<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1998
REGISTRATION NO. 333-53025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
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. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Units, each consisting of one share of Common
Stock, $.01 par value, and one redeemable Class
A Warrant to purchase one share of Common
Stock........................................... 2,875,000 $4.125 $11,859,375 $3,498.52
Common Stock, $.01 par value.................... 2,875,000 -- -- N/A(3)
Redeemable Class A Warrant to purchase one share
of Common Stock............................... 2,875,000 -- -- N/A(3)
Common Stock, $.01 par value, underlying the
Units........................................... 2,875,000 $5.50 $15,812,500 $4,664.69
</TABLE>
(1) Includes 375,000 Units subject to an option granted to the Underwriter to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating registration fees pursuant
to Rule 457(a) under the Securities Act of 1933, as amended.
(3) The registration fee is being paid and accounted for in the registration fee
calculation of the Units.
--------------------------
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.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 15, 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 250,000 Units at an
exercise price of $4.95 per Unit (the "Underwriter's Warrant"). 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.
ii
<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) 250,000 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)
1,045,275 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) 250,000 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) 1,094,999 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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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
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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
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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
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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
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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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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
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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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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) 250,000 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) 1,094,999
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) 250,000 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) 1,094,999 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
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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-
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<PAGE>
matched patients free of disease in order to establish a range of clinical
information useful to both the 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
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<PAGE>
important clinical distinction which cannot be easily determined in medical
practice today. Some patients, 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)
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<PAGE>
- 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 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.
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<PAGE>
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 $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
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<PAGE>
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 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
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<PAGE>
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."
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
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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.
- 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)
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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 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
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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 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.
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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.
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
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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 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 material 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
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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>
- ------------------------
(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.
45
<PAGE>
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
46
<PAGE>
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 the
above options have an exercise price equal to at least 85% of the fair market
value of the Shares as of the date of grant. 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.
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
47
<PAGE>
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 will be effective upon the receipt of 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.
48
<PAGE>
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>
- ------------------------
* 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.
49
<PAGE>
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,
50
<PAGE>
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 $3.00 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."
51
<PAGE>
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 1,094,999 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 has adopted and has submitted for the
approval of the Company's shareholders at a Special Meeting of the Company's
Shareholders to be held on May 22, 1998, the Company's 1998 Option Plan. Subject
to shareholder approval of the 1998 Option Plan, the Company will reserve 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 250,000 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
52
<PAGE>
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
53
<PAGE>
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 250,000 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
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).
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
54
<PAGE>
Underwriter, for nominal consideration, a five-year warrant to purchase up to
50,000 Shares, at an exercise price of $3.00 per Share, and granted the
Underwriter a three-year right of first refusal to participate as the sole lead
or managing underwriter in an initial public offering of the Company's
securities pursuant to the Securities Act and as the exclusive agent in any
private placement of the Company's securities.
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
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 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 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>
(This page has been left blank intentionally.)
<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 $3.00 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. 1 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Eagan, State of Minnesota on July 15, 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. 1 to the Registration Statement was signed by the following
persons in the capacities stated below on July 15, 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>
HYPERTENSION DIAGNOSTICS, INC.
Public Offering of Units
_______________, 1998
R. J. Steichen & Company
One Financial Plaza
120 South Sixth Street
Minneapolis, MN 55402
Ladies and Gentlemen:
This letter is being delivered to you in connection with the Underwriting
Agreement (the "UNDERWRITING AGREEMENT") between Hypertension Diagnostics, Inc.,
a Minnesota corporation (the "COMPANY") and you, as the Underwriter named in the
Underwriting Agreement, relating to an underwritten public offering of Units
("UNITS") of the Company, each Unit consisting of one share of Common Stock,
$.01 par value ("COMMON STOCK") and one Class A Warrant to purchase one share of
Common Stock (the "WARRANT").
In order to induce you to enter into the Underwriting Agreement, the
undersigned agree(s) that, without your prior express written consent, the
undersigned will not offer, sell, contract to sell, grant any option to
purchase, or otherwise dispose of, or arrange for the contingent disposition of,
any equity securities of the Company or any securities convertible into, or
exercisable or exchangeable for, equity securities of the Company (except by
gift to a donee who agrees to be bound by the terms hereof and except for the
BONA FIDE pledge of such securities to a pledgee who agrees to be bound by the
terms hereof) for a period of 180 days after the date that the Registration
Statement relating to the sale of the Units has been declared effective by the
Securities and Exchange Commission.
If, for any reason, the Underwriting Agreement shall be terminated prior to
the First Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall likewise be terminated.
Very truly yours,
-------------------------------------------
Signature of Shareholder
-------------------------------------------
Signature of Shareholder (IF MORE THAN ONE)
-------------------------------------------
(Please Print Name)
<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
HYPERTENSION DIAGNOSTICS, INC.
I, the undersigned, President of Hypertension Diagnostics, Inc., a
corporation subject to the provisions of Chapter 302A, Minnesota Statutes, do
hereby certify that at a meeting of the shareholders of the corporation, duly
held on May 22, 1998, the following resolutions, providing for the amendment of
the Articles of Incorporation of Hypertension Diagnostics, Inc., were duly
adopted pursuant to said Chapter 302A:
RESOLVED: That Article III of the Articles of Incorporation
shall be amended to add Sections 3.07, 3.08 and 3.09 as follows:
3.07 CLASSIFICATION OF THE BOARD. The Board of Directors of
this Corporation shall be divided into three classes, with the term of
office of one class expiring each year. At the special meeting of
shareholders in 1998 two directors of the first class shall be elected
to hold office for a term expiring at the 1998 annual meeting, one
director of the second class shall be elected to hold office for a
term expiring at the 1999 annual meeting and two directors of the
third class shall be elected to hold office for a term expiring at the
2000 annual meeting. At each annual meeting of shareholders beginning
in 1998, each class of directors whose term shall then expire shall be
elected to hold office for a three-year term and until the election
and qualification of their respective successors in office. In case
of any increase or decrease in the number of directors, the number of
directors in each class shall be as nearly equal as possible.
3.08 VACANCIES. Newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause shall be filled
solely by the Board of Directors, acting by not less than a majority
of the directors then in office. Any director so chosen shall hold
office until the next election of the class for which such director
shall have been chosen and until his successor shall be elected and
qualified. No vacancy created by shareholder action at a regular or
special shareholder meeting may be filled by shareholder action at the
same shareholder meeting in which such vacancy was created. No
decrease in the number of directors shall shorten the term of any
incumbent director.
3.09 REMOVAL. Directors of the Corporation may only be removed
in accordance with the provisions of this Section 3.09. At any annual
meeting of shareholders of the Corporation, or at any special meeting
of shareholders of the Corporation the notice of which shall state
that the removal of a director or directors
<PAGE>
is among the purposes of the meeting, the holders of capital stock entitled
to vote thereon, present in person or by proxy, by vote of a majority of
the outstanding shares thereof, voting together as a single class, may
remove such director or directors for cause, or, by vote of at least 80% of
the outstanding shares thereof, voting together as a single class, may
remove such director or directors other than for cause.
FURTHER RESOLVED: That Article X, Section (A), of the Articles
of Incorporation shall be amended and restated as follows:
(A) Notwithstanding any other provision of these Articles of
Incorporation or the Bylaws of the Corporation (and notwithstanding
the fact that a lesser percentage may be specified by law, these
Articles of Incorporation or the Bylaws of the Corporation), the
affirmative 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, shall be required to alter, amend, adopt any provision
inconsistent with or repeal Section 3.07, 3.08 or 3.09 of Article III.
IN WITNESS WHEREOF, I have subscribed my name hereto this 2nd day of June,
1998.
/s/ Greg H. Guettler
--------------------------------------
Greg H. Guettler, President
2
<PAGE>
COMMON STOCK COMMON STOCK
- ---------------- ----------------
NUMBER [LOGO] HYPERTENSION SHARES
DIAGNOSTICS, INC.(TM)
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SEE REVERSE SIDE
FOR CERTAIN DEFINITIONS
HYPERTENSION DIAGNOSTICS, INC.
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CUSIP 44914V 10 4
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INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK PAR VALUE $.01 PER
SHARE OF
HYPERTENSION DIAGNOSTICS, INC.
(hereinafter called the Corporation), transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be held subject to all of the provisions
of the Articles of Incorporation of the Corporation and of the amendments from
time to time made thereto (copies of which are on file with the Transfer Agent),
to all of which the holder, by acceptance hereof assents.
This Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS, the facsimile signatures of the duly authorized officers of the
Corporation.
Dated: /s/ Charles F. Chesney /s/ Greg H. Guettler
SECRETARY PRESIDENT
Countersigned and Registered:
FIRSTAR TRUST COMPANY
Transfer Agent
and Registrar
By
Authorized Officer
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
________________________________________________________________________________
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______Custodian_______
(Cust) (Minor)
TEN ENT - as tenants by entireties under Uniform Gifts to
Minors
JT TEN - as joint tenants with right Act __________________
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
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For value received, ___________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
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PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE,
OF ASSIGNEE
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_________________________________________________________________________ Shares
of the stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint _________________________________________________________
_______________________________________________________________________ attorney
to transfer the said shares on the books of the within-named Corporation with
full power of substitution in the premises.
Dated
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NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND TO THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATSOEVER.
SIGNATURE GUARANTEED:
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THE BOARD OF DIRECTORS OF THE CORPORATION HAS THE AUTHORITY TO ISSUE SHARES OF
UNDESIGNATED PREFERRED STOCK WITHOUT SHAREHOLDER APPROVAL. THE BOARD OF
DIRECTORS OF THE CORPORATION IS AUTHORIZED TO ESTABLISH ADDITIONAL CLASSES OR
SERIES OF SHARES AND TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF SUCH
CLASS OR SERIES. THE CORPORATION WILL FURNISH TO ANY SHARE-HOLDER UPON REQUEST
MADE TO THE SECRETARY OF THE CORPORATION AND WITHOUT CHARGE A FULL STATEMENT (A)
OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF THE SHARES
OF EACH CLASS AND SERIES AUTHORIZED TO BE ISSUED, INSOFAR AS THE SAME HAVE BEEN
DETERMINED, AND (B) OF THE AUTHORITY OF THE BOARD OF DIRECTORS TO DIVIDE THE
SHARES INTO CLASSES OR SERIES AND TO DETERMINE AND CHANGE THE RELATIVE RIGHTS,
PREFERENCES AND LIMITATIONS OF ANY CLASS OR SERIES.
<PAGE>
THIS WARRANT CERTIFICATE MAY BE TRANSFERRED SEPARATELY
FROM THE COMMON STOCK CERTIFICATE WITH WHICH IT IS INITIALLY ISSUED
COMMENCING 10 TRADING DAYS AFTER ___________, 1998
EXERCISABLE ON OR BEFORE, AND VOID AFTER,
5:00 P.M. MINNEAPOLIS TIME ____________, 2002
WARRANTS TO PURCHASE COMMON STOCK OF
HYPERTENSION DIAGNOSTICS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
NO. W-_________________ CERTIFICATE FOR ____________ WARRANTS
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CUSIP 44914V 11 2
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THIS CERTIFIES THAT
or assigns, is the owner of the number of Warrants set forth above, each of
which represents the right to purchase from Hypertension Diagnostics, Inc., a
Minnesota corporation (the "Company"), at any time on or before 5:00 P.M.
Minneapolis time, ________________ 2002, upon compliance with and subject to the
conditions set forth herein and in the Warrant Agreement hereinafter referred
to, one share (subject to adjustments referred to below) of the Common Stock of
the Company (such shares or other securities or property purchasable upon
exercise of the Warrants being herein called the "Shares"), by surrendering this
Warrant Certificate, with the Purchase Form on the reverse side duly executed,
at the principal office of Firstar Trust Company, or its successor, as warrant
agent (the "Warrant Agent"), and by paying in full, in cash or by certified or
official bank check payable to the order of the Company, the exercise price of
$5.50 per share.
Upon any exercise of less than all the Warrants evidenced by this Warrant
Certificate, there shall be issued to the holder a new Warrant Certificate in
respect of the Warrants as to which this Warrant Certificate was not exercised.
Upon the surrender for transfer or exchange of any Warrant Certificates,
properly endorsed, to the Warrant Agent, the Warrant Agent at the Company's
expense will issue and deliver to the order of the holder hereof, a new Warrant
Certificate or Warrant Certificates of like tenor, in the name of such holder or
as such holder (upon payment by such holder of any applicable transfer taxes)
may direct, calling in the aggregate on the face or faces thereof for the number
of shares of Common Stock called for on the face hereof.
The Warrant Certificates are issued only as registered Warrant
Certificates. Until this Warrant Certificate is transferred in the Warrant
Register, the Company and the Warrant Agent may treat the person in whose name
this Warrant Certificate is registered as the absolute owner hereof and of the
Warrants represented hereby for all purposes, notwithstanding any notice to the
contrary.
This Warrant Certificate is issued under the Warrant Agreement dated as of
________________, 1998 between the Company and the Warrant Agent. The Warrant
Agreement is hereby incorporated by reference into this Warrant Certificate and
this Warrant Certificate is subject to the terms and provisions contained in
said Warrant Agreement, to all of which terms and provisions the registered
holder of this Warrant Certificate consents by acceptance hereof. Copies of said
Warrant Agreement are on file at the office of the Warrant Agent in Minneapolis,
Minnesota, and may be obtained by writing to the Warrant Agent.
The number of Shares receivable upon the exercise of the Warrants
represented by this Warrant Certificate and the exercise price per share are
subject to adjustment upon the happening of certain events specified in the
Warrant Agreement.
No fractional Shares of the Company's Common Stock will be issued upon the
exercise of Warrants. As to any final fraction of a share which a holder of
Warrants exercised in the same transaction would otherwise be entitled to
purchase on such exercise, the Company shall pay a cash adjustment in lieu of
any fractional Share determined as provided in the Warrant Agreement.
The Warrants may be redeemed at the option of the Company, at any time
following a period of 14 consecutive trading days where the per share closing
bid price of the Common Stock exceeds $6.50, on notice as set forth in the
Warrant Agreement, and at a redemption price equal to $.01 per Warrant. If
notice of redemption shall have been given as provided in the Warrant Agreement
and cash sufficient for the redemption be deposited by the Company for that
purpose, the exercise rights of the Warrants identified for redemption shall
expire at the close of business on such date of redemption unless extended by
the Company.
This Warrant Certificate shall not entitle the holder hereof to any of the
rights of a holder of Common Stock of the Company, including, without
limitation, the right to vote, to receive dividends and other distributions, to
exercise any preemptive right, or to receive any notice of, or to attend
meetings of holders of Common Stock or any other proceedings of the Company.
This Warrant Certificate shall be void and the Warrants and any rights
represented hereby shall cease unless exercised on or before 5:00 P.M.
Minneapolis time on ________________, 2002, unless extended by the Company.
This Warrant Certificate shall not be valid for any purpose until it shall
have been countersigned by the Warrant Agent.
WITNESS the facsimile signatures of the Company's duly authorized officers.
HYPERTENSION DIAGNOSTICS, INC.
Dated:
COUNTERSIGNED AND REGISTERED:
FIRSTAR TRUST COMPANY By /s/ Greg H. Guettler
(Milwaukee, Wisconsin) President
as Warrant Agent
By Attest /s/ Charles F. Chesney
Secretary
Authorized Officer
<PAGE>
THE CORPORATION WILL FURNISH ANY SHAREHOLDER UPON REQUEST AND WITHOUT CHARGE, A
COPY OF THE ARTICLES OF INCORPORATION AND A FULL STATEMENT OF THE DESIGNATIONS,
PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OR
SERIES AUTHORIZED TO BE ISSUED, SO FAR AS THEY HAVE BEEN DETERMINED, AND THE
AUTHORITY OF THE BOARD TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF
SUBSEQUENT CLASSES OR SERIES.
To: Hypertension Diagnostics, Inc.
c/o Firstar Trust Company
Warrant Agent
PURCHASE FORM
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE
WARRANT CERTIFICATES)
The undersigned hereby irrevocably elects to exercise ____________ * of the
Warrants represented by the Warrant Certificate and to purchase for cash the
Shares issuable upon the exercise of said Warrants and requests that
certificates for such Shares shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF
REGISTERED HOLDER OF CERTIFICATE
- --------------------------------
- --------------------------------
-----------------------------------------
(Print Name)
-----------------------------------------
(Address)
-----------------------------------------
(Address)
Dated: Signature:
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* Insert here the number of Warrants evidenced on the face of this Warrant
Certificate (or, in the case of a partial exercise, the portion thereof being
exercised), in either case without making any adjustment for additional Common
Stock or any other securities or property or cash which, pursuant to the
adjustment provisions referred to in this Warrant Certificate, may be
deliverable upon exercise.
ASSIGNMENT FORM
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO TRANSFER WARRANT
CERTIFICATES)
PLEASE INSERT SOCIAL SECURITY OR FOR VALUE RECEIVED, the undersigned
OTHER IDENTIFYING NUMBER OF ASSIGNEE hereby sells, assigns and transfers
__________ of the Warrants to purchase
- ------------------------------------ shares of Common Stock represented by
this Warrant Certificate unto
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- --------------------------------------------------------------------------------
(Please print or typewrite name and address, including postal zip code, of
assignee)
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and does hereby irrevocably constitute and appoint _____________________________
Attorney to transfer this Warrant Certificate on the records of the Company with
full power of substitution in the premises.
Dated: Signature(s)
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SIGNATURE(S) GUARANTEED:
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NOTICE:
THE SIGNATURE(S) TO THE PURCHASE FORM OR THE ASSIGNMENT FORM MUST
CORRESPOND TO THE NAME(S) AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE
IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
<PAGE>
UNIT CERTIFICATE
EACH UNIT COMPOSED OF
ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE CLASS A WARRANT
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NUMBER HYPERTENSION DIAGNOSTICS, INC. UNITS
U-
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CUSIP 44914V 20 3
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INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or assigns (the "Registered Holder"), is the owner of the number of units (the
"Units") specified above, each of which Units entitles the Registered Holder to
one (1) share of Common Stock, $.01 par value per share (the "Common Stock"), of
Hypertension Diagnostics, Inc., a Minnesota corporation (the "Company") and one
(1) Redeemable Class A Warrant (the "Warrant"). One Warrant initially entitles
the Registered Holder to purchase one fully paid and non-assessable share of the
Company's Common Stock at any time on or before 5:00 P.M. (Minneapolis time) on
____________________, 2002, at an exercise price of $5.50 per share, subject to
adjustment (the "Exercise Price") in lawful money of the United States of
America. The Warrants are issued pursuant to and are subject in all respects to
the terms and conditions set forth in the Warrant Agreement dated _____________,
1998 (the "Warrant Agreement"), by and between the Company and Firstar Trust
Company, as Warrant Agent. In the event of certain contingencies provided for in
the Warrant Agreement, the Exercise Price and the number of shares of Common
Stock subject to purchase upon the exercise of each Warrant are subject to
modification or adjustment. The Company may, on thirty (30) days' prior written
notice, redeem all the Warrants at one cent ($.01) per Warrant at any time on or
after ____________________, 1998 and, provided, however, that before any such
call for redemption of Warrants can take place, the closing bid price of the
Common Stock as reported by Nasdaq, if the Common Stock is then quoted on Nasdaq
(or the last reported sale price, if the Common Stock is then traded on a
national securities exchange), shall have exceeded $6.50 for any fourteen (14)
consecutive trading days.
The Common Stock and the Warrants may not be traded separately or be
transferred until _________________, 1998. Prior to such date, the Company will
not recognize any transfer or exchange other than in Units. At any time after
the Common Stock and Warrants are separately tradeable, the Registered Holder is
entitled to exchange this Unit Certificate for separate certificates
representing the number of shares of Common Stock and the Warrants included in
the Units represented by this Unit Certificate upon surrender of this Unit
Certificate to the Transfer Agent and Registrar at the office of the Transfer
Agent and Registrar, together with any documentation required by the Transfer
Agent and Registrar. This Unit Certificate is exchangeable, upon surrender
hereof by the Registered Holder to the Transfer Agent and Registrar, for a new
Unit Certificate or Unit Certificates of like tenor representing an equal
aggregate number of Units, each of such new Unit Certificates as represents such
number of Units as shall be designated by such Registered Holder at the time of
such surrender. This Unit Certificate is transferable at the office of the
Transfer Agent and Registrar by the Registered Holder in person or by attorney
duly authorized in writing upon surrender of this Unit Certificate. Upon due
presentment and payment of any tax or other charge imposed in connection
therewith or incidental thereto, for registration of transfer of this Unit
Certificate at such office, a new Unit Certificate or Unit Certificates
representing an equal aggregate number of Units will be issued to the transferee
in exchange for this Unit Certificate.
Prior to due presentment for registration of transfer hereof, the Company
and the Transfer Agent and Registrar may deem and treat the Registered Holder as
the absolute owner hereof and of each Unit represented hereby (notwithstanding
any notations of ownership or writing hereof made by anyone other than a duly
authorized officer of the Company or the Transfer Agent and Registrar) for all
purposes and shall not be affected by any notice to the contrary.
The Warrants covered by this Unit Certificate are subject to the terms of
the Warrant Agreement. The Warrant Agreement is available at the offices of the
Transfer Agent and Registrar. The Warrant Agreement is incorporated herein by
this reference and made a part hereof and reference is hereby made thereto for a
full description of the rights, limitations of rights, obligations, duties and
immunities hereunder.
This Unit Certificate shall be valid until __________________, 1998, on
which date the Common Stock and Warrants to which the Registered Holder hereof
is entitled shall be represented by a Common Stock Certificate and a Warrant
Certificate, respectively.
This Unit Certificate shall be governed by and construed in accordance with
the laws of the State of Minnesota without giving effect to conflicts of laws.
This Unit Certificate shall not be valid or obligatory for any purpose
unless countersigned and registered by the Transfer Agent and Registrar of the
Company.
IN WITNESS WHEREOF, the Company has caused this Unit Certificate to be duly
executed, manually or in facsimile, by two of its officers thereunto duly
authorized.
DATED: HYPERTENSION DIAGNOSTICS, INC.
COUNTERSIGNED AND REGISTERED:
FIRSTAR TRUST COMPANY By /s/ Greg H. Guettler
(Milwaukee, Wisconsin) President
as Transfer Agent and Registrar
By Attest /s/ Charles F. Chesney
Authorized Officer Secretary
<PAGE>
THE CORPORATION WILL FURNISH ANY SHAREHOLDER UPON REQUEST AND WITHOUT CHARGE, A
COPY OF THE ARTICLES OF INCORPORATION AND A FULL STATEMENT OF THE DESIGNATIONS,
PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OR
SERIES AUTHORIZED TO BE ISSUED, SO FAR AS THEY HAVE BEEN DETERMINED, AND THE
AUTHORITY OF THE BOARD TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF
SUBSEQUENT CLASSES OR SERIES.
The following abbreviations, when used in the inscription on the face of this
instrument, shall be construed as though they were written in full according to
applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-___________Custodian_______
TEN ENT - as tenants by the (custodian) (minor)
entireties
JT TEN - as joint tenants with under Uniform Gifts to
right of survivorship and Minors Act
not as tenants in common ___________________________
(state)
Additional abbreviations may also be used though not in the above list.
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TO: Hypertension Diagnostics, Inc.
c/o Firstar Trust Company
Transfer Agent and Registrar
STOCK AND WARRANTS EXCHANGE FORM
(To be Executed by the Registered Holder to exercise the rights to exchange this
Unit Certificate for that number of shares of Common Stock and Warrants
evidenced by the Unit Certificate).
The undersigned hereby irrevocably tenders this Unit Certificate in exchange for
_______________ Shares of the Common Stock and ________________ Warrants of
Hypertension Diagnostics, Inc. pursuant to and in accordance with the terms and
conditions of this Unit and requests that certificates be issued in the names of
and in the denomination as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
and be delivered to _________________________________ at the address set forth
below and if such number of Shares and Warrants shall not be all of the Shares
and Warrants to which the holder is entitled to hereunder, that Certificate(s)
of like tenor for the balance of the remaining Shares and Warrants to which the
holder is entitled to hereunder be delivered to the undersigned at the address
set forth below:
Dated: Signature:
--------------------------- ----------------------------------
Address: Signature Guaranteed:
------------------------- -----------------------
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
- --------------------------------
- --------------------------------
Please refer to signature information below.
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ASSIGNMENT FORM
(To be Executed by the Registered Holder in Order to Assign Units)
FOR VALUE RECEIVED, ____________________hereby sells, assigns and transfers unto
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print Name and Address, Including Zip Code)
of the Units represented by this Unit Certificate, and hereby irrevocably
constitutes and appoints _____________________________________________, attorney
to transfer this Unit Certificate on the books of the Company, with full power
of substitution in the premises.
Dated: Signature X
-------------------------------- ----------------------------
Signature(s) Guaranteed: Signature X
-------------- ----------------------------
The signature to the
exchange or assignment must
correspond to the name as
written upon the face of
this Unit Certificate in
PLEASE INSERT SOCIAL SECURITY OR every particular, without
OTHER IDENTIFYING NUMBER alteration or enlargement or
any change whatsoever.
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- --------------------------------
Reference is made to the Warrant Agreement referred to on the front side hereof
and the provisions of such Warrant Agreement shall for all purposes have the
same effect as though fully set forth on the front of this certificate.
<PAGE>
[LETTERHEAD]
(612) 340-5555
EXHIBIT 5.1
July 15, 1998
Hypertension Diagnostics, Inc.
2915 Waters Road
Suite 108
Eagan, MN 55121
RE: REGISTRATION STATEMENT ON FORM SB-2
Ladies and Gentlemen:
We have acted on behalf of Hypertension Diagnostics, Inc., a Minnesota
corporation (the "Company") in connection with a Registration Statement on Form
SB-2, File No. 333-53025 (the "Registration Statement") filed by the Company
with the Securities and Exchange Commission relating to 2,875,000 Units (the
"Units"), each consisting of one share (the "Unit Shares") of Common Stock, $.01
par value (the "Common Stock") of the Company and one Class A Warrant (the
"Warrants") to purchase one share of the Common Stock, and shares (the "Warrant
Shares") of the Common Stock issuable upon exercise of the Warrants, all of
which are to be issued by the Company. Upon examination of such corporate
documents and records as we have deemed necessary or advisable for the purposes
hereof and including and in reliance upon certain certificates by the Company,
it is our opinion that:
1. The Company is a validly existing corporation in good standing under
the laws of the State of Minnesota.
2. The Units, the Unit Shares, the Warrants and the Warrant Shares, when
issued and sold as contemplated in the Registration Statement, will be validly
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
DOHERTY, RUMBLE & BUTLER
PROFESSIONAL ASSOCIATION
/s/ Girard P. Miller
Girard P. Miller
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
FORM OF STOCK OPTION AGREEMENT
THIS AGREEMENT is entered as of _______ by and between Hypertension
Diagnostics, Inc., a Minnesota corporation (the "Company") and
___________________________________ (the "Participant").
WHEREAS, the Company maintains the 1998 Stock Option Plan (the "1998
Plan"), which is incorporated into and forms a part of this Agreement, and the
Participant has been selected by the individuals administering the 1998 Plan
(the "Committee") to receive a [INCENTIVE OR NONQUALIFIED] Stock Option under
the 1998 Plan;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the
Participant, as follows:
1. TERMS OF OPTION. The following terms used in this Agreement shall
have the following meanings.
a. The "Participant" is ________________________.
b. The "Date of Grant" is _______________________.
c. The number of "Covered Shares" shall be _____________ shares of
Common Stock.
d. The "Exercise Price" is _________________.
e. The "Expiration Date" is ________________.
2. GRANT OF OPTION. The Company hereby grants to the Participant an
option (the "Option") to purchase the number of Covered Shares of Common Stock
at the Exercise Price per share as set forth in paragraph 1, subject to all of
the terms and conditions of the 1998 Plan. This Option [IS OR IS NOT] intended
to constitute an Incentive Stock Option within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
3. EXERCISE OF OPTION.
a. DATE OF EXERCISE. The Option shall become exercisable according
to the following schedule.
-1-
<PAGE>
As of the Date of Grant and The Option shall become exercisable
each succeeding anniversary of with respect to the following
the Date of Grant: percentage of the Covered Shares:
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Exercisability under this schedule is cumulative. After the Option becomes
exercisable with respect to any portion of the Covered Shares, it shall
continue to be exercisable with respect to that portion of the Covered
Shares until the Option expires. The Option shall not be exercisable on or
after the Expiration Date as set forth in paragraph 1.
b. LIMITATIONS ON EXERCISE. The Covered Shares shall not be issued
unless the exercise of the Option and the issuance of such Covered Shares
shall comply with all applicable provisions of the law and the applicable
requirements of any stock exchange or Nasdaq. As a condition to the
exercise of all or any portion of the Option, the Company may require the
person exercising such Option to represent and warrant at the time of any
such exercise that the Covered Shares are being purchased only for
investment and without any present intention to sell or distribute the
Covered Shares.
4. TERMINATION.
a. TERMINATION FOR ANY REASON EXCEPT DEATH AND DISABILITY. If
participant's employment with the Company and all Related Companies is
terminated for any reason other than for death or disability, the Option,
to the extent that it would have been exercisable by the Participant on the
Date of Termination, may be exercised by Participant no later than 90 days
[OR ______ DAYS IF A NONQUALIFIED OPTION] after such Date of Termination;
provided, however, the Option shall not be exercisable after the Expiration
Date.
b. TERMINATION BY REASON OF DEATH OR DISABILITY. If Participant's
employment with the Company and all Related Companies is terminated due to
death or disability (within the meaning of Section 22(e)(3) of the Code) of
the Participant, the Option, to the extent that it is exercisable on the
Date of Termination, may be exercised by Participant (or Participant's
estate or legal representative) no later than one year after such Date of
Termination; provided, however, the Option shall not be exercisable after
the Expiration Date.
c. DATE OF TERMINATION. For purposes of this Agreement, the
Participant's "Date of Termination" shall be the first day occurring on or
after the Date of Grant on
-2-
<PAGE>
which the Participant's employment with the Company and all Related
Companies terminates for any reason; provided that the Participant's
employment shall not be considered terminated while the Participant is on
military leave, sick leave or leave of absence for a period of not more
than 90 days unless re-employment upon the expiration of such leave is
guaranteed by contract or statute.
5. METHOD OF EXERCISE. The Option may be exercised in whole or in part
by delivering a written notice (in such form as may be approved by the
Committee) to the Secretary of the Company at its corporate headquarters prior
to the Expiration Date. Such written notice shall be accompanied by payment of
the Exercise Price for such shares of Common Stock being purchased. Payment
shall be by cash or by check payable to the Company. Except as otherwise
provided by the Committee before the Option is exercised: (i) all or a portion
of the Exercise Price may be paid by the Participant by delivery of shares of
Common Stock acceptable to the Company and having an aggregate Fair Market Value
(valued as of the date of exercise) that is equal to the amount of cash that
would otherwise be required; and (ii) the Participant may pay the Exercise Price
by authorizing a third party to sell shares of Common Stock (or a sufficient
portion of the shares) acquired upon exercise of the Option and remit to the
Company a sufficient portion of the sale proceeds to pay the entire Exercise
Price and any tax withholding resulting from such exercise.
6. TAX WITHHOLDING. All distributions under this Agreement are subject
to withholding of all applicable taxes. At the election of the Participant, and
subject to such rules as may be established by the Committee, such withholding
obligations may be satisfied through the surrender of shares of Common Stock
which the Participant already owns, or to which the Participant is otherwise
entitled under the 1998 Plan.
7. NOTICE OF DISQUALIFYING DISPOSITION OF SHARES. If the Option is an
Incentive Stock Option and if the Participant sells or otherwise disposes of any
of the shares acquired pursuant to the Option on or before two years from the
Date of Grant or one year following the exercise of the Option, the Participant
shall immediately notify the Company in writing of such disposition. The
Company shall have the right to require the Participant to remit to the Company
an amount sufficient to satisfy any withholding requirements.
8. NONTRANSFERABILITY OF OPTION. The Option is not transferable in any
manner other than by will or by the laws of descent and distribution and may be
exercised during the Participant's life only by the Participant. The terms of
the Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Participant.
9. ADMINISTRATION. The authority to control and manage the operation and
administration of this Agreement shall be vested in the Committee, and the
Committee shall have all powers with respect to this Agreement as it has with
respect to the Plan. Any interpretation of the Agreement by the Committee and
any decision made by it with respect to the Agreement is final and binding.
-3-
<PAGE>
10. PLAN DEFINITIONS. Notwithstanding anything in this Agreement to the
contrary, the terms of this Agreement are subject to the terms of the 1998 Plan,
a copy of which may be obtained by the Participant from the Secretary of the
Company.
11. NO EFFECT ON TERMS OF EMPLOYMENT. Nothing in this Agreement shall
confer on the Participant any right with respect to continuation of employment
or consulting relationship with the Company or any Related Company, or limit the
right of the Company or any Related Company to terminate the Participant's
employment or consulting relationship at any time, with or without cause.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
inure to the benefit of, the Company and its successor and assigns, and upon any
person acquiring, whether by merger, consolidation, purchase of assets or
otherwise, all or substantially all of the Company's business and assets.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
14. PARTICIPANT ACKNOWLEDGMENT. Participant hereby acknowledges receipt
of a copy of the 1998 Plan. Participant has read and understands the terms and
provisions thereof, and accepts the Option subject to all the terms and
conditions of the 1998 Plan and this Agreement.
IN WITNESS WHEREOF, the Participant has executed this Agreement, and the
Company has caused this Agreement to be executed in its name and on its behalf,
all as of the date of this Agreement.
PARTICIPANT HYPERTENSION DIAGNOSTICS, INC.
By:
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Signature
Its:
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Print Name
-4-
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HYPERTENSION DIAGNOSTICS, INC.
1998 STOCK OPTION PLAN
Form of Notice of Stock Option Exercise
Optionee Name: ________________________________________________________________
Social Security Number: _______________________________________________________
Address: ______________________________________________________________________
1. I hereby elect to purchase _______ shares of common stock at an exercise
price per share of $__________ pursuant to the Stock Option Agreement dated
______________ and the 1998 Stock Option Plan (the "1998 Plan").
2. The shares should be issued in the name(s) of: ___________________________
__________________________________________________________________________
3. I hereby deliver payment of the purchase price as follows (check
appropriate box):
/ / in cash or check in the amount of $___________.
/ / by delivering shares of common stock having a Fair Market Value (as
defined in the 1998 Plan) on the date of exercise equal to the
purchase price.
/ / through the simultaneous sale through a broker of shares of common
stock acquired upon the exercise of the option (i.e., a cashless
exercise).
/ / a combination of cash and shares of common stock together having a
Fair Market Value on the date of exercise equal to the purchase price.
IF PREVIOUSLY-ACQUIRED COMMON STOCK IS USED TO PAY THE PURCHASE PRICE, THE
COMMON STOCK MUST BE FREELY TRANSFERABLE AND HELD BY THE OPTIONEE FOR AT
LEAST SIX MONTHS.
4. I have received a copy of the complete 1998 Plan and agree to be bound by
the terms and conditions of the 1998 Plan.
5. I understand that my exercise of the option and sale of the shares acquired
upon exercise may have certain adverse tax consequences and that I should
consult with my own personal tax advisor concerning the possible tax
consequences.
Dated:
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Signature of Optionee
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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. 1 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 14, 1998
