<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1998
REGISTRATION NO. 333-53025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HYPERTENSION DIAGNOSTICS, INC.
(Name of small business issuer as specified in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 3841 41-1618036
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
No.)
</TABLE>
2915 WATERS ROAD, SUITE 108, EAGAN, MINNESOTA 55121-1562
(612) 687-9999
(Address and telephone number of principal executive offices)
(Address of principal place of business or intended principal place of business)
GREG H. GUETTLER, PRESIDENT
HYPERTENSION DIAGNOSTICS, INC.
2915 WATERS ROAD, SUITE 108
EAGAN, MINNESOTA 55121-1562
TELEPHONE: (612) 687-9999
FACSIMILE: (612) 687-0485
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
GIRARD P. MILLER, ESQ. PHILIP T. COLTON, ESQ.
Doherty, Rumble & Butler Maun & Simon, PLC
Professional Association 2000 Midwest Plaza Building West
3500 Fifth Street Towers 801 Nicollet Mall
150 South Fifth Street Minneapolis, Minnesota 55402-2534
Minneapolis, Minnesota 55402-4235 Telephone: (612) 904-7400
Telephone: (612) 340-5555 Facsimile: (612) 904-7424
Facsimile: (612) 340-5584
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: AS SOON AS PRACTICABLE AFTER THIS
REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE SMALL BUSINESS ISSUER HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE SMALL
BUSINESS ISSUER SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 20, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,500,000 UNITS
[HYPERTENSION DIAGNOSTICS-TM- INC. LOGO]
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE CLASS A WARRANT
Hypertension Diagnostics, Inc. (the "Company") is offering 2,500,000 units
(the "Offering"), each unit consisting of one share of Common Stock, $.01 par
value (a "Share") and one redeemable Class A Warrant (a "Class A Warrant") at an
initial public offering price of $4.125 per unit (a "Unit"). The Class A
Warrants are immediately exercisable and, commencing 10 trading days after the
Effective Date (as defined below), are separately transferable from the Shares.
At any time until four years following the date that the Registration Statement
relating to this Prospectus has been declared effective by the Securities and
Exchange Commission (the "Effective Date"), each Class A Warrant entitles the
holder to purchase one Share at an exercise price of $5.50 per Warrant, subject
to adjustment. The Class A Warrants are subject to redemption by the Company for
$.01 per Warrant at any time commencing 90 days after the Effective Date,
provided that the closing bid price of the Shares exceeds $6.50 (subject to
adjustment), for 14 consecutive trading days.
No public market currently exists for the Company's securities. The initial
offering price of the Units offered hereby has been arbitrarily determined by
negotiations between the Company and the Underwriter. See "Underwriting." The
Company has applied for listing of its Common Stock, Class A Warrants and Units
on the Nasdaq SmallCap Market under the symbols, HDII, HDIIW and HDIIU,
respectively.
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE
"RISK FACTORS" COMMENCING ON PAGE 7 AND "DILUTION" ON PAGE 17.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(1)(2)
<S> <C> <C> <C>
Per Unit..................................... $4.125 $0.35 $3.77
Total (3).................................... $10,312,500 $876,563 $9,435,937
</TABLE>
(1) The Underwriter will purchase the Units from the Company at a discount equal
to 8.5% of the total Price to Public. The Company has also agreed to pay the
Underwriter a nonaccountable expense allowance equal to 2.5% of the total
Price to Public, and has agreed to sell to the Underwriter, for nominal
consideration, a five-year warrant to purchase up to 200,000 Units at an
exercise price of $4.95 per Unit (the "Underwriter's Warrant"). The warrant
component of the Units underlying the Underwriter's Warrant is exercisable
at a price of $5.50 per share. In addition, the Company has agreed to
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$225,000 (excluding the nonaccountable expense allowance referenced in Note
1 above).
(3) The Company has granted the Underwriter a 45-day option to purchase up to an
aggregate of 375,000 additional Units solely to cover over-allotments, if
any (the "Over-allotment Option"), at the per Unit Price to Public less the
Underwriting Discount. If the Underwriter exercises the Over-allotment
Option in full, the total Price to Public, Underwriting Discount and
Proceeds to Company in the aggregate will be $11,859,375; $1,008,047 and
$10,851,328, respectively. See "Underwriting."
The Units are offered by the Underwriter subject to prior sale when, as and
if, delivered to and accepted by the Underwriter and subject to the approval of
certain legal matters by counsel and to certain other conditions. It is expected
that delivery of the certificates representing the Units will be made on or
about , 1998, in Minneapolis, Minnesota.
[RJ STEICHEN & CO LOGO]
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
The HDI/PULSEWAVE-TM- Model DO-2020 CardioVascular Profiling Instrument
non-invasively measures the elasticity of both small and large arteries
providing a real-time assessment of a patient's vascular health.
<TABLE>
<S> <C>
[Picture of a physician utilizing the The HDI PULSEWAVE-TM- Model DO-2020 is
HDI/PULSEWAVE-TM- Cardio Vascular designed for easy inclusion in routine
Profiling Instrument on a patient in a examinations as a vascular screening
medical office] tool.
Utilizing a proprietary sensor, the HDI [Picture of the HDI/PULSEWAVE-TM-
PULSEWAVE-TM- Model DO-2020 provides Cardio Vascular Profiling Instrument
measurements of 14 cardiovascular in the background and a sensor
parameters. attached to a human wrist in the
foreground]
</TABLE>
THE HDI/PULSEWAVE-TM- MODEL DO-2020 HAS NOT RECEIVED CLEARANCE FOR MARKETING
BY THE FDA AND THERE CAN BE NO ASSURANCE THAT IT WILL RECEIVE SUCH CLEARANCE.
CERTAIN PERSONS WHO PARTICIPATE IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, UNITS AND
CLASS A WARRANTS, INCLUDING PURCHASES OF THE COMMON STOCK, UNITS AND CLASS A
WARRANTS TO MAINTAIN THEIR MARKET PRICE OR PURCHASES TO COVER SOME OR ALL OF THE
UNDERWRITER'S SHORT POSITION IN THE COMMON STOCK, UNITS AND CLASS A WARRANTS.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION AND IS QUALIFIED IN ITS
ENTIRETY BY THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION.
THE FOLLOWING DISCUSSION CONTAINS VARIOUS FORWARD-LOOKING STATEMENTS, WHICH
MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY,"
"EXPECT," "ANTICIPATE," "ESTIMATE," "GOAL," "CONTINUE" OR OTHER COMPARABLE
TERMINOLOGY. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
RELATING TO THE COMPANY'S FUTURE PERFORMANCE. ACTUAL RESULTS OR EVENTS MAY
MATERIALLY DIFFER FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. IN
EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS AND ARE SPECIFICALLY DIRECTED
TO REVIEW THE VARIOUS FACTORS IDENTIFIED UNDER THE CAPTION "RISK FACTORS" WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH
FORWARD-LOOKING STATEMENTS.
THE COMPANY
The Company is engaged in the design, development, assembly and marketing of
a proprietary medical device that it believes will non-invasively detect subtle
changes in the elasticity of large and small arteries. Vascular elasticity has
been researched for many years and clinical studies suggest that a lack of
arterial elasticity is an early indicator of cardiovascular disease. The present
method for screening a patient for hypertension or potential cardiovascular
diseases is the sphygmomanometer, or traditional blood pressure cuff, which
provides the physician with very limited clinical information about the
patient's vascular health. Additionally, while the aorta and large arteries can
be visualized by various non-invasive techniques, such as radiology, magnetic
resonance imaging ("MRI"), computerized tomography ("CT") scans and
ultrasonography, the Company believes there is currently no clinical way to
evaluate the elasticity of the small and very small arteries which appear to be
the first to become altered in hypertension and other vascular diseases. For
this reason, the Company developed an easy to use, non-invasive solution that
could assess the status of these small blood vessels and provide a physician
with information to assess an individual's risk for cardiovascular disease.
The Company's HDI/PULSEWAVE-TM- CardioVascular Profiling Instrument (the
"Product") was developed by two of the Company's founders and is based on a
patented blood pressure waveform analysis methodology which has been tested on
more than 2,500 patients and featured in approximately 30 peer-reviewed articles
published in medical journals. This methodology consists of a computer algorithm
that analyzes the diastolic portion of the arterial waveform by identifying the
mathematical components of the pressure decay that can be introduced into a
circulatory model to calculate the capacitive and reflective compliance of the
arteries. The Company has developed two models of the Product: one for research
purposes only (that is, not for screening, diagnosis, monitoring or determining
treatment) (the "Model CR-2000"), which the Company is currently marketing, and
one for primary care physicians and other health care professionals (the "Model
DO-2020"), which requires Food and Drug Administration ("FDA") clearance to
market. The Model DO-2020 provides quantitative measurements of 14
cardiovascular parameters that may provide clinically valuable information to
physicians and researchers in screening individuals who may be at risk for
future vascular disease and in monitoring the effectiveness of treatment of
individuals with previously diagnosed vascular disease. The Company expects that
the Model DO-2020 will eventually generate the majority of its revenues and
early marketing efforts will be targeted in the United States.
The Company believes that the Model DO-2020 can markedly improve the
efficiency and cost-effectiveness of identifying and managing cardiovascular
disease by primary care physicians and other health care professionals. By
utilizing the Model DO-2020, physicians could identify for treatment those
patients demonstrating a high risk for cardiovascular disease, as opposed to
treating every patient who may merely possess one or more risk factors for
cardiovascular disease. The Company plans to utilize a combination of direct and
independent representatives, contract sales representatives and/or corporate
partners in its marketing efforts.
3
<PAGE>
Physicians will be charged for each use of the Model DO-2020, as opposed to
purchasing the equipment. The Company anticipates that marketing the Model
DO-2020 in this fashion will encourage early and more rapid adoption of the
Company's technology by minimizing the physician's capital cost and may provide
the Company with a recurring stream of revenue. Each Model DO-2020 will come
equipped with an internal modem designed to transmit the patient information to
a central data management facility ("CDMF") being developed by the Company. The
Company is designing the CDMF so that it may provide the physician with the
ability to archive a data base of patient information that can be used to
consistently monitor and analyze trends in patient treatment response.
The Company commenced marketing of the Model CR-2000 worldwide for use in
research by pharmaceutical companies, academic research centers, government
research agencies and medical device manufacturers in April 1998. The medical
research market is diverse, with pharmaceutical companies, the federal
government and medical device manufacturers funding the vast majority of
research. According to a March 1997 survey by the Pharmaceutical Research and
Manufacturers of America (PhRMA), pharmaceutical companies spent an estimated
$15 billion dollars in 1997 on research and development within the United
States. As reported in Parexel's Pharmaceutical R&D Statistical Sourcebook
(1997), cardiovascular research and development costs were projected to be
between $3.1 billion and $3.9 billion worldwide in 1997.
More than one million Americans suffer a heart attack annually, and
according to a 1997 release by the National Heart, Lung and Blood Institute,
approximately 50 million adults in the United States have been diagnosed as
suffering from hypertension, or high blood pressure. According to the Johns
Hopkins White Papers on Hypertension (1998), an additional 30 million Americans
are estimated to have "high-normal hypertension," defined as a blood pressure
reading at or slightly above 130/85 mmHg. Within the United States health care
industry, which is estimated at approximately $1 trillion by the United States
Department of Health and Human Services (December 15, 1997), cardiovascular
disease is expected to account for approximately $274 billion in 1998, with
approximately $26 billion of that amount spent on physician and professional
services according to American Heart Association estimates. Current American
Medical Association ("AMA") estimates indicate that there are approximately
650,000 active physicians in the United States, of which the Company believes
approximately 250,000 fall into its primary target market.
The Company was incorporated in Minnesota on July 19, 1988. The Company
maintains its office at 2915 Waters Road, Suite 108, Eagan, Minnesota 55121-1562
and its telephone number is (612) 687-9999.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.......................... 2,500,000 Units, each Unit consisting of one
Share and one Class A Warrant, at an initial
public offering price of $4.125 per Unit. Each
Class A Warrant is immediately exercisable
and, commencing 10 trading days after the
Effective Date, is transferable separately
from the Share. At any time until four years
after the Effective Date, each Class A Warrant
entitles the holder to purchase one Share at
an exercise price of $5.50 per Warrant,
subject to adjustment. The Company may redeem
the Class A Warrants at $.01 per Warrant at
any time 90 days after the Effective Date,
provided that the closing bid price of the
Shares exceeds $6.50 (subject to adjustment)
for 14 consecutive trading days. Written
notice must precede redemption by 30 days and
must be sent within 10 business days of the 14
consecutive trading day period.
Common Stock Outstanding:
Before the Offering....................... 2,517,735 Shares(1)
After the Offering........................ 5,017,735 Shares(1)
Proposed Nasdaq SmallCap Market Symbols:
Common Stock.............................. HDII
Warrants.................................. HDIIW
Units..................................... HDIIU
Use of Proceeds............................. Sales and marketing; inventory and equipment;
wages and salaries; CDMF development; outside
consultants; clinical trials and working
capital.
</TABLE>
- ------------------------
(1) Reflects 55,724 Shares issued pursuant to option exercises after March 31,
1998. Does not include: (i) 375,000 Units subject to the Underwriter's
Over-allotment Option; (ii) 200,000 Units issuable upon exercise of the
Underwriter's Warrant; (iii) 2,500,000 Shares issuable upon the exercise of
the Class A Warrants; (iv) 311,500 Shares underlying options that have been
granted to employees under the Company's 1995 Long-Term Incentive and Stock
Option Plan (the "1995 Option Plan"); (v) 75,000 Shares underlying options
that have been granted to the Company's independent directors; (vi)
1,075,275 Shares underlying options that have been granted to consultants
and others; and (vii) 182,900 Shares underlying warrants issued to the
Underwriter or current affiliates of the Underwriter in connection with
prior private placements. See "Description of Securities--Stock Options and
Warrants."
5
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes certain data derived from the Company's
audited financial statements as of June 30, 1996 and 1997, and for the years
then ended, and unaudited financial statements as of March 31, 1998 and for the
nine months ended March 31, 1997 and 1998. In the opinion of the Company's
management, the unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
representation of the financial position and results of operations as of the
dates and for the periods represented. The results of operations for the nine
months ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year. The summary financial data should be read in
conjunction with the financial statements and notes thereto included elsewhere
in this Prospectus.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 19, 1988
NINE MONTHS (INCEPTION)
YEAR ENDED JUNE 30, ENDED MARCH 31, TO
------------------------ ------------------------ MARCH 31,
1996 1997 1997 1998 1998
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development.................... $ 564,012 $ 526,352 $ 483,062 $ 255,787 $ 1,550,372
General and administrative.................. 201,604 426,818 300,186 623,383 1,554,285
Other income, net............................. 51,531 81,198 64,724 45,700 137,101
----------- ----------- ----------- ----------- -------------
Net loss and deficit accumulated during the
development stage......................... $ (714,085) $ (871,972) $ (718,524) $ (833,470) $ (2,967,556)
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
Net loss per Share--basic and diluted......... $(.57) $(.44) $(.37) $(.41)
Weighted average Shares outstanding........... 1,248,634 1,962,011 1,962,011 2,050,407
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------
JUNE 30, 1997 ACTUAL AS ADJUSTED(1)
------------- ------------- --------------
<S> <C> <C> <C>
Cash and cash equivalents........................................... $ 1,198,778 $ 1,569,245 $ 10,522,369
Total assets........................................................ 1,213,705 1,730,695 10,683,819
Total liabilities................................................... 4,551 44,730 44,730
Deficit accumulated during the development stage.................... (2,134,086) (2,967,556) (2,967,556)
Total shareholders' equity.......................................... 1,209,154 1,685,965 10,639,089
</TABLE>
- ------------------------
(1) As adjusted for the sale of the Units offered hereby and the anticipated
application of the net proceeds therefrom. Does not include: (i) 375,000
Units subject to the Underwriter's Over-allotment Option; (ii) 200,000 Units
issuable upon exercise of the Underwriter's Warrant; (iii) 2,500,000 Shares
issuable upon the exercise of the Class A Warrants; (iv) 317,500 Shares
underlying options that have been granted to employees under the 1995 Option
Plan (6,000 of which options were exercised after March 31, 1998); (v)
75,000 Shares underlying options that have been granted to the Company's
independent directors; (vi) 1,124,999 Shares underlying options that have
been granted to consultants and others (49,724 of which options were
exercised after March 31, 1998); and (vii) 182,900 Shares underlying
warrants issued to the Underwriter or current affiliates of the Underwriter
in connection with prior private placements. See "Description of
Securities--Stock Options and Warrants."
6
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE HIGHLY SPECULATIVE, INVOLVE A
HIGH DEGREE OF RISK OF LOSS AND IMMEDIATE SUBSTANTIAL DILUTION. PROSPECTIVE
INVESTORS SHOULD READ THE ENTIRE PROSPECTUS AND CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS. THE COMPANY WISHES TO CAUTION PROSPECTIVE INVESTORS THAT THE
FOLLOWING FACTORS, AMONG OTHERS, COULD IN THE FUTURE AFFECT THE COMPANY'S ACTUAL
OPERATING RESULTS, AND THAT SUCH RESULTS COULD DIFFER MATERIALLY FROM THOSE
EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY. THE ORDER IN
WHICH SUCH FACTORS APPEAR BELOW SHOULD NOT BE CONSTRUED TO INDICATE THEIR
RELATIVE IMPORTANCE OR PRIORITY.
DEVELOPMENT STAGE COMPANY; SUBSTANTIAL ANTICIPATED FUTURE LOSSES. The
Company is a development stage company that until April 1998 has been engaged
primarily in research, design, development and commercialization of the
Company's Product. While the Company has developed a commercial version of the
Model CR-2000 and a version of the Model DO-2020 that is presently undergoing
clinical testing, the Company has only since April 1998 commenced marketing
efforts for the Model CR-2000 and has not yet generated any revenues. The
Company expects to continue to incur substantial net operating losses as
clinical testing, research and development, sales and marketing activities and
operations continue. Marketing of the Model DO-2020 to primary care physicians
and other health care professionals in the United States cannot begin until it
has received FDA clearance, which may not occur for several years, if ever. The
Company believes that marketing of the Company's Model CR-2000, intended for
research purposes only (that is, not for screening, diagnosis, monitoring or
determining treatment), does not require FDA clearance. There is no assurance
that either the Model CR-2000 or the Model DO-2020 will ever generate any
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Factors--Lack of FDA Clearance for Product."
HISTORY OF OPERATING LOSSES; UNCERTAINTY AS A GOING CONCERN. As of March
31, 1998, the Company had a deficit accumulated during the development stage of
$(2,967,556). The Company has not yet generated any revenues. The Company's
independent auditors included an explanatory paragraph in their report on the
Company's financial statements indicating that such deficit accumulated during
the development stage raises substantial doubt as to the Company's ability to
continue as a going concern. The likelihood of the success of the Company must
be considered in light of the expenses, difficulties and delays frequently
encountered in connection with development stage businesses and the competitive
environment in which the Company will operate. The Company's ability to achieve
profitability is dependent in large part on obtaining FDA clearance for its
Model DO-2020, the availability of third party reimbursement, gaining market
acceptance of its Product, establishing distribution channels and developing the
capacity to manufacture and sell its Product successfully. There can be no
assurance that the Company will successfully market either model of its Product
or operate profitably. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LIMITED FINANCIAL RESOURCES; NEED FOR ADDITIONAL FINANCING. The Company's
ability to execute its business strategy depends to a significant degree on its
ability to obtain substantial equity capital and other financing. The Company's
business strategy requires a large capital outlay for equipment which is to be
placed in a physician's office without charge. Consequently, the Company will
necessarily build up and maintain an inventory of equipment before the Company
will know whether its business strategy will be successful. The proceeds of the
Offering are expected to be sufficient to fund the Company's operations through
the next 18 to 24 months. Although the Company estimates that the proceeds from
the Offering will be sufficient to allow initial marketing of both models of the
Company's Product, no assurance of such can be given. Any unforeseen
contingencies, including, but not limited to, delays in FDA clearance of the
Model DO-2020, unanticipated expenses or delays in CDMF development,
unavailability of third party reimbursement, delays or limited market
acceptance, delays in establishment of distribution channels, shortage of
components or delays in manufacturing may impede the Company's initial marketing
efforts. If the proceeds of the Offering are not sufficient to achieve initial
marketing of both models of the Company's Product, the Company will be required
to seek additional funds through another offering of the
7
<PAGE>
Company's equity securities or by incurring indebtedness. If additional funds
are required, there can be no assurance that any additional funds will be
available on terms acceptable to the Company or its security holders, or at all,
or that any future capital that is available will be raised on terms that are
not dilutive to investors in the Offering. The Company's business plan and
financing needs are subject to change depending on, among other things, market
conditions, business opportunities and cash flow from operations, if any. See
"Business."
LACK OF FDA CLEARANCE FOR PRODUCT. The Company produces two models of its
Product: the Model CR-2000 and the Model DO-2020. The Company expects that the
Model DO-2020 will eventually generate the majority of its revenues. The Company
believes that the Model CR-2000 does not need either FDA clearance or approval
prior to marketing to research institutions for research use only. However, the
FDA could disagree with the Company's position and require a 510(k) Pre-Market
Notification ("510(k) Application") or Pre-Market Approval ("PMA") submission
for the Model CR-2000, which, if pursued, may not be cleared or approved, or if
cleared or approved, may contain significant limitations on the intended uses
for which the Product is marketed. In contrast, the Company's Model DO-2020 will
be regulated by the FDA as a medical device and will need FDA clearance or
approval prior to being marketed in the United States. Clearance for marketing
of the Company's Model DO-2020 has not been received from the FDA and the
Company will be unable to market the Model DO-2020 in the United States until
such clearance is obtained. The Company has submitted a 510(k) Application to
the FDA. However, the FDA may decide that one or more of the proposed claims or
indications for use of the Model DO-2020 cannot be cleared by means of the
510(k) process. In that case, the FDA might require that the Company seek
approval for such claims or indications by means of a PMA submission which could
delay using such claims or indications for marketing purposes by several months
or even years.
The process of obtaining FDA clearance or approval can be lengthy and could
require additional clinical testing and expenditure of financial and other
substantial resources. The timing of the FDA clearance or approval process is
unpredictable and there can be no assurance that the Company's 510(k)
Application for marketing the Model DO-2020 will ultimately receive FDA
clearance. FDA clearance and/ or approval, if granted, may include significant
limitations on the intended uses for which a product may be marketed. FDA
enforcement policy strictly prohibits the promotion of cleared or approved
medical devices for non-approved or "off-label" uses. In addition, product
clearances may be withdrawn for failure to comply with regulatory standards or
the occurrence of unforeseen problems following initial marketing. Failure to
receive necessary regulatory clearances or approvals or a lengthy approval
process would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. The Company's financial
performance will depend in large part on the extent to which reimbursement for
the cost of medical products and services will be available from government
health administration authorities, private health coverage insurers and other
payer organizations, if at all. No third-party payer has yet approved
reimbursement for use of the Company's Model DO-2020. Significant uncertainty
exists as to the pricing, availability of distribution channels and
reimbursement status of new medical products, and there can be no assurance that
adequate third-party reimbursement will be available for the Model DO-2020. In
certain foreign markets, pricing or profitability of health care products is
subject to government control. Inability of the Company to obtain third-party
reimbursement for the Product would have a material adverse effect on the
Company. See "Business--Reimbursement."
NEW PRODUCT; UNCERTAINTY OF MARKET ACCEPTANCE OF PRODUCT OR MEDICAL
APPLICATION OF TECHNOLOGY. The Company's financial performance will depend in
large part upon FDA clearance of the Model DO-2020 and the extent to which the
respective models of the Product are accepted by researchers (Model CR-2000) as
useful, and by physicians (Model DO-2020) as effective, reliable and safe for
use in screening, diagnosing and monitoring the treatment of patients with
vascular disease. If the Model
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<PAGE>
DO-2020 does not achieve market acceptance due to lack of appropriate
third-party reimbursement, FDA clearance, acceptance of test data as reliable
and beneficial, operational problems with the CDMF or any other factors which
prohibit acceptance by physicians, the Company will likely be required to cease
operations. The Company is unable to predict how quickly or how broadly either
model of its Product will be accepted by the market, if at all, or if accepted,
what the demand for them could be. Achieving market acceptance will require the
Company to educate the marketplace about the anticipated benefits associated
with the use of the Company's Product and may also require the Company to obtain
and disseminate additional data acceptable to the medical community as evidence
of such benefits. Because the Company's Product represents a new approach for
evaluating vascular disease, there may be a greater reluctance to accept the
Company's Product than would occur with products utilizing more traditional
technologies or methods of diagnosis, resulting in longer sales cycles and
slower revenue growth than currently anticipated. There can be no assurance that
the Company will be successful in educating the marketplace about its Product or
that available data concerning these benefits will create a demand by the
medical community for the Company's Product. Furthermore, the Company's Product
will be substantially more expensive to operate than the traditional blood
pressure testing instrument, the sphygmomanometer. There can be no assurance
that physicians will utilize the Model DO-2020 once installed, or that the
Company's services will be profitable to or become generally accepted by such
physicians. In addition, the Company's Product is premised on the medical
assumption that a loss of arterial elasticity is an indicator for the early
onset of cardiovascular disease. While the Company believes, based on its
clinical studies, that the loss of arterial elasticity is an indicator for the
early onset of cardiovascular disease, there can be no assurance that the
Company's claims will be accepted by the medical community. See
"Business--Marketing Strategy."
LACK OF DEVELOPMENT OF CENTRAL DATA MANAGEMENT FACILITY. An integral
component of the Model DO-2020 is a fully operational CDMF. Each Model DO-2020
will be equipped with an internal modem designed to transmit patient profiles to
the CDMF via a dedicated, toll-free telephone number. The Company has a working
version of the CDMF, but it has only limited communication and storage
capability, sufficient only to conduct FDA clinical trials. The Company
estimates that the design and development of a CDMF capable of handling multiple
simultaneous physician transmissions integrated with the Company's tracking,
billing and production systems, and capable of storing several hundred thousand
patient records will require approximately $750,000 to complete. There can be no
assurance that the actual cost of developing a full scale CDMF will not exceed
such estimated amount. In addition, once a full scale CDMF is developed, the
Company will be required to hire additional personnel to operate the CDMF. The
Company is currently developing a full scale CDMF; however, should CDMF
completion be delayed, the Company's efforts to market the DO-2020 will also be
delayed and the Company would be materially adversely affected. See
"Business--CardioVascular Profile Reports."
LACK OF MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD-PARTY
MANUFACTURERS. To date, the Company has relied on independent contractors and
consultants for manufacturing of both models of the Product. For the Company to
be financially successful, it must manufacture its products in accordance with
strict regulatory requirements, in commercial quantities, at appropriate quality
levels and at acceptable costs. To date, the Company's Product has been
manufactured in limited quantities and not on a commercial scale. As a result,
there can be no assurance that the Company will not encounter difficulties in
obtaining reliable and affordable contract manufacturing assistance and/or in
scaling up manufacturing capabilities, including problems involving production
yields, per-unit manufacturing costs, quality control, component supply and
shortages of qualified manufacturing personnel. In addition, there can be no
assurance that the Company will not encounter problems relating to integration
of components if changes are made in the present models' configuration. Any such
difficulties could result in the inability of the Company to satisfy any
customer demand for its Product in a cost-effective manner and would likely have
a material adverse effect on the Company. See "Business--Production."
SINGLE SOURCE OF SUPPLY OF SENSOR AND OTHER COMPONENTS. The Company
currently obtains its proprietary arterial pulse pressure sensor (the "Sensor"),
an integral component of the Company's
9
<PAGE>
Product, from a single source. The Company has a manufacturing services
agreement with Apollo Research Corp., the sole supplier of the Sensor.
Disruption or termination of this relationship could have a material adverse
effect on the Company's operations. While the Company has no reason to believe
that this relationship will be disrupted or terminated, the inability to obtain
sufficient quantities of the Sensor meeting its standards of reliability,
accuracy and performance or the need to develop alternative sources in a timely
and cost effective manner, if and as required in the future, would adversely
affect the Company's operations until new sources of the Sensor become
available, if at all. In addition, while the Sensor utilized in prototypes of
the Product has performed reliably, there is no assurance that reliable Sensors
will be available on a large-scale commercial basis. Should the Company be
unable to obtain an adequate supply of Sensors or other components meeting its
standards of reliability, accuracy and performance, the Company would be
materially adversely affected, including delays due to the unavailability of
Products to sell, delays in obtaining FDA clearance of the Model DO-2020 and new
patent applications. See "Business--Production."
COMPETITION. Competition from medical devices which are used to screen,
diagnose and monitor the treatment of patients with cardiovascular disease is
intense and likely to increase. The Company competes with manufacturers of, for
example, non-invasive blood pressure monitoring equipment and instruments, and
may compete with manufacturers of other non-invasive devices. In addition, the
Model DO-2020 will also compete with traditional blood pressure testing by means
of a standard sphygmomanometer which is substantially less expensive than the
Company's Product. Many of the Company's competitors and potential competitors
have substantially greater capital resources, name recognition, research and
development experience and extensive regulatory, manufacturing and marketing
capabilities. Many of these competitors offer well established, broad product
lines and ancillary services not offered by the Company. Some of the Company's
competitors have long-term or preferential supply arrangements with physicians
and hospitals which may act as a barrier to market entry for the Company's
Product. In addition, other large health care companies or medical instrument
firms may enter the non-invasive vascular product market in the future.
Competing companies may succeed in developing products that are more efficacious
or less costly than any that may be produced by the Company, and such companies
also may be more successful than the Company in producing and marketing such
products or their existing products. Competing companies may also introduce
competitive pricing pressures that may adversely affect the Company's sales
levels and margins. As a result, there can be no assurance that the Company will
be able to compete successfully with existing or new competitors. See
"Business--Competition."
DEPENDENCE ON SINGLE PRODUCT; MODEL DO-2020 PRICING STRUCTURE NOT YET
DETERMINED. The Company's success is dependent upon the marketing of the Model
CR-2000 and the Model DO-2020 versions of the Product. The Company expects that
the Model DO-2020 will eventually generate the majority of its revenues. No
assurance can be given that the Company will be able to successfully develop any
additional products. In addition, the Company has not yet finalized the pricing
structure for the Model DO-2020. While the Company intends to offer the Model
DO-2020 at terms that it believes will be competitive in the market, higher than
expected manufacturing, marketing and distribution costs or competitive forces,
may force the Company to raise or lower its price or alter its terms in a manner
which has a material and adverse effect on the Company. See "Business--The
Product."
GOVERNMENT REGULATION. The Company's research, manufacturing, marketing and
distribution of its Product in the United States and other countries are subject
to extensive regulation by numerous governmental authorities including, but not
limited to, the FDA. The FDA administers the Federal Food, Drug, and Cosmetic
Act (the "FDC Act"). Under the FDC Act, medical devices generally must receive
FDA clearance through the Section 510(k) Application process or through the more
lengthy PMA process before they can be marketed in the United States. The
process of obtaining FDA and other required regulatory clearances or approvals
can be lengthy and has required, and will continue to require, the expenditure
of substantial resources of the Company. Manufacturing of the Company's medical
device products is subject to extensive regulatory requirements administered by
the FDA and other regulatory
10
<PAGE>
bodies. The Company and its contract design and manufacturing firms must be
found in compliance with the Quality System Regulation ("QSR") required by the
FDA. FDA inspections can be conducted at any time. Failure to comply with the
QSR and other regulatory requirements could, among other things, result in
fines, suspensions or withdrawals of regulatory clearances or approvals, product
recalls, product seizures, suspension of manufacturing, operating restrictions
and criminal prosecution. Furthermore, changes in existing regulations or
adoption of new regulations or policies could prevent the Company from
obtaining, or affect the timing of, future regulatory clearances or approvals.
There can be no assurance that the Company will be able to obtain necessary
regulatory clearances or approvals on a timely basis or at all. Delays in
receipt of or failure to receive such clearances or approvals, or failure to
comply with existing or future regulatory requirements, would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Government Regulation."
COMPLIANCE WITH FOREIGN REGULATORY REQUIREMENTS. As a part of its marketing
strategy, the Company intends to pursue commercialization of its Product in
international markets. The Company's Product is subject to regulations that vary
from country to country. The process of obtaining foreign regulatory approvals
in certain countries can be lengthy and require the expenditure of substantial
resources. Until FDA clearance or approval is obtained for the Model DO-2020, it
also must comply with the export requirements of the FDC Act before they can be
exported. There can be no assurance that the Company will be able to meet FDC
Act requirements or obtain necessary foreign regulatory clearances or approvals
for the Product on a timely basis or at all, and delays in receipt of or failure
to receive such clearances or approvals, or failure to comply with existing or
future regulatory requirements, would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business-- Government Regulation."
LACK OF ESTABLISHED SALES/DISTRIBUTION CHANNELS. The Company commenced
marketing of the Model CR-2000 in April 1998, and currently has a limited sales
force. The Company has not yet developed a distribution system for either of its
models. There can be no assurance that the Company will be able to develop an
effective sales force with the requisite knowledge and skill to fully exploit
the sales potential of the Company's Product or be able to establish
distribution channels to promote market acceptance of, and create demand for,
the Company's Product. Even if the Company enters into an agreement with
distributors, there can be no assurance that such distributors will devote the
resources necessary to provide effective sales and promotion support to the
Company's Product. The Company's ability to expand Product sales will depend in
large part on its ability to develop relationships with distributors who are
willing to devote the resources necessary to provide such effective sales and
promotional support and to educate and train a sales force and the medical
community. There can be no assurance that the Company will be able to accomplish
these objectives. There is also no assurance that the Company's financial
condition will allow it to withstand long sales cycles for its Model DO-2020.
See "Business--Marketing Strategy."
RAPID TECHNOLOGICAL CHANGE. The medical device market is characterized by
intensive development efforts and rapidly advancing technology. Success of the
Company will depend, in large part, upon its ability to anticipate and keep pace
with advancing technology and competitive innovations. There can be no assurance
that the Company and its personnel will be successful in identifying, developing
and marketing new products or enhancing its existing Product. In addition, there
can be no assurance that new products or alternative diagnostic techniques will
not be developed that will render the Company's current or planned products
obsolete or inferior. Rapid technological development by competitors may result
in the Company's Product becoming obsolete before the Company recovers a
significant portion of the research, development and commercialization expenses
incurred with respect to such Product.
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE. The Company faces
an inherent business risk of exposure to product liability claims in the event
that the use of its Product is alleged to have resulted in adverse effects. The
Company has obtained a general liability insurance policy that will also cover
product liability claims, if any. There can be no assurance that liability
claims will not be excluded from
11
<PAGE>
such policies, will not exceed the coverage limits of such policies, or that
such insurance will continue to be available on commercially reasonable terms or
at all. Consequently, a product liability claim or other claim with respect to
uninsured liabilities or in excess of insured liabilities would have a material
adverse effect on the Company's business, financial condition and results of
operations.
UNCERTAINTY OF HEALTH CARE REFORM. The levels of revenue and profitability
of medical device companies may be affected by the efforts of government and
third party payers to contain or reduce the costs of health care through various
means. In the United States there have been, and the Company expects that there
will continue to be, a number of federal, state and private proposals to control
health care costs. These proposals may contain measures intended to control
public and private spending on health care as well as to provide universal
public access to the health care system. If enacted, these proposals may result
in a substantial restructuring of the health care delivery system. Significant
changes in the nation's health care system are likely to have a substantial
impact over time on the manner in which the Company conducts its business and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Government Regulation."
MANAGEMENT OF GROWTH. The execution of its business plan will likely place
increasing demands on the Company's existing management and operations. The
Company's future growth and profitability will depend on its ability to
successfully attract, train, motivate, manage and retain new employees and to
continue to improve its operational, financial and management information
systems. There can be no assurance that the Company will be able to effectively
manage any expansion of its business. Management's inability to manage its
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Employees and Consultants" and "Management."
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The Company is
highly dependent on a limited number of key management and technical personnel,
particularly its President, Greg H. Guettler, and its Executive Vice President
and Chief Technology Officer, Charles F. Chesney, D.V.M., Ph.D., R.A.C. The
Company does not have key-person life insurance on either Mr. Guettler or Dr.
Chesney. The Company has entered into a one year employment agreement with Mr.
Guettler that automatically extends for an additional year unless either party
gives written notice of the nonextension by a specified date. The employment
agreement contains certain confidentiality obligations and a one-year covenant
not to compete. There can be no assurance that Minnesota or other state courts
will enforce such provision, either partially or in its entirety. In October
1995, the Company entered into a five-year employment agreement with Dr. Chesney
which contains certain confidentiality obligations. The Company's future success
will depend on its ability to attract and retain highly qualified personnel. The
Company competes for such personnel with other companies, academic institutions,
government entities and other organizations. There can be no assurance that the
Company will be successful in hiring or retaining such qualified personnel. The
loss of key personnel or an inability to hire or retain qualified personnel
could have an adverse effect on the Company's business, financial condition and
results of operations. See "Business-- Employees and Consultants" and
"Management."
UNCERTAIN ABILITY TO PROTECT PROPRIETARY TECHNOLOGY. The Company's success
depends, and will continue to depend, in part, on its ability to maintain patent
protection for its products and processes, and to preserve its trade secrets and
to operate without infringing the property rights of third parties. The Company
is the exclusive assignee for one issued United States patent and has obtained
the exclusive rights to commercialize inventions (on a worldwide basis)
described by three other United States patents issued to the Regents of the
University of Minnesota (the "University"). The above four patents relate to the
Company's blood pressure waveform analysis procedures, its cardiovascular
profiling technology, the non-invasive determination of cardiac output and
overall technology and operation of the Product. The license from the University
expires with the term of these patents (currently expected to be in 2012).
Patent applications regarding one or more of these United States issued patents
are currently pending in Japan as
12
<PAGE>
well as in Germany, France and the United Kingdom. The Company has three other
patent applications that were submitted regarding certain other aspects and
components of the Product. There is no assurance that these patents will be
issued. Besides seeking patents, the Company intends to rely to the fullest
extent possible on certain trade secrets, on proprietary "know-how," and on its
ongoing endeavors involving product improvement and enhancement. The validity
and breadth of claims coverage in medical technology patents involve complex
legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that the Company's current patent and licenses will
provide a competitive advantage, that the pending applications will result in
patents being issued, or that competitors of the Company will not design around
any patents or licenses issued to the Company. Furthermore, there can be no
assurance that the Company's non-disclosure agreements and invention assignment
agreements will protect its proprietary information and know-how or provide
adequate remedies for the Company in the event of unauthorized use or disclosure
of such information, or that others will not be able to develop such information
independently. There can be no assurance that allegations of infringement of the
proprietary rights of third parties will not be made, or that if made such
allegations would not be sustained if litigated. There has been substantial
litigation regarding patent and other intellectual property rights in the
medical device industry. Litigation may be necessary to enforce patents issued
to the Company, to protect trade secrets or know-how owned by the Company, to
defend the Company against claimed infringement of the rights of others or to
determine the ownership, scope or validity of the proprietary rights of the
Company and others. Any such claims may require the Company to incur substantial
litigation expenses and to divert substantial time and effort of management
personnel. An adverse determination in litigation involving the proprietary
rights of others could subject the Company to significant liabilities to third
parties, could require the Company to seek licenses from third parties, and
could prevent the Company from manufacturing, selling or using its Product. The
occurrence of such litigation or the effect of an adverse determination in any
such litigation could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Patents and
Proprietary Technology" and "--University of Minnesota Research and License
Agreement."
CONTROL BY MANAGEMENT. Upon completion of the Offering, the officers and
directors of the Company as a group will beneficially own 16.4% of the Company's
outstanding Shares and they will be in a position to influence the outcome of
shareholder votes, including the election of directors. See "Management" and
"Principal Shareholders."
DILUTION. Investors will experience an immediate substantial dilution of
approximately $1.99 per Share (48%) in the net tangible book value per Share.
The dilution experienced by investors will be even more substantial in the event
that outstanding options or warrants to purchase Shares are exercised. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of significant amounts of Shares in
the public market or the perception that such sales may occur could adversely
affect the market price of the Company's securities or the future ability of the
Company to raise capital through an offering of its equity securities. Of the
5,017,735 Shares outstanding upon completion of the Offering, the 2,500,000
Shares component of the Units offered hereby will be eligible for immediate sale
in the public market without restriction with the exception of Shares held by
"affiliates" of the Company within the meaning of Rule 144 under the Securities
Act. Of the 2,517,735 Shares presently outstanding, 306,557 Shares are held by
officers, directors or 5% shareholders, of which 100% are subject to an
agreement in favor of the Underwriter (a "Lock Up Agreement") providing that the
shareholder will not sell, grant any option for the sale of, or otherwise
dispose of any equity securities of the Company for 180 days after the Effective
Date. Of the remaining 2,211,178 Shares, an additional 825,500 Shares are
subject to Lock Up Agreements; however, the Underwriter has requested and the
Company has agreed to use its best efforts to attempt to obtain Lock Up
Agreements on the remaining 1,385,678 Shares. There is no assurance that the
Company will be able to obtain Lock Up Agreements on all of these Shares. Of the
remaining 1,385,678 Shares, all such Shares will be eligible for resale in the
open market immediately under Rule 144(k).
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<PAGE>
ARBITRARY OFFERING PRICE; NO PRIOR PUBLIC MARKET; POTENTIAL LIQUIDITY
PROBLEMS. The initial offering price of the Units and the Warrant exercise
price have been arbitrarily determined by negotiation between the Company and
the Underwriter. The initial offering price and the Warrant exercise price bear
no relationship to the Company's assets, book value, earnings, net worth or
other recognized criteria of value. Prior to the Offering, there has been no
public market for the Company's securities. Although the Company has applied for
listing of the Company's securities on the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") SmallCap Market, there can be no
assurance that an active public market will develop or be sustained. If the
Company fails to satisfy the Nasdaq requirements to maintain listing on Nasdaq
in the future, the Company's securities will likely be quoted in the over-the-
counter market in the so-called "pink sheets" or the OTC Bulletin Board.
Consequently, an investor would find it more difficult to trade the Company's
securities. In addition, if the Company is unable to maintain the Nasdaq
requirements for continued listing, the securities would be subject to the rules
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") relating to "penny stocks." These rules require brokers who sell
securities subject to such rules to persons other than established customers and
"institutional accredited investors" to complete certain documentation, make
suitability inquiries of investors and provide investors with certain
information concerning the risks of trading in the security. Consequently, these
rules may restrict the ability of brokers to sell the securities and may affect
the ability of purchasers in the Offering to sell their securities in the
secondary market. In addition, regardless of where the Company's securities are
traded, there can be no assurance that purchasers will be able to resell the
Units at the Price to Public, or at any price. See "Underwriting."
FLUCTUATIONS IN FINANCIAL RESULTS; VOLATILITY OF MARKET PRICE. Factors such
as variations in the Company's revenues, earnings and cash flow, ability to meet
market expectations, status of the FDA clearance process, availability of
Product components, market acceptance, changes in price, terms or product mix,
changes in manufacturing costs or the introduction of new products by the
Company or competitors could cause fluctuations in the Company's quarterly
financial results and the market price of the Company's securities following the
Offering. Until the Company receives FDA clearance, the Company's inability to
market the Model DO-2020 will adversely affect the Company's financial results
which may have an adverse effect on the market price of its securities. There
can be no assurance that the Company will ever generate significant revenues or
that the Company's revenues or income will ever improve on a quarterly basis or
that any improvements from quarter to quarter will be indicative of future
performance. In addition, the Company's expenses are based in part on
expectations of future revenues. As a result, expenses may not match revenues on
a quarterly basis, and a delay in future revenues would adversely affect the
Company's operating results. In addition, the stock markets have experienced
price and volume fluctuations, resulting in change in the market prices of the
stocks of many companies which may not have been directly related to the
operating performance of these companies. Such broad market fluctuations may
adversely affect the market price of the Company's securities following the
Offering.
ANTI-TAKEOVER CONSIDERATIONS. The Company's Articles of Incorporation
provide that the authorized and unissued capital stock of the Company includes
5,000,000 undesignated preferred shares. The Board of Directors, without any
action by the Company's shareholders is authorized to designate and issue the
undesignated preferred shares in such classes or series as it deems appropriate,
and to establish the rights, preferences and privileges of such shares,
including dividends, liquidation and voting rights. No shares of preferred stock
or other senior equity securities are currently designated and there is no
current plan to designate or issue any such securities. The issuance of such
shares may deprive current shareholders of the ability to sell their shares at a
premium over any market price or adversely affect the voting power and other
rights of holders of Common Stock.
At the Company's special meeting of shareholders held on May 22, 1998, the
Company's shareholders approved certain amendments to the Company's Articles of
Incorporation and Bylaws which (a) classify the Board of Directors into three
classes, each of which member would serve (after a transitional period) for a
staggered three year term; (b) provide that directors may be removed for cause
with the vote of the holders of a majority of the then outstanding shares
entitled to vote or other than for cause with the vote of
14
<PAGE>
the holders of at least 80% of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors, voting
together as a single class; (c) provide that any new director elected to fill a
vacancy on the Board shall serve for the remainder of the full term of the class
in which the vacancy occurred rather than until the next meeting of
shareholders; and (d) require an 80% shareholder vote requirement to alter,
amend or repeal the foregoing provisions of the Articles or Bylaws. Such
amendments could have the effect of discouraging an attempt to acquire control
of the Company and limit the price of the Company's securities. See "Description
of Securities--Minnesota Anti-Takeover Law" and "Management."
NO CASH DIVIDENDS. The Company has never paid cash dividends and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
It is anticipated that profits, if any, received from operations will be devoted
to the Company's future operations. In addition, the Company may be prohibited
by future loan covenants from the payment of dividends. Investors who anticipate
a need for immediate income from their investment should not purchase the Units.
See "Dividend Policy."
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS;
POSSIBLE REDEMPTION OF WARRANTS. Purchasers of Units will be able to exercise
the Class A Warrants only if a current prospectus relating to the Shares
underlying the Class A Warrants is then in effect and only if such securities
are qualified for sale or exempt from qualification under the applicable
securities laws of the states in which the various holders of Class A Warrants
reside. Although the Company will use its best efforts to (i) maintain the
effectiveness of a current prospectus covering the Shares underlying the Class A
Warrants and (ii) maintain the registration of such Shares under the securities
laws of the states in which the Company initially qualifies the Units for sale
in the Offering, there can be no assurance that the Company will be able to do
so. The Company will be unable to issue Shares to those persons desiring to
exercise their Class A Warrants if a current prospectus covering the Shares
issuable upon the exercise of the Class A Warrants is not kept effective or if
such Shares are not qualified nor exempt from qualification in the states in
which the holders of the Warrants reside.
The Class A Warrants are subject to redemption at any time by the Company at
$.01 per Warrant commencing 90 days after the Effective Date if the closing bid
price of the Shares exceeds $6.50 (subject to adjustment) for 14 consecutive
trading days. Written notice must precede redemption by 30 days and must be sent
within 10 business days of the 14 consecutive trading day period. In addition, a
current prospectus covering the Shares issuable upon exercise of the Class A
Warrants must then be effective under the Securities Act. If the Class A
Warrants are redeemed, Warrant holders will lose their right to exercise the
Warrants except during such 30 day redemption period. Redemption of the Class A
Warrants could force the holders to exercise the Class A Warrants at a time when
it may be disadvantageous for the holders to do so or to sell the Class A
Warrants at the then market price or accept the redemption price, which likely
would be substantially less than the market value of the Class A Warrants at the
time of redemption.
DISCRETION OF BOARD TO REALLOCATE THE PROCEEDS. The Company intends to use
the net proceeds from the Offering for the purposes and in the amounts described
in "Use of Proceeds." The Company's estimates of its allocation of the net
proceeds of the Offering are based upon the current state of its business
operations, its current plans and current economic and industry conditions.
These estimates are subject to change based on material factors such as
unanticipated levels and types of competition, adverse market trends and new
business opportunities. Thus, the Board will have broad discretion to make
material changes in the allocation of the proceeds. See "Use of Proceeds."
LIMITATIONS ON DIRECTOR LIABILITY. The Company's Articles of Incorporation
provide, as permitted by governing Minnesota law, that a director of the Company
shall not be personally liable to the Company or its shareholders for monetary
damages for breach of fiduciary duty as a director, with certain exceptions.
This provision may discourage shareholders from bringing suit against a director
for breach of fiduciary duty and may reduce the likelihood of derivative
litigation brought by shareholders on behalf of the Company against a director.
See "Management--Indemnification of Directors and Officers."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $8,953,124 after deduction of the Underwriting Discount, the
Underwriter's nonaccountable expense allowance and estimated expenses of the
Offering payable by the Company. This would increase to approximately
$10,329,843 if the Over-allotment Option is exercised in full. There is no
assurance that such Over-allotment Option will be exercised. The Company intends
to use the net proceeds from the Offering, assuming no exercise of the
Over-allotment Option, in the following approximate amounts:
<TABLE>
<CAPTION>
AMOUNT OF NET PERCENTAGE OF NET
PROCEEDS PROCEEDS
------------- -----------------
<S> <C> <C>
Sales and marketing......................................... $ 3,100,000 34.6%
Inventory and equipment..................................... 2,100,000 23.4
Wages and salaries.......................................... 1,350,000 15.1
CDMF development............................................ 750,000 8.4
Outside consultants......................................... 580,000 6.5
Clinical trials............................................. 80,000 0.9
Working capital............................................. 993,124 11.1
------------- -----
Total................................................... $ 8,953,124 100.0%
------------- -----
------------- -----
</TABLE>
Additional information regarding each of the above categories is set forth
below:
SALES AND MARKETING--To establish a domestic and international Product
distribution network (direct and indirect), domestic physician education
programs, domestic marketing, advertising and public relations programs and
additional market research.
INVENTORY AND EQUIPMENT--To produce the Model DO-2020 and the Model CR-2000.
WAGES AND SALARIES--To compensate the Company's current workforce and
approximately 10 planned additions.
CDMF DEVELOPMENT--To develop a CDMF capable of handling multiple
simultaneous physician transmissions and storing several hundred thousand
patient records and to integrate it with the Company's tracking, billing and
production systems.
OUTSIDE CONSULTANTS--To maintain consultant relationships with third-party
reimbursement consultants; marketing consultants; Product design, development
and engineering consultants and regulatory affairs consultants.
CLINICAL TRIALS--To complete the Company's clinical trial phase for the
Model DO-2020. The amount required for clinical trials may increase
substantially if delays are encountered in FDA clearance or a PMA submission is
required.
WORKING CAPITAL--To provide for working capital and other general corporate
purposes to support the Company's growth.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering, based upon the current state of its business
operations, its current plans and current economic and industry conditions.
These estimates are subject to change based upon material factors such as
unanticipated levels and types of competition, adverse market trends and new
business opportunities. Any material revisions in the allocation of proceeds
will be made at the discretion of the Board. The Company believes the net
proceeds from the Offering will be sufficient to meet the Company's capital
needs through the next 18 to 24 months. Pending the use of the proceeds of the
Offering, the Company intends to invest the proceeds in short-term, high
quality, interest-bearing instruments. If the Underwriter exercises the
Over-allotment Option in full, the Company will realize additional net proceeds
of $1,376,719. Such additional net proceeds will be added to the Company's
working capital.
16
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1998 was
$1,682,851 or approximately $.680 per Share. "Net tangible book value"
represents the amount of tangible assets less all liabilities. Without giving
effect to any other changes in net tangible book value after March 31, 1998,
other than to give effect to (i) the sale of the Units offered hereby (assuming
the entire offering price of the Units is allocated to the Shares and no
exercise of the Over-allotment Option), and (ii) the application of the
estimated net proceeds therefrom, the net tangible book value of the Company as
of March 31, 1998 would have been $10,635,975, or $2.140 per Share. This
represents an immediate increase in net tangible book value of $1.460 per Share
to existing shareholders and an immediate dilution in net tangible book value of
$1.985 per Share (48%) to new investors in this Offering, as illustrated by the
following table:
<TABLE>
<S> <C> <C>
Initial public offering price per Share............................. $ 4.125
Net tangible book value per Share at March 31, 1998............... $ .680
Increase in net tangible book value per Share attributable to new
investors....................................................... 1.460
---------
Pro forma net tangible book value per Share after Offering.......... 2.140
---------
Dilution in net tangible book value per Share to new investors(1)... $ 1.985
---------
---------
</TABLE>
- ------------------------
(1) The dilution in net tangible book value per Share to new investors, assuming
the Over-allotment Option is fully exercised, would be $1.875.
The following table summarizes the differences between the existing
shareholders and the new investors with respect to the number of Shares
purchased from the Company, the total cash consideration paid, and the average
cash consideration paid per Share (assuming the entire offering price of the
Units is allocated to the Shares).
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED(1) CONSIDERATION PAID AVERAGE CASH
----------------------- -------------------------- CONSIDERATION
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders........................... 2,517,735 50.2% $ 4,880,946 32.1% $ 1.939
New Investors................................... 2,500,000 49.8 10,312,500 67.9% $ 4.125
---------- ----- ------------- -----
Total....................................... 5,017,735 100.0% $ 15,193,446 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Does not include: (i) 375,000 Units subject to the Underwriter's
Over-allotment Option; (ii) 200,000 Units issuable upon exercise of the
Underwriter's Warrant; (iii) 2,500,000 Shares issuable upon the exercise of
the Class A Warrants; (iv) 317,500 Shares underlying options that have been
granted to employees under the 1995 Option Plan (6,000 of which options were
exercised after March 31, 1998); (v) 75,000 Shares underlying options that
have been granted to the Company's independent directors; (vi) 1,124,999
Shares underlying options that have been granted to consultants and others
(49,724 of which options were exercised after March 31, 1998); and (vii)
182,900 Shares underlying warrants issued to the Underwriter or current
affiliates of the Underwriter in connection with prior private placements.
See "Description of Securities--Stock Options and Warrants."
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Shares since
its inception, and the Board of Directors presently intends to retain all
earnings, if any, for use in the Company's business for the foreseeable future.
Any future determination as to declaration and payment of dividends will be made
at the discretion of the Board of Directors. In addition, the Company may be
prohibited by future loan covenants from the payment of dividends.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, and as adjusted to give effect to the receipt of net proceeds from
sale of the Units offered hereby.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------
ACTUAL AS ADJUSTED(1)
------------- --------------
<S> <C> <C>
Total liabilities.................................................................. $ 44,730 $ 44,730
Shareholders' equity:
Common stock, $.01 par value: 25,000,000 Shares authorized; 2,462,011 Shares
issued and outstanding (actual); and 4,962,011 Shares issued and outstanding
(as adjusted).................................................................. 24,620 49,620
Additional paid-in capital....................................................... 4,628,901 13,557,025
Deficit accumulated during the development stage................................. (2,967,556) (2,967,556)
------------- --------------
Total shareholders' equity................................................. 1,685,965 10,639,089
------------- --------------
Total liabilities and shareholders' equity................................. $ 1,730,695 $ 10,683,819
------------- --------------
------------- --------------
</TABLE>
- ------------------------
(1) As adjusted for the sale of the Units offered hereby and the anticipated
application of the net proceeds therefrom. Does not include: (i) 375,000
Units subject to the Underwriter's Over-allotment Option; (ii) 200,000 Units
issuable upon exercise of the Underwriter's Warrant; (iii) 2,500,000 Shares
issuable upon the exercise of the Class A Warrants; (iv) 317,500 Shares
underlying options that have been granted to employees under the 1995 Option
Plan (6,000 of which options were exercised after March 31, 1998); (v)
75,000 Shares underlying options that have been granted to the Company's
independent directors; (vi) 1,124,999 Shares underlying options that have
been granted to consultants and others (49,724 of which options were
exercised after March 31, 1998); and (vii) 182,900 Shares underlying
warrants issued to the Underwriter or current affiliates of the Underwriter
in connection with prior private placements. See "Description of
Securities--Stock Options and Warrants."
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of the Company have been derived from
the Company's audited financial statements as of June 30, 1996 and 1997, and for
the years then ended, and from the Company's unaudited financial statements as
of March 31, 1998 and for the nine months ended March 31, 1997 and 1998. The
data set forth below should be read in conjunction with the financial statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
SELECTED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 19, 1988
NINE MONTHS (INCEPTION)
YEAR ENDED JUNE 30, ENDED MARCH 31, TO
------------------------ ------------------------ MARCH 31,
1996 1997 1997 1998 1998
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development.................... $ 564,012 $ 526,352 $ 483,062 $ 255,787 $ 1,550,372
General and administrative.................. 201,604 426,818 300,186 623,383 1,554,285
Other income, net............................. 51,531 81,198 64,724 45,700 137,101
----------- ----------- ----------- ----------- -------------
Net loss and deficit accumulated during the
development stage......................... $ (714,085) $ (871,972) $ (718,524) $ (833,470) $ (2,967,556)
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
Net loss per Share--basic and diluted......... $(.57) $(.44) $(.37) $(.41)
Weighted average Shares outstanding........... 1,248,634 1,962,011 1,962,011 2,050,407
</TABLE>
SELECTED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1998
------------- --------------
<S> <C> <C>
Cash and cash equivalents.......................................................... $ 1,198,778 $ 1,569,245
Total assets....................................................................... 1,213,705 1,730,695
Total liabilities.................................................................. 4,551 44,730
Deficit accumulated during the development stage................................... (2,134,086) (2,967,556)
Total shareholders' equity......................................................... 1,209,154 1,685,965
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS. FUTURE
OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS NOT WITHIN THE CONTROL OF THE
COMPANY. THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE COMPANY'S FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED ELSEWHERE IN THE PROSPECTUS, THE RISK FACTORS SECTION
OF THIS PROSPECTUS AND THE OTHER INFORMATION CONTAINED IN THE PROSPECTUS.
OVERVIEW
The Company was founded in July 1988 to develop its blood pressure waveform
analysis technology into a clinically acceptable, non-invasive method for
conducting cardiovascular profiling. From inception, the majority of the
Company's efforts have been focused on incorporating this technology into an
instrument that is intended to allow physicians to reliably and effectively
screen, diagnose and monitor the treatment of patients with vascular disease.
While the Company has developed and tested commercial models of the Product and
in April 1998 commenced marketing the Model CR-2000 for research use only, it
has not sold any of its Product and expects to incur substantial net operating
losses until it achieves a significant level of revenue following FDA clearance
to market the Model DO-2020.
The Company plans to market two models: the Model CR-2000 and the Model
DO-2020. Management believes that the Model CR-2000, intended for research use
only (that is, not for screening, diagnosis, monitoring or determining
treatment), does not require FDA clearance to market, and marketing activities
have commenced. The Model DO-2020, intended for use by physicians to screen,
diagnose and monitor the treatment of patients with vascular disease, is an FDA
regulated medical device. Although a 510(k) Application has been submitted to
the FDA, the Company will be unable to market the Model DO-2020 in the United
States until FDA clearance to market is obtained. At a later date, the Company
intends to pursue foreign registrations and approvals that will allow marketing
of a similar product in foreign markets.
The Company is the sole assignee of one issued United States patent and has
obtained the exclusive rights to commercialize inventions, on a worldwide basis,
described by three other United States patents issued to the University of
Minnesota. These four patents relate to the Company's blood pressure waveform
analysis procedures, its cardiovascular profiling technology, the non-invasive
determination of cardiac output and the overall technology and operation of the
Company's Products. The Company has the right to grant sub-licenses to produce
products and provide services based on the technology. The Company has three
other patent applications that were submitted regarding certain other aspects
and components of the Product. There is no assurance that these patents will be
issued.
DEVELOPMENT STAGE RESULTS OF OPERATIONS
The Company is a development stage company and is not presently generating
any revenues. There can be no assurance that the Company will ever be able to
generate revenues, attain or maintain profitable operations or successfully
implement its business plan or its current development opportunities. As of
March 31, 1998, the Company had a deficit accumulated during the development
stage of $(2,967,556), attributable primarily to research and development and
general and administrative expenses. Until it is able to generate significant
revenues from its activities, the Company expects to continue to incur operating
losses.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
Operating expenses for the fiscal year ended June 30, 1996 were $765,616
compared to $953,170 for the fiscal year ended June 30, 1997. Approximately 74%
of the $765,616 and 55% of the $953,170 total
20
<PAGE>
operating expenses were related to research and development expenses. A further
breakdown of research and development expenses is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Design and development of prototype devices..................... $ 214,038 $ 425,988
Recognized compensation cost for value of stock options granted
in lieu of cash compensation.................................. 349,974 100,364
------------- -------------
Total research and development expenses..................... $ 564,012 $ 526,352
------------- -------------
------------- -------------
</TABLE>
In May 1996, the Company secured the services of a contract design
engineering firm for the design, development and integration of all of the
components necessary to fabricate and manufacture the Product. In coordination
with this firm, the Company completed a pilot production run to evaluate the
design and functionality of hardware components from a manufacturing and user
standpoint. For the fiscal years ended June 30, 1996 and June 30, 1997,
respectively, approximately 62% of the $214,038 and 81% of the $425,988 were
paid to this contract design engineering firm.
The following is a summary of the major categories included in general and
administrative expenses:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Wages and related expenses...................................... $ 84,548 $ 176,045
Patent expenses................................................. 21,012 21,019
Outside consultants............................................. 31,295 133,663
Insurance--general and health................................... 5,107 26,008
Travel.......................................................... 4,785 4,689
Other--miscellaneous............................................ 54,857 65,394
------------- -------------
Total general and administrative expenses................... $ 201,604 $ 426,818
------------- -------------
------------- -------------
</TABLE>
For the periods shown above, the Company added two new employees, one in May
1996 and one in July 1996.
Interest income was $53,237 and $81,198 for the fiscal years ended June 30,
1996 and June 30, 1997, respectively. Private placements of the Company's Shares
yielded net proceeds of approximately $2,431,000 in the fiscal year ended June
30, 1996.
Net loss was $(714,085) and $(871,972) for the fiscal years ended June 30,
1996 and June 30, 1997, respectively. For the fiscal year ended June 30, 1996,
basic and dilutive net loss per Share was $(.57), based on weighted average
Shares outstanding of 1,248,634. For the fiscal year ended June 30, 1997, basic
and dilutive net loss per Share was $(.44), based on weighted average Shares
outstanding of 1,962,011.
NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
Operating expenses for the nine months ended March 31, 1997 were $783,248
compared to $879,170 for the nine months ended March 31, 1998. Approximately 62%
of the $783,248 and 29% of the $879,170
21
<PAGE>
total operating expenses were related to research and development expenses. A
further breakdown of research and development expenses is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Design and development of prototype devices.................. $ 407,789 $ 168,454
Recognized compensation cost for value of stock options
granted in lieu of cash compensation....................... 75,273 87,333
-------------- --------------
Total research and development expenses.................. $ 483,062 $ 255,787
-------------- --------------
-------------- --------------
</TABLE>
For the nine months ended March 31, 1997 and March 31, 1998, respectively,
approximately 84% of the $407,789 and 30% of the $168,454 were paid to the
Company's outside contract design engineering firm.
The following is a summary of the major categories included in general and
administrative expenses:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Wages and related expenses................................... $ 129,722 $ 262,096
Patent expenses.............................................. 13,637 24,209
Outside consultants.......................................... 102,559 110,221
Rent--building and utilities................................. -- 32,037
Insurance--general and health................................ 23,179 22,561
Travel....................................................... 1,426 8,559
Legal and accounting......................................... 3,400 83,813
Other--miscellaneous......................................... 26,263 79,887
-------------- --------------
Total general and administrative expenses................ $ 300,186 $ 623,383
-------------- --------------
-------------- --------------
</TABLE>
The Company's number of employees increased from three in the nine months
ended March 31, 1997 to five in the nine months ended March 31, 1998. In
September 1997, the Company hired its President, Greg H. Guettler. Effective
November 1997, the Company leased approximately 6,900 square feet of commercial
office and light assembly space in Eagan, Minnesota.
Interest income was $64,724 and $45,700 for the nine months ended March 31,
1997 and March 31, 1998, respectively. Private placements of the Company's
Shares yielded net proceeds of approximately $1,223,000 in the nine months ended
March 31, 1998.
Net loss was $(718,524) and $(833,470) for the nine months ended March 31,
1997 and March 31, 1998, respectively. For the nine months ended March 31, 1997,
basic and dilutive net loss per Share was $(.37), based on weighted average
Shares outstanding of 1,962,011. For the nine months ended March 31, 1998, basic
and dilutive net loss per Share was $(.41), based on weighted average Shares
outstanding of 2,050,407.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents had a net decrease of $781,514 from June 30, 1996
to June 30, 1997. The significant elements of this change were as follows: CASH
USED IN OPERATING ACTIVITIES--net loss, as adjusted for non-cash items, of
$(761,983); decrease in accounts payable of $18,989. From June 30, 1997 to March
31, 1998, cash and cash equivalents had a net increase of $370,467. The
significant elements of this change were as follows: CASH USED IN OPERATING
ACTIVITIES--net loss, as adjusted for non-cash items, of $(737,546); increase in
prepaid expenses--$31,287; increase in other assets--$36,640; increase in
accounts
22
<PAGE>
payable--$40,179; CASH USED IN INVESTING ACTIVITIES--purchase of property and
equipment--$87,487; CASH PROVIDED BY FINANCING ACTIVITIES--issuance of
Shares--$1,222,948.
The Company estimates that the net proceeds of the Offering should satisfy
its cash requirements for 18 to 24 months. The Company's business plan and
financing needs are subject to change depending on, among other things, market
conditions, timing of the receipt of clearance from the FDA to market the Model
DO-2020, business opportunities and cash flow from operations. See "Risk
Factors--Limited Financial Resources; Need for Additional Financing" and "Use of
Proceeds."
Pending application of the net proceeds, such proceeds will be invested in
short-term, high quality, interest-bearing instruments.
In addition to the net proceeds to be derived from the sale of the Units,
the Company may derive over a period of time up to $13,750,000 from the exercise
of the Class A Warrants included in the Units. At any time until four years
after the Effective Date, each Class A Warrant entitles the holder to purchase
one Share at an exercise price of $5.50 per Warrant, subject to adjustment. The
Class A Warrants are subject to redemption by the Company for $.01 per Warrant
at any time commencing 90 days after the Effective Date, provided that the
closing bid price of the Shares exceeds $6.50 (subject to adjustment) for 14
consecutive days. Written notice must precede redemption by 30 days and must be
sent within 10 business days of the 14 consecutive trading day period. Any
amounts, if any, that the Company derives from the exercise of such Class A
Warrants will be used in connection with the Company's development
opportunities, business plan activities and/or working capital requirements.
POTENTIAL IMPACT OF YEAR 2000
The Company has considered the potential impact of the year 2000 for its
internal information systems, external integration problems and its current
Product. The Company believes that its internal information systems and current
Product are either year 2000 compliant or will be so prior to the year 2000
without incurring substantial costs. There can be no assurance, however, that
the Company will not experience unexpected costs and delays in achieving year
2000 compliance for its internal information systems, external integration
problems and its current Product, which could result in a material adverse
effect on the Company's future results of operations.
23
<PAGE>
BUSINESS
INTRODUCTION
The Company is engaged in the design, development, assembly and marketing of
a proprietary medical device that it believes will non-invasively detect subtle
changes in the elasticity of large and small arteries. Vascular compliance or
elasticity has been researched for many years and clinical studies suggest that
a lack of arterial elasticity is an early indicator of vascular disease. The
Company has developed two models of the Product: one for research purposes only
(that is, not for screening, diagnosis, monitoring or determining treatment)
(the "Model CR-2000"), which the Company is currently marketing, and one for
primary care physicians and other health care professionals (the "Model
DO-2020"), which will require FDA clearance to market. The Model DO-2020
provides quantitative measurements of 14 cardiovascular parameters, which the
Company believes will provide clinically valuable information to physicians and
researchers in screening individuals who may be at risk for future vascular
disease and in monitoring the effectiveness of treatment of individuals with
previously diagnosed vascular disease. The Company expects that the Model
DO-2020 will eventually generate the majority of its revenues.
BACKGROUND AND GENERAL INFORMATION
VASCULAR DISEASE
Disease of the blood vessels (vascular disease) is the leading cause of
death and a primary cause of heart attacks and strokes in the United States.
Vascular disease can manifest itself in many ways: hypertension, coronary artery
disease, peripheral artery disease, atherosclerosis, aneurysm, stroke, kidney
failure and retinopathy. According to a Fall 1997 memo by the National Heart,
Lung and Blood Institute, 58 million Americans have some form of cardiovascular
disease. Hypertension is the leading cardiovascular disease. Coronary artery
disease affects 13.9 million Americans and is the nation's number one killer.
Stroke is ranked number three. According to a 1997 release by the National
Heart, Lung and Blood Institute, approximately 50 million Americans
(approximately 28% of the adult population in the United States) have been
diagnosed as suffering from hypertension, typically defined as a blood pressure
greater than 140 millimeters of mercury ("mmHg") systolic pressure and/or
greater than 90 mmHg diastolic pressure, with nearly 75% of those (37.5 million)
not properly treated for the condition and thus facing significantly increased
risk for heart and kidney disease and strokes. According to the Johns Hopkins
White Papers on Hypertension (1998), an additional 30 million Americans are
estimated to have "high-normal hypertension" (sometimes referred to as
"borderline hypertension"), defined as a blood pressure reading at or slightly
above 130/85 mmHg. These individuals are twice as likely to develop hypertension
and they have a greater risk of cardiovascular events than people with lower
blood pressure. In fact, high-normal blood pressure is so common in the United
States that the majority of cardiovascular events attributable to high blood
pressure occur in people who demonstrate this condition.
Hypertension can easily go undetected and has been called the "silent
killer" because it usually produces no symptoms until after it seriously damages
the heart, kidneys, brain or some other organ. According to the Archives of
Internal Medicine (March 24, 1997), high blood pressure is of particular concern
to older adults, as levels increase with age, and is present in more than half
of Americans age 60 or older. The seriousness of this problem increases as the
population grows older because individuals with sustained high blood pressure
have an increased overall death rate from stroke, heart attack and kidney
disease.
Hypertension is a deadly disease that damages both large and small arteries,
leading to pathological changes in the tissues or organs supplied by these
damaged arteries, and accelerating the development of atherosclerosis (the
formation of plaque and the accumulation of fatty deposits lining the walls of
the artery which affect blood flow) in large blood vessels, and the arteries
supplying blood to the brain, heart, kidneys and legs. Atherosclerotic plaques
can cause mini-strokes (transient ischemic attacks) due to diminished blood flow
(ischemia) to parts of the brain; angina from partly obstructed coronary
arteries; or pain in the leg muscles when walking, a result of poor blood supply
to the legs (peripheral arterial disease).
24
<PAGE>
Blood clots, which tend to occur at the sites of atherosclerotic narrowing, can
totally block a vessel and cause a stroke or heart attack.
[ILLUSTRATION OF THREE CROSS-SECTIONS OF THE ARTERY WHICH SHOWS A
NORMAL ELASTIC ARTERY, AN ARTERY AT EARLY STAGES OF ATHEROSCLEROSIS
AND AN ARTERY AT AN ADVANCED STAGE OF ATHEROSCLEROSIS]
AN ARTERY IS MADE UP OF THREE LAYERS. THE INNER LINING OF THE VESSEL
WALL (CLOSEST TO THE BLOOD) IS ONLY AS THICK AS A SINGLE CELL AND IS
PARTICULARLY SMOOTH TO ALLOW BLOOD TO FLOW EASILY. THIS LAYER IS VERY
DELICATE AND VULNERABLE TO DAMAGE FROM HIGH BLOOD PRESSURE, HIGH
CHOLESTEROL LEVELS, SMOKING AND DIABETES. THE MIDDLE LAYER IS COMPOSED
OF SMOOTH MUSCLE CELLS WHICH CONTRACT AND RELAX TO REGULATE THE AMOUNT
OF BLOOD FLOW. THE OUTER LAYER IS MADE UP OF VARIOUS CONNECTIVE TISSUES
THAT SURROUND AND PROTECT THE ARTERY. FIGURE A SHOWS A NORMAL ELASTIC
ARTERY. FIGURE B SHOWS EARLY STAGES OF ATHEROSCLEROSIS WHERE CHANGES IN
THE ARTERIAL WALL HAVE BEGUN TO IMPACT BLOOD FLOW AND REDUCE ARTERIAL
ELASTICITY. FIGURE C SHOWS AN ADVANCED STAGE OF ATHEROSCLEROSIS WHERE
ARTERIAL ELASTICITY IS REDUCED AND WHERE PLAQUE FORMATION HAS RESTRICTED
BLOOD FLOW.
A number of risk factors for atherosclerosis have been identified, including
elevated blood pressure, elevated cholesterol level, smoking, diabetes and
family history of atherosclerosis. Clinical events associated with
atherosclerosis, including heart attacks (myocardial infarction), strokes,
angina (myocardial ischemia), peripheral vascular ischemia (claudication) and
renal failure are late manifestations of the disease as a result of plaque
formation that impinges on the blood vessel lumen. The absence of a clinically
applicable method to detect the presence of atherosclerosis prior to plaque
obstruction of the lumen has led to widespread efforts to identify the risk
factors in the entire population and to intervene on those who harbor such risk
factors. The problem with this approach is two-fold: (a) patients without these
risk factors will not be identified even though up to half of the
atherosclerotic clinical events occur in individuals without any of the
traditional risk factors; and (b) patients who have one or more risk factors may
be subjected to therapy even though they do not have the atherosclerotic process
the therapy is designed to inhibit.
Atherosclerosis begins in the wall of the artery with an early abnormality
in the lining of the arterial wall called the endothelium. The endothelium helps
to maintain the flexibility or elasticity of the artery and normally inhibits
the accumulation of lipid and cellular deposits into the arterial wall of the
artery. Abnormal function of the endothelium and the associated structural
changes in the wall result in a loss of elasticity of the small arteries.
Detection of this loss in elasticity can identify individuals with abnormal
arterial structure and function long before plaque formation can cause morbid
cardiovascular events. Furthermore, demonstration of normal arterial structure
and function might suggest that the individual does not have early
atherosclerosis and may not need aggressive risk factor management.
THE CLINICAL PROBLEM
Cardiovascular specialists spend considerable effort on evaluating heart
function, including electrocardiograms (EKG's), echocardiograms and stress
tests, but have been unable to assess the functional and structural abnormality
of the arteries prior to the late phase of arterial obstruction (as determined
by angiography). Blood pressure measurement is a very insensitive and
non-specific means of assessing the condition of the arteries. Traditionally, a
patient's arterial blood pressure is obtained clinically by using a
sphygmomanometer which involves a cuff placed on the patient's upper arm that is
pressurized to occlude blood flow. As the cuff pressure is gradually reduced,
sounds are generated in the artery below the cuff and
25
<PAGE>
these are identified by using a stethoscope placed over that artery. The initial
occurrence of sound as the cuff is deflated reflects the "systolic blood
pressure" or the highest pressure generated during the heart's contraction, and
the pressure at which the sounds finally disappear is taken as the "diastolic
blood pressure," or the lowest pressure reached before the next cardiac cycle.
Although an elevated blood pressure is associated with a higher risk for
cardiovascular events, the elevated blood pressure is not the disease but merely
a crude marker for the likelihood of disease. Furthermore, blood pressure itself
is highly variable from moment to moment and day to day. Measurement of
ambulatory blood pressure throughout the day provides a more accurate assessment
of the actual pressure but it is a cumbersome and expensive technique and still
does not demonstrate the disease in the blood vessels it is designed to
identify. Elevated cholesterol, especially an increase in the low-density
lipoproteins/high-density lipoproteins ("LDL/HDL") ratio, also is associated
with a higher risk for morbid cardiovascular events, but this measurement does
not identify blood vessel disease but rather identifies a factor that might
accelerate blood vessel disease if it is present. Thus, the only methods in
routine use by physicians today to identify individuals who need treatment are
methods that are neither sensitive nor specific in detecting the blood vessel
disease that leads to morbid cardiovascular events.
THE COMPANY'S SOLUTION
The traditional systolic-diastolic method for measuring blood pressure
provides the physician with very limited clinical information about the
patient's vascular health. In contrast, the Company's Model DO-2020 measures a
blood pressure waveform produced by the beating heart that the Company believes
can be analyzed to provide an assessment of arterial elasticity. When the aortic
valve closes after the heart has ejected its stroke volume of blood (the blood
ejected during each heart beat), the decay or decrease of blood pressure within
the arteries prior to the next heart beat forms a pressure curve or waveform
which is indicative of arterial elasticity. Subtle changes in arterial
elasticity introduce changes in the arterial system that are reflected in the
arterial blood pressure waveform and research suggests that these changes in the
function and structure of the arterial wall precede the development of coronary
artery disease, or the premature stiffening of the small arteries which appears
to be an early marker for cardiovascular disease.
AN ARTERIAL BLOOD PRESSURE WAVEFORM
[DIAGRAM OF AN ARTERIAL BLOOD PRESSURE WAVEFORM]
WHEN THE HEART'S AORTIC VALVE CLOSES AFTER THE HEART HAS EJECTED ITS
STROKE VOLUME OF BLOOD, THE DECREASE OF BLOOD PRESSURE WITHIN THE
ARTERIES PRIOR TO THE NEXT HEART BEAT FORMS A "PULSE CONTOUR" OR "BLOOD
PRESSURE WAVEFORM" THAT, WHEN ANALYZED BY THE COMPANY'S MODEL DO-2020,
MAY PROVIDE A MEASUREMENT OF ARTERIAL ELASTICITY. BLOOD PRESSURE CUFF
MEASUREMENTS, WHICH ARE LIMITED TO A SINGLE HIGH (SYSTOLIC) AND SINGLE
LOW (DIASTOLIC) VALUE, DO NOT CONVEY THE DYNAMIC NATURE OF THE BODY'S
ARTERIES.
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Incorporating the physiological phenomena associated with blood pressure
waveforms, Drs. Jay N. Cohn and Stanley M. Finkelstein, Professors at the
University of Minnesota in Minneapolis and two of the founders of the Company,
developed in the early 1980's a method for determining a measure of elasticity
in both large and small arteries. The technique involved an invasive procedure
that placed a catheter connected to a pressure transducer into the patient's
artery in order to obtain a blood pressure waveform that could be analyzed using
a modified Windkessel model, a well-established electrical analog model which
describes the pressure changes during the diastolic phase of the cardiac cycle
in the circulatory system.
MODIFIED WINDKESSEL MODEL
[DIAGRAM OF A MODIFIED WINDKESSEL MODEL]
A MODIFIED WINDKESSEL MODEL, A WELL-ESTABLISHED ELECTRICAL ANALOG MODEL
WHICH DESCRIBES PRESSURE CHANGES THAT OCCUR DURING THE DIASTOLIC PHASE
OF THE CARDIAC CYCLE, IS USED BY THE COMPANY TO DEFINE ARTERIAL
VASCULATURE PROPERTIES.
This "blood pressure waveform" or "pulse contour" analysis method provided
an independent assessment of the elasticity or flexibility of the large arteries
which expand to briefly store blood ejected by the heart, and of the small and
very small arteries (arterioles) which produce oscillations or reflections in
response to the blood pressure waveform generated during each heart beat.
AORTA
<TABLE>
<S> <C> <C>
SYSTOLE
WHEN PRESSURE WITHIN THE DIASTOLE
HEART RISES, THE AORTIC WHEN PRESSURE WITHIN THE
VALVE IS FORCED OPEN AND HEART FALLS, THE AORTIC
BLOOD IS EJECTED CAUSING VALVE CLOSES AND THE WALLS
THE WALLS OF THE AORTA TO [ILLUSTRATION OF THE HUMAN AORTA AND HEART] OF THE AORTA RECOIL TO
BE STRETCHED TO ACCOMMODATE THEIR ORIGINAL POSITION,
THE EXPELLED BLOOD, STORING PROPELLING BLOOD OUTWARDS,
ENERGY FROM THE HEART'S AWAY FROM THE HEART.
CONTRACTIONS
</TABLE>
A HEALTHY, ELASTIC AORTA ACTS AS A SUBSIDIARY PUMP TO THE HEART, ITS
WALLS EXPANDING TO STORE THE ENERGY FROM THE HEART'S CONTRACTION AND
THEN RECOILING TO ITS ORIGINAL POSITION FORCING BLOOD ONWARD WHEN THE
HEART IS RESTING.
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<PAGE>
By assessing the elasticity of the arterial system, clinical investigators
have been able to identify a reduction in arterial elasticity in patients
without evidence of traditional risk factors, suggesting the early presence of
vascular disease. Furthermore, clinical research data has demonstrated that
individuals with heart failure, coronary artery disease, hypertension and
diabetes, typically exhibit a loss of arterial elasticity. These abnormal blood
vessel changes often appear to precede overt signs of cardiovascular disease and
the occurrence of a heart attack or stroke by many years. Clinical investigators
have also demonstrated an age-related loss of elasticity of both the large and
small arteries suggesting that premature stiffening of an individual's arteries
is an apparent marker for the early onset of cardiovascular disease.
ILLUSTRATION OF CIRCULATORY SYSTEM
[ILLUSTRATION OF HUMAN CIRCULATORY SYSTEM]
THE WALLS OF ALL LARGE AND SMALL ARTERIES THROUGHOUT THE BODY EXPAND AND
CONTRACT AS BLOOD PRESSURE WAVES FROM THE HEART PASS THROUGH THEM. AN
ARTERIAL SYSTEM THAT IS COMPOSED OF ELASTIC CONDUITS AND HIGH RESISTANCE
TERMINALS CONSTITUTES A HYDRAULIC FILTER THAT CONVERTS THE INTERMITTENT
OUTPUT OF THE HEART INTO A STEADY CAPILLARY FLOW. CHANGES IN ARTERIAL
ELASTICITY INTRODUCE CHANGES IN THE ARTERIAL SYSTEM THAT THE COMPANY
BELIEVES ARE REFLECTED IN THE BLOOD PRESSURE WAVEFORM ANALYZED BY THE
COMPANY'S PRODUCT.
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THE PRODUCT
Although the aorta and large arteries can be visualized by various
non-invasive techniques, such as radiology, magnetic resonance imaging ("MRI"),
computerized tomography ("CT") scans and ultrasonography, the Company believes
there is currently no clinical way to evaluate the elasticity of the small and
very small arteries which appear to be the first to become altered in
hypertension and other vascular diseases. For this reason, the Company sought an
easy to use, non-invasive solution that could assess the status of these small
blood vessels.
The Product incorporates a patented and proprietary instrument and
procedures which painlessly and non-invasively collects 30 seconds of blood
pressure waveform data, automatically analyzes this data by means of an embedded
computer and generates a CardioVascular Profile Report. Both models of the
Product consist of four primary components: (a) a non-invasive arterial pulse
pressure sensor placed over the radial artery at the wrist; (b) an upper-arm
blood pressure cuff connected to an oscillometric pressure module; (c) an
enclosure which contains a computer, other electronics and software programs;
and (d) an external printer.
PRODUCT MODELS
<TABLE>
<CAPTION>
USE BASIC FEATURES SPECIAL FEATURES
<S> <C> <C> <C>
MODEL DO-2020 Cardiovascular The Product non-inva- - A brief medical
(DOCTOR'S OFFICE) Specialists, sively collects blood history of the patient
Cardiologists, Gen- pressure waveform is recorded by the
eral and Family data, performs a pulse nurse or technician.
Practice Physicians, contour analysis on - An internal modem
Internists, the digitized data, transmits data via a
Nephrologists, etc. and generates a toll- free telephone
CardioVascular Profile line to CDMF.
Report. Some Report - Upon FDA clear-
parameters are ance, this model may
displayed on the be used to screen,
screen, and the entire diagnose and monitor
Report is generated by the treatment of
an external printer. patients.
MODEL CR-2000 Pharmaceutical Compa- The Product non-inva- - A standard output
(CLINICAL nies, Academic sively collects blood port is included to
RESEARCH) Research Centers, pressure waveform allow Research
Medical Device data, performs a pulse Investigators to send
Manufacturers, Govern- contour analysis on blood pressure
ment Research Centers, the digitized data and waveform data and
etc. generates a research analyzed
version of a CardioVascular Profile
CardioVascular Profile Report results to
Report. Some Report computer systems
parameters are within their research
displayed on the facilities.
screen, and the entire
Report is generated by
an external printer.
</TABLE>
The Model DO-2020 will initially be marketed to cardiovascular specialists,
cardiologists, general and family practitioners, internists, nephrologists and
other physicians in medical practices throughout the United States. Because the
Model DO-2020 provides an index of a patient's arterial elasticity, the
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<PAGE>
Company believes it could permit physicians to screen, diagnose and monitor the
treatment of patients with cardiovascular disease with more reliability than
other methods currently available. With the Model DO-2020, physicians could have
a simple, painless and non-invasive method to obtain vital information on the
vascular status of patients in support of their efforts to identify individuals
at risk for developing cardiovascular disease and to more effectively monitor
the treatment of patients receiving cardiovascular therapy. The Company expects
that the Model DO-2020 will eventually generate the majority of its revenues.
The Model CR-2000 is being marketed to medical directors and research
investigators at pharmaceutical firms and academic research centers on a
worldwide basis. These organizations are in the business of conducting research
on a variety of therapies and have a strong interest in a non-invasive means of
gathering information from human research subjects.
<TABLE>
<S> <C>
MODEL DO-2020 CARDIOVASCULAR PROFILE REPORTS
The CardioVascular Profile Report provides
the following 14 cardiovascular values:
- - A 1.5 Second Blood Pressure Waveform Graph [Reproduction
- - Systolic Blood Pressure (mmHg) of sample
- - Diastolic Blood Pressure (mmHg) CardioVascular
- - Mean Arterial Pressure (mmHg) Profile
- - Pulse Rate (beats/min) Report]
- - Cardiac Ejection Time (msec)
- - Stroke Volume (ml/beat)
- - Stroke Index Volume (ml/beat/m2)
- - Estimated Cardiac Output (L/min)
- - Estimated Cardiac Index (L/min/m2)
- - Large Artery Elasticity Index (ml/mmHg X
10)
- - Small Artery Elasticity Index (ml/mmHg X
100)
- - Systemic Vascular Resistance
(dynes-sec-cm-5)
- - Total Vascular Impedance (dynes-sec-cm-5)
</TABLE>
Clinical research suggests that the arterial elasticity indices can be used
to determine the clinical age of the body's arteries and that these values, when
viewed in combination with a medical history, physical examination and/or other
tests, may provide a meaningful picture of vascular health for patients 15 years
of age and older. The large artery elasticity index and the small artery
elasticity index are of particular clinical importance in this assessment. These
indices indicate the elasticity or flexibility of the patient's large and small
arteries, which may be beneficial in distinguishing between individuals with
high-normal blood pressure and those with more severe vascular disease. These
indices also are expected to provide valuable information to physicians in
monitoring the effectiveness of treatment provided to patients with confirmed
cardiovascular disease as well as screening patients who may be at risk for
future vascular disease and/or life-threatening cardiovascular events.
The Model DO-2020 is intended to transmit patient information to a CDMF
installed on the Company's premises. The Company's current working model of the
CDMF has limited communication and storage capability, sufficient only to
conduct FDA clinical trials. A CDMF capable of handling multiple simultaneous
physician transmissions integrated with the Company's tracking, billing and
production systems, and capable of storing cardiovascular profile information on
several hundred thousand patients from different age groups and with different
disease states is currently being designed and developed. The Company expects to
compare the information transmitted to data from age and gender-matched patients
free of disease in order to establish a range of clinical information useful to
both the
30
<PAGE>
Company and physicians. The Company believes the database may also prove useful
to physicians in terms of archiving patient profiles and trending patient data
over time, enhancing the accuracy of ranges for report parameters, and providing
continuity of CardioVascular Profile Reports for patients who may have been seen
over a period of time by several physicians in different parts of the United
States. If CDMF design or development is delayed, the Company's efforts to
market the DO-2020 would also be significantly delayed, which would materially
adversely affect the Company's financial performance. See "Risk Factors--Lack of
Development of CDMF."
Following completion of the CDMF, the Company may offer an Internet link to
physicians (with security protection) via a Company web site, allowing
physicians to make direct inquiries into the database regarding their patient
records. The Company intends to provide primary care physicians and other health
care professionals with toll-free telephone access to Company personnel to
obtain technical Product support.
ANTICIPATED CLINICAL BENEFIT OF CARDIOVASCULAR PROFILES
While current methods focus on major health and genetic risk factors
associated with the development of cardiovascular disease, risk factors such as
smoking, elevated cholesterol levels, diabetes, obesity, lack of exercise, high
blood pressure and a family history of cardiovascular disease are merely
statistical approximations of the likelihood for development of the disease and
do little to provide an accurate indication of blood vessel abnormalities.
According to the Johns Hopkins White Papers on Coronary Heart Disease (1998),
for approximately 20% to 40% of patients, a heart attack is their first sign of
cardiovascular disease. A patient possessing such risk factors has a greater
probability of experiencing a life-threatening event than a patient without
them.
In contrast, conducting a cardiovascular profile could provide physicians
with specific information on the status of an individual patient's vascular
system. The Company anticipates that patients identified with abnormal
cardiovascular profiles could be provided aggressive and immediate treatment
versus those who may only have a risk factor(s) but a relatively normal
cardiovascular profile. When vascular disease is diagnosed in its early stages,
the physician has an opportunity to intervene with lifestyle alterations or
certain drugs, such as lipid lowering therapy, calcium channel blockers,
angiotensin-converting-enzyme ("ACE") inhibitors or nitrate compounds, which may
slow or reverse the abnormal arterial function. Early detection, therefore, may
provide the opportunity for aggressive intervention that may prevent heart
attacks, strokes and other cardiovascular events.
The Company does not propose that cardiovascular risk factors or traditional
blood pressure measurements be ignored when clinically evaluating patients for
the presence of vascular disease. The Company believes that non-invasively
obtained arterial elasticity measurements should be utilized to supplement
traditional blood pressure measurements and risk factor assessments, and thereby
identify much more precisely the early stages of vascular disease in patients.
THE ADVANTAGES: POTENTIAL BENEFICIAL MEDICAL OUTCOMES FOR PATIENTS AND PAYERS
During the last several years, research investigators have evaluated
hundreds of "normal" subjects as well as more than 250 patients with
cardiovascular disease. They have summarized their clinical research data in
order to establish the approximate "normal range" for arterial elasticity and
other cardiovascular parameters. Patients with normal blood pressure have been
identified who have "premature stiffening" of their small and very small
arteries. Without the benefit of a CardioVascular Profile Report, it is possible
that such patients would be considered "clinically normal and asymptomatic." It
is believed that the Model DO-2020 may help physicians identify these patients
and to intervene therapeutically.
Further, the Company believes there may be an advantage to using the Model
DO-2020 to clinically evaluate high-normal hypertensive patients in order to
decide who requires immediate and aggressive treatment versus those who might
merely need to be monitored on a periodic basis. This would be an important
clinical distinction which cannot be easily determined in medical practice
today. Some patients,
31
<PAGE>
therefore, are being treated needlessly despite cost containment concerns and
despite the potential for drug side effects (such as liver dysfunction, sexual
impotence, etc.). Further, it is possible that many other patients with normal
blood pressure readings who should perhaps be treated for a latent hypertensive
condition of their arteries, are being misdiagnosed, thereby leaving them at
risk for progressive and severe cardiovascular disease.
CLINICAL RESEARCH STUDIES
To date, the core blood pressure waveform analysis method (which has been
incorporated into the Company's Product) has been used to clinically evaluate
more than 2,500 patients and research subjects, many of whom had a confirmed
diagnosis of cardiovascular disease. The clinical research studies involving
these patients and subjects were conducted at one of several clinics or medical
facilities at the University of Minnesota Hospital & Clinic, the Minneapolis
Veterans Administration Medical Center and other Clinical Investigator sites.
Some of the sites which have collaborated with the Company include:
- The University of California--Irvine, California
- Veterans Administration Medical Center, Irvine, California
- Tulane University Medical Center, New Orleans, Louisiana
- Louisiana State University, New Orleans, Louisiana
- Duke University Medical Center, Raleigh-Durham, North Carolina
- Wayne State University Medical Center, Detroit, Michigan
- Indiana University Medical Center, Indianapolis, Indiana
- Queen's University Hospital, Belfast, Northern Ireland
- Ghent University Hospital in Belgium
- The Hypertension Center at the Wolfson Medical Center in Holon, Israel
- Berman Research Center, Minneapolis, Minnesota
Some of these sites initially acquired blood pressure waveform data
utilizing invasive means, and, more recently, by using a non-invasive approach.
Clinical research studies continue to be conducted in conjunction with
nationwide governmental investigations, experiments by independent researchers
and as part of clinical trials for pharmaceutical firms. Some of these
investigations are being undertaken by members of the Company's Scientific and
Clinical Advisory Board.
The cardiovascular profile data obtained during these clinical research
studies have been summarized and presented formally at numerous scientific and
medical meetings during the last decade. The data have also been presented in
approximately 30 peer-reviewed articles published in medical journals.
MARKETS
Within the United States health care industry, which is estimated at
approximately $1 trillion by the United States Department of Health and Human
Services (December 15, 1997), cardiovascular disease is expected to account for
$274 billion (27%) in 1998, with approximately $26 billion of that spent on
physician and other professional services, according to American Heart
Association estimates. Although significant advances have been made in the
prevention and treatment of heart attacks and strokes during the past few
decades, these diseases remain among the leading causes of death in the United
States and many other countries.
- According to the American Heart Association, cardiovascular disease is the
leading cause of death in the United States accounting for more than
one-half of all deaths (over one million) every year.
- More than one million Americans suffer heart attacks annually--the first
sign of cardiovascular disease in 20% to 40% of patients. (Sources: 1997
Heart and Stroke Statistical Update, American Heart Association (1996);
Johns Hopkins--Coronary Heart Disease)
- According to a 1997 release by the National Heart, Lung and Blood
Institute, approximately 50 million adults (approximately 28% of the adult
American population) are currently diagnosed
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<PAGE>
with high blood pressure, with nearly 75% of those (37.5 million) not
properly treated for the condition.
- According to the Johns Hopkins White Papers on Hypertension (1998), an
additional 30 million American adults are estimated to have "high-normal
hypertension."
- Hypertension is present in more than 50% of Americans age 60 or older.
(Source: Archives of Internal Medicine, Volume 157, Number 6, March 24,
1997.)
- Stroke accounts for about one in every 15 deaths in the United States.
(Sources: 1997 Health Care Almanac & Yearbook; 1997 Heart and Stroke
Statistical Update, American Heart Association)
- According to a March 1997 survey by the Pharmaceutical Research and
Manufacturers of America, research expenditures within the United States
by all research-based pharmaceutical companies is estimated at $15 billion
in 1997.
- Cardiovascular research and development is estimated to account for
approximately $3.1 billion to $3.97 billion (or 16% to 21% of all United
States research and development spending in 1997). (Source: Parexel's
Pharmaceutical R&D Statistical Sourcebook (1997))
Because of the magnitude of the impact which cardiovascular disease has on
the United States population, the Company believes it has a significant
opportunity for providing a more accurate and effective means with which to
screen, diagnose and monitor the treatment of patients with cardiovascular
disease. Furthermore, cardiovascular disease is a major cause of death in many
other developed countries throughout the world.
THE PRACTICING PHYSICIAN MARKET
The Model DO-2020 is intended to be used by physicians or trained medical
personnel. The Company's focus will be on the practice of cardiovascular
medicine within these facilities and, in particular, toward those health care
professionals who are directly involved in the screening, diagnosis, treatment
and monitoring of patients with cardiovascular disease. Current AMA estimates
indicate there are approximately 650,000 active physicians in the United States,
approximately 250,000 of which fall into the target market as potential users of
the Model DO-2020:
- Approximately 120,000 internal medicine physicians
- Approximately 80,000 general and family practice physicians
- Approximately 30,000 medical sub-specialty physicians
- Approximately 20,000 cardiovascular disease specialists
THE RESEARCH MARKET
The Model CR-2000 is being marketed to medical directors and research
investigators at pharmaceutical firms, academic centers, and/or medical device
manufacturers on a worldwide basis. The Company believes that these research
centers, especially those in the United States, have a strong interest in a non-
invasive means of gathering information from human research subjects.
According to the Tufts Center for the Study of Drug Development and a
February 1993 report by the U.S. Congressional Office of Technology Assessment,
it costs a company, on average, $359 million and about fifteen years to get one
new drug from the laboratory to the pharmacist's shelf. According to the
Pharmaceutical Research and Manufacturers of America, only five in 5,000
chemical compounds that enter preclinical testing are ultimately subjected to
human testing and only one in five of those is ultimately approved. The Company
believes the Model CR-2000 provides a new means for gathering information on
additional variables during research.
The clinical research market is diverse, with pharmaceutical companies, the
federal government and medical device manufacturers funding the vast majority of
research. According to annual surveys by the Pharmaceutical Research and
Manufacturers of America, pharmaceutical companies spent an estimated
33
<PAGE>
$13.6 billion and $15 billion on all R&D within the United States in 1996 and
1997, respectively. Of this amount, spending on clinical development in Phases I
to IV of research was approximately $4.8 billion in 1996. In most cases, the
direct costs of physician payments and the costs of additional medical care due
to the trial are paid directly to the provider organization by the
pharmaceutical study sponsor.
The Company has identified four markets for the Model CR-2000:
- PHARMACEUTICAL COMPANIES. There are approximately 1,950 firms conducting
clinical research trials in the United States. Nonetheless, according to
Parexel's Pharmaceutical R&D Statistical Sourcebook 1997, a small number
of pharmaceutical firms in the United States accounted for the majority of
all research and development spending. These pharmaceutical firms often
seek ways for gathering information on additional variables during
research.
- ACADEMIC CENTERS. Hundreds of universities throughout the world conduct
research under grants supplied by government agencies, disease management
foundations and private sponsors. Universities with research centers
conducting clinical trials in the areas of preventative cardiology,
nephrology and epidemiology are a particular target market for the Model
CR-2000.
- MEDICAL DEVICE MANUFACTURERS. Manufacturers of medical devices are
continually testing their devices to gather information on additional
variables during research.
- THE U.S. GOVERNMENT. The National Institutes of Health and Veterans'
Affairs Medical Centers, the Agency for Health Care Policy and Research
and the Centers for Disease Control and Prevention conduct large-scale
research projects. These organizations represent a market opportunity for
the Model CR-2000.
The Company anticipates that use of the Model CR-2000 in research settings
will not only provide information contributing to the advancement of significant
cardiovascular research, but will likely lead to the publication of favorable
articles in respected medical journals that will likely promote a greater
worldwide awareness of the importance of vascular elasticity and the
capabilities of the Company's Product within the medical community.
MARKETING STRATEGY
The Company's primary objective is to establish the Product as the standard
of non-invasive patient cardiovascular screening and the predominant methodology
used for the diagnosis and monitoring of patients with cardiovascular diseases.
MODEL DO-2020
Once the Model DO-2020 obtains FDA clearance to market in the United States,
the Company intends to direct its sales and marketing efforts at physicians who
screen, diagnose and monitor the treatment of patients with cardiovascular
disease. The Company will seek to gain Product acceptance by implementing a
strategy that promotes the Product's benefits directly to people who have, or
are at risk for developing, cardiovascular disease, and to educate healthcare
professionals, managed care decision makers and insurers as to the potential
advantages involved in early detection of cardiovascular disease. The Company's
education and awareness strategy will also focus on the publication of
additional research covering performance and utility of the Product and
attendance at major cardiovascular conventions.
The introduction of the Model DO-2020 will occur in three stages. The first
will consist of a controlled introduction to key physicians in the United States
in order to allow the Company sufficient time to develop a strong referral base
among opinion leaders and to allow for an orderly and efficient scaling-up of
the Company's production capabilities. Following a successful introduction of
the Product, the Company plans to implement a nationwide marketing campaign
directed towards primary care physicians and other health care professionals.
The third stage will target international cardiovascular markets.
Following FDA clearance, the Company will focus early marketing and
education efforts on United States physicians who evaluate individuals at risk
for developing cardiovascular disease and monitor
34
<PAGE>
patient response to cardiovascular therapy. In an effort to encourage rapid
acceptance of the Product, the Company anticipates offering the Model DO-2020 to
physicians on a "per-patient" or "per-report" billing basis. Because
reimbursement is a key component of physician acceptance, the Company has
retained a reimbursement consulting firm to assist in payer education and claims
approval. Invoices for physician use of the Product will be generated based on
the number of CardioVascular Profile Reports that are transmitted to the
Company's CDMF each month.
The Company anticipates using a core direct sales force to call on key
cardiovascular opinion leaders and to establish distribution arrangements with
independent and/or contract sales representatives and medical companies with
complementary distribution networks. Long term, the Company intends to use
various direct marketing methods to promote the Product to people with
cardiovascular disease, including public relations materials, advertising and a
Company Internet web site.
MODEL CR-2000
The Company is currently using various direct and indirect methods to market
the Model CR-2000 including direct mail, attendance at major medical conventions
and the use of a limited direct sales force to market the Product to
pharmaceutical companies, academic centers and major cardiovascular research
centers for gathering information from human subjects. The Company anticipates
using a core direct sales force to sell the Model CR-2000 and to identify and
manage independent and/or contract sales representatives for marketing the Model
DO-2020 following FDA clearance. The Company has established a sale price of
$18,750 for the Model CR-2000. Higher than expected manufacturing, marketing or
distribution costs or competitive pressures may, however, force the Company to
raise or lower the price of the Product.
PRODUCTION
The design, development and integration of all of the components necessary
to fabricate and manufacture the Product was undertaken on behalf of the Company
by a contract design engineering firm. The Company determined that it would be
more efficient and cost-effective to have Product development completed by a
specialized engineering firm, rather than to establish an internal design and
engineering staff. The Company has completed a pilot production run to evaluate
the design and functionality of hardware components from a manufacturing and
user standpoint and to test and modify as necessary the operation of various
software components. According to testing performed at TUV Product Services,
Inc., the Product was found to be in compliance with the electromagnetic
compatibility immunity requirements as defined in European Standard EN
60601-1-2. The Product was also found to conform to Council Directive
(89/336/EEC) permitting display of the CE Mark. The Model DO-2020 was also
investigated by Underwriters Laboratories, Inc. for compliance to the
requirements of the Standard for Medical and Dental Equipment, UL 544, Third
Edition. The unit fully complies, is UL listed and may now display the UL label.
In the interest of flexibility and efficiency, the Company anticipates using
a contract manufacturing firm to produce the components and to manufacture the
Product on a contractual basis. Final Product assembly, testing, packaging and
shipping will be conducted by the Company at its facility in compliance in all
material respects with the FDA's Quality System Regulations ("QSR").
An integral component of the Company's Product is the Sensor. While Sensors
utilized in prototypes of the Product have performed reliably, the Company is
uncertain as to whether Sensors will be available on a commercial basis, and if
available, whether such Sensors will be reliable and accurate in their
performance during clinical use. Should the Company be unable to obtain an
adequate supply of Sensors meeting its standards of reliability, accuracy and
performance, the Company would be materially adversely affected. The Company
currently obtains the Sensor from a single source. The Company has a
manufacturing services agreement with the sole supplier of the Sensor.
Disruption or termination of this relationship would have a material adverse
effect on the Company's operations. See "Risk Factors--Single Source of Supply
of Sensor and Other Components."
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<PAGE>
COMPETITION
Competition in the medical device industry is intense and many of the
Company's competitors have substantially greater financial, manufacturing,
marketing, distribution and technical resources than the Company. The Company
directly competes with manufacturers of sphygmomanometers, as well as drug,
medical instrument and health care companies. In addition, the Company is aware
of other companies that are developing products that measure arterial
elasticity. To the best of the Company's knowledge, no products which measure
both large and small artery elasticity have yet obtained FDA clearance to market
within the United States and no other products developed appear capable of
providing both large artery and small artery elasticity values. The Company is
aware of five other firms that are developing products that attempt to measure
vascular elasticity and which may be viewed as competitive alternatives. One
such firm has received FDA clearance to market a device which claims to evaluate
a patient's general cardiovascular condition:
- CARDIOVISION: International Medical Device Partners, of Las Vegas, Nevada
is marketing the MS-2000P under the CardioVision name. The device claims
to provide non-invasive detection of cardiovascular conditions by
measuring blood pressure and pulse rate that it then uses to indicate one
of five general cardiovascular conditions: (a) normal, (b) hypertension /
anemia / shock, (c) arteriosclerosis / diabetes / obesity / intense
stress, (d) arrhythmia or (e) potential heart failure. The device displays
a pulse pressure pattern obtained during the course of the blood pressure
measurement, and then classifies the pattern into one of these five
standard groupings that the company claims have a correlation with
cardiovascular disease. The CardioVision MS-2000P is patented, connects to
a standard PC through a serial port and can maintain 9,999 patients with
up to 100 records per patient. This product received FDA 510(k) clearance
for marketing during the Spring of 1997.
- ASULAB SA: A non-invasive ultra-sound (NIUS) instrument invented by Dr.
Hans Brunner has been developed by ASULAB Research Labs of the SMH Group
in Neuchatel, Switzerland. The NIUS has been marketed through their
licensee, Capital Medical Services (Paris). It is an ultrasonic
echo-tracking instrument which, when combined with a separate commercially
available finger blood pressure device, is capable of generating an
arterial elasticity pressure curve for just a small cross-sectional
portion of the radial artery by the wrist. Since the NIUS instrument
determines a vascular elasticity value for just a very small portion of a
single artery, it does not appear to provide information about the
patient's total vascular system.
- PULSE METRIC, INC.: Pulse Metric, a San Diego, California firm, uses
proprietary non-invasive waveform technology with a variety of personal
computer based products. In addition to providing oscillometric-based
blood pressure values, the products display a pressure waveform. However,
the Company believes the equipment presently does not analyze the waveform
data or determine arterial elasticity values. Rather, it appears that
blood pressure information collected by Pulse Metric's product is
forwarded by diskette or e-mail for subsequent analysis and determination
of arterial elasticity values at their office in San Diego.
- PWV MEDICAL LTD.: Dr. Michael O'Rourke, based in Sydney, Australia, has
developed an approach to examine the question of hardening of the arteries
or stiffened blood vessels using an "augmentation index" which is a
mathematical approach to what the blood pressure waveform looks like at
the root of the aorta by the heart. He uses data and makes assumptions as
to what the blood pressure data would actually be if, in fact, it had been
obtained at the root of the aorta. He applies certain mathematical
equations to transform these measurements and determines an "augmentation
index." Dr. O'Rourke founded PWV Medical and the Company assumes he will
attempt to commercialize this technology. To date, the instrument has been
used exclusively for clinical research purposes; however, PWV Medical
stated their intent to file for FDA clearance on their product by early
1998.
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<PAGE>
- SPECAWAY: Specaway Pty Ltd., of St. Pauls New South Wales, Sydney,
Australia, offers a Diagnostic Applanation Tonometry (DAT) device for use
in clinical research studies which can perform an "automated arterial
waveform analysis." The DAT system can acquire EKG signals and arterial
pulses from several peripheral arteries via applanation tonometry which
then are used to derive various physiological parameters including pulse
wave velocity which some believe to be a relative surrogate value for
arterial stiffness. Using a Windkessel representation of the arterial
system involving pressure decay during diastole, and by acquiring a
measurement of peripheral resistance, Specaway's literature states that
the DAT system can estimate system arterial compliance.
The medical device industry is intensely competitive and is dominated by
several large conglomerates and numerous medical electronic device
manufacturers, any of which could enter the market at any time. These companies
have substantially greater financial and other resources and could present
intense competition for either model of the Company's Product.
GOVERNMENT REGULATION
Medical devices including the Company's Model DO-2020 are subject to strict
regulation by state and federal authorities, including the FDA and comparable
authorities in certain states. Under the 1976 amendments to the Federal Food,
Drug and Cosmetic Act and the regulations promulgated thereunder, manufacturers
of medical devices are required to comply with very specific rules and
regulations concerning the testing, manufacturing, packaging, labeling and
marketing of medical devices. Failure to comply with the Federal Food, Drug and
Cosmetic Act and any applicable regulatory requirements can result in, among
other things, civil and criminal fines, product recalls, detentions, seizures,
injunctions and criminal prosecutions. When the Company markets products outside
the United States, its products are also subject to rules and regulations in
foreign countries similar to those imposed by the FDA.
Before a new medical device may be introduced into the U.S. market, the
manufacturer generally must obtain prior authorization from the FDA. Such
authorization is based on a review by the FDA of the medical device's safety and
effectiveness for its intended uses. Medical devices may be authorized by the
FDA for marketing in the United States either pursuant to a 510(k) Application
or a PMA submission. The process of obtaining clearances or approvals from the
FDA and other applicable regulatory authorities can be expensive, uncertain and
time consuming, frequently requiring several years from the commencement of
clinical trials or submission of data to regulatory acceptance.
A PMA submission consists of information provided to the FDA sufficient to
establish independently that a device is safe and effective for its intended
use. A PMA submission must be supported by extensive clinical trial data, often
including preclinical data, as well as extensive literature to prove the safety
and effectiveness of the device. By statute, the FDA is required to respond to a
PMA submission within 180 days from the date of its submission; however, the
approval process usually takes substantially longer, often as long as several
years. During the review period, the FDA may conduct extensive reviews of the
Company's facilities, deliver multiple requests for additional information and
clarifications, and convene advisory panels to assist in its determination.
On the other hand, a 510(k) Application requires an applicant to show that a
medical device is "substantially equivalent" in terms of safety and
effectiveness to a predicate product marketed prior to 1976 or to an instrument
already cleared by the FDA for marketing in the United States. In general, the
FDA requires that a 510(k) Application include a broad spectrum of information
on various aspects of its design, operation, manufacture, intended use, claims
concerning its efficacy and safety, examples of its user manual, examples of its
promotional literature, and clinical data comparing the product to the predicate
medical device(s). An applicant may not begin marketing a product for which it
has submitted a 510(k) Application until the FDA issues a written finding of
substantial equivalence. In practice, clearance of products often takes
substantially longer than the FDA 510(k) Application period of 90 days.
FDA clearances and approvals, if granted, may include significant
limitations on the intended uses for which a product may be marketed. FDA
enforcement policy strictly prohibits the promotion of cleared or
37
<PAGE>
approved medical devices for non-approved or "off-label" uses. In addition,
product clearances or approvals may be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing.
Marketing of the Model DO-2020 Product in the United States will require
clearance or approval by the FDA. A clinical research trial, to collect data as
well as analyze results from both the Product and a predicate medical device at
the same time and from the same patients has been completed. The Company has
submitted a 510(k) Application to the FDA. However, the FDA may decide that one
or more of the proposed claims or indications for use of the Model DO-2020
cannot be cleared by means of the 510(k) process. In that case, the FDA might
require that the Company seek approval for such claims or indications by means
of a PMA submission which could delay using such claims or indications for
marketing purposes by several months or even years. This could result in
significant delays in marketing the Model DO-2020 in the United States and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Model CR-2000 is intended for use in research markets and therefore the
Company believes it does not require FDA clearance. The FDA could disagree with
the Company's interpretation of the regulations and require a 510(k) Application
or PMA submission which, if pursued, may not be cleared or approved or, if
approved, may contain certain significant limitations on the intended uses for
which the product is marketed.
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain clearance by a foreign country may be longer or shorter than that
required for FDA clearance, and the requirements may differ. Export sales of
certain devices that have not received FDA marketing clearance generally are
subject to both FDA export permit requirements and, in some cases, general U.S.
export regulations. In order to obtain a FDA export permit, the Company may be
required to provide the FDA with documentation from the medical device
regulatory authority of the country in which the purchaser is located. No
assurance can be given that foreign regulatory clearances or approvals will be
granted on a timely basis, if ever, or that the Company will not be required to
incur significant costs in obtaining or maintaining its foreign regulatory
clearance or approvals.
The Company's Model DO-2020, the Company's contract design and manufacturing
organizations, as well as the Company itself, will all be subject to regulation
by the FDA and certain state and foreign governments, including, but not limited
to, required compliance with the FDA's QSR and equivalent state and foreign
regulations. Failure of any of these organizations to be or remain in compliance
with those regulations could subject one or more of those organizations, or the
medical device designed and produced for and by the Company, to regulatory
action. Such a regulatory action could threaten or cut off the Company's source
of supply or cause the FDA to order the removal of the Product from the market.
While the Company believes it could locate and qualify other sources of design
and/or manufacture of medical device products if required to do so, supply
interruptions in the meantime would have a materially adverse effect on the
Company's business, financial condition and results of operations.
Federal, state and foreign regulations regarding the manufacture and sale of
healthcare products and diagnostic devices are subject to future change. The
Company cannot predict what material impact, if any, such changes might have on
its business. Future changes in regulations or enforcement policies could impose
more stringent requirements on the Company, compliance with which could
adversely affect the Company's business. Such changes may relax certain
requirements, which could prove beneficial to the Company's competitors and thus
adversely affect the Company's business. In addition, regulations of the FDA and
state and foreign laws and regulations depend heavily on administrative
interpretations, and there can be no assurance that future interpretations made
by the FDA, or other regulatory authorities, with possible retroactive effect,
will not adversely affect the Company.
In addition to the regulations directly pertaining to the Company and its
products, many of the Company's potential customers are subject to extensive
regulation and governmental oversight. Regulatory
38
<PAGE>
changes in the healthcare industry that adversely affect the business of the
Company's customers could have a material adverse effect on the Company's
business, financial condition and results of operation.
There can be no assurance that the Company will be able to obtain necessary
regulatory clearances or approvals in the United States or internationally on a
timely basis, if ever. Delays in the receipt of, or failure to receive, such
clearances or approvals, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
REIMBURSEMENT
The Company anticipates that most revenue affiliated with physician use of
the Model DO-2020 Product will be derived from insurance coverage and third
party payers. The patient payer marketplace includes commercial insurers, Blue
Cross/Blue Shield plans and Health Maintenance Organizations ("HMOs"), with
Medicare, other federally funded plans and "self-pay" accounting for a smaller
percentage of the payers. Each payer group establishes its own coverage and
procedure payment schedule resulting in a range of allowable payments. Physician
reimbursement is an important aspect in the Model DO-2020's success. Without
adequate levels of reimbursement, physicians will be reluctant to try the Model
DO-2020, if at all.
In contrast to patients covered by Medicare, the private insurance segment
uses a variety of payment mechanisms including: Usual, Customary and Reasonable
("UC&R") fees, Schedules of Benefits fees and fees based on Capitation
Contracts. Under the UC&R payment method, insurance carriers determine customary
professional fees for services provided by specific procedural groupings within
geographic areas. The carrier pays the "usual, customary and reasonable fee" for
a specific procedure. With a Schedule of Benefits payment method, each medical
procedure is assigned a specific dollar amount which the insurance carrier
agrees to pay toward its cost. The Schedule does not relate in any way to
doctors' actual professional fees. A capitation contract is a pre-paid plan
wherein the insurance carrier pays a contracted provider a specified amount,
typically on a monthly basis, for services rendered to their subscribers. This
method of payment is most often employed by HMOs.
The Health Care Financing Administration ("HCFA") a division of the
Department of Health and Human Services ("HHS"), has established three levels of
coding for health care products and services: Level I, Current Procedural
Terminology ("CPT") codes for physicians' services; Level II, National Codes for
supplies and certain services; and Level III, local codes. The coding system
applicable to the Model DO-2020 is the Physicians' Current Procedural
Terminology, Fourth Edition. This is a listing of descriptive terms and
identifying codes for reporting medical services and procedures performed by
physicians. Insurers require physicians to report their services with the CPT
coding system.
Review of the national Physicians' Current Procedural Terminology, Fourth
Edition, developed by the American Medical Association ("AMA"), lists codes for
non-invasive extremity studies. The existing codes closely, but not precisely,
reflect the service and parameters presented by the Model DO-2020, which is
often the situation with new or advanced medical technologies. In such cases,
CPT guidelines make provisions available by way of modifiers for existing codes
or the use of miscellaneous codes for reporting purposes. Additionally, the AMA
CPT Coding Clearinghouse Service provides a service that identifies appropriate
coding mechanisms for new technologies. The Company intends to solicit the AMA
for clarification purposes.
Should the AMA determine that none of the existing CPT codes are appropriate
for use, the Company will be prepared to seek a new code application or code
revision following FDA clearance. In this situation, the AMA CPT guidelines
provide unlisted or miscellaneous codes for physicians to use for patient
billing purposes until a Product-specific code is obtained. Application to the
AMA for a CPT code specific to the Model DO-2020 will be among the first
reimbursement strategies implemented following FDA clearance.
39
<PAGE>
Recognizing that reimbursement is integral in securing physician acceptance
of the Product, the Company has contracted with a consultant to assess the
healthcare environment and to position the Model DO-2020 into current
reimbursement coverage, coding and payment guidelines and regulations and to
evaluate the prospects for securing physician reimbursement with a
Product-specific CPT code. The Company believes that it will take 12 to 24
months to obtain a Model DO-2020-specific CPT code. During this time, physicians
may be able to use a "miscellaneous code" along with a description of the
services rendered to obtain reimbursement, although the level of reimbursement
they receive, if any, will depend on each individual payer's assessment of the
procedure.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success depends, and will continue to depend in part, on its
ability to maintain patent protection for its products and processes, and to
preserve its trade secrets and to operate without infringing the property rights
of third parties. The Company is the exclusive assignee for one issued United
States patent and has obtained the exclusive rights to commercialize inventions
(on a worldwide basis) described by three other United States patents issued to
the University. These four patents relate to the Company's blood pressure
waveform analysis procedures, its cardiovascular profiling technology, the non-
invasive determination of cardiac output, and the overall technology and
operation of the Products. The license from the University expires with the term
of these patents (currently expected to be in 2012). Patent applications
regarding one or more of these United States issued patents are currently
pending in Japan as well as in Germany, France and the United Kingdom. In
addition, one United States patent, which broadens the claims of an earlier
issued United States patent, has been allowed and while not assured, the Company
believes it may be issued soon. The Company has three other patent applications
that were submitted regarding certain other aspects and components of the
Product. There is no assurance that these patent applications will be issued.
Besides seeking additional patents, the Company intends to rely to the fullest
extent possible on certain trade secrets, on proprietary "know-how", and on its
ongoing endeavors involving product improvement and enhancement.
The validity and breadth of claims coverage in medical technology patents
involve complex legal and factual questions and, therefore, may be highly
uncertain. No assurance can be given that the Company's current patent and
licenses will provide a competitive advantage, that the pending applications
will result in patents being issued, or that competitors of the Company will not
design around any patents or licenses issued to the Company. Furthermore, there
can be no assurance that the Company's non-disclosure agreements and invention
assignment agreements will protect its proprietary information and know-how or
provide adequate remedies for the Company in the event of unauthorized use or
disclosure of such information, or that others will not be able to develop
independently such information. There has been substantial litigation regarding
patent and other intellectual property rights in the medical device industry.
Litigation may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, to defend the Company against
claimed infringement of the rights of others or to determine the ownership,
scope or validity of the proprietary rights of the Company and others. Any such
claims may require the Company to incur substantial litigation expenses and to
divert substantial time and effort of management personnel. An adverse
determination in litigation involving the proprietary rights of others could
subject the Company to significant liabilities to third parties, could require
the Company to seek licenses from third parties and could prevent the Company
from manufacturing, selling or using its Product. The occurrence of such
litigation or the effect of an adverse determination in any such litigation
could have a material adverse effect on the Company's business, financial
condition and results of operations.
UNIVERSITY OF MINNESOTA RESEARCH AND LICENSE AGREEMENT
On September 23, 1988, the Company entered into a Research and License
Agreement (the "University License Agreement") with the University, pursuant to
which the University granted to the Company an exclusive, worldwide license to
use the Product for diagnostic, therapeutic, monitoring and
40
<PAGE>
related uses. The University License Agreement expires with the last to expire
of the patents related to the licensed technology (currently expected to be in
2012). The Company also has the right to grant sub-licenses to produce products
and provide services based on the technology.
In consideration of the University License Agreement, the Company conducted
expanded clinical trials of arterial compliance technology and is continuing to
use its best efforts to develop commercial medical devices. The Company must pay
a royalty on revenue from commercialization of the Products (or future products,
which incorporate the licensed arterial compliance technology), in the amount of
3% of gross revenue (less certain reductions, such as returned goods).
EMPLOYEES AND CONSULTANTS
The Company currently employs six full-time employees including: Greg H.
Guettler as its President; Dr. Charles F. Chesney as its Executive Vice
President and Chief Technology Officer; James S. Murphy as its Vice President of
Finance and Chief Financial Officer; Dennis J. Morgan as its Director of
Biomedical and Software Engineering; James M. Johnson as its Director of Sales
and Julie A. Radosevich as its Director of Marketing. The Company anticipates
hiring approximately 10 additional personnel following the successful completion
of the Offering, for marketing and sales activities, for plant operations and
assembly tasks, for computer software and data base endeavors and for clinical
and customer support needs including accounting and administrative staff. The
Company believes that its relations with its employees are good.
In addition to vendors under contract to the Company regarding specific
product-related tasks, the Company has had and continues to have consultant
relationships with several experts including: (a) several experts in regulatory
affairs and FDA matters; (b) Jay N. Cohn, M.D. as its Chief Clinical Consultant;
(c) Stanley M. Finkelstein, Ph.D. as its Chief Technical Consultant, (d) a
consulting firm for computer software engineering design and programming; (e) a
consulting firm for medical electronic manufacturing and production engineering
tasks; (f) a consulting firm for third-party reimbursement; and (g) several
experts in sales and marketing. Additional consultants may be retained as
necessary to accommodate the Company's need for experts in selected areas of
Product-related activities.
LEGAL PROCEEDINGS
The Company is not a party to any litigation and is not aware of any
threatened litigation.
FACILITIES
Under the terms and conditions of a 36-month lease effective November 1997,
the Company occupies approximately 6,900 square feet of commercial office and
light assembly space at The Waters in Eagan, Minnesota, a location in close
proximity to the Minneapolis/St. Paul International Airport. The monthly gross
rent, including basic operating expenses, is approximately $7,000. The Company
believes that this facility should be adequate for its currently anticipated
requirements for the term of the lease.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY CONSULTANT
The following table provides information about the Company's directors,
executive officers and key consultant:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION(S) SINCE
- --------------------------------- --- --------------------------------------------------------------- -----------
<S> <C> <C> <C>
Melville R. Bois(1)(2) 51 Chairman of the Board of Directors 1995
Greg H. Guettler 44 President and Director 1997
Charles F. Chesney, D.V.M., 55 Executive Vice President, Chief Technology Officer and Director
Ph.D., R.A.C. 1988
James S. Murphy 53 Vice President of Finance and Chief Financial Officer --
Jay N. Cohn, M.D.(1) 67 Chief Clinical Consultant, Chairman of the Scientific and
Clinical Advisory Board and Director 1988
Kenneth W. Brimmer(1)(2) 42 Director 1995
Stanley M. Finkelstein, Ph.D. 57 Chief Technical Consultant --
</TABLE>
- ------------------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
MELVILLE R. BOIS Mr. Bois was elected to the Board of Directors in November
1995 and was elected its Chairman in 1997. From January 1996 until September
1997, he was the Company's President and Chief Executive Officer. For more than
30 years, Mr. Bois has been employed by title insurance and financial companies.
In 1979, he founded and was the owner of Universal Title Insurance Company. This
company became Universal Title and Financial Corporation in 1984 and Mr. Bois
continues as its President. Universal Title and Financial Corporation is a
private holding company which is engaged in commercial real estate and related
records and data management. Mr. Bois has been and is presently a member of the
board of directors of several companies, including Hilex Corporation and Grand
Forks Abstract Company and since 1988 he has been the owner and President of the
Bois Family Foundation, a charitable organization.
GREG H. GUETTLER, M.B.A. Mr. Guettler has been the President and a Director
of the Company since September 1997. Mr. Guettler has more than 19 years of
experience in sales, marketing and management positions within the medical
industry. Prior to joining the Company, Mr. Guettler was a senior manager at
Universal Hospital Services, Inc. ("UHS"), a nationwide provider of medical
devices and device management services to the health care industry. During his
14 years at UHS, Mr. Guettler held positions as Director of National and
Strategic Accounts where he led a national accounts sales team, as Director of
Alternate Care and Specialty Product Promotions where he was responsible for the
development of UHS's alternate care business unit and the nationwide
distribution of new medical products, and as Marketing Manager where he was
responsible for company-wide marketing and planning. Additionally, Mr. Guettler
has held sales, sales management, product management and marketing positions for
the St. Paul Regional Blood Services. Mr. Guettler has a Bachelor's degree from
the University of St. Thomas in St. Paul, Minnesota (1977) and a Masters degree
in Business Administration (M.B.A.) from the University of St. Thomas Graduate
School of Management in St. Paul, Minnesota (1983).
CHARLES F. CHESNEY, D.V.M., PH.D., R.A.C. Dr. Chesney was the President and
Chief Executive Officer of the Company from its inception in 1988 until January
1, 1996 when he became the Company's Executive Vice President and Chief
Technology Officer. He has been a member of the Board of Directors since its
inception in July 1988 and has been the Secretary of the Company since December
1988. Since 1978,
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Dr. Chesney has been a consultant to P-T Consulting Associates, Inc., a
biomedical research, product development and consulting firm, which he owns.
From 1984 to 1987, Dr. Chesney was employed by the 3M Company as Research and
Development Manager for 3M/Riker Laboratories in its Pharmaceutical and Health
Care Division. Dr. Chesney is the founder of a small computer firm which offers
data base management systems to large drug companies and he is the author of
more than 25 scientific publications in the field of medical pathology and
toxicology. Dr. Chesney is a member of more than 30 professional societies and
has been engaged in new product research and development in the pharmaceutical,
medical device and bio-technology industries since 1974. In 1991, Dr. Chesney
became "Board Certified" in regulatory affairs by the Certification Board of the
Regulatory Affairs Professional Society. Dr. Chesney holds the degree of Doctor
of Veterinary Medicine from the University of Minnesota (1970) and a Ph.D. in
Medical Pathology with a minor in Cardiovascular Physiology from the University
of Wisconsin--Madison (1973).
JAMES S. MURPHY, C.P.A., M.B.A. Mr. Murphy joined the Company as Vice
President of Finance and Chief Financial Officer in May 1996. Mr. Murphy was
Controller of Gaming Corporation of America from December 1992 through November
1995. From 1978 to 1988, Mr. Murphy was the tax partner with Fox, McCue and
Murphy, a certified public accounting firm located in Eden Prairie, Minnesota.
From 1970 to 1978, Mr. Murphy was employed by Ernst & Ernst (currently Ernst &
Young LLP) with both audit (six years) and tax (two years) experience. Mr.
Murphy is a member of the American Institute of Certified Public Accountants and
the Minnesota Society of CPAs. Mr. Murphy holds a Bachelor of Science degree
from Saint John's University in Collegeville, Minnesota (1966) and a Masters
degree in Business Administration (M.B.A.) from the University of Minnesota
(1968).
JAY N. COHN, M.D. Dr. Cohn has served as a member of the Board of Directors
of the Company since its inception in July 1988. Since 1974, Dr. Cohn has been
employed by the University of Minnesota Medical School as a Professor of
Medicine and was Head of the Cardiovascular Division from 1974 through 1997. Dr.
Cohn is the co-inventor of the technology used in the Company's Product. Dr.
Cohn is the Company's Chief Clinical Consultant and has been a consultant to
several pharmaceutical firms. He became the Chairman of the Company's Scientific
and Clinical Advisory Board in 1996. Dr. Cohn is currently President of the
International Society of Hypertension and is also a member of the editorial
boards of 12 professional journals and of approximately 17 professional
societies. Since 1959, Dr. Cohn has published more than 500 scientific articles
and a new textbook of cardiovascular medicine. Dr. Cohn received his M.D. degree
from Cornell University (1956). Dr. Cohn currently serves on the board of
directors of Medco Research, Inc.
KENNETH W. BRIMMER Mr. Brimmer was elected to the Board of Directors during
November 1995. Mr. Brimmer was employed by Grand Casinos, Inc. and its
predecessor, since October 1990 as Special Assistant to the Chairman and Chief
Executive Officer. Mr. Brimmer presently serves on the board of directors of
Rainforest Cafe, Inc., and has served as its Treasurer since May 1995 and its
acting President from April 1997 to May 1998 when he was named its President.
Mr. Brimmer also currently serves on the board of directors of New Horizons Kids
Quest, Inc. and Oxboro Medical International, Inc.
STANLEY M. FINKELSTEIN, PH.D. Dr. Finkelstein is the Company's Chief
Technical Consultant. Dr. Finkelstein has been employed by the University of
Minnesota since 1977, and is a Professor of Laboratory Medicine and Pathology in
the Medical School. He has also been Associate Director of the Division of
Health Computer Sciences within the Department of Laboratory Medicine and
Pathology since 1982 and is currently the Director of Graduate Studies for
Biomedical Engineering. Dr. Finkelstein is the author of over 100 scientific
articles in professional journals and technical conference proceedings on
subjects relating to arterial vascular compliance, pulmonary disease, medical
informatics and data management. He has also presented related material at more
than 100 conferences and technical meetings. Dr. Finkelstein is the co-inventor
of the technology used in the Company's Product. Dr. Finkelstein earned
43
<PAGE>
his Ph.D. in Electrical Engineering/Systems Science--Bioengineering from the
Polytechnic Institute of Brooklyn, Brooklyn, New York (1969).
At the Company's special meeting of shareholders held on May 22, 1998, the
Company's shareholders approved a proposal to (a) classify the Board of
Directors into three classes, each of which member would serve (after a
transitional period) for a staggered three year term; (b) provide that directors
may be removed for cause with the vote of the holders of a majority of the then
outstanding shares entitled to vote or other than for cause with the vote of the
holders of at least 80% of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors, voting
together as a single class; (c) provide that any new director elected to fill a
vacancy on the Board shall serve for the remainder of the full term of the class
in which the vacancy occurred rather than until the next meeting of
shareholders; and (d) require an 80% shareholder vote requirement to alter,
amend or repeal the foregoing provisions of the Articles or Bylaws. Such
classification will make it more difficult to change the members of the Board of
Directors or to effect a takeover of the Company.
SCIENTIFIC AND CLINICAL ADVISORY BOARD In order to provide the Company with
a wide range of scientific and clinical advice, the Company's Board of Directors
appointed Dr. Jay N. Cohn to become the Chairman for an Advisory Board of
cardiovascular experts. The following physicians are members of the Advisory
Board:
- Jay N. Cohn, M.D.--Advisory Board Chairman; Professor of Medicine,
Cardiovascular Division, University of Minnesota Medical School,
Minneapolis, Minnesota.
- Thomas D. Giles, M.D.--Director of Program in Hypertension and Heart
Failure, Director of Cardiovascular Research, Professor of Medicine,
Department of Medicine, Louisiana State University Medical School, New
Orleans, Louisiana.
- Stevo Julius, M.D., Sc.D.--Professor of Medicine and Physiology, Frederick
G.L. Huetwell Professor of Hypertension, University of Michigan Medical
Center, Ann Arbor, Michigan.
- Lawrence M. Resnick, M.D.--Professor of Medicine, Director of
Hypertension, Wayne State University School of Medicine, Southfield,
Michigan.
- Marc A. Silver, M.D.--Professor of Medicine, Director, Loyola University
Heart Failure Center, Loyola University Medical Center, Maywood, Illinois.
- Michael A. Weber, M.D.--Chairman, Department of Medicine, Brookdale
Hospital Medical Center, Professor of Medicine, State University of New
York, Brooklyn, New York; President of the American Society of
Hypertension.
The Scientific and Clinical Advisory Board meets once or twice yearly and
serves to provide the Company with advice regarding advances in the field of
arterial elasticity and to review results and new developments associated with
the Company's technology. Under some circumstances, members of the Board may be
asked to test new products in their own laboratories. The Company intends to
loan each member of the Advisory Board a Model CR-2000 for use in their clinical
research and for publication of their research results in clinical papers and
trade journals.
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EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to annual
compensation paid for the years indicated to the Company's chief executive
officer. No executive officer of the Company received salary and bonus in excess
of $100,000 during the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
FISCAL YEAR -------------------
ENDED ---------------------- SECURITIES
NAME AND PRINCIPAL POSITION JUNE 30 SALARY BONUS UNDERLYING OPTIONS
- -------------------------------------------------------------- ------------- --------- ----------- -------------------
<S> <C> <C> <C> <C>
Melville R. Bois(1)........................................... 1997 $ 48,000 -- --
Chief Executive Officer 1996 24,000 -- 37,500
1995 -- -- --
</TABLE>
- ------------------------
(1) The Company currently has two employees that will have an annual
compensation in excess of $100,000. See "Management--Employment Agreements."
The following table summarizes the total number of options held by the named
executive officer as of the end of fiscal year 1997. No stock options were
exercised during fiscal year 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
JUNE 30, 1997 JUNE 30, 1997(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Melville R. Bois.......................................... 22,500 15,000 $ 22,500 $ 15,000
</TABLE>
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(1) Assumes a market price for the Shares equal to the Fall 1997 private
placement price of $3.00 per Share less the exercise price thereof.
EMPLOYMENT AGREEMENTS
As of September 8, 1997, the Company entered into an employment agreement
with Greg H. Guettler to serve as its President. The employment agreement has a
term of one year, but provides for automatic extension for an additional year
unless either party gives written notice of the nonextension by a specified
date. Pursuant to the employment agreement, Mr. Guettler is paid a minimum
annual salary (exclusive of benefits, bonuses or incentive payments) of
$126,000, subject to adjustment annually by the Board of Directors, and a
discretionary one-time cash bonus and incentive compensation, equal to not less
than 10% and not more than 25% of Mr. Guettler's annual salary, as determined by
the Board of Directors. Payment of the bonus and incentive compensation is
contingent upon the successful completion of Mr. Guettler's first year of
employment with the Company and will be payable at the time Mr. Guettler
commences his second year of employment. In addition, the employment agreement
provides for the one-time grant of options to purchase 150,000 Shares at an
exercise price of $2.00 per Share. If Mr. Guettler is terminated without cause
(as defined), he will be entitled to one year's severance payment based on his
base salary. The employment agreement is terminable by the Company with 60 days
written notice. Under the terms of the employment agreement, Mr. Guettler will
be entitled to accelerated vesting of his stock options and one year's
compensation in the event that there is a "change in control," as defined. The
employment agreement contains certain confidentiality obligations and a one-year
covenant not to compete.
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On October 30, 1995, the Company entered into a five-year employment
agreement with Charles F. Chesney to serve as its President and Chief Executive
Officer until the Company appointed another President and Chief Executive
Officer, at which time Dr. Chesney became the Executive Vice President and Chief
Technology Officer (which occurred on January 1, 1996). Pursuant to the
employment agreement, Dr. Chesney is paid a minimum annual salary (exclusive of
benefits, bonuses or incentive payments) of $100,800, subject to annual
adjustments to reflect increases in the cost of living. Dr. Chesney's base
annual salary, plus benefits, bonuses and incentive payments, must be equal to,
or greater than, 80% of that paid to the Company's President and/or Chief
Executive Officer. Dr. Chesney also was granted a stock option to purchase
288,046 Shares at an exercise price of $1.70 per Share and is entitled to
certain registration rights with respect to the Shares underlying such options.
In addition, on August 18, 1997, the Company granted Dr. Chesney a stock option
under the 1995 Option Plan to purchase 75,000 Shares at an exercise price of
$2.00 per Share. The employment agreement is terminable by Dr. Chesney for any
reason, upon sixty (60) days written notice. Dr. Chesney may be terminated by
the Company only for "reasonable cause," as defined. The employment agreement
contains certain confidentiality obligations.
On July 1, 1997, the Company entered into a two-year employment agreement
with James S. Murphy to serve as Vice President of Finance and Chief Financial
Officer. The employment agreement provides for an annual base salary of $76,800,
subject to adjustments, if any, to increase the annual base salary by the Board
of Directors following an annual review in June 1998. In addition, the
employment agreement provides for a one-time grant of options to purchase 53,100
Shares, vesting monthly over a four-year period commencing July 1, 1997, at an
exercise price of $2.00 per Share. The employment agreement is terminable by the
Company if it determines, in good faith, that Mr. Murphy is not meeting
performance expectations, standards or objectives, either (a) upon 30 days
written notice, or (b) immediately by delivering one month's pay with the
termination notice. The employment agreement is terminable by Mr. Murphy upon 30
days written notice. The employment agreement contains certain nondisclosure and
confidentiality obligations.
OUTSIDE DIRECTOR COMPENSATION
Members of the Board of Directors receive no cash compensation for such
service. However, the Company has granted to each of the Company's outside
directors an option to purchase 25,000 Shares at an exercise price of $2.00 per
Share.
On October 30, 1995, the Company entered into a four-year consulting
agreement with Jay N. Cohn, M.D., a member of the Board of Directors. Dr. Cohn
is also one of the founders of the Company and serves as the Company's Chief
Clinical Consultant and Chairman of the Scientific and Clinical Advisory Board.
The agreement is cancellable for any reason by either the Company or Dr. Cohn
upon 60 days prior notice. Under the terms of the agreement, the Company agreed
to grant Dr. Cohn nonqualified stock options to purchase 449,265 Shares which
are exercisable for a period of ten years, at an exercise price of $1.70 per
Share, to serve as clinical liaison and spokesman for the Company's arterial
compliance technology and to use his best efforts to forward the research,
clinical penetration and marketing of the Company's products. All of the Shares
underlying these options have been fully vested. Dr. Cohn is entitled to certain
registration rights with respect to the Shares underlying these options.
On January 1, 1996, the Company entered into a consulting agreement with
Melville R. Bois, currently the Chairman of the Board of Directors, to serve as
the Company's President and Chief Executive Officer on a part-time basis until
such time as the Company appointed another President and/or Chief Executive
Officer. Under the terms of the agreement, the Company agreed to pay Mr. Bois a
monthly consulting fee of $4,000 and grant Mr. Bois nonqualified stock options
to purchase 12,500 Shares which are exercisable for a period of ten years, at an
exercise price of $2.00 per Share. All of the Shares underlying such options
have been fully vested. The agreement was terminated by the Company in
accordance with its terms, upon the hiring of Greg H. Guettler as President in
September 1997. On July 1, 1997, the Company granted Mr. Bois a stock option to
purchase 12,500 Shares at an exercise price of $2.00
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per Share. All of the Shares underlying such options have been fully vested. Mr.
Bois is entitled to certain registration rights with respect to the Shares
underlying his options.
1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN
The Company adopted the 1995 Option Plan, with the approval of the Board of
Directors and the shareholders of the Company. The 1995 Option Plan permits the
granting of awards to employees of the Company, in the form of Stock
Appreciation Rights, Restricted Stock, Stock Awards and Stock Options. Stock
Options granted under the 1995 Option Plan may be "incentive stock options,"
meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or nonqualified options which do not meet the requirements
of Section 422. A total of 400,000 Shares are presently reserved for issuance
pursuant to awards granted under the 1995 Option Plan. As of the date of this
Prospectus, there were 311,500 Shares subject to outstanding stock options
issued under the 1995 Option Plan.
The 1995 Option Plan is administered by the Compensation Committee of the
Board of Directors. The 1995 Option Plan gives broad powers to the Committee to
administer and interpret the plan, including the authority to select the
individuals to be granted options and rights, and to prescribe the particular
form and conditions of each option or right granted.
As of the date of this Prospectus, the Company has also granted a total of
1,045,275 options to purchase Shares outside the 1995 Option Plan, all of which
options have an exercise price equal to at least 85% of the fair market value of
the Shares as of the date of grant. In addition, on July 17, 1998, the Company
granted 30,000 options to purchase Shares outside the 1995 Option Plan, at an
exercise price of $2.00 per Share. See "Description of Securities--Stock Options
and Warrants."
1998 STOCK OPTION PLAN
On May 1, 1998, the Board of Directors approved the 1998 Stock Option Plan
(the "1998 Option Plan"), under which stock options may be granted to employees,
consultants and independent directors of the Company. The purpose of the 1998
Option Plan is to attract and retain high-quality individuals; to provide an
increased incentive to achieve the long-term goals of the Company; and to
closely associate the interests of participants with those of other shareholders
through compensation that is based on the Company's Common Stock.
The 1998 Option Plan will be administered by either the full Board of
Directors or a committee of two or more nonemployee directors (the "Committee"),
either of which has broad authority to administer the 1998 Option Plan, select
who will receive stock options, determine the terms and provisions of the stock
option and handle interpretive issues.
Stock options may be either qualified or nonqualified for income tax
purposes. Up to a maximum of 750,000 Shares may be issued under the 1998 Option
Plan. The maximum limit is subject to adjustment in the event of stock splits,
recapitalization or other similar changes affecting the Shares. If an
outstanding option expires, is canceled or is otherwise terminated or forfeited
without being exercised, either in whole or in part, the unexercised Shares may
again be made available for issuance under the 1998 Option Plan.
The exercise price of each incentive option may not be less than 100% of the
fair market value of the Shares on the date of grant. The exercise period may be
determined by the Board or the Committee. However, an incentive stock option may
not be exercisable after the expiration of ten (10) years from the date of
grant. If the recipient owns more than 10% of the total combined voting power of
all classes of stock of the Company, then the incentive stock option may not be
exercisable after the expiration of five (5) years from the date of grant and
the exercise price may not be less than 110% of the fair market value of the
Shares on the date of grant.
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The 1998 Option Plan may be amended or terminated by the Board or the
Committee at any time, but no amendment may increase the maximum number of
Shares to be issued under the 1998 Option Plan or extend the term of the 1998
Option Plan unless shareholders approve the change. In addition, no amendment or
termination may, without the consent of the affected person, adversely affect
any outstanding option.
The 1998 Option Plan became effective following shareholder approval at the
Company's special meeting on May 22, 1998.
No options have been granted under the 1998 Option Plan as of the date of
this Prospectus.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Minnesota Business Corporation Act provides that officers and directors
of the Company have the right to indemnification by the Company for liability
arising out of certain actions. Such indemnification may be available for
liabilities arising in connection with the Offering. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the Company, pursuant to such indemnification
provisions, the Company has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy, as
expressed in the Securities Act and is, therefore, unenforceable.
The Company has adopted, in its Articles of Incorporation, a provision which
limits personal liability for breach of the fiduciary duty of its directors, to
the extent provided by Section 302A of the Minnesota Business Corporation Act.
Such provision eliminates the personal liability of directors for damages
occasioned by breach of fiduciary duty, except for liability based on the
director's duty of loyalty to the Company, liability for acts or omissions not
made in good faith, liability for acts or omissions involving intentional
misconduct, liability based on payment of improper dividends, liability based on
violations of state securities laws and liability for acts occurring prior to
the date such provision was added.
CERTAIN TRANSACTIONS
On October 30, 1995, the Company entered into a four-year consulting
agreement with Stanley M. Finkelstein, Ph.D., one of the founders of the Company
and currently the Company's Chief Technical Consultant. The agreement is
cancellable for any reason by either the Company or Dr. Finkelstein upon 60 days
prior notice. Under the terms of the agreement, the Company agreed to grant Dr.
Finkelstein nonqualified stock options to purchase 297,688 Shares, which are
exercisable for a period of ten years, at an exercise price of $1.70 per Share,
to serve as technical liaison and spokesman for the Company's arterial
compliance technology and to use his best efforts to forward the research,
clinical penetration and marketing of the Company's products. All of the Shares
underlying these options have been fully vested. Dr. Finkelstein is entitled to
certain registration rights with respect to the Shares underlying these options.
The Company's management believes that the terms of this transaction are no
less favorable to the Company than would have been obtained from a
non-affiliated third party for similar services. Any future transactions between
the Company and any of its officers, directors or affiliates will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties. All future material affiliated transactions must be approved by a
majority of the independent outside members of the Company's Board of Directors
who do not have an interest in the transactions.
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PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information regarding beneficial ownership of the Company's Shares, as adjusted
to give effect to the issuance of the Units offered hereby, by (i) each person
known by the Company to be the beneficial owner of 5% or more of the outstanding
Shares; (ii) each director and executive officer of the Company; and (iii) all
directors and executive officers of the Company as a group. The percentage of
Shares outstanding before and after the Offering is calculated separately for
each person and assumes, for purposes of the calculation, the issuance of Shares
issuable upon exercise or conversion of fully vested options of securities that
are exchangeable for or convertible into Shares held by such person within 60
days from the date of this Prospectus. Unless otherwise indicated, each of the
following persons has sole voting and investment power with respect to the
Shares set forth opposite their respective names.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OUTSTANDING
NUMBER OF SHARES --------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) OWNED OFFERING OFFERING(2)
- ------------------------------------------------------------------------ ----------------- ----------- -------------
<S> <C> <C> <C>
Greg H. Guettler(3)..................................................... 24,000 * % * %
Charles F. Chesney, D.V.M., Ph.D., R.A.C.(4)............................ 296,046 8.4 4.9
James S. Murphy(5)...................................................... 87,387 2.5 1.5
Jay N. Cohn, M.D.(6).................................................... 466,385 13.3 7.8
Melville R. Bois(7)..................................................... 65,000 1.9 1.1
Kenneth W. Brimmer(8)................................................... 50,000 1.4 *
Stanley M. Finkelstein, Ph.D.(9)........................................ 312,071 8.9 5.2
All Officers and Directors as a Group (6 persons)....................... 988,818 28.2 16.4
</TABLE>
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* Less than 1%.
(1) The address for the directors is: 2915 Waters Road, Suite 108, Eagan,
Minnesota 55121. Dr. Finkelstein's address is: Health Informatics
Division--Box 609 UMHC, 420 Delaware St. S.E., Minneapolis, Minnesota 55455.
(2) Assumes no exercise of the Underwriter's Over-allotment Option.
(3) Includes options to purchase 12,000 Shares.
(4) Includes options to purchase 240,046 Shares.
(5) Includes options to purchase 37,387 Shares.
(6) Includes options to purchase 392,211 Shares.
(7) Includes options to purchase 40,000 Shares.
(8) Includes options to purchase 15,000 Shares.
(9) Includes options to purchase 257,688 Shares.
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DESCRIPTION OF SECURITIES
The Company is presently authorized to issue up to 25,000,000 Shares and
5,000,000 shares of Preferred Stock. As of the date of this Prospectus, there
were 2,517,735 Shares outstanding. No shares of Preferred Stock were issued or
outstanding.
COMMON STOCK
Holders of Shares are entitled to receive such dividends as are declared by
the Board of Directors of the Company, out of funds legally available for the
payment of dividends. The Company expects to retain any earnings to finance the
development of its business. Accordingly, the Company does not anticipate
payment of any dividends on its Shares for the foreseeable future. In the event
of any liquidation, dissolution or winding-up of the Company, the holders of
Shares will be entitled to receive a pro rata share of the net assets of the
Company remaining after payment, or provision for payment, of the debts and
other liabilities of the Company, if any.
Holders of Shares are entitled to one vote per Share on all matters to be
voted upon by shareholders. There is no cumulative voting for the election of
directors, which means that the holders of Shares entitled to exercise more than
50% of the voting rights in an election of directors are able to elect all of
the directors. Holders of Shares have no preemptive rights to subscribe for or
to purchase any additional Shares, or other obligations convertible into Shares,
which may, hereafter, be issued by the Company.
All of the outstanding Shares are, and the Share component of the Units sold
pursuant to the Offering will be, fully paid and non-assessable. Holders of
Shares of the Company are not liable for further calls or assessments.
CLASS A WARRANTS
The Class A Warrants included as part of the Units being offered hereby will
be issued under and governed by the provisions of a Warrant Agreement (the
"Warrant Agreement") between the Company and Firstar Trust Company as Warrant
Agent (the "Warrant Agent"). The following summary of the Warrant Agreement is
not complete, and is qualified in its entirety by reference to the Warrant
Agreement, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
Commencing 10 trading days after the Effective Date, the Shares and the
Class A Warrants offered as part of the Units will be detachable and separately
transferable. One Class A Warrant entitles the holder ("Warrantholder") thereof
to purchase one Share during the four years following the Effective Date,
subject to earlier redemption, provided that at such time a current prospectus
relating to the Shares issuable upon exercise of the Class A Warrants is
effective and the issuance of such Shares is qualified for sale or exempt from
qualification under applicable state securities laws. Each Class A Warrant will
be exercisable at an exercise price of $5.50 per Share, subject to adjustment in
certain events.
The Class A Warrants are subject to redemption by the Company for $.01 per
Warrant at any time commencing 90 days after the Effective Date, provided that
the closing bid price of the Shares exceeds $6.50 (subject to adjustment) for 14
consecutive trading days. Written notice must precede redemption by 30 days and
must be sent within 10 business days of the 14 consecutive trading day period.
In addition, a current prospectus covering the Shares issuable upon the exercise
of the Class A Warrants must then be effective under the Securities Act. For
purposes of the redemption, the closing bid price of the Shares if quoted on
Nasdaq and, if the Shares are listed on a national securities exchange, shall be
determined by the last reported sale price on the primary exchange on which the
Shares are traded. Holders of Class A Warrants will automatically forfeit all
rights thereunder except the right to receive the $.01 redemption price per
Warrant unless the Class A Warrants are exercised before they are redeemed.
The Warrantholders are not entitled to vote, receive dividends or exercise
any of the rights of holders of Shares for any purpose. The Class A Warrants are
in registered form and may be presented for transfer,
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exchange or exercise at the office of the Warrant Agent. Although the Company
has applied for listing of the Class A Warrants on the Nasdaq SmallCap Market,
there is currently no established market for the Class A Warrants, and there is
no assurance that any such market will develop.
The Warrant Agreement provides for adjustment of the exercise price and the
number of Shares purchasable upon exercise of the Class A Warrants to protect
Warrantholders against dilution in certain events, including stock dividends,
stock splits, reclassification, and any combination of Shares, or the merger,
consolidation, and any combination of Shares, or the merger, consolidation, or
disposition of substantially all the assets of the Company.
The Class A Warrants may be exercised upon surrender of the certificate
therefor on or prior to the expiration date (or earlier redemption date) at the
offices of the Warrant Agent, with the form of "Election to Purchase" on the
reverse side of the certificate properly completed and executed as indicated,
accompanied by payment of the full exercise price (by certified or cashier's
check payable to the order of the Company) for the number of Class A Warrants
being exercised.
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of undesignated
Preferred Stock. The unissued shares of Preferred Stock are subject to
designation into one or more classes or series by the Board of Directors. The
Board of Directors has the authority, without further shareholder action, to
issue, from time to time, all or any part of the undesignated shares of
Preferred Stock. Undesignated shares of Preferred Stock are issuable in one or
more classes or series, and the Board of Directors is authorized to determine
the designation and number of shares, in each class or series, and to fix the
dividend, redemption, liquidation, retirement, conversion and voting rights, if
any, of each class or series, and any other rights and preferences thereof. Any
undesignated shares of Preferred Stock, which may be issued, may have
disproportionately high voting rights or class voting rights, may be convertible
into Shares, and may rank prior to the Shares as to payment of dividends and to
the distribution of assets upon liquidation or dissolution.
The consent of the holders of the Shares is not required for any such
issuance of the undesignated shares of Preferred Stock. The existence of the
undesignated shares may have the effect of discouraging an attempt, through
acquisition of a substantial number of Shares to acquire control of the Company,
with a view to effecting a merger, sale or exchange of assets or similar
transaction. The Board of Directors, without shareholder's approval, can issue
shares of classes of Preferred Stock with voting conversion rights, which could
adversely effect the voting power of the Shares.
STOCK OPTIONS AND WARRANTS
As compensation for services performed by a licensed broker-dealer for
soliciting sales of Shares in a previous private placement terminating in 1996,
the Company issued warrants for the purchase of 132,900 Shares at an exercise
price of $2.00 per Share. All such warrants are currently exercisable and expire
on October 30, 2000. The warrants contain customary anti-dilution provisions and
certain participatory and demand registration rights and are non-transferable
except in accordance with applicable securities laws and regulations. The
warrants also include "cashless" exercise provisions entitling the holder to
convert the warrants into Shares.
As compensation for services previously performed by the Underwriter for
soliciting sales of Shares in a private placement completed in March 1998, the
Company issued warrants for the purchase of 50,000 shares, at an exercise price
of $4.95 per Share. All such warrants are exercisable commencing in February and
March 1999 and expire in February and March 2004. The warrants contain customary
anti-dilution provisions and certain participatory and demand registration
rights and are non-transferable except in accordance with applicable securities
laws and regulations. The warrants also include "cashless" exercise provisions
entitling the holder to convert the warrants into Shares. See "Underwriting."
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The Company has reserved 400,000 Shares for issuance pursuant to its 1995
Option Plan and has granted options for the purchase of 317,500 Shares, at
exercise prices ranging from $2.00 to $3.00 per Share, under the 1995 Option
Plan, of which 6,000 have been exercised after March 31, 1998. See
"Management--Stock Option Plan."
The Company has also granted a total of 1,124,999 options to purchase Shares
outside the 1995 Option Plan, of which 49,724 have been exercised after March
31, 1998. These options have exercise prices ranging from $1.70 to $2.00.
The Company has also granted a total of 75,000 options to purchase Shares to
outside directors of the Company, at an exercise price of $2.00 per Share.
The Company's Board of Directors adopted and the Company's shareholders
approved, at a Special Meeting of the Company's Shareholders held on May 22,
1998, the Company's 1998 Option Plan. The Company has reserved a total of
750,000 Shares for issuance under the 1998 Option Plan.
The Company has agreed to sell to the Underwriter in connection with the
Offering, for nominal consideration, a warrant to purchase 200,000 Units,
exercisable for a period of four years commencing one year from the date of this
Prospectus, at an exercise price of $4.95 per Unit. See "Underwriting."
MINNESOTA ANTI-TAKEOVER LAW
The Company is governed by the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. In general, Section 302A.671 provides
that the shares of a corporation acquired in a "control share acquisition" have
no voting rights unless the control share acquisition is approved in a
prescribed manner. A "control share acquisition" is an acquisition, directly or
indirectly, of beneficial ownership of shares that would, when added to all
other shares beneficially owned by the acquiring person, cause the acquiring
person to have voting power in the election of directors to exceed any one of
the following thresholds of ownership: 20%, 33 1/3% or 50%. In general, Section
302A.673 prohibits a publicly-held Minnesota corporation from engaging in a
"business combination" with an "interested shareholder" for a period of four
years after the date of transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar is Firstar Trust Company,
Milwaukee, Wisconsin.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 5,017,735
Shares (or 5,385,735 Shares if the Underwriter's Over-allotment Option is
exercised in full). Of these Shares, the Units (and their components) purchased
in the Offering will be freely tradable without registration or other
restriction under the Securities Act.
Of the 2,517,735 Shares currently outstanding, none have been registered
under the Securities Act, all are "restricted securities" under Rule 144 of the
Securities Act (the "Restricted Shares") and may not be sold in the absence of a
registration under the Securities Act unless an exemption from registration is
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available, including an exemption contained in Rule 144. All such Restricted
Shares will become eligible for sale, assuming all of the other requirements of
Rule 144 have been satisfied, as follows:
In general, under Rule 144 as currently in effect, a holder of Restricted
Shares who has beneficially owned such shares for at least one year (including
the holding period of any prior owner other than an affiliate of the Company) is
entitled to sell within any three-month period a number of Shares that does not
exceed the greater of (i) 1% of the then outstanding Shares (approximately
50,177 Shares immediately after the Offering); or (ii) the average weekly
trading volume of the Shares in the public market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. A person who is not an affiliate of the Company
at any time during the 90 days preceding a sale and who beneficially owns shares
that were not acquired from the Company or an affiliate of the Company within
the past two years is entitled to sell such shares under Rule 144(k) without
regard to volume limitations, manner of sale provisions, notice requirements or
the availability of current public information concerning the Company.
In general, under Rule 701 as currently in effect, any employee, consultant
or advisor of the Company who purchases Shares from the Company by exercising a
stock option outstanding on the date of the Offering is eligible to resell such
Shares 90 days after the date of the Prospectus in reliance on Rule 144, but
need not comply with certain restrictions contained in Rule 144, including the
holding period requirement. The Company plans to file a Registration Statement,
no sooner than 180 days after the Effective Date, on Form S-8 (the "S-8
Registration Statement") to register all Shares subject to outstanding stock
options. Shares issued upon exercise of options may be freely tradeable once the
S-8 Registration Statement becomes effective.
Following the Offering, the Company cannot predict the effect, if any, that
sales of the Shares or the availability of such Shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales by existing
shareholders of substantial amounts of Shares could adversely affect prevailing
market prices for the Units, the Shares or Class A Warrants if and when a public
market exists.
Of the 2,517,735 Shares presently outstanding, 306,557 Shares are held by
officers, directors or 5% shareholders, of which 100% are subject to Lock Up
Agreements for 180 days after the Effective Date. Of the remaining 2,211,178
Shares, an additional 825,500 Shares are subject to Lock Up Agreements; however,
the Underwriter has requested and the Company has agreed to use its best efforts
to attempt to obtain Lock Up Agreements on the remaining 1,385,678 Shares. There
is no assurance that the Company will be able to obtain Lock Up Agreements on
all of these Shares. Of the remaining 1,385,678 Shares, all such Shares will be
eligible for resale in the open market immediately under Rule 144(k).
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Company and R. J. Steichen & Company
(the "Underwriter"), the Company has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Company the 2,500,000 Units offered
hereby.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to approval of certain legal matters by counsel and to various other
conditions precedent. The nature of the Underwriter's obligations are such that
it is committed to purchase all Units offered hereby if any of the Units are
purchased.
The Underwriter proposes to offer the Units directly to the public at the
Price to Public set forth on the cover page of this Prospectus and to certain
securities dealers who are members of the National Association of Securities
Dealers, Inc., at such price less usual and customary concessions. The Company
has agreed to pay the Underwriter a nonaccountable expense allowance equal to
2.5% of the aggregate
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Price to Public of the Units sold, including any Units sold pursuant to the
Underwriter's Over-allotment Option. After the initial public offering of the
Units, the initial offering price and other selling terms may be changed by the
Underwriter. The Underwriter has advised the Company that it does not intend to
confirm sales of Units to any accounts over which it exercises discretionary
authority.
The Company has granted to the Underwriter an Over-allotment Option,
exercisable not later than 45 days after the date of this Prospectus, and
subject to the terms and conditions set forth in the Underwriting Agreement, to
purchase up to 375,000 additional Units at the Price to Public, less the
Underwriting Discount and nonaccountable expense allowance. The Underwriter may
exercise such option only to cover over-allotments made in connection with the
sale of the Units offered hereby.
The Company has agreed to sell to the Underwriter, for nominal
consideration, a warrant (the "Warrant") to purchase up to 200,000 Units (the
"Underwriter's Warrant"). The Underwriter's Warrant is not exercisable during
the first year after the date of this Prospectus and thereafter is exercisable
at a price per Unit equal to $4.95 for a period of four years. The warrant
component of the Units underlying the Underwriter's Warrant is exercisable at a
price of $5.50 per share. The Warrant contains customary anti-dilution
provisions and certain participatory and demand registrations. The Underwriter's
Warrant also includes "cashless" exercise provisions entitling the holder to
convert the Warrant into Shares.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Underwriter and their officers, directors and controlling
persons against civil liabilities in connection with the Offering, including
certain liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted pursuant to such
indemnification provisions, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
In order to facilitate the Offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Units. Specificially, the Underwriter may over-allot the Units in connection
with the Offering, creating a short position in the Units for its own account.
In addition, to cover over-allotments or to stabilize the price of the Units,
the Underwriter may bid for, and purchase, Units in the open market. The
Underwriter may also reclaim selling concessions allowed to a dealer for
distributing Units in the Offering, if the Underwriter repurchases previously
distributed Units in transactions to cover its short positions, in stabilization
transactions or otherwise. Finally, the Underwriter may bid for, and purchase,
Units in market making transactions and impose penalty bids. These activities
may stabilize or maintain the market price of the Units above the market level
that may otherwise prevail. The Underwriter is not required to engage in these
activities and may end any of these activities at any time.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. Neither the Company nor the
Underwriter makes any representation or prediction as to the direction and
magnitude of any effect that the transactions described above might have on the
price of the Units. In addition, neither the Company nor the Underwriter makes
any representations that the Underwriter will engage in such transactions or
that such transactions, once commenced, will not be discontinued without notice.
Of the 2,517,735 Shares presently outstanding, 306,557 Shares are held by
officers, directors or 5% shareholders, of which 100% are subject to Lock Up
Agreements for 180 days after the Effective Date. Of the remaining 2,211,178
Shares, an additional 825,500 Shares are subject to Lock Up Agreements; however,
the Underwriter has requested and the Company has agreed to use its best efforts
to attempt to obtain Lock Up Agreements on the remaining 1,385,678 Shares. There
is no assurance that the Company will be able to obtain Lock Up Agreements on
all of these Shares. Of the remaining 1,385,678 Shares, all such Shares will be
eligible for resale in the open market immediately under Rule 144(k).
54
<PAGE>
From December 1997 to March 1998, the Company sold an aggregate of 500,000
Shares in a private placement in which the Underwriter acted as selling agent.
The Underwriter received an agent's commission of $150,000 and a nonaccountable
expense allowance of $45,000. The Company also sold to the Underwriter, for
nominal consideration, a five-year warrant to purchase up to 50,000 Shares, at
an exercise price of $4.95 per Share.
Prior to the Offering, there has been no public market for the securities of
the Company. The Price to Public and the Warrant exercise price were determined
through negotiation between the Company and the Underwriter and bear no relation
to the Company's current earnings, book value, net worth or financial statement
criteria of value. There can be no assurance that transactions in the Company's
securities in the public market after the Offering will be higher or lower than
the initial Price to Public.
The foregoing is a summary of the material provisions of the Underwriting
Agreement and the Underwriter's Warrant. Copies of such documents have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Doherty, Rumble & Butler Professional Association, Minneapolis,
Minnesota. Certain legal matters in connection with the Offering will be passed
upon for the Underwriter by Maun & Simon, PLC, Minneapolis, Minnesota.
EXPERTS
The financial statements of the Company as of June 30, 1996 and 1997 and for
each of the years then ended and the period from July 19, 1988 (inception) to
June 30, 1997, appearing in this Prospectus and Registration Statement, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon (which contains an explanatory paragraph describing conditions
that raise substantial doubt about the Company's ability to continue as a going
concern as described in Note 2 to the financial statements) appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act with respect to the
Units offered hereby. This Prospectus filed as a part of the Registration
Statement does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement, including the exhibits, copies of which may be obtained at prescribed
rates from the Securities and Exchange Commission at its principal office at 450
Fifth Street N.W., Washington, D.C. 20549, and at the following regional offices
of the Commission: 75 Park Place, New York, New York 10007, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60604. In
addition, the Securities and Exchange Commission maintains a world wide web site
on the Internet at http://www.sec.gov that contains reports, proxy, information
statements and other documents filed electronically with the Securities and
Exchange Commission, including the Registration Statement. Descriptions
contained in this Prospectus as to the contents of any agreement or other
documents filed as an exhibit to the Registration Statement are not necessarily
complete and each such description is qualified by reference to such agreement
or document.
The Company currently is not a reporting company under the Exchange Act.
After completion of the Offering, the Company intends to make available to its
securityholders annual reports containing financial statements audited by its
independent accountants and quarterly reports for the first three quarters of
each fiscal year containing unaudited financial information.
55
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996 AND 1997 AND PERIOD FROM
JULY 19, 1988 (INCEPTION) TO JUNE 30, 1997 AND NINE MONTH
PERIODS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
AND PERIOD FROM JULY 19, 1988 (INCEPTION) TO
MARCH 31, 1998 (UNAUDITED)
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Financial Statements
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statement of Shareholders' Equity......................................... F-5
Statements of Cash Flows.................................................. F-7
Notes to Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Hypertension Diagnostics, Inc.
We have audited the balance sheets of Hypertension Diagnostics, Inc. (a
development stage company) as of June 30, 1996 and 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
years then ended and the period from July 19, 1988 (inception) to June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hypertension Diagnostics,
Inc. at June 30, 1996 and 1997, and the results of its operations and its cash
flows for each of the years then ended and the period from July 19, 1988
(inception) to June 30, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, the Company's deficit
accumulated during the development stage raises substantial doubt about its
ability to continue as a going concern. The Company intends to obtain additional
capital financing to permit it to continue its operations. The financial
statements do not include any adjustments that might result from this
uncertainty.
ERNST & YOUNG LLP
Minneapolis, Minnesota
October 3, 1997
F-2
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
---------------------------- MARCH 31,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 1,980,292 $ 1,198,778 $ 1,569,245
Interest receivable................................................ 6,606 5,375 5,075
Prepaid expenses................................................... -- -- 31,287
------------- ------------- -------------
Total current assets................................................. 1,986,898 1,204,153 1,605,607
Property and equipment:
Leasehold improvements............................................. -- -- 9,003
Furniture and equipment............................................ 18,527 20,300 98,784
Less accumulated depreciation...................................... (8,596) (15,730) (22,452)
------------- ------------- -------------
9,931 4,570 85,335
Patents, net of accumulated amortization of $4,562, $6,843 and $8,554
at June 30, 1996 and 1997 and March 31, 1998, respectively......... 6,843 4,562 2,851
Other assets......................................................... 630 420 36,902
------------- ------------- -------------
Total assets......................................................... $ 2,004,302 $ 1,213,705 $ 1,730,695
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable..................................................... $ 23,540 $ 4,551 $ 44,730
------------- ------------- -------------
Total current liabilities............................................ 23,540 4,551 44,730
Shareholders' equity:
Preferred Stock, $.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares--none.............................. -- -- --
Common Stock, $.01 par value:
Authorized shares--25,000,000
Issued and outstanding shares--1,962,011 at June 30, 1996 and
1997 and 2,462,011 at March 31, 1998........................... 19,620 19,620 24,620
Additional paid-in capital......................................... 3,223,256 3,323,620 4,628,901
Deficit accumulated during the development stage................... (1,262,114) (2,134,086) (2,967,556)
------------- ------------- -------------
Total shareholders' equity........................................... 1,980,762 1,209,154 1,685,965
------------- ------------- -------------
Total liabilities and shareholders' equity........................... $ 2,004,302 $ 1,213,705 $ 1,730,695
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes
F-3
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 19, 1988 NINE MONTHS ENDED MARCH 31 PERIOD FROM
YEAR ENDED JUNE 30 (INCEPTION) JULY 19, 1988
-------------------------- TO JUNE 30, -------------------------- (INCEPTION) TO
1996 1997 1997 1997 1998 MARCH 31, 1998
------------ ------------ ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Operating expenses:
Research and
development........... $ 564,012 $ 526,352 $ 1,294,585 $ 483,062 $ 255,787 $ 1,550,372
General and
administrative........ 201,604 426,818 930,902 300,186 623,383 1,554,285
------------ ------------ ------------- ------------ ------------ --------------
Operating loss............ 765,616 953,170 2,225,487 783,248 879,170 3,104,657
Other income (expense):
Interest income......... 53,237 81,198 138,432 64,724 45,700 184,132
Interest expense........ (1,706) -- (47,031) -- -- (47,031)
------------ ------------ ------------- ------------ ------------ --------------
Net loss and deficit
accumulated during the
development stage....... $ (714,085) $ (871,972) $ (2,134,086) $ (718,524) $ (833,470) $ (2,967,556)
------------ ------------ ------------- ------------ ------------ --------------
------------ ------------ ------------- ------------ ------------ --------------
Basic and dilutive net
loss per share.......... $ (.57) $ (.44) $ (.37) $ (.41)
Weighted average shares
outstanding............. 1,248,634 1,962,011 1,962,011 2,050,407
</TABLE>
See accompanying notes.
F-4
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
--------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
---------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at July 19, 1988 (inception).................... -- $ -- $ -- $ -- $ --
Conversion of notes payable to Common Stock at $3.00
in August 1988 through June 1989.................... 75,167 752 224,748 -- 225,500
Sale of Common Stock at $.04 in September 1988 through
June 1989........................................... 342,853 3,428 10,286 -- 13,714
Net loss.............................................. -- -- -- (188,496) (188,496)
---------- --------- ------------ ------------- ------------
Balance at June 30, 1989................................ 418,020 4,180 235,034 (188,496) 50,718
Sale of Common Stock at $.04 in July 1989............. 1,900 19 57 -- 76
Private placement of Common Stock at $3.00 in October
1989 through January 1990........................... 58,750 587 175,663 -- 176,250
Conversion of notes payable to Common Stock at $3.00
in July 1989 through April 1990..................... 13,000 130 38,870 -- 39,000
Redemption of Common Stock in August 1989............. (7,500) (75) (225) -- (300)
Net loss -- -- -- (195,716) (195,716)
---------- --------- ------------ ------------- ------------
Balance at June 30, 1990................................ 484,170 4,841 449,399 (384,212) 70,028
Private placement of Common Stock at $3.00 in July
1990................................................ 1,667 17 4,984 -- 5,001
Net loss.............................................. -- -- -- (134,857) (134,857)
---------- --------- ------------ ------------- ------------
Balance at June 30, 1991................................ 485,837 4,858 454,383 (519,069) (59,828)
Net loss.............................................. -- -- -- (3,076) (3,076)
---------- --------- ------------ ------------- ------------
Balance at June 30, 1992................................ 485,837 4,858 454,383 (522,145) (62,904)
Net income............................................ -- -- -- 45,061 45,061
---------- --------- ------------ ------------- ------------
Balance at June 30, 1993 (carried forward).............. 485,837 4,858 454,383 (477,084) (17,843)
</TABLE>
See accompanying notes.
F-5
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
--------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
---------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993 (brought forward).............. 485,837 $ 4,858 $ 454,383 $ (477,084) $ (17,843)
Net loss.............................................. -- -- -- (17,743) (17,743)
---------- --------- ------------ ------------- ------------
Balance at June 30, 1994................................ 485,837 4,858 454,383 (494,827) (35,586)
Net loss.............................................. -- -- -- (53,202) (53,202)
---------- --------- ------------ ------------- ------------
Balance at June 30, 1995................................ 485,837 4,858 454,383 (548,029) (88,788)
Common Stock issued in connection with bridge
financing at $1.00 in August 1995, net of expenses
of $6,250........................................... 125,000 1,250 117,500 -- 118,750
Conversion of notes payable to Common Stock at
$1.00............................................... 2,174 22 2,152 -- 2,174
Private placement of Common Stock at $2.00 (October
1995 through May 1996), net of expenses of
$385,313............................................ 1,349,000 13,490 2,299,197 -- 2,312,687
Purchase of warrants.................................. -- -- 50 -- 50
Value of stock options granted in lieu of cash
compensation........................................ -- -- 349,974 -- 349,974
Net loss.............................................. -- -- -- (714,085) (714,085)
---------- --------- ------------ ------------- ------------
Balance at June 30, 1996................................ 1,962,011 19,620 3,223,256 (1,262,114) 1,980,762
Value of stock options granted in lieu of cash
compensation........................................ -- -- 100,364 -- 100,364
Net loss.............................................. -- -- -- (871,972) (871,972)
---------- --------- ------------ ------------- ------------
Balance at June 30, 1997................................ 1,962,011 19,620 3,323,620 (2,134,086) 1,209,154
Private placement of Common Stock at $3.00 (December
1997 through March 1998), net of expenses of
$172,994............................................ 500,000 5,000 1,217,898 -- 1,222,898
Purchase of warrants.................................. -- -- 50 -- 50
Value of stock options granted in lieu of cash
compensation........................................ -- -- 87,333 -- 87,333
Net loss.............................................. -- -- -- (833,470) (833,470)
---------- --------- ------------ ------------- ------------
Balance at March 31, 1998 (unaudited)................... 2,462,011 $ 24,620 $ 4,628,901 $ (2,967,556) $ 1,685,965
---------- --------- ------------ ------------- ------------
---------- --------- ------------ ------------- ------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 19,
1988 NINE MONTHS ENDED PERIOD FROM
YEAR ENDED JUNE 30 (INCEPTION) MARCH 31 JULY 19, 1988
-------------------- TO JUNE 30, -------------------- (INCEPTION) TO
1996 1997 1997 1997 1998 MARCH 31, 1998
--------- --------- ------------ --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss........................... $(714,085) $(871,972) $(2,134,086) $(718,524) $(833,470) $ (2,967,556)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Value of stock options granted in
lieu of cash compensation...... 349,974 100,364 450,338 75,273 87,333 537,671
Depreciation..................... 5,961 7,134 52,199 560 6,723 58,922
Amortization..................... 2,491 2,491 7,473 623 1,868 9,341
Write-off of property and
equipment...................... -- -- 42,702 -- -- 42,702
Change in operating assets and
liabilities:
Interest receivable............ (6,606) 1,231 (5,375) 918 300 (5,075)
Prepaid expenses............... -- -- -- -- (31,287) (31,287)
Other assets................... -- -- -- -- (36,640) (36,640)
Accounts payable............... 21,452 (18,989) 4,551 (23,540) 40,179 44,730
Accrued liabilities............ (66,351) -- 174 -- -- 174
--------- --------- ------------ --------- --------- --------------
Net cash used in operating
activities....................... (407,164) (779,741) (1,582,024) (664,690) (764,994) (2,347,018)
INVESTING ACTIVITIES
Purchase of property and
equipment........................ (1,226) (1,773) (99,471) (2,956) (87,487) (186,958)
Payment of patent costs............ -- -- (12,455) -- -- (12,455)
--------- --------- ------------ --------- --------- --------------
Net cash used in investing
activities....................... (1,226) (1,773) (111,926) (2,956) (87,487) (199,413)
FINANCING ACTIVITIES
Proceeds from notes payable........ -- -- 315,500 -- -- 315,500
Payments of notes payable.......... (49,000) -- (49,000) -- -- (49,000)
Issuance of common stock........... 2,431,487 -- 2,626,528 -- 1,222,948 3,849,476
Redemption of common stock......... -- -- (300) -- -- (300)
--------- --------- ------------ --------- --------- --------------
Net cash provided by financing
activities....................... 2,382,487 -- 2,892,728 -- 1,222,948 4,115,676
--------- --------- ------------ --------- --------- --------------
Net increase (decrease) in cash and
equivalents...................... 1,974,097 (781,514) 1,198,778 (667,646) 370,467 1,569,245
Cash and equivalents at beginning
of period........................ 6,195 1,980,292 -- 1,980,292 1,198,778 --
--------- --------- ------------ --------- --------- --------------
Cash and equivalents at end of
period........................... $1,980,292 $1,198,778 $1,198,778 $1,312,646 $1,569,245 $ 1,569,245
--------- --------- ------------ --------- --------- --------------
--------- --------- ------------ --------- --------- --------------
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Conversion of note payable and
accrued interest into common
stock............................ $ 2,174 $ -- $ 266,674 $ -- $ -- $ 266,674
Cash paid for interest............. 12,526 -- 12,526 -- -- 12,526
</TABLE>
See accompanying notes.
F-7
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Hypertension Diagnostics, Inc. (the "Company") is a development stage
company formed on July 19, 1988 to develop, design and market a cardiovascular
profiling system.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements are capitalized,
while repair and maintenance costs are charged to operations when incurred.
Depreciation is computed principally using the straight-line method. Estimated
useful lives for property and equipment are the term of the lease for leasehold
improvements and 3-7 years for furniture and equipment.
PATENTS
Costs incurred in obtaining patents and trademarks are capitalized as
incurred and amortized on a straight-line basis over 60 months. The Company
periodically reviews its patents and trademarks for impairment in value. Any
adjustment from the analysis is charged to operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense as incurred.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial reporting and
tax bases of assets and liabilities.
F-8
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of March 31, 1998 and for the nine
month periods ended March 31, 1997 and 1998 and the period from July 19, 1988
(inception) to March 31, 1998 are unaudited. In the opinion of management of the
Company, these financial statements reflect all adjustments, consisting only of
normal and recurring adjustments necessary for a fair presentation of the
financial statements. The results of operations for the nine month period ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the full year ending June 30, 1998.
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," requiring dual presentation of basic and diluted
earnings per share. Basic and diluted net loss per share are equal because the
effect of outstanding stock options and warrants is antidilutive. Statement No.
128 was adopted by the Company on December 31, 1997. All earnings per share
amounts have been presented, and where necessary, restated to conform to
Statement 128 requirements.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board Opinion No. 25 (APB 25)
and related interpretations in accounting for its plans. Under APB 25, when the
exercise price of employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
2. GOING CONCERN
As reflected in the accompanying financial statements, the Company has
accumulated a deficit during its development stage and to date has not generated
positive cash flows from operations. The Company may be unable to maintain
solvency unless it continues to obtain outside financing. The Company intends to
obtain additional financing through a public offering of Common Stock.
3. INCOME TAXES
At June 30, 1997, the Company had a net operating loss carryforward for tax
purposes of approximately $1,684,000. This carryforward is available to offset
future taxable income through 2012.
Components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Loss carryforwards.................................................. $ 365,000 $ 674,000
Less valuation allowance............................................ (365,000) (674,000)
----------- -----------
Net deferred tax assets............................................. $ -- $ --
----------- -----------
----------- -----------
</TABLE>
F-9
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
4. STOCK OPTIONS AND WARRANTS
During 1995, the Company adopted the Hypertension Diagnostics, Inc. 1995
Long-Term Incentive and Stock Option Plan ("the Plan") that includes both
incentive stock options and non-qualified stock options to be granted to
employees, directors, officers, consultants and advisors of the Company. The
maximum number of shares reserved under the Plan is 400,000 shares. The Board of
Directors establishes the terms and conditions of all stock option grants,
subject to the Plan and applicable provisions of the Internal Revenue Code.
Incentive stock options must be granted at an exercise price not less than the
fair market value of the Common Stock on the grant date. The options granted to
participants owning more than 10% of the Company's outstanding voting stock must
be granted at an exercise price not less than 110% of fair market value of the
Common Stock on the grant date. The options expire on the date determined by the
Board of Directors but may not extend more than ten years from the grant date
while incentive stock options granted to participants owning more than 10% of
the Company's outstanding voting stock expire five years from the grant date.
A summary of outstanding options is as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
AVAILABLE OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING PER SHARE
----------- ----------- -----------------
<S> <C> <C> <C>
Balance at June 30, 1995............................................... -- -- $ --
Shares reserved...................................................... 400,000 -- --
Granted.............................................................. (15,000) 15,000 2.00
----------- -----------
Balance at June 30, 1996............................................... 385,000 15,000 2.00
Granted.............................................................. (11,900) 11,900 2.00
----------- -----------
Balance at June 30, 1997............................................... 373,100 26,900 $ 2.00
----------- -----------
----------- -----------
</TABLE>
At June 30, 1997, there were 26,900 options outstanding with an exercise
price of $2.00 that had been granted under the Plan. The outstanding options had
a weighted average remaining contractual life of nine years. The number of
options exercisable as of June 30, 1996 and 1997 were 3,750 and 23,900,
respectively, at a weighted average exercise price of $2.00. The weighted
average fair value of options granted under the Plan during each of the years
ended June 30, 1996 and 1997 was $.52 per share.
At June 30, 1997, the Company has also granted a total of 1,157,499 options
outside the Plan to officers, directors and consultants. These options all have
exercise prices between $1.70 and $2.00 and a weighted average remaining
contractual life of eight years. The number of non-Plan options exercisable at
June 30, 1996 and 1997 were 679,023 and 895,761, respectively, at a weighted
average exercise price of $1.71. The weighted average fair value of non-Plan
options granted during the years ended June 30, 1996 and 1997 was $.44 and $.52
per share, respectively.
For the years ended June 30, 1996 and 1997, the Company recognized $349,974
and $100,364, respectively, of expense related to the granting of options for
consulting services provided by the Company.
Pro forma information regarding net loss is required by Statement No. 123,
and has been determined as if the Company had accounted for its stock options
under the fair value method of that Statement. The fair value of these options
was estimated at the date of grant using the minimum value option pricing
F-10
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
4. STOCK OPTIONS AND WARRANTS (CONTINUED)
model with the following weighted average assumptions for 1996 and 1997:
risk-free interest rate of 6% and a weighted average expected life of the option
of 5 years.
The minimum value option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions.
The effect of applying Statement No. 123's fair value method of the
Company's stock-based awards results in a net loss that is not materially
different than the amounts reported for the years ended June 30, 1996 and 1997,
respectively.
During the initial phase-in period, the effects of applying Statement No.
123 for recognizing compensation cost may not be representative of the effects
on reported net income or loss for future years because the options vest over
several years and additional awards will be made in the future.
WARRANTS
In connection with private equity offerings, the Company has issued warrants
to purchase shares of Common Stock as follows:
<TABLE>
<CAPTION>
WARRANT EXERCISE EXPIRATION
SHARES PRICE DATE
- --------- ----------- -------------
<S> <C> <C>
132,900 $ 2.00 2001
50,000 $ 3.00 2003
- ---------
182,900
- ---------
- ---------
</TABLE>
5. LICENSE AGREEMENT
In September 1988, the Company entered into a license agreement with the
Regents of the University of Minnesota ("the Regents"), whereby the Company was
granted a license to utilize certain technology developed by the Regents. Under
the license agreement, the Company is required to pay royalties on net product
sales containing the technology licensed from the Regents. In the first two
years after execution of the agreement, royalties were 1% of net sales, and for
the third and fourth years were 1.5% of net sales. Beginning in the fifth year,
and continuing through the termination of the agreement, royalties were 2% of
net sales, and 3% if the Regents obtain a United States patent on any of the
technology covered under the agreement (which, in fact, occurred). Termination
occurs with the expiration of the last patent, or ten years after the date of
the first commercial product sale, if no patent exists.
6. COMMITMENTS
Subsequent to June 30, 1997, the Company entered into a non-cancelable
operating lease agreement for office/warehouse space. The term of the lease is
from November 1997 to October 2000. Prior to entering into this lease agreement,
the Company had utilized office space of its founders and officers for which it
paid no rent.
F-11
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
6. COMMITMENTS (CONTINUED)
The following is a schedule of future minimum lease payments due as of
November 1997:
<TABLE>
<S> <C>
Year ending June 30:
1998............................................ $ 51,321
1999............................................ 76,981
2000............................................ 76,981
2001............................................ 25,660
---------
$ 230,943
---------
---------
</TABLE>
7. EMPLOYMENT AGREEMENTS AND CONSULTING AGREEMENTS
The Company has entered into employment agreements or consulting agreements
with its officers and some members of the Board of Directors. The officer's
employment agreements call for minimum salary levels subject to adjustment by
the Company's Board of Directors in addition to awards of stock options. The
employment agreements terminate at various times through 1999. The consulting
agreements provide for the consultants to receive compensation, in the form of
cash or stock options, for the services provided.
8. SUBSEQUENT EVENT (UNAUDITED)
From December 1997 to March 1998, the Company sold 500,000 shares of Common
Stock resulting in net proceeds to the Company of $1,222,898.
F-12
<PAGE>
<TABLE>
<S> <C>
[HYPERTENSION DIAGNOSTICS-TM- INC. LOGO]
[PICTURE DISPLAYING THE THE PORTABILITY OF THE
HDI/PULSEWAVE-TM- CARDIOVASCULAR HDI/PULSEWAVE-TM- MODEL DO-2020 AND
PROFILING INSTRUMENT AND ITS VARIOUS ITS COMPONENTS MAKE IT CONVENIENT TO
COMPONENTS] USE THROUGHOUT A CLINIC OR PHYSICIAN'S
OFFICE.
WITH THE MODEL DO-2020 CARDIOVASCULAR [PICTURE OF SAMPLE CARDIOVASCULAR
PROFILE REPORT, PHYSICIANS WILL BE ABLE PROFILE REPORTS LYING ON A WOODEN
TO NON-INVASIVELY SCREEN, DIAGNOSE AND SURFACE SURROUNDED BY A STETHOSCOPE, A
MONITOR THE TREATMENT OF PATIENTS FOR BALL-POINT PEN AND MEDICAL JOURNALS]
CARDIOVASCULAR DISEASE.
</TABLE>
The HDI/PulseWave-TM- Model DO-2020 has not received clearance for marketing by
the FDA and there can be no assurance it will receive such clearance.
The HDI/PULSEWAVE-TM- Model DO-2020 CardioVascular Profiling Instrument
non-invasively measures the elasticity of both small and large arteries
providing a real-time assessment of a patient's vascular health.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO PURCHASE BY ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 16
Dilution.................................................................. 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 24
Management................................................................ 42
Certain Transactions...................................................... 48
Principal Shareholders.................................................... 49
Description of Securities................................................. 50
Shares Available for Future Sale.......................................... 52
Underwriting.............................................................. 53
Legal Matters............................................................. 55
Experts................................................................... 55
Additional Information.................................................... 55
Financial Statements...................................................... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,500,000 UNITS
[HYPERTENSION DIAGNOSTICS-TM- INC. LOGO]
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE CLASS A
WARRANT
---------------------
PROSPECTUS
---------------------
[RJ STEICHEN & CO LOGO]
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS:
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is governed by the Minnesota Business Corporation Act, Chapter
302A. Minnesota Statues Section 302A.521 provides that a corporation shall
indemnify any person made or threatened to be made a party to any proceedings by
reason of the former or present official capacity of such person against
judgments, penalties, fines, including, without limitation, excise taxes
assessed against such person with respect to an employee benefit plan,
settlements, and reasonable expenses, including attorney's fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person has not been indemnified by another organization or
employee benefit plan for the same expenses and respect to the same acts or
omissions; acted in good faith; received no improper personal benefit and
Section 302A.255, if applicable, has been satisfied; in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and in
the case of acts or omissions by persons in their official capacity for the
corporation, reasonably believed that the conduct was in the best interests of
the corporation, or in the case of acts or omissions by persons in their
capacity for other organizations, reasonably believed that the conduct was not
opposed to the best interests of the corporation.
The Company has adopted, in its Articles of Incorporation, a provision which
limits personal liability for breach of the fiduciary duty of its directors, to
the extent provided by Section 302A of the Minnesota Business Corporation Act.
Such provision eliminates the personal liability of directors for damages
occasioned by breach of fiduciary duty, except for liability based on the
director's duty of loyalty to the Company, liability for acts or omissions not
made in good faith, liability for acts or omissions involving intentional
misconduct, liability based on payments of improper dividends, liability based
on violations of state securities laws, and liability for acts occurring prior
to the date such provision was added.
The Underwriting Agreement contains provisions under which the Company on
the one hand, and the Underwriter, on the other hand, have agreed to indemnify
each other (including officers and directors of the Company and the Underwriter
and any person who may be deemed to control the Company or the Underwriter)
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of
the securities registered hereby, other than underwriting discounts and fees,
are set forth in the following table:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 8,165
NASD filing fee................................................... 3,270
Nasdaq SmallCap Market listing fee................................ 10,000
Accounting fees and expenses...................................... 35,000
Legal fees and expenses........................................... 85,000
Printing expenses................................................. 45,000
Blue Sky fees and expenses........................................ 10,000
Transfer agent fees and expenses.................................. 5,000
Miscellaneous..................................................... 23,565
---------
Total......................................................... $ 225,000
---------
---------
</TABLE>
Except for the SEC registration fee and the NASD fee, which are rounded, all
of the foregoing expenses have been estimated.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
1. In December 1995, the Company issued, in connection with the conversion
of notes payable in Shares, to Jay N. Cohn, M.D., an aggregate of 2,174 Shares
at $1.00 per Share. These securities were issued in reliance upon the exemption
set forth in Section 4(2) of the Securities Act. Dr. Cohn is a founder and a
director of the Company.
2. In August 1995, the Company sold an aggregate of 125,000 Shares to four
accredited investors at a price of $1.00 per Share. The net proceeds to the
Company were approximately $118,750. These securities were issued in reliance
upon the exemption set forth in Section 4(2) and Rule 506 of Regulation D of the
Securities Act. The placement was made without any public advertisement or
solicitation. Each purchaser executed a subscription agreement representing that
such purchaser either alone or through a representative had knowledge and
experience sufficient to evaluate the merits and risks of the investment. Each
purchaser was given full access to financial and other information regarding the
Company.
3. From October 1995 through May 1996, the Company sold an aggregate of
1,349,000 Shares to 86 accredited investors in a private placement transaction
at a price of $2.00 per Share. The net proceeds to the Company were
approximately $2,312,687. These securities were issued in reliance upon the
exemption set forth in Section 4(2) and Rule 506 of Regulation D of the
Securities Act. The placement was made without any public advertisement or
solicitation. Each purchaser executed a subscription agreement representing that
such purchaser either alone or through a representative had knowledge and
experience sufficient to evaluate the merits and risks of the investment. Each
purchaser was given full access to financial and other information regarding the
Company.
4. From December 1997 to March 1998, the Company sold an aggregate of
500,000 Shares to 51 accredited investors in a private placement at a price of
$3.00 per Share. The net proceeds to the Company were approximately $1,223,000.
The Underwriter acted as the selling agent for the private placement and
received a commission and expense allowance in an approximate amount of $195,000
and warrants to purchase 50,000 Shares at $4.95 per Share. These securities were
issued in reliance upon the exemption set forth in Section 4(2) and Rule 506 of
Regulation D of the Securities Act. The placement was made without any public
advertisement or solicitation. Each purchaser executed a subscription agreement
representing that such purchaser either alone or through a representative had
knowledge and experience sufficient to evaluate the merits and risks of the
investment. Each purchaser was given full access to financial and other
information regarding the Company.
5. On May 8, 1998, one optionholder exercised 24,018 options at $1.70 per
Share. On May 11, 1998, two optionholders exercised an aggregate of 19,706
options at $1.70 per Share. On May 11, 1998, one optionholder exercised 6,000
options at $2.00 per Share. On May 13, 1998, one optionholder exercised 6,000
options at $1.70 per Share. These securities were issued in reliance upon the
exemption set forth in Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement (with form of Underwriter's Warrant attached)
*1.2 Form of Selected Dealer Agreement
*1.3 Form of Lock-up Agreement
*3.1 Articles of Incorporation
*3.2 Bylaws
*3.3 Articles of Amendment to Articles of Incorporation, dated June 2, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
*4.1 Specimen of Common Stock Certificate
*4.2 Form of Warrant Agreement
*4.3 Specimen of Warrant Certificate
*4.4 Specimen of Unit Certificate
*5.1 Opinion of Doherty, Rumble & Butler Professional Association
*10.1 Company's 1995 Long-Term Incentive and Stock Option Plan
*10.2 Company's Proposed 1998 Stock Option Plan
*10.3 Company's Proposed Form of Stock Option Agreement for 1998 Stock Option Plan
*10.4 Research and License Agreement between the Company and the Regents of the University of Minnesota,
dated September 23, 1988
*10.5 Employment Agreement between Charles F. Chesney, D.V.M., Ph.D., R.A.C. and the Company, dated October
30, 1995
*10.6 Employment Agreement between James S. Murphy and the Company, dated July 1, 1997
*10.7 Employment Agreement between Greg H. Guettler and the Company, dated September 8, 1997
*10.8 Consulting Agreement between Jay N. Cohn, M.D. and the Company, dated October 30, 1995
*10.9 Consulting Agreement between Stanley M. Finkelstein, Ph.D. and the Company, dated October 30, 1995
*10.10 Consulting Agreement between Melville R. Bois and the Company, dated January 1, 1996
*10.11 Office Lease Agreement, dated as of October 24, 1997
*10.12 Manufacturing Services Agreement between Altron, Inc. and the Company, dated July 15, 1997.
*10.13 Manufacturing Services Agreement between Apollo Research Corporation and the Company, dated May 14,
1998.
23.1 Consent of Ernst & Young LLP
*23.2 Consent of Doherty, Rumble & Butler Professional Association (included in Exhibit 5.1.)
*24.1 Power of Attorney (included in the signature page to the Registration Statement, p. II-5)
</TABLE>
- ------------------------
* Previously filed
ITEM 28. UNDERTAKINGS.
The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
II-3
<PAGE>
(iii) include any additional or changed material information on the plan
of distribution;
(2) For determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the end of the offering.
(4) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(6) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or
Rule 497(h) under the Securities Act as part of this registration statement as
of the time the Securities and Exchange Commission declared it effective.
(7) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the small
business issuer certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2 and authorized this
Amendment No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Eagan, State of Minnesota on July 20, 1998.
<TABLE>
<S> <C> <C>
HYPERTENSION DIAGNOSTICS, INC.
By /s/ GREG H. GUETTLER
-----------------------------------
Greg H. Guettler
PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Greg H. Guettler, such person's true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution for such person and in such
persons' name, place and stead, in any and all capacities, to sign the
Registration Statement on Form SB-2 of Hypertension Diagnostics, Inc. and any or
all amendments (including post-effective amendments) to the Registration
Statement, and to file the same, with all exhibits hereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement was signed by the following
persons in the capacities stated below on July 20, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<C> <S>
/s/ MELVILLE R. BOIS*
-------------------------------------------- Chairman of the Board of Directors
Melville R. Bois
/s/ GREG H. GUETTLER
-------------------------------------------- President and Director (Principal Executive Officer)
Greg H. Guettler
/s/ CHARLES F. CHESNEY* Executive Vice President, Chief Technology Officer and
-------------------------------------------- Director
Charles F. Chesney
/s/ JAMES S. MURPHY* Vice President of Finance and Chief Financial Officer
-------------------------------------------- (Principal Financial and Accounting Officer)
James S. Murphy
/s/ JAY N. COHN, M.D.*
-------------------------------------------- Director
Jay N. Cohn, M.D.
/s/ KENNETH W. BRIMMER*
-------------------------------------------- Director
Kenneth W. Brimmer
</TABLE>
* by Greg H. Guettler
as attorney-in-fact
II-5
<PAGE>
2,500,000 UNITS
Each Unit Consisting of One Share of Common Stock and
One Redeemable Class A Warrant
HYPERTENSION DIAGNOSTICS, INC.
UNDERWRITING AGREEMENT
_________________, 1998
R. J. Steichen & Company
One Financial Plaza
120 South Sixth Street
Minneapolis MN 55402
Dear Ladies and Gentlemen:
Hypertension Diagnostics, Inc., a Minnesota corporation (the "Company")
hereby confirms its agreement, subject to the terms and conditions stated
herein, to issue and sell to you (the "Underwriter") an aggregate of 2,500,000
Units ("Units"), each Unit consisting of one share of Common Stock of the
Company, $.01 par value (the "Share") and one Redeemable Class A Warrant (the
"Warrant") exercisable for a period of four (4) years commencing on the
effective date of the Registration Statement at a price of $5.50 per Share.
Each Warrant entitles the holder thereof to purchase one Share of Common Stock
at a price of $5.50 per Share. The Warrants shall be immediately exercisable
and are detachable and transferable commencing ten (10) trading days after the
effective date of the Registration Statement under the 1933 Act or at any
earlier time agreed by the Underwriter and the Company. The Warrants shall be
redeemable at the option of the Company at $.01 per Warrant upon thirty (30)
days' prior notice in writing of the Company's intention to redeem, provided
that the closing bid price for the Common Stock shall have averaged $6.50 for
any fourteen (14) consecutive trading days prior to such notice, or on such
other terms as may be set forth in the Preliminary Prospectus (defined herein).
The 2,500,000 Units to be purchased from the Company are referred to herein
as the "Firm Units." In addition, the Company proposes to grant the Underwriter
an option to purchase up to 375,000 additional Units upon the request of the
Underwriter solely for the purpose of covering over-allotments (the "Optional
Units"). The Firm Units and any Optional Units, which aggregate 2,875,000
Units, are collectively referred to herein as the "Units." Further, the Company
hereby
<PAGE>
confirms its agreement to sell to the Underwriter warrants for the purchase
of 200,000 Units as described in Section 5 hereof (the "Underwriter's
Warrants"), assuming purchase by the Underwriter of the Firm Units. The
shares issuable upon exercise of the Underwriter's Warrants and the Warrants
are referred to as the "Warrant Shares." The Units (including the securities
included therein) and the Underwriter's Warrants will be in the form and
contain such rights and terms as described in the Prospectus.
The Company hereby confirms the following arrangements with respect to the
purchase of the Units by the Underwriter.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to and agrees with the Underwriter as follows:
(a) A registration statement on Form SB-2 with respect to the Units,
and as a part thereof a preliminary Prospectus has been prepared by the
Company in conformity with the requirements of the Securities Act of 1933,
as amended (the "1933 Act") and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "SEC")
thereunder and has been filed with the SEC under the 1933 Act. The Company
has filed such amendments to the registration statement and such amended
preliminary prospectuses as may have been required to be filed to the date
hereof. If the Company has elected not to rely upon Rule 430A, the Company
has prepared and will promptly file an amendment to the registration
statement and an amended prospectus (provided the Underwriter has consented
to such filing). If the Company has elected to rely upon Rule 430A, it will
prepare and timely file a prospectus pursuant to Rule 424(b) that discloses
the information previously omitted from the prospectus in reliance upon
Rule 430A. Copies of such registration statement and each pre-effective
amendment thereto, and each related preliminary prospectus have been
delivered by the Company to the Underwriter. Such registration statement,
as amended or supplemented, including all prospectuses included as a part
thereof, financial schedules, exhibits, the information (if any) deemed to
be part thereof pursuant to Rules 430A and 434 under the 1933 Act and any
registration statement filed pursuant to Rule 462 under the 1933 Act, is
herein referred to as the "Registration Statement." The term "Prospectus"
as used herein shall mean the final prospectus, as amended or supplemented,
included as a part of the Registration Statement on file with the SEC when
it becomes effective; provided, however, that if a prospectus is filed by
the Company pursuant to Rules 424(b) and 430A or a term sheet is filed by
the Company pursuant to Rule 434 under the 1933 Act, the term "Prospectus"
as used herein shall mean the prospectus so filed pursuant to Rules 424(b)
and 430A and the term sheet so filed pursuant to Rule 434. The term
"Preliminary Prospectus" as used herein means any prospectus, as amended or
supplemented, used prior to the Effective Date (as defined in Section 4(a)
hereof) and included as a part of the Registration Statement, including any
prospectus filed with the SEC pursuant to Rule 424(a).
(b) Neither the SEC nor any state securities division has issued any
order preventing or suspending the use of any Preliminary Prospectus, or
issued a stop order
2
<PAGE>
with respect to the offering of the Units or requiring the recirculation
of a Preliminary Prospectus and, to the best knowledge of the Company,
no proceeding for any such purpose has been initiated or threatened.
Each part of the Registration Statement, when such part became or
becomes effective, each Preliminary Prospectus, on the date of filing
with the SEC, and the Prospectus and any amendment or supplement
thereto, on the date of filing thereof with the SEC and on any Closing
Date (as defined in Section 2 hereof), as the case may be, conformed or
will conform in all material respects with the requirements of the 1933
Act and the Rules and Regulations and the securities laws ("Blue Sky
laws") of the states where the Units are to be sold (the "States") and
contained or will contain all statements that are required to be stated
therein in accordance with the 1933 Act, the Rules and Regulations and
the Blue Sky laws of the States. When the Registration Statement became
or becomes effective and when any post-effective amendments thereto
shall become effective, the Registration Statement did not and will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. Neither any Preliminary Prospectus, on the date of
filing thereof with the SEC, nor the Prospectus or any amendment or
supplement thereto, on the date of filing thereof with the SEC and on
the First and Second Closing Dates, contained or will contain any untrue
statement of a material fact or omit to state 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 none
of the representations and warranties in this Subsection 1(b) shall
apply to statements in, or omissions from, the Registration Statement,
Preliminary Prospectus or the Prospectus, or any amendment thereof or
supplement thereto, which are based upon and conform to written
information furnished to the Company by the Underwriter, as identified
in Section 11 herein, specifically for use in the preparation of the
Registration Statement, Preliminary Prospectus or the Prospectus, or any
amendment or supplement thereto. There is no contract or other document
of the Company of a character required by the 1933 Act or the Rules and
Regulations to be described in the Registration Statement or Prospectus,
or to be filed as an exhibit to the Registration Statement, that has not
been described or filed as required. The descriptions of all such
contracts and documents or references thereto are correct and include
the information required under the 1933 Act and the Rules and
Regulations.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Minnesota,
with full corporate power and authority, to own, lease and operate its
properties and conduct its business as described in the Registration
Statement and Prospectus. The Company is duly qualified to do business as
a foreign corporation in good standing in each jurisdiction in which the
ownership or lease of its properties, or the conduct of its business,
requires such qualification and in which the failure to be qualified or in
good standing would have a material adverse effect on the business of the
Company. The Company has all necessary and material authorizations,
approvals and orders of and from all governmental regulatory officials and
bodies to own its properties and to conduct its business as described in
the Registration Statement and Prospectus, and is conducting its business
in
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substantial compliance with all applicable material laws, rules and
regulations of the jurisdictions in which it is conducting business. The
Company holds all material licenses, certificates, permits, authorizations,
approvals and orders of and from all state, federal and other governmental
regulatory officials and bodies necessary to own its properties and to
conduct its business as described in the Registration Statement and
Prospectus, or has obtained waivers from any such applicable requirements
from the appropriate state, federal or other regulatory authorities. All
such licenses, permits, approvals, certificates, consents, orders and other
authorizations are in full force and effect, and the Company has not
received notice of any proceeding or action relating to the revocation or
modification of any such license, permit, approval, certificate, consent,
order or other authorization which, individually or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, might materially
and adversely affect the conduct of the business or the condition,
financial or otherwise, or the earnings, affairs or business prospects of
the Company.
(d) The Company has no subsidiaries and is not affiliated with any
other Company or business entity, except as disclosed in the Prospectus.
(e) The Company is not in violation of its Articles of Incorporation
or Bylaws. The Company is not in default in the performance or observance
of any obligation, agreement, covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness or in any contract,
indenture, mortgage, loan agreement, joint venture or other agreement or
instrument to which the Company is a party or by which the Company or its
properties are bound, and there does not exist any state of facts which
constitutes an event of default on the part of the Company or which, with
notice or lapse of time or both, would constitute such an event of default.
The Company is not, to the best of its knowledge, in violation of any law,
order, rule, regulation, writ, injunction or decree of any government,
governmental instrumentality or court, domestic or foreign, which violation
is material to the business of the Company.
(f) The Company has full requisite power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company and will be a valid and binding agreement on the
part of the Company, enforceable in accordance with its terms, if and when
this Agreement shall have become effective in accordance with Section 8,
except as enforceability may be limited by the application of bankruptcy,
insolvency, moratorium or similar laws affecting the rights of creditors
generally and by judicial limitations on the right of specific performance
and except as the enforceability of the indemnification or contribution
provisions hereof may be affected by applicable federal or state securities
laws. The performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or violation
of any of the terms and provisions of, or constitute a default under or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to, (i) any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note, agreement
or other evidence of indebtedness, lease, contract or other agreement or
instrument to which the Company is a party or by
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<PAGE>
which the property or assets of the Company is bound, (ii) the Company's
Articles of Incorporation or Bylaws or (iii) any statute or any order,
rule or regulation of any court, governmental agency or body having
jurisdiction over the Company. No consent, approval, authorization or
order of any court, governmental agency or body is required for the
consummation by the Company of the transactions on its part herein
contemplated, except such as may be required under the 1933 Act, the
Rules and Regulations, the Blue Sky laws, the rules and regulations of
the National Association of Securities Dealers, Inc. ("NASD") and the
rules and regulations of Nasdaq.
(g) There are no actions, suits or proceedings pending before any
court or governmental agency, authority or body to which the Company is a
party or of which the business or property of the Company is the subject
which might result in any material adverse change in the condition
(financial or otherwise), business or prospects of the Company, materially
and adversely affect its properties or assets or prevent consummation of
the transactions contemplated by this Agreement; and, to the best of the
Company's knowledge, no such actions, suits or proceedings are threatened.
The Company is not aware of any facts which would form the basis for the
assertion of any material claim or liability which are not disclosed in the
Registration Statement or the Prospectus or adequately reserved for in the
financial statements which are a part thereof, except for such claims or
liabilities which are not currently expected to have a material adverse
effect on the condition (financial or otherwise) or the earnings, affairs
or business prospects of the Company. All pending legal or governmental
proceedings to which the Company is a party or to which any of its property
is subject, which are not described in the Registration Statement and the
Prospectus, including ordinary routine litigation incidental to the
business, are, considered in the aggregate, not material to the Company.
(h) The Company has the duly authorized and outstanding
capitalization as set forth in the Prospectus. The outstanding Common
Stock of the Company is duly authorized, validly issued, fully paid and
nonassessable. The Company's securities, including the Units, conform in
substance to all statements relating thereto contained in the Registration
Statement and Prospectus. The securities to be sold by the Company
hereunder have been duly authorized and, when issued and delivered pursuant
to this Agreement, will be validly issued, fully paid and nonassessable and
will conform to the description thereof contained in the Prospectus. No
preemptive rights or similar rights of any security holders of the Company
exist with respect to the issuance and sale of the Units or the
Underwriter's Warrant by the Company. Except as disclosed in the
Prospectus, the Company has no agreement with any security holder which
gives such security holder the right to require the Company to register
under the 1933 Act any securities of any nature owned or held by such
person either in connection with the transactions contemplated by this
Agreement or after a demand for registration by such holder. Upon payment
for and delivery of the Units pursuant to this Agreement, the Underwriter
will acquire the Units, free and clear of all liens, encumbrances or
claims. The certificates evidencing the Units and the Warrants will comply
as to form with all applicable provisions of the laws of the State of
Minnesota. Except as set forth in any part of the Registration Statement,
the Company does not have outstanding any options to
5
<PAGE>
purchase, or any rights or warrants to subscribe for, or any securities
or obligations convertible into, or any contracts or commitments to
issue or sell, any Common Stock or other securities of the Company, or
any such warrants, convertible securities or obligations.
(i) The Underwriter's Warrant, the Warrants and the Warrant Shares
have been duly authorized. The Underwriter's Warrant and the Warrants,
when issued and delivered to the Underwriter, will constitute valid and
binding obligations of the Company in accordance with their terms, except
as enforceability may be limited by the application of bankruptcy,
insolvency, moratorium or similar laws affecting the rights of creditors
generally and by judicial limitations on the right of specific performance.
The Warrant Shares when issued in accordance with the terms of the
Underwriter's Warrant and the Warrants, will be validly issued, fully paid
and nonassessable and subject to no preemptive rights or similar rights on
the part of an person or entity. A sufficient number of shares of Common
Stock of the Company have been reserved for issuance by the Company upon
exercise of the Underwriter's Warrant and the Warrants.
(j) Ernst & Young LLP, whose reports appear in the Registration
Statement and Prospectus, are independent accountants within the meaning of
the 1933 Act and the Rules and Regulations. The financial statements of
the Company, together with the related notes, forming part of the
Registration Statement and Prospectus (the "Financial Statements"), fairly
present the financial position and the results of operations of the Company
at the respective dates and for the respective periods to which they apply.
The Financial Statements are accurate, complete and correct and have been
prepared in accordance with the 1933 Act, the Rules and Regulations and
generally accepted accounting principles ("GAAP"), consistently applied
throughout the periods involved, except as may be otherwise stated therein.
The summaries of the Financial Statements and the other financial and
statistical data and related notes set forth in the Registration Statement
and the Prospectus are (i) accurate and correct and fairly present the
information purported to be shown thereby as of the dates and for the
periods indicated on a basis consistent with the audited financial
statements of the Company and (ii) in compliance in all material respects
with the requirements of the 1933 Act and the Rules and Regulations. The
Financial Statements are based upon and consistent with the financial
statements and other reports filed by the Company with the SEC, except for
inconsistencies attributable solely to differences between GAAP and
regulatory accounting principles.
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus and at any Closing Date,
except as is otherwise disclosed in the Registration Statement or
Prospectus, there has not been:
(i) any change in the capital stock or long-term debt (including
any capitalized lease obligation), or except in the ordinary course of
business increase in the short-term debt of the Company;
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<PAGE>
(ii) any issuance of options, warrants, convertible securities
or other rights to purchase the capital stock of the Company;
(iii) any material adverse change, or any development involving a
material adverse change, in or affecting the business, business
prospects, properties, assets, patents or patent applications
(including those of the Company and those relating to devices or
technologies licensed to the Company), management, financial position,
stockholders' equity, results of operations or general condition of
the Company;
(iv) any material transaction entered into by the Company;
(v) any material obligation, direct or contingent, incurred by
the Company, except obligations incurred in the ordinary course of
business that, in the aggregate, are not material; or
(vi) any dividend or distribution of any kind declared, paid or
made on the Company's capital stock.
(l) Except as is otherwise disclosed in the Registration Statement or
Prospectus, the Company has good and marketable title to all of the
property, real and personal, described in the Registration Statement or
Prospectus as being owned by the Company, free and clear of all liens,
encumbrances, equities, charges or claims, except as do not materially
interfere with the uses made and to be made by the Company of such property
or as disclosed in the Financial Statements. Except as is otherwise
disclosed in the Registration Statement or Prospectus, the Company has
valid and binding leases to the real and personal property described in the
Registration Statement or Prospectus as being under lease to the Company,
except as to those leases which are not material to the Company or the lack
of enforceability of which would not materially interfere with the use made
and to be made by the Company of such leased property.
(m) The Company has filed all necessary federal and state income and
franchise tax returns and paid all taxes shown as due thereon. The Company
is not in default in the payment of any taxes and has no knowledge of any
tax deficiency which might be asserted against it which would materially
and adversely affect the Company's business or properties.
(n) No labor disturbance by the employees of the Company exists or,
to the best of the Company's knowledge, is imminent which could reasonably
be expected to have a material adverse effect on the conduct of the
business, operations, financial condition or income of the Company.
(o) Except as disclosed in the Prospectus:
(i) The Company owns or possesses the unrestricted rights to use
all patents, copyrights, trademarks, trade secrets and proprietary
rights or information
7
<PAGE>
necessary for the development, manufacture, operation and sale of
all products and services sold or proposed to be sold by the
Company and for the conduct of its present or intended business as
described in the Prospectus. There are no pending legal,
governmental or administrative proceedings relating to patents,
copyrights, trademarks or proprietary rights or information to
which the Company is a party or to which any property of the
Company is subject and no such proceedings are, to the best of the
Company's knowledge, threatened or contemplated against the Company
by any governmental agency or authority or others. The Company has
not received any notice of conflict with asserted rights of others.
The Company is not using any confidential information or trade
secrets of any third party without such party's consent.
(ii) The Company does not infringe upon the right or claimed
rights of any person under or with respect to any of the intangible
rights listed in the preceding subsection. The Company is not
obligated or under any liability whatsoever to make any payments by
way of royalties, fees or otherwise to any owner of, licensor of, or
other claimant to, any patent, trademark, trade name, copyright or
other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise, except as
disclosed in the Registration Statement.
(p) The Company intends to apply the proceeds from the sale of the
Units by it to the purposes and substantially in the manner set forth in
the Prospectus.
(q) The Company has no defined benefit pension plan or other pension
benefit plan which is intended to comply with the provisions of the
Employee Retirement Income Security Act of 1974 as amended from time to
time, except as disclosed in the Registration Statement.
(r) To the best of the Company's knowledge, no person is entitled,
directly or indirectly, to compensation from the Company or the Underwriter
for services as a finder in connection with the transactions contemplated
by this Agreement.
(s) The conditions for use of a Registration Statement on Form SB-2
for the distribution of the Units have been satisfied with respect to the
Company.
(t) The Company has not taken and will not take, directly or
indirectly, any action (and does not know of any action by its directors,
officers, stockholders, or others) which has constituted or is designed to,
or which might reasonably be expected to, cause or result in stabilization
or manipulation, as defined in the Securities Exchange Act of 1934, as
amended (the "1934 Act") or otherwise, of the price of any security of the
Company to facilitate the sale or resale of the Units.
8
<PAGE>
(u) The Company has not sold any securities in violation of Section
5(a) of the 1933 Act and has sold no securities within three (3) years
prior to the date hereof, except as set out in Item 26 of Part II of the
Registration Statement.
(v) The Company maintains insurance, which is in full force and
effect, of the types and in the amounts adequate for its business and in
line with the insurance maintained by similar companies and businesses.
(w) The Company hereby represents that it has complied and will
comply with all provisions of Florida Statutes Section 517.075 (Ch. 92-198
and Rule 3EER92-1 of the Rules of the Florida Department of Banking and
Finance, Division of Securities). Neither the issuer, nor any affiliate
thereof, does business with the government of Cuba or with any person or
affiliate located in Cuba.
(x) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations
and (ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP.
(y) All material transactions between the Company and its
shareholders who beneficially own more than 5% of any class of the
Company's voting securities have been accurately disclosed in the
Prospectus, and the terms of each such transaction are fair to the Company
and no less favorable to the Company than the terms that could have been
obtained from unrelated parties.
(z) The Company will use its best efforts to obtain a written
agreement from all shareholders of the Company that such person or
entity will not, without the prior written consent of the
Underwriter, during the 180-day period commencing on the effective
date of the Registration Statement (the "Lockup Period) (i) sell,
transfer or otherwise dispose of, or agree to sell, transfer or
otherwise dispose of any Securities of the Company beneficially
held during the Lockup Period, (ii) sell, transfer or otherwise dispose
of or agree to sell, transfer or otherwise dispose of any options,
rights, warrants or other securities exercisable or convertible
into Units of Common Stock of the Company beneficially held during
the Lockup Period, or (iii) sell or grant, or agree to sell or
grant, options, rights, warrants or other securities exercisable or
convertible into any such Units of Common Stock; provided, however,
that the foregoing does not prohibit gifts by donees who agree to
be bound by the restrictions set forth in the lockup agreement or
transfers by will or the laws of descent.
(aa) The Common Stock of the Company has been approved by Nasdaq for
trading on its SmallCap Market-SM- following effectiveness of the
Registration Statement subject to official notice of issuance.
9
<PAGE>
2. PURCHASE, SALE, DELIVERY AND PAYMENT.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth,
the Company agrees to issue and sell to the Underwriter, and the
Underwriter agrees to purchase from the Company, the Firm Units at $3.7125
per Unit.
(b) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Underwriter to purchase the Option
Units (not to exceed an aggregate of fifteen percent (15%) of the total
number of Firm Units) at the same purchase price as the Firm Units for use
solely in covering any over-allotments made by the Underwriter in the sale
and distribution of the Firm Units. The option granted hereunder may be
exercised at any time (but not more than once) within forty-five (45) days
after the Effective Date (as defined in Section 4(a) hereof) upon notice
(confirmed in writing) by the Underwriter to the Company setting forth the
aggregate number of Option Units as to which the Underwriter is exercising
the option and the date on which certificates for such Option Units are to
be delivered. The option granted hereby may be canceled by the Underwriter
as to the Option Units for which the option is unexercised at any time
prior to the expiration of the forty-five (45) day period upon notice to
the Company.
(c) The Company will deliver the Firm Units to the Underwriter at the
offices of Doherty Rumble & Butler, P.A. unless some other place is agreed
upon, at 10:00 A.M., Minneapolis time, against payment of the purchase
price at the same place, on the third full business day after trading the
Units has commenced (but not more than ten (10) full business days after
the date the Registration Statement is declared effective), or such earlier
time as may be agreed upon between the Underwriter and the Company. Such
time and place is herein referred to as the "First Closing Date."
(d) The Company will deliver the Option Units being purchased by the
Underwriter to the Underwriter at the offices of Doherty Rumble & Butler,
P.A. set forth in Section 2(c) above, unless some other place is agreed
upon, at 10:00 A.M., Minneapolis time, against payment of the purchase
price at the same place, on the date determined by the Underwriter and
of which the Company has received notice as provided in Section 2(b),
which shall not be earlier than two nor later than three (3) full business
days after the exercise of the option as set forth in Section 2(b), or at
such other time not later than ten (10) full business days thereafter as
may be agreed upon by the Underwriter and the Company, such time and date
being herein referred to as the "Second Closing Date." The First and
Second Closing Dates are collectively referred to herein as the "Closing
Date."
(e) Certificates for the Units to be delivered will be registered in
such names and issued in such denominations as the Underwriter shall
request of the Company at least two (2) full business days prior to the
First Closing Date or the Second Closing Date, as the case may be. The
certificates will be made available to the Underwriter in definitive
10
<PAGE>
form for the purpose of inspection and packaging at least 24 hours prior
to each respective Closing Date.
(f) Payment for the Units shall be made, against delivery to the
Underwriter or its designated agent, of certificates for the Units by wire
transfer to a designated account of the Company.
(g) The Underwriter will make a public offering of the Units directly
to the public (which may include selected dealers who are members in good
standing with the NASD or foreign dealers not eligible for membership in
the NASD but who have agreed to abide by the interpretation of the NASD's
Board of Governor's with respect to free-riding and withholding) as soon as
the Underwriter deems practicable after the Registration Statement becomes
effective at the Price to Public set forth in the Prospectus, subject to
the terms and conditions of this Agreement and in accordance with the
Prospectus. Such concessions from the public offering price may be allowed
selected dealers of the NASD as the Underwriter determines, and the
Underwriter will furnish the Company with such information about the
distribution arrangements as may be necessary for inclusion in the
Registration Statement. It is understood that the public offering price
and concessions may vary after the initial public offering. The
Underwriter shall offer and sell the Units only in jurisdictions in which
the offering of Units has been duly registered or qualified, or is exempt
from registration or qualification, and shall take reasonable measures to
effect compliance with applicable state and local securities laws.
3. FURTHER AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees with the Underwriter as follows:
(a) If the Registration Statement has not become effective prior to
the date hereof, the Company will use its best efforts to cause the
Registration Statement and any subsequent amendments thereto to become
effective as promptly as possible. The Company will notify the Underwriter
promptly, after the Company shall receive notice thereof, of the time when
the Registration Statement, or any subsequent amendment thereto, has become
effective or any supplement to the Prospectus has been filed. Following the
execution and delivery of this Agreement, the Company will prepare, and
timely file or transmit for filing with the SEC in accordance with Rules
430A, 424(b) and 434, as applicable, copies of the Prospectus, or, if
necessary, a post-effective amendment to the Registration Statement
(including the Prospectus), in which event, the Company will take all
necessary action to have such post-effective amendment declared effective
as soon as possible. The Company will notify the Underwriter promptly upon
the Company's obtaining knowledge of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceedings for that purpose and will use its
best efforts to prevent the issuance of any stop order and, if a stop order
is issued, to obtain as soon as possible the withdrawal or lifting thereof.
The Company will promptly prepare and file at its own expense with the SEC
any amendments of, or supplements to, the Registration Statement or the
Prospectus which may be necessary in connection with the distribution of
the Units by the
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<PAGE>
Underwriter. During the period when a Prospectus relating to the Units
is required to be delivered under the 1933 Act, the Company will
promptly file any amendments of, or supplements to, the Registration
Statement or the Prospectus which may be necessary to correct any untrue
statement of a material fact or any omission to state any material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Company will notify the
Underwriter promptly of the receipt of any comments from the SEC
regarding the Registration Statement or Prospectus or request by the SEC
for any amendment thereof or supplement thereto or for any additional
information. The Company will not file any amendment of, or supplement
to, the Registration Statement or Prospectus, whether prior to or after
the Effective Date, which shall not previously have been submitted to
the Underwriter and its counsel a reasonable time prior to the proposed
filing or to which the Underwriter shall have reasonably objected.
(b) The Company has used and will continue to use its best efforts to
register or qualify the Units for sale under the securities laws of such
jurisdictions as the Underwriter may designate and the Company will file
such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification. In each
jurisdiction in which the Units shall have been registered or qualified as
above provided, the Company will continue such registrations or
qualifications in effect for so long as may be required for purposes of the
distribution of the Units, the Warrants and the Warrant Shares; provided,
however, that in no event shall the Company be obligated to qualify to do
business as a foreign corporation in any jurisdiction in which it is not
now so qualified or to take any action which would subject it to the
service of process in suits, other than those arising out of the offering
or sale of the Units in any jurisdiction where it is not now so subject. In
each jurisdiction where any of the Units shall have been so qualified, the
Company will file such statements and reports as are or may be reasonably
required by the laws of such jurisdiction to continue such qualification in
effect. The Company will notify the Underwriter immediately of, and
confirm in writing, the suspension of qualification of the Units, the
Warrants, and the Warrant Shares or the threat of such action in any
jurisdiction. The Company will use its best efforts to qualify or register
its securities for sale in nonissuer transactions under (or obtain
exemptions from the application of) the securities laws of such states
designated by the Underwriter (and thereby permit market-making
transactions and secondary trading in its securities in such states), and
will comply with such securities laws and will continue such
qualifications, registrations and exemptions in effect for a period of five
(5) years after the date hereof.
(c) The Company will furnish to the Underwriter, as soon as
available, copies of the Registration Statement (one of which will be
signed and which shall include all exhibits), each Preliminary Prospectus,
the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section
10(a)(3) of the 1933 Act, all in such quantities as the Underwriter may
from time to time reasonably request prior to the printing of each such
document. The Company specifically authorizes the Underwriter and all
dealers to whom any of the
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<PAGE>
Units may be sold by the Underwriter to use and distribute copies of
such Preliminary Prospectuses and Prospectuses in connection with the
sale of the Units as and to the extent permitted by the federal and
applicable state and local securities laws.
(d) For as long as the Company has more than 100 beneficial owners,
but in no event more than five (5) years after the Effective Date, the
Company will mail as soon as practicable to the holders of its securities
substantially the following documents, which documents shall be in
compliance with this Section if they are in the form prescribed by the 1934
Act:
(i) within sixty (60) days after the end of the first three
quarters of each fiscal year, copies of the quarterly unaudited
statement of profit and loss and quarterly unaudited balance sheets of
the Company and any material subsidiaries; and
(ii) within ninety (90) days after the close of each fiscal year,
appropriate financial statements as of the close of such fiscal year
for the Company and any material subsidiary which shall be certified
to by a nationally recognized firm of independent certified public
accountants in such form as to disclose the Company's financial
condition and the results of its operations for such fiscal year.
(e) For as long as the Company has more than 100 beneficial owners,
but in no event more than five (5) years after the Effective Date, the
Company will furnish to the Underwriter (i) concurrently with furnishing
such reports to its security holders, the reports described in Section 4(d)
hereof; (ii) as soon as they are available, copies of all other reports
(financial or otherwise) mailed to security holders; and (iii) as soon as
they are available, copies of all reports and financial statements
furnished to, or filed with, the SEC, the NASD, any securities exchange or
market or any state securities commission by the Company. During such
period, the foregoing financial statements shall be on a consolidated basis
to the extent that the accounts of the Company and any subsidiary or
subsidiaries are consolidated and shall be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated.
(f) The Company will not, without the prior written consent of the
Underwriter, which consent shall not be unreasonably withheld, sell or
otherwise dispose of any capital stock or securities convertible or
exercisable into capital stock of the Company (other than pursuant to
existing option plans, director compensation plans or currently outstanding
options and warrants) during the 180-day period following the Effective
Date. Prior to the Closing Date, the Company will not repurchase or
otherwise acquire any of its capital stock or declare or pay any dividend
or make any distribution on any class of its capital stock.
(g) Subject to the proviso set forth below and whether or not this
Agreement becomes effective or is terminated, cancelled or the sale of the
Units to you is consummated, and regardless of the reason for or cause of
any such termination,
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<PAGE>
cancellation, or failure to consummate, the Company shall be
responsible for and pay all costs and expenses incident to the
performance of the obligations of the Company under this Agreement
including, without limiting the generality of the foregoing, (i) all
costs and expenses in connection with the preparation, printing and
filing of the Registration Statement (including financial statements and
exhibits), Preliminary Prospectuses and the Prospectus and any
amendments thereof or supplements to any of the foregoing; (ii) the
issuance and delivery of the Units, including taxes, if any; (iii) the
cost of all certificates representing the Units; (iv) the fees and
expenses of the Transfer Agent for the Units; (v) the fees and
disbursements of counsel for the Company; (vi) all fees and other
charges of the independent public accountants of the Company; (vii) the
cost of furnishing and delivering to the Underwriter and dealers
participating in the offering copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectuses, the
Prospectus and any amendments of, or supplements to, any of the
foregoing; (viii) the NASD filing and quotation fees; and (ix) the fees
and disbursements, including filing fees and all accountable fees and
expenses of counsel for the Company incurred in registering or
qualifying the Units for sale under the laws of such jurisdictions upon
which the Underwriter and the Company may agree; and (x) the
non-accountable expenses of the Underwriter in an amount equal to 2.5%
of the gross proceeds of the Offering. Pursuant to Section 8, the
Underwriter hereby acknowledges receipt of a $10,000 advance from the
Company against the Underwriter's non-accountable expense allowance
referred to in the preceding sentence. In the event this Agreement is
terminated by the Underwriter pursuant to Section 8 or for any reason
beyond the Underwriter's control or through no fault of the Underwriter
or by the Company, the Company shall be obligated to pay, to the
Underwriter the greater of the $10,000 deposit paid at the time of the
execution of the letter of intent or all of its actual accountable
out-of-pocket expenses, including fees of its counsel, not to exceed
$20,000. In the event this Agreement is terminated by the Company or
the Underwriter for any reason within its control, including but not
limited to, an opinion of the NASD regarding the compensation
arrangement of the Underwriter, the Company shall be obligated to pay
the Underwriter only the $10,000 deposit paid at the time of the
execution of the letter of intent.
(h) The Company will not take, and will use its best efforts to cause
each of its officers and directors not to take, directly or indirectly, any
action designed to or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Units.
(i) The Company will use its best efforts to obtain (prior to the
Effective Date) and maintain the quotation of the Units, its Common Stock
and the Warrants on the Nasdaq SmallCap Market-SM-.
(j) For a period of at least five (5) years after the Effective Date,
the Company will continue to file with the SEC all reports and other
documents as may be required by the 1933 Act, the Rules and Regulations and
the 1934 Act.
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(k) The Company will apply the proceeds from the sale of the Units
substantially in the manner set forth in the Prospectus.
(l) Other than as permitted by the 1933 Act and the Rules and
Regulations, the Company will not distribute any prospectus or other
offering material in connection with the Offering.
(m) The Company will, for a period of two (2) years after the
Effective Date, furnish directly to you, quarterly profit and loss
statements, reports of the Company's cash flow, and statements of
application of the proceeds of the offering contained in reports or
statements filed by the Company with the Commission.
(n) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than eighteen (18)
months after the effective date of the Registration Statement, a statement
of earnings of the Company (which need not be audited) complying with
Section 11(a) of the 1933 Act and the Rules and Regulations of the
Commission thereunder (including at the option of the Company Rule 158).
(o) The Company authorizes the Underwriter and all dealers to whom
any of the Units may be sold by the Underwriter in connection with the
distribution of the Units, to use the Prospectus as from time to time
amended or supplemented in connection with the offering and sale of the
Units and in accordance with the applicable provisions of the Act and the
applicable Rules and Regulations and applicable state Blue Sky or
securities laws.
(p) The Company shall not request an Effective Date nor allow the
Registration Statement to be declared effective without the prior approval
of the Underwriter.
(q) Within the time during which the Prospectus is required to be
delivered under the Act, the Company will comply, at its own expense, with
all requirements imposed upon it by the 1933 Act, by the Rules and
Regulations, by the Exchange Act, and by any order of the Commission, so
far as necessary to permit the continuance of sales or dealings in the
Units.
(r) Deleted.
(s) The Company will reserve and keep available that maximum number
of its authorized but unissued shares of Common Stock which are issuable
under exercise of Warrants and the Underwriter's Warrant during the term of
the Warrants and the Underwriter's Warrant.
(t) Prior to the Closing Date, no discussions will be held by
officers, directors or any other affiliate or associate of the Company with
any member of the news media and
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no news release or other publicity about the Company will be permitted
without prior approval of the Company's and the Underwriter's respective
legal counsel.
(u) The Company shall have obtained a CUSIP number for the Units (and
its components) prior to the effective date of the Registration Statement
under the Act.
(v) The Company shall supply to the Underwriter, and its legal
counsel, at the Company's cost, one complete bound volume of all of the
documents relating to the public offering, within a reasonable time after
the Closing Date, not to exceed four (4) months. The volume shall be hard
cover bound in book format.
(w) The Company will apply the proceeds from the sale of the Units by
it to the purposes and in the manner set forth in the Registration
Statement and, pending such application, shall invest such net proceeds
only in one or more of the following, except as otherwise provided by
prior written consent of the Underwriter: (i) interest-bearing
obligations issued by the United States Government or issued by an
agency or instrumentality of the United States Government and guaranteed
by the United States Government and having a maturity not in excess of
one year, (ii) interest-bearing domestic commercial paper having a
maturity of not more than three hundred sixty-five (365) days and, at
the time of purchase by the Company, rated investment grade by Moody's
Investors Service, Inc. or Standard & Poor's Corporation, (iii)
interest-bearing certificates of deposit issued by a commercial bank
chartered by the United States Government or by any state of the United
States having shareholders' equity of at least $500,000,000 except that
the foregoing notwithstanding, the Company may invest no more than
$100,000 of such net proceeds in certificates of deposit issued by any
such commercial bank regardless of shareholders' equity, and (iv) shares
or other units of interest in a registered open-ended investment company
the assets of which aggregate at least $200,000,000 and are invested
solely in so-called "money market" obligations.
(x) Prior to or as of the First Closing Date, the Company shall have
performed each condition to closing required to be performed by it pursuant
to Section 4 hereof.
4. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligation of the
Underwriter to purchase and pay for the Units as provided herein shall be
subject to the accuracy of the representations and warranties of the Company, in
the case of the Firm Units as of the date hereof and the First Closing Date (as
if made on and as of the First Closing Date) and in the case of the Option
Units, as of the date hereof and the Second Closing Date (as if made on and as
of the Second Closing Date), to the performance by the Company of its
obligations hereunder, and to the satisfaction of the following additional
conditions on or before the First Closing Date in the case of the Firm Units and
on or before the Second Closing Date in the case of the Option Units:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M. Minneapolis time, on the first full business day following
the date of this Agreement, or such later date as shall be consented to in
writing by the Underwriter (the
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<PAGE>
"Effective Date"). If the Company has elected to rely upon Rule 430A,
the information concerning the price of the Units and price-related
information previously omitted from the effective Registration Statement
pursuant to Rule 430A shall have been transmitted to the SEC for filing
pursuant to Rule 424(b) within the prescribed time period, and prior to
the Closing Date the Company shall have provided evidence satisfactory
to the Underwriter of such timely filing (or a post-effective amendment
providing such information shall have been promptly filed and declared
effective in accordance with the 1933 Act and the Rules and
Regulations). No stop order suspending the effectiveness thereof shall
have been issued and no proceeding for that purpose shall have been
initiated or, to the knowledge of the Company or the Underwriter,
threatened by the SEC or any state securities commission or similar
regulatory body. Any request of the SEC for additional information (to
be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of the
Underwriter and their legal counsel. The NASD, upon review of the terms
of the Offering, shall not have objected to the terms of the
Underwriter's participation in the Offering.
(b) The Underwriter shall not have advised the Company that the
Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, contains any 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 contained therein, in
light of the circumstances under which they were made, not misleading;
provided, however, that this Section 4(b) shall not apply to statements in,
or omissions from, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, which are based upon and conform
to written information furnished to the Company by the Underwriter
specifically for use in the preparation of the Registration Statement or
the Prospectus, or any such amendment or supplement.
(c) Subsequent to the date as of which information is given the
Registration Statement and Prospectus, there shall not have occurred any
change, or any development involving a prospective change, which materially
and adversely affects the business or properties of the Company and which,
in the reasonable opinion of the Underwriter, materially and adversely
affects the market for the Units or the Company's securities.
(d) On or prior to each Closing Date, the form and validity of the
Units and their component parts, the legality and sufficiency of the
corporate proceedings and matters relating to the incorporation of the
Company and other matters incident to the issuance of the Units and their
component parts, the form of the Registration Statement and the Prospectus
and of any amendments thereof or supplements thereto filed prior to such
Closing Date (other than financial statements and schedules and other
financial or statistical data included therein), the authorization,
execution, and delivery of this Agreement and the description of the Units
and their component parts contained in the Prospectus shall have been
reasonably approved by the Underwriter. In connection with such
determination, the Company shall have furnished to the Underwriter such
documents as you may have requested for the purpose of enabling the
Underwriter to pass upon such matters.
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<PAGE>
(e) The Underwriter shall have received the opinion of Doherty,
Rumble & Butler, P.A., counsel for the Company, dated as of such respective
Closing Date and satisfactory in form and substance to the Underwriter and
its counsel, to the effect that:
(i) The Company has been duly incorporated and is validly
existing in good standing under the laws of the State of Minnesota
with the requisite corporate power to own, lease and operate its
properties and conduct its business as described in the Prospectus;
and is duly qualified to do business as a foreign corporation in good
standing in all jurisdictions where the ownership or leasing of its
properties or the conduct of its business requires such qualification
and in which the failure to be so qualified or in good standing would
have a material adverse effect on its business and the activities of
the Company. The Company has no active subsidiaries.
(ii) The number of authorized and, to the best of such counsel's
knowledge, the number of issued and outstanding shares of capital
stock of the Company are as set forth in the Prospectus, and all such
capital stock has been duly authorized and is validly issued, fully
paid and nonassessable. The Units (and their components) have been
duly authorized, and upon issuance, delivery of, and payment therefor
as described in this Agreement, will be validly issued, fully paid and
nonassessable, and the Underwriter will acquire the Units free and
clear of all liens, encumbrances or claims. To the best knowledge of
such counsel's knowledge, no preemptive rights, contractual or
otherwise, of securities holders of the Company or others exist with
respect to the issuance or sale of the Units by the Company pursuant
to this Agreement or to the issuance of Warrant Shares upon exercise
of the Warrants or the Underwriter's Warrants. To the best of such
counsel's knowledge, no rights to require registration of shares of
Common Stock or other securities of the Company exist which may be
exercised in connection with the filing of the Registration Statement.
The Units, Warrants, Underwriter's Warrant, Warrant Shares and Shares
conform as to matters of law in all material respects to the
description of these securities made in the Prospectus and such
description accurately sets forth the material legal provisions
thereof required to be set forth in the Prospectus.
(iii) The shares of Common Stock underlying the Warrants have
been duly authorized and reserved for issuance and when issued, sold
and delivered in accordance with the terms of the Warrants, will be
validly issued, fully paid and nonassessable. The issuance, sale and
delivery of the Underwriter's Warrant has been duly authorized and the
Warrant Shares issuable upon the exercise thereof have been reserved
for issuance upon such exercise. The Warrant Shares, when issued,
sold and delivered in accordance with the terms of the Underwriter's
Warrant, will be validly issued, fully paid and nonassessable. No
preemptive rights of, or rights of refusal in favor of, shareholders
of the Company exist with respect to the Units (or any component
thereof), the Underwriter's Warrant or the
18
<PAGE>
Warrant Shares, or the issue and sale thereof, pursuant to the
Company's Articles of Incorporation or Bylaws.
(iv) The authorized securities of the Company conform as to legal
matters in all material respects to the description thereof set forth
in the Prospectus under the caption "Description of Securities." The
certificates representing the Warrants and the Common Stock are in
proper form under the Minnesota Business Corporation Act.
(v) The Registration Statement and the Prospectus comply as to
form in all material respects with the requirements of the 1933 Act
and with the Rules and Regulations, except the financial statements,
the notes thereto and the related schedules and other financial and
statistical data contained therein, as to which such counsel need not
express an opinion.
(vi) Counsel knows of no contracts, leases or documents that are
required to be described in the Prospectus or to be filed as exhibits
to the Registration Statement that are not so described or filed.
(vii) The Underwriting Agreement, the Units (and their
components), the Warrant Agreement and the Underwriter's Warrant have
been duly authorized by all requisite corporate action, executed and
delivered by the Company and constitute the valid and binding
obligations of the Company enforceable in accordance with their
respective terms.
(viii) The execution and delivery of the Underwriting Agreement
and the issue and sale of the Underwriter's Warrant, the Units (and
their components) and the Warrant Shares will not violate or conflict
with the Articles of Incorporation or the Bylaws of the Company or any
material provision of any material contract or instrument to which the
Company is a party or by which the Company is bound, or any law of the
United States or the State of Minnesota, any rule or regulation of any
governmental authority or regulatory body of the United States or the
State of Minnesota, or any judgment, order or decree known by such
counsel and applicable to the Company of any court or governmental
authority.
(ix) No holders of capital stock of the Company, or securities
convertible into capital stock of the Company, have the right to cause
the Company to include such holder's capital stock in the Registration
Statement pursuant to the Company's Articles of Incorporation or
Bylaws or any contract or agreement.
(x) No consent, approval, authorization or order of, and no
notice to or filing with, any governmental agency or body or any court
is required to be obtained or made by the Company for the issue and
sale of the Units pursuant to the Underwriting Agreement, except such
as may be required and obtained under
19
<PAGE>
the 1933 Act or under state or other securities laws in connection
with the purchase and distribution of the Units by the Underwriter.
(xi) The Warrant Agreement and the Underwriter's Warrants have
been duly authorized, executed and delivered by the Company and are
the valid and binding obligations of the Company, enforceable in
accordance with their terms, except as enforceability may be limited
by the application of bankruptcy, insolvency, moratorium, or other
laws of general application affecting the rights of creditors
generally and by judicial limitations on the right of specific
performance and other equitable remedies, and except as the
enforceability of indemnification or contribution provisions hereof
may be limited by federal or state securities laws. The Warrant
Shares when issued in accordance with the terms of this Agreement and
pursuant to the Warrants and the Underwriter's Warrants will be
validly issued, fully paid and nonassessable. A sufficient number of
shares of Common Stock has been reserved for issuance upon exercise of
the Warrants and the Underwriter's Warrants.
(xii) The Registration Statement has become and is effective
under the 1933 Act, the Prospectus has been filed as required by Rule
424(b), if necessary and, to the best knowledge of such counsel, no
stop orders suspending the effectiveness of the Registration Statement
have been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the 1933 Act. The
registration of the Company's securities on Form 8-A has become
effective under the Securities Exchange Act of 1934, as amended, and
no stop order suspending the effectiveness of such registration, and,
to such counsel's knowledge, no proceedings for that purpose have been
instituted or are pending by the Commission.
(xiii) To the best of such counsel's knowledge, there are no
material legal or governmental proceedings of a character required by
the 1933 Act and the Rules and Regulations to be described or referred
to in the Registration Statement or Prospectus that are not described
or referred to therein. All pending legal or governmental proceedings,
if any, to which the Company is a party or to which any of its
property is subject which are not described in the Registration
Statement and the Prospectus, including ordinary routine litigation
incidental to the business, are, considered in the aggregate, not
material to the Company.
(xiv) The Registration Statement, when it became effective,
the Prospectus and any amendments thereof or supplements thereto,
(other than the financial statements and supporting financial and
statistical data included or incorporated therein, as to which such
counsel need express no opinion) on the date of filing or the date
thereof, complied as to form in all material respects with the
requirements of the 1933 Act and the Rules and Regulations.
20
<PAGE>
(xv) This Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as enforceability may
be limited by the application of bankruptcy, insolvency, moratorium or
similar laws affecting the rights of creditors generally and judicial
limitations on the right of specific performance and except as the
enforceability of indemnification or contribution provisions hereof
may be limited by federal or state securities laws.
(xvi) To the best of such counsel's knowledge, the execution,
delivery and performance of this Agreement and the consummation of the
transactions described herein will not result in a violation of, or a
default under, the terms or provisions of (A) any material bond,
debenture, note, contract, lease, license, indenture, mortgage, deed
of trust, loan agreement, joint venture or other agreement or
instrument to which the Company is a party or by which the Company or
any of its properties are bound, or (B) any material law, order, rule,
regulation, writ, injunction, or decree known to such counsel of any
government, governmental agency or court having jurisdiction over the
Company or any of its properties.
In expressing the foregoing opinion, as to matters of fact relevant to
conclusions of law, counsel may rely, to the extent that they deem proper,
upon certificates of public officials and of the officers of the Company,
provided that copies of such officers' certificates are attached to the
opinion.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that, although such counsel cannot
guarantee the accuracy, completeness or fairness of any of the statements
contained in the Registration Statement, Prospectus, or any amendment
thereof or supplement thereto in connection with such counsel's
representation, investigation and due inquiry of the Company in the
preparation of the Registration Statement, Prospectus and any amendment
thereof or supplement thereto, nothing has come to the attention of such
counsel which causes them to believe that the Registration Statement,
Prospectus, or any amendment thereof or supplement thereto (other than
the financial statements and supporting financial and statistical data
included or incorporated therein, as to which such counsel need express no
opinion) 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, in light of the circumstances in which they were made,
not misleading; provided, however, that such opinion of counsel does not
require any statement concerning statements in, or omissions from, the
Registration Statement, Prospectus, or any amendment thereof or supplement
thereto, which are based upon and conform to written information furnished
to the Company by the Underwriter specifically for use in the preparation
of the Registration Statement, Prospectus, or any such amendment or
supplement.
(f) The Underwriter shall have received from Maun & Simon, PLC, its
counsel, such opinion or opinions as the Underwriter may reasonably
require, dated as of each closing date and satisfactory in form and
substance to the Underwriter, with respect to the
21
<PAGE>
sufficiency of corporate proceedings and other legal matters relating to
this Agreement and the transactions contemplated hereby, and the Company
shall have furnished to said counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters. In
connection with such opinion, as to matters of fact relevant to conclusions
of law, such counsel may rely, to the extent that they deem proper, upon
representations or certificates of public officials and of responsible
officers of the Company.
(g) The Underwriter and the Company shall have received letters,
dated the date hereof and as of each Closing Date, from Ernst & Young LLP,
independent public accountants, substantially similar to the form set forth
in Appendix A hereto.
(h) The Underwriter shall have received from the Company a
certificate, dated as of each Closing Date, of the principal executive
officer and the principal financial or accounting officer of the Company to
the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct as if made on and as of each closing
date. The Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at, or
prior to, such date.
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for that
purpose has been instituted or is pending or to the best knowledge of
such officers contemplated under the 1933 Act.
(iii) Neither the Registration Statement nor the Prospectus
nor any amendment thereof or supplement thereto included any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented prospectus which has not been so set forth;
provided, however, that such certificate does not require any
representation concerning statements in, or omissions from, the
Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, which are based upon and conform to written
information, as identified in Section 11 herein, furnished to the
Company by the Underwriter specifically for use in the preparation of
the Registration Statement or the Prospectus, or any such amendment or
supplement.
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except
as contemplated or referred to in the Prospectus, no event has
occurred that should have been set forth in an amendment or supplement
to Registration Statement or the Prospectus which has not been so set
forth and the Company has not incurred any direct or
22
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contingent liabilities or obligations material to the Company, or
entered into any material transactions, except liabilities,
obligations or transactions in the ordinary course of business, and
there has not been any change in the capital stock or long-term debt
of the Company, (including any capitalized lease obligations), any
material increase in the short-term debt of the Company, any material
adverse change in the financial position, net worth or results of
operations of the Company or declaration or payment of any dividend.
(v) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the Company
has not sustained any material loss of, or damage to, its properties,
whether or not insured.
(vi) There are no material actions, suits or proceedings pending
before any court or governmental agency, authority or body, or, to the
best of their knowledge, threatened, to which the Company is a party
or of which the business or property of the Company is the subject.
(i) The Underwriter shall have received, dated as of each closing
date, from the Secretary of the Company a certificate of incumbency
certifying the names, titles and signatures of the officers authorized to
execute the resolutions of the Board of Directors of the Company
authorizing and approving the execution, delivery and performance of this
Agreement, a copy of such resolutions to be attached to such certificate,
certifying that such resolutions and the Articles of Incorporation of the
Company and the Bylaws of the Company have been validly adopted and have
not been amended or modified.
(j) In addition, at each Closing, the Company shall have delivered to
the Underwriter an opinion, satisfactory to the Underwriter, of Schwegman,
Lundberg, Woessner & Kluth, P.A., special intellectual property counsel for
the Company, dated as such respective Closing Date, and satisfactory in
form and substance to the Underwriter and its counsel, to the effect that:
(i) To the best of such counsel's knowledge, except as described
in the Prospectus, there are no United States patents of third parties
which are or would be infringed by the manufacture, use, or sale of
the products or processes made or to be made, used, or sold by the
Company.
(ii) To the best of such counsel's knowledge, and except as
stated below, there are no legal, governmental or administrative
proceedings pending or threatened against the Company that relate to
patents, trademarks or other intellectual property, except for pending
or proposed United States and foreign patent applications.
(iii) To the best of such counsel's knowledge, after due
inquiry, the Company has not received any notice of conflict with the
asserted rights of others in respect of any trademarks, service marks,
trade names, trademark registrations,
23
<PAGE>
service mark registrations, copyrights, licenses, inventions, trade
secrets, patents, patent applications, know-how, or similar rights,
nor of any threatened actions with respect thereto, which, if
determined adversely to the Company, would individually or in the
aggregate have a material adverse effect on the general affairs,
financial position, net worth or results of operations of the Company.
(iv) To the best of such counsel's knowledge, after due inquiry,
the Company owns, possesses or is licensed under all such material
trademarks, trademark applications, trademark registrations, service
marks, service mark registrations, copyrights, patents, patent
applications and licenses as are described in the Prospectus and which
are necessary for the Company's present or planned future business as
described in the Prospectus.
In expressing the foregoing opinion, as to matters of fact relevant to
conclusions of law, counsel may rely, to the extent that they deem proper,
upon certificates of public officials and of the officers of the Company,
provided that copies of such officers' certificates are attached to the
opinion.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that, although such counsel cannot
guarantee the accuracy, completeness or fairness of any of the statements
regarding intellectual property matters contained in the Registration
Statement, Prospectus, or any amendment thereof or supplement thereto in
connection with such counsel's representation of the Company in connection
with intellectual property matters and in preparation of the intellectual
property portions of the Registration Statement, Prospectus, or any
amendment thereof or supplement thereto, nothing has come to the attention
of such counsel which causes them to believe that the intellectual
property portions of the Registration Statement, Prospectus, or any
amendment thereof or supplement thereto (other than the financial
statements and supporting financial and statistical data included or
incorporated therein, as to which such counsel need express no opinion)
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, in light of the circumstances in which they were made,
not misleading; provided, however, that such opinion of counsel does not
require any statement concerning statements in, or omissions from, the
Registration Statement, Prospectus, or any amendment thereof or supplement
thereto, which are based upon and conform to written information
furnished to the Company by the Underwriter specifically for use in the
preparation of the Registration Statement, Prospectus, or any such
amendment or supplement.
(k) In addition, at each Closing, the Company shall have delivered to
the Underwriter an opinion, satisfactory to the Underwriter, of McKenna &
Cuneo, L.L.P., special Food & Drug Administration (FDA) counsel for the
Company, dated as of each Closing Date, satisfactory in form and substance
to the Underwriter and its counsel to the effect that:
24
<PAGE>
(i) To the best of its knowledge: (i) the statements regarding
federal government regulation included in the Registration Statement,
insofar as those statements summarize provisions of the Federal Food,
Drug, and Cosmetic Act ("FDC Act") and regulations issued thereunder,
are accurate in all material respects; and (ii) the FDC Act and FDA's
implementing regulations summarized in the Regulatory Portion are the
federal food and drug statute and regulations that are material to the
Company's business.
(ii) It has no reason to believe that the Company's business, as
described in the Registration Statement is not being conducted in all
material respects in compliance with applicable requirements of the
FDC Act.
(iii) To the best of its knowledge, there are no
administrative enforcement or legal actions pending or contemplated
against the Company by the Food and Drug Administration or any similar
state or local regulatory agency.
(iv) It has no reason to believe that the information contained
in the Registration Statement, as of the date of its opinion, contains
any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements
in light of the circumstances under which they were made, not
misleading.
In expressing the foregoing opinion, as to matters of fact relevant to
conclusions of law, counsel may rely, to the extent that they deem proper,
upon certificates of public officials and of the officers of the Company,
provided that copies of such officers' certificates are attached to the
opinion.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that, although such counsel cannot
guarantee the accuracy, completeness or fairness of any of the statements
regarding FDA matters contained in the Registration Statement, Prospectus,
or any amendment thereof or supplement thereto in connection with such
counsel's representation of the Company in connection with FDA matters and
in preparation of the FDA portions of the Registration Statement,
Prospectus, or any amendment thereof or supplement thereto, nothing has
come to the attention of such counsel which causes them to believe that
the FDA portions of the Registration Statement, Prospectus, or any
amendment thereof or supplement thereto (other than the financial
statements and supporting financial and statistical data included or
incorporated therein, as to which such counsel need express no opinion)
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, in light of the circumstances in which they were made,
not misleading; provided, however, that such opinion of counsel does not
require any statement concerning statements in, or omissions from, the
Registration Statement, Prospectus, or any amendment thereof or supplement
thereto, which are based upon and conform to written information furnished
to the Company by the Underwriter specifically for use in the preparation
of the Registration Statement, Prospectus, or any such amendment or
supplement.
25
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(l) The Underwriter shall have received a written agreement from each
shareholder of the Company, that such persons or entity will not, without
the prior written consent of the Underwriter during the Lockup Period (i)
sell, transfer or otherwise dispose of, or agree to sell, transfer or
otherwise dispose of any Units of Common Stock of the Company beneficially
held during the Lockup Period, (ii) sell, transfer or otherwise dispose of
or agree to sell, transfer or otherwise dispose of any options, rights,
warrants or other securities exercisable or convertible into Units of
Common Stock of the Company beneficially held during the Lockup Period, or
(iii) sell or grant, or agree to sell or grant, options, rights, warrants
or other securities exercisable or convertible into to any such Units of
Common Stock; provided, however, that the foregoing does not prohibit gifts
to donees who agree to be bound by the restrictions set forth in the lockup
agreement or transfers by will or the laws of descent.
(m) The Company shall not have failed to have performed any of its
agreements herein contained and required to be performed at or prior to the
First Closing Date or the Second Closing Date, as the case may be.
(n) The Units (and their components) shall have been registered or
qualified for sale or exempt from such registration or qualification under
the securities laws of such jurisdictions as designated by the Underwriter
such qualifications or exemptions shall continue in effect.
(o) The Company shall have furnished to the Underwriter, dated as of
the date of the Closing Date, such further certificates and documents as
the Underwriter shall have reasonably required.
(p) All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory to the Underwriter and its legal counsel. All statements
contained in any certificate, letter, or other document delivered pursuant
hereto by, or on behalf of, the Company shall be deemed to constitute
representations and warranties of the Company.
(q) The Underwriter may waive in writing the performance of any one
or more of the conditions specified in this Section 4 or extend the time
for their performance.
(r) If any of the conditions specified in this Section 4 shall not
have been fulfilled when and as required by this Agreement to be fulfilled,
this Agreement and all obligations of the Underwriter hereunder may be
canceled at, or at any time prior to, each Closing Date by the Underwriter.
Any such cancellation shall be without liability of the Underwriter to the
Company and shall not relieve the Company of its obligations under Section
3(g) hereof. Notice of such cancellation shall be given to the Company at
the address specified in Section 11 hereof in writing, or by telegraph or
telephone confirmed in writing.
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<PAGE>
5. UNDERWRITER'S WARRANTS. On the First Closing Date, the Company shall
sell to the Underwriter for $50 the Underwriter's Warrant, which shall first
become exercisable one year after the Effective Date and shall remain
exercisable for a period of four (4) years thereafter. The Underwriter's
Warrants shall be subject to certain transfer restrictions and shall be in
substantially the form filed as an exhibit to the Registration Statement and
attached as Appendix B hereto.
6. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the 1933 Act against any losses, claims,
damages or liabilities, joint or several, to which the Underwriter or each
such controlling person may become subject, under the 1933 Act, the 1934
Act, the common law or otherwise, insofar as such losses, claims, damages
or liabilities (or judicial or governmental actions or proceedings in
respect thereof) arise out of, or are based upon, (i) any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, or the omission or alleged
omission to state in the Registration Statement or any amendment thereof a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus if used prior to
the Effective Date of the Registration Statement or in the Prospectus (as
amended or as supplemented, if the Company shall have filed with the SEC
any amendment thereof or supplement thereto), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; or (iii) any
untrue statement or alleged untrue statement of a material fact contained
in any application or other statement executed by the Company or based upon
written information furnished by the Company filed in any jurisdiction in
order to qualify the Units under, or exempt the Units or the sale thereof
from qualification under, the securities laws of such jurisdiction, or the
omission or alleged omission to state in such application or statement a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; and the Company will reimburse the Underwriter, and
each such controlling person for any legal or other expenses reasonably
incurred by the Underwriter, or controlling person (subject to the
limitation set forth in Section 6(c) hereof) in connection with
investigating or defending against 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, omission or alleged omission, made in reliance upon and in
conformity with written information furnished to the Company by, or on
behalf of, the Underwriter specifically for use in the preparation of the
Registration Statement or any such post-effective amendment thereof, any
such Preliminary Prospectus or the Prospectus or any such amendment thereof
or supplement thereto, or in any application or other
27
<PAGE>
statement executed by the Company or the Underwriter filed in any
jurisdiction in order to qualify the Units (and their components) under,
or exempt the Units (and their components) or the sale thereof from
qualification under, the securities laws of such jurisdiction; and
provided further that the foregoing indemnity agreement is subject to the
condition that, insofar as it relates to any untrue statement, alleged
untrue statement, omission or alleged omission made in any Preliminary
Prospectus but eliminated or remedied in the Prospectus, such indemnity
agreement shall not inure to the benefit of the Underwriter if the person
asserting any loss, claim, damage or liability purchased the Units from
the Underwriter which are the subject thereof (or to the benefit of any
person who controls the Underwriter), if a copy of the Prospectus was
not sent or given to such person with, or prior to, the written
confirmation of the sale of such Units to such person. This indemnity
agreement is in addition to any liability which the Company may otherwise
have.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of the Company's directors, each of the Company's officers
who has signed the Registration Statement and each person who controls the
Company within the meaning of Section 15 of the 1933 Act against any
losses, claims, damages or liabilities to which the Company or any such
director, officer, or controlling person may become subject, under the 1933
Act, the 1934 Act, the common law, or otherwise, insofar as such losses,
claims, damages, or liabilities (or judicial or governmental actions or
proceedings in respect thereof) arise out of, or are based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, or the omission or
alleged omission to state in the Registration Statement or any amendment
thereof, a material fact required to be stated therein or necessary to make
the statements therein not misleading; (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus
if used prior to the Effective Date of the Registration Statement or in the
Prospectus (as amended or as supplemented, if the Company shall have filed
with the SEC any amendment thereof or supplement thereto), or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; or (iii) any
untrue statement or alleged untrue statement of a material fact contained
in any application or other statement executed by the Company or by the
Underwriter and filed in any jurisdiction in order to qualify the Units
(and their components) under, or exempt the Units (and their components) or
the sale thereof from qualification under, the securities laws of such
jurisdiction, or the omission or alleged omission to state in such
application or statement a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; in each case to the extent, but
only the extent, that such untrue statement, alleged untrue statement,
omission or alleged omission, was made in reliance upon and in conformity
with written information furnished to the Company by, or on behalf of, the
Underwriter specifically for use in the preparation of the Registration
Statement or any such post effective amendment thereof, any such
Preliminary Prospectus or the Prospectus or any such amendment thereof or
supplement thereto, or in any application or other statement
28
<PAGE>
executed by the Company or by the Underwriter and filed in any
jurisdiction; and the Underwriter will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer
or controlling person in connection with investigating or defending
against any such loss, claim, damage, liability or action. This indemnity
agreement is in addition to any liability which the Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
6 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
under this Section 6, notify in writing the indemnifying party of the
commencement thereof. The omission so to notify the indemnifying party
will not relieve it from any liability under this Section 6 as to the
particular item for which indemnification is then being sought, unless such
omission so to notify prejudices the indemnifying party's ability to defend
such action. In case any such action is brought against any indemnified
party and the indemnified party notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel who shall be 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 6 for
any legal or other expenses subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the reasonable judgment of
the indemnified party, it is advisable for such parties and controlling
persons to be represented by separate counsel, any indemnified party shall
have the right to employ separate counsel to represent it and all other
parties and their controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Underwriter against the Company or by the Company against the Underwriter
hereunder, in which event the fees and expenses of such separate counsel
shall be borne by the indemnifying party and paid as incurred. Any such
indemnifying party shall not be liable to any such indemnified party on
account of any settlement of any claim or action effected without the prior
written consent of such indemnifying party.
7. CONTRIBUTION.
(a) If the indemnification provided for in Section 6 is unavailable
under applicable law to any indemnified party in respect of any losses,
claims, damages or liabilities referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and
the Underwriter from the offering of the Units or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company
and the Underwriter in connection with the statements or omissions which
resulted in
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<PAGE>
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The Company and the Underwriter agree that
contribution determined by per capita allocation would not be equitable.
The respective relative benefits received by the Company, on the one hand,
and the Underwriter, on the other hand, shall be deemed to be in the same
proportion (A) in the case of the Company, as the total price paid to the
Company for the Units by the Underwriter (net of underwriting discount
received but before deducting expenses) bears to the aggregate public
offering price of the Units, (b) in the case of the Underwriter, as the
aggregate underwriting discount received by them bears to the aggregate
public offering price of the Units, in each case as reflected in the
Prospectus. The relative fault of the Company and the Underwriter shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or by the Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The amount paid or payable by a party as a result of the
losses, claims, damages and liabilities referred to above shall be deemed
to include any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim.
Notwithstanding the provisions of this Section 7, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the
total price at which the Units underwritten by it were offered to the
public exceeds the amount of any damages which the Underwriter has
otherwise been required to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission in the Registration Statement,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person who controls the Underwriter
within the meaning of the 1933 Act or the 1934 Act shall have the same
rights to contribution as the Underwriter, each person who controls the
Company within the meaning of the 1933 Act or the 1934 Act shall have the
same rights to contribution as the Company and each officer of the Company
who shall have signed the Registration Statement and each director of the
Company shall have the same rights to contribution as the Company.
(b) Promptly after receipt by a party to this Agreement of notice
of the commencement of any action, suit or proceeding, such person will,
if a claim for contribution in respect thereof is to be made against
another party (the "Contributing Party"), notify the Contributing Party
of the commencement thereof, but the omission so to notify the
Contributing Party will not relieve the Contributing Party from any
liability which it may have to any party other than under this Section
7, unless such omission so to notify prejudices the Contributing Party's
ability to defend such action. Any notice given pursuant to Section 7
hereof shall be deemed to be like notice hereunder. In case any such
action, suit or proceeding is brought against any party, and such person
notifies a Contributing Party of the commencement thereof, the
Contributing Party will be entitled to participate therein with the
notifying party and any other Contributing Party similarly notified.
30
<PAGE>
8. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective when the Underwriter
releases the initial public offering of the Firm Units for sale to the
public. The Underwriter shall notify the Company immediately after any
action has been taken which causes this Agreement to become effective.
Until this Agreement is effective, it may be terminated by the Company
or the Underwriter by giving notice as hereinafter provided, except that
the provisions of Section 3(g) and Sections 6, 7, and 8 shall at all
times be effective. For purposes of this Agreement, the release of the
initial public offering of the Firm Units for sale to the public shall
be deemed to have been made when the Underwriter releases, by facsimile
or otherwise, firm offers of the Firm Units to securities dealers or
release for publication a newspaper advertisement relating to the Firm
Units, whichever occurs first.
(b) Until the First Closing Date, this Agreement may be terminated
by the Underwriter, at its option, by giving notice to the Company, if
(i) the Company shall have sustained a loss by fire, flood, accident or
other calamity which is material with respect to the business of the
Company; the Company shall have become a party to material litigation,
not disclosed in the Registration Statement or the Prospectus; or the
business or financial condition of the Company shall have become the
subject of any material litigation, not disclosed in the Registration
Statement or the Prospectus; or there shall have been, since the
respective dates as of which information is given in the Registration
Statement or the Prospectus, any material adverse change in the general
affairs, business, key personnel, capitalization, financial position or
net worth of the Company, whether or not arising in the ordinary course
of business, which loss or change, in the reasonable judgment of the
Underwriter, shall render it inadvisable to proceed with the delivery of
the Units, whether or not such loss shall have been insured; (ii)
trading in securities generally on the New York Stock Exchange, American
Stock Exchange, Nasdaq National Market, Nasdaq SmallCap Market or the
over-the-counter market shall have been suspended or minimum prices
shall have been established on such exchange by the SEC or by such
exchanges or markets; (iii) a general banking moratorium shall have been
declared by federal, New York or Minnesota authorities; (iv) there shall
have been such a material adverse change in general economic, monetary,
political or financial conditions, or the effect of international
conditions on the financial markets in the United States shall be such
that, in the judgment of the Underwriter, makes it inadvisable to
proceed with the delivery of the Units; (v) the enactment, publication,
decree or other promulgation of any federal or state statute,
regulation, rule or order of either of any court or other governmental
authority which, in the judgment of the Underwriter, materially and
adversely affects or will materially and adversely affect the business
or operations of the Company; (vi) there shall be a material outbreak of
hostilities or material escalation and deterioration in the political
and military situation between the United States and any foreign power,
or a formal declaration of war by the United States of America shall
have occurred; (vii) the Company shall have failed to comply with any of
the provisions of this Agreement on its part to be performed on or prior
to such date or if any of the conditions, agreements, representations or
warranties of the Company shall not have been fulfilled within the
respective times provided for in this Agreement; or (viii) the Company
is no
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longer registered under the 1934 Act. Any such termination shall be
without liability of any party to any other party, except as provided in
Sections 7 and 8 hereof; provided, however, that the Company shall
remain obligated to pay costs and expenses to the extent provided in
Section 3(g) hereof.
(c) If the Underwriter elects to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this
Section 8, it shall notify the Company promptly by telegram or
telephone, confirmed by letter sent to the address specified in Section
10 hereof. If the Company shall elect to prevent this Agreement from
becoming effective, it shall notify the Underwriter promptly by telegram
or telephone, confirmed by letter sent to the address specified in
Section 10 hereof.
9. SURVIVAL OF INDEMNITIES, CONTRIBUTION AGREEMENTS, WARRANTIES AND
REPRESENTATIONS. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 6 and 7, respectively, the
representations and warranties of the Company set forth in Sections 1 hereof
respectively and the covenants of the Company set forth in Section 3 hereof
shall remain operative and in full force and effect, regardless of any
investigation made by, or on behalf of, the Underwriter, the Company, any of its
officers and directors, or any controlling person referred to in Sections 6 and
7, and shall survive the delivery of and payment for the Units. The aforesaid
indemnity and contribution agreements shall also survive any termination or
cancellation of this Agreement. Any successor of any party or of any such
controlling person, or any legal representative of such controlling person as
the case may be, shall be entitled to the benefit of the respective indemnity
and contribution agreements.
10. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and, if sent to Underwriter
or any of the Underwriter, shall be mailed, delivered or telegraphed and
confirmed, to R. J. Steichen & Company, One Financial Plaza, 120 South Sixth
Street, 700, Minneapolis, Minnesota 55402 Attention: Patrick M. Sidders, Senior
Vice President and Managing Director, with a copy to Philip T. Colton, Esq.,
Maun & Simon, PLC, 2000 Midwest Plaza Building West, 801 Nicollet Mall,
Minneapolis, Minnesota 55402; or, if sent to the Company, shall be mailed,
delivered or telegraphed and confirmed, to Hypertension Diagnostics, Inc., 2915
Waters Road, Suite 108, Eagan, Minnesota 55121-1662, Attention: Greg H.
Guettler, with a copy to Girard P. Miller, Esq., Doherty, Rumble & Butler,
P.A., 3500 Fifth Street Towers, 150 South Fifth Street, Minneapolis, Minnesota
55402-4235.
11. INFORMATION FURNISHED BY THE UNDERWRITER. The statements set forth in
the last paragraph on the cover page, the stabilization legend on the inside
front cover and the statements under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the only written
information furnished by, or on behalf of, the Underwriter specifically for use
with reference to the Underwriter referred to in Section 1 and Section 6 hereof.
12. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the Underwriter and the Company, their respective successors and assigns,
and the officers, directors and controlling persons referred to in Sections 6
and 7. Nothing expressed in this Agreement is
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intended or shall be construed to give any person or corporation, other than
the parties hereto, their respective successors and assigns, and the
controlling persons, officers and directors referred to in Sections 6 and 7
any legal or equitable right, remedy, or claim under, or in respect of, this
Agreement or any provision herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of the parties hereto and their respective executors,
administrators, successors, assigns and such controlling persons, officers
and directors, and for the benefit of no other person or corporation. No
purchaser of any Units from the Underwriter shall be construed a successor or
assign merely by reason of such purchase.
13. TERMINATION OF RIGHT OF FIRST REFUSAL. The parties hereto hereby
acknowledge and confirm termination of the right of first refusal granted by
the Company to the Underwriter by the terms of that certain agency agreement
dated November 24, 1997, as amended.
14. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall constitute an original copy
hereof, but all of which together shall constitute one Agreement.
If the foregoing is in accordance with the Underwriter's understanding
of this agreement, kindly sign and return to the Company the enclosed
counterpart of this Agreement, whereupon it will become a binding agreement
between the Company and the Underwriter in accordance with its terms.
Very truly yours,
HYPERTENSION DIAGNOSTICS, INC.
By: ___________________________________
Its: ____________________________
"Company"
Confirmed as of the date hereof
at Minneapolis, Minnesota
R. J. STEICHEN & COMPANY
By:__________________________________
Authorized Officer
_____________________________________
(Print Name)
"Underwriter"
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APPENDIX A
FORM OF COMFORT LETTER OF ERNST & YOUNG LLP
(1) They are independent public accountants with respect to the
Company within the meaning of the Securities Act of 1933, as amended (the "1933
Act").
(2) In their opinion, the financial statements of the Company
included in the Registration Statement which are stated therein to have been
examined by them comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the related published rules and
regulations.
(3) On the basis of specified procedures (but not an audit in
accordance with generally accepted auditing standards), including inquiries of
certain officers of the Company responsible for financial and accounting matters
as to transactions and events subsequent to the date of the financial statements
included in the Prospectus, a reading of minutes of meetings of the stockholders
and directors of the Company since the date of the financial statements included
in the Prospectus and other procedures as specified in such letter, nothing came
to their attention which caused them to believe that (a) at a specified date not
more than five (5) days prior to the date thereof in the case of the first
letter and not more than two (2) business days prior to the date thereof in the
case of the second and third letters, there was any change in the capital stock,
long-term debt, or short-term debt (other than normal payments) of the Company,
or any material decrease in net current assets or stockholders' equity, as
compared with amounts shown on the latest balance sheet of the Company included
in the Registration Statement; or (b) for the period from the date of such
balance sheet to a date not more than five (5) days prior to the date thereof in
the case of the first letter and not more than two (2) business days prior to
the date thereof in the case of the second letter, there were any material
decreases in working capital, long-term debt or total stockholders' equity,
except for changes or decreases which the Prospectus discloses, have occurred or
may occur, or which are set forth in such letter.
(4) They have carried out specified procedures, which have been
agreed to by the Underwriter, with respect to certain information in the
Prospectus specified by the Underwriter, and on the basis of such procedures,
they have found such information to be in agreement with the accounting records
of the Company or with material derived from such records.
<PAGE>
Warrant No.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
EITHER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED
FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
SUCH LAWS COVERING SUCH SECURITIES, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT,
OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
________________________, 1998
WARRANT
TO PURCHASE __________ UNITS
OF
HYPERTENSION DIAGNOSTICS, INC.
Each Unit Consisting of One Share
of Common Stock and
One Redeemable Class A Warrant
THIS CERTIFIES THAT, for good and valuable consideration, R. J. Steichen &
Company (the "Underwriter"), or its registered assigns, is entitled to subscribe
for and purchase from Hypertension Diagnostics, Inc., a Minnesota corporation
(the "Company"), at any time after ________, ____, to and including __________,
____, _________________ (________) fully paid and nonassessable Units of the
Company's securities at the price of $_____ per Unit (the "Warrant Exercise
Price"), subject to the antidilution provisions of this Warrant. Reference is
made to this Warrant in the Underwriting Agreement dated _______ 1998, as
amended, by and between the Company and the Underwriter. The Units which may be
acquired upon exercise of this Warrant are referred to herein as the "Warrant
Units." The term "Unit" shall mean one share of the Company's Common Stock,
$.01 par value and one Redeemable Class A Warrant (exercisable at $5.50 per
share). As used herein, the term "Holder" means the Underwriter, any party
who acquires all or a part of this Warrant as a registered transferee of the
Underwriter, or any record holder or holders of the Warrant Units issued upon
exercise, whether in whole or in part, of the Warrant. As used herein, the
term "Common Stock" means and includes the Company's presently authorized
common stock, $.01 par value, and shall also include any capital stock of any
class of the Company hereafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the Holders thereof to
participate in dividends or in the distribution of assets upon the voluntary
or involuntary liquidation, dissolution, or winding up of the Company. The
term "Class A Warrant" shall mean the Company's Warrants exercisable for a
period of four (4) years commencing on the effective date of the Registration
Statement defined in the above-referenced Underwriting Agreement, entitling
the holder thereof to purchase one share of Common Stock at a price of $5.50
per share.
<PAGE>
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE: TRANSFERABILITY.
A. The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to a fractional Unit), by
written notice of exercise (in the form attached hereto) delivered to the
Company at the principal office of the Company prior to the expiration of
this Warrant and accompanied or preceded by the surrender of this Warrant
along with a check in payment of the Warrant Exercise Price for such Units.
B. Except where directed by a court of competent jurisdiction
pursuant to the dissolution or liquidation of a corporate holder hereof and
subject to Section 7, for one (1) year from the date hereof, title to this
Warrant may be transferred only to a person who is both an officer and
shareholder, or both an officer and employee, or both an employee and
registered representative, of the Underwriter, or to a successor (or both
an officer and shareholder, or both an officer and employee, or both an
employee and registered representative of the successor) in interest to the
business of the Underwriter, by endorsement (by the holder hereof executing
the form of assignment attached hereto) and delivery in the same manner as
in the case of a negotiable instrument transferable by endorsement and
delivery.
2. EXCHANGE AND REPLACEMENT. Subject to Sections 1 and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Units purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Units (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Underwriter shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section
2. This Warrant shall be promptly canceled by the Company upon the surrender
hereof in connection with any exchange or replacement. The Company shall pay
all expenses, taxes (other than stock transfer taxes), and other charges
payable in connection with the preparation, execution, and delivery of
Warrants pursuant to this Section 2.
3. ISSUANCE OF THE WARRANT UNITS.
A. The Company agrees that the Units purchased hereby shall be and
are deemed to be issued to the Holder as of the close of business on the
date on which this Warrant shall have been surrendered and the payment made
for such Warrant Units as aforesaid. Subject to the provisions of the next
section, certificates for the Warrant Units so purchased shall be delivered
to the Holder within a reasonable time, not exceeding fifteen (15) days
after the rights represented by this Warrant shall have been so exercised,
and,
2
<PAGE>
unless this Warrant has expired, a new Warrant representing the right
to purchase the number of Warrant Units, if any, with respect to which this
Warrant shall not then have been exercised shall also be delivered to the
Holder within such time.
B. Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Units upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities
laws. Such Holder shall also provide the Company with written
representations from the Holder and the proposed transferee satisfactory to
the Company regarding the transfer or, at the election of the Company, an
opinion of counsel reasonably satisfactory to the Company to the effect
that the proposed transfer of this Warrant or disposition of Units may be
effected without registration or qualification (under any Federal or State
law) of this Warrant or the Warrant Units. Upon receipt of such written
notice and either such representations or opinion by the Company, such
Holder shall be entitled to transfer this Warrant, or to exercise this
Warrant in accordance with its terms and dispose of the Warrant Units, all
in accordance with the terms of the notice delivered by such Holder to the
Company, provided that an appropriate legend, if any, respecting the
aforesaid restrictions on transfer and disposition may be endorsed on this
Warrant or the certificates for the Warrant Units. Nothing herein,
however, shall obligate the Company to effect registrations under federal
or state securities laws, except as provided in Section 9. If
registrations are not in effect and if exemptions are not available when
the Holder seeks to exercise the Warrant, the Warrant exercise period will
be extended, if need be, to prevent the Warrant from expiring, until such
time as either registrations become effective or exemptions are available,
and the Warrant shall then remain exercisable for a period of at least 30
calendar days from the date the Company delivers to the Holder written
notice of the availability of such registrations or exemptions. The Holder
agrees to execute such documents and make such representations, warranties,
and agreements as may be required solely to comply with the exemptions
relied upon by the Company, or the registrations made, for the issuance of
the Warrant Units.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees that all
Warrant Units and shares issuable upon exercise of the Class A Warrants will,
upon issuance, be duly authorized and issued, fully paid, nonassessable, and
free from all taxes, liens, and charges with respect to the issue thereof except
for all taxes, liens and changes imposed by the Holder. The Company further
covenants and agrees that during the period within which the rights represented
by this Warrant may be exercised, the Company will at all times have authorized
and reserved for the purpose of issue or transfer upon exercise of the
subscription rights evidenced by this Warrant a sufficient number of Units of
Common Stock to provide for the exercise of the rights represented by this
Warrant and the Class A Warrants included therein.
5. ANTIDILUTION ADJUSTMENTS. If the Company shall at any time hereafter
subdivide or combine its outstanding shares of Common Stock, or declare a
dividend payable in Common Stock, or declare a dividend payable in Common Stock,
the exercise price in effect immediately prior to the subdivision, combination
or record date for such dividend payable in Common Stock shall forthwith be
proportionately increased, in the case of combination, or proportionately
decreased, in the case of subdivision or declaration of a dividend payable in
Common Stock, and
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the number of Units purchasable upon exercise of this Warrant, immediately
preceding such event, shall be changed to the number determined by dividing
the then current exercise dividend payable in Common Stock and against the
number of Units purchasable upon the exercise of this Warrant immediately
preceding such event, so as to achieve an exercise price and number of Units
purchasable after such event proportional to such exercise price and number of
Units purchasable immediately preceding such event. No adjustment in 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 are not required to be so made shall be carried forward
and taken into account in any subsequent adjustment. All calculations hereunder
shall be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be.
No fractional Units are to be issued upon the exercise of the Warrant, but
the Company shall pay a cash adjustment in respect of any fraction of a Unit
which would otherwise be issuable in an amount equal to the same fraction of the
market price per share of Unit's on the day of exercise as determined in good
faith by the Company.
In case of any capital reorganization or any reclassification of the shares
of Common Stock of the Company, or in the case of any consolidation with or
merger of the Company into or with another corporation, or the sale of all or
substantially all of its assets to another corporation, which is effected in
such a manner that the holders of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for Common Stock,
then, as a part of such reorganization, reclassification, consolidation, merger
or sale, as the case may be, lawful provision shall be made so that the holder
of the Warrant shall have the right thereafter to receive, upon the exercise
hereof, the kind and amount of shares of stock or other securities or property
which the holder would have been entitled to receive if, immediately prior to
such reorganization, reclassification, consolidation, merger or sale, the holder
had held the number of Units which were then purchasable upon the exercise of
the Warrant. In any such case, appropriate adjustment (as determined in good
faith by the Board of Directors of the Company) shall be made in the application
of the provisions set forth herein with respect to the rights and interest
thereafter of the holder of the Warrant, to the end that the provisions set
forth herein (including provisions with respect to adjustments of the exercise
price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the exercise of the Warrant.
When any adjustment is required to be made in the exercise price, initial
or adjusted, the Company shall forthwith determine the new exercise price, and
A. Prepare and retain on file a statement describing in reasonable
detail the method used in arriving at the new exercise price; and
B. Cause a copy of such statement to be mailed to the holder of the
Warrant as of a date within ten (10) days after the date when the
circumstances giving rise to the adjustment occurred.
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6. NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE WARRANT UNITS.
A. Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance
hereof, agrees to give written notice to the Company before transferring
this Warrant or transferring any Warrant Units of such Holder's intention
to do so, describing briefly the manner of any proposed transfer. Promptly
upon receiving such written notice, the Company shall present copies
thereof to the Company's counsel and to counsel to the original purchaser
of this Warrant. If in the opinion of each such counsel the proposed
transfer may be effected without registration or qualification (under any
federal or state securities laws), the Company, as promptly as practicable,
shall notify the Holder of such opinion, whereupon the Holder shall be
entitled to transfer this Warrant or to dispose of Warrant Units received
upon the previous exercise of this Warrant, all in accordance with the
terms of the notice delivered by the Holder to the Company; provided that
an appropriate legend may be endorsed on this Warrant or the certificates
for such Warrant Units respecting restrictions upon transfer thereof
necessary or advisable in the opinion of counsel to the Company and
satisfactory to the Company to prevent further transfers which would be in
violation of Section 5 of the Securities Act of 1933, as amended (the "1933
Act") and applicable state securities laws; and provided further that the
prospective transferee or purchaser shall execute such documents and make
such representations, warranties, and agreements as may be required solely
to comply with the exemptions relied upon by the Company for the transfer
or disposition of the Warrant or Warrant Units.
B. If in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such
Warrant Units described in the written notice given pursuant to this
Section 7 may not be effected without registration or qualification of this
Warrant or such Warrant Units the Company shall promptly give written
notice thereof to the Holder, and the Holder will limit its activities in
respect to such as, in the opinion of both such counsel, are permitted by
law.
8. FRACTIONAL UNITS. Fractional Units shall not be issued upon the
exercise of this Warrant, but in any case where the Holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional Unit, the Company shall, upon the exercise of this Warrant for the
largest number of whole Units then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Fair Market Value (as defined in Section
10(d)) of such fractional Unit over the proportional part of the Warrant
Exercise Price represented by such fractional Unit, plus (b) the proportional
part of the Warrant Exercise Price represented by such fractional Unit.
9. REGISTRATION RIGHTS.
A. If at any time prior to the expiration of seven (7) years from
the date hereof, the Company proposes to file any Registration Statement
under the 1933 Act covering a public offering of any of the Company's
securities (except by a Form S-4 or Form S-8
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Registration Statement or any successor forms thereto), it will give
written notice to all Holders of this Warrant, any Warrants issued pursuant
to Section 2 and/or Section 3(a) hereof, and any securities issuable upon
exercise of this Warrant or the Class A Warrants of its intention to do so
and, on the written request of any such Holder given within twenty (20)
days after receipt of any such notice (which request shall specify the
interest in this Warrant or the securities issuable upon exercise of this
Warrant or the Class A Warrants intended to be sold or disposed of by such
Holder and describe the nature of any proposed sale or other disposition
thereof), the Company will use its best efforts to cause all such
securities, the Holders of which shall have requested the registration or
qualification thereof, to be included in such registration statement
proposed to be filed by the Company; provided, however, that nothing
herein shall prevent the Company from, at any time, abandoning or delaying
any registration. If any registration pursuant to this Section 9(a) is
underwritten in whole or in part, the Company may require that the
securities requested for inclusion pursuant to this Section 9(a) be
included in the underwriting on the same terms and conditions as the
securities otherwise being sold through the underwriters. If a greater
number of securities is offered for participation in the proposed offering
than in the reasonable opinion of the managing underwriter of the proposed
offering can be accommodated without adversely affecting the proposed
offering, then the amount of securities proposed to be offered by such
Holders for registration, as well as the number of securities of any other
selling shareholders participating in the registration, shall be
proportionately reduced to a number deemed satisfactory by the managing
underwriter.
B. Further, at any time prior to the expiration of this Warrant, and
provided that a registration statement on Form S-3 (or any successor form
thereto) is then available to the Company, and on a one-time basis only,
upon request by the Holder or Holders of a majority in interest of any
securities originally issuable under this or any warrant issued to the
Underwriter or any affiliate in connection with the sale of shares pursuant
to the Underwriter Agreement Underwriter (whether or not then issued) and
any Warrants issued pursuant to Section 2 and/or Section 3(a) hereof, the
Company will promptly take all necessary steps to register or qualify,
under the 1933 Act and the securities laws of such states as the Holders
may reasonably request, such number of securities issued and to be issued
upon conversion of the Warrants requested by such Holders in their request
to the Company. In addition, upon the receipt of such request, the Company
shall promptly give written notice to all other record Holders of the
securities not theretofore registered under the Securities Act and sold
that such registration is to be effected. The Company shall include in
such registration statement such securities for which it has received
written requests to register by such other record Holders within 30 days
after the delivery of the Company's written notice to such other record
Holders. The Company shall be obligated to prepare, file and cause to
become effective only one registration statement pursuant to this Section
9(b) and to pay the costs and expenses associated with such registration
statement to the extent provided in Section 9(c). The Company shall keep
effective and maintain any registration, qualification, notification, or
approval specified in this Paragraph (b) for a period of one hundred twenty
(120) days or the date on which all securities are sold, whichever is
earlier.
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C. With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, the Company shall bear the following
fees, costs, and expenses: all registration, filing and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or
underwriters of such securities (if the Company is required to bear such
fees and disbursements), all internal expenses, the premiums and other
costs of policies of insurance for the benefit of the Company and/or its
directors and officers against liability arising out of the public
offering, and legal fees and disbursements and other expenses of complying
with state securities laws of any jurisdictions in which the securities to
be offered are to be registered or qualified. Fees and disbursements of
special counsel and accountants for the selling Holders, underwriting
discounts and commissions, and transfer taxes for selling Holders shall be
borne by the selling Holders.
D. The Company hereby indemnifies each of the Holders of this
Warrant and of any securities issued upon exercise thereof or the Class A
Warrant, and the officers and directors, if any, who control such Holders,
within the meaning of Section 15 of the 1933 Act, against all losses,
claims, damages, and liabilities caused by (1) any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement or Prospectus (and as amended or supplemented if the Company
shall have furnished any amendments thereof or supplements thereto), any
Preliminary Prospectus or any state securities law filings; (2) any
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading except insofar as such losses, claims, damages, or liabilities
are caused by any untrue statement or omission contained in information
furnished in writing to the Company by such Holder expressly for use
therein; and each such Holder by its acceptance hereof severally agrees
that it will indemnify and hold harmless the Company, each of its officers
who signs such Registration Statement, and each person, if any, who
controls the Company, within the meaning of Section 15 of the 1933 Act,
with respect to losses, claims, damages, or liabilities which are caused by
any untrue statement or alleged untrue statement, omission or alleged
omission contained in information furnished in writing to the Company by
such Holder expressly for use therein.
10. ADDITIONAL RIGHT TO CONVERT WARRANT.
A. The Holder of this Warrant shall have the right to require the
Company to convert this Warrant (the "Conversion Right") at any time after
it is exercisable, but prior to its expiration, into Units as provided for
in this Section 10. Upon exercise of the Conversion Right, the Company
shall deliver to the Holder (without payment by the Holder of any exercise
price) that number of shares of Company Common Stock equal to the quotient
obtained by dividing (x) the value of the Warrant at the time the
Conversion Right is exercised (determined by subtracting the aggregate
exercise price for the Warrant in effect immediately prior to the exercise
of the Conversion Right from the aggregate Fair Market Value (as determined
below) for the Warrant immediately prior to the exercise of the Conversion
Right) by (y) the Fair Market Value of one share of Company Common Stock
immediately prior to the exercise of the Conversion Right. No fractional
shares shall be issuable upon exercise of the Conversion Right, and if the
number of shares to be issued in accordance with the foregoing formula is
other than a whole
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number, the Company shall pay to the holder of this Warrant an amount in
cash equal to the fair market value of the resulting fractional share.
B. The Conversion Right may be exercised by the Holder, at any time
or from time to time after this Warrant is exercisable, prior to its
expiration, on any business day by delivering a written notice in the form
attached hereto (the "Conversion Notice") to the Company at the offices of
the Company exercising the Conversion Right and specifying (i) the total
number of shares of Common Stock the Holder will purchase pursuant to such
conversion and (ii) a place and date not less than one or more than 20
business days from the date of the Conversion Notice for the closing of
such purchase.
C. At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Company Common
Stock issuable upon such conversion, together with cash, in lieu of any
fraction of a share, and (iii) the Company will deliver to the Holder a new
Warrant representing the number of shares, if any, with respect to which
the Warrant shall not have been converted.
D. Fair Market Value of a share of Common Stock as of a particular
date (the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange or is
quoted on the Nasdaq National Market System, then the average closing or
last sale prices, respectively, reported for the ten (10) business days
immediately preceding the Determination Date,
(ii) If the Company's Common Stock is not traded on an exchange or on
the Nasdaq National Market System but is traded on the Nasdaq SmallCap
Market or other over-the-counter market, then the average closing bid and
asked prices reported for the ten (10) business days immediately preceding
the Determination Date, and
(iii) If the Company's Common Stock is not traded on an exchange
or on the Nasdaq National Market, Nasdaq SmallCap Market or other
over-the-counter market, then the price established in good faith by the
Company's Board of Directors.
11. MISCELLANEOUS. Whenever reference is made herein to the issue or sale
of shares of Common Stock, the term "Common Stock" shall include any stock of
any class of the Company other than preferred stock with a fixed limit on
dividends and a fixed amount payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company.
The Company will not, by amendment of its Articles of Incorporation or
through reorganization, consolidation, merger, dissolution or sale of assets, or
by any other voluntary act or deed, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be observed
or performed hereunder by the Company, but will, at all times in good faith,
assist, insofar as it is able, in the carrying out of all provisions hereof and
in the taking of all
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other action which may be necessary in order to protect the rights of the
Holder hereof against dilution.
The Company agrees to provide Underwriter with detailed quarterly and
annual financial statements as soon as available, in a form reasonably
satisfactory to Underwriter, as well as any other documents as Underwriter or
its counsel may reasonably request in a form satisfactory to Underwriter, so
long as this Warrant or any Warrant Units are outstanding and unregistered.
Upon written request of the Holder of this Warrant, the Company will
promptly provide such Holder with a then current written list of the names and
addresses of all Holders of warrants originally issued under the terms of, and
concurrent with, this Warrant.
The representations, warranties and agreements herein contained shall
survive the exercise of this Warrant. References to the "holder of" include the
immediate holder of shares purchased on the exercise of this Warrant, and the
word "holder" shall include the plural thereof. This Common Stock Purchase
Warrant shall be interpreted under the laws of the State of Minnesota.
All shares of Common Stock or other securities issued upon the exercise of
the Warrant shall be validly issued, fully paid and non-assessable, and the
Company will pay all taxes due and payable by the issuer in respect of the
issuance thereof.
Notwithstanding anything contained herein to the contrary, the holder of
this Warrant shall not be deemed a Shareholder of the Company for any purpose
whatsoever until and unless this Warrant is duly exercised.
Neither this Warrant nor any term hereof may be changed, waived, discharged
or terminated orally but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
IN WITNESS WHEREOF, Hypertension Diagnostics, Inc. has caused this Warrant
to be signed by its duly authorized officer and this Warrant to be dated
___________________, 1998.
"Company"
HYPERTENSION DIAGNOSTICS, INC.
By______________________________________
Its_____________________________________
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TO: HYPERTENSION DIAGNOSTICS, INC.
NOTICE OF EXERCISE OF WARRANT -- To Be Executed by the Registered Holder in
Order to Exercise the Warrant
The undersigned hereby irrevocably elects to exercise the attached Warrant to
purchase for cash, __________________ of the Units issuable upon the exercise of
such Warrant, and requests that certificates for such Units (together with a new
Warrant to purchase the number of shares, if any, with respect to which this
Warrant is not exercised) shall be issued in the name of
________________________________________
(Print Name)
Please insert social security
or other identifying number
of registered Holder of
certificate (_____________) Address:
________________________________________
________________________________________
Date: ____________ ________________________________________
Signature*
*The signature on the Notice of Exercise of Warrant must correspond to the name
as written upon the face of the Warrant in every particular without alteration
or enlargement or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
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ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrants.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
unto _______________________________ the right to purchase the securities of
Hypertension Diagnostics, Inc. to which the within Warrant relates and appoints
______________________, attorney, to transfer said right on the books of
Hypertension Diagnostics, Inc. with full power of substitution in the premises.
Dated:___________ ______________________________
(Signature)
Address:
______________________________
______________________________
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CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 10)
TO: HYPERTENSION DIAGNOSTICS, INC.
The undersigned hereby irrevocably elects a cashless exercise of the right
of purchase represented by the within Warrant Certificate for, and to purchase
thereunder, _______________ shares of Common Stock, as provided for in Section
10 therein.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional share to:
Name__________________________
(Please print name)
Address____________________________________
Social Security No.________________
Signature__________________________________
NOTE: The above signature should correspond exactly with the name on
the first page of this Warrant Certificate or with the name of the assignee
appearing in the assignment form below.
And if said number of shares is not all of the shares purchasable under the
within Warrant, a new Warrant is to be issued in the name of said undersigned
for the balance remaining of the shares purchasable thereunder rounded up to the
next higher number of shares.
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Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 3, 1997 in Amendment No. 2 to the
Registration Statement (Form SB-2) and related Prospectus of Hypertension
Diagnostics, Inc. for the registration of 2,875,000 units, each unit
consisting of one share of its common stock and one redeemable common stock
purchase warrant.
Ernst & Young LLP
Minneapolis, Minnesota
July 17, 1998
