<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1999
REGISTRATION NO. 333-69207
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CARESIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3841 23-2863507
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
6100 BRISTOL PARKWAY, CULVER CITY, CA 90230
(310) 338-6767
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
W. VICKERY STOUGHTON
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER
CARESIDE, INC.
6100 BRISTOL PARKWAY
CULVER CITY, CA 90230
(310) 338-6767
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
WITH COPIES TO:
BARRY M. ABELSON, ESQ. JONATHAN L. KRAVETZ, ESQ.
JULIA D. CORELLI, ESQ. MINTZ, LEVIN, COHN, FERRIS,
PEPPER HAMILTON LLP GLOVSKY AND POPEO, P.C.
3000 TWO LOGAN SQUARE ONE FINANCIAL CENTER
PHILADELPHIA, PA 19103 BOSTON, MA 02111
(215) 981-4000 (617) 542-6000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this 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,
check the following box. [_]
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,
check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY +
+NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN +
+OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE +
+SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated February 10, 1999
2,800,000 SHARES
[LOGO OF CARESIDE]
Common Stock
-----------
This is an initial public offering of shares of common stock of Careside,
Inc. We are offering all of these shares and will receive all of the proceeds
of the offering, less the underwriting discount. There is currently no public
market for the shares. We expect that the offering price will be between $8.00
and $10.00 per share. The offering price may not reflect the market price of
the shares after the offering.
We have applied to have the shares listed for quotation on the Nasdaq
National Market under the symbol "CARE."
INVESTING IN THE COMMON STOCK INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Offering Price.................................................. $ $
Underwriting Discount........................................... $ $
Proceeds to Careside............................................ $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Careside has granted the underwriters a 30-day option to purchase up to
420,000 additional shares of common stock to cover over-allotments.
-----------
FAHNESTOCK & CO. INC.
WEDBUSH MORGAN SECURITIES
SOUTHEAST RESEARCH PARTNERS, INC.
, 1999
<PAGE>
[INSIDE FRONT COVER]
[CARESIDE LOGO] THE CARESIDE SYSTEM IS A PROPRIETARY BLOOD TESTING
SYSTEM. IT INCLUDES THE CARESIDE ANALYZER(TM) AND
DISPOSABLE TEST CARTRIDGES.
CARESIDE ANALYZER(TM) [Photo of CareSide
Analyzer and
Cartridges]
(A) CHEMISTRY
The CareSide (B) ELECTROCHEMISTRY
Analyzer(TM) combines (C) IMMUNOCHEMISTRY
multiple testing (D) COAGULATION
methodologies.
[Photo Close-up of [Photo of Different
Cartridge] Cartridges]
THE CARESIDE CARTRIDGE
The proprietary test cartridges have unique design
features.
COMPREHENSIVE MENU LOW COST EASE OF USE
At launch, Careside The Careside System's A non-technical
expects to offer more approach to testing is individual with
than 50 tests. This designed to produce a simple training can
would be the most rapid test result at a easily operate the
comprehensive menu for a competitive price. CareSide
single point-of-care Analyzer(TM).
system.
----------------
We have not yet commercialized the Careside System. We currently have 22
tests cleared or exempt for licensed laboratory use by the United States Food
and Drug Administration. We plan to complete development and seek to obtain FDA
clearance or exemption for additional tests prior to commercial introduction.
Careside(TM), CareSide Analyzer(TM) and Careside's logo are our trademarks
for which registration applications have been filed with the United States
Patent and Trademark Office. All other tradenames, trademarks or servicemarks
appearing in this prospectus are the property of their respective owners and
are not our property.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights information from this prospectus. Because
this is a summary, it does not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section, the financial
statements and the notes to those financial statements.
CARESIDE
Careside has developed and plans to sell a proprietary blood testing system
called the Careside system. It is designed to decentralize laboratory
operations. The system consists of a testing instrument called the CareSide
Analyzer and disposable test cartridges. It performs blood tests in the same
location as the patient, or what is commonly called point-of-care testing.
Blood testing is a significant part of routine and critical patient care.
Today, almost all blood testing is done by sending the blood samples to
hospital or commercial laboratories. Because of transportation time and several
processing steps, these central laboratories generally take between 4 and 24
hours to provide test results to the doctor. We believe that the Careside
system provides the platform for solving the limitations of central blood
testing laboratories and redefines the market for point-of-care testing. Here
are the reasons why:
. Cost-Effective Results -- Our system is designed to provide test results
that are cost competitive with both hospital and commercial
laboratories.
. Rapid Test Results -- Our system produces test results within 10 to 15
minutes from the time the blood is drawn from the patient.
. Comprehensive Test Menu -- We believe that our planned menu of tests
represents over 80% of all blood tests ordered on an out-patient basis,
including all of the most commonly ordered blood tests.
. Ease of Use -- Our system is designed for use by non-technical
personnel, with only simple training.
. Industry Standard Technology -- Our system uses the same test methods
and technology as large testing devices in hospital and commercial
laboratories.
. Embedded Quality Assurance/Quality Control -- Our system captures all
data required to comply with regulations governing laboratory
operations, including those under the Clinical Laboratory Improvement
Amendments of 1988.
. Ability for Practice Enhancement -- By providing rapid test results for
a broad menu of tests, our system will enable doctors to treat patients
more quickly, see more patients, improve office productivity and improve
patient satisfaction and quality of care. In addition, healthcare
providers can increase their revenue by performing and billing for tests
themselves.
Our goal is to make decentralized testing with the Careside system the
standard for routine and critical care blood testing.
THE CARESIDE SYSTEM STATUS
The FDA has already granted pre-market clearance for the CareSide Analyzer
and clearance or exemption for 22 blood tests. We recently filed for clearance
for nine additional blood tests. Our initial product launch is planned for the
third quarter of 1999 through a distribution and supply arrangement with one of
our strategic partners, SmithKline Beecham Clinical Laboratories, Inc. We
expect to have the CareSide Analyzer and over 50 tests cleared or exempt at
that time.
3
<PAGE>
We will conduct pilot site marketing studies prior to initial product launch.
These studies will demonstrate our system's cost-effectiveness and how
potential customers will use it. We have arranged pilot site studies with APRIA
Healthcare in the home care services market, three hospitals affiliated with
Child Health Corporation of America in the hospital market, Reliant Care Group,
L.L.C. in the nursing home market, a small group practice in Arizona for the
physician office market and SmithKline for its own use.
MARKET OPPORTUNITY
The lack of timely test results from central laboratories has given rise to a
growing market for point-of-care tests. However, no company has developed a
point-of-care system designed to decentralize routine and critical care blood
testing. Precise industry data for the market we are targeting is not
available. According to 1997 industry data and estimates, the worldwide product
market for testing of blood and other bodily fluids and tissues was $18.3
billion in 1997 and was expected to grow to $20 billion in 2000. Based on their
prior industry experience, our senior management believes that the Careside
system's 50 test menu will address over 38% of this market. The rest of the
market includes complex and specialized tests not performed by the Careside
system. The U.S. and Canadian market is approximately 40% of the worldwide
market. Our initial marketing efforts will be targeted towards converting U.S.
and Canadian blood testing to point-of-care testing.
EARLY HISTORY
SmithKline Beecham Clinical Laboratories, Inc. conducted extensive surveys of
the point-of-care market beginning in 1993. As a result, in 1994, SmithKline
started our predecessor business to develop the technology we use. We acquired
this business in November 1996. Several senior members of SmithKline's
management team, including the President of SmithKline Beecham Clinical
Laboratories, worked on this point-of-care project at SmithKline. They are now
part of the executive management team of Careside.
Careside was incorporated in the State of Delaware in July 1996 under the
name Exigent Diagnostics, Inc. In May 1998, we changed our name to Careside,
Inc. Our principal executive offices are located at 6100 Bristol Parkway,
Culver City, California 90230 and our telephone number is (310) 338-6767.
4
<PAGE>
THE OFFERING
Except as otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option, and has been adjusted to
give effect to a 1-for-5.2 reverse stock split to be effected immediately prior
to the completion of the offering.
<TABLE>
<C> <S>
Common Stock Offered by the Company.............. 2,800,000 shares
Common Stock Outstanding after the Offering (1).. 7,884,281 shares
Dividend Policy.................................. We do not plan to pay cash
dividends in the foreseeable
future. See "Dividend
Policy" on page 14.
Use of Proceeds.................................. We expect to use the
proceeds to:
. Complete product
development, launch our
product and cover related
expenses.
. Purchase manufacturing
equipment and expand our
facilities.
. Build inventory and
provide working capital.
. Repay the December 1998
bridge financing.
Proposed Nasdaq National Market Symbol........... CARE
</TABLE>
- --------
(1) Does not include 1,514,815 shares of common stock issuable upon exercise of
options and warrants which will be outstanding upon completion of this
offering. In calculating this number, we have assumed the initial offering
price is $9.00 per share. For more information about potential future
exercise of these options and warrants, see "Management--Stock Option
Plans" on page 48 and "Description of Capital Stock--Warrants" on page 55.
5
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary financial information for Careside and
the predecessor business at SmithKline Beecham Clinical Laboratories, Inc. The
as adjusted balance sheet data assumes the sale by Careside of 2,800,000 shares
of common stock in the offering at $9.00 per share and the use of the estimated
net proceeds as set forth in "Use of Proceeds" on page 14. You should read this
data together with the financial statements and related notes included in this
prospectus.
<TABLE>
<CAPTION>
PREDECESSOR BUSINESS CARESIDE, INC.
------------------------------------ ----------------------------------------------------
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
YEAR ENDED TEN MONTHS (JULY 10, YEAR ENDED (JULY 10,
DECEMBER 31, ENDED 1996) TO DECEMBER 31, 1996) TO
----------------------- OCTOBER 31, DECEMBER 31, ------------------------ DECEMBER 31,
1994 1995 1996 1996 1997 1998 1998
----------- ----------- ----------- ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating expenses:
Research and
development............ $ 949,346 $ 2,109,802 $ 3,054,503 $ 1,561,847 $ 5,895,465 $ 8,297,974 $ 15,755,286
General and
administration........ 26,069 585,058 224,399 55,515 640,574 850,129 1,546,218
--------- ----------- ----------- ----------- ----------- ----------- ------------
Operating loss......... $(975,415) $(2,694,860) $(3,278,902) (1,617,362) (6,536,039) (9,148,103) (17,301,504)
========= =========== ===========
Net interest income
(expense).............. (20,809) 205,256 211,814 396,261
----------- ----------- ----------- ------------
Net loss................ $(1,638,171) $(6,330,783) $(8,936,289) $(16,905,243)
=========== =========== =========== ============
Net loss per share...... $ (2.25) $ (2.04) $ (1.93)
=========== =========== ===========
Shares used in computing
net loss per share..... 728,465 3,098,980 4,629,916
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
CARESIDE, INC.
----------------------------------------
DECEMBER 31, 1998
DECEMBER 31, --------------------------
1997 ACTUAL AS ADJUSTED
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 1,237,149 $ 3,926,603 $24,762,603
Total assets......................... 3,140,223 7,911,403 28,747,403
Long-term debt....................... -- 2,044,932 854,086
Deficit accumulated during
development stage................... (7,968,954) (16,905,243) (17,214,397)
Total stockholders' equity........... 2,437,607 4,149,145 26,175,991
</TABLE>
6
<PAGE>
RISK FACTORS
An investment in the common stock involves many risks. These risks may be
substantial and are inherent in the business of Careside. You should carefully
consider the following information about these risks, together with the other
information in this prospectus, before buying shares of common stock.
If any of the following risks actually occur, our business and prospects
could be materially adversely affected, the trading price of our common stock
could decline, and you might lose all or part of your investment.
WE HAVE A LIMITED OPERATING HISTORY AND HAVE NOT GENERATED ANY REVENUE
Careside was formed in 1996 and has not generated any revenue. We have
incurred net losses of approximately $17 million from inception through
December 31, 1998. We will not generate any revenue from product sales and will
continue to incur significant additional operating losses until we complete the
development of our test menu, receive necessary FDA clearances, expand our
manufacturing and marketing efforts, manufacture our products according to
regulations prescribed by the FDA, and begin selling the Careside system.
THE OFFERING MAY NOT RAISE SUFFICIENT FUNDS TO MEET OUR GOALS
The offering may not provide sufficient funds to meet our operating plan. We
anticipate that the net proceeds from the offering, together with revenue
expected after 1999, will be sufficient to fund our operating expenses and
capital requirements for approximately 18 months. However, these expenses and
requirements may change. If sufficient funds are not raised or revenues are not
sufficient, we may have to reduce our inital marketing expenses or product
development activities. In addition, we may not be able to meet our obligations
to our suppliers and strategic partners during this 18 month period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" on page 19.
ADDITIONAL FUNDING MAY NOT BE AVAILABLE
In the event we need funding, we will seek additional equity, debt, lease
financing and/or third-party collaboration opportunities. This financing may
not be available on acceptable terms, or at all. If adequate funds are not
available, we may be required to delay, reduce or eliminate product development
programs or to license to third parties rights to commercialize our products or
technologies.
WE MAY NEVER BE PROFITABLE
Even if we are able to generate revenue from sales of the Careside system, we
may never be profitable. There are several reasons why this might happen:
.We could build up our overhead in anticipation of sales goals that are not
met.
.We may not be able to reduce our manufacturing costs to acceptable levels.
.We may have to lower our prices to remain competitive.
.We may experience delays in developing additional tests or product
upgrades.
.We may experience problems in production, distribution or marketing.
MEDICAL COMMUNITY MAY NOT ACCEPT THE CARESIDE SYSTEM
The CareSide Analyzer and related test cartridges are our only products. We
will not be able to operate profitably unless these products achieve a
significant level of market acceptance. The following factors are the greatest
risks to our market acceptance:
7
<PAGE>
We May Fail to Develop the Comprehensive Test Menu Needed to Sell Our Product
If we are not able to fully develop our proposed comprehensive test menu,
customers may not buy our products. One of our major selling points to
potential customers will be the breadth of our menu.
We May Be Unable to Change How Tests are Ordered
We may not be able to demonstrate the economic or clinical benefits of the
Careside system sufficiently to convince members of the medical community to
change the way they order tests. Currently, physicians and hospitals typically
order blood tests from central laboratories.
Sales of Our Products May Be Limited By Managed Care Contractual Relationships
Our ability to sell to healthcare providers may be limited by managed care
relationships. Many health maintenance and managed care organizations have
exclusive contracts with laboratories that require participating or employed
physicians to send patient specimens only to contracted laboratories.
We May Be Unable to Keep Pace With Changing Technology
Blood testing technology is evolving. Other companies may develop products in
response to technological changes that make our products noncompetitive,
particularly if the development, introduction or marketing of our products is
delayed.
WE NEED TO OBTAIN POINT-OF-CARE USE DESIGNATION
The Careside system is not currently approved for point-of-care use. It is
only approved for laboratory use. Point-of-care use designation from the FDA is
necessary to expand our potential market beyond licensed laboratories.
Following clinical testing of the testing instrument at the pilot sites, we
expect that the CareSide Analyzer will receive pre-market clearance for point-
of-care use.
WE MAY NOT BE ABLE TO DEVELOP OUR PRODUCTS
In order for us to expand our test menu, we must complete the development of
one of the four types of disposable cartridges. Factors outside our control may
delay our proposed development schedules by one year or more. These factors
include:
.delays in regulatory clearance,
.technological difficulties,
.restrictions on access to proprietary technology of strategic partners,
and
.changes in the healthcare, regulatory or reimbursement environment.
REDUCTIONS IN THIRD-PARTY REIMBURSEMENT FOR TESTS MAY HURT OUR BUSINESS
Government authorities, private health insurers and other third-party payers,
such as health maintenance organizations may not reimburse providers for our
products' tests. Current reimbursement amounts for diagnostic tests may not be
maintained. Any decrease in test reimbursement amounts may reduce the demand
for our products or force us to lower our sales prices. In addition,
legislative proposals to reform healthcare and the trend toward managed
healthcare in the United States may require lower prices for our products. See
"Business--Third Party Reimbursement" on page 37.
WE HAVE NO SALES, MARKETING OR DISTRIBUTION EXPERIENCE
We may not be able to recruit or retain direct sales and marketing personnel
who will successfully implement our marketing strategy. We have no sales,
marketing or distribution experience. We intend to distribute our products in
the United States primarily through our own sales force, and internationally
through a limited number of distributors. Establishing a sales and marketing
capability will require substantial efforts and significant resources.
8
<PAGE>
THIRD-PARTY DISTRIBUTORS MAY NOT BE EFFECTIVE
We will depend on third party distributors to assist us in promoting market
acceptance and creating demand for our products. We have a distribution
arrangement with SmithKline Beecham Clinical Laboratories, Inc. for the United
States and certain foreign countries. However, SmithKline Beecham Corporation
has recently entered into an agreement to sell its laboratory business. The
impact of their sale on our business is not known. We have also granted Fuji a
right of first refusal to distribute the Careside system exclusively in Japan
and non-exclusively in some of the other Asian countries. We will need
additional arrangements to distribute our products worldwide. We may not be
able to maintain these arrangements or enter into additional distribution
arrangements. In addition, we have little control over the resources that the
distributors will devote to the marketing of the Careside system. See
"Business--Marketing Strategy" on page 32 and "Certain Transactions--SmithKline
Beecham" on page 52.
OUR CONTRACT MANUFACTURERS MAY NOT SUFFICIENTLY SUPPLY US
We will depend upon outside vendors to manufacture most of the Careside
system, including the CareSide Analyzer and components of the disposable
testing cartridges. We will have only limited control over third-party
manufacturers as to quality control and timeliness of production and delivery.
We cannot be certain that outside manufacturers will be able to provide us with
a sufficient number of instruments and cartridge components on a timely basis.
OUR LACK OF MANUFACTURING EXPERIENCE COULD REDUCE OUR ABILITY TO ASSEMBLE
CARTRIDGES
We will be assembling the cartridges at Careside. We have never operated a
manufacturing/assembly business. We will need to assemble significant and
increasing quantities of test cartridges on a timely basis, while maintaining
strict quality standards. We are converting from manual production of cartridge
components and assembly to an automated system. We may not be able to achieve
and maintain product accuracy and reliability when producing the cartridges in
the quantities required, on a timely basis or at an acceptable cost.
OUR THIRD-PARTY SUPPLIERS COULD INTERRUPT OUR SUPPLY
We will purchase the materials used in the test cartridges from outside
suppliers, such as Fuji Photo Film Co., Ltd. Each of our supply agreements has
termination rights. Any interruption in supply would adversely affect our
schedule. See "Business--Manufacturing and Supply" on page 35.
OUR ABILITY TO ADD HEMATOLOGY TESTING CAPABILITIES DEPENDS ON A THIRD PARTY
The CareSide Analyzer does not perform hematology tests, which are an
important part of point-of-care testing. We are negotiating an arrangement with
a third party to supply hematology testing capabilities in an additional
device. We may not be able to agree upon pricing that will enable us to offer
cost-effective hematology testing. In addition, we have not yet developed an
interface between the hematology device and the CareSide Analyzer. See
"Business--The Careside System--Test Menu" on page 30.
OUR CEO AND OTHER KEY PERSONNEL ARE CRITICAL TO OUR SUCCESS
The loss of key employees or unsuccessful recruiting efforts will harm us.
Competition for qualified and talented individuals with experience in point-of-
care testing is intense. Our success depends on our ability to retain the
services of Mr. Stoughton, our Chairman of the Board of Directors and Chief
Executive Officer, and Dr. Grove, Executive Vice President--Research and
Development. Mr. Stoughton has over 20 years experience as a senior executive
of several large hospitals and over four years experience as President of
SmithKline Beecham Clinical Laboratories, Inc. Dr. Grove managed research and
development activities at SmithKline Beecham Clinical Laboratories, Inc. for 12
years and has extensive experience in the development of diagnostic tests. We
also need to attract additional sales and marketing, research and development,
and experienced manufacturing personnel. See "Management--Employment
Agreements" on page 48.
9
<PAGE>
WE MAY NOT BE ABLE TO MANAGE OUR EXPANDING OPERATIONS
We will need to expand our operations if we are successful in achieving
market acceptance for the Careside system. This expansion will result in
additional responsibilities for management and place significant demand upon
our management, our operating and financial systems and our resources. To
accommodate this growth and to compete effectively, we will need to implement
and improve our internal operating systems and controls, and to hire and train
additional personnel.
OUR COMPETITORS HAVE ADVANTAGES OVER US
Our business may fail because our market is highly competitive. Our primary
competitors are large diagnostic device manufacturers, commercial and hospital
laboratories and other point-of-care device manufacturers. The large device
manufacturers and commercial and hospital laboratories have significant
marketing, manufacturing, financial and managerial resources, and have
substantially greater research and development capabilities than we do. We
expect that manufacturers of conventional blood testing products used in
centralized laboratories will compete intensely with us to maintain their
market share. Commercial and hospital laboratories may try to influence
providers against the Careside system to protect their revenue. Other point-of-
care companies have already sold their product in the marketplace. We
anticipate competition from these manufacturers in discrete tests using areas
such as critical care testing. Many of these companies offer tests that will
cost less than the Careside system and so may be attractive to some of our
customers. See "Business--Competition" on page 36.
OUR PROPRIETARY TECHNOLOGY IS A CRUCIAL PART OF OUR BUSINESS
The success of our business will depend on our ability to protect our
proprietary technology. Our business may fail if we are not able to do so.
We Do Not Have Any Patents on Our Proprietary Technology
Currently, no patents have been issued to us. We have submitted three U.S.
and two international patent applications, and we intend to file more. We
cannot be certain that any patent application will result in the issuance of a
patent or that our patents will withstand any challenges by third parties.
Our Technology May Infringe on the Proprietary Rights of Third Parties
Universities and government laboratories, physicians and other corporations
are conducting substantial research in point-of-care diagnostic blood testing
technology. We believe that numerous patent applications have been filed by
others, and patents have been issued to them, relating to specific diagnostic
products and processes. If we use technologies, products or processes covered
by patents issued to others, we may have to obtain licenses. We may not be able
to obtain such licenses on reasonable terms, or at all.
Our Trademarks and Trade Names May Not Be Protected
Our registered or unregistered trademarks or trade names may be challenged,
canceled, infringed, circumvented or declared generic or determined to be
infringing on other marks. We may not be able to protect our rights to these
trademarks and trade names, which we need to build brand loyalty. See
"Business--Patents and Proprietary Rights" on page 37.
Our Trade Secrets May Be Disclosed
We also rely on unpatented trade secrets to protect our proprietary
technology. We attempt to protect our proprietary technology through an
employee handbook and agreements with our executive officers. Our employees
have not signed confidentiality agreements. The confidentiality provisions in
the handbook and executives' agreements may not be enforceable under applicable
law. Other companies may independently develop or otherwise acquire equivalent
technology or gain access to our proprietary technology.
10
<PAGE>
Our Proprietary Rights May Fail to Protect Our Business
We may have to resort to litigation to protect or defend our rights. This
could result in substantial costs and the diversion of management's attention.
If we lost any such litigation, we could lose our competitive position, be
required to obtain licenses from third parties or be prevented from
manufacturing, selling or using certain of our products.
CARESIDE SYSTEM IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
Our products are medical devices subject to extensive regulation by the FDA,
similar agencies in other countries, and to a lesser extent, by state
regulatory authorities. See "Business -- Government Regulation" page 38. In
addition to our need to obtain a point-of-care use designation, the following
are the greatest regulatory risks we face:
Need to Obtain FDA Pre-Market Clearance
FDA regulations require rigorous laboratory and clinical testing to establish
product performance before commercial marketing. Medical devices such as the
CareSide Analyzer are subject to pre-market clearance. Clearance is subject to
further review, such as when products are modified. We cannot be certain that
we will be able to obtain all necessary approvals on a timely basis, or at all.
Moreover, it is possible that one or more of our products will be subjected to
more extensive pre-market clinical testing and FDA pre-market approval.
Need to Comply With GMP and Other Manufacturing Regulations
Our manufacturing facilities and processes will be required to comply with
strict federal regulations, including Good Manufacturing Practices, or GMP, and
quality system requirements, regarding validation and quality of manufacturing.
We have limited experience in complying with regulations governing our products
and manufacturing facilities. We must devote substantial resources and
management attention to monitoring and maintaining compliance with governmental
regulations. If we, or our manufacturing partners, violate applicable
regulations, we may be sanctioned and our production or distribution may be
suspended. In addition, the FDA may withdraw the approval or clearance to
market any of our products.
CLIA MAY DISCOURAGE HEALTHCARE PROVIDERS FROM USING POINT-OF-CARE TESTING
Careside system users will be required to be licensed under the Clinical
Laboratory Improvement Amendments of 1988. This may make healthcare providers
reluctant to initiate, continue or expand patient testing using the Careside
system.
YEAR 2000 PROBLEMS COULD INTERRUPT OUR SUPPLY
Our receipt of key component products used in the Careside system may be
delayed if our suppliers' software systems are not able to read and apply
proper dates. We expect to have contingency plans in place in the event any of
our key suppliers are not Year 2000 compliant by the second half of 1999.
However, our contingency plans may not provide the same product or timing as
our current suppliers.
SIGNIFICANT NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE COULD LOWER MARKET PRICE
Sales of large numbers of common stock after the offering, or even the
potential for those sales, are likely to lower the market price of common
stock. In addition, these sales may negatively affect our ability to raise
needed capital through the sale of our common stock. After the offering, we
will have 7,884,281 shares of
11
<PAGE>
common stock outstanding. In addition to the 2,800,000 shares that will be
freely tradeable after the offering, 7,521,383 currently outstanding or
reserved shares may be sold in the future subject to compliance with the
Securities Act.
<TABLE>
<CAPTION>
NUMBER OF SHARES DESCRIPTION
<S> <C>
5,084,281 Common stock currently outstanding
411,923 Issuable upon exercise of currently outstanding options
772,287 Issuable upon exercise of options that may be granted in the future
150,000 Issuable pursuant to employee stock purchase plan
822,892 Issuable upon exercise of currently outstanding warrants
280,000 Issuable upon exercise of representatives' warrants beginning one year after
the closing of the offering
---------
7,521,383
=========
</TABLE>
In addition to the Securities Act restrictions, all of our directors, officers
and principal stockholders are subject to lock-up agreements. Without the prior
written consent of Fahnestock & Co. Inc., the parties to the lock-up
agreements, including our officers and directors, are not permitted to sell
their shares until after 360 days after the offering. See "Shares Eligible for
Future Sale" on page 60.
OUR MANAGEMENT AND PRINCIPAL STOCKHOLDERS WILL CONTROL CARESIDE AFTER THE
OFFERING
Following completion of the offering, our directors and executive officers,
together with the principal stockholders of Careside, will own or control
approximately 25.2% of our outstanding common stock. Accordingly, these
stockholders may be able to influence the outcome of stockholder votes,
including votes concerning the election of directors, certain amendments to our
charter and bylaws, and the approval of significant corporate transactions such
as a merger or a sale of our assets. Such influence could have the effect of
delaying, deferring or preventing a change in control of our stock. In
addition, the interests of these stockholders could conflict with the interests
of other Careside stockholders, including the purchasers in the offering. See
"Principal Stockholders" on page 51.
FUTURE ISSUANCES OF PREFERRED STOCK MAY DILUTE RIGHTS OF COMMON STOCKHOLDERS
Our Board of Directors will have the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, privileges and other
terms of such shares. The Board may exercise this authority without the
approval of the stockholders. The rights of the holders of common stock may be
adversely affected by the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock may make it more
difficult for a third party to acquire control of Careside. See "Description of
Capital Stock--Preferred Stock" on page 55.
STATUTE, CHARTER AND BY-LAWS MAY DELAY OR PREVENT AN ACQUISITION OF CARESIDE
We will be subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. Section 203 could delay or prevent a third
party or a significant stockholder from acquiring control of Careside. In
addition, our charter and by-laws may have the effect of discouraging, delaying
or preventing a merger, tender offer or proxy contest involving Careside. Any
of these anti-takeover provisions could lower the market price of the common
stock. See "Description of Capital Stock--Takeover Protection and Certain
Charter and By-Law Provisions" on page 57.
OUR STOCK PRICE MAY TRADE BELOW THE OFFERING PRICE
Our shares of common stock may trade at prices significantly below the
initial public offering price. The initial public offering price may bear no
relationship to the future market price of our common stock.
12
<PAGE>
The market price for shares of our common stock may be highly volatile
depending on many factors, including:
. the success of our new products or new products introduced by our
competitors,
. developments with respect to our patents and other proprietary rights,
. our ability to meet sales and earnings expectations of securities
analysts, and
. changes in general market conditions.
PURCHASERS IN THE OFFERING WILL FACE IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of common stock. If 2,800,000 shares are sold in
the offering at $9.00 per share, our net tangible book value per share will be
$3.32, $5.68 below the $9.00 per share price. The net tangible book value after
the offering will thus be 63% below the $9.00 offering price. Sales of
additional common stock in the future may reduce net tangible book value per
share, resulting in further dilution to purchasers of shares sold in the
offering. See "Dilution" on page 16.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus discuss future events and
developments, including our ability to generate revenue, income and cash flows,
or state other "forward-looking" information. We generally identify these
forward-looking statements by using the words "anticipate," "believe,"
"estimate," "expect," and similar expressions. Those statements are subject to
known and unknown risks, uncertainties and other factors that could cause the
actual results to differ materially from those contemplated by the statements.
Important factors that may cause actual results to differ include those set
forth under "Risk Factors" beginning on page 7.
We do not promise to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements.
13
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of shares of
common stock in the offering of approximately $22,336,000 after deduction of
underwriting discounts and commissions and expenses payable by us. This assumes
an initial public offering price of $9.00 per share. We estimate net proceeds
of $25,851,000 if the underwriters' over-allotment option is exercised in full.
We expect to use the proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT OF
NET APPROXIMATE
PROCEEDS PERCENTAGE
(IN OF NET
MILLIONS) PROCEEDS
----------- -----------
<S> <C> <C>
Complete product development and launch and related
expenses ............................................ $14.0 62.7%
Purchase manufacturing equipment and expand our
facilities........................................... $ 3.3 14.8%
Build inventory and provide working capital........... $ 2.0 9.0%
Repay December 1998 bridge financing.................. $ 3.0 13.5%
----- -----
Total............................................... $22.3 100.0%
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" on page 19 and "Risk Factors--
The Offering May Not Raise Sufficient Funds to Meet Our Goals" and "--
Additional Funding May Not Be Available" on page 7.
Pending use of the net proceeds, we intend to invest such funds in short-term
bank deposits and investment grade securities, United States government
securities, and other short-term, income-producing securities.
The foregoing discussion is merely an estimate based on our current business
plans. Our actual expenditures may vary depending upon circumstances not yet
known, such as the time actually required to reach a positive cash flow, or to
successfully develop our products.
DIVIDEND POLICY
We have never paid any cash dividends on our shares of common stock and do
not anticipate paying any cash dividends on our shares of common stock in the
foreseeable future. Currently, we intend to retain any future earnings for
reinvestment in our business. Any future determination to pay cash dividends
will be at the discretion of our Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements and other
factors our Board of Directors deems relevant.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1998 for Careside:
. the actual capitalization,
. the pro forma capitalization which reflects the additional $1,500,000
borrowed under the bridge financing in January 1999, and
. the pro forma as adjusted capitalization which shows the effect of the
sale of 2,800,000 shares of common stock in the offering at an assumed
initial public offering price of $9.00 per share and the use of the net
proceeds of the offering.
This table should be read in conjunction with our Financial Statements
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Long-term debt:
Equipment loan due finance
company........................... $ 854,086 $ 854,086 $ 854,086
Note payable under bridge financing
(1)............................... 1,190,846 2,690,846 --
------------ ------------ ------------
Total long-term debt............. 2,044,932 3,544,932 854,086
------------ ------------ ------------
Stockholders' equity (2):
Preferred Stock, $.01 par value --
5,000,000 shares authorized; none
issued and outstanding........... -- -- --
Common Stock, $.01 par value --
50,000,000 shares authorized;
5,084,281 shares issued and
outstanding (actual and pro forma)
and 7,884,281 shares issued and
outstanding (pro forma as
adjusted) (3)..................... 50,843 50,843 78,843
Additional paid-in capital......... 21,003,545 21,003,545 43,311,545
Deficit accumulated during
development stage................. (16,905,243) (16,905,243) (17,214,397)
------------ ------------ ------------
Total stockholders' equity....... 4,149,145 4,149,145 26,175,991
------------ ------------ ------------
Total capitalization............. $ 6,194,077 $ 7,694,077 $ 27,030,077
============ ============ ============
</TABLE>
- --------
(1) For a discussion of the note payable, see the description of the 1998
bridge financing under "Management's Discussion & Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" on
page 19, and "Certain Transactions--Financing Activities" on page 53. The
amounts in this chart are net of the unamortized value of the bridge
warrant of $309,154.
(2) See "Description of Capital Stock" on page 55.
(3) Excludes 1,514,815 shares of common stock issuable upon exercise of options
and warrants which will be outstanding upon completion of the offering. See
"Management--Stock Option Plans" on page 47, "Certain Transactions--
Financing Activities" on page 53, "Description of Capital Stock--Warrants"
on page 55 and "Underwriting" on page 62.
15
<PAGE>
DILUTION
As of December 31, 1998, our net tangible book value was $4,149,000, or
$0.82 per share of common stock. Net tangible book value per share represents
our total tangible assets less total liabilities, divided by the total number
of shares of common stock outstanding. Without taking into effect any changes
in the net tangible book value after December 31, 1998, other than to give
effect to the sale of 2,800,000 shares of common stock in the offering at an
assumed initial public offering price of $9.00 per share and the application of
the estimated net proceeds of the offering, the net tangible book value of
Careside as of December 31, 1998 would have been $26,176,000 or $3.32 per
share. This represents an immediate increase of $2.50 per share of common stock
to existing stockholders and an immediate dilution of $5.68 per share of common
stock to the new stockholders who purchase common stock in the offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.......................... $9.00
Net tangible book value per share before the offering.......... $0.82
Increase in net tangible book value per share attributable to
new stockholders.............................................. 2.50
-----
As adjusted net tangible book value per share after the
offering...................................................... 3.32
-----
Dilution in tangible book value per share to new stockholders.. $5.68
=====
</TABLE>
If the underwriters' over-allotment option is exercised in full, dilution per
share to new stockholders would be $5.42 per share of common stock.
The following table summarizes as of December 31, 1998 the differences
between the existing stockholders and the new stockholders with respect to the
number of shares of common stock purchased, the total consideration paid, and
the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 5,084,281 64.5% $23,318,075 48.1% $4.59
New stockholders.......... 2,800,000 35.5 25,200,000 51.9 $9.00
--------- ----- ----------- -----
Total................... 7,884,281 100.0% $48,518,075 100.0%
========= ===== =========== =====
</TABLE>
The above computations assume no exercise of outstanding options or warrants
to purchase common stock or of the underwriters' over-allotment option. See
"Description of Capital Stock" on page 55.
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of Careside and the predecessor
business should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 18 and the
Financial Statements and notes thereto beginning on page F-7. The financial
data presented for the predecessor business at SmithKline Beecham Clinical
Laboratories, Inc. represents the research and development and related general
and administrative costs incurred by SmithKline Beecham Corporation in
connection with the development of technology and know-how acquired by Careside
on November 7, 1996. The selected financial data for Careside as of December
31, 1996 and the predecessor business as of December 31, 1995 and for the year
then ended are derived from the audited financial statements not included in
this prospectus. The selected financial data for the predecessor business as of
December 31, 1994 and for the year then ended are unaudited, but, in our
opinion, include all adjustments necessary for a fair presentation of such
financial data.
<TABLE>
<CAPTION>
PREDECESSOR BUSINESS CARESIDE, INC.
----------------------------------- ------------------------------------------------------------------
YEAR ENDED TEN MONTHS PERIOD FROM YEAR ENDED PERIOD FROM
DECEMBER 31, ENDED INCEPTION DECEMBER 31, INCEPTION
---------------------- OCTOBER 30, (JULY 10, 1996) TO ------------------------ (JULY 10, 1996)
1994 1995 1996 DECEMBER 31, 1996 1997 1998 TO DECEMBER 31, 1998
--------- ----------- ----------- ------------------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Operating expenses
Research and
development..... $ 949,346 $ 2,109,802 $ 3,054,503 $ 1,561,847 $ 5,895,465 $ 8,297,974 $ 15,755,286
General and
administration.. 26,069 585,058 224,399 55,515 640,574 850,129 1,546,218
--------- ----------- ----------- ----------- ----------- ----------- ------------
Operating loss.. $(975,415) $(2,694,860) $(3,278,902) (1,617,362) (6,536,039) (9,148,103) (17,301,504)
========= =========== ===========
Net interest in-
come
(expense)........ (20,809) 205,256 211,814 396,261
----------- ----------- ----------- ------------
Net loss.......... $(1,638,171) $(6,330,783) $(8,936,289) $(16,905,243)
=========== =========== =========== ============
Net loss per
share............ $ (2.25) $ (2.04) $ (1.93)
=========== =========== ===========
Shares used in
computing net
loss per share... 728,465 3,098,980 4,629,916
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
BUSINESS(1) CARESIDE, INC.
---------------------- ------------------------------------
DECEMBER 31, DECEMBER 31,
---------------------- ------------------------------------
1994 1995 1996 1997 1998
--------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents ........... $ -- $ -- $ 31,041 $1,237,149 $ 3,926,603
Total assets............ 43,780 306,589 1,192,562 3,140,223 7,911,403
Long-term debt.......... -- -- -- -- 2,044,932
Deficit accumulated
during the development
stage.................. (975,415) (3,670,275) (1,638,171) (7,968,954) (16,905,243)
Total stockholders'
equity (deficit)....... -- -- (1,066,818) 2,437,607 4,149,145
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Development of the point-of-care technology used in the Careside system began
in 1994 at SmithKline Beecham Clinical Laboratories, Inc., a subsidiary of
SmithKline Beecham Corporation. In November 1996, we acquired the predecessor
business, including intellectual property, equipment and other assets, from
SmithKline, to continue the development of point-of-care diagnostic technology
and to create a commercial product. As part of the consideration paid for the
acquisition, SmithKline Beecham Corporation became an equity owner in Careside.
The initial development of our point-of-care technology at SmithKline has been
reflected in the accompanying financial statements as a predecessor business.
Since November 1996, we have devoted substantially all of our resources to
research and development activities. We have incurred losses since inception.
As of December 31, 1998, the aggregate loss incurred was approximately $16.9
million. We expect to incur significant additional losses over at least the
next 18 months as we continue product development activities, complete a pilot
marketing program and initiate marketing efforts.
Although the CareSide Analyzer and 22 tests are cleared or exempt by the FDA
for use in laboratory testing, the rollout of our system is not expected to
take place until the third quarter of 1999. To date, we have generated no
revenue. We expect that our revenue will derive primarily from the sale of
disposable test cartridges rather than of the CareSide Analyzer itself.
RESULTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
Research and Development Expenses. Research and development expenses
increased to approximately $8.3 million for the year ended December 31, 1998
compared to approximately $5.9 million in the same period in 1997, an increase
of 41%. This increase reflects increased payments to third parties for the
development of the CareSide Analyzer and increased staffing for additional test
development and submissions to the FDA.
General and Administrative Expenses. General and administrative expenses
increased to $850,000 for the year ended December 31, 1998 compared to $641,000
in the same period in 1997, an increase of 33%. This increase reflects the
increase in the preliminary sales and marketing efforts associated with planned
pilot market testing in the second quarter of 1999.
Net Interest Income (Expense). Interest income was approximately the same
for the year ended December 31, 1998 as compared to the same period in 1997 at
$212,000 and $205,000, respectively. This reflects comparable levels of cash
and cash equivalents available for investment.
Net Loss. The net loss was approximately $8.9 million for the year ended
December 31, 1998 compared to approximately $6.3 million in the same period in
1997, an increase of 41%. This increase reflects the increase in research and
development expenses and preliminary sales and marketing efforts.
Years Ended December 31, 1997 and 1996
Research and Development Expenses. Research and development expenses
increased to approximately $5.9 million for the year ended December 31, 1997
compared to approximately $1.6 million for the period from inception through
December 31, 1996. This increase reflects a full year of spending as well as
the expanded efforts devoted to completing additional test development and
submissions of these tests to the FDA. Combined research and development
expenses for the year ended December 31, 1996 for both Careside and the
predecessor business were approximately $4.6 million.
General and Administrative Expenses. General and administrative expenses
increased to $641,000 for the year ended December 31, 1997 compared to $56,000
for the period from inception through December 31, 1996. This increase reflects
the full year impact of general and administrative expenses and the costs
associated with
18
<PAGE>
raising additional capital. Combined general and administrative expenses for
the year ended December 31, 1996 for both Careside and the predecessor business
were $280,000.
Net Interest Income (Expense). Net interest income was $205,000 for the year
ended December 31, 1997 compared to net interest expense of $21,000 for the
period from inception through December 31, 1996. This increase reflects the
impact of the resulting cash and cash equivalents available for investment
after an equity financing in 1997.
Net Loss. The net loss was approximately $6.3 million for the year ended
December 31, 1997 compared to approximately $1.6 million for the period from
inception through December 31, 1996. This increase reflects the increase in
research and development expenses, a full year of activity and preliminary
sales and marketing efforts.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through the net
proceeds generated from the issuance of common stock, long-term debt and
certain short-term borrowings that were subsequently converted into equity
securities. As of December 31, 1998, we have received net proceeds aggregating
approximately $22.7 million from these transactions.
Net cash used in operating activities was approximately $7.7 million for the
year ended December 31, 1998. This represents the net loss for the year
partially offset by an increase in accounts payable to the manufacturer of the
CareSide Analyzer. Net cash used in operating activities was approximately $6.5
million for the year ended December 31, 1997 and $0.9 million for the period
from inception through December 31, 1996. Cash used for operations was
primarily related to funding expansion of research and development activities
as well as the establishment of an administrative infrastructure.
Cash used in investing activities for the purchase of property and equipment
was approximately $2.0 million for the year ended December 31, 1998, $0.9
million for the year ended December 31, 1997 and $345,000 for the period from
inception through December 31, 1996. The cash was used primarily for the
acquisition of laboratory equipment used in research and development.
At December 31, 1998, our principal source of liquidity was approximately
$3.9 million in cash and cash equivalents.
In December 1998, we entered into an agreement with an equipment lease
financing company regarding a $2.5 million facility secured by specific
equipment. Each draw will be a separate loan under the facility. Approximately
$1.0 million of this facility was drawn in December 1998 and was secured by our
existing equipment. We anticipate drawing the remaining amount by the end of
1999 which will be secured by manufacturing equipment for cartridge assembly
which we purchase with the loan proceeds. Each equipment loan will have a 48-
month term and bears an interest rate of approximately 14% per annum adjusted
for an index rate based on four-year U.S. Treasury Notes at the time of
borrowing.
In addition, we entered into an agreement for the bridge financing with S.R.
One, Limited of which $1.5 million was funded in December 1998. The remaining
$1.5 million was funded in January 1999. The bridge financing matures upon the
earliest to occur of completion of the offering, a private equity financing of
at least $8,000,000 or January 31, 2000. It bears interest at 8% per annum,
payable quarterly. We issued a bridge warrant in connection with the bridge
financing. The bridge warrant will become exercisable on the earlier of
December 17, 1999 or six months after the completion of the offering for the
number of shares of common stock which is equal to $750,000 divided by 85% of
the initial public offering price per share of the common stock in the
offering. If the offering price is $9.00 per share, the bridge warrant will be
exercisable for 98,039 shares. The bridge warrant has an exercise price of 85%
of the initial public offering price. If the bridge financing is not repaid by
June 30, 1999, the bridge warrant becomes exercisable for twice as many shares
of common stock. The bridge warrant will expire on the earlier of December 17,
2005 or four years after the completion of the offering.
19
<PAGE>
We estimate that our current liquidity, when combined with the proceeds of
this offering and sales revenue expected after 1999, will be sufficient to fund
our operating expenses and capital requirements for approximately 18 months.
Our operating expenses will increase as we approach the market launch of our
product in the second half of 1999. We also expect that the development of
additional tests will require research expenditures at a level comparable to
past spending for test development. Sales and marketing activities will require
hiring and training approximately 15 additional staff in 1999. Initiation of
manufacturing activities will require hiring approximately 20 staff and capital
expenditures to purchase the equipment needed for the automated cartridge
assembly line. We will also utilize our funds to build a cartridge inventory
during the second half of 1999 to the level needed to support our sales. This
estimate of the period for which we expect our available sources of cash to be
sufficient to meet our funding needs is a forward looking statement that
involves risks and uncertainties. There can be no assurance that we will be
able to meet our capital requirements for this period as a result of certain
factors set forth under "Risk Factors--Additional Funding May Not Be Available"
and elsewhere in this prospectus. In the event our capital requirements are
greater than estimated, we may need to raise additional capital to fund our
research and development activities, to scale-up manufacturing activities and
to expand our sales and marketing efforts. Our future liquidity and capital
funding requirements will depend on numerous factors, including the extent to
which our products under development are successfully developed and gain market
acceptance, the timing of regulatory actions regarding our products, the costs
and timing of expansions of sales, marketing and manufacturing activities,
procurement and enforcement of patents important to our business, and the
impact of competitors' products. There can be no assurance that such additional
capital will be available on terms acceptable to us, if at all. Furthermore,
any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants. If adequate funds
are not available, we may be forced to curtail our operations significantly or
to obtain funds through entering into collaborative agreements or other
arrangements on unfavorable terms. Our failure to raise capital on acceptable
terms could have a material adverse effect on our business, financial condition
or results of operations.
INCOME TAXES
As of December 31, 1998, we had approximately $2,148,000 and $225,000 of net
operating loss and research and development credit carryforwards, respectively,
for federal income tax purposes, which expire on various dates between 2011 and
2013. These amounts reflect different treatment of expenses for tax reporting
than are used for financial reporting. As of December 31, 1998, we had
capitalized approximately $12.9 million of research and development expenses
for federal income tax purposes. The Tax Reform Act of 1986 contains certain
provisions that may limit our ability to utilize net operating loss and tax
credit carryforwards in any given year. We experienced a change in ownership
interest in excess of 50% as defined under the Tax Reform Act upon the first
closing of our 1997 equity financing. We do not believe that this change in
ownership will impact our ability to utilize our net operating loss and tax
credit carryforwards. There can be no assurance that ownership changes in
future periods will not significantly limit our use of existing or future net
operating loss and tax credit carryforwards.
YEAR 2000 COMPLIANCE
We have identified our Year 2000 risks in three major categories: internal
business operations software; software utilized within the CareSide Analyzer;
and software used by our external suppliers and distributor. A review of our
non-information technology systems did not identify any material risks.
With respect to internal operations, most of our computers and software
programs have been recently acquired. We have relied on the efforts of computer
and software vendors to make their latest hardware and software releases Year
2000 compliant. As a result, no incremental material compliance cost is
expected to be incurred in this area. Our management has contacted vendors to
confirm the status of their software that we use. In addition, we have utilized
Year 2000 test software to evaluate compliance.
20
<PAGE>
With respect to the CareSide Analyzer, all development work has occurred
since the widespread recognition of the Year 2000 problem. We designed our
products and the software encoded in our system to be Year 2000 compliant. We
plan to issue software updates for the CareSide Analyzer on a routine basis to
add additional tests to the menu. If an unforeseen Year 2000 issue arises, we
could distribute compliant software to our customers at little or no
incremental cost as part of these routine updates. In the future, it will also
be necessary to link the CareSide Analyzer with customer systems. If these
systems are Year 2000 compliant, management's time addressing Year 2000 issues
on the CareSide Analyzer's interface with customer systems will be minimal. If
they are not, management's time may be more significant. As the specific
customers are not known at this time, it is not possible to measure the
opportunity cost.
Regarding our critical suppliers, the worst scenario that we might encounter
would be a short-term disruption of supply if a vendor were impacted by an
unforeseen Year 2000 failure. We inquire regularly regarding our suppliers'
Year 2000 compliance programs. To date, we believe that our suppliers either
are or will be Year 2000 compliant. We expect to establish appropriate
contingency plans by mid-1999 in the event certain key suppliers are not Year
2000 compliant. These contingency plans could include utilizing alternative
suppliers or building inventory of critical parts as appropriate. We do not
anticipate any incremental material costs if we are required to implement our
contingency plans.
Sales and distribution of our product through SmithKline is anticipated in
the third quarter of 1999. Based on inquiries of SmithKline, we do not believe
that Year 2000 problems encountered by SmithKline would impact our ability to
distribute our product. Distribution of our products by other third parties is
not anticipated before the year 2000.
21
<PAGE>
BUSINESS
GENERAL
We have developed and plan to sell a proprietary blood testing system. It is
designed to decentralize laboratory operations. The system provides cost-
effective, accurate test results within 10 to 15 minutes at the point-of-care,
for a comprehensive menu of routine blood tests. Because it provides rapid test
results, the Careside system can also perform blood tests required for critical
care testing. The Careside system performs chemistry, electrochemistry,
coagulation and immunochemistry tests within a single testing instrument. Tests
in these four different test categories, along with hematology tests, comprise
the vast majority of blood tests ordered. No other point-of-care product
currently in the market offers as broad a menu of tests or combines these four
test categories. Our goal is to make the Careside system the standard for
routine and critical care blood testing. If we are successful, diagnostic
information will travel more rapidly and healthcare costs for physicians,
providers and payers will be reduced.
The Careside system consists of the CareSide Analyzer and disposable test
cartridges. A separate hematology testing device to be manufactured by a third
party will be connected to the CareSide Analyzer. The Careside system is easy
to use and can be operated by a non-technical person. Its software will enable
the user to capture all data required to comply with the Clinical Laboratory
Improvement Amendments of 1988. This law, commonly called CLIA, governs quality
assurance and quality control processes and reporting for healthcare providers.
The FDA has granted pre-market clearance for the CareSide Analyzer and pre-
market clearance or exemption for 22 blood tests for laboratory use. We
recently filed for clearance for nine additional blood tests. Prior to the
Careside system's launch in the third quarter of 1999 through SmithKline
Beecham Clinical Laboratories, Inc., we will conduct pilot site marketing
studies. We expect the pilot studies to demonstrate how potential customers
will use the Careside system and its cost-effectiveness. We will also use the
pilot study results to obtain FDA designation of the Careside system for point-
of-care use by non-technical personnel. At product launch, we expect to have
the CareSide Analyzer and over 50 tests, including nine hematology tests,
cleared or exempt for laboratory use. As we expand our marketing efforts in the
fourth quarter of 1999, we expect to have all of our tests cleared for point-
of-care use as well. We believe that the Careside system's planned menu
represents over 80% of all blood tests ordered on an out-patient basis,
including all of the most commonly ordered out-patient blood tests. We plan to
market and distribute the Careside system in the United States through our own
sales force and through SmithKline.
We have utilized strategic partners with specific design expertise and state-
of-the-art technology in order to develop the Careside system rapidly and on a
cost-effective basis. Many of our partners' expertise is in the area of test
reagents. Reagents are the materials within the test cartridges that react with
a patient's blood. The CareSide Analyzer then performs the test by analyzing
the reaction. Currently, we have agreements with:
. Fuji Photo Film Co., Ltd. for the supply of its dry film based chemistry
reagents during the Careside system's development stage,
. International Technidyne Corporation for the joint development of
coagulation reagents, and
. UMM Electronics, Inc. to design and manufacture the CareSide Analyzer.
We are negotiating long-term agreements with Fuji and Diagnostic Reagents,
Inc. to supply reagents for the test cartridges. In addition, we previously
contracted with Hauser, Inc. for the design of the Careside system and with
Battelle Memorial Institute for the design of the system's disposable test
cartridges and their automated assembly manufacturing system.
22
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In November 1996, we acquired the assets and contracts used in the
predecessor business, including intellectual property, equipment and other
assets, from SmithKline to continue the development of point-of-care diagnostic
technology and to create a commercial product. Several senior members of our
management team worked on this point-of-care project at SmithKline, including
our Chief Executive Officer and Executive Vice President--Research and
Development. We continue to have a business relationship with SmithKline
through a distribution and supply agreement. This agreement gives SmithKline
distribution rights in the United States and certain foreign countries,
including the right to use the Careside system in its patient service centers
where blood is drawn.
THE LABORATORY TESTING MARKET
According to 1997 industry data and estimates, the worldwide market for in
vitro testing was $18.3 billion in 1997 and was expected to grow to $20 billion
in 2000. In vitro testing is the testing of all bodily tissues and fluids,
including blood. Based on their experiences while at SmithKline, our senior
management believes that the Careside system's 50 test menu will address over
38% of this market. The rest of the market includes complex and specialized
tests not performed by the Careside system. The United States and Canadian
market for in vitro testing is approximately 40% of the worldwide market. We
will seek to convert a reasonable portion of the United States and Canadian
blood testing market to point-of-care testing and then expand into the
worldwide market.
Most routine blood tests are sent to a central location, either a commercial
or hospital laboratory, for processing. In these central laboratories, large
blood analyzers reduce individual test costs by producing high volumes of test
results. Commercial laboratories provide approximately 27% of all in vitro
diagnostic testing services, hospital laboratories provide approximately 63%,
and the balance is provided in physicians' offices.
Commercial laboratories are currently the low cost provider of blood testing
services due primarily to economies of scale in testing multiple samples in
large analyzers. Commercial laboratories' testing expenditures relate
predominantly to labor intensive functions such as distribution, customer
service, general administration, communication technology and preparation of
the blood sample. There are numerous steps involved in obtaining test results
from commercial laboratories. Blood samples are collected throughout the day
from a variety of sources including hospitals, physicians' offices, nursing
homes and home care agencies. The samples are transported to the laboratory,
usually with special care in packaging to preserve sample integrity. After the
samples arrive at the laboratory, several administrative tasks are necessary as
thousands of samples are processed daily. Each sample is split into tubes that
are then sorted for testing in multiple large analyzers. The high throughput
analyzers require the attention of highly skilled technicians to prepare
reagents, prime multiple pumps, calibrate, prepare and load blood samples,
conduct centrifuge operations, process measurement data and report results.
This complex process must be tightly controlled at each step to ensure both
administrative and analytical accuracy. Tests are generally run overnight and
results are sent back to the healthcare provider the following day. This
factory-like process limits the ability to provide test results in less than 24
hours. If results are required sooner, certain laboratory operations must be
interrupted, resulting in significantly increased costs.
The process in hospital laboratories is very similar. Blood samples are
typically collected in the early morning with tests performed late morning and
early afternoon. Results are generally returned within four to five hours.
However, in many instances, hospitals must respond to critical patient
conditions and conduct tests on an immediate basis in order to support the
healthcare provider when a patient's condition is life threatening. A hospital
must be able to process these critical care tests 24 hours a day. This requires
the hospital laboratory to remain open whether or not any tests are being
conducted. With insufficient testing volume to absorb laboratory operating
expenses and capital costs, tests performed in hospital laboratories are more
expensive.
Many physicians' offices currently outsource their testing to commercial or
hospital laboratories. This practice is largely the result of the enactment of
the Clinical Laboratory Improvement Amendments in 1988. CLIA was an attempt to
ensure the quality and reliability of laboratory test results by placing more
stringent
23
<PAGE>
administrative and regulatory burdens on testing conducted in the physician's
office. Under CLIA, technicians conducting complex tests must meet detailed
proficiency requirements and must have established well-defined quality
assurance and quality control programs. As a result, for most individual
physicians, diagnostic testing became too burdensome and costly to justify
being done in the office.
Managed care has put substantial pressure on healthcare providers to reduce
costs and to treat patients using clinical treatment protocols that have been
developed for many chronic and acute illnesses. These protocols frequently
contain diagnostic tests that are used to help avoid the occurrence of acute
episodes of illness. Diagnostic blood and urine testing are two of the major
tools used in these protocols for early detection and ongoing evaluation of
treatment efficacy. Although these pressures should increase testing volume,
managed care providers and other payers are becoming more stringent by only
reimbursing tests for which there is a clear medical need. We expect these
pressures to continue to cause healthcare providers to order individual
diagnostic tests instead of "panels," or pre-determined groups, of tests
performed at one time. Managed care providers and payers will reimburse all
tests in a panel only if there is a clear medical need for each. As managed
care pressures mount to perform only medically necessary tests, reimbursement
rates for individual tests will decrease, requiring the healthcare provider and
the testing laboratory to be even more cost-effective. Therefore, we believe
that, because the Careside system performs single reagent testing and offers
packages of tests that are based on third-party payer approved panels, it will
be well received by managed care organizations and other payers.
The lack of timely test results from central laboratories has given rise to a
growing market for point-of-care tests. The initial products in the market have
targeted point-of-care tests for use in emergency rooms or critical care units.
While immediate test results benefit the patient and the healthcare provider,
current point-of-care testing devices have added costs to the system as the
hospitals must continue to operate a central laboratory using equipment that
conducts the same critical care tests as well as a much broader menu of tests
required for routine care. Furthermore, current point-of-care devices have not
attempted to provide customers with the quality assurance and quality control
data storage and retrieval capabilities necessary for CLIA requirements. No
company has developed a point-of-care system designed to decentralize routine
and critical care blood testing.
We believe that an easy-to-use diagnostic blood testing system offering a
broad menu of accurate point-of-care tests with built-in quality assurance and
quality control features can respond to the substantial unmet needs in the
diagnostic testing marketplace. We expect that the Careside system will be able
to perform all of the most commonly ordered out-patient blood tests.
Consequently, it will enable healthcare providers to decentralize laboratory
services to the point-of-care and outsource the less common tests as necessary.
CARESIDE'S SOLUTION
We believe that the Careside system provides the platform for solving the
limitations of central blood testing laboratories and redefines the market for
point-of-care testing. In addition, we believe the features of the Careside
system will enable healthcare providers not currently conducting blood tests to
start providing this service. The following are the reasons why:
. Cost-Effective Results-- The Careside system is designed to provide test
results that are cost competitive with commercial laboratories, the
lowest cost alternative currently available in the market. This is true
even taking into consideration the initial purchase of the CareSide
Analyzer, laboratory set-up and training, and ongoing costs associated
with maintenance, cartridge and blood drawing supplies.
. Rapid Test Results--The Careside system furnishes test results within 10
to 15 minutes from the time blood is drawn from the patient. The Careside
system can test from one to six cartridges in this time period. By
comparison, 24 hours or more may elapse before a healthcare provider has
in hand the results of blood tests performed at commercial laboratories,
and four to five hours may elapse before results are in the provider's
hands for a blood test performed at a hospital laboratory.
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<PAGE>
. CComprehensive Test Menu--The Careside system will offer a broad menu of
the most commonly ordered blood tests, including critical care tests. The
Careside system performs chemistry, electrochemistry, coagulation and
immunochemistry tests, all within a single testing instrument. By the
time of product launch, over 50 tests, including nine hematology tests,
are expected to be available, which we believe substantially exceeds the
capabilities of any other point-of-care system currently on the market.
In addition, the Careside system will include a separate hematology
testing device manufactured by a third party.
. Ease of Use--The Careside system can be easily operated and maintained by
non-technical personnel. The test process does not require separate
centrifuging or sample splitting, and automatically doses and mixes the
patient's blood sample with reagents within the cartridges.
. Industry Standard Technology--The Careside system uses many test methods
that are the same as those used in hospital and commercial laboratories.
The Careside system's technology is a miniaturization of the technology
in the largest testing devices utilized by centralized laboratories,
which is considered the best testing technology.
. Embedded Quality Assurance and Quality Control--The CareSide Analyzer has
operating software designed to assist in meeting the quality assurance
and quality control documentation requirements of the Clinical Laboratory
Improvement Amendments of 1988.
. Ability for Practice Enhancement--The Careside system's rapid test
results enable a provider to make clinical decisions more quickly, see
more patients, eliminate time spent reviewing records and making follow-
up calls, and improve patient satisfaction and quality of care.
Healthcare providers can also increase their revenue by performing and
billing for tests themselves.
CARESIDE'S STRATEGY
Our goal is to make point-of-care testing with the Careside system the
standard of care for routine and critical care blood testing. If we are
successful, diagnostic information will travel more rapidly and reduce
healthcare costs for physicians, providers and payers. The following are the
key elements of our strategy to achieve our objective:
PROVIDE THE UNIQUE POINT-OF-CARE SOLUTION. Most point-of-care companies have
focused solely on the critical care testing market with a limited number of
tests. In contrast, we have developed the Careside system to replace large
analyzers and decentralize testing to the point-of-care. As an illustrative
analogy, we believe that centralized laboratory testing is like using a
mainframe computer, whereas point-of-care testing is like using a desktop
personal computer. Unlike the "mainframe computer-based" approach of large
hospital and commercial testing laboratories, the Careside system creates a
"personal computer-based" solution for blood testing. We believe this will
enable hospitals and other healthcare provider-sponsored laboratories to
substantially reduce their reliance on centralized testing services. Instead,
they could use decentralized point-of-care technology on a cost-effective basis
with test results available in 10 to 15 minutes.
More complex tests that are not supportable by our decentralized testing
system, such as microbiology, genetic and other less common tests, could then
be referred outside the hospital to commercial laboratories or to a core
laboratory supporting multiple hospitals. Centralized laboratories that
continue to provide such complex testing would be able to streamline
procedures. We expect that this would lower the cost of complex testing. With
lower costs of centralized testing and the Careside system for decentralized
testing, we expect that the entire testing process will become more efficient
and cost effective. After the Careside system's launch, we intend to continue
to build its test menu so as to have the broadest test menu of any point-of-
care system on the market. Its unique menu will combine the four different test
categories of chemistry, electrochemistry, coagulation and immunochemistry into
a single testing instrument.
SATISFY HEALTHCARE SYSTEM NEEDS. The Careside system is designed to meet the
various needs of each of our targeted customer markets. Important factors for
hospitals will include quality of test result, ease of use, impact on
personnel, benefits to patients and whether it provides a better cost
alternative than the central
25
<PAGE>
hospital laboratory. For physician group practices, the Careside system will
offer improvements in daily office routine, greater convenience, enhanced
patient satisfaction, and new revenue opportunities. For the nursing home and
home care markets, which traditionally outsource testing services, the Careside
system will offer improved turnaround time on test results, individualized
testing, cost savings or revenue opportunities, and improved patient services.
We believe that the Careside system will enable each of these types of
healthcare providers to replace their centralized testing services with
decentralized point-of-care technology on a cost-effective basis. In pursuing
this strategy, we will continue to benefit from the over 20 years experience of
our Chief Executive Officer as a senior executive of several large hospitals
where hospital laboratory costs were a significant issue, as well as his more
than four years experience as President of SmithKline Beecham Clinical
Laboratories, Inc. See "Management."
LEVERAGE EXPERTISE OF STRATEGIC PARTNERS. We expect to continue to work with
our strategic partners, such as Fuji Photo Film Co., Ltd. and UMM Electronics,
Inc. who have already developed specific expertise and state-of-the-art
technology. Fuji supplies chemistry and electrochemistry test reagents for the
Careside system's proprietary test cartridges. UMM develops the software and
manufactures the device for our system. With these and other strategic
partners, we expect to be able to develop new tests on a rapid, cost-effective
basis.
SYSTEMATIC COMMERCIAL ROLLOUT. The CareSide Analyzer and 22 tests are cleared
for marketing in the United States for use in licensed laboratories. We
recently filed for clearance of nine additional blood tests. Our initial
product launch is not planned until the third quarter of 1999, at which time
over 50 tests are expected to be cleared or exempt by the FDA. In the second
quarter of 1999, we intend to conduct pilot site marketing studies in certain
of our targeted market segments to determine utilization patterns, demonstrate
cost-effectiveness and develop a "franchise book." The franchise book will be a
tool for customers to follow in order to take the appropriate steps in
establishing diagnostic testing services using the Careside system. In
addition, the pilot sites will provide validation testing necessary to obtain
FDA clearance of tests for point-of-care use by non-technical personnel. We
have arranged pilot site studies with APRIA Healthcare in the home care
services market, three hospitals affiliated with Child Health Corporation of
America in the hospital market, Reliant Care Group, L.L.C. in the nursing home
market, a small group practice in Arizona for the physician office market, and
SmithKline for its own use. We plan to market and distribute the Careside
system in the United States through our own sales force and through our
distribution arrangement with SmithKline. We believe that this systematic
commercial rollout improves the chances of having a successful product launch.
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<PAGE>
STATUS OF CARESIDE PRODUCT DEVELOPMENT
<TABLE>
<CAPTION>
TECHNOLOGY
PRODUCT REGULATORY STATUS PARTNER
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CareSide Analyzer Cleared under Section 510(k) of the Federal Food, Drug UMM
and Cosmetic Act for use in licensed laboratories. Electronics, Inc.
Section 510(k) clearance for point-of-care use will be Hauser, Inc.
applied for based on data to be gathered during
marketing pilot program.
- ---------------------------------------------------------------------------------------------------------
Disposable Test Cartridges Test cartridges are integral to approval of the tests Battelle
listed below. Chemistry, electrochemistry and Memorial
coagulation cartridges have been developed. The Institute
immunochemistry test cartridge is in development.
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
SUBMITTED PENDING
CLEARED/EXEMPT FOR MARKETING CLEARENCE PLANNED 1999
TEST CATEGORY LABORATORY USE* FOR LABORATORY USE SUBMISSIONS
- ---------------------------------------------------------------------------------------------------------
Chemistry Glucose AST Carbon Fuji Photo
Dioxide
BUN (Urea Nitrogen) ALT/AST Ratio Ionized Film Co., Ltd.
Calcium
Creatinine Amylase Bilirubin,
Direct
BUN/Creatinine Creatine Kinase Magnesium
Ratio
Albumin Creatine Kinase MB Hemoglobin
A/G Ratio (calc.) %CKMB Direct LDL-
Globulin (calc.) cholesterol
Total Cholesterol Ammonia
HDL-Cholesterol Anion Gap
LDL-Cholesterol (Chem-Echem)
(calc.)
Cholesterol/HDL
Cholesterol
Ratio
GGT
ALT
Total Bilirubin
Phosphorus
Total Protein
Uric Acid
Triglycerides
LDH
Total Calcium
Alkaline
Phosphatase
Osmolality
- ---------------------------------------------------------------------------------------------------------
Electrochemistry Chloride Fuji Photo
Potassium Film Co., Ltd.
Sodium
- ---------------------------------------------------------------------------------------------------------
Coagulation aPTT International
Fibrinogen Technidyne
PT Corporation
Thrombin Time
- ---------------------------------------------------------------------------------------------------------
Immunochemistry Digoxin Diagnostic
Theophylline Reagents, Inc.
Phenytoin
</TABLE>
* Clearance or exemption for point-of-care use by non-technical personnel is
expected based on submissions after our pilot marketing studies.
<TABLE>
<CAPTION>
TECHNOLOGY
PRODUCT REGULATORY STATUS PARTNER
- ------------------------------------------------------------------------------------------
<C> <S> <C>
Hematology Testing In development; scheduled for filing under Independent third
Device Section 510(k) in the second quarter of party with whom we
1999 for laboratory use. are negotiating a
supply agreement
- ------------------------------------------------------------------------------------------
Careside Cable Development planned for first quarter of UMM Electronics, Inc.
Interface between 1999 after availability of the Hematology
the CareSide Testing Device.
Analyzer and the
Hematology Testing
Device
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Hematology Tests
Platelet count All hematology tests will be submitted with Independent third
the filing of the Hematology Testing Device party with whom we
under Section 510(k) in 1999 for laboratory are negotiating a
and point-of-care use. supply agreement
Lymphocyte/Monocyte
Count
%
Lymphocyte/Monocyte
Count
Total Granulocyte
Count
% Total Granulocyte
Count
White Blood Cell
Count
Hematocrit
Hemoglobin
MCHC
</TABLE>
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<PAGE>
THE CARESIDE SYSTEM
The Careside system is comprised of an instrument, the CareSide Analyzer, and
a series of disposable, diagnostic test cartridges designed for the accurate
determination of a wide variety of commonly ordered chemistry,
electrochemistry, immunochemistry and coagulation tests. In addition, the
Careside system will include a separate hematology testing device manufactured
by a third party. The chart on page 27 summarizes the status of tests that the
CareSide Analyzer is intended to perform.
The CareSide Analyzer
The CareSide Analyzer is approximately 13 inches tall by 12 inches wide and
11 inches deep and weighs about 17 pounds. The exterior is made of high impact
resin plastic. The top of the CareSide Analyzer consists primarily of a touch
screen, on an ergonometric angle, on which the user inputs patient, physician
and billing information, the tests to be conducted and any desired commentary.
Alternatively, a separate keyboard is available for use if the operator so
chooses. We believe that the CareSide Analyzer's user interface software is a
significant strategic advantage. The software includes extensive user interface
applications in addition to its quality assurance and quality control
capabilities which are equal to those required of central laboratories. The
quality assurance and quality control software stores and interprets the
quality control data generated using the embedded electronic quality control
system in the CareSide Analyzer as well as the traditional wet testing quality
control approach for test cartridges. After testing, quality control data is
flagged when out of limits and plotted on graphical charts for ease of review.
A set of five re-usable and proprietary quality control test cartridges will be
provided with each instrument that allows the user to perform automated,
electronic quality control for all electrochemistry, chemistry, coagulation and
immunochemistry tests. These reusable quality control test cartridges will
replace traditional quality control which involved running multiple levels of
commercial plasma specimens for all the tests on the system. The software
utilized by the CareSide Analyzer is designed to govern testing of one patient
at a time, perform quality assurance and quality control documentation and
conduct the test ordering processes. It also contains a security system that is
compliant with the Clinical Laboratory Improvement Amendments of 1988. The user
interface system can be customized for each particular customer.
The process for using the CareSide Analyzer is streamlined and partially
automated compared to conducting tests in large commercial blood diagnostic
testing laboratories. The Careside system can be operated by non-technical
personnel. The operator will first select one or more test cartridges from
inventory depending on the tests ordered by the attending healthcare provider.
Most cartridges will contain one test, but some cartridges will contain two or
three tests. Up to six cartridges of a single patient's blood can be tested at
the same time. See "--Disposable Test Cartridges." The Careside system is
currently capable of conducting a maximum of eight tests per patient in a
single 10 to 15 minute test cycle. When the development of additional multi-
test cartridges is completed, the Careside system will be able to handle 13
tests in a single 10 to 15 minute test cycle. To prepare a cartridge, the
operator will place a small amount of the patient's drawn blood into the test
cartridge with a pipette or other standard transfer device. The operator will
then simply load the test cartridges into the instrument. Any combination of
cartridges can be loaded in any order, thus enabling the operator flexibility
to perform individual tests or customized panels. This flexibility is designed
to minimize waste by allowing the operator to run only the tests ordered by the
provider rather than traditional pre-set panels that may contain unnecessary
tests. This feature is particularly responsive to the current and expected
future requirements of third-party payers. See "--Third-Party Reimbursement."
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<PAGE>
ROUTINE BLOOD ANALYSIS PROCEDURE: THE CARESIDE SYSTEM
1. Draw blood. Place a few 2. Using the touch-screen or 3. 10-15 minutes later,
drops of whole blood into keyboard, input demographic CareSide Analyzer(TM)
the cartridge sample well. information and select tests provides test results
to be performed. Insert via print card, screen,
appropriate cartridges and and/or electronic data
press start. transfer. Caregiver
reviews test results
with patient.
After the operator inputs patient information and test orders, the instrument
will automatically perform the tests and record and display or print the
results. To perform the tests, the CareSide Analyzer undertakes cycles for
heating, centrifuging and several types of reading. The cycle time from the
moment the cartridge is dosed with whole blood and placed into the CareSide
Analyzer to final test result is approximately 10 to 15 minutes for chemistry,
electrochemistry, immunochemistry or coagulation tests, or any combination of
these tests. A standard Chem 7 panel, comprised of sodium, potassium, chloride,
carbon dioxide, glucose, creatinine and urea nitrogen tests, can be performed
in approximately ten minutes and will utilize five cartridges. Sodium,
potassium and chloride tests are on one cartridge and they are always ordered
in combination. At the conclusion of the test, the CareSide Analyzer ejects the
cartridges into a waste container for later disposal in appropriate biohazard
vessels.
The CareSide Analyzer provides test results to the healthcare professional in
several ways. A self-adhesive label can be printed with test results for direct
transfer to the patient's chart. Each CareSide Analyzer also incorporates a
floppy disk drive so that information can be downloaded from the instrument for
analysis. An additional electronic output method is through use of the rs-232
port on the rear of the machine. With appropriate FDA clearance, we expect to
routinely work with our customers to program an appropriate software interface
into the CareSide Analyzer to allow information to be transferred
electronically into the user's data system.
Disposable Test Cartridges
Each test cartridge is designed to facilitate the flow of the blood, serum or
plasma specimen onto chemicals packaged in the cartridge. These chemicals,
which are called reagents, react with the specimen and change. The changes are
then read by the CareSide Analyzer to yield the test result. Each test
cartridge is designed for a single use. Its various channels and pools assure
proper reagent and specimen temperature equilibration, sample separation,
sample metering, sample dispensing, test incubation and facilitate result
detection. Each cartridge contains all reagents necessary to perform a reagent
measurement on a serum, plasma or whole blood sample for a particular test. The
proprietary cartridges are each approximately 2.5 inches long and 1.5 inches
wide and are comprised of layers of molded plastic with channels for
application of the sample to the reagent. When stored in refrigerators, the
cartridges are expected to have a maximum of an 18 month shelf life. The
cartridges are placed in the CareSide Analyzer directly from the refrigerator
after sample dosing.
29
<PAGE>
The first four minutes of the test cycle warms the test cartridges to the
appropriate test temperature. If necessary, the CareSide Analyzer then spins
the cartridges using centrifugal force to push the sample through small
channels, separating it into serum or plasma. Excess sample is deposited in an
overflow well. A measured amount of sample remains in the metering passage and
is dispensed onto the reagent film or mixed with wet reagent pushed from an
interior pouch. Each test cartridge is designed to be airtight to prevent
ventilation spoilage of the specimen sample.
The three basic types of measurements that will be made are spectral
transmittance, reflectance and electrochemical. In the case of the chemistry
cartridge, the CareSide Analyzer's platter spins the cartridge containing the
dry film, which will turn color from reaction with the blood element, over
LED/photodiode pairs. The LED lights reflect through the colors of the reagent.
Multiple reflectance tests are performed to yield a result. In the case of
coagulation and immunochemistry tests, the cartridge is spun over the same
LED/photodiode pairs which shine through a small rectangular hollowed prism,
called a prismatic cuvette, built into the cartridge. The light transmission is
then read by the CareSide Analyzer. In the case of electrochemistry, the test
is done on whole blood, before the other cartridges are centrifuged. For these
tests, the CareSide Analyzer contains ion specific electrodes which interact
with the proprietary electrochemistry cartridges to yield the test result.
The disposable test cartridges have a number of key features that we believe
contribute to the Careside system's reliability, speed, low cost and accuracy
of analysis. These include:
. Unique Cartridge Design. Specimen preparation, calibration and test
performance are incorporated in an inexpensive plastic cartridge. Where
necessary, the cartridge design incorporates storage and measured
delivery of reagents and electrolytes for mixing with the patient's
sample prior to analysis. Cartridges are loaded into the instrument
manually and are designed so that they can be inserted in only one
direction to avoid error.
. Ease of Sampling. Sampling is automatic and requires small volumes using
approximately 75 to 150 microliters (^l) of whole blood, as compared to
current approaches requiring much larger amounts. The dosing process
requires the tester to fill the cartridge well to a point indicated on
the cartridge. No precise measurement of the blood sample is required by
the tester, as the cartridges' channels measure how much sample is
applied to the reagent.
. Built-in Centrifuge. Separation of plasma from whole blood, as required
for many tests, is accomplished in the cartridge after placement in the
CareSide Analyzer, so that a separate centrifugation step is
unnecessary.
. Flexibility in Testing. One, two or three tests may be contained in each
cartridge. Single test cartridges and a three test cartridge have been
designed, manufactured and used in testing. Two test cartridges have
been designed, but have not yet been manufactured and used in testing.
Careside's multi-testing capability in a single cartridge is unique
among point-of-care instrument makers. The added cost and complications
of using test panels containing unnecessary tests is avoided.
. Quality Assurance and Quality Control Features. All test cartridges are
bar-coded for test identification. The bar codes contain the type of
test cartridge, as well as a lot number, expiration date and self-
calibration information, which are all CLIA requirements. The data from
the cartridge's bar code will be read and stored in the CareSide
Analyzer. As each test is completed, it becomes part of the CLIA
documentation. Because each cartridge contains an identifying bar code
which is read by the instrument, the order in which the cartridges are
loaded is immaterial. The Careside system will check that the ordered
tests and the cartridges entered in the device match.
Test Menu
The CareSide Analyzer combines chemistry, electrochemistry, coagulation and
immunochemistry testing in a single testing instrument. In addition, the
Careside system will include a separate hematology testing device manufactured
by a third party. We are not aware of any other point-of-care blood testing
system on the market that has this combined capability.
Chemistry Tests. Chemistry tests are used to assess general health status as
well as to diagnose and monitor diseases of the major organ systems such as the
heart, liver, kidney, blood, pancreas, endocrine and
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bone. The film chemistry cartridges contain dry chemistry reagents which are
stacked as required for the test. When they react with the sample, generate an
optical remission level that correlates to the concentration of the reagent
being measured. Within a few minutes after the sample has been applied, a
colored dye is produced. The color intensity of the dye is measured by
reflectance and, through calibration information coded in the instrument and on
the test cartridge, a test result is generated.
We have an agreement with Fuji Photo Film Co., Ltd. for the use of its dry
film chemistry reagent technology during the Careside system's development
stage and are currently negotiating a long-term supply agreement with Fuji.
Although in dry form, the film uses the same technology as the wet reagent
technology used in high volume commercial analyzers. We anticipate that the
long-term agreement will continue to provide us with an exclusive supply of
Fuji's dry film chemistry reagents for use in our point-of-care system. Under
the current development-stage agreement, Fuji has agreed to supply this reagent
technology for more than 25 chemistry tests, and we have agreed to purchase dry
chemistry reagents exclusively from Fuji. See "--Sales--International." Fuji is
also developing four additional chemistry tests at its expense. Any additional
tests that Fuji develops may be available to us over the period of the existing
agreement, which runs through 2003 and thereafter is automatically renewed on
an annual basis. If we fail to obtain the necessary regulatory clearances for
80% of the 39 tests specified in the contract by the end of 1999, our rights
become non-exclusive.
Electrochemistry Tests. Like chemistry tests, electrochemistry tests
produced by Fuji pursuant to its agreement with us, are used to assess general
health status and to diagnose and monitor diseases of the major organ systems
such as the heart, liver, kidney, blood, pancreas, endocrine and bone. The
electrochemistry cartridge contains an ion specific electrode slide. When the
slide reacts with the sample, it generates values that correlate to the
concentration of sodium, potassium and chloride in the sample. The test
compares an electrochemical signal generated from a reference solution to a
similar signal generated from the patient's blood. The reference solution is a
liquid contained in a pre-filled pouch embedded in the cartridge. One side of
the ion specific electrode slide is exposed to a reference solution during the
testing sequence and the other side is exposed to the patient's whole blood.
The CareSide Analyzer reads the difference between the two, thereby generating
the test result.
Coagulation Tests. Coagulation testing assesses the ability of a patient's
blood to coagulate. Coagulation is the series of events that leads to the
formation of a blood clot. Tests of prothrombin time, or PT, and activated
partial thromboplastin time, or aPTT, are the primary coagulation tests used by
both physicians and hospitals.
Reagents from the coagulation test cartridge are contained inside a small
hollowed prism, called a prismatic cuvette, and in a pouch. Plasma is delivered
to the cuvette by pressurization of the membrane on the cartridge. A second
reagent, such as a buffer or calcium chloride, is added via the pouch. Light is
then transmitted through the cuvette. The coagulation reaction causes a change
in the cloudiness, or turbidity, of the plasma that is detected optically by
the CareSide Analyzer. The time it takes for this optical change to occur is
reported out as the coagulation time.
We are co-developing coagulation reagent technology for PT and aPTT tests
with International Technidyne Corporation. International Technidyne has agreed
that such reagent technology may be used by us in the CareSide Analyzer on an
exclusive basis. However, International Technidyne will retain the exclusive
right to use the technology in the field of point-of-care devices that perform
only coagulation testing. International Technidyne will also initially
manufacture the coagulation reagent and load it in the cuvette for us.
Immunochemistry Tests. Immunochemistry tests are used for the diagnosis of
drug effectiveness for heart, thyroid analysis and for other purposes. To date,
immunochemistry systems have had limited penetration in the point-of-care
market, because they are difficult to use, related instrumentation is
expensive, reagents are costly and assay times are long. We are in the process
of developing our immunochemistry test cartridge and are in the process of
performing our first validation studies using it.
The immunochemistry test cartridge is identical in form and function to the
coagulation test cartridge except that a much smaller sample size is delivered
to the prismatic cuvette. The reagents in the cuvette and pouch are different
for each immunochemistry test. The CareSide Analyzer measures a rate of change
or
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endpoint in cloudiness depending on the test. The rate of change or endpoint is
converted from calibration information coded in the instrument and on the test
cartridge, generating a test result. We currently purchase immunochemistry
reagents from Diagnostic Reagents, Inc. and are currently negotiating a long-
term supply agreement with Diagnostic Reagents.
Hematology Tests. Hematology testing determines various attributes of a
patient's blood, such as how many platelets, monocytes or lymphocytes it has.
We expect to expand the Careside system's capabilities by adding nine
hematology tests, which will be performed on a separate device manufactured and
supported by a third party. It is expected that this device will be
electronically connected to the CareSide Analyzer via a cable interface to take
advantage of the CareSide Analyzer's extensive ordering, data storage, clinical
records and quality assurance and quality control capabilities.
Future Developments
We intend to have the broadest menu of any point-of-care blood testing device
and plan to continue to develop tests for the Careside system. At product
launch, the Careside system's menu is expected to include over 50 tests,
including nine hematology tests, representing over 80% of all blood tests
ordered on an out-patient basis, including all of the most commonly ordered
out-patient blood tests. Even though our point-of-care technology will not be
capable of conducting every test potentially ordered by a healthcare provider,
we believe that, over time, our planned menu will provide over 90% of all out-
patient tests in many clinical settings, and up to 60% of tests commonly
ordered in in-patient settings. For tests not performed by the Careside system,
healthcare providers could order tests from either a hospital laboratory or a
commercial laboratory.
We plan to add enhancements to the Careside system in the future, including
the ability for the blood sample to be loaded from a test tube into a test
cartridge automatically. This will eliminate the need for a person to handle an
open tube containing the patient's blood. In addition, we are evaluating
alternative methods of immunochemistry testing, such as the use of high
precision latex beads for the development of large molecule immunochemistry
tests. Also designed and under development is a multi-test cartridge that will
be able to perform two or more film tests simultaneously on one cartridge. The
CareSide Analyzer's detection technology is capable of extensive menu
expansion. This gives us the ability to add traditional chemistry, coagulation
and small molecule immunochemistry tests such as screening tests for drugs of
abuse. We expect to develop additional tests in the large molecule
immunochemistry field such as prostate specific antigen for prostate cancer and
Troponin for heart attacks, as well as tests for infectious diseases such as
Strep A and Chlamydia.
MARKETING STRATEGY
Our marketing strategy is to position the Careside system as the blood
testing system of choice by demonstrating to hospitals the benefits of
decentralized blood testing, and by providing other healthcare providers with a
profitable and cost-effective alternative to central laboratory testing. In the
second quarter of 1999, we intend to conduct pilot site marketing studies with
hospitals, home care organizations and physician group practices to determine
utilization patterns, create a franchise book, demonstrate cost-effectiveness
and obtain FDA designation of the Careside system for point-of-care use. We
currently plan to rollout our system in the third quarter of 1999 through
SmithKline Beecham Clinical Laboratories, Inc. pursuant to our distribution and
supply agreement. Commencing in the fourth quarter of 1999, we intend to employ
our own sales force to sell the Careside system to hospitals, nursing homes,
home care organizations and larger physician group practices. At the time of
product rollout, our goal is to have the most comprehensive menu of tests
available in any single point-of-care system.
Our key targeted market segments are as follows:
Hospitals. There are over 5,000 acute care hospitals in the United States.
Laboratory testing services required by hospitals are usually provided by a
central hospital laboratory, which services all of the hospital's testing needs
as well as the testing service needs of hospital physician groups. Hospital
laboratories are
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expensive to maintain because they have to be maintained on a 24 hour basis,
they require specially trained personnel to be present at all times to operate
high volume analyzers and they demand significant amounts of capital to equip
and maintain. Furthermore, hospitals are often reimbursed by institutional
payers for patient admissions based on specific diagnoses reflecting the
complexity of the care needed and a predetermined payment for such care. While
laboratory testing services are an essential part of diagnosis and monitoring
the beneficial results of treatment, they also represent a cost to the hospital
as it seeks to generate a profit by completing the care and treatment of
patients before their costs exceed the level of reimbursement. The Careside
system provides hospitals with the opportunity to decentralize laboratory
testing to the patient floors and bedside, as routine and stat tests can be
conducted at the time the patient is being evaluated by providers.
Consequently, the Careside system is expected to enable some hospitals to
eliminate their central laboratories or replace certain costly analyzers and
outsource non-routine testing not done on the CareSide Analyzer to a
centralized laboratory.
Physician Groups. There are over 3,500 physician groups in the United States
with practices in excess of 35 doctors. Excluding radiology groups, the target
market for the Careside system is over 2,200 groups. Physicians usually obtain
their laboratory testing services from the hospital laboratories with which the
physicians are affiliated or from a commercial laboratory. In either case,
patient samples are collected from the physician's office and sent via courier
to the applicable laboratory, with results delivered to the physician, either
electronically, by fax or by telephone. For physician group practices, the
Careside system will offer improvements in daily office routine, greater
convenience, enhanced patient satisfaction and new revenue opportunities.
Home Care. Industry data shows that the number of home care agencies and
patients receiving home care services has grown significantly in recent years.
We believe significant growth in this market segment will continue. Industry
data reported that the total number of Medicare certified home care agencies
rose from 11,000 in 1989 to over 20,000 by the end of 1996. In 1996, the Health
Care Financing Administration estimated that 3.9 million Medicare enrollees
would receive home care services during 1997. This is twice the number that
received such services in 1990. The number of home care visits increased from
70 million in 1990 to an estimated 306 million in 1997. On average, 30% of home
care patients visited each week require laboratory testing. Common laboratory
tests include, among others, Chem 7 panels, iron, blood glucose, magnesium,
prothrombin time and immunochemistry tests for monitoring phenobarbital,
phenytoin and digoxin. Patient samples are drawn from the patient, gathered
from the home care providers and delivered via courier to a commercial
laboratory for testing. Test results are made available the next day or on a
premium price basis by fax, telephone or written report delivered four or five
hours later. The CareSide Analyzer is expected to enable the home healthcare
provider to draw the patient's sample, run the test and deliver the results
without having the sample delivered via courier to a commercial laboratory.
Nursing Homes. In 1994, the most recent year for which industry data has
been compiled, there were over 15,000 nursing homes in the United States with
more than 1.6 million licensed beds. The average occupancy rate was over 92%
with each nursing home averaging nearly 100 patients. Common diagnostic tests
ordered for nursing home patients are complete blood counts, Chem 7 panels,
electrolytes, blood glucose, prostate specific antigen, therapeutic drug
monitoring and urinalysis. Nursing homes generally obtain their testing
services from commercial laboratories and encounter the same delays and
reimbursement issues as physicians. The CareSide System provides a profit
opportunity to the nursing home by allowing it to conduct and bill for
laboratory services, while simultaneously enhancing the nursing home's ability
to provide better care.
PILOT PROGRAM
Prior to the planned rollout of our system commencing in the third quarter of
1999, we will pilot the Careside system in multiple sites within certain
targeted market segments. To date, we have arranged for pilot studies with
Children's Hospital of San Diego, Children's Hospital--Los Angeles and the
Seattle Children's Hospital, all through Child Health Corporation of America,
APRIA Healthcare, one of the largest United States home care providers, a group
physician practice in the Phoenix, Arizona area, Reliant Care Group, L.L.C. in
the nursing home market, and SmithKline.
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The purposes of piloting the Careside system are to collect data
demonstrating the economic benefit of the Careside system in each customer
segment, and to create a franchise book that will be tailored to the needs of
each customer type. This franchise book will explain the process of obtaining
and maintaining a laboratory license, train personnel to conduct testing and
educate personnel about the operation of the Careside system. With both a
financial model and franchise book that are specific to customer segments, we
then intend to introduce the Careside system to the overall market in the
fourth quarter of 1999. We will also use the pilot program to generate data to
support the regulatory application for point-of-care classification.
SALES
Domestic
We intend to hire, train and regionally deploy our own domestic sales force
to sell the Careside system to hospitals, healthcare systems, large physician
group practices, managed care organizations, home care agencies and nursing
homes, either directly or through institutional pharmaceutical service
organizations which serve them. Because we intend to target customers who order
large volumes of tests, we anticipate building a direct sales force of
approximately 40 people.
As one of the largest commercial laboratories in the United States,
SmithKline Beecham Clinical Laboratories, Inc. conducts millions of tests for
small physician groups and individual physicians annually. We expect the
Careside system to be available to small or solo practices through in-patient
service centers owned and staffed by SmithKline since it may be inefficient for
such practices to own and operate a CareSide Analyzer. SmithKline owns and
operates over 700 patient service centers across the United States. We have
entered into a distribution agreement with SmithKline which gives SmithKline,
with respect to domestic sales, an exclusive right, as a commercial laboratory,
to use and distribute the Careside system within the commercial laboratory
industry and the non-exclusive rights to sell the Careside system to hospitals
and healthcare systems, other health care providers, managed care organizations
and insurers. The agreement also obligates SmithKline, upon FDA clearance or
exemption of 25 specified tests, to purchase a minimum number of CareSide
Analyzers and test cartridges from us for the first five years following such
FDA action. SmithKline Beecham Corporation has recently entered into an
agreement to sell its laboratory business. The impact of this sale on our
business is not known. See "Certain Transactions--SmithKline Beecham."
International
In international markets, we intend initially to enter into distribution
agreements and gradually to develop our own sales force as appropriate. Our
distribution and supply agreement with SBCL gives SBCL the same exclusive and
non-exclusive distribution rights as it has in the United States in any ten of
the following countries where SBCL owns, operates, manages a commercial
laboratory on or before December 31, 2000: Great Britain, Mexico, Spain, South
Africa, Singapore, Malaysia, Indonesia, Australia, Chile, Argentina, France and
Germany. In addition, Fuji Photo Film Co., Ltd. has a right of first refusal to
be our distributor on an exclusive basis in Japan and a non-exclusive basis in
other Asian countries. The current agreement with Fuji expires in 2003 and
permits automatic annual renewals thereafter subject to cancellation by either
party. We are currently negotiating more specific terms of our supply and
distribution arrangement with Fuji. We also expect to partner with other
diagnostic instrument distributors in the international markets with an initial
focus on Europe. See "Certain Transactions--SmithKline Beecham."
RESEARCH AND DEVELOPMENT
As of December 31, 1998, we employed 25 scientists and technical staff who
supervise the development of the instrument and tests, validate test results,
and perform quality assurance and quality control documentation and regulatory
submissions.
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After extensive review of available test technologies, we chose Fuji Photo
Film Co., Ltd. as our partner for chemistry and electrochemistry tests. Fuji
makes dry film based chemistry tests and uses them in large analyzers that it
produces and sells in Japan and Taiwan. In addition, Fuji has agreed to supply
this reagent technology during the Careside system's development stage for more
than 25 chemistry tests. We are currently negotiating a long-term supply
agreement with Fuji. Fuji has agreed to develop four additional tests at its
expense for the Careside system. See "--The Careside System--Test Menu."
The utilization of third parties to develop our tests has allowed us to focus
on creating a platform for delivery of a highly efficient test system. For
hospital environments, the CareSide Analyzer's software has a configuration
capability that facilitates a test order entry menu and security processes as
determined by laboratory management. Fields exist for extensive data capture
including patient, physician and billing information. All of these systems are
optional to the user other than the data requirements for compliance with the
Clinical Laboratory Improvement Amendments of 1988. In addition, the Careside
system easily accommodates test menu additions by downloading new test
algorithms into the device via a floppy disk. This eliminates the need to
remove the instrument from the field as new test capabilities receive FDA
clearance/approval.
We have entered into a series of research and development agreements for our
system. As is customary in the industry, these agreements are short term and
provide for termination for any reason by either party on relatively short
notice. Battelle Memorial Institute, a leader in developing industrial
technology, has designed the disposable testing cartridge according to
specifications which we provided. All applicable patent rights under this
contract have been assigned to us. To date, three applications have been filed
with the United States Patent and Trademark Office. See "--Patents and
Proprietary Rights." Pursuant to this relationship, Battelle is also designing
a cost-effective manufacturing process and quality assurance methods, based on
federal Good Manufacturing Practices protocols, for the disposable cartridges.
We have engaged UMM Electronics, Inc. a contract engineering and
manufacturing firm, to perform the design and development work of the CareSide
Analyzer. Other products developed by UMM include point-of-care blood glucose
monitors, point-of-care coagulation instruments, intravenous infusion pumps,
dialysis machines and infant care warmers. UMM is an FDA-registered
manufacturer of sophisticated medical products required to comply with federal
GMP regulations.
Hauser, Inc., an industrial design consultant, has provided services for the
design and development of the entire Careside system. Hauser conducted focus
groups from each target market segment in order to obtain customer input on the
design features and to assist in the development of an instrument and software
systems involving user interaction.
MANUFACTURING AND SUPPLY
We designed and outfitted a building in Culver City, California, of
approximately 16,000 square feet in December 1996 as our development facility
and offices. The building contains space for our automated assembly system
which Battelle Memorial Institute is designing. The assembly system will mount
the reagents in the test cartridges, and package and label the cartridges. This
facility has been set up to comply with all applicable state and federal
regulatory requirements, including registration with the state and federal
governments in accordance with applicable laws governing medical devices prior
to commercial distribution. The facility will be subject to periodic FDA
inspection to determine whether our manufacturing processes comply with federal
GMP regulations for medical devices.
We intend to assemble and package at our Culver City facility all cartridges
used by the instrument. The cartridges are assembled in two main stages.
Initially, those components which are not sensitive to humidity, such as
plastic parts, are assembled in a normal humidity environment. The second stage
of the cartridge assembly process involves the mounting of dry film chemistry
strips or pouched reagents in the cartridges, which must be done in a low
humidity environment to preserve the film. This step will be performed in an
automated assembly line at our facility. We are in the process of selecting and
purchasing the equipment
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necessary for this process. In addition, during the cartridge manufacturing
process, our equipment must test the pressure of the ultrasonic seal between
the base plate and the upper plates of the test cartridges. Our equipment
allows for several inspection steps during the assembly process. Battelle is
assisting us in developing the fully automated assembly line for the cartridges
with these steps built in. The production capacity of the pilot cartridge
production line for chemistry and immunochemistry will be approximately 1,800
units per hour or 13,000 units per shift. Depending on the specific tests
ordered, our current facility will support between $40 and $60 million of test
cartridge sales annually. The automated production line will utilize
proprietary process technology, designed by Battelle and owned by us, and will
be scalable to meet increasing demand.
We will outsource the manufacturing of the plastic components of our
cartridges. We have been using a third party to manufacture these components
using injection molding processes. Recently, we obtained bids from a number of
manufacturers of cartridge components and have selected a supplier to meet our
manufacturing needs based on competitive terms.
We have entered into an agreement with UMM Electronics, Inc. for the
manufacture of the CareSide Analyzer at UMM Electronics' facility in
Indianapolis. Certain aspects of the manufacturing agreement, including the
price at which UMM Electronics will manufacture the device, are subject to
further negotiation and will be finalized once tooling is completed and the
manufacturing line set up.
We expect to source our chemistry, electrochemistry, coagulation and
immunochemistry reagents from Fuji, International Technidyne Corporation and
Diagnostic Reagents, Inc. See "--The Careside System--Test Menu."
We intend to purchase and distribute a hematology testing device manufactured
by a third party and are currently negotiating a supply agreement.
COMPETITION
We will principally compete with manufacturers of traditional diagnostic
testing equipment used by centralized laboratories and current point-of-care
diagnostic companies whose products perform testing for patients in critical
condition. Historically, most clinical testing has been performed in a
centralized laboratory setting. These laboratories provide analyses similar to
those to be conducted by our system and have traditionally been effective at
processing large panels of tests using skilled technicians and complex
equipment. While the CareSide Analyzer will not be designed to provide the same
range of tests, we believe that our products will offer several advantages over
centralized laboratories, including lower costs, mobility, faster results,
simplified specimen preparation, reduced opportunity for error through
decreased specimen handling, ease of regulatory compliance and increased
patient satisfaction.
We are also aware of other companies with point-of-care analysis devices.
These companies have focused on the testing for critical care patients or tests
that are disease specific. Examples of disease specific tests are glucose and
digoxin which measure blood sugar levels in diabetic patients or heart
complications. In all cases, these companies perform a limited number of tests
and their systems are not designed to have their test menus increase.
Consequently, these devices add costs as the large analyzers in hospital or
commercial laboratories conduct these tests and many more. We believe that our
system will offer distinct competitive advantages over these products,
including the ability to conduct multiple tests in a single device, internal
centrifugation, convenience and ease of use. Several companies, including i-
STAT Corporation, Abaxis, Inc., Diametrics Medical, Inc. and PharmaNetics,
Inc., are currently making or developing products that will compete with our
tests although not with our system. Some of these companies also provide
disease specific tests that will not be available at the time of launch on the
CareSide Analyzer but which we expect will be added later.
Some large pharmaceutical companies also have point-of-care blood testing
devices and could, given their resources, develop systems which compete with
the Careside system. Abbott Laboratories, Inc., Clinical Diagnostic Systems (a
division of Johnson & Johnson) and Roche Diagnostic Systems, Inc. all have
products
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which perform point-of-care testing. To date, we believe that none has
developed a point-of-care testing system comparable to our system.
PATENTS AND PROPRIETARY RIGHTS
Our policy is to seek patent protection, both in the United States and
abroad, for each of the areas of invention embodied in our CareSide Analyzer
and related cartridges. To date, we have filed three patent applications on our
cartridges with the U.S. Patent and Trademark Office. We have filed an
international application corresponding to one of the United States cartridge
applications and intend to file two additional international cartridge
applications for the other United States applications. We also expect to file
one design and three utility patent applications on the CareSide Analyzer in
the near future. Our agreements with Fuji Photo Film Co., Ltd., Battelle
Memorial Institute and International Technidyne Corporation, assign to us
certain proprietary rights that result from the research conducted under the
agreements. The Fuji agreement gives us non-exclusive rights to use Fuji's
proprietary technology in the Careside system outside of Japan. Only Fuji will
sell our system in Japan. The other agreements provide that the technology used
in the Careside system is owned either by us or jointly by us and our partner.
These agreements do not restrict us, if we choose, from seeking other suppliers
of competitive technologies. We will seek to protect any such proprietary
rights assigned to us by our technology partners. Battelle and International
Technidyne have agreed to share expenses or otherwise assist us in prosecuting
patent applications. Upon completion of the offering, we expect to proceed with
the patent application process, and anticipate the filing of additional
applications. In addition to patent protection, if any, we will rely upon trade
secrets, know-how and continuing technological innovation. Although our Chief
Executive Officer, Executive Vice President--Research and Development and Chief
Financial Officer have agreed to maintain in confidence our confidential
information and proprietary technology, we have not otherwise required our
employees to sign confidentiality agreements. We plan on seeking the execution
of such confidentiality agreements by our current and future employees.
THIRD-PARTY REIMBURSEMENT
In April 1998, the federal government instituted a policy that, in connection
with Medicare reimbursement for large panel testing, will only reimburse four
different panels of chemistry tests, the largest of which has 13 tests. The
consequence of this policy has been that more single tests are ordered as
compared to large panels. The Careside system is currently capable of
conducting eight tests in a single 10 to 15 minute test cycle. At the time of
product launch, the 13 test panel can be accommodated in two test cycles. Upon
the completion of development of additional multi-test cartridges, the Careside
system will be able to handle a 13-test panel in a single 10 to 15 minute test
cycle. The Careside system is also configured to easily test any combination of
single test cartridges with similar cycle times for up to six single tests per
cycle. Payers have stated that they will only reimburse for panels that are
disease specific. With this change in policy and reimbursement practice, the
number of tests reimbursed as part of panels has begun to drop. The Careside
system, which places primary focus on single and disease specific testing, is
very competitive in light of these changes in payer practice related to test
panels. See "Risk Factors--Uncertainty Relating to Third-Party Reimbursement
May Impact Our Business."
Managed care provides physicians with incentives to treat patients using
clinical treatment protocols that have been developed for many chronic and
acute illnesses. These protocols frequently contain preventative diagnostic
interventions that are used to help avoid the occurrence of acute episodes of
illness. Diagnostic blood testing is one of the major tools used in these
protocols for early detection and for ongoing evaluation of treatment efficacy.
We believe that a diagnostic blood testing system that is cost effective and
adds convenience and rapid information will be well received by managed care
organizations and their physicians.
Even with the growth of managed care, more than 75% of all blood tests
continue to be reimbursed on a fee for service basis. This number has remained
steady in the commercial laboratory industry for the past three years. We
believe that in both the managed care and fee-for-service markets, our point-
of-care system will be responsive to incentives that drive the respective
markets. Many managed care entities dictate to their member
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physicians which laboratories they must use for blood testing. Physicians have
the opportunity to utilize exceptions to these mandates to conduct in-office
testing. The Careside system will enable physicians to offer laboratory testing
services and take advantage of these exceptions to the managed care
organizations' policies. We expect to facilitate this by working closely with
the physicians and the managed care organizations to demonstrate cost
effectiveness and cost reduction of our system. This will be a critical
component of the pilot site testing strategy and is intended to position the
Careside system as the new testing standard and the blood testing system of
choice over traditional laboratory testing methods.
GOVERNMENT REGULATION
The FDA regulates the development, manufacture, and marketing of medical
devices including diagnostic tests. The FDA requires testing of the Careside
system in accordance with regulatory requirements in the laboratory and, as
appropriate, in clinical settings to establish product performance before
marketing. After marketing has commenced, FDA clearance must be obtained before
making certain types of product changes. The CareSide Analyzer and certain
tests have already received marketing clearance for laboratory use, and we
expect that the CareSide Analyzer and tests will receive marketing clearance
for point-of-care use following clinical testing of the instrument at clinical
sites. Without the point-of-care use clearance, the CareSide Analyzer could be
used only at licensed laboratory sites with laboratory personnel, which would
limit our potential market.
The point-of-care designation depends upon the FDA's determination that the
results obtained from clinical studies for a number of representative tests,
selected by the FDA, have accuracy and reliability when performed by a non-
laboratory user that is equivalent to or better than test results obtained from
the same tests performed by a laboratory professional.
The FDA has regulations that set varying requirements for medical devices
according to potential risk class. Class I devices represent the lowest
potential risk devices and are therefore subject only to the general controls
that include establishment registration, product listing, the prohibition of
mislabeling or adulteration, and a requirement to comply with federal Good
Manufacturing Practices regulations. Pre-market notification is required for
some Class I clinical diagnostic devices. Class II devices present greater risk
than Class I devices and are subject to special controls, such as guidelines or
performance standards, as well as the same general controls that are applicable
to Class I devices. Class II devices require pre-market clearance to
demonstrate that the FDA accepts the manufacturer's claims that the device is
substantially equivalent to other legally marketed devices, and meets generally
accepted performance criteria that may be required to demonstrate that the
device is safe and effective. Class III devices present a higher level of risk
and are additionally subject to rigorous demonstration of safety and
effectiveness through the pre-market approval process.
For some Class I and most Class II devices, a pre-market notification must be
submitted to the FDA. Usually within 90 days of the receipt of this
notification, the FDA makes the determination whether the device submitted is
substantially equivalent to a legally marketed device. A legally marketed
device is one which was marketed prior to the passage of the Medical Device
Amendments of 1976, or a post-1976 device that has been determined by the FDA
to be substantially equivalent to previously cleared devices. A determination
of substantial equivalence requires several FDA findings: first, that the
device has the same intended use as the legally marketed device; and second,
either that the device has the same technological characteristics as the
legally marketed device or, if it does not, that the device is as safe and
effective as the legally marketed device and does not present different
questions about safety and effectiveness. Class III devices require extensive
clinical testing to prove safety and effectiveness, and submission of the
resulting data to the FDA as a pre-market approval application. The FDA
ordinarily will refer a new device pre-market approval application to an
advisory panel of outside experts for a recommendation on whether to approve
the application or to request additional testing. We believe that the CareSide
Analyzer and all of the tests currently expected to be performed by it will be
classified in Class II requiring pre-market notification. If the FDA disagrees,
however, a pre-market approval application might be required for one or more
tests. We expect certain future tests, such as prostate specific antigen, to
require pre-market approval.
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The information required for a pre-market notification for the Company's
products will be generated by or for us. For tests that will be performed in a
clinical laboratory, validation may be performed in the manufacturer's
laboratory. For tests that are intended for use outside of the clinical
laboratory, such as physician offices or nursing homes, the FDA also requires
that validation data be gathered from at least three clinical sites. We believe
that the required laboratory or clinical studies do not constitute a
significant risk for patients. Non-significant risk device studies performed in
the clinic require institutional review board approval and may require patient
informed consent but do not require the clearance of an investigational device
exemption application by the FDA. If the FDA were to believe that such studies
constitute a significant risk, we would need to submit an investigational
device exemption application, containing an investigation and study monitoring
plan, and allow the FDA 30 days to review the investigational device exemption
application or request additional information prior to initiating an
investigation.
Where a pre-market approval application is required, FDA regulations require
the demonstration of safety and effectiveness, typically based upon extensive
clinical trials. Fulfilling the requirements of the pre-market approval
application are costly and both the preparation and review are time consuming,
commonly taking from one to several years. Before granting pre-market approval,
the FDA must inspect and find acceptable the proposed manufacturing procedures
and facilities. The pre-market approval regulations also require FDA approval
of most changes made after the tests have been approved.
Manufacturing Regulation
For products either cleared through the pre-market notification process or
approved through the pre-market approval process, our manufacturing facility
must also be registered with the FDA. The manufacture of products subject to
Section 510(k) of the Federal Food, Drug, and Cosmetic Act or to Section 515
pre-market approval requirements must be in accordance with quality system
regulations and current federal Good Manufacturing Practices regulations. We
are also subject to various post-marketing requirements, such as complaint
handling and reporting of adverse events. Pre-market approval products are also
subject to annual reports. The FDA typically inspects manufacturing facilities
every two years. We intend to seek and maintain ISO 9001 certification. As a
result, inspections by notified bodies may be more frequent.
The CareSide Analyzer is being developed and will be manufactured by UMM
Electronics, Inc. UMM is an FDA registered and inspected facility. UMM is also
ISO 9001 certified. In adherence to FDA and ISO 9001 requirements, UMM follows
a structured design control process.
Third-Party Safety
Third-party safety certification is not required for FDA marketing
permission, but will be required by our customers and to enter markets in other
countries. In this regard, we intend to obtain an Underwriters Laboratories, or
UL, listing for the instrument. UL will review the CareSide Analyzer according
to UL 3101-1 that is equivalent to the international standard IEC 1010. The
CareSide Analyzer is also being designed to comply with requirements that
ultimately will facilitate marketing of the product in Europe and Japan. These
requirements include the Low Voltage Directive (73/23/EEC), the Electromagnetic
Compatibility Directive (89/336/EEC), and the In Vitro Diagnostic Medical
Device Directive (98/79/EC).
Clinical Laboratory Improvement Amendments of 1988
All medical testing in the United States is regulated by the Health Care
Financing Administration according to the complexity of the testing as
specified under the Clinical Laboratory Improvement Amendments of 1998. CLIA
regulations establish three categories of laboratory tests, for which
regulatory requirements become increasingly stringent as the complexity of the
test rises: (1) tests that require little or no operator skill, which allows
for a certificated waiver of the regulations; (2) tests of moderate complexity;
and (3) high complexity tests which require significant operator skill or
training. All laboratories performing tests of moderate or high complexity must
register with HCFA or an organization to whom HCFA has delegated such
authority. All
39
<PAGE>
registered laboratories are subject to periodic inspection. We expect all of
the tests for the CareSide Analyzer to be categorized as moderate or lower
complexity. To date, the tests performed by the CareSide Analyzer have been
categorized within the moderate complexity class as defined by current CLIA
regulations. In practical terms, performing a test of moderate complexity means
that the individual supervising the test, i.e., the physician, pathologist or
laboratory director, must be appropriately educated and trained, whereas the
individual technician who operates the CareSide Analyzer requires no formal
laboratory education and only task-specific training.
State Regulation
We and our products will be subject to a variety of state laws and
regulations in those states where our products are marketed, sold or used.
Thirteen states currently restrict or control, to varying degrees, the use of
medical devices such as the Careside system outside the clinical laboratory by
persons other than doctors or licensed technicians. For example, California,
New York and Florida all have unique requirements that define which steps in
the testing process can be performed by physicians, nursing or other personnel
who are not licensed technicians. We have designed our testing system to comply
with these requirements, while minimizing the need for higher cost labor to run
the test process. However, these restrictions may add labor costs to the
customer, and such costs may hinder our ability to market our products in these
locations. Although we plan to seek interpretations, rulings or changes in
relevant laws and regulations to remove or ameliorate these restrictions, there
can be no assurance that we will be successful.
International Regulation
In addition to the United States market, we intend to pursue markets in Asia
and Europe through select strategic alliances. The recently published European
Community In Vitro Diagnostic Directive places our products within a category
that has a low regulatory burden. Manufacturers are allowed entry into the
market based upon self-certification that they complied with published
directives, similar to existing United States requirements, containing
performance, labeling, and other quality requirements. Japan has its own
requirements for in vitro diagnostics.
PRODUCT LIABILITY AND PROPERTY INSURANCE
Sale of our products entails risk of product liability claims. The medical
testing industry has historically been litigious, and we face financial
exposure to product liability claims in the event that use of our products
result in personal injury. We also face the possibility that defects in the
design or manufacture of our products might necessitate a product recall. There
can be no assurance that we will not experience losses due to product liability
claims or recalls in the future. We anticipate purchasing product liability
insurance in reasonable and customary amounts when we begin to sell products in
the third quarter of 1999. Such insurance can be expensive, difficult to obtain
and may not be available in the future on acceptable terms, or at all. No
assurance can be given that product liability insurance can be maintained in
the future at a reasonable cost or in sufficient amounts to protect us against
losses due to liability. An inability to maintain insurance at an acceptable
cost or to otherwise protect against potential product liability could prevent
or inhibit the commercialization of our products. We expect that our insurance
coverage will be adequate for the risks we face. However, a product liability
claim in excess of relevant insurance coverage or product recall could have a
material adverse effect on our business, financial condition and results of
operations.
We have liability insurance covering our property and operations with
coverage and deductible amounts and exclusions that we believe are customary
for companies of our size and adequate for our industry. There can be no
assurance that our current insurance coverage is adequate or that we will be
able to maintain insurance at an acceptable cost or otherwise to protect
against liability.
EMPLOYEES
As of December 31, 1998, we had 29 full-time employees, of which 25 were
engaged in research and development and manufacturing activities and four were
engaged in administrative activities. None of our
40
<PAGE>
employees is covered by a collective bargaining agreement, and we believe our
relations with our employees are good. Additionally, our contract strategic
partners, Battelle Memorial Institute and UMM Electronics, Inc. have provided
approximately 40 full-time equivalent employees on a contract basis to develop
of the Careside system.
PROPERTIES
We lease approximately 16,000 square feet of space in Culver City, California
as our executive offices and for the research and development, validation,
manufacture and assembly of test cartridges. The lease has a term of five
years, with a current monthly rent of $13,620, increasing to $15,220 per month
until the expiration of the lease in October 2001. We have an option to renew
the lease for one additional five-year term at 95% of the fair market rental
value. We believe that the Culver City facility will adequately serve our needs
for the immediate future.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
41
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning the individuals
who serve as our directors, executive officers and key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <S> <C>
Directors and Executive Officers:
W. Vickery Stoughton (1)......... 52 Chairman of the Board of Directors and Chief Executive Officer
Thomas H. Grove.................. 49 Executive Vice President--Research and Development,
Secretary and Director
James R. Koch (2)................ 44 Chief Financial Officer, Treasurer, Executive Vice
President and Director
Anthony P. Brenner (1)........... 41 Director
William F. Flatley (2)........... 57 Director
Kenneth N. Kermes (2)............ 63 Director
C. Alan MacDonald (2)............ 65 Director
Diana Mackie (1)................. 52 Director
Philip B. Smith (1).............. 63 Director
Key Employees:
Kenneth Asarch................... 41 Vice President--Quality Systems and Regulatory Affairs
Harry J. Fini.................... 48 Vice President--Sales and Marketing
Marija N. Valentekovich.......... 66 Vice President--Manufacturing
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Directors and Executive Officers
W. VICKERY STOUGHTON, CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE
OFFICER. Mr. Stoughton has served as our Chairman of the Board of Directors and
the Chief Executive Officer since our formation in July 1996. Prior to that, he
served as President of SmithKline Beecham Diagnostics Systems Co., a diagnostic
services and product company, from October 1995 to July 1996, and was President
of SmithKline Beecham Clinical Laboratories, Inc., a provider of diagnostic
laboratory services, from August 1992 to September 1995. As President of SBDS,
Mr. Stoughton had responsibility for SBCL, SmithKline Beecham Clinical
Laboratories International and SBDS's genetic testing and point-of-care testing
projects. In addition, Mr. Stoughton served as Chief Executive Officer and Vice
Chancellor for Health Affairs of Duke University Hospital from 1991 to 1992,
Chief Executive Officer of Toronto Hospital in Toronto, Canada from 1981 to
1991, Chief Operating Officer of Brigham and Women's Hospital in Boston from
1980 to 1981 and Chief Executive Officer of Peter Bent Brigham Hospital in
Boston from 1978 to 1980. Mr. Stoughton holds a B.S. in Chemistry from St.
Louis University and a M.B.A. from the University of Chicago. He is currently a
director of Sun Life Assurance Company of Canada, a financial services company,
and Biomira, Inc., a pharmaceutical company.
THOMAS H. GROVE, EXECUTIVE VICE PRESIDENT--RESEARCH AND DEVELOPMENT,
SECRETARY AND DIRECTOR. Dr. Grove has served as our Executive Vice President--
Research and Development, Secretary and as one of our directors since our
formation in July 1996. From April 1984 to July 1996, he served in a number of
management positions at SmithKline Beecham Clinical Laboratories, Inc.
involving research and development activities, including the position of Vice
President of Scientific Affairs from January 1991 to July 1996, where, among
other things, he was in charge of National Quality Control and Quality
Assurance for SBCL. Dr. Grove has received a number of awards, including a NATO
Science Fellowship to attend Oxford
42
<PAGE>
University from 1978 to 1979. He was also named Young Investigator of the Year
in 1980 by the American Association for Clinical Chemistry and was elected to
the National Academy of Clinical Biochemistry in 1977. Dr. Grove holds a B.S.
in Biology from SUNY-Albany and a Ph.D. in Biochemistry from Syracuse
University.
JAMES R. KOCH, CHIEF FINANCIAL OFFICER, TREASURER, EXECUTIVE VICE PRESIDENT
AND DIRECTOR. Mr. Koch has served as our Chief Financial Officer, Treasurer,
Executive Vice President and as one of our directors since July 1998. Prior to
joining us, Mr. Koch served as Vice President and Chief Financial Officer of
ILEX Oncology, Inc., a company which develops oncology drugs, from August 1996
to July 1998. In addition, Mr. Koch served as Vice President, Finance and Chief
Financial Officer for two start-up specialty pharmaceutical companies, Symphony
Pharmaceuticals, Inc., from September 1993 to August 1996, and Neose
Pharmaceuticals, Inc., currently Neose Technologies, Inc., from September 1991
to September 1993. His prior experience also includes ten years in senior
financial management positions with G.D. Searle Pharmaceutical, a manufacturer
of pharmaceutical products. Mr. Koch holds a B.S. in Mechanical Engineering
from General Motors Institute and a M.S. from the Krannert School of Management
at Purdue University.
ANTHONY P. BRENNER, DIRECTOR. Mr. Brenner has served as one of our directors
since November 1996. Since January 1998, he has served as a Managing Director
with Omega Ventures, a venture capital firm, where he oversees investment
activities in the information and business services industries. Prior to that,
Mr. Brenner served as Senior Managing Director of Advanta Partners LP, a
private equity investment partnership, and as a member of the Board of
Directors of Advanta Corporation, a financial services company, from 1992 to
1996. In addition, since 1989 Mr. Brenner has served as President of Cedar
Point Partners, a private equity investment partnership. Mr. Brenner earned a
B.A. from Yale University and a M.B.A. from Stanford University.
WILLIAM F. FLATLEY, DIRECTOR. Mr. Flatley has served as one of our directors
since November 1996. Since July 1997, he has served as the President and Chief
Executive Officer of Executive Health Group, a provider of preventive
healthcare services to corporations. From 1980 to December 1994, he held a
number of senior management positions with Bristol-Myers Squibb Corporation, a
pharmaceutical company, including President of a multi-division medical device
business, the Health Care Group, and President of the Drackett Company, a
household products manufacturer. Mr. Flatley retired from Bristol-Myers Squibb
at the end of 1994 but continued to provide the company with certain consulting
services after his retirement. Mr. Flatley obtained a B.S. from Villanova
University and a M.B.A. from the Wharton School of the University of
Pennsylvania.
KENNETH N. KERMES, DIRECTOR. Mr. Kermes has served as one of our directors
since February 1997. Since June 1998, he has served as a principal of Riparian
Partners Limited and of Bay View Equity Partners, two related investment
banking and private equity investment partnerships. Prior to that, he served as
Vice President of Business and Finance for the University of Rhode Island from
December 1994 to June 1998 and as Chief Financial Officer for SmithKline
Beecham Corporation from October 1986 to July 1989. From 1991 to 1994, Mr.
Kermes was a consultant and an investor in the venture capital industry. Mr.
Kermes obtained a B.A. from Amherst College and attended the New York
University Graduate School of Business and the Harvard Business School Advanced
Management Program.
C. ALAN MACDONALD, DIRECTOR. Mr. MacDonald has served as one of our directors
since November 1996. Since October 1997, Mr. MacDonald has served as a Managing
Director of Directorship, Inc., a consulting firm specializing in corporate
governance issues. Prior to that, he served as General Partner of the Marketing
Partnership, Inc., a full service marketing consulting firm, from January 1995
to July 1997 and as an acquisitions consultant with the Noel Group, a venture
capital firm, from July 1994 to December 1994. In addition, he served as
Chairman and Chief Executive Officer of Lincoln Snacks Co., a caramelized
popcorn snack company, from September 1992 to July 1994. Mr. MacDonald holds a
B.S. in Hotel Administration from Cornell University and is a member of the
Cornell Society of Hotelmen and the Dean's Advisory Committee at Cornell. Mr.
MacDonald is also a director of Lincoln Snacks Co.
DIANA MACKIE, DIRECTOR. Ms. Mackie has served as one of our directors since
February 1997. She currently is a Vice President for Strategy and Business
Development at SmithKline Beecham Healthcare Services, the business development
division of SmithKline Beecham Corporation, a position she has held since
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<PAGE>
October 1997, where her responsibilities include developing business plans,
long-range strategy and negotiating external alliances and investments. Prior
to that, Ms. Mackie served as Vice President, Group Business Initiatives for
SBHS from November 1996 to October 1997. From March 1996 to November 1996, she
was General Manager of Diversified Prescription Delivery, a pharmaceutical mail
services company and a wholly-owned subsidiary of Diversified Pharmaceutical
Services, a pharmaceutical benefit management group. From March 1993 to March
1996, she served as Vice President, Strategy Development, SmithKline Beecham
Pharmaceuticals, a pharmaceutical company. Ms. Mackie holds a B.S. in Chemistry
from the University of Illinois, a M.B.A. from The Massachusetts Institute of
Technology Sloan School of Management and a M.S. in Polymer and Fiber
Engineering from The Massachusetts Institute of Technology.
PHILIP B. SMITH, DIRECTOR. Mr. Smith has served as one of our directors since
November 1996. Since June 1998, Mr. Smith has served as a Vice Chairman of
Laird & Co., LLC, a merchant bank. In addition, from 1991 until August 1998,
Mr. Smith served as a Vice Chairman with Spencer Trask Securities Incorporated,
an investment banking firm. Mr. Smith served in a number of other senior
management positions. From June 1986 to June 1988, Mr. Smith served as Managing
Director of Prudential Securities, an investment firm, in its merchant bank
division. From December 1967 to December 1972, Mr. Smith served as President
and Chief Executive Officer of Citicorp Venture Capital, a venture capital
company which he founded. Mr. Smith currently serves on the board of directors
of Movie Gallery, Inc., Digital Video Systems, Inc., and KLS Enviro Resources,
Inc. Mr. Smith has a B.S.E. from Princeton University and a M.B.A. from the
Harvard Business School.
Key Employees
KENNETH ASARCH, VICE PRESIDENT--QUALITY SYSTEMS AND REGULATORY AFFAIRS. Dr.
Asarch has served as our Vice President--Quality Systems and Regulatory Affairs
since November 1996. From June 1995 to October 1996, Dr. Asarch served as
Director of Regulatory Affairs for SmithKline Beecham Clinical Laboratories,
Inc. and SmithKline Beecham Diagnostics Systems Co. Prior to that, he served as
Director of Regulatory Affairs, Quality Assurance and Clinical Affairs with
Diagnostic Products Corporation, an immuno-diagnostic testing company, from
1987 to 1995, where his duties included overseeing the FDA regulatory clearance
and approval process for approximately 150 blood testing products. Dr. Asarch
holds a B.S. in Biochemistry from the University of California at Los Angeles
and doctoral degrees in both Clinical Pharmacy (Pharm.D.) and Pharmaceutical
Sciences (Ph.D.) from the University of Southern California.
HARRY J. FINI, VICE PRESIDENT--SALES AND MARKETING. Mr. Fini has served as
our Vice President--Sales and Marketing since June 1997. From 1995 until he
joined us, Mr. Fini operated a consulting practice which assisted point-of-care
companies and venture capitalists in evaluating technologies, business
development, marketing and sales, and strategic planning. Prior to that, Mr.
Fini had more than 16 years of executive, sales and marketing experience,
including serving as Vice President of Sales and Marketing at i-STAT
Corporation, a medical diagnostic device manufacturer, from 1992 to 1995 where
he was responsible for marketing, market research, business development,
strategic planning and sales of a point-of-care in vitro blood diagnostics
device worldwide. From 1987 through 1992, Mr. Fini was employed at Bristol-
Myers Squibb Corporation, a pharmaceutical company, as Director of Marketing
and Sales in the managed healthcare area, and at Pyxis Corporation, a
manufacturer of drug distribution systems, as Vice President of Sales. Mr. Fini
received a B.A. in English from LaSalle College.
MARIJA N. VALENTEKOVICH, VICE PRESIDENT--MANUFACTURING. Dr. Valentekovich has
served as our Vice President--Manufacturing since January 1998 when she came
out of retirement to join us. Before that, Dr. Valentekovich served as a
Production Manager with Diagnostic Products Corporation from January 1989 to
July 1997. Dr. Valentekovich received a M.S. in Chemical Engineering and a
Ph.D. in Physical Organic Chemistry, using radioisotope techniques, from the
University of Zagreb, Croatia.
AGREEMENT RELATING TO ELECTION OF DIRECTORS
Each of our directors was nominated and elected pursuant to the terms and
conditions of a stockholders' agreement we entered into with our stockholders
and warrantholders in connection with two private placements
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<PAGE>
of our common stock in 1997 and 1998. Pursuant to this stockholders' agreement,
SmithKline Beecham Corporation was granted the right to nominate an individual
to our Board of Directors to serve as its representative. Spencer Trask
Securities Incorporated was also granted the right in the stockholders'
agreement to nominate one individual to our Board of Directors to serve as its
representative. Currently, Ms. Mackie serves as SmithKline's representative and
Mr. Smith serves as Spencer Trask's representative. Mr. Stoughton and Dr. Grove
were nominated and elected to our Board of Directors pursuant to this
stockholders' agreement. In addition, the stockholders' agreement requires that
three individuals who are independent of us and hold no more than five percent
of our common stock serve on our Board of Directors. The number of directors
permitted by the stockholders' agreement was increased from seven to nine with
the consent of Spencer Trask as called for in the stockholders' agreement. This
stockholders' agreement expires by its terms upon the completion of the
offering.
CLASSIFIED BOARD OF DIRECTORS
Upon completion of the offering, our Board of Directors will be divided into
three classes. Each class will contain, as nearly as possible, an equal number
of directors. Directors within each class will be elected to serve three-year
terms and approximately one-third of the directors will sit for election at
each annual meeting of our stockholders. Mr. Koch, Mr. Kermes and Mr. Smith
will serve in the class whose term expires in 1999. Dr. Grove, Mr. Flatley and
Ms. Mackie will serve in the class whose term expires in 2000. Mr. Stoughton,
Mr. Brenner and Mr. MacDonald will serve in the class whose term expires in
2001. A classified board of directors may have the effect of deterring or
delaying any attempt by any group to obtain control of us by a proxy contest
since such third party would be required to have its nominees elected at two
separate annual meetings of our Board of Directors in order to elect a majority
of the members of our Board of Directors. See "Description of Capital Stock--
Takeover Protection and Certain Charter and By-Law Provisions."
DIRECTOR COMPENSATION
Our non-employee directors receive an annual fee of $5,000 payable semi-
annually, plus $1,000 for each Board of Directors or committee meeting they
attend in person and $500 for those meetings they attend telephonically. Ms.
Mackie is precluded by SmithKline policy from receiving any fees or stock
options for her service as a director. We reimburse all reasonable expenses
incurred by the directors in attending Board of Directors or committee
meetings. In addition, the non-employee directors, other than the SmithKline
representative, Ms. Mackie, participate in our 1996 Incentive and Non-Qualified
Stock Option Plan. For each year that Mr. Brenner, Mr. Flatley, Mr. Kermes, Mr.
MacDonald and Mr. Smith served as directors, we granted each an annual option
to purchase 2,163 shares of common stock at the then applicable market price.
The options granted after the end of 1996 were issued at $5.20 per share. The
options granted after the end of 1997 were issued at $6.76 per share. Upon
completion of the offering, options granted to non-employee directors will only
be made under our 1998 Director Stock Option Plan. Under our 1998 Director
Stock Option Plan, we will grant each non-employee director an annual option to
purchase 2,000 shares of common stock at the then applicable market price. See
"--Stock Option Plans" and "Certain Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors presently consists of
Mr. Stoughton, Mr. Brenner, Ms. Mackie and Mr. Smith. The Compensation
Committee makes recommendations to the Board of Directors concerning salaries
and incentive compensation for our officers and employees other than our Chief
Executive Officer, whose compensation is determined by the Board of Directors
after consultation with the non-employee directors on the Compensation
Committee. The Audit Committee of the Board of Directors presently consists of
Mr. Koch, Mr. Flatley, Mr. Kermes and Mr. MacDonald. The Audit Committee
reviews our financial statements and accounting practices, makes
recommendations to the Board of Directors regarding the selection of
independent auditors and reviews the results and scope of all audits and other
services provided by our independent auditors.
We also have granted rights to two parties to send observers to our Board
meetings. Pursuant to a letter agreement with Fahnestock & Co. Inc. entered
into in connection with the offering, Fahnestock has the right to
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<PAGE>
have one person of its choosing attend our Board meetings for up to 18 months
after completion of the offering. In addition, in connection with the bridge
financing, we granted S.R. One, Limited the right to send one observer to our
Board meetings. Each of these observers also has the right to receive materials
distributed to directors for the Board meetings. Before the observers attend
any meetings after completion of the offering, and before any information is
disclosed to these observers, we will seek the agreement of Fahnestock's and
S.R. One's representatives to keep confidential all information received
through this arrangement and to abide by the trading restrictions that apply to
our directors generally. The observers, however, are not required to sign such
agreements. We also intend to adopt internal confidentiality and trading
policies and to educate our directors and observers regarding confidentiality
and trading obligations under applicable law. The observers from Fahnestock and
S.R. One shall not have any of the duties, powers or obligations of a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
While Mr. Stoughton, a member of our Compensation Committee, is our Chairman
of the Board of Directors and Chief Executive Officer, Mr. Brenner, Ms. Mackie
and Mr. Smith, the other members of our Compensation Committee, have not been,
at any time since our formation, an officer or employee of ours. In addition,
none of our executive officers serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving on our Board of Directors or Compensation Committee. Cedar Capital
Investors, an entity owned and controlled by Mr. Brenner, provided certain
financial consulting services to us immediately following our formation and up
to the completion of our private placement of common stock in 1997. As
consideration for such services, we reimbursed Cedar Capital's out-of-pocket
expenses and granted Cedar Capital an option to purchase 1,154 shares of common
stock at an exercise price of $.052 per share. Ms. Mackie, who serves as Vice
President for Strategy and Business Development at SmithKline Beecham
Healthcare Services, the business development division of SmithKline Beecham
Corporation, was nominated to serve on the Board of Directors by SmithKline
Beecham Corporation pursuant to the terms of a stockholders' agreement by and
among us and our stockholders and warrantholders prior to the offering. Mr.
Smith, who served as a Vice Chairman of Spencer Trask Securities Incorporated
until August 1998, was nominated to serve on the Board of Directors by Spencer
Trask Securities and was formerly a partner in Exigent Partners L.P. See "--
Agreement Relating to Election of Directors" and "Certain Transactions."
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation awarded to,
earned by, or paid to our Chief Executive Officer and executive officers whose
salary and bonus exceeded $100,000 for all services rendered to us during the
years ended December 31, 1997 and 1998. No executive officer who would
otherwise have been includable in such table on the basis of salary and bonus
earned during the years ended December 31, 1997 and 1998 has resigned or
otherwise terminated employment during such years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
----------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS(1) OPTIONS COMPENSATION(2)
------------------ ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
W. Vickery Stoughton...... 1998 $203,481 -- 9,135 $20,797
Chairman of the Board of 1997 $195,281 $27,000 158,655 $20,547
Directors and Chief
Executive Officer
Thomas H. Grove........... 1998 $163,880 -- 5,529 $ 8,603
Executive Vice 1997 $154,013 $25,000 79,327 $ 8,353
President--Research and
Development
</TABLE>
- --------
(1) Bonus earned in 1997 and paid in 1998.
(2) Includes $4,750 contributed under our 401(k) Plan for the benefit of each
of Mr. Stoughton and Dr. Grove in 1997 and $5,000 for the benefit of each
of Mr. Stoughton and Dr. Grove in 1998. Also includes $15,797 and $3,603 of
premiums paid for life insurance for Mr. Stoughton and Dr. Grove, in each
year, respectively.
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<PAGE>
STOCK OPTIONS GRANTED TO EXECUTIVE OFFICERS DURING 1998
The following table sets forth information regarding options for the purchase
of common stock that were granted to certain executive officers during the year
ended December 31, 1998:
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF PERCENT OF VALUE AT ASSUMED
SHARES TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS EXERCISE OR PRICE APPRECIATION FOR
OPTIONS GRANTED BASE PRICE OPTION TERM (4)
GRANTED TO EMPLOYEES PER SHARE EXPIRATION -----------------------
NAME (1) IN 1998 (2) (3) DATE 5% 10%
---- ---------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
W. Vickery Stoughton.... 7,212 7% $6.76 7/30/08 $ 30,659 $ 77,695
1,923 2% $7.28 11/05/08 $ 8,805 $ 22,312
Thomas H. Grove......... 3,606 4% $6.76 7/30/08 $ 15,329 $ 38,847
1,923 2% $7.28 11/05/08 $ 8,805 $ 22,312
</TABLE>
- --------
(1) All options were granted under our 1996 Incentive and Non-Qualified Stock
Option Plan. The first listed grant for each person vested or will vest 12%
on December 31, 1998, 1999, 2000, 2001 and 2002 and 40% on July 30, 2007.
The second listed grant vested or will vest 20% on each December 31,
commencing December 31, 1998. See "--Stock Option Plans."
(2) Based on an aggregate of 102,329 shares of common stock underlying options
granted to employees in 1998.
(3) Options were granted at fair market value, as determined by our Board of
Directors, based on all factors available to them on the date of grant.
These factors included our history and prospects, as well as the history
and prospects of our industry, an assessment of our past and present
operations and financial performance, the prospects for our future
earnings, the present state of our development, the possibility of an
initial public offering by us and market prices of publicly traded common
stocks of comparable companies in recent periods.
(4) Assumes stock price appreciation of 5% and 10% compounded annually from the
date the respective options were granted to their expiration date, as
mandated by the rules of the Securities and Exchange Commission, and does
not represent our estimate or projection of the future appreciation of our
stock price. Actual gains, if any, on stock option exercises and common
stock holdings, are dependent upon the timing of such exercise and the
future performance of the common stock and may be greater or less than the
potential realizable value set forth in the table.
The following table sets forth certain information regarding options held as
of December 31, 1998 by certain executive officers. None of such executive
officers exercised options during the year ended December 31, 1998.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
END FISCAL YEAR-END (1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
W. Vickery Stoughton....... 81,865 85,923 $287,333 $295,138
Thomas H. Grove............ 41,048 43,808 $151,453 $155,749
</TABLE>
- --------
(1) There was no public trading market for the common stock as of December 31,
1998. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $9.00 per share minus the
applicable per share exercise price.
47
<PAGE>
EMPLOYMENT AGREEMENTS
We are party to employment agreements with each of Mr. Stoughton, Dr. Grove
and Mr. Koch. On the anniversary date of each employment agreement, the
agreement is automatically extended for three-year rolling terms unless either
party, at least 60 days prior to the annual extension date, gives notice that
the employment agreement shall not be extended or otherwise terminates the
agreement. Mr. Stoughton, Dr. Grove and Mr. Koch may resign upon 90 days notice
to us. Under the employment agreements, Mr. Stoughton, Dr. Grove or Mr. Koch
will be entitled to have his base salary, bonus and stock options continue to
accrue through the end of the then current term if he is terminated without
cause, or becomes disabled. "Cause" includes disloyalty, dishonesty, fraud,
conviction of a felony or the disclosure of confidential information. He will
also be entitled to such amounts if he terminates his employment agreement as a
result of a reduction in his duties, our breach of the employment agreement or
a transaction resulting in our sale . The employment agreements prohibit Mr.
Stoughton, Dr. Grove and Mr. Koch from engaging in the point-of-care
diagnostics business during the term of such employment agreements. These non-
compete clauses will remain in effect for one year after the expiration or
termination of employment. If, however, the term of employment had continued
for at least two years then the non-compete clauses have no effect when
employment is terminated or expires. However, if we terminate employment
without cause or if the employee terminates his employment following our breach
of the agreement or because of a change of control, the non-compete clause
terminates.
Under their respective employment agreements, Mr. Stoughton serves as our
Chairman of the Board of Directors and Chief Executive Officer, and currently
earns an annual base salary of $210,893, Dr. Grove serves as Executive Vice
President--Research and Development, and currently earns an annual base salary
of $167,633, and Mr. Koch serves as our Chief Financial Officer, Treasurer and
Executive Vice President, and currently earns an annual base salary of
$160,000. In addition, Mr. Koch received a $15,000 relocation allowance in
connection with entering into his employment agreement. At the discretion of
our Board of Directors, an annual bonus may be paid to Mr. Stoughton, Dr. Grove
and Mr. Koch. In each case, we may agree to future raises and other
compensation for each of Mr. Stoughton, Dr. Grove and Mr. Koch. In addition,
Mr. Stoughton, Dr. Grove and Mr. Koch are eligible to receive stock options
pursuant to the 1996 Incentive and Non-Qualified Stock Option Plan, the 1996
Key Executive Stock Option Plan and the 1998 Incentive and Non-Qualified Stock
Option Plan. Such executive officers are also entitled to reimbursement for
certain travel and entertainment expenses incurred in connection with the
performance of their duties.
STOCK OPTION PLANS
Prior to completion of the offering, we have had two stock option plans in
place: the 1996 Incentive and Non-Qualified Stock Option Plan and the 1996 Key
Executive Stock Option Plan. These plans provide for the grant of stock options
to purchase up to 576,923 shares of common stock. To date, we have granted
options to purchase 430,309 shares of common stock under these plans. Of these,
options to purchase 411,923 shares are outstanding. The weighted average
exercise price of options outstanding under the plans is $5.80. To date, we
have granted Mr. Stoughton, Dr. Grove, Mr. Koch, Dr. Asarch, Mr. Fini and Ms.
Valentekovich options to purchase 167,788, 84,856, 41,587, 21,875, 38,462 and
5,769 shares of common stock, respectively, at a weighted average exercise
price of $5.81. We have also granted options to purchase an aggregate of
19,471 shares of common stock to non-employee directors for their service as
directors. We may grant options to purchase 147,287 shares of common stock in
the future under the 1996 plans.
Upon completion of the offering, two additional option plans will take
effect: the 1998 Incentive and Non-Qualified Stock Option Plan and the 1998
Director Stock Option Plan. These 1998 plans provide for the grant of stock
options to purchase up to 565,000 and 60,000 shares of common stock,
respectively.
The purpose of our stock option plans is to promote our long-term growth and
profitability by providing key personnel with incentives to improve stockholder
value and to contribute to our growth and financial success. After completion
of this offering, options may be awarded under the 1996 plans and the 1998
48
<PAGE>
Incentive and Non-Qualified Stock Option Plan to our executive officers,
employees and consultants. Only non-employee directors will be eligible for
awards under the 1998 Director Stock Option Plan.
Our option plans are administered by our Board of Directors or a committee of
the Board. They decide the types of options to be granted, the number of shares
to be covered, the exercise price of each stock option, the expiration date of
each stock option, the vesting schedule and any other material provisions.
Non-employee directors have received automatic, fully-vested option grants
under the 1996 Incentive and Non-Qualified Stock Option Plan. After completion
of the offering, each year, we will automatically grant each non-employee
director an option to purchase 2,000 shares of common stock under the 1998
Director Stock Option Plan. Director options always have a fair market value
exercise price. Such options vest at the end of the year of service as a
director to which the option relates. All director options under the 1998
Director Stock Option Plan generally will be exercisable for a period of five
years.
Option grants to our employees may take the form of either incentive stock
options, which are intended to qualify for preferential tax treatment under
Section 422 of the Internal Revenue Code, or non-qualified stock options, which
do not qualify for such treatment. Directors may receive only non-qualified
stock options. The exercise price of an incentive stock option generally must
not be less than the fair market value of the common stock on the date the
option is granted. The exercise price of a non-qualified stock option will be
stated in the option agreement governing the non-qualified stock option and is
not required by the option plans to be the fair market value of the common
stock on the date the option is granted.
In the event of any stock dividend, stock split, reverse stock split,
recapitalization or reclassification, involving us, appropriate proportional
adjustments will be made in the number of shares reserved for issuance under
the option plans, and the number, kind and price of shares covered by
outstanding grants. The option plans also provide for the ability of the Board
of Directors or a committee to accelerate the exercise date of any options
granted thereunder. Options may not be exercised more than 10 years after the
date of grant. In some cases, shorter periods apply. Shares underlying options
that lapse or expire are returned to the pool of shares available under the
plans. Grants under any option plan may only be made during the 10 year period
after the plan's adoption.
Our stock option plans may be amended by the Board of Directors so long as
such amendment does not change the terms of any outstanding option without the
affected optionee's consent or increase the number of shares that are the
subject of the plans.
EMPLOYEE STOCK PURCHASE PLAN
Our Board of Directors adopted an Employee Stock Purchase Plan in November
1998. This plan qualifies as an employee stock purchase plan under Internal
Revenue Code Section 423 and will be effective upon completion of the offering.
It allows employees to purchase, in the aggregate, up to 150,000 shares of our
common stock at a discount through payroll deductions. The purchase price per
share offered under the Employee Stock Purchase Plan will be 85% of the lesser
of the fair market value per share on the first or last trading day of the
quarter. Stock purchased will not be subject to taxes until sold. The plan is
designed to encourage and facilitate the purchase of common stock by our
employees and thereby to provide our employees with both a personal stake in
our business and a long range inducement to remain our employee. Each of our
full-time employees is eligible to participate in the Employee Stock Purchase
Plan.
The number and price of shares of common stock available for purchase under
the plan is subject to adjustment in the event the outstanding shares of common
stock are increased or decreased through stock dividends, recapitalizations,
reorganizations or similar changes. The plan is to be administered by our Board
of Directors or a committee of the Board of Directors.
All funds we hold or receive under the Employee Stock Purchase Plan may be
used for any corporate purpose until applied to the purchase of shares of
common stock or refunded to employees and will not be
49
<PAGE>
segregated from our general assets. We will pay all fees and expenses incurred
(excluding individual federal, state, local or other taxes) in connection with
the Employee Stock Purchase Plan.
Unless stockholder approval is required by law, the Board of Directors or a
committee of the Board of Directors has the right to amend, modify or terminate
the Employee Stock Purchase Plan at any time without notice, provided that no
employee's then existing rights are adversely affected without his or her
consent.
401(K) PLAN
We have a 401(k) Salary Reduction Plan and Trust for eligible employees.
Eligible employees may contribute up to 15% of their current compensation, up
to a statutorily prescribed annual limit, to the 401(k) plan. Each participant
is fully-vested in his or her deferred salary contributions. A participant's
contributions are held in trust and invested pursuant to his or her directions
from among 20 or more investment funds made available under the 401(k) plan. We
may make matching contributions of 50% of each participant's deferred salary
contributions, up to a maximum of 4% of such participant's compensation. Our
matching contributions vest after a participant has completed three years of
service with us, or earlier upon attainment of age 55, death while in service,
retirement for disability or termination of the 401(k) plan. Payment of 401(k)
plan benefits are made in a single lump-sum payment. Distribution of a
participant's vested interest in his or her account generally occurs after a
participant's termination of employment for any reason, including retirement,
death or disability.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of common stock as of February 10, 1999, by (1) each person or group
of affiliated persons known by us to be the beneficial owner of more than 5% of
our outstanding common stock, (2) each of our directors, (3) each of our
executive officers and (4) all of our executive officers and directors as a
group. As of such date, there were 5,084,281 shares of common stock outstanding
before giving effect to the sale of common stock in the offering.
The number of shares of common stock actually owned by each principal
stockholder is listed in the column entitled "Shares of Common Stock." In
addition, each principal stockholder is deemed to be the beneficial owner of
common stock such stockholder can acquire upon the exercise of warrants or
options on or within 60 days after February 10, 1999. These option and warrant
shares are listed separately in the column entitled "Shares Underlying
Options/Warrants." Each principal stockholder's percentage ownership includes
the share numbers from both of these columns. Unless otherwise noted, we
believe that all persons named in the table have sole voting and investment
power with respect to all shares beneficially owned by them.
<TABLE>
<CAPTION>
SHARES OF SHARES PERCENTAGE PERCENTAGE
COMMON UNDERLYING OWNED BEFORE OWNED AFTER
NAME OF BENEFICIAL OWNER STOCK OPTIONS/WARRANTS OFFERING OFFERING
- ------------------------ --------- ---------------- ------------ -----------
<S> <C> <C> <C> <C>
Kevin Kimberlin......... 765,891(1) 336,349(2) 20.3% 13.4%
c/o Spencer Trask
Securities
Incorporated
535 Madison Avenue,
18th Floor
New York, New York
10022
W. Vickery Stoughton.... 285,005 152,692 8.4% 5.5%
c/o Careside, Inc.
6100 Bristol Parkway
Culver City, California
90230
Peter Friedli........... 373,521(3) 42,973(4) 8.1% 5.3%
c/o Friedli Corp.
Finance
Freigustrasse 5
8002 Zurich,
Switzerland
SmithKline Beecham
Corporation............ 229,808 98,039(5) 6.3% 4.1%
One Franklin Plaza
Philadelphia,
Pennsylvania 19101
Dr. Thomas H. Grove..... 205,294 76,538 5.5% 3.6%
c/o Careside, Inc.
6100 Bristol Parkway
Culver City, California
90230
Philip B. Smith......... 94,315(6) 113,098(7) 4.0% 2.6%
James R. Koch........... -- 32,673 * *
William F. Flatley...... 15,471 4,327 * *
Anthony P. Brenner...... 9,615 5,481(8) * *
Kenneth Kermes.......... 2,959 2,163 * *
Diana Mackie............ 4,438 -- * *
C. Alan MacDonald....... -- 4,327 * *
All executive officers
and directors as a
group (9 persons)...... 617,097 391,299 18.4% 12.2%
</TABLE>
- --------
* Represents less than 1% of our outstanding shares of common stock.
(1) Includes 426,850 shares of common stock held by Oshkim Limited Partners,
L.P., and 339,041 shares of common stock held by Kevin Kimberlin Partners,
L.P., both of which are limited partnerships of which Mr. Kimberlin is the
general partner.
(2) Includes 20,517 shares of common stock issuable upon the exercise of
warrants held by Oshkim Limited Partners, L.P., and 38,095 shares of
common stock issuable upon the exercise of warrants held by Kevin
Kimberlin Partners, L.P. Also includes 277,737 shares of common stock
issuable upon the exercise of warrants owned by Spencer Trask Securities
Incorporated of which Mr. Kimberlin is Chairman and exercises voting
control. See "Certain Transactions--Financing Activities."
(3) Includes 373,521 shares of common stock owned by Venturetec, Inc., of
which Mr. Friedli is the controlling stockholder.
(4) Includes 9,320 shares of common stock issuable upon the exercise of
warrants owned by Pine Incorporated, a corporation owned and controlled by
Mr. Friedli.
(5) Includes 98,039 shares of common stock issuable upon exercise of warrants
held by S.R. One, Limited, an affiliate of SmithKline Beecham Corporation.
Notwithstanding the exercisability of the bridge warrant by its terms,
S.R. One has separately agreed not to exercise it until the earlier of six
months after the offering or December 17, 1999.
(6) Includes 50,952 shares of common stock owned by Private Equity
Partnership, of which Mr. Smith is the general partner.
(7) Includes 108,771 shares of common stock issuable upon exercise of warrants
held by Private Equity Partnership.
(8) Includes 1,154 shares of common stock issuable upon the exercise of
options which were issued pursuant to a consulting agreement with an
affiliate of Mr. Brenner. See "Certain Transactions--Financing
Activities."
51
<PAGE>
CERTAIN TRANSACTIONS
SmithKline Beecham
In July 1996, we entered into a letter of intent with SmithKline Beecham
Corporation and SmithKline Beecham Diagnostics Systems Co., an affiliate of
SmithKline Beecham Corporation, with respect to their point-of-care development
program. Pursuant to that letter of intent, SmithKline Beecham Corporation
supported the point-of-care development program by funding $1.8 million of the
program's operating expenses for the transition period from July 1, 1996
through October 31, 1996. This funding has been reflected in the Statement of
Operations of the predecessor business for the ten months ended October 31,
1996. Pursuant to an asset purchase agreement, SmithKline Beecham Diagnostics
Systems Co. and SmithKline Beecham Clinical Laboratories, Inc., sold us certain
fixed and intangible assets used in connection with the point-of-care
development program. As consideration for the purchase of the assets, we issued
to SmithKline Beecham Diagnostics Systems Co. 5% of our total common stock
outstanding at that time. This stock was later transferred to SmithKline
Beecham Corporation. Ms. Mackie, Vice President for Strategy and Business
Development at SmithKline Beecham Healthcare Services, a division of SmithKline
Beecham Corporation, has served as one of our directors since February 1997 as
a representative of SmithKline Beecham Corporation. SmithKline Beecham
Corporation is one of our significant stockholders.
In addition to the operating funding provided during the transition period,
SmithKline Beecham Corporation made available to us a $1.0 million credit
facility at an interest rate of 8% per annum. We used the $1.0 million to fund
research and development and to establish our production facility by funding
capital purchases, rental payments for our facilities in Culver City,
California and operating expenses. In January 1997, the SmithKline Beecham
Corporation credit facility was converted into an additional 2% of our
outstanding common stock simultaneously with the initial closing of our 1997
private placement of common stock.
Simultaneously with the closing of the asset purchase, we entered into a
distribution and supply agreement with SmithKline Beecham Clinical
Laboratories, Inc. pursuant to which SmithKline received exclusive distribution
rights to sell our products to segments of the commercial laboratory industry.
The exclusive distribution rights will extend to ten of the following
countries: United States, Great Britain, Mexico, Spain, South Africa,
Singapore, Malaysia, Indonesia, Australia, Chile, Argentina, France or Germany,
if SmithKline or one of its affiliates owns, operates or manages a clinical
laboratory in such country on or before December 31, 2000. Whenever we obtain
the necessary approvals to market and sell our products in a listed country,
SmithKline must submit purchase orders for the products within designated time
periods in order to preserve its exclusive rights in that country. Otherwise,
we will be free to sell our products in that country to the commercial
laboratory industry as well. Our ability to sell our products outside the
commercial laboratory industry is not limited by the contract with SmithKline.
SmithKline and its affiliates are not restricted from entering into similar
commercial distribution arrangements with other point-of-care diagnostic
companies. In consideration for this grant of exclusivity, SmithKline will pay
us an annual fee of up to $100,000 commencing on the date of FDA approval of
the CareSide Analyzer and 25 designated tests. Subject to earlier termination,
the distribution and supply agreement will terminate five years from the date
of such FDA approval.
Under the distribution and supply agreement, SmithKline will, until December
31, 2000 or any earlier termination of the agreement, supply us with clinical
samples to enable us to validate tests for our research and development of
point-of-care products. We will bear the cost of retrieving the samples and
conducting our comparative validation tests. In addition, the distribution and
supply agreement obligates SmithKline, upon FDA approval of the CareSide
Analyzer and 25 designated tests, to purchase minimum numbers of CareSide
Analyzers and test cartridges from us for the first five years following such
FDA approval. We have agreed to supply SmithKline with its requirements of
CareSide Analyzers and cartridges at our cost plus a reasonable margin. If we
do not develop the CareSide Analyzer and obtain FDA approval of the 25
designated tests by December 31, 2000, SmithKline has the option to terminate
the agreement or waive the FDA approval requirement.
52
<PAGE>
Under our distribution and supply agreement with SmithKline, all intellectual
property rights to patents, trademarks or otherwise which are associated with
the marketing and development of point-of-care products remain with us although
we share rights and responsibilities with SmithKline in the protection of these
rights.
Financing Activities
On December 2, 1996, in connection with the establishment of a $1 million
working capital facility, we issued 557,600 shares of common stock to Exigent
Partners, L.P. for an aggregate purchase price of $98,995. The working capital
facility was arranged by Exigent Partners, L.P. to be provided to us in the
form of a $1.0 million irrevocable letter of credit from Citibank, N.A.,
secured by pledges of cash or cash equivalents by Exigent Partners, L.P. The
general partner of Exigent Partners, L.P. was Kevin Kimberlin, an affiliate of
Spencer Trask Securities Incorporated and one of our principal stockholders,
and the limited partners were Mr. Stoughton and Dr. Grove, two of our executive
officers and directors, and Mr. Smith, one of our directors. Of the 557,600
shares of common stock issued to Exigent Partners, L.P., Mr. Kimberlin took
beneficial ownership of 426,850 shares of common stock, and Mr. Stoughton and
Dr. Grove took beneficial ownership of 36,802 and 18,958 shares of common
stock, respectively. We repaid all funds drawn under the facility and the
letter of credit, both of which have since terminated. Exigent Partners, L.P.
was dissolved and each of its partners received a pro rata distribution of
shares of common stock. See "Principal Stockholders."
In 1997 and 1998, we undertook two private placements of our common stock,
both of which were completed through Spencer Trask Securities Incorporated.
Spencer Trask received approximately $2.5 million in commissions and expenses
from the private placements, which generated aggregate net proceeds to us of
$19.0 million. Affiliates of Spencer Trask, including its employees, received
warrants to purchase 384,615 shares of common stock at $5.20 per share in the
1997 private placement and warrants to purchase 340,238 shares of common stock
at $6.76 per share in the 1998 private placement. Warrants issued in connection
with both private placements will expire three years from the closing of the
offering.
As partial consideration for its services in the 1997 private placement,
Spencer Trask was granted a right of first refusal to act as underwriter or
agent for any proposed public offering or any private placement of our
securities. Spencer Trask was also granted the right to purchase securities in
any such offering in which purchasers in the 1997 private placement are
entitled to preemptive rights under the stockholders' agreement or in any sale
of common stock by the former partners of Exigent Partners, L.P. Spencer Trask
has waived all such rights in connection with the offering. Upon completion of
the offering, Spencer Trask will be paid $100,000 pursuant to a letter
agreement signed in connection with the 1998 private placement.
At the first closing of the 1997 private placement, we entered into an
investment banking agreement with Spencer Trask pursuant to which Spencer Trask
will receive a percentage, ranging from seven percent to two and one-half
percent depending upon the size of the transaction involved, of the
consideration involved in any transaction we undertake with a person introduced
to us by Spencer Trask in the five years ending March 2002. The agreement also
provides for Spencer Trask, subject to certain terms and conditions, to act as
our exclusive representative in advising us with respect to executive
compensation benefits, insurance and retirement planning, providing us with
certain investment banking services and addressing our cash management needs.
Spencer Trask has waived all such rights relating to investment banking
services.
In connection with the 1997 and 1998 private placements, we entered into a
stockholders' agreement with each of our stockholders and warrantholders. The
stockholders' agreement included preemptive rights and provided for the
nomination and election of each of our current directors including Ms. Diana
Mackie, Vice President of a division of SmithKline Beecham Corporation. The
preemptive rights do not apply to shares issued in the offering. The
stockholders' agreement will terminate by its terms upon completion of the
offering. See "Management-- Agreement Relating to Election of Directors."
53
<PAGE>
In December 1997, Cedar Capital Investors, an entity owned and controlled by
Anthony P. Brenner, one of our directors, provided certain financial consulting
services to us in connection with the 1998 private placement. In consideration
for providing such services, Cedar Capital Investors was reimbursed $6,651 for
out-of-pocket expenses and received options to purchase 1,154 shares of common
stock at an exercise price of $.052 per share. These options remain exercisable
until August 8, 2007.
In July 1998, in connection with the relocation of James R. Koch, our Chief
Financial Officer, Treasurer and Executive Vice President, as well as one of
our directors, from Texas to the Los Angeles area in August 1998, we provided a
bridge loan to Mr. Koch, pursuant to a promissory note executed in our favor by
Mr. Koch, in the aggregate principal amount of $125,000. The bridge loan, which
was subject to an interest rate of 7.5% per annum, was paid in full by Mr. Koch
on September 21, 1998. As of that date, an aggregate of $125,911 in principal
and interest was owing under the promissory note.
In December 1998, we entered into a bridge financing with S.R. One, Limited,
a business trust controlled by SmithKline Beecham Corporation. For
consideration of $3.0 million cash, we issued S.R. One a $3.0 million note
payable and a detachable bridge warrant for the purchase of that number of
shares of common stock which is equal to $750,000 divided by 85% of the initial
public offering price per share of common stock in the offering. In addition,
for so long as S. R. One owns the bridge warrant or shares purchased upon
exercise of the bridge warrant, it has the right to have a representative
observe our Board of Directors' meetings and receive all information
distributed to our directors in connection with such Board of Directors'
meetings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
We consider the terms of all of the above-referenced transactions to be at
arm's length and reasonably equivalent to terms it could have obtained through
negotiations with unaffiliated third parties under similar economic conditions.
Any transactions undertaken in the future, including loans, we enter into with
any of our officers, directors and principal stockholders or their affiliates,
will be approved by a majority of the entire Board of Directors, and will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties. See "Description of Capital Stock--Takeover Protection and Certain
Charter and By-Law Provisions."
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of the offering, our authorized capital stock will consist of
(1) 50,000,000 shares of common stock, $.01 par value per share and (2)
5,000,000 shares of preferred stock, $.01 par value per share, of which there
will be 7,884,281 shares of common stock and no shares of preferred stock
outstanding, assuming no exercise of the underwriters' over-allotment option.
The following description of our capital stock is a summary and is qualified in
its entirety by the provisions of our Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws, copies of which have been filed
as exhibits to the registration statement of which this prospectus forms a
part.
COMMON STOCK
The issued and outstanding shares of common stock being offered hereby will
be, when sold and issued in accordance herewith, validly issued, fully paid and
non-assessable. Each holder of shares of common stock will be entitled to one
vote for each share held of record and may not cumulate votes for election of
directors. The shares will not be entitled to preemptive rights under
applicable law and will not be subject to redemption or assessment. Subject to
the rights and preferences of the holders of any preferred stock outstanding in
the future, upon our liquidation, dissolution or winding-up, the holders of
shares of common stock will be entitled to receive, pro rata, our assets which
are legally available for distribution to stockholders. In addition, subject to
the rights and preferences of the holders of any preferred stock outstanding in
the future, the holders of shares of common stock will be entitled to share
ratably in dividends as, if and when declared by our Board of Directors. We do
not anticipate that any dividends will be paid in the foreseeable future. As of
December 31, 1998, there were 433 holders of common stock.
PREFERRED STOCK
In addition to the common stock, we are, without further action by
stockholders, also authorized to issue up to 5,000,000 shares of preferred
stock. Our Board of Directors may determine the timing, series, designation,
and number of shares of preferred stock to be issued, as well as the rights,
preferences, and limitations of such shares, including those relating to voting
power, redemption, conversion, dividend rights, and liquidation. The issuance
of preferred stock could adversely affect the voting power of the holders of
common stock or have the effect of deterring, delaying or preventing any
attempt by a person, entity or group to obtain control of us. We have no
current plans to issue any shares of preferred stock.
WARRANTS
As of December 31, 1998, we had outstanding exercisable warrants to purchase
384,615 shares of common stock at $5.20 per share. These warrants were issued
in connection with the 1997 private placement and will expire on the later of
three years from the completion of the offering. In addition, as of December
31, 1998, we had outstanding exercisable warrants to purchase 340,238 shares of
common stock at $6.76 per share. These warrants were issued in connection with
the 1998 private placement and will expire three years from the closing of the
offering. Further, we issued a bridge warrant to S.R. One, Limited in
connection with the bridge financing. The bridge warrant will become
exercisable on the earlier of December 17, 1999 or six months after the
completion of the offering for the number of shares of common stock which is
equal to $750,000 divided by 85% of the initial public offering price per share
of the common stock in the offering. The bridge warrant would be exercisable
for 98,039 shares if the initial public offering price were $9.00 per share.
The bridge warrant has an exercise price of 85% of the initial public offering
price. If the bridge financing is not repaid by June 30, 1999, the bridge
warrant becomes exercisable for twice as many shares of common stock. The
bridge warrant will expire four years after completion of the offering. Upon
the completion of the offering, an additional 280,000 warrants will be issued
to the representatives of the underwriters. These warrants will have an
exercise price equal to 120% of the initial public offering price and will
expire five years from the date of their issuance. See "Underwriting."
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<PAGE>
REGISTRATION RIGHTS
Granted in Private Placements
We granted investors in the 1997 and 1998 private placements of common stock
demand and incidental registration rights. These include the right of the
holders of a majority of the registrable shares to demand registration of their
shares and the right of these investors to include their shares in other
registrations of our equity securities, other than in connection with issuances
under our benefit and other employee plans. We granted similar rights with
respect to the shares underlying the warrants issued to Spencer Trask
Securities Incorporated in connection with the 1997 and 1998 private
placements. In addition, we agreed to effect a registration under the
Securities Act for the resale of the common stock purchased by investors in the
1997 private placement automatically within 180 days after the date of this
prospectus. We also agreed to effect a registration for the resale of the
common stock purchased by investors in the 1998 private placement automatically
within 360 days after the date of this prospectus. This automatic registration
may be delayed by Spencer Trask together with Fahnestock & Co Inc. If we fail
to register the common stock underlying the shares in accordance with the terms
of the agreements with the investors in the 1997 and 1998 private placements,
we must either repurchase the shares at the fair market value or give investors
the ability to elect a majority of our Board of Directors in order to provide
liquidity. Pursuant to powers of attorney granted by many investors, and
amendments and waivers to the registration agreements, our obligation to effect
such registrations has been deferred until one year after the date of this
prospectus.
Granted to SmithKline
We have also granted demand and incidental registration rights to SmithKline
Beecham Corporation for the registration under the Securities Act of the resale
of any or all of the common stock held by it at any time after the date of this
prospectus. SmithKline has agreed not to make a demand for registration for a
period of at least one year after the offering. If we register an issuance of
our equity securities, other than shares issuable under employee or other
benefit plans, SmithKline may request that its shares be included in the
registration.
Granted to Management and Exigent Partners, L.P.
Additionally, Messrs. Stoughton and Smith, Drs. Grove and Asarch and three of
our employees and the former partners of Exigent Partners, L.P. have also been
granted demand and incidental registration rights with respect to their common
stock. The holders of a majority of all registrable securities owned by these
stockholders may demand on two occasions registration for the resale of any or
all of their shares. If we register an issuance of our equity securities, other
than shares issuable under our employee or other benefit plans, these holders
may request to include their shares in the registration.
Granted to S.R. One
In December 1998, we granted demand and incidental registration rights to
S.R. One, Limited in connection with the bridge financing. S.R. One may demand
that their shares of common stock purchased upon exercise of the bridge warrant
be registered under the Securities Act. S.R. One may make such demand anytime
after one year and before three years after this offering. S.R. One has the
same incidental registration rights as SmithKline, described above.
Granted to Representatives
Finally, pursuant to a warrant agreement that we will enter into with each of
the representatives of the underwriters, we will agree, on or before the date
which is one year after the issuance of the representatives' warrants, to file
a registration statement under the Securities Act covering the common stock
issuable upon the
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<PAGE>
exercise of the representatives' warrants. Such registration statement will
allow the representatives of the underwriter to offer and resell such shares of
common stock to the public. We will cause the registration statement to remain
effective until the earlier of the time that all of the representatives'
warrants have been exercised and the date which is five years after the
issuance of such warrants. All expenses incurred in connection with the
registration of the shares issuable upon the exercise of the representatives'
warrants will be borne by us. Under the warrant agreement, the parties will
also be bound by standard indemnification and contribution provisions with
respect to the registration of the warrant shares issuable upon the exercise of
the representatives' warrants.
General
As of February 10, 1999, there were 5,084,281 shares of common stock subject
to registration rights. We will pay for all expenses incurred in connection
with these registrations, other than underwriting discounts and commissions.
The registration agreements also provide for customary indemnification and
contribution provisions involving the participants in any registration effected
pursuant thereto. The foregoing is only a summary of certain of the terms and
conditions of the registration rights agreements involving such parties. Copies
of the actual agreements have been filed with the Securities and Exchange
Commission as exhibits to the registration statement of which this prospectus
is a part.
TAKEOVER PROTECTION AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Delaware General Corporation Law (the "DGCL"), our
Amended and Restated Certificate of Incorporation (the "Charter") our Amended
and Restated By-Laws (the "By-Laws") and our stock option plans may have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt. This may be true even in circumstances where
a takeover attempt might result in payment of a premium over market price for
shares held by stockholders.
Following the completion of the offering, we will become subject to Section
203 of the DGCL. Section 203 prohibits, subject to certain exceptions, a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that such
stockholder became an interested stockholder. A business combination includes
mergers, asset sales and other transactions that may result in a financial
benefit to stockholders. A person will be deemed an interested stockholder
triggering this protection if the person together with any affiliates or
associates of such person, beneficially owns, directly or indirectly, 15% or
more of our outstanding voting stock. There are three exceptions to these
provisions. First, if our Board of Directors gives prior approval to either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder then the restrictions do not apply. Second,
the restrictions will not apply if, upon the consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of our outstanding voting stock.
Finally, the restrictions will not apply if, at the time of or following the
consummation of the transaction in which the stockholder became an interested
stockholder, our Board of Directors approves the business combination and
stockholders holding at least 66 2/3% of our outstanding voting stock not owned
by the interested stockholder authorize the business combination.
Upon completion of the offering, our Board of Directors will be divided into
three classes of directors each containing, as nearly as possible, an equal
number of directors. Directors within each class will serve three-year terms.
Approximately one-third of the directors will sit for election at each annual
meeting of our stockholders. All directors elected to our classified Board of
Directors serve until the election and qualification of their successors or
their earlier resignation or removal. The Board of Directors may create new
directorships and fill such positions so created. In addition, the Board of
Directors or its remaining members, even though
57
<PAGE>
less than a quorum may fill vacancies on the Board of Directors occurring for
any reason until the next annual election of directors. Members of the Board of
Directors may only be removed for cause. These provisions may have the effect
of deterring or delaying any attempt by any group to obtain control of us by a
proxy contest. For example, a third party would be required to have its
nominees elected at two separate annual meetings in order to elect a majority
of the members of the Board of Directors.
We may issue 5,000,000 shares of undesignated preferred stock. Under certain
circumstances, the issuance of preferred stock could be utilized as a method of
discouraging, delaying or preventing a change in control of our stock.
Our Charter provides that any action required or permitted to be taken by our
stockholders may be effected only at an annual or special meeting of
stockholders. Such action will not be permitted to be taken by written consent
in lieu of a meeting. Our Charter and the By-Laws also provide that special
meetings of stockholders may only be called by a majority of our Board of
Directors, our Chairman or our Chief Executive Officer. Stockholders will not
be permitted to call a special meeting or to require that our Board of
Directors call a special meeting of stockholders.
Our Charter provides that any director or the entire Board of Directors may
be removed only for cause and only upon the affirmative vote of holders of 80%
or more of the outstanding shares of our capital stock. Further, our Charter
provides that the amendment of this provision for removing directors for cause
may only be amended by the affirmative vote of at least 75% of the voting power
of all the then outstanding shares of our capital stock voting together as a
single class.
Our By-Laws establish an advance notice procedure for nomination, other than
by or at the direction of our Board of Directors, of candidates for election as
directors. Advance notice procedures also exist for other stockholder proposals
to be considered at annual or special meetings of stockholders. In general, we
must receive notice of intent to nominate a director or raise business at an
annual meeting not less than 60 nor more than 90 days prior to the scheduled
annual meeting. In the case of a special meeting called for the purpose of
electing directors, such notice of intent must be received not later than the
close of business on the fifth day following the day on which notice of the
date of the meeting was mailed. Such notice of intent must contain certain
specified information concerning the person to be nominated or the mater to be
brought before the meeting.
In addition, our By-Laws allow our Board of Directors to increase the number
of directors from time to time although a decrease in the number of directors
may not have the effect of shortening the term of any incumbent director. Our
By-Laws also grant the Board of Directors the authority to fill any vacancies
on the Board of Directors, including vacancies resulting from an increase in
the number of directors. Our Charter states that our By-Laws may be amended by
the stockholders only by the vote of not less than 80% of the outstanding
shares of stock entitled to vote upon the election of directors.
The provisions of the Charter and the By-Laws summarized in the preceding
paragraphs may have the effect of delaying, deferring or preventing a non-
negotiated merger or other business combination involving us. These provisions
are intended to encourage any person interested in acquiring us to negotiate
with and obtain the approval of our Board of Directors in connection with the
transaction. Certain of these provisions may, however, discourage our future
acquisition in a transaction not approved by our Board of Directors in which
stockholders might receive an attractive value for their shares or that a
substantial number or even a majority of our stockholders might believe to be
in their best interest. As a result, stockholders who desire to participate in
such a transaction may not have the opportunity to do so. Such provisions could
also discourage bids for our common stock at a premium, as well as create a
depressive effect on the market price of our common stock. See "Risk Factors--
Statute, Charter and By-laws May Delay or Prevent Acquisition of Careside."
58
<PAGE>
Our stock option plans, in certain circumstances, allow our Board of
Directors or a committee thereof to accelerate the vesting or exercise date of
any options granted thereunder. The ability to accelerate the vesting or
exercise date of options could be utilized as a method of discouraging,
delaying or preventing a change in control of our stock. See "Management--Stock
Option Plans."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, New York, New York.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we expect to have 7,884,281 shares of common
stock outstanding, assuming no exercise of outstanding options or warrants, or
8,304,281 shares if the underwriters' over-allotment is exercised in full. Of
these shares, the 2,800,000 shares of common stock sold in the offering will be
freely tradeable without restrictions or further registration under the
Securities Act, except that any shares purchased by our "affiliates", as that
term is defined under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 under the Securities Act. All of
the remaining outstanding shares of common stock are restricted securities
within the meaning of Rule 144 and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption from registration offered by Rule 144.
Holders of more than 95% of our restricted shares of common stock have agreed
(the "Lock-Up Agreements") not to sell or otherwise dispose of any of their
shares of common stock for a period of one year after completion of the
offering (the "Lock-Up Period"), without the prior written consent of
Fahnestock & Co. Inc., subject to certain limited exceptions. After the
expiration of the Lock-Up Period, or earlier upon the prior written consent of
Fahnestock, 5,084,281 shares of the common stock may be sold in the public
market pursuant to Rule 144.
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including a person who may be deemed to be our
affiliate, may sell within any three-month period a number of shares of common
stock that does not exceed a maximum number of shares. This maximum is equal to
the greater of 1% of the then outstanding shares of our common stock or the
average weekly trading volume in the common stock during the four calendar
weeks immediately preceding the sale. Sales under Rule 144 are also subject to
restrictions relating to manner of sale, notice and availability of current
public information about us. In addition, under Rule 144(k) of the Securities
Act, a person who is not our affiliate, has not been an affiliate of ours
within three months prior to the sale and has beneficially owned shares for at
least two years, would be entitled to sell such shares immediately without
regard to volume limitations, manner of sale provisions, notice or other
requirements of Rule 144.
Beginning 90 days after the date of this prospectus, certain shares issued or
issuable upon the exercise of options granted by us prior to the date of this
prospectus will also be eligible, subject to the Lock-Up Period, for sale in
the public market pursuant to Rule 701 under the Securities Act. Pursuant to
Rule 701, persons who purchase shares upon exercise of options granted under a
written compensatory plan or contract may sell such shares in reliance on Rule
144 without having to comply with the holding period requirements of Rule 144,
and in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice provisions of Rule 144. As of February
10, 1999, we have options outstanding to purchase 411,923 shares of common
stock which have not been exercised and which become exercisable at various
times in the future. Any shares issued upon the exercise of these options will
be eligible for sale pursuant to Rule 701.
We intend to file a Form S-8 registration statement under the Securities Act
approximately 180 days after the closing of the offering to register up to an
aggregate of 1,334,210 shares of common stock reserved for issuance under our
stock option plans and the employee stock purchase plan. See "Management--Stock
Option Plans" and "--Employee Stock Purchase Plan." Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale in the open market,
unless such options are subject to vesting restrictions or the Lock-Up
Agreements. As of February 10, 1999, options to purchase 411,923 shares of
common stock were outstanding and 932,287 shares of common stock remained
available for future grants under our stock option plans and issuance under the
employee stock purchase plan.
We previously issued warrants to purchase an aggregate of 724,853 shares of
common stock at exercise prices ranging $5.20 to $6.76 per share to Spencer
Trask Securities Incorporated. These warrants are
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<PAGE>
exercisable until three years after completion of the offering. The bridge
warrant issued to S.R. One, Limited will become exercisable on the earlier of
December 17, 1999 or six months after completion of the offering to purchase
such number of shares of common stock determined by dividing $750,000 by 85% of
the initial public offering price per share. The bridge warrant has an exercise
price of 85% of the initial public offering price and will expire on the
earlier of December 17, 2005 or four years after the completion of the
offering. The holders of the warrants and the bridge warrant are entitled to
certain registration rights with respect to the shares issuable upon exercise
of such warrants. These shares may be sold without restriction in the public
market upon registration, and with respect to more than 95% of these shares,
after the lock-up period expires.
In connection with the offering, the Company has agreed to issue to the
representatives of the underwriters warrants to purchase 280,000 shares of
common stock. This number is equal to 10% of the number of shares of common
stock being offered by this prospectus, excluding over-allotment shares. The
representatives' warrants will be exercisable at any time during the four-year
period commencing one year after the date of their issuance. The common stock
issued to the representatives will be freely tradeable.
Prior to the offering, there has been no market for our common stock and
there can be no assurance that a significant public market for the common stock
will develop or be sustained after the offering. Future sales of substantial
amounts of common stock, including shares issued upon exercise of outstanding
options and warrants in the public market after the offering, or the perception
that such sales may occur, could adversely affect market prices prevailing from
time to time and could impair our ability to raise capital through the sale of
our securities.
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<PAGE>
UNDERWRITING
The underwriters named below, for whom Fahnestock & Co. Inc., Wedbush Morgan
Securities, Inc. and Southeast Research Partners, Inc. are acting as the
representatives, have severally agreed, subject to the terms and conditions
contained in an underwriting agreement, to purchase from us, and we have agreed
to sell to each underwriter, the aggregate number of shares of common stock
indicated below opposite the name of such underwriter at the initial public
offering price less the underwriting discount set forth below and on the cover
page of this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME OF UNDERWRITER PURCHASED
- ------------------- ---------
<S> <C>
Fahnestock & Co. Inc..................................................
Wedbush Morgan Securities, Inc. ......................................
Southeast Research Partners, Inc......................................
---
TOTAL...............................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions and that the underwriters are committed to
purchase all of the shares, other than those covered by the over-allotment
option described below, if any are purchased. The underwriting agreement also
provides that we will indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and will contribute to payments
which the underwriters may be required to make in respect thereof.
The representatives of the underwriters have advised us that the underwriters
propose to offer the common stock directly to the public initially at the
public offering price set forth on the cover page of this prospectus and to
certain dealers, who may include the underwriters, at such public offering
price less a selling concession not to exceed $ per share. The underwriters
may allow, and such dealers may reallow, a concession of not more than $ per
share to certain other dealers. After the offering, the offering price, the
concession to certain dealers and other selling terms may be changed by the
representatives of the underwriters. The underwriters have agreed not to
confirm sales of common stock in excess of 5% of the total amount of shares
offered hereby to any account over which they exercise discretionary authority.
The underwriters have also agreed not to confirm any such sales without the
prior written approval of the customer.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to a maximum of 420,000
additional shares of common stock solely to cover over-allotments, if any, at
the initial public offering price less the underwriting discount set forth
herein. If the underwriters exercise the over-allotment option, each
underwriter will be committed to purchase a proportionate number of the
additional shares based on its relative proportion of shares to be purchased by
it shown in the preceding table.
Without the prior written consent of Fahnestock, holders of more than 95% of
our shares of common stock, certain option and warrant holders, including our
officers and directors, and we, are not permitted to offer, pledge, sell,
contract to sell or otherwise transfer or dispose of, directly or indirectly,
our securities until after at least 360 days after the closing of the offering.
Such prohibition does not apply to our grant of options under our stock option
plans, our issuance of warrants to representatives of the underwriters or to
the potential issuance of our common stock upon exercise of the over-allotment
option.
The following table sets forth the amount of the underwriting discount and
the nature of the compensation to be paid to the underwriters for each share of
common stock and in total. Such amounts are shown assuming both no exercise and
full exercise of the underwriters' over-allotment option.
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<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TO BE PAID TO UNDERWRITERS
---------------------------------------------------------------
NO EXERCISE OF OVER- FULL EXERCISE OF OVER-
ALLOTMENT OPTION ALLOTMENT OPTION
------------------------------- -------------------------------
PER SHARE TOTAL PER SHARE TOTAL
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Underwriting Discount...
Representatives'
Warrants(1)............ 1/10th Warrant 280,000 Warrants 1/10th Warrant 280,000 Warrants
Non-accountable Expense
Allowance(2)........... N/A $250,000 N/A $250,000
</TABLE>
- --------
(1) In connection with the offering, we have agreed to issue warrants to the
representatives of the underwriters to purchase a number of shares of
common stock equal to ten percent (10%) of the number of shares of common
stock being offered hereby, excluding over-allotment shares. The
representatives' warrants will be exercisable during the four-year period
commencing one year after the date of their issuance, at an exercise price
equal to one hundred twenty percent (120%) of the initial public offering
price set forth on the cover page of this prospectus. The representatives'
warrants may not be transferred, except to affiliates of the
representatives of the underwriters. The representatives of the
underwriters are entitled to certain rights with respect to the
registration of shares of the common stock issuable upon the exercise of
the representatives' warrants for offer and sale to the public under the
Securities Act. See "Description of Capital Stock--Registration Rights." To
the extent that the representatives of the underwriters realize any gain
from the resale of the shares issuable upon the exercise of such warrants,
such gain may be deemed additional underwriting compensation.
(2) We have also agreed to pay Fahnestock a non-accountable expense allowance
equal to 1% of the gross proceeds of the offering, up to a maximum of
$250,000, of which $60,000 has been paid to date.
We will enter into an investment banking agreement with Fahnestock which,
among other things, will grant Fahnestock a right of first refusal in
connection with any investment banking services we require for a period of 18
months after the completion of the offering. In addition, pursuant to a letter
of intent executed in connection with this offering, Fahnestock has the right
to nominate one person to our Board of Directors who is acceptable to us. Such
nominee may be a director, officer, partner, employee or affiliate of
Fahnestock. As of February 10, 1999, Fahnestock has not exercised its right to
nominate any person to our Board of Directors. However, Fahnestock is expected
to exercise its right and nominate a person to our Board of Directors after the
closing of the offering. Fahnestock also has the right to have one
representative observe all meetings of our Board of Directors and to have such
person receive all information provided to our Board of Directors for a period
of 18 months after the closing of the offering.
The following table sets forth an itemization of all expenses we will pay in
connection with the issuance and distribution of the securities being
registered. Except for the SEC Registration Fee, the Nasdaq National Market
Listing Fee and the NASD Fee, the amounts listed below are estimates.
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<PAGE>
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- ----------
<S> <C>
SEC Registration Fee................................................ $ 9,174
Nasdaq National Market Listing Fee.................................. 72,875
NASD Fee............................................................ 3,720
Printing and engraving fees......................................... 150,000
Registrant's counsel fees and expenses.............................. 320,000
Accounting fees and expenses........................................ 125,000
Spencer Trask Fee................................................... 100,000
Underwriters' Expenses.............................................. 250,000
Blue Sky expenses and counsel fees.................................. 25,000
Transfer agent and registrar fees................................... 8,000
Miscellaneous....................................................... 36,231
----------
TOTAL............................................................. $1,100,000
==========
</TABLE>
Prior to the offering, there has been no public market for our common stock.
We will negotiate the initial public offering price for our common stock with
the representatives of the underwriters. Such public offering price will not
necessarily bear any relationship to our assets, book value, revenues or other
established criteria of value. The initial public offering price should not be
considered to be indicative of our actual value. Among the factors to be
considered in determining the initial public offering price, in addition to
prevailing market conditions, will be the prospects for the business and
industry in which we compete, an assessment of our management, our capital
structure, our past and present operations, our prospects for future earnings
and other factors deemed relevant. There can be no assurance that an active
trading market will develop for our common stock or that the prices at which
our common stock will sell in the public market after the offering will not be
lower than the price at which it will be sold in the offering.
In connection with the offering, certain underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of our common stock.
Such transactions may include stabilization transactions effected in accordance
with Regulation M of the Securities Exchange Act of 1934, pursuant to which
such persons may bid for or purchase common stock for the purpose of pegging,
fixing or maintaining the price of our common stock at a level that is higher
than the market would dictate in the absence of such transactions.
The underwriters may also create a short position for the account of the
underwriters by selling more shares of common stock in connection with the
offering than they are committed to purchase from the company, and in such case
may purchase common stock in the open market following the completion of the
offering to cover all or a portion of such short position. The underwriters may
also cover all or a portion of such short position, up to 420,000 shares of
common stock, by exercising the over-allotment option described herein.
In addition, the representatives of the underwriters may also impose a
"penalty bid" under contractual arrangements with the underwriters whereby the
representatives may reclaim from an underwriter, or dealer participating in the
offering, for the account of other underwriters, the selling concession with
respect to common stock that is distributed in the offering but subsequently
purchased for the account of the underwriters in the open market.
In general, any of the transactions described above may result in the
maintenance of the price of our common stock at a level above that which might
otherwise prevail in the absence of such transactions. We and the underwriters
make no representation or prediction as to the direction or magnitude of any
effect that such transactions may have on the price of our common stock. In
addition, we and the underwriters make no representation that the
representatives of the underwriters or the underwriters, as the case may be,
will engage in such transactions or that such transactions, once commenced,
will not be discontinued without notice.
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<PAGE>
Spencer Trask Securities Incorporated is not participating as an underwriter
or member of the selling group in the offering. However, we will pay Spencer
Trask a $100,000 fee upon completion of the offering pursuant to a placement
agency agreement we entered into with Spencer Trask in connection with our 1998
private placement of common stock. See "Certain Transactions--Financing
Activities."
LEGAL MATTERS
The validity of shares of common stock offered hereby will be passed upon for
us by Pepper Hamilton LLP. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts has acted as counsel for the underwriters in connection
with the offering.
EXPERTS
The audited financial statements included in this prospectus and elsewhere in
the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of that firm as
experts in giving their reports. Reference is made to their report contained
elsewhere in this prospectus on us which contains an explanatory paragraph
regarding our ability to continue as a going concern.
The statements in this prospectus under the captions "Risk Factors -- Our
Proprietary Technology is a Crucial Part of Our Business -- We Do Not Have Any
Patents on Our Proprietary Technology," "Risk Factors--Our Technology May
Infringe on the Proprietary Rights of Third Parties" and "Business -- Patents
and Proprietary Rights" relating to patent matters have been reviewed and
approved by Oppenheimer Wolff & Donnelly LLP, Los Angeles, California, patent
counsel to Careside, as experts on such matters, and are included herein in
reliance upon that review and approval.
WHERE YOU CAN GET MORE INFORMATION
Our fiscal year ends on December 31. We will file annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any reports, statements or other
information on file at the SEC's public reference room in Washington, D.C. You
can request copies of those documents, upon payment of a duplicating fee, by
writing to the SEC.
We have filed a registration statement on Form S-1 with the SEC. This
prospectus, which forms a part of the registration statement, does not contain
all of the information included in the registration statement. Certain
information is omitted. You should refer to the registration statement and its
exhibits. With respect to references made in this prospectus to any contract or
other document relating to us, such references are not necessarily complete.
You should refer to the exhibits attached to the registration statement for
copies of the actual contract or document. You may review a copy of the
registration statement at the SEC's public reference room in Washington, D.C.,
and at the SEC's regional offices in Chicago, Illinois and New York, New York.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our SEC filings, including the registration
statement, can also be reviewed by accessing the SEC's Internet site at
http://www.sec.gov.
65
<PAGE>
CARESIDE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CARESIDE, INC.:
Report of Independent Public Accountants................................. F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Stockholders' Equity (Deficit)............................. F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
PREDECESSOR BUSINESS:
Report of Independent Public Accountants................................. F-14
Statement of Operations.................................................. F-15
Notes to Statement of Operations......................................... F-16
</TABLE>
F-1
<PAGE>
After the recapitalization referred to in Note 2 to the Financial Statements
is effected, we will be in a position to render the following report.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
January 29, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Careside, Inc.:
We have audited the accompanying balance sheets of Careside, Inc. (a Delaware
corporation in the development stage) as of December 31, 1997 and 1998, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the period from inception (July 10, 1996) to December 31, 1996, the years
ended December 31, 1997 and 1998, and the period from inception (July 10, 1996)
to December 31, 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 Careside, Inc. as of December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from inception (July 10, 1996) to December 31, 1996, the years ended
December 31, 1997 and 1998, and the period from inception (July 10, 1996) to
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company will require significant funding to continue
operations, which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern.
Philadelphia, Pa.,
January 20, 1999 (except for the
recapitalization discussed in Note 2, as
to which the date is , 1999)
F-2
<PAGE>
CARESIDE, INC.
(A DEVELOPMENT-STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 1,237,149 $ 3,926,603
Prepaid expenses and other........................ 226,580 251,698
----------- ------------
Total current assets............................ 1,463,729 4,178,301
PROPERTY AND EQUIPMENT, net......................... 1,578,727 3,216,959
DEFERRED OFFERING COSTS............................. -- 498,443
DEPOSITS............................................ 97,767 17,700
----------- ------------
$ 3,140,223 $ 7,911,403
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................. $ -- $ 186,998
Accounts payable.................................. 492,985 1,369,889
Accrued expenses.................................. 209,631 160,439
----------- ------------
Total current liabilities....................... 702,616 1,717,326
----------- ------------
LONG-TERM DEBT...................................... -- 2,044,932
----------- ------------
COMMITMENTS (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued.......................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 3,365,385 and 5,084,281 shares issued
and outstanding.................................. 33,654 50,843
Additional paid-in capital........................ 10,372,907 21,003,545
Deficit accumulated during development stage...... (7,968,954) (16,905,243)
----------- ------------
Total stockholders' equity...................... 2,437,607 4,149,145
----------- ------------
$ 3,140,223 $ 7,911,403
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CARESIDE, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM FROM
INCEPTION FOR THE YEAR INCEPTION
(JULY 10, 1996) ENDED (JULY 10, 1996)
THROUGH DECEMBER 31, THROUGH
DECEMBER 31, ------------------------ DECEMBER 31,
1996 1997 1998 1998
--------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
OPERATING EXPENSES:
Research and
development........... $ 1,561,847 $ 5,895,465 $ 8,297,974 $ 15,755,286
General and
administrative........ 55,515 640,574 850,129 1,546,218
----------- ----------- ----------- ------------
Operating loss......... (1,617,362) (6,536,039) (9,148,103) (17,301,504)
INTEREST INCOME......... -- 213,585 234,089 447,674
INTEREST EXPENSE........ (20,809) (8,329) (22,275) (51,413)
----------- ----------- ----------- ------------
NET LOSS................ $(1,638,171) $(6,330,783) $(8,936,289) $(16,905,243)
=========== =========== =========== ============
BASIC NET LOSS PER
SHARE.................. $ (2.25) $ (2.04) $ (1.93)
=========== =========== ===========
SHARES USED IN COMPUTING
BASIC NET LOSS PER
SHARE 728,465 3,098,980 4,629,916
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CARESIDE, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL STOCK DURING TOTAL
----------------- PAID-IN SUBSCRIPTION DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE STAGE EQUITY (DEFICIT)
--------- ------- ----------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 10, 1996
(inception)............ -- $ -- $ -- $ -- $ -- $ --
Shares issued to
founders and
management............ 659,342 6,593 (6,593) -- -- --
Shares issued to
SmithKline Beecham
Corporation in
connection with asset
purchase.............. 34,702 347 571,006 -- -- 571,353
Sale of shares to
Exigent Partners,
L.P................... 557,600 5,576 93,419 (98,995) -- --
Shares issued to
investment banker in
connection with equity
financing............. 30,173 302 (302) -- -- --
Shares issued to
SmithKline Beecham
Corporation pursuant
to antidilution
agreement............. 30,936 310 (310) -- -- --
Net loss............... -- -- -- -- (1,638,171) (1,638,171)
--------- ------- ----------- ------- ------------ -----------
BALANCE, DECEMBER 31,
1996................... 1,312,753 13,128 657,220 (98,995) (1,638,171) (1,066,818)
Shares issued in
connection with
private placement, net
of expenses of
$1,291,772 1,923,077 19,231 8,688,998 -- -- 8,708,229
Shares issued to
SmithKline Beecham
Corporation upon
conversion of note
payable............... 129,555 1,295 1,026,689 -- -- 1,027,984
Payment of stock
subscription.......... -- -- -- 98,995 -- 98,995
Net loss............... -- -- -- -- (6,330,783) (6,330,783)
--------- ------- ----------- ------- ------------ -----------
BALANCE, DECEMBER 31,
1997................... 3,365,385 33,654 10,372,907 -- (7,968,954) 2,437,607
Shares issued in
connection with
private placement, net
of expenses of
$1,302,029............ 1,701,183 17,012 10,180,959 -- -- 10,197,971
Shares issued in
connection with
exercise of stock
options............... 17,713 177 119,565 -- -- 119,742
Value of warrants
issued in connection
with bridge
financing............. -- -- 330,114 -- -- 330,114
Net loss............... -- -- -- -- (8,936,289) (8,936,289)
--------- ------- ----------- ------- ------------ -----------
BALANCE, DECEMBER 31,
1998 .................. 5,084,281 $50,843 $21,003,545 $ -- $(16,905,243) $ 4,149,145
========= ======= =========== ======= ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CARESIDE, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM FROM
INCEPTION INCEPTION
(JULY 10, 1996) FOR THE YEAR ENDED (JULY 10, 1996)
THROUGH DECEMBER 31, THROUGH
DECEMBER 31, ------------------------ DECEMBER 31,
1996 1997 1998 1998
--------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............... $(1,638,171) $(6,330,783) $(8,936,289) $(16,905,243)
Adjustments to
reconcile net loss to
net cash used in
operating activities--
Depreciation.......... 12,275 145,858 367,231 525,364
Imputed interest on
note payable......... -- 8,329 -- 8,329
Amortization of debt
discount............. -- -- 20,960 20,960
Changes in assets and
liabilities--
Increase in prepaid
expenses and other... (15,840) (210,740) (25,118) (251,698)
Decrease (increase) in
deposits............. (102,700) 19,933 80,067 (2,700)
Increase in accounts
payable.............. 284,079 208,906 876,904 1,369,889
Increase (decrease) in
accrued expenses..... 575,301 (346,014) (49,192) 180,095
----------- ----------- ----------- ------------
Net cash used in
operating
activities........... (885,056) (6,504,511) (7,665,437) (15,055,004)
----------- ----------- ----------- ------------
INVESTING ACTIVITIES:
Purchases of property
and equipment......... (344,733) (888,510) (2,005,463) (3,238,706)
----------- ----------- ----------- ------------
FINANCING ACTIVITIES:
Net borrowings
(repayments) on line
of credit............. 400,000 (400,000) -- --
Proceeds from issuance
of notes.............. 1,000,000 -- 2,541,084 3,541,084
Deferred offering
costs................. (191,906) -- (498,443) (690,349)
Proceeds from the
issuance of Common
stock................. -- 8,900,134 10,317,713 19,217,847
Payment of stock
subscription.......... -- 98,995 -- 98,995
Cash received from
SmithKline Beecham
Corporation in
connection with asset
purchase.............. 52,736 -- -- 52,736
----------- ----------- ----------- ------------
Net cash provided by
financing
activities........... 1,260,830 8,599,129 12,360,354 22,220,313
NET INCREASE IN CASH AND
CASH EQUIVALENTS....... 31,041 1,206,108 2,689,454 3,926,603
CASH AND CASH
EQUIVALENTS, BEGINNING
OF YEAR................ -- 31,041 1,237,149 --
----------- ----------- ----------- ------------
CASH AND CASH
EQUIVALENTS, END OF
YEAR................... $ 31,041 $ 1,237,149 $ 3,926,603 $ 3,926,603
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CARESIDE, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. CARESIDE:
BACKGROUND
Careside, Inc., formerly Exigent Diagnostics, Inc., is focused on designing
products intended to perform routine diagnostic blood tests in doctors'
offices, hospital rooms, patient homes or anywhere a patient is receiving
medical attention. Careside's first product in development is a compact
portable device with related disposables that performs chemistry,
electrochemistry, immunochemistry and coagulation testing.
DEVELOPMENT-STAGE RISKS AND LIQUIDITY
Careside was incorporated in July 1996 to acquire an ongoing, point-of-care
("POC") testing, development-stage product from SmithKline Beecham Corporation
and its affiliates ("SmithKline") and to complete the development of and to
manufacture, market and distribute POC diagnostic products. Since its
inception, Careside has generated no revenues and incurred significant losses.
Careside anticipates incurring additional losses over at least the next several
years, and such losses are expected to increase as Careside expands its
research and development activities. Substantial financing will be needed by
Careside to fund its operations and to commercially develop its products. The
ability of Careside to commercialize its products will depend on, among other
things, the relative cost to the customer of Careside's products compared to
alternative products, its ability to obtain necessary regulatory approvals and
to manufacture the products in accordance with Good Manufacturing Practices,
and its ability to market and distribute its products. There can be no
assurance that Careside's research and development efforts will be successful
or that any products developed by Careside will receive regulatory clearance or
be profitable in the marketplace.
The accompanying financial statements have been prepared in conformity with
principles of accounting applicable to a going concern. These principles
contemplate the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the accompanying financial
statements, Careside incurred a net loss of $8,936,289 and used cash for
operating activities of $7,665,437 for the year ended December 31, 1998.
Management believes that Careside's existing sources of liquidity together with
the proceeds to be received from its initial public offering (the "Offering")
contemplated in this prospectus will be sufficient to fund its planned
operations into 2000. There can be no assurance that the Offering will be
successful.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 expenses during the reporting period. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
Careside considers all highly liquid investments consisting of purchases with
an original maturity of three months or less to be cash equivalents.
F-7
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment capitalized
under capital leases are recorded at the present value of the minimum lease
payments due over the lease term. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives of the related
assets or the lease term, whichever is shorter. Careside uses lives of three to
five years for research and manufacturing equipment and five to seven years for
office equipment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, prepaid expenses and other current assets,
accounts payable and accrued expenses are reflected in the accompanying
financial statements at fair value due to the short-term nature of those
instruments. The carrying amount of long-term debt approximates fair value on
the balance sheet dates.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
INCOME TAXES
Careside follows Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Under SFAS No. 109, the liability method is
used in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax
rates that are expected to be in effect when the differences reverse.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Careside applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock
options. Careside follows the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits pro forma disclosure
of the net loss using a fair value-based method of accounting for employee
stock option plans (see Note 8).
NET LOSS PER COMMON SHARE
Careside has presented net loss per share pursuant to SFAS No. 128, "Earnings
per Share," and the Securities and Exchange Commission Staff Accounting
Bulletin No. 98. Net loss per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period.
Basic loss per share was computed by dividing net loss applicable to common
shareholders by the weighted average number of shares of Common stock
outstanding during the period. Dilutive loss per share has not been presented,
since the impact on loss per share using the treasury stock method is anti-
dilutive due to Careside's losses.
RECAPITALIZATION
In 1999, Careside's stockholders approved a 1-for-5.2 reverse stock
split of Careside's Common stock. All references in the accompanying financial
statements to the number of shares and per share amounts have been
retroactively restated to reflect the reverse stock split.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement requires companies to
classify items of other comprehensive income
F-8
<PAGE>
separately from retained earnings and additional paid-in capital in the
stockholders' equity section of the balance sheet. SFAS No. 130 is effective
for financial statements issued for fiscal years beginning after December 15,
1997. Management believes that SFAS No. 130 will not have a material adverse
effect on Careside's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective
for fiscal years beginning after December 15, 1997. Management is currently
evaluating the need to make additional disclosures under SFAS No. 131. However,
this statement will not have any effect on Careside's reported financial
position or results of operations.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Laboratory equipment................................ $1,280,663 $3,264,286
Leasehold improvements.............................. 371,239 371,239
Computer and office equipment....................... 84,958 106,798
---------- ----------
1,736,860 3,742,323
Less-Accumulated depreciation and amortization...... (158,133) (525,364)
---------- ----------
$1,578,727 $3,216,959
========== ==========
</TABLE>
Depreciation and amortization expense for the period from inception (July 10,
1996) through December 31, 1996, the years ended 1997 and 1998, and the period
from inception (July 10, 1996) through December 31, 1998 was $12,275, $145,858,
$367,231 and $525,364, respectively.
4. INCOME TAXES:
At December 31, 1998, Careside had net operating loss carryforwards for
federal income tax purposes of approximately $2,148,000. In addition, Careside
has federal research and development credit carryforwards of approximately
$225,000. The net operating loss and credit carryforwards begin to expire in
2011 and are subject to review and possible adjustment by the Internal Revenue
Service. The Tax Reform Act of 1986 contains provisions that may limit the net
operating loss carryforwards available to be used in any given year in the
event of significant changes in ownership interest.
The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards........................ $ 233,188 $ 730,438
Research and development credit carryforwards........... 128,623 224,775
Capitalized research and development.................... 2,219,926 4,395,926
Start-up costs.......................................... 185,906 419,936
Nondeductible accruals.................................. 8,779 6,663
Nondeductible depreciation and amortization............. 53,765 178,623
Valuation allowance..................................... (2,830,187) (5,956,361)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
Due to the uncertainty surrounding the realization of the deferred tax asset,
Careside has provided a full valuation allowance against this asset.
F-9
<PAGE>
5. COMMON STOCK PRIVATE PLACEMENTS:
In March 1997, Careside completed a private placement (the "1997 Private
Placement") of 1,923,077 shares of its Common stock at $5.20 per share. The
1997 Private Placement raised approximately $8,800,000, net of the placement
agent's commission and offering costs. In connection with the 1997 Private
Placement, the placement agent and its affiliates received warrants to purchase
384,615 shares of Careside's Common stock at $5.20 per share. These warrants
are currently exercisable and expire on the later of seven years from the date
of issuance or three years from the closing the Offering.
In June 1998, Careside completed a private placement (the "1998 Private
Placement") of 1,701,183 shares of its Common stock at $6.76 per share, which
generated net proceeds of approximately $10,200,000. In connection with the
1998 Private Placement, the placement agent and its affiliates received
warrants to purchase 340,238 shares of Careside's Common stock at $6.76 per
share. These warrants are currently exercisable and expire on the later of
seven years from the date of issuance or three years from the closing of the
Offering. In connection with providing financial consulting services for the
1998 Private Placement, Careside granted an option to purchase 1,154 shares of
Common stock at $.05 per share to an entity owned by a director of Careside.
6. TRANSACTIONS WITH SMITHKLINE:
On November 7, 1996, Careside and SmithKline entered into an Asset Purchase
Agreement (the "Agreement") under which Careside acquired certain assets and
intangible property related to SmithKline's POC business in exchange for a 5%
equity interest in Careside. In connection with the Agreement, SmithKline
loaned Careside $1,000,000, which was converted into an additional 2% equity
interest in Careside upon the closing of the 1997 Private Placement (see Note
5). The Agreement provided for certain antidilution protection, which required
Careside to issue additional shares of Common stock to SmithKline such that it
maintained its 7% ownership interest, until a defined equity financing was
completed. Upon the closing of the 1997 Private Placement, the antidilution
protection lapsed and SmithKline owned 195,193 shares, representing 5.8% of the
then outstanding Common stock. The tangible property received in connection
with the Agreement was as follows:
<TABLE>
<S> <C>
Cash........................................................... $ 52,736
Property and equipment......................................... 503,617
Deposit........................................................ 15,000
--------
$571,353
========
</TABLE>
In December 1998, Careside entered into an agreement with an affiliate of
SmithKline for up to $3,000,000 of bridge financing (see Note 7).
7. DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- ----------
<S> <C> <C>
Note payable, interest at 8%, $1,500,000 due on January
31, 1999,
net of unamortized discount of $309,154................ $ -- $1,190,846
Equipment loan due to finance company, interest at 14%,
due in 47
remaining monthly installments of principal and
interest
of $26,836, with a final payment of $133,489 in
December 2002.......................................... -- 1,041,084
------- ----------
2,231,930
Less--Current portion................................... -- (186,998)
------- ----------
Long-term debt.......................................... $ -- $2,044,932
======= ==========
</TABLE>
In connection with the Agreement (see Note 6), Careside borrowed $1,000,000
from SmithKline. In connection with closing the 1997 Private Placement (see
Note 5), 129,555 shares of Common stock were issued to SmithKline upon the
conversion of the $1,000,000 note plus accrued interest of $27,985.
F-10
<PAGE>
In December 1996, Careside established a $1,000,000 line of credit facility
with a bank collateralized by a standby letter of credit guaranteed by Exigent
Partners, L.P. ("Exigent Partners"), whose partners are the founders of
Careside and an affiliate of the private placement agent. In consideration for
the establishment of the standby letter of credit, Exigent Partners was issued
557,600 shares of Common stock at $0.18 per share. The balance outstanding
under the line at December 31, 1996 was $400,000, with interest at 9.25% per
year. The line was repaid in connection with the 1997 Private Placement.
In December 1998, Careside entered into a $2,500,000 facility with an
equipment lease financing company. Borrowings under the facility will be
evidenced as separate loans and will be secured by specific equipment assets.
Each equipment loan will have a 48-month term and bears interest at
approximately 14% per year, adjusted for an index rate based on 48-month U.S.
Treasury Notes at the time of borrowing.
In December 1998, Careside entered into an agreement with an affiliate of
SmithKline for up to $3,000,000 of bridge financing, of which $1,500,000 was
drawn on December 28, 1998. The remaining $1,500,000 may be drawn, at
Careside's option, prior to January 31, 1999. The outstanding principal under
the bridge financing matures upon the earliest of the completion of the
Offering, a private equity financing of at least $8,000,000 or January 31,
2000. Careside issued a warrant (the "Bridge Warrant") in connection with the
bridge financing. The Bridge Warrant is exercisable into that number of shares
of Common stock which is equal to $750,000 divided by 85% of the Offering price
per share (98,039 shares based on an assumed Offering price of $9.00 per
share). The Bridge Warrant has an exercise price equal to 85% of the Offering
price. If the Offering does not occur, the Bridge Warrant is exercisable into
103,022 shares of Common stock at an exercise price of $7.28 per share. If the
outstanding principal under the bridge financing is not repaid by June 30,
1999, the Bridge Warrant becomes exercisable for twice as many shares of Common
stock. The Bridge Warrant becomes exercisable on the earlier of December 1999
or six months after the completion of the Offering and expires on the earlier
of December 2005 or four years after the completion of the Offering. Using the
Black-Scholes model, the estimated fair value of the Bridge Warrant was
calculated at $330,114 and was recorded as a reduction in the carrying amount
of the bridge note, with a corresponding increase in stockholders' equity. The
discount on the bridge note is being amortized over the estimated term of the
note as additional interest expense.
Future maturities of debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999......................................................... $ 186,998
2000......................................................... 1,715,141
2001......................................................... 247,520
2002......................................................... 391,425
----------
2,541,084
Less--Unamortized discount................................... (309,154)
----------
$2,231,930
==========
</TABLE>
Careside borrowed the remaining $1,500,000 under the Bridge Financing in
January 1999.
8. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS
Careside has adopted the 1996 Incentive and Non-Qualified Stock Option Plan
and the 1996 Key Executive Stock Option Plan (together, the "Plans"), which
provide for the granting of options to purchase up to 576,923 shares of Common
stock to directors, officers, consultants and employees of Careside. The number
of options to be granted and the option prices are determined by the Board of
Directors in accordance with the terms of the Plans. Each option expires on
such date as the Board of Directors may determine.
F-11
<PAGE>
For purposes of SFAS No. 123 disclosure requirements, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model using the following assumptions for options granted during 1997
and 1998: weighted average risk-free interest rate of 6.41% and 5.56%; expected
weighted average life of 6.7 and 7.0 years; dividend yield of zero; and
volatility of zero. The weighted average fair value of each option granted
during 1997 and 1998 was $1.72 and $2.20, respectively. Had the compensation
cost of these options been recorded for the year ended December 31, 1997 and
1998, the Company's net loss would have increased by approximately $28,000 and
$316,000, respectively.
Information with respect to options under the Plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------
AVAILABLE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE PRICE
--------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, inception (July
10, 1996)................ -- -- $ -- $ --
Authorized.............. 576,923 -- -- --
-------- ------- ---------- ----------
Balance, December 31,
1996..................... 576,923 -- -- --
Granted................. (317,163) 317,163 .05--7.44 1,741,123
-------- ------- ---------- ----------
Balance, December 31,
1997..................... 259,760 317,163 .05--7.44 1,741,123
Granted................. (113,146) 113,146 6.76--8.00 772,367
Cancelled............... 673 (673) 5.20 (3,500)
Exercised............... -- (17,713) 6.76 (119,742)
-------- ------- ---------- ----------
Balance, December 31,
1998..................... 147,287 411,923 $.05--8.00 $2,390,248
======== ======= ========== ==========
</TABLE>
As of December 31, 1998, 202,580 options were exercisable at prices ranging
from $.05 to $8.00 per share, with a weighted average exercise price of $5.59
per share. At December 31, 1998, the aggregate exercise price of these options
was $1,131,732.
STOCK WARRANTS
The following table summarizes outstanding warrants at December 31, 1998:
<TABLE>
<CAPTION>
TYPE OF OUTSTANDING EXERCISE
WARRANTS WARRANTS PRICE ISSUANCE DATE
-------- ----------- -------- -------------
<S> <C> <C> <C>
Common stock 384,615 $5.20 February 1997
Common stock 340,238 $6.76 April 1998
Common stock 98,039 $7.65 December 1998
-------
822,892
=======
</TABLE>
The warrants issued in March 1997 and June 1998 are currently exercisable and
expire on the later of seven years from the date of issuance or three years
from the closing of the Offering. The number of warrants outstanding and the
exercise price of the Bridge Warrant issued in December 1998 is based on an
assumed Offering price of $9.00 per share. If the outstanding principal under
the bridge financing is not repaid by June 30, 1999, the Bridge Warrant becomes
exercisable for twice as many shares of Common stock. The Bridge Warrant
becomes exercisable on the earlier of December 1999 or six months after the
completion of the Offering and expires on the earlier of December 2005 or four
years after the completion of the Offering.
F-12
<PAGE>
9. COMMITMENTS:
LEASES
Careside leases an office and laboratory facility under a noncancelable
operating lease. Rent expense for the period from inception (July 10, 1996)
through December 31, 1996, the years ended 1997 and 1998, and the period from
inception (July 10, 1996) through December 31, 1998 was $26,126, $156,756,
$156,756 and $339,638, respectively. Future minimum rental payments under these
leases at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1999............................................................ 167,440
2000............................................................ 177,040
2001............................................................ 152,200
--------
$496,680
========
</TABLE>
COLLABORATIVE ARRANGEMENTS
Careside has utilized strategic partners with specific design expertise and
state-of-the-art technology in order to develop the Careside system rapidly and
on a cost-effective basis. Careside has agreements with (i) Fuji Photo Film
Co., Ltd. for the supply of its dry film based chemistry reagents during the
Careside system's development stage, (ii) Diagnostic Reagents, Inc. to supply
immunochemistry reagents and technology during the Careside system's
development stage, (iii) International Technidyne Corporation for the joint
development of coagulation reagents and (iv) UMM Electronics, Inc. to design
and manufacture the CareSide Analyzer. In addition, Careside contracted with
Hauser, Inc. for the design of the Careside system and with Battelle Memorial
Institute for the design of the system's disposable test cartridges and their
automated assembly manufacturing system. Careside's agreements with its
strategic partners do not obligate Careside to any minimum purchase
commitments.
EMPLOYMENT AGREEMENTS
Careside has entered into three-year renewable employment agreements with
three of its executive officers that provide for aggregate annual compensation
of approximately $539,000.
10.RETIREMENT PLAN:
Careside maintains a 401(k) profit sharing plan on behalf of its employees.
Participation in the plan is voluntary and eligible employees, as defined, may
contribute up to 15% of their compensation to the plan. Careside matches 50% of
the employee's contribution up to 4% of an employee's compensation. Careside's
contributions were zero, $32,315, $34,657 and $66,972 for the period from
inception (July 10, 1996) through December 31, 1996, the years ended 1997 and
1998, and the period from inception (July 10, 1996) through December 31, 1998,
respectively.
F-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Careside, Inc:
We have audited the accompanying statement of operations for the ten months
ended October 31, 1996 of the Predecessor Business (see Note 1). This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The statement of operations has been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Form S-1 filing of Careside, Inc.) as described in Note 1 and
is not intended to be a complete presentation of the financial results of the
Predecessor Business.
In our opinion, the statement of operations referred to above presents
fairly, in all material respects, the results of operations of the Predecessor
Business for the ten months ended October 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
October 16, 1998
F-14
<PAGE>
PREDECESSOR BUSINESS (NOTE 1)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
OCTOBER 31,
1996
-----------
<S> <C>
OPERATING EXPENSES:
Research and development........................................ $ 3,054,503
General and administrative...................................... 224,399
-----------
NET LOSS.......................................................... $(3,278,902)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-15
<PAGE>
PREDECESSOR BUSINESS
NOTES TO STATEMENT OF OPERATIONS
1.BASIS OF PRESENTATION:
Careside, Inc. was incorporated in Delaware on July 12, 1996, and had no
operations until the purchase of certain assets from SmithKline Beecham
Corporation ("SmithKline") on November 7, 1996. The assets were acquired in
exchange for an equity interest in Careside. The assets acquired are referred
to as the "Predecessor Business." In connection with Careside's initial public
offering as contemplated in this Prospectus, the accompanying financial
statement has been prepared to comply with the rules and regulations of the
Securities and Exchange Commission.
The statement of operations represents the research and development and
related general and administrative expenses incurred by the Predecessor
Business in connection with the technology and know-how acquired by Careside.
The development of the technology related to the Predecessor Business commenced
in 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 expenses during the reporting period. Actual results
could differ from those estimates.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
TRANSACTIONS WITH SMITHKLINE
For the ten months ended October 31, 1996, SmithKline allocated corporate
overhead to the Predecessor Business of $55,118 for employee benefits and other
corporate services. These allocations were based on actual payroll expense
incurred by the Predecessor Business and the estimated cost of services
provided by SmithKline. Management believes the method of allocation of such
expenses is reasonable and that the Predecessor Business would not have
incurred any other material costs if it had operated on a stand alone basis. In
addition, SmithKline funded approximately $7,450,000 of operating losses and
capital expenditures since the commencement of the Predecessor Business for
which no interest charge has been reflected in the statement of operations.
CASH FLOW INFORMATION
For the ten months ended October 31, 1996, cash used in operations was
$3,233,423 and purchases of property and equipment were $242,507.
F-16
<PAGE>
[INSIDE BACK COVER]
ROUTINE BLOOD ANALYSIS PROCEDURE
<TABLE>
<CAPTION>
THE TRADITIONAL WAY [Careside Logo] THE CARESIDE SOLUTION
<S> <C> <C> <C> <C>
[Drawings of At hospital or 1. [Photos of Draw blood. Place a
Traditional 1 commercial lab, Cartridge and Blood few drops of whole
Blood Testing caregiver or Test] blood into the
Procedures] phlebotomist draws blood cartridge sample well.
sample.
Technicians properly
2 package and store blood
sample for transport.
Hospitals hand-carry 2. [Photos of Using the touch-screen
multiple samples to the CareSide Analyzer or keyboard, input
3 clinical lab. Commercial and Test Menu] demographic
laboratories receive information and select
samples via ground tests to be performed.
and/or air courier. Insert appropriate
cartridges and press
start.
4 Lab technicians receive
and log the samples.
5 Samples are then 3. [Photos of Test 10 to 15 minutes
separated for different Results and Test later, CareSide
testing stations. Analysis] Analyzer provides test
results via print
card, screen and/or
electronic data
transfer. Caregiver
can immediately review
data with patient.
Technicians centrifuge
6 the samples to separate
whole blood into serum
and plasma.
Skilled technologists
7 prepare various large,
high-volume analyzers
for batch processing and
run the tests.
Skilled technologists CareSide Analyzer: 10 to 15 Minutes
8 review results to assure
that they pass quality Hospital lab: Typically 4 to 6 Hours
control checks.
Commercial lab: Typically 24 Hours
Data is transferred to
9 laboratory information
systems and into QA/QC
records.
10 Data is disseminated to
the caregivers.
11 Caregiver reviews the
data and reconciles it
with patient charts.
Caregiver calls patient
12 to report results and to
order additional therapy
or schedule follow-up
visit if required.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO
SELL OR BUY ANY SHARES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE
INFORMATION IN THIS PROSPECTUS IS CURRENT AS OF , 1999.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 13
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 22
Management............................................................... 42
Principal Stockholders................................................... 51
Certain Transactions..................................................... 52
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 62
Legal Matters............................................................ 65
Experts.................................................................. 65
Where You Can Get More Information....................................... 65
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT BUY, SELL OR TRADE THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF CARESIDE]
2,800,000 SHARES
Common Stock
----------------
PROSPECTUS
----------------
FAHNESTOCK & CO. INC.
WEDBUSH MORGAN SECURITIES
SOUTHEAST RESEARCH PARTNERS, INC.
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all
of which we will pay, in connection with the issuance and distribution of the
securities being registered:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- ----------
<S> <C>
SEC Registration Fee............................................. $ 9,174
Nasdaq National Market Listing Fee............................... 72,875
NASD Fee......................................................... 3,720
Printing and engraving fees...................................... 150,000
Registrant's counsel fees and expenses........................... 320,000
Accounting fees and expenses..................................... 125,000
Spencer Trask Fee................................................ 100,000
Underwriters' Expenses........................................... 250,000
Blue Sky expenses and counsel fees............................... 25,000
Transfer agent and registrar fees................................ 8,000
Miscellaneous.................................................... 36,231
----------
TOTAL.......................................................... $1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Amended and Restated Certificate of Incorporation (the "Charter")
provides that we shall indemnify and advance expenses to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law ("DGCL"), as
amended from time to time, to each person who is or was one of our directors or
officers and the heirs, executors and administrators of such a person. Any
expenses, including attorneys' fees, incurred by a person who is or was one of
our directors or officers, and the heirs, executors and administrators of such
a person in connection with defending any such proceeding in advance of its
final disposition shall be paid by us; provided, however, that if the DGCL
requires, an advancement of expenses incurred by an indemnitee in his capacity
as a director or officer, and not in any other capacity in which service was or
is rendered by such indemnitee, including, without limitation, service to an
employee benefit plan, shall be made only upon delivery to us of an undertaking
by or on behalf of such indemnitee, to repay all amounts so advanced, if it
shall ultimately be determined that such indemnitee is not entitled to be
indemnified for such expenses. Notwithstanding the aforementioned
indemnification provisions, we may, at the discretion of our Chief Executive
Officer, enter into indemnification agreements with directors or officers.
Section 145 of the DGCL provides that a corporation has the power to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, other than an action by or in the right of the corporation,
by reason of the fact that such director or officer or former director or
officer is or was a director, officer, employee or agent of the corporation,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by them in connection with such
action, suit or proceeding, if such person shall have acted in good faith and
in a manner reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding,
provided that such person had no reasonable cause to believe his or her conduct
was unlawful, except that, if such action shall be in the right of the
corporation, no such indemnification shall be provided as to any claim, issue
or matter as to which such person shall have been judged to have been liable to
the corporation unless and to the extent that the Court of Chancery of the
State of Delaware, or any court in which such suit or action was brought, shall
determine upon application that, in view of all of the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses as such court shall deem proper.
II-1
<PAGE>
The Charter, which will be filed prior to the completion of our initial
public offering of securities, contains a provision to limit the personal
liability of our directors to the fullest extent permitted by Section 102(b)(7)
of the DGCL, as amended. In addition, the Amended and Restated By-Laws, which
will become effective prior to the completion of the offering of securities,
provide that we shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
other than an action by us or in our right, by reason of the fact that he is or
was one of our directors, officers, employees or agents, or is or was serving
at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to our best interests, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. See Exhibit 3.1c, "Form of Amended and
Restated Certificate of Incorporation of Careside, Inc."
As permitted by the DGCL, the Charter, which will be filed prior to the
completion of the offering, provides that, subject to certain limited
exceptions, none of our directors shall be liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the director's duty of loyalty to us or our
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) for the unlawful
payment of dividends on or redemption or repurchase of our capital stock or (4)
for any transaction from which the director derived an improper personal
benefit. The effect of this provision is to limit our ability and our
stockholders' ability through stockholder derivative suits on our behalf, to
recover monetary damages against a director for the breach of certain fiduciary
duties as a director, including breaches resulting from grossly negligent
conduct. In addition, the Charter and Amended and Restated By-Laws provide that
we shall, to the fullest extent permitted by the DGCL, indemnify all of our
directors and officers and that we may, to the extent permitted by the DGCL,
indemnify our employees and agents.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our formation in July 1996, we have issued the following securities,
giving retroactive effect to a 1-for-5.2 reverse stock split to be effected in
connection with the offering described in the prospectus, without registration
under the Securities Act:
1. In July 1996 and October 1996, we issued an aggregate of 659,342 shares
of common stock to our founder group for no consideration.
2. In November 1996, pursuant to an asset purchase agreement, SmithKline
Beecham Diagnostics Systems Co. and SmithKline Beecham Clinical
Laboratories, Inc. sold us certain fixed and intangible assets used in
connection with our point-of-care development program. As consideration
for the purchase of the assets, we issued to SBDS 34,702 shares of
common stock, representing 5% of our total common stock outstanding at
that time.
3. In December 1996, in connection with the establishment of a $1.0 million
working capital facility, we issued Exigent Partners, L.P. 557,600
shares of common stock for an aggregate purchase price of $98,995. In
the same month, we issued (1) 30,936 shares of common stock to
SmithKline Beecham Corporation pursuant to certain anti-dilution
protections granted to SmithKline Beecham Corporation in connection with
a credit facility and asset transfer and (2) 30,173 shares of common
stock to Philip B. Smith for the investment banking services he provided
in connection with our equity financing.
4. In January 1997, our credit facility from SmithKline Beecham
Corporation, pursuant to its terms, was converted into 129,555 shares of
common stock, representing 2% of our total common stock outstanding at
that time.
II-2
<PAGE>
5. In March 1997, we completed a private placement of securities through
Spencer Trask Securities Incorporated which resulted in our issuance of
1,923,077 shares of common stock at $5.20 per share to 203 investors who
were deemed to be accredited investors under Rule 501(a) of Regulation D
of the Securities Act of 1933 based upon representations made to us by
such investors. In connection with the private placement in February
1997, we issued warrants to Spencer Trask Securities Incorporated to
purchase 384,615 shares of common stock at an exercise price of $5.20
per share as partial consideration for its services in the private
placement. These warrants expire three (3) years after closing of the
offering. Of the proceeds of this private placement, which totalled in
the aggregate approximately $10 million, we received approximately $9
million with the remainder paid as a commission to Spencer Trask for its
services in the private placement.
6. In February 1997, we granted stock options to purchase an aggregate of
256,370 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan and 1996 Key Executive Stock Option Plan
(collectively, the "1996 Stock Option Plans") to ten employees and
directors. The weighted average per share exercise price of these stock
options is $5.29.
7. In May 1997, we granted stock options to purchase 192 shares of common
stock under our 1996 Incentive and Non-Qualified Stock Option Plan to
one employee. The per share exercise price of these stock options is
$5.20.
8. In June 1997, we granted stock options to purchase an aggregate of
31,731 shares of common stock under our 1996 Stock Option Plans to an
individual who was both one of our employees and a director. The per
share exercise price of these stock options is $6.76.
9. In August 1997, we granted Cedar Capital Investors, options to purchase
1,154 shares of common stock at an exercise price of $.052 per share.
These options remain exercisable until August 8, 2007. These options
were granted to Cedar Capital Investors in consideration for providing
certain financial consulting services to us in connection with a private
placement of securities in 1998.
10. In December 1997, we granted stock options to purchase an aggregate of
27,716 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to 20 employees. The weighted average per
share exercise price of these stock options is $6.09.
11. In January 1998, we granted stock options to purchase an aggregate of
1,923 shares of common stock under our 1996 Incentive and Non-Qualified
Stock Option Plan to one employee. The per share exercise price of
these stock options is $6.76.
12. In February 1998, we granted stock options to purchase an aggregate of
13,702 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to six employees. The per share exercise
price of these stock options is $6.76.
13. In May 1998, we granted stock options to purchase an aggregate of
17,713 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to 18 employees which were immediately
exercised. The per share exercise price of these stock options was
$6.76 per share.
14. In June 1998, we completed a second private placement of securities
through Spencer Trask Securities Incorporated which resulted in our
issuance of 1,701,183 shares of common stock at $6.76 per share to 311
investors, of whom 101 invested in the 1997 private placement of
securities, who were deemed to be accredited investors under Rule
501(a) of Regulation D of the Securities Act of 1933 based upon certain
representations made to us by such investors. In connection with the
private placement in 1998, we issued warrants to Spencer Trask
Securities Incorporated to purchase 340,238 shares of common stock at
an exercise price of $6.76 per share as partial consideration for our
services in these private placements. These warrants expire three years
from the date of closing of the offering. Of the proceeds of this
private placement, which totalled in the aggregate approximately $11.5
million, we received approximately $10 million with the remainder paid
as a commission to Spencer Trask Securities Incorporated for its
services in the private placement.
15. In July 1998, we granted stock options to purchase an aggregate of
67,068 shares of common stock under our 1996 Stock Option Plans to 29
employees and directors. The per share exercise price of these stock
options is $6.76.
II-3
<PAGE>
16. In November 1998, we granted stock options to purchase an aggregate of
11,538 shares of common stock under our 1996 Incentive and Non-
Qualified Stock Option Plan to six employees. The per share exercise
price of these stock options is $7.28.
17. In December 1998, we entered into a bridge loan agreement with S.R.
One, Limited for a $3.0 million loan. Draw down of $1.5 million on this
loan occured on December 28, 1998 with the remaining $1.5 million drawn
down in January 1999. The bridge loan matures on the date of completion
of the offering or January 31, 2000, whichever occurs sooner. The
bridge loan carries an interest rate of 8% per annum. We issued a
warrant to S.R. One, Limited which will be based upon the price of the
offering, less a 15% discount as partial consideration for providing
the bridge loan. Such warrant will not be exercisable until at least
twelve months after completion of the offering.
18. In January 1999, we granted stock options to purchase an aggregate of
1,202 shares of common stock under our 1996 Incentive and Non-Qualified
Stock Option Plan to one employee. The per share exercise price of
these stock options is $8.00.
We believe that the transactions described in paragraphs 1 through 18 above
were exempt from registration under Section 3(b) or 4(2) of the Securities Act
because the subject securities were either (1) issued pursuant to a
compensatory benefit plan pursuant to Rule 701 under the Securities Act or (2)
issued to a limited group of persons, each of whom was believed to have been a
sophisticated investor or to have had a preexisting business or personal
relationship with us or our management and to have been purchasing for
investment without a view to further distribution. In addition, the recipients
of securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
3.1a* Amended and Restated Certificate of Incorporation of Careside, Inc.
3.1b* Form of Certificate of Amendment of Certificate of Incorporation of Careside, Inc. (to be filed
immediately prior to completion of the offering)
3.1c* Form of Amended and Restated Certificate of Incorporation of Careside, Inc. (effective upon
the completion of the offering)
3.2a* Amended and Restated Bylaws of Careside, Inc.
3.2b* Form of Amended and Restated Bylaws of Careside, Inc. (effective upon completion of the offering)
4.1** Specimen Stock Certificate
4.2* Placement Agent Warrant Agreement dated as of January 31, 1997 by and between
Careside, Inc. and Spencer Trask Securities Incorporated (including Form of Warrant)
4.3* Placement Agent Warrant Agreement dated as of March 6, 1998 by and between Careside,
Inc. and Spencer Trask Securities Incorporated (including Form of Warrant)
4.4* Securities Purchase Agreement dated as of December 17, 1998 by and between S.R. One,
Limited and Careside, Inc. (including Form of Note)
4.5* Warrant Issued to S.R. One, Limited on December 17, 1998
4.6 Form of Warrant Agreement to be dated as of the closing date of the offering, by and among Careside,
Inc., Fahnestock & Co. Inc., Wedbush Morgan Securities, Inc. and Southeast Research Partners, Inc.
(including Form of Warrant)
5.1 Opinion of Pepper Hamilton LLP
10.1* Registration Rights Agreement dated as of November 7, 1996 by and among SmithKline
Beecham Diagnostic Systems Co., SmithKline Beecham Corporation and Careside, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.2* Registration Rights Agreement dated as of December 4, 1996 by and
among Careside, Inc.,
Exigent Partners, L.P., W. Vickery Stoughton, Thomas H. Grove,
Kenneth B. Asarch,
William S. Knight, Donald S. Wong, Ashok K. Sawhney and Philip B.
Smith
10.3* Amendment No. 1 to Registration Rights Agreement dated as of
January 31, 1997 by and among
Careside, Inc. Exigent Partners, L.P., W. Vickery Stoughton,
Thomas H. Grove,
Kenneth B. Asarch, William S. Knight, Donald S. Wong, Ashok K.
Sawhney and Philip B. Smith
10.4* Registration Rights Agreement dated as of December 4, 1996 by and
between Careside, Inc.
and Spencer Trask Securities Incorporated
10.5* Registration Rights Agreement dated as of January 31, 1997 by and
among Careside, Inc.
and the Investors signatory thereto
10.6* Stockholders Agreement dated as of December 4, 1996 by and among
the Careside, Inc.,
SmithKline Beecham Corporation, SmithKline Beecham Diagnostic
Systems Co., Spencer Trask
Securities Incorporated, Exigent Partners, L.P., W. Vickery
Stoughton, Thomas H. Grove,
Kenneth B. Asarch, William S. Knight, Donald S. Wong, Ashok K.
Sawhney, Philip B. Smith
and each Investor signatory thereto
10.7* Consulting Agreement by and between Careside, Inc. and Cedar
Capital Investors dated August 8, 1997
10.8* Employment Agreement dated as of March 3, 1997 between Careside,
Inc. and W. Vickery Stoughton
10.9* Employment Agreement dated as of March 3, 1997 between Careside,
Inc. and Thomas H. Grove
10.10* Employment Agreement dated as of July 30, 1998 between Careside,
Inc. and James R. Koch
10.11* 1996 Incentive and Non-Qualified Stock Option Plan, as amended and
restated
10.12* 1996 Key Executive Stock Option Plan, as amended and restated
10.13* 1998 Incentive and Non-Qualified Stock Option Plan
10.14* 1998 Director Stock Option Plan
10.15* Standard Industrial/Commercial Single-Tenant Lease-NET dated as of
October 14, 1996,
by and between Fox Hills Business Park, a California Limited
Partnership and Careside, Inc.
10.16* Agreement dated as of August 23, 1996, by and between Fuji Photo
Film Co., Ltd. and Careside, Inc.+
10.17 Agreement dated as of December 12, 1995, by and between United
Medical Manufacturing
Company and SmithKline Beecham Corporation and assignment
10.18* Product Development and Supply Agreement dated as of July 18,
1997, by and between
Careside, Inc. and UMM Electronics, Inc.
10.19 Agreement executed December 7, 1995 and February 28, 1996, by and
between SmithKline
Beecham Corporation and Hauser, Inc. and assignment
10.20* Agreement Number CP032284 Cost Type executed December 5 and 17,
1996 by and between
Battelle Memorial Institute and Careside, Inc.
10.21* Joint Research and Development Agreement dated as of October 28,
1996 by and between
Careside, Inc. and International Technidyne Corporation+
10.22 [INTENTIONALLY OMITTED]
10.23* Distribution and Supply Agreement dated as of November 7, 1996, by
and between SmithKline
Beecham Clinical Laboratories, Inc. and Careside, Inc.+
10.24* Asset Purchase Agreement dated as of November 7, 1996, by and
among SmithKline Beecham
Clinical Laboratories, Inc., SmithKline Beecham Diagnostic Systems
Co. and Careside, Inc.
10.25* Loan and Security Agreement dated as of October 1, 1996, by and
between Careside, Inc. and
SmithKline Beecham Corporation
10.26* Placement Agency Agreement dated as of December 10, 1996, by and
between Careside, Inc.
and Spencer Trask Securities Incorporated
10.27* Placement Agency Agreement dated as of January 29, 1998, by and
between Spencer Trask
Securities Incorporated and Careside, Inc.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.28* Investment Banking Agreement dated as of January 31, 1997, by and
between Careside, Inc.
and Spencer Trask Securities Incorporated
10.29* Agreement of Limited Partnership of Exigent Partners, L.P. dated
as of October 1996,
by and between Kevin Kimberlin and those persons listed on
Schedule A attached thereto
10.30* The Lincoln National Life Insurance Company Standardized 401(k)
Salary Reduction Plan
and Trust Prototype Plan Adoption Agreement Plan #008, effective
January 1, 1997, by and
between Careside, Inc. W. Vickery Stoughton and Thomas Grove
10.31* Employee Stock Purchase Plan
10.32* Registration Rights Agreement dated as of March 6, 1998 by and
among Careside, Inc. and the Investors signatory thereto
10.33* Registration Rights Agreement dated as of March 6, 1998 by and
between Careside, Inc. and Spencer Trask Securities Incorporated
10.34* Registration Rights Agreement dated as of December 17, 1998 by and
between Careside, Inc. and S.R. One, Limited
10.35* Waiver Letter Agreement dated as of December 8, 1998 by and
between Careside, Inc. and Spencer Trask Securities Incorporated
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Pepper Hamilton LLP (included in Exhibit 5.1)
23.3 Consent of Oppenheimer Wolff & Donnelly LLP
24.1* Power of Attorney (included on Signature Pages)
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed with the Securities and Exchange Commission.
** To be filed by amendment.
+ Portions of these documents have been omitted pursuant to a request for
confidential treatment. The material has been filed separately with the
Securities and Exchange Commission.
(B) FINANCIAL STATEMENT SCHEDULES:
Financial Statement Schedules are omitted because the information is included
in the Financial Statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant 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 registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
II-6
<PAGE>
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
In addition, the undersigned registrant hereby undertakes to provide to the
underwriters 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.
II-7
<PAGE>
SIGNATURES
PURSUANT TO 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 S-1 AND HAS DULY CAUSED THIS AMENDMENT NO. 2 TO
THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN CULVER CITY, CALIFORNIA, ON THE 10TH DAY OF
FEBRUARY, 1999.
CARESIDE, INC.
/s/ W. Vickery Stoughton
By: _________________________________
W. VICKERY STOUGHTON
CHAIRMAN OF THE BOARD OF
DIRECTORS
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ W. Vickery Stoughton Chairman of the Board of February 10, 1999
______________________________________ Directors, Chief
W. VICKERY STOUGHTON Executive Officer and
Director (principal
executive officer)
/s/ Thomas H. Grove Executive Vice President-- February 10, 1999
______________________________________ Research and Development
THOMAS H. GROVE and Director
/s/ James R. Koch Chief Financial Officer, February 10, 1999
______________________________________ Treasurer, Executive Vice
JAMES R. KOCH President and Director
(principal financial and
accounting officer)
* Director February 10, 1999
______________________________________
ANTHONY P. BRENNER
* Director February 10, 1999
______________________________________
WILLIAM F. FLATLEY
* Director February 10, 1999
______________________________________
KENNETH N. KERMES
* Director February 10, 1999
______________________________________
C. ALAN MACDONALD
* Director February 10, 1999
______________________________________
DIANA MACKIE
* Director February 10, 1999
______________________________________
PHILIP B. SMITH
</TABLE>
/s/ W. Vickery Stoughton
*By: ________________________________
W. VICKERY STOUGHTON ATTORNEY-IN-
FACT
II-8
<PAGE>
Exhibit 1.1
2,800,000 SHARES OF COMMON STOCK
($.01 PAR VALUE)
CARESIDE, INC.
FORM OF
UNDERWRITING AGREEMENT
----------------------
New York, New York
February ___, 1999
FAHNESTOCK & CO. INC.
WEDBUSH MORGAN SECURITIES, INC.
SOUTHEAST RESEARCH PARTNERS, INC.
As Representatives of the Several
Underwriters listed on Schedule A hereto
c/o Fahnestock & Co. Inc.
125 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Careside, Inc., a Delaware corporation (the "Company"), confirms its
agreement with Fahnestock & Co. Inc. ("Fahnestock"), Wedbush Morgan Securities,
Inc. ("Wedbush"), Southeast Research Partners, Inc. ("Southeast") and each of
the underwriters named in Schedule A hereto (collectively, the "Underwriters,"
----------
which term shall also include any underwriter substituted as hereinafter
provided in Section 11), for whom Fahnestock, Wedbush and Southeast are acting
-------
as representatives (the "Representatives"), with respect to the sale by the
Company and the purchase by the Underwriters, acting severally and not jointly,
of the respective numbers of shares of the Company's common stock, $.01 par
value per share ("Common Stock"), set forth in Schedule A hereto. Such shares
----------
of Common Stock are hereinafter referred to as the "Firm Shares."
Upon your request, as provided in Section 2(b) of this Agreement, the
-------
Company shall also sell to the Underwriters, acting severally and not jointly,
up to an additional 420,000 shares of Common Stock for the purpose of covering
over-allotments, if any (the "Option Shares"). The Firm Shares and the Option
Shares are sometimes hereinafter referred to as the "Shares." The Company also
proposes to issue and sell to the Representatives and/or their designees
warrants (the "Representatives' Warrants") pursuant to a certain Warrant
Agreement, dated as of [_____], 1999, among the Company and each of the
Representatives (the "Representatives' Warrant Agreement"), for the purchase of
an additional 280,000 shares of Common Stock in the aggregate. The shares of
Common Stock issuable upon exercise of the Representatives'
<PAGE>
Warrants are hereinafter referred to as the "Representatives' Shares." The Firm
Shares, the Option Shares, the Representatives' Warrants and the
Representatives' Shares (collectively, hereinafter referred to as the
"Securities") are more fully described in the Registration Statement and the
Prospectus referred to below.
SmithKline Beecham Clinical Laboratories, Inc. ("SBCL"), a Delaware
corporation and subsidiary of SmithKline Beecham Corporation, a Pennsylvania
corporation, started the Company's predecessor business (the "Predecessor"
Business"), to develop the technology that the Company currently uses. The
Company acquired the Predecessor Business in November 1996. The Company was
incorporated in the State of Delaware on July 10, 1996 under the name Exigent
Diagnostics, Inc. On May 21, 1998, the Company changed its name to Careside,
Inc.
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, each of the Underwriters, as of the date
hereof, as of the Closing Date (hereinafter defined) and as of the Option
Closing Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (File No. 333-69207), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Firm Shares and the Option Shares under the Securities Act of 1933, as
amended (the "Act"), which registration statement and amendment or amendments
have been prepared by the Company in conformity, in all material respects, with
the requirements of the Act, and the rules and regulations of the Commission
under the Act (the "Regulations"). The Company will promptly file a further
amendment to said registration statement in the form heretofore delivered to the
Underwriters, and will not file any other amendment thereto to which the
Underwriters shall have reasonably objected in writing after having been
furnished with a copy thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus, financial
statements, schedules, exhibits and all other documents filed as a part thereof
or incorporated therein (including, but not limited to those documents or
information incorporated by reference therein) and all information deemed to be
a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the
Regulations), is hereinafter called the "Registration Statement," and the form
of prospectus in the form first filed with the Commission pursuant to Rule
424(b) of the Regulations, is hereinafter called the "Prospectus". For purposes
hereof, "Rules and Regulations" mean the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or the Prospectus or any part of any of the foregoing
and no proceedings for a stop order suspending the effectiveness of the
Registration Statement or any of the Company's securities have been instituted,
are pending or, to the Company's knowledge, are threatened. Each of the
Preliminary Prospectus, Registration Statement and Prospectus, at the time of
filing thereof,
2
<PAGE>
conformed, in all material respects, with the requirements of the Act and the
Rules and Regulations, and none of the Preliminary Prospectus, Registration
Statement or Prospectus, at the time of filing thereof, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
-------- -------
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriters by or on behalf of the
Underwriters, expressly for use in such Preliminary Prospectus, Registration
Statement or Prospectus, or any amendment thereof or supplement thereto.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date and each Option Closing Date, if any,
and during such longer period as the Prospectus is required under the Act or the
Regulations to be delivered in connection with sales by the Underwriters or a
dealer, the Registration Statement and the Prospectus will contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations, and will conform, in all material respects, to
the requirements of the Act and the Rules and Regulations. Neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, at the time of the effectiveness of the Registration Statement or any
amendment thereto and at the time of delivery of the Prospectus or any amendment
or supplement thereto, will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading. Notwithstanding the
above, the representation and warranty contained in this subsection (c) of
Section 1 does not apply to statements made or statements omitted in reliance
- -------
upon and in conformity with information furnished to the Company in writing by
or on behalf of any Underwriter expressly for use in the Preliminary Prospectus,
Registration Statement or Prospectus, or any amendment thereof or supplement
thereto.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation. The Company does not own an interest in any corporation,
partnership, trust, joint venture or other business entity. The Company is duly
qualified and licensed, and is in good standing as a foreign corporation, in
each jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing, except
where the failure to be so qualified or licensed would not have a material
adverse effect upon the business, results of operations, financial condition or,
insofar as can reasonably be foreseen, prospects of the Company (a "Company
Material Adverse Effect"). The Company has all requisite corporate power and
authority, and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits ("Governmental
Authorizations") of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct its business as
described in the Prospectus, except where the failure to obtain or maintain a
Governmental Authorization would not have a Company Material Adverse Effect.
The Company is and has been doing business in compliance with all such
authorizations, approvals,
3
<PAGE>
orders, licenses, certificates, franchises, permits and all federal, state and
local laws, rules and regulations, and has not received any notice of
proceedings relating to the revocation or modification of any such Governmental
Authorization which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Company Material Adverse
Effect. The disclosures in the Registration Statement concerning the effects of
federal, state and local laws, rules and regulations on the Company's business
as currently conducted and as contemplated to be conducted as set forth in the
Registration Statement are correct in all material respects and do not omit to
state a material fact necessary to make the statements contained therein not
misleading in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Capital Stock" and will, upon the closing of the purchase of the
Firm Shares in accordance with the terms of this Agreement, have the adjusted
capitalization set forth therein on the Closing Date based upon the assumptions
set forth therein. 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
Representatives' Warrant Agreement and as otherwise described in the Prospectus.
The Securities and all other securities issued or issuable by the Company as
described in the Prospectus conform or, when issued and paid for in accordance
with the terms of this Agreement or the Representatives' Warrant Agreement or as
described in the Prospectus, as applicable, will conform, in all material
respects, to all statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding securities of the
Company have been duly authorized and validly issued and are fully paid and non-
assessable, and the holders thereof have no rights of rescission with respect
thereto, and, subject to the requirements of applicable law, are not subject to
personal liability by reason of being such holders; and none of such securities
were issued in violation of the preemptive rights of any holders of any security
of the Company or similar contractual rights granted by the Company. The
Securities (i) are not and will not be subject to any preemptive or other
similar rights of any stockholder, (ii) have been duly authorized and (iii) when
issued, paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable and will conform to the
description thereof contained in the Prospectus. The holders of the Securities
will not be subject to any personal liability solely by reason of being such
holders, subject to the requirements of applicable law. All corporate action
required to be taken for the authorization, issue and sale of the Securities has
been duly and validly taken; and the certificates representing the Securities
will be in due and proper form according to the corporate law of the
jurisdiction of the Company's incorporation. Upon the issuance and delivery,
pursuant to the terms hereof, of the Securities to be sold by the Company
hereunder, the Underwriters or the Representatives, as the case may be, will
acquire good and marketable title to such Securities, free and clear of any
lien, charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever (a "Lien"), other than Liens
imposed as a result of actions or omissions by the Underwriters, the
Representatives or those persons or entities purchasing any such Securities from
the Underwriters or the Representatives.
(f) The consolidated financial statements, including the related notes
and schedules thereto, included in the Registration Statement, each Preliminary
Prospectus and the
4
<PAGE>
Prospectus, fairly present, in all material respects, the financial position,
income, changes in cash flow, changes in stockholders' equity, and results of
operations of the Company at the respective dates and for the respective periods
to which they apply. Such financial statements have been prepared in conformity
with generally accepted accounting principles and the Rules and Regulations,
consistently applied throughout the periods involved. There has been no Company
Material Adverse Effect or development involving a prospective Company Material
Adverse Effect, 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. The outstanding debt, the property, both tangible and
intangible, and the business of the Company conform, in all material respects,
to the descriptions thereof contained in the Registration Statement and the
Prospectus. Financial information set forth in the Prospectus under the headings
"Summary Financial Data," "Selected Financial Data," "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," fairly present, in all material respects, on the basis stated in
the Prospectus, the information set forth therein, and have been derived from,
or compiled on, a basis consistent with that of the audited financial statements
included in the Prospectus.
(g) The Company (i) has paid all federal, state, local, and foreign
taxes for which it is liable and for which payment is due, including, but not
limited to, withholding taxes and amounts payable under Chapters 21 through 24
of the Internal Revenue Code of 1986, as amended (the "Code"), and, to its
knowledge, based on consultation with its tax advisors, has furnished all
information and returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such taxes which are not due and payable, and
(iii) does not have any tax deficiency or claims outstanding, proposed or
assessed against it. All tax liabilities have been adequately provided for in
the financial statements of the Company.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Securities to be
sold by the Company hereunder, (iii) the purchase by the Representatives of the
Representatives' Warrants from the Company, or (iv) resales of the Securities in
connection with the distribution by the Underwriters contemplated hereby.
(i) The Company maintains insurance policies, including, but not
limited to, general liability, product liability and property insurance, and
surety bonds which insure the Company and its employees against such losses and
risks generally insured against by comparable businesses. The Company (i) has
given notice or presented insurance claims with respect to all matters covered
by such insurance policies or surety bonds, including, but not limited to,
claims involving the Company's business, property or employees, in a due and
timely manner, (ii) has no disputes or claims against any underwriter of such
insurance policies or surety bonds, (iii) has paid all premiums due and payable
with respect to such insurance policies and surety bonds and (iv) has complied,
in all material respects, with all conditions contained in such insurance
policies and surety bonds so as to avail itself of coverage in the event of any
claim.
5
<PAGE>
(j) There is no action, suit, proceeding, inquiry, arbitration,
litigation, governmental proceeding (including, without limitation, those having
jurisdiction over environmental or similar matters) or, to the knowledge of the
Company, investigation, domestic or foreign, pending or, to the knowledge of the
Company, threatened against the Company or expressly involving the properties or
business of the Company which (i) questions the validity of the capital stock of
the Company, this Agreement, the Representatives' Warrant Agreement or any
action taken or to be taken by the Company pursuant to or in connection with
this Agreement or the Representatives' Warrant Agreement, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed or (iii)
except for matters disclosed in the Prospectus, could reasonably be expected to
have a Company Material Adverse Effect.
(k) The Company has full legal right, corporate power and authority to
authorize, issue, deliver and sell the Securities, enter into this Agreement and
the Representatives' Warrant Agreement and to consummate the transactions
provided for in such agreements; and this Agreement and the Representatives'
Warrant Agreement have each been duly and properly authorized, executed and
delivered by the Company. Each of this Agreement and the Representatives'
Warrant Agreement constitutes a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, except (i)
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification or
contribution provisions may be limited under applicable laws or the public
policies underlying such laws and (iii) that the remedies of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceedings may be brought. None of the Company's issuance and sale of the
Securities, execution or delivery of this Agreement or the Representatives'
Warrant Agreement, performance hereunder and thereunder, or consummation of the
transactions contemplated herein and therein, (A) conflicts with or will
conflict with, (B) results in or will result in any breach or violation of any
of the terms or provisions of, (C) constitutes or will constitute a default
under, or (D) result in the creation or imposition of any Lien upon any property
or assets (tangible or intangible) of the Company pursuant to the terms of, any
of the following: (i) the Certificate of Incorporation or By-laws of the
Company, (ii) any material license, contract, indenture, mortgage, deed of
trust, voting trust agreement, stockholders agreement, note, indebtedness, loan,
credit agreement or any other agreement or instrument to which the Company is a
party or by which it is bound or to which any of its properties or assets
(tangible or intangible) is expressly subject, or (iii) any statute, rule or
regulation, applicable to the Company, or any judgment, decree or order which by
its terms is expressly applicable to the Company, of any arbitrator, court,
regulatory body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the Company or
any of its activities or properties.
(l) Except as described in the Prospectus, 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 Shares pursuant to the Prospectus and the Registration
Statement, the issuance of the Representatives' Warrants, the performance of
this
6
<PAGE>
Agreement and the Representatives' Warrant Agreement and the transactions
contemplated hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person may have
with respect to the issuance and/or sale of any of the Securities, except such
as have been or may be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the Underwriters' purchase and
distribution of the Shares, and the Representatives' Warrants to be sold by the
Company hereunder and under the Representatives' Warrant Agreement.
(m) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which any of its assets, properties or business may be subject have
been duly and validly authorized, executed and delivered by the Company, and
constitute the legal, valid and binding agreements of the Company, enforceable
against the Company in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law). The descriptions in the
Registration Statement of agreements, contracts and other documents are accurate
in all material respects and fairly present, in all material respects, the
information required to be shown with respect thereto on Form S-1. There are no
contracts or other documents which are required by the Act to be described in
the Registration Statement or filed as exhibits to the Registration Statement
which are not described or filed as required, and the exhibits which have been
filed are, in all material respects, complete and correct copies of the
documents of which they purport to be copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, (iii) considered entering into a material transaction that
is probable of occurring, or (iv) declared or paid any dividend or made any
other distribution on or in respect of its capital stock of any class; and there
has not been any change in the Company's capital stock, material increase in its
debt (long or short term) or liabilities or material adverse change in or
affecting its general affairs, management, financial operations, stockholders'
equity or results of operations. The Company has no material contingent
obligations that are not disclosed in the Company's financial statements
included in the Registration Statement.
(o) No default by the Company exists in the due performance and
observance of any term, covenant or condition of any license, contract,
indenture, mortgage, installment sale agreement, lease, deed of trust, voting
trust agreement, stockholders' agreement, partnership agreement, note, loan,
credit agreement, purchase order, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which the property or assets
7
<PAGE>
(tangible or intangible) of the Company are subject or affected, except where
such default would not have a Company Material Adverse Effect.
(p) The Company is in 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 knowledge of the Company, there are no pending investigations
involving the Company by the United States Department of Labor, or any other
governmental agency responsible for the enforcement of any 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, organized
slowdown or stoppage pending or, to the knowledge of the Company, threatened
against or involving the Company. No question exists with respect to the
employees of the Company being represented by a labor union, and no collective
bargaining agreement or modification thereof is currently being negotiated by
the Company. No grievance or arbitration proceeding is pending under any
expired or existing collective bargaining agreements of the Company. No labor
dispute with the employees of the Company exists or, to the knowledge of the
Company, is imminent.
(q) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan" or a
"multiemployer plan" (collectively, "ERISA Plan") as such terms are defined in
Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income
- --------
Security Act of 1974, as amended ("ERISA"). To the Company's knowledge, 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. To the Company's
-------
knowledge, no ERISA Plan (or any trust created thereunder), has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
------- -------
4975 of the Code, which could subject the Company to any tax penalty on
prohibited transactions and which has not adequately been corrected. To the
Company's knowledge, each ERISA Plan is in compliance, in all material respects,
with all 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."
(r) Neither the Company nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Regulations) of
any of the foregoing has taken or will take, directly or indirectly, any action
designed to or which has constituted or which might be expected to cause or
result in, under the Exchange Act, or otherwise, stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Securities or otherwise. The Company acknowledges that the Underwriters may
engage in passive market making transactions in the Shares on the Nasdaq
National Market ("Nasdaq") in accordance with the Rules and Regulations.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, service names, trade
names and copyrights, and none of the licenses and rights to the foregoing
presently owned or held by the Company is in
8
<PAGE>
dispute or is in any conflict with the right of any other person or entity.
Except as set forth in the Prospectus, the Company (i) owns or has the right to
use, free and clear of all Liens, all patents, patent applications, trademarks,
service marks, service names, trade names, copyrights, technology, licenses and
rights with respect to the foregoing, used in the conduct of its business as now
conducted or proposed to be conducted without infringing upon or otherwise
acting adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing and (ii) is not
obligated or under any liability whatsoever to make any payment by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant to,
any patent, patent application, trademark, service mark, service name, trade
name, copyright, know-how, technology or other intangible asset, with respect to
the use thereof or in connection with the conduct of its business or otherwise.
(t) There is no action, suit, proceeding, inquiry, arbitration,
litigation, governmental or other proceeding or, to the knowledge of the
Company, investigation, domestic or foreign, pending or, to the knowledge of the
Company, threatened (or circumstances that may give rise to the same) against
the Company which challenges the exclusive rights of the Company with respect to
any trademarks, trade names, service marks, service names, copyrights, patents,
patent applications, licenses or rights to the foregoing used in the conduct of
its business, or which challenge the right of the Company to use any technology
presently used or contemplated to be used in the conduct of its business.
(u) Subject to the various license and other agreements described in
the Prospectus, the Company owns and has the right to use all material trade
secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
technology, designs, processes, works of authorship, computer programs and
technical data and information (collectively herein, "intellectual property")
that are material to the development, manufacture, operation and sale of all
products and services sold or proposed to be sold by the Company, free and clear
of, and without violating, any right, Lien, or claim of others, including,
without limitation, former employers of its employees; provided, however, that
-------- -------
the possibility exists that other persons or entities, completely independently
of the Company, or their employees or agents, could have developed trade secrets
or items of technical information similar or identical to those of the Company.
The Company is not aware of any such development of similar or identical trade
secrets or technical information by others.
(v) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all material items of real and personal
property stated in the Prospectus to be owned or leased by it, free and clear of
all Liens, other than those referred to in the Prospectus, lessor's interests,
Liens for taxes not yet due and payable, and other Liens which would not have a
Company Material Adverse Effect.
(w) Arthur Andersen LLP ("Andersen"), whose report is filed with the
Commission as a part of the Registration Statement, is an independent public
accountant as required by the Act and the Rules and Regulations.
9
<PAGE>
(x) The Company has caused to be executed and delivered to Fahnestock,
agreements in substantially the form of Exhibit A attached hereto (the "Lock-up
---------
Agreements"), covering not less than __ percent ( __%) of the outstanding Common
Stock of the Company (treating all outstanding options and warrants to purchase
shares of Common Stock as fully exercised and the shares of Common Stock
issuable thereunder as outstanding for purposes of such calculation). The
Company is not aware of any facts which would give the Company reason to believe
that any Lock-up Agreement has not been duly executed and is not a legally
binding and enforceable agreement (except as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of general application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or equitable).
(y) Except as described in the Prospectus under "Underwriting" and
except for the rights of Spencer Trask Securities Incorporated, which have been
expressly waived, there are no claims, payments, issuances, arrangements or
understandings, whether oral or written, to which the Company is a party, for
services in the nature of a finder's or origination fee with respect to the sale
of the Securities hereunder or any other arrangements, agreements,
understandings, payments or issuances with respect to the Company or, to the
knowledge of the Company, any of its officers, directors, stockholders,
partners, employees or affiliates that may affect the Underwriters'
compensation, as determined by the National Association of Securities Dealers,
Inc. ("NASD").
(z) The Common Stock has been approved for quotation on the Nasdaq
National Market.
(aa) Neither the Company nor any of its officers, employees, agents,
or any other person acting on behalf of the Company, has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
or employee of any governmental agency (domestic or foreign) or instrumentality
of any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is or may be in a position
to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (i) would subject the
Company, or any other such person, to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (ii) if
not given in the past, might have had a materially adverse effect on the assets,
business or operations of the Company, or (iii) if not continued in the future,
could reasonably be expected to result in a Company Material Adverse Effect.
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(bb) Except as set forth in the Prospectus, to the best of the
Company's knowledge, no officer, director or stockholder of the Company, or any
"affiliate" or "associate" (as these terms are defined in Rule 405 promulgated
under the Regulations) of any of the foregoing persons or entities has or has
had, either directly or indirectly, (i) an interest in any person or entity
which (A) furnishes or sells services or products which are furnished or sold or
10
<PAGE>
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 beneficial
interest in any contract or agreement to which the Company is a party or by
which it may be bound or affected which is material to the Company or is
otherwise required by the Regulations to be disclosed in the Prospectus. Except
as set forth in the Prospectus, there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, on the one hand,
and any officer, director, or Principal Stockholder (as such term is defined in
the Prospectus) of the Company, or any partner, affiliate or associate of any of
the foregoing persons or entities, on the other hand, which the Company is a
party or by which it may be bound or affected which is material to the Company
or is otherwise required by the Regulations to be disclosed in the Prospectus.
(cc) Any certificate signed by any officer of the Company, and
delivered to the Underwriters or to Underwriters' Counsel (as defined herein),
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(dd) The minute book of the Company has been made available to the
Underwriters and, in all material respects, (i) contains a complete summary of
all meetings and actions of the directors, stockholders, audit committee,
compensation committee and any other committee of the Board of Directors of the
Company, since the time of its incorporation, and (ii) reflects all transactions
referred to in such minutes accurately.
(ee) 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, other than those
holders who have effectively waived such rights. Except as described in the
Prospectus, no holder of any securities of the Company or any other person has
the right, contractual or otherwise, which has not been satisfied or effectively
waived, to cause the Company to sell or otherwise issue to them, or permit them
to underwrite the sale of, any of the Securities.
(ff) The Company has, as of the date that the Commission has entered
an order declaring the Registration Statement effective under the Act (the
"Effective Date"), (i) entered into an employment agreement with each of W.
Vickery Stoughton, Thomas H. Grove and James R. Koch, substantially in the forms
filed as Exhibit 10.8, 10.9 and 10.10, respectively, to the Registration
Statement and (ii) purchased individual term key-man life insurance policies on
the lives of Mr. Stoughton and Dr. Grove in the amounts of $3,000,000 and
$2,000,000 respectively, which policies name the Company as the sole
beneficiary.
(gg) Prior to the Effective Date, the Company amended its Certificate
of Incorporation to effect a plan of recapitalization by consummating a 1-for-
5.2 reverse stock split with respect to the Common Stock (the
"Recapitalization"), without any change in the powers, preferences, rights,
qualifications, limitations or restrictions thereof, such that every 5.2 shares
of Common Stock outstanding or held by the Company in its treasury on the date
of the filing of the
11
<PAGE>
Certificate of Amendment to the Company's Certificate of Incorporation was
changed and reclassified into one (1) share of Common Stock, which share was
fully paid and nonassessable. The Recapitalization has been duly and validly
authorized by the Company and its respective shareholders and all certificates,
agreements, contracts, minutes or other documents necessary to effect the
Recapitalization (collectively, the "Recapitalization Documents"), have been
duly and validly authorized, executed and delivered and, if necessary, filed
with the appropriate regulatory body, government agency or other body, domestic
or foreign, by the appropriate parties, and constitute the legal, valid and
binding agreements of such parties, enforceable against each of them in
accordance with their respective terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law), and none of the execution or delivery of any of the
Recapitalization Documents by the parties thereto, the performance by the
Company hereunder or thereunder, or the consummation of the transactions
contemplated herein or therein, (i) conflicts with or will conflict with, (ii)
results in or will result in any breach or violation of any of the terms or
provisions of, (iii) constitutes or will constitute a default under, (iv) or
result in the creation or imposition of any Lien upon any property or assets
(tangible or intangible) of the Company pursuant to the terms of, (A) the
Certificate of Incorporation or By-laws of the Company, (B) any material
license, contract, collective bargaining agreement, indenture, mortgage, deed of
trust, lease, voting trust agreement, stockholders' agreement, note,
indebtedness, loan, credit agreement or any other agreement or instrument to
which the Company is a party or by which it is or may be bound or to which any
of its properties or assets (tangible or intangible) is or may be subject or (C)
any statute, judgment, decree, order, rule or regulation, applicable to the
Company, of any arbitrator, court, regulatory body, administrative agency or
other governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties. The
Recapitalization Documents properly effect the Recapitalization as described in
the Prospectus; and the descriptions in the Registration Statement of the
Recapitalization are accurate and fairly present, in each case in all material
respects, the information required to be shown with respect thereto by Form S-1.
(hh) The Company is not an "investment company" within the meaning of
such term under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), and the rules and regulations of the Commission thereunder.
(ii) At least five (5) days prior to the Effective Date, the Company
filed a Form 8-A with the Commission providing for the registration of the
Shares under the Exchange Act.
(jj) The Company owns all of the assets (the "Purchased Assets"),
related to the Predecessor Business which it acquired from SmithKline Beecham
Corporation and its affiliates (within the meaning of the Regulations;
collectively, "SmithKline") free and clear of all Liens, other than Liens
disclosed in the Prospectus. For purposes of the preceding sentence, Purchased
Assets shall not mean assets that have been disposed of or used in the ordinary
course
12
<PAGE>
of the Company's business, or assets that are obsolete or otherwise not used in
the ordinary course of the Company's business.
(kk) The only liabilities acquired (i.e., assumed) from SmithKline
related to the Predecessor Business, other than those stated on the Company's
balance sheets for the years ended December 31, 1997 and 1998, are set forth in
that certain Asset Purchase Agreement, dated as of November 7, 1996, between the
Company and SmithKline.
2. Purchase, Sale and Delivery of the Shares and the Representatives'
------------------------------------------------------------------
Warrants.
- --------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$[______] per share of Common Stock (the "Offering Price"), that number of Firm
Shares set forth in Schedule A opposite the name of such Underwriter, plus any
----------
additional number of Firm Shares which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 11 hereof.
-------
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of the
Option Shares. The option granted hereby will expire thirty (30) days after (i)
the date the Registration Statement becomes effective, if the Company has
elected not to rely on Rule 430A under the Rules and Regulations, or (ii) the
date of this Agreement, if the Company has elected to rely on Rule 430A under
the Rules and Regulations, and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Firm Shares upon notice by
the Representatives to the Company setting forth the number of Option Shares as
to which the several Underwriters are then exercising the option and the time
and date of payment and delivery for any such Option Shares. Any such time and
date of delivery (an "Option Closing Date") shall be determined by the
Representatives, but shall not be later than seven (7) full business days after
the exercise of said option, nor in any event prior to the Closing Date, as
hereinafter defined, unless otherwise agreed upon by the Representatives and the
Company. Nothing herein contained shall obligate the Underwriters to make any
over-allotments. No Option Shares shall be delivered unless the Firm Shares
shall be simultaneously delivered or shall theretofore have been delivered as
herein provided.
(c) Payment of the purchase price and delivery of certificates for the
Firm Shares shall be made at the offices of Fahnestock & Co. Inc., 125 Broad
Street, New York, New York 10004, or at such other place as shall be agreed upon
by the Representatives and the Company. Such delivery and payment shall be made
at 10:00 a.m. (New York City time) on ___________________, 1999, or at such
other time and date as shall be agreed upon by the Representatives and the
Company, but not less than three (3) nor more than seven (7) full business days
after the Effective Date (such time and date of payment and delivery being
herein called the "Closing Date"). In addition, in the event that any or all of
the Option Shares are
13
<PAGE>
purchased by the Underwriters, payment of the purchase price and delivery of
certificates for such Option Shares shall be made at the above-mentioned offices
of the Representatives or at such other place as shall be agreed upon by the
Representatives and the Company on each Option Closing Date, as specified in the
notice from the Representatives to the Company. Delivery of the certificates for
the Shares shall be made to the Underwriters against payment by the
Underwriters, severally and not jointly, of the purchase price for the Shares,
to the order of the Company for the Shares, by New York Clearing House (next
day) funds. In the event the option to purchase the Option Shares is exercised,
each of the Underwriters, acting severally and not jointly, shall purchase that
proportion of the total number of Option Shares then being purchased which the
number of Firm Shares set forth in Schedule A hereto opposite the name of such
----------
Underwriter bears to the total number of Firm Shares, subject in each case to
such adjustments as the Representatives in their discretion shall make to
eliminate any sales or purchases of fractional shares. Certificates for the
Shares shall be in definitive, fully registered form, shall bear no restrictive
legends and shall be in such denominations and registered in such names as the
Underwriters may request in a written notice delivered to the Company at least
two (2) business days prior to the Closing Date or the relevant Option Closing
Date, as the case may be. The certificates for the Shares shall be made
available to the Representatives at the above-mentioned offices or such other
place as the Representatives may designate for inspection, checking and
packaging, no later than 9:30 a.m. (New York City time) on the last business day
prior to the Closing Date or the relevant Option Closing Date, as the case may
be.
(d) On the Closing Date, the Company shall issue and sell to the
Representatives, the Representatives' Warrants at a purchase price of $.0001 per
warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 280,000 shares of Common Stock. The Representatives' Warrants
shall be exercisable for a period of four (4) years commencing at the beginning
of the second year after their issuance and sale at a price equaling one hundred
twenty percent (120%) of the initial public offering price of the shares of
Common Stock. The Representatives' Warrant Agreement and form of Warrant
Certificate shall be substantially in the form filed as Exhibit 4.6 to the
Registration Statement. Payment for the Representatives' Warrants shall be made
on the Closing Date.
3. Public Offering of the Shares. As soon as practicable after the
-----------------------------
Effective Date, the Underwriters shall make a public offering of the Shares
(other than to residents of or in any jurisdiction in which qualification of the
Shares is required and has not become effective) at the price and upon the other
terms set forth in the Prospectus. The Representatives may from time to time
increase or decrease the public offering price after distribution of the Shares
has been completed to such extent as the Representatives, in their discretion,
deem advisable. The Underwriters may enter into one (1) or more agreements (as
the Underwriters, in each of their sole discretion, deem advisable), with one
(1) or more broker-dealers who shall act as dealers in connection with such
public offering.
4. Covenants and Agreements of the Company. The Company covenants and
---------------------------------------
agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement
14
<PAGE>
and any amendments thereto to become effective as promptly as practicable and
will not at any time, whether before or after the Effective Date, file any
amendment to the Registration Statement or supplement to the Prospectus or file
any document under the Act or the Exchange Act, before termination of the
offering of the Shares by the Underwriters, of which the Representatives shall
not previously have been advised and furnished with a copy, or to which the
Representatives shall have reasonably objected based on such amendment or
supplement not being in compliance with the Act, the Exchange Act or the Rules
and Regulations.
(b) The Company will advise the Representatives promptly after having
knowledge thereof, in writing (i) when the Registration Statement, as amended,
becomes effective, if the provisions of Rule 430A promulgated under the Act will
be relied upon, when the Prospectus has been filed in accordance with said Rule
430A and when any post-effective amendment to the Registration Statement becomes
effective, (ii) of the issuance by the Commission of any stop order, or of the
initiation or the threat of the initiation, of any proceeding, suspending the
effectiveness of the Registration Statement or any order preventing or
suspending the use of the Preliminary Prospectus or the Prospectus, or any
amendment or supplement thereto, or the institution of proceedings for that
purpose, (iii) of the issuance by the Commission or by any state securities
commission of any proceedings for the suspension of the qualification of any of
the Securities for offering or sale in any jurisdiction or of the initiation, or
the threat of the initiation, of any proceeding for that purpose, (iv) of the
receipt of any comments from the Commission; and (v) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information. If the Commission
or any state securities commission authority shall enter a stop order or suspend
such qualification at any time, the Company will use its best efforts to
promptly obtain the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
reasonably satisfactory to the Representatives) or transmit the Prospectus by a
means reasonably calculated to result in filing with the Commission, pursuant to
Rule 424(b)(1) (or, if applicable and if consented to by the Representatives,
pursuant to Rule 424(b)(4)), not later than the Commission's close of business
on the earlier of (i) the second business day following the execution and
delivery of this Agreement and (ii) the fifteenth business day after the
Effective Date.
(d) The Company will give the Representatives notice of its intention
to file or to prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Shares which differs from
the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representatives with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such prospectus to which the
Representatives or Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
("Underwriters' Counsel"), shall object based on such amendment or supplement
not being in
15
<PAGE>
compliance with the Act or the Regulations.
(e) The Company shall endeavor in good faith, in cooperation with the
Representatives, at or prior to the Effective Date, to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as the
Representatives may designate to permit the continuance of sales and dealings
therein for as long as may be necessary to complete the distribution, and shall
make such applications, file such documents and furnish such information as may
be required for such purpose; provided, however, the Company shall not be
-------- -------
required to qualify as a foreign corporation or file a general or limited
consent to service of process in any such jurisdiction. In each jurisdiction
where such qualification shall be effected, the Company will, unless the
Representatives agree that such action is not at the time necessary or
advisable, use reasonable efforts to file and make such statements or reports at
such times as are or may reasonably be required by the laws of such jurisdiction
to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Shares in accordance with the provisions hereof and the Prospectus, or any
amendments or supplements thereto. If at any time when a prospectus relating to
the Shares is required to be delivered under the Act, any event shall have
occurred as a result of which, in the opinion of counsel for the Company or
Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or if it
is necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representatives promptly and will prepare and file with
the Commission an appropriate amendment or supplement in accordance with Section
-------
10 of the Act and Section 4(a) hereof. The Company will also furnish to the
-------
Underwriters copies of such amendment or supplement as soon as available and in
such quantities as the Underwriters may reasonably request.
(g) As soon as practicable, but in any event not later than forty-five
(45) days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the Effective Date occurs
(ninety (90) days in the event that the end of such fiscal quarter is the end of
the Company's fiscal year), the Company shall make generally available to its
security holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Representatives, an earnings statement which will be in
the detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which
- -------
statement need not be audited unless required by the Act, covering a period of
at least twelve (12) consecutive months after the Effective Date.
(h) During a period ending on the earlier of (i) five (5) years after
the date hereof and (ii) the date when the Company no longer has a class of
equity securities registered under the Exchange Act, the Company will furnish to
its stockholders annual reports (including financial statements audited by
independent public accountants) and will deliver to the
16
<PAGE>
Representatives:
(i) financial statements of the Company for each quarter, in the
form filed with the Commission;
(ii) concurrently with furnishing the above-mentioned annual
reports to its stockholders, a balance sheet of the Company as at the
end of the preceding fiscal year, together with statements of
operations, stockholders' equity, and cash flows of the Company for
such fiscal year, accompanied by a copy of the report thereon of
independent certified public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the
NASD or any securities exchange;
(v) every press release and every material news item or article
of interest to the financial community in respect of the Company, or
its affairs which was released or prepared by or at the direction of
the Company; and
(vi) any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the
Representatives may reasonably request.
During such period, if the Company has an active subsidiary, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiary are required to be
consolidated in accordance with Regulation S-X, and will be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.
(i) The Company will maintain a Transfer Agent (the "Transfer Agent")
and, if necessary under the jurisdiction of incorporation of the Company, a
Registrar (which may be the same entity as the Transfer Agent) for its Common
Stock for so long as the Company has a class of equity securities registered
under the Exchange Act.
(j) The Company will furnish to the Representatives or on the
Representatives' order, without charge, at such place as the Representatives may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two (2) of such copies
will be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
related to the offering of the Shares prepared after the Effective Date, in each
case as soon as available and in such quantities as the Representatives may
request.
(k) On or before the Closing Date, the Company shall deliver
instructions to
17
<PAGE>
the Transfer Agent authorizing it to place appropriate legends on the
certificates representing the securities subject to the Lock-up Agreements and
to place appropriate stop transfer orders on the Company's ledgers. During the
twelve (12) month period commencing on the Effective Date, the Company shall
not, without the prior written consent of Fahnestock, sell, contract or offer to
sell, issue, transfer, assign, pledge, hypothecate, distribute, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or any options,
rights or warrants with respect to any shares of Common Stock, except up to
[_____] shares of Common Stock reserved for grants of options under the
Company's stock option plans as described in the Prospectus. The Company will
cause the Transfer Agent to place "stop transfer" orders on the Company's stock
ledgers. During the twelve (12) month period commencing with the Effective Date,
the Company shall not file any registration statement with the Commission on
Form S-8 without the prior written consent of Fahnestock.
(l) Neither the Company nor any of its officers, directors or
stockholders, nor any of their respective affiliates or Associates (within the
meaning of the Regulations) will take, directly or indirectly, any action
designed to, or which might in the future reasonably be expected to, cause or
result in, stabilization or manipulation of the price of any securities of the
Company.
(m) The Company shall apply the net proceeds from the sale of the
Shares in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. Except as described in the Prospectus, no portion
of the net proceeds will be used, directly or indirectly, to acquire any
securities issued by the Company.
(n) The Company shall use its best efforts to timely file all such
reports, forms or other documents as may be required from time to time, under
the Act, the Exchange Act, and the Rules and Regulations, and all such reports,
forms and documents, when filed, will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act, and the Rules and
Regulations.
(o) The Company shall furnish to the Representatives, as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in their letter to be
furnished pursuant to Section 6(j) hereof.
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(p) The Company shall use its best efforts to cause the Common Stock
to be quoted on Nasdaq or a national securities exchange for a period of seven
(7) years from the date hereof, and shall use its best efforts to maintain the
Nasdaq quotation or exchange listing of the Common Stock to the extent
outstanding.
(q) For a period of three (3) years from the Closing Date, on a
quarterly basis, the Company shall instruct the Transfer Agent to furnish to the
Representatives, at the Company's sole expense, the list of holders of all of
the Company's securities and a list of Depository Trust Company "participant
holders."
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<PAGE>
(r) The Company hereby agrees, as soon as practicable, but in no event
more than thirty (30) days from the Effective Date, to take all necessary and
appropriate actions to be included in Standard and Poor's Corporation
Descriptions and Moody's OTC Manual and to continue such inclusion until the
earlier of (i) seven (7) years from the Effective Date and (ii) the first date
when the Company no longer has a class of equity securities registered under the
Exchange Act.
(s) The Company hereby agrees that, for a period of thirteen (13)
months from the Effective Date, it will not, without the written consent of the
Representatives, which consent will not be unreasonably withheld, and (A) the
written consent of a majority of the Company's stockholders who are not
affiliates of the Company at such time or (B) the vote of a majority of such
non-affiliate stockholders, voting at a duly held stockholder's meeting, adopt,
propose to adopt or otherwise permit to exist any employee, officer, director,
consultant or compensation plan or arrangement permitting the grant, issue or
sale of any shares of Common Stock or other securities of the Company (i) in an
amount greater than an aggregate of 1,351,923 shares of Common Stock, (ii) at an
exercise or sale price per share less than either the fair market value of the
Common Stock on the date of grant or sale or the Offering Price and (iii) upon
payment of less than the full purchase or exercise price for such shares of
Common Stock or other securities of the Company.
(t) Until the completion of the distribution of the Shares, and for
twenty (25) days thereafter, except to the extent required to do so by
applicable law or the Regulations, the Company shall not, without the prior
written consent of the Representatives and Underwriters' Counsel, issue,
directly or indirectly, any press release or other communication or hold any
press conference with respect to the Company or its activities or the offering
contemplated hereby.
(u) Until the earlier of (i) seven (7) years from the date hereof,
(ii) the sale to the public of the Representatives' Shares and (iii) the first
date in which the Company no longer has a class of equity securities registered
under the Exchange Act, the Company will use reasonable efforts not to take any
action or actions (including any failure to so act) which may prevent or
disqualify the Company's use of Form S-3 (or other appropriate form) for the
registration under the Act of the Representatives' Shares.
(v) The Company shall enter into an investment banking agreement with
Fahnestock which, among other things, will grant to Fahnestock a right of first
refusal, for a period of eighteen (18) months after the Effective Date, with
respect to any investment banking services, including, and without limitation,
any sales of securities to be made by the Company or any of its future
subsidiaries.
(w) For a period of three (3) years after the Effective Date, the
Company shall (i) cause one (1) additional independent person to be nominated
for inclusion on the Company's Board of Directors who shall be reasonably
satisfactory to the Company and Fahnestock (or any designee of Fahnestock) and
(ii) use its best efforts to cause such person to be elected, including best
efforts to obtain the affirmative votes of all executive officers, directors and
shareholders owning greater than five percent (5%) of the Company's capital
stock entitled to vote thereon.
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<PAGE>
Such person shall be entitled to all of the rights and privileges as each of the
other members of the Company's Board of Directors. For a period of three (3)
years after the Effective Date, Fahnestock shall have the right to designate one
(1) person to attend all meetings of the Company's Board of Directors. Such
person shall be entitled to attend all such meetings and to receive all such
notices and other correspondence and communications sent by the Company to
members of its Board of Directors. The Company shall reimburse such designee for
his or her reasonable out of pocket expenses actually incurred in connection
with his or her attendance of such meetings in accordance with the Company's
policy for such reimbursement applicable to its directors.
(x) The Company shall enter into an agreement with SBCL which amends,
among other things, Appendix A to the Distribution and Supply Agreement, dated
as of November 7, 1996, between the Company and SBCL and shall enter into a
supply agreement with Fuji Photo Film Co., Ltd, a Japanese corporation ("Fuji"),
for the supply of Fuji's dry film chemistry reagents during the commercial
manufacturing and marketing phases of the Company's Careside system.
5. Payment of Expenses.
-------------------
(a) The Company hereby agrees to pay on each of the Closing Date and
the Option Closing Date, if any (to the extent not paid at the Closing Date) all
expenses and fees (other than the fees of Underwriters' Counsel, except as
provided in (iv) below) incident to the performance of the obligations of the
Company under this Agreement and the Representatives' Warrant Agreement,
including, without limitation, (i) the fees and expenses of accountants and
counsel for the Company, (ii) all costs and expenses incurred in connection with
the preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto, and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreements and related documents, including
the cost of all copies thereof and of the Preliminary Prospectuses and of the
Prospectus and any amendments thereof or supplements thereto supplied to the
Underwriters and such dealers as the Underwriters may request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of the
Securities including, but not limited to, (x) the purchase by the Underwriters
of the Shares and the purchase by the Representatives of the Representatives'
Warrants from the Company, (y) the consummation by the Company of any of its
obligations under this Agreement and the Representatives' Warrant Agreement, and
(z) the resale of the Shares by the Underwriters in connection with the initial
distribution contemplated hereby, (iv) the qualification of the Shares under
state or foreign securities or "Blue Sky" laws, including the costs of printing
and mailing the "Preliminary Blue Sky Memorandum" and the "Supplemental Blue Sky
Memorandum," if any, and reasonable disbursements and fees of counsel in
connection therewith, (v) costs and expenses in connection with due diligence
investigations, including, but not limited to, the fees of any independent
counsel or consultant retained, but excluding those directly incurred by the
Representatives and their counsel, (vi) fees and expenses of the Transfer Agent
and Registrar, (vii) applications for assignments of a rating of the Shares by
qualified
20
<PAGE>
rating agencies, (viii) the fees payable to the Commission and the NASD, and
(ix) the fees and expenses incurred in connection with the quotation of the
Shares on Nasdaq and any other exchange. Notwithstanding any other provision of
this Agreement, whether or not the offering contemplated hereby is successfully
completed, it shall be the Company's obligation to bear all expenses incident to
the performance of the Company's obligations under this Agreement, including,
but not limited to, the following: costs and expenses related to "Tombstone"
advertisements, the Company's "road show" and information meetings and
presentation costs, bound volumes (including a total of four (4) sets for the
Representatives and Underwriters' Counsel), up to four (4) "velobound" volumes
if requested by the Representatives and/or Underwriters' Counsel and all filing
fees and the reasonable fees and disbursements of Underwriters' Counsel incurred
in connection with the review and qualification of the offering of the Shares by
the NASD.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 or Section 12 hereof, the Company shall
------- -------
reimburse and indemnify the Representatives for all of their actual out-of-
pocket expenses, including the fees and disbursements of Underwriters' Counsel,
less any amounts already paid pursuant to Section 5(c) hereof.
-------
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
-------
Representatives on the Closing Date and the Option Closing Date, if any, by
certified or bank cashier's check or, at the election of the Representatives, by
deduction from the proceeds of the offering contemplated herein, a non-
accountable expense allowance equal to one percent (1%) of the gross proceeds of
the sale of the Shares to the public on such dates, so long as such non-
accountable expense allowance does not exceed two hundred fifty thousand dollars
($250,000), thirty-five thousand dollars ($35,000) of which was paid upon the
signing of a Letter of Intent, dated August 25, 1998, between the Company and
Fahnestock. Twenty-five thousand dollars ($25,000) of the non-accountable
expense allowance referred to above was paid upon the filing of the Registration
Statement with the Commission; the balance of such non-accountable allowance is
payable on the Closing Date.
6. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
Underwriters hereunder shall be subject to (i) the continuing accuracy of the
representations and warranties of the Company herein, as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, with respect to the
Company as if such representations and warranties had been made on and as of the
Closing Date or each Option Closing Date, as the case may be, (ii) the accuracy
on and as of the Closing Date or Option Closing Date, if any, of the statements
of the officers of the Company made pursuant to the provisions hereof, (iii) the
performance by the Company on and as of the Closing Date and each Option Closing
Date, if any, of its covenants and obligations hereunder and (iv) the following
further conditions:
(a) The Registration Statement shall have become effective not later
than 3:00 p.m. (New York City time), on the date of this Agreement or such later
date and time as shall be consented to in writing by the Representatives, and,
at the Closing Date and each Option Closing Date, if any, no stop order
suspending the effectiveness of the Registration Statement shall have
21
<PAGE>
been issued and no proceedings for that purpose shall have been instituted or
shall be pending or threatened by the Commission and any request on the part of
the Commission for additional information shall have been complied with to the
reasonable satisfaction of Underwriters' Counsel. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, the price of the Shares and
any price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and, prior to the Closing Date, the Company
shall have provided evidence satisfactory to the Representatives of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
(b) The Registration Statement, or any amendment thereto, shall not
contain an untrue statement of a material fact or omit to state a material fact
which is required to be stated therein or is necessary to make the statements
therein not misleading. The Prospectus, or any supplement thereto, shall not
contain an untrue statement of a material fact or omit to state a material fact
which is required to be stated therein or is necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(c) On or prior to the Closing Date and on or prior to the Option
Closing Date, as the case may be, the Representatives shall have received from
Underwriters' Counsel, such opinion or opinions with respect to the organization
of the Company, the validity of the Securities, the compliance as to form of the
Registration Statement, and the Prospectus with the requirements of the Act and
the Rules and Regulations, and other related matters as the Representatives
request. Underwriters' Counsel shall have received such papers and information
as it reasonably requests a reasonable time in advance of such Closing Date to
enable it to pass upon such matters.
(d) On the Closing Date, the Underwriters shall have received the
favorable opinion of Pepper Hamilton LLP, counsel to the Company, dated the
Closing Date, addressed to the Underwriters in substantially the form attached
hereto as Exhibit B.
---------
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws, (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company, and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Representatives are
justified in relying thereon. Such opinion shall also state that Underwriters'
Counsel is entitled to rely thereon.
22
<PAGE>
An opinion with respect to regulatory matters shall be rendered by
Covington & Burling, or other counsel reasonably acceptable to the Underwriter
in substantially the form attached hereto as Exhibit C.
---------
(e) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Pepper Hamilton LLP and Covington & Burling,
or other counsel reasonably acceptable to the Underwriter and counsel to the
Company, dated the Option Closing Date, addressed to the Underwriters and in
form and substance reasonably satisfactory to Underwriters' Counsel, confirming,
as of the Option Closing Date, the statements made by Pepper Hamilton LLP and
Covington & Burling, or other counsel reasonably acceptable to the Underwriter,
in its opinion, delivered on the Closing Date.
(f) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
-------
satisfaction of any of the representations, warranties or conditions of the
Company, as herein contained.
(g) Prior to each of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no change which has resulted in a Company
Material Adverse Effect nor any development involving a prospective change,
whether or not in the ordinary course of business, from the latest dates as of
which information is given in the Registration Statement and Prospectus, which
is reasonably likely to have a Company Material Adverse Effect; (ii) there shall
have been no transaction, not in the ordinary course of business, entered into
by the Company, from the latest date as of which the financial condition of the
Company is set forth in the Registration Statement and Prospectus which is
materially adverse to the Company; (iii) the Company shall not be in default
under any provision of any instrument relating to any outstanding indebtedness;
(iv) the Company shall not have issued any securities (other than the
Securities); (v) the Company shall not have declared or paid any dividend or
made any distribution in respect of its capital stock of any class; and there
has not been any change in the capital stock of the Company, or any material
change in the debt (long or short term) or liabilities or obligations of the
Company (contingent or otherwise); (vi) no material amount of the assets of the
Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vii) no action, suit or proceeding, at
law or in equity, shall have been pending or, to the best knowledge of the
Company, threatened against the Company, or expressly affecting any of its
properties or business, before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding is reasonably likely to have a Company Material
Adverse Effect, except as set forth in the Registration Statement and
Prospectus; and (viii) no stop order shall have been issued under the Act and no
proceedings therefor shall have been initiated or, to the best knowledge of the
Company, threatened or contemplated by the Commission.
(h) At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the Company signed by the
principal executive
23
<PAGE>
officer and by the chief financial or chief accounting officer of the Company,
dated the Closing Date or Option Closing Date, as the case may be, to the effect
that each of such persons has carefully examined the Registration Statement, the
Prospectus and this Agreement, and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct, in all material respects, as if made
on and as of the Closing Date or the Option Closing Date, as the case
may be, and the Company has complied, in all material respects, with
all agreements and covenants and satisfied all conditions contained in
this Agreement on its part to be performed or satisfied at or prior to
such Closing Date or Option Closing Date, as the case may be;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or,
to the best of each of such person's knowledge, are threatened under
the Act;
(iii) the Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading; and
(iv) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus and except
as disclosed in the Prospectus, (A) the Company has not incurred, up
to and including the Closing Date or the Option Closing Date, as the
case may be, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent; (B) the
Company has not paid or declared any dividends or other distributions
on its capital stock; (C) the Company has not entered into any
material transactions outside of its ordinary course of business; (D)
there has not been any change in the capital stock of the Company or
any material change in the debt (long or short-term) of the Company;
(E) the Company has not sustained any material loss or damage to its
property or assets, whether or not insured; (F) there is no litigation
which is pending or, to the best knowledge of the Company, threatened,
or any development or occurrence which is reasonably likely to give
rise to the same, against the Company, or any affiliated party of the
Company, which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth; and (G) there
has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this
Subsection 6(h) are to such documents as amended and supplemented as of the date
- ----------
of such certificate.
24
<PAGE>
(i) By the Closing Date, the Underwriters will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters complying
in form and substance with Statement on Auditing Standards No. 72 "Letters for
Underwriters and Certain Other Requesting Parties" (including the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
from Andersen:
(i) confirming that they are independent public accountants with
respect to the Company within the meaning of the Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form, in all material respects,
with the applicable accounting requirements of the Act and the Rules
and Regulations thereunder and that the Representatives may rely upon
the opinion of Andersen with respect to such financial statements and
supporting schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company, if available, a reading of the latest
available minutes of the stockholders and Board of Directors of the
Company and the various committees of the Board of Directors of the
Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to their
attention which would lead them to believe that (A) the unaudited
financial statements and supporting schedules of the Company included
in the Registration Statement, if any, do not comply as to form, in
all material respects, with the applicable accounting requirements of
the Act and the Rules and Regulations or are not fairly presented in
conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial
statements of the Company included in the Registration Statement, or
(B) at a specified date not more than five (5) days prior to the
Effective Date, there has been any change in the capital stock of the
Company, any change in the long-term debt of the Company, any decrease
in the stockholders' equity of the Company or any decrease in the net
current assets or net assets of the Company as compared with amounts
shown in the December 31, 1998 balance sheet included in the
Registration Statement, other than as set forth in or contemplated by
the Registration Statement, or, if there was any change or decrease,
setting forth the amount of such change or decrease and (C) during the
period from December 31, 1998 to a specified date not more than five
(5) days prior to the Effective Date,
25
<PAGE>
there was any increase in operating expenses or net loss of the
Company or increase in net loss per share of Common Stock, in each
case as compared with the corresponding period beginning December 31,
1997, other than as set forth in or contemplated by the Registration
Statement, or, if there was any such increase, setting forth the
amount of such increase;
(iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth in
the Prospectus, in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the
general accounting records, including work sheets, of the Company and
excluding any questions requiring an interpretation by legal counsel,
with the results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter and found them to be in
agreement; and
(v) statements as to such other matters incident to the
transaction contemplated hereby as the Representatives may reasonably
request.
(k) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Andersen a letter, dated as of the Closing
Date or the Option Closing Date, as the case may be, to the effect that they
reaffirm the statements made in the letter furnished pursuant to subsection (j)
----------
of this Section 6, except that the specified date referred to shall be a date
-------
not more than five (5) days prior to the Closing Date or the Option Closing
Date, as the case may be, and, if the Company has elected to rely on Rule 430A
of the Rules and Regulations, to the further effect that they have carried out
procedures as specified in clause (iv) of subsection (j) of this Section 6 with
---------- -------
respect to certain amounts, percentages and financial information as specified
by the Representatives and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (iv).
(l) The Company shall have delivered to the Representatives a letter
from Andersen addressed to the Company stating that they have not, during the
immediately preceding two (2) year period, brought to the attention of the
Company's management, any "weakness," as defined in Statement of Auditing
Standards No. 60 "Communication of Internal Control Structure Related Matters
Noted in an Audit," in any of the Company's internal controls.
(m) On each of the Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Representatives for the several
Underwriters' accounts the appropriate number of Shares.
(n) No order suspending the sale of the Shares in any jurisdiction
designated by the Representatives pursuant to subsection (e) of Section 4 hereof
-------
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
threatened.
26
<PAGE>
(o) On or before the Closing Date, the Underwriters shall have
received the favorable opinion of Oppenheimer Wolff & Donnelly LLP, special
intellectual property counsel to the Company, with respect to certain
intellectual property matters, dated the Closing Date, addressed to the
Underwriters, in form and substance satisfactory to Underwriters' Counsel, and
in substantially the form of Exhibit D attached hereto, or in such other form
---------
reasonably acceptable to Underwriters' Counsel.
(p) On or before the Closing Date, the Company shall have executed and
delivered to the Representatives, (i) the Representatives' Warrant Agreement
substantially in the form filed as Exhibit 4.6 to the Registration and (ii) the
Representatives' Warrants in such denominations and to such designees as shall
have been provided to the Company.
(q) On or before the Closing Date, the Shares shall have been duly
approved for quotation on the Nasdaq National Market, subject to official notice
of issuance.
(r) On or before the Closing Date, there shall have been delivered to
the Representatives, in the form and substance previously approved by
Underwriters' Counsel, the Lock-up Agreements covering ___ percent (__%) of the
outstanding Common Stock of the Company, as more fully set forth in Section
-------
1(x).
(s) On or before the Effective Date, the Company shall have effected
the Recapitalization as described in the Prospectus.
(t) Before the Effective Date, the Company shall have properly
effected waivers of all registration rights that the Company granted at any time
prior to the Effective Date.
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 Representatives may terminate this Agreement
or, if the Representatives so elect, may waive any such conditions in writing
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7, "Underwriter" shall include the
-------
officers, directors, partners, employees, agents and counsel of each
Underwriter, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), and each person, if any, who
-------
controls the Underwriter ("controlling person") within the meaning of Section 15
-------
of the Act or Section 20(a) of the Exchange Act, from and against any and all
-------
losses, claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, and suits in respect thereof),
whatsoever (including, but not limited to, any and all costs and expenses
whatsoever reasonably incurred in investigating, preparing or defending against
such action, proceeding, investigation, inquiry or suit, commenced or
threatened, or any claim whatsoever), as such are incurred, to which the
Underwriter or such controlling person may become subject under the Act, the
Exchange Act or any other statute, or at common law or otherwise or under the
27
<PAGE>
laws of foreign countries, arising out of or based upon (A) any untrue statement
or alleged untrue statement of a material fact contained (i) in any Preliminary
Prospectus, the Registration Statement or the Prospectus (as each may be from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which are
included securities of the Company issued or issuable upon exercise of the
Securities; or (iii) in any application or other document or written
communication (in this Section 7 collectively called, "application") executed by
-------
the Company or based upon written information furnished by the Company filed,
delivered or used in any jurisdiction in order to qualify the Securities under
the securities laws thereof or filed with the Commission, any state securities
commission or agency, Nasdaq or any other securities exchange, (B) the omission
or alleged omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they were made), or
(C) any breach of any representation, warranty, covenant or agreement of the
Company contained herein or in any certificate by or on behalf of the Company or
any of its officers delivered pursuant hereto unless, in the case of clause (A)
or (B) above, such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company with respect to any
Underwriter, by or on behalf of such Underwriter, expressly for use in any
Preliminary Prospectus, the Registration Statement or any Prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case may
be; provided, however, that the foregoing indemnity agreement with respect to
-------- -------
any Preliminary Prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any such losses, claims, damages, expenses or
liabilities purchased Shares, or any person controlling such Underwriter, if a
copy of the 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
Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such losses, claims, damages,
expenses or liabilities, unless such failure is the result of noncompliance by
the Company with Section 4(j) hereof.
-------
The indemnity agreement in this subsection (a) shall be in addition to any
liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters, but only with
respect to statements or omissions or alleged omissions, if any, made in any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any application made in reliance
upon, and in conformity with, written information furnished to the Company with
respect to any Underwriter, by such Underwriter, expressly for use in such
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus and directly
relate to the transactions
28
<PAGE>
effected by the Underwriters in connection with the offering of the Shares. The
Company acknowledges that the statements with respect to the public offering of
the Shares set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriters expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus.
The indemnity agreement in this subsection (b) shall be in addition to any
liability which the Underwriters may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section
-------
7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
-------
whom indemnification is to be sought in writing of the commencement thereof (but
the failure to so notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7, except to the extent that it
-------
has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action, investigation,
inquiry, suit or proceeding is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case; provided, however, the fees and expenses of such counsel shall be paid by
-------- -------
such indemnified party or parties unless (i) the employment of such counsel
shall have been authorized in writing by the indemnifying parties in connection
with the defense of such action at the expense of the indemnifying party, (ii)
the indemnifying parties shall not have employed counsel reasonably satisfactory
to such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one (1) or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action, investigation, inquiry, suit or proceeding on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one (1)
additional counsel shall be borne by the indemnifying parties. In no event
shall the indemnifying parties be liable for fees and expenses of more than one
(1) counsel (in addition to any local counsel) separate from their own counsel
for all indemnified parties in connection with any one (1) action,
investigation, inquiry, suit or proceeding or separate but similar or related
actions, investigations, inquiries, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
-------
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent shall not be
-------- -------
unreasonably withheld; provided, further, that no such consent shall be required
-------- -------
where the indemnified parties receive an unconditional release from all claims
in connection with such matter in exchange for payment by the indemnifying party
or indemnifying parties. An indemnifying party will not, without the prior
written consent of the
29
<PAGE>
indemnified parties, settle compromise or consent to the entry of any judgment
with respect to any pending or threatened claim, action, investigation, inquiry,
suit or proceeding in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action), unless such settlement, compromise or consent
(i) includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding and (ii) does
not include a statement as to, or an admission of, fault, culpability or a
failure to act by or on behalf of any indemnified party.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
-------
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
-------
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions, investigations, inquiries, suits or proceedings in respect thereof) (A)
in such proportion as is appropriate to reflect the relative benefits received
by each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand, from the offering of the Shares or (B) if the
allocation provided by clause (A) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above, but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand, in connection with the statements or omissions that resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is the contributing
party and the Underwriters are the indemnified party, the relative benefits
received by the Company, on the one hand, and the Underwriters, on the other
hand, shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Shares (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus. Relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, or by
the Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions, investigations,
inquiries, suits or proceedings in respect thereof) referred to above in this
subdivision (d), shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action, claim, investigation, inquiry, suit or proceeding.
Notwithstanding the provisions of this subdivision (d), the Underwriters shall
not be required to contribute any amount in excess of the underwriting discount
applicable to the Shares purchased by the Underwriters hereunder. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
-------
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 7, each person,
-------
if any, who
30
<PAGE>
controls the Company within the meaning of the Act, each officer of the Company
who has signed the Registration Statement, and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to this subparagraph (d). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit, inquiry,
investigation or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this
subparagraph (d), notify such party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this subparagraph (d), or to
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
--------------------------------------------------
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements as of the
Closing Date and as of the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the indemnity
agreements contained in Section 7 hereof, shall remain operative and in full
-------
force and effect regardless of any investigation made by or on behalf of any
Underwriter, the Company, or any controlling person of any Underwriter, or the
Company, and shall survive the termination of this Agreement or the issuance,
sale and delivery of the Securities to the Underwriters and the Representatives,
as the case may be.
9. Effective Date.
--------------
(a) This Agreement shall become effective at 10:00 a.m., New York City
time, on the next full business day following the date hereof, or at such
earlier time after the Effective Date as the Representatives, in their
discretion, shall release the Shares for sale to the public; provided, however,
-------- -------
that the provisions of Sections 5, 7 and 10 of this Agreement shall at all times
--------
be effective. For purposes of this Section 9, the Shares to be purchased
-------
hereunder shall be deemed to have been so released upon the earlier of dispatch
by the Representatives of telegrams to securities dealers releasing such Shares
for offering or the release by the Representatives for publication of the first
newspaper advertisement which is subsequently published relating to the Shares.
10. Termination.
-----------
(a) Subject to subsection (b) of this Section 10, the Representatives
-------
shall have the right to terminate this Agreement, after the date hereof, (i) if
any domestic or international event or act or occurrence has materially
disrupted, or in the Representatives' opinion will in the immediate future
materially adversely disrupt, the financial markets; or (ii) if any material
adverse change in the financial markets shall have occurred; or (iii) if trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the NASD, the Commission or any
other government authority having
31
<PAGE>
jurisdiction; or (iv) if trading of any of the securities of the Company shall
have been suspended on, or any of the securities of the Company shall have been
delisted from, any exchange or any over-the-counter market; or (v) if the United
States shall have become involved in a war or major hostilities, or if there
shall have been an escalation in an existing war or major hostilities or a
national emergency shall have been declared in the United States; or (vi) if a
banking moratorium has been declared by a state or federal authority; or (vii)
if a moratorium in foreign exchange trading has been declared; or (viii) if the
Company shall have sustained a loss material or substantial to the Company by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in the Representatives' opinion, make it inadvisable to proceed with the
delivery of the Shares; or (ix) if there shall have occurred any outbreak or
escalation of hostilities or any calamity or crisis or there shall have been
such a material adverse change in the conditions or prospects of the Company or
such material adverse change in the general market, or the political or economic
conditions, in the United States or elsewhere as in the Representatives'
judgment would make it inadvisable to proceed with the offering, sale and/or
delivery of the Shares or (x) if W. Vickery Stoughton or Thomas H. Grove shall
no longer serve the Company in his present executive officer position.
(b) If this Agreement is terminated by the Representatives in
accordance with the provisions of Section 10(a) hereof, the Company shall
-------
promptly reimburse and indemnify the Representatives for all of their actual
out-of-pocket expenses, including the fees and disbursements of counsel for the
Underwriters (less amounts previously paid pursuant to Section 5(c) above), so
-------
long as such reimbursable amount does not exceed sixty thousand dollars
($60,000). Notwithstanding any contrary provision contained in this Agreement,
if this Agreement shall not be carried out within the time specified herein, or
any extension thereof granted by the Representatives, by reason of any failure
on the part of the Company to perform any undertaking or satisfy any condition
of this Agreement by it to be performed or satisfied (including, without
limitation, pursuant to Section 6 or Section 12), then the Company shall
------- -------
promptly reimburse and indemnify the Representatives for all of their actual
out-of-pocket expenses, including the fees and disbursements of counsel for the
Underwriters (less amounts previously paid pursuant to Section 5(c) above).
-------
Notwithstanding any contrary provision contained in this Agreement, any election
hereunder or any termination of this Agreement (including, without limitation,
pursuant to Sections 6, 10, 11 and 12 hereof), and whether or not this Agreement
--------
is otherwise carried out, the provisions of Section 5 and Section 7 shall not be
------- -------
in any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
11. Substitution of the Underwriters. If one or more of the Underwriters
--------------------------------
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
------- ------- -------
hereof) to purchase the Shares which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Shares"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangement for one
(1) or more of the non-defaulting Underwriters, or any other underwriter, to
purchase all, but not less than all, of the Defaulted Shares in such amounts as
may be agreed upon and upon the terms
32
<PAGE>
herein set forth. If, however, the Representatives shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Shares does not exceed 10% of the total
number of Firm Shares to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Shares exceeds 10% of the total number
of Firm Shares, this Agreement shall terminate without liability on the part of
any non-defaulting Underwriter.
No action taken pursuant to this Section 11 shall relieve any defaulting
-------
Underwriter from liability in respect of any default by such Underwriter
pursuant to this Agreement.
In the event of any such default which does not result in a termination of
this Agreement, the Representatives shall have the right to postpone the Closing
Date for a period not exceeding seven (7) days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
in any arrangements.
12. Default by the Company. If the Company shall fail on the Closing Date
----------------------
or on any Option Closing Date, as applicable, to sell and deliver the number of
Shares which it is obligated to sell hereunder on such date, then this Agreement
shall terminate (or, if such default shall occur with respect to any Option
Shares to be purchased on an Option Closing Date, the Underwriters may, at the
Representatives' option, by notice from the Representatives to the Company,
terminate the Underwriters' obligation to purchase Option Shares from the
Company on such date) without any liability on the part of any non-defaulting
party other than pursuant to Section 5, Section 7 and Section 10 hereof. No
------- ------- -------
action taken pursuant to this Section 12 shall relieve the Company from
-------
liability, if any, in respect of such default, including under Section 10(b)
-------
hereof.
13. Notices. All notices and communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representatives c/o Fahnestock & Co. Inc., 125 Broad Street, New York, New York
10004, Attention: Henry P. Williams, with a copy to Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C., One Financial Center, Boston, Massachusetts 02111,
Attention: Jonathan L. Kravetz, Esq. Notices to the Company shall be directed
to the Company at 6100 Bristol Parkway, Culver City, California 90230,
Attention: W. Vickery Stoughton, Chairman and Chief Executive Officer, with a
copy to Pepper Hamilton LLP, 3000 Two Logan Square, Philadelphia, Pennsylvania
19103, Attention: Barry M. Abelson, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and
-------
shall be binding upon, the Underwriters, the Company, and the persons referred
to in Section 7 hereof, and their respective successors, legal representatives
-------
and assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue
33
<PAGE>
of this Agreement or any provisions herein contained. No purchaser of Shares
from any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
15. Construction. This Agreement shall be governed by and construed and
------------
enforced in accordance with the laws of the State of New York, without giving
effect to choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement and the Representatives'
----------------------------
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may not be amended
except in a writing, signed by the Representatives and the Company.
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
CARESIDE, INC.
By:
------------------------------
W. Vickery Stoughton
Chairman and Chief Executive Officer
34
<PAGE>
Confirmed and accepted as of
the date first above written.
FAHNESTOCK & CO. INC.
WEDBUSH MORGAN SECURITIES, INC.
SOUTHEAST RESEARCH PARTNERS, INC.
For themselves and as Representatives
of the several Underwriters named
in Schedule A hereto.
----------
By: FAHNESTOCK & CO. INC.
By:
----------------------
Name:
Title:
As Attorney-in-Fact for each of the
Representatives
35
<PAGE>
SCHEDULE A
Number of Shares
to be Purchased
---------------
Fahnestock & Co. Inc.
Wedbush Morgan Securities, Inc.
Southeast Research Partners, Inc.
TOTAL: 2,800,000
36
<PAGE>
EXHIBIT D
[FORM OF INTELLECTUAL PROPERTY OPINION]
[To be provided.]
37
<PAGE>
EXHIBIT A
[FORM OF LOCK-UP AGREEMENT]
____________, 199_
Fahnestock & Co. Inc.,
as Representative of the
several Underwriters
125 Broad Street, 16th Floor
New York, NY 10004
Ladies and Gentlemen:
The undersigned understands that Fahnestock & Co. Inc. ("Fahnestock"), as
Representative of the several Underwriters, proposes to enter into an
Underwriting Agreement (the "Underwriting Agreement") with Careside, Inc., a
Delaware corporation (the "Company"), providing for the public offering (the
"Public Offering") by the several Underwriters, including Fahnestock (the
"Underwriters"), of shares of Common Stock, $.01 par value per share, of the
Company (the "Common Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Fahnestock on behalf of
the Underwriters, it will not, during the period commencing on the date hereof
and ending one (1) year after the date of the final prospectus relating to the
Public Offering (the "Prospectus"), (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock,
or (ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the transfer of shares
of Common Stock or other securities of the Company by the undersigned as a gift
or gifts; and (B) the transfer of shares of Common Stock or other securities of
the Company by the undersigned to its affiliates, as such term is defined in
Rule 405 under the Securities Act of 1933, as amended; provided, that, in the
-------- ----
case of clause (A) or (B) above, the recipient(s), donee(s) or transferee(s),
respectively, agrees in writing as a condition precedent to such issuance, gift
or transfer to be bound by the terms of this agreement. In addition, the
undersigned agrees that, without the prior written consent of Fahnestock on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending one (1) year after the date of the Prospectus, make any
demand for or exercise any right with respect to, the registration of any shares
of Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock.
<PAGE>
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
agreement between the Company and the Underwriters.
Very truly yours,
------------------------
------------------------
Print Name
________________________
(Address)
<PAGE>
EXHIBIT C
---------
[FORM OF OPINION OF COVINGTON & BURLING]
, 1999
FAHNESTOCK & CO. INC.
WEDBUSH MORGAN SECURITIES, INC.
SOUTHEAST RESEARCH PARTNERS, INC.
As Representatives of the Several
Underwriters listed on Schedule A hereto
c/o Fahnestock & Co. Inc.
125 Broad Street
New York, New York 10004
Ladies and Gentlemen:
This letter is furnished to you pursuant to Section 6(d) of the
Underwriting Agreement dated ___________, 1999 (the "Underwriting Agreement")
between _____________________ and Careside, Inc. (the "Company") relating to a
public offering and sale of __________ shares of the Company's common stock, par
value $________ per share (the "Shares"). As used herein, the terms
"Registration Statements" and "Prospectus" have the meanings assigned thereto in
the Underwriting Agreement.
We have acted as special counsel to the Company with respect to certain
United States Food and Drug Administration ("FDA") regulatory matters. In our
capacity as special FDA regulatory counsel to the Company, we have reviewed at
your request those portions of the Registration Statements and the Prospectus
set forth under the captions "Risk Factors - Government Regulation", "Risk
Factors - Effect of Clinical Laboratory Improvement Amendments of 1988", and
"Business - Government Regulation" (collectively, the "Regulatory Disclosure").
In connection with rendering this opinion, we have examined originals, or
copies identified as being true copies of originals, of the Registration
Statements, the Prospectus, and pages _____ of the Underwriting Agreement. Our
understanding of the scope and nature of the Company's business is based solely
on the description of the Company's business set forth under the heading
"Business" in the Prospectus.
We have not made any independent review or investigations of factual or
other matters, including the assets, business or affairs of the Company. We
have assumed the authenticity, accuracy and completeness of the foregoing
documents, on which we are relying, and have made no independent investigations
thereof. Further, we state that we have not independently verified, do not take
any responsibility for, and do not express any opinion as to: (i) any statements
of fact, (ii) any statements concerning state or foreign law, (iii) any legal
conclusions or any statements of belief attributed to the Company, or (iv) the
compliance by the Company with
<PAGE>
applicable FDA or other legal requirements. This opinion is given in the context
of the foregoing.
Nothing herein shall be construed to cause us to be considered "experts"
within the meaning of Section 11 of the Securities Act of 1933, as amended.
Based solely on the inquiry described herein and subject to the limitations
set forth above, we are of the opinion that the statements in the Regulatory
Disclosure, insofar as such statements purport to describe or summarize
applicable provisions of the Federal Food, Drug, and Cosmetic Act ("FDCA") and
the regulations promulgated thereunder, are accurate and complete in all
material respects and fairly present the information purported to be described
therein, and based upon the description of the Company's business contained
under the caption "Business" in the Registration Statements and Prospectus, such
statements summarize the provisions of the FDCA that are material to the
Company's business.
Except as set forth above, we are not passing upon, and we assume no
responsibility for, the accuracy or completeness of the Regulatory Disclosure.
However, we inform you that, in the course of our representation of the Company
on matters as to which we have been consulted from time to time in our capacity
as special FDA counsel, no information has come to our attention that cause us
to believe (i) that the Regulatory Disclosure of the Registration Statements, as
of the date it was declared effective, 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 (ii) that the
Regulatory Disclosure of the Prospectus, as of the date hereof, contains any
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. We are not
commenting on any portion of the Registration Statements or the Prospectus other
than the Regulatory Disclosure.
Based solely on the inquiry described herein and subject to the limitations
set forth above, we are not aware of any lawsuit or regulatory proceeding,
pending or threatened, brought by or before the FDA, in which the Company is or
would be the defendant or respondent, except as described in the Prospectus.
The opinion is rendered to you solely in your capacity as and solely in
connection with the offer and sale by the Company of the Shares to the
Underwriters pursuant to the Underwriting Agreement on the date hereof, and may
not be relied upon by any other person or for any other purpose without our
prior written consent. We assume no obligation to advise you of any facts or
circumstances, or any changes in law, that may come to our attention subsequent
to the date hereof.
Sincerely yours,
COVINGTON & BURLING
2
<PAGE>
EXHIBIT 4.6
FORM OF
WARRANT AGREEMENT
Dated as of
[ ], 1999
among
CARESIDE, INC.,
FAHNESTOCK & CO. INC.,
WEDBUSH MORGAN SECURITIES, INC.
and
SOUTHEAST RESEARCH PARTNERS, INC.
Warrants for
Common Stock of
Careside, Inc.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 Definitions....................................................... 1
SECTION 1.01. Definitions................................................... 1
SECTION 1.02. Other Definitions............................................. 2
SECTION 1.03. Rules of Construction......................................... 3
ARTICLE 2 Warrant Certificates............................................... 3
SECTION 2.01. Form and Dating............................................... 3
SECTION 2.02. Legend........................................................ 3
SECTION 2.03. Execution..................................................... 4
SECTION 2.04. Registration.................................................. 4
SECTION 2.05. Transfer and Exchange......................................... 4
SECTION 2.06. Replacement Certificates...................................... 5
ARTICLE 3 Exercise Terms..................................................... 6
SECTION 3.01. Exercise Price................................................ 6
SECTION 3.02. Exercise Periods.............................................. 6
SECTION 3.03. Expiration.................................................... 6
SECTION 3.04. Manner of Exercise............................................ 6
SECTION 3.05. Issuance of Warrant Shares.................................... 7
SECTION 3.06. Fractional Warrant Shares..................................... 7
SECTION 3.07. Reservation of Warrant Shares................................ 7
ARTICLE 4 Antidilution Provisions........................................... 8
SECTION 4.01. Changes in Common Stock....................................... 8
SECTION 4.02. Cash Dividends and Other Distributions........................ 8
SECTION 4.03. Rights Issue to All Holders of Common Stock................... 9
SECTION 4.04. Other Issuances of Common Stock or Rights.....................10
SECTION 4.05. Combination; Liquidation......................................11
SECTION 4.06. Other Events..................................................11
SECTION 4.07. Superseding Adjustment........................................11
SECTION 4.08. Minimum Adjustment............................................12
SECTION 4.09. Notice of Adjustment..........................................12
SECTION 4.10. Notice of Certain Transactions...............................12
SECTION 4.11. Adjustment to Warrant Certificate.............................13
ARTICLE 5 Registration Rights................................................13
SECTION 5.01. Effectiveness of Registration Statement.......................13
SECTION 5.02. Blue Sky......................................................14
SECTION 5.03. Accuracy of Disclosure........................................14
i
<PAGE>
SECTION 5.04. Indemnification...............................................14
SECTION 5.05. Additional Acts...............................................17
SECTION 5.06. Expenses......................................................17
ARTICLE 6 Miscellaneous......................................................18
SECTION 6.01. Securities and Exchange Commission Reports and
Other Information.............................................18
SECTION 6.02. Persons Benefitting...........................................18
SECTION 6.03. Rights of Holders.............................................18
SECTION 6.04. Amendment.....................................................18
SECTION 6.05. Notices.......................................................19
SECTION 6.06. Governing Law.................................................19
SECTION 6.07. Successors....................................................19
SECTION 6.08. Multiple Originals............................................20
SECTION 6.09. Table of Contents.............................................20
SECTION 6.10. Severability..................................................20
EXHIBIT A Form of Face of Warrant Certificate
ii
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WARRANT AGREEMENT
WARRANT AGREEMENT dated as of [ ], 1999 (this "Agreement"), among
CARESIDE, INC., a Delaware corporation ("Careside"), FAHNESTOCK & CO. INC.,
WEDBUSH MORGAN SECURITIES, INC. and SOUTHEAST RESEARCH PARTNERS, INC., as
Purchasers (the "Purchasers").
WHEREAS, Careside desires to sell to the Purchasers up to 280,000 warrants
(the "Warrants") described herein which will initially entitle the Purchasers to
purchase in the aggregate 280,000 shares of Common Stock, par value $.0l per
share, of Careside ("Common Stock") in connection with an initial public
offering by Careside of 2,800,000 shares of Common Stock (not including shares
offered pursuant to the over-allotment option (the "Shares")); and
WHEREAS, each Warrant will entitle the Purchasers to purchase one (1) share
of Common Stock, subject to adjustment as provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth and for other good and valuable consideration, including, but
not limited to, the payment of Twenty-Eight Dollars ($28.00) by the Purchasers
to Careside, the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1
Definitions
-----------
SECTION 1.01. Definitions.
-----------
"Affiliate" of any Person means any other Person, directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; provided, however, that beneficial
--------- -------
ownership of 10% or more of the voting securities of a Person shall be decreed
to be control. The terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Board" means the Board of Directors of Careside or any committee thereof
duly authorized to act on behalf of such Board of Directors.
"Business Day" means each day that is not a Saturday, a Sunday or a day on
which banking institutions are not required to be open in the State of New York.
"Cashless Exercise Ratio" means a fraction, the numerator of which is the
excess of the Current Market Value per share of Common Stock on the Exercise
Date over the Exercise Price per share as of the Exercise Date and the
denominator of which is the Current Market Value per share of the Common Stock
on the Exercise Date.
<PAGE>
"Combination" means an event in which Careside consolidates with, merges
with or into, or sells all or substantially all of its assets to another Person.
"Current Market Value" per share of Common Stock or any other security at
any date means: (i) if the security is not registered under the Exchange Act,
(a) the value of the security, determined in good faith by the Board and
certified in a board resolution, based on the most recently completed arm's-
length transaction between Careside and a Person other than an Affiliate of
Careside, the closing of which occurred on such date or within the six-month
period preceding such date, or (b) if no such transaction shall have occurred on
such date or within such six-month period, the value of the security as
determined by an independent financial expert; or (ii) if the security is
registered under the Exchange Act, the average of the last reported sale price
of the Common Stock on the Nasdaq National Market or any other exchange or
market on which the Common Stock is traded (or the equivalent in an over-the-
counter market) for each Business Day during the period commencing 15 Business
Days before such date and ending on the date one day prior to such date, or if
the security has been registered under the Exchange Act for less than 15
consecutive Business Days before such date, the average of the last reported
sale prices (or such equivalent) for all of the Business Days before such date
for which daily closing bid prices are available (provided, however, that if the
-------- -------
closing bid price is not determinable for at least 10 Business Days in such
period, the "Current Market Value" of the security shall be determined as if the
security were not registered under the Exchange Act).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Date" means, for a given Warrant, the day on which such Warrant
is exercised pursuant to Section 3.04.
"Issue Date" means the date on which Warrants are initially issued.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"SEC" means the Securities and Exchange Commission, or any successor agency
or body performing substantially similar functions.
"Securities Act" means the Securities Act of 1933, as amended.
"Warrant Certificates" mean the registered certificates issued by Careside
under this Agreement representing the Warrants.
"Warrant Shares" mean the shares of Common Stock (and any other securities)
for which the Warrants are exercisable.
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SECTION 1.02. Other Definitions
-----------------
SECTION
-------
"Agreement".................................... Recitals
"Cashless Exercise"............................ 3.04
"Certificate Register"......................... 2.04
"Common Stock"................................. Recitals
"Exercise Price"............................... 3.01
"Expiration Date".............................. 3.02(b)
"Holder"....................................... 2.04
"Indemnified Holders".......................... 5.04(a)
"Registrar..................................... 3.07
"Registration Statement"....................... 5.01
"Shares"....................................... Recitals
"Successor Company"............................ 4.05(a)
"Transfer Agent"............................... 3.05
"Warrants"..................................... Recitals
SECTION 1.03. Rules of Construction .
---------------------
(i) a defined term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles as in
effect from time to time;
(iii) "or" is not exclusive;
(iv) "including" means including without limitation; and
(v) words in the singular include the plural and words in the plural
include the singular.
ARTICLE 2
Warrant Certificates
--------------------
SECTION 2.01. Form and Dating. Each Warrant Certificate shall be
---------------
substantially in the form of Exhibit A attached hereto, which is hereby
---------
incorporated in and expressly made a part of this Agreement. The Warrant
Certificates may have notations, legends or endorsements required by law, stock
exchange rule, agreements to which Careside is subject, if any, or usage
(provided that any such notation, legend or endorsement is in a form acceptable
to Careside) and shall bear the legends required by Section 2.02. Each Warrant
Certificate shall be dated the date of its countersignature. The terms of the
Warrant Certificate set forth in Exhibit A are part of the terms of this
---------
Agreement.
SECTION 2.02. Legend. Each Warrant Certificate shall bear the
------
following legend:
THE COMMON STOCK, PAR VALUE $.0l PER SHARE, OF CARESIDE FOR WHICH THIS
WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES
ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN
APPLICABLE EXEMPTION
3
<PAGE>
FROM SUCH REGISTRATION REQUIREMENTS. ACCORDINGLY, NO HOLDER SHALL BE
ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE TIME
OF EXERCISE, (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT RELATING
TO THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT
HAS BEEN FILED WITH, AND DECLARED EFFECTIVE BY, THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC"), AND NO STOP ORDER SUSPENDING THE EFFECTIVENESS OF
SUCH REGISTRATION STATEMENT HAS BEEN ISSUED BY THE SEC, OR (ii) THE
ISSUANCE OF SUCH SHARES IS PERMITTED PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OR ANY STATE SECURITIES LAWS AND NEITHER THIS SECURITY NOR
ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED WITHIN THE "UNITED STATES" OR TO "U.S. PERSONS" (AS DEFINED IN
REGULATION S UNDER THE SECURITIES ACT) IN THE ABSENCE OF SUCH REGISTRATION
OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS
HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT.
SECTION 2.03. Execution. Warrants entitling the Purchasers to purchase
---------
in the aggregate up to 280,000 Warrant Shares shall be executed on behalf of
Careside by the Chief Executive Officer or Chief Financial Officer of Careside
and attested by the signature of the Secretary or Assistant Secretary of
Careside.
SECTION 2.04. Registration. The Warrants shall be numbered and shall be
-------------
registered by Careside as they are issued. Careside shall keep a register
("Certificate Register") of the Warrant Certificates and of their transfer and
exchange. The Certificate Register shall show the names and addresses of the
respective Holders (as defined below) and the date and number of Warrants
represented on the face of each Warrant Certificate. Careside shall be entitled
to treat the registered holder of any Warrant (the "Holder") as the owner in
fact thereof for all purposes and shall not be bound to recognize any equitable
or other claim to or interest in such Warrant on the part of any other Person,
and shall not be liable for any registration or transfer of any Warrant which is
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary. [Ninety-Three Thousand Three Hundred Thirty-Four (93,334)] Warrants
shall be registered initially in the name of "Fahnestock & Co. Inc." and
[Ninety-Three Thousand Three Hundred Thirty-Three (93,333)] Warrants shall be
initially registered in each of the names of "Wedbush Morgan Securities, Inc."
and "Southeast Research Partners, Inc.".
SECTION 2.05. Transfer and Exchange. The Warrants may not be
---------------------
transferred, assigned, sold or hypothecated by the Holder except in accordance
with this Section 2.05 or in an involuntary assignment by operation of law to
the Holder's personal representative.
4
<PAGE>
(a) Each Holder of Warrants, by acceptance thereof, represents and
acknowledges that such Warrants have not been and will not be registered under
the Securities Act on the grounds that the issuance of such Warrants is exempt
from registration under Section 4(2) of the Securities Act as not involving any
public offering. Each Holder of Warrants represents and warrants that such
Holder (i) is acquiring these Warrants for investment for such Holder's own
account, with no intention of reselling or otherwise distributing the same,
subject, nevertheless, to any requirement of law that the disposition of such
Holder's property shall at all times be within such Holder's control, (ii) is an
"accredited investor" as defined in Rule 501 of Regulation D under the
Securities Act, (iii) has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the
investments made or to be made in connection with the acquisition and exercise
of the Warrants, and (iv) has been provided all such information and access to
information concerning such Holder's investment hereunder as such Holder has
requested from Careside. The Warrants may not be transferred except (1) to
officers and partners of the Purchasers, (2) (x) pursuant to an effective
registration statement under the Securities Act or (y) in the case of transfers
other than those described in clause (2) (x), upon the conditions specified in
Section 2.02 hereof, which conditions are intended, among other things, to
ensure compliance with the provisions of the Securities Act in respect of the
transfer of such Warrant, and (3) upon compliance with applicable state
securities laws.
(b) The Warrant Certificates shall be issued in registered form only and
shall be transferable only upon the surrender of such Warrant Certificate for
registration of transfer. When a Warrant Certificate is presented to Careside
with a request to register a transfer, Careside shall register the transfer as
requested if the requirements of Section 8-401(1) of the Uniform Commercial Code
as in effect in the State of New York are met. All Warrant Certificates issued
upon any registration of transfer or exchange of Warrant Certificates shall be
valid obligations of Careside, entitled to the same benefits under this
Agreement as the Warrant Certificates surrendered upon such registration of
transfer or exchange. No service charge will be made to a Holder for any
registration of transfer or exchange upon surrender of any Warrant Certificate.
However, Careside may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge that may be imposed in connection with
any registration of transfer or exchange of Warrant Certificates but not for any
exchange or original issuance (not involving a transfer) pursuant to Section
3.04 or 3.05.
SECTION 2.06. Replacement Certificates. If a mutilated Warrant
------------------------
Certificate is surrendered to Careside or if the Holder of a Warrant Certificate
claims that the Warrant Certificate has been lost, destroyed or wrongfully
taken, Careside shall issue a replacement Warrant Certificate if the
requirements of Section 8-405 of the Uniform Commercial Code as in effect in the
State of New York are met. Such Holder shall furnish an indemnity bond
sufficient in the judgment of Careside to protect Careside from any loss which
it may suffer if a Warrant Certificate is replaced. Careside may charge the
Holder for its expenses in replacing a Warrant Certificate. Every replacement
Warrant Certificate is an additional obligation of Careside. Careside may not
issue new Warrant Certificates to replace Warrant Certificates to the extent
they represent Warrants which have been exercised or Warrants which Careside has
purchased or otherwise acquired.
5
<PAGE>
ARTICLE 3
Exercise Terms
--------------
SECTION 3.01. Exercise Price. Each Warrant shall initially entitle
--------------
the Holder thereof, subject to adjustment pursuant to the terms of this
Agreement, to purchase one share of Common Stock for a per share exercise price
(the "Exercise Price") of $[___] [120% of the initial public offering price].
SECTION 3.02. Exercise Periods.
----------------
(a) Subject to the terms and conditions set forth herein, the
Warrants shall be exercisable at any time or from time to time after [ ]
[the first anniversary of the date the warrants are issued]; provided, however,
-------- -------
that Holders will be able to exercise their Warrants only if (i) the
Registration Statement relating to the Warrant Shares is effective, or (ii) the
exercise of such Warrants is exempt from the registration requirements of the
Securities Act, and the Warrant Shares are qualified for sale or exempt from
qualification under the applicable securities laws of the states or other
jurisdictions in which such holders reside.
(b) No Warrant shall be exercisable after [insert the date which is
the fifth anniversary of the date the warrants are issued] (the "Expiration
Date").
SECTION 3.03. Expiration. Each Warrant shall terminate and become
----------
void as of the earlier of (i) the close of business on the Expiration Date or
(ii) the date such Warrant is exercised. Careside shall give notice not less
than 90 and not more than 120 days prior to the Expiration Date to the Holders
of all then outstanding Warrants to the effect that the Warrants will terminate
and become void as of the close of business on the Expiration Date; provided
--------
however, that if Careside fails to give notice as provided in this Section 3.03,
- -------
the Warrants will nevertheless expire and become void on the Expiration Date.
SECTION 3.04. Manner of Exercise. Warrants may be exercised upon (i)
------------------
surrender to Careside, or its duly authorized agent, of the related Warrant
Certificate, together with the form of election to purchase Common Stock
attached thereto, duly filled in and signed by the Holder thereof, and (ii)
payment to Careside, or its duly authorized agent, for the account of Careside,
of the Exercise Price for each Warrant Share issuable upon the exercise of such
Warrants then exercised. Such payment shall be made (i) in cash or by certified
or official bank check payable to the order of Careside or by wire transfer of
funds to an account designated by Careside for such purpose or (ii) without the
payment of cash, by reducing the number of shares of Common Stock obtainable
upon the exercise of a Warrant so as to yield a number of shares of Common Stock
upon the exercise of such Warrant equal to the product of (a) the number of
shares of Common Stock issuable as of the Exercise Date upon the exercise of
such Warrant (if payment of the Exercise Price were being made in cash) and (b)
the Cashless Exercise Ratio. An exercise of a Warrant in accordance with the
immediately preceding sentence is herein called a "Cashless Exercise". Upon
surrender of a Warrant Certificate representing more than one Warrant in
connection with the Holder's option to elect a Cashless Exercise, the number of
shares of Common Stock deliverable upon a Cashless Exercise shall be equal to
the number of
6
<PAGE>
shares of Common Stock issuable upon the exercise of Warrants that the Holder
specifies are to be exercised pursuant to a Cashless Exercise multiplied by the
Cashless Exercise Ratio. All provisions of this Agreement shall be applicable
with respect to a surrender of a Warrant Certificate pursuant to a Cashless
Exercise for less than the full number of Warrants represented thereby. Subject
to Section 3.02, the rights represented by the Warrants shall be exercisable at
the election of the Holders thereof either in full at any time or from time to
time in part. In the event that a Warrant Certificate is surrendered for
exercise of less than all the Warrants represented by such Warrant Certificate
at any time prior to the Expiration Date, a new Warrant Certificate representing
the remaining Warrants shall be issued by Careside.
SECTION 3.05. Issuance of Warrant Shares. Subject to Section 2.06, upon
--------------------------
the surrender of Warrant Certificates and payment of the per share Exercise
Price, as set forth in Section 3.04, Careside shall issue and cause a transfer
agent for the Common Stock ("Transfer Agent") to countersign and deliver, upon
the written order of the Holder in such name or names as the Holder may
designate, a stock certificate or certificates for the number of full Warrant
Shares so purchased upon the exercise of such Warrants or other securities or
property to which it is entitled, registered or otherwise, to the Person or
Persons entitled to receive the same, together with cash as provided in Section
3.06 in respect of any fractional Warrant Shares otherwise issuable upon such
exercise. Such stock certificate or certificates shall be deemed to have been
issued and any Person so designated to be named therein shall be deemed to have
become a holder of record of such Warrant Shares as of the date of the surrender
of such Warrant Certificates and payment of the per share Exercise Price, as
previously stated; provided, however, that if, at such date, the transfer books
--------- -------
for the Warrant Shares shall be closed, the stock certificates for the Warrant
Shares in respect of which such Warrants are then exercised shall be issuable as
of the date on which such books shall next be opened and until such date
Careside shall be under no duty to deliver any stock certificates for such
Warrant Shares; provided further, however, that such transfer books, unless
----------------- -------
otherwise required by law, shall not be closed at any one time for a period
longer than 20 calendar days.
SECTION 3.06. Fractional Warrant Shares. Careside shall not be required
-------------------------
to issue fractional Warrant Shares on the exercise of Warrants. If more than
one Warrant shall be exercised in full at the same time by the same Holder, the
number of full Warrant Shares which shall be issuable upon such exercise shall
be computed on the basis of the aggregate number of Warrant Shares purchasable
pursuant thereto. If any fraction of a Warrant Share would, except for the
provisions of this Section 3.06, be issuable on the exercise of any Warrant (or
specified portion thereof), Careside shall pay, at the time of exercise, an
amount in cash equal to the Current Market Value per Warrant Share, as
determined on the day immediately preceding the date the Warrant is exercised,
multiplied by such fraction, computed to the nearest whole cent.
SECTION 3.07. Reservation of Warrant Shares. Careside shall at all
-----------------------------
times keep reserved out of its authorized shares of Common Stock a number of
shares of Common Stock sufficient to provide for the exercise of all outstanding
Warrants. The registrar for the Common Stock (the "Registrar") shall, at all
times until the Expiration Date, reserve such number of authorized shares as
shall be required for such purpose. Careside will keep a copy of this Agreement
on file with the Transfer Agent. All Warrant Shares which may be issued upon
7
<PAGE>
exercise of Warrants shall, upon issue, be fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
created by or through Careside, with respect to the issue thereof. Careside
will supply such Transfer Agent with duly executed stock certificates for such
purpose and will itself provide or otherwise make available any cash which may
be payable as provided in Section 3.06. Careside will provide such Transfer
Agent with a copy of all notices of adjustments (and certificates related
thereto) transmitted to each Holder.
Before taking any action which would cause an adjustment pursuant to
Article 4 to reduce the Exercise Price below the then par value (if any) of the
Common Stock, Careside shall take any and all corporate action which may, in the
opinion of its counsel, be necessary in order that Careside may validly and
legally issue fully paid and nonassessable shares of Common Stock at the
Exercise Price as so adjusted.
ARTICLE 4
Antidilution Provisions
-----------------------
SECTION 4.01. Changes in Common Stock. In the event that at any time or
-----------------------
from time to time Careside shall (i) pay a dividend or make a distribution on
its Common Stock in shares of its Common Stock or other shares of its capital
stock, (ii) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock or (iv) increase or
decrease the number of shares of Common Stock outstanding by reclassification of
its Common Stock, then the number of shares of Common Stock issuable upon
exercise of each Warrant immediately after the happening of such event shall be
adjusted to a number determined by multiplying the number of shares of Common
Stock that a Holder would have owned or have been entitled to receive upon
exercise had such Warrants been exercised immediately prior to the happening of
the events described above (or, in the case of a dividend or distribution of
Common Stock or other shares of capital stock, immediately prior to the record
date therefor) by a fraction, the numerator of which shall be the total number
of shares of Common Stock outstanding immediately after the happening of the
events described above and the denominator of which shall be the total number of
shares of Common Stock outstanding immediately prior to the happening of the
events described above; and subject to Section 4.08, the Exercise Price for each
Warrant shall be adjusted to a number determined by dividing the Exercise Price
immediately prior to such event by such fraction. An adjustment made pursuant
to this Section 4.01 shall become effective immediately after the effective date
of such event, retroactive to the record date therefor in the case of a dividend
or distribution in shares of Common Stock or other shares of Careside's capital
stock.
SECTION 4.02. Cash Dividends and Other Distributions. In the event that
--------------------------------------
at any time or from time to time Careside shall distribute to all holders of
Common Stock (i) any dividend or other distribution of cash, evidences of its
indebtedness, shares of its capital stock or any other assets, properties or
securities or (ii) any options, warrants or other rights to subscribe for or
purchase any of the foregoing (other than, in each case, (w) the issuance of any
rights under a shareholder rights plan, (x) any dividend or distribution
described in Section 4.01, (y)
8
<PAGE>
any rights, options, warrants or securities described in Section 4.03 and (z)
any cash dividends or other cash distributions from current or retained
earnings), then the number of shares of Common Stock issuable upon the exercise
of each Warrant shall be increased to a number determined by multiplying the
number of shares of Common Stock issuable upon the exercise of such Warrant
immediately prior to the record date for any such dividend or distribution by a
fraction, the numerator of which shall be the Current Market Value per share of
Common Stock on the record date for such dividend or distribution and the
denominator of which shall be such Current Market Value per share of Common
Stock on the record date for such dividend or distribution less the sum of (x)
the amount of cash, if any, distributed per share of Common Stock and (y) the
fair value (as determined in good faith by the Board, whose determination shall
be evidenced by a board resolution, a copy of which will be sent to Holders upon
request) of the portion, if any, of the distribution applicable to one share of
Common Stock consisting of evidences of indebtedness, shares of stock,
securities, other assets or property, warrants, options or subscription or
purchase rights; and, subject to Section 4.08, the Exercise Price shall be
adjusted to a number determined by dividing the Exercise Price immediately prior
to such record date by the above fraction. Such adjustments shall be made
whenever any distribution is made and shall become effective as of the date of
distribution, retroactive to the record date for any such distribution;
provided, however, that Careside is not required to make an adjustment pursuant
- -------- -------
to this Section 4.02 if at the time of such distribution Careside makes the same
distribution to Holders of Warrants as it makes to holders of Common Stock pro
rata based on the number of shares of Common Stock for which such Warrants are
exercisable (whether or not currently exercisable). No adjustment shall be made
pursuant to this Section 4.02 which shall have the effect of decreasing the
number of shares of Common Stock issuable upon exercise of each Warrant or
increasing the Exercise Price.
SECTION 4.03. Rights Issue to All Holders of Common Stock. In the event
-------------------------------------------
that at any time or from time to time Careside shall issue to all holders of
Common Stock, without any charge, rights, options or warrants entitling the
holders thereof to subscribe for shares of Common Stock, or securities
convertible into or exchangeable or exercisable for Common Stock, entitling such
holders to subscribe for or purchase shares of Common Stock at a price per share
that is lower at the record date for such issuance than the then Current Market
Value per share of Common Stock other than in connection with the adoption of a
shareholder rights plan by Careside, then the number of shares of Common Stock
issuable upon the exercise of each Warrant shall be increased to a number
determined by multiplying the number of shares of Common Stock theretofore
issuable upon exercise of each Warrant by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding on the date of
issuance of such rights, options, warrants or securities plus the number of
additional shares of Common Stock offered for subscription or purchase or into
or for which such securities that are issued are convertible, exchangeable or
exercisable, and the denominator of which shall be the number of shares of
Common Stock outstanding on the date of issuance of such rights, options,
warrants or securities plus the total number of shares of Common Stock which the
aggregate consideration expected to be received by Careside (assuming the
exercise or conversion of all such rights, options, warrants or securities)
would purchase at the then Current Market Value per share of Common Stock.
Subject to Section 4.08, in the event of any such adjustment, the Exercise Price
shall be adjusted to a number determined by dividing the Exercise Price
immediately prior to
9
<PAGE>
such date of issuance by the aforementioned fraction. Such adjustment shall be
made immediately after such rights, options or warrants are issued and shall
become effective, retroactive to the record date for the determination of
stockholders entitled to receive such rights, options, warrants or securities.
No adjustment shall be made pursuant to this Section 4.03 which shall have the
effect of decreasing the number of shares of Common Stock purchasable upon
exercise of each Warrant or of increasing the Exercise Price.
SECTION 4.04. Other Issuances of Common Stock or Rights. In the event
-----------------------------------------
that at any time or from time to time Careside shall issue (i) shares of Common
Stock (subject to the provisions below), (ii) rights, options or warrants
entitling the holders thereof to subscribe for shares of Common Stock (provided,
--------
however, that no adjustment shall be made upon the exercise of such rights,
- -------
options or warrants) or (iii) securities convertible into or exchangeable or
exercisable for Common Stock (provided, however, that no adjustment shall be
-------- -------
made upon the conversion, exchange or exercise of such securities (other than
issuances specified in (i), (ii) or (iii) which are made as the result of anti-
dilution adjustments in such securities)), at a price per share at the record
date of such issuance that is less than the then Current Market Value per share
of Common Stock, then the number of shares of Common Stock issuable upon the
exercise of each Warrant shall be increased to a number determined by
multiplying the number of shares of Common Stock theretofore issuable upon
exercise of each Warrant by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately after such sale or
issuance plus the number of additional shares of Common Stock offered for
subscription or purchase or into or for which such securities that are issued
are convertible, exchangeable or exercisable, and the denominator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
sale or issuance plus the total number of shares of Common Stock which the
aggregate consideration expected to be received by Careside (assuming the
exercise or conversion of all such rights, options, warrants or securities, if
any) would purchase at the then Current Market Value per share of Common Stock;
and, subject to Section 4.08, the Exercise Price shall be adjusted to a number
determined by dividing the Exercise Price immediately prior to such date of
issuance by the aforementioned fraction; provided, however, that no adjustment
-------- -------
to the number of Warrant Shares issuable upon the exercise of the Warrants or to
the Exercise Price shall be made as a result of (i) the issuance of shares of
Common Stock under any warrants, options or other rights existing on the date
hereof, (ii) the issuance of shares of Common Stock in bona fide public
offerings that are underwritten or in which a placement agent is retained by
Careside or (iii) the issuance of options, or shares of Common Stock pursuant to
any option, under any employee benefit plans approved by the Board. Such
adjustments shall be made whenever such rights, options or warrants or
convertible securities are issued. No adjustment shall be made pursuant to this
Section 4.04 which shall have the effect of decreasing the number of shares of
Common Stock issuable upon exercise of each warrant or of increasing the
Exercise Price. For purposes of this Section 4.04 only, any issuance of Common
Stock, or rights, options or warrants to subscribe for, or other securities
convertible into or exercisable or exchangeable for, Common Stock, which
issuance (or agreement to issue) (A) is in exchange for or is otherwise in
connection with the acquisition of the property (excluding any such exchange
exclusively for cash) of any Person and (B) is at a price per share equal to the
lower of the Current Market Value at the time an agreement in principle is
reached or at the time a definitive agreement is entered into, shall be deemed
to have been made at a price
10
<PAGE>
per share equal to the Current Market Value per share at the record date with
respect to such issuance (the time of closing or consummation of such exchange
or acquisition) if such definitive agreement is entered into within 90 days of
the date of such agreement in principle.
SECTION 4.05. Combination; Liquidation.
------------------------
(a) Except as provided in Section 4.05(b), in the event of a Combination,
each Holder shall have the right to receive upon exercise of the Warrants the
kind and amount of shares of capital stock or other securities or property which
such Holder would have been entitled to receive upon or as a result of such
Combination had such Warrant been exercised immediately prior to such event.
Unless paragraph 4.05(b) is applicable to a Combination, Careside shall provide
that the surviving or acquiring Person (the "Successor Company") in such
Combination will enter into an agreement confirming the Holders' rights pursuant
to this Section 4.05(a) and providing for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Article
4. The provisions of this Section 4.05(a) shall similarly apply to successive
Combinations involving any Successor Company.
(b) In the event of (i) a Combination where consideration to the holders of
Common Stock in exchange for their shares is payable solely in cash or (ii) the
dissolution, liquidation or winding-up of Careside, the holders of the Warrants
shall be entitled to receive, upon surrender of their Warrant Certificates,
distributions on an equal basis with the holders of Common Stock or other
securities issuable upon exercise of the Warrants, as if the Warrants had been
exercised immediately prior to such event, less the Exercise Price.
In case of any Combination described in this Section 4.05(b), the Successor
Company and, in the event of any dissolution, liquidation or winding-up of
Careside, Careside, shall deposit promptly with an independent agent appointed
for such purpose the funds, if any, necessary to pay to the Holders the amounts
to which they are entitled as described above. After such funds and the
surrendered Warrant Certificates are received, such agent is required to deliver
a check in such amount as is appropriate (or, in the case of consideration other
than cash, such other consideration as is appropriate) to such Person or Persons
as it may be directed in writing by the Holders surrendering such Warrants.
SECTION 4.06. Other Events. If any event occurs as to which the
------------
foregoing provisions of this Article 4 are not strictly applicable or, if
strictly applicable, would not, in the good faith judgment of the Board, fairly
and adequately protect the purchase rights of the Holders in accordance with the
essential intent and principles of such provisions, then the Board shall make
such adjustments in the application of such provisions, in accordance with such
essential intent and principles, as shall be reasonably necessary, in the good
faith opinion of such Board, to protect such purchase rights as aforesaid, but
in no event shall any such adjustment have the effect of increasing the Exercise
Price or decreasing the number of shares of Common Stock issuable upon exercise
of any Warrant.
SECTION 4.07. Superseding Adjustment. Upon the expiration of any
----------------------
rights, options, warrants or conversion or exchange privileges which resulted in
adjustments pursuant to this Article 4, if any Warrants shall not have been
exercised, the number of Warrant Shares
11
<PAGE>
issuable upon the exercise of each Warrant shall be readjusted pursuant to the
applicable section of this Article 4 as if (A) the only shares of Common Stock
issuable upon exercise of such rights, options, warrants, conversion or exchange
privileges were the shares of Common Stock, if any, actually issued upon the
exercise of such rights, options, warrants or conversion or exchange privileges
and (B) shares of Common Stock actually issued, if any, were issuable for the
consideration actually received by Careside upon such exercise plus the
aggregate consideration, if any, actually received by Careside for the issuance,
sale or grant of all such rights, options, warrants or conversion or exchange
privileges whether or not exercised and the Exercise Price shall be readjusted
inversely; provided, however, that no such readjustment shall (except by
-------- ------
reason of an intervening adjustment under Section 4.01) have the effect of
decreasing the number of Warrant Shares purchasable upon the exercise of each
Warrant or increase the Exercise Price by an amount in excess of the amount of
the adjustment initially made in respect of the issuance, sale or grant of such
rights, options, warrants or conversion or exchange privileges.
SECTION 4.08. Minimum Adjustment. The adjustments required by the
------------------
preceding Sections of this Article 4 shall be made whenever and as often as any
specified event requiring an adjustment shall occur, except that no adjustment
of the Exercise Price or the number of shares of Common Stock issuable upon
exercise of Warrants that would otherwise be required shall be made unless and
until such adjustment either by itself or with other adjustments not previously
made increases or decreases by at least l% the Exercise Price or the number of
shares of Common Stock issuable upon exercise of Warrants immediately prior to
the making of such adjustment. Any adjustment representing a change of less
than such minimum amount shall be carried forward and made as soon as such
adjustment, together with other adjustments required by this Article 4 and not
previously made, would result in a minimum adjustment. For the purpose of any
adjustment, any specified event shall be deemed to have occurred at the close of
business on the date of its occurrence. In computing adjustments under this
Article 4, fractional interests in Common Stock shall be taken into account to
the nearest one-hundredth of a share.
SECTION 4.09. Notice of Adjustment. Whenever the Exercise Price or the
--------------------
number of shares of Common Stock and other property, if any, issuable upon
exercise of the Warrants is adjusted, as herein provided, Careside shall
promptly deliver to the Holders in accordance with Section 6.05 a certificate of
a firm of independent accountants selected by the Board (who may be the regular
accountants employed by Careside) setting forth, in reasonable detail, the event
requiring the adjustment and the method by which such adjustment was calculated
(including a description of the basis on which (i) the Board determined the fair
value of any evidences of indebtedness, other securities or property or
warrants, options or other subscription or purchase rights and (ii) the Current
Market Value of the Common Stock was determined, if either of such
determinations were required), and specifying the Exercise Price and the number
of shares of Common Stock issuable upon exercise of Warrants after giving effect
to such adjustment.
SECTION 4.10. Notice of Certain Transactions. In the event that
------------------------------
Careside shall propose to (a) pay any dividend payable in securities of any
class to the holders of its Common Stock or to make any other non-cash dividend
or distribution to the holders of its Common Stock (b) offer the holders of its
Common Stock rights to subscribe for or to purchase any securities convertible
into shares of Common Stock or shares of stock of any class or any other
securities,
12
<PAGE>
rights or options, (c) issue any (i) shares of Common Stock, (ii) rights,
options or warrants entitling the holders thereof to subscribe for shares of
Common Stock, or (iii) securities convertible into or exchangeable or
exercisable for Common Stock (in the case of (i), (ii) and (iii), if such
issuance or adjustment would result in an adjustment hereunder), (d) effect any
capital reorganization, reclassification, consolidation or merger, (e) effect
the voluntary or involuntary dissolution, liquidation or winding-up of Careside
or (f) make a tender offer or exchange offer with respect to the Common Stock,
Careside shall within 5 days send to the Holders a notice of such proposed
action or offer. Such notice shall be mailed to the Holders in accordance with
Section 6.05, which shall specify the record date for the purposes of such
dividend, distribution or rights, or the date such issuance or event is to take
place and the date of participation therein by the holders of Common Stock, if
any such date is to be fixed, and shall briefly indicate the effect of such
action on the Common Stock and on the number and kind of any other shares of
stock and on other property, if any, and the number of shares of Common Stock
and other property, if any, issuable upon exercise of each Warrant and the
Exercise Price after giving effect to any adjustment pursuant to Article 4 which
will be required as a result of such action. Such notice shall be given as
promptly as possible and (x) in the case of any action covered by clause (a) or
(b) above, at least 10 days prior to the record date for determining holders of
the Common Stock for purposes of such action or (y) in the case of any other
such action, at least 20 days prior to the date of the taking of such proposed
action or the date of participation therein by the holders of Common Stock,
whichever shall be the earlier.
SECTION 4.11. Adjustment to Warrant Certificate. The form of Warrant
---------------------------------
Certificate need not be changed because of any adjustment made pursuant to this
Article 4, and Warrant Certificates issued after such adjustment may state the
same Exercise Price and the same number of shares of Common Stock issuable upon
exercise of the Warrants as are stated in the Warrant Certificates initially
issued pursuant to this Agreement. Careside, however, may at any time in its
sole discretion make any change in the form of Warrant Certificate that it may
deem appropriate to give effect to such adjustments and that does not affect the
substance of the Warrant Certificate, and any Warrant Certificate thereafter
issued or countersigned, whether in exchange or substitution for an outstanding
Warrant Certificate or otherwise, may be in the form as so changed.
ARTICLE 5
Registration Rights
-------------------
SECTION 5.01. Effectiveness of Registration Statement. Careside shall
---------------------------------------
cause to be filed pursuant to Rule 415 (or any successor provision) of the
Securities Act a registration statement covering the issuance of Warrant Shares
to the Holders upon exercise of the Warrants by the Holders thereof (the
"Registration Statement") and shall use its reasonable efforts to cause the
Registration Statement to be declared effective on or before the first
anniversary of the Issue Date. Careside shall cause the Registration Statement
to remain effective until the earlier of (i) such time as all Warrants have been
exercised and (ii) the Expiration Date. Careside shall (a) furnish to each
Holder, without charge, at least one copy of the Registration Statement and any
amendments thereto, (b) for so long as any Registration Statement is effective,
deliver to each
13
<PAGE>
Holder, without charge, as many copies of the final prospectus included in such
Registration Statement and any amendment or supplement thereto as such Holder
may reasonably request and (c) if in the opinion of counsel for the Holders any
amendment or supplement to the Registration Statement is required to enable the
Holder to resell Warrant Shares, effect such amendments or supplements and
cooperate in any arrangement with respect to such resale.
SECTION 5.02. Blue Sky. Careside shall use its reasonable efforts to
--------
register or qualify the Warrant Shares under all applicable securities laws,
blue sky laws or similar laws of all jurisdictions in the United States [and
Canada] in which any Holder of Warrants may be deemed to purchase Warrant Shares
upon the exercise of Warrants and shall use its reasonable efforts to maintain
such registration or qualification through the earlier of (i) such time as all
Warrants have been exercised and (ii) the Expiration Date; provided, however,
-------- -------
that Careside shall not be required to qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 5.02 or to take any action which would subject it to general service of
process or to taxation in any such jurisdiction where it is not then so subject.
SECTION 5.03. Accuracy of Disclosure. To the extent any Holder uses the
----------------------
Registration Statement for any resale of Warrant Shares as provided in clause
(c) of Section 5.01, Careside represents and warrants to each Holder and agrees
for the benefit of each Holder that (i) the Registration Statement and any
amendment thereto will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein not misleading; and (ii) the prospectus
delivered to such Holder upon the exercise of Warrants and the documents
incorporated by reference therein will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading; provided, however,
-------- -------
that Careside shall have no liability under clauses (i) or (ii) of this Section
5.03 with respect to any such untrue statement or omission made in any
Registration Statement in reliance upon and in conformity with information
furnished to Careside by or on behalf of the Holders specifically for inclusion
therein.
SECTION 5.04. Indemnification. To the extent any Holder uses the
---------------
Registration Statement for any resale of Warrant Shares as provided in clause
(c) of Section 5.01:
(a) In connection with any Registration Statement, Careside agrees to
indemnify and hold harmless each Holder and each person, if any, who controls
such Holder within the meaning of the Securities Act or the Exchange Act (each
Holder and such controlling persons being referred to collectively as the
"Indemnified Holders") from and against any losses, claims, damages or
liabilities, joint or several, or any actions in respect thereof (including, but
not limited to, any losses, claims, damages, liabilities or actions relating to
purchases and sales of the Warrant Shares) to which each Indemnified Holder may
become subject under the Securities Act, the Exchange Act or otherwise, insofar
as such losses, claims, damages, liabilities or actions arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in such Registration Statement or prospectus or in any amendment or
supplement
14
<PAGE>
thereto, or arise out of, or are based upon, the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and shall reimburse, as incurred, the Indemnified Holders
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action in
respect thereof; provided, however, that (i) Careside shall not be liable in
-------- -------
any such case to the extent that such loss, claim, damage or liability arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in such Registration Statement or any
preliminary or final prospectus or in any amendment or supplement thereto in
reliance upon and in conformity with written information pertaining to such
Holder and furnished to Careside by or on behalf of such Holder specifically for
inclusion therein; (ii) with respect to any untrue statement or omission or
alleged untrue statement or omission made in any prospectus relating to such
Registration Statement, the indemnity agreement contained in this subsection (a)
shall not inure to the benefit of any person as to which there is a prospectus
delivery requirement (a "Delivering Seller") that sold the Warrant Shares to the
person asserting any such losses, claims, damages or liabilities to the extent
that any such loss, claim, damage or liability of such Delivering Seller results
from the fact that there was not sent or given to such person, on or prior to
the written confirmation of such sale, a copy of the relevant prospectus, as
amended and supplemented, provided that (A) Careside shall have previously
furnished copies thereof to such Delivering Seller in accordance with this
Agreement and (B) such furnished prospectus, as amended and supplemented, would
have corrected any such untrue statement or omission or alleged untrue statement
or omission; and (iii) this indemnity agreement will be in addition to any
liability which Careside may otherwise have to such Indemnified Holder.
(b) In connection with any Registration Statement, each Holder, severally
and not jointly, will indemnify and hold harmless Careside and each person, if
any, who controls Careside within the meaning of the Securities Act or the
Exchange Act and the directors, officers, agents and employees of such
controlling persons from and against any losses, claims, damages or liabilities
or any actions in respect thereof to which Careside or any such controlling
person or director, officer, agent or employee of such controlling person may
become subject under the Securities Act, the Exchange Act or otherwise, insofar
as such losses, claims, damages, liabilities or actions arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in such Registration Statement or preliminary or final prospectus or
in any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information pertaining to such
Holder and furnished to Careside by or on behalf of such Holder specifically for
inclusion therein; and, subject to the limitation set forth immediately
preceding this clause, shall reimburse, as incurred, Careside for any legal or
other expenses reasonably incurred by Careside or any such controlling person or
director, officer, agent or employee of such controlling person in connection
with investigating or defending any loss, claim, damage, liability or action in
respect thereof. This indemnity agreement will be in addition to any liability
which such Holder may otherwise have
15
<PAGE>
to Careside or any of its controlling persons or directors, officers, agents or
employees of such controlling persons.
(c) Promptly after receipt by an indemnified party under this section of
notice of the commencement of any action or proceeding (including a governmental
investigation), such indemnified party will, if a claim in respect thereof is to
be made against the indemnifying party under this Section 5.04, notify the
indemnifying party of the commencement thereof, however, the omission to so
notify the indemnifying party will not, in any event, relieve the indemnifying
party from any obligations to any indemnified party other than the
indemnification obligation provided in subsections (a) or (b) above, except to
the extent that it is prejudiced or harmed in any material respect by failure to
give such prompt notice. 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 therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with one (1) counsel (and local counsel
as necessary) reasonably satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and after notice from the indemnifying party to such indemnified party
of its election to so assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section 5.04 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof. No
indemnifying party shall, without the prior written consent of the indemnified
party, not to be unreasonably withheld, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release of such
indemnified party from all liability on any claims that are the subject matter
of such action. No indemnifying party shall be liable for any amounts paid in
settlement of any action or claim without its written consent, which consent
shall not be unreasonably withheld, but if settled in accordance with its
written consent or if there be a final judgment of the plaintiff in any such
action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
(d) If the indemnification provided for in this Section 5.04 is unavailable
or insufficient to hold harmless an indemnified party under subsections (a) or
(b) above for any reason other than as provided in subsection (c) above, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to in subsection (a) or (b) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other or (ii) if the allocation provided by the foregoing clause (i) is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the indemnifying party or parties on the one hand and the indemnified
party on the other in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities (or actions in respect thereof)
as well as any other relevant equitable considerations. The relative fault of
the parties shall be determined by
16
<PAGE>
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by Careside on the one hand or such Holder or
such other indemnified person, as the case may be, on the other, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection 5(d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of this
subsection 5(d). Notwithstanding any other provision of this subsection 5 (d),
the Holders shall not be required to contribute any amount in excess of the
amount by which the net proceeds received by such Holders from the sale of the
Warrant Shares pursuant to the Registration Statement exceeds the amount of
damages which such Holders would have otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Subsection 5(d), each officer, director, employee, representative and agent of
an indemnified party and each person, if any, who controls such indemnified
party within the meaning of the Securities Act or the Exchange Act shall have
the same rights to contribution as such indemnified party, and each officer,
director, employee, representative and agent of Careside and each person, if
any, who controls Careside within the meaning of the Securities Act or the
Exchange Act shall have the same rights to contribution as Careside.
(e) The agreements contained in this section shall survive the sale of the
Warrant Shares pursuant to the Registration Statement, as the case may be, and
shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of any
indemnified party.
SECTION 5.05. Additional Acts. If the issuance or sale of any Common
---------------
Stock or other securities issuable upon the exercise of the Warrants requires
registration or approval of any governmental authority (other than the
registration requirements under the Securities Act), or the taking of any other
action under the laws of the United States of America or any political
subdivision thereof before such securities may be validly offered or sold in
compliance with such laws, then Careside covenants that it will, in good faith
and as expeditiously as reasonably possible, use all reasonable efforts to
secure and maintain such registration or approval or to take such other action,
as the case may be.
SECTION 5.06. Expenses. All expenses incident to Careside's performance
--------
of or compliance with its obligations under this Article 5 will be borne by
Careside, including without limitation: (i) all Securities and Exchange
Commission, stock exchange or National Association of Securities Dealers, Inc.
registration and filing fees, (ii) all reasonable fees and expenses incurred in
connection with compliance with state securities or blue sky laws, (iii) all
reasonable expenses of any Persons incurred by or on behalf of Careside in
preparing or assisting in preparing, printing and distributing the Registration
Statement or any other registration statement, prospectus, any amendments or
supplements thereto and other documents relating to
17
<PAGE>
the performance of and compliance with this Article 5, (iv) the fees and
disbursements of counsel for Careside and (v) the fees and disbursements of the
independent public accountants of Careside, including the expenses of any
special audits or comfort letters required by or incident to such performance
and compliance.
ARTICLE 6
Miscellaneous
-------------
SECTION 6.01. Securities and Exchange Commission Reports and Other
----------------------------------------------------
Information. Careside shall file with the Securities and Exchange Commission
- -----------
and thereupon provide the Holders with such annual reports and such information,
documents and other reports as are specified in Sections 13 and 15(d) of the
Exchange Act and applicable to a United States corporation subject to such
Sections, such information, documents and other reports to be so filed and
provided at the times specified for the filing of such information, documents
and reports under such Sections.
SECTION 6.02. Persons Benefiting. Nothing in this Agreement is intended
------------------
or shall be construed to confer upon any Person other than Careside and the
Holders any right, remedy or claim under or by reason of this Agreement or any
part hereof.
SECTION 6.03. Rights of Holders. Holders of unexercised Warrants are
-----------------
not entitled to (i) receive dividends or other distributions, (ii) receive
notice of or vote at any meeting of the stockholders, (iii) consent to any
action of the stockholders, (iv) receive notice as stockholders of any other
proceedings of Careside or (v) exercise any other rights whatsoever as
stockholders of Careside.
SECTION 6.04. Amendment. This Agreement may be amended by the parties
---------
hereto without the consent of any Holder for the purpose of curing any
ambiguity, or of curing, correcting or supplementing any defective provision
contained herein or adding or changing any other provisions with respect to
matters or questions arising under this Agreement as Careside may deem necessary
or desirable (including, without limitation, any addition or modification to
provide for compliance with the transfer restrictions set forth herein);
provided, however, that such action shall not adversely affect the rights of any
- -------- -------
of the Holders. Any amendment or supplement to this Agreement that has an
adverse effect on the interests of the Holders shall require the written consent
of the Holders of a majority of the then outstanding Warrants. The consent of
each Holder affected shall be required for any amendment pursuant to which the
Exercise Price would be increased or the number of Warrant Shares issuable upon
exercise of Warrants would be decreased (other than pursuant to adjustments
provided herein) or the exercise period with respect to the Warrants would be
shortened. In determining whether the Holders of the required number of
Warrants have consented, Warrants owned by Careside or by any Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with Careside shall be disregarded and deemed not to be outstanding.
Subject to the foregoing, only Warrants outstanding at the time shall be
considered in any such determination.
18
<PAGE>
SECTION 6.05. Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing, shall be addressed to the
receiving party's address set forth below or to such other address as a party
may designate by notice hereunder, and shall be either (i) delivered by hand,
(ii) made by telex, telecopy or facsimile transmission, (iii) sent by overnight
courier, or (iv) sent by registered or certified mail, return receipt requested,
postage prepaid.
if to Careside: Careside, Inc.
1600 Bristol Parkway
Culver City, California 90230
Attention: Chief Executive Officer
with a copy to: Pepper Hamilton LLP
3000 Two Logan Square
18th & Arch Streets
Philadelphia, Pennsylvania 19103
Attention: Barry M. Abelson, Esquire
if to the Purchasers: Fahnestock & Co. Inc.
Wedbush Morgan Securities, Inc.
Southeast Research Partners, Inc.
c/o Fahnestock & Co. Inc.
125 Broad Street
New York, New York 10004
Attention: [Henry P. Williams]
Any notice or communication mailed to a Holder shall be mailed to the
Holder at the Holder's address as it appears on the Certificate Register and
shall be sufficiently given if so mailed within the time prescribed.
All notices, requests and other communications hereunder shall be deemed to
have been given either (i) if by hand, at the time of the delivery thereof to
the receiving party at the address of such party set forth above, (ii) if made
by telex, telecopy or facsimile transmission, at the time that receipt thereof
has been acknowledged by electronic confirmation or otherwise, (iii) if sent by
overnight courier, on the next business day following the day such notice is
delivered to the courier service or (iv) if sent by registered or certified
mail, on the 5th business day following the day such mailing is made.
SECTION 6.06. Governing Law. The laws of the State of New York
-------------
shall govern this Agreement and the Warrant Certificates.
SECTION 6.07. Successors. All agreements of Careside in this Agreement
----------
and the Warrant Certificates shall bind its successors.
19
<PAGE>
SECTION 6.08. Multiple Originals. The parties may sign any number of
------------------
copies of this Agreement. Each signed copy shall be an original, but all of
them together represent the same agreement. One signed copy is enough to prove
this Agreement.
SECTION 6.09. Table of Contents. The table of contents and headings of
-----------------
the Articles and Sections of this Agreement have been inserted for convenience
of reference only, are not intended to be considered a part hereof and shall not
modify or restrict any of the terms or provisions hereof.
SECTION 6.10. Severability. The provisions of this Agreement are
------------
severable, and if any clause or provision shall be held invalid, illegal or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect in that jurisdiction only such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision of this
Agreement in any jurisdiction.
[THE BALANCE OF THIS PAGE LEFT BLANK INTENTIONALLY]
20
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
CARESIDE, INC.
By:
---------------------------
Name:
Title:
FAHNESTOCK & CO. INC., as Purchaser
By:
---------------------------
Name:
Title:
WEDBUSH MORGAN SECURITIES, INC., as
Purchaser
By:
---------------------------
Name:
Title:
SOUTHEAST RESEARCH PARTNERS, INC., as
Purchaser
By:
---------------------------
Name:
Title:
21
<PAGE>
EXHIBIT A
[FORM OF FACE OF WARRANT CERTIFICATE]
THE COMMON STOCK, PAR VALUE $.0l PER SHARE, OF CARESIDE, INC. ("CARESIDE")
FOR WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR SOLD IN THE UNITED
STATES ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN APPLICABLE
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. ACCORDINGLY, NO HOLDER SHALL BE
ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE TIME OF
EXERCISE, (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT RELATING TO THE
SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAS BEEN FILED
WITH, AND DECLARED EFFECTIVE BY, THE SECURITIES AND EXCHANGE COMMISSION (THE
"SEC"), AND NO STOP ORDER SUSPENDING THE EFFECTIVENESS OF SUCH REGISTRATION
STATEMENT HAS BEEN ISSUED BY THE SEC, OR (ii) THE ISSUANCE OF SUCH SHARES IS
PERMITTED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT, OR ANY STATE SECURITIES LAWS AND NEITHER THIS SECURITY NOR ANY
INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
WITHIN THE "UNITED STATES" OR TO "U.S. PERSONS" (AS DEFINED IN REGULATION S
UNDER THE SECURITIES ACT) IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT
THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF
THE SECURITIES ACT.
No. [ ] Certificate for ____ Warrants
to Purchase _____________ shares of Common Stock
VOID AFTER 5.00 P.M. NEW YORK TIME
on [insert the date which is the fifth anniversary of the date of the warrants]
WARRANTS TO PURCHASE COMMON STOCK OF
CARESIDE, INC.
THIS CERTIFIES THAT , or its registered assigns, is the
registered holder of the number of Warrants set forth above (the "Warrants").
Each Warrant entitles the registered holder thereof (the "Holder"), at its
option and subject to the provisions contained herein and in the Warrant
Agreement referred to below, to purchase from Careside, Inc., a Delaware
corporation ("Careside"), [ ] shares of Common Stock, par value of $.01 per
share, of Careside (the "Common Stock") at the per share exercise price of $[ ]
(the
I
<PAGE>
EXHIBIT A
"Exercise Price"), or by Cashless Exercise referred to below. This Warrant
Certificate shall terminate and become void as of the close of business on
[insert the date which is the fifth anniversary of the date of the warrants],
(the "Expiration Date") or upon the exercise hereof as to all the shares of
Common Stock subject hereto. The number of shares issuable upon exercise of the
Warrants and the Exercise Price per share shall be subject to adjustment from
time to time as set forth in the Warrant Agreement.
This Warrant Certificate is issued under and in accordance with a Warrant
Agreement dated as of [___________], 1999 (the "Warrant Agreement"), among
Fahnestock & Co. Inc., Wedbush Morgan Securities, Inc. and Southeast Research
Partners, Inc. (collectively, the "Purchasers") and Careside, and is subject to
the terms and provisions contained in the Warrant Agreement, all of which terms
and provisions the Holder consents by acceptance hereof. The Warrant Agreement
is hereby incorporated herein by reference and made a part hereof. Reference is
hereby made to the Warrant Agreement for a full statement of the respective
rights, limitations of rights, duties and obligations of Careside and the
Holders. Capitalized terms used but not defined herein shall have the meanings
ascribed thereto in the Warrant Agreement. A copy of the Warrant Agreement may
be obtained for inspection by the Holder hereof upon written request to Careside
at 6100 Bristol Parkway, Culver City, California 90230, Attention: Secretary.
Subject to the terms of the Warrant Agreement, the Warrants may be
exercised in whole or in part (i) by presentation of this Warrant Certificate
with the Election to Purchase Warrant Shares attached hereto duly executed and
with the simultaneous payment of the Exercise Price in cash (subject to
adjustment) to Careside or its duly authorized agent for the account of Careside
at the principal office of Careside or (ii) by Cashless Exercise. Payment of
the Exercise Price in cash shall be made by certified or official bank check
payable to the order of Careside or by wire transfer of funds to an account
designated by Careside for such purpose. Payment by Cashless Exercise shall be
made without the payment of cash by reducing the amount of Common Stock that
would be obtainable upon the exercise of a Warrant and payment of the Exercise
Price in cash so as to yield a number of shares of Common Stock upon the
exercise of such Warrant equal to the product of (1) the number of shares of
Common Stock for which such Warrant is exercisable as of the Exercise Date (if
the Exercise Price were being paid in cash) and (2) the Cashless Exercise Ratio.
As provided in the Warrant Agreement and subject to the terms and
conditions therein set forth, the Warrants shall be exercisable at any time on
or after [the first anniversary of the date the warrants are issued]; provided,
--------
however, that Holders will be able to exercise their Warrants only if a shelf
- -------
registration statement relating to the Common Stock underlying the Warrants is
effective or the issuance of such Common Stock is permitted pursuant to an
exemption from the registration requirements of the Securities Act and such
securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states or other jurisdictions in which such
Holders reside; provided further, however, that no Warrant shall be exercisable
-------- ------- -------
after the Expiration Date.
II
<PAGE>
EXHIBIT A
In the event Careside enters into a Combination, the Holder hereof will be
entitled to receive upon exercise of the Warrants the kind and amount of shares
of capital stock or other securities or other property of such surviving entity
as the Holder would have been entitled to receive upon or as a result of the
Combination had the Holder exercised its Warrants immediately prior to such
Combination; provided, however, that in the event that, in connection with such
-------- -------
Combination, consideration to holders of Common Stock in exchange for their
shares is payable solely in cash or in the event of the dissolution, liquidation
or winding-up of Careside, the Holder hereof will be entitled to receive such
cash distributions as the Holder would have received had the Holder exercised
its Warrants immediately prior to such Combination, less the Exercise Price.
As provided in the Warrant Agreement, the number of shares of Common Stock
issuable upon the exercise of the Warrants and the Exercise Price are subject to
adjustment upon the happening of certain events.
Careside may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with the transfer or
exchange of the Warrant Certificates pursuant to Section 2.05 of the Warrant
Agreement, but not for any exchange or original issuance (not involving a
transfer) with respect to temporary Warrant Certificates, the exercise of the
Warrants or the issuance of the Warrant Shares.
Upon any partial exercise of the Warrants, there shall be countersigned and
issued to the Holder hereof a new Warrant Certificate representing those
Warrants which were not exercised. This Warrant Certificate may be exchanged at
the principal office of Careside by presenting this Warrant Certificate properly
endorsed with a request to exchange this Warrant Certificate for other Warrant
Certificates evidencing an equal number of Warrants. No fractional Warrant
Shares will be issued upon the exercise of the Warrants, but Careside shall pay
an amount in cash equal to the Current Market Value per Warrant Share on the day
immediately preceding the date the Warrant is exercised, multiplied by the
fraction of a Warrant Share that would be issuable on the exercise of any
Warrant.
All shares of Common Stock issuable by Careside upon the exercise of the
Warrants shall, upon such issue, be duly and validly issued and fully paid and
non-assessable.
Careside shall be entitled to treat the Holder of any Warrant as the owner
in fact thereof for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in such Warrant on the part of any other
Person, and shall not be liable for any registration or transfer of any Warrant
which is registered or to be registered in the name of a fiduciary or the
nominee of a fiduciary.
The Warrants do not entitle any holder hereof to any of the rights of a
shareholder of Careside.
III
<PAGE>
EXHIBIT A
This Warrant Certificate shall not be valid or obligatory for any purpose
until it shall have been attested by the Secretary or Assistant Secretary of
Careside.
CARESIDE, INC.
By:
---------------------------
Name:
Title: [Chief Executive Officer or Chief
Financial Officer]
DATED:
Attest:
- ----------------------------------------
Name:
Title: [Secretary or Assistant Secretary]
IV
<PAGE>
EXHIBIT A
FORM OF ELECTION TO PURCHASE WARRANT SHARES
(to be executed only upon exercise of Warrants)
CARESIDE, INC.
The undersigned hereby irrevocably elects to exercise [________] Warrants
at an exercise price per Warrant (subject to adjustment) of $[___________] to
acquire [________] shares of Common Stock, par value $.01 per share, of
Careside, Inc. on the terms and conditions specified within the Warrant
Certificate and the Warrant Agreement therein referred to, surrenders the
Warrant Certificate attached hereto and all right, title and interest therein to
Careside, Inc. and directs that the shares of Common Stock deliverable upon the
exercise of such Warrants be registered or placed in the name and at the address
specified below and delivered thereto.
Date:
---------------------------------------
(Signature of Owner)
---------------------------------------
(Street Address)
---------------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
---------------------------------------
[Signature must be guaranteed by an eligible
Guarantor Institution (banks, stock brokers,
savings and loan associations and credit unions)
with membership in an approved signature guarantee
program pursuant to Rule l7Ad-15 of the Securities
Exchange Act of 1934, as amended]
V
<PAGE>
EXHIBIT A
Securities and/or check to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
Any unexercised Warrants represented by the Warrant Certificate to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
VI
<PAGE>
Exhibit 5.1
February 10, 1999
Careside, Inc.
6100 Bristol Boulevard
Culver City, CA 90230
Re: Registration Statement on Form S-1 (Registration No. 333-69207)
---------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Careside, Inc. a Delaware corporation (the
"Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of a public offering (the "Offering") of up to
2,800,000 shares (the "Primary Shares") of the Company's Common Stock, $.01 par
value per share (the "Common Stock"), and up to an additional 420,000 shares of
Common Stock (the "Additional Shares" and, togetherwith the Primary Shares, the
"Shares") subject to an option which may be exercised by the underwriters of the
Offering to cover over-allotments.
The opinion is delivered in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Act.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of (i) the Registration Statement on Form S-1
originally filed under the Act with the Securities and Exchange Commission (the
"Commission") on December 18, 1999, Amendment No. 1 thereto filed on February 1,
1999 and Amendment No. 2 ("Amendment No. 2) thereto filed on February 10, 1999
(as so amended, the "Registration Statement"); (ii) the form of underwriting
agreement, filed as Exhibit 1.1 to Amendment No. 2 to the Registration Statement
(the "Underwriting Agreement"), to be entered into by and among the Company,
Fahnestock & Co., Inc., Wedbush Morgan Securities, Inc. and Southeast Research
Partners, Inc. (the "Underwriters"); (iii) the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated By-Laws, as in effect on
the date hereof; (iv) the forms of the Company's
<PAGE>
Careside, Inc.
Page 2
February 10, 1999
Certificate of Amendment of the Certificate of Incorporation, its Amended and
Restated Certificate of Incorporation and its Amended and Restated By-Laws, each
to become effective prior to the completion of the Offering; (v) certain
resolutions of the Board of Directors of the Company relating to, among other
things, the issuance of the Shares; and (vii) such other documents as we
have deemed necessary or appropriate as a basis for the opinions set forth
below.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such latter documents. As to any facts material to the opinions
expressed herein which were not independently established or verified, we have
relied upon statements and representations of officers and other representatives
of the Company and others. In addition, we have assumed (a) that prior to the
completion of the Offering, both the form of Certificate of Amendment of the
Certificate of Incorporation filed as Exhibit 3.1b to the Registration Statement
and the form of Amended and Restated Certificate of Incorporation filed as
Exhibit 3.1c to the Registration Statement are filed with the Secretary of State
of the State of Delaware and (b) the due execution and delivery of the
certificates representing the Shares.
Members of our firm are admitted to the Bar of the Commonwealth of
Pennsylvania, and we express no opinion as to the laws of any other jurisdiction
other than the General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that
when (i) the Board of Directors of the Company or the Pricing Committee duly
appointed by the Board of Directors authorizes the price per share, (ii) the
duly appointed officers of the Company execute and deliver the Underwriting
Agreement and (iii) the Primary Shares and the Additional Shares, if any, are
issued and delivered against payment therefor in accordance with the terms of
the Underwriting Agreement, the Primary Shares and the Additional Shares, if
any, will be duly authorized, legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Experts" in the prospectus filed as part of the Registration Statement.
In giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the Rules and
Regulations promulgated thereunder.
<PAGE>
Careside, Inc.
Page 3
February 10, 1999
This opinion is furnished by us, as your counsel, in connection with
the filing of the Registration Statement and, except as provided in the
immediately preceding paragraph, is not to be used, circulated, quoted or
otherwise referred to for any other purpose without our express written
permission or relied upon by any other person.
Very truly yours,
/s/ Pepper Hamilton LLP
Pepper Hamilton LLP
<PAGE>
EXHIBIT 10.17
UNITED MEDICAL MANUFACTURING COMPANY
hereinafter called
UMM
and
SMITHKLINE BEECHAM CORPORATION
hereinafter called
CLIENT
UMM agrees to provide Client with services for the development and manufacture
of a multi-analyte reflectance diagnostic instrument substantially in accordance
with UMM's proposal dated May 10, 1995 (the "Proposal"), which is incorporated
herein, subject to the following terms and conditions (the "Project"):
1. TERM
UMM will begin work on the Project within thirty (30) days of receipt of this
Agreement executed by Client and will continue for a period of three (3) months
through Phases I and II of the Proposal (unless extended by mutual written
agreement), subject to the terms and conditions of this Agreement.
2. PAYMENT
UMM estimates that the price to the Client for performance of the Project will
be Two Hundred Thirteen Thousand Eight Hundred Dollars ($213,800.00) and Client
agrees to provide UMM with a purchase order within fifteen (15) days of signing
this Agreement. Client shall not be required to reimburse, and UMM shall not be
required to incur, any charges for performance in excess of the above price,
unless mutually agreed upon in writing. Client, through its representative Dr.
Thomas Grove or his designee, shall approve in advance any equipment purchases
or significant material purchases. Upon termination of the Project, and after
all costs are available, any balance of payments by Client in excess of actual
costs and fees incurred shall be credited or refunded to Client, unless said
refund shall be less than One Hundred Dollars ($100.00). Client shall authorize
in advance the incurrence of expenses listed in Appendix C to the Proposal and
attached hereto, which expenses shall be invoiced separately when incurred in
accordance with the terms and conditions set forth in Appendix C.
<PAGE>
3. OWNERSHIP
The parties agree that all Work (which shall include for purposes of this
Section all ideas, processes, methodologies, software, algorithms, formulae,
notes, outlines, photographs, inventions, improvements and other information and
work product developed or generated by or on behalf of UMM during the course of
its performance of the Project pursuant to this Agreement) shall be considered
"works made for hire" within the meaning of the Copyright Act of 1976, 17 U.S.
C. (s)101, and that Client is and shall be the sole author of the Work, and the
sole owner of all rights therein, including but not limited to all rights of
copyright. In the event any of the Work is deemed not to be a "work made for
hire," then UMM hereby transfers to Client, without further consideration, all
right, title, and interest to such Work, including any and all patents,
copyrights, trade secrets and other proprietary rights related thereto. UMM
agree to promptly execute and deliver, or cause to be promptly executed and
delivered, all documents and instruments requested by Client to evidence the
foregoing assignment, UMM hereby irrevocably appoints Client as UMM's
attorney-in-fact for the purpose of executing such documents and instruments in
UMM's name. UMM represents and warrants that it has the right to grant to Client
sole right, title and interest in and to the Work, and that ownership or use of
the Work by Client will not constitute an infringement of any third-party
patent, copyright, trade secret or other proprietary right.
4. INVENTIONS
If UMM employees conceive and first actually reduce to practice an invention
within the scope of the Project while working on the Project, UMM will promptly
notify Client of the invention and shall be deemed to have assigned to Client
any and all of its rights to such invention. Upon request, within sixty (60)
days of the notification, UMM will also assist Client in preparing and
prosecuting an application for Letters Patent. The costs of providing such
assistance are not included in the Project estimate stated in Section 2 above,
and Client agrees to pay such costs in addition to any other amounts payable
under this Agreement.
5. CONFIDENTIALITY
UMM acknowledges that it may be exposed or have access to trade secrets and
other confidential business information of Client or other entities with which
Client has business relationships. Such information, referred to hereinafter as
"Confidential Data," shall include all information concerning the business or
affairs or Client that is not known by or generally available to third parties,
including, without limitation, existing systems and programs and those in
development, customer lists, customer needs and requirements, employee lists,
salaries and benefits, and all data received in confidence by Client from third
parties. UMM agrees that during its business dealings with Client and thereafter
(i) it will hold all Confidential Data in the strictest confidence and will not
copy or disclose any portion thereof to any person or entity, except its
employees who
-2-
<PAGE>
have a need to know, without the prior written consent of Client; (ii) it will
comply, and cause each of its employees to comply, with Client's policies on
data and information security; (iii) it will not make any use whatsoever of any
Confidential Data except to perform services in connection with the Work
pursuant to this Agreement; and (iv) upon termination of its business dealings
with Client or at any time upon Client's request, it will immediately return to
Client all Confidential Data in its possession or in the possession of its
employees.
6. REPORTS AND USE OF RESULTS BY CLIENT
UMM agrees to render to Client written reports of its findings and progress made
during the term of the Agreement, at intervals agreed upon by the parties.
Client may use the results of the Project as Client sees fit.
UMM will provide a high standard of professional service. UMM warrants that
services provided hereunder shall be performed in a competent and workmanlike
manner and that each item of Work furnished to Client pursuant to this Agreement
shall conform with its description and specifications as set forth in the
Proposal. UMM further warrants that it is, and will be, in compliance with good
manufacturing practices as required by the Food & Drug Administration.
7. INDEPENDENT CONTRACTORS
Client and UMM are independent contractors, are not related and shall not be
construed as co-employers, joint venturers, partners or otherwise. UMM shall be
responsible for payment of all wages and/or salaries and benefits due to its
employees. Notwithstanding the above, Client will, if appropriate, deduct
applicable taxes from UMM's compensation for services performed under this
Agreement. Upon Client's request, UMM will provide Client with certificates of
insurance evidencing that its employees are covered by: (i) general liability
insurance with a minimum limit of $1 million combined single limit bodily injury
and property damage; and (ii) workmen's compensation insurance in the state in
which each UMM employee is employed.
8. FORCE MAJEURE
Neither Client nor UMM shall be liable in any way for failure to perform any
provision of this Agreement (except the payment of monetary obligations) if such
failure is caused by any law, rule or regulation, or any cause beyond the
control of the party in default.
9. EARLY TERMINATION
Either party shall have the right to terminate this contract upon thirty (30)
days' written notice. In the event of early termination, UMM agrees to: (i)
provide Client with all reports, materials, or other deliverable items available
as of the date of termination, and
-3-
<PAGE>
(ii) refund the applicable pro rata portion of the estimated payment as set
forth in Section 2. In any event, Client agrees to pay all appropriate and
reasonable costs incurred or committed by UMM including costs of termination,
within thirty (30) days of receipt of a final invoice, which invoice is subject
to review and approval by Client.
10. FURTHER ASSURANCES
Each of UMM and Client agree to work in good faith to execute a formal Supplier
Agreement between the parties prior to termination of the initial term of this
Agreement.
11. GENERAL
This Agreement and the Proposal incorporated herein represent the entire
Agreement of the parties, and may be modified or amended only by mutual
agreement in writing. This Agreement shall not be assigned by either party
without the prior written consent of the other party, except that Client may
assign this Agreement to an affiliate without the prior written consent of UMM.
This Agreement shall be governed by and is to be construed in accordance with
the laws of and enforced within the jurisdiction of Pennsylvania.
SMITHKLINE BEECHAM CORPORATION UNITED MEDICAL
MANUFACTURING COMPANY
By /s/ W. V. Stoughton By /s/ Mark A. Gregory
---------------------------- ----------------------------
Title Title President
--------------------------- -------------------------
Date Date December 12, 1995
--------------------------- --------------------------
-4-
<PAGE>
EXIGENT DIAGNOSTICS, INC.
W. VICKERY STOUGHTON
CHAIRMAN AND CEO
CONSENT TO ASSIGNMENT
The undersigned hereby consents to the assignment by SmithKline
Beecham Corporation, a Pennsylvania corporation ("SB"), to Exigent Diagnostics,
Inc., a Delaware corporation ("Assignee"), of all of the rights of SB under the
Preliminary Agreement by and between the undersigned and SB dated as of May 10,
-------
1995 (the "Agreement"). For purposes of this consent, "Effective Time of the
- ----
Assignment" means the effective time of the closing of Assignee's purchase of
the assets of SmithKline Beecham Diagnostic Systems Co., a Pennsylvania limited
liability company. In executing this consent, the undersigned agrees that SB
will be responsible for obligations arising under the Agreement prior to the
Effective Time of the Assignment and Assignee will be responsible for any
obligations arising under the Agreement after the Effective Time of the
Assignment.
UNITED MEDICAL MANUFACTURING COMPANY
By:/s/ Mark A. Gregory
----------------------------------
Name: Mark A. Gregory
Title: President
<PAGE>
CONSENT TO ASSIGNMENT
The undersigned hereby consents to the assignment by SmithKline
Beecham Corporation, a Pennsylvania corporation ("SB"), to Exigent Diagnostics,
Inc., a Delaware corporation ("Assignee"), of all of the rights of SB under the
Preliminary Agreement by and between the undersigned and SB dated as of August
------
27, 1996, (the "Agreement"). For purposes of this consent, "Effective Time of
- --------
the Assignment" means the effective time of the closing of Assignee's purchase
of the assets of SmithKline Beecham Diagnostic Systems Co., a Pennsylvania
limited liability company. In executing this consent, the undersigned agrees
that SB will be responsible for obligations arising under the Agreement prior to
the Effective Time of the Assignment and Assignee will be responsible for any
obligations arising under the Agreement after the Effective Time of the
Assignment.
UNITED MEDICAL MANUFACTURING COMPANY
By:/s/ Mark A. Gregory
----------------------------
Name: Mark A. Gregory
Title: President
<PAGE>
ANNEX C
-------
UNITED MEDICAL MANUFACTURING GENERAL TERMS AND CONDITIONS FOR MANUFACTURING
- ---------------------------------------------------------------------------
SERVICES
- --------
. Prices are FOB United Medical Manufacturing's dock.
. Unless specified, prices do not include packaging for shipping.
. If prices are denoted as estimates, then the final price will be
determined based on the final bill-of-materials.
. A lead time will be established in conjunction with customer which
balances customer forecasted demand, component lead times and inventory
management.
. Costs associated with requests for expedited orders will be determined and
proposed prior to implementing expedited order.
. If requested, Development labor time will be tracked using job order
numbers and will be billed monthly unless otherwise noted.
. Travel and miscellaneous expenses will be billed at cost plus 5%.
Travel expenses include:
Private auto mileage at 30c per mile.
Parking, tolls and fares.
Car rental, if required.
Airfare, if required.
Miscellaneous expenses include, but are not limited to:
Rooms and meals away from home base, if required.
. A purchase order for the full amount of any tooling must be provided to
United Medical prior to UMM placing the order.
. Payment terms are net 15 days after date of invoice.
. Unless otherwise noted, any proposal or estimate is valid for 30 days.
<PAGE>
UNITED MEDICAL MANUFACTURING GENERAL TERMS AND CONDITIONS FOR DESIGN AND
- ------------------------------------------------------------------------
DEVELOPMENT SERVICES
- --------------------
. Development labor rate is $60 per hour.
. "Time and Materials" is the actual time to perform the specified tasks
with the necessary resources or materials.
. Development labor time will be tracked using job order numbers and will be
billed monthly unless otherwise noted.
. Travel and miscellaneous expenses will be billed at cost plus 5%.
Travel expenses include:
Private auto mileage at 30c per mile (latest rate as determined
by the IRS).
Parking, tolls and fares.
Car rental, if required.
Airfare, if required.
Miscellaneous expenses include, but are not limited to:
Rooms and meals away from home base, if required.
. A purchase order for the full amount of any tooling must be provided to
United Medical prior to UMM placing the order.
. Payment terms are net 15 days after date of invoice.
. Unless otherwise noted, any proposal or estimate is valid for 30 days.
. An endorsement of this agreement or a purchase order for 25% of the
estimate constitutes acceptance of the agreement and acknowledges
acceptance of the terms and conditions.
<PAGE>
The Competitive Advantage of Choosing
United Medical Manufacturing
United Medical Manufacturing is uniquely well qualified to handle the design,
development and manufacture of the point of care reflectance system. In fact, we
can bring a number of unique attributes to this project which will spell
competitive advantage for SmithKline Beecham Clinical Laboratories, and which
will help assure the rapid, cost-effective development and manufacture of the
point of care reflectometer system.
We realize that selecting a development, and ultimately, manufacturing partner
is an extremely important decision. SmithKline Beecham Clinical Laboratories
(SBCL) needs a partner who can support the market entry of the point of care
reflectometer system, enhance your image, meet your product design demands, and
comply with regulatory requirements.
Among the factors which make United Medical Manufacturing the right choice to
manufacture the reflectometer, the following are particularly important
A Proven Track Record provides assurance that we will do the job right. United
Medical Manufacturing (UMM) has all the resources to help you succeed. UMM is a
world leader in the design and manufacture of hand-held (portable) reflectance
meters for the blood glucose market and clinical analyzers. We have manufactured
more than 2,000,000 of these meters in the past six years. We are FDA GMP
registered for class II and class III medical device manufacturing, and our ISO
9001 certification is pending. (We have been audited and recommended for
certification by TUV Product Services of Germany.)
Experience in a company is really the experience of its people. We have years of
experience in manufacturing meters which combine electronics, optics, and
chemistry in an integrated system--exactly like the SmithKline reflectometer. In
fact, there is probably no medical manufacturer with more experience that is
specifically relevant to your project. Because this is a specialized kind of
design and manufacturing, our experience will be invaluable, both in the
long-term management of the project and in achieving significant savings through
the design and development program.
We believe that good companies consist of quality people unified in their focus
and commitment. At United Medical manufacturing, our engineers are committed to
designing and developing products of the highest quality. A design that
integrates all aspects of its marketability, functionality, reliability,
serviceability, and manufacturability can prevent costly delays and rework
later.
Expertise in optics and reflectance technology to support the SmithKline design
and manufacturing program is particularly deep at UMM. We have performed the
design and development of similar devices (especially analyzers) requiring
optics, low power, and the utilization of chemistries as part of the system. In
fact, this is a key differentiation factor from straightforward electronic
design... the device and chemistry must be designed and work together as an
integrated system. We understand the necessary tasks to ensure the rapid, yet
thorough, co-development of an instrument and the disposeable. We have learned
the problem areas to avoid in a reflectance system, and the potential
opportunities for improvement. Our experience in this area will prove extremely
valuable in rapidly getting to market.
Quality vendors and suppliers are another key to a successful manufacturing
process. Because of our extensive experience in manufacturing blood glucose
meters and
<PAGE>
coagulation analyzers, we have established a network of quality vendors who
supply components very similar to those required in the SmithKline meter. Having
a reliable supplier network in place reduces overhead costs and minimizes the
risk of selecting a supplier whose poor quality or lack of responsiveness do not
support the design and manufacturing goals of this project. It fundamentally
reduces the time to market.
Manufacturing processes must fulfill the potential of the product design. The
process must produce consistent quality and timely delivery. United Medical
Manufacturing has created a focused factory environment to handle the demands of
various kinds of manufacturing processes. We have created the following three
areas:
High volume, repetitive manufacturing
Mid-range volume manufacturing
Low volume, highly customized manufacturing
The benefit to SmithKline Beecham Clinical Laboratories is that your
manufacturing will be handled in a dedicated area, specifically designed to
accommodate your anticipated volumes. This means a cost effective application of
the services required to support the program. You do not financially subsidize
other programs.
Quality is a way of life at United Medical Manufacturing. It's the one component
that goes into everything we build. Our work has been found to be in strict
compliance with the FDA's "good manufacturing practices" in the course of
rigorous audits by our clients and the FDA. Also, as mentioned above, we have
been audited and recommended for certification under ISO 9001, which includes
manufacturing and design services. In addition, UMM is certified under EN 46001
to manufacture and ship medical devices to Europe.
United Medical Manufacturing takes pride in being 100% medical device
manufacturing. We believe that medical device manufacturing especially class II
and class III products requires a higher level of care. We also understand the
healthcare industry and the major trends such as cost containment that effect
both UMM and our customers.
Investment in the future to provide our customers with cost effective services.
United Medical Manufacturing continues to invest in the future with improvements
to our equipment and facilities to ensure our customers are receiving efficient
and high quality manufacturing services. We are expanding our facilities for
optimization of our high volume operation. This will further streamline the work
flow and effectively utilize point-of-use storage. We are currently installing a
new SMD system which will increase our throughput by 400% and reduce set-up time
from eight (8) hours to five (5) minutes. These high-volume improvements will
provide tremendous benefits and savings for the SBCL program.
2
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The SmithKline Beecham Clinical Laboratories and United Medical Product
Development Partnership
United Medical Manufacturing has established procedures to assure quality in
every phase of a project. This is the approach we will bring to your point of
care reflectometer system project. Specifically, we propose to use our
concurrent engineering process--a proven method of working with clients to
guarantee clear, comprehensive communication, a fertile exchange of ideas and
insights, rapid prototyping. and high-quality manufacturing processes. This
process results in a cost-effective design to the customer's requirements.
Enclosed in Appendix A is a Gantt chart with an approximate timeline for the
proposed concurrent engineering process. Based on the SBCL estimated
requirements, United Medical has outlined the approach and milestones in this
chart. Upon establishing an initial product specification, United Medical will
be able to provide a more accurate assessment of the program scope and schedule.
Similar to the approach outlined in your RFP, UMM's proposed concurrent
engineering process is divided into five phases which integrate the activities
of marketing, financial analysis, research and development, manufacturing,
quality control, and project management.
This approach divides the program into phases and identifies specific
deliverables for each phase. The time line conceptually comprise the milestones
and schedule. These would be tailored for the specific project.
(Appendix B describes UMM's general approach to concurrent engineering with
details of the major tasks.)
. Phase 1 involves assessing and defining the product concept in terms of
market potential and technical requirements.
Clearly, SBCL has completed the key aspects of this phase in determining
the market opportunity. However, at the outset, by working closely to
review the product concept and refine it as appropriate, SBCL and United
Medical Manufacturing will develop a uniform understanding of technical and
marketing objectives that can assure overall success of the project.
United Medical often recommends utilizing a very useful communication tool
called Quality Function Deployment (QFD) to review the product concept.
This process integrates customer benefits, product attributes with
engineering and manufacturing tradeoffs. The outcomes of the QFD are
usually the Customer Requirements Document or a Marketing Requirements
Document which will help to further define the product specifications.
While SBCL has established a core concept, United Medical recommends
utilizing the QED process for two reasons. First, this process could
strengthen the product specification which translates into designing a
better product earlier. Second, this provides an excellent forum for
starting the communication between SBCL and United Medical Manufacturing to
familiarize UMM personnel with the product. By providing a common
understanding for the point of care system and valuable insight for all
team members to the various aspects of the program, the team will be moving
in the same direction, resulting in a faster start.
The QFD process has been very successful for our customers in establishing
customer requirements and the initial product specifications. This ensures
the product is market-driven by customer needs. After completion of the QED
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process, the baseline knowledge about the system is established among all
team members. Now the development program will be at full speed.
. Phase 2 involves a careful analysis of feasibility and functionality
issues, including design studies to determine the methods for lowest cost
of manufacturing and assembly without compromising quality requirements.
This is a very critical phase. It identifies and resolves potential
problems early in the process which saves time and money later.
Phase 2 analyzes tradeoffs and synergies between the various functional
requirements. These product and process synergies include decisions about
functionality, quality, reliability, and manufacturability. This is in the
form of feature cost analysis and design tradeoffs.
As the design proceeds, there may be mutually exclusive design goals
discovered. Before any significant tradeoff is implemented, United Medical
will immediately contact SBCL for approval. Although not anticipated,
prohibitively costly or conflicting requirements are sometimes identified.
Again any such issues will be reviewed promptly with SBCL at an appropriate
location.
The formal documentation generated in the feasibility section of Phase 2
are: 1) a Design plan. 2) a Manufacturing plan and 3) Quality and
Reliability plan. During the functional analyses. United Medical will hold
informal initial design walkthroughs. These walkthroughs will be
constructively critiqued to continually improve the design. SBCL has an
open invitation to participate in any of these informal meetings. Upon
completion of Phase 2, a formal Initial Design review will be held at SBCL
. Phase 3 involves the detailed design and development program. This includes
the creation of prototypes to complete the development process and to check
the evolved concept against the established goals. This provides a baseline
for the final product design and development process. At this point, UMM
and SBCL will work together to optimize the system design.
United Medical Manufacturing strongly believes in "design for manufacture".
We believe it is essential for experienced manufacturing personnel to be
actively involved in the design and development process. By developing
manufacturing processes in parallel with the product development, the
manufacturing partner can and should improve the design. This influence
increases manufacturing quality and reduces overall program costs. We
believe United Medical's expertise in manufacturing Class II and Class III
medical devices uniquely qualifies us to provide this necessary support for
the SmithKline Beecham point of care reflectance system.
The prototype phase is most beneficial when it is coordinated by the
manufacturing partner as part of our overall concurrent engineering
process. This is congruent with United Medical's focus to design with
manufacturability in mind. This also provides valuable insight of the
system for integration into the manufacturing processes. The knowledge
gained from this prototype development is then integrated forward into the
key areas of pilot production and full-scale manufacturing. With United
Medical as the manufacturing partner as well as the product development
partner. SBCL gets the best of both worlds. Our intent is to develop
prototypes which resemble the end manufactured products as closely as
possible. It is our experience that these prototypes
4
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increase product quality while shortening the total time to get the product
to market. Upon completion of Phase 3, a formal review will be held at
United Medical or SBCL
. Phase 4 involves the development of a pilot production run to develop and
verify documentation, set-up, assembly methods, and manufacturing
processes. This also includes assembly and test fixture development. Phase
4 will be coordinated by a UMM manufacturing engineer. The UMM
manufacturing engineer's early contributions to the design will now reap
huge "dividends" in this phase. Those "dividends" combined with expertise
in the management and coordination of pilot production will provide the
basis for a smooth transition into manufacturing. In conjunction with SBCL,
UMM will determine the number of pilot production units to meet the
necessary requirements
United Medical's culture of "Continuous Improvement" provides the impetus
for "fine tuning" the manufacturing processes. This will optimize the
manufacturing effort and will contribute to the program's overall success.
. Phase 5 involves the organization and launch of full-scale manufacturing.
At this point the total team becomes involved in the process of continuous
quality improvement to increase quality and decrease production costs or
time frames.
Success is not determined by simply providing a product, it is determined by
your customers' value of that product. SBCL has an impeccable reputation for
providing its customers with high quality medical products and services. Your
name is synonymous with this quality and responsiveness. Like SBCL, United
Medical Manufacturing's reputation is one of manufacturing excellence and
quality. We understand that for SBCL to be successful, its products must be of
the highest quality. As your manufacturing partner, United Medical realizes that
if SBCL is successful then we will be successful. Therefore, we must provide
total customer satisfaction through the quality and workmanship of our
manufacturing services. United Medical is truly excited about the prospects of
partnering with SBCL to develop and manufacture the idea for a point of care
reflectometer system.
Meetings and Communication. We believe communication is the key to successful
development programs. The frequency of meetings would likely vary during the
project. During the first few weeks, the first technical meetings and project
meetings would most likely be daily in order to develop a working baseline about
the system. Later during the project, weekly or bi-weekly meetings may suffice.
It will be the responsibility of the team to determine the appropriate meeting
schedule and locations. All meeting minutes will be documented and distributed
to SBCL and UMM.
A project status meeting, would be scheduled on a monthly basis separate from
the technical meetings. The meetings could be held at either location at
SmithKline's option. The appropriate personnel would attend as necessary and a
project status report will be provided at the meeting. Minutes of the meeting
including action item assignments will be provided within 1 week following the
meeting unless a joint decision to do otherwise.
The project team meetings should include a complete cross section of the
organization that will be responsible for the product. Again, specific
involvement at the meetings may vary during the course of the development.
However, the overall team should be comprised of personnel from marketing,
regulatory affairs, quality, product development, purchasing, manufacturing,
finance, clinical affairs, and service. Depending on the structure of your
organization, additional responsibilities may be independently represented.
Groups such as
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reliability, safety, planning and technical publications may also be represented
on the overall project team.
Responsibilities. United Medical Manufacturing realizes that SmithKline Beecham
Clinical Laboratories is ultimately responsible to their customers for the
product. Again, we sincerely value a long-term relationship and therefore
provide the quality that is necessary to maintain your excellent reputation. We
have found it beneficial to clarify our understanding of the roles and
responsibilities of both companies in the design and development and
manufacturing programs. If these do not represent your requirements, please let
us know and we can discuss.
. SBCL has the primary responsibility to define the customer requirements,
marketing requirements
. UMM and SBCL will work together to develop a product specification. (We
realize the product specification will evolve through the program.)
This specification should include but not be limited to:
- reliability criteria
- functional performance
- quality criteria
- specific standards as requirements
. United Medical has the responsibility to design, develop and manufacture a
point of care reflectance system that meets the product specification.
Furthermore, United Medical has the responsibility to identify and
highlight any conflicting or high risk requirement as soon as possible.
. United Medical will utilize its experience and expertise to suggest ideas
to improve the success of the program. This includes suggesting the early
development of a "Test Stand" to aid in the evolution of development of the
disposeable and the reflectometer. This is dependent on the stage of the
disposeable.
. United Medical has the responsibility to design, develop and manufacture in
accordance with GMP and FDA standards.
. SBCL has the responsibility to clinically evaluate and accept the final
design.
. SBCL has the responsibility to review and approve the design at various
stages of the program.
. United Medical has the responsibility to manufacture and deliver the SBCL
point of care systems at the agreed quantity with the agreed terms.
. United Medical and SBCL share the responsibility to evaluate the product
performance in the field and continually improve the product for
performance, quality and manufacture through quarterly meetings.
. United Medical is charged with continually searching for product and
process improvements which will be mutually beneficial.
. Both partners should support the needs and concerns of each other and
together create a formidable team.
6
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Quality Assurance through Compliance.
United Medical Manufacturing is committed to product development and
manufacturing which meet or exceed customer's expectations. It is our normal
operating procedure to establish customer expectations as early as possible. To
understand SBCL's expectations, United Medical would request/identify a list of
the standards with which the product must comply. The standards are assigned to
the appropriate discipline to incorporate your requirements into the
specification and design. All design and development tasks will adhere to those
standards. Where appropriate, United Medical will design and build with UL544,
CSA, IEC6O1-1 and VDE approved parts. In addition, at the appropriate point in
the project, we would review and audit the design where needed prior to
submission to the regulating body.
As an FDA registered manufacturer, all of our products are designed and
manufactured in compliance with current GMPs.
Continuous Improvement to Strengthen Partnership.
UMM believes it is important to continue to strive for improvement in all areas.
This includes periodically reviewing the effectiveness and performance of our
relationship with SBCL.
The performance and status of the project will be included in various design
review meetings. Each review meeting will also generate a set of "action items"
assignments. This will provide a mechanism for identification of critical and
important areas.
After the manufacturing begins, United Medical Manufacturing proposes periodic
partnership meetings which would include top level management from both
companies. These meetings would be a forum to review the effectiveness of the
partnership and to identify areas for improvement to strengthen the partnership.
The partners would review the overall performance of the partnership and discuss
systemic and organizational improvements as necessary. As the partnership
extends, strategic issues for both organizations could be shared which should
result in mutual benefits for both SBCL and United Medical Manufacturing.
United Medical is committed to a corporate philosophy of continuous quality
improvement. We strive to challenge the norms and extend our manufacturing
leadership by continually searching for ways to improve our processes and
services. Our continuous quality improvement teams represent a true partnership
commitment. The teams have included customers (partners) along with UMM R&D,
Manufacturing, Purchasing, Finance, Management and Quality Services personnel.
The team's members are the key people who are "closest" to the problem or
opportunity. They identify opportunities for improvement, perform necessary
analyses, and then make and implement their recommendations. Recommendations are
reviewed by our Continuous Quality Improvement Process (CQIP) steering committee
and by our customers to prior to implementation. The recommendations are also
reviewed to determine any beneficial applications to other areas of the company.
Finally, United Medical periodically conducts "customer satisfaction" surveys
which address areas for improving operations and relations with our customers.
We are committed to total customer satisfaction and if at any time SBCL is not
satisfied with UMM's performance, you are invited to call Mark A. Gregory, the
president of UMM.
7
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Design Services
As the development and manufacturing partner, United Medical Manufacturing
offers a very competitive cost structure for our experienced engineering
services. Our primary business focus is on turnkey manufacturing. Therefore, as
part of our commitment to the manufacturing partnership, UNM will provide to
SmithKline Beecham engineering product design and development services at only
$60 per hour. (Note: This is in 1995 dollars.)
We believe this offers SBCL extremely high value for our experience and
expertise. Because manufacturing is our primary goal, it also provides UMM with
additional incentives to complete the design and development program as early as
possible and to ensure the product is of high quality and very manufacturable.
Our initial estimates are
Phase 1 Product Definition $ 76,800
Phase 2 Feasibility/Design Tradeoffs $137,000
Phase 3 Derailed Design $270,000
Phase 4 Pilot Production $175,000/1/
Phase 5 Full-Scale Production Unit Cost
TBD
. This estimate does not include any tooling or mold charges.
/1/ This does not include pilot production units. The cost of the pilot
production units is dependent on the design and on the number of units
required. It also does not any regulatory agency approval fees (UL,
etc.), although it does include support time.
These are rough estimates based on development programs of similar devices. We
will perform these services on a "Time and Materials" basis. We will track and
charge only the actual time required to accomplish the necessary tasks. Upon
completion of the Product Definition, we will be in a better position to provide
a more accurate schedule and cost assessment.
Based on our experience with similar programs, we estimate that we could be
completed with the design and development within 10 months after starting.
Depending on component lead times and clinical testing, the full-scale
production could occur within 12 months after starting.
UMM's general terms and conditions are included in Appendix C.
Conclusion
United Medical Manufacturing is exceptionally qualified to provide SmithKline
Beecham Clinical Laboratories with design and manufacturing services which will
translate your concept for point of care analyzer into a high quality, cost
effective system. Our experience and expertise will provide insight to get you
there faster and cheaper with less product introduction problems. The conclusion
is clear: United Medical Manufacturing is the best qualified company to partner
with designing and manufacturing the SBCL reflectometer as part of your point of
care analyzer system. We urge you to select United Medical Manufacturing.
8
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Appendix A.
Estimated Schedule for the Design, Development and Documentation for the
SmithKline Beecham Clinical Laboratories Point of Care Reflectometer
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[GRAPH APPEARS HERE]
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[GRAPH APPEARS HERE]
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[GRAPH APPEARS HERE]
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Appendix B
Detailed Schedule and Description of Work
This appendix contains our initial estimate for the schedule and scope of the
work needed accomplish design, developing and documenting the SmithKline Beecham
point of care diagnostic reflectometer.
Objective: The purpose of this project is to design, develop, and manufacture
diagnostic devices for SmithKline Beecham Clinical Laboratories. The preliminary
requirements are outlined in Dr. Tom Grove's RFP.
Product Profile and Goals
- -------------------------
The diagnostic device has the following preliminary characteristics:
. AC/DC power
. reflectometer with multiple wavelength capabilities
. capable of reading reagents on test cards inserted into meter
. capable of reading multiple (1-4) tests per card (multiple
detectors)
. capable of decoding test information from the test card (what test
to perform, parameters of reagents etc.)
. LCD (five (5) lines)
. Serial communications port/access
. temperature control
. Alpha-numeric keypad input capability
. onboard QC -- realtime testing
. error detection/diagnostics -- built-in-test
. capable of wireless transfer of data (line of sight)
. inexpensive (less than $1000 to make) -- Transfer price
We propose utilizing a concurrent engineering approach to the design and
development of this device. The following details our approach based on our
design and control quality system procedure. It is very similar to the three
phase approach outlined in your RFP. (in fact we mapped our phases into a three
phase schedule.)
SmithKline Development Phases UMM Development Phases
- ----------------------------- ----------------------
Phase 1 - Product Specification Phase 1: Product Definition
Phase 2: Feasibility/Tradeoffs
--- Result: Product Specification
Phase 2 - Development Phase 3: Design/Development
--- Result: Detailed Design
and Documentation
Phase 3 - Production Phase 4: Pilot Production
Phase 5: Full-Scale Production
The following provides a more detailed account of this approach.
Approach
- --------
1. Phase 1: Product Definition Concept Development
2. Phase 2: Preliminary Design/Feasibility Phase.
3. Phase 3: Design and Development Phase.
4. Phase 4: Pilot Production
5. Phase 5: Full scale Production
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Phase 1: Product Definition/Concept Development Phase
- -----------------------------------------------------
Reviewing Smithkline's Requirements --Initial Meeting
Preliminary Hazard Analysis.
QFD-- Preliminary Concept Review
Mockup
User Interface Research
Phase 2: Preliminary design/Feasibility Phase
- ---------------------------------------------
System Analysis:
Mechanical Analysis
Electronic Analysis.
Software Analysis.
Test station for Disposeable Analysis
Industrial design
Functional Specification.
Quality Plan
Reliability Plan
Manufacturing Plan
Initial Manufacturing Analysis
Technical Risk Assessment.
Design Alternative Analysis.
Feasibility Phase Review and Approval.
Phase 3: Detailed Design and Development Phase
- ----------------------------------------------
Mechanical Design
Environmental Test Plan
Electronic Design:
Hardware Detailed Design Specification.
Circuit Design.
Material and Component Specifications.
Drawings: Schematics, BOM's.
Theory of Operation.
Hardware Design Review 1.
Printed Circuit Board Design and Layout.
Electronic Component Reliability Report.
Hardware Test Plan.
Hardware Design Review 2.
Build Pre-Prototypes.
Hardware Detailed Test Protocol.
Software Design:
Software Detailed Design Specification.
CASE Diagrams and Data Dictionary.
Process Specifications and Pseudo Code.
Software Test Plan.
Software Design Review.
Coding.
Software Detailed Test Protocol.
Mechanical Design (Enclosure)
Detailed Design Specification
FMEA
Assembly Drawings -- exploded view
Quality Services Plan
Hazard Analysis.
Integrate Software.
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Debug Electronic Hardware.
Debug Software.
Execute Electronic Hardware Test Protocol
Execute Software Test Protocol
System Design Review.
Environmental Testing
Shock and Vibration
EMI and RFI
Temperature
Update Electronic Design.
Update Software Design.
Produce Pilot Prototype Enclosures
Build Prototypes
FMEA Analysis (Component and Process).
Fault Tree Analysis.
Final Hazard Analysis.
Execute (Final) Electronic Hardware Test Protocol.
Execute (Final) Software Test Protocol.
Functional Audit.
Design and Development Phase Review and Approval (Design frozen)
Phase 4: Pilot Production
- -------------------------
Manufacturing Process Design
Assembly Procedures
Fixture Development
Test Procedures
Test Fixture Development
Process Validation
Build TBD pilot units
Complete Documentation Package
Phase 5: Full-Scale Production
- ------------------------------
Final enclosure tooling Defined
Production enclosure specifications
Production enclosure drawings (materials can affect drwgs)
Major Tasks
- -----------
The following is a brief (summary) description of some of the major tasks:
----
Phase 1: Product Definition and Assessment
Initial Meeting -- (SmithKline, UMM)
- ------------------------------------
Review the general requirements such as the user profile, the typical
application environment, competing products, instrument size, weight and shape
constraints. Review other design goals such as serviceability, cleanability. We
would also discuss the interaction of the instrument with the chemistry. This
includes assessing the card reader requirements (if the chemistry card is
already defined), the chemistry's characteristics and behaviors, any dosing or
sample detection requirements (sensing when sample application occurs), flow
rates, control solutions and standards, calibration requirements etc.
Quality Functional Deployment/Customer Requirements
- ---------------------------------------------------
UMM recommends utilizing a QFD or similar approach to defining key customer
requirements. This approach provides benefits which are twofold: 1) it defines
the key features based on the needs of the users/customers and on a competitive
analysis, 2) it provides a forum for the development to obtain a common vision
of the concept. When
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facilitated properly, this becomes a very powerful communication tool as well as
rapidly developing a baseline concept for the reflectometer. This saves
considerable time and money by preventing misunderstandings and providing a
common focus. The QFD does not result in a final product definition, but
provides for early tradeoffs and considerations.
Mockup Fabrication (optional -- Not included in estimate)
- ---------------------------------------------------------
A full scale mockup of the analyzer will be fabricated in order to validate the
design with users and refine the over all size proportion and user interface.
The mock up will contain no working parts but will simulate the user interface
and visual detailing of the enclosure.
UMM could rapidly generate LCD screens to perform user interface research, if
this is required. Our internally developed computer aided software (CASE) tool
provides SmithKline with the opportunity to quickly assess user interface
considerations.
User Evaluation (Focus Groups if necessary -- not included in estimate)
- -----------------------------------------------------------------------
Upon availability of the mockup and all the materials required to execute a test
on the system, consideration should be given to execute and analyze a hands-on
evaluation of the system. The objective of the evaluation will be to identify
ergonomic, work flow and design refinements to be incorporated into the system
prototype. Activities included user: research design, session execution,
results, analysis and an executive summary of product design requirements. This
effort has proven to be extremely beneficial in providing more insight to the
user's needs and wants. Please note this activity is usually performed by the
Marketing company, however, UMM can identify an Industrial Design/Market
Research company who can perform this analysis.
Program management will review the information and determine what or if any,
chances or refinements to make. Meeting minutes will be recorded and provided.
Phase 2: Feasibility and Design Tradeoffs
System Analysis
- ---------------
The System Analysis is an in-depth review and analysis of the product
Requirements and Design Goals as presented in the QFD or customer requirements
definition, The purpose of the System Analysis is to determine the optimum
architecture to satisfy the requirements for the device. The System Analysis
will also evaluate the hardware and software tradeoffs, to obtain the best
"system" solution.
Functional Specifications
- -------------------------
Functional Specifications will be developed from the Requirements Document. The
Functional Specifications will include:
1. "How" the Requirements will be met.
2. What electronic hardware will be used.
3. How the User Interface will function.
4. The Normal mode of operation.
5. Other modes of operation, including Setup, Test, and Errors as applicable.
6. Operating Specifications including input voltage and frequency,
temperature range, humidity, etc.
7. Enclosure dimensions, shape, material, gauge, and finish.
Other items as deemed necessary will be included.
Layout Update
- -------------
The system layout will be updated to include any refinement or adjustments that
are a results of the user evaluation. The layout will finalize the location and
mounting of all interior and exterior component. The exterior surface detailing
of the enclosure will be
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developed to include the color and finish specifications Industrial [design
input will be provided to insure that any changes to the enclosure are
integrated into the design as they occur.
Phase 3: Detailed Design
Mechanical Preliminary Design Review
- ------------------------------------
A meeting will be scheduled with Program Management in order to review the
concepts. Program management will determine which direction or combination of
concepts to develop further. Meeting minutes will be recorded and provided.
Hardware Detailed Design Specification
- --------------------------------------
The Hardware Detailed Design Specification documents the electronics design in
detail, including a Theory of Operation, circuit description, etc. It references
other design documents such as the schematics, Bill of Materials, wiring
diagrams and component specifications to provide a complete encapsulation of the
electronics design.
Circuit Design
- --------------
The electronic circuit design task will include circuit design and component
selection. Tradeoffs pertaining to features, performance, availability, and cost
will be evaluated to choose the optimum parts for the application. The component
selection will focus on existing components readily available in the anticipated
quantities, which can be integrated together to provide the lowest finished
product cost, with the highest system quality and reliability.
Drawings; Schematic, Bill of Materials
- --------------------------------------
The circuit design (schematic and Bill of Materials) will be documented with a
Computer Aided Design (CAD) package. The Bill of Materials will specify the
component manufacturer and part number, with approved sources of supply.
Hardware Design Review 1
- ------------------------
The focus of the first Hardware Design Review is the circuit design and
component selection. The review is performed as a top-down review. It begins by
looking at the overall design, then the components selected, and ends after
analyzing each circuit node. This review confirms that the design is in
agreement with the Functional Specification.
Printed Circuit Board Design and Layout
- ---------------------------------------
The printed circuit board (PCB) design will be done on a CAD system. A printed
circuit board component assembly drawing will also be generated. It will show
all components on the board(s). The PCB will be designed to meet regulatory and
agency approval as stated in the Functional Specifications. The PCB will include
transient protection, electrostatic discharge protection, and RFI filtering as
stated in the Functional Specifications.
Hardware Test Plan
- ------------------
The Hardware Test Plan outlines what equipment is required, and what tests will
be performed on the electronic hardware.
Hardware Design Review 2
- ------------------------
The focus of the second Hardware Design Review is the printed circuit board
design and Hardware Test Plan. The review begins by re-verifying any outstanding
issues from the first review, and ends after reviewing the printed circuit board
layout and Hardware Test Plan.
Build Pre-Prototypes
- --------------------
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Electronic Technicians will assemble, build, and aid in the testing and
debugging of the pre-prototype units.
Hardware Test Protocol
- ----------------------
The Hardware Test Protocol will detail the test steps to be performed for each
test specified in the Hardware Test Plan.
Software Detailed Design Specification
- --------------------------------------
The Software Detailed Design Specification documents the software design in
detail, including the overall architecture, communication protocols. algorithms,
etc. It references other design documents such as the Data Flow Diagrams, Data
Dictionary, Structure charts, State Transition Diagrams, process specifications
and pseudo-code to provide a complete encapsulation of the software design.
CASE Diagrams and Data Dictionary
- ---------------------------------
The software will be designed using structured design techniques. Computer Aided
Software Engineering (CASE) tools will be used to generate Data Flow Diagrams,
State Transition Diagrams, Structure Charts and a Data Dictionary. The Data Flow
Diagrams embody a `process model', which shows how data flows between internal
processes, which perform data transformations. State Transition Diagrams specify
the logic of transitions between different states in terms of conditions and
actions. The Data Dictionary defines the data elements which communicate
information between processes or storage.
Process Specifications and Pseudo Code
- --------------------------------------
The `process model' described by the Data Flow Diagrams is a hierarchical
description, which at the lowest level is described by Process Specifications
detailing the logic. These P-specs are usually English language descriptions or
Pseudo Code.
Software Test Plan
- ------------------
The Software Test Plan outlines what equipment is required, and what tests will
be performed on the software program.
Soft Design Review
- ------------------
The focus of the Software Design Review is to review and critique the software
design as described by the Software Detailed Design Specification, including the
CASE Diagrams, Data Dictionary, Pseudo Code, and Software Test Plan. These
documents are analyzed for internal consistency and logic, and to determine if
the Functional Specification is met in the design as described.
Software Coding
- ---------------
For ease of maintainability, the software program will be written in "C".
Structured, modular programming techniques, with source level documentation will
be included.
Software Test Protocol
- ----------------------
The Software Test Protocol will specify in detail how the software will be
tested, and what results will he expected. The protocol will include both "black
box" and "white box" testing. "Black box" testing is based on having no
knowledge of the actual implementation of the software program, and therefore
tests combination of input stimuli to monitor output results. "White box"
testing is based on knowledge of the software program, and specifically tests
functions and modules `in isolation' for proper performance. This usually
requires the use of emulation equipment or debuggers.
Execute Software Test Protocol
- ------------------------------
18
<PAGE>
After the preliminary testing and debug has been completed, a formal software
test will be performed per the Software Test Protocol. The test results will be
compiled and documented, and will state the expected and actual results
obtained.
Mechanical Design and development
- ---------------------------------
Based on the results of the design review, a final design direction for the
analyzer enclosure will be developed. The design will be developed in the form
of a scale layout, perspective renderings and exploded views depicting
preliminary part count and assembly methods,
Develop a complete layout of the reflectometer housing. The layout will include
the approximate size and location of the P.C. boards, power supply connector
interfaces, chassis and enclosures, a 3-D computer model of the analyzer will be
developed in order to define the preliminary component to component interfaces
and the attachment and assembly of the enclosure. The data base will be provided
to Program Management for review and updates. The updated data base will be
continually refined as we move through the development program.
Materials and Process Identification
- ------------------------------------
UMM, will determine the appropriate materials and manufacturing processes for
the production unit. This determination will be based on the ultimate
manufacturing quantities environment of use, appearance and cost.
Documentation of the process will be provided.
Mechanical Design Review
- ------------------------
This will review the enclosure and its internal components and structure.
Final Design Review
- -------------------
A meeting will be scheduled with Program Management in order to review the final
design direction, provide input and to provide approval to proceed to the next
phase. Meeting minutes will be recorded and provided.
FMEA Matrix
- -----------
A Failure Modes and Effects Analysis (FMEA) Matrix will be developed. The matrix
will address any component that, as a result of the design direction, is
determined to be an active component of the system.
Enclosure Design Review
- -----------------------
During the design layout activity, periodic reviews with Program Management will
be scheduled in order to keep abreast of program progress and address any
changes in a timely manner. It is anticipated that the computer model will be
viewed on an available CAD system followed by a discussion and review of the
plots. Meeting minutes will be recorded and provided.
Detailed Component Drawings
- ---------------------------
From the 3-D computer layout of the system, individual part files will be
created. The individual components will then be detailed as prototype part
drawings for the housing components. This activity will address part design,
material, hardware, color and finish specifications. All individual components
will be maintained in a 3-D format to facilitate back annotation into the system
layout. This will insure proper part to part fit and provide the ability to make
chances as they may arise. The drawings will be provided in both print and
compatible disc format.
Vendor Review and Cost Update
- -----------------------------
Review the prototype drawings package with selected vendors in order to
determine preliminary piece part costs, lead times and preliminary tooling
estimates.
19
<PAGE>
Part Drawings Review
- --------------------
Upon completion of the part drawings and vendor review, UMM will schedule a
review with Program Management. The purpose of the review will be to insure that
all prototype criteria have been met and to discuss any chances or modifications
that may be required prior to the fabrication of the prototype. Meeting minutes
will be recorded and provided.
Prototype Fabrication
- ---------------------
UMM will develop a functional, working prototype to ensure design intent has
been accomplished. This should confirm achievement of the customer's
requirements.
Presentation
- ------------
UMM will schedule a meeting with Program Management/(Customer) to present the
assembled prototype. Program Management will review the prototype and determine
the requirements for further development. Meeting minutes will be recorded and
provided.
Phase 4: Pilot Production
Assembly Procedures
- -------------------
The complete procedures package will be developed which details the
manufacturing process and component assemblies.
Fixture Development
- -------------------
The design, development and documentation of any fixtures necessary for
performing the assembly procedures.
Test Procedures
- ---------------
This includes any electrical and functional tests (GenRad circuit tests, final
functional load test, etc.) to ensure unit functions as specifies.
Test Fixture Development
- ------------------------
This is the design, development and documentation for any necessary test
fixtures.
Process Validation
- ------------------
An FMEA will be performed on the processes to identify processes required to be
validated. The validation of the processes ensures consistent, reliable
manufacturing processes.
Environmental Tests
- -------------------
Pre-prototype units will be submitted to a test laboratory to confirm they pass
the environmental specifications. Operating temperature, humidity, Electrostatic
Discharge (ESD), Radio Frequency Interference (RFI). and Electromagnetic
Interference (EMI) testing will be performed as stated in the Environmental Test
Plan.
Pilot Production Run
- --------------------
UMM will manufacture a specified number of reflectometers to verify the assembly
processes and procedures are correct. The number of units will be determined by
SmithKline Beecham and United Medical Manufacturing.
Pilot Production Acceptance and Approval
- ----------------------------------------
A formal acceptance and delivery meeting will be schedule.
Full-Scale Production Schedule
- ------------------------------
20
<PAGE>
UMM will develop a master production schedule based on anticipated forecasts and
lead time availability for specified components.
Vendor Review
- -------------
Preview clinical unit drawing package with selected molding vendor in order to
determine mold preferences and part design strategy particular to that vendor.
Production Part Drawings
- ------------------------
Develop production part drawings for the enclosure components to include
modifications and refinements determined from the use of the prototype units.
Drawings Review
- ---------------
The purpose of the review will be to insure that all molding and manufacturing
criteria have been met and to discuss any changes or modifications that may be
required.
Drawing Revisions
- -----------------
Should any changes or modifications be required, UMM will revise the drawings
and submit them for review and approval.
Phase 5: Full-Scale Production
21
<PAGE>
Appendix C
General Terms and Conditions
22
<PAGE>
United Medical Manufacturing General Terms and Conditions for Design and
- ------------------------------------------------------------------------
Development Services
- --------------------
. Development labor rate is $60 per hour.
. "Time and Materials" is the actual time to perform the specified tasks
with the necessary resources or materials.
. Development labor time will be tracked using job order numbers and
will be billed monthly unless otherwise noted.
. Travel and miscellaneous expenses will be billed at cost plus 5%.
- Travel expenses include:
Private auto mileage at 30 cents
per mile (latest rate as
determined by the IRS).
Parking, tolls and fares.
Car rental, if required.
Airfare, if required.
- Miscellaneous expenses include, but are not limited to:
Rooms and meals away from home base, if required.
. A purchase order for the full amount of any tooling must be provided
to United Medical prior to UMM placing the order.
. Payment terms are net 15 days after date of invoice.
. Unless otherwise noted, any proposal or estimate is valid for 30 days.
. An endorsement of this agreement or a purchase order for 25% of the
estimate constitutes acceptance of the agreement and acknowledges
acceptance of the terms and conditions.
23
<PAGE>
United Medical Manufacturing General Terms and Conditions for
- -------------------------------------------------------------
Manufacturing Services
- ----------------------
. Prices are FOB United Medical Manufacturing's dock.
. Unless specified, prices do not include packaging for shipping.
. If prices are denoted as estimates, then the final price will be
determined based on the final bill-of-materials.
. A lead time will be established in conjunction with customer which
balances customer forecasted demand, component lead times and
inventory management.
. Costs associated with requests for expediated orders will be
determined and proposed prior to implementing expedited order.
. If requested, Development labor time will be tracked using job order
numbers and will be billed monthly unless otherwise noted.
. Travel and miscellaneous expenses will be billed at cost plus
5%.
- Travel expenses include:
Private auto mileage at 30 cents per mile.
Parking, tolls and fares.
Car rental, if required.
Airfare, if required.
- Miscellaneous expenses include, but are not limited to:
Rooms and meals away from home base, if required.
. A purchase order for the full amount of any tooling must be provided
to United Medical prior to UMM placing the order.
. Payment terms are net 15 days after date of invoice.
. Unless otherwise noted, any proposal or estimate is valid for 30 days.
24
<PAGE>
EXHIBIT 10.19
AGREEMENT
Between
HAUSER, INC.
hereinafter called
HAUSER
and
SMITHKLINE BEECHAM CORPORATION
hereinafter called
CLIENT
Hauser agrees to provide Client with services for the design and development of
a Point of Care Diagnostic Analyzer substantially in accordance with Hauser's
proposal dated September 15, 1995 (the "Proposal"), which is incorporated
herein, subject to the following terms and conditions (the "Project"):
1. TERM
Hauser will begin work on the Project within thirty (30) days of receipt of this
Agreement executed by Client and will continue for a period of seven (7) months,
from Phase 0 through Phase 4, subject to the terms and conditions of this
Agreement.
2. PAYMENT
Hauser estimates that the price to the Client for performance of the Project
will be One Hundred Sixty-Seven Thousand Five Hundred Dollars ($167,500.00) as
set forth in the Fee Schedule. To initiate the Project, Client shall advance
Eight Thousand Dollars ($8,000) which amount shall be deducted from the final
invoice and Client shall provide Hauser with a purchase order and executed
Authorization to Proceed. Prior to each Phase, Client shall provide Hauser with
a purchase order or, to the extent same is not feasible, an Authorization to
Proceed executed by an authorized officer of Client. Hauser shall present
invoices at the earlier of the end of each month or the end of each Phase which
shall be payable fifteen (15) days from the invoice date. If Client shall not
have paid any invoice twenty-two (22) days from the invoice date, Hauser may
discontinue the Project until such invoice is paid in full and Hauser's
commitment to delivery dates shall be adjusted accordingly. In the event Client
fails to make payment with the applicable twenty-two (22) day period with
respect to at least two invoices, Hauser may re-evaluate the noted payment
terms. Client shall not be required to
<PAGE>
reimburse, and Hauser shall not be required to incur, any charges for
performance in excess of the above price, unless mutually agreed upon in
writing. If Client or Hauser requests activities that constitute a change of
scope from the Proposal or if additional information is discovered which
increases the complexity of the Project, Hauser shall provide a work change
order ("WCO") which must be approved by Client. Pending approval of the WCO,
Hauser shall not implement a change of scope. Upon termination of the Project,
and after all costs are available, any balance of payments by Client in excess
of actual costs and fees incurred shall be credited or refunded to Client,
unless said refund shall be less than One Hundred Dollars ($100.00). Certain
designated expenses are not included in the above estimated price and, when
authorized by Client, will be invoiced seperately when incurred as follows: (i)
travel time at a 50% rate, (ii) travel expenses at cost, (iii) marketing
expenses at cost, and (iv) materials and outside services at cost plus 15%.
3. OWNERSHIP
The parties agree that all Work (which shall include for purposes of this
Section all ideas, processes, methodologies, software, algorithms, formulae,
notes, outlines, paragraphs, inventions, improvements and other information and
work product developed or generated by or on behalf of Hauser during the course
of its performance of the Project pursuant to this Agreement) shall be
considered "works made for hire" within the meaning of the Copyright Act of
1976, 17 U.S.C.(SS)101, and that Client is and shall be the sole author of the
Work, and the sole owner of all rights therein, including but not limited to all
rights of copyright. In the event any of the Work is deemed not to be a "work
made for hire," then Hauser hereby transfers to Client, without further
consideration, all right, title, and interest to such Work, including any and
all patents, copyrights, trade secrets and other proprietary rights related
thereto. Hauser agrees to promptly execute and deliver, or cause to be promptly
executed and delivered, all documents and instruments requested by Client to
evidence the foregoing assignment. Hauser hereby irrevocably appoints Client as
Hauser's attorney-in-fact for the purpose of executing such documents and
instruments in Hauser's name. Hauser represents and warrants that it has the
right to grant to Client sole right, title and interest in and to the Work, and
that ownership or use of the Work by Client will not constitute an infringement
of any third-party patent, copyright, trade secret or other proprietary right.
4. INVENTIONS
If Hauser employees conceive and first actually reduce to practice an invention
within the scope of the Project while working on the Project, Hauser will
promptly notify Client of the invention and shall be deemed to have assigned to
Client any and all of its rights to such invention. Upon request, within sixty
(60) days of the notification, Hauser will also assist Client in preparing and
prosecuting an application for Letters Patent. The costs of providing such
assistance are not included in the Project estimate stated in Section 2
-2-
<PAGE>
above, and Client agrees to pay such costs in addition to any other amounts
payable under this Agreement.
5. CONFIDENTIALITY
Hauser acknowledges that it may be exposed or have access to trade secrets and
other confidential business information of Client or other entities with which
Client has business relationships. Such information, referred to hereinafter as
"Confidential Data," shall include all information concerning the business or
affairs or Client that is not known by or generally available to third parties,
including, without limitation, existing systems and programs and those in
development, customer lists, customer needs and requirements, employee lists,
salaries and benefits, and all data received in confidence by Client from third
parties. Hauser agrees that during its business dealings with Client and
thereafter (i) it will hold all Confidential Data in the strictest confidence
and will not copy or disclose any portion thereof to any person or entity,
except its employees who have a need to know, without the prior written consent
of Client; (ii) it will comply, and cause each of its employees to comply, with
Client's policies on data and information security; (iii) it will not make any
use whatsoever of any Confidential Data except to perform services in connection
with the Work pursuant to this Agreement; and (iv) upon termination of its
business dealings with Client or at any time upon Client's request, it will
immediately return to Client all Confidential Data in its possession or in the
possession of its employees.
6. REPORTS AND USE OF RESULTS BY CLIENT
Hauser agrees to render to Client written reports of its findings and progress
made during the term of the Agreement, at intervals agreed upon by the parties.
Client may use the results of the Projects as Client sees fit.
Hauser will provide a high standard of professional service. Hauser warrants
that services provided hereunder shall be performed in a competent and
workmanlike manner and that each item of Work furnished to Client pursuant to
this Agreement shall conform with its description and specifications as set
forth in the Proposal.
7. INDEPENDENT CONTRACTORS
Client and Hauser are independent contractors, are not related and shall not be
construed as co-employers, joint venturers, partners or otherwise. Hauser shall
be responsible for payment of all wages and/or salaries and benefits due to its
employees. Notwithstanding the above, Client will, if appropriate, deduct
applicable taxes from Hauser's compensation for services performed under this
Agreement. Upon Client's request, Hauser will provide Client with certificates
of insurance evidencing that its employees are covered by; (i) general liability
insurance with a minimum limit of $1
-3-
<PAGE>
million combined single limit bodily injury and property damage; and (ii)
workmen's compensation insurance in the state in which each Hauser employee is
employed.
8. INDEMNITY
Client agrees to indemnify and hold Hauser harmless from any and all claims or
suits, and all costs and expenses in connection therewith, for or arising out of
Hauser's performance under this Agreement, other than for injury or damage
occurring (i) as a result of a breach of this Agreement by Hauser, or (iii) as a
result of the negligence or improper act or omission of Hauser or any employee
or agent thereof. Notwithstanding the foregoing, Client's indemnity of Hauser is
contingent upon Hauser promptly notifying Client of any claim and/or suit
whereby Client may conduct and control the defense thereof with the cooperation
of Hauser and may defend or settle such suit or claim in its discretion.
9. FORCE MAJEURE
Neither Client nor Hauser shall be liable in any way for failure to perform any
provision of this Agreement (except the payment of monetary obligations) if such
failure is caused by any law, rule or regulation, or any cause beyond the
control of the party in default.
10. EARLY TERMINATION
Either party shall have the right to terminate this contract upon thirty (30)
days' written notice. In the event of early termination, Hauser agrees to: (i)
provide Client with all reports, materials, or other deliverable items available
as of the date of termination, and (ii) refund the applicable pro rata portion
of the estimated payment as set forth in Section 2. In any event, Client agrees
to pay all appropriate and reasonable costs incurred or committed by Hauser
including costs of termination, within thirty (30) days of receipt of a final
invoice, which invoice is subject to review and approval by Client.
-4-
<PAGE>
11. GENERAL
This Agreement and the Proposal incorporated herein represent the entire
Agreement of the parties, and may be modified or amended only by mutual
agreement in writing. This Agreement shall not be assigned by either party
without the prior written consent of the other party, except that Client may
assign this Agreement to an affiliate without the prior written consent of
Hauser. This Agreement shall be governed by and is to be construed in accordance
with the laws of and enforced within the jurisdiction of Pennsylvania.
SMITHKLINE BEECHAM HAUSER,INC.
CORPORATION
By /s/ W. Vickery Stoughton By /s/ Ronald Pierce
--------------------------- ---------------------------
Title President Title Vice President
------------------------ --------------------
Date 2/28/96 Date 12/7/95
-------------------- --------------------
-5-
<PAGE>
CONSENT TO ASSIGNMENT
The undersigned hereby consents to the assignment by SmithKline Beecham
Corporation, a Pennsylvania corporation ("SB"), to Exigent Diagnostics, Inc., a
Delaware corporation ("Assignee"), of all of the rights of SB under the
Agreement by and between the undersigned and SB dated as of February 28, 1996,
(the "Agreement"). For purposes of this consent, "Effective Time of the
Assignment" means the effective time of the closing of Assignee's purchase of
the assets of SmithKline Beecham Diagnostic Systems Co., a Pennsylvania limited
liability company. In executing this consent, the undersigned agrees that SB
will be responsible for obligations arising under the Agreement prior to the
Effective Time of the Assignment and Assignee will be responsible for any
obligations arising under the Agreement after the Effective Time of the
Assignment.
HAUSER.INC
By: /s/ Stephen G. Hauser
------------------------
Name: Stephen G. Hauser
Title: President
Hauser. Inc.
<PAGE>
HAUSER Proposal
SmithKline Beecham
Clinical Laboratories
1201 S. Collegeville Road
Collegeville, PA 19426
Phone (800) 877-7478
Fax (610)983-2040
Point of Care Analyzer
Product Design and Development
Prepared for:
Debbie Travers
Director Medical Marketing
September 15, 1995
Hauser, Inc.
<PAGE>
SmithKline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
Contents
Hauser Background and Experience 3
Relevant Experience and Capabilities 4
Program Definition 6
Program Assumptions 7
Program Outline 8
Phase 0 Applied Research: Foundational 9
Phase 1 Concept Development 11
Phase 2 Applied Research: Concepts 13
(Optional)
Phase 3 Design Refinement & Visual Mode 15
Phase 4 Pre-Production Design 17
Phase 5 Prototype Fabrication 18
Phase 6 Multiple Prototypes - Clinical Trials 20
Phase 7 Production Design 21
CAD Capability 22
Program & Fee Schedule 23
Terms & Conditions 24
Authorization to Proceed 26
2
<PAGE>
SmithKline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER Hauser Background and Experience
Hauser is built upon a solid foundation of engineering and
manufacturing knowledge. Currently, Hauser takes approximately 75%
of projects from product research and conceptual design through
prototyping, production design and vendor sourcing and liaison. For
over 30 years, Hauser has established a reputation within the
medical and consumer electronics industry as a stable, highly
competent product design firm that combines the appropriate degree
of innovation and creativity with pragmatic design for
manufacturability.
Hauser has developed award-winning designs for the consumer and
medical industries. Hauser has developed medical products, from
disposables and complex medical diagnostic products, as well as
point-of-care devices, for companies such as Bayer, Abbott, Johnson
& Johnson, Baxter, Sherwood, Coulter, etc.
The Hauser Medical Services organization is comprised of resources
experienced in medical device design and engineering, medical user
research, and medical regulations and standards. We facilitate
medical clients in meeting their 1SO9000 and GMP requirements as
well as meeting medical industry design and engineering standards.
Hauser has research resources experienced in providing design-based
user research and QFD analysis in the medical environment.
As part of its user-centered process, Hauser offers a comprehensive
user interaction design practice. Our methodology combines applied
development and iterative testing, to develop and assure optimum
physical and cognitive interaction with the product or system,
Hauser has specific experience in the design, testing and
implementation of user interfaces within medical systems. These
programs have included design for multiple product platforms for
domestic and international markets.
Hauser features a full-service prototype shop, capable of producing
photographic quality visual models and production-like prototypes.
Hauser is capable of producing models and prototypes virtually
without help from the outside. Hauser employs rapid prototyping
techniques, including soft-mold casting, stereolithography, CNC,
and other methods. Our facility features 2D and Unix based 3D CAD
including Pro/ENGINEER and HP's 3D Solid Design Engineering
Software.
Hauser is typically asked to maintain involvement throughout the
entire product development process. After the conceptualization,
development of mock-ups and prototypes we often, at the option of
our clients, assist in the development of the required production
documentation so that the product is ready for manufacture in a
timely manner.
3
<PAGE>
SmithKline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER Experience and Capabilities Specifically Relevant to the Point of
Care Analyzer
Hauser has recently worked on programs similar in complexity to
SKB's proposed Point of Care Analyzer device. The following is an
overall view of our related experience:
. Hauser has developed several products related to the
Point of Care Analyzer:
. PPG Point of Care Blood Gas Analyzer
. Several blood glucose monitors
. A wide variety of clinical laboratory products
for Baxter, Abbott, Bayer and Becton Dickinson.
. Hauser has over 30 years of extensive medical product
development experience including clinical and laboratory
products.
. We are experienced in both high-volume and low-volume,
plastic product design - Including disposables and
instrumentation. We work well with resin manufactures and
injection molders insuring the cost for molded plastic
parts is optimized.
. Hauser's experience includes development of global
products which address international variation in user
interface, ergonomics and design preferences.
. Hauser has a user-centered approach to product
development employing applied research, including:
. User Research in the User's Environment/User
Interviews and videotape
. User Concept Evaluation Testing .
. Human Factors Evaluation
. Our user interaction design capabilities include:
. Design for imbedded and computer
interfaces
. Task analysis and usability testing
4
<PAGE>
SmithKline Beecham
Point of Cure Analyzer
September 15, 1995 . P-1317
HAUSER
. Graphic interface design
. Interface prototyping
. Development, execution and analysis of iterative research and
usability testing
5
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER Program Definition
SKB has requested that Hauser, Inc. submit a proposal for the design
and development of a Point of Care Diagnostic Analyzer.
The following program has been developed in somewhat general terms
since the physical size and final characertistics of the instrument
will evolve as the program is underway.
Hauser understands that we will be working with SKB marketing and
engineering, as well as the staff of contract manufacturers specified
by SKB. Hauser has had experience developing team relationships with
other contract manufacturers in the past.
Our design effort will focus on developing a range of possibilities
for the design and user interaction design of the Point of Care
analyzer that are appropriate for initial U.S., then global
distribution.
The design effort will focus on SKB's request for a functionally
elegant medical device. Hauser will concentrate on product usability,
including user interface design to develop a product suitable for the
user and the working environment. Hauser will focus on designing an
instrument that can be efficiently manufactured and assembled by the
specified contract manufacturer, in the quantities and within target
costs specified by SKB. Hauser will focus on appearance issues,
developing appropriate overall forms, design details, color, finish
and graphics that will support an appearance suitable for SKB.
Taken from the text of Thomas H. Grove, Ph.D. letter concerning The
Product Definition: "SKB is interested in developing a hand-held
reflectometer/luminometer for Point of Care chemistry and
immunochemistry testing. The meter would have the following
characteristics:"
. AC/DC powered
. reflectometer with multiple wavelength capabilities
. luminescence capabilities
. reagents would be run on a test card inserted into the
device
. test cards would have 1-4 tests (multiple detectors)
. testing information would be coded on test card
. five line LCD
. serial port
. temperature control
. alpha-numeric control
. onboard QC
. inexpensive (less the $1,000 to make)
. error detection/diagnostics
. wireless transfer of data (line of sight)
6
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER Program Assumptions
For the purposes of this proposal, Hauser has assumed the following:
. SKB, and the contract manufacturer, will be responsible for the
electrical and software engineering of the Point of Care
Analyzer. Hauser will work with SKB and the contract
manufacturer's engineering departments on specific engineering
issues while developing our program responsibilities. Hauser will
assume responsibility for the development of the user interface
design, (Please Note: Hauser does not perform software code
development but will work closely with programmers while
developing the user interface design).
. SKB will be responsible for the development of the disposable
test cards and the associated chemistry for the Point of Care
Analyzer. Hauser has had extended experience in the development
of disposables and related low cost molding design configurations
and assemblies. Hauser will work closely with SKB in developing
the instrument design to accommodate the disposable. We would be
pleased to work with SKB on the development of the disposable, if
requested. The development of the disposable is not part of this
proposal.
. Hauser will have access to any pertinent marketing research known
by SKB, to assist in defining the appearance and use of the Point
of Care Analyzer.
. SKB will inform Hauser of any known labeling and/or regulatory
requirements for U.S. and international sale.
. Hauser will not be responsible for performance testing and
regulatory approvals for the Point of Care Analyzer.
. For cost estimating purposes we have assumed that all of the
meetings scheduled at SKB will take place at their Van Nuys
facilities.
7
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER Program Outline
This Program Outline carries the Point of Care Analyzer through
conceptual design to production design. Each new phase is predicated
on the development of the product during the previous phase. An
overall description of the complete design program is offered at the
beginning of the program to give SKB and Hauser beginning guidelines
for determining the cost required to carry this project to conclusion.
It can be expected, as the program moves through its various phases,
the guidelines may alter. If this should be the case, the program will
be modified because of new information suggested and agreed upon by
SKB and Hauser.
8
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
Phase 0 Applied Research: Foundational
Objective
The Hauser team will observe a sampling of typical Point of Care Analyzer target
users and use environments. Hauser designers will observe, videotape and
interview potential users, regarding the complete process of storing,
retrieving, preparation, using and restoring the product, disposables and
reagents. In addition, the purchase decision making process will be identified
so that key features and benefits are prioritized prior to design. In this phase
the designers will observe opportunities for innovation and problem solving
first hand and prepare themselves with relevant information required to develop
concept solutions in Phase 1.
Please Note Applied Research is a qualitative research program, designed to
allow designers to observe and evaluate device design in the use environment.
These programs are not intended as substitutes for qualitative market studies.
Procedure
. Prior to Start-Up Meeting
We ask that SKB supply Hauser with any existing and applicable design,
engineering and marketing documentation they may have compiled on the
competition for review.
. Start-Up Requirements Workshop at SKB
A project kick-off meeting will be held to introduce and understand the
roles of key people involved in the project, and to discuss the product
requirements, the project deliverables, and schedule. It is important to
address marketing, design and manufacturing issues at this time, Attending
this meeting will be representatives from SKB, the Hauser design team, and
the contract manufacturer. Of specific importance will be a delineation of
known components and the definition of the disposable. This information
will allow Hauser begin to layout components for access and ease-of-use. In
addition, this meeting is an opportunity for briefing interface designers
with any existing interaction rules and task analysis, if available.
. Research Preparation
Based on the target market defined by SKB, Hauser will arrange personal
interviews with a sampling of 8 to 10 users, within a variety of use
environments. This sampling will include laboratory personnel, as well as
relevant nursing and medical staff with no experience with this type of
device. Confidentiality will be a critical requirement of this process.
9
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
. Contextual Inquiry
The Hauser research team will observe and videotape the subjects as they
interact with various similar products within their work environment. The
subjects will also be interviewed regarding product interaction, job and
environment requirements. The videotapes will be analyzed to identify
requirements relating to product performance and ease-of-use.
. Research Documentation and Evaluation
Based on the primary research Hauser will document its findings,
identifying user issues, and potential areas for product improvements or
features. Hauser recommends a simple Quality Function Deployment Matrix for
documentation and analysis. In addition, a preliminary task analysis will
be prepared, to guide in interaction design.
. Phase Review Meeting at SKB
A meeting will be held to review the research and Hauser's evaluation of
the users needs and preferences and product opportunities. This meeting
will conclude Phase 0.
Deliverables:
. User interaction requirements document
. Videotapes
. Transcripts of key interviews
. Research documentation
10
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
Phase 1 Concept Development
Objective
Hauser will begin to develop preliminary design concepts based on the user
research presented to SKB at the end of Phase 0.
Procedure
. Preliminary Design Concepts
Based on knowledge gained from the start-up meeting and user research,
Hauser will begin development of several concept designs of the Point of
Care Analyzer. Each concept will be developed in quick-sketch form and
solid foam volume study models to allow a better understanding of the
design direction.
. Preliminary Layouts Developed
Hauser will begin to develop accurate layouts on CAD to determine size and
various proportions of different approaches.
. User Interaction Concepts
Hauser will develop a series of rough visual models based on the User
Interaction Requirements document and user research developed during Phase
0. These rough visual models will incorporate the discoveries made, and
reported on, during Phase 0. The rough visual models will be used by Hauser
during Phase 2 - Applied Research: Concepts.
Based on an initial task analysis, options will be explored for the
operation protocol. It is expected that an appropriate range of display and
input techniques will be explored. These concepts can then be evaluated,
along with the respective cost implications of each option.
Based on the user interaction requirements, several interaction concepts
will be developed. Promising interaction concepts will be refined and
presented for testing in Phase 2.
. Phase Review Meeting at SKB
Hauser will present its recommended design directions to SKB. The
presentation will use sketch renderings and foam study models to
communicate the suggested design directions. Digitally-generated
representations of the display graphics and interaction scenarios will also
be presented. The outcome of the review will be a selection of an estimated
three concepts for further development in Phase 2. In addition, a project
schedule and budget will be reviewed. This meeting will conclude Phase 1.
11
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
Deliverables:
. Task analysis
. Concept sketches
. Preliminary layouts
. Rough foam models for research
. Interaction design concepts for research
12
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
Phase 2 Applied Research: Concepts
Objective
We are aware that SKB has retained a market research firm to help develop the
direction the product will take in the market place. Phase 2 is intended to
supplement that effort.
Hauser will have users evaluate the design concepts and rough visual models
which were presented to SKB at the end of Phase 1. Hauser recommends user
research at this phase to allow users to evaluate designs and interact with the
design team. In addition, user interface concepts will be tested with users,
allowing for the definition of an interaction concept that best satisfies the
user's abilities and needs. In this phase, the interaction of the user and the
immediate environment will be observed and videotaped. Users will be interviewed
regarding their preferences. From this evaluation, the design team can determine
a design direction preferred by the user which is based on the design's ability
to meet customer needs. This design direction may be a hybrid of several design
concepts.
. Research Preparation
Based on the target market defined by SKB, Hauser will arrange personal
interviews with a sampling of 8 to 10 users within a variety of use
environments. This sampling will include laboratory personnel as well as
relevant nursing and medical staff with no experience with this type of
device. Confidentiality will be a critical requirement of this process.
. Contextual Inquiry
The Hauser research team will observe and videotape the subjects as they
interact with design and interface concepts within their work environment.
The subjects will also be interviewed. The videotapes will be analyzed to
identify requirements relating to performance of design and interface
concepts.
. Research Documentation and Evaluation
Based on the primary research Hauser will document its findings,
identifying user issues, and potential areas for product improvements.
Hauser recommends a simple Quality Function Deployment Concept Selection
Matrix for documentation and determination of a design direction. In
addition, the task analysis and user interaction guideline will be
prepared, to guide the development of the user interface.
. Phase Review Meeting at SKB
A meeting will be held to review the research and Hauser's evaluation of
the design and interface concepts. All project team members should be
present to determine a design direction that best meets user,
manufacturing, marketing and performance requirements. The final design
direction may be a hybrid of several design concepts, with refinements
based on user needs.
13
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
Deliverables:
. User interaction requirements document
. Videotapes
. Transcripts of key interviews
. A research report including documentation of the chosen design direction
14
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
Phase 3 Design Development & Visual Model
Objective
To develop and refine a single design to a visual model level. To refine the
chosen interface design using computer simulation. The design direction will
require additional refinement before fabrication of a visual model.
Procedure
. Design Development
Based on results of the research in Phase 2, Hauser will develop and refine
the most promising concept, and then update the rough visual model to
reflect those changes.
. Layouts Updated
Hauser will also update the selected layout as more is learned about the
internal components, and the acceptance of the selected design by the
users.
. Preliminary Cost Analysis
Hauser will generate a rough, ballpark, tooling and part cost estimate
based on the current design. This assessment should not be construed as a
formal production estimate, but as a check towards the cost targets
specified by SKB at the beginning of the program. Local vendors will be our
source for this, and later cost reviews.
. Design Documentation
Hauser will generate a preliminary drawing package (layout and control
drawings) that will be used by our model makers to fabricate the visual
model. The drawings will define external dimensions and details that are
important to the appearance and user interaction of the Point of Care
Analyzer. Consultation with SKB's mechanical engineering staff should
identify appropriate formats for CAD file transfer.
. Visual Model Fabrication
Hauser will fabricate one visual model of the Point of Care Analyzer
design. The model will visually represent the approved design to date and
will be of such quality that it will be suitable for marketing photography.
The model will not house electronics and will not be functional, however
external mechanical details, such as sliding doors or hinged covers, will
function. Color/finish and graphics will be applied to the model.
. Ul Simulation
Hauser will generate an interactive simulation of the chosen interface
design. This computer model will relay fundamental elements of the protocol
in the interaction design to date. The simulation can run on a variety of
platforms; it is currently envisioned on a Macintosh computer.
15
<PAGE>
SmithKline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
. Phase Review Meeting at SKB
Hauser will present the visual model and updated interface simulation at a
phase review meeting to be held at SKB. This review will serve as formal
definition of the industrial and interaction design freeze for the Point of
Care Analyzer. This meeting will conclude Phase 3.
Deliverables:
. Preliminary product design
. Ballpark tooling and part cost analysis
. One visual model
. Updated interface simulation
Please note: Hauser recommends a concept validation market study be conducted at
this time, to assure that the final design is evaluated by users before
production design and tooling is started. Hauser can conduct research, if
requested, and will submit a proposal at that time.
16
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
Phase 4 Pre-Production Design
Objective
The objective of this phase is to develop a pre-production documentation package
that will enable Hauser to fabricate a prototype in Phase 5.
Procedure
. Design Modifications
Hauser will incorporate the modifications requested by SKB at the end of
the Phase 3 review meeting.
. Pre-Production Design
Hauser will produce a pre-production design drawing package that will
incorporate the latest design modifications. The pre-production design
drawings will be used by Hauser to fabricate a final prototype of the
design in Phase 5.
Please Note: If appropriate, Hauser will execute the pre-production design
via 3D solid modeling CAD platform.
. Camera-Ready Art
Housing:
Hauser will provide camera-ready artwork and files for all housing graphics
and nomenclature, including corporate identity, product identity and
operational graphics. It is expected that regulatory and corporate identity
samples will be provided by SKB.
Display (LCD):
Hauser will provide camera-ready artwork and files for the custom LCD
display. Graphics will incorporate the system addressing requirements
specified by SKB's electronic designers and will include active variations,
if any, (Active variations are graphics for animated or dynamic elements of
the display not apparent in default mode(s), such as blinking or moving
elements.)
. Review Meeting at SKB
A meeting will be held at SKB to review the pre-production drawing package
and to determine prototyping requirements for initial evaluation and for
clinical submittal. This meeting will conclude Phase 4.
Deliverables
. Preliminary production design package including housing, chassis and
internal mechanical elements
. Housing camera-ready art
. LCD display camera-ready art
17
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER Phase 5 Prototype Fabrication
Objective
The objective of this phase will be to fabricate one working prototype
of the Point of Care Analyzer. We are aware that ten Beta Site units
are scheduled for fabrication. We have elected to address those ten
units under the next phase. The single prototype developed during the
phase, Phase 5 will be checked for dimensional accuracy and finally
approved by SKB. Once that approval has been received, Hauser will use
parts of the first prototype and create flexible rubber molds from
which urethane parts will be cast for the Beta Site Units.
Procedure
. Prototype Internal Components
At the conclusion of Phase 4, SKB, Hauser and the contract
manufacturer, will finalize definition of the internal operating
components. This will include electronic assemblies and any
mechanical or system-specific components. Working or
representative samples, of unavailable internal components will
be provided by Hauser.
. Prototype Fabrication
Hauser will fabricate one prototype housing capable of accepting
SKB's and the contract manufacturer's internal components. The
prototype materials will resemble, as closely as possible,
production solutions. The prototype can be used to test and
evaluate engineering details, mechanical details and internal
component fit checks. The prototype cannot survive impacting or
flame testing.
Please Note: If 3D solids CAD platform is utilized for the design
documentation, Hauser may execute the prototype housing originals
via rapid prototyping techniques. Such prototype components
provide an optimum design check, given their design fidelity, and
closely approximate mechanical properties of injection-molded
parts. External vendor costs for these services are
indeterminable before design and are, therefore, not included in
this proposal. This prototype may also serve as a pattern for
production of multiple prototypes.
. Review Meeting at SKB
A meeting will be held at SKB to deliver the prototype. SKB,
Hauser and the contract manufacturer will evaluate the prototype
in relation to fit checks, user interaction and
manufacturability. Formal mechanical or regulatory testing of the
prototype is not included in this proposal. This meeting will
conclude Phase 5.
18
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September l5, 1995 . P-1317
HAUSER Deliverables
. One Point of Care Analyzer prototype
. Modified design package
19
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER Phase 6 Multiple Prototypes - Clinical Trials
Objective
SKB has determined they will need ten (10) functional prototypes for
clinicals in the second quarter, 1996...according to the POCT Product
Development Plan we have been reviewing. The date may change. The
process outlined here should not. We have not estimated this phase at
this time.
Procedure
. Prototype #1 As a Master Pattern
Whether the parts are hand fabricated, CNC'd, or stereolithed,
the first set can become master patterns, from which rubber molds
can be made, and the ten Beta units can be cast from urethane.
These will become the clinical information-gathering units, we
assume.
Deliverables
. Functional pre-production prototypes for clinical information
gathering at ten Beta sites.
20
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER Phase 7 Production Design
Objective
After evaluation of prototype #1, Hauser will complete the
pre-production documentation bringing the complete housing package to
a production level, suitable for release to SKB, and eventual release
to the contract manufacturer for implementation.
Procedure
. Design Revisions
Hauser will document all changes from the outcome of the
prototype evaluation. It is assumed, for the purposes of this
proposal, that the changes will be minimal. Should it be
determined that a major revisions need to take place, Hauser will
evaluate the change's effect on cost and schedule.
. Production Design Documentation
Production Drawing Package
Part drawings and assembly drawings will be upgraded to a
level suitable for release to SKB and U. S. Medical.
Bill of Materials
Included in this documentation package will be a Bill of
Materials that will describe all of the parts that make up
the exterior housing and internal mounting brackets for the
analyzer.
Camera-Ready Art:
Required updates will be added to the housing and display
camera-ready art.
. Vendor Quotations
Hauser will assist SKB and the contract manufacturer in acquiring
production quotes for tooling and part costs, lead time
schedules, etc.
. Phase Review Meeting
Delivery of the production documentation package will conclude
Phase 7. SKB will be asked by Hauser to approve the documentation
package.
Deliverables:
. Production drawing package
. Bill of Materials
. Production artwork
. Color and graphic specification
21
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
CAD Capability
Software:
SGH has several CAD software platforms available. The platform to be
used is based on the nature of the design and the requirements of the
project. We maintain the latest releases of the following
applications:
Pro/ENGINEER Full 3-D solid modeling software (Unix Based)
Hewlett Packard Full 3-D solid modeling software (Unix Based)
Solid Designer
Hewlett Packard ME 10 2-D drafting software (Unix Based)
AutoCAD 2-D drafting and 3-D wire frame
software (DOS based)
Ashlar Vellum 2-D drafting and 3-D wire frame
software (Macintosh)
22
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER ....................................................................
Program & Fee Schedule
....................................................................
Phase 0 Time Estimate
Applied Research: Foundational 3-4 weeks $ 13,500
....................................................................
Phase 1 Time Estimate
Concept Development 5-6 weeks $22,500 - $27,000
....................................................................
Phase 2 Time Estimate
Applied Research: Concepts 3-4 weeks $36,000 - $39,000
....................................................................
Phase 3 Time Estimate
Design Development 6-7 weeks $45,000 - $55,000
& Visual Model
....................................................................
Phase 4 Time Estimate
Pre-Production Design 5-6 weeks $28,000 - $33,000
....................................................................
Phase 5 Time Estimate
Prototype Fabrication To be determined
....................................................................
Phase 6 Time Estimate
Multiple Prototypes To be determined
....................................................................
Phase 7 Time Estimate
Production Design To be determined
23
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
Terms & Conditions
. Hauser, Inc. will invoice at the end of each month or at the end
of a phase, whichever occurs first; invoices are due 15 days
from the invoice date and Hauser allows a 7 day grace period. If
payment is not received 22 days after date of invoice, Hauser has
the option to discontinue all project-related activities until
the invoice is paid in full. Hauser will be released from all
commitments to delivery dates should this occur.
If two invoices throughout the course of a project exceed the 22
day limit, Hauser has the option to re-evaluate payment terms to
a COD or pre-payment basis.
. Hauser requires that a purchase order be issued at the beginning
of each phase as that phase is approved by both parties.
. At times a purchase order cannot be generated quickly enough to
maintain critical project schedule requirements. In this case,
Hauser will provide the client an "Authorization to Proceed"
document that must be signed by an authorized member of the
client's company before work can continue.
. Hauser requires an advance be paid at the beginning of the
project and will provide the client with an invoice for the
advance. Hauser has the option not to commence work until the
advance is received. The entire amount of the advance will be
deducted from the final invoice at the conclusion of the project.
. Invoices covering authorized travel for Hauser staff will be
submitted for payment immediately and separately following such
travel. Travel time is billed at 50% rate. Out-of-pocket travel
expenses including airfare and accommodations are not included in
the fee schedule. Travel expenses are billed at cost.
. Market research expenses for facility rentals, videotaping, and
payment for participants are not included in the fee schedule.
. All anticipated meetings have been included in this estimate. If
additional meetings are requested, it may result in a WCO (Work
change order).
. All designs and concepts conceived by Hauser under the terms of
this agreement shall become the property of the client upon
payment of the final invoice. Hauser will not knowingly infringe
upon the rights of another patent. Hauser will cooperate with the
client to help secure patent rights at the client's expense.
. Sales tax will be in addition to the Fee Schedule and is
applicable to the Prototype Fabrication. Production Design and
Graphic Artwork phases, for California companies only.
. The Fee Schedule does not include materials (blueprints, model
supplies, long distance phone calls, etc.) or outside services
(graphic services, sheet metal fabrication. etc.) required for
the project.
. Materials and Outside Services (M&OS) will be billed at cost plus
15%. M&OS costs are generally 3-5% of design phases and 10-20%
of phases that involve model building and prototyping. The actual
costs are dependent upon the scale and complexity of each
project.
. Prototypes are a part of most product design projects. It must be
understood that the prototype will address the functional
requirements of the design, but may not resolve issues that only
become evident after the prototype is fabricated and evaluated.
Modifications to the design may be required under a WCO for an
additional phase before the project can resume.
24
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September l5, 1995 . P-1317
HAUSER
. If the client or Hauser requests activities that constitute a
change of scope from this proposal, or if information is
discovered by either party that increases the complexity of the
program. Hauser will generate a WCO that will be presented to the
client for approval. Hauser will not proceed with change of scope
requests until a WCO is signed by the client. A delay in approval
may impact the program's schedule.
. To the best of Hauser's knowledge, all designs and concepts
conceived by Hauser under the terms of this Agreement do not
infringe any United States patent or patent of another nation.
However, Hauser does not represent or warrant that such designs
will not infringe any United States patent or patent of another
nation or subsequently issued patent and Hauser expressly
disclaims any liability for any such patent infringement. Note:
at client's option and expense, Hauser, through its outside
patent counsel, can perform a patent search to provide some
assurances that designs and concepts conceived under the terms of
this agreement do not infringe any issued United States or other
nation's patent.
. Client agrees to indemnify and hold Hauser harmless from and
against any liability for any third party claim or suit for
injury and/or damage based on any alleged defect in any product
or material supplied by client to Hauser, unless such injury
and/or damage was due in whole or in part to any negligent or
improper act or omission of Hauser or any employee or agent
thereof.
. Client additionally agrees to indemnify and hold Hauser harmless
from and against any liability for any third party claim or suit
for injury and/or damage based on any alleged defect in any
product or material sold by client and manufactured by or for
client utilizing any information or services provided by Hauser
to client on this project. Client's obligation under this
paragraph shall be contingent upon Hauser giving client prompt
notice of any such claim and/or suit, the right to conduct and
control the defense thereof, with the right to defend or settle,
and cooperation of Hauser in any such defense.
Please consider this proposal good for 30 days.
25
<PAGE>
Smithkline Beecham
Point of Care Analyzer
September 15, 1995 . P-1317
HAUSER
Authorization to Proceed
To initiate the first phase of the program outlined in this proposal,
Hauser requires a purchase order, a signed Authorization to Proceed,
and an advance in the amount of $8,000.
If the processing of a purchase order will delay a critical start
date, Hauser will start work upon receipt of the advance and this
form, signed by an authorized employee. A purchase order must be
received within five days of the project start for work to continue.
For each subsequent phase, a signed Authorization to Proceed, a
purchase order, and an advance must be received before work can
continue.
This document will confirm that Hauser has authorization to proceed on
the work outlined in the first phase of this proposal.
-----------------------------------------------
Authorization Signature
-----------------------------------------------
Title
-------------------
Date
-----------------------------------------------
Hauser, Inc.
-------------------
Date
26
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
S-1 Registration Statement.
Arthur Andersen LLP
Philadelphia, Pa.,
February 10, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF PATENT COUNSEL
We hereby consent to the reference to our firm under the caption "Experts"
regarding patents matters, as set forth in this Amendment No. 2 to Form S-1
Registration Statement of Careside, Inc., and the prospectus which forms a part
thereof.
/s/ OPPENHEIMER WOLFF & DONNELLY LLP
Oppenheimer Wolff & Donnelly LLP
Los Angeles, California
February 10, 1999
