<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
REGISTRATION NO. 333-64499
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IMPLANT SCIENCES CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
MASSACHUSETTS 3842 04-2837126
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
107 AUDUBON ROAD, #5
WAKEFIELD, MASSACHUSETTS 01880
(781) 246-0700
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL PLACE OF BUSINESS AND PRINCIPAL
EXECUTIVE OFFICES)
ANTHONY J. ARMINI, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
107 AUDUBON ROAD, #5
WAKEFIELD, MASSACHUSETTS 01880
(781) 246-0700
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
ROBERT W. SWEET, JR., ESQ. WILLIAM M. PRIFTI, ESQ.
DAVID A. BROADWIN, ESQ. FIVE MARKET SQUARE, SUITE 109
FOLEY, HOAG & ELIOT LLP AMESBURY, MA 01913
ONE POST OFFICE SQUARE (978) 388-4942
BOSTON, MASSACHUSETTS 02109
(617) 832-1000
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As promptly as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Units each consisting of one
share of Common Stock and
one Redeemable Common Stock
Purchase Warrant
("Warrants")(2)............. 1,150,000 $ 8.50 $ 9,775,000
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Common Stock issuable upon
exercise of Warrants(2)..... 1,150,000 $10.08 $11,592,000
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Representatives' Warrant...... 100,000 $ .001 $ 100
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Representatives' Redeemable
Warrant..................... 100,000 $ .15 $ 15,000
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Common Stock issuable upon
exercise of Representatives'
Warrant..................... 100,000 $13.44 $ 1,344,000
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Common Stock issuable upon
exercise of Representatives'
Redeemable Warrant.......... 100,000 $18.81 $ 1,881,000
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Totals........................ $24,607,100 $7,259(3)
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933. Other expenses
of the offering aggregate $779,500 and are itemized under Item 25 of Part II
of this Registration Statement.
(2) Includes shares or warrants represented by 150,000 Units, each consisting of
one share of Common Stock and one Warrant to purchase one share of Common
Stock, subject to an over-allotment option granted to the Underwriters by
the Registrant. See "Underwriting."
(3) Previously paid $7,770.
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<PAGE> 2
PROSPECTUS
[IMPLANT SCIENCES LOGO]
1,000,000 UNITS
EACH CONSISTING OF
ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
------------------------
Implant Sciences Corporation, a Massachusetts corporation (the "Company"),
hereby offers 1,000,000 Units (collectively, the "Units"). Each Unit consists of
one share of common stock, $0.10 par value per share ("Common Stock"), and one
Redeemable Common Stock Purchase Warrant (a "Warrant"). The Common Stock and
Warrants which comprise the Units will trade only as units until the earlier of
thirteen months after the date of the Prospectus or such time as may be
determined by the Representatives. The initial public offering price per Unit
will be $7.50. Each Warrant entitles the registered holder thereof to purchase,
at any time over a three-year period commencing thirteen months after the date
of the Prospectus, one share of Common Stock at $9.00. The Warrant exercise
price is subject to adjustment under certain circumstances. Commencing thirteen
months from the date of the Prospectus, the Warrants are subject to redemption
by the Company at $0.20 per Warrant if the closing bid price of the Common Stock
as reported on the Nasdaq SmallCap Market, Inc. averages at least $10.50 for a
period of fifteen consecutive trading days.
Prior to this offering (the "Offering"), there has been no public market
for the Units, the Common Stock or the Warrants, and there can be no assurance
that an active market will develop. The offering price of the Units and the
exercise price of the Warrants have been determined by negotiation between the
Company and ISG Solid Capital Markets, LLC and Schneider Securities, Inc., the
representatives of the several underwriters (the "Representatives") and are not
necessarily related to the Company's asset value, or any other established
criterion of value. For the method of determining the initial public offering
price of the Units, see "Underwriting." The Units have been approved for listing
on the Nasdaq SmallCap Market, Inc. under the symbol IMPLU and the Units, Common
Stock and Warrants have been approved for listing on the Boston Stock Exchange
under the symbols IMXU, IMX and IMXW, respectively. The Company will apply for
listing of the Common Stock and Warrants on the Nasdaq SmallCap Market, Inc.
upon separation of the Units.
------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION FROM THE PUBLIC OFFERING PRICE. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED UNDER THE CAPTION "RISK
FACTORS" WHICH APPEAR BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Unit............................ $7.50 $0.75 $6.75
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Total(3)............................ $7,500,000 $750,000 $6,750,000
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</TABLE>
(1) Does not include additional compensation to be received by the
Representatives in the form of (i) a non-accountable expense allowance of
$225,000 (or $258,750 if the Underwriters' over-allotment option described
in footnote (3) is exercised in full), and (ii) a warrant to purchase up to
100,000 shares of Common Stock and 100,000 Warrants exercisable at 160% of
the initial public offering price of these securities, exercisable over a
period of four years, commencing one year from the date of this Prospectus.
In addition, the Company has agreed to indemnify the Underwriters against
certain civil liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $779,500 not including the Representatives' non-accountable expense
allowance.
(3) The Underwriters have an option, exercisable within 45 days of the date of
this Prospectus, to purchase up to 150,000 additional Units on the same
terms and conditions as set forth above to cover over-allotments, if any.
See "Underwriting." If all such Units are purchased, the Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company (before
deducting expenses of the Offering payable by the Company, estimated at
$779,500 not including the representatives non-accountable expense
allowance), will be $8,625,000, $862,500 and $7,762,500, respectively.
These Units are offered on a "firm commitment" basis by the Underwriters
when, as and if delivered to and accepted by the Underwriters, and subject to
prior sale, withdrawal or cancellation of the offer without notice. It is
expected that closing will take place at the offices of ISG Solid Capital
Markets, LLC, 592 Fifth Avenue, New York, NY 10036 on or about May 5, 1999.
ISG SOLID CAPITAL MARKETS, LLC SCHNEIDER SECURITIES, INC.
The date of this Prospectus is April 30, 1999.
<PAGE> 3
[INSIDE FRONT COVER
On this page appear drawings of medical devices manufactured or processed
by Implant Sciences Corporation on an anatomical drawing of the human body.
Included in these drawings are stents, radioactive seeds, and orthopedic
implants.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, SHARES
OR WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
The Company intends to furnish to its security holders annual reports
containing audited financial statements and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information, and the financial statements and
notes thereto, appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus has been adjusted to give
retroactive effect to a 7-for-1 stock split effected in the form of a Common
Stock dividend on September 9, 1998 (see "Description of Securities") and
assumes that the Underwriters' over-allotment option has not been exercised.
Each prospective investor is urged to read this Prospectus in its entirety.
The discussion in this Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that involve risks and uncertainties. The safe
harbor from private actions based on untrue statements or omissions of material
fact that is provided by the two statutory provisions does not apply to
statements made in connection with an initial public offering. The Company's
actual results and the timing of certain events may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and "Business."
The Company uses the following marks: MICROFUSION, PROFILE CODE, and
NITROCHROME. Other trademarks referred to in this Prospectus are not owned by
the Company and the Company makes no claim of association with respect to those
marks or their owners.
Certain terms are defined in a Glossary beginning on page 58.
THE COMPANY
Implant Sciences Corporation (the "Company") has, over the past fifteen
years, developed core technologies using ion implantation and thin film coatings
for medical device applications and has proprietary processes and equipment for
the manufacture of radiation therapy implants. The Company plans to apply this
technology to manufacture radioactive prostate seeds using a non-radioactive
fabrication process which it believes will be more cost-effective and less
hazardous than conventional processes which use radioactive wet chemistry. The
seeds will be sealed and then made radioactive in a nuclear reactor just prior
to shipment to customers. The Company believes that the opportunities for
radioactive prostate seeds will continue to grow as an attractive alternative to
other methods of treatment. On January 21, 1999, the Company filed a 510(k)
notification of premarket clearance for its iodine-125 seed with the Food and
Drug Administration ("FDA") and anticipates that it will take six to nine months
to obtain such clearance. In the interventional cardiology field, the Company
has a joint development agreement with a major stent manufacturer to develop
radioactive coronary stents. See "Business -- Radioactive Stents." The Company
believes these radioactive seeds used for the treatment of prostate cancer and
radioactive coronary stents for the prevention of restenosis (reclosure of the
artery) after balloon angioplasty, will have a significant competitive advantage
over currently existing devices.
The Company is currently developing its proprietary thin film coating
technology in order to apply it to radiopaque (visible by x-ray) coatings on
stents, guidewires, catheters and other devices used in interventional
cardiology procedures. In addition, the Company is applying its ion implantation
technologies to modify surfaces to reduce polyethylene wear generation in
orthopedic joint implants, manufactured by the Howmedica/Osteonics Division of
Stryker Corporation and Biomet Incorporated. Approximately 77% of the Company's
revenues in fiscal 1998 were derived from its ion implantation of medical
products business. The Company also supplies ion implantation services to
numerous semiconductor manufacturers, research laboratories and universities.
The Company has eight issued United States patents and sixteen United States
patents pending covering its technologies and processes. The Company also has
pending two international patent applications.
TECHNOLOGIES
The Company uses two core technologies, ion implantation and thin film
coatings, to provide enhanced surfaces to various medical implants and
semiconductor products. The Company's proprietary ion implantation process
accelerates ionized atoms of a material to high velocity in a vacuum and embeds
them into the surface of medical devices and semiconductor wafers to form new
surface alloys. In manufacturing its
3
<PAGE> 5
radioactive prostate seeds and radioactive coronary stents, the Company plans to
use this process to form a radioactive layer just under the surface of metal or
polymer implants. In manufacturing its metal orthopedic implants, the Company
uses a nitrogen ion implantation process to form a near-surface layer which
modifies the native oxide of the metal surface, thereby producing less wear on
the polyethylene component. Ion implantation offers advantages in accuracy,
cleanliness, controllability and reproducibility over other methods of surface
engineering.
Thin film coatings modify surfaces by depositing a thin layer of a material
onto a medical device or other product. The Company's proprietary thin film
coating process, called microfusion(TM), improves visibility of catheters,
guidewires and stents used in interventional cardiology and other catheter-based
procedures that are guided by x-ray observation.
PROPOSED PRODUCTS
Prostate Seeds. The Company has developed, and applied for three United
States patents covering radioactive seeds, implants and methods of manufacturing
radioactive seed implants by a proprietary process. These seeds are used
primarily in the treatment of prostate cancer. This treatment, known as
brachytherapy, involves implanting approximately 100 radioactive seeds
(encapsulated radioactive material, approximately half the size of a grain of
rice) directly into the prostate and is usually performed on an outpatient
basis. A ten-year study conducted by the Northwest Hospital, Seattle, Washington
(the "Northwest Hospital Study") shows that this treatment has a ten-year
disease-free survival rate equal to surgical removal of the prostate and may be
superior to other early stage treatments, with a substantial reduction of the
negative side effects -- impotence and incontinence -- frequently associated
with surgery and external beam radiation treatment. The Company intends to
manufacture and sell its prostate seeds to distributors of medical products as
well as directly to hospitals.
Radioactive Stents. The Company has developed, and applied for six United
States patents and has pending one international patent application for, new
methods of implanting radioactivity onto coronary stents (metal mesh tubes
designed to hold arteries open after angioplasty), which are used to prevent
restenosis (reocclusion or renarrowing of the artery). According to the American
Heart Association, restenosis occurs following 30% - 40% of balloon angioplasty
procedures. However, researchers in a number of studies at the Washington
Hospital Center, the Emory University School of Medicine and the Scripps Clinic
have found that the incidence of restenosis has been reduced when the artery is
treated with therapeutic intravascular radiation. Radiation applied locally to
the site is designed to inhibit intimal hyperplasia (smooth muscle cell
proliferation), thought to be a primary cause of restenosis. By implanting
therapeutic radioactivity onto a stent, the patient can receive the appropriate
dose of radiation within the coronary artery without significantly affecting the
surrounding tissue. The Company intends to implant therapeutic radioactivity
into stents manufactured by its customers.
Radiopaque Coatings. The Company applies coatings that increase the
visibility of medical devices manufactured by its customers and used in
interventional cardiology and other catheter-based procedures. Interventional
cardiology involves the positioning and manipulation of stents, guidewires,
catheters, and other instruments by x-ray or fluoroscopic observation of those
devices. Most of the instruments used in these procedures are transparent to
x-rays and therefore cannot be fully observed. The Company has developed a
proprietary process that provides an improved image of medical devices during
interventional cardiology procedures by creating a thin film coating of
radiopaque material over sections of the device.
CURRENT PRODUCTS AND SERVICES
Orthopedic Implants. The Company implants nitrogen ions in the metal
surfaces of knee and hip total joint replacements manufactured by its customers
to reduce polyethylene wear and thereby increase the life of the implant. Knee
and hip total joint replacements are typically composed of metal and
polyethylene components that articulate against one another. The generation of
polyethylene wear debris is one of the leading causes of osteolysis
(deterioration of the bone surrounding the implant) which causes implant
loosening and ultimately the need for revision surgery. In fiscal 1998, the
Company ion implanted approximately 50,000 metal components used in knee and hip
total joint replacements for the
4
<PAGE> 6
Howmedica/Osteonics Division of Stryker Corporation and Biomet Incorporated. See
"Risk Factors -- Dependence on Major Customers."
The Company is currently developing zirconia and alumina ceramic ion
implantation techniques and believes these techniques will emerge as the
preferred next generation surface treatment method for orthopedic total joint
replacements. Management believes the use of bulk ceramic or ceramic coated
femoral components holds greater promise than other types of components in
reducing osteolysis because ceramics have wear characteristics superior to
metals and are biocompatible and inert. However, monolithic ceramic components
are expensive when used for hip joint replacements and are too brittle to be
used for knee joint replacements. The Company believes a ceramic coating of a
metal implant will combine the superior strength of metal with the surface
characteristics of ceramic at a modest increase in cost over traditional
implants and will permit use in knee joint replacements.
Semiconductor Ion Implantation. The Company supplies ion implantation
services to numerous semiconductor manufacturers, research laboratories, and
universities. Ion implantation of electronic dopants into silicon, the process
by which silicon is turned into a semiconductor, is an integral part of the
integrated circuit fabrication process. Many of the Company's customers provide
semiconductor circuits and wafers to the communications satellite and cellular
telephone markets.
SALES
In fiscal 1998, the Company had revenue of approximately $2,904,000. All of
such revenue was derived from nitrogen ion implantation of total hip and knee
joint replacements, ion implantation of semiconductors, government research
grants, and contract research. The Company has not sold any radioactive prostate
seeds, radioactive coronary stents, or implanted ceramics into total hip and
knee joint replacements, for commercial use. The Company will not be able to
sell any such products until it, or its customer, has obtained appropriate
clearance or approval from the U.S. Food and Drug Administration ("FDA"), state
agencies, and foreign regulations and regulatory bodies.
On January 21, 1999, the Company filed a 510(k) notice of premarket
clearance with the FDA for its radioactive iodine-125 seed and believes its seed
should receive clearance for sale in the second half of 1999. Although the
Company is developing and has delivered radioactive stents, the Company believes
its radioactive stents will not be available for commercial sale before 2001
except possibly for sales for animal studies and clinical trials. The Company's
customers will require FDA clearance or approval before commercial sale of total
hip and knee replacements treated with ceramic ion implantation. The Company
believes these total hip and knee replacements will not be available for
commercial sale before 2001.
MARKETS
The Company is focused on using its technologies to design, develop and
manufacture medical implants and devices used to treat prostate cancer, heart
disease, and in total joint replacements. These diseases occur most frequently
in people over the age of 50. The Company believes that the growth in the number
of people over the age of 50 in the United States and other highly developed
countries, as a result of the so-called baby boom, will lead to increased
numbers of procedures for the treatment of these diseases. For example,
according to a 1998 report by the Administration on Aging of the United States
Department of Health and Human Services, in the United States alone, 75 million
people, one third of the entire U. S. population, were born between 1946 and
1964. The first of the baby boomers turned age 50 in 1996.
The American Cancer Society estimates that in 1998 about 184,500 new cases
of prostate cancer will have been diagnosed and 39,200 men will have died of the
disease in the United States. According to the National Cancer Institute, over
80% of prostate cancer is found in men over the age of 65. Radical prostectomies
and external beam radiation treatments are procedures that are frequently used
and have significant side effects, including impotence and incontinence.
According to the American Cancer Society, in 58% of diagnosed cases, the cancers
are localized in the prostate and are potential candidates for brachytherapy.
The Company believes brachytherapy is an attractive alternative to surgery or
external beam radiation for these cases because research to date has shown that
it has a lower incidence of these side effects.
5
<PAGE> 7
The American Heart Association estimates that in 1995 there were 434,000
balloon angioplasty procedures performed in the United States. Restenosis occurs
in approximately 30% to 40% of all such procedures. The American Society for
Therapeutic Radiology and Oncology has reported, and numerous clinical trials
have found, that delivery of an appropriate dose of therapeutic radiation can
reduce the incidence of restenosis and therefore the need for additional
procedures. The Company believes that stents treated with therapeutic radiation
will be an attractive alternative to traditional stents because they can reduce
restenosis by delivering an appropriate dose of radioactivity to the affected
site without adversely affecting the surrounding tissue.
Osteoarthritis (a degenerative disease of joints) is a natural result of
the aging process and is the predominant cause of the need for joint
replacement. The Company believes that longer life expectancy as well as the
growth in the number of people over 50 will cause the demand for total joint
replacement to increase. According to the American Academy of Orthopedic
Surgeons, the total joint replacement market was approximately 500,000 units in
1995 in the United States. Over the last three years, the Company has treated
approximately 50,000 units each year using its ion implantation process.
The Company's offices and facilities are located at 107 Audubon Road, #5,
Wakefield, Massachusetts 01880, telephone (781) 246-0700. The Company's home
page can be found at www.implantsciences.com. Information contained in the
Company's website shall not be deemed part of this Prospectus.
6
<PAGE> 8
THE OFFERING
Securities Offered by the
Company............................ 1,000,000 Units, each consisting of one
share of common stock, $0.10 par value
per share ("Common Stock"), and one
Redeemable Common Stock Purchase Warrant
("Warrant") to purchase one share of
Common Stock at $9.00 at any time over a
three-year period commencing thirteen
months after the date of this Prospectus.
The Common Stock and Warrants which
comprise the Units will trade only as
units until the earlier of thirteen
months after the date of the Prospectus
or such time as may be determined by the
Representatives. Commencing thirteen
months from the date of this Prospectus,
the Warrants are subject to redemption by
the Company at $0.20 per Warrant if the
closing bid price of the Common Stock as
reported on the Nasdaq SmallCap Market,
Inc. averages in excess of $10.50 for a
period of fifteen consecutive trading
days. See "Description of Securities."
Common Stock Outstanding Prior to
the Offering....................... 4,747,540 shares(1)
Common Stock to be Outstanding
after the Offering................. 5,747,540 shares(1)(2)
Use of Proceeds.................... The net proceeds of this Offering will be
used for research and development,
acquisition of additional manufacturing
equipment, infrastructure development,
manufacturing, quality assurance, quality
control, marketing, sales, and working
capital and general corporate purposes.
See "Use of Proceeds."
Nasdaq SmallCap Market Symbols(3)
Units............................ IMPLU
Common Stock..................... IMPL
Warrants......................... IMPLW
Boston Stock Exchange Symbols(3)
Units............................ IMXU
Common Stock..................... IMX
Warrants......................... IMXW
Risk Factors....................... See "Risk Factors -- Intense Competition;
Rapid Technological Change,"
"-- Acceptance by Medical Community;
Market Acceptance," "Uncertainties of
Ability to Distribute," "-- Dependence on
Patents and Proprietary Technology,"
"-- Governmental Regulation," "-- No
Prior Securities Market; Possible
Volatility of Stock Price," "-- Immediate
and Substantial Dilution."
- ---------------
(1) Based on shares of Common Stock outstanding on March 1, 1999. Excludes an
aggregate of: (i) the Warrants; (ii) the Underwriters' over-allotment
option, including the shares underlying the Warrants included in the Units
subject to such option; (iii) the Representatives' Warrant; (iv) the
Warrants
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<PAGE> 9
included in the Representatives' Warrant; or (v) 485,131 shares reserved
for issuance upon the exercise of options outstanding under the Company's
1992 and 1998 Stock Option Plans, and upon exercise of outstanding
warrants, all at a weighted average exercise price of $4.66 per share.
Additionally, the Company's 1998 Stock Option Plan provides for the
issuance of options to purchase up to 276,000 shares of Common Stock;
however, the Company has agreed with the Representatives that it will not
issue options to purchase more than 100,000 shares of Common Stock in the
next 18 months. Additionally, the Company's 1998 Employee Stock Purchase
Plan provides for the issuance of up to an aggregate of 164,500 shares of
Common Stock to participating employees. See "Underwriting," "Certain
Transactions" and "Management -- Benefit Plans."
(2) Adjusted for the shares of Common Stock included in the Units offered
hereby.
(3) The Units have been approved for listing on the Nasdaq SmallCap Market and
the Units, Common Stock and Warrants have been approved for listing on the
Boston Stock Exchange. The Company will apply for listing of the Common
Stock and Warrants on the Nasdaq SmallCap Market upon separation of the
Units.
8
<PAGE> 10
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary financial information of the Company
at the dates and for the periods indicated. All information set forth below
should be read in conjunction with the audited financial statements and notes
thereto of the Company included elsewhere in this Prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, ------------------------------
------------------------ DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product and contract research
revenues.............................. $2,678,918 $2,904,429 $1,446,325 $1,350,072
Equipment revenues(1)................... 350,754 -- -- --
---------- ---------- ---------- ----------
Total revenues.......................... 3,029,672 2,904,429 1,446,325 1,350,072
Total costs and expenses................ 2,628,899 3,014,599 1,438,014 1,418,382
---------- ---------- ---------- ----------
Operating income (loss)................. 400,773 (110,170) 8,311 (68,310)
Other income (expenses), net............ (21,043) 13,285 7,450 (22,913)
---------- ---------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes...................... 379,730 (96,885) 15,761 (91,223)
Provision (benefit) for income taxes.... 161,400 (38,900) 6,304 (36,701)
---------- ---------- ---------- ----------
Net income (loss)....................... $ 218,330 $ (57,985) $ 9,457 $ (54,522)
========== ========== ========== ==========
Net income (loss) per share
Basic................................. $ .06 $ (.01) $ .00 $ (.01)
Diluted............................... .05 (.01) .00 (.01)
Weighted average number of common and
common equivalent shares outstanding
Basic................................. 3,418,107 4,110,596 3,862,453 4,372,291
Diluted............................... 4,066,874 4,110,596 4,097,772 4,372,291
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------
AS
ACTUAL ADJUSTED(2)
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<S> <C> <C>
BALANCE SHEET DATA
Cash........................................................ $ 73,545 $5,819,045
Current assets.............................................. 748,375 6,493,875
Working capital............................................. (132,777) 5,820,917
Total assets................................................ 2,686,915 8,432,415
Current portion of long term debt, including capital
lease..................................................... 179,283 179,283
Long term debt, including capital lease, net of current
portion................................................... 658,857 658,857
Stockholders' equity........................................ 1,134,606 6,880,106
</TABLE>
- ---------------
(1) Represents non-recurring revenue from a contract to build one piece of
customized manufacturing equipment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" and
Footnote 5 of the audited financial statements.
(2) Adjusted to reflect the sale of 1,000,000 Units offered by the Company
hereby at an initial public offering price of $7.50 per Unit, after
deducting estimated underwriting discounts and commissions and offering
expenses, and the application of the net proceeds thereof. See "Use of
Proceeds" and "Capitalization."
9
<PAGE> 11
RISK FACTORS
The Units being offered hereby represent a speculative investment and
involve a high degree of risk and substantial dilution, and should not be
purchased by persons who cannot afford the loss of their entire investment.
Prospective investors should thoroughly consider all of the risk factors
discussed below as well as other information in this Prospectus, including the
information contained in the Financial Statements and notes thereto included
elsewhere in this Prospectus, prior to purchasing the securities.
ANTICIPATED LOSSES
During the six months ended December 31, 1998, the Company had a net loss
of approximately $55,000. The Company plans to further increase its expenditures
to complete development and commercialize its new products, to increase its
manufacturing capacity and equipment, to ensure compliance with the FDA's
Quality System Regulations and broaden its sales and marketing capabilities. As
a result, the Company believes that it will likely incur losses over the next
several quarters. Accumulated deficit as of December 31, 1998 was $319,882.
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
The medical device industry is characterized by rapidly evolving technology
and intense competition. Other companies in the medical device industry are
currently marketing products that compete with the Company's products, may be
developing or could in the future develop additional products that are
competitive with the Company's products or could increase their productive
capacity to meet demands. Among the most closely competing products in
intracoronary radiation therapy are radioactive tipped guidewires and
radioactive fluid-filled balloons. Many of the Company's competitors have
substantially greater capital resources, greater research and development,
manufacturing and marketing resources and experience and greater name
recognition than the Company does. There can be no assurance that the Company's
competitors will not succeed in developing or marketing technologies and
products that are more effective than the Company's products or that would
render the Company's products obsolete or noncompetitive. Moreover, there can be
no assurance that the Company will be able to price its products at or below the
prices of competing products and technologies in order to facilitate market
acceptance. In addition, new procedures and medications could be developed that
replace or reduce the importance of procedures that use the Company's products.
Accordingly, the Company's success will depend in part on the Company's ability
to respond quickly to medical and technological changes through the development
and introduction of new products and enhancements. Product development involves
a high degree of risk and there can be no assurance that the Company's new
product development efforts will result in any commercially successful products.
The Company's failure to compete or respond to technological change in an
effective manner would have a material adverse effect on the Company. See
"Business -- Competition."
NO ASSURANCE OF ACCEPTANCE BY MEDICAL COMMUNITY OR MARKET ACCEPTANCE
There can be no assurance that the Company's radioactive prostate seeds and
coronary stents, orthopedic ceramic coatings, or radiopaque coatings will
achieve acceptance, or continue to receive acceptance, by the medical community
and market acceptance generally. The Company does not have FDA approval or pre-
market clearance for the manufacture or distribution of these products, and
there is no assurance that the Company will be able to receive FDA approval or
will successfully manufacture the products. The degree of market acceptance for
the Company's products and services will also depend upon a number of factors,
including the receipt and timing of regulatory approvals and the establishment
and demonstration in the medical community and among health care payers of the
clinical safety, efficacy and cost effectiveness of the Company's products.
Certain of the medical indications that can be treated by the Company's devices
or devices treated using the Company's coatings can also be treated by other
medical procedures. Decisions to purchase the Company's products will primarily
be influenced by members of the medical community, who will have the choice of
recommending medical treatments, such as radiotherapeutic seeds, or the more
traditional alternatives, such as surgery and external beam radiation therapy.
Many alternative treatments currently are widely accepted in the medical
community and have a long history of use. There can be no assurance that the
Company's devices or technologies will be able to replace such established
treatments or that physicians, health care payers, patients or the medical
community in general will accept and utilize the
10
<PAGE> 12
Company's devices or any other medical products that may be developed or treated
by the Company even if regulatory and reimbursement approvals are obtained.
Long-term market acceptance of the Company's products and services will depend,
in part, on the capabilities, operating features and price of the Company's
products and technologies as compared to those of other available products and
services. Failure of the Company's products and technologies to gain market
acceptance would have a material adverse effect on the Company's business. See
"-- Intense Competition; Rapid Technological Change" and "Business -- Products."
UNCERTAINTY OF ABILITY TO DISTRIBUTE
Because the Company's medical products will be targeted to the medical
community, the Company will have limited options in distributing its products
and may incur additional requirements imposed on it by the FDA or its customers
or distribution partners with respect to product characteristics and quality. A
significant portion of the Company's sales to date have depended on its ability
to provide products that meet the requirements of other medical product
companies. There can be no assurance that the Company will be able to market its
products successfully or that the Company will be able to enter into contracts
for distribution of its products. The Company has limited internal marketing and
sales resources and personnel. In order to market and sell its products and
services, the Company expects to enter into distribution agreements. There can
be no assurance that the Company will be able to enter into such agreements.
LIMITED COMMERCIALIZATION; UNCERTAINTY OF PRODUCT DEVELOPMENT
The Company currently markets or plans to market products, including
radioactive prostate seeds and coronary stents, orthopedic ceramic coatings, and
radiopaque coatings that may require substantial further investment in research,
product development, preclinical and clinical testing and governmental
regulatory approvals prior to being marketed and sold. The Company's ability to
increase revenues and achieve profitability and positive cash flow will depend,
in part, on its ability to complete such product development efforts, obtain
such regulatory approvals, and establish manufacturing and marketing programs
and gain market acceptance for such proposed products.
In particular, the Company's radioactive coronary stents are in an early
stage of development and are only intended to be used in animal studies. There
can be no assurance that the clinical trials will ever be undertaken or, if
undertaken, will conclude that the radioactive coronary stents have a sufficient
degree of safety and efficacy. In addition, there can be no assurance that the
radioactive coronary stents will reduce the frequency of restenosis outside of
test conditions.
The Company's product development efforts are subject to the risks inherent
in the development of such products. These risks include the possibility that
the Company's products will be found to be ineffective or unsafe, or will
otherwise fail to receive necessary regulatory approvals; that the products will
be difficult to manufacture on a large scale or be uneconomical to market; that
the proprietary rights of third parties will interfere with the Company's
product development; or that third parties will market superior or equivalent
products which achieve greater market acceptance. Furthermore, there can be no
assurance that the Company will be able to conduct its product development
efforts within the time frames currently anticipated or that such efforts will
be completed successfully. See "-- Product Liability" and
"Business -- Products."
RISK OF THIRD-PARTY CLAIMS OF INFRINGEMENT
The Company's ability to compete effectively will depend to a significant
extent on its ability to operate without infringing the intellectual property
rights of others. Many participants in the medical device area aggressively seek
patent protection and have increasing numbers of patents, and have frequently
demonstrated a readiness to commence litigation based on patent infringement.
Third parties may assert exclusive patent rights to technologies that are
important to the Company.
The Company is aware of a U.S. patent of a third party having broad claims
covering radioactive stents and methods of using radioactive stents for the
treatment of restenosis. The Company has not sought a formal opinion of counsel
regarding the validity of this patent or whether the Company's processes may
infringe this patent. The Company plans to implant radioactivity onto coronary
stents manufactured by the patent holder, its licensees or others. If the
Company's plans to implant radioactivity onto the patent holder's stents do not
succeed and/or if the Company implants radioactivity onto stents that are not
manufactured by the patent
11
<PAGE> 13
holder or its licensees there can be no assurance that the holder of this patent
will not seek to enforce the patent against the Company or the manufacturer of
the stents, or that the Company would prevail in any such enforcement action.
If the patent holder seeks to enforce the patent against the Company, the
Company may be required to engage in costly and protracted litigation;
discontinue the manufacture or activation of radioactive stents; develop
non-infringing technology; or enter into a license arrangement with respect to
the patent. There can be no assurance that the Company would be able to develop
non-infringing technology, or that any necessary licenses would be available, or
that, if available, such licenses could be obtained on commercially reasonable
terms. There can be no assurance that any such litigation would not result in
the patent holder obtaining an injunction which would prevent the Company from
implanting radioactivity onto stents. In addition, the costs associated with
defending a patent infringement claim are significant, even if the Company
ultimately prevails, and the Company would be required to commit considerable
financial and management resources in defending such claim which would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
Although the Company has eight United States patents issued and sixteen
United States and two international patent applications pending for its
technology and processes, the Company's success will depend, in part, on its
ability to obtain the patents applied for and maintain trade secret protection
for its technology and operate without infringing on the proprietary rights of
third parties. The validity and breadth of claims in medical technology patents
involve complex legal and factual questions and, therefore, may be highly
uncertain. No assurance can be given that any pending patent applications or any
future patent application will issue as patents, that the scope of any patent
protection obtained will be sufficient to exclude competitors or provide
competitive advantages to the Company, that any of its patents will be held
valid if subsequently challenged or that others will not claim rights in or
ownership of the patents and other proprietary rights held by the Company.
Furthermore, there can be no assurance that others have not or will not develop
similar products, duplicate any of the Company's products or design around any
patents issued or that may be issued in the future to the Company. In addition,
whether or not patents are issued to the Company, others may hold or receive
patents which contain claims having a scope that covers products or processes
developed by the Company.
Moreover, there can be no assurances that patents issued to the Company
will not be challenged, invalidated or circumvented or that the rights
thereunder will provide any competitive advantage. The Company could incur
substantial costs in defending any patent infringement suits or in asserting any
patent rights, including those granted to third parties. Patents and patent
applications in the United States may be subject to interference proceedings
brought by the U.S. Patent & Trademark Office, or to opposition proceedings
initiated in a foreign patent office by third parties. The Company may incur
significant costs defending such proceedings. In addition, the Company may be
required to obtain licenses to patents or proprietary rights from third parties.
There can be no assurance that such licenses will be available on acceptable
terms if at all. If the Company does not obtain required licenses, the Company
could encounter delays in product development or find that the development,
manufacture or sale of products requiring such licenses could be foreclosed. See
"Business."
The Company also relies on unpatented proprietary technology, trade secrets
and know-how and no assurance can be given that others will not independently
develop substantially equivalent proprietary information, techniques or
processes, that such technology or know-how will not be disclosed or that the
Company can meaningfully protect its rights to such unpatented proprietary
technology, trade secrets, or know-how. Although the Company has entered into
non-disclosure agreements with its employees and consultants, there can be no
assurance that such non-disclosure agreements will provide adequate protection
for its trade secrets or other proprietary know-how.
NO ASSURANCE THAT THE COMPANY WILL SUCCESSFULLY MANAGE GROWTH
The Company has very limited experience in the commercial production of
radioactive prostate seeds or the commercial implantation of therapeutic
radiation onto coronary stents. The Company's future success will
12
<PAGE> 14
depend upon, among other factors, its ability to recruit, hire, train and retain
highly educated, skilled and experienced management and technical personnel, to
generate capital from operations, to scale-up its manufacturing process and
expand its facilities and to manage the effects of growth on all aspects of its
business, including research, development, manufacturing, distribution, sales
and marketing, administration and finance. The Company's failure to identify and
exploit new product and service opportunities, attract or retain necessary
personnel, generate adequate revenues or conduct its expansion or manage growth
effectively could have a material adverse effect on the Company's business.
DEPENDENCE ON MAJOR CUSTOMERS
Approximately 48% of the Company's sales in fiscal 1998 were made to the
Howmedica/Osteonics Division of Stryker Corporation and Biomet Incorporated. All
of these sales were of nitrogen ion implantation that enhance orthopedic joint
implants. The Company has no significant purchase commitments from these or
other customers extending beyond one year. There can be no assurance that these
customers will continue to purchase the Company's products and services at the
same levels as in previous years or that such relationships will continue in the
future. The loss of a significant amount of business from any of these customers
would have a material adverse effect on the sales and operating results of the
Company. The Company has had an agreement to supply an ion implantation process
to a customer which it is currently negotiating to extend through January 2000.
See "Business -- Products."
GOVERNMENTAL REGULATION
The manufacture and sale of the Company's medical device products and
services are subject to extensive regulation principally by the Food and Drug
Administration (the "FDA") in the United States and corresponding foreign
regulatory agencies in each country in which it sells its products. These
regulations affect product approvals, product standards, packaging requirements,
design requirements, manufacturing and quality assurance, labeling, import
restrictions, tariffs and other tax requirements. Securing FDA authorizations
and approvals requires submission of extensive clinical data and supporting
information. In most instances, the manufacturers or licensees of medical
devices that are treated by the Company will be responsible for securing
regulatory approval for medical devices incorporating the Company's technology.
However, the Company plans on preparing and maintaining Device Master Files
which may be accessed by the FDA. The Company expects to incur substantial
product development, clinical research and other expenses in connection with
obtaining final regulatory clearance or approval for and commercialization of
its products.
Certain medical devices incorporating the Company's technology, including
prostate seeds, have historically been subject to the FDA's 510(k) notification
of pre-market clearance which typically requires about three to nine months from
submission to clearance to market. If the FDA determines that a particular
medical device should be subject to a supplemental or full pre-market approval
("PMA") review, a significantly longer review period may be required. The
Company's products for treating restenosis and certain other cardiology and
orthopedic medical devices typically must undergo a PMA review. The time
required to obtain approval for sale of a particular medical device
internationally may be longer or shorter than that required for FDA clearance or
approval.
There can be no assurance that the Company's medical device manufacturers
or licensees will be able to obtain regulatory clearance or approval for devices
incorporating the Company's technology on a timely basis, or at all. Regulatory
clearance or approvals, if granted, may include significant limitations of the
indicated uses for which the product may be marketed. In addition, product
clearance or approval could be withdrawn for failure to comply with regulatory
standards or the occurrence of unforeseen problems following initial marketing.
Changes in existing regulations or adoption of new governmental regulations or
policies could prevent or delay regulatory approval of products incorporating
the Company's technology or subject the Company to additional regulation.
In addition to FDA regulation, certain of the Company's activities are
regulated by and require approvals from other federal and state agencies. For
example, aspects of the Company's operations require the approval of the
Massachusetts Department of Public Health and registration with the Department
of Labor and Industries. Furthermore, the Company's use, management,
transportation, and disposal of certain chemicals
13
<PAGE> 15
and wastes are subject to regulation by several federal and state agencies
depending on the nature of the chemical or waste material. Certain toxic
chemicals and products containing toxic chemicals may require special reporting
to the United States Environmental Protection Agency and/or its state
counterparts. The Company's future operations may require additional approvals
from federal and/or state environmental agencies. There can be no assurance that
the Company will be able to obtain necessary government approvals, or that it
will be able to operate with the conditions that may be attached to future
regulatory approvals. Moreover, there can be no assurance that the Company will
be able to maintain previously obtained approvals. While it is the Company's
policy to comply with applicable regulations, failure to comply with existing or
future regulatory requirements and failure to obtain or maintain necessary
approvals could have a material adverse effect on the Company's business,
financial condition, and results of operations.
Failure or delay of the Company's medical device manufacturers in obtaining
FDA and other necessary regulatory clearance or approval, the loss of previously
obtained clearance or approvals, as well as failure to comply with other
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
Because certain of the Company's products utilize radiation sources, their
manufacture, distribution, transportation, import/export, use and disposal will
also be subject to federal, state and/or local laws and regulations relating to
the use, handling, procurement and storage of radioactive materials.
Specifically, the Company will need to obtain the approval of its radiation
sources for certain medical uses by the Department of Health of The Commonwealth
of Massachusetts to commercially distribute the radiation sources in the United
States. The Company must also comply with U.S. Department of Transportation
regulations on the labeling and packaging requirements for shipment of radiation
sources to hospitals or other users of the Company's products. The Company
expects that there will be comparable regulatory requirements and/or approvals
in markets outside the United States. If any of the foregoing approvals are
significantly delayed or not obtained, the Company's business could be
materially adversely affected. See "Business -- Government Regulation."
HAZARDOUS MATERIALS
The Company's research activities sometimes involve the use of various
hazardous materials. Although the Company believes that its safety procedures
for handling, manufacturing, distributing, transporting and disposing of such
materials comply with the standards for protection of human health, safety, and
the environment, prescribed by local, state, federal and international
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. Nor can the Company eliminate the risk that one
or more of its hazardous material or hazardous waste handlers may cause
contamination for which, under laws imposing strict liability, the Company could
be held liable. While the Company currently maintains insurance in amounts which
it believes are appropriate in light of the risk of accident, the Company could
be held liable for any damages that might result from any such event. Any such
liability could exceed the Company's insurance and available resources and could
have a material adverse effect on its business. See "Business -- Government
Regulation."
DEPENDENCE ON STRATEGIC ALLIANCES
The Company intends to continue pursuing a strategy of researching,
developing and commercializing new products using the financial and technical
support of corporate partners. The Company's success will depend, in part, on
its ability to attract additional partners. There can be no assurance that the
Company can successfully enter into additional strategic alliances or that such
alliances will result in increased commercialization of the Company's products.
UNCERTAIN AVAILABILITY OF THIRD PARTY REIMBURSEMENT; POSSIBLE HEALTH CARE
REFORMS
Medicare, Medicaid and other government insurance programs, as well as
private insurance reimbursement programs greatly affect suppliers of health care
products. Several of the products produced or processed by the Company,
including its orthopedic implants, prostate seeds, stents, and interventional
cardiology instruments and devices, are currently being reimbursed by third
party payers. The Company's customers rely on third-party reimbursements to
cover all or part of the costs of most of the procedures in which the
14
<PAGE> 16
Company's products are used. Third party payers (including health maintenance
organizations) may affect the pricing or relative attractiveness of the
Company's products by regulating the maximum amount of reimbursement provided by
such payers to the physicians, hospitals and clinics using the Company's
devices, or by taking the position that such reimbursement is not available at
all. The amounts of reimbursement by third party payers in those states that do
provide reimbursement varies considerably. Major third party payers reimburse
inpatient medical treatment, including all or most operating costs and all or
most furnished items or services, including devices such as the Company's, at a
prospectively fixed rate based on the diagnosis-related group ("DRG") that
covers such treatment as established by the federal Health Care Financing
Administration. For interventional cardiology procedures, the fixed rate of
reimbursement is based on the procedure or procedures performed and is unrelated
to the specific devices used in such procedure. Therefore, the amount of profit
realized by suppliers of health care services in connection with the procedure
may be reduced by the use of the Company's devices if they prove to be costlier
than competing products. If a procedure is not covered by a DRG, certain third
party payers may deny reimbursement.
Alternatively, a DRG may be assigned that does not reflect the costs
associated with the use of the Company's devices or devices treated using the
Company's services, resulting in limited reimbursement. If, for any reason, the
cost of using the Company's products or services was not to be reimbursed by
third party payers, the Company's ability to sell its products and services
would be materially adversely affected. In the international market,
reimbursement by private third party medical insurance providers, and
governmental insurers and providers, varies from country to country. In certain
countries, the Company's ability to achieve significant market penetration may
depend upon the availability of third party governmental reimbursement. See
"Business -- Government Regulation."
PRODUCT LIABILITY RISKS; INSURANCE
To date no product liability claims have been asserted against the Company;
however, the testing, marketing and sale of implantable devices and materials
entail an inherent risk that product liability claims will be asserted against
the Company, if the use of its devices is alleged to have adverse effects on a
patient, including exacerbation of a patient's condition, further injury, or
death. A product liability claim or a product recall could have a material
adverse effect on the Company's business. Certain of the Company's devices are
designed to be used in treatments of diseases where there is a high risk of
serious medical complications or death. Although the Company intends to obtain
product liability insurance coverage when it commences sales of its seeds and
stents, there can be no assurance that in the future the Company will be able to
obtain such coverage on acceptable terms or that insurance will provide adequate
coverage against any or all potential claims. Furthermore there can be no
assurance that the Company will avoid significant product liability claims and
the attendant adverse publicity. Any product liability claim or other claim with
respect to uninsured or underinsured liabilities could have a material adverse
effect on the Company's business. See "Business -- Product Liability and
Insurance."
DEPENDENCE ON SUPPLIERS
The Company relies on a limited number of suppliers to provide materials
used to manufacture its products. If the Company cannot obtain adequate
quantities of necessary materials and services from its suppliers, there can be
no assurance that the Company would be able to access alternative sources of
supply within a reasonable period of time or at commercially reasonable rates.
Moreover, in order to maintain its relationship with major suppliers, the
Company may be required to enter into preferred supplier agreements that will
increase the cost of materials obtained from such suppliers, thereby also
increasing the prices of the Company's products. The limited sources,
unavailability of adequate quantities, the inability to develop alternative
sources, a reduction or interruption in supply or a significant increase in the
price of raw materials or services could have a material adverse effect on the
Company's business.
UNCERTAIN FUTURE CAPITAL REQUIREMENTS
The Company may require funds in addition to the net proceeds of the
Offering for its research and development programs, operating expenses,
regulatory processes and manufacturing and marketing programs. The Company may
seek additional funding through public or private financing or licensing or
other
15
<PAGE> 17
arrangements with corporate partners. If the Company raises additional funds by
issuing equity securities, further dilution to existing stockholders will result
and future investors may be granted rights superior to those of existing
stockholders; debt financing, if available, may involve restrictive covenants.
The Company's capital requirements will depend on numerous factors, including
the sales of its products, the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and cost
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, competing technological and market developments, developments and
changes in the Company's existing research, licensing and other relationships
and the terms of any new arrangements that the Company may establish.
Under the provisions of its Loan Agreement, the Company is required to
maintain compliance with certain financial covenants including debt service
coverage, minimum levels of net worth and restrictions on indebtedness. At June
30, 1998, the Company's debt service coverage and net worth was less than the
required amounts. The Company's bank has waived its rights under the Loan
Agreement with respect to compliance with these financial covenants at June 30,
1998. The Company complied with these covenants at September 30, 1998. In
December 1998, the Company's bank changed its loan compliance requirements from
a quarterly basis to an annual basis. The bank now measures compliance annually,
consistent with the Company's fiscal year end.
There can be no assurance that additional financing will be available or
will be available on acceptable terms when needed. Insufficient funds may
prevent the Company from implementing its business strategy or may require the
Company to delay, scale back or eliminate certain of its research and product
development programs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
RELIANCE UPON MANAGEMENT
The Company is substantially dependent, for the foreseeable future, upon
its Chairman of the Board, President and Chief Executive Officer, Dr. Anthony J.
Armini and its Vice President and Chief Scientist, Dr. Stephen N. Bunker, both
of whom currently devote their full time and efforts to the management of the
Company. The Company has entered into an employment agreement with each of these
officers. If the Company were to lose the services of Dr. Armini or Dr. Bunker
for any significant period of time, its business would be materially adversely
affected. The Company maintains key man life insurance policies of $1,000,000
and $500,000 insuring the lives of Messrs. Armini and Bunker, respectively. See
"Management."
DEPENDENCE ON QUALIFIED PERSONNEL; ABILITY TO ATTRACT QUALIFIED PERSONNEL
There is intense competition for qualified personnel in the medical device
field, and there can be no assurance that the Company will be able to continue
to attract and retain qualified personnel necessary for the development of its
business. The loss of the services of existing personnel as well as the failure
to recruit additional qualified scientific, technical and managerial personnel
in a timely manner would be detrimental to the Company's anticipated growth and
expansion into areas and activities requiring additional expertise such as
marketing. The failure to attract and retain such personnel could adversely
affect the Company's business. See "Business -- Employees" and "Management."
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Upon completion of this Offering, current principal stockholders and
management of the Company will own approximately 72.6% of the outstanding Common
Stock, assuming no exercise of options or warrants. The Company's principal
stockholders and current management will, as a practical matter, be able to
direct the affairs of the Company. In addition, the Company's Chairman of the
Board, President and Chief Executive Officer, Anthony J. Armini, who currently
owns 30.3% of the outstanding Common Stock and currently controls 53% of the
voting shares of the Company, will, as a practical matter, be able to control
the affairs of the Company. See "Principal Stockholders."
16
<PAGE> 18
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company believes that its operating results may be subject to
substantial quarterly fluctuations due to several factors, some of which are
outside its control, including fluctuating market demand for, and declines in
the average selling price of, the Company's products, the timing of significant
orders from customers, delays in the introduction of new or improved products,
delays in obtaining customer acceptance of new or changed products, the cost and
availability of raw materials, and general economic conditions. The Company
plans to further increase its expenditures to complete development and
commercialize its new products, to increase its manufacturing capacity, to
ensure compliance with the FDA's Quality Systems Regulations and to broaden its
sales and marketing capabilities. A substantial portion of the Company's revenue
in any quarter historically has been derived from orders booked in that quarter,
and historically, backlog has not been a meaningful indicator of revenues for a
particular period. Accordingly, the Company's sales expectations currently are
based almost entirely on its internal estimates of future demand and not from
firm customer orders. See "Business."
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market, or
the prospect of such sales, could materially adversely affect the market price
of the Units, the Common Stock and the Warrants and the Company's ability to
raise equity capital in the future. Upon completion of this Offering, the
Company will have outstanding 5,747,540 shares of Common Stock (after accounting
for the shares of Common Stock included in the Units) and options to purchase
373,551 shares. Of these shares 4,747,540 shares of Common Stock and 373,551
shares issuable upon exercise of options will be restricted shares (the
"Restricted Shares") under the Securities Act of 1933, as amended (the
"Securities Act"). The Units offered hereby will be immediately eligible for
sale in the public market without restriction on the date of the Prospectus. All
of the Restricted Shares are subject to lock-up agreements under which the
holders of such shares have agreed not to sell or otherwise dispose of any of
their shares for thirteen months after the date of this Prospectus, without the
prior written consent of the Representatives. Taking into account the lock-up
agreements and the restrictions of Rules 144, 144(k) and 701 promulgated under
the Securities Act, all of the Restricted Shares will be available for sale in
the public market beginning thirteen months from the date of this Prospectus.
Sales in the public market of substantial amounts of Common Stock, or the
perception that such sales could occur, could depress prevailing market prices
for the Common Stock and the Company's ability to raise additional capital
through the sale of equity securities. See "Description of Securities," "Shares
Eligible for Future Sale" and "Underwriting."
SUBSTANTIAL SHARES OF COMMON STOCK RESERVED FOR ISSUANCE
The Company has reserved 1,000,000 shares of Common Stock for issuance upon
the exercise of the Warrants included in the Units exclusive of any
over-allotment option. The Company has also reserved 649,551 shares of Common
Stock for issuance to employees, officers, directors, and consultants pursuant
to option exercises or sales of Common Stock pursuant to options outstanding
under the Company's 1992 Stock Option Plan and its 1998 Stock Option Plan and
111,580 shares of Common Stock for issuance pursuant to exercise of outstanding
warrants. As of March 1, 1999, the Company has granted options and warrants to
purchase a total of 485,131 shares of Common Stock, at prices ranging from $1.18
to $7.00 for a weighted average price of $4.66. In addition, the Company has
reserved 164,500 shares of Common Stock for issuance to employees pursuant to
its 1998 Employee Stock Purchase Plan. The Company will issue to the
Representatives, in connection with this Offering, the Representatives' Warrant
to purchase 100,000 shares of Common Stock and 100,000 Warrants, and has
reserved 200,000 shares of Common Stock for issuance upon exercise of the
Representatives' Warrant and the Warrants acquired upon such exercise. The
existence of the Warrants, the Representatives' Warrant and any other options or
warrants may prove to be a hindrance to the Company's future equity financing.
Further, the holders of such warrants and options may exercise them at a time
when the Company would otherwise be able to obtain additional equity capital on
terms more favorable to the Company. Sales in the public market of substantial
amounts of Common Stock, or the perception that such sales could occur, could
depress prevailing market prices for the Common Stock and Warrants. See
"Management -- Benefit Plans" and "Description of Securities."
17
<PAGE> 19
REQUIRED DISCLOSURE CONCERNING TRADING OF PENNY STOCKS OR LOW-PRICED SECURITIES
The Securities and Exchange Commission ("SEC") has adopted regulations that
define a "penny stock" to be any equity security that has a market price (as
defined) of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a disclosure schedule prepared by the SEC relating to the penny stock market.
The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
While many NASDAQ-listed securities would be covered by the definition of
penny stock, transactions in a NASDAQ-listed security would be exempt from all
but the sole market-maker provision for (i) issuers who have at least $4,000,000
in tangible assets, (ii) transactions in which the customer is an institutional
accredited investor, and (iii) transactions that are not recommended by the
broker-dealer. In addition, transactions in a NASDAQ security directly with a
NASDAQ market-maker for such securities would be subject only to the sole
market-maker disclosure, and the disclosure with respect to commissions to be
paid to the broker-dealer and the registered representative. Finally, all NASDAQ
securities would be exempt if NASDAQ raised its requirements for continued
listing so that any issuer with less than $2,000,000 in net tangible assets or
stockholders' equity would be subject to delisting. These criteria are more
stringent than the current NASDAQ maintenance requirements. Consequently, these
rules may restrict the ability of broker-dealers to sell the Company's
securities and may affect the ability of purchasers to sell the Company's
securities in the secondary market.
POSSIBLE ILLIQUIDITY OF TRADING MARKETS
Upon completion of this Offering, the Units will be eligible for initial
quotation on the Nasdaq SmallCap Market and the Boston Stock Exchange, which may
be significantly less liquid markets than the Nasdaq National Market System.
Moreover, if the Company should experience losses from operations, the Company
may be unable to maintain the standards for continued quotation on the Nasdaq
SmallCap Market and the Boston Stock Exchange, and the Units, the Common Stock
and the Warrants could be subject to removal from the Nasdaq SmallCap Market and
the Boston Stock Exchange. Trading, if any, in the Units, the Common Stock and
the Warrants would thereafter be conducted in the over-the-counter market on an
electronic bulletin board or in what are commonly referred to as the pink
sheets. As a result, an investor would find it more difficult to dispose of, or
to obtain accurate quotations as to the price of, the Company's securities. In
addition, if the Company's securities were removed from the Nasdaq SmallCap
Market and the Boston Stock Exchange, they would be subject to so-called penny
stock rules that impose additional sales practice and market-making requirements
on broker-dealers who sell and/or make a market in the Company's securities. The
ability of purchasers of the Company's securities to sell their securities in
the secondary market would also be negatively affected. Furthermore, if the
market price of the Company's Units or Common Stock is less than $5.00 per
share, the Company may become subject to certain penny stock rules even if still
quoted on the Nasdaq SmallCap Market. While such penny stock rules would not
affect the quotation of the Company's Units, Common Stock or Warrants on the
Nasdaq SmallCap Market, such rules may further limit the market liquidity of
Units, Common Stock and Warrants and the ability of purchasers in this Offering
to sell such securities in the secondary market.
MAINTENANCE REQUIREMENTS FOR NASDAQ SMALLCAP SECURITIES
The Units have been accepted for listing on the Nasdaq SmallCap Market. An
issuer seeking continued inclusion of its securities on the SmallCap Market is
required to meet certain criteria including (i) net tangible assets of at least
$2,000,000, a market capitalization of $35,000,000 or net income of $500,000 in
the most recently completed fiscal year or two of the three most recently
completed fiscal years, and (ii) a minimum bid price of $1.00 per share. Upon
completion of the Offering, the Company anticipates that it will satisfy the
criteria for continued inclusion of its securities on the Nasdaq SmallCap
Market. However, there
18
<PAGE> 20
can be no assurance that the Company will continue to satisfy such criteria and
for how long. See "Prospectus Summary -- Summary Financial Information" and
"Capitalization."
NO PRIOR SECURITIES MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There has been no prior market for the Units, the Common Stock or the
Warrants and there can be no assurance that a public market for the Units, the
Common Stock or the Warrants will develop or be sustained after the Offering. In
the absence of such a market, purchasers of the Units, the Common Stock and the
Warrants may experience substantial difficulty in selling their securities. The
initial public offering price for the Units, the Common Stock and Warrants has
been determined by negotiations between the Company and the Representatives. The
trading price of the Units, the Common Stock and the Warrants could be subject
to significant fluctuations in response to variations in quarterly operating
results, changes in analysts' estimates, announcements of technological
innovations, general conditions in the Company's industries and other factors.
In addition, the capital markets are subject to price and volume fluctuations
that affect the market prices of publicly traded securities in general, and the
market prices of less heavily capitalized high technology companies in
particular. Such fluctuations may be unrelated to actual operating performance.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Units offered hereby will incur immediate and substantial
dilution of approximately $6.24 per share, or 83% of their investment in the
Units (at an initial public offering price of $7.50 per Unit), in that the net
tangible book value of the Units after this Offering will be approximately $1.26
per Unit. See "Dilution."
LEGAL RESTRICTIONS ON SALES OF SHARES UNDERLYING THE WARRANTS
The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered or deemed to
be exempt under the securities laws of the state of residence of the exercising
holder of the Warrants. Although the Company will use its best efforts to have
all the shares of the Common Stock issuable upon exercise of the Warrants
registered or qualified on or before the exercise date and to maintain effective
a registration statement relating thereto until the expiration of the Warrants,
there can be no assurance that it will be able to do so.
REDEMPTION OF WARRANTS
Commencing thirteen months from the date of this Prospectus, the Warrants
are subject to redemption at $0.20 per Warrant if the closing bid price of the
Common Stock as reported on the Nasdaq SmallCap Market (or any other market on
which the stock is then traded) averages in excess of $10.50 over a period of
fifteen consecutive trading days. In the event the Company elects to redeem the
Warrants, such Warrants would be exercisable until the close of business on the
date fixed for redemption. If any Warrant called for redemption is not exercised
by such date, it will cease to be exercisable and the holder will be entitled
only to the redemption price. See "Description of Securities -- Warrants."
NO ANTICIPATED DIVIDENDS
The Company has not previously paid any dividends on the Common Stock and,
for the foreseeable future, intends to continue its policy of retaining any
earnings to finance the development and expansion of its business. The Company's
revolving credit line, term loan and equipment purchase facility with its
principal lender prohibit the payment of dividends other than common stock
dividends. See "Dividend Policy."
NEGATIVE EFFECTS OF POSSIBLE ISSUANCE OF PREFERRED STOCK
The Company's Articles of Organization authorize the issuance of up to
5,000,000 shares of preferred stock, $0.10 par value per share ("Preferred
Stock"), in series with designations, rights (including voting rights), and
preferences determined from time to time by its Board of Directors. Accordingly,
the Board of Directors is empowered, without stockholder approval, to issue
Preferred Stock with dividends, liquidation, conversion, voting, or other rights
that could adversely affect the voting power or other rights of the holders of
Common Stock. In the event of issuance, the Preferred Stock could be used to
restrict the Company's ability
19
<PAGE> 21
to merge with or sell its assets to a third party and, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. See "Description of Securities."
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As permitted by Massachusetts Business Corporation Act, the Company has
included in its Articles of Organization a provision to eliminate the personal
liability of the Board of Directors for monetary damages for breaches or alleged
breaches of their duties as directors, subject to certain exceptions. In
addition, the Bylaws provide that the Company is required to indemnify our
officers and directors under certain circumstances, including circumstances in
which indemnification would otherwise be discretionary, and that the Company is
required to advance expenses to its officers and directors as incurred in
connection with any proceeding against them for which they may be indemnified.
20
<PAGE> 22
USE OF PROCEEDS
If all 1,000,000 Units offered by this Prospectus are sold at an initial
public offering price per Unit of $7.50, the Company will receive net proceeds
of approximately $5,745,500 ($6,724,250 if the over-allotment option is
exercised in full). Net proceeds are determined after estimated commissions,
discounts and offering expenses payable by the Company.
The Company intends to use the net proceeds of this offering for the
following purposes:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT NET PROCEEDS
---------- -------------
<S> <C> <C>
Production equipment....................................... $2,000,000 34.8%
- Expenditures for additional equipment and personnel to
prepare for and to increase production capacity
Research and development activities and regulatory
matters.................................................. $1,500,000 26.1%
- Expenditures to increase research personnel,
development expenses, and regulatory matters
Marketing and sales........................................ $1,500,000 26.1%
- Expenditures for sales and marketing personnel,
introducing new products, market research studies,
marketing collateral materials, trade show
participation, public relations, advertising expenses
Working capital and general corporate purposes............. $ 745,500 13.0%
</TABLE>
The amount and timing of working capital expenditures may vary
significantly depending upon numerous factors, including the progress of the
Company's research and development programs, the timing and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments,
payments received under collaborative agreements, changes in collaborative
research relationships, the costs associated with potential commercialization of
the Company's products, including the development of marketing and sales
capabilities, the cost and availability of third-party financing for capital
expenditures and administrative and legal expenses.
The Company believes that its available cash and existing sources of
funding, together with the proceeds of this offering and interest earned
thereon, will be adequate to maintain its current and planned operations for the
next 18 months.
Until used, the Company intends to invest the net proceeds of this offering
in interest-bearing, investment-grade securities. While the net proceeds are so
invested, the interest earned by the Company on such proceeds will be limited by
available market rates. The Company intends to invest and use such proceeds so
as not to be considered an "investment company" under the Investment Company Act
of 1940, as amended.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for the expansion and operation of its business, and does not anticipate paying
cash dividends in the foreseeable future. The Company's revolving credit line,
term loan and equipment purchase facility with its principal lender prohibit the
payment of dividends other than common stock dividends.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1998, on an actual basis and as adjusted to reflect the sale by the
Company of 1,000,000 Units offered hereby (at an initial public offering price
of $7.50 per Unit and after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company) and the application of
the estimated net proceeds therefrom. The capitalization information set forth
in the following table is qualified by the more detailed Financial Statements
and Notes thereto included elsewhere in this Prospectus and should be read in
conjunction with such Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Current portion of long-term debt, including capital
lease..................................................... $ 179,283 $ 179,283
Long-term debt, including capital lease, net of current
portion................................................... 658,857 658,857
Stockholders' equity:
Preferred Stock, par value $0.10 per share; 5,000,000
shares authorized, and no shares issued or
outstanding............................................ -- --
Common Stock, par value $0.10 per share; 20,000,000 shares
authorized and 4,372,291 shares issued and outstanding,
actual; 5,372,291 shares issued and outstanding, as
adjusted(1)............................................ 437,229 537,229
Additional paid-in capital.................................. 1,017,259 6,662,759
Retained earnings (accumulated deficit)..................... (319,882) (319,882)
---------- ----------
Total stockholders' equity................................ 1,134,606 6,880,106
---------- ----------
Total capitalization.............................. $1,972,746 $7,718,246
========== ==========
</TABLE>
- ---------------
(1) Does not give effect to an aggregate of up to 2,888,380 shares of Common
Stock issuable upon exercise of: (i) the Warrants; (ii) the Underwriters'
over-allotment option, including the shares underlying the Warrants included
in the Units subject to such option; (iii) the Representatives' Warrant;
(iv) the Warrants included in the Representatives' Warrant; or (v) the
issuance of any of the 1,112,300 shares reserved for issuance upon the
exercise of options outstanding under the Company's 1992 Stock Option Plan,
the Company's 1998 Stock Option Plan, the 164,500 shares of Common Stock
reserved for issuance under the Company's 1998 Employee Stock Purchase Plan
and the 111,580 shares of Common Stock reserved for issuance upon exercise
of outstanding warrants. The Company's 1998 Stock Option Plan provides for
the issuance of options to purchase up to 280,000 shares of Common Stock;
however, the Company has agreed with the Representatives that it will not
issue options to purchase more than 100,000 shares of Common Stock in the
next 18 months. See "Underwriting," "Certain Transactions" and
"Management -- Benefit Plans." In January 1999, 375,249 options to purchase
Common Stock were exercised.
22
<PAGE> 24
DILUTION
The net tangible book value of the Company's Common Stock as of December
31, 1998 was approximately $246,999, or $0.06 per share. Net tangible book value
per share represents the amount of the Company's total tangible assets less
total liabilities, divided by the 4,372,291 shares of Common Stock outstanding
as of December 31, 1998 (after the 7-for-1 stock split).
Net tangible book value dilution per share represents the difference
between the amount per share paid by new investors who purchase Units in this
Offering and the pro forma net tangible book value per share of Common Stock
immediately after completion of this Offering. After giving effect to the sale
of 1,000,000 Units in this Offering at an initial public offering price of $7.50
per Unit, after deduction of estimated underwriting discounts and commissions
and offering expenses, the pro forma net tangible book value of the Company at
December 31, 1998 would have been $6,745,215 or $1.26 per share.
This represents an immediate increase in net tangible book value of $1.20
per share to existing shareholders, and an immediate dilution in net tangible
book value of $6.24 per share to new investors in the Offering, as illustrated
in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Unit(1).................. $7.50
Net tangible book value per share at December 31, 1998.... $0.06
Increase per share attributable to new investors.......... 1.20
-----
Pro forma net tangible book value per share after the
Offering(2)...................................................... 1.26
-----
Net tangible book value dilution per share to new investors(3)..... $6.24
=====
</TABLE>
- ---------------
(1) Before deduction of estimated underwriting discounts and commissions and
offering expenses to be paid by the Company. The initial public offering
price includes $0.10 for a Warrant.
(2) Does not give effect to an aggregate of up to 2,888,380 shares of Common
Stock issuable upon exercise of: (i) the Warrants; (ii) the Underwriters'
over-allotment option, including the shares underlying the Warrants included
in the Units subject to such option; (iii) the Representatives' Warrant;
(iv) the Warrants included in the Representatives' Warrant; or (v) the
issuance of any of the 1,112,380 shares reserved for issuance upon the
exercise of options outstanding under the Company's 1992 Stock Option Plan,
the Company's 1998 Stock Option Plan, the 164,500 shares of Common Stock
reserved for issuance under the Company's 1998 Employee Stock Purchase Plan
and the 111,580 shares of Common Stock reserved for issuance upon exercise
of outstanding warrants. The Company's 1998 Stock Option Plan provides for
the issuance of options to purchase up to 280,000 shares of Common Stock;
however, the Company has agreed with the Representatives that it will not
issue options to purchase more than 100,000 shares of Common Stock in the
next 18 months. See "Underwriting," "Certain Transactions" and
"Management -- Benefit Plans."
(3) Represents dilution of approximately 83% to purchasers of the Units.
The following table summarizes as of January 9, 1999, on a pro forma basis
to reflect the same adjustments described above, the number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid by (i) the existing holders of Common Stock and (ii) the
new investors in the Offering, assuming the sale of 1,000,000 Units by the
Company hereby at an initial public offering price of $7.50 per Unit. The
calculations are based upon total consideration given by new and existing
shareholders, before any deduction of estimated underwriting discounts and
commissions and offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............. 4,747,540 82.6% $1,328,741 15.1% $0.28
New Investors...................... 1,000,000 17.4% $7,500,000 84.9% $7.50
--------- ----- ---------- -----
Total(1)................. 5,747,540 100.0% $8,828,741 100.0%
========= ===== ========== =====
</TABLE>
- ---------------
(1) The foregoing table does not give effect to the items described in footnotes
(1) and (2) to the previous dilution table.
23
<PAGE> 25
SELECTED FINANCIAL DATA
The following selected financial data for the fiscal years ended June 30,
1997 and June 30, 1998 has been derived from the Company's audited historical
financial statements, which are included in this Prospectus. The financial data
for the six month periods ended December 31, 1997 and 1998 are derived from
unaudited financial statements, which are included in this Prospectus. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the six months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending June 30, 1999. This data should be read in conjunction with the Financial
Statements and Notes thereto and the other financial information included
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, ----------------------------
------------------------ DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product and contract research revenues............... $2,678,918 $2,904,429 $1,446,325 $1,350,072
Equipment revenues(1)................................ 350,754 -- -- --
---------- ---------- ---------- ----------
Total revenues....................................... 3,029,672 2,904,429 1,446,325 1,350,072
Cost of product and contract research revenues....... 1,354,188 1,693,662 891,266 789,335
Cost of equipment revenues........................... 347,414 -- -- --
Research and development............................. 300,936 306,536 144,618 158,298
Selling, general and administrative.................. 626,361 1,014,401 402,130 470,749
---------- ---------- ---------- ----------
Total costs and expenses............................. 2,628,899 3,014,599 1,438,014 1,418,382
---------- ---------- ---------- ----------
Operating income (loss).............................. 400,773 (110,170) 8,311 (68,310)
Other income (expense)............................... (21,043) 13,285 7,450 (22,913)
---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes.............................................. 379,730 (96,885) 15,761 (91,223)
Provision (benefit) for income taxes................. 161,400 (38,900) 6,304 (36,701)
---------- ---------- ---------- ----------
Net income (loss).................................... $ 218,330 $ (57,985) $ 9,457 $ (54,522)
========== ========== ========== ==========
Net income (loss) per share..........................
Basic.............................................. $ .06 $ (.01) $ .00 $ (.01)
Diluted............................................ $ .05 $ (.01) $ .00 $ (.01)
Weighted average number of common and common
equivalent shares outstanding......................
Basic.............................................. 3,418,107 4,110,596 3,862,453 4,372,291
Diluted............................................ 4,066,874 4,110,596 4,097,772 4,372,291
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
ACTUAL AS ADJUSTED(2)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash........................................................ $ 73,545 $5,819,045
Current assets.............................................. 748,375 6,493,875
Working capital............................................. (132,777) 5,820,917
Total assets................................................ 2,686,915 8,432,415
Current portion of long term debt, including capital
lease..................................................... 179,283 179,283
Long term debt, including capital lease, net of current..... 658,857 658,857
Stockholders' equity........................................ 1,134,606 6,880,106
</TABLE>
- ---------------
(1) Represents non-recurring revenue from a contract to build one piece of
customized manufacturing equipment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" and
Footnote 5 of the audited financial statements.
(2) Adjusted to reflect the sale of 1,000,000 Units offered by the Company
hereby at an initial public offering price of $7.50 per Unit, after
deducting estimated underwriting discounts and commissions and offering
expenses, and the application of the net proceeds thereof. See "Use of
Proceeds" and "Capitalization."
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. The discussion in this Section
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that
involve risks and uncertainties. The safe harbor from private actions based on
untrue statements or omissions of material fact that is provided by the two
statutory provisions does not apply to statements made in connection with an
initial public offering. The Company's actual results and the timing of certain
events may differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Risk Factors" and "Business."
OVERVIEW
Implant Sciences Corporation (the "Company") was founded in 1984 by its
present CEO and initially provided ion implantation services to the aerospace
and machine tool industries. The Company had proprietary equipment and processes
which provided increased hardness, wear resistance, and corrosion resistance to
its customers' components. In 1986, the Company added its first semiconductor
ion implantation machine to compete in the semiconductor industry. The Company
now has three automated semiconductor implanters which produced annual revenues
of approximately $667,000 in fiscal 1998.
In 1990, the Company developed, manufactured and began to sell wear testing
equipment to complement its ion implantation business. In 1994, the Company's
ion implantation business expanded into medical implants including total joint
replacements which is now the Company's largest revenue producer. By 1995, the
Company divested the wear test equipment product line through an asset sale to
Falex Corporation for a total price of $200,000 and future aggregate minimum
royalty payments of $175,000. This divestiture was made to focus the Company's
development and engineering personnel on the expanding medical device market.
In 1993 and in 1995, the Company accepted two significant government
contracts to design, construct and install two large ion implantation systems at
customer sites. The second system was completed in 1997 for a total contract
amount of approximately $1,933,000 of which $351,000 was recognized as revenue
in fiscal 1997. After meeting its present obligations, the Company plans to
cease producing this equipment line to devote its entire engineering staff to
the medical device business. The Company continues to build ion implantation
equipment for its own use. The Company believes that its proprietary equipment
expertise is best devoted to manufacturing its own products such as radioactive
prostate seeds, radioactive stents, and coatings for orthopedic implants and
other medical devices. In addition to its three semiconductor ion implanters,
the Company now operates four implanters dedicated to medical production
including one special purpose ion implanter for the production of radioactive
stents, two implanters dedicated to research and development, and has two under
construction. At present the Company's revenues are approximately 77% from the
medical products and services business and the remainder from the semiconductor
ion implantation business.
25
<PAGE> 27
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, ----------------------------
--------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product and contract research
revenues:
Medical........................... 73.7% 77.0% 78.6% 83.3%
Semiconductor..................... 14.8 23.0 21.4 16.7
Equipment............................ 11.5 -- -- --
----- ----- ----- -----
Total revenues............... 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of product and contract research
revenues.......................... 44.7 58.3 61.6 58.4
Cost of equipment revenues........... 11.5 -- -- --
Research and development............. 9.9 10.6 10.0 11.7
Selling, general and
administrative.................... 20.7 34.9 27.8 34.9
----- ----- ----- -----
Total costs and expenses..... 86.8 103.8 99.4 105.0
----- ----- ----- -----
Operating income (loss)................ 13.2 (3.8) 0.6 (5.0)
Other income (expense), net............ (0.7) 0.5 0.5 (1.7)
----- ----- ----- -----
Income before (benefit) provision for
income taxes......................... 12.5 (3.3) 1.1 (6.7)
(Benefit) provision for taxes.......... 5.3 (1.3) 0.4 (2.7)
----- ----- ----- -----
Net income (loss)...................... 7.2% (2.0)% 0.7% (4.0)%
===== ===== ===== =====
</TABLE>
MD&A
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Total revenues decreased to approximately $1,350,000, in the six
months ended December 31, 1998 from approximately $1,446,000 in the six months
ended December 31, 1997. The 6.7% decrease was primarily attributable to soft
semiconductor sales and a decrease in government contract and grant revenue as
three, Phase I contracts reached completion during the six months ended December
31, 1998. These decreases were offset by a 15% increase in orthopedic and
interventional cardiology revenues. Less than 5% of all revenues were derived
from foreign sources.
The Company's two major customers, the Howmedica/Osteonics Division of
Stryker Corporation and Biomet Incorporated, accounted for 54.8% and 7.4%,
respectively, of revenue in the six months ended December 31, 1998 and 43.7% and
6.7%, respectively, in the six months ended December 31, 1997. The Company's
government contract and grant revenue accounted for 12.0% and 23.9% of revenue
for the six months ended December 31, 1998 and 1997, respectively.
Cost of Product and Contract Research Revenues. Cost of product and
research revenues decreased to approximately $789,000 for the six months ended
December 31, 1998 from approximately $891,000 in the six months ended December
31, 1997 and decreased as a percentage of revenues to 58.4% from 61.6% in the
same periods. This decrease in cost is primarily attributable to a reduction in
costs of materials, government contract and grant related costs and repair and
maintenance costs.
Research and Development. Research and development expenses increased to
approximately $158,000 in the six months ended December 31, 1998 from
approximately $145,000 in the six months ended December 31, 1997, a 9.0%
increase, due to new product development. The Company anticipates that in
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future periods its research and development expenses will continue to increase
in total dollars expended as a result of its new product development plans.
Selling, General and Administrative. Selling, general and administrative
expenses increased to approximately $471,000 in the six months ended December
31, 1998 from approximately $402,000 in the six months ended December 31, 1997.
The 17.1% increase in selling, general and administrative expenses is primarily
attributable to increased personnel, particularly the development of a senior
management team. The Company anticipates that in future periods its selling,
general and administrative expenses will increase in total dollars expended as a
result of its plans to commercialize new products.
Other Income and Expenses, Net. Other income and expenses, net consist
primarily of interest earned on the Company's short term investments, interest
expenses on loans and rental income for machine space. Other income and expenses
increased as a result of an increase in interest expense due to increased
borrowing, under the Company's equipment purchase facility loan.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues. Total revenues decreased to approximately $2,904,000, in fiscal
1998, from approximately $3,030,000, in fiscal 1997. The 4.2% decrease was
primarily attributable to the completion of a one-time contract, completed in
fiscal 1997, to build one piece of customized manufacturing equipment. The
Company's medical and semiconductor businesses both experienced revenue
increases in fiscal 1998. Less than 5% of all revenues were derived from foreign
sources.
The Company has three major customers, the Howmedica/Osteonics Division of
Stryker Corporation, Concurrent Technology Corporation and Biomet Incorporated.
Sales to Howmedica/Osteonics accounted for 48.9% of total revenues, in fiscal
1997, and 42.3% of total revenues, in fiscal 1998. Sales to Concurrent
Technology Corporation accounted for 11.6% of total revenues, in fiscal 1997,
and 0% of total revenues, in fiscal 1998. Sales to Biomet Incorporated accounted
for 4.9% of total revenues, in fiscal 1997, and 6.0% of total revenues, in
fiscal 1998.
The Company's government contract and grant revenue accounted for less than
1% and 11% of total revenues, in fiscal 1997 and 1998, respectively, with
approximately one-third of the fiscal 1998 revenue derived from a National
Institutes of Health grant to develop radioactive coronary stents. The Company
also conducts research and development under cost sharing arrangements with its
commercial customers. Revenues under such arrangements were approximately
$110,000 and $100,000 for the years ended June 30, 1997 and 1998, respectively.
Medical revenues increased to approximately $2,237,000, in fiscal 1998,
from approximately $2,232,000, in fiscal 1997. The increase in fiscal 1998
revenues is primarily attributable to increased contract revenue from government
contracts and grants, and increased medical coatings revenue, offset by a
decrease in orthopedic revenue primarily due to a price reduction associated
with a negotiated supply agreement.
Semiconductor revenues increased to approximately $667,000, in fiscal 1998,
from approximately $447,000, in fiscal 1997. The 49.2% increase in semiconductor
ion implantation revenue primarily reflects an increase in customer base as well
as volume increases from existing customers.
Cost of Product and Contract Research Revenues. Cost of product and
contract research increased to approximately $1,694,000, in fiscal 1998, from
approximately $1,354,000, in fiscal 1997, and increased as a percentage of
revenues from 44.7%, in fiscal 1997, to 58.3%, in fiscal 1998. The increase in
cost is primarily attributable to increased activity related to government
contracts and grants which generally have lower gross margins than product
revenues, increased production material costs and the absorption of fixed labor
and overhead expenses associated with the completion, in fiscal 1997, of a
one-time equipment production subcontract.
Research and Development. Research and development expenses increased to
approximately $307,000, in fiscal 1998, from approximately $301,000, in fiscal
1997, and increased as a percentage of revenues from 9.9%, in fiscal 1997, to
10.6%, in fiscal 1998. The increase primarily reflects an increased level of
research and
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development activity relating to the Company's new products, which are
radioactive prostate seeds for the treatment of prostate cancer and radioactive
and radiopaque stents for the treatment of coronary artery reocclusion. The
Company anticipates that its research and development expenses will continue to
increase in total dollars expended.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $1,014,000, in fiscal 1998,
from approximately $626,000, in fiscal 1997, and increased as a percentage of
revenues from 20.7%, in fiscal 1997, to 34.9%, in fiscal 1998. The increase
primarily reflects the cost associated with a terminating an agreement with the
acting Financial Officer; sales and marketing expenses, personnel, travel, and
legal expenses. The Company anticipates that its selling, general and
administrative expenses will increase in total dollars as a result of its plans
to commercialize its new products.
Other Income and Expenses, Net. Other income and expenses, net consist
primarily of interest earned on the Company's short-term investments, interest
expense on loans and rental income for machine space. Other income and expense
increased to approximately $13,000, in fiscal 1998, from ($21,000), in fiscal
1997. This increase in income primarily reflects a reduction in interest expense
due to the repayment of loans provided by officers of the Company in fiscal
1996.
Liquidity and Capital Resources. As of December 31, 1998 the Company had
approximately $74,000 in cash in the form of checking and money market accounts.
The Company also had a $300,000 revolving line of credit from a commercial bank
at a rate of prime plus one percent, of which $270,000 was available at December
31, 1998. This line of credit expires on September 30, 1999. The Company also
has a term loan and an equipment purchase facility with a commercial bank, under
which approximately $63,000 and $750,000, respectively, were outstanding at
December 31, 1998. Under the provisions of its Loan Agreement, the Company is
required to maintain compliance with certain financial covenants, including debt
service coverage, minimum levels of net worth and restrictions on indebtedness.
At June 30, 1998, the Company's debt service coverage and net worth was less
than the required amounts. The Company's bank waived its rights under the Loan
Agreement with respect to compliance with these financial covenants at June 30,
1998. At September 30, 1998 the Company met all of its financial covenants. In
December 1998, the Company's bank changed its loan compliance requirements from
a quarterly basis to an annual basis. The bank now measures compliance annually,
consistent with the Company's fiscal year end. Accordingly, amounts payable
under the Loan Agreement are classified as long-term in the accompanying balance
sheet. See "Risk Factors -- Uncertain Future Capital Requirements."
During fiscal 1998, operating activities used $83,000 of cash. Net cash
used by operating activities in fiscal 1998 primarily reflects the net loss of
$58,000 and payment of offering costs.
During fiscal 1998, investing activities used $392,000 in cash. Net cash
used by investing activities included $559,000 of purchases of property and
equipment and $31,000 of patent fees. These uses of cash were partially offset
by the redemption of short-term investments of $198,000. The Company intends to
make significant investments over the next several years to support the
development and commercialization of its products and the expansion of its
manufacturing facility. See "Use of Proceeds."
During fiscal 1998, financing activities provided $103,000 in cash. Net
cash provided by financing activities primarily includes proceeds from an
equipment loan and the sale of the Company's Common Stock, as a result of option
exercises, offset by the repayment in full of the Company's line of credit.
During the six months ended December 31, 1998, operating activities used
cash of approximately $502,000 due principally to payment of operating expenses
and offering costs and an increase in accounts receivable.
During the six months ended December 31, 1998, investing activities used
approximately $313,000. Net cash used by investing activities included $292,000
purchases of property and equipment and $21,000 of patent fees. Although the
Company does not have significant capital commitments, the Company intends to
make significant investments over the next several years to support the
development and commercialization of its products and the expansion of its
manufacturing equipment.
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During the six months ended December 31, 1998, financing activities
provided approximately $578,000 in cash. Net cash provided by financing
activities primarily includes proceeds from an equipment loan.
The Company plans to further increase its expenditures to complete
development and commercialize its new products, to increase its manufacturing
capacity, to ensure compliance with the FDA's Quality System Regulations and to
broaden its sales and marketing capabilities.
The Company anticipates that the proceeds of the Offering and interest
thereon, together with existing cash and cash equivalents, will be sufficient to
fund its operations and planned new product development, including increased
working capital expenditures, through at least the next 18 months. See "Risk
Factors -- Uncertain Future Capital Requirements."
YEAR 2000 COMPLIANCE.
As the year 2000 approaches, it is generally anticipated that certain
computers, software and other equipment utilizing microprocessors may be unable
to recognize or properly process dates after the year 1999 without software
modification. The Company has evaluated this potential issue with respect to its
software, equipment, financial systems and suppliers. Expenditures by the
Company to date in connection with year 2000 compliance have not been material,
and the Company does not believe the year 2000 problem will have any material
adverse effect on its business, operations or financial condition.
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BUSINESS
Certain terms are defined in a glossary beginning on page 58.
GENERAL
Implant Sciences Corporation (the "Company") has, over the past fifteen
years, developed core technologies using ion implantation and thin film coatings
for medical device applications and has proprietary processes and equipment for
the manufacture of radiation therapy implants. The Company plans to apply this
technology to manufacture radioactive prostate seeds using a non-radioactive
fabrication process which it believes will be more cost-effective and less
hazardous than conventional processes which use radioactive wet chemistry. The
seeds will be sealed and then made radioactive in a nuclear reactor just prior
to shipment to customers. The Company believes that the opportunities for
radioactive prostate seeds will continue to grow as an attractive alternative to
other methods of treatment. On January 21, 1999, the Company filed a 510(k)
notification of premarket clearance for its iodine-125 seed with the Food and
Drug Administration ("FDA") and anticipates that it will take three to nine
months to obtain such a clearance. In the interventional cardiology field, the
Company has a joint development agreement with a major stent manufacturer to
develop radioactive coronary stents. The Company believes these radioactive
seeds used for the treatment of prostate cancer and radioactive coronary stents
for the prevention of restenosis (reclosure of the artery) after balloon
angioplasty, will have a significant competitive advantage over currently
existing devices.
The Company is currently developing its proprietary thin film coating
technology in order to apply it to radiopaque (visible by x-ray) coatings on
stents, guidewires, catheters and other devices used in interventional
cardiology procedures. In addition, the Company is applying its ion implantation
technologies to modify surfaces to reduce polyethylene wear generation in
orthopedic joint implants, manufactured by the Howmedica/Osteonics Division of
Stryker Corporation and Biomet Incorporated. Approximately 77% of the Company's
revenues in fiscal 1998 were derived from its ion implantation of medical
products business. The Company also supplies ion implantation services to
numerous semiconductor manufacturers, research laboratories and universities.
The Company has eight issued United States patents and sixteen United States
patents pending covering its technologies and processes. The Company also has
pending two international patent applications.
Although there are a wide range of commercial applications for the
Company's proprietary technologies, the Company has chosen to focus on the
medical device industry. Within the medical device industry, the Company is
concentrating on the prostate cancer, interventional cardiology and orthopedic
segments. The Company believes that each of these segments share similar growth
dynamics in that they represent diseases or chronic conditions that most
frequently occur in people over the age of 50. The Company expects that the
number of medical procedures performed annually in each of these segments will
continue to grow as the population in the United States over the age of 50
continues to grow. Similar trends appear in other highly developed countries.
TECHNOLOGIES
General. The Company uses two core technologies, ion implantation and thin
film coatings, to provide enhanced surfaces to various medical implants and
semiconductor products. With respect to each core technology, the Company has
developed proprietary processes and equipment for the purpose of improving or
altering the surfaces of medical implants and semiconductor wafers.
Ion implantation and thin film coatings are techniques first developed in
the 1970s to improve the functional surface properties of metals, ceramics and
polymers, such as friction, wear, wettability and hardness. Ion implantation was
initially developed as a means to dope semiconductors in the fabrication of
integrated circuits. The accuracy, cleanliness and controllability of this
process has made it the standard for semiconductor manufacturing. Ion
implantation is generally preferred over other surface modification methods
because it does not delaminate, does not require high temperatures and does not
deform or alter the dimensions of the treated surface.
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Thin film coatings were initially developed to interconnect transistors on
semiconductor chips. Thin films modify surfaces by layering a desired metal or
ceramic coating on the substrate material. Common thin film coating techniques
include chemical vapor deposition and physical vapor deposition.
Ion Implantation. Ion implantation is a process by which ions
(electrically charged atoms) are accelerated to high velocity in a vacuum and
directed toward a substrate or target material. The atoms become embedded just
below the surface of the material producing an alloy composed of the atoms and
the substrate material in the near-surface region of the target material. This
surface alloy may have new mechanical, electrical, chemical, optical and other
properties. The Company believes its proprietary technology, including high
current ion sources and specialized component holding fixtures, provides higher
ion implant doses and higher beam power and yields superior surface
characteristics at lower cost than commercially available equipment.
LOGO
Ion implantation of a knee component
Ion implantation can be used to embed single isotopes of radioactive
elements into components. The Company plans to use its proprietary equipment to
manufacture radioactive seed implants for the treatment of prostate cancer and
other carcinomas. The Company is in the process of developing radioactive
prostate seeds containing iodine-125, which can be manufactured without
hazardous radioactive wet chemistry, the methods currently employed by existing
suppliers. The Company has three patents pending on its process. The Company
also believes it can cost-effectively implant ions of therapeutic radioisotopes
including phosphorous-32 or yttrium-90 into a device such as a coronary stent
used to reduce restenosis following balloon angioplasty.
Thin Film Coating. A thin film coating is grown upon a substrate in a
vacuum by the gradual deposition of atoms on the substrate. The Company's
proprietary unbalanced magnetron sputtering process results in coatings that are
extremely dense and free of voids, yielding good contrast and sharp edges under
x-ray or fluoroscopic examination. These coatings usually consist of gold or
platinum for radiopaque applications. The Company's proprietary manufacturing
process allows for efficient utilization of precious metals and for cost-
effective recovery and recycling of these precious metals. The Company is
developing processes to coat stents, guidewires and catheters used in
interventional cardiology procedures with substances, usually gold or platinum,
that allow those stents, guidewires and catheters to be visible under x-ray
observation during a procedure. The Company believes other techniques for
applying thin film coatings are less desirable for medical device applications
because of their inability to apply a dense coating, while continuing to be
flexible and adhering to the substrate.
CURRENT AND FUTURE PRODUCTS
Prostate Cancer Seeds
General. The alternatives generally presented to patients diagnosed with
prostate cancer are surgical removal of the prostate (radical prostatectomy) or
external beam radiation. Both techniques frequently have significant side
effects including impotence and incontinence. Brachytherapy is an increasingly
popular
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treatment technique whereby radioactive seeds (each of which is approximately
half the size of a grain of rice) are temporarily or permanently implanted into
the prostate. This technique allows the delivery of highly concentrated yet
confined doses of radiation directly to the prostate. Surrounding healthy
tissues and organs are spared significant radiation exposure. Advances in
transrectal ultrasound and catscan imaging equipment provide detailed and
precise measurements of prostate size and shape, for seed distribution and
placement. LOGO
Radioactive prostate seed implant procedure
Prostate Seeds. The Company has developed, and applied for three United
States patents covering radioactive seeds, implants and methods of manufacturing
radioactive seed implants by a proprietary process. On January 21, 1999, the
Company filed a 510(k) notice of pre-market clearance with the FDA for its
iodine-125 seed and, if clearance is granted upon this 510(k) notification,
believes these seeds should be available for commercial sale at the end of 1999.
These seeds are used primarily in the treatment of prostate cancer. This
treatment, known as brachytherapy, involves implanting approximately 100
radioactive seeds directly into the prostate and is usually performed on an
outpatient basis. A ten-year study conducted by the Northwest Hospital, Seattle,
Washington (the "Northwest Hospital Study") shows that this treatment has a
ten-year disease-free survival rate equal to surgical removal of the prostate
and may be superior to other early stage treatments, with a substantial
reduction in the negative side effects, impotence and incontinence, frequently
associated with surgery and external beam radiation treatment. The National
Cancer Institute and American Cancer Society have reported that sexual potency
after implantation of radioactive seeds has been 86% to 92%, which compares with
rates of 10% to 40% for radical prostectomies and 40% to 60% for external beam
radiation therapy. The Company's production method, involving a proprietary
non-radioactive fabrication procedure, does not use radioactive wet chemistry.
Hospitals are currently purchasing prostate seeds for approximately $39 to $55
each, for a cost of $3,900 to $5,500 per procedure; however no assurance can be
given that these costs will remain the same. Initially the Company plans to
introduce an iodine-125 prostate seed.
Competitive Advantages. Management believes that the Company's
manufacturing process will result in lower capital equipment and manufacturing
assembly costs and will be less hazardous than the manufacturing processes used
by the Company's competitors. Other radioactive prostate seed manufacturers use
radioactive wet chemistry during seed assembly for iodine-125 products. These
technologies require much higher capital equipment costs than the Company's
technologies. The Company's dry process, for which it has patents pending, uses
no radioactive fabrication, and the Company believes it requires fewer personnel
and yields faster throughput. Following seed assembly the Company sends its
seeds to a nuclear reactor for activation. Using this non-radioactive
fabrication process, seeds can be fabricated and inventoried in large quantities
and activated only when ordered. Due to the short half life of iodine-125 (60
days), the competition must
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assemble and ship seeds on a tight schedule so they can be implanted at the
appropriate strength. For European and Asian markets, the Company may ship and
inventory "cold" seeds in overseas subsidiaries and activate them in local
nuclear reactors just prior to use. The Company currently has no contracts with
any foreign nuclear facility for activation of its products overseas although
such overseas facilities are readily available. The Company believes these
factors will result in lower manufacturing costs and, therefore, will give the
Company a cost advantage over its competitors.
Sales. The Company intends to manufacture and sell its own radioactive
prostate seeds to distributors of medical products and directly to major medical
centers, purchasing groups and hospitals. The Company has not yet sold any
prostate seeds for commercial use and cannot make any such sales until it has
obtained appropriate clearance from the FDA and state agencies. On January 21,
1999, the Company filed a 510(k) notice of premarket clearance with the FDA for
its iodine-125 seed and, if clearance is granted upon this 510(k) notification,
the Company believes these seeds should be available for commercial sale at the
end of 1999.
Markets. 1998 research by the American Cancer Society shows that prostate
cancer is the second most common cancer in American men, after skin cancer. The
American Cancer Society estimates that in 1998 about 184,500 new cases of
prostate cancer will be diagnosed and 39,200 men will die of the disease in the
United States. According to the National Cancer Institute, over 80% of prostate
cancer is found in men over the age of 65. The National Cancer Institute
estimates that approximately 19 out of every 100 men born today will be
diagnosed with prostate cancer during their lifetimes. According to the American
Cancer Society, these numbers approximate the incidence and mortality for breast
cancer in women.
Radical prostectomies and external beam radiation treatments are procedures
that are frequently used and have significant side effects including impotence
or incontinence. According to the American Cancer Society, in 58% of diagnosed
cases, the cancers are localized in the prostate and are potential candidates
for brachytherapy. The Company believes brachytherapy is an attractive
alternative to surgery or external beam radiation for these cases because
research to date has shown that it has a lower incidence of these side effects.
The Company believes that there is currently a shortage of certain
radioactive seeds, although this situation may change as new competitors enter
this market and existing competitors increase production capacity.
Interventional Cardiology Devices
General. The American Heart Association estimates that in 1995, there were
approximately 434,000 balloon angioplasty procedures performed in the United
States. According to the American Heart Association, of these approximately 30%
to 40% result in restenosis after balloon angioplasty. Research by the
Washington Hospital Center, the Emory University School of Medicine and the
Scripps Clinic has shown that delivery of an appropriate dose of therapeutic
intravascular radioactivity can reduce the incidence of restenosis and therefore
the need for additional procedures. In cooperation with certain device
manufacturers, the Company is in the process of developing a number of devices
to be used in interventional cardiology procedures. Among these devices are
intravascular radioactive stents that are used to reduce restenosis following
balloon angioplasty and stents, guidewires and catheters containing radiopaque
markers. Coronary stents are made of metals which are not radiopaque and in many
cases must be coated with dense precious metals for increased visibility that is
critical to their guiding, positioning, manipulation and placement.
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LOGO
Expected therapeutic effect of a radioactive stent
compared to a conventional stent with restenosis
Radioactive Stents. The Company has developed, and applied for six United
States patents and has pending one international patent application for, new
methods of implanting radioactivity onto coronary stents that it believes will
reduce the incidence of restenosis. Ionizing radiation is recognized as a
promising approach to reducing restenosis at the site following balloon
angioplasty by inhibiting intimal hyperplasia. Radiosotopes, when implanted into
the stent itself, have shown marked inhibition of restenosis in animal studies.
Researchers at the Washington Hospital Center, the Emory University School of
Medicine and the Scripps Clinic researched a wide number of both external and
internal methods to deliver intravascular radiation to the coronary arteries,
some of which have problems associated with excessive whole-body radiation dose
exposure to the patient and cardiologist. The Company has developed a
proprietary technique for the ion implantation of both pure beta and pure x-ray
emitters into stents, which management believes has significant advantages over
other methods. These radioisotopes produce short-range radiation that only
affect the targeted tissues, rather than the entire body or region.
In fiscal 1998, the Company was awarded a grant from the National
Institutes of Health for the first phase of a possible two phase program to
further develop its radioactive stents on a commercial basis. The Company
currently has a joint development agreement with Guidant Corporation, a major
stent manufacturer, to develop a radioactive stent for animal studies which
could lead to clinical trials. Although the Company has developed and delivered
radioactive stents under this agreement, the Company believes that radioactive
stents will not be available for clinical use before 2001. See "Risk
Factors -- Government Regulation."
Radiopaque Coatings. The Company has developed proprietary methods for
applying radiopaque coatings onto a variety of medical devices manufactured by
its customers in order to increase the visibility of such devices during
interventional cardiology and other catheter-based procedures. These
biocompatible coatings are deposited using a proprietary unbalanced magnetron
sputtered coating process. The resulting coating is extremely dense and free of
voids yielding good contrast and sharp edges under x-ray or fluoroscopic
examination. The Company uses this process to coat stents, guidewires and
catheters. For a fractional increase in the manufacturing cost of a stent, the
Company believes its coatings can provide significant added value and enhanced
performance. The Company's thin film coatings are being evaluated by certain
customers for stents, guidewires and catheters.
Competitive Advantages. For manufacture of radioactive stents, the Company
uses a proprietary ion implanter that has been optimized for this application.
The Company also has developed a proprietary ion source which uses a relatively
non-toxic form of phosphorous as the radioactive phosphorous-32 source material.
The Company believes its proprietary equipment can be used for commercial
production with the safety and quality control required by the FDA. For
manufacture of its radiopaque coatings, the Company has developed a proprietary
gold coating process and has built equipment that uses unbalanced magnetron
sputtering which provides adherent coatings on implants with complex shapes
(such as stents) and which allows for efficient recovery of precious metals not
consumed in the process.
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Sales. The Company intends to implant therapeutic radioactivity into
stents manufactured by its customers. Although the Company developed and
delivered radioactive stents for evaluation and anticipated animal studies, the
Company has not implanted radioactivity into stents for commercial sale by its
customers and cannot make any such sales until it, or its customers, has
obtained appropriate approval from the FDA. The Company believes its radioactive
stents will not be available for commercial sale before 2001.
Markets. The American Heart Association estimates that in 1995 over 58
million Americans had one or more forms of cardiovascular disease and that there
were 434,000 balloon angioplasty procedures performed in the U.S. Restenosis
occurs in approximately 30% to 40% of all such procedures. The American Society
for Therapeutic Radiology and Oncology has reported, and numerous clinical
trials have found, that delivery of an appropriate dose of therapeutic
radioactivity can reduce the incidence of restenosis and therefore the need for
additional procedures. The Company believes that stents treated with therapeutic
radiation will be an attractive alternative to traditional stents because they
can reduce restenosis by delivering an appropriate dose of radioactivity to the
affected site without adversely affecting the surrounding tissue.
Orthopedic Total Joint Replacements
General. The Company provides surface engineering technology to
manufacturers of orthopedic hip and knee total joint replacements. The majority
of existing hip and knee joint replacements are made of a cobalt-chromium
("CoCr") femoral component that articulates against a polyethylene component.
While offering excellent biocompatibility and superior wear resistance over
prior alloys and designs and potentially longer average life than prior alloys,
CoCr devices still suffer from particle generation where the metal and
polyethylene components articulate against each other. This particle generation
has been identified as a primary cause of implant loosening due to osteolysis
requiring repeat surgery.
LOGO
Total hip replacement Total knee replacement
Orthopedics. The Company implants CoCr components of total joint
replacements manufactured by its customers with nitrogen ions. Nitrogen ion
implantation of these components reduces polyethylene wear by modifying the
native oxide present in CoCr alloys. Laboratory tests and clinical studies have
shown that nitrogen ion-implanted CoCr components offer superior performance
over untreated components, significantly reducing wear and slowing the incidence
of osteolysis which ultimately leads to revision surgery.
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The Company is currently developing zirconia and alumina ceramic ion
implantation techniques and believes they will emerge as the preferred next
generation surface treatment method for orthopedic total joint replacements.
Management believes the use of monolithic ceramic or ceramic coated femoral
components holds greater promise than other types of components in reducing
osteolysis because ceramics have wear characteristics superior to metal and are
biocompatible and inert. The Company believes monolithic ceramic hip heads are
currently employed in a limited number of hip procedures in the US. Because of
their brittle nature, monolithic ceramics are not likely to be utilized for
femoral knee components. As an alternative to monolithic ceramic components, the
Company's ceramic coatings of CoCr devices using its "blended interface" process
can be applied to either hip or knee joint replacements. The Company believes
that ceramic coatings of CoCr devices would combine the bulk strength of a metal
alloy with the superior surface characteristics of a ceramic. Several orthopedic
companies are considering the Company's surface treatment methods to provide
ceramic coated metal implants.
Competitive Advantages. The Company believes it now operates one of the
highest beam-current ion implanters used in the medical field. This equipment
has higher through-put and lower cost than equipment with a lower beam-current.
For the Company's new second generation orthopedic coating this equipment can
provide a ceramic coating with superior adhesion due to its patented "blended
interface" process.
Sales. The Company currently implants CoCr components of total joint
replacements made by its customers with nitrogen ions and is developing ceramic
ion implantation techniques for total joint replacements. The Company receives
untreated CoCr total joint replacements from its customers and implants them at
its facility. The Company then invoices and ships the implanted total joint
replacements to its customers. Total joint replacements treated with ceramic ion
implantation may not be sold commercially until the Company, or its customer,
has obtained appropriate approval from the FDA. The Company believes these total
joint replacements will not be available for commercial sale until after 2001.
Markets. Osteoarthritis is a natural result of the aging process and is
the predominant cause of the need for joint replacement. The Company believes
that longer life expectancy as well as the growth in the number of people over
50 will cause the demand for total joint replacement to increase. According to
the American Academy of Orthopedic Surgeons, the hip and knee total joint
replacement market was estimated to be 500,000 units in 1995 in the United
States. The Company treats approximately 50,000 units each year using its ion
implantation process for the Howmedica/Osteonics Division of Stryker Corporation
and Biomet Incorporated. Research by the Company has shown that the Company's
ceramic coatings can decrease wear debris generation by two-thirds, which the
Company believes will reduce osteolysis and thereby reduce the need for revision
surgery.
Semiconductor Ion Implantation
The Company supplies ion implantation services to numerous semiconductor
manufacturers, research laboratories, and research universities. Ion
implantation of electronic dopants into silicon, the process by which silicon is
turned into a semiconductor, is an integral part of the integrated circuit
fabrication process. While many of the Company's customers have their own ion
implantation equipment, they often use the Company's services and specialized
expertise for research and new product development because they do not want to
interfere with production or because they are unable to perform the services
themselves.
To serve this market, the Company offers the ion implantation of over 60 of
the 92 natural elements for its customers' research programs. The Company offers
all of the necessary dopants for silicon as well as for new materials such as
gallium arsenide, silicon carbide, indium phosphide and other advanced compound
semiconductors. The Company also performs high dose ion-implantation of silicon
and germanium to improve the crystallinity and to modify the semiconductor
properties of these materials.
PRINCIPAL SUPPLIERS
The Company uses several principal suppliers for the materials it uses to
prepare its products. PraxAir Distributors, Inc. provides the Company with
production gases. Newark Electronics Corp. and Eaton Corporation both provide
the Company with electronic components. The Company uses Glemco, Inc.,
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McMaster-Carr Supply Co., Cambridge Valve and Fitting, Inc. and Copper and Brass
Sales for its machine shop supplies, including copper, aluminum, stainless
steel, graphite and hardware. The Company uses Refining Systems, Inc. for its
supply of gold. The Company believes that adequate supplies of its required
materials will continue to be available, however, no assurances can be given
that this will be the case. See "Risk Factors -- Dependence on Suppliers."
SALES AND MARKETING
The Company's marketing and sales methods vary according to the
characteristics of each of its main business areas. The Company's foreign sales
have comprised less than five percent of its total revenues. Sales and marketing
to the medical device and semiconductor markets are directed by the Company's
Vice President of Marketing and Sales who is assisted by the Company's Director
of Medical Devices and the Company's Director of Semiconductor Products. Sales
in the medical device and semiconductor arena are handled by three full time
salespeople, who handle both medical devices and semiconductor products. The
solicitation and proposal process for research and development contracts and
grants are conducted by the Company's President, its Chief Scientist, and its
scientific staff.
Medical Sales and Marketing
The Company plans to market its radioactive prostate seeds to distributors
of medical products as well as major hospitals and key physicians who might
purchase radioactive prostate seeds. The Company plans to hire additional sales
personnel to make direct calls on these potential customers. The Company plans
to market its implantation of radioactivity onto coronary stents directly to
stent manufacturers who will in turn sell the stents to hospitals.
In the provision of ion implantation for total joint replacements, the
Company concentrates on identifying and serving leading manufacturers. Where
possible, the Company attempts to become the sole provider of devices or surface
engineering services to each such manufacturer. The Company's marketing and
sales efforts require considerable direct contact and typically involve a
process of customer education in the merits of the Company's technology. The
Company accomplishes this by first researching customer needs, delivering
scientific papers at orthopedic and biomaterial conferences, and through
presentations at customer sites. The Company's internal research and government
research grants are an integral part of the marketing process. The Company's
patent portfolio is also very important in this process. See "Risk
Factors -- Acceptance by Medical Community; Market Acceptance."
In order to promote sales of its radiopaque coatings, the Company attends
trade shows and uses press releases. Once a customer's interest is established,
the sales process proceeds with an initial demonstration project funded by the
customer. A set of developmental runs are then performed to determine project
feasibility and to roughly optimize a parameter set for deposition. After
testing of samples generated and considering cost estimates for production
quantities, the customer may authorize the Company to proceed to pilot
production.
In pilot production, typically, several hundred units are produced in a
manner equivalent to the envisioned full production method. Pilot production may
be done on an existing piece of equipment with customer/device specific
fixturing, or a prototype machine depending on the complexity of the process and
device. Samples made in pilot production are fabricated into complete devices
and used by the customer for further testing, clinical studies, FDA submissions,
and marketing and sales efforts.
To date two types of implants have been coated for 6 companies in the
orthopedic market and 28 types of devices have been coated for 23 companies in
the interventional cardiology market. Although none have been shipped for
commercial sale, more than half of these are presently under evaluation by the
customers for commercial production.
The Company is a party to a research and development agreement with Guidant
Corporation to develop radioactive stents for testing and commercialization by
Guidant Corporation. Guidant Corporation is required to fund the research up to
an amount totaling $375,000 provided that certain conditions are satisfied. For
the
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<PAGE> 39
initial term of the agreement, the Company is required to deal exclusively with
Guidant Corporation in developing radioactive coronary stents and is prohibited
from entering into any discussions or agreement regarding any sale, assignment,
licensing or other disposition of any of its intellectual property relating to
radioactive coronary stents. After the initial term and at the option of Guidant
Corporation, the parties have agreed to negotiate for an exclusive supply
agreement and/or license relating to any intellectual property arising from the
research.
Semiconductor Sales and Marketing
Since semiconductor ion implantation is a standard process in all
integrated circuit fabrication, customers usually know what they want and little
education is necessary. The Company's services are promoted and sold through
trade shows, advertising in trade magazines, direct mailings and press releases.
Most sales are between $600 and $2,500 per order, take less than one day to
complete, and the entire sales effort is often conducted by telephone. Most of
the Company's sales in this area are for outsourced customer-specified ion
implantation services which the customer's own ion implantation department is
unable or unwilling to perform.
Government Contracts
Research and development contracts from the U.S. government must be won
through a competitive proposal process which undergoes peer review. The Company
is in frequent contact with the Department of Defense, the Department of Energy
and other agencies at conferences to stay informed of the government's needs.
The Company believes its principals and senior scientific staff have earned a
strong reputation with these and other agencies. To date the Company has been
awarded research and development contracts by the National Institute of Health,
the Department of Defense, the National Science Foundation, and the National
Aeronautics and Space Administration ("NASA").
RESEARCH AND DEVELOPMENT
The technical staff of the Company consists of seven scientists including
four with Ph.D. degrees, and three with Bachelor Degrees and with expertise in
physical sciences and engineering. All of the Company's existing and planned
products rely on proprietary technologies developed in its research and
development laboratories. The Company's research and development efforts may be
self-funded, funded by corporate partners or by awards under the Small Business
Innovative Research ("SBIR") program. The Company has obtained over $4,000,000
in U.S. government grants and contracts over the past 10 years. Of this amount
approximately $160,000 and $438,000 was obtained in 1997 and 1998, respectively.
The Company also conducts research and development under cost-sharing
arrangements with its commercial customers. Revenues under such arrangements
were approximately $110,000 and $100,000 for the year ended June 30, 1997 and
1998, respectively.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's policy is to protect its proprietary position by, among other
methods, filing United States and foreign patent applications. The Company
currently has eight issued United States patents and sixteen United States
patent applications pending. The Company has two international patent
applications pending.
The Company has exclusive rights under patents covering the following
technologies: (i) an ion source generator which can be used in making
semiconductor devices while minimizing the use of toxic gases, (ii) a method of
using ion implantation for epitaxially growing thin films, which can be used for
semiconductor materials, (iii) a method of ion beam coating orthopedic implant
components to form a zirconium oxide interface layer with improved wear
properties, and (iv) an improved ceramic coated orthopedic implant component in
which the implant is first coated with a platinum alloy.
The Company is aware of a U.S. patent of a third party having broad claims
covering radioactive stents and methods of using radioactive stents for the
treatment of restenosis. The Company has not sought a formal opinion of counsel
regarding the validity of this patent or whether the Company's processes
infringe this patent. The Company plans to implant radioactivity onto coronary
stents manufactured by the patent holder,
38
<PAGE> 40
its licensees or others. If the Company's plans to implant radioactivity onto
the patent holder's stents do not succeed and/or if the Company implants
radioactivity onto stents that are not manufactured by the patent holder or its
licensees there can be no assurance that the holder of this patent will not seek
to enforce the patent against the Company or the manufacturer of the stents, or
that the Company would prevail in any such enforcement action. See "Risk
Factors -- Risk of Third-Party Claims of Infringement."
The Company intends to seek further patents on its technologies, if
appropriate. However, there can be no assurance that patents will issue for any
of the Company's pending or future applications or that any claim allowed from
such applications will be of sufficient scope or strength, or be issued in all
countries where the Company sells its products and services, to provide
meaningful protection or any commercial advantage to the Company. See "Risk
Factors -- Dependence on Patents and Proprietary Technology."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Although the Company's present business itself is not directly regulated by
the FDA, the medical devices incorporating its technologies are subject to FDA
regulation. The burden of securing FDA clearance or approval for these medical
devices rests with the Company's medical device manufacturers or licensees.
However, the Company intends to prepare Device Master Files which may be
accessed by the FDA to assist it in its review of the applications filed by the
Company's medical device manufacturers. The Company's radioactive iodine-125
seed is subject to the FDA's 510(k) notification of pre-market clearance
submission. This submission usually requires about three to nine months to
obtain such clearance. On January 21, 1999, the Company filed a 510(k)
notification of pre-market clearance submission for its iodine-125 seed, and
believes this seed will receive clearance for sale at the end of 1999.
Supplemental or full pre-market approval ("PMA") reviews require a
significantly longer period. A PMA will be required for the Company's
radioactive coronary stents. Thus, significantly more time will be required to
commercialize applications subjected to PMA review. The Company believes its
radioactive coronary stents will not be available for commercial sale before
2001. Furthermore, sales of medical devices outside the U.S. are subject to
international regulatory requirements that vary from country to country. The
time required to obtain clearance or approval for sale internationally may be
longer or shorter than that required for FDA approval. See "Risk
Factors -- Government Regulation."
In addition to FDA regulation, certain of the Company's activities are
regulated by, and require approvals from, other federal and state agencies. For
example, aspects of the Company's operations require the approval of the
Massachusetts Department of Public Health and registration with the Department
of Labor and Industries. Furthermore, the Company's use, management,
transportation, and disposal of certain chemicals and wastes are subject to
regulation by several federal and state agencies depending on the nature of the
chemical or waste material. Certain toxic chemicals and products containing
toxic chemicals may require special reporting to the United States Environmental
Protection Agency and/or its state counterparts. The Company is not aware of any
specific environmental liabilities that it could incur. The Company's future
operations may require additional approvals from federal and/or state
environmental agencies.
FACILITIES AND EQUIPMENT
Pursuant to a lease, dated July 29, 1998, the Company operates from a
21,992 sq. ft. leased facility in Wakefield, Massachusetts. The Company
currently operates nine ion implantation machines, and has two more under
construction by its own technical staff. Four are dedicated to medical
production including one special purpose ion implanter dedicated to production
of radioactive coronary stents. Three machines are dedicated to semiconductor
ion implantation. Two are used for research and development. Five machines are
housed in class 100 clean rooms. The Company maintains a machine shop facility
on its premises and employs four machinists which allows the Company to
fabricate and customize is specialized manufacturing equipment. The Company
expects that its space will be sufficient for the next 18 months. The Company's
current lease expires in May, 2000.
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<PAGE> 41
COMPETITION
In radioactive products, such as prostate seed implants and radioactive
stents, the Company expects to compete with Nycomed Amersham plc, Theragenics
Corp., North American Scientific, Inc. and International Isotopes Inc. Of these,
Nycomed Amersham plc, Theragenics Corp. and North American Scientific, Inc.
serve substantially the entire radioactive prostate seed market and
International Isotopes Inc. has announced that it plans to enter the seed
market. In addition, the Company's proposed radioactive stents will compete with
alternative technologies such as Novoste Corporation's Beta-Cath system,
radioactive tipped guidewires and radioactive filled balloons. The number and
types of procedures being performed on the prostate are increasingly drawing new
entrants into the market. The Company believes that competition, and, in turn,
pricing pressures, may increase. Many of the Company's competitors have
substantially greater financial, technical and marketing resources than the
Company. See "Risk Factors -- Intense Competition; Rapid Technological Change."
Many medical device manufacturers have developed or are engaged in efforts
to develop internal surface modification technologies for use on their own
products. Most companies that market surface modification to the outside
marketplace are divisions of organizations with businesses in addition to
surface modification. Overall, the Company believes the worldwide market for
surface modification technologies applicable to medical devices is very
fragmented with no competitor having more than a 10% market share. Many of the
Company's existing and potential competitors (including medical device
manufacturers pursuing coating solutions through their own research and
development efforts) have substantially greater financial, technical and
marketing resources than the Company. See "Risk Factors -- Intense Competition;
Rapid Technological Change."
With respect to ion implantation of orthopedic implants, the Company
primarily competes with Spire Corporation. Competition within the orthopedic
implant industry is primarily conducted on the basis of service and product
design. Price competition has abated somewhat in the case of first time and more
youthful patients where higher-cost and more durable reconstructive devices are
preferred. The Company attempts to differentiate itself from its competition by
providing what it believes are high value-added solutions to surface
modification. Management believes that the primary factors customers consider in
choosing a particular surface modification technology are performance, ease of
manufacturing, ability to produce multiple properties from a single process,
compliance with manufacturing regulations, customer service, pricing, turn
around time, and the ability to work with a variety of materials. The Company
believes that its process competes favorably with respect to these factors. The
Company believes that the cost and time required to acquire equipment and
technical engineering talent, as well as to obtain the necessary regulatory
approvals, significantly reduces the likelihood of a manufacturer changing the
coating process it uses after a device has been approved for marketing. See
"Risk Factors -- Intense Competition; Rapid Technological Change."
The Company's primary competition in the semiconductor industry consists of
three companies: Ion Implant Services, The Implant Center, and Ion Implant
Corporation. These companies are all located in Silicon Valley, California and
primarily serve the silicon wafer production needs of semiconductor factories in
their local area, although Ion Implant Corporation does research and development
implants nationwide. The Company mostly serves east coast factories with silicon
production and research and development laboratories worldwide.
Many of the Company's competitors and potential competitors have
substantially greater capital resources than the Company does and also have
greater resources and expertise in the areas of research and development,
obtaining regulatory approvals, manufacturing and marketing. There can be no
assurance that the Company's competitors and potential competitors will not
succeed in developing, marketing and distributing technologies and products that
are more effective than those developed and marketed by the Company or that
would render the Company's technology and products obsolete or noncompetitive.
Additionally, there is no assurance that the Company will be able to compete
effectively against such competitors and potential competitors in terms of
manufacturing, marketing and sales. See "Risk Factors -- Intense Competition;
Rapid Technological Change."
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<PAGE> 42
PRODUCT LIABILITY AND INSURANCE
The Company's business entails the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
there can be no assurance that such claims will not be asserted or that it will
have sufficient resources to satisfy any liability resulting from such claims.
The Company intends to acquire product liability insurance when its radioactive
prostate seed products and interventional cardiology devices are in commercial
production. There can be no assurance that product liability claims will not
exceed such insurance coverage limits, that such insurance will continue to be
available on commercially reasonable terms or at all, or that a product
liability claim would not materially adversely affect the business, financial
condition or results of operations of the Company. See "Risk Factors--Product
Liability Risk; Insurance."
EMPLOYEES
As of December 31, 1998, the Company employed 34 full-time individuals. The
Company believes it maintains good relations with its employees. None of the
Company's employees is represented by a union or covered by a collective
bargaining agreement. The Company's success will depend, in large part, upon its
ability to attract and retain qualified employees. The Company faces competition
in this regard from other companies, research and academic institutions and
other organizations.
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<PAGE> 43
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Anthony J. Armini..................... 61 President, Chief Executive Officer and
Chairman of the Board of Directors
Stephen N. Bunker..................... 55 Vice President and Chief Scientist,
Director
Alan D. Lucas......................... 43 Vice President of Marketing, Sales and
Business Development
Darlene M. Deptula-Hicks.............. 41 Vice President and Chief Financial
Officer
Robert E. Hoisington.................. 62 Director
Shunkichi Shimizu..................... 52 Director
</TABLE>
The Company currently has four directors. All directors are elected to hold
office until the next annual meeting of shareholders of the Company and until
their successors have been duly elected and qualified. Officers are elected to
serve subject to the discretion of the Board of Directors and until their
successors are appointed. There are no family relationships among executive
officers and directors of the Company.
DR. ANTHONY J. ARMINI has been the President, Chief Executive Officer, and
Chairman of the Board of Directors since the Company's incorporation. From 1972
to 1984, prior to founding the Company, Dr. Armini was Executive Vice President
at Spire Corporation. From 1967 to 1972, Dr. Armini was a Senior Scientist at
McDonnell Douglas Corporation. Dr. Armini received a Ph.D. in nuclear physics
from the University of California, Los Angeles in 1967. Dr. Armini is the author
of eleven patents and fifteen patents pending in the field of implant technology
and of fourteen publications in this field. Dr. Armini has over thirty years of
experience working with cyclotrons and linear accelerators, the production and
characterization of radioisotopes, and fifteen years of experience with ion
implantation in the medical and semiconductor fields.
DR. STEPHEN N. BUNKER has served as the Vice President and Chief Scientist
of the Company since 1987 and a Director of the Company since 1988. Prior to
joining the Company, from 1972 to 1987, Dr. Bunker was a Chief Scientist at
Spire Corporation. From 1971 to 1972, Dr. Bunker was an Engineer at McDonnell
Douglas Corporation. Dr. Bunker received a Ph.D. in nuclear physics from the
University of California, Los Angeles in 1969. Dr. Bunker is the author of six
patents in the field of implant technology.
ALAN D. LUCAS joined the Company in March 1998 as Vice President of
Marketing, Sales and Business Development. Prior to joining the Company, Mr.
Lucas accumulated over 20 years of experience in various marketing and business
development positions for medical device companies. Most recently, from 1996 to
1998, Mr. Lucas was the Director of Corporate Development at ABIOMED, Inc. From
1994 to 1996, Mr. Lucas was a strategic marketing and sales consultant focused
on medical technology. From 1991 to 1994 Mr. Lucas was the Director of Marketing
at Vision Sciences, Inc. a development stage medical device company.
DARLENE M. DEPTULA-HICKS joined the Company in July 1998 as Vice President
and Chief Financial Officer. Prior to joining the Company, from 1997 to 1998 Ms.
Deptula-Hicks was the Corporate Controller for ABIOMED, Inc., a medical device
manufacturer. From 1994 to 1997 Ms. Deptula-Hicks was an independent financial
consultant. From 1992 to 1994 Ms. Deptula-Hicks was the Vice President and Chief
Financial Officer of GCA, a division of General Signal Corporation, a
semiconductor equipment manufacturer. Ms. Deptula-Hicks holds a BS in Accounting
and an MBA.
ROBERT E. HOISINGTON has served on the Board of Directors of the Company
since August, 1992. He is the President and founder of Management Strategies, a
general line consulting firm providing strategic planning
42
<PAGE> 44
for businesses with annual revenues ranging from $10 million to $1 billion.
Prior to founding Management Strategies, Mr. Hoisington was a professional
management consultant at Arthur Young & Company.
SHUNKICHI SHIMIZU joined the Company's Board of Directors in March, 1998.
He is the Director of North American Operations of Takata Corporation, domiciled
in Tokyo, Japan. Takata Corporation is a manufacturer of seat belts and air
bags. Mr. Shimizu also is the Executive Vice President of TK Holdings, Inc. of
Ohio. Prior to joining Takata Corporation, he served as the Head of
International Finance Corporate Division at the Bank of Tokyo, Ltd.,
Headquarters. NAR Holding Corporation is a wholly-owned subsidiary of TREC
(Holland) Amsterdam B.V. Pursuant to an agreement with the Company, for so long
as NAR Holding Corporation owns at least 10% of the Company's issued and
outstanding shares of Common Stock, it is entitled to nominate one person for
election to the Board of Directors of the Company. Mr. Shimizu is NAR Holding
Corporation's nominee.
The Board of Directors has a Compensation Committee, which provides
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company. Messrs. Hoisington and Shimizu serve on this
committee. The Board of Directors also has an Audit Committee, which reviews the
scope and results of the audit and other services provided by the Company's
independent auditors. Messrs. Hoisington and Shimizu serve on this committee.
There are no family relationships among the directors and executive
officers of the Company.
COMPENSATION OF DIRECTORS
The Company's directors who are employees of the Company do not currently
receive any compensation for service on the Board of Directors. Directors who
are not employees of the Company, other than Mr. Shimizu, are paid a yearly
stipend of $2,500 and are reimbursed for reasonable expenses incurred in
connection with attendance at Board and committee meetings.
Under the 1998 Incentive and Nonqualified Stock Option Plan (the "Option
Plan"), each Director who is not an employee of the Company automatically
receives an annual grant of options to purchase 2,000 shares of Common Stock at
an exercise price equal to the closing price of the Common Stock on that date
for each year of service. Each such option will have a term of five years and
will vest in full on the date of grant.
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<PAGE> 45
MEDICAL ADVISORY BOARD
The Company has formed a Medical Advisory Board which will advise and
consult with the Company's Board of Directors and senior management at such
times as the Chief Executive Officer shall request. This advice and consultation
will relate generally to the Company's business and products. The Medical
Advisory Board advises on industry trends and new or experimental modalities of
treatment in the oncology, interventional cardiology and orthopedic specialties.
The Medical Advisory Board members may be employed on a full-time basis by
employers other than the Company, and these members may have commitments to, or
consulting, advisory or other contractual relationships with, other third
parties. These third party commitments and relationships may limit the
availability of the Medical Advisory Board members to the Company, and may
potentially result in conflicts of interest. Consultations with Medical Advisory
Board members may be either individually or as a group depending upon board
member availability. To date, the following individuals have agreed to serve as
members of the Medical Advisory Board.
<TABLE>
<CAPTION>
NAME CURRENT POSITION
- ---- ----------------
<S> <C>
William Capello, M.D. Professor, Orthopaedic Surgeon (Total
Joint Replacement)
Department of Orthopedic Surgery
Indiana University School of Medicine
Indianapolis, Indiana
Andrew J. Carter, D.O., FACC Interventional Cardiologist (Intra-
Vascular Radiation Therapy)
Cardiology Research Foundation
Washington, District of Columbia
Jay P. Ciezki, M.D. Radiation Oncologist
Department of Radiation Oncology
The Cleveland Clinic Foundation
Cleveland, Ohio
Adam Dicker, M.D., Ph.D. Assistant Professor
Department of Radiation Oncology
Bodine Center for Cancer Treatment
Philadelphia, Pennsylvania
Stuart Goodman, M.D., Ph.D. Professor and Chairman, Orthopaedic
Surgeon (Total Joint Replacement)
Department of Orthopaedic Surgery
UCSF/Stanford Medical Center
Palo Alto, California
Robert Poss, M.D. Orthopedic Surgeon (Total Joint
Replacement)
Department of Orthopedic Surgery
Brigham and Women's Hospital
Boston, Massachusetts
</TABLE>
The Company has agreed to grant each member of the Advisory Board an option
to purchase 1,000 shares of Common Stock for each full year that such member
serves. The exercise price per share for the options issued with respect to the
first year of service is $7.00 per share. Each member also receives a yearly
stipend of $1,000.
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<PAGE> 46
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation earned in the fiscal year ended June 30, 1998 by the Company's
Chief Executive Officer and Company's other executive officers (collectively,
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
(FISCAL YEAR 1998)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) COMPENSATION
- --------------------------- -------- ------- --------------- ------------
<S> <C> <C> <C> <C>
Anthony J. Armini(2)...................... $104,000 -- $4,044 --
President, Chief Executive Officer and
Chairman of the Board
Stephen N. Bunker(3)...................... $79,000 -- $2,605 --
Vice President, Chief Scientist and
Director
Darlene M. Deptula-Hicks(4)............... -- -- -- --
Vice President and Chief Financial
Officer
Alan D. Lucas(5).......................... $22,500 $10,000 -- (6)
Vice President of Marketing, Sales and
Business Development
</TABLE>
- ---------------
(1) Other Annual Compensation consists of life and disability insurance premiums
and 401(k) plan benefits paid by the Company on behalf of the Named
Executive Officer. See "-- Benefit Plans."
(2) Dr. Armini entered into an Employment Agreement with the Company on
September 26, 1998. See "-- Employment Agreements."
(3) Dr. Bunker entered into an Employment Agreement with the Company on
September 26, 1998. See "-- Employment Agreements."
(4) Ms. Deptula-Hicks joined the Company in July of 1998 and receives an annual
salary of $100,000. In addition, in July of 1998, Ms. Deptula-Hicks received
a stock option grant to purchase 29,400 shares of Common Stock at an
exercise price of $6.00 per share.
(5) Mr. Lucas joined the Company in March of 1998 and receives an annual salary
of $120,000.
(6) See "Option Grants in Last Fiscal Year," below.
The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted (as adjusted to give effect
to the 7-for-1 stock split effected in the form of a common stock dividend on
September 9, 1998) during the fiscal year ended June 30, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED TO EXERCISE
UNDERLYING OPTIONS EMPLOYEES IN PRICE
NAME GRANTED FISCAL YEAR ($/SH) EXPIRATION DATE
- ---- -------------------- ------------------ -------- ---------------
<S> <C> <C> <C> <C>
Alan D. Lucas.................... 29,400 45.7% $6.00 2008
</TABLE>
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<PAGE> 47
The following table sets forth certain information concerning the value of
unexercised stock options held by the Named Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT JUNE 30, 1998 OPTIONS AT JUNE 30, 1998
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Anthony J. Armini......................... -- -- -- --
Stephen N. Bunker......................... -- -- -- --
Alan D. Lucas............................. -- 29,400 -- $51,500
</TABLE>
EMPLOYMENT AGREEMENTS
On September 26, 1998, the Company entered into employment agreements with
each of Anthony J. Armini, the President, Chief Executive Officer and Chairman
of the Board, and Stephen N. Bunker, the Vice President and Chief Scientist of
the Company. Pursuant to their employment agreements, each of which has a term
of five years, Dr. Armini is entitled to an annual base salary of $125,000 and
Dr. Bunker is entitled to an annual base salary of $100,000. Each of them is
eligible to receive additional bonuses at the discretion of the Board of
Directors.
BENEFIT PLANS
1998 Incentive and Nonqualified Stock Option Plan
The 1998 Incentive and Nonqualified Stock Option Plan (the "1998 Option
Plan") was adopted by the Board of Directors and the shareholders of the Company
in September, 1998. A total of 280,000 shares of Common Stock will be reserved
for issuance under the 1998 Incentive and Nonqualified Stock Option Plan.
However, the Company has entered into an agreement with the Representative
pursuant to which it has agreed not to issue options to purchase more than
100,000 shares of Common Stock in the next 18 months. The 1998 Option Plan will
authorize (i) the grant of options to purchase Common Stock intended to qualify
as incentive stock options ("Incentive Options"), as defined in Section 422 of
the Code and (ii) the grant of options that do not so qualify ("Nonqualified
Options"). The exercise price of Incentive Options granted under the 1998 Option
Plan must be at least equal to the fair market value of the Common Stock of the
Company on the date of grant. The exercise price of Incentive Options granted to
an optionee who owns stock possessing more than 10% of the voting power of the
Company's outstanding capital stock must be at least equal to 110% of the fair
market value of the Common Stock on the date of grant.
The 1998 Option Plan may be administered by the Board of Directors or the
Compensation Committee. Except in the case of certain formula grants to
nonemployee directors described above under "Director Compensation," the Board
or the Compensation Committee will select the individuals to whom options will
be granted and will determine the option exercise price and other terms of each
award, subject to the provisions of the 1998 Option Plan. Incentive Options may
be granted under the 1998 Option Plan to employees, including officers and
directors who are also employees. Nonqualified Options may be granted under the
1998 Option Plan to officers and other employees and to directors and other
individuals providing services to the Company, whether or not they are employees
of the Company.
1998 Employee Stock Purchase Plan
The 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") was
adopted by the Board of Directors and the shareholders of the Company in
September, 1998. The Stock Purchase Plan authorizes the issuance of up to an
aggregate of 164,500 shares of Common Stock to participating employees. The
Stock Purchase Plan may be administered by the Board of Directors or the
Compensation Committee.
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<PAGE> 48
Under the terms of the Stock Purchase Plan, all employees of the Company
(other than seasonal employees) who have completed one year of employment with
the Company and whose customary employment is more than part-time (i.e. more
than 20 hours per week and more than five months in the calendar year) are
eligible to participate in the Stock Purchase Plan. Employees who own five
percent or more of the outstanding Common Stock of the Company and directors who
are not employees are not eligible to participate in the Stock Purchase Plan.
The right to purchase Common Stock under the Stock Purchase Plan will be
made available through a series of one year offerings (each, an "Offering
Period"). On the first day of an Offering Period, the Company will grant to each
eligible employee who has elected in writing to participate in the Stock
Purchase Plan an option to purchase shares of Common Stock. The employee will be
required to authorize an amount (between one and ten percent of the employee's
compensation) to be deducted by the Company from the employee's pay during the
Offering Period. On the last day of the Offering Period, the employee will be
deemed to have exercised the option, at the option exercise price, to the extent
of accumulated payroll deductions. Under the terms of the Stock Purchase Plan,
the option exercise price is an amount equal to 85% of the fair market value of
one share of Common Stock on either the first or last day of the Offering
Period, whichever is lower.
No employee may be granted an option that would permit the employee's
rights to purchase Common Stock to accrue at a rate in excess of $25,000 of the
fair market value of the Common Stock, determined as of the date the option is
granted, in any calendar year.
The Company has made no determination as to when the first Offering Period
under the Stock Purchase Plan will commence.
1992 Stock Option Plan
The 1992 Stock Option Plan (the "1992 Option Plan") was adopted by the
Board of Directors and the shareholders in 1992. Upon the adoption of the 1998
Option Plan, the 1992 Option Plan was terminated. The 1992 Option Plan governs
only stock options outstanding under such plan. No new stock options will be
granted under the 1992 Option Plan, which has been superseded by the 1998 Option
Plan.
The 1992 Option Plan authorized (i) the grant of options to purchase Common
Stock intended to qualify as incentive stock options ("Incentive Options"), as
defined in Section 422 of the Code, and (ii) the grant of options that did not
so qualify ("Nonqualified Options"). The exercise price of Incentive Options
granted under the 1992 Option Plan was required to be at least equal to the fair
market value of the Common Stock of the Company on the date of grant. The
exercise price of Incentive Options granted to an optionee who owned stock
possessing more than 10% of the voting power of the Company's outstanding
capital stock was required to be at least equal to 110% of the fair market value
of the Common Stock on the date of grant.
The 1992 Option Plan was required to be administered by the Board of
Directors or a committee designated by the Board. The Board or the designated
committee was empowered to select the individuals to whom options were granted
and to determine the option exercise price and other terms of each award,
subject to the provisions of the 1992 Option Plan. The Board or a designated
committee had authority to grant Incentive Options under the 1992 Option Plan to
employees, including directors who were also employees, and to grant
Nonqualified Options to employees and to directors and other individuals
providing services to the Company, whether or not they were employees of the
Company.
47
<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 9, 1999, by (i) each
person or entity known to the Company to own beneficially five percent or more
of the Company's Common Stock, (ii) each of the Company's directors, (iii) the
Named Executive Officers, and (iv) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT BENEFICIALLY OWNED(3)
BENEFICIALLY ---------------------------------
NAME AND ADDRESSES(1) OWNED(2) BEFORE OFFERING AFTER OFFERING
- --------------------- ---------------- --------------- --------------
<S> <C> <C> <C>
Anthony J. Armini................................ 1,436,309 30.3% 25.0%
Patricia A. Armini............................... 1,086,309 22.9% 18.9%
NAR Holding Corporation(4)....................... 905,821 19.1% 15.8%
555 Madison Avenue, 27th Floor
New York, New York
Stephen N. Bunker................................ 742,406 15.6% 12.9%
Robert E. and Joan Hoisington.................... 35,000 * *
Shunkichi Shimizu................................ -- -- --
Darlene M. Deptula-Hicks......................... -- -- --
Alan D. Lucas.................................... -- -- --
All Directors and Officers as a group
(5 persons).................................... 2,213,715 46.6% 38.5%
</TABLE>
- ---------------
* Less than 1%.
(1) The address of all persons who are executive officers or directors of the
Company is care of the Company, 107 Audubon Road, Wakefield, Massachusetts
01880.
(2) To the Company's knowledge and subject to the information contained in the
footnotes to this table, all of the persons named in the table except
Patricia A. Armini, the former spouse of Anthony J. Armini, have sole voting
power with respect to all shares of Common Stock shown as beneficially owned
by them. All of Ms. Armini's shares are voted by Dr. Armini. Shares not
outstanding but deemed beneficially owned by virtue of the right of a person
or group to acquire them within 60 days of January 9, 1999 are treated as
outstanding only for purposes of determining the amount and percent owned by
such person or group.
(3) Percentage ownership is based on (i) before the Offering, 4,747,500 shares
of Common Stock outstanding as of January 9, 1999 and (ii) after the
Offering, an additional 1,000,000 shares to be issued by the Company in this
Offering.
(4) NAR Holding Corporation is a wholly-owned subsidiary of TREC (Holland)
Amsterdam B.V. The Company believes that the principal beneficial owner of
TREC (Holland) Amsterdam B.V. is Takata Corporation and that its principal
beneficial owner is Juichiro Takada.
VOTING TRUST AGREEMENT
Two of the principal stockholders of the Company, Anthony J. Armini and
Patricia A. Armini, are parties to a Voting Trust Agreement, dated November 1,
1991. Under this agreement, so long as either party owns at least 25% of the
beneficial interest in the Common Stock of the Company and Dr. Armini continues
to serve as Trustee of the Voting Trust, all of Ms. Armini's shares are voted by
Dr. Armini. In addition, this agreement places certain restrictions on the
rights of either party to sell or encumber his or her shares.
48
<PAGE> 50
CERTAIN TRANSACTIONS
Some of the transactions described below were entered into when there were
less than two disinterested independent directors.
Between 1983 and 1994, two officers and shareholders of the Company, Dr.
Anthony J. Armini, and Dr. Stephen N. Bunker, did not receive certain
compensation. These underpayments of $562,070 for Dr. Armini and $249,755 for
Dr. Bunker were accrued by the Company as liabilities as the services were
rendered. In each of fiscal 1996 and 1997, a deferred compensation payment of
$193,252 and $119,000, respectively, was paid to Dr. Armini and $20,000 and $0,
respectively, was paid to Dr. Bunker, which payments were partial payments of
the accrued compensation due to each of them. The remaining amounts were
reflected as deferred compensation on the June 30, 1997 balance sheet. During
fiscal 1998, these two principal officers discharged the Company from its
remaining obligation.
On December 9, 1997, the Company entered into a Loan Agreement with Anthony
J. Armini. Pursuant to the terms of this Agreement, the Company loaned $137,500
to Dr. Armini for the purpose of exercising 350,000 options granted in 1993 to
purchase Common Stock. The interest rate on the loan, which is unsecured, is six
percent per annum. The entire amount of the principal and accumulated interest
will be due on December 9, 2003.
In December, 1997, three of the directors of the Company exercised options
issued in 1993 to purchase shares of Common Stock of the Company in the
following amounts and at the following prices (as adjusted to give effect to the
7-for-1 stock split effected in the form of a Common Stock dividend on September
9, 1998): Stephen N. Bunker purchased 350,000 shares at a price of $.39 per
share; Anthony J. Armini purchased 350,000 shares at a price of $.39 per share;
and Robert E. Hoisington purchased 35,000 shares at a price of $.36 per share.
In addition, in June, 1997, NAR Holding Corporation exercised its preemptive
rights pursuant to a 1987 agreement to purchase 351,946 shares of Common Stock
of the Company at a price of $.42 per share.
In July, 1998, as consideration for terminating an agreement with Eric
Akhund, acting chief financial officer of the Company, and his resignation from
the Company's board of directors, the Company provided the following benefits:
(i) a $60,000 lump sum cash payment; (ii) 12 additional payments of $4,125 per
month; (iii) warrants, with a three-year term, to purchase 101,080 shares of the
Common Stock of the Company at a price of $14.84 per share; (iv) 14,000 shares
of the Common Stock of the Company; and (v) the forgiveness of an $18,750
employee advance. The total cost to the Company of terminating this agreement
was $144,050. As part of Mr. Akhund's original agreement he was also provided
warrants, with a three year term, to purchase 10,500 shares of Common Stock of
the Company at a price of $1.29 per share. The Company granted piggyback
registration rights to this individual in any public offering after the initial
public offering of the Common Stock. This individual has agreed to sign a
lock-up agreement for future sale of such warrants and shares equivalent to the
lock-up agreements signed by the Company's management.
In January, 1999, the Company entered into loan agreements aggregating
$137,500 with ten employees for the purpose of permitting these employees to
exercise options to purchase 375,249 shares of Common Stock, in the aggregate.
The interest rate of each loan, which is unsecured, is 6% per annum. The entire
principal amount and accumulated interest on each loan will be due on January 7,
2002.
Pursuant to an agreement with the Company, for so long as NAR Holding
Corporation owns at least 10% of the Company's issued and outstanding shares of
Common Stock, it is entitled to nominate one person for election to the Board of
Directors of the Company. Mr. Shimizu is NAR Holding Corporation's designated
director.
Any future transactions between the Company and its officers, directors,
principal stockholders or other affiliates will be on terms no less favorable
than could be obtained from independent third parties and will be subject to
approval by a majority of the independent and disinterested directors.
LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings.
49
<PAGE> 51
DESCRIPTION OF SECURITIES
Following the closing of the sale of the Units offered hereby, the
authorized capital stock of the Company will consist of 20,000,000 shares of
Common Stock, $0.10 par value per share and 5,000,000 shares of Preferred Stock,
$0.10 par value per share.
UNITS
Each Unit being offered by the Company consists of one share of Common
Stock and a Warrant exercisable for one share of Common Stock. The Common Stock
and Warrants which comprise the Units will trade only as units until the earlier
of thirteen months after the date of the Prospectus or such time as may be
determined by the Representatives.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in all matters
to be voted on by the shareholders. Subject to the preferences that may be
applicable to any Preferred Stock then outstanding, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of the Company's
liabilities and the liquidation preference, if any, of any then outstanding
shares of Preferred Stock. Holders of Common Stock have no preemptive rights and
no rights to convert their Common Stock into any other securities, and there are
no redemption or sinking fund provisions with respect to such shares. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be materially adversely affected by, the rights of the holders of shares
of any series of Preferred Stock which the Company may designate and issue in
the future. All outstanding shares of Common Stock are fully paid and
non-assessable. The shares of Common Stock to be issued by the Company in the
Offering will be fully paid and non-assessable.
WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Unit and Warrant Agreement (the "Warrant
Agreement") between the Company and American Securities Transfer & Trust Inc.
(the "Transfer and Warrant Agent"). A copy of the Warrant Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. See "Additional Information."
Each Warrant entitles the registered holder thereof to purchase, at any
time over a three-year period commencing thirteen months after the date of the
Prospectus, one share of Common Stock at a price equal to $9.00, at which time
the Warrants will expire. The Warrant exercise price is subject to adjustment
under provisions referred to below. The holder of any Warrant may exercise such
Warrant by surrendering the certificate representing the Warrant to the Transfer
and Warrant Agent, with the subscription form on the reverse side of such
certificate properly completed and executed, together with payment of the
exercise price. The Warrants may be exercised at any time in whole or in part at
the applicable exercise price until expiration of the Warrants. No fractional
shares will be issued upon the exercise of the Warrants.
The exercise price of the Warrants bears no relation to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
The exercise price and number of shares of Common Stock purchasable upon
the exercise of the Warrants are subject to adjustment upon the occurrence of
certain events, including, without limitation, stock splits, stock dividends,
recapitalizations and reclassifications.
Commencing thirteen months from the date of the Prospectus (the "Redemption
Date"), the Warrants are subject to redemption by the Company at $0.20 per
Warrant if, after the Redemption Date, the closing bid price of the Common Stock
as reported on the Nasdaq SmallCap Market averages in excess of $10.50
50
<PAGE> 52
for a period of fifteen consecutive trading days. In the event the Company
exercises the right to redeem the Warrants, such Warrants will be exercisable
until the close of business on the date of redemption. If any Warrant called for
redemption is not exercised by such time, it will cease to be exercisable and
the holder will be entitled only to the redemption price.
The Warrants are in registered form and may be presented to the Transfer
and Warrant Agent for transfer, exchange or exercise at any time on or prior to
their expiration commencing thirteen months from the date of this Prospectus, at
which time the Warrants become wholly void and of no value. If a market for the
Warrants develops, holders may sell Warrants instead of exercising them. There
can be no assurance, however, that a market for the Warrants will develop or
continue.
The Warrants do not confer upon holders any voting, dividend or other
rights as shareholders of the Company.
The Company and the Transfer and Warrant Agent may make such modifications
to the Warrants that they deem necessary and desirable that do not materially
adversely affect the interests of the Warrant holders. No other modifications
may be made to the Warrants without the consent of the majority of the Warrant
holders. Modification of the number of securities purchasable upon the exercise
of any Warrant, the exercise price and the expiration date with respect to any
Warrant requires the consent of the holder of such Warrant unless such
modification occurs in connection with a stock split, stock dividend,
recapitalization, reclassification or similar event.
No gain or loss will be recognized by a holder upon the exercise of a
Warrant. The sale of a Warrant by a holder or the redemption of a Warrant by the
Company will result in the recognition of gain or loss in an amount equal to the
difference between the amount realized by the holder and the Warrant's adjusted
basis in the hands of the holder. Provided that the holder is not a dealer in
the Warrants and that the Common Stock would have been a capital asset in the
hands of the holder had the Warrant been exercised, gain or loss from the sale
or redemption of Warrant will be long-term or short-term capital gain or loss to
the holder. Loss on the expiration of the Warrant, equal to the Warrant's
adjusted basis in the hands of the holder, will be long-term or short-term
capital loss, depending on whether the Warrant had been held for more than one
year.
THE ABOVE DISCUSSION DOES NOT ADDRESS ALL OF THE TAX CONSIDERATIONS THAT MAY BE
RELEVANT TO A PARTICULAR PURCHASER. ACCORDINGLY, ALL PROSPECTIVE PURCHASERS ARE
ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE OF THE UNITS AND THE OWNERSHIP AND
DISPOSITION OF THE WARRANTS AND THE COMMON STOCK.
PREFERRED STOCK
The Board of Directors is authorized, subject to limitations prescribed by
Massachusetts law, to provide for the issuance of Preferred Stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, and to fix the designations, preferences, voting powers,
qualifications and special or relative rights or privileges thereof. The Board
of Directors is authorized to issue Preferred Stock with voting, conversion and
other rights and preferences that could adversely affect the voting power or
other rights of the holders of Common Stock. Although the Company has no current
plans to issue such shares, the issuance of Preferred Stock or of rights to
purchase Preferred Stock could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company. As of the
date of this Prospectus, there were no shares of Preferred Stock outstanding.
The Company has agreed with the Representative that it will not issue any
shares of Preferred Stock for a period ending thirteen months after date of this
Prospectus, without the prior written consent of the Representative. See
"Underwriting." The Company will issue preferred stock only with the approval of
a majority of the independent directors who do not have an interest in the
transaction and who have access, at the Company's expense, to the Company's or
independent legal counsel.
51
<PAGE> 53
REPRESENTATIVES' WARRANTS
At the closing of this Offering, the Company will issue to the
Representatives warrants (the "Representatives' Warrants") to purchase 100,000
shares of Common Stock and 100,000 Redeemable Warrants. The Representatives'
Warrants will be exercisable for a four-year period commencing one year from the
date of this Prospectus. The exercise price of the Representatives' Warrants
will be $12.00. The Representatives' Warrants will not be transferable prior to
their exercise date except to officers of the Representatives and members of the
syndicate and officers and partners thereof. The Representatives' Warrants will
contain provisions providing adjustment in the event of any recapitalization,
reclassification, stock dividend, stock split or similar transaction. The
Representatives' Warrants and the securities issuable upon their exercise may
not be offered for sale except in compliance with the applicable provisions of
the Securities Act. The Company has agreed that, for a period of five years from
the date of this Prospectus, if the Company intends to file a registration
statement for the public sale of securities (other than a registration statement
on Form S-4, S-8 or a comparable registration statement), it will notify all of
the holders of the Representatives' Warrants and securities issued upon exercise
thereof, and if so requested, it will include therein material to permit a
public offering of the securities underlying the Representatives' Warrants
solely at the expense of the Company (excluding fees and expenses of the
Holder's counsel and any underwriting or selling commissions). See
"Underwriting."
REGISTRATION RIGHTS
The Company has granted registration rights to the holders of the
Representatives' Warrants, which provides the holders with certain rights to
register the shares of Common Stock underlying the Representatives' Warrants. In
addition, for a period of five years from the date of this Prospectus, upon
written demand of the holders of a majority of the Representatives' Warrants,
the Company has agreed, on one occasion, to promptly register the underlying
securities solely at the expense of the Company (excluding fees and expenses of
the holder's counsel and any underwriting or selling commissions). Additionally,
for a period of five years from the date of this Prospectus, upon written demand
of any holder, the Company has agreed, on one occasion, to promptly register the
underlying securities for purposes of a public offering, solely at the expense
of such holder. See "Underwriting."
The Company has also granted to a former consultant piggyback registration
rights in any public offering after the initial public offering of the Common
Stock.
MASSACHUSETTS LAW
Following the Offering, the Company expects that it will have more than 200
stockholders, as a result of which it will be subject to the provisions of
Chapter 110F of the Massachusetts General Laws, an anti-takeover law. In
general, this statute prohibits a publicly held Massachusetts corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless either (i) prior to that date, the
Board of Directors approved either the business combination or the transaction
in which the person became an interested stockholder, (ii) the interested
stockholder acquires 90% of the outstanding voting stock of the corporation
(excluding shares held by certain affiliates of the corporation) at the time it
becomes an interested stockholder or (iii) the business combination is approved
by the Board of Directors and by the holders of two-thirds of the outstanding
voting stock of the corporation (excluding shares held by the interested
stockholder) voting at a meeting. In general, an "interested stockholder" is a
person who owns 5% (15% in the case of a person eligible to file a Schedule 13G
under the Securities Act with respect to the Common Stock) or more of the
outstanding voting stock of the corporation or who is an affiliate or associate
of the corporation and was the owner of 5% (15% in the case of a person eligible
to file a Schedule 13G under the Securities Act with respect to the Common
Stock) or more of the outstanding voting stock within the prior three years. A
"business combination" includes mergers, consolidations, stock and asset sales,
and other transactions with the interested stockholder resulting in a financial
benefit (except proportionately as a stockholder of the corporation) to the
interested stockholder. The Company may at any time amend its Articles or
By-Laws to elect not to be governed by Chapter 110F by a vote of the holders of
a majority of its voting stock. Such an
52
<PAGE> 54
amendment would not be effective for twelve months and would not apply to a
business combination with any person who became an interested stockholder prior
to the date of the amendment.
The Company's By-Laws provide that any holder of 10% or more of the
outstanding shares of Common Stock may call a meeting of stockholders.
LIMITATION OF LIABILITY
The Company's Articles provide that no director of the Company shall be
personally liable to the Company or to its stockholders for monetary damages for
breach of fiduciary duty as a director, except that the limitation shall not
eliminate or limit liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 61 or 62 of Chapter 156B of the Massachusetts General
Laws, dealing with liability for unauthorized distributions and loans to
insiders, respectively, or (iv) for any transaction from which the director
derived an improper personal benefit.
The Company's Articles and By-Laws further provide for the indemnification
of the Company's directors and officers to the fullest extent permitted by
Section 67 of Chapter 156B of the Massachusetts General Laws, including
circumstances in which indemnification is otherwise discretionary.
A principal effect of these provisions is to limit or eliminate the
potential liability of the Company's directors for monetary damages arising from
breaches of their duty of care, unless the breach involves one of the four
exceptions described in (i) through (iv) above. These provisions may also shield
directors from liability under federal and state securities laws.
TRANSFER AGENT AND WARRANT AGENT
The Transfer Agent and Registrar for the Units, the Common Stock and the
Warrants is American Securities Transfer and Trust Inc., Denver, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the securities
of the Company. Future sales of substantial amounts of Units or Common Stock in
the public market could materially adversely affect the market price of such
securities. As described below, only a limited number of shares will be
available for sale shortly after this Offering, due to certain contractual and
legal restrictions on resale. Nevertheless, sales of substantial amounts of the
Company's Units or Common Stock in the public market or the perception that such
sales could occur after such restrictions lapse could materially adversely
affect the market price of the Units, Common Stock and Warrants and the ability
of the Company to raise equity capital in the future. See "Risk
Factors -- Shares of Common Stock Eligible for Future Sale."
Upon completion of this Offering, the Company will have outstanding
5,747,540 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. The Units
consisting of 1,000,000 shares of Common Stock and the Warrants to purchase
1,000,000 shares of Common Stock that are to be sold by the Company to the
public in this Offering will be freely tradable without restriction under the
Securities Act, unless purchased by affiliates of the Company as that term is
defined in Rule 144 under the Securities Act.
The remaining 4,747,540 shares of Common Stock outstanding upon completion
of this Offering will be restricted securities as that term is defined in Rule
144 under the Securities Act ("Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144 or 701 promulgated under the Securities Act,
which are summarized below. Sales of the Restricted Shares in the public market,
or the availability of such shares for sale, could materially adversely affect
the market price of the Common Stock and Warrants. In general, under Rule 144 as
currently in effect, beginning 90 days after the date of this Prospectus, a
person (or persons whose shares are aggregated) who has beneficially owned
Restricted Shares for at least one year (including the holding period
53
<PAGE> 55
of any owner other than an affiliate of the Company) would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the number of shares of Common Stock then
outstanding or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of notice of such sale. Sales under
Rule 144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any owner other than an affiliate of the
Company), is entitled to sell such shares without complying with the manner of
sale, public information volume limitations or notice provisions of Rule 144.
Any employee, officer or director of or consultant to the Company who
purchased shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates of the Company to sell their Rule 701 shares under Rule 701 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice requirements of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before selling
such shares.
Holders of 4,747,540 shares of Common Stock, including officers and
directors and holders of five percent or more of the Common Stock, have entered
into contractual lock-up agreements providing that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise dispose of the
shares of stock owned by them or that could be purchased by them through the
exercise of options to purchase Common Stock of the Company, for thirteen months
after the date of this Prospectus without prior written consent of the
Representatives. Taking into account the lock-up agreements and the restriction
of Rule 144, 144(k) and 701 described above, the number of Restricted Shares
that will first be eligible for sale in the public market will be 4,747,540
beginning thirteen months after the date of this Prospectus.
The Company has agreed that for a period of thirteen months from the date
of this Prospectus it will not sell or otherwise dispose of any securities
without the prior written consent of the Representatives, shares may, however,
be issued pursuant to the exercise of options and warrants outstanding on the
date of this Prospectus or issued hereafter pursuant to the Company's 1998 Stock
Option Plan.
54
<PAGE> 56
UNDERWRITING
The Underwriters named below have agreed, subject to the terms and
conditions of the Underwriting Agreement between the Company, ISG Solid Capital
Markets, LLC and Schneider Securities, Inc., as Representatives, to purchase
from the Company the number of Units set forth opposite their names. The
underwriting discount set forth on the cover page of this Prospectus will be
allowed to the Underwriters at the time of delivery to the Underwriters of the
Units so purchased.
<TABLE>
<CAPTION>
NUMBER
NAME OF UNDERWRITER OF UNITS
- ------------------- ---------
<S> <C>
ISG Solid Capital Markets, LLC.............................. 500,000
Schneider Securities, Inc. ................................. 500,000
---------
Total............................................. 1,000,000
=========
</TABLE>
The Underwriters have advised the Company that they propose to offer the
Units to the public at an offering price $7.50 per Unit and that the
Underwriters may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. a concession not in excess of $0.45 per
Unit, of which the Underwriters may allow and such dealers may reallow
concessions not in excess of $0.10 per Unit to certain other dealers.
The Company has granted to the Underwriters an over-allotment option
exercisable during the 45-day period following the date of this Prospectus to
purchase up to a maximum of 150,000 additional shares of Common Stock or
Warrants at the public offering price, less the underwriting discount set forth
on the cover page of this Prospectus. The Underwriters may exercise such option
only to satisfy over-allotments in the sale of the Units.
The Company has agreed to pay to the Representatives a non-accountable
expense allowance equal to 3% of the total proceeds of this Offering, or
$225,000 ($258,750 if the Underwriters exercise the over-allotment option in
full), of which $62,500 has already been paid. The Underwriters do not intend to
offer or sell Units to accounts over which they exercise discretionary
authority.
At the closing of this Offering, the Company will issue to the
Representatives, for nominal consideration the Representatives' Warrants to
purchase 100,000 shares of Common Stock and 100,000 Warrants exercisable at 160%
of the initial public offering price for these Securities. See "Description of
Securities -- Representative's Warrants."
For the period during which the Representatives' Warrants is exercisable,
the holder(s) will have the opportunity to profit from a rise in the market
value of the Company's Common Stock, with a resulting dilution in the interests
of the other stockholders of the Company. The holder(s) of the Representatives'
Warrants can be expected to exercise it at a time which the Company would, in
all likelihood, be able to obtain any needed capital from an offering of
unissued Common Stock on terms more favorable to the Company than those provided
for in the Representatives' Warrants. Such facts may adversely affect the terms
on which the Company can obtain additional financing. To the extent that the
Representatives realize any gain from the resale of the Representatives'
Warrants or the securities issuable thereunder, such gain may be deemed
additional underwriting compensation under the Securities Act of 1933, as
amended.
The Company has agreed to enter into a two-year non-exclusive consulting
agreement with the Representatives, pursuant to which the Representatives will
act as a financial consultant to the Company, commencing on the closing date of
this Offering. The consulting fee of $36,000 for the first year of the
Representatives' services will be payable, in full, on the closing date of this
Offering and the consulting fee of $3,000 per month for the second year of the
Representatives' services will be payable monthly in advance beginning on the
first anniversary of the date of this Prospectus.
The Company has agreed that for a period of thirteen months from the date
of this Prospectus it will not sell or otherwise dispose of any securities
without the prior written consent of the Representatives, with the
55
<PAGE> 57
exception of the grant of options and the issuance of shares issued upon the
exercise of options granted or to be granted under the Company's option plans
and outstanding warrants.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
The Company has agreed with the Representatives that for a period of 24
months from the closing date of this Offering, the Representatives may designate
an observer to the Board of Directors who will be entitled to attend and receive
notice of all meetings of the Board. The observer will be reimbursed for
out-of-pocket travel expenses incurred in attending such meetings but will
otherwise not be compensated by the Company.
Upon the exercise of the Redeemable Warrants more than one year after the
Offering and to the extent not inconsistent with the guidelines of the National
Association of Securities Dealers Regulation, Inc., and the rules and
regulations of the Securities and Exchange Commission, the Company has agreed to
pay the Representatives a commission equal to five percent of the exercise price
of the Redeemable Warrants. However, no compensation will be paid to the
Representatives in connection with the exercise of the Redeemable Warrants if
(a) the market price of the underlying shares of Common Stock is lower than the
exercise price, (b) the Redeemable Warrants are exercised in an unsolicited
transaction, or (c) the Redeemable Warrants are held in any discretionary
accounts. In addition, unless granted an exemption by the Commission from
Regulation M promulgated under the Exchange Act, the Representatives will be
prohibited from engaging in any market making activities or solicited brokerage
activities with regard to the Company's securities for a period of one or five
days before the solicitation of the exercise of any Redeemable Warrant or before
the exercise of any Redeemable Warrant based upon a prior solicitation, until
the later of the termination of such solicitation activity or the termination by
waiver or otherwise of any right the Representatives or any other soliciting
broker-dealers may have to receive a fee for the exercise of the Redeemable
Warrants following such solicitation.
DETERMINATION OF OFFERING PRICE
Prior to this Offering, there has been no public market for the Common
Stock. The offering price of the securities being offered hereby was determined
by negotiation between the Company and the Representatives. Factors considered
in determining such price include the history and the prospects for the industry
in which the Company competes, the past and present operations of the Company,
the future prospects of the Company, the abilities of the Company's management,
the earnings, net worth and financial condition of the Company, the general
condition of the securities markets at the time of this Offering, and the prices
of similar securities of comparable companies.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Foley, Hoag & Eliot LLP, Boston, Massachusetts. Certain legal matters
in connection with this Offering will be passed upon for the Underwriters by
William M. Prifti, Esq., Amesbury, Massachusetts.
EXPERTS
The financial statements of Implant Sciences Corporation at June 30, 1998
and 1997, and for each of the two years in the period ended June 30, 1998,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
56
<PAGE> 58
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act with respect to the Units offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Units offered hereby, reference
is made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Statements contained in this Prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete and,
in each instance, if the contract or document is filed as an exhibit, reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement. Each such statement is qualified in all respects by
reference to such exhibit. The Registration Statement, including exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the
Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7
World Trade Center, Thirteenth Floor, New York, New York 10048. Copies also may
be obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed
rates. The Commission also maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that make electronic filings with
the Commission.
57
<PAGE> 59
GLOSSARY
Alloy A mixture or solution of two or more metals.
Angioplasty A medical procedure used to repair a damaged or
diseased artery.
Balloon Catheter A tube with a balloon at its tip for dilating
arteries, used in angioplasty.
Beta Rays Radioactive emissions consisting of energetic
electrons.
Blended Interface The merging or blending of a coating into the
substrate material.
Brachytherapy Placement of a radioactive source in or near tissue to
deliver radiation therapy.
Cardiovascular System The heart with a network of blood vessels that
circulates blood around the body.
Catheter A flexible tubular device for insertion into a narrow
opening used to deliver a balloon and/or a stent
during angioplasty.
Chemical Vapor Deposition Depositing a coating by decomposition of a compound
gas on a surface.
Coronary Artery A vessel which delivers oxygenated blood to the heart
muscle.
Cyclotron A circular ion accelerator used in medicine to produce
radioisotopes.
Dopant An impurity element used to add positive or negative
charge to a semiconductor.
External Beam Radiation
Treatment A beam of x-rays or electrons usually generated by a
linear accelerator for radiation therapy.
Femoral Relating to the human femur or thigh bone.
Gamma Rays Electromagnetic radiation emitted by a nucleus.
Guidewire Wire used to guide a catheter through a narrow
opening.
Hyperplasia Excessive proliferation of smooth muscle cells within
the coronary artery.
Intima The inner layer of cells of an artery.
Iodine-125 A radioisotope emitting x-rays with a 60-day
half-life.
Ion Implantation The acceleration of ions to high velocity to embed
them into a surface.
Ion Charged atom, usually positive.
Linear Accelerator A straight ion accelerator used for external radiation
therapy or radioisotope production.
Magnetron Sputtering A process used to intensify the emission of material
from the surface of a target by magnetic means in
order to form a coating on a substrate.
Native Oxide The natural oxide which exists on most active metals
such as stainless steel, cobalt chrome or titanium.
Osteoarthritis A disease of the joint cartilage and underlying bone,
which may cause pain and impair joint function.
Osteolysis A dissolution of the organic matrix of bone resulting
in destruction.
Phosphorus-32 A radioisotope emitting only beta rays with a 14 day
half-life.
Physical Vapor Deposition Depositing a coating by condensing it from the vapor
onto a substrate.
58
<PAGE> 60
Radioactive Seed A small permanently implanted pellet containing
therapeutic radioactivity.
Radioactive Stent A stent which contains a radioactive isotope embedded
within its metal surface.
Radioactive Wet Chemistry A chemical process using radioactive liquid solutions.
Radiopaque Opaque to x-ray radiation and thus visible on x-ray
film.
Restenosis The reocclusion or closure of an artery after a new
channel has been formed using a balloon catheter or
stent.
Stent A metal mesh tube implanted into an artery to hold it
open.
Thin Film Coatings Coatings of an element or compound usually less than
10 microns thick.
X-Rays Electromagnetic radiation emitted by atomic electrons.
Ytterbium-169 A radioisotope emitting x-rays and gamma rays with a
32 day half-life.
59
<PAGE> 61
IMPLANT SCIENCES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets as of June 30, 1997 and 1998 and December 31,
1998 (Unaudited).......................................... F-3
Statements of Operations for the Years Ended June 30, 1997
and 1998 and for the Six Months Ended December 31, 1997
and 1998 (Unaudited)...................................... F-4
Statements of Changes in Stockholders' Equity for the Years
Ended June 30, 1997 and 1998 and for the Six Months Ended
December 31, 1998 (Unaudited)............................. F-5
Statements of Cash Flows for the Years Ended June 30, 1997
and 1998 and for the Six Months Ended December 31, 1998
(Unaudited)............................................... F-6
Notes to Financial Statements (Including Data Applicable to
Unaudited Periods)........................................ F-7
</TABLE>
F-1
<PAGE> 62
IMPLANT SCIENCES CORPORATION
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Implant Sciences Corporation
We have audited the accompanying balance sheets of Implant Sciences
Corporation as of June 30, 1997 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended June 30, 1998. 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 Implant Sciences Corporation
at June 30, 1997 and 1998, and the results of its operations and its cash flows
for each of the two years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
July 31, 1998 except as to
Note 13 as to which the
date is January 7, 1999
F-2
<PAGE> 63
IMPLANT SCIENCES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1997 1998 1998
---------- ---------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 683,076 $ 311,189 $ 73,545
Short-term investment..................................... 197,729 -- --
Accounts receivable, less allowances of $2,000............ 389,409 388,235 497,255
Inventories............................................... 24,785 31,338 37,818
Deferred income taxes..................................... 13,000 18,000 18,000
Refundable income taxes................................... -- 118,781 118,781
Prepaid expenses.......................................... 10,351 3,746 2,976
---------- ---------- ----------
1,318,350 871,289 748,375
Property and Equipment, at cost:
Machinery and equipment................................... 770,113 1,314,850 1,589,538
Leasehold improvements.................................... 60,141 62,553 65,036
Computers and software.................................... 36,335 36,335 41,268
Furniture and fixtures.................................... 38,096 49,833 59,895
Motor vehicles............................................ 14,822 14,822 14,822
Leased property under capital lease....................... -- 28,360 28,360
---------- ---------- ----------
919,507 1,506,753 1,798,919
Less accumulated depreciation............................. (602,842) (692,808) (747,986)
---------- ---------- ----------
316,665 813,945 1,050,933
Other Assets:
Patent costs, net of accumulated amortization of $10,627
and $15,699, at June 30, 1997 and 1998, respectively,
and of $19,678 at December 31, 1998..................... 91,871 117,738 134,891
Other noncurrent assets, primarily offering costs......... 18,402 363,511 752,716
Deferred income taxes..................................... 176,000 -- --
---------- ---------- ----------
286,273 481,249 887,607
---------- ---------- ----------
Total Assets....................................... $1,921,288 $2,166,483 $2,686,915
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit.................................. $ 210,000 $ -- $ 30,000
Accounts payable.......................................... 95,173 107,359 75,353
Accrued expenses.......................................... 694,572 567,435 596,516
Current portion of long-term debt......................... 66,667 50,278 173,611
Obligations under capital lease........................... -- 5,074 5,672
---------- ---------- ----------
1,066,412 730,146 881,152
Long Term Liabilities:
Long term debt, net of current portion.................... 38,889 224,491 639,352
Obligations under capital lease........................... -- 22,090 19,505
Deferred income taxes..................................... -- 12,300 12,300
---------- ---------- ----------
38,889 258,881 671,157
Stockholders' Equity:
Common stock, $0.10 par value; 1,000,000 and 6,500,000
shares authorized; 517,613 and 622,613 shares issued and
outstanding at June 30, 1997 and 1998, respectively and
20,000,000 shares authorized; 4,372,291 shares issued
and outstanding at December 31, 1998.................... 51,761 62,261 437,229
Additional paid-in capital................................ 971,601 1,380,555 1,017,259
Retained earnings (accumulated deficit)................... (207,375) (265,360) (319,882)
---------- ---------- ----------
Total Stockholders' Equity......................... 815,987 1,177,456 1,134,606
---------- ---------- ----------
Total Liabilities and Stockholders' Equity......... $1,921,288 $2,166,483 $2,686,915
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 64
IMPLANT SCIENCES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------ ------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product and contract research revenues:
Medical.............................. $2,231,918 $2,237,417 $1,137,157 $1,124,900
Semiconductor........................ 447,000 667,012 309,168 225,172
Equipment............................... 350,754 -- -- --
---------- ---------- ---------- ----------
Total Revenues.................. 3,029,672 2,904,429 1,446,325 1,350,072
Costs and Expenses:
Cost of product and contract research
revenues............................. 1,354,188 1,693,662 891,266 789,335
Cost of equipment revenues.............. 347,414 -- -- --
Research and development................ 300,936 306,536 144,618 158,298
Selling, general and administrative..... 626,361 1,014,401 402,130 470,749
---------- ---------- ---------- ----------
Total Costs and Expenses........ 2,628,899 3,014,599 1,438,014 1,418,382
---------- ---------- ---------- ----------
Operating income (loss)................... 400,773 (110,170) 8,311 (68,310)
Other income (expense):
Interest income......................... 20,717 18,872 10,497 5,316
Interest expense........................ (41,760) (11,563) (6,035) (28,229)
Other................................... -- 5,976 2,988 --
---------- ---------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes........................ 379,730 (96,885) 15,761 (91,223)
Provision (benefit) for income taxes...... 161,400 (38,900) 6,304 (36,701)
---------- ---------- ---------- ----------
Net income (loss)....................... $ 218,330 $ (57,985) $ 9,457 $ (54,522)
========== ========== ========== ==========
Net income (loss) per share--basic...... $ .06 $ (0.01) $ 0.00 $ (0.01)
========== ========== ========== ==========
Net income (loss) per share--diluted.... $ .05 $ (0.01) $ 0.00 $ (0.01)
========== ========== ========== ==========
Weighted average number of common shares
outstanding used for basic earnings
per share............................ 3,418,107 4,110,596 3,862,453 4,372,291
========== ========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding
used for diluted earnings per
share................................ 4,066,874 4,110,596 4,097,772 4,372,291
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 65
IMPLANT SCIENCES CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------- ADDITIONAL EARNINGS TOTAL
NUMBER OF PAR PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT) EQUITY
--------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996...... 467,335 $ 46,734 $ 828,398 $(425,705) $ 449,427
Net income.................. 218,330 218,330
Issuance of common stock.... 50,278 5,027 143,203 -- 148,230
--------- -------- ---------- --------- ----------
Balance at June 30, 1997...... 517,613 51,761 971,601 (207,375) 815,987
Net loss.................... (57,985) (57,985)
Issuance of common stock.... 105,000 10,500 134,881 -- 145,381
Forgiveness of obligation to
stockholders, net of
related tax effect....... -- -- 274,073 -- 274,073
--------- -------- ---------- --------- ----------
Balance at June 30, 1998...... 622,613 $ 62,261 $1,380,555 $(265,360) $1,177,456
Net loss (unaudited).......... -- -- -- (54,522) (54,522)
Issuance of common stock
(unaudited)................. 2,000 200 11,472 -- 11,672
Adjustment to reflect 7-for-1
stock split (unaudited)..... 3,747,678 374,768 (374,768) -- --
--------- -------- ---------- --------- ----------
Balance at December 31, 1998
(unaudited)................. 4,372,291 $437,229 $1,017,259 $(319,882) $1,134,606
========= ======== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 66
IMPLANT SCIENCES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
--------------------- ---------------------
1997 1998 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................. $ 218,330 $ (57,985) $ 9,457 $ (54,522)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 65,052 101,075 47,521 57,454
Deferred income taxes provision (benefit).... 91,000 (3,200) -- --
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable.............................. 216,330 1,174 (18,207) (109,020)
(Increase) decrease in inventories........ (24,785) (6,553) (4,946) (6,480)
(Increase) decrease in prepaid income
taxes................................... -- (118,781) (64,589) --
(Increase) decrease in prepaid expenses... (7,512) 6,605 (3,500) 770
(Increase) decrease in other noncurrent
assets.................................. (15,853) (351,146) (26,407) (387,502)
Increase (decrease) in accounts payable... 32,002 12,186 6,659 (32,006)
Increase (decrease) in accrued expenses... (125,963) 333,436 32,092 29,081
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities................................... 448,601 (83,189) (21,920) (502,225)
CASH FLOWS USED IN INVESTING ACTIVITIES
Redemption (purchase) of short-term
investments.................................. (197,729) 197,729 (126) --
Purchase of property and equipment............. (51,708) (558,886) (219,516) (292,166)
Capitalized patent costs....................... (27,076) (30,939) (14,430) (21,132)
--------- --------- --------- ---------
Net cash used in investing activities.......... (276,513) (392,096) (234,072) (313,298)
CASH FLOWS USED IN FINANCING ACTIVITIES
Proceeds from common stock issued.............. 148,230 145,381 149,500 11,672
Proceeds from long-term debt................... -- 200,000 -- 548,015
Repayments of long-term debt................... (195,595) (31,983) (18,982) (11,808)
Proceeds from revolving line of credit......... 210,000 -- 30,000
Repayments of revolving line of credit......... (210,000) (210,000) --
Repayments of notes payable--related parties... (207,000) -- -- --
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities................................... (44,365) 103,398 (79,482) 577,879
--------- --------- --------- ---------
Net increase (decrease) in cash................ 127,723 (371,887) (335,474) (237,644)
Cash at beginning of year...................... 555,353 683,076 683,076 311,189
--------- --------- --------- ---------
Cash at end of year............................ $ 683,076 $ 311,189 $ 347,602 $ 73,545
========= ========= ========= =========
Supplemental Disclosures:
Interest paid................................ $ 42,948 $ 10,835 $ 6,035 $ 28,228
========= ========= ========= =========
Income taxes paid............................ $ 83,815 $ 98,393 $ 70,893 $ --
========= ========= ========= =========
Obligations under capital lease.............. -- $ 28,360 $ -- $ --
========= ========= ========= =========
Forgiveness of obligation to stockholders.... -- $ 460,573 $ -- $ --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 67
IMPLANT SCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND DECEMBER 31, 1998 IS UNAUDITED.)
1. DESCRIPTION OF BUSINESS
Implant Sciences Corporation is a provider of patented and proprietary
surface modification services to the medical device and semiconductor
industries. Ion implantation and thin film coating techniques are utilized to
enhance the surfaces for orthopedic implants (hip and knee total joint
replacements), to implant radioactive material into prostate seeds and coronary
stents, coatings on guidewires, stents and catheters for interventional
cardiology devices, and ion implantation of electronic dopants for the
semiconductor industry. The Company's principal markets are the orthopedic,
interventional cardiology and semiconductor markets.
Interim Financial Statements
The financial information at December 31, 1998, and for the six months
ended December 31, 1997 and 1998, is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and of
the operating results and cash flows for these periods. The results of
operations and cash flows for the six months ended December 31, 1997 and 1998
are not necessarily indicative of results that may be expected for the entire
year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers any security with a maturity of 90 days or less to be
cash equivalents.
Short-Term Investment
Short-term investment consists of a U.S. Treasury bill with an original
maturity of six months. The investment is recorded at cost plus accrued interest
which approximates market value.
Inventories
Inventories consist of gold and other precious metal raw materials used in
the manufacturing process and are carried at the lower of cost (first-in,
first-out) or market.
Property and Equipment and Capital Lease
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets as
follows:
<TABLE>
<S> <C>
Leasehold improvements.......................... life of lease
Furniture and fixtures.......................... 5-7 years
Machinery and equipment......................... 7 years
</TABLE>
Equipment under the capital lease is being amortized over the life of the
lease.
Warranty Costs
The Company accrues warranty costs in the period the related revenue is
recognized. Warranty costs are not material to operating results.
Income Taxes
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and income tax basis of assets and liabilities
F-7
<PAGE> 68
IMPLANT SCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
as well as net operating loss and tax credit carryforwards and are measured
using the enacted tax rates and laws that will be in effect when the differences
reverse. Deferred tax assets may be reduced by a valuation allowance to reflect
the uncertainty associated with their ultimate realization.
Patent Costs
The costs to obtain patents are capitalized. The Company amortizes the cost
of patents ratably over their legal lives commencing with the month in which the
patents are issued. As of June 30, 1998, there were four patents issued.
Accumulated amortization at June 30, 1997 and 1998 was $10,627 and $15,699,
respectively.
Concentrations of Credit Risk
The Company grants credit to its customers, primarily large corporations in
the medical device and semiconductor industries. The Company performs periodic
credit evaluations of customer financial condition and does not require
collateral. Receivables are generally due within thirty days. Credit losses have
historically been minimal, which is consistent with management's expectations.
The Company has three major customers which accounted for the following
annual revenue:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Company A........................................... $1,482,000 $1,229,000
Company B (see Note 5).............................. 350,000 --
Company C........................................... 148,000 175,000
</TABLE>
Total accounts receivable at June 30, 1997 and 1998 for Company A was
approximately $223,000 and $138,000, respectively.
Stock Based Compensation
The Company accounts for its stock based compensation arrangements under
the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
rather than the alternative fair value accounting method provided for under FAS
No. 123, Accounting for Stock-Based Compensation. Under APB 25, when the
exercise price of options granted to employees and non-employee directors under
these plans equals the market price of the underlying stock on the date of
grant, no compensation expense is recorded.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized at the time product is shipped. During fiscal 1996,
the Company was awarded a non-recurring, long-term, fixed price contract to
build one piece of customized manufacturing equipment, which was completed in
fiscal 1997. Revenues under this contract were recognized as costs were
incurred. The Company uses the percentage-of-completion method under the
contract and measures progress towards the completion using the cost-to-cost
method.
Contract revenue under cost-sharing research and development agreements is
recognized as eligible research and development expenses are incurred. The
Company's obligation with respect to these agreements is to perform the research
on a best-efforts basis.
F-8
<PAGE> 69
IMPLANT SCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Research and Development Costs
All costs of research and development activities are expensed as incurred.
The Company performs research and development for itself and under contracts
with others, primarily the U.S. government. Company funded research and
development includes the excess of expenses over revenues on its commercial and
government research contracts and, therefore, is included in cost of product and
contract research revenues in the accompanying statement of operations.
The Company funded and customer funded research and development costs for
1997 and 1998 were as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Company funded......................................... $522,765 $495,098
Customer funded........................................ 118,539 289,530
-------- --------
Total research and development............... $641,304 $784,628
======== ========
</TABLE>
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, Reporting Comprehensive Income and Statement No. 131,
Disclosures About Segments of an Enterprise and Related Information. Statement
No. 130 establishes standards for the reporting and display of comprehensive
income and its components. Statement No. 131 establishes standards for public
companies to report information about operating segments in financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and customers. Statement 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1999.
Under Statement 131 the Company believes that it will operate in one business
segment. Accordingly, the Company does not anticipate that the adoption of this
statement will have a significant effect on the Company's disclosures. Statement
130, which will be adopted in 1999, will not have a significant impact on the
Company's disclosures.
Earnings per Share
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share. This Standard revises certain
methodology for computing earnings per common share (EPS) and requires the
reporting of two earnings per share figures: basic earnings per share and
diluted earnings per share. Basic earnings per common share are computed by
dividing net income by the weighted-average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income by the sum of the
weighted-average number of common shares outstanding plus the dilutive effect of
shares issuable through the exercise of stock options (common stock
equivalents).
F-9
<PAGE> 70
IMPLANT SCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The shares used for basic earnings per common share and diluted earnings
per common share are reconciled as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------- ----------------------
1997 1998 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Average shares outstanding for basic
earnings per share.................. 3,418,107 4,110,596 3,862,453 4,372,291
Dilutive effect of stock options...... 648,767 -- 235,319 --
--------- --------- --------- ---------
Average shares outstanding for diluted
earnings per share.................. 4,066,874 4,110,596 4,097,772 4,372,291
========= ========= ========= =========
</TABLE>
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Accrued compensation and benefits........................... $549,366 $ 90,573
Deferred revenue............................................ -- 125,000
Accrued income taxes........................................ 14,900 --
Warranty.................................................... 8,700 8,000
Accrued consulting fees..................................... -- 125,300
Other....................................................... 121,606 218,562
-------- --------
$694,572 $567,435
======== ========
</TABLE>
4. RESEARCH AND DEVELOPMENT ARRANGEMENTS
The Company is the recipient of several grants under the U.S. Government's
Small Business Innovative Research (SBIR) program. These grants are firm
fixed-priced contracts and generally range in length from six to nine months.
Revenues under such arrangements were approximately $12,000 and $308,000 for the
years ended June 30, 1997 and 1998, respectively.
The Company also conducts research and development under cost-sharing
arrangements with its commercial customers. Revenues under such arrangements
were approximately $110,000 and $100,000 for the years ended June 30, 1997 and
1998, respectively.
5. LONG-TERM CONTRACT
During 1996, the Company entered into a one-time contract as a
subcontractor under a cost-plus fixed fee arrangement at a total contract price
of approximately $1,933,000, as amended.
Amounts subject to retainage provisions were $13,500 at June 30, 1997. The
Company incurred general and administrative expenses relating to this contract
of approximately $88,000 for the year ended June 30, 1997. No general and
administrative expense relating to this contract were incurred for the year
ended June 30, 1998.
F-10
<PAGE> 71
IMPLANT SCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Maturities of long-term debt at June 30, 1998 are as follows:
<TABLE>
<S> <C>
Year ending June 30:
1999............................................ $ 50,278
2000............................................ 63,611
2001............................................ 63,611
2002............................................ 43,936
2003............................................ 40,000
Thereafter...................................... 13,333
--------
274,769
Less current portion.............................. 50,278
--------
$224,491
========
</TABLE>
The Company finances its operations utilizing a Revolving Credit Facility
("Credit Facility") and two Equipment Term Loans under a Loan Agreement with its
bank. Both borrowings under the Loan Agreement are cross-collateralized and
cross-defaulted. The Loan Agreement has a first lien on substantially all of the
Company's assets.
The Credit Facility bears interest at the bank's base rate, plus 1% (9.5%
at June 30, 1998). Advances under the Credit Facility are limited to 70% of
qualifying accounts receivable and payable on demand. At June 30, 1998 the
Company had $300,000 available under the Credit Facility.
In August 1997, the Company refinanced one of its Term Loans. The Term Loan
is payable in 48 monthly installments of $1,968, and matures September 30, 2001.
Interest is payable monthly at the same rate as the Credit Facility.
In January 1998, the Company increased the amount available under its
Equipment Term Loan to $750,000. The Company may utilize this facility to
finance capital expenditures through October 1998. Principal repayments commence
November 1998 in sixty equal monthly installments. Interest is payable monthly
at 1% above the banks base rate commencing February 1998.
Under the provisions of its Loan Agreement, the Company is required to
maintain compliance with certain financial covenants including debt service
coverage, minimum levels of net worth and restrictions on indebtedness. At June
30, 1998, the Company's debt service coverage and net worth was less than the
required amounts. The Company's bank has waived its rights under the Loan
Agreement with respect to compliance with these financial covenants at June 30,
1998. The Company complied with these covenants at September 30, 1998. In
December 1998, the Company's bank changed its loan compliance requirements from
a quarterly basis to an annual basis. The bank now measures compliance annually,
consistent with the Company's fiscal year end. Accordingly, amounts payable
under the Loan Agreement are classified as long-term in the accompanying balance
sheet.
7. RELATED-PARTY TRANSACTIONS
Accounts receivable from related parties as of June 30, 1998 consisted of a
loan of $137,500 to a principal shareholder. The interest rate on the loan,
which is unsecured, is six percent per annum. The entire amount of the principal
and accumulated interest will be due on December 9, 2003. This was accounted for
as a reduction of stockholders' equity.
Between 1984 and 1994, two officers, Dr. Armini and Dr. Bunker, of the
Company, were not paid certain compensation. As a result, deferred compensation
of $811,825 was accrued by the Company as the services
F-11
<PAGE> 72
IMPLANT SCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
were rendered. In 1996 and 1997, payments of $213,252 and $119,000,
respectively, were made to these individuals. The remaining obligation was
included in accrued compensation in the June 30, 1997 balance sheet.
During 1998, these individuals discharged the Company from the remaining
obligation of $461,000 which was recorded as an increase to Additional Paid-In
Capital, net of related tax effect of $186,500.
In 1998, as consideration for terminating an agreement with an acting Chief
Financial Officer and resignation from the Company's board of directors, the
Company provided the following benefits to the consultant: (i) a $60,000 lump
sum cash payment; (ii) 12 additional payments of $4,125 per month; (iii)
warrants, with a three-year term, to purchase 101,080 shares of the Common Stock
of the Company at a price of $14.84 per share; (iv) 14,000 shares of the Common
Stock of the Company; and (v) the forgiveness of an $18,750 employee advance. In
connection with this individual's agreement he was granted a three year term, to
purchase 10,500 shares of Common Stock of the Company at a price of $1.29 per
share. All such consideration was accrued as of June 30, 1998.
8. LEASE OBLIGATION
The Company has an operating lease for its manufacturing, research and
office space which expires on May 31, 2000. Under the terms of the lease, the
Company is responsible for their proportionate share of real estate taxes and
operating expenses relating to this facility. Total rental expense for fiscal
years ended June 30, 1997 and 1998 was $115,954 and $160,224, respectively.
Included in property and equipment at June 30, 1998 is equipment recorded
under a capital lease, net of accumulated depreciation of $28,360.
Future minimum rental of payments required under capital leases and
operating leases with noncancellable terms in excess of one year at June 30,
1998, together with the present value of net minimum lease payments:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE TOTAL
------- --------- --------
<S> <C> <C> <C>
Year ending June 30:
1999.............................................. $ 6,578 $146,229 $152,807
2000.............................................. 7,176 163,963 171,139
2001.............................................. 7,176 -- 7,176
2002.............................................. 7,176 -- 7,176
2003.............................................. 6,578 -- 6,578
------- -------- --------
Net minimum lease payments........................ $34,684 $310,192 $344,876
======== ========
Less finance charges.............................. 7,520
-------
Present value of net minimum lease payments....... $27,164
=======
</TABLE>
F-12
<PAGE> 73
IMPLANT SCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Current:
Federal................................................... $ 53,900 $(30,100)
State..................................................... 16,500 (5,600)
-------- --------
70,400 (35,700)
Deferred.................................................... 91,000 (3,200)
-------- --------
$161,400 $(38,900)
======== ========
</TABLE>
The income tax provision (benefit) is greater than the amounts computed by
applying the statutory federal income tax rate of 34% to income before the
provision for income taxes, primarily as a result of state income taxes.
Significant components of the Company's deferred tax assets as of June 30
are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
Deferred tax assets:
Deferred compensation..................................... $185,000 $ --
Net operating loss and tax credit carryforwards........... 8,000 8,000
Other..................................................... 14,000 18,000
-------- -------
Total deferred tax assets................................... 207,000 26,000
Deferred tax liabilities:
Tax over book depreciation................................ 18,000 20,300
-------- -------
Total deferred tax liabilities.............................. 18,000 20,300
-------- -------
Net deferred tax assets..................................... $189,000 $ 5,700
======== =======
</TABLE>
10. STOCKHOLDERS' EQUITY
Each share of the Company's outstanding common stock has one vote. The 1992
Stock Option Plan (the "1992 Plan") provides for the grant of incentive stock
options and nonqualified stock options to employees. The exercise price of the
options equals 100% of the fair market value on the date of the grant, and vest
ratably over three years commencing with the second year. A total of 1,960,000
shares have been reserved for issuance under the 1992 Plan. (See Note 13)
F-13
<PAGE> 74
IMPLANT SCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the activity of the 1992 Plan for the years
ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period....... 1,666,000 $ .67 1,788,500 $ .70
Granted.................................. 122,500 1.18 64,400 3.38
Exercised................................ -- -- (735,000) .39
Canceled................................. -- -- (280,000) 1.29
--------- ----- --------- -----
Outstanding at end of period............. 1,788,500 $ .70 837,900 $ .98
========= ===== ========= =====
Options exercisable at end of period..... 1,292,669 $ .50 598,500 $ .67
========= ===== ========= =====
Weighted average fair value per share of
options granted during the period...... $ .09 $ .40
===== =====
</TABLE>
The following table presents weighted average price and life information
about significant option groups outstanding at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE (YRS) PRICE NUMBER PRICE
- -------- ------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$ .36 371,000 5.05 $ .36 371,000 $ .36
1.18 437,500 8.02 1.18 227,500 1.18
6.00 29,400 9.74 6.00 -- --
------- -------
837,900 598,500
======= =======
</TABLE>
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-based Compensation
(FAS 123). If the compensation cost for the option plans had been determined
based on the fair value at the grant date for grants in 1997 and 1998,
consistent with the provisions of FAS 123, the pro forma net income for 1997 and
1998, would have decreased by $45,000 and $55,000 respectively, and by $.01 per
share and $.01 per share-diluted, respectively.
The fair value of options and warrants issued at the date of grant were
estimated using the Minimum-Value method with the following weighted average
assumptions:
<TABLE>
<CAPTION>
OPTIONS GRANTED
-------------------------
1997 1998
---------- -----------
<S> <C> <C>
Expected life (years)............................ 5 5
Risk free interest rate.......................... 6.9%-6.96% 5.55%-5.75%
Dividend yield................................... 0% 0%
</TABLE>
The Company has never declared nor paid dividends and does not expect to do
so in the foreseeable future.
The effects on 1997 and 1998 pro forma net income of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on the results of operations for future years as the periods presented
include only two and three years, respectively, of option grants under the
Company's plans.
F-14
<PAGE> 75
IMPLANT SCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. ROYALTY AGREEMENT
Under the terms of the sale of a former product line, the Company is
entitled to minimum annual royalties which aggregate $175,000 over four years.
During 1997 and 1998, the Company recognized approximately $75,000 and $44,000,
respectively, of royalties under this arrangement.
12. 401(k) PLAN
The Company has a defined contribution retirement plan which contains a
401(k) program. All employees who are 21 years of age and who have completed one
year of service during which they worked at least 1,000 hours are eligible for
participation in the plan. The Company may make discretionary contributions. The
Company made contributions to the plan of $1,100 and $3,200 in 1997 and 1998,
respectively.
13. SUBSEQUENT EVENTS
In connection with a planned initial public offering of the Company's
Common Stock, the Company amended and restated its articles of incorporation in
September 1998. The amendment, among other things, included the following:
- The Company's Board of Directors increased the authorized Common Stock
to 20,000,000 shares.
- The Company's Board of Directors authorized 5,000,000 shares of
Preferred Stock ($.10 par value). The Board of Directors was also
authorized to issue the Preferred Stock in one or more series, and to
fix the powers, designations, preferences and other rights, including
dividend rights, conversion rights, voting rights, redemption terms
and liquidation preferences without any further action by the
Company's stockholders.
- The Board of Directors declared a 7-for-1 stock split effected in the
form of a stock dividend.
Except for historical share amounts in the accompanying balance sheet and
statement of changes in stockholders' equity, the Company has restated all
historical share and per-share data to give retroactive effect to the 7-for-1
stock split effected in the form of a stock dividend. Upon distribution of the
shares the par value of the shares distributed will be transferred from
additional paid-in-capital to Common Stock.
In addition, in September 1998, the Company adopted two new employee
benefit plans, the 1998 Incentive and Nonqualified Stock Option Plan ("Incentive
Plan") and the 1998 Employee Stock Purchase Plan ("Stock Purchase Plan").
The Incentive Plan provides for the grant of incentive stock options and
nonqualified stock options to officers and key employees for the purchase of up
to 1,960,000 shares of Common Stock. Options granted to purchase shares of
Common Stock are exercisable as determined by an appointed committee consisting
of two or more non-employee directors (Committee), expire within ten years from
date of grant and have an exercise price not less than the fair market value of
the Company's Common Stock on the date of grant. However, in the case of
qualified options, if an employee owns more than 10% of the voting power of all
classes of stock, the option granted will be at 110% of the fair market value of
the Company's Common Stock on the date of grant and will expire over a period
not to exceed five years.
In January 1999, the shares authorized and reserved for issuance under the
1998 Stock Option Plan were reduced from 1,960,000 shares to 280,000 shares of
authorized and unissued Common Stock.
Under the terms of the Incentive Plan each non-employee director, upon
election and each subsequent reelection to the Board of Directors, shall
automatically receive a Nonqualified Option to purchase 2,000 shares of Common
Stock subject to the same terms and conditions referred to in the immediately
preceding paragraph.
The 1998 Employee Stock Purchase Plan ("Purchase Plan") provides for the
issuance of 164,500 shares of common stock thereunder. Under the Purchase Plan,
eligible employees may purchase common shares at a
F-15
<PAGE> 76
IMPLANT SCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
price per share equal to 85% of the lower of the fair market value of the common
stock on the first or last day of a one-year offering period. Participation in
the offering period is limited to $25,000 in any calendar year.
On January 7, 1999, the Company entered into Loan Agreements with ten
employees. Pursuant to the terms of these Agreements, the Company loaned a total
of $137,500 to these ten employees for the purpose of exercising a total of
375,249 options to purchase Common Stock. The interest rate on the loans, which
are unsecured, is six percent per annum. The entire amount of the principal and
accumulated interest will be due within three years.
F-16
<PAGE> 77
INSIDE BACK COVER
On this page appear photographs of an ion implanter, the production
facilities and orthopedic hips being ion implanted knee components, radiopaque
coatings, hip components and radioactive prostate seeds.
<PAGE> 78
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE CIRCUMSTANCES OF THE COMPANY OR THE FACTS HEREIN
SET FORTH SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 3
Risk Factors.......................... 10
Use of Proceeds....................... 21
Dividend Policy....................... 21
Capitalization........................ 22
Dilution.............................. 23
Selected Financial Data............... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 30
Management............................ 42
Principal Stockholders................ 48
Certain Transactions.................. 49
Legal Proceedings..................... 49
Description of Securities............. 50
Shares Eligible for Future Sale....... 53
Underwriting.......................... 55
Legal Matters......................... 56
Experts............................... 56
Additional Information................ 57
Glossary.............................. 58
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL MAY 25, 1999 (25 DAYS AFTER THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT) ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN DISTRIBUTIONS, 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.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,000,000 UNITS
EACH CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE COMMON STOCK
PURCHASE WARRANT
[IMPLANT SCIENCES LOGO]
--------------------
PROSPECTUS
--------------------
ISG SOLID CAPITAL MARKETS, LLC
SCHNEIDER SECURITIES, INC.
April 30, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24: INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI.C. of the Company's Amended and Restated Articles of
Organization provides that a director shall not have personal liability to the
Company or its stockholders for monetary damages arising out of the director's
breach of fiduciary duty as a director of the Company, to the maximum extent
permitted by Massachusetts law. Section 13(b)(1 1/2) of Chapter 156B of the
Massachusetts General Laws provides that the articles of organization of a
corporation may state a provision eliminating or limiting the personal liability
of a director to a corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided, however, that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under sections 61 or 62 of Chapter 156B of the
Massachusetts General Laws, which relate to liability for unauthorized
distributions and loans to insiders, respectively, or (iv) for any transaction
from which the director derived an improper personal benefit.
Article VI.D. of the Company's Amended and Restated Articles of
Organization further provides that the Company shall, to the fullest extent
authorized by Chapter 156B of the Massachusetts General Laws, indemnify each
person who is, or shall have been, a director or officer of the Company or who
is or was a director or employee of the Company and is serving, or shall have
served, at the request of the Company, as a director or officer of another
organization or in any capacity with respect to any employee benefit plan of the
Company, against all liabilities and expenses (including judgments, fines,
penalties, amounts paid or to be paid in settlement, and reasonable attorneys'
fees) imposed upon or incurred by any such person in connection with, or arising
out of, the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, in which they may be involved by reason of being or
having been such a director or officer or as a result of service with respect to
any such employee benefit plan. Section 67 of Chapter 156B of the Massachusetts
General Laws authorizes a corporation to indemnify its directors, officers,
employees and other agents unless such person shall have been adjudicated in any
proceeding not to have acted in good faith in the reasonable belief that such
action was in the best interests of the corporation or, to the extent such
matter related to service with respect to an employee benefit plan, in the best
interests of the participants or beneficiaries of such employee benefit plan.
The effect of these provisions would be to permit indemnification by the
Company for, among other liabilities, liabilities arising out of the Securities
Act of 1933, as amended (the "Securities Act").
Section 67 of Chapter 156B of the Massachusetts General Laws also affords a
Massachusetts corporation the power to obtain insurance on behalf of its
directors and officers against liabilities incurred by them in those capacities.
The Company intends to procure a directors and officers liability and company
reimbursement liability insurance policy that (i) insures directors and officers
of the Company against losses (above a deductible amount) arising from certain
claims made against them by reason of certain acts done or attempted by such
directors or officers and (ii) insures the Company against losses (above a
deductible amount) arising from any such claims, but only if the Company is
required or permitted to indemnify such directors or officers for such losses
under statutory or common law or under provisions of the Company's Amended and
Restated Articles of Organization or Amended and Restated By-Laws.
Reference is hereby made to Section 7 of the Underwriting Agreement between
the Company and the Underwriters, filed as Exhibit 1.1 to this Registration
Statement, for a description of indemnification arrangements between the Company
and the Underwriters.
II-1
<PAGE> 80
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
An itemized statement of expenses in connection with the issuance and
distribution of the securities to be registered, other than underwriting
discounts and commissions, appears below. All amounts are estimates, except for
the SEC registration fee, the NASD filing fee and the Nasdaq and Boston Stock
Exchange listing fees.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 7,862
NASD Filing Fee............................................. 4,000
Nasdaq and Boston Stock Exchange Listing Fees............... 15,000
Blue Sky Qualification Fees and Expenses.................... 10,000
Accounting Fees and Expenses................................ 272,140
Legal Fees and Expenses..................................... 250,000
Transfer Agent Fees......................................... 3,000
Printing and Engraving Expenses............................. 75,000
Road Show................................................... 10,000
Miscellaneous Expenses...................................... 132,498
--------
Total............................................. $779,500
========
</TABLE>
ITEM 26: RECENT SALES OF UNREGISTERED SECURITIES.
The following information is furnished with regard to all securities sold
by the Company within the past three years which were not registered under the
Securities Act. The share numbers set forth below have been adjusted to reflect
the 7-for-1 stock split effected by the Company on September 9, 1998.
(a) On July 1, 1998, as partial consideration for terminating an
agreement with the acting Chief Financial Officer to the Company and his
resignation from the Company's board of directors, the Company provided the
following: (i) 14,000 shares of the Common Stock of the Company; and (ii)
warrants, with a three-year term, to purchase 101,080 shares of the Common
Stock of the Company at a price of $14.84 per share. In addition, as part
of this individual's original agreement, dated October 31, 1997, he was
also provided warrants, with a three year term, to purchase 10,500 shares
of Common Stock of the Company at a price of $1.29 per share. The Company
granted piggyback registration rights to this individual in any public
offering after the initial public offering of the Common Stock.
(b) On June 17, 1997, NAR Holding Corporation exercised its preemptive
rights to purchase 351,946 shares of Common Stock of the Company at a price
of $.42 per share.
The issuances described in this Item 26 were made in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act
relating to sales by an issuer not involving any public offering. None of the
foregoing transactions involved a distribution or public offering. No
underwriters were engaged in connection with the foregoing issuances of
securities, and no underwriting discounts or commissions were paid.
ITEM 27: EXHIBITS
<TABLE>
<C> <S>
*1.1 Agreement Among Underwriters (preliminary copy)
+1.2 Underwriting Agreement
*1.3 Selected Dealer Agreement (preliminary copy)
*1.4 Representative's Warrant Agreement (preliminary copy)
*1.5 Consulting Agreement with the Representative (preliminary
copy)
*3.1 Restated Articles of Organization of the Company
*3.2 By-Laws of the Company
*4.1 Specimen certificate for the Common Stock of the Company
*4.2 Specimen certificate for the Redeemable Warrants of the
Company
+4.3 Specimen certificate for the Units of the Company
5.1 Opinion of Foley, Hoag & Eliot LLP
*9 Armini Voting Trust Agreement, dated November 1, 1991
</TABLE>
II-2
<PAGE> 81
<TABLE>
<C> <S>
*10.1 Employment Agreement with Anthony J. Armini, dated September
26, 1998
*10.2 Employment Agreement with Stephen N. Bunker, dated September
26, 1998
*10.3 Employment Offer Letter to Darlene Deptula-Hicks, dated June
15, 1998
*10.4 Employment Offer Letter to Alan Lucas, dated March 20, 1998
*10.5 Amendment to Employment Offer Letter to Alan Lucas, dated
September 24, 1998
*10.6 Form of Employee Agreement on Ideas, Inventions, and
Confidential Information used between 1993 and 1995
*10.7 Form of Employee Agreement on Ideas, Inventions, and
Confidential Information used in 1993
*10.8 Form of Employee Agreement on Ideas, Inventions, and
Confidential Information used between 1997 and 1998
*10.9 Loan Agreement between the Company and US Trust, dated May
1, 1996
*10.10 $100,000 Commercial Promissory Note signed by the Company in
favor of US Trust, dated May 1, 1996
*10.11 $300,000 Commercial Promissory Note signed by the Company in
favor of US Trust, dated May 1, 1996
*10.12 Guaranty of Loan Agreement between the Company and US Trust,
by Anthony J. Armini, dated May 1, 1996
*10.13 Security Agreement between the Company and US Trust, dated
May 1, 1996
*10.14 Lessor's Subordination and Consent between the Company and
Teacher's Insurance and Annuity Association of America,
dated May 1, 1996
*10.15 First Amendment to Loan Agreement between the Company and US
Trust, dated July 24, 1997
*10.16 $300,000 Commercial Promissory Note signed by the Company in
favor of US Trust, dated July 24, 1997
*10.17 $94,444.40 Commercial Promissory Note signed by the Company
in favor of US Trust, dated August 12, 1997
*10.18 Second Amendment to Loan Agreement between the Company and
US Trust, dated January 16, 1998
*10.19 $750,000 Commercial Promissory Note signed by the Company in
favor of US Trust, dated January 16, 1998
*10.20 Promissory Note signed by Anthony J. Armini in favor of the
Company, dated September 26, 1998
*10.21 Shareholders Agreement between NAR Holding Corporation and
Anthony J. Armini, dated July 15, 1987
*10.22 Lease between the Company and Teachers Insurance and Annuity
Association of America, dated September 29, 1995
*10.23 First Amendment to Lease and Expansion Agreement between the
Company and Teachers Insurance and Annuity Association of
America, dated July 29, 1998
*10.24 Standard Cooperative Research and Development Agreement
between the Company and the Naval Research Laboratory, dated
January 21, 1997**
*10.25 Cooperative Agreement between the Company and the United
States of America U.S. Army Tank-Automotive and Armaments
Command Armamanet Research, Development and Engineering
Center, dated September 30, 1997**
*10.26 Vendor Agreement Memorandum between the Company and
Osteonics, dated February 2, 1998**
*10.27 Sample Purchase Order between the Company and MicroSpring
Company, Inc., dated October 24, 1996**
*10.28 Asset Purchase Agreement between the Company and Falex
Corporation, dated November 17, 1995**
*10.29 Settlement between the Company and Erik Akhund, dated July
1, 1998
*10.30 1992 Stock Option Plan
*10.31 Form of Stock Option Agreement under the 1992 Stock Option
Plan
*10.32 1998 Incentive and Nonqualified Stock Option Plan
*10.33 Form of Incentive Stock Option under the 1998 Incentive and
Nonqualified Stock Option Plan
</TABLE>
II-3
<PAGE> 82
<TABLE>
<C> <S>
*10.34 Form of Nonqualified Stock Option under the 1998 Incentive
and Nonqualified Stock Option Plan
*10.35 Form of Nonqualified Stock Option for Non-Employee Directors
under the 1998 Incentive and Nonqualified Stock Option Plan
*10.36 Form of Lock-Up Agreement
*10.37 Agreement Appointing Transfer Agent and Registrar between
the Company and American Securities Transfer & Trust, Inc.,
dated October 19, 1998
*10.38 Certification of Corporate Secretary dated October 19, 1998
concerning Agreement Appointing Transfer Agent and Registrar
between the Company and American Securities Transfer &
Trust, Inc.
*10.39 Research and Development Agreement between the Company and
Guidant Corporation, dated May 20, 1998**
*10.40 Letter Agreement between the Company and Guidant
Corporation, dated September 29, 1998**
*10.41 Form of Medical Advisory Board Agreement
*10.42 Form of Loan Agreement, dated January 7, 1999, between the
Company and the following employees in the following
amounts: Donald J. Dench ($12,500), Diane J. Ryan ($12,500),
Mark and Kathleen Gadarowski ($12,500), Gregory Huntington,
Sr. ($12,500), Leonard DeMild ($25,000), Michael Nelson
($12,500), Richard Sahagian ($12,500), Darryl Huntington
($12,500), Dennis Gadarowski ($12,500) and David Santos
($12,500)
*10.43 Terms and Conditions from Sample Purchase Order between the
Company and Biomet, Incorporated
10.44 Unit and Warrant Agreement between the Company and American
Securities Transfer & Trust, Inc., dated April 9, 1999
*21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of Foley, Hoag & Eliot LLP (included in Exhibit 5.1)
*24.1 Power of Attorney
*27.1 Financial Data Schedule
*27.2 Financial Data Schedule -- Three Months Ended September 30,
1998
*27.3 Financial Data Schedule -- Three Months Ended September 30,
1997
*27.4 Financial Data Schedule -- Six Months Ended December 31,
1998
*27.5 Financial Data Schedule -- Six Months Ended December 31,
1997
</TABLE>
- ---------------
* Previously filed.
** Filed under application for confidential treatment.
+ Replaces previously filed exhibit.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "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 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 Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE> 83
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(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
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination of the offering.
(4) 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) of 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declared it effective.
(5) 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-5
<PAGE> 84
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Wakefield, The Commonwealth of Massachusetts, on
April 30, 1999.
IMPLANT SCIENCES CORPORATION
By: /s/ ANTHONY J. ARMINI
------------------------------------
Anthony J. Armini
President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ANTHONY J. ARMINI President, Chief Executive April 30, 1999
- --------------------------------------------------- Officer and Chairman of the
Anthony J. Armini Board of Directors (Principal
Executive Officer)
/s/ DARLENE M. DEPTULA-HICKS Vice President and Chief April 30, 1999
- --------------------------------------------------- Financial Officer (Principal
Darlene M. Deptula-Hicks Financial and Accounting
Officer)
/s/ STEPHEN N. BUNKER Vice President and Chief April 30, 1999
- --------------------------------------------------- Scientist, Director
Stephen N. Bunker
* /s/ ROBERT E. HOISINGTON Director April 30, 1999
- ---------------------------------------------------
Robert E. Hoisington
* /s/ SHUNKICHI SHIMIZU Director April 30, 1999
- ---------------------------------------------------
Shunkichi Shimizu
*By: /s/ ANTHONY J. ARMINI
---------------------------------------------
Anthony J. Armini, as Attorney-in-Fact
</TABLE>
II-6
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
<C> <S> <C>
*1.1 Agreement Among Underwriters (preliminary copy).............
+1.2 Underwriting Agreement......................................
*1.3 Selected Dealer Agreement (preliminary copy)................
*1.4 Representative's Warrant Agreement (preliminary copy).......
*1.5 Consulting Agreement with the Representative (preliminary
copy).......................................................
*3.1 Restated Articles of Organization of the Company............
*3.2 By-Laws of the Company......................................
*4.1 Specimen certificate for the Common Stock of the Company....
*4.2 Specimen certificate for the Redeemable Warrants of the
Company.....................................................
+4.3 Specimen certificate for the Units of the Company...........
5.1 Opinion of Foley, Hoag & Eliot LLP..........................
*9 Armini Voting Trust Agreement, dated November 1, 1991.......
*10.1 Employment Agreement with Anthony J. Armini, dated September
26, 1998....................................................
*10.2 Employment Agreement with Stephen N. Bunker, dated September
26, 1998....................................................
*10.3 Employment Offer Letter to Darlene Deptula-Hicks, dated June
15, 1998....................................................
*10.4 Employment Offer Letter to Alan Lucas, dated March 20,
1998........................................................
*10.5 Amendment to Employment Offer Letter to Alan Lucas, dated
September 24, 1998..........................................
*10.6 Form of Employee Agreement on Ideas, Inventions, and
Confidential Information used between 1993 and 1995.........
*10.7 Form of Employee Agreement on Ideas, Inventions, and
Confidential Information used in 1993.......................
*10.8 Form of Employee Agreement on Ideas, Inventions, and
Confidential Information used between 1997 and 1998.........
*10.9 Loan Agreement between the Company and US Trust, dated May
1, 1996.....................................................
*10.10 $100,000 Commercial Promissory Note signed by the Company in
favor of US Trust, dated May 1, 1996........................
*10.11 $300,000 Commercial Promissory Note signed by the Company in
favor of US Trust, dated May 1, 1996........................
*10.12 Guaranty of Loan Agreement between the Company and US Trust,
by Anthony J. Armini, dated May 1, 1996.....................
*10.13 Security Agreement between the Company and US Trust, dated
May 1, 1996.................................................
*10.14 Lessor's Subordination and Consent between the Company and
Teacher's Insurance and Annuity Association of America,
dated May 1, 1996...........................................
*10.15 First Amendment to Loan Agreement between the Company and US
Trust, dated July 24, 1997..................................
*10.16 $300,000 Commercial Promissory Note signed by the Company in
favor of US Trust, dated July 24, 1997......................
*10.17 $94,444.40 Commercial Promissory Note signed by the Company
in favor of US Trust, dated August 12, 1997.................
*10.18 Second Amendment to Loan Agreement between the Company and
US Trust, dated January 16, 1998............................
*10.19 $750,000 Commercial Promissory Note signed by the Company in
favor of US Trust, dated January 16, 1998...................
*10.20 Promissory Note signed by Anthony J. Armini in favor of the
Company, dated September 26, 1998...........................
*10.21 Shareholders Agreement between NAR Holding Corporation and
Anthony J. Armini, dated July 15, 1987......................
*10.22 Lease between the Company and Teachers Insurance and Annuity
Association of America, dated September 29, 1995............
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
<C> <S> <C>
*10.23 First Amendment to Lease and Expansion Agreement between the
Company and Teachers Insurance and Annuity Association of
America, dated July 29, 1998................................
*10.24 Standard Cooperative Research and Development Agreement
between the Company and the Naval Research Laboratory, dated
January 21, 1997**..........................................
*10.25 Cooperative Agreement between the Company and the United
States of America U.S. Army Tank-Automotive and Armaments
Command Armamanet Research, Development and Engineering
Center, dated September 30, 1997**..........................
*10.26 Vendor Agreement Memorandum between the Company and
Osteonics, dated February 2, 1998**.........................
*10.27 Sample Purchase Order between the Company and MicroSpring
Company, Inc., dated October 24, 1996**.....................
*10.28 Asset Purchase Agreement between the Company and Falex
Corporation, dated November 17, 1995**......................
*10.29 Settlement between the Company and Erik Akhund, dated July
1, 1998.....................................................
*10.30 1992 Stock Option Plan......................................
*10.31 Form of Stock Option Agreement under the 1992 Stock Option
Plan........................................................
*10.32 1998 Incentive and Nonqualified Stock Option Plan...........
*10.33 Form of Incentive Stock Option under the 1998 Incentive and
Nonqualified Stock Option Plan..............................
*10.34 Form of Nonqualified Stock Option under the 1998 Incentive
and Nonqualified Stock Option Plan..........................
*10.35 Form of Nonqualified Stock Option for Non-Employee Directors
under the 1998 Incentive and Nonqualified Stock Option
Plan........................................................
*10.36 Form of Lock-Up Agreement...................................
*10.37 Agreement Appointing Transfer Agent and Registrar between
the Company and American Securities Transfer & Trust, Inc.,
dated October 19, 1998......................................
*10.38 Certification of Corporate Secretary dated October 19, 1998
concerning Agreement Appointing Transfer Agent and Registrar
between the Company and American Securities Transfer &
Trust, Inc..................................................
*10.39 Research and Development Agreement between the Company and
Guidant Corporation, dated May 20, 1998**...................
*10.40 Letter Agreement between the Company and Guidant
Corporation, dated September 28, 1998**.....................
*10.41 Form of Medical Advisory Board Agreement....................
*10.42 Form of Loan Agreement, dated January 7, 1999, between the
Company and the following employees in the following
amounts: Donald J. Dench ($12,500), Diane J. Ryan ($12,500),
Mark and Kathleen Gadarowski ($12,500), Gregory Huntington,
Sr. ($12,500), Leonard DeMild ($25,000), Michael Nelson
($12,500), Richard Sahagian ($12,500), Darryl Huntington
($12,500), Dennis Gadarowski ($12,500) and David Santos
($12,500)...................................................
*10.43 Terms and Conditions from Sample Purchase Order between the
Company and Biomet, Incorporated............................
10.44 Unit and Warrant Agreement between the Company and American
Securities Transfer & Trust, Inc., dated April 9, 1999......
*21.1 Subsidiaries of the Company.................................
23.1 Consent of Ernst & Young LLP................................
23.2 Consent of Foley, Hoag & Eliot LLP (included in Exhibit
5.1)........................................................
*24.1 Power of Attorney...........................................
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
<C> <S> <C>
*27.1 Financial Data Schedule.....................................
*27.2 Financial Data Schedule -- Three Months Ended September 30,
1998
*27.3 Financial Data Schedule -- Three Months Ended September 30,
1998
*27.4 Financial Data Schedule -- Six Months Ended December 31,
1998
*27.5 Financial Data Schedule -- Six Months Ended December 31,
1997
</TABLE>
- ---------------
* Previously filed.
** Filed under application for confidential treatment.
+ Replaces previously filed exhibit.
<PAGE> 1
Exhibit 1.2
IMPLANT SCIENCES CORPORATION
1,000,000 UNITS
EACH UNIT CONSISTING OF
ONE SHARE
OF COMMON STOCK
AND
ONE REDEEMABLE WARRANT
UNDERWRITING AGREEMENT
April 30, 1999
ISG Solid Capital Markets, LLC
592 Fifth Avenue
New York, NY 10036
Schneider Securities, Inc.
1120 Lincoln Street
Denver, Colorado 80203
Dear Sirs:
Implant Sciences Corporation a Massachusetts corporation (the "Company"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto, who are acting severally and not jointly, (the "Underwriters"), one
million units (the "Units") each Unit consisting of one share of common stock of
the Company and one redeemable common stock purchase warrant ( the "Warrant(s)")
(the Units, Common Stock and Warrants collectively referred to as the
"Securities"). The Company hereby confirms the agreement made by it with respect
to the purchase of the Securities by the Underwriter (s), which Securities are
more fully described in the Registration Statement referred to below. ISG Solid
Capital Markets, LLC is referred to herein as the "Representative" and along
with Schneider Securities, Inc. as the "Underwriters".
You have advised the Company that the Underwriters desire to act on a firm
commitment basis to publicly offer and sell the Securities for the Company and
that you are authorized to execute this Agreement. The Company confirms the
agreement made by it with respect to the relationship with the Underwriters as
follows:
1. Filing of Registration Statement with S.E.C. and Definitions. A
Registration Statement and Prospectus on Form SB-2 (File No.333-64499) with
respect to the Securities has been carefully and accurately prepared by the
Company in conformity with the requirements of the Securities Act of 1933,
as amended (the "Act"), and the published rules and regulations (the "Rules
and Regulations") thereunder or under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and has been filed with the Securities and
Exchange Commission (the "Commission") and such other states that the
Underwriter deems necessary in its discretion to so file to permit a public
offering and trading thereunder. Such registration statement, including the
prospectus, Part II, and all financial schedules and exhibits thereto, as
amended at the time when it shall become effective, is herein referred to
as the "Registration Statement," and any prospectus included as part of the
Registration Statement on file with the Commission that discloses all the
information that was omitted from the prospectus on the effective date
pursuant to Rule 430 A of the Rules and Regulations with any changes
contained in any prospectus filed with the Commission by the Company with
the Underwriters consent after the effective date of the Registration
Statement, is herein referred to as the "Final Prospectus." The prospectus
included as part of the Registration Statement of the Company and in any
amendments thereto prior to the effective date of the Registration
Statement is referred to herein as a "Preliminary Prospectus."
<PAGE> 2
2. Discount, Delivery, and Sale of the Securities
(a) Subject to the terms and conditions of this Agreement, and on the basis
of the representations, warranties, and agreements herein contained, the Company
agrees to sell to, and the Underwriters agree to buy from the Company at a
purchase price of $ per Unit before any underwriter expense allowances, an
aggregate of 1,000,000 Units on a firm commitment basis the "Initial
Securities".
It is understood that the Underwriters propose to offer the Securities to be
purchased hereunder to the public upon the terms and conditions set forth in the
Registration Statement, after the Registration Statement becomes effective.
(b) Delivery of the Securities against payment of the purchase price
therefor by certified or official bank check or checks or wire transfer in
next-day funds, payable to the order of the Company shall take place at the
offices of the clearing broker for the Representative at New York City, within
three (3) business day after the Securities are first traded (or such other
place as may be designated by agreement between you and the Company) at 11:00
A.M., New York time or such time and date as you and the Company may agree upon
in writing, such time and date of payment and delivery for the Securities being
herein called the "Initial Closing Date."
The Company will make the certificates for the Units and for the shares of
Common Stock and Warrants to be purchased by the Underwriters hereunder
available to the Underwriter for inspection and packaging at least two (2) full
business days prior to the Initial Closing Date. The Unit certificates shall be
in such names and denominations as the Underwriter may request to the Company in
writing at least four (4) full business days prior to any Closing Date.
(c) In addition, subject to the terms and conditions of this Agreement and on
the basis of the representations, warranties and agreements herein contained,
the Company grants an option to the Underwriters to purchase up to an additional
150,000 Units ("Option Securities") at the same terms as the Underwriters shall
pay for the Initial Securities being sold by the Company pursuant to the
provisions of Section 2(a) hereof. This option may be exercised from time to
time, for the purpose of covering overallotments, within forty-five (45) days
after (i) the effective date of the Registration Statement if the Company has
elected not to rely on Rule 430A under the Rules and Regulations or (ii) the
date of this Agreement if the Company has elected to rely upon Rule 430A under
the Rules and Regulations, upon written notice by the Underwriter setting forth
the number of Option Securities as to which the Underwriter is exercising the
option and the time and date at which such certificates are to be delivered.
Such time and date shall be determined by the Underwriter but shall not be
earlier than four (4) nor later than ten (10) full business days after the date
of the exercise of said option. Nothing herein shall obligate the Underwriter to
make any overallotment.
(d) Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriter(s) hereunder will be delivered at the closing by
the Company to the Underwriters against payment of the purchase price by the
Underwriters by certified or bank cashier's checks or wire transfer in funds
payable to the order of the Company.
(e) The information set forth under "Underwriting" in any preliminary
prospectus and Prospectus relating to the Securities and the information set
forth in the front cover page, and within the prospectus concerning
stabilization and over-allotment by the Underwriters, and (insofar as such
information relates to the Underwriters) constitutes the only information
furnished by the Underwriters to the Company for inclusion therein, and you
represent and warrant to the Company that the statements made therein are
correct.
(f) On the Initial Closing Date, the Company shall issue and sell to the
Underwriters, warrants (the "Underwriters' Warrants") at a purchase price of
$.001 per Underwriters' Warrant, which shall entitle the holders thereof to
purchase an aggregate of 100,000 Shares of Common Stock and 100,000 Redeemable
Warrants. The shares of Common Stock and Redeemable Warrants issuable upon the
exercise of the Underwriters' Warrants are hereafter referred to as the
"Underwriter's Securities" or "Underwriter's Warrants." The shares of Common
Stock issuable upon exercise of the redeemable warrants are hereinafter referred
to collectively as the "Underwriters Warrant Shares". The Underwriters' Warrants
for all securities shall be exercisable for a period of four (4) years
commencing one (1) year
2
<PAGE> 3
from the effective date of the Registration Statement at a price equaling one
hundred sixty percent (160%) of the initial public offering price
of the Securities. The form of Underwriters' Warrant shall be substantially in
the form filed as an Exhibit to the Registration Statement. Payment for the
Underwriters' Warrants shall be made on the Initial Closing Date.
3. Representations and Warranties of the Company.
(a) The Company represents and warrants to you as follows:
(i) The Company has prepared and filed with the Commission a registration
statement, and an amendment or amendments thereto, on Form SB-2 (No.333-64499),
including any related Preliminary Prospectus for the registration of the
Securities, the Underwriters' Warrant and the Underwriters' Warrant Shares
(sometimes referred to herein collectively as the "Registered Securities"),
under the Act, which registration statement and amendment or amendments have
been prepared by the Company in conformity with the requirements of the Act, and
the Rules and Regulations. The Company will promptly file a further amendment to
said registration statement in the form heretofore delivered to the Underwriter
and will not file any other amendment thereto to which the Underwriter shall
have objected verbally or in writing after having been furnished with a copy
thereof. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the registration
statement becomes effective (including the prospectus, financial statements, any
schedules, exhibits and all other documents filed as a part thereof or that may
be incorporated therein (including, but not limited to those documents or
information incorporated by reference therein) and all information deemed to be
a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the
Rules and Regulations), is hereinafter called the "Registration Statement," and
the form of prospectus in the form first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations, is hereinafter called the "Final
Prospectus."
(ii) Neither the Commission nor any state regulatory authority has issued any
order preventing or suspending the use of any Prospectus or the Registration
Statement and no proceeding for an order suspending the effectiveness of any
prospectus or the Registration Statement or any of the Company's securities has
been instituted or is pending or threatened. Each such Prospectus and/or any
supplement thereto has conformed in all material respects with the requirements
of the Act and the Rules and Regulations and on its date did not include any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein not misleading, in light of the circumstances
under which they were made; and when the Prospectus and any supplements thereto
becomes legally effective and for twenty-five (25) days subsequent thereto (i)
the Prospectus and/or any supplement thereto will contain all statements which
are required to be stated therein by the Act and Rules and Regulations, and (ii)
the Prospectus and/or any supplement thereto will not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, in
light of the circumstances under which they were made; provided, however, that
no representations, warranties or agreements are made hereunder as to
information contained in or omitted from the Prospectus in reliance upon, and in
conformity with, the written information furnished to the Company by you as set
forth in Section 2(e) above.
(iii)The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of its incorporation,
with full power and authority (corporate and other) to own its properties and
conduct its businesses as described in the Prospectus and is duly qualified to
do business as a foreign corporation in good standing in all other jurisdictions
in which the nature of its business or the character or location of its
properties requires such qualification, except where the failure to so qualify
would not have a material adverse effect on the business, properties or
operations of the Company as a whole.
(iv) The Company has full legal right, power and authority to authorize,
issue, deliver and sell the Securities, the Option Securities and the
Underwriters' Warrants and to enter into this Agreement, the Underwriters'
Warrant dated as of the initial closing date to be executed and delivered by the
Company to the Representative (the "Underwriters' Warrant Agreement"), and the
Financial Advisory and Investment Banking Agreement dated as of the Initial
Closing Date between the Company and the Underwriters (the "Consulting
Agreement"), and to consummate the transactions provided for in such agreements,
and each of such agreements has been duly and properly authorized, and on the
Initial Closing Date will be duly and properly executed and delivered by the
Company. This Agreement constitutes and on the Initial Closing Date each of the
Underwriters Warrant and the Consulting Agreement will then constitute valid and
binding agreements of the Company,
3
<PAGE> 4
except as the validity and binding nature of indemnification provisions may be
limited by federal or state securities laws).
(v) Except as disclosed in the Prospectus, the Company is not in violation
of its respective certificate or articles of incorporation or bylaws or in
default in the performance or observance of any material obligation, agreement,
covenant or condition contained in any material bond, debenture, note or other
evidence of indebtedness or in any material contract, indenture, mortgage, loan
agreement, lease, joint venture, partnership or other agreement or instrument to
which the Company is a party or by which it may be bound or is not in material
violation of any law, order, rule, regulation, writ, injunction or decree of any
governmental instrumentality or court, domestic or foreign; and the execution
and delivery of this Agreement, the Underwriters' Warrant and the Consulting
Agreement, and the consummation of the transactions contemplated therein and in
the Prospectus and compliance with the terms of each such agreement will not
conflict with, or result in a material breach of any of the terms, conditions or
provisions of, or constitute a material default under, or result in the
imposition of any material lien, charge or encumbrance upon any of the property
or assets of the Company pursuant to, any material bond, debenture, note or
other evidence of indebtedness or any material contract, indenture, mortgage,
loan agreement, lease, joint venture, partnership or other agreement or
instrument to which the Company is a party nor will such action result in the
material violation by the Company of any of the provisions of its respective
certificate or articles of incorporation or bylaws or any law, order, rule,
regulation, writ, injunction, decree of any government, governmental
instrumentality or court, domestic or foreign, except where such violation will
not have a material adverse effect on the financial condition of the Company.
(vi) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus and the Company will have the adjusted
capitalization set forth therein on the Initial Closing Date; provided that the
Company may issue additional shares to the extent disclosed in the Final
Prospectus; all of the shares of issued and outstanding capital stock of the
Company set forth therein have been duly authorized, validly issued and are
fully paid and nonassessable; the holders thereof do not have any rights of
rescission with respect thereto and are not subject to personal liability for
any obligations of the Company by reason of being stockholders under the laws of
the State in which the Company is incorporated; none of such outstanding capital
stock is subject to or was issued in violation of any preemptive or similar
rights of any stockholder of the Company; and such capital stock (including the
Securities, the Option Securities and the Underwriters' Warrant) conforms in all
material respects to all statements relating thereto contained in the
Prospectus.
(vii)The Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement or as described in the
Prospectus. The Securities, the Option Securities and the Underwriters' Warrant
are not and will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and delivered
in accordance with the terms hereof, will be validly issued, fully paid and
non-assessable and will conform in all material respects to the respective
descriptions thereof contained in the Prospectus; except for payment of the
applicable purchase price payable upon exercise of the options or warrants, as
the case may be the holders thereof will not be subject to any liability solely
as such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities, the Option Securities and the
Underwriters' Warrant has been duly and validly taken; and the certificates
representing the Securities, the Option Securities and the Underwriters'
Securities will conform with all legal requirements therefor. Upon the issuance
and delivery pursuant to the terms hereof of the Securities, the Option
Securities and the Underwriter's Units to be sold by the Company hereunder, the
Underwriter will acquire good and marketable title to such Securities, Option
Securities and Underwriter's Warrant free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction of any kind
whatsoever other than restrictions as may be imposed under the securities laws.
(viii) The Company has good and marketable title to all properties and assets
described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are described or referred
to in the Prospectus or which are not materially significant or important in
relation to its business or which have been incurred in the ordinary course of
business or for taxes not yet due and payable and except for a security interest
granted to the Company's lender; except as described in the Prospectus all of
the leases and subleases under which the Company holds properties or assets as
lessee or sublessee as described in the Prospectus are in full force and effect,
and the Company is not in material default in respect of any of the terms or
provisions of any of such leases or subleases, and no claim has been asserted to
the Company by anyone adverse to the Company's rights as lessor, sublessor,
lessee or sublessee under any of the leases or subleases mentioned above or
affecting or questioning the Company's right to the continued
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<PAGE> 5
possession of the leased or subleased premises or assets under any such lease or
sublease; and the Company owns or leases all such properties as are necessary to
its operations as now conducted and as contemplated to be conducted, except as
otherwise stated in the Prospectus.
(ix) The financial statements, together with related notes, set forth in
the Prospectus fairly present in all material respects the financial position
and results of operations of the Company at the respective dates and for the
respective periods to which they apply. Said statements and related notes have
been prepared in accordance with generally accepted accounting principles
applied on a basis which is consistent in all material respects during the
periods involved but any stub period has not been audited by an independent
accounting firm. There has been no material adverse change or material
development involving a prospective change in the condition, financial or
otherwise, or in the prospects, value, operation, properties, business or
results of operations of the Company whether or not arising in the ordinary
course of business, since the date of the financial statements included in the
Registration Statement and the Prospectus.
(x) Subsequent to the respective dates as of which information is
given in the Prospectus as it may be amended or supplemented, and except as
described in the Prospectus, the Company has not, directly or indirectly,
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business or entered into any transactions not in the ordinary
course of business, which are material to the business of the Company as a whole
and there has not been any change in the capital stock of, or any incurrence of
long term debts by, the Company or any issuance of options, warrants or rights
to purchase the capital stock of the Company (other than pursuant to the
Company's 1992 and 1998 Stock Option Plans and 1998 Employee Stock Purchase
Plan) or declaration or payment of any dividend on the capital stock of the
Company or any material adverse change in the condition (financial or other),
net worth or results of operations of the Company as a whole and the Company has
not become a party to, any material litigation whether or not in the ordinary
course of business.
(xi) To the knowledge of the Company, except as disclosed in the
Prospectus there is no pending or threatened, action, suit or proceeding to
which the Company is a party before or by any court or governmental agency or
body, which might result in any material adverse change in the condition
(financial or other), business or prospects of the Company as a whole or might
materially and adversely affect the properties or assets of the Company as a
whole nor are there any actions, suits or proceedings against the Company
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race which might be expected to materially and adversely
affect the conduct of the business, property, operations, financial condition or
earnings of the Company as a whole; and no labor disturbance by the employees of
the Company individually exists or is, to the knowledge of the Company, imminent
which might be expected to materially and adversely affect the conduct of the
business, property, operations, financial condition or earnings of the Company
as a whole.
(xii) Except as may be disclosed in the Prospectus, the Company has
properly prepared and filed all necessary federal, state, local and foreign
income and franchise tax returns, has paid all taxes shown as due thereon, has
established adequate reserves for such taxes which are not yet due and payable,
and does not have any tax deficiency or claims outstanding, proposed or assessed
against it.
(xiii) Except as may be disclosed in the Prospectus, the Company has
sufficient licenses, permits, right to use trade or service marks and other
governmental authorizations currently required for the conduct of its business
as now being conducted and as contemplated to be conducted and the Company is in
all material respects complying therewith. Except as set forth in the
Prospectus, the expiration of any such licenses, permits, or other governmental
authorizations would not materially affect the Company's operations. To its
knowledge, none of the activities or businesses of the Company are in material
violation of, or cause the Company to materially violate any law, rule,
regulations, or order of the United States, any state, county or locality, or of
any agency or body of the United States or of any state, county or locality the
violation of which would have a material adverse effect on the business
properties or financial condition of the Company taken as a whole.
(xiv) The Company has not at any time (i) made any contributions to any
candidate for political office in violation of law, or failed to disclose fully
any such contribution, or (ii) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasipublic duties, other than payments required or allowed by applicable law.
(xv) Except as set forth in the Prospectus the Company knows of no
outstanding claims for services either in the nature of a finder's fee,
brokerage fee or otherwise with respect to this financing for which the Company
or the
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<PAGE> 6
Underwriters may be responsible, or which may affect the Underwriter's
compensation as determined by the National Association of Securities Dealers
Regulation, Inc. ("NASD") except as otherwise disclosed in the Prospectus or
known by the Underwriters.
(xvi) The Company has its property adequately insured against loss or
damage by fire and maintains such other insurance as is customarily maintained
by companies in the same or similar business.
(xvii) The Underwriters' Warrants herein described are duly and validly
authorized and upon delivery to the Underwriters in accordance herewith will be
duly issued and legal, valid and binding obligations of the Company, except as
the enforceability thereof may be limited by bankruptcy or other similar laws
affecting the rights of creditors generally or by equitable principles, and
except as the enforcement of indemnification provisions may be limited by
federal or state securities laws.
The Underwriters' Securities issuable upon exercise of any of the
Underwriter's Warrants have been duly authorized, and when issued upon payment
of the exercise price therefor, will be validly issued, fully paid and
nonassessable.
(xviii)Except as set forth in the Prospectus, no default exists in the
due performance and observance of any term, covenant or condition of any
material license, contract, indenture, mortgage, installment sale agreement,
lease, deed of trust, voting trust agreement, stockholders agreement, note, loan
or credit agreement, purchase order, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which the property or assets (tangible or intangible) of the Company is
subject or affected.
(xix) The Company has generally enjoyed a satisfactory employer-employee
relationship with its employees and, is in substantial compliance in all
material respects with all federal, state, local, and foreign laws and
regulations respecting employment and employment practices, terms and conditions
of employment and wages and hours. To the best of the Company's knowledge, there
are no pending investigations involving the Company, by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement of such
federal, state, local, or foreign laws and regulations. There is no unfair labor
practice charge or complaint against the Company pending before the National
Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or
stoppage pending or threatened against or to its knowledge involving the
Company, or any predecessor entity, and none has ever occurred. There is no
representation question pending respecting the employees of the Company, and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. There is no grievance or arbitration proceeding
pending or to its knowledge threatened under any expired or existing collective
bargaining agreements of the Company. No labor dispute with the employees of the
Company is pending, or, to its knowledge is imminent; and the Company is not
aware of any pending or imminent labor disturbance by the employees of any of
its principal suppliers, manufacturers or contractors which may result in any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs, position, prospects, value, operation, properties,
business or results of operations of the Company.
(xx) Except as may be set forth in the Registration Statement, the
Company does not maintain, sponsor or contribute to any program or arrangement
that is an "employee pension benefit plan," an "employee welfare benefit plan,"
or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(l) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute,
now or at any time previously, to a defined benefit plan, as defined in Section
3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Internal Revenue Code (the "Code"), which could subject the Company
to any tax penalty on prohibited transactions and which has not adequately been
corrected. Each ERISA Plan is in compliance with all material reporting,
disclosure and other requirements of the Code and ERISA as they relate to any
such ERISA Plan. The Company has never completely or partially withdrawn from a
"multiemployer plan."
(xxi) None of the Company, or any of its employees, directors,
stockholders, or affiliates (within the meaning of the Rules and Regulations)
has taken or will take, directly or indirectly, any action designed to or which
has constituted
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<PAGE> 7
or which might be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities, Option Securities,
Underwriter's Securities or otherwise.
(xxii) Except as disclosed in the Prospectus, none of the patents,
patent applications, trademarks, service marks, trade names, copyrights, and
licenses and rights to the foregoing presently owned or held by the Company, are
in dispute or, to the knowledge of the Company's management are in any conflict
with the right of any other person or entity. The Company (i) except as
disclosed in the Prospectus owns or has the right to use, all patents,
trademarks, service marks, trade names and copyrights, technology and licenses
and rights with respect to the foregoing, used in the conduct of its business as
now conducted or proposed to be conducted without infringing upon or otherwise
acting adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing, and except as set
forth in the Prospectus or otherwise disclosed to the Underwriters in writing,
to the best knowledge of the Company's management is not obligated or under any
liability whatsoever to make any material payments by way of royalties, fees or
otherwise to any owner or licensee of, or other claimant to, any patent,
trademark, service mark, trade name, copyright, know-how, technology or other
intangible asset, with respect to the use thereof or in connection with the
conduct of its business or otherwise.
(xxiii)Except as disclosed in the Prospectus the Company owns and has
adequate right to use to the best knowledge of the Company's management all
trade secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
designs, processes, works of authorship, computer programs and technical data
and information (collectively herein "intellectual property") required for or
incident to the development, manufacture, operation and sale of all products and
services sold or proposed to be sold by the Company. The Company is not aware of
any such development of similar or identical trade secrets or technical
information by others. In the event the Company has valid and binding
confidentiality agreements with all of its officers, covering its intellectual
property (subject to the equitable powers of any court), such agreements have
remaining terms of at least two years from the effective date of the
Registration Statement except where the failure to have such agreements would
not materially and adversely effect the Company's business taken as a whole. The
Company has good and marketable title to, or valid and enforceable leasehold
estates in, all items of real and personal property stated in the Prospectus, to
be owned or leased by it free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects, or other restrictions or
equities of any kind whatsoever, other than those referred to in the Prospectus
and liens for taxes not yet due and payable.
(xxiv) Ernst & Young , LLP., whose reports are filed with the Commission
as a part of the Registration Statement, are independent certified public
accountants as required by the Act and the Rules and Regulations.
(xxv) The Company has agreed to execute and has also caused to be duly
executed agreements pursuant to which each of the Company's officers and
directors and employee shareholders and any person or entity deemed to be an
affiliate of the Company pursuant to the Rules and Regulations has agreed not
to, directly or indirectly, sell, assign, transfer, or otherwise dispose of any
shares of Common Stock or securities convertible into, exercisable or
exchangeable for or evidencing any right to purchase or subscribe for any shares
of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or
otherwise) for a period of not less than thirteen) (13) months following such
effective date; provided however, that the foregoing shall not prevent (i) the
Company from selling shares of Common Stock in accordance with its 1992 and 1998
Stock Plans and Employee Stock Purchase Plan, and (ii) the Restricted
Shareholders from making gifts of shares of Common Stock to persons or
organizations agreeing to be bound by the foregoing restrictions. The Company
shall use its best efforts to obtain from its shareholders holding in excess of
1,000 outstanding shares, written commitments restricting each such person from
selling any of their shares of common stock for thirteen (13) months from the
effective date of the Registration Statement. The Company will cause the
Transfer Agent, as defined below,to mark an appropriate legend on the face of
stock certificates representing all of such securities and to place "stop
transfer" orders on the Company's stock ledgers.
(xxvi) The Registered Securities have been approved for listing on
Nasdaq or an Exchange.
(xxvii) Except as set forth in the Prospectus or disclosed in writing to
the Underwriters (which writing specifically refers to this Section), no officer
or director of the Company, holder of 5% or more of securities of the Company or
any "affiliate" or "associate" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) of any of the foregoing persons or
entities has or has had, either directly or indirectly, (i) an interest in any
7
<PAGE> 8
person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services, or
(ii) a beneficiary interest in any contract or agreement (other than a
subscription agreement) to which the Company is a party or by which it is or
may be bound or affected. Except as set forth in the Prospectus under "Certain
Transactions" or disclosed in writing to the Underwriters (which writing
specifically refers to this Section) there are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the Company, and
any officer, director, principal stockholder of the Company, or any partner,
affiliate or associate of any of the foregoing persons or entities.
(xxviii) Any certificate signed by any officer of the Company, and
delivered to the Underwriters or to the Underwriters' counsel (as defined
herein) shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(xxix) Each of the minute books of the Company has been made available to
the Underwriters and contains a complete summary of all meetings and actions of
the directors and stockholders of the Company, since the time of its
incorporation and reflect all transactions referred to in such minutes
accurately in all respects.
(xxx) As of the Initial Closing Date, the Company will enter into the
Consulting Agreement substantially in the form filed as an Exhibit to the
Registration Statement with respect to the rendering of consulting services by
the Representative to the Company.
(xxxi) Except and only to the extent described in the Prospectus or
disclosed in writing to the Underwriters (which writing specifically refers to
this Section), no holders of any securities of the Company or of any options,
warrants or other convertible or exchangeable securities of the Company have the
right to include any securities issued by the Company in the Registration
Statement or any registration statement to be filed by the Company or to require
the Company to file a registration statement under the Act and no person or
entity holds any anti-dilution rights with respect to any securities of the
Company. Except as disclosed in the Prospectus, all rights so described or
disclosed have been waived or have not been triggered with respect to the
transactions contemplated by this Agreement, the Consulting Agreement and the
Underwriters' Warrant Agreement (including the warrants issuable thereunder).
(xxxii) The Company has not entered into any employment agreements with its
executive officers, except as disclosed in the Prospectus.
(xxxiii) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the issuance of the Underwriters'
Warrants, the performance of this Agreement, the Underwriters' Warrant and the
Consulting Agreement, and the transactions contemplated hereby and thereby,
including without limitation, any waiver of any preemptive, first refusal or
other rights that any entity or person may have for the issue and/or sale of any
of the Securities, the Option Securities and the Underwriter's Warrant, except
such as have been or may be obtained under the Act, otherwise or may be required
under state securities or blue sky laws in connection with the Underwriters'
purchase and distribution of the Securities, the Option Securities, the
Underwriter's Securities and the Underwriters' Warrants to be sold by the
Company hereunder or may be required by the Rules of the National Association of
Securities Dealer, Inc. ("NASD").
(xxxiv) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or businesses may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company, enforceable
against the Company, in accordance with their respective terms. The descriptions
in the Registration Statement of agreements, contracts and other documents are
accurate and fairly present the information required to be shown with respect
thereto by Form SB-2, and there are no contracts or other documents which are
required by the Act to be described in the Registration Statement or filed as
exhibits to the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are complete and correct copies
of the documents of which they purport to be copies.
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(xxxv) Within the past five (5) years, none of the Company's independent
public accountants has brought to the attention of the Company's management any
"material weakness" as defined in the Statement of Auditing Standard No. 60 in
any of the Company's internal controls.
4. Covenants of the Company. The Company covenants and agrees with you that:
(a) It will cooperate in all respects in making the Prospectus effective and
will not at any time, whether before or after the effective date, file any
amendment to or supplement to the Prospectus of which you shall not previously
have been advised and furnished with a copy or to which you or your counsel
shall have reasonably objected or which is not in material compliance with the
Act and the Rules and Regulations or applicable state law.
As soon as the Company is advised thereof, the Company will advise you, and
confirm the advice in writing, of the receipt of any comments of the Commission
or any state securities department, when the Registration Statement becomes
effective if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance with said Rule
430A, of the effectiveness of any posteffective amendment to the Registration
Statement or Prospectus, or the filing of any supplement to the Prospectus or
any amended Prospectus, of any request made by the Commission or any state
securities department for amendment of the Prospectus or for supplementing of
the Prospectus or for additional information with respect thereto, of the
issuance of any stop order suspending the effectiveness of the Prospectus or any
order preventing or suspending the use of any Prospectus or any order suspending
trading in the Common Stock of the Company, or of the suspension of the
qualification of the Securities, the Option Securities or the Underwriters'
Warrants for offering in any jurisdiction, or of the institution of any
proceedings for any such purposes, and will use its best efforts to prevent the
issuance of any such order and, if issued, to obtain as soon as possible the
lifting or dismissal thereof.
The Company has caused to be delivered to you copies of such Prospectus, and
the Company has consented and hereby consents to the use of such copies for the
purposes permitted by law. The Company authorizes you and the dealers to use the
Prospectus and such copies of the Prospectus in connection with the sale of the
Securities, the Option Securities and the Underwriters' Warrants for such period
as in the opinion of your counsel and our counsel the use thereof is required to
comply with the applicable provisions of the Act and the Rules and Regulations.
The Company will prepare and file with the states, promptly upon your request,
any such amendments or supplements to the Prospectus, and take any other action,
as, in the opinion of your counsel, may be necessary or advisable in connection
with the initial sale of the Securities, the Option Securities and the
Underwriters' Warrants and will use its best efforts to cause the same to become
effective as promptly as possible.
The Company shall file the Prospectus (in form and substance satisfactory to
the Underwriter) or transmit the Prospectus by a means reasonably calculated to
result in filing with the Commission pursuant to rule 424(b)(1) or pursuant to
Rule 424(b)(3) not later than the Commission's close of business on the earlier
of (i) the second business day following the execution and delivery of this
Agreement, and (ii) the fifth business day after the effective date of the
Registration Statement.
In case of the happening, at any time within such period as a Prospectus is
required under the Act to be delivered in connection with the initial sale of
the Securities, the Option Securities and the Underwriters' Warrants of any
event of which the Company has knowledge and which materially affects the
Company, or the securities thereof, and which should be set forth in an
amendment of or a supplement to the Prospectus in order to make the statements
therein not then misleading, in light of the circumstances existing at the time
the Prospectus is required under the Act to be delivered, or in case it shall be
necessary to amend or supplement the Prospectus to comply with the Act, the
Rules and Regulations or any other law, the Company will forthwith prepare and
furnish to you copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as you may reasonably request, in
order that the Prospectus, as so amended or supplemented, will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they are made. The preparation and
furnishing of any such amendment or supplement to the Prospectus or supplement
to be attached to the Prospectus shall be without expense to you.
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The Company will to the best of its ability comply with the Act, the Exchange
Act and applicable state securities laws so as to permit the initial offer and
sales of the Securities, the Option Securities and the Underwriters' Warrants
under the Act, the Rules and Regulations, and applicable state securities laws.
(b) The Company will cooperate to qualify the Securities and the Option
Securities and the Underwriters' Securities for initial sale under the
securities laws of such jurisdictions as you may designate and will make such
applications and furnish such information as may be required for that purpose,
provided the Company shall not be required to qualify as a foreign corporation
or a dealer in securities. The Company will, from time to time, prepare and file
such statements and reports as are or may be required to continue such
qualification in effect for so long as the Underwriters may reasonably request.
(c) So long as any of the Securities, the Option Securities or the
Underwriter's Securities remain outstanding in the hands of the public, the
Company, at its expense, will annually furnish to its shareholders a report of
its operations to include financial statements audited by independent public
accountants, and will furnish to the Underwriter as soon as practicable after
the end of each fiscal year, a balance sheet of the Company as at the end of
such fiscal year, together with statements of operations, shareholders' equity,
and changes in cash flow of the Company for such fiscal year, all in reasonable
detail and accompanied by a copy of the certificate or report thereon of
independent public accountants.
(d) The Company will deliver to you at or before the Initial Closing Date
three signed copies of the signature pages to the Registration Statement . The
Company will deliver to you, from time to time until the effective date of the
Prospectus, as many copies of the Prospectus as you may reasonably request. The
Company will deliver to you on the effective date of the Prospectus and
thereafter for so long as a Prospectus is required to be delivered under the Act
and the Rules and Regulations as many copies of the Prospectus, in final form,
or as thereafter amended or supplemented, as you may from time to time
reasonably request.
(e) The Company will apply the net proceeds from the sale of the Securities
and the Option Securities substantially in the manner set forth under "Use of
Proceeds" in the Prospectus. No portion of the proceeds shall be used, directly
or indirectly, to acquire any securities issued by the Company, without the
prior written consent of the Underwriters.
(f) As soon as it is practicable, but in any event not later than the first
(lst) day of the fifteenth (15th) full calendar month following the effective
date of the Registration Statement, the Company will make available to its
security holders and the Underwriter an earnings statement (which need not be
audited) covering a period of at least twelve (12) consecutive months beginning
after the effective date of the Registration Statement, which shall satisfy the
requirements of Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations.
(a) Non-Accountable Expense Allowance and other Costs and Expenses.
The Company shall pay to the Underwriters at each closing date, and to
be deducted from the purchase price for the Securities and the Option
Securities, an amount equal to three percent (3%) of the total proceeds received
by the Company from the sale of the Securities and the Option Securities at such
closing date, less in the case of the Initial Closing Date, the sum of $62,500
previously paid by the Company. If the sale of the Securities by the Underwriter
is not consummated for any reason not attributable to the Underwriter, or if (i)
the Company withdraws the Registration Statement from the Commission or does not
proceed with the public offering, or (ii) the representations in Section 3
hereof are not correct or the covenants cannot be complied with, or (iii) there
has been a materially adverse change in the condition, prospects or obligations
of the Company or a materially adverse change in stock market conditions from
current conditions, all as determined by the Underwriter, then the Company shall
reimburse the Underwriter for their out of pocket expenses including without
limitation its legal fees and disbursements all on an accountable basis but not
to exceed $100,000 (less the $62,500 previously paid by the Company), and if any
excess remains from the advance previously paid, such excess will be returned to
the Company.
Costs and Expenses.
Subject to the provisions above the Company will pay all costs
and expenses incident to the performance of this Agreement by the Company
including, but not limited to, the fees and expenses of counsel to the Company
and of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement and Prospectus (including the fee of the Commission, any securities
exchange and the NASD in connection with the filing required by the NASD
relating to the offering of the
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Securities contemplated hereby); all expenses, including fees of counsel, which
shall be due and payable on the Closing Date in connection with the
qualification of the Securities under the state securities or blue sky laws; the
cost of furnishing to you copies of the Prospectus, this Agreement, the cost of
printing the certificates representing the Securities and of preparing and
photocopying the Underwriting Agreement and related Underwriting documents, the
cost of three underwriter's bound volumes, any advertising costs and expenses,
including but not limited to the Company's expenses on "road show" information
meetings and presentations, prospectus memorabilia, issue and transfer taxes, if
any. The Company will also pay all costs and expenses incident to the furnishing
of any amended Prospectus of or any supplement to be attached to the Prospectus.
(h) reserved
(i) During a date five years after the date hereof, the Company will file
Form 8-K where required and, as soon as practicable deliver to the Underwriter:
(1) as soon as they are available, copies of all reports (financial or
other) mailed to shareholders;
(2) as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, the NASD or any securities
exchange;
(3) however, every press release and every material news item or article
of interest to the financial community in respect of the Company or its affairs
which was prepared and released by or on behalf of the Company to be delivered
only to the underwriter not the shareholder unless the Company deems otherwise;
and
(4) any additional information of a public nature concerning the Company
(and any future subsidiaries) or its businesses which the Underwriters may
reasonably request.
During such five-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(j) The Company will maintain a Transfer Agent and, if necessary under the
jurisdiction of incorporation of the Company, a Registrar (which may be the same
entity as the Transfer Agent) for its Units, Common Stock, and Warrants.
(k) The Company will furnish to the Underwriters or on the Underwriters'
order, without charge, at such place as the Underwriters may designate, copies
of each Preliminary Prospectus, the Final Prospectus the Registration Statement
and any pre-effective or post-effective amendments thereto (two of which copies
will be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Underwriters may request.
(1) Neither the Company nor any of its officers, directors, stockholders or
any of its affiliates will take, directly or indirectly, any action designed to,
or which might in the future reasonably be expected to cause or result in
stabilization or manipulation of the price of any of the Company's securities.
(m ) Reserved
(n) The Company shall cause the Securities to be listed on the NASDAQ Small
Cap Market or on an exchange for a period of five (5) years from the date
hereof, and use its best efforts to maintain the listing of the Securities to
the extent they are outstanding.
(o) As soon as practicable, (i) before the effective date of the Registration
Statement, file a Form 8-A with the Commission providing for the registration
under the Exchange Act of the Securities and (ii) but in no event more than 30
days from the effective date of the Registration Statement, take all necessary
and appropriate actions to be included in Standard and Poor's Corporation
Descriptions and/or Moody's OTC Manual and to continue such inclusion for a
period
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of not less than five years if the securities are not listed on an exchange. The
Company also agrees to take such steps as may be necessary to comply with the
requirements of any state to be in compliance with the provisions of Section 18
of the Securities Act of 1933, as amended by the National Securities Markets
Improvement Act of 1996.
(p) Until the completion of the distribution of the Securities, the Company
shall not without the prior written consent of the Underwriters and their
counsel which consent shall not be unreasonably withheld or delayed, issue,
directly or indirectly, any press release or other communication or hold any
press conference with respect to the Company or its activities or the offering
contemplated hereby, other than trade releases issued in the ordinary course of
the Company's business consistent with past practices with respect to the
Company's operations.
(q) Until the earlier of (i) five (5) years from the date hereof or (ii) the
sale to the public of the Warrant Shares, the Company will not take any action
or actions which may prevent or disqualify the Company's use of Form SB-2 (or
other appropriate form) for the registration under the Act of the Warrant Shares
and the Underwriters' Securities.
(a) Commencing one year from the effective date of the Registration
Statement, the Company agrees to pay the Underwriter a 5% solicitation
fee for the exercise of the publicly-held Warrants such solicitation
being subject to applicable SEC and NASD Rules.
(a) The Company agrees to retain the Underwriters for a period of 24
months at $3000 per month, to continue the development of interest and
sponsorship in the common shares with the first twelve months paid in
advance at the closing.
(t) The Company agrees that the Representative may designate one person at
its discretion to attend board meetings as an observer without compensation
except for associated travel expenses to be reimbursed by the Company.
5. Conditions of the Underwriters' Obligations. The obligation of the
Underwriters to offer and sell the Securities and the Option Securities is
subject to the accuracy in all material respects (as of the date hereof, and as
of the Closing Dates) of and compliance in all material respects with the
representations and warranties of the Company to the performance by it of its
agreement and obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective as and when
cleared by the Commission, and you shall have received notice thereof, on or
prior to any closing date no stop order suspending the effectiveness of the
Prospectus shall have been issued and no proceedings for that or similar purpose
shall have been instituted or shall be pending, or, to your knowledge or to the
knowledge of the Company, shall be contemplated by the Commission; any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the Underwriters; and
qualification, under the securities laws of such states as you may designate, of
the issue and sale of the Securities upon the terms and conditions herein set
forth or contemplated and containing no provision unacceptable to you shall have
been secured, and no stop order shall be in effect denying or suspending
effectiveness of such qualification nor shall any stop order proceedings with
respect thereto be instituted or pending or threatened under such law.
(b) On any closing date and, with respect to the letter referred to in
subparagraph (iii), as of the date hereof, you shall have received:
(i) the opinion, together with such number of signed or photostatic copies of
such opinion as you may reasonably request, addressed to you by Foley, Hoag &
Eliot LLP counsel for the Company, in form and substance reasonably satisfactory
to the Underwriters and William M. Prifti, Esq., counsel to the Underwriters,
dated each such closing date, to the effect that:
(A) The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the jurisdiction in which it is
incorporated and has all necessary corporate power and authority to carry on its
business as described in the Prospectus.
(B) The Company is qualified to do business in each jurisdiction in which
conducting its business requires such qualification, except where the failure to
be so qualified would not have a material adverse effect on the Company's
business or assets.
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<PAGE> 13
(C) The Company has the full corporate power and authority to enter into this
Agreement, the Underwriters' Warrant and the Consulting Agreement and to
consummate the transactions provided for therein and each such Agreement has
been duly and validly authorized, executed and delivered by the Company. Each of
this Agreement, the Consulting Agreement and the Underwriters' Warrant assuming
due authorization, execution and delivery by each other party thereto,
constitutes a legal, valid and binding agreement of the Company and provided
that no opinion need be given as to the enforceability of any indemnification or
contribution provisions, and none of the Company's execution or delivery of this
Agreement, the Consulting Agreement or the Underwriter's Warrant, its
performance hereunder or thereunder, its consummation of the transactions
contemplated herein or therein, or the conduct of its business as described in
the Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
material breach or violation of any of the terms or provisions of, or
constitutes or will constitute a material default under, or result in the
creation or imposition of any material lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company pursuant to the terms
of (A) the articles of incorporation or by-laws of the Company, (B) to the
knowledge of such counsel, any material license, contract, indenture, mortgage,
deed of trust, voting trust agreement, stockholders' agreement, note, loan or
credit agreement or any other agreement or instrument to which the Company is a
party or by which it is or may be bound, or (C) to the knowledge of such
counsel, any statute, judgment, decree, order, rule or regulation applicable to
the Company, whether domestic or foreign.
(D) The Company had authorized and outstanding capital stock as set forth in
the Prospectus under the heading "Capitalization" as of the date set forth
therein, and all of such issued and outstanding shares of capital stock have
been duly and validly authorized and issued, and to the knowledge of such
counsel are fully paid and nonassessable, and to the knowledge of such counsel
no stockholder of the Company is entitled to any preemptive rights to subscribe
for, or purchase shares of the capital stock and to the knowledge of such
counsel none of such securities were issued in violation of the preemptive
rights of any holders of any securities of the Company.
(E) To the knowledge of such counsel, the Company is not a party to or bound
by any instrument, agreement or other arrangement providing for it to issue any
capital stock, rights, warrants, options or other securities, except for this
Agreement, the Underwriters' Warrant, and except as described in the Prospectus.
The Common Stock, the Warrants and the Underwriters' Warrants each conforms in
all material respects to the respective descriptions thereof contained in the
Prospectus. The outstanding shares of Common Stock, the Warrant and the Warrant
Stock and the Underwriters' Warrant Stock, upon issuance and delivery and
payment therefore in the manner described herein, the Warrant and the
Underwriters' Warrant, as the case may be, will be, duly authorized, validly
issued, fully paid and nonassessable. There are no preemptive or other rights to
subscribe for or to purchase, or any restriction upon the voting or transfer of,
any shares of Common Stock pursuant to the Company's articles of incorporation,
by-laws, other governing documents or any agreement or other instrument known to
such counsel to which the Company is a party or by which it is bound.
(F) The certificates representing the Securities comprising the Unit, the
Common Stock and Warrants conform with all legal requirements therefor and each
of the Warrant Stock and the Underwriters' Warrant Stock has been duly
authorized and reserved for issuance and when issued and delivered in accordance
with the respective terms of the Warrant Agreement and the Underwriter's
Warrant, respectively, will be duly and validly issued, fully paid and
nonassessable.
(G) To the knowledge of such counsel, there are no claims, suits or other
legal proceedings pending or threatened against the Company in any court or
before or by any governmental body which might materially affect the business of
the Company or the financial condition of the Company as a whole, except as set
forth in the Prospectus.
(H) Based on oral and/or written advice from the staff of the Commission, the
Registration Statement has become effective and, to the knowledge of such
counsel, no stop order suspending the effectiveness of the Prospectus is in
effect and no proceedings for that purpose are pending before, or threatened by,
federal or by a state securities administrator.
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<PAGE> 14
(I) To the knowledge of such counsel, there are no legal or governmental
proceedings, actions, arbitrations, investigations, inquiries or the like
pending or threatened against the Company of a character required to be
disclosed in the Prospectus which have not been so disclosed, questions the
validity of the capital stock of the Company or this Agreement or the
Underwriters' Warrant Agreement or might adversely affect the condition,
financial or otherwise, or the prospects of the Company or which could adversely
affect the Company's ability to perform any of its obligations under this
Agreement, or the Underwriters' Warrant.
(J) To such counsel's knowledge, there are no material agreements, contracts
or other documents known to such counsel required by the Act to be described in
the Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the Registration Statement
and the Prospectus and filed as exhibits thereto, and to such counsel's
knowledge (A) the exhibits which have been filed are correct copies of the
documents of which they purport to be copies; (B) the descriptions in the
Registration Statement and the Prospectus and any supplement or amendment
thereto of contracts and other documents to which the Company is a party or by
which it is bound, including any document to which the Company is a party or by
which it is bound incorporated by reference into the Prospectus and any
supplement or amendment thereto, are accurate in all material respects and
fairly represent the information required to be shown by Form SB-2.
(K) No consent, approval, order or authorization from any regulatory board,
agency or instrumentality having jurisdiction over the Company, or its
properties (other than registration under the Act or qualification under state
or foreign securities law or approval by the NASD) is required for the valid
authorization, issuance, sale and delivery of the Securities, the Option
Securities or the Underwriters' Warrant.
(L) The statements in the Prospectus under "Risk Factors-Control by Existing
Stockholders," "Risk of Third-Party Claims of Infringement", "Patents and
Proprietary Technology", "Management-Limitation of Liability" "Description of
the Securities," and "Shares Eligible For Future Sale" have been reviewed by
such counsel, and insofar as they refer to statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions, are correct in
all material respects.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company,
Underwriters' Counsel and the independent certified public accountants of the
Company, at which such conferences the contents of the Registration Statement
and Prospectus and related matters were discussed, and although they have not
certified the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention of
such counsel which leads them to believe that, at the time the Registration
Statement became effective and at all times subsequent thereto up to and on the
Closing Date and on any later date on which Option Shares are to be purchased,
the Registration Statement and any amendment or supplement, when such documents
became effective or were filed with the Commission (other than the financial
statements including the notes thereto and supporting schedules and other
financial and statistical information derived therefrom, as to which such
counsel need express no comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the Closing Date
or any later date on which the Option Shares are to be purchased, as the case
may be, the Prospectus and any amendment or supplement thereto (other than the
financial statements including the notes thereto and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
Such opinion shall also cover such other matters incident to the transactions
contemplated hereby and the offering Prospectus as you or counsel to the
Underwriter shall reasonably request. In rendering such opinion, to the extent
deemed reasonable by them, such counsel may rely upon certificates of any
officer of the Company or public officials as to matters of fact of which the
maker of such certificate has knowledge.
(ii) a certificate, signed by the Chief Executive Officer and the Principal
Financial or Accounting Officer of the Company dated the Closing Date, to the
effect that with regard to the Company, each of the conditions set forth in
Section 5(d) have been satisfied.
(iii) a letter, addressed to the Underwriter and in form and substance
satisfactory to the Underwriter in all respects (including the nature of the
changes or decreases, if any, referred to in clause (D) below),
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<PAGE> 15
from Ernst & Young LLP, dated, respectively, as of the effective date of the
Registration Statement and as of the Closing Date, as the case may be:
(A) Confirming that they are independent public accountants with respect to
the Company and its consolidated subsidiaries, if any, within the meaning of the
Act and the applicable published Rules and Regulations.
(B) Stating that, in their opinion, the financial statements, related notes
and schedules of the Company and its consolidated subsidiaries, if any, included
in the Registration Statement examined by them comply as to form in all material
respects with the applicable accounting requirements of the Act and the
published Rules and Regulations thereunder.
(C) Stating that, with respect to the period from June 30, 1998 to a
specified date ("specified date") not earlier than five (5) business days prior
to the date of such letter, they have read the minutes of meetings of the
stockholders and board of directors (and various committees thereof) of the
Company and its consolidated subsidiaries, if any, for the period from June 30,
1998 through the specified date, and made inquiries of officers of the Company
and its consolidated subsidiaries, if any, responsible for financial and
accounting matters and, especially as to whether there was any decrease in
sales, income before extraordinary items or net income as compared with the
corresponding period in the preceding year; or any change in the capital stock
of the Company or any change in the long term debt or any increase in the
short-term bank borrowings or any decrease in net current assets or net assets
of the Company or of any of its consolidated subsidiaries, if any, and further
stating that while such procedures and inquiries do not constitute an
examination made in accordance with generally accepted auditing standards,
nothing came to their attention which caused them to believe that during the
period from June 30, 1998, through the specified date there were any decreases
as compared with the corresponding period in the preceding year in sales, income
before extraordinary items or net income; or any change in the capital stock of
the Company or consolidated subsidiary, if any, or any change in the long term
debt or any increase in the short-term bank borrowings (other than any increase
in short-term bank borrowings in the ordinary course of business) of the Company
or any consolidated subsidiary, if any, or any decrease in the net current
assets or net assets of the Company or any consolidated subsidiary, if any; and
(D) Stating that they have carried out certain specified procedures
(specifically set forth in such letter or letters) as specified by the
Underwriter (after consultations with Ernst & Young, LLP relating to such
procedures), not constituting an audit, with respect to certain tables,
statistics and other financial data in the Prospectus specified by the
Underwriter and such financial data not included in the Prospectus but from
which information in the Prospectus is derived, and which have been obtained
from the general accounting records of the Company or consolidated subsidiaries,
if any, or from such accounting records by analysis or computation, and having
compared such financial data with the accounting records of the Company or the
consolidated subsidiaries, if any, stating that they have found such financial
data to agree with the accounting records of the Company.
(c) All corporate proceedings and other legal matters relating to this
Agreement, the Prospectus and other related matters shall be satisfactory to or
approved by counsel to the Underwriters and you shall have received from Foley,
Hoag & Eliot, LLP a signed opinion dated as of each closing date, with respect
to the incorporation of the Company, the validity of the Securities, the form of
the Prospectus, (other than the financial statements together with related notes
and other financial and statistical data contained in the Prospectus or omitted
therefrom, as to which such counsel need express no opinion), the execution of
this Agreement and other related matters as you may reasonably require.
(d) At each closing date, (i) the representations and warranties of the
Company contained in this Agreement shall be true and correct in all material
respects with the same effect as if made on and as of such closing date; (ii)
the Prospectus and any amendments or supplements thereto shall contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations and in all material respects conform to the
requirements thereof, and neither the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary, in light of the
circumstances under which they were made, in order to make the statements
therein not misleading; (iii) there shall have been since the respective dates
as of which information is given no material adverse change in the business,
properties or condition (financial or otherwise), results of operations, capital
stock, longterm debt or general affairs of the Company from that set forth in
the Prospectus, except changes which the Prospectus indicates might occur after
the effective date of the Prospectus, and the Company shall not have incurred
any material liabilities or material obligations, direct or contingent, or
entered into any material transaction, contract or agreement not in the ordinary
course of business other than as referred to in the Prospectus and which would
be required to be set forth in the Prospectus; and (iv) except as set forth in
the Prospectus,
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<PAGE> 16
no action, suit or proceeding at law or in equity shall be pending or threatened
against the Company which would be required to be set forth in the Prospectus,
and no proceedings shall be pending or threatened against the Company or any
subsidiary before or by any commission, board or administrative agency in the
United States or elsewhere, wherein an unfavorable decision, ruling or finding
would materially and adversely affect the business, property, condition
(financial or otherwise), results of operations or general affairs of the
Company.
(e) On the Initial Closing Date, the Company shall have executed and
delivered to the Underwriter, (i) the Underwriters' Warrant substantially in the
form filed as an Exhibit to the Registration Statement in final form and
substance satisfactory to the Underwriters, and (ii) the Underwriters' Warrants
in such denominations and to such designees as shall have been provided to the
Company.
(f) On or before the Initial Closing Date, the Securities shall have been
duly approved for listing on an exchange or on Nasdaq.
(g) On or before the Initial Closing Date, there shall have been delivered
to the Underwriters all of the Lock-up Agreements required to be delivered
pursuant to Section 3(a)(xxv) in form and substance satisfactory to the
Underwriters and Underwriters' counsel.
If any condition to the Underwriters obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Underwriters may terminate this Agreement or,
if the Underwriters so elect, they may waive any such conditions which have not
been fulfilled or extend the time for their fulfillment.
6. Conditions of the Company's Obligations. The obligation of the Company to
sell and deliver the Securities is subject to the following:
(a) The provisions regarding the effective date, as described in Section
10.
(b) At the Initial Closing Date, no stop order suspending the
effectiveness of the Prospectus shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission or by any state
securities department.
(c) Tender of payment by the Underwriters in accord with Section 2 hereof.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and its employees and each person, if any, who controls you within the meaning
of the Act, against any losses, claims, damages or liabilities, joint or several
(which shall, for any purposes of this Agreement, include, but not be limited
to, all costs of defense and investigation and all attorneys' fees), to which
each Underwriter or such controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission made in the Prospectus, or such amendment or supplement to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, which is in reliance upon and in conformity
with written information furnished by the Company to you specifically for use in
the preparation thereof, and provided further that the indemnity agreement
contained in this subsection (a) shall not inure to the benefit of you with
respect to any person asserting any such loss, claim, damage or liability who
has purchased the Securities which are the subject thereof if you or any
participants failed to send or give a copy of the Prospectus to such person at
or prior to the written confirmation of the sale of such Securities to such
person and except that, with respect to any untrue statement or omission or any
alleged untrue statement or omission, made in any Pre-Effective Prospectus, the
indemnity agreement contained in this subsection (a) shall not inure to the
benefit of any Underwriter (or to any person controlling any such underwriter)
from whom the person asserting any such loss, claim, damage or liability
purchased the securities concerned to the extent that such untrue statement or
omission, or alleged untrue statement or omission, has been corrected in a later
Pre-Effective Prospectus or in the Final Prospectus unless the Underwriter
circulated a later Pre-Effective Prospectus or the Final Prospectus to such
person
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<PAGE> 17
(b) Each Underwriter will indemnify and hold harmless the Company, each of
its directors, each of its officers, each person, if any, who controls the
Company within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company or any such director, officer or
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission was made in the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by you specifically for use in the preparation thereof and from and
against any and all losses caused by an untrue statement or alleged untrue
statement of a material fact contained in the Prospectus (if used within the
Applicable Period and as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, if the person
asserting such losses purchased Securities from such Underwriter and a copy of
the Final Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by or on
behalf of such Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the Securities
to such person, and if the Prospectus (as so amended or supplemented) would
have cured the defect giving rise to such loss, claim, damage or liability. This
indemnity will be in addition to any liability which any Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify the indemnifying party of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party, similarly notified, to assume the
defense thereof, subject to the provisions herein stated, with counsel
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that, if the indemnified party is you or a person who controls you, the fees and
expenses of such counsel shall be at the expense of the indemnifying party if
(i) the employment of such counsel has been specifically authorized in writing
by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both you or such controlling person
and the indemnifying party and you or such controlling person shall have been
advised by such counsel that there is a conflict of interest which would prevent
counsel for the indemnifying party from representing the indemnifying party and
you or such controlling person (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of you or such
controlling person, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction or which are consolidated
into the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for you and all such controlling persons, which firm
shall be designated in writing by you). No settlement of any action against an
indemnified party shall be made without the consent of the indemnified party,
which shall not be unreasonably withheld in light of all factors of importance
to such indemnified party.
8. Contribution. In order to provide for just and equitable contribution
under the Act in any case in which (i) the indemnifying party makes a claim for
indemnification pursuant to Section 7 hereof but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of the
Underwriters, then the Company and the Underwriters in the aggregate shall
contribute to the aggregate losses, claims, damages, or liabilities to which
they may be subject (which shall, for all purposes of this Agreement, include,
but not be limited to, all costs of defense and investigation and all attorneys'
fees) in either such case
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(after contribution from others) in such proportions that the Underwriters are
responsible in the aggregate for that portion of such losses, claims, damages or
liabilities determined by multiplying the total amount of such losses, claims,
damages or liabilities times the difference between the public offering price
and the commission to the Underwriter and dividing the product thereof by the
public offering price, and the Company, if applicable, shall be responsible for
that portion of such losses, claims, damages or liabilities times the commission
to the Underwriters and dividing the product thereof by the public offering
price; provided, however, that the Underwriters shall not be required to so
contribute any amount in excess of the underwriting discount applicable to the
Securities purchased by the Underwriters hereunder if such allocation is not
permitted by applicable law, then the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such damages and other relevant equitable considerations shall also be
considered. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 12(2) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. The foregoing
contribution agreement shall in no way affect the contribution liabilities of
any person having liability under Section 12 of the Act other than the Company
and the Underwriter. As used in this paragraph, the term "Underwriters" includes
any person who controls the Underwriters within the meaning of Section 15 of the
Act. If the full amount of the contribution specified in this paragraph is not
permitted by law, then any Underwriter and each person who controls any
Underwriter shall be entitled to contribution from the Company, to the full
extent permitted by law.
9. Effective Date. This Agreement shall become effective at the earlier of
(i) 10:00 a.m. New York time on the next full business day following the
effective date of the Registration Statement, or (ii) at such other time after
the effective date of the Prospectus as you in your discretion shall first
commence the public offering of any of the Securities covered thereby, provided,
however, that at all times the provisions of Sections 7, 8, 9 and 11 shall be
effective.
10. Termination.
(a) This Agreement, may be terminated at any time prior to the Closing
Date by you if in your judgment it is impracticable to offer for sale or to
enforce contracts made by you for the sale of the Securities agreed to be sold
hereunder by reason of (i) the Company as a whole having sustained a material
loss, whether or not insured, by reason of fire, earthquake, flood, accident or
other calamity, or from any labor dispute or court or government action, order
or decree, (ii) trading in securities of the Company having been suspended by a
state securities administrator or by the Commission, (iii) material governmental
restrictions having been imposed on trading in securities generally (not in
force and effect on the date hereof) or trading on the New York Stock Exchange,
American Stock Exchange, or in the over-the-counter market shall have been
suspended, (iv) a banking moratorium having been declared by federal or New York
State authorities, (v) an outbreak or escalation of hostilities or other
national or international calamity having occurred, (vi) the passage by the
Congress of the United States or by any state legislative body, of any act or
measure, or the adoption of any orders, rules or regulations by any governmental
body or any authoritative accounting institute or board, or any governmental
executive, which is believed likely by you to have a material impact on the
business, financial condition or financial statements of the Company; or (vii)
any material adverse change having occurred, since the respective dates as of
which information is given in the Prospectus, in the condition, financial or
otherwise, of the Company as a whole, whether or not arising in the ordinary
course of business, (viii) Anthony J. Armini ceases to be employed by the
Company in his present capacity; (ix) the Securities are not listed on any
exchange or on Nasdaq Small Cap.
(b)If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 10 or in Section 9, the
Company shall be promptly notified by you, by telephone or telegram, confirmed
by letter.
11. Representations, Warrants and Agreements to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company (or its officers) and the Underwriters set forth in or
made pursuant to this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of the Underwriters, the Company, or
any of their officers or directors and will survive delivery of and payment for
the Securities.
1. Notices. All communications hereunder will be in writing and, except as
otherwise expressly provided herein, if sent to you, will be mailed, delivered
or telephoned and confirmed to you at ISG Solid Capital Markets, LLC,
18
<PAGE> 19
592 Fifth Avenue, New York, NY 10036, Attn: Investment Banking Department; to
Schneider Securities, Inc.,1120 Lincoln Street, Denver, Colorado 80203 Attn:
Investment Banking Department; and to the Company to A.J. Armini, President,
Implant Sciences Corporation, 107 Audubon Road, #5,Wakefield, MA 01880.
13. Parties in Interest. This Agreement is made solely for the benefit of the
Underwriters,and the Company, and their respective controlling persons,
directors and officers, and their respective successors, assigns, executors and
administrators. No other person shall acquire or have any right under or by
virtue of this Agreement.
14. Headings. The Section headings in this Agreement have been inserted as a
matter of convenience of reference and are not a part of this Agreement.
15. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
conflict of law principles.
1. Counterparts. This Agreement may be executed in any number of
counterparts, each of which together shall constitute one and the same
instrument.
1. Miscellaneous. The Underwriters represent that when market conditions
are deemed appropriate to support the trading of two securities of the
Company, the Underwriters in their sole discretion, may request that the
Units be separated prior to the thirteen month period from the effective
date of the prospectus. The Underwriters also acknowledge and confirm to
the Company that they will hold the Units as a unit for at least the
required minimum 30-day period from the first day of inclusion of trading,
in conformity with the Rules and Regulations of NASD Regulation, Inc.
If the foregoing correctly sets forth the understanding between the Company
and you, as Representative of the several underwriters, please so indicate in
the space provided below for such purpose, whereupon this letter and your
acceptance shall constitute a binding agreement between us.
Very truly yours,
Implant Sciences Corporation
By:
-----------------------------
(Authorized Officer)
A.J. Armini, President
Accepted as of the date first above written:
ISG Solid Capital Market,LLC
As Representative of the several Underwriters
By:
---------------------------------
President
19
<PAGE> 20
EXHIBIT A
SCHEDULE I
UNDERWRITERS
UNDERWRITER 1,000,000 Units
Each Unit Consisting of One
Share of Common Stock and
One Redeemable Warrant
ISG Solid Capital Markets, LLC
Schneider Securities,Inc.
TOTAL 1,000,000 Units
20
<PAGE> 1
EXHIBIT 4.3
SPECIMEN UNIT CERTIFICATE
EACH UNIT CONSISTING OF ONE SHARE OF
COMMON STOCK, PAR VALUE $.10,
AND ONE REDEEMABLE COMMON STOCK
PURCHASE WARRANT
CUSIP 45320R 20 7
THIS CERTIFICATE
IS TRANSFERABLE
IN DENVER, CO
IMPLANT SCIENCES CORPORATION
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Units specified above, each of which consists of one share of Common Stock, par
value $.10, and one Redeemable Common Stock Purchase Warrant (the "Warrant").
Each Warrant entitles the holder to purchase one share of Common Stock, at an
exercise price of $ (120% of the initial public offering price of the Common
Stock included in the Units) at any time commencing thirteen months after the
date of the Prospectus (the "Commencement Date") and ending three years after
the Commencement Date. The Warrants are redeemable by the Company at a
redemption price of $.20 per Warrant at any time commencing thirteen months from
the date of the Prospectus, provided that the reported closing bid price of the
Common Stock as reported on the Nasdaq SmallCap Market, Inc. (or if the Common
Stock is not traded on such market then on the principal trading market for the
Common Stock) averages at least $ (140% of the initial public offering price
of the Common Stock included in the Units) for a period of 15 consecutive
trading days.
The shares of Common Stock and Warrants comprising the Units shall be
separately tradeable, upon the earlier of the determination of the Underwriter
for the public offering of these Units and thirteen months from the Commencement
Date. The Warrants can only be redeemed if a current prospectus covering the
Warrants and the shares of Common Stock issuable thereunder is then in effect.
The terms of the Warrants are governed by a Unit and Warrant Agreement dated as
of April 9, 1999 (the "Unit and Warrant Agreement") between the Company and
American Securities Transfer & Trust, Inc. as Warrant Agent (the "Agent") and
are subject to the terms and provisions contained therein and on the face of the
certificates covered thereby, to all of which terms and provision the holder of
this Unit Certificate consents by acceptance hereof.
Copies of the Unit and Warrant Agreement are on file at the office of
the Agent at American Securities Transfer & Trust, Inc., ___________, Denver,
Colorado 80201, and are available to any Unit or Warrant holder on written
request and without cost.
This Unit Certificate is not valid unless countersigned 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 and a facsimile of its corporate seal to be imprinted heron.
Dated:
------------------------
Countersigned and Registered
American Securities Transfer & Trust, Inc.
PO Box 1596
Denver, Colorado 80201
Transfer Agent and Registrar
By
----------------------------
Authorized Signature
Implant Sciences Corporation
Corporate Seal
Implant Sciences Corporation
By:
---------------------------
Treasurer, Vice President
and Chief Financial Officer
By:
---------------------------
President and Chief Executive
Officer
<PAGE> 2
IMPLANT SCIENCES CORPORATION
The Registered Holder hereby is entitled, at any time commencing on the
Separation Date (as defined in the Unit and Warrant Agreement, dated April 9,
1999), to exchange each Unit represented by this Unit Certificate for Common
Stock Certificates representing one share of Common Stock for each Unit
represented by this Unit Certificate and Warrant Certificates representing one
Warrant for each Unit represented by this Unit Certificate upon surrender of
this Unit Certificate to the Unit Agent at its Corporate Office specified in the
Unit and Warrant Agreement together with any documentation required by such
Agent.
REFERENCE IS MADE TO THE UNIT AND WARRANT AGREEMENT REFERRED TO ON THE
FRONT SIDE HEREOF AND THE PROVISIONS OF SUCH UNIT AND WARRANT AGREEMENT SHALL
FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FACE OF
THIS CERTIFICATE. COPIES OF THE UNIT AND WARRANT AGREEMENT MAY BE OBTAINED UPON
WRITTEN REQUEST FROM THE UNIT AGENT, _____________________.
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
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
COM PROP - as community property
UNIF GIFT MIN ACT - ________ Custodian ________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _________________________
(State)
UNIF TRF MIN ACT - ________ Custodian ________
(Cust) (Minor)
under Uniform Transfers to Minors
Act _____________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________________________________ hereby
sell(s), assign(s) and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________
| |
| |
|_____________________________________|
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
Units represented by the within Certificate, and do(es) hereby irrevocably
constitute and appoint
_______________________________________________________________________________
Attorney to transfer the said Unit(s) on the books of the within named Company
with full power of substitution in the premises.
Dated ___________________
______________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THIS UNIT CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: ______________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 5.1
April 26, 1999
Implant Sciences Corporation
107 Audubon Road, #5
Wakefield, Massachusetts 01880
Ladies and Gentlemen:
We are familiar with the Registration Statement on Form SB-2,
Registration No. 333-64499 filed by Implant Sciences Corporation, a
Massachusetts corporation (the "Company"), with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Registration
Statement"). The Registration Statement relates to the proposed public offering
by the Company of 1,150,000 Units (the "Units") to be issued by the Company.
Each Unit consists of one share of Common Stock, $0.10 par value per share
("Common Stock"), and one Redeemable Common Stock Purchase Warrant ("Warrants").
(The foregoing number of Units assumes exercise in full of the over-allotment
option described in the Registration Statement.)
We are familiar with the Company's Articles of Organization and all
amendments thereto, its By-Laws and all amendments thereto, records of meetings
and consents of its Board of Directors and of its stockholders provided to us by
the Company, and its stock records. In addition, we have examined and relied on
the originals or copies certified or otherwise identified to our satisfaction of
all such corporate records of the Company and such other instruments and other
certificates of public officials, officers and representatives of the Company
and such other persons, and we have made such investigations of law, as we have
deemed appropriate as a basis for the opinions expressed below.
Based on the foregoing, it is our opinion that the Company has
corporate power adequate for the issuance of the Units in accordance with the
Registration Statement. The Company has taken all necessary corporate action
required to authorize the issuance and sale of the Units. When certificates for
the Units have been duly executed and countersigned, and delivered against due
receipt of consideration therefor as described in the Registration Statement,
the Units will be legally issued, fully paid and non-assessable.
<PAGE> 2
Implant Sciences Corporation
April 26, 1999
Page 2
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the incorporated reference to us under the heading
"Legal Matters" in the prospectus forming part of the Registration Statement.
Very truly yours,
FOLEY, HOAG & ELIOT LLP
By: /s/ Dave Broadwin
-----------------------------
A Partner
<PAGE> 1
EXHIBIT 10.44
UNIT AND WARRANT AGREEMENT
Implant Sciences Corporation, a Massachusetts corporation (the
"Company"), and American Securities Transfer & Trust, Inc. ("AST"), 1825
Lawrence Street, Suite 444, Denver, Colorado 80202, a Colorado corporation (the
"Agent"), agree as follows:
1. Purpose. The Company proposes to publicly offer and issue
1,150,000 units ("Units"), each Unit consisting of (i) one
share (a "Share") of the Company's common stock, $.10 par
value per share ("Common Stock"), and (ii) one Redeemable
Common Stock Purchase Warrant (a "Warrant") permitting the
purchase of one Share of Common Stock. The Agent has agreed to
serve as Transfer Agent for the Common Stock and the preferred
stock, $.10 par value per share, of the Company pursuant to
that certain Agreement Appointing Transfer Agent and
Registrar, dated October 19, 1998, between the Company and the
Agent (the "Transfer Agent Agreement"). The Company and the
Agent now wish to provide for the Agent to act as transfer
agent for the Units and warrant agent for the Warrants.
Subject to the terms and conditions of this Agreement and the
Transfer Agent Agreement, the Company hereby authorizes the
Agent to originally issue, register and countersign
certificates representing the Units and the Warrants covered
by this Agreement upon being furnished with an appropriate
written request signed by an officer of the Company, a
certified copy of the resolutions of the Board of Directors or
a copy of
<PAGE> 2
the minutes of a meeting of the Board of Directors authorizing
such issuance and, if specifically requested by the Agent, an
opinion of counsel regarding the status of such securities
under the Securities Act of 1933, as amended (the "Securities
Act"), and any other applicable Federal or state statutes. The
Agent hereby agrees to serve as transfer agent for the Units
and warrant agent for the Warrants and to establish and
maintain such books and records as may be required for the
performance of its agency duties and responsibilities, and to
establish and maintain ledgers for the Company and to make
entries therein of all Certificates (as defined in Section 5)
issued, canceled and transferred.
2. Units. The Common Stock and the Warrants which comprise the
Units will trade only as Units until the earlier of (a)
thirteen months after ___ (the date of the Prospectus for the
initial public offering of the Units (the "Prospectus Date"))
or (b) such time as may be determined by ISG Solid Capital
Markets, LLC and Schneider Securities, Inc. (collectively, the
"Representatives"); but in any event for a period of not less
than 30 days from the Prospectus Date. Such time being
hereinafter referred to as the "Separation Date." In the event
that the Separation Date shall occur as a result of the
decision of the Representatives, the Company shall promptly so
notify the Agent in writing. After the occurrence of the
Separation Date, Units shall be treated as separate Shares and
Warrants on the books and ledgers maintained by the Agent.
After the Separation Date the Agent shall cease to issue
certificates representing Units
2
<PAGE> 3
and shall issue certificates representing Shares and Warrants
and/or make other appropriate book entries upon the exchange,
split up, or transfer of a Unit.
3. Warrants. Subject to this Agreement including, without
limitation, Sections 4, 8, 12, and 13, each Warrant will
entitle the registered holder of a Warrant ("Warrant Holder")
to purchase from the Company one Share at 120% of the initial
public offering price per share of the Common Stock included
in the Units (the "Exercise Price"). A Warrant Holder may
exercise all or any number of Warrants resulting in the
purchase of a whole number of Shares.
4. Exercise Period. Subject to this Agreement including, without
limitation, Section 8, the Warrants may be exercised at any
time during the period commencing thirteen months after the
Prospectus Date (the "Commencement Date") and ending at 5:00
p.m., New York City time three years after the Commencement
Date (as such date may be extended in accordance with the
provisions of Section 8(h) hereof, the "Expiration Date").
After the Expiration Date, any unexercised Warrants will be
void and all rights of Warrant Holders shall cease.
5. Certificates. The Unit Certificates shall be in registered
form only and shall be substantially in the form set forth in
Exhibit A attached to this Agreement. Unit Certificates shall
be signed by, or shall bear the facsimile signature of, the
President or a Vice President of the Company and the Treasurer
or an Assistant Treasurer of
3
<PAGE> 4
the Company and shall bear a facsimile of the Company's
corporate seal. If any person, whose facsimile signature has
been placed upon any Unit Certificate as the signature of an
officer of the Company, shall have ceased to be such officer
before such Unit Certificate is countersigned, issued and
delivered, such Unit Certificate shall be countersigned,
issued and delivered with the same effect as if such person
had not ceased to be such officer. Any Unit Certificate may be
signed by, or made to bear the facsimile signature of, any
person who at the actual date of the preparation of such Unit
Certificate shall be a proper officer of the Company to sign
such Unit Certificate even though such person was not such an
officer upon the date of the Agreement.
The Warrant Certificates shall be in registered form
only and shall be substantially in the form set forth in
Exhibit B attached to this Agreement. Warrant Certificates
shall be signed by, or shall bear the facsimile signature of,
the President or a Vice President of the Company and the
Treasurer or an Assistant Treasurer of the Company and shall
bear a facsimile of the Company's corporate seal. If any
person, whose facsimile signature has been placed upon any
Warrant Certificate as the signature of an officer of the
Company, shall have ceased to be such officer before such
Warrant Certificate is countersigned, issued and delivered,
such Warrant Certificate shall be countersigned, issued and
delivered with the same effect as if such person had not
ceased to be such officer. Any Warrant Certificate may be
signed by, or made to bear the facsimile signature of, any
person who at the actual date of the preparation of such
Warrant Certificate shall be a proper officer of the Company
to
4
<PAGE> 5
sign such Warrant Certificate even though such person was not
such an officer upon the date of the Agreement.
The Company shall furnish the Agent with a sufficient
quantity of blank Certificates and from time to time will
renew such supply upon the reasonable request of the Agent.
Such blank Certificates shall be properly signed by officers
of the Company authorized by law and in accordance with the
Company's by-laws to sign such Certificates and, if requested
by the Agent, shall bear the corporate seal or a facsimile
thereof.
Unit Certificates and Warrant Certificates are
sometimes hereinafter referred to collectively as
"Certificates." The holder of a Certificate is referred to
herein as a "Holder".
6. Countersigning. Certificates shall be manually countersigned
by the Agent and shall not be valid for any purpose unless so
countersigned. The Agent hereby is authorized to countersign
and deliver to, or in accordance with the proper instructions
of, any Unit Holder or Warrant Holder any Certificate which is
properly issued.
7. Registration of Transfer and Exchanges. Subject to this
Agreement including, without limitation, Sections 1 and 2, the
Agent shall from time to time register the transfer of any
outstanding Certificate upon records maintained by the Agent
for such
5
<PAGE> 6
purpose upon surrender of such Certificate to the Agent for
transfer, accompanied by appropriate instruments of transfer
in form satisfactory to the Company and the Agent and duly
executed by the Holder or a duly authorized attorney. Upon any
such registration of transfer, a new Certificate or
Certificates shall be issued in the name of and to the
transferee and the surrendered Certificate shall be canceled.
8. Exercise and Redemption of Warrants.
(a) Subject to this Agreement including, without
limitation, Sections 8(i), 12 and 13, any one Warrant
or any multiple of one Warrant evidenced by any
Warrant Certificate may be exercised upon any single
occasion on or after the Exercise Date, and on or
before the Expiration Date (as more particularly set
forth in Section 4). A Warrant shall be exercised by
the Warrant Holder by surrendering to the Agent the
Warrant Certificate evidencing such Warrant with the
exercise form on the reverse of such Warrant
Certificate duly completed and executed and
delivering to the Agent, by good check or bank draft
payable to the order of the Company, the Exercise
Price for each Share to be purchased.
(b) Upon receipt of a Warrant Certificate with the
exercise form thereon duly executed together with
payment in full of the Exercise Price for the Shares
for which Warrants are then being exercised, the
Agent shall requisition from any transfer agent for
the Shares, and upon receipt shall make delivery of,
certificates evidencing the total number of whole
Shares for which Warrants
6
<PAGE> 7
are then being exercised in such names and
denominations as are required for delivery to, or in
accordance with the instructions of, the Warrant
Holder. Such certificates for the Shares shall be
deemed to be issued, and the person to whom such
Shares are issued of record shall be deemed to have
become a holder of record of such Shares, as of the
date of the surrender of such Warrant Certificate and
payment of the Exercise Price, whichever shall last
occur; provided that if the books of the Company with
respect to the Shares shall be deemed to be closed,
the person to whom such Shares are issued of record
shall be deemed to have become a record holder of
such Shares, as of the date on which such books shall
next be open (whether before, on or after the
Expiration Date), whichever shall have last occurred.
(c) If less than all the Warrants evidenced by a Warrant
Certificate are exercised upon a single occasion, a
new Warrant Certificate for the balance of the
Warrants not so exercised shall be issued and
delivered to, or in accordance with, transfer
instructions properly given by the Warrant Holder
until the Expiration Date.
(d) All Warrant Certificates surrendered upon exercise of
the Warrants shall be canceled and shall not be
reissued.
(e) Upon the exercise of any Warrant, the Agent shall
promptly deposit the payment into an escrow account
established by mutual agreement of the Company and
the Agent at a federally insured commercial bank. All
funds deposited in the escrow account will be
disbursed on a weekly basis to the
7
<PAGE> 8
Company once they have been determined by the Warrant
Agent to be collected funds. Once the funds are
determined to be collected, the Warrant Agent shall
cause the share certificate(s) representing the
exercised Warrants to be issued.
(f) Usual and customary out-of-pocket expenses incurred
by American Securities Transfer & Trust, Inc. while
acting in the capacity as Agent will be paid by the
Company. These expenses, including costs of delivery
of Share certificates to the Warrant Holder upon
exercise of Warrants, will be deducted from the
exercise fee submitted prior to distribution of funds
to the Company. A detailed accounting statement
relating to the number of Shares exercised, names of
registered Warrant Holder(s) and the net amount of
exercised funds remitted will be given to the Company
with the payment of each exercise amount.
(g) Except as otherwise provided in Section 9 of this
Agreement, at the time of exercise of the Warrant(s),
the transfer fee is to be paid by the Company. In the
event the shareholder must pay the fee and fails to
remit same, the fee will be deducted from the
proceeds prior to distribution to the Company.
(h) The Company in its sole discretion, may extend the
Expiration Date. If the Company elects to do so, it
will give not less than 30 days prior written notice
of such extension, specifying the date to which the
Expiration Date has been extended, to the Agent, the
Warrant Holders and to any stock exchange or Self
Regulatory Organization on which the Warrants may be
listed.
8
<PAGE> 9
(i) The Company may redeem the Warrants after the
Warrants become exercisable, by giving notice to the
Agent, if the Common Stock of the Company shall have
had a Closing Price (hereinafter defined) of not less
than 140% per share of the assumed initial public
offering price of the Common Stock included in the
Units for a period of 15 consecutive trading days
after the Warrants became exercisable. The Company
shall pay Warrant Holders $.20 per Warrant for each
Warrant not exercised prior to the close of business
on the date specified in the notice ("Redemption Call
Date"). Whenever the Exercise Price is adjusted
pursuant to Section 13, a similar and proportionate
adjustment will be made in the redemption price. Such
notice shall contain a certification by the Company
that the above condition to redemption of the
Warrants has been satisfied. Notice of redemption
shall be mailed by the Agent to all registered
holders of Warrants in accordance with the provisions
of Section 20, at least 30 days, but no more than 60
days, prior to the Redemption Call Date. The Agent
shall mail such notice to all registered holders of
Warrants on a date designated by the Company, but in
no event shall such designated date be earlier than
the fifth business day after the date on which the
Agent received notice of the redemption from the
Company. The right to exercise the Warrants shall
expire at the close of business on the Redemption
Call Date. At the time of any such notice or any time
after such notice or prior to the Redemption Call
Date, the Company may deposit, or cause its nominee
to deposit, the aggregate redemption price (the
calculation
9
<PAGE> 10
of which shall be certified by the Company or its
agents) for disbursal of the monies so deposited upon
proper surrender of the Warrants. In the event the
Warrant Holder shall not, within three years after
the Redemption Call Date, claim the amount deposited
for the redemption of the Warrants, the depositary
shall upon demand pay over to the Company such
unclaimed amounts and shall thereafter be relieved
from all responsibility.
(j) As used in this Warrant Agreement, the term "Closing
Price" of the shares of Common Stock for a day or
days shall mean (i) if the shares of Common Stock are
not listed or admitted for trading on a national
securities exchange, (A) the closing bid price of the
shares of Common Stock in the Nasdaq Small Cap Market
(or on the Nasdaq Stock Market, if so quoted) or (B)
if the shares of Common Stock are not so quoted, in
the over-the-counter market, as reported by the
National Quotation Bureau, Inc., or an equivalent
generally accepted reporting service, or (ii) if the
shares of Common Stock are listed or admitted for
trading on a national securities exchange, the last
reported sale price regular way, or, in case no such
reported sale takes place on such day or days, the
reported closing bid price regular way, in either
case on the principal national securities exchange on
which the shares of Common Stock are listed or
admitted for trading.
9. Transfer Taxes and Fees. The Company will pay all transfer
taxes and fees attributable to the initial issuance of Shares
upon exercise of Warrants. The Company
10
<PAGE> 11
shall not, however, be required to pay any transfer taxes and
fees which may be payable in respect to any transfer involved
in any issue of Unit Certificates or Warrant Certificates or
in the issue of any certificates of Shares in the name other
than that of the Warrant Holder upon the exercise of any
Warrant.
10. Mutilated or Missing Certificates. On receipt by the Company
and the Agent of evidence satisfactory as to the ownership of
and the loss, theft, destruction or mutilation of any
Certificate, the Company shall execute and the Agent shall
countersign and deliver in lieu thereof, a new Certificate
representing an equal aggregate number of Units or Warrants as
the case may be. In the case of loss, theft or destruction of
any Certificate, the Holder requesting issuance of a new
Certificate shall be required to secure an indemnity bond from
an approved surety bonding company. In the event a Certificate
is mutilated, such Certificate shall be surrendered and
canceled by the Agent prior to delivery of a new Certificate.
Applicants for a substitute Certificate shall also comply with
such other regulations and pay such other reasonable charges
as the Agent may prescribe.
11. Reservation of Shares. For the purpose of enabling the Company
to satisfy all obligations to issue Shares upon exercise of
Warrants, the Company will at all times reserve and keep
available free from preemptive rights, out of the aggregate of
its authorized but unissued shares, the full number of Shares
which may be issued upon the exercise of the Warrants and such
Shares will upon issue be fully paid and
11
<PAGE> 12
nonassessable by the Company and free from all taxes, liens,
charges and security interests with respect to the issue
thereof.
12. Governmental Restrictions. If any Shares issuable upon the
exercise of Warrants require registration or approval of any
governmental authority, the Company will endeavor to secure
such registration or approval; provided that in no event shall
such Shares be issued, and the Company shall have the
authority to suspend the exercise of all Warrants, until such
registration or approval shall have been obtained. If any such
period of suspension continues past the Expiration Date, all
Warrants, the exercise of which have been requested on or
prior to the Expiration Date, shall be exercisable upon the
removal of such suspension until the close of business on the
business day immediately following the expiration of such
suspension.
Notwithstanding any other provision of this Agreement or of
the Warrants to the contrary, the Warrants shall not be
exercisable by the holder of any Warrant Certificate (a) if a
registration statement covering the issuance of the shares of
Common Stock subject to such Warrant is not effective at the
time of exercise or an exception from registration not
available or (b) if such holder is resident in a jurisdiction
under the securities or blue sky laws of which the shares of
Common Stock issuable upon exercise of such Warrant
Certificate are not registered or qualified or exempt from
registration or qualification or in which a current prospectus
12
<PAGE> 13
meeting the requirements of the laws of such jurisdiction
cannot be lawfully delivered by or on behalf of the Company.
The Company covenants and agrees that it will file a
registration statement under the Securities Act, (which
registration statement may be the registration statement for
the Company's initial public offering), use its best efforts
to cause such registration statement to become effective, use
its best efforts to keep such registration statement current,
if required under the Securities Act, while any of the
Warrants are outstanding, and deliver a prospectus which
complies with Section 10(a) (3) of the Securities Act to any
Holder exercising a Warrant (if so required by the Securities
Act).
13. Adjustment of Exercise Price, Number of Shares, or Number of
Warrants. The Exercise Price, the number and kind of
securities purchasable upon the exercise of each Warrant, and
the number of Warrants outstanding shall be subject to
adjustment from time to time upon the happening of the events
enumerated in this Section 13.
(a) In case the Company shall at any time after the date
of this Warrant Agreement (i) pay a dividend in
shares of Common Stock or other stock of the Company
or make a distribution in shares of Common Stock or
such other stock to holders of all its outstanding
shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, (iii) combine the
outstanding shares of Common Stock into a smaller
number of shares of Common Stock, or (iv)
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<PAGE> 14
issue by reclassification of its shares of Common
Stock other securities of the Company (including any
such reclassification in connection with a
consolidation or merger in which the Company is the
continuing corporation), the number and kind of
shares purchasable upon exercise of each Warrant
outstanding immediately prior thereto shall be
adjusted so that the holder of each Warrant shall be
entitled to receive at the same aggregate Warrant
Exercise Price the kind and number of shares of
Common Stock or other securities of the Company which
the holder would have owned or have been entitled to
receive after the happening of any of the events
described above had such Warrant been exercised in
full immediately prior to the earlier of the
happening of such event or any record date with
respect thereto. In the event of any adjustment of
the total number of shares of Common Stock
purchasable upon the exercise of the then outstanding
Warrants pursuant to this paragraph (a), the Exercise
Price shall be adjusted to be the amount resulting
from dividing the number of shares of Common Stock
(including fractional shares of Common Stock) covered
by such Warrant immediately after such adjustment
into the total amount payable upon exercise of such
Warrant in full immediately prior to such adjustment.
An adjustment made pursuant to this paragraph 13(a)
shall become effective immediately after the
effective date of such event retroactive to the
record date, if any, for such event. Such adjustment
shall be made successively whenever any event listed
above shall occur.
14
<PAGE> 15
(b) In case the Company shall issue rights, options, or
warrants to all holders of its outstanding shares of
Common Stock, entitling them (for a period expiring
within 45 days after the record date for the
determination of stockholders entitled to receive
such rights, options, or warrants) to subscribe for
or purchase shares of Common Stock (or securities
exchangeable for or convertible into shares of Common
Stock) at a price per share of Common Stock (or
having an exchange or conversion price per share of
Common Stock, with respect to a security exchangeable
for or convertible into shares of Common Stock) which
is less than 95% of the current Market Price per
share of Common Stock (as defined in paragraph (d) of
Section 13) on such record date, then the Exercise
Price shall be adjusted by multiplying the Exercise
Price in effect immediately prior to such record date
by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on such
record date plus the number of shares of Common Stock
which the aggregate offering price of the total
number of shares of Common Stock so to be offered (or
the aggregate initial exchange or conversion price of
the exchangeable or convertible securities to be
offered) would purchase at such Market Price and of
which the denominator shall be the number of shares
of Common Stock outstanding on such record date plus
the number of additional shares of Common Stock to be
offered for subscription or purchase (or into which
the exchangeable or convertible securities so to be
offered are initially exchangeable or convertible).
Such adjustment shall become effective at the
15
<PAGE> 16
close of business on such record date; however, to
the extent that shares of Common Stock (or securities
exchangeable for or convertible into shares of Common
Stock) are not delivered after the expiration of such
rights, options, or warrants, the Exercise Price
shall be readjusted (but only with respect to
Warrants exercised after such expiration) to the
Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights,
options, or warrants been made upon the basis of
delivery of only the number of shares of Common Stock
(or securities exchangeable for or convertible into
shares of Common Stock) actually issued. In case any
subscription price may be paid in a consideration,
part or all of which shall be in a form other than
cash, the value of such consideration shall be as
determined by the Board of Directors of the Company
and shall be described in a statement filed with the
Warrant Agent. Shares of Common Stock owned by or
held for the account of the Company shall not be
deemed outstanding for the purpose of any such
computation.
(c) In case the Company shall distribute to all holders
of its shares of Common Stock (including any such
distribution made in connection with a consolidation
or merger in which the Company is the surviving
corporation) evidences of its indebtedness or assets
(other than cash dividends and distributions payable
out of consolidated net income in accordance with
Delaware law or earned surplus and dividends or
distributions payable in shares of stock described in
paragraph (a) above) or rights, options, or warrants
or
16
<PAGE> 17
exchangeable or convertible securities containing the
right to subscribe for or purchase shares of Common
Stock (excluding those expiring within 45 days after
the record date mentioned in (b) above), then the
Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to the
record date for the determination of stockholders
entitled to receive such distribution by a fraction,
of which the numerator shall be the current Market
Price per share of Common Stock (as defined in
paragraph (d) of this Section 13) on such record
date, less the fair market value (as determined by
the Board of Directors of the Company, whose
determination shall be conclusive and described in a
statement filed with the Warrant Agent) of the
portion of the evidences of indebtedness or assets so
to be distributed or of such rights, options or
warrants applicable to one share of Common Stock and
of which the denominator shall be such current Market
Price per share of Common Stock. Such adjustment
shall be made whenever any such distribution is made
and shall become effective on the date of
distribution retroactive to the record date for the
determination of stockholders entitled to receive
such distribution.
(d) For the purpose of any computation under paragraphs
(b) and (c) of this Section 13, the current Market
Price per share of Common Stock at any date shall be
deemed to be the average daily Closing Prices of the
shares of Common Stock for the 15 consecutive trading
days commencing 20 trading days before the day in
question.
17
<PAGE> 18
(e) No adjustment in the Exercise Price shall be required
unless such adjustment would require any increase or
decrease of at least one percent or more of the
Exercise Price; provided, however, that any
adjustments which by reason of this paragraph (e) are
not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All
calculations under this Section 13 shall be made to
the nearest cent or to the nearest one-hundredth of a
share, as the case may be
(f) Unless the Company shall have exercised its election
as provided in paragraph (g) of this Section 13, upon
each adjustment of the Exercise Price as a result of
the calculations made in paragraphs (b) or (c) of
this Section 13, each Warrant outstanding prior to
the making of the adjustment in the Exercise Price
shall thereafter evidence the right to purchase at
the adjusted Exercise Price, that number of shares of
Common Stock (calculated to the nearest hundredth)
obtained by (i) multiplying the number of shares of
Common Stock purchasable upon exercise of a Warrant
prior to adjustment of the number of shares of Common
Stock by the Exercise Price in effect prior to
adjustment of the Exercise Price and (ii) dividing
the product so obtained by the Exercise Price in
effect after such adjustment of the Exercise Price.
(g) The Company may elect on or after the date of any
adjustment of the Exercise Price to adjust the number
of Warrants in substitution for any adjustment in the
number of shares of Common Stock purchasable upon the
exercise of a Warrant as provided in paragraph (f) of
this Section 13. Each of the Warrants
18
<PAGE> 19
outstanding after such adjustment of the number of
Warrants shall be exercisable for one share of Common
Stock. Each Warrant held of record prior to such
adjustment of the number of Warrants shall become
that number of Warrants (calculated to the nearest
hundredth) obtained by dividing the Exercise Price in
effect prior to adjustment of the Exercise Price by
the Exercise Price in effect after adjustment of the
Exercise Price. The Company shall cause the Agent to
send to each Warrant Holder an announcement of its
election to adjust the number of Warrants, indicating
the record date for the adjustment, and, if known at
the time, the amount of the adjustment to be made.
This record date may be the date on which the
Exercise Price is adjusted or any day thereafter, but
shall be at least ten days later than the date such
announcement is sent to the Warrant Holders. Upon
each adjustment of the number of Warrants pursuant to
this paragraph (g), the Company shall, as promptly as
practicable, cause to be distributed to holders of
record of Warrant Certificates on such record date
Warrant Certificates evidencing, the additional
Warrants to which such holders shall be entitled as a
result of such adjustment, or at the option of the
Company, shall cause to be distributed to such
holders of record in substitution and replacement for
the Warrant Certificates held by such holders prior
to the date of adjustment, and upon surrender thereof
if required by the Company, new Warrant Certificates
evidencing all the Warrants to which such holders
shall be entitled after such adjustment. Warrant
Certificates so to be distributed shall be issued,
19
<PAGE> 20
executed, and countersigned in the manner specified
in this Agreement (but may bear, at the option of the
Company, the adjusted Exercise Price) and shall be
registered in the names of the holders of record of
Warrant Certificates on the record date specified in
the announcement sent to Warrant Holders.
(h) In case of any capital reorganization of the Company,
or of any reclassification of the shares of Common
Stock (other than a reclassification of the shares of
Common Stock referred to in paragraph (a) of this
Section 13, or in case of the consolidation of the
Company with, or other merger of the Company with, or
merger of the Company into, any other corporation
(other than a reclassification of the shares of
Common Stock referred to in paragraph (a) of this
Section 13 or a consolidation or merger which does
not result in any reclassification or change of the
outstanding shares of Common Stock) or of the sale of
the properties and assets of the Company as, or
substantially as, an entirety to any other
corporation or entity, each Warrant shall after such
capital reorganization, reclassification of shares of
Common Stock, consolidation, merger or sale, be
exercisable, upon the terms and conditions specified
in this Warrant Agreement, for the number of shares
or other securities, assets, or cash to which a
holder of the number of shares of Common Stock
purchasable (at the time of such capital
reorganization, reclassification of shares of Common
stock, consolidation, merger or sale) upon exercise
of such Warrant would have been entitled upon such
capital reorganization, reclassification of shares of
Common Stock,
20
<PAGE> 21
consolidation, merger, or sale; and in any such case,
if necessary, the provisions set forth in this
Section 13 with respect to the rights and interests
thereafter of the holders of the Warrants shall be
appropriately adjusted so as to be applicable, as
nearly as may reasonably be, to any shares or other
securities, assets, or cash thereafter deliverable
on the exercise of the Warrants. The subdivision or
combination of shares of Common Stock at any time
outstanding into a greater or lesser number of shares
shall not-be deemed to be a reclassification of the
shares of Common Stock for the purposes of this
paragraph. The Company shall not effect any such
consolidation, merger, or sale, unless prior to or
simultaneously with the consummation thereof the
successor corporation or entity (if other than the
Company) resulting from such consolidation or merger
or the corporation or entity purchasing such assets
or other appropriate corporation or entity shall
assume, by written instrument executed and delivered
to, and in form reasonably acceptable to, the Warrant
Agent, the obligations to deliver to the holder of
each Warrant such shares, securities, assets, or cash
as, in accordance with the foregoing provisions, such
holders may be entitled to purchase and the other
obligations under this Warrant Agreement.
(i) In the event that at any time, as a result of an
adjustment made pursuant to this Section 13 the
holders of a Warrant or Warrants shall become
entitled to purchase any shares or securities of the
Company other than the shares of Common Stock,
thereafter the number of such other shares or
securities so
21
<PAGE> 22
purchasable upon exercise of each Warrant and the
Exercise Price for such shares or securities shall be
subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to
the provisions with respect to the shares of Common
Stock contained in paragraphs (a) through (h) of
Section 13, inclusive, and the other provisions of
this Agreement, with respect to the shares of Common
Stock shall apply on like terms to any such other
shares.
(j) In any case in which this Section 13 shall require
that an adjustment in the Exercise Price be made
effective as of a record date for a specified event,
the Company may elect to defer until the occurrence
of such event issuing to the holder of any Warrant
exercised after such record date the shares of Common
Stock if any, issuable upon exercise over and above
the shares of Common Stock, if any, issuable upon
such exercise on the basis of the Exercise Price in
effect prior to such adjustment; provided, however,
that the Warrant Agent shall deliver as soon as
practicable to such holder a due bill or other
appropriate instrument provided by the Company and in
form acceptable to the Warrant Agent, evidencing such
holder's right to receive such additional shares of
Common Stock upon the occurrence of the event
requiring such adjustment.
14. Notice to Warrant Holders. Upon any adjustment as described in
Section 13, the Company within 20 business days thereafter
shall (i) cause to be filed with the Agent
22
<PAGE> 23
a certificate signed by a Company officer setting forth the
details of such adjustment, the method of calculation and the
facts upon which such calculation is based, which certificate
shall be conclusive evidence of the correctness of the matters
set forth therein, and (ii) cause written notice of such
adjustments to be given to each Warrant Holder (or Unit
Holders, if prior to the Separation Date) as of the record
date applicable to such adjustment. Also, if the Company
proposes to enter into any reorganization, reclassification,
sale of substantially all of its assets, consolidation,
merger, dissolution, liquidation or winding up, the Company
shall give notice of such fact at least 20 days prior to the
consummation of such action to all Warrant Holders (or Unit
Holders, if prior to the Separation Date) which notice shall
set forth such facts as indicate the effect of such action (to
the extent such effect may be known at the date of such
notice) on the Exercise Price and the kind and amount of the
shares or other securities and property deliverable upon
exercise of the Warrants. Without limiting the obligation of
the Company hereunder to provide notice to each Warrant Holder
(or Unit Holder, if prior to the Separation Date), failure of
the Company to give notice shall not invalidate any corporate
action taken by the Company.
15. No Fractional Warrants or Shares. The Company shall not be
required to issue fractions of Warrants upon the reissue of
Warrants, any adjustments as described in Section 13 or
otherwise; but the Company in lieu of issuing any such
fractional interest, shall round up or down to the nearest
full Warrant. If the total Warrants surrendered by exercise
would result in the issuance of a fractional share, the
23
<PAGE> 24
Company shall not be required to issue a fractional share but
rather the aggregate number of shares issuable will be rounded
up or down to the nearest full share.
16. Rights of Warrant Holders. No Warrant Holder, as such, shall
have any rights of a shareholder of the Company, either at law
or equity, and the rights of the Warrant Holders, as such, are
limited to those rights expressly provided in this Agreement
or in the Warrant Certificates. The Company and the Agent may
treat the registered Warrant Holder in respect of any Warrant
Certificates as the absolute owner thereof for all purposes
notwithstanding any notice to the contrary.
17. Agent. The Company hereby appoints the Agent to act as the
agent of the Company and the Agent hereby accepts such
appointment upon all of the terms and conditions set forth in
this Agreement including, without limitation, the following
terms and conditions by all of which the Company and every
Unit Holder and Warrant Holder, by acceptance of his Units or
Warrants, shall be bound:
(a) Statements contained in this Agreement and in the
Certificates shall be taken as statements of the
Company. The Agent assumes no responsibility for the
correctness of any of the same except such as
describes the Agent or for action taken or to be
taken by the Agent.
(b) The Agent shall not be responsible for any failure of
the Company to comply with any of the Company's
covenants contained in this Agreement or in the
Warrant Certificates.
24
<PAGE> 25
(c) The Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the
Company) and the Agent shall incur no liability or
responsibility to the Company or to any Unit Holder
or Warrant Holder in respect of any action taken,
suffered or omitted by it hereunder in good faith and
in accordance with the opinion or the advice of such
counsel; provided the Agent shall have exercised
reasonable care in the selection and continued
employment of such counsel.
(d) The Agent shall incur no liability or responsibility
to the Company or to any Unit Holder or Warrant
Holder for any action taken in reliance upon any
notice, resolution, waiver, consent, order,
certificate or other paper, document or instrument
believed by it to be genuine and to have been signed,
sent or presented by the proper party or parties.
(e) The Company agrees to pay to the Agent compensation
for all services rendered by the Agent in the
execution of this Agreement in accordance with the
fee schedule attached in Exhibit C hereto, to
reimburse the Agent for all reasonable out-of-pocket
expenses, taxes and governmental charges and all
other charges of any kind or nature incurred by the
Agent in the execution of this Agreement and to
indemnify the Agent and save it harmless against any
and all liabilities, including judgments, costs and
reasonable counsel fees, for this Agreement except
those costs and fees arising as a result of the
Agent's negligence or bad faith.
25
<PAGE> 26
(f) The Agent shall be under no obligation to institute
any action, suit or legal proceeding or to take any
other action likely to involve expense unless the
Company or one or more Unit Holders or Warrant
Holders shall furnish the Agent with reasonable
security and indemnity for any costs and expenses
which may be incurred in connection with such action,
suit or legal proceeding, but this provision shall
not affect the power of the Agent to take such action
as the Agent may consider proper, whether with or
without any such security or indemnity. All rights of
action under this Agreement or under any of the
Warrants may be enforced by the Agent without the
possession of any of the Warrant Certificates or the
production thereof at any trial or other proceeding
relative thereto, and any such action, suit or
proceeding instituted by the Agent shall be brought
in its name as Agent, and any recovery of judgement
shall be for the ratable benefit of the Unit Holders
or Warrant Holders, as the case may be, as their
respective rights or interest may appear.
(g) The Agent and any shareholder, director, officer or
employee of the Agent may buy, sell or deal in any of
the Units or Warrants or other securities of the
Company or become pecuniarily interested in any
transaction in which the Company may be interested,
or contract with or lend money to the Company or
otherwise act as fully and freely as though it were
not Agent under this Agreement. Nothing herein shall
preclude the Agent from acting in any other capacity
for the Company or for any other legal entity.
26
<PAGE> 27
(h) At any time the Agent may apply to the Company or its
counsel for instructions or information, and may
consult with its own counsel, with respect to any
matter arising in connection with the agency created
hereby and the Agent shall not be liable for any
action taken or omitted in accordance with such
instructions, information or the advice or opinion of
such officer or counsel. The Agent shall not be
liable for acting upon any paper or document believed
by it to be genuine and to have been signed by the
proper person(s). The Agent shall also not be liable
for recognizing stock certificates which it
reasonably believes bear the proper manual or
facsimile signatures of the officers of the Company
and the proper counter-signature of a transfer agent
or registrar, or of a co-transfer agent or
co-registrar. The Agent, if it so elects, may rely
conclusively, for any and all purposes, upon any
advice or transfer or transfers made in the course of
transferring or registering original issuances,
retirements or cancellation of Units or Warrants;
upon advice of stop transfer orders placed, released
or in effect against outstanding Certificates; and
upon any certification or notification as to the
number of Certificates issued, the Certificates
representing such Units or Warrants and other
information which the Agent may receive from time to
time from any co-transfer agent or co-registrar. The
Agent shall further not be liable for relying upon
all information contained in Certification of
Corporate Secretary or otherwise supplied to the
Agent by the Company in accordance with the terms of
this Agreement. The Agent may deliver to the Company
from time
27
<PAGE> 28
to time at its discretion, for safekeeping or
disposition by the Company in accordance with law,
such records, papers, stock certificates which have
been cancelled in transfer or exchanges and other
documents accumulated in the execution of its duties
hereunder as the Agent may deem expedient, other than
those which the Agent is itself required to maintain
pursuant to applicable laws and regulations. Upon
delivery of such records, the Company shall assume
all responsibility for any failure thereafter to
produce any record, paper, cancelled stock
certificate or other document so returned, if and
when required. The Agent will endeavor to notify the
Company of, and will follow instructions received
from the Company with respect to, any request or
demand for the inspection of the Company's books.
However, the Agent reserves the right to exhibit the
records to any person if it is advised by its counsel
that it may be held liable for the failure to exhibit
such records to such person.
18. Successor Agent. Any corporation into which the Agent may be
merged or converted or with which it may be consolidated, or
any corporation resulting from any merger, conversion or
consolidation to which the Agent shall be a party, or any
corporation succeeding to the corporate trust business of the
Agent, shall be the successor to the Agent hereunder without
the execution or filing of any paper or any further act of a
party or the parties hereto. In any such event or if the name
of the Agent is changed, the Agent or such successor may adopt
the countersignature of the original Agent and
28
<PAGE> 29
may countersign Certificates either in the name of the
predecessor Agent or in the name of the successor Agent.
19. Change of Agent. The Agent may resign or be discharged by the
Company from its duties under this Agreement, by the Agent or
the Company, as the case may be, giving notice in writing to
the other, and by giving a date when such resignation or
discharge shall take effect, which notice shall be sent at
least 30 days prior to the date so specified. If the Agent
shall resign, be discharged or shall otherwise become
incapable of acting, the Company shall appoint a successor to
the Agent. If the Company shall fail to make such appointment
within a period of 30 days after it has been notified in
writing of such resignation or incapacity by the Agent after
discharging the Agent, then any Unit Holder or Warrant Holder
may apply to the District Court for Denver County, Colorado,
for the appointment of a successor to the Agent. Pending
appointment of a successor to the Agent, either by the Company
or by such Court, the duties of the Agent shall be carried out
by the Company. Any successor Agent, whether appointed by the
Company or by such Court, shall be a bank or a trust company,
in good standing, organized under the laws of any State of the
United States of America, and having at the time of its
appointment as Agent, a combined capital and surplus of at
least four million dollars. After appointment, the successor
Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Agent
without further act or deed and the former Agent shall deliver
and transfer to the successor Agent any property at the time
held by it
29
<PAGE> 30
thereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for effecting the delivery
or transfer. Failure to give any notice provided for in this
section, however, or any defect therein, shall not affect the
legality or validity of the resignation or removal of the
Agent or the appointment of the successor Agent, as the case
may be.
20. Notices. Any notice or demand authorized by this Agreement to
be given or made by the Agent or by any Unit Holder or Warrant
Holder to or on the Company shall be sufficiently given or
made if sent by mail, first class, certified or registered,
postage prepaid, addressed (until another address is filed in
writing by the Company with the Agent), as follows:
Implant Sciences Corporation
107 Audubon Road, #5
Wakefield, MA 01880
Attn: President
With a copy to:
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, MA 02109
Attn: Dave Broadwin, Esq.
Any notice or demand authorized by this Agreement to be given
or made by any Unit Holder, Warrant Holder or by the Company
to or on the Agent shall be sufficiently given or made if sent
by mail, first class, certified or registered, postage
prepaid,
30
<PAGE> 31
addressed (until another address is filed in writing by the
Agent with the Company), as follows:
American Securities Transfer & Trust, Inc.
1825 Lawrence Street, Suite 444
Denver, CO 80202-1817
Any distribution, notice or demand required or authorized by
this Agreement to be given or made by the Company or the Agent
to or on the Unit Holders or Warrant Holders shall be
sufficiently given or made if sent by mail, first class,
certified or registered, postage prepaid, addressed to the
Unit Holders or Warrant Holders at their last known addresses
as they shall appear on the registration books for the
Certificates maintained by the Agent.
21. Supplements and Amendments. The Company and the Agent may make
such modifications to this Agreement and to the Warrants that
they deem necessary and desirable that do not materially
adversely affect the interests of the Unit Holders and Warrant
Holders. No other modifications may be made to the Units and
Warrants without the consent of the majority of the Unit
Holders and Warrant Holders, respectively. Reduction of the
number of securities purchasable upon the exercise of any
Warrant, increase in the exercise price and shortening of the
expiration date with respect to any Warrant requires the
consent of the holder of such Warrant unless such modification
occurs in connection with a stock split, stock dividend,
recapitalization, reclassification or similar event.
31
<PAGE> 32
22. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Agent shall bind
and inure to the benefit of their respective successors and
assigns hereunder.
23. Termination. This Agreement shall terminate at the close of
business on the Expiration Date or such earlier date upon
which all Warrants have been exercised or redeemed; provided,
however, that if exercise of the Warrants is suspended
pursuant to Section 12 and such suspension continues past the
Expiration Date, this Agreement shall terminate at the close
of business on the business day immediately following
expiration of such suspension. The provisions of Section 17
shall survive such termination.
24. Governing Law. This Agreement and each Certificate issued
hereunder shall be deemed to be a contract made under the laws
of the State of New York and for all purposes shall be
construed in accordance with the laws of said State.
25. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give any person or corporation other than the
Company, the Agent and the Unit Holders and Warrant Holders
any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Agent and the Unit
Holders and Warrant Holders.
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<PAGE> 33
26. Counterparts. This Agreement may be executed in any number of
counterparts, each of such counterparts shall for all purposes
be deemed to be an original and all such counterparts shall
together constitute but one and the same instrument.
Date: April 9, 1999
- ------------------------
Implant Sciences Corporation,
a Massachusetts corporation
By: /s/ Darlene M. Deptula-Hicks
---------------------------------------
Vice President and
Chief Financial Officer
SEAL
ATTEST:
/s/ Stephen N. Bunker
- ------------------------
Secretary:
American Securities Transfer & Trust, Inc.,
a Colorado corporation
By: /s/ Gregory D. Tubbs
---------------------------------------
Vice President:
SEAL
ATTEST:
/s/ illegible
- ------------------------
Secretary:
33
<PAGE> 1
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 July 31, 1998 except as to Note 13 as to which the
date is January 7, 1999, in Amendment No. 3 to the Registration Statement (Form
SB-2 No. 333-64499) and related Prospectus of Implant Sciences Corporation.
/s/ ERNST & YOUNG LLP
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Ernst & Young LLP
Boston, Massachusetts
April 28, 1999
