Section 6(d) below, no payment or
adjustment will be made on account of accrued or unpaid
dividends upon conversion of shares of Series A Preferred
Stock. Holders of shares of Series A Preferred Stock called
for redemption on a redemption date falling between a dividend
payment record date and the dividend payment date shall, in
lieu of receiving such dividend on the dividend payment date,
receive such dividend payment on the redemption payment date
(unless such holders convert such shares in accordance with
this Certificate).
iii. The Corporation shall pay the dividends on the
Series A Preferred Stock described in Section 6(a)(i), at the
Corporation's option and in its sole discretion, out of funds
legally available therefor (A) in cash, (B) in shares of
Common Stock, such that the number of shares of Common Stock
to be distributed as a dividend with respect to the portion of
the dividend attributable to each Accrual Period shall be
equal to the number obtained by dividing the dollar amount of
the portion of the dividend attributable to such Accrual
Period by the Current Market Price of the Common Stock on the
tenth trading day immediately preceding the applicable Accrual
Date, or (C) in
-8-
<PAGE>
any combination of cash and shares of Common Stock that the
Corporation may determine in its sole discretion, with the
number of shares of Common Stock to be distributed in
connection therewith to be calculated on the basis set forth
in Section 6(a)(iii)(B).
iv. No fractional shares of Common Stock or scrip shall
be issued upon payment of any dividends in shares of Common
Stock. If more than one share of Series A Preferred Stock
shall be held by the same holder at the time of any dividend
payment date, the number of full shares of Common Stock
issuable upon payment of such dividends shall be computed on
the basis of the aggregate dividend amount that the
Corporation has determined to pay in Common Stock shares.
Instead of any fractional shares of Common Stock which would
otherwise be issuable upon payment of such dividends, the
Corporation shall pay out of funds legally available therefor
a cash adjustment in respect of such fractional interest,
rounded to the nearest one hundredth (1/100th) of a share, in
an amount equal to that fractional interest of the then
Current Market Price, rounded to the nearest cent ($.01).
b. ALLOCATION OF DIVIDENDS. Dividends on the Series A
Preferred Stock, if paid, or if declared and set apart for payment,
must be paid or declared and set apart for payment on all
outstanding shares of Series A Preferred Stock contemporaneously. In
the event dividends on the Series A Preferred Stock and any other
series of Preferred Stock ranking on a parity therewith in respect
thereto or any other class or series of capital stock of the
Corporation ranking on a parity therewith in respect thereto are
declared and paid in an amount less than all accumulated and current
dividends on all of such shares, the total amount declared and paid
shall be allocated among all of such shares so that the per share
dividend to be declared and paid on each share is the same
percentage of the sum of the accumulated dividends for each such
share. In the event dividends are declared and paid on the Series A
Preferred Stock in a combination of cash and shares of Common Stock,
the percentage of the dividend paid in cash and the percentage of
the dividend paid in stock must be the same for each share of Series
A Preferred Stock.
c. DIVIDEND PRIORITIES. The Corporation shall not declare or
pay any distributions to the holders of the Common Stock or any
other class or series of capital stock ranking junior to the Series
A Preferred Stock in respect of dividends during any period of time
in which any shares of Series A Preferred Stock are outstanding or
in which any dividends payable on any shares of Series A Preferred
Stock have not been declared and paid in full. In this Section 6(c),
"distribution" means the transfer of cash or property without
consideration, whether by way of dividend or otherwise (except a
dividend solely in shares of Common Stock), or the purchase or
redemption by the Corporation of shares of Common Stock or any other
shares of capital stock of the Corporation ranking junior to the
Series A Preferred Stock in respect of dividends for cash or
property, but does not include the repurchase by the Corporation of
shares from an officer, director, employee or consultant of the
Corporation.
-9-
<PAGE>
d. DIVIDENDS ON CONVERSION OR REDEMPTION.
i. Immediately prior to the conversion of any shares of
Series A Preferred Stock into Common Stock or the redemption
of any shares of Series A Preferred Stock, all accrued and
unpaid dividends payable pursuant to Section 6 (whether or not
declared) on such shares so converted or redeemed, as the case
may be, (prorated until the date of conversion or redemption,
as the case may be, in respect of the Accrual Period in which
such date occurs) shall be payable, at the Corporation's
option and in its sole discretion, out of funds legally
available therefor (A) in cash, (B) in shares of Common Stock,
such that the number of shares of Common Stock to be
distributed with respect to the portion of the dividend
attributable to each Accrual Period shall be equal to the
number obtained by dividing the dollar amount of the portion
of the dividend attributable to such Accrual Period by the
Current Market Price of the Common Stock on the tenth trading
day immediately preceding the applicable Accrual Date, or (C)
in any combination of cash and shares of Common Stock that the
Corporation may determine in its sole discretion, with the
number of shares of Common Stock to be distributed in
connection therewith to be calculated on the basis set forth
in Section 6(d)(i)(B).
ii. No fractional shares of Common Stock or scrip shall
be issued upon payment of any dividends in shares of Common
Stock upon conversion or redemption of any shares of Series A
Preferred Stock. If more than one share of Series A Preferred
Stock shall be held by the same holder at the time of any
automatic conversion or shall be held by the same holder at
the time of any redemption, as the case may be, the number of
full shares of Common Stock issuable upon payment of such
dividends shall be computed on the basis of the aggregate
dividend amount that the Corporation has determined to pay in
Common Stock shares. Instead of any fractional shares of
Common Stock which would otherwise be issuable upon payment of
such dividends, the Corporation shall pay out of funds legally
available therefor a cash adjustment in respect of such
fractional interest, rounded to the nearest one hundredth
(1/100th) of a share, in an amount equal to that fractional
interest of the then Current Market Price, rounded to the
nearest cent ($.01).
7. REDEMPTION.
a. GENERAL.
i. On June 15, 2005, the Corporation shall redeem in
whole the then outstanding shares of Series A Preferred Stock.
ii. The Corporation shall redeem the Series A Preferred
Stock by paying a redemption amount equal to $2.50 per share
of Series A Preferred Stock (the "Redemption Price") in cash.
-10-
<PAGE>
iii. In connection with any redemption of shares of
Series A Preferred Stock, in addition to the Redemption Price,
the Corporation shall pay accrued and unpaid dividends thereon
in accordance with the provisions of Section 6(d).
iv. The Redemption Price payable pursuant hereto shall
be equitably adjusted to reflect any stock dividend, stock
distribution, stock split or reverse stock split, combination
of shares, subdivision of shares or reclassification of shares
with respect to any shares of the Series A Preferred Stock.
b. NOTICE.
i. Notice of any proposed redemption of Series A
Preferred Stock shall be given by the Corporation by mailing a
copy of such notice by first class mail, postage prepaid, not
less than 30 nor more than 90 calendar days prior to the date
fixed for such redemption to each holder of record of the
shares to be redeemed at his address appearing on the books of
the Corporation.
ii. Each such notice shall state, among other things,
(A) the redemption payment date, (B) that dividends on the
shares to be redeemed shall cease to accrue following such
redemption payment date, and (C) that dividends accrued to and
including the date fixed for redemption will be paid as
specified in said notice.
iii. Notice having been mailed as aforesaid, from and
after the redemption payment date, unless the Corporation
shall be in default in providing money or Common Stock for the
payment of the Redemption Price (or for any accrued and unpaid
dividends to and including the redemption payment date), (A)
dividends on the shares of Series A Preferred Stock so called
for redemption shall cease to accrue, (B) said shares shall be
deemed no longer outstanding, and (C) all rights of the
holders thereof as stockholders of the Corporation (except the
right to receive from the Corporation any monies or Common
Stock payable upon redemption without interest thereon) shall
cease except for the rights applicable to any Common Stock
paid pursuant to the redemption.
8. REACQUIRED SHARES. Any shares of Series A Preferred Stock redeemed,
purchased, converted or otherwise acquired by the Corporation in any
manner whatsoever shall not be reissued as part of such series and
shall be retired promptly after the acquisition thereof. All such
shares shall upon their retirement and the filing of any certificate
required in connection therewith pursuant to the Texas Business
Corporation Act Law become authorized but unissued shares of
Preferred Stock.
-11-
<PAGE>
RESOLVED, that, before the Company shall issue any shares of the Series A
Preferred Stock, a certificate pursuant to Article 2.13 of the Texas Business
Corporation Act shall be made, executed, acknowledged, filed and recorded in
accordance with the provisions of said Article 2.13; and the proper officers of
the Company shall take all other actions and file all other documents as are
necessary or appropriate to effectuate the foregoing resolutions.
IN WITNESS WHEREOF, MEDICAL SCIENCE SYSTEMS, INC. has caused this
certificate to be duly executed this _____ day of June, 1999.
MEDICAL SCIENCE SYSTEMS, INC.
By ________________________________________
U. Spencer Allen, Chief Financial Officer
-12-
EXHIBIT 4.2
Medical Science Systems, Inc.
Warrant
Dated: June 15, 1999
THIS CERTIFIES THAT Fine Equities, Inc. (herein sometimes called the
"Holder") is entitled to purchase from Medical Science Systems, Inc., a Texas
corporation (hereinafter called the "Company"), at the prices and during the
periods as hereinafter specified, up to one million (1,000,000) shares of the
Company's common stock, no par value per share ("Common Stock"). This Warrant
(the "Warrant" and, together with any successor warrants, the "Warrants") is
exercisable at an exercise price of $0.50 per share, subject to adjustment, at
any time from the first anniversary of the date hereof until June 15, 2004. This
issuance of this Warrant shall cancel and supersede that certain Warrant, dated
June 15, 1999, to purchase up to 756,000 shares of the Company's Common Stock at
an exercise price of $0.50 per share.
This Warrant to purchase 1,000,000 shares of Common Stock, subject to
adjustment in accordance with Section 8 of this Warrant (the "Warrant Shares"),
was originally issued pursuant to an agency agreement among the Company and Fine
Equities, Inc. as placement agent (the "Placement Agent") in connection with a
private offering (the "Offering") of shares of Series of A Preferred Stock, no
par value per share ("Series A Preferred Stock"), through the Placement Agent,
in consideration of $100.00 received for the Warrant.
Except as specifically otherwise provided herein, the Common Stock
issuable upon exercise of the Warrant shall be the same class of Common Stock as
the currently outstanding Common Stock of the Company and the Common Stock
issuable upon conversion of the Series A Preferred Stock as described in the
Confidential Private Placement Memorandum, dated June 15, 1999, and any
supplements thereto, except that the holder shall have registration rights under
the Securities Act of 1933, as amended (the "Act"), for the Warrant Shares as
more fully described in Section 6 of this Warrant. The Company will list the
Warrant Shares on the Nasdaq SmallCap Market and/or such other exchange or
market as the Common Stock may then be listed or quoted prior to exercise of the
Warrant.
1. The rights represented by this Warrant shall be exercised at the
prices, subject to adjustment in accordance with Section 8 of this Warrant ("the
"Exercise Price"), and during the periods as follows:
(a) Between June 15, 2000 and June 15, 2004 inclusive, the Holder
shall have the option to purchase Warrant Shares hereunder at a price of $0.50
per share. For purposes of the adjustments under Section 8 hereof, the Per Share
Exercise Price shall be deemed to be $0.50, subject to further adjustment as
provided in such Section 8; and
(b) After June 15, 2004 the Holder shall have no right to purchase
any Warrant Shares hereunder.
2. (a) The rights represented by this Warrant may be exercised at any time
within the period above specified, in whole or in part, by (i) the surrender of
this Warrant (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); and (ii) payment to the
Company of the exercise price then in effect for the number of Warrant Shares
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any. This Warrant shall be deemed to have been exercised, in
whole or in part to the extent specified, immediately prior to the close of
business on the date this Warrant is surrendered and payment is made in
accordance with the foregoing provisions of this Section 2, and the person or
persons in whose name or names the certificates for Warrant Shares shall be
issuable upon such exercise shall become the holder or holders of record of such
Warrant Shares at that time and date. The certificates for the
<PAGE>
Warrant Shares so purchased shall be delivered to the Holder as soon as
practicable but not later than ten (10) days after the rights represented by
this Warrant shall have been so exercised.
(b) At any time during the period above specified, during which
this Warrant may be exercised, the Holder may, at its option, exchange this
Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant
Shares determined in accordance with this Section (b), by surrendering this
Warrant at the principal office of the Company, accompanied by a notice stating
such Holder's intent to effect such exchange, the number of Warrant Shares into
which this Warrant is to be exchanged and the date on which the Holder requests
that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant
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 Company (the "Exchange
Date"). Certificates for the Warrant Shares issuable upon such Warrant Exchange
and, if applicable, a new Warrant of like tenor evidencing the balance of the
Warrant Shares remaining subject to this Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within seven (7) days following the
Exchange Date. In connection with any Warrant Exchange, this Warrant shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (x) the number of Warrant Shares
specified by the Holder in its Notice of Exchange up to the maximum number of
Warrant Shares subject to this Warrant (the "Total Number") less (y) the number
of Warrant Shares equal to the quotient obtained by dividing (A) the product of
the Total Number and the existing Exercise Price by (B) the Fair Market Value.
"Fair Market Value" shall mean first, if there is a trading market as indicated
in Subsection (i) below for the shares of Common Stock, such Fair Market Value
of the Common Stock and if there is no such trading market in the Common Stock,
then Fair Market Value shall have the meaning indicated in Subsections (ii)
through (iii) below:
(i) If the Common Stock is listed on a domestic or foreign
securities exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on the Nasdaq National Market or the Nasdaq SmallCap
Market, the Fair Market Value shall be the average of the last reported sale
prices or the average of the means of the last reported bid and asked prices of
the Common Stock on such exchange or market for the ten (10) business days
ending on the last business day prior to the Exchange Date; or
(ii) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the Fair Market Value shall be the average of the
means of the last reported bid and asked prices of the Common Stock for the ten
(10) business days ending on the last business day prior to the Exchange Date;
or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
Fair Market Value shall be an amount, not less than book value thereof as at the
end of the most recent fiscal year of the Company ending prior to the Exchange
Date, determined in such reasonable manner as may be prescribed by the Board of
Directors of the Company.
3. This Warrant and the Warrant Shares may be transferred, sold, assigned
or hypothecated so long as any such assignment shall be effected by the Holder
(i) executing the form of assignment at the end hereof and (ii) surrendering
this Warrant for cancellation at the office or agency of the Company referred to
in Section 2 hereof, whereupon the Company shall issue, in the name or names
specified by the Holder (including the Holder) a new Warrant or Warrants of like
tenor and representing in the aggregate rights to purchase the same number of
Warrant Shares as are purchasable hereunder.
4. The Company covenants and agrees that all shares of Common Stock which
may be issued upon exercise of the Warrant, upon issuance and payment therefor
in accordance with the terms of this Warrant, will be duly and validly issued,
fully paid and nonassessable and no personal liability will attach to the holder
thereof solely by reason of being such holder. The Company further covenants and
agrees that during the periods within which this Warrant may be exercised,
assuming approval of an amendment to the Company's Articles of Incorporation
increasing the number of authorized shares of Common Stock to a number
sufficient to allow for the issuance of all shares of Common Stock reserved for
issuance, the Company will at all times have authorized and reserved a
sufficient number of shares of its Common Stock to provide for the exercise of
this Warrant.
- 2 -
<PAGE>
5. This Warrant shall not entitle the Holder to any voting rights or any
other rights, or subject the Holder to any liabilities, as a stockholder of the
Company.
6. (a) If any Majority Holder (as defined below) shall give notice to the
Company at any time to the effect that such holder desires to register under the
Securities Act of 1933, as amended (the "Act"), any of the Warrant Shares under
such circumstances that a public distribution (within the meaning of the Act) of
any such securities will be involved then the Company will promptly, at its own
expense, but no later than four weeks after receipt of such notice, file a
registration statement to the end that the Warrant Shares may be publicly sold
under the Act as promptly as practicable thereafter and the Company will use its
best efforts to cause such registration to become and remain effective
(including the taking of such steps as are necessary to obtain the removal of
any stop order); provided, that such Majority Holder shall furnish the Company
with appropriate information in connection therewith as the Company may
reasonably request in writing. A Majority Holder may request the filing of a
registration statement under the Act on one occasion during the period beginning
on the date hereof through June 15, 2004. The Majority Holder may request the
registration of the Warrant Shares in connection with a request made pursuant to
this Section 6(a) prior to acquisition of the Warrant Shares issuable upon
exercise of the Warrant and even though the Majority Holder has not given notice
of exercise of the Warrant. Such registration rights may be exercised by the
Majority Holder prior to or subsequent to the exercise of the Warrant.
In the event the registration statement is not filed within the period
specified herein and in the event the registration statement is not declared
effective under the Act prior to June 15, 2004, then, at the holders' request,
the Company shall purchase the Warrant from the holder for a per share price
equal to the difference between (i) the Fair Market Value of the Common Stock on
the date of notice multiplied by the number of shares of Common Stock issuable
upon exercise of the Warrant and (ii) the per share purchase price of the
Warrant. All costs and expenses of the registration statement under this
paragraph 6(a) shall be borne by the Company, except that the holders shall bear
the fees of their own counsel and any underwriting discounts or commissions
applicable to any of the securities sold by them.
The Company will maintain such registration statement current under the
Act for a period of at least six months (and for up to an additional three
months if requested by the Holder) from the effective date thereof.
The term "Majority Holder" as used in this Section 6 shall mean the holder
of greater than 50% of the Warrant Shares and shall include any owner or
combination of owners of such securities, which ownership shall be calculated by
determining the number of Warrant Shares held by such owner or owners as well as
the number of shares then issuable upon exercise of the Warrant(s).
(b) At any time prior to June 15, 2006, if the Company shall
determine to proceed with the actual preparation and filing of a registration
statement under the Act in connection with the proposed offer and sale of any of
its securities by it or any of its security holders (other than a registration
statement on Form S-4, S-8 or similar limited purpose form), then the Company
will give written notice of its determination to all record holders of the
Warrants and Warrant Shares. Upon the written request from any record holder or
holders (the "Requesting Holder(s)"), within twenty (20) days after receipt of
any such notice from the Company, the Company will, except as herein provided,
cause all the Warrant Shares of such Requesting Holder(s) to be included in such
registration statement, all to the extent requisite to permit the sale or other
disposition by the prospective seller or sellers of the Warrant Shares at the
Company's expense to be so registered; provided, further, that nothing herein
shall prevent the Company from, at any time, abandoning or delaying any
registration. If any registration pursuant to this Section 6(b) shall be
underwritten in whole or in part, the Company may require that the Warrant
Shares requested for inclusion pursuant to this Section 6(b) be included in the
underwriting on the same terms and conditions as the securities otherwise being
sold through the underwriters. In the event that the Warrant Shares requested
for inclusion pursuant to this Section 6(b) together with any other shares which
have similar piggyback registration rights (such shares and the Warrant Shares
being collectively referred to as the "Requested Stock") would constitute more
than 15% of the total number of shares to be included in a proposed underwritten
public offering, and if in the good faith judgment of the managing underwriter
of such public offering the inclusion of all of the Requested Stock originally
covered by a request for registration would reduce the number of shares to be
offered by the Company or interfere with the successful
- 3 -
<PAGE>
marketing of the shares of stock offered by the Company, the number of shares of
Requested Stock otherwise to be included in the underwritten public offering may
be reduced pro rata (by number of shares) among the holders thereof requesting
such registration or excluded in their entirety if so required by the
underwriter.
All costs and expenses of the registration statement under this
paragraph 6(b) shall be borne by the Company, except that the holders shall bear
the fees of their own counsel and any underwriting discounts or commissions
applicable to any of the securities sold by them.
(c) Whenever pursuant to Section 6 a registration statement relating
to any Warrant Shares is filed under the Act, amended or supplemented, the
Company shall (i) supply prospectuses and such other documents as the Holder may
request in order to facilitate the public sale or other disposition of the
Warrant Shares, (ii) use its best efforts to register and qualify any of the
Warrant Shares for sale in such states as such Holder designates, (iii) furnish
indemnification in the manner provided in Section 7 hereof, (iv) notify each
Holder of Warrant Shares at any time when a prospectus relating thereto is
required to be delivered under the Act, of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading and, at the request of any such Holder, prepare and
furnish to such Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Warrant Shares, such prospectus shall not
included an untrue statement of a material fact or omit to state material fact
required to be stated therein or necessary to make the statements therein not
misleading and (v) do any and all other acts and things which may be necessary
or desirable to enable such Holders to consummate the public sale or other
disposition of the Warrant Shares. The Holder shall furnish appropriate
information in connection therewith and indemnification as set forth in Section
7.
(d) The Company shall not permit the inclusion of any securities
other than the Warrant Shares to be included in any registration statement filed
pursuant to Section 6(a) hereof without the prior written consent of the
Majority Holder.
(e) 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 (or, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) if such registration
includes an underwritten public offering, a "cold comfort" letter dated the
effective date of such registration statement and 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 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 reasonably and
customarily covered in opinions of issuer's counsel and in accountants' letters
delivered to underwriters in underwritten public offerings of securities.
(f) The Company shall deliver promptly to each Holder participating
in the offering requesting the correspondence and memoranda described below and
to the managing underwriter 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 reasonable necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to
non-confidential 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 as any such Holder shall
reasonably request.
7. (a) Whenever pursuant to Section 6 a registration statement relating to
the Warrant Shares is filed under the Act, amended or supplemented, the Company
will indemnify and hold harmless each holder of the Warrant Shares covered by
such registration statement, amendment or supplement (such holder being
hereinafter called
- 4 -
<PAGE>
the "Distributing Holder"), and each person, if any, who controls (within the
meaning of the Act) the Distributing Holder, and each underwriter (within the
meaning of the Act) of such securities and each person, if any, who controls
(within the meaning of the Act) any such underwriter, against any losses,
claims, damages or liabilities, joint or several, to which the Distributing
Holder, any such controlling person or any such underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such registration statement or any preliminary prospectus or final
prospectus constituting a part thereof or any amendment or supplement thereto,
or arise out of or are based upon the omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and will reimburse the Distributing Holder and each such controlling
person and underwriter for any legal or other expenses reasonably incurred by
the Distributing Holder or such controlling person or underwriter in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in said registration statement, said preliminary
prospectus, said final prospectus or said amendment or supplement in reliance
upon and in conformity with written information furnished in writing by such
Distributing Holder specifically for use in the preparation thereof.
(b) Each Distributing Holder agrees, severally but not jointly, to
indemnify and hold harmless the Company against any losses, claims, damages or
liabilities to which the Company may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained in
said registration statement, said preliminary prospectus, said final prospectus
or said amendment or supplement, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished in writing by such Distributing Holder specifically for use in the
preparation thereof; except that the maximum amount which may be recovered from
the Distributing Holder pursuant to this Section 7 or otherwise shall be limited
to the amount of net proceeds received by the Distributing Holder from the sale
of the Warrant Shares.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 7.
(d) In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. The Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of the Warrant shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares or (iii) combine or reclassify its outstanding shares
of Common Stock into a smaller number of shares, the Exercise Price in effect at
the time of the record date for such dividend or distribution or of the
effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the
- 5 -
<PAGE>
price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur.
(b) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least five cents
($0.05) in such price; provided, however, that any adjustments which by reason
of this Subsection (b) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment required to be made hereunder.
All calculations under this Section 8 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. Anything in this
Section 8 to the contrary notwithstanding, the Company shall be entitled, but
shall not be required, to make such changes in the Exercise Price, in addition
to those required by this Section 8, as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
Stock, hereafter made by the Company shall not result in any Federal Income tax
liability to the holders of Common Stock or securities convertible into Common
Stock.
(c) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such an
adjustment by the Holder, cause a notice setting forth the adjusted Exercise
Price and adjusted number of Warrant Shares issuable upon exercise of each
Warrant and, if requested, information describing the transactions giving rise
to such adjustments, to be mailed to the Holders, at the address set forth
herein, and shall cause a certified copy thereof to be mailed to its transfer
agent, if any. The Company may retain a firm of independent certified public
accountants selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any computation required by this
Section 8, and a certificate signed by such firm shall be conclusive evidence of
the correctness of such adjustment.
(d) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (a) above, the Holder of this Warrant thereafter shall
become entitled to receive any shares of the Company, other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of this
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Subsections (a) to (c), inclusive above.
(e) In case any event shall occur as to which the other provisions
of this Section 8 are not strictly applicable but as to which the failure to
make any adjustment would not fairly protect the purchase rights represented by
this Warrant in accordance with the essential intent and principles hereof then,
in each such case, the Holder(s) of Warrant(s) representing the right to
purchase a majority of the Warrant Shares may appoint a firm of independent
public accountants reasonably acceptable to the Company, which shall give their
opinion as to the adjustment, if any, on a basis consistent with the essential
intent and principles established herein, necessary to preserve the purchase
rights represented by the Warrant. Upon receipt of such opinion, the Company
will promptly mail a copy thereof to the Holder of this Warrant and shall make
the adjustments described therein. The fees and expenses of such independent
public accountants shall be borne by the Company.
9. This Agreement shall be governed by and in accordance with the laws of
the State of New York, without giving effect to the principles of conflicts of
law thereof.
IN WITNESS WHEREOF, Medical Science Systems, Inc. has caused this Warrant
to be signed by its duly authorized officers under its corporate seal, and this
Warrant to be dated June 15, 1999.
MEDICAL SCIENCE SYSTEMS, INC.
By:______________________________
(Corporate Seal)
- 6 -
<PAGE>
Attest:
______________________________
____________, Secretary
- 7 -
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of the Warrant)
The undersigned, the holder of the foregoing Warrant, hereby irrevocably
elects to exercise the purchase rights represented by such Warrant for, and to
purchase thereunder, shares of Common Stock, no par value per share, of Medical
Science Systems, Inc. and herewith makes payment of $___ therefor.
Dated: __________
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name: _____________________________________________
(Please type or print in block letters)
Address: _____________________________________________
Signature: ____________________________________________
- 8 -
<PAGE>
WARRANT EXCHANGE
The undersigned, pursuant to the provisions of the foregoing Warrant,
hereby elects to exchange its Warrant for ________shares of Common Stock, no par
value per share, of Medical Science Systems, Inc., pursuant to the Warrant
Exchange provisions of the Warrant.
Dated: ____________
Print Name: __________________________
Address: __________________________
Signature: __________________________
- 9 -
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Warrant)
For value received, the undersigned hereby sells, assigns and
transfers unto _____________ the right to purchase shares of Common Stock, no
par value per share, of Medical Science Systems, Inc. represented by the
foregoing Warrant to the extent of ______ shares , and appoints __________
attorney to transfer such rights on the books of Medical Science Systems, Inc.,
with full power of substitution in the premises.
Dated: ___________
FINE EQUITIES, INC.
By: _________________________________
_________________________________
Address
In the presence of:
- 10 -
EXHIBIT 10.1
CONSULTING SERVICES AGREEMENT
between
MEDICAL SCIENCE SYSTEMS, INC.
and
PHILIP R. REILLY
THIS CONSULTING SERVICES AGREEMENT (this "AGREEMENT") is made and entered
into as of the 1 day of June, 1999 (the "EFFECTIVE DATE") by and between Medical
Science Systems, Inc., a Texas corporation (the "COMPANY"), and Philip R.
Reilly, an individual residing in Concord, Massachusetts ("CONSULTANT").
IN CONSIDERATION of the mutual agreements herein contained and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is agreed as follows:
1. ENGAGEMENT. The Company hereby engages Consultant to serve as a
consultant to the Company, and Consultant hereby accepts such engagement, upon
and subject to the terms and conditions set forth herein. Consultant currently
is employed as the Executive Director of the Shriver Center for Mental
Retardation, Inc, and, in addition, provides consulting services to several
companies as set forth in Schedule 2.
2. AFFILIATIONS. From and following the Effective Date of this Agreement,
Consultant shall not act as a consultant for any person or entity other than the
Company without first obtaining the written consent of the Company's Board of
Directors. Notwithstanding the foregoing, consultant may (a) be employed as the
Executive Director of the Shriver Center, (b) terminate his employment with the
Shriver Center and seek employment elsewhere, and (c) be engaged as a consultant
by any company or organization, provided that such consulting activity does not
directly conflict with his duties and responsibilities as a consultant to
Medical Science Systems, Inc. Consultant warrants to the Company that Consultant
currently has no other consulting affiliations than those set forth in Schedule
2.
3. DUTIES. Consultant agrees to provide the services set forth on EXHIBIT
A which is attached hereto and incorporated herein for all purposes. Consultant
will devote approximately 10 to 15 hours per week, determined by averaging over
the course of each year, to provide the services set forth in EXHIBIT A. The
parties understand and acknowledge that potential conflicts or duality of
interest, or the appearance of such conflict or duality of interest, may arise
during Consultant's performance of those duties and services as a result of
Consultant's other affiliations. Both parties recognize the importance of
avoiding both actual conflicts and the appearance of conflicts of interest. The
parties will therefore mutually develop procedures for identifying and
evaluating actual, potential and apparent conflicts of duality of interests. In
discharging his duties and responsibilities hereunder, Consultant will
<PAGE>
advise the Company when and if an actual or potential conflict arises. The
parties will then mutually work at attempting to resolve the conflict.
4. COMPENSATION. Compensation for Consultant's services shall be in
accordance with EXHIBIT B which is attached hereto and incorporated herein for
all purposes.
5. INDEPENDENT CONTRACTOR. The parties understand and acknowledge that
Consultant is an independent contractor and is not an employee of the Company
for the purposes of this Agreement, the Social Security Act, the income
withholding provisions of the Internal Revenue Code of 1986, as amended, or
other federal or state laws relating to compensation, insurance, unemployment,
or workman's compensation. Consultant acknowledges and agrees that it shall be
his obligation to report as self-employment income all compensation received or
accrued as a result of this Agreement. Consultant acknowledges that he will not
be entitled to any insurance, pension, profit sharing, retirement or other
employee benefits which the Company may provide to its employees during the term
of this Agreement. This Agreement shall not be construed as creating a
partnership, joint venture, agency or employment relationship, or as granting a
franchise under either federal or state law.
6. INVENTIONS. Consultant warrants and represents to the Company that
Consultant has no affiliation with any other persons or entities which require,
to any degree or under any conditions, that Consultant assign his rights to any
discoveries, inventions or developments to such persons or entities. In the
performance of his duties and responsibilities hereunder, Consultant may
conceive, make or develop products, processes or other intellectual property. It
is the intent of the parties that intellectual property conceived, made or
developed by Consultant during the performance of his duties and
responsibilities hereunder or that is conceived, made or developed using the
Company's funds, facilities, materials or information, shall be owned by the
Company. Consultant will ensure that his obligations under affiliations with any
other persons or entities, including, without limitation, those persons or
entities listed in SCHEDULE 2, do not extend to intellectual property rightfully
owned by the Company. Consultant will assist the Company in obtaining legal
protection for such intellectual property as part of his duties and
responsibilities hereunder, and will execute such documents as are reasonably
necessary to secure such protection and confirm ownership in the Company.
7. CONFIDENTIAL INFORMATION. Consultant agrees to maintain in confidence
all information and materials provided by, or obtained from or through, the
Company including, without limitation, (a) all information regarding trade
secrets, inventions, ideas, processes, formulas, data, other works of
authorship, know-how, improvements, discoveries, developments, designs and
techniques, (b) all information regarding plans for research, development, new
products, marketing and selling, business plans, budgets and unpublished
financial statements, licenses, prices and costs, suppliers and customers,
computer software and documentation and (c) all other information relating to
the business of the Company, including, without limitation, information
regarding the skills and compensation of employees of the Company (collectively,
the "CONFIDENTIAL INFORMATION"). Consultant shall not publish, use or disclose
Confidential Information learned, developed or acquired as a result of services
offered under this Agreement without the Company's prior written consent.
Confidential
<PAGE>
Information shall not include (i) information which was rightfully in
Consultant's possession without an obligation of confidentiality prior to
disclosure by or through the Company, (ii) information which lawfully becomes
part of the public knowledge, literature or generally available to the public
through no act of Consultant, or (iii) information obtained from any third
party, provided that any such third party did not obtain such information from
the Company or obtain such information in confidence. Consultant shall protect
the Confidential Information and shall take all reasonable steps to prevent the
unauthorized disclosure, dissemination, or publication of the Confidential
Information.
All data, records, analyses, reports and material prepared or compiled by
Consultant or furnished to Consultant, in connection with this Agreement during
the term hereof shall be the sole and exclusive property of the Company, and all
of such data, records, analyses, reports and materials, and all copies thereof,
shall be delivered to the Company at its request or on the termination of this
Agreement.
The parties acknowledge that the terms of Consultant's other affiliations
also contain or require certain obligations of confidentiality. In discharging
his duties relative to Confidential Information, Consultant shall advise the
Company when and if an actual or potential conflict with such other obligations
arise. The parties will then mutually work at attempting to resolve the
conflict. If such conflict cannot be resolved, Consultant is expressly excused
from performing any services hereunder that would result in a breach or
potential breach of his confidentiality obligations owed to another entity.
8. TERM AND TERMINATION.
(a) TERM. Subject to the rights of termination set forth in this SECTION
8, this Agreement shall remain in full force and effect from June 11, 1999 until
June 11, 2002, unless sooner terminated by Consultant's death or continuing
inability to discharge the duties hereunder for three (3) consecutive months.
(b) VOLUNTARY TERMINATION. During the term of this Agreement, either party
may terminate this Agreement without cause, by giving 120 days written notice of
termination to the other party.
(c) TERMINATION WITH CAUSE. In the event of breach of this Agreement by
either party, the non-breaching party may, at its option, cancel this Agreement
for such breach by giving written notice of cancellation to the breaching party,
which cancellation shall be effective thirty (30) days following the delivery of
such notice or such later time as may be specified in such notice, unless the
breaching party shall have cured such breach prior to the expiration of the
notice.
(d) LIMITED SURVIVAL UPON TERMINATION. SECTIONS 6 and 7 shall survive
termination of this Agreement and shall remain in full force and effect.
9. MISCELLANEOUS.
(a) NOTICES. All notices, requests, demands, and other communications
hereunder
<PAGE>
shall be in writing and, unless otherwise provided herein, shall be deemed to
have been duly given upon hand delivery or upon deposit in the United States
Mail, postage prepaid, certified or registered mail, return receipt requested,
as follows:
If to the Company:
Medical Science Systems, Inc.
100 N.E. Loop 410, Suite 820
San Antonio, Texas 78216
Attention: U. Spencer Allen
If to Consultant:
Dr. Philip R. Reilly
145 Monument St.
Concord, Massachusetts 01742
or at such other address as shall have been furnished to the other party in
writing in accordance herewith, except that such notice of such change shall be
effective only upon receipt.
(b) AMENDMENTS AND WAIVER. This Agreement may be amended or modified by,
and only by, a written instrument executed by all the parties hereto. The terms
of this Agreement may be waived by, and only by, a written instrument executed
by the party against whom such waiver is sought to be enforced.
(c) SECTION AND OTHER HEADINGS. The section and other headings contained
in this Agreement are for convenience of reference only and shall not in any way
affect the meaning or interpretation of this Agreement.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument.
(e) ASSIGNMENTS AND PARTIES IN INTEREST. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns. This Agreement calls for Consultant's personal services
and may not be assigned by Consultant without the prior written consent of the
Company.
(f) NO IMPLIED RIGHTS OR REMEDIES. Except as otherwise expressly provided
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or to give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
(g) AGREEMENT OF FURTHER COOPERATION. Each of the parties agrees to
execute and deliver such further documents and to cooperate in such manner as
may be necessary to implement and give effect to the agreements contained
herein.
<PAGE>
(h) ENTIRE AGREEMENT. This Agreement, together with all exhibits and
schedules hereto, embodies the entire agreement and understanding between the
parties hereto relating to the subject matter hereof and supersedes any prior
agreements and understandings relating to the subject matter hereof.
(i) SEVERABILITY. If any part or provision of this Agreement is or shall
be deemed violative of any applicable laws, rules or regulations, such legal
invalidity shall not void this Agreement or affect the remaining terms and
provisions of this Agreement, and this Agreement shall be construed and
interpreted to comport with all such laws, rules or regulations to the maximum
extent possible.
(j) APPLICABLE LAW. This Agreement has been accepted and made performable
in Bexar County, Texas. This Agreement and the rights and obligations of the
parties hereto shall be construed under and governed by the laws of the State of
Texas, without giving effect to principles of conflict of laws. The exclusive
venue for resolution of any dispute between the parties related to the subject
matter of this Agreement shall be in Bexar County, Texas.
EXECUTED as of the day and year first above written.
COMPANY:
MEDICAL SCIENCE SYSTEMS, INC.
By:
U. Spencer Allen, Chief Financial Officer
CONSULTANT:
Philip R. Reilly
<PAGE>
EXHIBIT A
DUTIES AND SERVICES
Consultant shall perform the following services for the Company. In
performing these services, Consultant shall at all times exercise his
independent judgment, discretion and control to accomplish the stated objective.
1. STRATEGIC PLANS. Consultant shall, consistent with the terms of
this Agreement, advise and assist the senior management of the Company in
formulating plans for the strategic direction of the Company.
2. PRESENTATIONS; INTRODUCTIONS. Consultant shall, consistent with
the terms of this Agreement, make introductions and presentations for and on
behalf of the Company, including, without limitation, introductions and
presentations to financial investors and/or potential financial investors. Any
such presentation shall include an appropriate disclosure of Consultant's
financial relationship with the Company.
3. POSITIONS. Consultant shall, upon request by the Company and
subject to the approval of the shareholders of the Company, serve as Chairman of
the Board of Directors and a Director of the Company.
4. ADDITIONAL SERVICES. In addition to the other services specified
in this SECTION 1, Consultant shall, consistent with the terms of this
Agreement, perform such other services to the Company as necessary to build
shareholder value in the Company.
<PAGE>
EXHIBIT B
COMPENSATION
1. The Company shall pay to Consultant for Consultant's services a fee
equal to One Hundred Twenty Thousand and No/100 Dollars ($120,000.00) for the
period from June 11, 1999 to June 10, 2000 and One Hundred Thousand and No/100
Dollars ($100,000.00) per year for the period from June 11, 2000 to June 10,
2002, which fees shall be paid in monthly installments commencing on July10,
1999 and continuing on the 10th day of each month thereafter through and
including June 10, 2002. The amount of the monthly installment shall be (a)
$10,000.00 for each monthly installment payable from July 10, 1999 through and
including June 10, 2000 and (b) $8,333.33 for each monthly installment payable
from July 10, 2000 through and including June 10, 2002. In addition to the fees
set forth herein above, the Company shall reimburse Consultant for all expenses
reasonably incurred by Consultant in connection with the performance of
Consultant's responsibilities set forth herein in accordance with the prevailing
practice and policy of the Company.
2. In addition to the fees provided for in Paragraph 1 above, on the date
hereof, the Company shall pay Consultant the sum of $5,000.00.
3. The Company shall grant to Consultant the option to purchase up to
240,000 shares of Common Stock, no par value, of the Company at an exercise
price equal to $.50 per share pursuant to the terms and provisions of that one
certain Non-Qualified Stock Option Agreement of even date herewith between the
Company and Consultant.
<PAGE>
SCHEDULE 2
AFFILIATIONS OF CONSULTANT
EXHIBIT 10.2
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS NON-QUALIFIED STOCK OPTION AGREEMENT (this "AGREEMENT"), dated as of
June 1, 1999, is entered into between Medical Science Systems, Inc., a Texas
corporation (the "COMPANY") and Philip Reilly ("OPTIONEE").
RECITALS
A. The Company desires to have Optionee become Chairman of the Board of
Directors of the Company, encourage the stock ownership of Optionee and increase
Optionee's proprietary interest in the Company.
B. The Company desires to grant to Optionee the option to purchase up to 240,000
shares of the Common Stock (as defined below) of the Company.
AGREEMENTS
In consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth in this
Agreement, the Company hereby grants to Optionee the option to purchase, during
the period commencing on the date of this Agreement and ending June 1, 2009, at
an exercise price equal to $.50 per share (the "OPTION PRICE"), up to, but not
exceeding the aggregate of 240,000 shares of Common Stock, no par value (the
"COMMON STOCK"), of the Company (such option being hereinafter referred to as
the "OPTION").
2. NON-QUALIFIED STATUS. The Option is intended to be a non-qualified stock
option which does not satisfy the requirements of Section 422A of the Internal
Revenue Code of 1986, as amended (the "CODE"). The Option is granted outside of
and therefore shall not be subject to the terms and provisions of the Company's
1996 Equity Incentive Plan, as amended.
3. VESTING OF OPTION. The Option evidenced hereby may be exercised from time to
time as to the following numbers of shares, on a cumulative basis (as to options
to purchase shares not previously exercised), on each of the following dates if
Optionee serves on the Board of Directors of the Company on such date:
(a) 8,000 shares on July 1, 1999;
(b) 8,000 shares on August 1, 1999;
(c) 8,000 shares on September 1, 1999;
(d) 8,000 shares on October 1, 1999;
(e) 8,000 shares on November 1, 1999;
(f) 8,000 shares on December 1, 1999;
(g) 8,000 shares on January 1, 2000;
(h) 8,000 shares on February 1, 2000;
(i) 8,000 shares on March 1, 2000;
(j) 8,000 shares on April 1, 2000;
<PAGE>
(k) 8,000 shares on May 1, 2000;
(l) 8,000 shares on June 1, 2000;
(m) 8,000 shares on July 1, 2000;
(n) 8,000 shares on August 1, 2000;
(o) 8,000 shares on September 1, 2000;
(p) 8,000 shares on October 1, 2000;
(q) 8,000 shares on November 1, 2000;
(r) 8,000 shares on December 1, 2000;
(s) 8,000 shares on January 1, 2001;
(t) 8,000 shares on February 1, 2001;
(u) 8,000 shares on March 1, 2001;
(v) 8,000 shares on April 1, 2001;
(w) 8,000 shares on May 1, 2001;
(x) 8,000 shares on June 1, 2001;
(y) 8,000 shares on July 1, 2001;
(z) 8,000 shares on August 1, 2001;
(aa) 8,000 shares on September 1, 2001;
(bb) 8,000 shares on October 1, 2001;
(cc) 8,000 shares on November 1, 2001; and
(dd) 8,000 shares on December 1, 2001.
4. ACCELERATION OF VESTING. Notwithstanding the foregoing, in the event Optionee
is (i) not nominated by the Board of Directors or committee thereof for election
to the Board of Directors at a meeting of the shareholders of the Company called
for that purpose and, as a result thereof, is not elected and shall no longer
serve on the Board of Directors of the Company, or (ii) removed from the Board
of Directors without cause, then the Option shall become exercisable in full.
5. EXERCISE OF OPTION. The Option shall be deemed exercised when Optionee (a)
shall indicate the decision to do so in writing delivered to the Company and (b)
shall at the same time tender to the Company payment in full of the Option Price
for the shares for which the Option is exercised. The Option may be exercised
for any lesser number of shares than the full amount for which it could be
exercised. Such a partial exercise of the Option shall not affect the right to
exercise the Option from time to time in accordance with the provisions
contained herein for the remaining shares subject to the Option. Upon compliance
with the foregoing, the Company shall cause certificates for the shares so
purchased to be delivered to Optionee, his legal representative or such other
person who is entitled to exercise the Option (in accordance with the provisions
of paragraph 6) at its principal business office.
In no event may the Option be exercised after June 1, 2009.
6. NON-TRANSFERABILITY OF OPTIONS. The Option granted to Optionee shall not be
transferable by Optionee except by will or under
2
<PAGE>
the laws of descent and distribution, and shall be exercisable, during his
lifetime, only by him. Any assignment or transfer of the Option except by will
or under the laws of descent and distribution, whether voluntarily or
involuntarily, by operation of law or otherwise, shall not vest in the assignee
or transferee any interest or rights whatsoever, but immediately upon such
assignment or transfer the Option shall terminate and become of no further
effect.
7. EARLY FORFEITURE OF OPTION. The Option shall terminate on the date 30 days
after the date Optionee ceases to be a member of the Board of Directors of the
Company (and shall not be exercisable thereafter), unless Optionee shall (a) die
while a member of the Board of Directors of the Company, (b) be permanently or
totally disabled within the meaning of Section 22(e)(3) of the Code while a
member of the Board of Directors of the Company, (c) resign or retire as
Chairman of the Board of Directors with the written consent of the Company, or
(d) cease to be a member of the Board of Directors of the Company as a result of
the circumstances set forth in Section 4 hereof. In the event either (a), (b),
(c) or (d) shall occur, Optionee, or his legatees under his will or his personal
representatives, as the case may be, may exercise the previously unexercised
portion of the Option for a period of 365 days after such death, disability,
resignation or retirement, to the extent Optionee could have exercised it
immediately prior to such death, disability, resignation or retirement, as the
case may be.
8. In the event the Option granted under this Agreement shall be exercised by
the legal representative of the deceased Optionee, or by a person who acquired
the Option granted hereunder by bequest or inheritance or by reason of the death
of the deceased Optionee, written notice of such exercise shall be accompanied
by certified copy of letters testamentary or equivalent proof of the right of
such legal representative or other person to exercise such option.
9. ADJUSTMENT OF SHARES. Notwithstanding any other provision contained herein,
in the event of any change in the outstanding Common Stock by reason of a stock
dividend, stock split, reorganization, recapitalization, merger, split-up or
other change in capital structure, an adjustment may be made by the Company, in
its sole and absolute discretion, to prevent dilution or enlargement of
Optionee's rights hereunder, and the determination of the Company as to these
matters shall be conclusive.
10. ISSUANCE OF STOCK CERTIFICATES; LEGENDS AND PAYMENT OF EXPENSES. Upon any
exercise of Option which may be granted hereunder and the payment of the
exercise price, a certificate or certificates representing the shares as to
which the Option has been exercised shall be issued by the Company in the name
of Optionee and shall be delivered to or upon the order of Optionee.
11. The Company may, in its discretion, endorse an appropriate legend upon the
certificate or certificates representing any shares issued or transferred
pursuant to the exercise of any Option granted hereunder and may issue "stop
transfer" instructions to its transfer agent in respect of such shares to (a)
prevent a violation of, or to perfect an exemption from, the registration
requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT") or
(b) implement the provisions of any agreement between the Company and Optionee
with respect to such shares.
3
<PAGE>
12. The Company shall pay all issue or transfer taxes with respect to the
issuance or transfer of shares, as well as all fees and expenses necessarily
incurred by the Company in connection with such issuance or transfer, except
fees and expenses which may be necessitated by the filing or amending of a
Registration Statement under the Securities Act, which fees and expenses shall
be borne by Optionee unless such Registration Statement has been filed by the
Company for its own corporate purposes (and the Company so states) in which
event the recipient of the shares shall bear only such fees and expenses as are
attributable solely to the inclusion of such shares in the Registration
Statement. All the shares issued as provided herein shall be fully paid and
nonassessable to the extent permitted by law.
13. NO RIGHTS AS SHAREHOLDER. Optionee shall not have rights as a shareholder
with respect to shares covered by the Option until the date of issuance of a
stock certificate for such shares; and, except as otherwise provided in
paragraph 8 hereof, no adjustment for dividends or otherwise shall be made if
the record date therefor is prior to the date of issuance of such certificate.
14. REQUIREMENTS OF LAW. The Company shall not be required to sell or issue any
shares under the Option if the issuance of such shares shall constitute or
result in a violation by Optionee or the Company of any provision of any law,
statute or regulation of any governmental authority. Specifically, in connection
with any applicable statute or regulation relating to the registration of
securities, upon exercise of the Option, the Company shall not be required to
issue such shares unless the Company has received evidence satisfactory to it to
the effect that Optionee will not transfer such shares except in accordance with
applicable law, including the receipt of an opinion of counsel satisfactory to
the Company to the effect that any proposed transfer complies with applicable
law. The Company may, but shall in no event be obligated to, register any shares
covered hereby pursuant to applicable securities laws of any country or
political subdivision thereof. In the event the shares issuable on exercise of
the Option are not so registered, the Company may imprint on the certificate
evidencing such shares any legend counsel for the Company considers necessary or
advisable to comply with applicable law. The Company shall not be obligated to
take any other affirmative action in order to cause the exercise of the Option
or the issuance of shares pursuant to the Option to comply with any law or
regulation of any governmental authority.
15. NOTICES. Every notice or other communication relating to this Agreement
shall be in writing, and shall be mailed or delivered to the party for whom it
is intended at such address as may from time to time be designated by such party
in a notice mailed or delivered to the other party as provided herein, provided
that, unless and until some other address be so designated, all notices or
communications by Optionee to the Company shall be mailed or delivered to the
Company at:
Medical Science Systems, Inc.
100 N.E. Loop 410, Suite 820
San Antonio, Texas 78216
4
<PAGE>
and all notices or communications by the Company to Optionee be given to
Optionee personally or may be mailed to him at:
Dr. Philip Reilly
145 Monument St.
Concord, Massachusetts 01742
EXECUTED to be effective as of the date first written above.
COMPANY: MEDICAL SCIENCE SYSTEMS, INC.
By: ____________________________________________
U. Spencer Allen, Chief Financial Officer
OPTIONEE:
PHILIP REILLY
5
EXHIBIT 10.3
MEDICAL SCIENCE SYSTEMS, INC.
SUBSCRIPTION AGREEMENT made as of this ____ day of ________, 1999
between Medical Science Systems, Inc., a Texas corporation with its principal
offices at 100 N.E. Loop 410, Suite 820, San Antonio, Texas 78216 (the
"Company") and the undersigned (the "Subscriber").
WHEREAS, the Company desires to issue, in a private placement (the
"Offering"), a minimum of $2,500,000 (the "Minimum Offering") and a maximum of
$5,000,000 (the "Maximum Offering") in aggregate purchase price of Series A
Preferred Stock, no par value (the "Shares"), with each Share being convertible
into five (5) shares of the Company's common stock, no par value (the "Common
Stock"), on the terms and conditions hereinafter set forth and the Subscriber
desires to acquire that number of Shares set forth on the signature page hereof.
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants hereinafter set forth, the parties hereto do hereby agree as
follows:
I. SUBSCRIPTION FOR SHARES AND REPRESENTATIONS BY AND
COVENANTS OF SUBSCRIBER
1.1 Subject to the terms and conditions hereinafter set forth,
the Subscriber hereby subscribes for and agrees to purchase from the Company
such number of Shares as is set forth upon the signature page hereof at a price
of $2.50 per Share. The Company agrees to sell such Shares to the Subscriber for
said purchase price. The purchase price is payable by certified or bank check
made payable to United States Trust Company of New York, Special Account Re:
Medical Science Systems, Inc., or by wire transfer of funds, contemporaneously
with the execution and delivery of this Subscription Agreement. The certificates
for the Shares will be delivered by the Company within ten (10) days following
each Closing of this offering as set forth in Article III hereof. The Subscriber
understands however, that this purchase of Shares is contingent upon the Company
making sales of at least $2,500,000 in aggregate purchase price of the Shares
prior to the Termination Date as defined in Article III hereof.
1.2 The Subscriber recognizes that the purchase of Shares
involves a high degree of risk in that (i) the Company will need additional
capital but has no assurance of additional necessary capital; (ii) conversion of
the Shares into Common Stock is not assured and is subject to approval by the
Company's common shareholders; (iii) an investment in the Company is highly
speculative and only investors who can afford the loss of their entire
investment should consider investing in the Company and the Shares; (iv) an
investor may not be able to liquidate his investment; (v) transferability of the
securities comprising the Shares is extremely limited; and (vi) an investor
could sustain the loss of his entire investment, as well as other risk factors,
as more fully set forth herein and in the Private Placement Memorandum dated
April 14, 1999 and any supplements thereto (the "Offering Memorandum").
<PAGE>
1.3 The Subscriber represents that he is an "accredited
investor" as such term is defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933, as amended (the "Act"), as indicated by his
responses to the Investor Questionnaire, and that he is able to bear the
economic risk of an investment in the Shares.
1.4 The Subscriber acknowledges that he has prior investment
experience, including investment in non-listed and non-registered securities, or
he has employed the services of an investment advisor, attorney or accountant to
read all of the documents furnished or made available by the Company both to him
and to all other prospective investors in the Shares and to evaluate the merits
and risks of such an investment on his behalf, and that he recognizes the highly
speculative nature of this investment.
1.5 The Subscriber acknowledges receipt and careful review of
the Offering Memorandum and the attachments thereto (the "Offering Documents")
and hereby represents that he has been furnished by the Company during the
course of this transaction with all information regarding the Company which he
had requested or desired to know; that all documents which could be reasonably
provided have been made available for his inspection and review; that he has
been afforded the opportunity to ask questions of and receive answers from duly
authorized officers or other representatives of the Company concerning the terms
and conditions of the Offering, and any additional information which he had
requested.
1.6 The Subscriber acknowledges that this offering of Shares
may involve tax consequences, and that the contents of the Offering Documents do
not contain tax advice or information. The Subscriber acknowledges that he must
retain his own professional advisors to evaluate the tax and other consequences
of an investment in the Shares.
1.7 The Subscriber acknowledges that this offering of Shares
has not been reviewed by the United States Securities and Exchange Commission
("SEC") because of the Company's representations that this is intended to be a
nonpublic offering pursuant to Sections 4(2) or 3(b) of the Act. The Subscriber
represents that the Shares are being purchased for his own account, for
investment and not for distribution or resale to others. The Subscriber agrees
that he will not sell or otherwise transfer such securities unless they are
registered under the Act or unless an exemption from such registration is
available.
1.8 The Subscriber understands that the Shares have not been
registered under the Act by reason of a claimed exemption under the provisions
of the Act which depends, in part, upon his investment intention. In this
connection, the Subscriber understands that it is the position of the SEC that
the statutory basis for such exemption would not be present
2
<PAGE>
if his representation merely meant that his present intention was to hold such
securities for a short period, such as the capital gains period of tax statutes,
for a deferred sale, for a market rise, assuming a market develops, or for any
other fixed period. The Subscriber realizes that, in the view of the SEC, a
purchase now with an intent to resell would represent a purchase with an intent
inconsistent with his representation to the Company, and the SEC might regard
such a sale or disposition as a deferred sale to which such exemptions are not
available.
1.9 The Subscriber understands that there is no public market
for the securities comprising the Shares. The Subscriber understands that even
if a public market exists for the Common Stock issuable upon conversion of the
Shares, Rule 144 (the "Rule") promulgated under the Act requires, among other
conditions, a one year holding period prior to the resale (in limited amounts)
of securities acquired in a non-public offering without having to satisfy the
registration requirements under the Act. The Subscriber understands that the
Company makes no representation or warranty regarding its fulfillment in the
future of any reporting requirements under the Securities Exchange Act of 1934,
as amended, or its dissemination to the public of any current financial or other
information concerning the Company, as is required by Rule 144 as one of the
conditions of its availability. The Subscriber understands and hereby
acknowledges that the Company is under no obligation to register the securities
comprising the Shares under the Act, with the exception of certain registration
rights set forth in Article IV herein. The Subscriber consents that the Company
may, if it desires, permit the transfer of the securities comprising the Shares
or issuable upon conversion thereof out of his name only when his request for
transfer is accompanied by an opinion of counsel reasonably satisfactory to the
Company that neither the sale nor the proposed transfer results in a violation
of the Act or any applicable state "blue sky" laws (collectively "Securities
Laws"). The Subscriber agrees to hold the Company and its directors, officers
and controlling persons and their respective heirs, representatives, successors
and assigns harmless and to indemnify them against all liabilities, costs and
expenses incurred by them as a result of any misrepresentation made by him
contained herein or in the Investor Questionnaire or any sale or distribution by
the undersigned Subscriber in violation of any Securities Laws.
1.10 The Subscriber consents to the placement of one or more
legends on any certificate or other document evidencing his Shares and the
Common Stock issuable upon conversion of such Shares stating that they have not
been registered under the Act and setting forth or referring to the restrictions
on transferability and sale thereof.
1.11 The Subscriber understands that the Company will review
this Subscription Agreement and the Investor Questionnaire and is hereby given
authority by the undersigned to call his bank or place of employment or
otherwise review the financial standing of
3
<PAGE>
the Subscriber; and it is further agreed that the Company reserves the
unrestricted right to reject or limit any subscription and to close the offer at
any time.
1.12 The Subscriber hereby represents that the address of
Subscriber furnished by him at the end of this Subscription Agreement is the
undersigned's principal residence if he is an individual or its principal
business address if it is a corporation or other entity.
1.13 The Subscriber acknowledges that if he is a Registered
Representative of a National Association of Securities Dealers, Inc. ("NASD")
member firm, he must give such firm the notice required by the NASD Conduct
Rules, or any applicable successor rules of the NASD receipt of which must be
acknowledged by such firm on the signature page hereof.
1.14 The Subscriber hereby represents that, except as set
forth in the Offering Documents, no representations or warranties have been made
to the Subscriber by the Company or any agent, employee or affiliate of the
Company and in entering into this transaction, the Subscriber is not relying on
any information, other than that contained in the Offering Documents and the
results of independent investigation by the Subscriber.
1.15. The Subscriber agrees that he will purchase securities
in the Offering only if his intent at such time is to make such purchase for
investment purposes and not with a view toward resale.
1.16 If the undersigned Subscriber is a partnership,
corporation, trust or other entity, such partnership, corporation, trust or
other entity further represents and warrants that: (i) it was not formed for the
purpose of investing in the Company; (ii) it is authorized and otherwise duly
qualified to purchase and hold the Shares; and (iii) that this Subscription
Agreement has been duly and validly authorized, executed and delivered
constitutes the legal, binding and enforceable obligation of the undersigned.
II. REPRESENTATIONS BY THE COMPANY
The Company represents and warrants to the Subscriber that
prior to the consummation of this Offering and at the date of the closing of
this offering (which date, the "Closing Date"):
(a) The Company is a corporation duly organized, existing and
in good standing under the laws of the State of Texas and has the corporate
power to conduct the business which it conducts and proposes to conduct.
4
<PAGE>
(b) The execution, delivery and performance of this
Subscription Agreement by the Company will have been duly approved by the Board
of Directors of the Company and all other actions required to authorize and
effect the offer and sale of the Shares and the securities contained therein
will have been duly taken and approved, except for the approval by the Company's
stockholders of (i) the conversion of the Shares, and (ii) an amendment to the
Company's Articles of Incorporation increasing the number of authorized shares
of Common Stock to a number sufficient to allow the issuance of all shares of
Common Stock reserved for issuance, including the Common Stock to be issued upon
conversion of the Shares, and the filing and effectiveness of such amendment.
The Company will use all reasonable efforts to promptly obtain the foregoing
approvals.
(c) The Shares have been duly and validly authorized and when
issued and paid for in accordance with the terms hereof, will be valid and
binding obligations of the Company enforceable in accordance with their
respective terms.
(d) Assuming approval by the Company's Stockholders of the
conversion of the Shares and assuming approval by the stockholders of an
amendment to the Company's Articles of Incorporation increasing the number of
authorized shares of Common Stock to a number sufficient to allow the issuance
of all shares of Common Stock reserved for issuance, including, the Common Stock
to be issued upon conversion of the Shares, and upon the effectiveness of such
amendment, when issued and delivered, the shares of Common Stock issuable upon
conversion of the Shares will be validly issued and outstanding, fully paid and
nonassessable. The Company will use all reasonable efforts to promptly obtain
the foregoing approvals.
(e) The Company has obtained, or is in the process of
obtaining, all licenses, permits and other governmental authorizations necessary
to the conduct of its business; such licenses, permits and other governmental
authorizations obtained are in full force and effect; and the Company is in all
material respects complying therewith.
(f) Other than as described in the Offering Documents, the
Company knows of no pending or threatened legal or governmental proceedings to
which the Company is a party which could materially adversely affect the
business, property, financial condition or operations of the Company.
(g) The Company is not in violation of or default under, nor
will the execution and delivery of this Subscription Agreement, the issuance of
the Shares, and the incurrence of the obligations herein and therein set forth
and the consummation of the transactions
5
<PAGE>
herein or therein contemplated, result in a violation of, or constitute a
default under, the articles of incorporation or by-laws, in the performance or
observance of any material obligations, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of indebtedness or in
any material contract, indenture, mortgage, loan agreement, lease, joint venture
or other agreement or instrument to which the Company is a party or by which it
or any of its properties may be bound or in violation of any material order,
rule, regulation, writ, injunction, or decree of any government, governmental
instrumentality or court, domestic or foreign, other than violations, breaches
or defaults as may result from the issuance of shares of Common Stock prior to
the Company's Articles of Incorporation being amended to increase the authorized
number of shares of Common Stock to a number sufficient to allow the issuance of
all of the Company's Common Stock currently reserved for issuance, including the
Common Stock to be issued upon conversion of the Shares.
(h) The financial information contained in the Offering
Documents is accurate in all material respects. The Company's Form 10-KSB for
the year ended December 31, 1998 contains the Company's (i) Balance Sheets at
December 31, 1998 (the "Balance Sheet Date"), (ii) Statements of Operations for
each of the last two years ending December 31, 1997 and December 31, 1998, and
(iii) Statements of Cash Flows for each of the last two years ending December
31, 1997 and December 31, 1998 (such financial statements attached to the
Offering Documents hereinafter referred to collectively as the "Financial
Statements"). The Financial Statements have been prepared in conformity with
generally accepted accounting principles consistently applied and show all
material liabilities, absolute or contingent, of the Company required to be
recorded thereon and present fairly the financial position and results of
operations of the Company as of the dates and for the periods indicated.
III. TERMS OF SUBSCRIPTION
3.1 The subscription period will begin as of April 14, 1999
and will terminate (if the Closing Date has not earlier occurred) at 11:59 PM
Eastern time on July 14, 1999, unless extended by the Placement Agent for up to
an additional thirty (30) days (the "Termination Date"). The Shares will be
offered on a "best efforts" minimum-maximum basis as more particularly set forth
in the Offering Memorandum. The minimum subscription per subscriber shall be at
least $50,000 in aggregate purchase price of Shares, provided, however, that a
lesser amount may be accepted at the discretion of the Placement Agent and the
Company.
3.2 Placement of the Shares will be made by Fine Equities,
Inc. (the "Placement Agent"), which will receive (i) a placement fee in the
amount of 10% of the purchase price of the Shares placed; (ii) warrants to
purchase such number of shares of Common Stock of the Company equal to 10% of
the number of Shares sold in the Offering for assisting the
6
<PAGE>
Company in the placement and (iii) reimbursement for expenses and other
compensation as summarized in the Offering Memorandum.
3.3 Pending the sale of the Shares, all funds paid hereunder
shall be deposited by the Company in escrow with United States Trust Company of
New York. If the Company shall not have obtained subscriptions (including this
subscription) for purchases of Shares for an aggregate purchase price of
$2,500,000 on or before the Termination Date, then this subscription shall be
void and all funds paid hereunder by the Subscriber, without interest, shall be
promptly returned to the Subscriber, subject to paragraph 3.5 hereof. If at
least $2,500,000 in aggregate purchase price of the Shares is sold at or prior
to the Termination Date, then all subscription proceeds shall be paid over to
the Company within ten days thereafter (the "Initial Closing") and subsequent
closings (together with the Initial Closing, each a "Closing") may take place
thereafter until the sale of the Maximum Offering (the date of such final
closing, the "Final Closing Date"). In such event, placements of additional
Shares may continue until the Termination Date, with subsequent releases of
funds to be at the mutual consent of the Company and the Placement Agent.
3.4 The Subscriber hereby authorizes and directs the Company
to deliver the securities to be issued to such Subscriber pursuant to this
Subscription Agreement to the residential or business address indicated in the
Confidential Purchaser Questionnaire.
3.5 The Subscriber hereby authorizes and directs the Company
to return any funds for unaccepted subscriptions to the same account from which
the funds were drawn, including any customer account maintained with the
Placement Agent.
3.6 The Subscriber acknowledges that at such time, if ever, as
any of the Shares or underlying shares of Common Stock (collectively, the
"Securities") are registered, sales of such Securities will be subject to state
securities laws, including those of states which may require any securities sold
therein to be sold through a registered broker-dealer or in reliance upon an
exemption from registration.
3.7 If the Subscriber is not a United States person, such
Subscriber hereby represents that it has satisfied itself as to the full
observance of the laws of its jurisdiction in connection with any invitation to
subscribe for the Shares or any use of this Agreement, including (i) the legal
requirements within its jurisdiction for the purchase of the Securities, (ii)
any foreign exchange restrictions applicable to such purchase, (iii) any
governmental or other consents that may need to be obtained, and (iv) the income
tax and other tax consequences, if any, that may be relevant to the purchase,
holding, redemption, sale or transfer of the Securities. Such
7
<PAGE>
Subscriber's subscription and payment for, and his or her continued beneficial
ownership of the Securities, will not violate any applicable securities or other
laws of the Subscriber's jurisdiction.
IV. REGISTRATION RIGHTS
4.1 REQUIRED REGISTRATION. The Company hereby agrees with the
holders of the Shares or their transferees (collectively, the "Holders") to
prepare and file with the SEC thirty (30) days after the Final Closing Date of
the Offering a registration statement under the Act covering the resale of the
shares of Common Stock issuable upon conversion of the Shares (the "Registrable
Securities") and to use all reasonable efforts to cause such registration
statement to become effective as soon as practicable hereafter.
The obligation of the Company under this Section 4.1 shall be
limited to one registration statement. The Company shall pay the expenses
described in Section 4.3 for the registration statement filed pursuant to this
Section 4.1, except for underwriting discounts and commissions and legal fees of
the Holders, which shall be borne by the Holders.
4.2 REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of Section 4.1 to effect the registration of
Registrable Securities under the Act, the Company will:
(a) prepare and file with the SEC a registration
statement with respect to such securities, and use all reasonable efforts to
cause such registration statement to become and remain effective until the
earlier of (i) twelve months from the date of effectiveness thereof or (ii) the
date when all such securities are sold pursuant to such registration statement;
(b) prepare and file with the SEC such amendments to
such registration statement and supplements to the prospectus contained therein
as may be necessary to keep such registration statement effective until the
earlier of (i) twelve months from the date of effectiveness thereof or (ii) the
date when all such securities are sold pursuant to such registration statement;
(c) furnish to the security holders participating in
such registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters may
reasonably request in order to facilitate the public offering of such
securities;
8
<PAGE>
(d) use all reasonable efforts to register or qualify
the securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as such participating holders
may reasonably request in writing within twenty (20) days following the original
filing of such registration statement, except that the Company shall not for any
purpose be required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction wherein it
is not so qualified;
(e) notify the security holders participating in such
registration, promptly after it shall receive notice thereof, of the time when
such registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(f) notify such holders promptly of any request by the
SEC for the amending or supplementing of such registration statement or
prospectus or for additional information;
(g) prepare and file with the SEC, promptly upon the
request of any such holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such holders (and
concurred in by counsel for the Company), is required under the Act or the rules
and regulations thereunder in connection with the distribution of Common Stock
by such holder;
(h) prepare and promptly file with the SEC and promptly
notify such holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Act, any event shall have
occurred as the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances in which they were made, not misleading; and
(i) advise such holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use all reasonable
efforts to prevent the issuance of any stop order or to obtain its withdrawal if
such stop order should be issued.
9
<PAGE>
4.3 EXPENSES.
(a) With respect to the registration required pursuant
to Section 4.1 hereof, all fees, costs and expenses of and incidental to such
registration, inclusion and public offering (as specified in paragraph (b)
below) in connection therewith shall be borne by the Company, provided, however,
that any securityholders participating in such registration shall bear their pro
rata share of the underwriting discount and commissions and transfer taxes.
(b) The fees, costs and expenses of registration to be
borne by the Company as provided in paragraph (a) above shall include, without
limitation, all registration, filing, and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, and all legal fees and
disbursements and other expenses of complying with state securities or blue sky
laws of any jurisdictions in which the securities to be offered are to be
registered and qualified (except as provided in 4.4(a) above). Fees and
disbursements of counsel and accountants for the selling securityholders and any
other expenses incurred by the selling securityholders not expressly included
above shall be borne by the selling securityholders.
4.4 INDEMNIFICATION.
(a) The Company will indemnify and hold harmless each
holder of Registrable Securities which are included in a registration statement
pursuant to the provisions of Section 4.1 hereof, its directors and officers,
and any underwriter (as defined in the Act) for such holder and each person, if
any, who controls such holder or such underwriter within the meaning of the Act,
from and against, and will reimburse such holder and each such underwriter and
controlling person with respect to, any and all loss, damage, liability, cost
and expense to which such holder or any such underwriter or controlling person
may become subject under the Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue statement or alleged
untrue statement of any material fact contained in such registration statement,
any prospectus contained therein or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, damage, liability, cost or expenses
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission so made in conformity with information furnished
by such holder, such underwriter or such controlling person in writing
specifically for use in the preparation thereof.
(b) Each holder of Registrable Securities included in a
registration pursuant to the provisions of Section 4.1 hereof will indemnify and
hold harmless the
10
<PAGE>
Company, its directors and officers, any controlling person and any underwriter
from and against, and will reimburse the Company, its directors and officers,
any controlling person and any underwriter with respect to, any and all loss,
damage, liability, cost or expense to which the Company or any controlling
person and/or any underwriter may become subject under the Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused by
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in reliance upon and in
strict conformity with written information furnished by or on behalf of such
holder specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party
pursuant to the provisions of paragraph (a) or (b) of this Section 4.4 of notice
of the commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said paragraph
(a) or (b), promptly notify the indemnifying party of the commencement thereof;
but the omission to so notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than
hereunder. In case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party shall have the right to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party,
provided, however, if the defendants in any action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or in addition to those available
to the indemnified party, or if there is a conflict of interest which would
prevent counsel for the indemnifying party from also representing the
indemnified party, the indemnified party or parties have the right to select
separate counsel to participate in the defense of such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party pursuant to the
provisions of said paragraph (a) or (b) for any legal or other expense
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation, unless (i) the indemnified
party shall have employed counsel in accordance with the provisions of the
preceding sentence, (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after the notice of the commencement of the action or (iii)
the indemnifying party
11
<PAGE>
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party.
V. MISCELLANEOUS
5.1 Any notice or other communication given hereunder shall be
deemed sufficient if in writing and sent by registered or certified mail, return
receipt requested, addressed to the Company, at its registered office, 100 N.E.
Loop 410, Suite 820, San Antonio, Texas 78216, Attention: U. Spencer Allen and
to the Subscriber at his address indicated on the signature page of this
Subscription Agreement. Notices shall be deemed to have been given on the date
of mailing, except notices of change of address, which shall be deemed to have
been given when received.
5.2 Unless at least 50% of the holders of Securities have
given their approval, which approval shall be binding on all holders of
Securities, this Subscription Agreement shall not be changed, modified or
amended and may not be discharged except by performance in accordance with its
terms.
5.3 This Subscription Agreement shall be binding upon and
inure to the benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns. This Subscription Agreement sets forth
the entire agreement and understanding between the parties as to the subject
matter hereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
5.4 Notwithstanding the place where this Subscription
Agreement may be executed by any of the parties hereto, the parties expressly
agree that all the terms and provisions hereof shall be construed in accordance
with and governed by the laws of the State of New York. The parties hereby agree
that any dispute which may arise between them arising out of or in connection
with this Subscription Agreement shall be adjudicated before a court located in
New York City and they hereby submit to the exclusive jurisdiction of the courts
of the State of New York located in New York, New York and of the federal courts
in the Southern District of New York with respect to any action or legal
proceeding commenced by any party, and irrevocably waive any objection they now
or hereafter may have respecting the venue of any such action or proceeding
brought in such a court or respecting the fact that such court is an
inconvenient forum, relating to or arising out of this Subscription Agreement or
any acts or omissions relating to the sale of the securities hereunder, and
consent to the service of process in any such action or legal proceeding by
means of registered or certified mail, return receipt requested, in care of the
address set forth below or such other address as the undersigned shall furnish
in writing to the other.
12
<PAGE>
5.5 This Subscription Agreement may be executed in
counterparts. Upon the execution and delivery of this Subscription Agreement by
the Subscriber, this Subscription Agreement shall become a binding obligation of
the Subscriber with respect to the purchase of Shares as herein provided;
subject, however, to the right hereby reserved to the Company to enter into the
same agreements with other subscribers and to add and/or to delete other persons
as subscribers.
5.6 The holding of any provision of this Subscription
Agreement to be invalid or unenforceable by a court of competent jurisdiction
shall not affect any other provision of this Subscription Agreement, which shall
remain in full force and effect.
5.7 It is agreed that a waiver by either party of a breach of
any provision of this Subscription Agreement shall not operate, or be construed,
as a waiver of any subsequent breach by that same party.
5.8 The parties agree to execute and deliver all such further
documents, agreements and instruments and take such other and further action as
may be necessary or appropriate to carry out the purposes and intent of this
Subscription Agreement.
5.9 The Company agrees not to disclose the names, addresses or
any other information about the Subscribers, except as required by law,
provided, that the Company may provide information relating to the Subscriber as
required in any registration statement under the Act with respect to the
Registrable Securities.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Subscription
Agreement as of the day and year first written above.
______________________________ ___________________________________
Signature of Subscriber Signature of Co-Subscriber
______________________________ ___________________________________
Name of Subscriber Name of Co-Subscriber
[please print]
______________________________ ___________________________________
Address of Subscriber Address of Co-Subscriber
______________________________ ___________________________________
Social Security or Taxpayer Social Security or Taxpayer
Identification Number of Subscriber Identification Number of
Co-Subscriber
______________________________
Subscriber's Account Number
at Fine Equities, Inc.
______________________________
Number of Shares Subscribed For
14
<PAGE>
*IF SUBSCRIBER IS A REGISTERED REPRESENTATIVE
WITH AN NASD MEMBER FIRM, HAVE THE FOLLOWING
ACKNOWLEDGEMENT SIGNED BY THE APPROPRIATE PARTY:
The undersigned NASD member firm
acknowledges receipt of the notice
required by Rule 3050 of the NASD Subscription Accepted:
Conduct Rules.
MEDICAL SCIENCE SYSTEMS, INC.
______________________________
Name of NASD Member Firm By: ____________________________________
By _____________________________ Date: __________________________________
Authorized Officer
15
EXHIBIT 10.4
MEDICAL SCIENCE SYSTEMS, INC.
AGENCY AGREEMENT
Fine Equities, Inc.
600 Third Avenue
New York, New York 10016
June 15, 1999
Gentlemen:
Medical Science Systems, Inc., a Texas corporation (the "Company"),
proposes to offer for sale to purchasers qualifying as "accredited investors"
under Rule 501(a) of Regulation D of the Securities Act of 1933, as amended (the
"Securities Act"), in a private placement, up to $5,000,000 in aggregate
purchase price of the Company's Series A Preferred Stock, no par value
("Shares"). A minimum of $2,500,000 in aggregate purchase price of Shares
("Minimum Offering") and a maximum of $5,000,000 in aggregate purchase price of
Shares ("Maximum Offering") will be sold in the offering at a price of $2.50 per
Share. The Shares will be offered on a "best efforts" basis. The Shares are
being offered pursuant to the Private Placement Memorandum dated April 14, 1999
(the "Offering Memorandum") and related documents in accordance with Section
4(2) of the Securities Act and Regulation D promulgated thereunder.
Fine Equities, Inc. is sometimes referred to herein as the
"Placement Agent." The Offering Memorandum (including the exhibits thereto), as
it may be amended from time to time, and the form of proposed subscription
agreement between the Company and each subscriber (the "Subscription Agreement")
and the exhibits, if any, which are part of the Offering Memorandum and
Subscription Agreement are collectively referred to herein as the "Offering
Documents."
The Company will prepare and deliver to the Placement Agent a
reasonable number of copies of the Offering Documents in form and substance
satisfactory to counsel to the Placement Agent.
Each prospective investor subscribing to purchase Shares (each, a
"Subscriber") will be required to deliver, among other things, a Subscription
Agreement and a confidential investor questionnaire ("Questionnaire") in the
form to be provided to offerees. Capitalized terms used herein, unless otherwise
defined or unless the context otherwise indicates, shall have the same meanings
provided in the Offering Documents.
<PAGE>
1. APPOINTMENT OF PLACEMENT AGENT.
(a) You are hereby appointed exclusive Placement Agent of the
Company (subject to your right to have Selected Dealers, as defined in Section
1(c) hereof, participate in the Offering) for the duration of the Offering (the
"Offering Period") herein specified for the purposes of assisting the Company in
finding qualified Subscribers pursuant to the offering (the "Offering")
described in the Offering Documents. The "Offering Period" shall commence on the
day the Offering Documents are first made available to you by the Company for
delivery in connection with the offering for sale of the Shares and shall
continue until the earlier to occur of (i) the sale of all of the Maximum
Offering or (ii) July 14, 1999 (unless extended for a period of 30 days under
circumstances specified in the Offering Memorandum). If the Minimum Offering is
not sold prior to the end of the Offering Period, the Offering will be
terminated and all funds received from Subscribers will be returned, without
interest and without any deduction. The day that the Offering Period terminates
is hereinafter referred to as the "Termination Date."
(b) Subject to the performance by the Company of all of its
obligations to be performed under this Agreement and to the completeness and
accuracy of all representations and warranties of the Company contained in this
Agreement, Fine Equities, Inc. hereby accepts such agency and agrees to use its
best efforts to assist the Company in finding qualified Subscribers pursuant to
the Offering described in the Offering Documents. It is understood that the
Placement Agent has no commitment to sell the Shares. Your agency hereunder is
not terminable by the Company except upon termination of the Offering Period.
(c) You may engage other persons, selected by you in your
discretion, that are members of the National Association of Securities Dealers,
Inc., ("NASD") and that have executed a Selected Dealers Agreement substantially
in the form attached hereto as Schedule A, to assist you in the Offering (each
such person being hereinafter referred to as a "Selected Dealer") and you may
allow such persons such part of the compensation and payment of expenses payable
to you hereunder as you shall determine. Each Selected Dealer shall be required
to agree in writing to comply with the provisions of, and to make the
representations, warranties and covenants contained in, this Section 1.
(d) Subscriptions for Shares shall be evidenced by the
execution by subscribers of a Subscription Agreement. No Subscription Agreement
shall be effective unless and until it is accepted by the Company. Until the
Closing (as defined herein), all subscription funds received shall be held as
described in the Subscription Agreement. The Placement Agent shall not have any
obligation to independently verify the accuracy or completeness of any
information contained in any Subscription Agreement or the authenticity,
sufficiency, or validity of any check delivered by any prospective investor in
payment for Shares.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Placement Agent and each Selected Dealer, if any,
as follows:
(a) SECURITIES LAW COMPLIANCE. The Offering Documents conform
in all respects with the requirements of Section 4(2) of the Securities Act and
Regulation D promulgated thereunder and with the requirements of all other
published rules and regulations of
2
<PAGE>
the Securities and Exchange Commission (the "Commission") currently in effect
relating to "private offerings" to "accredited investors" of the type
contemplated by the Company. The Offering Documents will not contain an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances in which
they were made, not misleading. If at any time prior to the completion of the
Offering or other termination of this Agreement any event shall occur as a
result of which it might become necessary to amend or supplement the Offering
Documents so that they do not include any untrue statement of any material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances then existing, not misleading, the
Company will promptly notify you and will supply you with amendments or
supplements correcting such statement or omission. The Company will also provide
the Placement Agent for delivery to all offerees and purchasers and their
representatives, if any, any information, documents and instruments which the
Placement Agent deems necessary to comply with applicable state and federal law.
(b) ORGANIZATION. Each of the Company and the Subsidiaries (as
hereinafter defined) is a corporation duly organized, validly existing and in
good standing under the laws of its state or country of organization and has all
requisite corporate power and authority to own and lease its properties, to
carry on its business as currently conducted and as proposed to be conducted, to
execute and deliver this Agreement and to carry out the transactions
contemplated by this Agreement, as appropriate and is duly licensed or qualified
to do business as a foreign corporation in each jurisdiction in which the
conduct of its business or ownership or leasing of its properties requires it to
be so qualified.
(c) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company prior to the consummation of the transactions
contemplated hereby is as set forth in the Offering Documents. All issued and
outstanding shares of the Company are validly issued, fully paid and
nonassessable and have not been issued in violation of the preemptive rights of
any stockholder of the Company. All prior sales of securities of the Company
were either registered under the Act and applicable state securities laws or
exempt from such registration, and no security holder has any rescission rights
with respect thereto.
(d) WARRANTS, PREEMPTIVE RIGHTS, ETC. Except for the warrants
to purchase shares of the Company's common stock, no par value ("Common Stock")
to be issued to you or your designees in consideration for your acting as
Placement Agent hereunder (the "Agent's Warrants"), and except as set forth in
or contemplated by the Offering Documents, there are not, nor will there be
immediately after the Closing (as hereinafter defined), any outstanding
warrants, options, agreements, convertible securities, preemptive rights to
subscribe for or other commitments pursuant to which the Company is, or may
become, obligated to issue any shares of its capital stock or other securities
of the Company and this Offering will not cause any anti-dilution adjustments to
such securities or commitments except as reflected in the Offering Documents.
(e) SUBSIDIARIES AND INVESTMENTS. The Company has no
subsidiaries other than Medical Science Systems France E.U., a French
corporation, and Medical Science Systems Laboratory Services, Inc., a Delaware
corporation (the "Delaware Subsidiary")
3
<PAGE>
(collectively, the "Subsidiaries"). The Company does not own, directly or
indirectly, any capital stock or other equity ownership or proprietary interests
in any other corporation, association, trust, partnership, joint venture or
other entity. The Company owns all of the capital stock of the Subsidiaries, and
there are no warranties, options, agreements, convertible securities, preemptive
rights to subscribe for or other commitments pursuant to which any of the
Subsidiaries may become obligated to issue any shares of its capital stock or
any other securities to any person other than the Company.
(f) FINANCIAL STATEMENTS. The financial information contained
in the Offering Documents is accurate in all material respects. The Company's
Form 10-KSB for the year ended December 31, 1998 contains the Company's (i)
Balance Sheets at December 31, 1998 (the "Balance Sheet Date"), (ii) Statements
of Operations for each of the last two years ending December 31, 1997 and
December 31, 1998, and (iii) Statements of Cash Flows for each of the last two
years ending December 31, 1997 and December 31, 1998 (such financial statements
attached to the Offering Documents hereinafter referred to collectively as the
"Financial Statements"). The Financial Statements have been prepared in
conformity with generally accepted accounting principles consistently applied
and show all material liabilities, absolute or contingent, of the Company
required to be recorded thereon and present fairly the financial position and
results of operations of the Company as of the dates and for the periods
indicated.
(g) ABSENCE OF CHANGES. Other than as set forth in the
Offering Documents, since the Balance Sheet Date, neither the Company nor any
Subsidiary has incurred any liabilities or obligations, direct or contingent,
not in the ordinary course of business, or entered into any transaction not in
the ordinary course of business, which is material to the business of the
Company and the Subsidiaries, taken as a whole, and there has not been any
change in the capital stock of, or any incurrence of long-term debt by, the
Company or any Subsidiary, or any issuance of options, warrants or other rights
to purchase the capital stock of the Company or any Subsidiary, or any adverse
change or any development involving, so far as the Company can now reasonably
foresee, a prospective adverse change in the condition (financial or otherwise),
net worth, results of operations, business, key personnel or properties which
would be material to the business or financial condition of the Company or any
Subsidiary, and neither the Company nor any Subsidiary has become a party to,
and neither the business nor the property of the Company or any Subsidiary has
become the subject of, any material litigation whether or not in the ordinary
course of business.
(h) TITLE. Each of the Company and the Subsidiaries has good
and valid title to all properties and assets, owned by it, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to the Company's and the Subsidiaries'
business, taken as a whole; all of the material leases and subleases under which
each of the Company and the Subsidiaries is the lessor or sublessor of
properties or assets or under which each of the Company and the Subsidiaries
holds properties or assets as lessee or sublessee are in full force and effect,
and neither the Company nor any Subsidiary is in default in any material respect
with respect to any of the terms or provisions of any of such leases or
subleases, and no material claim has been asserted by anyone adverse to rights
of the Company or any Subsidiary as lessor, sublessor, lessee or sublessee under
any of the leases or subleases mentioned above, or affecting or questioning the
right of the Company or any
4
<PAGE>
Subsidiaries to continued possession of the leased or subleased premises or
assets under any such lease or sublease. The Company owns or leases all such
properties as are necessary to its operations as now conducted and to be
conducted, as presently planned.
(i) PROPRIETARY RIGHTS. Each of the Company and the
Subsidiaries owns or possesses adequate and enforceable rights to use all
patents, patent applications, trademarks, service marks, copyrights, trade
secrets, processes, formulations, technology or know-how used or proposed to be
used in the conduct of its business as described in or contemplated by the
Offering Documents (the "Proprietary Rights"). Other than as set forth in the
Offering Documents, neither the Company nor any Subsidiary has received any
notice of any claims, nor does it have any knowledge of any threatened claims,
and knows of no facts which would form the basis of any claim, asserted by any
person to the effect that the sale or use of any product or process now used or
offered by the Company or any Subsidiary or proposed to be used or offered by
the Company or any Subsidiary infringes on any patents or infringes upon the use
of any such Proprietary Rights of another person and, to the best of the
Company's knowledge, no others have infringed the Company's or any Subsidiary's
Proprietary Rights.
(j) LITIGATION. Other than as set forth in the Offering
Documents, there is no material action, suit, investigation, customer complaint,
claim or proceeding at law or in equity by or before any arbitrator,
governmental instrumentality or other agency now pending or, to the knowledge of
the Company, threatened against the Company or any Subsidiary the adverse
outcome of which would materially adversely affect the Company's or any
Subsidiary's business or prospects. Neither the Company nor any Subsidiary is
subject to any judgment, order, writ, injunction or decree of any Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign which would materially adversely
affect the Company's or any Subsidiary's business or prospects.
(k) NON-DEFAULTS; NON-CONTRAVENTION. Neither the Company nor
any Subsidiary is in violation of or default under, nor will the execution and
delivery of this Agreement or any of the Offering Documents, the Escrow
Agreement or the Agent's Warrants or consummation of the transactions
contemplated herein or therein result in a violation of or constitute a default
in the performance or observance of any obligation (i) under its Articles of
Incorporation, or its By-laws, or any indenture, mortgage, contract, material
purchase order or other agreement or instrument to which the Company or any
Subsidiary is a party or by which it or its property is bound or affected (all
of which are listed on Schedule 2(k) to this Agreement) or (ii) with respect to
any material order, writ, injunction or decree of any court of any Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, and there exists no condition,
event or act which constitutes, nor which after notice, the lapse of time or
both, could constitute a default under any of the foregoing, which in either
case would have a material adverse effect on the business, financial condition
or prospects of the Company or any Subsidiary, other than violations, breaches
or defaults as may result from the issuance of shares of Common Stock prior to
the Company's Articles of Incorporation being amended to increase the authorized
number of shares of Common Stock to a number sufficient to allow the issuance of
all of the Company's Common Stock currently reserved for issuance, including the
Common Stock to be issued upon conversion of the shares.
5
<PAGE>
(l) TAXES. Each of the Company and the Subsidiaries has filed
all Federal, state, local and foreign tax returns which are required to be filed
by it and all such returns are true and correct in all material respects. Each
of the Company and the Subsidiaries has paid all taxes pursuant to such returns
or pursuant to any assessments received by it or which it is obligated to
withhold from amounts owing to any employee, creditor or third party. Each of
the Company and the Subsidiaries has properly accrued all taxes required to be
accrued. The tax returns of the Company and each Subsidiary have never been
audited by any state, local or Federal authorities. Neither the Company nor any
Subsidiary has waived any statute of limitations with respect to taxes or agreed
to any extension of time with respect to any tax assessment or deficiency.
(m) COMPLIANCE WITH LAWS; LICENSES, ETC. Other than as set
forth in the Offering Documents, neither the Company nor any Subsidiary has
received notice of any violation of or noncompliance with any Federal, state,
local or foreign, laws, ordinances, regulations and orders applicable to its
business which has not been cured, the violation of, or noncompliance with
which, would have a materially adverse effect on the business or operations of
the Company or any Subsidiary. Each of the Company and the Subsidiaries has all
licenses and permits and other governmental certificates, authorizations and
permits and approvals (collectively, "Licenses") required by every Federal,
state and local government or regulatory body for the operation of its business
as currently conducted and the use of its properties, except where the failure
to be licensed would not have a material adverse effect on the business of the
Company or any Subsidiary. The Licenses are in full force and effect and no
violations are or have been recorded in respect of any License and no proceeding
is pending or threatened to revoke or limit any thereof.
(n) AUTHORIZATION OF AGREEMENT, ETC. This Agreement has been
duly and validly authorized, executed and delivered by the Company and the
execution, delivery and performance by the Company of this Agreement, the
Subscription Agreement, and the Escrow Agreement have been duly authorized by
all requisite corporate action by the Company and when delivered, constitute or
will constitute the legal, valid and binding obligations of the Company,
enforceable in accordance with their respective terms.
(o) AUTHORIZATION OF SHARES, ETC. The issuance, sale and
delivery of the Shares and the Agent's Warrants have been duly authorized by all
requisite corporate action of the Company. When so issued, sold and delivered,
the Shares and the Agent's Warrants will be duly executed, issued and delivered
and will constitute valid and legal obligations of the Company enforceable in
accordance with their respective terms and, in each case, will not be subject to
preemptive or any other similar rights of the stockholders of the Company or
others.
(p) AUTHORIZATION OF RESERVED SHARES. Assuming approval by the
Company's stockholders of the conversion of the Shares and assuming approval by
the stockholders of an amendment to the Company's Articles of Incorporation
increasing the number of authorized shares of Common Stock to a number
sufficient to allow the issuance of all shares of Common Stock reserved for
issuance, including, the Common Stock to be issued upon conversion of the
Shares, and upon the effectiveness of such amendment, when issued and
6
<PAGE>
delivered, the shares of Common Stock issuable upon conversion of the Shares
will be validly issued and outstanding, fully paid and nonassessable. The
Company will use all reasonable efforts to promptly obtain the foregoing
approvals. When issued, sold, paid for and delivered, the shares of Common Stock
issuable upon conversion of the Shares and exercise of the Agent's Warrants (the
"Reserved Shares") will be validly issued and outstanding, fully paid and
nonassessable, and not subject to preemptive or any other similar rights of the
stockholders of the Company or others.
(q) EXEMPTION FROM REGISTRATION. Assuming (i) the accuracy of
the information provided by the respective subscribers in the Subscription
Agreement and (ii) that the Placement Agent has complied in all material
respects with the provisions of Regulation D promulgated under the Securities
Act, the offer and sale of the Shares pursuant to the terms of this Agreement
are exempt from the registration requirements of the Securities Act and the
rules and regulations promulgated thereunder (the "Regulations"). The Company is
not disqualified from the exemption under Regulation D by virtue of the
disqualifications contained in Rule 505(b)(2)(iii) or Rule 507 promulgated
thereunder.
(r) REGISTRATION RIGHTS. Other than as set forth in the
Offering Documents, except with respect to holders of the Shares and the Agent's
Warrants, no person has any right to cause the Company to effect the
registration under the Securities Act of any securities of the Company.
(s) BROKERS. Neither the Company nor any of its officers,
directors, employees or stockholders has employed any broker or finder in
connection with the transactions contemplated by this Agreement other than the
Placement Agent.
(t) TITLE TO SHARES. Assuming approval by the Company's
stockholders of the conversion of the Shares and assuming approval by the
stockholders of an amendment to the Company's Articles of Incorporation
increasing the number of authorized shares of Common Stock to a number
sufficient to allow the issuance of all shares of Common Stock reserved for
issuance, including, the Common Stock to be issued upon conversion of the
Shares, and upon the effectiveness of such amendment, when issued and delivered,
the shares of Common Stock issuable upon conversion of the Shares will be
validly issued and outstanding, fully paid and nonassessable. The Company will
use all reasonable efforts to promptly obtain the foregoing approvals. When
certificates representing the securities comprising the Shares and the Reserved
Shares shall have been duly delivered to the purchasers and payment shall have
been made therefor, the several purchasers shall have good and valid title to
the Shares and the Reserved Shares free and clear of all liens, encumbrances and
claims whatsoever (with the exception of claims arising or through the acts of
the purchasers and except as arising from applicable federal and state
securities laws), and the Company shall have paid all taxes, if any, in respect
of the original issuance thereof.
(u) RIGHT OF FIRST REFUSAL. No person, firm or other business
entity is a party to any agreement, contract or understanding, written or oral
entitling such party to a right of first refusal with respect to the Company.
7
<PAGE>
(v) SECURITIES EXCHANGE ACT COMPLIANCE. The Company has filed
with the Securities and Exchange Commission ("SEC") on a timely basis all
filings required of a company whose securities have been registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
information contained in such filings is true, accurate and complete in all
material respects. The Company covenants to maintain the registration of its
Common Stock under the Exchange Act and to make all filings thereunder on a
timely basis. For the purpose of this paragraph, filings pursuant to Rule 12b-25
of the Exchange Act shall be deemed timely.
(w) NON-AFFILIATED DIRECTORS. The Company's Board of Directors
has not less than two directors who are independent from, and unaffiliated with,
management of the Company.
3. CLOSING; PLACEMENT AND FEES.
(a) CLOSING. Provided the Minimum Offering shall have been
subscribed for and funds representing the sale thereof shall have cleared, a
closing (the "Initial Closing") shall take place at the offices of the Placement
Agent, 600 Third Avenue, New York, New York 10016 within ten (10) days following
the Termination Date which date (the "Closing Date") may be accelerated or
adjourned by agreement between the Company and the Placement Agent). At the
Initial Closing, payment for the Shares issued and sold by the Company shall be
made against delivery of certificates representing the Shares. In addition,
subsequent Closings (if applicable) may be scheduled at the discretion of the
Company and Placement Agent, each of which shall be deemed a "Closing"
hereunder.
(b) CONDITIONS TO PLACEMENT AGENT'S OBLIGATIONS. The
obligations of the Placement Agent hereunder will be subject to the accuracy of
the representations and warranties of the Company herein contained as of the
date hereof and as of each Closing Date, to the performance by the Company of
its obligations hereunder and to the following additional conditions:
(i) DUE QUALIFICATION OR EXEMPTION. (A) The offering
contemplated by this Agreement will become qualified or be exempt from
qualification under the securities laws of the several states pursuant to
paragraph 4(e) below not later than the Closing Date, and (B) at the Closing
Date no stop order suspending the sale of the Shares shall have been issued, and
no proceeding for that purpose shall have been initiated or threatened;
(ii) NO MATERIAL MISSTATEMENTS. Neither the Blue Sky
qualification materials nor the Offering Memorandum, or any supplement thereto,
will contain an untrue statement of a fact which is material, or omits to state
a fact, which 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;
(iii) COMPLIANCE WITH AGREEMENTS. The Company will have
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied hereunder at or prior to each Closing;
8
<PAGE>
(iv) CORPORATE ACTION. The Company will have taken all
necessary corporate action, including, without limitation, obtaining the
approval of the Company's board of directors, for the execution and delivery of
this Agreement, the performance by the Company of its obligations hereunder and
the offering contemplated hereby;
(v) OPINION OF COUNSEL. The Placement Agent shall receive
the opinion of Fulbright & Jaworski, dated the Closing(s), substantially to the
effect that:
(A) each of the Company and the Delaware
Subsidiary has been duly organized and is validly existing and in good standing
under the laws of the State of Texas and Delaware, respectively, and has the
requisite corporate power and authority to own or hold its properties and
conduct its business as now conducted;
(B) all of the issued and outstanding shares of
capital stock of the Delaware Subsidiary have been duly authorized and validly
issued and are fully paid and nonassessable, and all of the issued and
outstanding shares of the capital stock of the Delaware Subsidiary are owned by
the Company free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity;
(C) each of this Agreement, the Escrow Agreement
(as hereinafter defined), the Subscription Agreement and the Agent's Warrants
has been duly authorized, executed and delivered by the Company, and constitutes
the valid and binding obligation of the Company, enforceable against it in
accordance with its terms, subject to any applicable bankruptcy, insolvency or
other laws affecting the rights of creditors generally and to general equitable
principles;
(D) Except for the Shares and Agent's Warrants to
be issued as contemplated by this Agreement and any options issued pursuant to,
or capital stock issuable upon conversion of any option issued pursuant to, the
Company's employee stock option plan or the Company's employee stock purchase
plan, to such counsel's knowledge, there are no outstanding warrants, options,
agreements, convertible securities, preemptive rights or other commitments
pursuant to which the Company is, or may become, obligated to issue any shares
of its capital stock or other securities of the Company other than as set forth
in the Offering Documents. The Shares have been duly authorized, validly issued
and when issued in accordance with the terms of the Offering Memorandum and this
Agreement, will be fully paid and nonassessable. Assuming approval by the
Company's stockholders of the conversion of the Shares and assuming the
Company's Articles of Incorporation are amended to increase the number of
authorized shares, the issuance of the Reserved Shares has been duly authorized,
and, upon issuance in accordance with the terms of the Articles of
Incorporation, the Reserved Shares will be fully paid and nonassessable and not
subject to preemptive or any other similar rights;
(E) assuming (i) the accuracy of the information
provided by the Subscribers in the Subscription Agreement and (ii) that the
Placement Agent has complied in all material respects with the requirements of
section 4(2) of the Securities Act (and
9
<PAGE>
the provisions of Regulation D promulgated thereunder), the offer and sale of
the Shares is exempt from the registration requirements of Section 5 of the
Securities Act;
(F) THE EXECUTION, DELIVERY AND PERFORMANCE BY THE
COMPANY OF THIS AGREEMENT AND THE OFFERING DOCUMENTS AND THE CONSUMMATION BY THE
COMPANY OF THE TRANSACTIONS CONTEMPLATED THEREBY DO NOT VIOLATE ANY PROVISION OF
ANY APPLICABLE FEDERAL, STATE OR, TO OUR KNOWLEDGE, LOCAL LAW, RULE OR
REGULATION (PROVIDED, THAT, WE EXPRESS NO OPINION WITH RESPECT TO REGISTRATION
UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS THEREFROM OF
OFFERS AND SALES OF THE SHARES (INCLUDING THE AGENT'S WARRANTS AND RESERVED
SHARES)) OR ANY PROVISION OF THE COMPANY'S ARTICLES OF INCORPORATION, AS
AMENDED, OR BYLAWS, AND DO NOT CONFLICT WITH OR CONSTITUTE, WITH OR WITHOUT THE
PASSAGE OF TIME OR THE GIVING OF NOTICE, A DEFAULT UNDER THE PROVISIONS OF ANY
JUDGMENT, WRIT, DECREE OR ORDER KNOWN TO US OR OF ANY MATERIAL AGREEMENT OR
INSTRUMENT WHICH WAS FILED AS AN EXHIBIT TO OR INCORPORATED BY REFERENCE TO THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, TO
WHICH THE COMPANY IS A PARTY OR BY WHICH IT IS BOUND (ALL OF WHICH ARE LISTED ON
SCHEDULE 2(K) TO THIS AGREEMENT); AND
(G) To our knowledge, there are no claims,
actions, suits, investigations or proceedings before or by any arbitrator,
court, governmental authority or instrumentality pending or currently threatened
against or affecting the Company or involving the properties of the Company
which might materially and adversely affect the business, properties or
financial condition of the Company or which might materially adversely affect
the transactions or other acts contemplated by this Agreement or the validity or
enforceability of this Agreement, except as set forth in or contemplated by the
Offering Documents.
(vi) OPINION OF FRENCH COUNSEL. The Placement Agent shall
receive the opinion of French counsel, dated the Closing(s), substantially to
the effect that:
(A) Medical Science Systems France E.U. (the
"French Subsidiary") has been duly organized and is validly existing and in good
standing under the laws of France and has the requisite corporate power and
authority to own or hold its properties and conduct its business as now
conducted; and
(B) all of the issued and outstanding shares of
capital stock of the French Subsidiary have been duly authorized and validly
issued and are fully paid and nonassessable and all of the issued and
outstanding shares of the capital stock of the French Subsidiary are owned by
the Company free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity.
(vii) OPINION OF PATENT COUNSEL. The Placement Agent shall
receive the opinion of Foley, Hoag and Eliot, the patent counsel to the Company,
dated the Closing(s), in form satisfactory to the Placement Agent.
(viii) The Placement Agent shall receive a certificate of the
Company, signed by the President and Secretary thereof, that the representations
and warranties
10
<PAGE>
contained in Section 2 hereof are true and accurate in all material respects at
such Closing with the same effect as though expressly made at such Closing.
(ix) The Placement Agent shall receive a copy of a duly
executed escrow agreement in the form previously delivered to you (the "Escrow
Agreement) with United States Trust Company of New York.
(x) The Placement Agent shall receive the agreements
described in Section 4(j) which agreements shall be in full force and effect.
(xi) Within two days after each Closing, the Placement
Agent shall receive copies of all letters from the Company to the investors
transmitting the Shares and shall receive a letter from the Company confirming
transmittal of the securities to the investors.
(c) BLUE SKY. A summary blue sky survey shall be prepared by
counsel to the Placement Agent stating the extent to which and the conditions
upon which offers and sales of the Shares may be made in certain jurisdictions.
It is understood that such survey may be based on or rely upon (i) the
representations of each Subscriber set forth in the Subscription Agreement
delivered by such Subscriber, (ii) the representations, warranties and
agreements of the Company set forth in Section 2 of this Agreement, (iii) the
representations and warranties of the Placement Agent, and (iv) the
representations of the Company set forth in the certificate to be delivered at
each Closing pursuant to paragraph (vi) of Section 3(b).
(d) PLACEMENT FEE AND EXPENSES. Simultaneously with payment
for and delivery of the Shares at each Closing as provided in paragraph 3(a)
above, the Company shall at such Closing pay to the Placement Agent (i) a
commission equal to ten percent (10%) of the aggregate purchase price of the
Shares sold and (ii) any expenses incurred by the Placement Agent that are
described in Section 4(b), except as set forth below. At each Closing, the
Company shall also pay all reasonable fees and expenses of Baker & McKenzie,
counsel to the Placement Agent, and all expenses (not to exceed ten thousand
dollars ($10,000)) in connection with the qualification of the Shares under the
securities or Blue Sky laws of the states which the Placement Agent shall
designate. The Company will, at each Closing, issue to you or your designees
(which may include any Selected Dealer or any officer of the Placement Agent or
a Selected Dealer) the Agent's Warrants in the form annexed hereto as Exhibit 1
to purchase such number of shares of Common Stock equal to 10% of the number of
shares of Common Stock underlying the Shares sold in the Offering. The Agent's
Warrants will be exercisable for a period of four years from the first
anniversary of the Initial Closing of the Offering.
(e) BRING DOWN OPINIONS AND CERTIFICATES. If there is more
than one Closing, then at each such Closing there shall be delivered to the
Placement Agent updated opinions and certificates as described in (v), (vi) and
(vii) of Section 3(b) above, respectively.
(f) NO ADVERSE CHANGES. There shall not have occurred, at any
time prior to the Closing or if applicable, any additional Closing, (i) any
domestic or international event, act or occurrence which has materially
disrupted, or in the Placement Agent's opinion will in the immediate future
materially disrupt, the securities markets; (ii) a general suspension of, or a
11
<PAGE>
general limitation on prices for, trading in securities on the New York Stock
Exchange or the American Stock Exchange or in the over-the-counter market; (iii)
any outbreak of major hostilities or other national or international calamity;
(iv) any banking moratorium declared by a state or federal authority; (v) any
moratorium declared in foreign exchange trading by major international banks or
other persons; (vi) any material interruption in the mail service or other means
of communication within the United States; (vii) any material adverse change in
the business, properties, assets, results of operations, or financial condition
of the Company; or (viii) any change in the market for securities in general or
in political, financial, or economic conditions which, in the Placement Agent's
reasonable judgment, makes it inadvisable to proceed with the offering, sale,
and delivery of the Shares.
(g) CAPITALIZATION. As of the Closing Date, the Company shall
not have more the 7,127,440 shares of Common Stock outstanding, including any
and all securities with equivalent rights to the Common Stock, shares of Common
Stock or any other securities with equivalent rights, issuable upon exercise of
options, warrants and other contract rights, securities convertible directly or
indirectly into shares of Common Stock or such other security having equivalent
rights; provided, however, that the shares of Common Stock issuable upon
exercise of the Agent's Warrants shall be excluded from this provision.
4. COVENANTS OF THE COMPANY.
(a) USE OF PROCEEDS. The net proceeds of the Offering will be
used by the Company substantially as set forth in the Offering Memorandum. The
Company shall not use any of the proceeds from the Offering to repay any
indebtedness of the Company, including but not limited to indebtedness to any
current executive officers, directors or principal stockholders of the Company.
(b) EXPENSES OF OFFERING. The Company shall be responsible
for, and shall bear all expenses directly incurred in connection with, the
proposed Offering including, but not limited to, (i) reasonable legal fees
(including those of counsel to the Placement Agent and the Company); (ii)
printing, duplication and other costs of preparing the Offering Documents and
all amendments, supplements and exhibits thereto in such quantities as the
Placement Agent reasonably deems necessary; (iii)costs of preparing and
delivering the Agency Agreement and the blue sky memorandum, Share and Reserved
Share certificates, and all other placement agent and selling documents,
including, but not limited to, all postage, mailing, express charges and other
expenses as directed by the Placement Agent; and (iv) expenses in connection
with blue sky registrations, including, but not limited to, filing fees, legal
expenses, registrar and transfer agent fees, accounting fees, issue and transfer
taxes, expenses of the Placement Agent's counsel and the fees and disbursements
of counsel in connection with blue sky matters; provided however that such legal
fees for blue sky matters are not to exceed $10,000 (the "Company Expenses").
If the Private Placement is not completed for any reason,
except if such prevention is based upon a breach by the Company of any covenant,
representation or warranty contained herein, the Company shall not be liable for
the Placement Agent expenses. If the Private Placement is not completed because
the Company prevents it or because of a breach by
12
<PAGE>
the Company of any such covenants, representations or warranties, the Company
shall remain liable for such expenses and the Placement Agent shall receive the
Agent's Warrants.
(c) AUTHORIZATION AND RESERVATION OF COMMON STOCK. The Company
shall reserve and keep available that maximum number of its authorized but
unissued shares of Common Stock which are issuable upon conversion of the Shares
and exercise of the Agent's Warrants. The Company has taken all necessary
actions to cause (other than obtaining stockholder approval of the conversion of
the Shares), and will use its reasonable best efforts to cause, the issuance,
sale and delivery by the Company of the shares of Common Stock issuable upon
conversion of the Shares and exercise of the Agent's Warrants to be duly
authorized by all requisite corporate action of the Company. The Reserved Shares
have been duly reserved for issuance upon conversion of all or any of the Shares
and exercise of the Agent's Warrants. The foregoing is subject to approval by
the Company's stockholders of an amendment to the Company's Articles of
Incorporation increasing the number of authorized Shares of Common Stock to a
number sufficient to allow the issuance of such Shares of Common Stock reserved
for issuance, including, the Common Stock to be issued upon conversion of the
Shares, and the filing and effectiveness of such amendment.
(d) REQUIRED REGISTRATION. The Company agrees to prepare and
file with the SEC thirty (30) days after the Closing Date of the Offering a
registration statement under the Securities Act covering the resale of the
shares of Common Stock issuable upon conversion of the Shares, subject to the
approval by the Company's shareholders. Such registration statement filed with
the SEC pursuant to this section shall become and remain effective until the
earlier of (i) 2 years from the date of effectiveness thereof or (ii) the date
when all such securities are sold which have been registered pursuant to such
registration statement.
(e) NOTIFICATION. The Company shall notify the Placement Agent
immediately, and in writing, (A) when any event shall have occurred during the
period commencing on the date hereof and ending on the later of the last Closing
or the Termination Date as a result of which the Offering Documents would
include 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
not misleading, and (B) of the receipt of any notification with respect to the
modification, rescission, withdrawal or suspension of the qualification or
registration of the Shares, or of any exemption from such registration or
qualification, in any jurisdiction. The Company will use its reasonable best
efforts to prevent the issuance of any such modification, rescission, withdrawal
or suspension and, if any such modification, rescission, withdrawal or
suspension is issued and you so request, to obtain the lifting thereof as
promptly as possible.
(f) BLUE SKY. The Company will use its reasonable best efforts
to qualify or register the Shares for offering and sale under, or establish an
exemption from such qualification or registration under, the securities or "blue
sky" laws of such jurisdictions as you may reasonably request; provided however,
that the Company will not be obligated to qualify as a dealer in securities in
any jurisdiction in which it is not so qualified. The Company will not
consummate any sale of Shares in any jurisdiction in which it is not so
qualified or in any manner in which such sale may not be lawfully made.
13
<PAGE>
(g) FORM D FILING. The Company shall file five copies of a
Notice of Sales of Securities on Form D with the Securities and Exchange
Commission (the "Commission") no later than 15 days after the first sale of the
Shares. The Company shall file promptly such amendments to such Notices on Form
D as shall become necessary and shall also comply with any filing requirement
imposed by the laws of any state or jurisdiction in which offers and sales are
made. The Company shall furnish the Placement Agent with copies of all such
filings.
(h) PRESS RELEASES, ETC. The Company shall not, during the
period commencing on the date hereof and ending on the later of the last Closing
or the Termination Date, issue any press release or other communication, or hold
any press conference with respect to the Company, its financial condition,
results of operations, business, properties, assets, or liabilities, or the
Offering, without the prior notice to and review by the Placement Agent.
(i) FORM 10-QSB The Company will provide to the Placement
Agent, promptly upon the filing thereof with the Commission (and in any event no
later than 5 days of such filing), a copy of its Quarterly Report in Form 10-QSB
for the three month period ended March 31, 1999 and copies of all other reports
filed under the Securities and Exchange Act of 1934, as amended, and rules
promulgated thereunder, prior to each Closing.
(j) RESTRICTIONS ON ISSUANCE OF SECURITIES. Prior to the
Closing Date, the Company will not, without the prior written consent of the
Placement Agent, issue additional shares of Common Stock or grant any warrants,
options or other securities of the Company.
(k) TRANSFER OF SHARES OF COMMON STOCK BY CERTAIN INDIVIDUALS.
The Company covenants that Paul J. White, Kenneth S. Korman and Michael G.
Newman will each individually agree that he will not directly or indirectly
offer, sell, transfer, pledge, assign, hypothecate or otherwise encumber ninety
percent (90%) of his shares of Common Stock or other securities convertible for
the Common Stock regardless of whether owned by him individually or
collectively, or otherwise dispose of any interest therein under Rule 144 of the
Securities Act or otherwise, from February 24, 1999 until twelve (12) months
following the Closing Date of the Offering. However, the above-mentioned
individuals may transfer their shares of Common Stock by gift or in a private
transaction, if the done or transferee agrees in writing to be bound to the same
provisions stated herein.
14
<PAGE>
5. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the
Placement Agent and each Selected Dealer, if any, and their respective
shareholders, directors, officers, agents and controlling persons (an
"Indemnified Party") against any and all loss, liability, claim, damage and
expense whatsoever (and all actions in respect thereof), and to reimburse the
Placement Agent for reasonable legal fees and related expenses as incurred
(including, but not limited to the costs of giving testimony or furnishing
documents in response to a subpoena or otherwise, and the costs of
investigating, preparing or defending any such action or claim whether or not in
connection with litigation in which the Placement Agent is a party), arising out
of any untrue statement or alleged untrue statement of a material fact contained
in the Offering Documents or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that the Company will not be liable in any such case, and the Placement Agent
agrees to indemnify the Company, to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is based upon an
untrue or alleged statement or omission made in reliance upon and conformity
with written information furnished to the Company by or on behalf of the
Placement Agent specifically for use in the preparation of the Offering
Documents, which information consists solely of the manner of distribution of
the Shares as set forth in the Offering Memorandum under "Plan of Distribution."
(b) The Company agrees to indemnify and hold harmless an
Indemnified Party to the same extent as the foregoing indemnity, against any and
all loss, liability, claim, damage and expense whatsoever directly arising out
of the exercise by any person of any right under the Securities Act or the
Exchange Act or the securities or Blue Sky laws of any state on account of
violations of the representations, warranties or agreements set forth in Section
2 hereof.
(c) Promptly after receipt by a person entitled to
indemnification pursuant to the foregoing subsection (a) or (b) (an "indemnified
party") under this Section of notice of the commencement of any action, the
indemnified party will, if a claim in respect thereof is to be made against the
Company under this Section, notify in writing the Company of the commencement
thereof; but the omission so to notify the Company will not relieve it from any
liability which it may have to the indemnified party otherwise than under this
Section. In case any such action is brought against an indemnified party, and it
notifies the Company of the commencement thereof, the Company will be entitled
to participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, subject to
the provisions herein stated, with counsel reasonably satisfactory to the
indemnified party, and after notice from the Company to the indemnified party of
its election so to assume the defense thereof, the Company will not be liable to
the indemnified party under this Section for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the Company if the Company has assumed the
defense of the action with counsel reasonably satisfactory to the indemnified
party; provided that the fees and expenses of such counsel shall be
15
<PAGE>
at the expense of the Company if (i) the employment of such counsel has been
specifically authorized in writing by the Company or (ii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party or parties and the Company and, in the judgment of the indemnified party,
it is advisable for the indemnified party or parties to be represented by
separate counsel (in which case the Company shall not have the right to assume
the defense of such action on behalf of the indemnified party or parties), it
being understood, however, that the Company shall not, in connection with any
one such action or separate but 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 the indemnified party or parties. No settlement of any action
against an indemnified party shall be made without the consent of the
indemnified party, which shall not be unreasonably withheld in light of all
factors of importance to the indemnified party.
16
<PAGE>
6. CONTRIBUTION.
To provide for just and equitable contribution, if (i) an indemnified party
makes a claim for indemnification pursuant to Section (5) but it is found in a
final judicial determination, not subject to further appeal, that such
indemnification may not be enforced in such case, even though this Agreement
expressly provides for indemnification in such case, or (ii) any indemnified or
indemnifying party seeks contribution under the Securities Act, the Exchange
Act, or otherwise, then the Company (including for this purpose any contribution
made by or on behalf of any officer, director, employee or agent for the
Company, or any controlling person of the Company), on the one hand, and the
Placement Agent and any Selected Dealers (including for this purpose any
contribution by or on behalf of an indemnified party), on the other hand, shall
contribute to the losses, liabilities, claims, damages, and expenses whatsoever
to which any of them may be subject, in such proportions as are appropriate to
reflect the relative benefits received by the Company, on the one hand, and the
Placement Agent and the Selected Dealers, on the other hand; provided, however,
that if applicable law does not permit such allocation, then other relevant
equitable considerations such as the relative fault of the Company and the
Placement Agent and the Selected Dealers in connection with the facts which
resulted in such losses, liabilities, claims, damages, and expenses shall also
be considered. In no case shall the Placement Agent or a Selected Dealer be
responsible for a portion of the contribution obligation in excess of the
compensation received by it pursuant to Section 3 hereof or the Selected Dealer
Agreement, as the case may be. No person guilty of a fraudulent
misrepresentation shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this Section 6,
each person, if any, who controls the Placement Agent or a Selected Dealer
within the meaning of Section 15 of the Securities Act or Section 20(a) of the
Exchange Act and each officer, director, stockholder, employee and agent of the
Placement Agent or a Selected Dealer, shall have the same rights to contribution
as the Placement Agent or the Selected Dealer, and each person, if any who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act and each officer, director, employee and agent
of the Company, shall have the same rights to contribution as the Company,
subject in each case to the provisions of this Section 6. Anything in this
Section 6 to the contrary notwithstanding, no party shall be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 6 is intended to supersede any right
to contribution under the Securities Act, the Exchange Act, or otherwise.
7. Miscellaneous.
(a) SURVIVAL. Any termination of the Offering without
consummation thereof shall be without obligation on the part of any party except
that the indemnification provided in Section 5 hereof and the contribution
provided in Section 6 hereof shall survive any termination and shall survive the
Closing Date for a period of two years and except as otherwise specifically set
forth herein.
(b) REPRESENTATIONS, WARRANTIES AND COVENANTS TO SURVIVE
DELIVERY. The respective representations, warranties, indemnities, agreements,
covenants and other statements of the Company as of the date hereof shall
survive execution of this Agreement and delivery of the Shares and the
termination of this Agreement for a period of two years.
17
<PAGE>
(c) NO OTHER BENEFICIARIES. This Agreement is intended for the
sole and exclusive benefit of the parties hereto and their respective successors
and controlling persons, and no other person, firm or corporation shall have any
third-party beneficiary or other rights hereunder.
(d) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the law of the State of New York without regard to
conflict of law provisions.
(e) COUNTERPARTS. This Agreement may be signed in counterparts
with the same effect as if both parties had signed one and the same instrument.
(f) NOTICES. Any communications specifically required
hereunder to be in writing, if sent to the Placement Agent, will be mailed,
delivered and confirmed to it at Fine Equities, Inc., 600 Third Avenue, New
York, New York 10016, Att: N. Scott Fine, with a copy to Baker & McKenzie, 805
Third Avenue, New York, New York 10022, Att: Michael S. Novins, Esq. and if sent
to the Company, will be mailed, delivered or telegraphed and confirmed to it at
Medical Science Systems, Inc., 100 N.E. Loop 410, Suite 820, San Antonio, Texas
78216, Att: Spence Allen, with a copy to Fulbright & Jaworski, 300 Convent,
Suite 2200, San Antonio, Texas 78205, Att: Daryl Lansdale.
(g) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties with respect to the matters herein referred and
supersedes all prior agreements and understandings, written and oral, between
the parties with respect to the subject matter hereof, including, but not
limited to, the letter of intent between the parties hereto dated February 24,
1999. Neither this Agreement nor any term hereof may be changed, waived or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver or termination is sought.
If you find the foregoing is in accordance with our understanding,
kindly sign and return to us a counterpart hereof, whereupon this instrument
along with all counterparts will become a binding agreement between us.
Very truly yours,
MEDICAL SCIENCE SYSTEMS, INC.
By: _______________________________
Title:
Agreed:
FINE EQUITIES, INC.
18
<PAGE>
By: ________________________
Authorized Officer
19
<PAGE>
SCHEDULE A
MEDICAL SCIENCE SYSTEMS, INC.
PRIVATE PLACEMENT SELLING AGREEMENT
New York, New York
April 12, 199
Fine Equities
600 Third Avenue
New York, New York 10016
Dear Sirs:
1. Medical Science Systems, Inc. (the "Company") is offering for
sale on a "best efforts" basis, up to $5,000,000 in aggregate selling price of
shares of Series A Preferred Stock, no par value per share ("Shares"). The
Shares and the terms under which they are to be offered for sale by the Company
are more particularly described in the Confidential Private Placement Memorandum
dated April 14, 1999 (the "Offering Memorandum") and the form of subscription
agreement between the Company and each subscriber (the "Subscription
Agreement"), the exhibits to the Offering Memorandum and the Subscription
Agreement, and any other documents delivered to subscribers (herein,
collectively the "Offering Documents"). Fine Equities, Inc. (the "Placement
Agent") has agreed to act as exclusive placement agent to the Company for the
purpose of assisting the Company in finding subscribers who satisfy the
requirements set forth in the Offering Documents and more particularly in the
Subscription Agreement (herein, "Qualified Subscribers") pursuant to the
offering ("Private Placement") described in the Offering Documents.
2. The Shares are to be offered to a limited number of subscribers
by the Company at the price per Share set forth in the Offering Documents (the
"Subscription Price"), in accordance with the terms of offering thereof set
forth in the Offering Documents.
3. We are extending the right, subject to the terms and conditions
hereof, to assist the Company in finding Qualified Subscribers to purchase a
portion of the Shares, to certain dealers who are actually engaged in the
investment banking or securities business and who are members in good standing
of the National Association of Securities Dealers, Inc. (the "NASD") (such
dealers who shall agree to assist in locating Qualified Subscribers for Shares
hereunder being herein called "Selected Dealers"), at the Subscription Price,
for which they will receive a commission of ____% of the Subscription Price for
Shares purchased by Qualified Subscribers presented to the Company by them. The
Selected Dealers have agreed to comply with the provisions of all applicable
Rules of Fair Practice of the NASD. We may be included among the Selected
Dealers.
1
<PAGE>
4. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the Private Placement of the
Shares.
5. If you desire to present to the Company any Qualified Subscribers
for Shares, your application should reach us promptly by telephone or telegraph
at 600 Third Avenue, New York, New York 10016, Attention: N. Scott Fine,
telephone number (212) 687-0888. We reserve the right to reject subscriptions in
whole or in part, to make allotments and to close the subscription books at any
time without notice. The Shares allotted to the Qualified Subscribers presented
by you will be confirmed, subject to the terms and conditions of this Agreement.
6. The privilege of assisting the Company in finding Qualified
Subscribers for the Shares is extended to you only so long as the Company may
lawfully sell the Shares to residents in the state in which any such Qualified
Subscribers reside pursuant to the terms of the Offering Documents.
7. Any Shares offered under the terms of this Agreement and the
Offering Documents may only be offered and sold subject to the securities or
blue sky laws of the various states or other jurisdictions.
You agree to advise us from time to time, upon request, of the
number of sets of Offering Documents delivered to qualified subscribers by you
hereunder at the time of such request.
No expenses shall be charged to Selected Dealers.
Neither you nor any other person is or has been authorized to give
any information or to make any representation in connection with the offer or
sale of the Shares other than as contained in the Offering Documents.
8. On becoming a Selected Dealer, and in assisting the Company in
finding Qualified Subscribers for the Shares, you agree to comply with all the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act") specifically with respect to the requirements of Regulation D thereunder.
You confirm that you are familiar with Rules 501 and 502 under the 1933 Act
relating to the limitations on the manner in which a private placement may be
conducted pursuant to Regulation D under the 1933 Act.
9. Upon request, you will be informed as to the states and other
jurisdictions in which we have been advised that the Shares have been qualified
or are exempt from registration requirements for offer and sale under the
respective securities or blue sky laws of such states and other jurisdictions,
but we do not assume any obligation or responsibility as to the right of any
Selected Dealer to offer the Shares in any state or other jurisdiction or as to
the eligibility of the Shares for sale therein. We will, if requested, file a
Further State Notice in respect of the Shares pursuant to Article 23-A of the
General Business Law of the State of New York.
2
<PAGE>
10. No Selected Dealer is authorized to act as our agent or an agent
of the Company or otherwise to act on our behalf in assisting the Company in
finding Qualified Subscribers or otherwise or to furnish any information or make
any representation except as contained in the Offering Documents.
11. Nothing will constitute the Selected Dealers an association or
other separate entity or partners with us, or with each other, but you will be
responsible for your share of any liability or expense based on any claim to the
contrary. We shall not be under any liability for or in respect of value,
validity or form of the Shares or the delivery of the Shares, or the performance
by anyone of any agreement on its part, or the qualification of the Shares for
offer or sale under the laws of any jurisdiction, or for or in respect of any
other matter relating to this Agreement, except for lack of good faith and for
obligations expressly assumed by us in this Agreement and no obligation on our
part shall be implied herefrom. The foregoing provisions shall not be deemed a
waiver of any liability imposed under the federal securities laws.
12. Payment for the Shares subscribed for hereunder is to be made by
Qualified Subscribers at the Subscription Price during the term of the Private
Placement set forth in the Offering Documents at the office of Fine Equities,
600 Third Avenue, New York, New York 10016, by a certified or official bank
check, payable to the order of [Escrow Agent name and account].
13. Notice to us should be addressed to Fine Equities, 600 Third
Avenue, New York, New York 10016, Attention: N. Scott Fine. Notices to you shall
be deemed to have been duly given if mailed to you at the address to which this
letter is addressed.
14. If you desire to assist the Company in finding Qualified
Subscribers pursuant to the terms set forth above, please confirm your
application by signing and returning to us your confirmation on the duplicate
copy of this letter enclosed herewith, even though you may have previously
advised us thereof by telephone or telegraph. Our signature hereon may be by
facsimile.
Very truly yours,
FINE EQUITIES, INC.
By: ________________________________
Authorized Officer
3
<PAGE>
Fine Equities, Inc.
600 Third Avenue
New York, New York 10016
We hereby present to Medical Science Systems, Inc. (the "Company")
Qualified Subscribers for $______ of Shares in accordance with the terms and
conditions stated in the foregoing letter. We hereby acknowledge receipt of the
Offering Documents referred to in the first paragraph thereof relating to said
Shares. We confirm that we are a dealer actually engaged in the investment
banking or securities business and that we are a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"). We hereby agree
to comply with all of the applicable provisions of the Rules of Fair Practice of
the NASD.
Firm:_________________________________
By: __________________________________
Authorized Officer
Dated:________________________
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,912,878
<SECURITIES> 0
<RECEIVABLES> 123,326
<ALLOWANCES> 38,351
<INVENTORY> 0
<CURRENT-ASSETS> 5,079,206
<PP&E> 797,782
<DEPRECIATION> 434,062
<TOTAL-ASSETS> 5,442,926
<CURRENT-LIABILITIES> 1,064,752
<BONDS> 0
0
1,234,854
<COMMON> 20,244,111
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,442,926
<SALES> 129,335
<TOTAL-REVENUES> 129,335
<CGS> 43,206
<TOTAL-COSTS> 1,239,237
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,966
<INCOME-PRETAX> (1,141,688)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,141,688)
<EPS-BASIC> (.43)
<EPS-DILUTED> (.43)
</TABLE>
