U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 1998.
Commission file number 0-10783
BSD MEDICAL CORPORATION
DELAWARE 75-1590407
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(State of Incorporation) (IRS Employer Identification Number)
2188 West 2200 South
Salt Lake City, Utah 84119
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 972-5555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 Par Value Over-the-Counter
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $1,437,917
The approximate aggregate market value of Common Stock held by
non-affiliates, computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of December 2, 1998, was
$2,227.572.
As of December 2, 1998, there were 16,370,052 shares of Common Stock with
$0.01 par value outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
BSD Medical Corporation 1998 10-KSB Page 1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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BSD Medical Corporation (the "Company") was founded in 1978 by John E.
Langdon to continue research into the demonstrated ability of high heat
(hyperthermia) to destroy cancer cells. BSD continued this research and was
successful in developing and commercializing hyperthermia treatment - a
break-through treatment for both cancerous and benign diseases. The Company is
currently engaged in the development, production, marketing, and servicing of
heat therapy (hyperthermia/thermotherapy) equipment. This equipment is used in
the application, monitoring and control of electromagnetic (microwave or
radiofrequency) or ultrasound generated heat for the treatment of malignant and
benign diseases. BSD has 14 current U.S. patents (which cover all of its current
applications and products as well as additional applications and devices).
BSD was the first Company to obtain full PreMarket approvals (PMA) from the
Food and Drug Administration (FDA) for a hyperthermia cancer therapy system and
the first Company to obtain Investigational Device Exemption (IDE) approval from
the FDA for thermotherapy systems for the treatment of Benign Prostatic
Hyperplasia (BPH). BSD has developed second and third generation equipment, and
the Company's systems, depending upon configuration and options, have list
prices ranging from approximately $53,500 to $850,000.
The Company was incorporated under the laws of the State of Utah on March
17, 1978. On July 31, 1986, pursuant to a Plan and Agreement of Merger dated
July 11, 1986, the Company was merged into a Delaware corporation, changing the
Company's state of incorporation from Utah to Delaware. The Delaware Corporation
was the surviving company. At the time of the 1986 merger, the total number of
shares of all classes of stock which the Company shall have the authority to
issue was increased to 30,000,000, of which 10,000,000 shares are of $1.00 par
value per share and are of a class designated Preferred Stock and of which
20,000,000 shares are of $.01 par value per share and are of a class designated
Common Stock. There are currently no preferred shares outstanding.
BSD'S PRODUCTS/THERAPIES
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HYPERTHERMIA AS A CANCER TREATMENT. There are more than eight million
Americans alive today who have a history of cancer. Over 83 million, half of
American men and one-third of American women, will eventually develop cancer.
Over 564,800 people are expected to die of cancer this year; and the incidence
of cancer is continuing to grow. The Company's hyperthermia equipment is used
both in an effort to cure cancer, by destroying and eliminating cancer cells,
and, where curing the cancer is not possible, as palliative treatment (the
shrinking of tumors in order to reduce the pain and other side effects of
cancer). The controlled application of high heat can be used to destroy
cancerous cells without causing serious damage to normal cells because of the
differential heat sensitivity between cancerous and normal cells and the
inability of solid tumors to dissipate heat as effectively as surrounding normal
cells. The Company's hyperthermia equipment can be used alone but is typically
used in conjunction with other therapies. Published, randomized clinical studies
using BSD's equipment have shown that the addition of hyperthermia to other
cancer therapies (including radiation therapy, chemotherapy, and surgery)
results in: increased tumor response; lower relapse rate; increased disease-free
survival time; and improved quality of life for the patient - with minimal
increase in side effects.
Hyperthermia has been shown to double the effectiveness of radiation;
provide supra-additive interactions with many chemotherapeutic drugs; to cause
localized toxicity of heated tumor areas (while maintaining low levels of
toxicity to non-heated normal tissues); and to cause some chemotherapeutic
agents that are not effective at normal temperatures to become effective at
elevated temperatures. The use of pre-surgical hyperthermia delivered using
BSD's equipment has been shown to obviate the need for amputation of normal
tissues in some sarcoma patients. BSD's systems have also been used
pre-surgically to reduce the size of the tumor prior to surgery and thus make
the tumor more easily resectable (surgical removal) and increase the chances of
obtaining clear surgical tumor margins, one of the most significant prognostic
factors in recurrence.
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CANCER HYPERTHERMIA PRODUCTS. The Company's cancer hyperthermia products
are designed to apply electromagnetic (i.e., microwave or radiofrequency) or
ultrasonic energy to the human body in order to generate temperatures of
40(degree)C to 60(degree)C at the site of the tumor. Thermometry systems are
used to measure tumor and normal tissue temperatures during treatment in order
to assist in achieving and maintaining safe and optimal treatment temperatures.
The Company's hyperthermia systems are designed to permit the treatment of
various tumor sizes, various tumor depths and various anatomical sites.
Cancer Hyperthermia Systems. A hyperthermia system typically consists of an
integrated computer control unit, a fixed or variable frequency generator,
applicators, and thermometry. The Company's computer software is designed to
maximize the safety and effectiveness of the treatment. The Company's computer
software provides accurate treatment planning, monitoring, and recall. The
pre-treatment planning capability utilizes the Company's proprietary algorithms
and software to allow the physician to customize hyperthermia treatments for
specific tumors. The Company's cancer hyperthermia system product line includes
various systems designed to target specific markets.
Cancer Hyperthermia Applicators. Hyperthermia applicators emit
radiofrequency, microwave or ultrasonic energy directly into the patient to
provide tumor heating. The Company has developed and patented a number of
specially designed applicators for treating a particular tumor in a particular
location.
Applicators generally fall into two categories: external surface
applicators (superficial and deep) and interstitial (i.e., invasive)
applicators. Microwave, superficial, external applicators deliver externally
generated heat to specific sites on or slightly below the surface of the skin.
Deep phased array radiofrequency applicators provide externally generated heat
to deep-seated tumors by combining phase-aligned beams from multiple applicators
positioned around the body. Ultrasound external applicators generally provide
deeper more focused heating than microwave external applicators but are limited
by bone and air interfaces and patient pain. Interstitial microwave applicators
are antennae that are implanted directly into the body for heating from within
the tumor itself.
Thermometry. The Company manufactures the BSD Thermistor Probe, as well as
other thermistor based thermometry probes. The Company has an exclusive license
for the manufacture and distribution of the BSD Thermistor Probe. The Company
also manufactures and sells specially developed thermistor probes for ultrasound
treatments.
THERMOTHERAPY AS A BPH TREATMENT. On November 24, 1997, BSD entered into an
agreement with Oracle Strategic Partners to form TherMatrx, Inc., a
jointly-owned company that would initially focus on minimally invasive
treatments of urological diseases, specifically Benign Prostatic Hyperplasia
(BPH), a market that is currently estimated to exceed $3 billion annually in the
United States alone.
The partnership allowed Oracle Strategic Partners to invest up to $6
million in the venture, with an initial $3 million investment on closing and an
additional $3 million contingent upon the achievement of certain milestone
parameters. Charles Manker, President and CEO of TherMatrx provided an initial
investment of $250,000 in addition to Oracle's investment and will provide
another $250,000 if milestone funding is obtained from Oracle. BSD contributed
certain assets that have applicability in the urology market, and agreed not to
engage in BPH business. BSD currently has fifty-four percent interest in
TherMatrx, thus, the financial statements for the two companies have been
consolidated (see Note 1 to Financial Statements). Upon completion of the
milestone funding, and after exercise of all shares allocated for the Management
Stock Purchase Plan, the Company will retain a 30 percent interest on a fully
diluted basis. As part of the agreement, BSD is providing certain manufacturing
and consulting services, for which TherMatrx compensates the Company.
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TherMatrx's corporate headquarters are in Chicago. Dr. Gerhard Sennewald
serves as BSD's representative on TherMatrx's Board of Directors.
MARKETING AND SALES
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The Company markets its cancer hyperthermia products primarily to radiation
oncology departments in the U.S. and to radiation oncology and chemotherapy
oncology departments outside the U.S. In the U.S., the Company markets its
equipment directly using its own sales and marketing staff. International sales
are generally accomplished through distributing companies located in various
foreign countries. The Company's marketing efforts include participation at
trade shows and symposia and development of product brochures, newsletters, and
other promotional materials. The Company also co-sponsors an annual
international BSD Users' Conference.
Future marketing for current cancer products may be expanded into two
previously unexplored markets: surgical and chemotherapeutic oncology. These two
disciplines control most cancer patients and treatment funds, and clinical
evidence of the safety and efficacy of hyperthermia in conjunction with
chemotherapy and surgery has been published. The Company believes that the
domestic market will begin to slowly expand in the future because of a renewed
interest in hyperthermia in the U.S. and evidence of increased profits from the
addition of hyperthermia; however, there can be no assurance that an increase in
the U.S. market will occur.
For the year ended August 31, 1998, two customers accounted for
approximately 56% and 12%, respectively, of BSD's net sales. The loss of a
significant customer could have a material detrimental impact on the Company's
operations.
THIRD-PARTY REIMBURSEMENT/MEDICAL COST CONTAINMENT. In the United States,
the Company's products are purchased primarily by medical institutions (which
then bill various third-party payers, such as Medicare, Medicaid, other
government programs, and private insurance plans, for the health care services
provided to their patients), or by managed care organizations which directly pay
for services provided to their patients. In December 1984, the Health Care
Financing Administration ("HCFA" --- the agency responsible for administering
the Medicare and Medicaid systems) and most of the private medical insurance
carriers in the U.S. approved reimbursement for hyperthermia in conjunction with
radiation therapy for the treatment of surface and subsurface tumors.
Reimbursement for services rendered to Medicaid beneficiaries is determined
pursuant to each state's Medicaid plan which is established by state law and
regulations, subject to requirements of Federal law and regulations.
In November 1995, HCFA authorized Medicare reimbursement for all
investigational therapies and devices for which underlying questions of safety
and effectiveness of that device type have been resolved, based on
categorization by FDA. All of BSD's investigational (IDE) equipment and
protocols have been placed in this category by the FDA and thus may be
reimbursed by Medicare.
Cost-containment policies are impacting the major cancer markets such as
the U.S., Western Europe, and Japan, and these changes have negatively impacted
the industry. The Company is unable to predict the extent to which its business
may be affected by future legislative and regulatory developments. There can be
no assurance that future health care reform legislation or regulation will not
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that procedures using the
Company's products will, in the future, be considered cost-effective by
third-party payers, that reimbursement will be available or, if available, that
payers' reimbursement levels will not adversely affect the Company's ability to
sell its products.
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COMPETITION
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Competition in the medical products industry is intense, both in the United
States and internationally. Some of the Company's competitors have significantly
greater financial, technical, research and development, engineering,
manufacturing, distribution, and sales and marketing resources than the Company.
Several companies have received IDEs in the United States for certain
experimental hyperthermia systems designed to treat both malignant and benign
diseases. In addition to BSD, four other companies have received FDA Pre-Market
Approval for the commercial sale of certain hyperthermia equipment for the
treatment of cancer in the U.S.: (Clinitherm - no longer in business);
Labthermics; Celsion Corporation (formerly Cheung Labs); and Cook Medical - no
longer in hyperthermia business.
BSD participates in the BPH market as an investor in TherMatrx, Inc. (see
"Thermotherapy as a BPH Treatment", Page 3). In the BPH market, competitive
companies offering products similar to TherMatrx's products include EDAP TMS,
Urologix, and Dornier (which have PMA approval from the FDA), VidaMed (which has
510(k) marketing clearance from the FDA), Thermal Therapeutics, and other
foreign manufacturers. In addition to thermotherapy equipment made by
competitors, there are many other competitive treatments for BPH (including
various drug treatments, surgical lasers, ultrasound ablation, electro-cautery
surgery, stents, transurethral incision of the prostate (T.U.I.P.), and balloon
dilation) which are currently being developed, clinically investigated and/or
actively marketed.
The Company believes that other companies are considering or will consider
marketing hyperthermia/thermotherapy equipment and anticipates increased
competition both in the United States and internationally. There can be no
assurance that others, including those with greater resources and more extensive
business experience than the Company, will not develop products that would
materially adversely affect the ability of the Company to compete effectively.
Further, the treatment of disease with hyperthermia equipment, and with other
methods, is subject to rapid technological change. There can be no assurance
that other forms of treatment will not be developed which could render the
Company's hyperthermia systems obsolete.
The Company expects to rely upon trade secrets, unpatented proprietary
know-how and continuing technological innovation, as well as current patents and
new patent applications, in order to maintain and improve its competitive
position.
PRODUCT SERVICE
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The Company provides a 12-month warranty following installation on all
cancer treatment systems and a 90-day limited warranty on individual components.
BSD's employees install and service the hyperthermia systems it sells to
domestic customers. In addition, Company personnel or consultants perform
technical and clinical training. Subsequent to the applicable warranty period,
the Company offers full or limited service contracts to its domestic customers.
Generally, the Company's distributors install and service systems sold to
foreign customers and are responsible for managing their own warranty programs
for their customers, including labor and travel expenses. The Company provides
parts repair/replacement warranties for 12 months for systems and for 90 days
for individual components. Spare parts are generally purchased by the
distributors and stored at the distributors' maintenance facilities to allow
prompt repair. Distributor service personnel are usually trained at customer
sites and at the Company's facilities in Salt Lake City.
PRODUCTION
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The Company produces and tests its products at its facilities in Salt Lake
City, Utah. The Company's manufacturing operations consist primarily of
component assembly and testing. Most of the principal components of the
Company's systems are purchased from independent suppliers and are modified, as
required, by the Company at its facilities. Some purchased components are
modified by the supplier or are customized to the Company's specifications. Key
factors in the manufacturing process are assembly and testing. Certain
components and processes used in the manufacturing of the Company's products are
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currently provided or performed by single-source vendors. Any supply
interruption or yield problems from these vendors would have a material adverse
effect on the Company's ability to manufacture its products until a new source
of supply were qualified and, as a result, could have a material adverse effect
on the Company's business, financial condition and results of operations.
In order to provide outside financial support for manufacturing operations
and diversify the Company's services, the Company is providing manufacturing and
testing services under contract to other companies.
RESEARCH AND DEVELOPMENT
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During the fiscal years ended August 31, 1997, and August 31, 1998, the
Company expended $432,394, and $878,511 respectively, for research and
development, representing 32.76%, and 61.10% of total revenues. Research and
Development expenditures increased in 1998 due to expenditures by TherMatrx,
which is conducting a clinical trial on the use of thermotherapy for the
treatment of BPH. $516,776 in research and development expenditures in 1998 were
attributable to TherMatrx, the Company's subsidiary. Non-consolidated research
and development expenditures during 1998 decreased to $361,735, a decrease of
$70,659 or 16.34% as compared to 1997, due to completion of the BSD-2000o3D
product line and near completion of the MR portion of this system.
BSD has developed the BSD-2000o3D - a new generation of deep regional
hyperthermia equipment funded in part by Phase I and II grants received from the
National Cancer Institute (Grant No. CA61515). The BSD-2000o3D can be modified
for integration with a magnetic resonance imaging system, and becomes the
BSD-2000o3D/MR system. The BSD-2000o3D System integrates three-dimensional (3D),
"steerable", focused deep regional hyperthermia with 3D patient specific
treatment planning. This system is targeted for the treatment of large and deep
tumors; i.e., recurrent breast, sarcoma, lung, colorectal, liver, cervical,
bladder, stomach, and prostate. The first BSD-2000o3D/MR system has been
installed and tested at a leading German oncological research institution - the
Clinic of Medical Oncology of the Klinikum Gro(beta)hadern Medical School of
Ludwigs-Maximilians-Universitat Munchen, Munich, Germany. The Medical School
received funding from the Stiftung Deutsche Krebshilfe e. V. (German Cancer Aid
Foundation) for the system order. (Over the past few years, the Foundation has
contributed more than DM 11 million - $7.5 million U.S. - to this Institution to
develop the clinical application of regional deep hyperthermia combined with
chemotherapy for the treatment of cancer patients.) The BSD-2000o3D has been
used successfully for patient treatments, and initial laboratory testing has
demonstrated the ability to simultaneously heat and image with the MR portion of
this system.
The BSD-2000o3D/MR System was designed to provide simultaneous heating and
non-invasive measurement of treatment parameters; such as tumor temperature,
tumor response, tissue heat damage, tissue blood-flow, tissue pathology, and
other chemical and biological changes in the tissue. Non-invasive treatment
monitoring has the potential to optimize tumor heating and thus tumor
destruction. (Currently available hyperthermia equipment requires the use of
invasive temperature monitoring to control heating delivery and to determine
treatment effectiveness, which limits the commercial and clinical applications.)
The development of reliable non-invasive thermometry is the next required step
in the field of hyperthermia and has the potential to significantly increase the
clinical applications and commercial potential of hyperthermia; however, there
can be no assurance that this system will provide reliable non-invasive
thermometry.
Technological changes in the treatment of disease in general, and in the
hyperthermia field in particular, are frequent. Thus, the Company intends to
continue to devote substantial sums to research and development in order to
improve existing products and develop new products. The Company is also
currently in discussions with some researchers and institutions regarding heat
treatment products and treatments which might increase the clinical applications
for BSD's products, with a focus on deep regional hyperthermia and the treatment
of prostatic carcinoma and breast cancer.
PATENTS, INTELLECTUAL PROPERTY, LICENSING, AND ROYALTY AGREEMENTS
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Because of the substantial length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the medical device industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. The Company's policy is to file patent applications to protect
significant technology, inventions and product improvements. The Company
currently has 14 patents in the United States and additional patents outside the
United States. (Four patents were assigned to TherMatrx, for which the Company
maintained a license.) Other hyperthermia related patents are pending in the
United States, Japan and Europe, and a European patent for the BSD-2000o3D
system was recently issued. There can be no assurance that the patents presently
issued or those applied for (if granted), will be of significant value to the
Company or will be held valid upon judicial review. Successful litigation
against these patents by a competitor could have a material adverse effect upon
the Company's business, financial condition and results of operations. The
Company believes that it possesses significant proprietary know-how in its
hardware and software capabilities. There can be no assurance that others will
not develop, acquire or patent technologies similar or superior to those of the
Company or that secrecy will not be breached.
In July 1979, the Company entered into an exclusive worldwide license for a
unique temperature probe (Bowman Probe). The license will remain in effect as
long as the technology does not become publicly known as a result of actions
taken by the licensor. The Company pays royalties based upon its sales of the
Bowman Probe. The license agreement was amended and renewed in 1987 and is
currently in effect.
On September 15, 1996, Medizintechnik (a company owned by Dr. Gerhard
Sennewald, a member of BSD's Board of Directors and a major stockholder of the
Company) obtained a worldwide fully paid software license from
Konrad-Zuse-Zentrum fur Informationstechnik (ZIB) of Berlin for a
three-dimensional (3D) hyperthermia treatment planning software - HYPERPLAN -
developed by ZIB. On January 21, 1998, BSD entered into an agreement with
Medizintechnik wherein Medizintechnik irrevocably assigned the worldwide rights
under the ZIB software license agreement to BSD, with the sole exception of
Europe, where Medizintechnik retained these rights itself. In consideration for
this assignment of rights, BSD agreed to supply, at no charge, one Sigma-Eye
applicator (not an MR compatible version) to Medizintechnik, who will forward
this applicator to Strahlenklinik and Poliklinik, Virchow-Klinikum of the
Humboldt-Universitat of Berlin. BSD also agreed to inform Medizintechnik on a
regular basis about software sales to final customers and to pay timely to
Medizintechnik the software license fee (8% of the sales price for the HYPERPLAN
software or a minimum of DM 6,000) that, under the terms of the ZIB agreement,
is due to ZIB for each software sale.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. In the past, the
Company has filed lawsuits for patent infringement against three of its
competitors and subsequently settled all three of those lawsuits.
From time to time, the Company has had and may continue to have discussions
with other companies, universities and private individuals concerning the
possible granting of licenses covering technology and/or patents. There can be
no assurance that such discussions will result in any agreements. In the past,
BSD has granted non-exclusive practice licenses for a few selected patents to
three companies. One of these companies is no longer in business. In 1994, BSD
issued a non-exclusive license to Urologix to practice some of its patented
technology for cash payments and royalties on future sales; in 1996, the Company
terminated this license. This license became part of a lawsuit that was settled
in May 1998. The license is now fully paid and irrevocable (see Note 15 to
Financial Statements and Part I, Item 3, Urologix, Inc. vs. BSD Medical
Corporation).
In July 1996, BSD entered into a license agreement and granted EDAP
Technomed, Inc., now EDAP TMS S.A., a non-exclusive, non-transferable license of
certain rights to one of BSD's patents. As a result of this transaction, BSD
received a non-refundable license fee in the amount of $1,500,000 ($1,000,000 in
July 1996 and $500,000 in September 1996), as well as the right to receive
royalties of 2.5%, up to a maximum of $3,500,000, on the sale of certain
products.
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GOVERNMENT REGULATION
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The medical devices that have been and are being developed by the Company
are subject to extensive and rigorous regulation by numerous governmental
authorities, principally by the United States Food and Drug Administration
(FDA). Pursuant to the Federal Food, Drug and Cosmetic Act (the FD&C Act), as
amended, the FDA regulates and must approve the clinical testing, manufacture,
labeling, distribution, and promotion of medical devices in the United States.
This regulation has become stringent and the approval process expensive and time
consuming. In addition, various foreign countries in which the Company's
products are or may be sold, have regulatory requirements.
The majority of the Company's past and present hyperthermia systems have
required, (and future systems, if any, would likely continue to require)
Pre-Market Approval from the FDA instead of the simpler 510(k) marketing
approval. Pre-Market Approval requires clinical testing to assure safety and
effectiveness prior to marketing and distribution of medical devices. The
Company intends to continue to make improvements in and to its existing
products. Significant product changes must be submitted to the FDA under IDEs,
510(k) PreMarket notifications or PMA supplements.
All medical devices must be manufactured in accordance with regulations
specified in the FDA Quality System Regulation (QSR). In complying with FDA's
QSR, manufacturers must continue to expend time, money and effort in the areas
of production and quality control to ensure full compliance. The Medical Device
Reporting regulation requires that the Company provide information to the FDA on
death or serious injuries alleged to have been associated with the use of its
products, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunctions were to recur. International
sales of unapproved medical devices are subject to FDA export requirements,
unless these products have been previously approved by one of the countries
specified by the FDA. Failure to comply with regulatory requirements could have
a material adverse effect on the Company's business, financial condition and
results of operations. Although the Company believes that it is in material
compliance with all applicable manufacturing and marketing regulations of the
FDA and other regulatory bodies with respect to its existing products, a
determination that the Company is in material violation of such regulations
could lead to the imposition of penalties, including fines, recall orders,
product seizures, and criminal sanctions. In addition, current regulations
depend heavily on administrative interpretation, and there can be no assurance
that future interpretations made by the FDA or other regulatory bodies, with
possible retroactive effect, will not adversely affect the Company.
International sales are subject to the regulatory and safety requirements
of the country into which the sale occurs. There can be no assurance that all of
the necessary approvals will be granted on a timely basis or at all. Delays in
receipt of or failure to receive such approvals could have a material adverse
effect on the Company's financial condition and results of operations.
Sales into the European Union (EU) are now governed by the need to obtain
ISO certification and a CE Mark and to comply with all applicable directives. In
June 1998, the Medical Devices Directives (MDD) requirements went into effect
for the EU. Following June no medical products could be marketed in Europe
without obtaining a CE Mark and thus demonstrating compliance to MDD
requirements. The Company is in the process of obtaining ISO certification of
its development and manufacturing processes and obtaining the testing and
certifications needed for compliance, which will allow BSD to affix the CE Mark
approval. The Company anticipates successful completion of the ISO certification
process and CE Mark approval during fiscal year 1999. However, there can be no
assurance that BSD can obtain the CE Mark, and, if BSD is unable to obtain these
approvals, it could have a significant material effect on the Company's future
financial condition.
The Federal Communications Commission (FCC) regulates the frequencies of
microwave and radiofrequency emissions from medical and other types of equipment
to prevent interference with commercial and governmental communications
networks. BSD's fixed frequency systems and applicators emit 915 MHz for U.S.
installations and 433.92 MHz for some European installations, which is approved
by the FCC for medical applications. Accordingly, these systems do not require
shielding to prevent interference with communications. BSD's variable-frequency
generators and applicators require electromagnetic shielding. Ultrasound
hyperthermia systems can be operated without shielding because the applicators
emit acoustic rather than electromagnetic energy.
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PRODUCT LIABILITY EXPOSURE
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The manufacturing and marketing of medical devices involve an inherent risk
of product liability. Because the Company's products are intended to be used in
hospitals on patients who may be physiologically unstable and severely ill, the
Company is exposed to potential product liability claims. The Company presently
carries product liability insurance. However, there can be no assurance that the
product liability insurance will provide adequate coverage against potential
claims that might be made against the Company. No product liability claims are
presently pending against the Company; however, there can be no assurance that
product liability claims will not be filed in the future.
EMPLOYEES
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As of August 31, 1998, the Company had 23 employees; 18 of them were full
time employees. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relations with its employees to
be satisfactory. The Company is dependent upon a limited number of key
management, manufacturing, and technical personnel. The Company's future success
will depend in part upon its ability to retain these highly qualified employees.
ITEM 2. PROPERTIES
The office, production and research facilities of the Company are located
in Salt Lake City, Utah. The complete headquarters and production facility
occupies approximately 20,000 square feet. On December 5, 1997, the Company
signed a new lease agreement (with a new owner) for the Company's facilities.
The new owner paid $700,000 to BSD for the Company's option to purchase the
building. As part of the agreement, the Company leases the building from the new
landlord for an annual rental expense of $78,396. The Company has an option to
purchase the building after 18 months for $775,000 (see Note 5 to Financial
Statements). The building lease is accounted for as an operating lease for
financial statement purposes. The building is currently in good condition; is
adequate for the Company's needs; is suitable for all Company functions; and
provides room for future expansion. The Company believes that it carries
adequate insurance on the property.
ITEM 3. LEGAL PROCEEDINGS
UROLOGIX, INC. VS. BSD MEDICAL CORPORATION, United States District Court for the
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District of Minnesota, Civil Action No. 4-96-647.
In June of 1996, the Company advised Urologix, Inc., with whom it had
previously been involved in litigation involving the alleged infringement of a
BSD patent, of information which the Company believed indicated a breach of
Urologix's confidentiality obligations under the Settlement Agreement that had
resolved the earlier suit; the company subsequently terminated the Settlement
Agreement and the patent license granted to Urologix thereunder.
On July 30, 1996, Urologix filed a lawsuit against the Company under seal
in the United States District Court for the District of Minnesota seeking a
declaratory judgment that Urologix had not breached the Settlement Agreement.
The Company answered the Complaint and filed a counterclaim on August 20, 1996,
seeking a declaratory judgment that the Settlement Agreement and license
provided thereunder were properly terminated by the Company, based on Urologix's
breaches of the confidentiality provision and seeking damages caused by such
breaches.
page 9
<PAGE>
On May 26, 1998, Urologix, Inc., BSD Medical Corporation, and TherMatrx,
Inc. jointly announced that they had entered into a Settlement Agreement
resolving their litigation. Pursuant to the Settlement Agreement, Urologix paid
BSD and TherMatrx a total of $5 million, the parties executed mutual releases,
and the parties jointly filed a Notice of Dismissal With Prejudice of the
pending litigation. Of the $5 million settlement, BSD received $2,950,000 and
TherMatrx received $2,050,000. Under the terms of the Settlement, Urologix
maintained its non-exclusive license to certain patents owned by TherMatrx and
BSD pertaining to transurethral insertable applicators and systems for the
treatment of Benign Prostatic Hyperplasia (BPH) and other urological conditions.
The non-exclusive license is now fully paid-up, irrevocable, perpetual,
non-cancelable, and non-terminable under all circumstances. irrevocable (see
Note 15 to Financial Statements).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Shareholders on August 21, 1998. The
shareholders were asked to elect directors to serve for the following year;
approve the selection of Tanner & Co. as auditor for the Corporation's fiscal
year ended August 31, 1998; and approve the 1998 Stock Incentive Plan and 1998
Director Stock Plan. Each proposal was approved by a majority of the
shareholders.
The total number of shares of common stock that were voted for Paul F.
Turner to serve as a director of the Company was 13,633,663, with 23,400 shares
withheld.
The total number of shares of common stock that were voted for Gerhard W.
Sennewald, Ph.D. to serve as a director of the Company was 13,630,763, with
26,300 shares withheld.
The total number of shares of common stock that were voted for S. Lewis
Meyer, Ph.D. to serve as a director of the Company was 13,633,463, with 23,600
shares withheld.
The total number of shares of common stock that were voted for J. Gordon
Short, M.D. to serve as a director of the Company was 13,631,163, with 25,900
shares withheld.
The total number of shares of common stock that were voted for Michael
Nobel, Ph.D. to serve as a director of the Company was 13,633,863, with 23,200
shares withheld.
The total number of shares of common stock that were voted for the
Resolution approving the appointment of Tanner + Co. as the independent public
accountants of the Company for the fiscal year ending August 31, 1998 was
13,603,307, with 12,335 shares voting against the resolution, and 24,371 shares
abstaining.
The total number of shares of common stock that were voted for the
Resolution approving the Company's 1998 Director Stock Plan was 12,388,167, with
149,935 shares voting against the resolution, and 340,285 shares abstaining.
The total number of shares of common stock that were voted for the
Resolution approving the Company's 1998 Stock Incentive Plan was 12,616,289,
with 145,435 shares voting against the resolution, and 116,663 shares
abstaining.
page 10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began publicly trading on December 9, 1980, and
was traded in the over-the-counter market under the NASDAQ symbol "BSDM" until
it was delisted from NASDAQ on January 3, 1991. After that time, it continued to
trade (very sporadically) in the over-the-counter market and consistently
reliable stock quotations were not readily available because there was no
established market for the Company's stock. In May 1997, the symbol "BSDM" was
listed on the OTC Bulletin Board.
The following table sets forth the high and low bid transactions, as
provided by the OTC Bulletin Board, for the quarters in fiscal year 1997 and
1998 after the Company's stock symbol was listed. The amounts reflect
inter-dealer prices, without retail mark-up, markdown or commission, and may not
represent actual transactions.
Bid
---------------------------
Quarter Ended: High Low
---------------------------------------------------------------
---------------------------------------------------------------
May 31, 1997...................... 9/16 1/2
August 31, 1997................... 3/4 1/4
November 30, 1997................. 3/4 1/4
February 28, 1998................. 13/16 3/8
May 31, 1998...................... 7/16 1/4
August 31, 1998................... 7/16 1/4
As of August 31, 1998, there were approximately 639 holders of record of
the Common Stock. The Company has not paid any cash dividends on its Common
Stock since its inception and has no intention of declaring any Common Stock
dividends in the foreseeable future.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
The balance sheet as of August 31, 1998, and the statements of operations,
statements of cash flow and statements of stockholders' equity for the years
ending August 31, 1997, and 1998, and the independent auditors report thereon,
are included elsewhere in this report. The following selected financial
information should be read in conjunction with the financial statements and
notes thereto included elsewhere in this report. BSD currently has fifty-four
percent interest in a subsidiary, TherMatrx, thus, the financial statements for
the two companies have been consolidated (see Note 1 to Financial Statements).
FISCAL YEAR ENDED AUGUST 31, 1998. Consolidated revenues for the year ended
August 31, 1998, totaled $1,437,917, as compared to $1,319,698 for the year
ended August 31, 1997, an increase of $118,219, or 8.96%, primarily because of
an increase in sales of the new BSD-2000o3D product line. The subsidiary had no
revenues.
During fiscal years 1996 through 1998, the Company devoted time and
resources to completion of a new product line - the BSD-2000o3D/MR - and to
establishing the manufacturing capabilities and support functions needed for
this new product line. The first BSD-2000o3D/MR was installed in August 1997,
and the first MR portion of this system was installed in August 1998. BSD has
received orders totaling $1,631,978 for purchases of this new product, and, as
page 11
<PAGE>
of November 1998, has a back-log of $204,060 in sales for the new product line,
which will be delivered in fiscal 1999. During fiscal year 1998, the Company's
subsidiary devoted time and resources to initiation of a clinical study to
evaluate the safety and efficacy of the use of thermotherapy for the treatment
of BPH.
The Company's consolidated revenues from products and services in the U.S.
decreased from $555,912 in fiscal 1997 to $339,244 in fiscal 1998. The market
for hyperthermia equipment in the U.S. continues to be sluggish due to low
reimbursement levels and cost containment efforts. The Company is currently
evaluating methods to increase U.S. sales; some of these actions may eventually
improve the U.S. market, however, there can be no assurance that U.S. sales will
increase in the future.
Consolidated product sales increased from $949,369 in 1997 to $1,304,744 in
1998, an increase of $355,375, or 37.43%, as a result of an increase in sales
for the BSD-2000o3D/MR product line.
Consolidated gross profit on product sales was $597,345, an increase of
6.49%, as compared to $560,924 for fiscal 1997, due to typical periodic business
fluctuations.
Consolidated Selling, General and Administrative Expenses for 1998 totaled
$1,731,383, an increase of $372,301, or 27.39%, of which $738,411 was
attributable to the company's subsidiary. Non-consolidated Selling, General and
Administrative Expenses for BSD only totaled $992,972, a decrease of $361,110,
or 26.94%, as compared to $1,359,082 for fiscal 1997, primarily because of a
reduction in legal costs due to settlement of the lawsuit with Urologix (see
Note 15 to Financial Statements and Part I, Item 3); and a reduction in deferred
compensation costs for amortization of options and warrants. The Selling,
General and Administrative Expenses for 1998 included $151,880 in deferred
compensation from amortization of options and warrants issued to purchase shares
of the Company's common stock, as compared to $372,000 in 1997 (see Note 6 to
Financial Statements). Selling, General and Administrative Expenses may increase
in the future as the Company intends to expand its marketing and sales efforts.
Consolidated Research and Development Expenses for 1998 totaled $878,511,
an increase of $446,117 or 103.17%, of which $516,776 was attributable to
TherMatrx. Research and Development expenditures increased in 1998 due to
expenditures by TherMatrx, which is conducting a clinical trial on the use of
thermotherapy for the treatment of BPH. Non-consolidated Research and
Development Expenses totaled $361,735, a decrease of $70,659 or 16.34%, as
compared to $432,394 for fiscal 1997, due to near completion of the design of
the BSD-2000o3D/MR product line. There will continue to be costs involved with
this system. The Company may increase research and development in the future in
order to improve existing products and develop new products.
Consolidated Total Costs and Expenses for 1998 were $3,317,293, of which
$1,255,187 was attributable to TherMatrx, an increase of $1,137,372, or 52.17%,
as compared to $2,179,921 for fiscal 1997 due to the aforementioned increases in
Selling, General and Administrative and Research and Development Expenses.
Non-consolidated Total Costs and Expenses for BSD were $2,062,106, a decrease of
$117,815, or 5.40%, as compared to $2,179,921 for fiscal 1997, due to the
aforementioned decreases in Selling, General and Administrative and Research and
Development Expenses for 1998 as well as increases in cost of goods sold due to
higher sales.
Consolidated Interest Expense in 1998 decreased to $8,373, as compared to
$22,936 in 1997. The decrease was caused primarily by lower interest costs
associated with notes payable as they reach maturity and typical periodic
business fluctuations. Consolidated Interest Income in 1998 was $159,274, of
which $121,178 was attributable to TherMatrx.
During fiscal 1998, the Company experienced a consolidated net income of
$2,890,579, of which $187,763 was attributable to the Company's subsidiary,
compared to a net loss in fiscal 1997 of $872,525. During fiscal 1998,
non-consolidated pre-tax income was $2,530,594; after tax income was $2,480,594.
During fiscal 1997, the Company experienced a net loss of $872,525 before and
after taxes. The difference from 1997 to 1998 was primarily due to the receipt
page 12
<PAGE>
in fiscal 1998 of $5 million from the grant of a patent license to Urologix
pursuant to settlement of a lawsuit (see Note 15 to Financial Statements and
Part I, Item 3). (Of the $5 million settlement, BSD received $2,950,000 and
TherMatrx received $2,050,000.) As of November 1998, BSD had received orders
totaling $1,631,978 for purchases of BSD-2000o3D/MR product line and has a
back-log of $204,060 in sales for the new product line, which will be delivered
in fiscal 1999.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. International sales
accounted for 75.3% and 84.21% of the Company's total consolidated product sales
during the fiscal years ended August 31, 1997, and August 31, 1998,
respectively. Non-consolidated product sales were 75.3% and 87.38%, respectively
of the Company's total product sales. The Company expects that international
sales will continue to represent a significant portion of its total sales;
however, a CE Mark is now required for sales to Europe. The Company is in the
process of obtaining the approvals necessary to allow the Company to affix the
CE Mark to its products, but a long delay or inability to obtain necessary
approvals could have adverse effects on the sales of products to EC countries
(see Government Regulation, page 7). The Company is subject to risks generally
associated with international operations, including the establishment by foreign
regulatory agencies of product standards different from, and in some cases more
stringent than, those in the United States. Although the Company's sales are
denominated in U.S. dollars, its international business may be affected by
changes in demand resulting from fluctuations in currency exchange rates. The
Company's international sales may also be adversely affected by tariff
regulations and export license requirements. Possible governmental, legislative
and political actions that may be taken by the United States in order to reduce
the balance of payments deficit may result in retaliatory actions by foreign
governments. Such actions could have adverse effects upon sales of the Company's
products in certain foreign markets. In addition, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States.
FLUCTUATIONS IN OPERATING RESULTS. The Company's sales and operating
results historically have varied (and will likely continue to vary) greatly on a
quarter-to-quarter and year-to-year basis due to risks associated with
international operations; budgeting considerations of the Company's customers;
the nature of the medical capital equipment market; the inability of the Company
to predict the timing of various approvals required from the Food and Drug
Administration and other governmental agencies; the relatively large per unit
sales prices of the Company's products; the typical fluctuations in the mix of
orders for different systems and system configurations; the limited unit sales
volumes; the Company's limited cash resources; changes in Medicare and other
third-party reimbursement policies; competition; and other factors. For these
and other reasons, the results of operations for a particular fiscal period may
not be indicative of results for any other period.
LIQUIDITY AND CAPITAL RESOURCES. Consolidated Total assets increased to
$7,635,150 in 1998, an increase of $6,266,143, as compared to 1997, of which
$3,736,274 was attributable to TherMatrx. Non-consolidated Total assets for
fiscal year 1998 increased to $3,898,876, an increase of $2,529,869 or 184.8%,
as compared to 1997. The increase was primarily due to increases in cash.
Consolidated Cash increased to $6,391,115, of which $3,593,083 was attributable
to TherMatrx, as compared to $43,681 in 1997. Non-consolidated Cash increased to
$2,798,032, an increase of $2,754,351, or 6,305.60%, as compared to 1997,
primarily as a result of the Urologix lawsuit settlement and resultant paid-up
patent license (see Note 15 to Financial Statements and Part I, Item 3, page 8).
Consolidated Trade accounts receivable decreased by $86,626, a decrease of
21.29%, primarily due to normal business fluctuations; a reduction of $6,690 was
attributable to TherMatrx. Consolidated Total inventories increased to $657,259,
an increase of $115,033, or 21.21%, of which $62,295 was attributable to
TherMatrx. Consolidated Current liabilities decreased to $690,678, a decrease of
$175,726, or 20.28%, of which $55,343 was attributable to TherMatrx.
Non-consolidated Current Liabilities decreased to $464,335, a decrease of
$402,069, or 46.41%, primarily as a result of decreases in notes payable,
accounts payable, and deferred revenue, as well as other normal periodic
fluctuations.
page 13
<PAGE>
MANAGEMENT DISCUSSION AND CURRENT STATUS OF FINANCIAL CONDITION.
- ----------------------------------------------------------------
Management believes that the current projected sales will be sufficient to
meet the Company's operating cash requirements into 1999. However, if sales are
not sufficient to meet operating needs, management intends to use its current
cash position to meet operating requirements planned for 1999. The Company's
backlog of unfilled customer orders was $204,060, as of August 31, 1998. The
Company also had long term receivables due for field service contracts of
$47,486, as of August 31, 1998. As of November 1998, BSD had received orders
totaling $1,634,978 for purchases of the BSD-2000o3D/MR product line and had a
back-log of $204,060 in sales for this product, which will be delivered in
fiscal 1999.
On November 14, 1997, BSD signed an agreement with Oracle Strategic
Partners (OSP) to form TherMatrx, Inc., a jointly-owned company which will
initially focus on minimally invasive treatments of benign urological diseases,
specifically Benign Prostatic Hyperplasia (BPH). BSD participates in the BPH
market through TherMatrx; the BPH market is currently estimated to be over $3
billion annually in the U.S. alone. The Company continues to provide certain
manufacturing and consulting services, for which TherMatrx compensates the
Company.
In 1996, BSD received the first purchase order for its new, deep regional
hyperthermia system - the BSD-2000o3D System. The first BSD-2000o3D/MR has been
installed and initial lab testing was successful. BSD has started collaborative
developments for clinical application of this technology. The Company
anticipates that the BSD-2000o3D System may increase the commercial market in
hyperthermia throughout the world.
The Company is seeking other strategic partnerships for marketing, sales
and distribution of the Company's current products; collaborative arrangements
for the development of new product lines; as well as alliances for product
development and manufacturing of the companies' product.
Management is expanding worldwide marketing for current cancer products
into two previously unexplored markets: surgical and chemotherapeutic oncology.
These two disciplines control most cancer patients and treatment funds, and
clinical evidence of the safety and efficacy of hyperthermia in conjunction with
chemotherapy and surgery has been published. However, these efforts will take
time to develop.
The Company's consolidated revenues from products and services in the
U.S. decreased from $555,912 in fiscal 1997 to $339,458 in fiscal 1998.
Non-consolidated revenues for BSD only from products and services in the U.S. in
fiscal 1998 totaled $493,857. The Company is currently evaluating methods to
increase U.S. sales, which include development of a low-cost PC-based device
targeted for the U.S. market and dissemination of a new reimbursement program
showing how institutions can increase profits using hyperthermia for some
treatments.
BSD plans to support further R & D for current products to improve function
and reduce cost. Funding of R & D will primarily come from government, strategic
partnerships, and foundation sources. Product improvements on existing product
lines will be supported by current product sales. The Company also intends to
expand marketing and product applications into the oncology area. In order to
utilize BSD's manufacturing expertise, the Company has expanded its business to
include contract manufacturing.
Management has implemented programs to increase profitability and expand
BSD's business; however, there can be no assurance that management will be
successful in achieving improved operating results and there are certain risk
factors which may impact the Company's ability to fund its cash needs. Such risk
factors include uncertainties as to the Company's ability to achieve adequate
sales, general economic conditions, possible unforeseen and/or non-recurring
expenses, and the availability of outside financing. The Company's backlog as of
any particular date may not be indicative of the Company's actual sales for any
fiscal period. In addition, the Company's ability to produce and ship its
products depends upon its production capacity, manufacturing yields and
component availability, among other factors. The U.S. market for cancer
hyperthermia equipment has been severely adversely impacted as a result of
Medicare and other third-party reimbursement policies and procedures. The
positive clinical results from European studies, recent changes in Medicare
reimbursement policy, and the Company's new reimbursement program may eventually
stimulate the U.S. market; however, BSD projects that the U.S. market will
continue to grow at a slower rate than the international market.
page 14
<PAGE>
YEAR 2000 COMPLIANCE. All of BSD Medical's systems are fully Year 2000
(Y2K) compliant, with the exception of some BSD-500 and BSD-2000 systems that
use either a 68000 or 68020 computer system. Beginning January 1, 2000, these
systems will display an error message when the system is first started,
indicating the system has an invalid date. The Company is in the process of
rewriting the software for both of these systems, which will allow usage to
continue until the end of 2099. The cost to BSD Medial to address this issue is
not material - less than $10,000. The new software will be available for
customer purchase by March 1, 1999. In the event that a customer elects not to
purchase the updated software, their system can still be operated by manually
entering a year between 1985 and 1999. The system operations and calculations do
not include any date driven functions and therefore will not exhibit any change
in performance due to the arrival of the year 2000; rather the date is used only
as a method to identify the treatment record. Thus, the use of an invalid date
does not create any material risks. These systems are not connected to any other
computer systems, as they are stand-alone systems. The Company is dependent on
other customers and vendors. The Company has been talking to our vendors and
customers but has not been able to determine the Y2K readiness of these
entities.
ITEM 7. FINANCIAL STATEMENTS
Pursuant to Rule 12b-23, the financial statements set forth on pages F-1
through F-19 attached hereto are incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
page 15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information regarding directors of the Company are contained under Election
of Directors in the registrant's 1998 Proxy Statement, which is incorporated
herein by reference. The current directorship positions resulted from vacancies
and were filled by a majority of the directors then in office, and the directors
so chosen hold office until their successors have been duly elected and
qualified. The Company does not presently have a nominating committee. Executive
officers of the Company are appointed by the Board of Directors and serve at the
discretion of the Board. There are no family relationships between any of the
directors or executive officers of the Company and none of these individuals
have been involved in any reportable legal proceedings.
The following table sets forth certain information concerning the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Initial Date as
Name Age Position Officer or Director
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Paul F. Turner, M.S.E.E. 51 Chairman of the Board, Acting President, and 1986
Senior Vice President of Research
Dixie Toolson Sells 48 Vice President of Regulatory Affairs and Corporate 1987
Secretary
Ray Lauritzen 48 Vice President of Field Service 1988
Gerhard W. Sennewald, Ph.D. 62 Member of the Board of Directors 1984
S. Lewis Meyer, Ph.D. 54 Member of the Board of Directors 1984
J. Gordon Short, M.D. 67 Member of the Board of Directors 1984
Michael Nobel, Ph.D. 58 Member of the Board of Directors 1987
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to Section 16(a) of the Securities Act of 1934, the Company's
directors, executive officers, and any persons holding more than 10 percent of
the Company's stock, are required to report their ownership and any changes in
beneficial ownership of the Company's stock to the Securities and Exchange
Commission. To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company, all of such persons subject to these
reporting requirements filed the required reports with respect to the Company's
most recent fiscal year.
page 16
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain information regarding all
compensation earned during the last three fiscal years and fiscal year-end stock
option values for the person acting in a similar capacity to chief executive
officer of the Company in the fiscal year ended August 31, 1998. No stock
options were granted to or exercised by the Acting President during fiscal year
1998. No other executive officers of the Company received compensation exceeding
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Long Term Compensation Awards
Annual Compensation
--------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Other Annual Restricted All Other
Name and Fiscal Salary Compen-sation(Stock Awards Compen-sation($)
Position Year ($) Bonus ($) ($) Options(#)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul F. Turner, 1998 $128,543 -0- -0- -0- -0- (1) -0-
Acting President; 1997 $115,000 -0- -0- -0- -0- -0-
Sr. VP, Research 1996 $115,000 -0- -0- $2,110 (2) 14,953 -0-
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) During fiscal 1998, TherMatrx approved the grant of an option to Mr. Turner
to purchase 1% of outstanding shares of common stock in TherMatrx, Inc.
(strike price and total number of outstanding shares to be determined at a
later date by TherMatrx's Board of Directors).
(2) During fiscal 1996, the Company awarded Mr. Turner 1,000 shares of
restricted common stock. Consistently reliable stock quotations had not
been readily available because there had been no established market for the
Company's stock (see Part II, Item 5). However, the Company received a
valuation of $2.11 per share on a minority interest basis as of December
31, 1996. The Company believes these numbers may not be a reliable
indicator of actual realizable value of these shares. However, this value
has been reflected for the shares listed in this table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Shares
Acquired on Number of Securities Underlying Value of Unexercised
Exercise Value Unexercised Options at FY-end (#) In-the-Money Options at FY-end
Name and Realized ($)
---------------------------------------------------------------------
---------------------------------------------------------------------
Position (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Paul F. Turner, -0- -0- 175,421 5,532 $26,313 $830
Acting President;
Sr. VP, Research
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
page 17
<PAGE>
COMPENSATION OF DIRECTORS
- -------------------------
During the fiscal year ended August 31, 1998, the Company's directors
received 50,000 shares of restricted common stock, with the exception of Dr.
Nobel, who received 20,000 shares. These shares served as compensation for their
services to the company as directors through August 31, 1998, (December 1997 to
August 1998 for Dr. Nobel and December 1994 to August 1998 for the other
Directors). Effective September 1, 1998, the Director Stock Plan provides for
annual compensation in the amount of $12,000 for each non-employee director -
$4,000 to be paid in cash and the balance of the retainer to be paid in the form
of restricted shares of BSD Common Stock. In addition to the annual compensation
to directors, each Non-Employee Director shall receive an annual option to
purchase 25,000 restricted shares of BSD Common Stock at a purchase price of 85%
of the Fair Market Value at the date the Option is granted.
page 18
<PAGE>
EMPLOYMENT CONTRACTS
- --------------------
The Company has an employment contract with the acting president, Mr.
Turner, that was signed November 2, 1988. This agreement provides that Mr.
Turner's salary will be based upon a reasonable mutual agreement. Additionally,
in the case of non-voluntary termination, Mr. Turner will receive severance pay
for a one-year period, which includes an extension of all employee rights,
privileges, and benefits, including medical insurance. The one-year severance
pay will be an average of Mr. Turner's salary for the immediate twelve-month
period prior to termination. The agreement also requires the Company to pay Mr.
Turner any accrued unused vacation at the time of termination. BSD is also
obligated to pay Mr. Turner $1,000 (or the equivalent value in stock options)
for newly issued patents (this compensation is halved if multiple inventors are
involved).
Mr. Turner's agreement includes a period of non-competition for one year
following termination of employment. This non-competition agreement may be
extended by BSD for up to an additional four years by written notification and
continuing severance payments for the additional years of extension (as defined
for the first year) if the non-competition obligation is extended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 2, 1998,
with respect to the beneficial ownership of the outstanding Common Stock by (i)
each person known to management of the Company to own beneficially more than 5%
of the outstanding Common Stock, (ii) all directors and named executive officers
of the Company, and (iii) all officers and directors as a group:
<TABLE>
<CAPTION>
Name and Address of Shares of Common Stock Percentage of Common Stock
Beneficial Owner Beneficially Owned (1) Ownership (2)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dr. Gerhard W. Sennewald 6,726,946(3) 40.90%
c/o Medizin-Technik GmbH
Augustenstrasse 27
D-80333 Munich, Germany
Paul F. Turner 1,990,339(4) 12.03%
762 Lacey Way
North Salt Lake, UT 84054
John E. Langdon 1,300,010(5) 7.94%
2501 Parkview Drive, Suite 500
Fort Worth, TX 76102
S. Lewis Meyer, Ph.D. 76,000(6) *
c/o Imatron
389 Oyster Point Boulevard
South San Francisco, CA 94080
Michael Nobel 20,000 *
P.O. Box 30043
S-10425 Stockholm Sweden
J. Gordon Short, M.D. 73,000(7) *
c/o Brevis Corporation
3310 South 2700 East
Salt Lake City, UT 84109
All officers and directors as 9,352,020(8) 55.63%
a group (7 persons)
* Less than 1.0%.
</TABLE>
page 19
<PAGE>
(1) Unless otherwise noted and subject to community property laws, where
applicable, the persons named in the table above possess sole voting and
investment power with respect to all shares shown to be beneficially owned
by them.
(2) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated
as outstanding only when determining the amount and percent owned by such
person or group.
(3) Includes 83,065 shares subject to options. Does not include 500,000 shares
held by Dr. Sennewald's spouse, for which he disclaims beneficial
ownership.
(4) Includes 175,421 shares subject to options.
(5) Includes 403,525 shares owned directly by Mr. Langdon. The remaining shares
are held in trusts for which Mr. Langdon is Trustee. Does not include
50,000 shares held by Mr. Langdon's spouse, for which he disclaims
beneficial ownership.
(6) Includes 21,000 shares subject to options.
(7) Includes 21,000 shares subject to options.
(8) Includes 441,729 shares subject to options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report or are hereby
incorporated by reference as indicated:
Exhibit
Number Description
- ------- ------------
3.1 Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 of
the BSD Medical Corporation Registration Statement on Form S-1, filed
October 16, 1986.
3.2 By-Laws. Incorporated by reference to Exhibit 3.2 of the BSD Medical
Corporation Registration Statement on Form S-1, filed October 16, 1986.
4.1 Specimen Common Stock Certificate. Incorporated by reference to Exhibit 4
of the BSD Medical Corporation Registration Statement on Form S-1, filed
October 16, 1986.
page 20
<PAGE>
10.1 Transfer of Trade Secrets Agreement dated December 7, 1979, among
BSD Medical Corporation, Vitek, Incorporated and Ronald R. Bowman.
Incorporated by reference to Exhibit 10.6 of the BSD Medical
Corporation Registration Statement on Form S-1, filed October 16,
1986.
10.2 Volume Purchase Agreement dated June 6, 1986, between BSD Medical
Corporation and Luxtron Corporation. Incorporated by reference to
Exhibit 10.9 of the BSD Medical Corporation Registration Statement
on Form S-1, filed October 16, 1986.
10.3 Second Addendum to Exclusive Transfer of Trade Secrets Agreement
dated April 2, 1987. Incorporated by reference to Exhibit 10 of the
BSD Medical Corporation Form 10-K, filed April 8, 1988.
10.4 License Agreement between BSD Medical Corporation and EDAP
Technomed, Inc., dated July 3, 1996. Incorporated by reference to
Exhibit 10 of Form 8-K, filed August 7, 1996.
10.5 Terms of Engagement between BSD Medical Corporation and Ambient
Capital dated November 26, 1996. Incorporated by reference to
Exhibit 10 of Form 10-QSB filed February 27, 1997.
10.6 Stock Purchase Agreement dated October 31, 1997, by and among
TherMatrx, Inc., BSD Medical Corporation, Oracle Strategic Partners,
L.P., and Charles Manker.
10.7 BSD Medical Corporation 1998 Director Stock Plan. Incorporated by
reference to Exhibit A of the BSD Medical Corporation Schedule 14A,
filed July 27, 1998.
10.8 BSD Medical Corporation 1998 Stock Incentive Plan. Incorporated by
reference to Exhibit B of the BSD Medical Corporation Schedule 14B,
filed July 27, 1998.
16 Letter on changes in certifying accountant. Incorporated by reference to
Exhibit 16 of the BSD Medical Corporation Form 8-K/A, filed September 23,
1997.
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the last quarter of fiscal year 1998, the Company filed no reports
on Form 8-K.
page 21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BSD MEDICAL CORPORATION
Date: December ,1998 By: /s/ Paul F. Turner
- -------------------- ------------------------
Paul F. Turner
Chairman of the Board,
Acting President,
and Senior Vice
President of Research
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: December ,1998 By: /s/ Paul F. Turner
- -------------------- ------------------------
Paul F. Turner
Chairman of the Board,
Acting President,
and Senior Vice
President of Research
Date: December, 1998 By: /s/ S. Lewis Meyer
- -------------------- ------------------------
Dr. S. Lewis Meyer
Member of the Board of
Directors
Date: December, 1998 By: /s/Gerhard W. Sennewald
- -------------------- ------------------------
Dr. Gerhard W. Sennewald
Member of the Board of
Directors
Date: December, 1998 By: /s/ J. Gordon Short
- -------------------- ------------------------
Dr. J. Gordon Short
Member of the Board of
Directors
Date: December, 1998 By: /s/ Michael Nobel
- -------------------- ------------------------
Dr. Michael Nobel
Member of the Board of
Directors
page 22
<PAGE>
BSD Medical Corporation
Index to Consolidated Financial Statements
Page
-----
Report of Tanner + Co. F-1
Consolidated Balance Sheet F-2
Consolidated Statement of Operations F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statement of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of BSD Medical Corporation
We have audited the consolidated balance sheet of BSD Medical Corporation and
Subsidiary (the Company) as of August 31, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended August 31, 1998 and 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BSD Medical
Corporation and Subsidiary as of August 31, 1998, and the results of its
consolidated operations and cash flows for the years ended August 31, 1998 and
1997 in conformity with generally accepted accounting principles.
Tanner + Co.
Salt Lake City, Utah
November 4, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
BSD MEDICAL CORPORATION
Consolidated Balance Sheet
August 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C>
Cash and cash equivalents $ 6,391,115
Receivables 320,248
Inventories 657,259
Prepaid expenses 21,241
Deposits 12,508
------------------
Total current assets 7,402,371
Property and equipment, net 125,516
Other assets, net 59,777
Long-term trade receivables 47,486
------------------
$ 7,635,150
------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 86,548
Accrued expenses 396,619
Current portion of long-term debt 51,388
Current portion of deferred revenue 94,707
Current portion of deferred gain on sale - leaseback 61,416
------------------
Total current liabilities 690,678
------------------
Long-term debt 5,422
Deferred revenue 99,623
Deferred gain on sale - leaseback 199,523
------------------
Total liabilities 995,246
------------------
Minority interest 3,149,946
------------------
Commitments and contingency -
Stockholders' equity:
Common stock, $.01 par value; authorized 20,000,000
shares; issued and outstanding 16,370,052 shares 163,701
Additional paid-in capital 20,531,967
Accumulated deficit (16,894,110)
Deferred compensation (311,366)
Less 13,412 shares of treasury stock, at cost (234)
------------------
Total stockholders' equity 3,489,958
------------------
$ 7,635,150
------------------
- ------------------------------------------------------------------------------------------------------------------------------------
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
Years Ended August 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
Product sales $ 1,304,744 $ 949,369
Grant and license revenue 133,173 370,329
-----------------------------------
Total revenues 1,437,917 1,319,698
-----------------------------------
Costs and expenses:
Cost of product sales 707,399 388,445
Research and development 878,511 432,394
Selling, general, and administrative 1,731,383 1,359,082
-----------------------------------
Total costs and expenses 3,317,293 2,179,921
-----------------------------------
Operating loss (1,879,376) (860,223)
Other income (expense):
Interest income 159,274 10,634
Interest expense (8,373) (22,936)
Litigation settlement 5,000,000 -
-----------------------------------
Net income (loss) before income taxes
and minority interest 3,271,525 (872,525)
Provision for income taxes - current (221,000) -
-----------------------------------
Income (loss) before minority interest 3,050,525 (872,525)
Minority interest in net income of subsidiary (159,946) -
-----------------------------------
Net income (loss) $ 2,890,579 $ (872,525)
-----------------------------------
Earnings (loss) per common share - basic $ .18 $ (.05)
-----------------------------------
Earnings (loss) per common share - assuming dilution $ .17 $ (.05)
-----------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BSD MEDICAL CORPORATION
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended August 31, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Deferred
Common Stock Paid-In Compen- Accumulated Treasury Stock
---------------------- ------------------------
Shares Amount Capital sation Deficit Shares Amount
-------------------------------------------------------------------------------------
Balances,
<S> <C> <C> <C> <C> <C> <C> <C>
September 1, 1996 16,176,980 $ 161,770 $ 20,341,418 $ (849,416) $ (18,912,164) 67,428 $ (14,867)
Amortization of
deferred compensation - - - 405,170 - - -
Cancellation of stock
options - - (19,843) - - - -
Deferred
compensation related
to grant of stock - - 19,000 (19,000) - - -
options
Treasury stock issued
for employees bonuses - - - - - (3,000) 630
Purchase of treasury
stock for cash - - - - - 170,500 (5,000)
Warrants issued for
services - - 73,000 - - - -
Net loss - - - - (872,525) - -
-------------------------------------------------------------------------------------
Balance,
August 31, 1997 16,176,980 161,770 20,413,575 (463,246) (19,784,689) 234,928 (19,237)
Amortization of
deferred compensation - - - 151,880 - - -
Donated shares - - - - - 5,412 -
Treasury stock issued
for services - - 51,913 - - (226,928) 19,003
Common stock issued
for services 193,072 1,931 66,479 - - - -
Net income - - - - 2,890,579 - -
-------------------------------------------------------------------------------------
Balance,
August 31, 1998 16,370,052 $ 163,701 $ 20,531,967 $ (311,366) $ (16,894,110) 13,412 $ (234)
-------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BSD MEDICAL CORPORATION
Consolidated Statement of Cash Flows
Years Ended August 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
Cash flows from operations activities:
<S> <C> <C>
Net income (loss) $ 2,890,579 $ (872,525)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 36,393 24,481
Write-off of patents - 67,742
Provision for losses on receivables - (46,694)
Deferred gain on sale of building (46,061) -
Gain on disposal of property and equipment (18,154) -
Deferred compensation 151,880 386,170
Stock compensation expense 139,326 73,000
(Increase) decrease in:
Receivables 107,620 324,539
Inventories (144,444) (11,160)
Prepaid expense and other assets (78,132) 14,475
Increase (decrease) in:
Accounts payable (237,370) 190,926
Accrued expenses 188,706 (178,269)
Deferred revenue 6,747 (252,291)
Minority interest 159,946 -
-----------------------------------
Net cash provided by (used in)
operations activities 3,157,036 (279,606)
-----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (55,278) (52,474)
Proceeds from sale of building 446,545 -
Capital contribution from minority interest 2,990,000 -
-----------------------------------
Net cash provided by (used in)
investing activities 3,381,267 (52,474)
-----------------------------------
Cash flows from financing activities:
Proceeds from long-term debt - 155,672
Payments on long-term debt (190,869) (156,657)
Purchase of treasury stock - (5,000)
-----------------------------------
Net cash used in
financing activities (190,869) (5,985)
-----------------------------------
Increase (decrease) in cash and cash equivalents 6,347,434 (338,065)
Cash and cash equivalents, beginning of year 43,681 381,746
-----------------------------------
Cash and cash equivalents, end of year $ 6,391,115 $ 43,681
-----------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
F-5
</TABLE>
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
August 31, 1998 and 1997
- --------------------------------------------------------------------------------
Business
1. Summary of BSD Medical Corporation (the Company) develops,
Business and produces, markets, and services systems used for the
Significant treatment of cancer and other diseases. These systems are
Accounting sold worldwide. In addition, the Company currently has
Policies fifty-four percent interest in Thermatrx, Inc. (Thermatrx) a
corporate joint venture that is engaged in the manufacture
and sale of medical equipment. Principles of Consolidation
The consolidated financial statements include the accounts
of the Company, and its subsidiary. All significant
intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and investments
with original maturities to the Company of three months
or less.
Inventories
Raw material inventories are stated at the lower
of cost or market. Cost is determined using the average cost
method. Work-in-process and finished goods are stated at the
lower of the accumulated manufacturing costs or market.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization is determined
using the straight-line method over the estimated useful
lives of the assets. Expenditures for maintenance and
repairs are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property and
equipment are reflected in operations.
Other Assets
Other assets include certain intangibles which costs and are
amortized over five years using the straight-line method.
Amortization expense and accumulated amortization for the
year ended August 31, 1998 and 1997, totaled approximately
$13,000 and -0-, respectively.
- --------------------------------------------------------------------------------
F-6
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
Income Taxes
1. Summary of The Company accounts for income taxes using the
Business asset and liability method. Under the asset and liability
and method, deferred tax assets and liabilities are recognized
Significant for the future tax consequences attributable to differences
Accounting between the financial statement carrying amounts of existing
Policies assets and liabilities and their respective tax bases.
Continued Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings (Loss) Per Share
The computation of basic earnings per common share is based
on the weighted average number of shares outstanding during
each year.
The computation of diluted earnings per common share is
based on the weighted average number of shares outstanding
during the year, plus the common stock equivalents that
would arise from the exercise of stock options and warrants
outstanding, using the treasury stock method and the average
market price per share during the year.
Revenue
Recognition Sales revenues for products are recorded
when products are shipped. Revenue from long-term service
contracts is recognized on a straight-line basis over the
term of the contract, which approximates recognizing it as
it is earned. Deferred revenue includes amounts from service
contracts as well as revenue from sales of products which
have not been shipped.
Research and Development
Costs Research and development costs are expensed as
incurred.
Concentration of Credit Risk
Financial instruments that potentially subject the Company
to concentration of credit risk consists primarily of trade
receivables. In the normal course of business, the Company
provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when
realized, have been within the range of management's
expectations.
- --------------------------------------------------------------------------------
F-7
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
Concentration of Credit Risk - Continued
1. Summary of The Company has cash in bank and short-term investments that
Business at times, may exceed federally insured limits. The Company
and has not experienced any losses in such accounts. The
Significant Company believes it is not exposed to any significant credit
Accounting risk on cash and short-term investments.
Policies
Continued
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Reclassifications
Certain accounts in the 1997 financial statements have been
reclassified to conform with the current year presentation.
2. Detail of Details of certain balance sheet accounts at September 30,
Accounts 1998, are as follows:
Certain
Balance
Sheet
Receivables:
Trade receivables $ 330,248
Less allowance for doubtful
accounts (10,000)
-----------------
$ 320,248
-----------------
Inventories:
Parts and supplies $ 342,205
Work-in-process 128,681
Finished goods 215,784
-----------------
$ 686,670
-----------------
- --------------------------------------------------------------------------------
F-8
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Property and Property and equipment consists of the following:
Equipment
Equipment $ 566,043
Furniture and fixtures 308,227
-----------------
874,270
Less accumulated depreciation
and amortization (778,165)
-----------------
$ 96,105
-----------------
4. Long-term Long-term debt consists of the following:
Debt
Note payable to a vendor, due in monthly
installments of $2,742, including interest at 9%,
maturing October 1, 1999 $ 36,310
Note payable to an insurance company, due in
monthly installments of $2,125, including interest
at 9.6%, maturing June 1999 20,500
-----------------
56,810
Less current portion (51,388)
-----------------
$ 5,422
-----------------
Future maturities of long-term debt are as follows:
Years Ending August 31: Amount
---------------
1999 $ 51,388
2000 5,422
---------------
$ 56,810
---------------
- --------------------------------------------------------------------------------
F-9
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Deferred During the year ended August 31, 1998, the Company entered
Gain into a sale-leaseback on its building. The sale-leaseback
resulted in a gain of $325,513, of which $307,000 was
deferred and is being credited to income as rent expense
adjustments over the term of the lease. The lease requires
monthly payments of $6,533 through November 2002.
Future minimum payments at August 31, 1998, are as follows:
Years Ending August 31, Amount
-----------------
1999 $ 78,396
2000 78,396
2001 78,396
2002 78,396
2003 19,599
-----------------
$ 331,183
-----------------
Rent expense on this operating lease for the year ended August 31, 1998,
amounted to approximately $59,000.
6. Income The Income tax (provision) benefit differs from the amount
Taxes computed at federal statutory rates as follows:
Years Ended
August 31,
----------------------------------
1998 1997
----------------------------------
Income tax (provision) benefit at
statutory rate $ (1,031,000) $ 297,000
Change in valuation allowance 810,000 (297,000)
----------------------------------
$ (221,000) $ -
----------------------------------
- --------------------------------------------------------------------------------
F-10
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Income Deferred tax assets (liabilities) are comprised of the following:
Taxes
Continued
Net operating loss carry forward $ 3,060,000
Deferred compensation expense 340,000
Capital loss carry forward 86,000
Allowance for bad debt and reserves 6,000
General business credit carry forward 123,000
AMT credit 50,000
-----------------
3,665,000
Valuation allowance (3,665,000)
-----------------
$ -
-----------------
At August 31, 1998, the Company has net operating losses
(NOL), research and experimentation tax credit (RETC), and
investment tax credit (ITC) available to offset future
taxable income and taxes payable as follows:
Expiration
Date NOL RETC ITC
- ---------------------------------------------------------------------------
2000 $ 577,000 $ - $ -
2001 236,000 - 2,000
2002 2,827,000 8,000 -
2003 2,122,000 41,000 -
2005 1,270,000 72,000 -
2007 190,000 - -
2008 100,000 - -
2009 671,000 - -
2010 170,000 - -
2012 837,000 - -
-----------------------------------------------------------
$ 9,000,000 $ 121,000 $ 2,000
-----------------------------------------------------------
The Company has experienced a greater than 50 percent change
of ownership. Consequently, use of the Company's carryovers
against future taxable income in any one year may be limited
and these carryovers may expire unutilized due to the
limitation imposed by the change of ownership rules.
- --------------------------------------------------------------------------------
F-11
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
Stock Options
7. Stock The Company's 1998 Employee Stock Option Plan
Options authorizes the granting of incentive stock options to
and certain key employees and nonemployees who provide services
Warrants to the Company. The Plan provides for the granting of
options for an aggregate of 2,000,000 shares. The options
vest subject to management's discretion.
The Company's 1998 Director Stock Plan authorizes granting a
total of $12,000 in cash and options to each nonemployee
director. The Plan allows for an aggregate of 1,000,000
shares to be granted. The options vest according to a set
schedule over a five-year period and expire upon the
director's termination, or after ten years from the date of
grant.
The Company's 1987 Employee Stock Option Plan, which has now
expired, authorizes the granting of incentive options to
certain key employees of the Company and nonqualified stock
options to certain key employees, nonemployee directors, or
individuals who provided services to the Company. The Plan,
as amended, allowed for an aggregate of 950,000 shares to be
granted. The options vested according to a set schedule of
over a five-year period and expire upon the employee's
termination, or after ten years from the date of grant.
In addition, the Board of Directors authorized the
cancellation of all outstanding options previously issued
under the 1987 option plan and reissuance of these options
with an exercise price of $.10 per share, which will vest
over a one to five year period. Each employee was granted
options to purchase 3,000 shares per year of service
performed at the Company, and the officers and directors
were each granted options to purchase 35,000 shares. In
addition, the Company granted 242,655 warrants to another
entity at an exercise price of $.20 per share.
- --------------------------------------------------------------------------------
F-12
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Stock A schedule of the options and warrants are as follows:
Options
and
Warrants
Continued
Price Per
Options Warrants Share
-------------------------------------
Outstanding at September 1,
1996 1,090,246 - $ .10
Granted 47,500 242,655 .10 to .20
Expired (30,000) - .10
-------------------------------------
Outstanding at August 31, 1997 1,107,746 242,655 $ .10 to .20
Granted 27,500 - .25
-------------------------------------
Outstanding at August 31, 1998 1,135,246 242,655 $ .10 to .25
-------------------------------------
The Company has issued options to purchase shares of common
stock to employees and nonemployees, at an exercise price of
$.10 per share. For options granted to employees, the
Company has recorded as deferred compensation the excess of
the market value of common stock at the date of grant over
the exercise price.
Stock options shown above include 162,065 options which were
authorized by the Company's Board of Directors and not
issued under the employee stock option plan discussed above.
Of these 162,065 options 100,000 were issued to
nonemployees, while 62,065 were issued to a related party.
- --------------------------------------------------------------------------------
F-13
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Stock The Financial Accounting Standards Board has issued
Options Statement of Financial Accounting Standards No. 123,
and "Accounting for Stock-Based Compensation" (SFAS 123) which
Warrants established financial accounting and reporting standards for
Continued stock-based compensation. The new standard defines a fair
value method of accounting for an employee stock option or
similar equity instrument. This statement gives entities the
choice between adopting the fair value method or continuing
to use the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25 with footnote
disclosures of the pro forma effects if the fair value
method had been adopted. The Company has opted for the
latter approach. Accordingly, no compensation expense has
been recognized for the stock option plans. Had compensation
expense for the Company's stock options been determined
based on the fair value at the grant date for awards in 1998
and 1997 consistent with the provisions of SFAS No. 123, the
Company's results of operations would have been reduced to
the pro forma amounts indicated below:
Years Ended
August 31,
------------------------------------
1998 1997
------------------------------------
Net income (loss) - as reported $ 2,890,579 $ (872,525)
Net income (loss) - pro forma $ 2,883,894 $ (881,898)
Diluted earnings (loss) per share - as
reported $ .17 $ (.05)
Diluted earnings (loss) per share -
pro forma $ .17 $ (.05)
------------------------------------
The fair value of each option grant is estimated in the date
of grant using the Black-Scholes option pricing model with
the following assumptions:
August 31,
-----------------------------------
1998 1997
-----------------------------------
Expected dividend yield $ $ -
Expected stock price volatility 139% 229%
Risk-free interest rate 5.6% 6.3%
Expected life of options 5 years 5 years
-----------------------------------
- --------------------------------------------------------------------------------
F-14
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Stock The weighted average fair value of options granted during
Options 1998 and 1997 are $.22 and $.10, respectively.
and
Warrants The following table summarizes information about stock
Continued options and warrants outstanding at August 31, 1998:
Options and Warrants
Options and Warrants Outstanding Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 8/31/98 (Years) Price 8/31/98 Price
- --------------------------------------------------------------------------------
$ .10 - .25 1,377,901 2.8 $ .12 1,060,397 $ .12
- --------------------------------------------------------------------------------
8. Grant In a prior year, the Company was awarded a federal grant
and from the National Cancer Institute for research and
License development. No revenues or expenses were recognized under
Revenue this grant during the year ended August 31, 1998. During the
year ended August 31, 1997, $138,499 and $117,699,
respectively, of revenues and expenses were recognized under
this grant.
9. Foreign Sales to foreign customers are as follows:
Customer
and Major
Customer
Years Ended
August 31,
-----------------------------------
1998 1997
-----------------------------------
Europe $ 903,849 $ 795,420
Far East 194,824 -
Other - 35,000
-----------------------------------
$ 1,098,673 $ 830,420
-----------------------------------
- --------------------------------------------------------------------------------
F-15
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Foreign During the years ended August 31, 1998 and 1997, the Company
Customers had sales to a major customer which amounted to $888,516 and
and Major $692,542, respectively.
Customer
Continued
10. Related During the years ended August 31, 1998 and 1997, the Company
Party had sales to a stockholder of approximately $888,000 and
Transactions $693,000.
11. Supplemental During the year ended August 31, 1998, the Company sold a
Cash Flow building with a book value of $213,259, debt of $93,741, and
Information recognized a deferred gain of $307,000.
Actual amounts paid for interest and income taxes are as
follows:
Years Ended
August 31,
-----------------------------------
1998 1997
-----------------------------------
Interest expense $ 8,373 $ 22,936
-----------------------------------
Income taxes $ - $ -
-----------------------------------
12. Commitments The Company has an employment agreement with the acting
and president of the Company. The agreement provides that the
Contingencies president's salary will be based upon a reasonable mutual
agreement. Additionally, in the case of nonvoluntary
termination, the acting president will receive severance pay
for a one year period, which includes an extension of all
employee rights, privileges, and benefits, including medical
insurance. The one year severance pay would be an average of
the acting president's salary for the immediate twelve month
period prior to termination. The agreement also requires the
Company to pay the acting president for any accrued unused
vacation and $1,000 for any newly issued patents.
- --------------------------------------------------------------------------------
F-16
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Commitments The Company has an exclusive worldwide license for a unique
and temperature probe. The license will remain in effect as long
Contingencies as the technology does not become publicly known as a result
Continued of actions taken by the licensor. The Company pays royalties
based upon its sales of this probe. Royalties accrued as of
August 31, 1998 and 1997, are approximately $1,000 and
$5,000, respectively. Royalty expense amounted to
approximately $9,000 and $8,000 for the years ended August
31, 1998 and 1997, respectively.
13. Fair Value of None of the Company's financial instruments are held for
Financial trading purposes. The Company estimates that the fair value
Instruments of all financial instruments at August 31, 1998, does not
differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance
sheet. The estimated fair value amounts have been determined
by the Company using available market information and
appropriate valuation methodologies. Considerable judgement
is necessarily required in interpreting market data to
develop the estimates of fair value, and, accordingly, the
estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
14. Earnings Per In February 1997, the Financial Accounting Standards Board
Share issued Statement of Financial Accounting Standards No. 128
(SFAS 128) "Earnings Per Share," which requires companies to
present basic earnings per share (EPS) and diluted earnings
per share, instead of the primary and fully diluted EPS as
previously required. The new standard also requires
additional informational disclosures, and makes certain
modifications to the previously applicable EPS calculations
defined in Accounting Principles Board No. 15. The new
standard is required to be adopted by all public companies
for reporting periods ending after December 15, 1997, and
requires restatement of EPS for all prior periods reported.
During the year ended August 31, 1998, the Company adopted
this standard.
- --------------------------------------------------------------------------------
F-17
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Earnings Per Earnings per share information in accordance with SFAS 128
Share is as follows:
Continued
Year Ended August 31, 1998
-----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net income $ 2,890,579
Less preferred stock
dividends -
----------------
Basic EPS
Income available to
common stockholders 2,890,579 16,214,000 $ .18
--------------
Effect of Dilutive Securities
Stock options/warrants - 960,000
---------------------------------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 2,890,579 17,174,000 $ .17
-----------------------------------------------
Year Ended August 31, 1997
-----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net loss $ (872,525)
Less preferred stock
dividends -
----------------
Basic EPS
Loss available to
common stockholders (872,525) 16,177,000 $ (.05)
--------------
Effect of Dilutive Securities
Stock options - -
---------------------------------
Diluted EPS
Loss available to common
stockholders plus assumed
conversions $ (872,525) 16,177,000 $ (.05)
-----------------------------------------------
- --------------------------------------------------------------------------------
F-18
<PAGE>
BSD MEDICAL CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Litigation During 1998, the Company settled litigation with Urologix.
Settlement Pursuant to the settlement agreement, Urologix paid an
aggregate total of $5,000,000 to the Company and its
subsidiary. As part of settlement, Urologix maintains its
non-exclusive license to certain patents.
- --------------------------------------------------------------------------------
F-19
================================================================================
STOCK PURCHASE AGREEMENT
dated as of
October 31, 1997
by and among
THERMATRX, INC.,
BSD MEDICAL CORPORATION,
ORACLE STRATEGIC PARTNERS, L.P., and CHARLES MANKER
================================================================================
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (the "Agreement") dated as of October
31, 1997, by and among THERMATRX, INC., a Delaware corporation (the "Company"),
BSD MEDICAL CORPORATION, a Delaware corporation ("BSD"), ORACLE STRATEGIC
PARTNERS, L.P., a Delaware limited partnership and/or one or more of its
affiliates ("Oracle"), and Charles Manker ("Manker") (Oracle and Manker are
sometimes collectively referred to as the "Purchasers").
W I T N E S S E T H :
--------------------
WHEREAS, at the Initial Closing (as hereinafter defined), BSD
is contributing certain prostate specific treatment assets, patents and
intellectual property as more particularly described on Exhibit A hereto (the
"BPH Business Assets") as a capital contribution to the Company and in exchange
for capital stock of the Company; and
WHEREAS, simultaneously with the exchange by BSD described
above, Oracle and Manker are purchasing from the Company, and the Company is
selling to Oracle and Manker, the number of shares of the Company's Preferred
Stock (as hereinafter defined) as set forth on Exhibit B hereto.
NOW, THEREFORE, in consideration of the mutual promises and
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED SHARES
Section 1.1 Purchase and Sale. On the terms and subject to the
-------------------
conditions set forth in this Agreement, at the Initial Closing and on each
Milestone Closing (as such terms are hereinafter defined), the Company will sell
and each of Oracle and Manker, will purchase the number of shares of Preferred
Stock in the amounts and for the purchase price set forth opposite such
Purchaser's name on Exhibit B attached hereto, of the Company's Preferred Stock,
par value $.001 per share (the "Preferred Stock"). The terms and provisions of
the Preferred Stock are set forth in the Certificate of Designation of the
Company, a true and correct copy of which is attached hereto as Exhibit C (the
"Certificate of Designation"). The shares of Preferred Stock purchased pursuant
to this Agreement are referred to herein as the "Preferred Shares."
1
<PAGE>
ARTICLE II
CLOSINGS; CONTRIBUTION OF THE BPH BUSINESS ASSETS
Section 2.1 Transactions at the Initial Closing.
-----------------------------------
(a) Securities to be Purchased at the Initial Closing.
----------------------------------------------------
At the Intial Closing, the Company shall deliver to the Purchasers
certificates representing the Preferred Shares sufficient to convey to
Purchasers good and marketable title to the Preferred Shares free and clear of
any and all claims, liens, charges, security interests, pledges or encumbrances
of any nature whatsoever and together with all accrued benefits and rights
attaching thereto. The aggregate purchase price for the Preferred Shares shall
be payable by each of the Purchasers for their number of Preferred Shares at the
Initial Closing in cash by either wire transfer of immediately available funds
or certified or cashier's check.
(b) Capital Contribution
---------------------
On the terms and subject to the conditions set forth in this Agreement, at
the Initial Closing, BSD agrees to contribute the BPH Business Assets to the
Company as a capital contribution. At the Initial Closing, BSD shall deliver
assignment documents, sufficient to convey to the Company good and marketable
title to the BPH Business Assets free and clear of any and all claims, liens,
charges, security interests, pledges or encumbrances of any nature whatsoever
and together with all accrued benefits and rights attaching thereto. In
consideration for such capital contribution, the Company will issue to BSD
fifty-four thousand (54,000) shares of the Company's Common Stock, par value
$.001 per share (the "Common Stock") resulting in ownership set forth on Exhibit
B hereto. The shares of Common Stock issued pursuant to this Agreement are
referred to herein as the "Common Shares." At the Initial Closing, the Company
shall deliver to BSD certificates representing the Common Shares sufficient to
convey to BSD good and marketable title to the Common Shares free and clear of
any and all claims, liens, charges, security interests, pledges or encumbrances
of any nature whatsoever and together with all accrued benefits and rights
attaching thereto. The Preferred Shares and the Common Shares are collectively
referred to herein as the "Shares". Shares of Common Stock representing twelve
and one half (12.5%) percent of the Milestone Closing percentage ownership of
the Company shall be reserved for issuance pursuant to the Company's management
stock option plan and issued pursuant to Board approval.
(c)Intial Closing; Effective Date
------------------------------
Subject to the terms and conditions set forth herein, the closing of the
transactions contemplated by this Agreement (the "Initial Closing") shall take
place at the offices of Kane Kessler, P.C., 1350 Avenue of the Americas, New
York, New York 10019, no later than ten (10) business days after the date
hereof, or on such other date and at such other place as may be agreed to by the
parties (the "Initial Closing Date"). All proceedings to be taken and all
documents to be executed at the Initial Closing shall be deemed to have been
taken, delivered and executed simultaneously, and no proceeding shall be deemed
taken nor documents deemed executed or delivered until all have been taken,
delivered and executed.
2
<PAGE>
Section 2.2 Future Funding.
--------------
(a) Milestone Funding Obligation.
----------------------------
Upon receipt by the Company of positive patient data over a six (6) month
period, as measured by the American Urology Association ("AUA") or other
standard symptom scores, indicating single treatment efficacy and durability in
the treatment of benign conditions or diseases (excluding cancer) of the
prostate gland (the "Milestone") the Purchasers shall purchase from the Company
the additional number of the Company's Preferred Shares at such prices as set
forth in Section 2.2(c) hereof. The Purchasers' obligations under this Section
2.2(a) shall be deemed satisfied if the Company obtains equivalent or additional
financing from third party sources on terms no less favorable to BSD than the
terms contemplated by this Agreement.
(b) Option.
------
At any time, and from time to time in one or more transactions, prior to
the consummation of a Milestone Closing (as hereinafter defined), the Purchasers
shall have the option (the "Option") to purchase from the Company up to an
aggregate amount of the additional number of the Company's Preferred Shares at
such prices as set forth in Section 2.2(c). The Purchasers' exercise of its
Option and the consummation of the purchase of the total number of Preferred
Shares set forth in Section 2.2(c) shall satisfy Purchasers' obligation under
Section 2.2(a).
(c)Securities to be Purchased at Milestone or Option Closing.
---------------------------------------------------------
On the terms and subject to the conditions set forth in this Agreement, at
the Milestone or Option Closing, the Company will issue and sell and each of
Oracle and Manker will purchase the number of shares of Preferred Stock as set
forth opposite such Purchaser's name on Exhibit B attached hereto (collectively,
the "Milestone or Option Preferred Shares"). At the Milestone or Option Closing,
the Company shall deliver to Purchasers certificates representing the Milestone
or Option Preferred Shares sufficient to convey to the Purchasers good and
marketable title to the Milestone or Option Preferred Shares free and clear of
any and all claims, liens, charges, security interests, pledges or encumbrances
of any nature whatsoever and together with all accrued benefits and rights
attaching thereto. The purchase price payable by each Purchaser for the
Milestone or Option Preferred Shares is set forth on Exhibit B hereto, and shall
be payable by such Purchaser at the Closing in cash by either wire transfer of
immediately available funds or certified or cashier's check.
(d)The Milestone or Option Closing.
-------------------------------
The Milestone or Option Closing of the transactions contemplated under this
Agreement (the "Milestone or Option Closing") shall take place at the offices of
Kane Kessler, P.C., 1350 Avenue of the Americas, 26th Floor, New York, New York
at 10:00 a.m., New York time, (i) with respect to a Milestone Closing, no later
than forty-five (45) days after the Purchasers' receipt of notice from the
Company regarding the achievement by the Company of the Milestone, (ii) with
respect to an Option Closing, no later than thirty (30) days after the
Purchasers have given notice to the Company and BSD of their desire to exercise
their option to purchase the Option Preferred Shares, (iii) or at such other
place, time or date as may be mutually agreed upon in writing by the parties
hereto (the "Milestone or Option Closing Date"). The Initial Closing, Milestone
Closing and the Option Closing are sometimes hereinafter referred to as the
"Closings". The Initial Closing Date and the Milestone or Option Closing Dates
are sometimes hereinafter referred to as the "Closing Dates".
3
<PAGE>
Section 2.3 Deliveries.
----------
(a) Deliveries.
----------
In addition to the provisions of Section 6.1, at each Closing, the Company
shall deliver or cause to be delivered to each Purchaser the following:
1. A stock certificate representing the
Preferred Shares purchased by such
Purchaser, with all necessary stock
issuance or transfer stamps affixed
thereto, duly completed and
registered in the name of each
Purchaser (as set forth on Exhibit B
hereto) on the stock transfer book
of the Company.
2. The Certificates and documents
contemplated by Article VI;
3. A wire transfer representing
the Purchasers' legal fees.
5. Such other documents as the
Purchasers shall reasonably request.
(b) Deliveries by Purchasers.
------------------------
In addition to the provisions of Section 6.2, at each Closing, each
Purchaser, severally and not jointly, will deliver or cause to be delivered to
the Company, payment of the purchase price in cash by either wire transfer of
immediately available funds or certified or cashier's check or in accordance
with the Company's instructions (which instructions shall be given to the
Purchasers in writing no later than 3 business days prior to each Closing Date).
(c) Legends and Transfer Restrictions.
---------------------------------
The Shares to be delivered by the Company at each Closing shall be subject
to certain restrictions on transfer and each certificate representing the Shares
shall contain the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED,
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SAID ACT, AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT, IN THE CIRCUMSTANCES,
REQUIRED, OR EVIDENCE SATISFACTORY TO THE COMPANY
THAT THE SHARES HAVE BEEN SOLD IN COMPLIANCE WITH
RULE 144 PROMULGATED UNDER SAID ACT."
"THE SHARES OF STOCK REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO AND ARE TRANSFERABLE
ONLY AS PROVIDED IN A STOCK PURCHASE AGREEMENT
DATED AS OF OCTOBER __, 1997 AMONG THE
SHAREHOLDERS OF THE COMPANY AND THE COMPANY, A
COPY OF WHICH IS ON FILE AT THE COMPANY'S OFFICE."
4
<PAGE>
Section 2.4 Registration Rights.
-------------------
(a) Demand and "Piggyback" Registration Rights
------------------------------------------
(i) Demand Registration Rights
--------------------------
If at any time after the date hereof during which there is no effective
registration statement relating to any of the Common Shares, the Company shall
be requested in writing by Purchasers holding at least a majority of the Common
Shares which would be issuable upon conversion of the Preferred Shares held by
such Purchasers to effect the registration under the Securities Act of 1933, as
amended (the "Securities Act") of Common Shares, the Company shall, as
expeditiously as possible, use its best efforts to effect the registration, on a
form of general use under the Securities Act, of all Common Shares which the
Company has been requested to register. The Company shall not be obligated to
cause to become effective more than two (2) registration statements pursuant to
which Common Shares are registered under this Section 2.4(a)(i). Notwithstanding
the foregoing, if the Company shall furnish to the Purchasers requesting a
registration under this Section 2.4(a)(i) a certificate signed by the Chief
Executive Officer of the Company stating that in the good faith judgment of the
Board of Directors of the Company it would be detrimental to the Company and its
shareholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, the Company shall
have the right to defer taking action with respect to such filing for a period
of not more than 90 days after receipt of the request by the Purchasers;
provided, however, that the Company may not utilize this right more than once in
any 12-month period. In addition, the Company shall not be obligated to effect,
or to take any action to effect, any registration pursuant to this Section
2.4(a)(i) during the period starting with the date 30 days prior to the
Company's good faith estimate of the date of filing of, and ending on a date 120
days after the effective date of, a registration subject to Section 2.4(a)(ii)
hereto; provided that the Company is actively employing in good faith its best
efforts to cause such registration statement to be filed and thereafter to
become effective.
(ii) "Piggyback" Registration Rights.
-------------------------------
The Company shall, at least thirty (30) days prior to the filing of any
registration statement under the Securities Act (other than a registration
statement on Form S-8 or Form S-4 or any successor forms) relating to the public
offering of its Common Stock by the Company or any of its security holders, give
written notice of such proposed filing and of the proposed date thereof to the
Purchasers and BSD, and if, on or before the twentieth (20th) day following the
date on which such notice is given, the Company shall receive a written request
from a Purchaser or BSD requesting that the Company include among the securities
covered by such registration statement some or all of the Common Shares held by
or to be held after conversion by such Purchaser or BSD, the Company shall,
subject to Section 2.4(b) hereof, include such Common Shares in such
registration statement, if filed, so as to permit such Common Shares to be sold
or disposed of in the manner and on the terms of the offering thereof set forth
in such request.
5
<PAGE>
(b) Terms and Conditions of Registration.
------------------------------------
Except as otherwise provided herein, in connection with any registration
statement filed pursuant to Section 2.4(a) herein, the following provisions
shall apply:
(i) If such registration statement shall
be filed pursuant to Section 2.4(a)(ii) hereof and if the managing underwriter
advises the Company in writing that the inclusion in such registration of some
or all of the Common Shares sought to be registered by the Purchasers creates a
substantial risk that the proceeds or price per share that will be derived from
such registration will be reduced or that the number of shares to be registered
at the insistence of the Purchasers, plus the number of shares of Common Stock
sought to be registered by the Company and any other stockholders of the Company
is too large a number to be reasonably sold, then, in such event, the number of
shares sought to be registered for the Company and the other stockholders of the
Company having registration rights, as applicable, shall be reduced, pro rata in
proportion to the number of shares sought to be registered to the number of
shares recommended be sold by the managing underwriter.
(ii) If requested by the Purchasers in
connection with a registration statement filed pursuant to Section 2.4(a)(i),
the Company will enter into an underwriting agreement with the underwriters for
such offering, such agreement to be reasonably satisfactory in form and
substance to the Company, the Purchasers and the underwriters, and to contain
such representations, warranties and covenants by the Company and such other
terms as are customarily contained in such agreements used by the managing
underwriter, including, without limitation, restrictions of sales of Common
Stock or other securities by the Company as may be reasonably agreed to between
the Company and such underwriters, and indemnities and rights to contributions
to the effect and to the extent provided in Sections 2.4(c) and 2.4(d) hereof.
The Purchasers shall be a party to any underwriting agreement relating to an
underwritten sale of their Common Shares and may, at their option, require that
any or all of the representations, warranties and covenants of the Company to or
for the benefit of such underwriters, shall also be made to and for the benefit
of the Purchasers. All representations and warranties of the Purchasers shall be
made to or for the benefit of the Company.
(iii) The Company shall provide a transfer agent
and registrar (which may be the same entity) for the Common Shares, not later
than the effective date of such registration.
(iv) All expenses in connection with the
preparation and filing of a registration statement filed pursuant to Section
2.4(a) shall be borne solely by the Company, except for any transfer taxes
payable with respect to the disposition of such Common Shares, and any
underwriting discounts and selling commissions applicable solely to such sales
of Common Shares, which shall be paid by the Purchasers of the Shares being
registered.
6
<PAGE>
(v) The Company shall use its best efforts to
cause all of the shares covered by such registration statement to be listed on
NASDAQ or on such other securities exchange as such shares may then be listed,
on which similar shares are listed for trading, if the listing of such
registered shares is permitted by such exchange.
(vi) Following the effective date of such
registration statement, the Company shall, upon the request of the Purchasers,
forthwith supply such number of prospectuses (including exhibits thereto and
preliminary prospectuses and amendments and supplements thereto) meeting the
requirements of the Securities Act and such other documents as are referred to
in the prospectus as shall be reasonably requested by the Purchasers to permit
the Purchasers to make a public distribution of their Common Shares.
(vii) (A) Each Purchaser agrees that it will not
effect any sales of Common Shares pursuant to a registration described in
Section 2.4(a) after such Purchaser has received notice from the Company to
suspend sales as a result of the occurrence or existence of any Suspension Event
(as defined in Section 2.4(b)(vii)(B) below) until the Company provides notice
to such Purchaser that all Suspension Events have ceased to exist. In addition,
each Purchaser agrees that it will not effect any sales of Common Shares
pursuant to a registration described in Section 2.4(a) after such Purchaser has
received notice from the Company to suspend sales because the registration
statement pursuant to which such sale is to be effected, and the related
prospectus or any supplement thereto contains an untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, until the Company notifies such Purchaser that the misstatement or
omission has been corrected. The Company hereby covenants and agrees that it
will use its best efforts to correct any such misstatement or omission, or to
cure any Suspension Event, and that it will give immediate notice to the
Purchasers of such correction or cure.
(B) Notwithstanding anything to the contrary set
forth in this Agreement, the Company's obligation to file a registration
statement pursuant to Section 2.4(a) hereof and make any filings with any state
securities authority, to use its best efforts to cause a registration statement
or any state securities filings to become effective, or to amend or supplement
such a registration statement or any state securities filings shall be
temporarily suspended in the event of and during a Suspension Event. A
"Suspension Event" shall exist at such times that (i) the Company is conducting
an underwritten primary offering and is advised by the underwriters therein that
sale of Common Shares under the registration statement filed pursuant to Section
2.4(a) hereof would have a material adverse effect on the Company's offering, or
(ii) negotiations and/or consummation are pending relating to a transaction or
the occurrence of some other event (x) where any of the foregoing would require
disclosure under applicable securities laws of material information in a
registration statement (or any other document incorporated into a registration
statement by reference) or such state securities filings and (y) as to which the
Company has a bona fide business purpose, as determined in good faith by its
7
<PAGE>
Board of Directors, for preserving confidentiality or which renders the Company
unable to comply with the Securities and Exchange Commission's (the
"Commission") requirements. Suspension of the Company's obligations pursuant to
this Section 2.4(b)(vii)(B) shall continue only for so long as a Suspension
Event is continuing. The Company shall notify each Purchaser immediately after
any Suspension Event occurs or ceases to exist.
(viii) The Purchasers may select the underwriter
or underwriters, if any, who are to undertake any offering and distribution of
the Common Shares to be included in a registration statement filed under the
provisions of Section 2.4(a)(i) hereof, subject to the Company's prior approval
of the underwriter, which approval shall not be unreasonably withheld.
(ix) The Company shall use its best efforts to
register the Common Shares covered by any such registration statements filed
pursuant to Section 2.4(a) under such securities or Blue Sky laws in addition to
those in which the Company would otherwise sell shares, as the Purchasers shall
request, except that neither the Company nor the Purchasers shall for any such
purpose be required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction where it is
not so qualified. The fees and expenses incurred in connection with such
registration shall be borne by the Company.
(x) The Purchasers shall cooperate fully with
the Company and provide the Company with all information reasonably requested by
the Company for inclusion in the registration statement or as necessary to
comply with the Securities Act. The Company shall cooperate fully with any
underwriters selected by the Purchasers and counsel to such underwriters, and
shall provide reasonable and customary access to the Company's books and records
(upon receipt from such underwriters of customary confidentiality agreements) in
order to facilitate such underwriters' review and examination of the Company in
connection with such underwriting.
(xi) The Company shall notify the Purchasers, at
any time after effectiveness when a prospectus relating thereto is required to
be delivered under the Securities Act within the period mentioned in subdivision
(vii) of this Section 2.4(b), of the happening of any event as a result of which
the prospectus included in such registration statement, as then in effect,
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
not misleading in light of circumstances then existing (and upon receipt of such
notice and until a supplemented or amended prospectus as set forth below is
available, the Purchasers shall not offer or sell any securities covered by such
registration statement and shall return all copies of such prospectus to the
Company if requested to do so by it), and at the request of the Purchasers
prepare and furnish the Purchasers as promptly as practicable, but in any event
within 90 days, a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing.
8
<PAGE>
(xii) The Company shall furnish to the Purchasers
at the time of the disposition of the Common Shares, a signed copy of an opinion
of the Company's regular in-house or outside general counsel, or other counsel
of the Company's selection reasonably acceptable to, and which opinion shall be
reasonably satisfactory in form and substance to, the Purchasers to the effect
that: (a) a registration statement covering such Common Shares has been filed
with the Commission under the Securities Act and has been declared effective by
order of the Commission, (b) said registration statement and prospectus
contained therein comply as to form in all material respects with the
requirements of the Securities Act, and nothing has come to such counsel's
attention (after due inquiry) which would cause such counsel to believe that
either said registration statement or such prospectus (other than the financial
statements contained therein, as to which such counsel need not express any
opinion) 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 the case of such prospectus, in light of the circumstances under
which they were made) not misleading, (c) after due inquiry such counsel knows
of no legal or governmental proceedings required to be described in such
registration statement or prospectus which are not described as required, or of
any contracts or documents of a character required to be described in such
registration statement or such prospectus to be filed as an exhibit to such
registration statement or to be incorporated by reference therein which are not
described and filed as required and (d) to such counsel's knowledge, no stop
order has been issued by the Commission suspending the effectiveness of such
registration statement; it being understood that such opinion may contain such
qualifications and assumptions as are customary in the rendering of similar
opinions, and that such counsel may rely, as to all factual matters treated
therein, on certificates of the Company (copies of which shall be delivered to
the Purchasers).
(xiii) The Company will use its best efforts to
comply with the reporting requirements of Sections 13 and 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to the extent
it shall be required to do so pursuant to such sections, and at all times while
so required shall use its best efforts to comply with all other public
information reporting requirements of the Commission (including reporting
requirements which serve as a condition to utilization of Rule 144 promulgated
by the Commission under the Securities Act) from time to time in effect and
relating to the availability of an exemption from the Securities Act for the
sale of any of the Company's Common Stock held by the Purchasers. The Company
will also cooperate with the Purchasers in supplying such information and
documentation as may be necessary for the Purchasers to complete and file any
information reporting forms presently or hereafter required by the Commission as
a condition to the availability of an exemption from the Securities Act for the
sale of any of the Company's Common Stock held by the Purchasers.
9
<PAGE>
. (c) Indemnification
----------------
(i) In the event of the registration of any
Common Shares of the Company under the Securities Act pursuant to the provisions
of Sections 2.4(a), the Company agrees to indemnify and hold harmless the
Purchasers, each underwriter, broker or dealer, if any, and their respective
directors, officers and employees, of such Common Shares, and each other person,
if any, who controls the holders of the Shares or the Common Shares (or a
permitted assignee thereof), such underwriter, broker or dealer within the
meaning of the Securities Act, from and against any and all losses, claims,
damages or liabilities (or actions in respect thereof), joint or several, to
which the Purchasers (and as applicable) its directors, officers or employees,
or such underwriter, broker or dealer or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in any registration statement under which such Common Shares were registered
under the Securities Act, any preliminary prospectus or final prospectus
relating to such Common Shares, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of any rule or
regulation under the Securities Act applicable to the Company or relating to any
action or inaction required by the Company in connection with any such
registration and will reimburse the Purchasers, each such underwriter, broker or
dealer and controlling person, and their respective directors, officers or
employees, for any legal or other expenses reasonably incurred by the Purchasers
or such underwriter, broker or dealer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, such preliminary prospectus, such
final prospectus or such amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by the Purchasers
and as applicable, such Purchasers' directors, officers or employees, or such
underwriter, broker, dealer or controlling person for use in the preparation
thereof. Such indemnity shall remain in full effect irrespective of any
investigation by any person indemnified above.
(ii) In the event of the registration of any
Common Shares of the Purchasers under the Securities Act for sale pursuant to
the provisions of this Agreement, the Purchasers agree to indemnify and hold
harmless the Company, its directors, officers and employees, from and against
any losses, claims, damages or liabilities, joint or several, to which the
Company, its directors, officers or employees, may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such Common Shares were registered under
the Securities Act, any preliminary prospectus or final prospectus relating to
such Common Shares, or any amendment or supplement thereto, or arise out of or
are based upon omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
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misleading, which untrue statement or alleged untrue statement or omission or
alleged omission was made therein in reliance upon and in conformity with
written information furnished to the Company by the Purchasers for use in the
preparation thereof. Such indemnity shall remain in full effect irrespective of
any investigation by any person indemnified above.
(iii) Promptly after receipt by a person entitled
to indemnification under this Section 2.4(c) (for purposes of this Section
2.4(c), an "Indemnified Party") of notice of the commencement of any action or
claim relating to any registration statement filed under Section 2.4(a) or as to
which indemnity may be sought hereunder, such Indemnified Party will, if a claim
for indemnification hereunder in respect thereof is to be made against any other
party hereto (for purposes of this Section 2.4(c), an "Indemnifying Party"),
give written notice to such Indemnifying Party of the commencement of such
action or claim, but the failure to so notify the Indemnifying Party will not
relieve it from any liability which it may have to any Indemnifying Party
otherwise than pursuant to the provisions of this Section 2.4(c) and shall also
not relieve the Indemnifying Party of its obligations under this Section 2.4(c),
except to the extent that the Indemnifying Party is damaged solely as a result
of the failure to give timely notice. In case any such action is brought against
an Indemnified Party, and it notifies an Indemnifying Party of the commencement
thereof, the Indemnifying Party will be entitled (at its own expense) to
participate in and, to the extent that it may wish, jointly with any other
Indemnifying Party similarly notified, to assume the defense with counsel
satisfactory to such Indemnified Party, of such action and/or to settle such
action and, after notice from the Indemnifying Party to such Indemnified Party
of its election so to assume the defense thereof, the Indemnifying Party will
not be liable to such Indemnified Party for any legal or other expenses
subsequently incurred by such Indemnified Party in connection with the defense
thereof, other than the reasonable cost of investigation; provided, however,
that no Indemnifying Party and no Indemnified Party shall enter into any
settlement agreement which would impose any liability on such other party or
parties without the prior written consent of such other party or parties.
(d) Contribution. If the indemnification provided for in
Section 2.4(c) hereof is unavailable to the Indemnified Party in respect of any
losses, claims, damages or liabilities referred to herein, then each such
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages or liabilities (i) as between the Company and
the Purchasers on the one hand and the underwriters on the other, in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Purchasers on the one hand and the underwriters on the other
from the offering of the Common Shares, or if such allocation is not permitted
by applicable law, in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Purchasers
on the one hand and of the underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations and (ii) as
between the Company on the one hand and each Purchaser on the other, in such
proportion as is appropriate to reflect the relative fault of the Company and of
each Purchaser in connection with such statements or omissions, as well as any
other relevant equitable considerations.
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In no event shall the obligation of any
Indemnifying Party to contribute under this Section 2.4(d) exceed the amount
that such Indemnifying Party would have been obligated to pay by way of
indemnification if the indemnification provided for under Section 2.4(c) hereof
had been available under the circumstances.
The amount paid or payable by an Indemnified
Party as a result of the losses, claims, damages and liabilities referred to in
the next preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
Indemnified Party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 2.4(d), no Purchaser or
underwriter shall be required to contribute any amount in excess of the amount
by which (i) in the case of a Purchaser, the net proceeds received by such
Purchaser from the sale of Common Shares or (ii) in the case of an underwriter,
the total price at which the Common Shares purchased by it and distributed to
the public were offered to the public exceeds, in any such case, the amount of
any damages that such Purchaser or underwriter has 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.
(e) Survival. The indemnity and contribution agreements
contained in this Section 2.4 shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement or any underwriting
agreement, (ii) any investigation made by or on behalf of any Indemnified Party
or by or on behalf of the Company and (iii) the consummation of the sale or
successive resales of the Common Shares.
(f) Future Registration Rights. Until such time as a
registration has been declared effective by the Commission, the Company shall
not grant to any third party any registration rights equal to or more favorable
than those contained in this Section 2.4; provided, however, that the foregoing
prohibition shall not prevent the Company from granting to a third party
specific registration rights that are equal to those contained in this Section
2.4, as long as all of the registration rights granted to such third party,
taken as a whole, are less favorable to the third party that those granted to
the Purchasers herein. In the event that a registration shall fail to remain
effective (or a stop order shall be entered with respect thereto) while any of
the Common Shares remain unsold, the provisions of this Section 2.4(f) shall
become applicable once again.
(g) Remedies. The Purchasers and each holder of Common
Shares, in addition to being entitled to exercise all rights hereto and all
other rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Agreement and hereby agrees
to waive the defense in any action for specific performance that a remedy at law
would be adequate. In addition to the foregoing, if the Company fails to comply
with the registration obligations of this Article II or if the Company files a
registration statement to be in technical compliance with the requirements of
this Article II, but such filed registration statement lacks, in material
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respects, the information required to be contained in the form of such
registration statement, the Company shall be fully liable for any and all losses
incurred or suffered by the Purchasers as a result of such failure together with
payment of liquidated damages to the Purchasers in the amount of Seventy Five
Thousand ($75,000) Dollars for every thirty (30) days that the Company is in
default of this Section.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND BSD
In order to induce the Purchasers to enter into this Agreement
and to consummate the transactions contemplated hereby, the Company with respect
to its status and BSD with respect to the BPH Business Assets, hereby represent
and warrant, severally, to the Purchasers as follows:
Section 3.1 Corporate Existence and Power. (a) BSD is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and has all corporate powers required to carry on
its business as now conducted. BSD is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where the failure to be
so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on BSD. For purposes of this Agreement, the term "Material
Adverse Effect" means, with respect to any person or entity, a material adverse
effect on the condition (financial or otherwise), business, properties, assets,
liabilities (including contingent liabilities), results of operations or current
prospects of such person or entity. Each jurisdiction in which BSD is so
qualified is listed on Schedule 3.1(a) hereto. BSD has the requisite power and
authority to (a) own or lease and operate its properties and (b) conduct its
business as presently conducted. True and complete copies of BSD's Certificate
of Incorporation, as amended, and Bylaws, as amended, have previously been
provided to the Purchasers.
(b) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Company is duly qualified to transact business as a foreign corporation in all
jurisdictions where the ownership or leasing of its properties or the conduct of
its business requires such qualification and the failure to so qualify would not
have a Material Adverse Effect on the Company. Each jurisdiction in which the
Company is so qualified is listed on Schedule 3.1(b) hereto. Prior to the date
hereof, the Company has had no properties and has not conducted any business.
Section 3.2 Authorization. The execution, delivery and
performance by each of the Company and BSD of this Agreement, and the
consummation of the transactions contemplated hereby (including, but not limited
to, the sale, issuance and delivery of the Shares by the Company, the subsequent
issuance of any additional securities of the Company as payment of dividends on
the Shares, when, if and as declared by the Board of Directors of the Company,
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and the subsequent issuance of the Common Shares upon conversion of the
Preferred Shares) have been duly authorized and no additional action is required
for the approval of this Agreement. This Agreement constitutes the legal, valid
and binding agreement of each of the Company and BSD enforceable against each of
them in accordance with its terms, except as may be limited by bankruptcy,
reorganization, insolvency, moratorium and similar laws of general application
relating to or affecting the enforcement of rights of creditors and except that
enforceability of its obligations hereunder are subject to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
Section 3.3 Governmental Authorization. The execution,
delivery and performance by each of the Company and BSD of this Agreement, and
the consummation of the transactions contemplated hereby (including, but not
limited to, the sale, issuance and delivery of the Shares by the Company, the
subsequent issuance of additional Shares as payment of the dividends on the
Shares, when, if and as declared by the Board of Directors of the Company, and
the subsequent issuance of the Common Shares upon conversion of the Preferred
Shares) by the Company and BSD require no action by or in respect of, or filing
with, any governmental body, agency, official or authority.
Section 3.4 Non-Contravention. Except as set forth on Schedule
3.4, the execution, delivery and performance by each of the Company and BSD of
this Agreement, and the consummation by each of the Company and BSD of the
transactions contemplated hereby do not and will not (a) contravene or conflict
with the Certificate of Incorporation, Certificate of Designation and Bylaws of
the Company or the Certificate of Incorporation and Bylaws of BSD; (b)
contravene or conflict with or constitute a violation of any provision of any
law, regulation, judgment, injunction, order or decree binding upon or
applicable to the Company or to BSD relating to the BPH Business Assets, (c)
constitute a default under or give rise to a right of termination, cancellation
or acceleration or loss of any benefit under any material agreement, contract or
other instrument binding upon the Company or upon BSD with respect to the BPH
Business Assets or under any material license, franchise, permit or other
similar authorization held by the Company or by BSD with respect to the BPH
Business Assets; or (d) result in the creation or imposition of any Lien (as
defined below) on any material asset of the Company or the BPH Business Assets.
For purposes of this Agreement, the term "Lien" means, with respect to any
asset, any mortgage, lien, pledge, charge, security interest, claim or
encumbrance of any kind in respect of such asset.
Section 3.5 Compliance with Law. To the knowledge of the
Company and BSD, each of BSD, with respect to the BPH Business Assets, and the
Company is in compliance in all material respects with all laws, rules and
regulations, judgments, decrees or orders of any court, administrative agency,
commission, regulatory authority or other governmental authority or
instrumentality, domestic or foreign, applicable to its operations. There are no
judgments or orders, injunctions, decrees, stipulations or awards (whether
rendered by a court or administrative agency or by arbitration), including any
such actions relating to affirmative action claims or claims of discrimination,
against the Company or against any of its properties or businesses or against
BSD that will have a Material Adverse Effect on the Company or the BPH Business
Assets.
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Section 3.6 No Defaults. Each of the Company and BSD is not,
nor has either received notice that it would be with the passage of time, giving
of notice, or both, (i) in violation of any provision of its Certificate of
Incorporation (including any Certificates of Designation) and Bylaws (ii) in
default or violation of any term, condition or provision of (A) any judgment,
decree, order, injunction or stipulation applicable to BSD (with respect to the
BPH Business Assets) or the Company or (B) any material agreement, note,
mortgage, indenture, contract, lease or instrument, permit, concession,
franchise or license to which the Company or BSD (with respect to the BPH
Business Assets) is a party or by which the Company or its properties or assets
may be bound or by which BSD (with respect to the BPH Business Assets) may be
bound.
Section 3.7 Litigation. There is no action, suit, proceeding,
judgment, claim or investigation pending or, to the best knowledge of the
Company or BSD, threatened against the Company or BSD, which could, individually
or in the aggregate, have an adverse effect on the Company or the BPH Business
Assets or which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay any of the transactions contemplated hereby, or which is likely
to lead to a claim, damages payment, settlement, loss, liability, cost or
expense to the Company or to BSD with respect to the BPH Business Assets. To the
best knowledge of the Company and BSD, there is no basis for the assertion of
any of the foregoing.
Section 3.8 Absence of Certain Changes. Since May 8, 1997 (the
"Determination Date"), BSD has conducted its business, to the extent such
business utilizes or relates to or includes the BPH Business Assets in the
ordinary course and to its knowledge there has not occurred:
(a) Any event that would result in a Material
Adverse Effect on the BPH Business Assets;
(b) Any damage, destruction or loss, whether or
not covered by insurance, that would, individually or in the aggregate, have a
Material Adverse Effect on the BPH Business Assets;
(c) Any (i) incurrence, assumption or guarantee by
BSD of any debt for borrowed money involving the BPH Business Assets; (ii) sale,
assignment or transfer of any of its intangible assets that are part of the BPH
Business Assets except in the ordinary course of business, or cancellation of
any debt or claim relating to the BPH Business Assets; (iii) waiver of any right
(with respect to the BPH Business Assets) of substantial value whether or not in
the ordinary course of business; (iv) other commitment (contingent or
otherwise), with respect to the BPH Business Assets, to do any of the foregoing.
(d) Any creation or assumption by BSD of any Lien
on any of the BPH Business Assets;
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(e) Any entry into, amendment of, relinquishment,
termination or non-renewal by BSD of any contract, license, lease, transaction,
commitment or other right or obligation relating to the BPH Business Assets,
other than in the ordinary course of business;
(g) Any transfer or grant of a right with respect
to the trademarks, trade names, service marks, trade secrets, copyrights or
other intellectual property rights owned or licensed by BSD relating to the BPH
Business Assets; or
(h) To the best knowledge of BSD, any agreement or
arrangement made by BSD to take any action which, if taken prior to the date
hereof, would have made any representation or warranty set forth in this Article
III untrue or incorrect as of the date when made.
Section 3.9 No Undisclosed Liabilities. Except for liabilities
and obligations incurred in the ordinary course of business since the
Determination Date, as of the date hereof, (i) BSD, with respect to the BPH
Business Assets, does not have any liabilities or obligations (absolute,
accrued, contingent or otherwise) and (ii) to BSD's knowledge, there has not
been any aspect of the prior or current conduct of the business of BSD, with
respect to the BPH Business Assets, which may form the basis for any claim by
any third party which if asserted could result in any such liabilities or
obligations, which are not fully reflected, reserved against or disclosed in the
consolidated balance sheet of the BSD. Schedule 3.9 lists all accounts payable
of BSD with respect to the BPH Business Assets as of the date hereof in excess
of $500.00 to any one payee. All indebtedness reflected in BSD's financial
statements, with respect to the BPH Business Assets or on Schedule 3.9 (for
indebtedness or which has arisen after the Determination Date) has arisen in the
ordinary course of business and represents valid indebtedness of BSD. As used
herein, the term "indebtedness" means all items which, in accordance with
generally accepted accounting principles, would be included in the consolidated
balance sheet of BSD as indebtedness or which has arisen after the Determination
Date in the ordinary course of business and represents valid indebtedness of
BSD.
Section 3.10 BSD Inventory. BSD is not transferring any
inventory to the Company, however, BSD represents and warrants that it owns
sufficient inventory to provide at least six (6) "BSD 50" systems to the
Company. BSD will not dispose of such inventory without giving the Company the
opportunity to purchase any such inventory.
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Section 3.11 Taxes. Except where a breach of the provisions of
this Section 3.11 would not have a Material Adverse Effect on the BPH Business
Assets:
(a) All tax returns, statements, reports and
forms (including estimated tax returns and reports and information returns and
reports) required to be filed with any taxing authority with respect to any
taxable period ending on or before the subject Closing Date by or on behalf of
BSD have been or will be filed when due (including any permitted extensions of
such due date); provided, however, that BSD shall not be in breach of this
Section 3.11(a) in respect of tax liabilities which BSD is contesting in good
faith with the relevant tax authorities, subject to BSD having made sufficient
reserves of funds in order to satisfy such tax liabilities in full.
(b) BSD has timely paid, withheld or made
provision on its books for all taxes due and payable by BSD.
(c) There are no Liens for taxes upon any of the
BPH Business Assets and, to the best knowledge of BSD, there are no such Liens
threatened or anticipated to be placed upon any of the BPH Business Assets.
Section 3.12 Interest of Officers, Directors and Other
Affiliates. Schedule 3.12 sets forth a description of any interest held,
directly or indirectly, by any officer, director or other affiliate of the
Company or BSD in any property, real or personal, tangible or intangible, used
in or pertaining to the Company's business or the BPH Business Assets, including
any interest in the Intellectual Property (as defined in Section 3.13 hereof).
. Section 3.13 Intellectual Property
(a) To the knowledge of the Company, the business
as currently proposed to be conducted by the Company will not cause the Company
to infringe or violate any patents, trademarks, service marks, trade names,
copyrights, licenses, trade secrets or other intellectual property rights of any
other person or entity.
(b) To the knowledge of BSD, the business
conducted by BSD as it relates to the BPH Business Assets does not and will not,
when transferred to the Company, cause the Company to infringe or violate any
patents, trademarks, service marks, trade names, copyrights, licenses, trade
secrets or other intellectual property rights of any other person or entity.
(c) Schedule 3.13 sets forth a listing of all
patents, trademarks, trade names, service marks, trade secrets, formulae,
processes, copyrights, franchises or other intellectual property, and all
applications for any of the foregoing, owned or licensed by BSD or in which BSD
has any interest and which is part of the BPH Business Assets (the "Intellectual
Property"), as well as the owners thereof, the parties to all licenses and
applicable royalties and terms thereof. Except as set forth on Schedule 3.13,
the Intellectual Property is free of any unresolved ownership disputes or
threats with respect to any third party.
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(d) Except as set forth on Schedule 3.13, the
Company or BSD, as the case may be, owns or possesses the exclusive right to use
all of the Intellectual Property and no claim is pending, or to the best
knowledge of the Company or BSD, as the case may be, threatened, to the effect
that the operations of the Company or BSD, as the case may be, infringe upon or
conflict with the asserted rights of any other person and there is no basis for
any such claim.
(e) The Company or BSD, as the case may be, has
taken all measures it deems reasonable to maintain the Intellectual Property in
full force and effect. To the best of BSD's knowledge, none of the processes and
formulae, research development results and other know-how relating to the
business or operations of the Company or of BSD with respect to the BPH Business
Assets, the value of which is contingent upon maintenance of the confidentiality
thereof, has been disclosed to any person or entity other than employees of BSD
or the Company.
(f) The Company currently possesses all licenses,
sublicenses and permits required to operate the business of the Company. Except
where such failure to possess would not have a Material Adverse Effect, BSD
currently possesses all licenses, sublicenses and permits required to operate or
use the BPH Business Assets.
(g) To the Company's and BSD's knowledge, except
as set forth on Schedule 3.13, there are no infringers of the Intellectual
Property and the Company or BSD has not learned of or communicated with any
third party considered by the Company or BSD to be actually or possibly
infringing on any of the Intellectual Property in any material respect. Except
as set forth on Schedule 3.13, no part of the Intellectual Property breaches,
violates, infringes or interferes with any rights of any third party or requires
payment for the use of any patent, trade name, trade secret, trade-mark,
copyright or other intellectual property right or technology of another.
(h) Attached hereto as Exhibit D is a Transfer of
Trade Secrets Agreement, by and between Vitek, Incorporated and Ronald R. Bowman
and Bio-Systems Design, Incorporated (now known as BSD), dated July 1, 1979,
whereby, among other things, BSD has acquired the exclusive rights to a
temperature probe (the "Bowman Agreement"). BSD has delivered to Purchasers true
and complete copies of the Bowman Agreement and all amendments thereto. The
Bowman Agreement is in full force and effect and BSD has the full right, power
and authority to sublicense its rights thereunder to the Company.
Section 3.14 Tangible Property. There is no tangible property
that is included as part of the BPH Business Assets. BSD (with respect to its
operation of the BPH Business) has not received any notice that it is in
violation of any existing law or any building, zoning, health, safety or other
ordinance, code or regulation. During the past five years there has not been any
significant interruption of BSD's BPH Business.
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Section 3.15 Vendors and Customers. BSD, with respect to its
BPH Business, has satisfactory relations and has engaged in no actions to
jeopardize such satisfactory relations with its vendors, customers and the
corporations, partnerships, and individuals whose products are offered for sale
by BSD. No facts, circumstances or conditions exist which create a reasonable
basis for believing that the Company will be unable to continue the relationship
with such vendors and customers on substantially the same terms and conditions
as currently exist with BSD when the BPH Business Assets are transferred to the
Company.
Section 3.16 Preemptive Rights. The issuance of the Shares as
contemplated hereby will not be subject to any preemptive rights.
Section 3.17 Insurance. Schedule 3.17 sets forth a true and
complete list of all insurance policies providing insurance coverage of any
nature relating to the BPH Business Assets. Such policies are sufficient for
compliance by BSD with all requirements of law, such that the failure to comply
would not have a Material Adverse Effect on the BPH Business Assets, and all
material agreements to which BSD with respect to the BPH Business Assets is a
party or by which it is bound. All of such policies are in full force and effect
and are valid and enforceable in accordance with their terms, and BSD has
complied with all material terms and conditions of such policies, including
premium payments. None of the insurance carriers has indicated to BSD an
intention to cancel any such policy. BSD has no claim pending against any of the
insurance carriers under any of such policies and there has been no actual or
alleged occurrence of any kind which may give rise to any such claim.
Section 3.18 Subsidiaries. Except as set forth on Schedule
3.18 the Company and BSD have no subsidiaries.
Section 3.19 Capitalization. Immediately prior to the Initial
Closing the authorized capital stock of the Company consists of (i) One Million
(1,000,000) shares of Common Stock, par value $.001 per share, none of which are
issued and outstanding and (ii) One Million (1,000,000) shares of Preferred
Stock, par value $.01 per share, none of which are issued and outstanding.
Exhibit B includes a capitalization table setting forth the capitalization of
the Company on the Initial Closing Date and on the Milestone or Option Closing
Date. No other shares of capital stock have been authorized or issued. All
shares of the Company's outstanding capital stock have been duly authorized, are
validly issued and outstanding, and are fully paid and nonassessable and the
Shares, when issued and paid for at the Initial Closing, will be duly
authorized, validly issued, fully paid and nonassessable. The Company has
reserved (x) out of its authorized but unissued shares of Common Stock, solely
for issuance upon the conversion of the Shares (including shares of Preferred
Stock issued in respect of dividends on the Shares), such number of shares of
Common Stock as shall from time to time be issuable upon conversion of all
shares of Preferred Stock at the time outstanding, and (y) out of its authorized
but unissued shares of Preferred Stock, solely for issuance in respect of the
payment of dividends, a sufficient number of shares of Preferred Stock to pay
such dividends when, if and as declared by the Board of Directors of the
Company. Upon the issuance of shares of Common Stock upon conversion of the
Preferred Stock, and upon the issuance of shares of Preferred Stock in payment
of dividends on the Preferred Stock, when, if and as declared by the Board of
Directors of the Company, such shares of Common Stock and Preferred Stock, as
the case may be, shall be duly authorized, validly issued, fully paid and
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nonassessable. The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of the Company are as set forth in its Certificate of
Incorporation or the Certificate of Designation, and all such designations,
powers, preferences, rights, qualifications, limitations and restrictions are
valid, binding and enforceable.
Section 3.20 Rights, Warrants, Options. Except as set forth on
Schedule 3.20 there are no outstanding (a) securities or instruments convertible
into or exercisable for any of the capital stock or other equity interests of
the Company; (b) options, warrants, subscriptions or other rights to acquire
capital stock or other equity interests of the Company; or (c) commitments,
agreements or understandings of any kind, including employee benefit
arrangements, relating to the issuance or repurchase by the Company of any
capital stock or other equity interests of the Company, any such securities or
instruments convertible or exercisable for securities or any such options,
warrants or rights.
Section 3.21 Employees and Employment Agreements
(a) Employment Agreements. Except as set forth in
Schedule 3.21 there are no employment, consulting, severance or indemnification
arrangements, agreements, or understandings between BSD and any officer,
director, consultant or employee of BSD (the "Employment Agreements") that would
affect BSD's ability to perform its obligations under the Consulting Agreement
referred to in Section 6.1(j) hereof. Except as set forth in Schedule 3.21 the
terms of employment or engagement of all directors, officers, employees, agents,
consultants and professional advisors of the Company are such that their
employment or engagement may be terminated upon not more than two weeks notice
given at any time without liability for payment of compensation or damages and
the Company has not entered into any agreement or arrangement for the management
of its business or any part thereof other than with its directors or employees.
(b) Employees. (i) No employee, consultant or agent of
The Company or of BSD is, or to the Company's or BSD's knowledge, will be, based
upon the business and activities taken or proposed to be taken by the Company,
in violation of any term of any employment contract, confidentiality or
non-disclosure agreement or any other contract, agreement, commitment or
understanding relating to the relationship of such employee, consultant or agent
with the Company or any other party.
(ii) Each significant employee or consultant of
the Company or of BSD with access to confidential or proprietary information of
the Company or of the BPH Business Assets has executed an agreement obligating
such employee, consultant, contractor or agent to hold confidential such
proprietary information.
(iii) The Company is not aware that any officer or
key employee intends to terminate employment with the Company. Except for Steve
Hanka, BSD is not aware that any officer or key employee who works for BSD with
respect to the portion of BSD's business that includes the BPH Business Assets
intends to terminate employment with BSD.
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Section 3.22 Agreements. Schedule 3.22 sets forth all of the
following contracts and other agreements to which the Company or to which BSD,
with respect to the BPH Business Assets, is a party or by or to which it or its
assets or properties are bound or subject: (i) contracts and other agreements
with any current or former officer, director, employee, consultant or
shareholder; (ii) agreements with any labor union or association representing
any employee: (iii) contracts and other agreements for the sale of publications
or other materials, supplies, equipment, merchandise or services; (iv) contracts
and other agreements for the purchase or acquisition of materials, supplies,
equipment, merchandise or services; (v) licenses or royalty agreements or
similar contracts, including the Bowman Agreement; (vi) warehousing,
distributorship, depository, representative, management, marketing, sales
agency, printing or advertising agreements; (vii) contracts and other agreements
for the sale of any of its assets or properties other than in the ordinary
course of business or for the grant to any person of any preferential rights to
purchase any of its assets or properties; (viii) joint venture agreements
relating to the assets, properties or business of the Company or BSD or by or to
which it or its assets or properties are bound or subject; (ix) contracts or
other agreements under which it agrees to indemnify any party, to share the tax
liability of any party or to refrain from competing with any party; or (x) any
other material contract or other agreement whether or not made in the ordinary
course of business. All of the contracts and other agreements set forth on
Schedule 3.22 and elsewhere referred to in this Agreement are in full force and
effect and the Company or BSD, as the case may be, has paid in full or accrued
all amounts due thereunder and has satisfied in full or provided for all of its
liabilities and obligations thereunder, and is not in default under any of them,
nor is any other party to any such contract or other agreement in default
thereunder, nor does any condition exist which with notice or lapse of time or
both would constitute a default thereunder. Except as separately identified on
Schedule 3.22 neither the Company nor BSD is a party to or bound by any contract
or other agreement which either individually or in the aggregate materially and
adversely affects its assets, properties, business, or condition, financial or
otherwise, or which was entered into other than in the ordinary course of its
business. Except as separately identified on Schedule 3.22 no approval or
consent of any person is needed in order that the contracts or other agreements
set forth on Schedule 3.22 and other Schedules and Exhibits hereto continue in
full force and effect following the consummation of the transactions
contemplated by this Agreement. Except as otherwise noted in Schedule 3.22 each
of the contracts or other agreements referred to in clause (i) of this Section
3.22 can be terminated upon not more than one year's notice without payment of
premium or penalty or any other kind of payment.
Section 3.23 Absence of Certain Business Practices. Neither
the Company nor BSD (with respect to the BPH Business Assets), nor, to the
Company's or BSD's best knowledge, any affiliate of the Company or BSD (with
respect to the BPH Business Assets), any agent of the Company or BSD (with
respect to the BPH Business Assets), any other person acting on behalf of or
associated with the Company or BSD (with respect to the BPH Business Assets), or
any individual related to any of the foregoing persons, acting alone or
together, has: (a) received, directly or indirectly, any rebates, payments,
commissions, promotional allowances or any other economic benefits, regardless
of their nature or type, from any customer, supplier, trading company, shipping
company, governmental employee or other person with whom the Company or BSD has
done business directly or indirectly; or (b) directly or indirectly, given or
agreed to give any gift or similar benefit to any customer, supplier, trading
company, shipping company, governmental employee or other person who is or may
be in a position to help or hinder the business of the Company or BSD (or assist
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the Company or BSD in connection with any actual or proposed transaction) which
(i) may subject the Company or BSD to any damage or penalty in any civil,
criminal or governmental litigation or proceeding, (ii) if not given in the
past, may have had an adverse effect on the Company or BSD or (iii) if not
continued in the future, may adversely affect the assets, business, operations
or prospects of the Company or BSD or subject the Company or BSD to suit or
penalty in any private or governmental litigation or proceeding.
Section 3.24 Services or Products
(a) To the best knowledge of the Company and BSD (with
respect to the BPH Business Assets), there exists no set of facts (i) which
could furnish a basis for the recall, withdrawal, suspension or cancellation of
any registration, license, permit or other governmental approval or consent of
any governmental or regulatory agency with respect to any service or product
developed or provided by the Company or by BSD with respect to the BPH Business
Assets (a "Service or Product"), (ii) which could furnish a basis for the
withdrawal, suspension or cancellation by order of any state, federal or foreign
court of law of any Service or Product, or (iii) which could have an adverse
effect on the continued operation of any facility of the Company or of BSD, with
respect to the BPH Business Assets or which could otherwise cause the Company or
BSD, with respect to the BPH Business Assets, to withdraw, suspend or cancel any
such Service or Product from the market or to change the marketing
classification of any such Service or Product.
(b) Each Service or Product provided by Company or by
BSD (with respect to the BPH Business Assets) has been provided in accordance
with the specifications under which such Service or Product normally is and has
been provided and the provisions of all applicable laws or regulations
including, without limitation, those of the United States Food and Drug
Administration ("FDA").
(c) Copies of all material correspondence received or
sent by or on behalf of Company or BSD (relating to the BPH Business Assets)
from or to the FDA or any other governmental regulatory agency, including,
without limitation, any inspection reports or notices, have been previously
delivered to the Purchasers.
Section 3.25 Environmental Matters. None of the premises or
any other property used by the Company or BSD in the past has been used by the
Company or BSD (with respect to the BPH Business Assets) or, to the Company's
and BSD's knowledge after due inquiry, any other person to manufacture, treat,
store, or dispose of any hazardous substance or any other regulated material,
and, to the best of Company's and BSD's knowledge after due inquiry, such
property is free of all such substances and materials. The Company and BSD (with
respect to the BPH Business Assets), and any other person for whose conduct it
may be responsible, are in compliance with all laws, regulations and other
federal, state or local governmental requirements, and all applicable judgments,
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orders, writs, notices, decrees, permits, licenses, approvals, consents or
injunctions relating to the generation, management, handling, transportation,
treatment, disposal, storage, delivery, discharge, release or emission of any
waste, pollutant or toxic, hazardous or other regulated substance (including,
without limitation, asbestos, radioactive material and pesticides) or to any
other actions, omissions or conditions affecting the environment (the
"Environmental Laws"). Neither the Company nor BSD (with respect to the BPH
Business Assets), nor any other person for whose conduct it may be responsible
has received any complaint, notice, order, or citation of any actual, threatened
or alleged noncompliance with any of the Environmental Laws, and there is no
proceeding, suit or investigation pending or, to the Company's and BSD's
knowledge, threatened against the Company or any such person with respect to any
violation or alleged violation of the Environmental Laws, and there is no basis
for the institution of any such proceeding, suit or investigation.
Section 3.26 Licenses; Compliance With Regulatory
Requirements. To the knowledge of the Company and BSD, BSD's transfer of the BPH
Business Assets will also include all licenses, franchises, ordinances,
authorizations, permits, certificates, variances, exemptions, orders and
approvals, domestic or foreign which are material to the operation of the
business of the Company and the operation and use of the BPH Business Assets
(collectively, the "Licenses"). To the best knowledge of the Company and BSD,
the Company and BSD (with respect to the BPH Business Assets) are in compliance
with, and have conducted their business so as to comply with, the terms of their
respective Licenses and with all material applicable laws, rules, regulations,
ordinances and codes, domestic or foreign, including laws, rules, regulations,
ordinances and codes relating to the protection of the environment. Neither the
Company nor BSD (with respect to the BSD Business Assets) has engaged in any
activity that would cause revocation or suspension of any material Licenses. No
action or proceeding looking to or contemplating the revocation or suspension of
any of such Licenses is pending, or, to the knowledge of the Company or BSD,
threatened.
Section 3.27. The copies of the Certificate of Incorporation,
Certificate of Designation and By-laws of the Company and copies of the
Certificate of Incorporation and By-laws of BSD, and all amendments to each,
which have been delivered to the Purchasers, are true, correct and complete. The
minute and stock books of the Company and BSD, which have been delivered to the
Purchasers, are true, correct and complete and contain true and complete records
of all meetings and consents in lieu of meetings of the Board of Directors (and
any committees thereof) since the time of its organization.
Section 3.28 Brokers. Except for payment directly by the
Company to Ambient Capital Group, Inc. of $125,000.00 at the Initial Closing and
$125,000.00 which will be payable directly by the Company to Ambient Capital
Group, Inc. at the Milestone Closing, the Company has not made any commitments
to pay any brokerage, finder's or other fees or commissions in connection with
the transactions contemplated by this Agreement. If any additional such fees or
commissions are payable to Ambient Capital Group, Inc. they will be the sole
obligation of BSD.
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Section 3.29 Arm's Length Transactions. Each of the agreements
entered into by the Company and by BSD (with respect to the BPH Business Assets)
have been entered into in good faith and represent transactions that are no more
favorable to the parties thereto than would be available in an arm's length
transaction between such parties. Except as set forth on Schedule 3.29, there
are no Related Person Transactions (as defined in Section 5.2.2 hereof).
Section 3.30 Liens. BSD owns outright and upon the Initial
Closing will transfer to Company good and marketable title to all of the BPH
Business Assets free and clear of any Lien except for (i) properties disposed
of, or subject to purchase or sales orders, in the ordinary course of business
since the Determination Date; (ii) Liens securing taxes, assessments,
governmental charges or levies, or the claims of materialmen, carriers,
landlords and like persons, which are not yet due and payable; or (iii) minor
Liens of a character which do not substantially impair the BPH Business Assets
or materially detract from the business conducted thereby.
Section 3.31 Regulatory Matters. True and complete copies of
all letters and other written communications between BSD or the Company and the
FDA which relate to the BPH Business Assets ("Regulatory Matters") have been
delivered to the Purchasers. To the knowledge of the Company and BSD there is no
pending Regulatory Matter which has or may reasonably be expected to have, a
Material Adverse Effect upon BSD's ability to develop, test, manufacture or
distribute products or which could reasonably be expected to have a Material
Adverse Effect upon the Company or upon BSD, in each case with respect to the
BPH Business Assets. To the Company's and BSD's best knowledge, BSD and the
Company are in compliance with all requirements of the FDA and other regulatory
authorities applicable to the conduct of their respective businesses as
currently conducted, except where the failure so to comply would not reasonably
be expected to have a Material Adverse Effect as described in the preceding
sentence.
Section 3.32 Disclosure. No representation or warranty made by
the Company or BSD in this Agreement, including any exhibits or schedules
hereto, contains or will contain any untrue statement of a material fact, or
omits or will omit to state a material fact necessary to make the statements or
facts contained herein or therein not misleading in light of the circumstances
under which they were furnished. To the best of BSD's knowledge, except as
disclosed in Schedule 3.32, there is no material event, fact or condition (other
than general business or economic conditions which affect businesses generally
or adverse FDA rulings) that materially adversely affects the proposed business
of the Company or the BPH Business Assets, or that reasonably could be expected
to do so, that has not been set forth in this Agreement or in the Exhibits or
Schedules attached hereto.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE PURCHASERS
Each Purchaser, as the case may be, severally and not jointly,
hereby represents and warrants to the Company and BSD as follows:
Section 4.1 Existence and Power. Oracle is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization. Oracle has all powers required to carry on its business as now
conducted.
Section 4.2 Authorization. The execution, delivery and
performance by each Purchaser of this Agreement, and the consummation by each
Purchaser of the transactions contemplated hereby has been duly authorized and
no additional action is required for the approval of this Agreement. This
Agreement constitutes a valid and binding agreement of each Purchaser,
enforceable against it in accordance with its terms, except as may be limited by
bankruptcy, reorganization, insolvency, moratorium and similar laws of general
application relating to or affecting the enforcement of rights of creditors and
except that enforceability of its obligations thereunder are subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
Section 4.3 Governmental Authorization. The execution,
delivery and performance by each Purchaser of this Agreement, and the
consummation of the transactions contemplated hereby by each Purchaser require
no action by or in respect of, or filing with, any governmental body, agency,
official or authority, which individually or in the aggregate, would have a
Material Adverse Effect on each such Purchaser.
Section 4.4 Non-Contravention. The execution, delivery and
performance by Oracle of this Agreement, and the consummation by Oracle of the
transactions contemplated hereby do not and will not: (a) contravene or conflict
with the Certificate of Limited Partnership or other organizational document of
Oracle; or (b) contravene or conflict with or constitute a material violation of
any material provision of any law, regulation, judgment, injunction, order or
decree binding upon or applicable to Oracle, which contravention, conflict or
violation would have a Material Adverse Effect on Oracle.
Section 4.5 Litigation. There is no action, suit, proceeding,
claim or investigation pending or to the best of each Purchaser's knowledge
threatened, which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay any of the transactions contemplated hereby.
Section 4.6 Investment. Each Purchaser is acquiring the Shares
purchased by it hereunder for its own account for investment and until such
Shares are registered pursuant to the Registration, not with a view to, or for
sale in connection with, any distribution thereof, nor with the intention of
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distribution or selling the same; provided, however, that each Purchaser may
transfer Shares among one or more of its affiliates, so long as such transfer
does not violate applicable securities laws. Each Purchaser is aware the Shares
have not been registered under the Securities Act or under applicable state
securities or blue sky laws and that until the Shares are registered pursuant to
the registration statement, the certificate representing the Shares will bear
the legend set forth in Section 2.3 hereof. Each Purchaser is an "accredited
investor" as such term is defined in Rule 501 of Regulation D, as promulgated
under the Securities Act.
Section 4.7 No Brokers. No broker, finder, agent or similar
intermediary has been retained by the Purchasers in connection with this
Agreement or the transactions contemplated hereby.
COVENANTS AND AGREEMENTS
Section 5.1 Actions Requiring Purchasers' Consent. The Company
with respect to its business and BSD only with respect to those actions that may
significantly or materially affect or relate to the BPH Business Assets covenant
and agree that none of the following actions will take place prior or subsequent
to the Initial Closing, without the prior written consent of the Purchasers
being first obtained:
5.1.1 the sale, transfer, assignment or encumbrance of any of
the BPH Business Assets or any asset related to or used in
connection with the BPH Business Assets;
5.1.2 the granting of any licenses or entering into any
similar arrangements relating to any of the BPH Business
Assets;
5.1.3 any filings or correspondence with the FDA;
5.1.4 an authorization or issuance by the Company (excluding
BSD) of any additional shares (with the exception of shares of
Common Stock issued at a price equal or greater than $13.33
per share), or classes of shares, or any warrants, options or
other rights to purchase any interest in the Company's shares
or adoption of any employee stock option plan for the benefit
of the Company's employees or any change, modification or
alteration of any of the terms of any warrant, option or
similar right to purchase any interest in the Company's
shares;
5.1.5 the entering into by the Company (excluding BSD) of any
bank or other non-trade indebtedness for borrowed money;
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5.1.6 the liquidation, dissolution or winding-up of the
Company or any of its subsidiaries or any merger or
consolidation of the Company or any subsidiary with or into
another entity or the sale of all or substantially all the
assets of the Company or any subsidiary;
5.1.7 the payment of any dividend by the Company;
5.1.8 the repurchase by the Company of any shares of the
Company's capital stock;
5.1.9 any amendment to any of the Company's charter documents
which relates to the Company's capital structure;
5.1.10 any Related Person Transactions (as defined herein);
5.1.11 any material change in the compensation of the five (5)
highest compensated employees and/or officers of the Company;
and
5.1.12 otherwise take any action, directly or indirectly,
which would undermine the intent and purpose of this
Agreement.
Section 5.2 Additional Covenants.
5.2.1 To the extent that BSD maintains any of the BPH Business
Assets after the Closing, BSD shall maintain insurance and
cause each of its subsidiaries to maintain insurance as to the
BPH Business Assets and its related products and business,
with financially sound and reputable insurers, against such
casualties and contingencies and of such types and in such
amounts as is customary for companies similarly situated.
5.2.2 Except for transactions approved by a majority of the
disinterested directors of the Board of Directors, neither BSD
(with respect to the BPH Business Assets) nor the Company nor
any of their subsidiaries shall enter into any transaction
with any director, officer, employee or holder of more than 5%
of the outstanding capital stock of any class or series of
capital stock of the Company or BSD or any of its
subsidiaries, member of the family of any such person, or any
corporation, partnership, trust or other entity in which any
such person, or member of the family of any such person, is a
director, officer, trustee, partner or holder of more than 5%
of the outstanding capital stock thereof, with the exception
of transactions which are consummated upon terms that are no
less favorable than would be available if such transaction had
been effected at arms-length, in the reasonable judgment of
the Board of Directors ("Related Person Transactions").
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5.2.3 The Company and BSD, with respect to the BPH Business
Assets, shall comply and cause any subsidiary to comply with
all applicable laws, rules, regulations and orders.
5.2.4 The Company and BSD, with respect to the BPH Business
Assets, shall keep, and cause any subsidiary to keep, adequate
records and books of account in which accurate and correct
entries will be made in accordance with generally accepted
accounting principles consistently applied.
5.2.5 The Company shall not make any change in the nature of
its business. BSD shall not make any change in the nature of
the BPH Business Assets without consultation with the
Purchasers. BSD shall comply with its obligations under the
Bowman Agreement and cause such license to remain in full
force and effect and shall not agree to any modification of
the Bowman Agreement without the prior written consent of the
Company.
Section 5.3 Reporting Obligations.
BSD or the Company, as appropriate, shall furnish to the
Purchasers:
5.3.1 As soon as practicable after receipt thereof, copies of
any written communications, including, without limitation, any
communications with the FDA, relating to any of the BPH
Business Assets;
5.3.2 Promptly after the commencement thereof, notice of all
actions, suits, claims, proceedings, investigations and
inquiries that could materially adversely affect the Company
or the BPH Business Assets in any manner;
5.3.3 Promptly, from time to time, any infringement of,
challenge to the validity or ownership of, or use of the
Intellectual Property that may come to the Company's or BSD's
attention.
5.3.4 Promptly, from time to time, such other information
regarding the business, prospects, financial condition,
operations, property or affairs of the Company or the BPH
Business Assets as the Purchasers reasonably may request; and
5.3.5 Representatives of the Purchasers shall be entitled to
inspect the properties, books and records of the Company and
BSD and their subsidiaries and interview the officers,
directors and senior employees of the Company and BSD and
their subsidiaries, including the Company's or BSD's
accountants, attorneys and other advisors, regarding the
business of the Company and the BPH Business Assets during
regular business hours after reasonable notice to BSD.
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Section 5.4 Confidentiality. Each party shall, and shall use
its reasonable efforts to cause its affiliates, directors, officers, agents,
advisors, employees and authorized representatives (collectively, "Agents") to,
(i) hold in confidence all confidential information obtained by it from the
disclosing party or such disclosing party's Agents pursuant to this Agreement
(unless such information (a) is or becomes generally available to the public or
the publishing industry other than as a result of wrongful acts of the
non-disclosing party, (b) is in the possession of the non-disclosing party or
its Agents prior to such disclosure (not by unlawful means), (c) is disclosed to
the non-disclosing party or its Agents on a non-confidential basis by a person
other than the disclosing party or its Agents that, to the non-disclosing
party's knowledge is not restricted from disclosing such information to the
non-disclosing party by any contractual, fiduciary or other legal obligation, or
(d) is developed by the non-disclosing party without the benefit of the
confidential information) and (ii) use all such data and information for the
purpose of consummating the transactions contemplated hereby, except, that the
parties may disclose such information (x) as required by law pursuant to court
order, or, if non-disclosure is likely to subject the party to some penalty or
liability as evidenced by opinion of independent counsel or (y) in connection
with legal proceedings relating to or arising out of the transactions
contemplated hereby. In the event a party is required by clauses (x) and (y) of
the preceding sentence to disclose any confidential information of the
disclosing party such non-disclosing party will (i) promptly notify the
disclosing party of the existence, terms and circumstances surrounding such
required disclosure, (ii) consult with the disclosing party on the advisability
of taking legally available steps to resist or narrow such request, and (iii) if
disclosure of such information is required, furnish only such portion of the
information as it is legally compelled to disclose and exercise its reasonable
best efforts to obtain, at the disclosing party's expense, an order or other
reliable assurance that confidential treatment will be accorded to such portion
of the disclosed information that the disclosing party may designate. In the
event this Agreement is terminated, each party shall within three business days
return or destroy (and certify to the other party the destruction of), if so
requested by the other party, all nonpublic documents obtained from such other
party in connection with the transactions contemplated hereby and any copies
thereof which may have been made by such first party and shall use its
reasonable efforts to cause its Agents to whom such documents were furnished
promptly to return or destroy (and certify to the other party the destruction
of) such documents and any copies thereof any of them may have had.
Section 5.5 Public Announcements. Neither the Purchaser, the
Company nor BSD shall (and each shall use its reasonable efforts to cause its
subsidiaries, affiliates, directors, officers, employees and authorized
representatives not to), issue any press release, make any public announcement
or furnish any written statement to its employees or stockholders generally
concerning the transactions contemplated by this Agreement without the consent
of the other parties, which consent shall not be unreasonably withheld or
delayed.
Section 5.6 Exclusivity. (a) Each of the Company and BSD agree
that unless this Agreement has been terminated by the mutual agreement of the
parties, neither the Company, BSD nor their respective affiliates,
representatives, employees or agents (collectively, "Agents") will, commencing
on the date of this Agreement and continuing through November 30, 1997 (the
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"Exclusive Period"), directly or indirectly, (i) solicit, encourage or negotiate
any proposal (whether solicited or unsolicited) for, or execute any agreement
relating to, a sale of all or any part of the Shares or the Company's assets or
the BPH Business Assets or a sale of any equity or debt security of the Company
or BSD or any merger, consolidation, recapitalization or similar transaction
involving the Company or BSD with any other party, which, in any such case,
would include or relate to the BPH Business Assets (any of the foregoing is
referred to as an "Acquisition Proposal"), (ii) provide any information
regarding the Company, BSD or the Shares to any third party for the purpose of
soliciting, encouraging or negotiating an Acquisition Proposal (it being
understood that nothing contained in clauses (i) or (ii) above shall restrict
the Company, BSD or any of its Agents from providing information as required by
legal process), or (iii) operate the business of the Company or the BPH Business
Assets other than in the ordinary course of business in a manner that negatively
impacts BSD's ability to transfer the BPH Business Assets.
(b) In the event that BSD does not consummate the transaction
contemplated hereby as a result of BSD's breach of Section 5.6(a) hereof, BSD
shall be liable to the Purchasers for all costs and expenses actually incurred
by the Purchasers in pursuit of the transaction, together with the payment of
liquidated damages to the Purchaser in the agreed upon amount of $250,000.
Section 5.7 Board Representation; Advisory Fees. (a) Until a
future Financing Event, as such term is defined in the Certificate of
Designation, the Board of Directors of the Company shall consist of one (1)
representative of Oracle, one (1) representative of BSD, Manker and at least two
(2) independent third-party directors elected by Oracle and BSD. The parties
hereto agree to vote their Shares to elect the Board of Directors as set forth
in this Section 5.7. The Company shall diligently attempt to obtain a
commercially reasonable directors and officers liability insurance policy that
is reasonably satisfactory to the Purchasers.
(b) The Company hereby grants to the Purchasers the first
option to provide and/or participate in any future financing that the Company
may require. The Purchasers shall be entitled to customary, appropriate and
reasonable advisory fees in the event that the Purchasers provide acquisition,
financing or other advisory services to the Company.
Section 5.8 Restriction on Transfer. (a) As long as any
Preferred Shares remain issued and outstanding, BSD shall not, directly or
indirectly, sell, assign or otherwise transfer, pledge as security, mortgage or
otherwise encumber any Shares until a date which is at least the earlier of
twenty four (24) months after the Initial Closing Date and six (6) months after
the Milestone or Option Closing Date.
(b) The parties recognize that there is no ready market for
the Shares and that the success of the Company is and will continue to be based
upon the effort of and relationship between the parties. Accordingly, BSD
acknowledges that the provisions of this Section 5.8 are reasonable and
necessary for the protection of the Company and that any breach or threatened
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breach of this Section would, in all likelihood, cause irreparable injury. For
this reason, among others, if BSD breaches or threatens to breach any of the
provisions contained in this Section 5.8, the Company and the Purchasers shall
be entitled to obtain a temporary restraining order, an injunction or other
equitable relief from any court having jurisdiction. No bond or surety shall be
required. In addition, nothing contained herein shall be construed as
prohibiting or preventing the Company or the Purchasers from pursuing any other
available remedies for any actual or threatened breach.
Section 5.9 EDAP and Urologix Royalty Payments. Except as
otherwise provided herein, BSD shall retain the right to receive the royalty and
other payments that may become payable under the certain License Agreements with
EDAP Technomed, Inc. ("EDAP") and Urologix.
Section 5.10 Urologix Lawsuit. (a) During the ninety (90) day
period following the Initial Closing Date (the "Settlement Phase"), BSD shall
retain the right to settle the current litigation with Urologix (the "Urologix
Lawsuit"). During the Settlement Phase, the Company agrees to consult with BSD
concerning the settlement discussions.
(b) If after the expiration of the Settlement Phase the
Urologix Lawsuit has not been finally settled, the Company shall assume full
responsibility for the prosecution and/or defense of the Urologix Lawsuit,
including responsibility for the costs and expenses and all settlement
negotiations and decisions. BSD shall have the right to approve any settlement
that requires the payment of money by BSD and the Company agrees that it will
not assign any of the patents listed on Exhibit A to Urologix as part of such
settlement. Any damages or other awards obtained by the Company in settling the
Urologix Lawsuit shall be divided between the Company and BSD in proportion to
the amount of legal costs and expenses (including any expenses incurred during
the Settlement Phase) paid by each company. BSD and the Company shall provide
each other with appropriate invoices and other statements in order to determine
the amount of costs and expenses incurred in the Urologix Lawsuit. In the event
of such transfer, BSD shall deliver, or cause to be delivered, to the Company
(i) an assignment of such rights concerning the Urologix Lawsuit in form and
substance satisfactory to the Purchasers, and (ii) all documents and
correspondence relating to the Urologix Lawsuit.
ARTICLE VI
CONDITIONS TO THE CLOSING
Section 6.1 Conditions to Obligations of Purchasers to the
Initial Closing. The obligations of Purchasers hereunder are subject to the
fulfillment or satisfaction, on and as of the Initial Closing Date, of each of
the following conditions (any one or more of which may be waived by the
Purchasers in their sole discretion, but only in a writing signed by the
Purchasers):
(a) Opinion. The Purchasers shall have received the opinion of
Parsons Behle & Latimer, counsel to BSD, in a form reasonably satisfactory to
the Purchasers.
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(b) Secretary's Certificate. The Purchasers shall have
received a certificate of the Secretary of the Company and BSD (in form and
substance satisfactory to the Purchasers) certifying (i) that attached thereto
are true and complete copies of the Certificate of Incorporation, Certificate of
Designation and Bylaws of Company and the Certificate of Incorporation and
By-laws of BSD, (ii) that attached thereto are true and complete copies of the
resolutions of the Board of Directors of Company and BSD authorizing the
execution, delivery and performance of this Agreement and any other documents,
instruments and certificates required to be executed by it in connection
herewith and approving the consummation of the transactions in the manner
contemplated hereby including, but not limited to, the authorization and
issuance of the Shares, (iii) the names and true signatures of the officers of
the Company and of BSD signing this Agreement and all other documents to be
delivered in connection with this Agreement, and (iv) such other matters as the
Purchasers may reasonably request.
(c) Filing of Certificate of Designation. The Certificate of
Designation of Company substantially in the form attached hereto as Exhibit C,
shall have been filed with the Secretary of State of the State of Delaware.
(d) Performance; Representation and Warranties. Each of the
Company and BSD shall have performed and complied in all material respects with
all agreements and conditions contained in this Agreement which are required to
be performed or complied with by each of them prior to or at the Initial
Closing, the representation and warranties of the Company and BSD contained
herein shall be true and correct on and as of the Initial Closing Date as though
made on such date, and the Company and BSD shall have delivered to the
Purchasers a certificate of a duly authorized officer of each of the Company and
BSD to such effect.
(e) Approvals, Etc. Approval and consent of all appropriate
governmental regulatory agencies and the receipt of approval and/or consent from
all other appropriate parties, and all consents which may be required under any
of the Company's agreements (or otherwise), with respect to the transactions
contemplated hereby shall have been obtained, including all assignments or
consents required by the FDA.
(f) No Material Adverse Effect. There shall have occurred no
event which, in the Purchasers' reasonable discretion, could result in a
Material Adverse Effect on the Company or the BSD Business Assets between the
date hereof and the date of the Initial Closing and the Company and BSD (with
respect to the BPH Business Assets) shall have operated its business in the
ordinary course, consistent with its past practices during such period.
(g) No Litigation. Except for the Urologix Lawsuit, no
litigation, arbitration or other legal or administrative proceeding shall have
been commenced or be pending by or before any court, arbitration panel or
governmental authority or official, and no statute, rule or regulation of any
foreign or domestic, national or local government or agency thereof shall have
been enacted after the date of this Agreement, and no judicial or administrative
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decision shall have been rendered which enjoins or prohibits, or seeks to enjoin
or prohibit, the consummation of all or any of the transactions contemplated by
this Agreement.
(h) Employment Agreement. Manker shall have entered into an
employment agreement with the Company on terms that are reasonably satisfactory
to the Purchaser, to act as the President and Chief Executive Officer of the
Company.
(i) Non-Competition Agreement. BSD shall have entered into a
non competition agreement with the Company in substantially the form attached
hereto as Exhibit E.
(j) Consulting Agreement. BSD shall have entered into a
Consulting Agreement with the Company in substantially the form attached hereto
as Exhibit F.
(k) Supply Agreement. BSD shall have entered into a Supply
Agreement with the Company in substantially the form attached hereto as Exhibit
G.
(l) Oracle/Manker. Oracle and Manker shall have entered into
an agreement, in form and substance satisfactory to Oracle, governing the
control and disposition of the Shares owned by Manker.
(m) Transfer Documents. BSD shall have delivered to the
Company any and all agreements and other documents, including all patent or
trademark assignments and bills of sale, required to transfer the BPH Business
Assets to the Company in form and substance reasonably satisfactory to the
Purchasers.
(n) Assignment. BSD shall have delivered to the Company an
assignment of the Medizin-Technik Agreement in form and substance reasonably
satisfactory to the Purchasers.
(o) Bowman Sub-License. BSD shall have delivered to the
Company a sub-license of the Bowman Agreement in form and substance reasonably
satisfactory to the Purchasers.
(p) License Agreement for Other Technology. BSD shall have
delivered to the Company a perpetual royalty-free license for all other patents
and intellectual property relating to the treatment of any conditions or
diseases (excluding malignant cancers) of the prostate gland, including, but not
limited to, benign prostatic hyperplasia (BPH) and prostatitis (the "Business of
the Company") that is not part of the patents and intellectual property being
assigned to the Company, in form and substance reasonably satisfactory to the
Purchasers.
(q) Company License to BSD. BSD shall have received a
perpetual royalty free license from the Company for the use of the technology
being transferred by BSD to the Company relating to the treatment by
thermotherapy of malignant or benign diseases (the "Business of BSD"), in form
and substance reasonably satisfactory to BSD, the Company and the Purchasers.
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(r) Delivery of Schedules. BSD shall use its diligent efforts
to deliver to the Purchasers within seven (7) days hereof Schedules 3.4, 3.9,
3.12, 3.13, 3.17, 3.21, 3.22, 3.29, 3.32 and 7.1 to this Agreement. If it fails
to do so, then each such Schedule shall be deemed to have been delivered and to
state "none," except for Schedule 3.13 which shall be deemed to set forth the
Intellectual Property listed on Exhibit A. In the event that such Schedules, if
delivered, shall not be satisfactory to the Purchasers in any respect, then, in
addition to any other rights or remedies that Purchasers may have hereunder, the
Purchasers shall have the right to terminate this Agreement.
(s) IDE Assignment. BSD shall have delivered to the Company an
assignment of its rights under all of its IDE's relating to the BPH Business
Assets, in form appropriate and suitable for filing with the US Food and Drug
Administration (FDA) and promptly upon the Initial Closing shall effect all
filings reasonably requested by the Company and permitted by applicable law
which are necessary for BSD to transfer such IDE's to the Company; provided,
however, that to the extent any such requested filings or transfer are not
permitted by applicable law BSD shall reasonably cooperate with the Company
prior to and after the Initial Closing to vest, to the fullest extent possible,
the Company with all rights to the IDE's.
Section 6.2 Conditions to Obligations of the Purchasers to
Milestone or Option Closing. The obligations of Purchasers hereunder are subject
to the fulfillment or satisfaction, on and as of the Milestone or Option Closing
Date, of each of the following conditions (any one or more of which may be
waived by the Purchasers in their sole discretion, but only in a writing signed
by the Purchasers):
(a) Secretary's Certificate. The Purchasers shall have
received a certificate of the Secretary of the Company (in form and substance
satisfactory to the Purchasers) certifying (i) that attached thereto are true
and complete copies of the Certificate of Incorporation, Certificate of
Designation and Bylaws of the Company, (ii) that attached thereto are true and
complete copies of the resolutions of the Board of Directors of the Company
authorizing the execution, delivery and performance of this Agreement and any
other documents, instruments and certificates required to be executed by it in
connection herewith and approving the consummation of the transactions in the
manner contemplated hereby including, but not limited to, the authorization and
issuance of the Shares, (iii) the names and true signatures of the officers of
the Company signing this Agreement and all other documents to be delivered in
connection with this Agreement, and (iv) such other matters as the Purchasers
may reasonably request.
(b) Performance; Representation and Warranties. Each of the
Company and BSD shall have performed and complied in all respects with all
agreements and conditions contained in this Agreement which are required to be
performed or complied with by Company or BSD prior to or at the Milestone or
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Option Closing, the representations and warranties of the Company and BSD
contained herein shall be true and correct on and as of the Milestone or Option
Closing Date as though made on such date, and the Company and BSD shall have
delivered to the Purchasers a certificate of a duly authorized officer of each
of the Company and BSD to such effect.
(c) Approvals, Etc. Approval and consent of all appropriate
governmental regulatory agencies and the receipt of approval and/or consent from
all other appropriate parties, and all consents which may be required under any
of the Company's agreements (or otherwise), with respect to the transactions
contemplated hereby shall have been obtained.
(d) No Material Adverse Effect. There shall have occurred no
event which, in the Purchasers' reasonable discretion, could result in a
Material Adverse Effect on the Company between the date hereof and the date of
the Milestone or Option Closing and the Company shall have operated its business
in the ordinary course, consistent with its past practices during such period.
Section 6.3 Conditions to Obligations of the Company and BSD
to the Initial Closing. The obligations of the Company and BSD hereunder are
subject to the fulfillment or satisfaction, on and as of the Initial Closing
Date, of the following conditions (which may be waived by the Company or BSD, in
their sole discretion, but only in a writing signed by Company or BSD):
(a) Performance; Representations and Warranties. The
Purchasers shall have performed and complied in all respects with all agreements
and conditions contained in this Agreement which are required to be performed or
complied with by the Purchasers prior to or at the Closing, the representations
and warranties of each Purchaser, severally and not jointly, contained herein
shall be true and correct on and as of the Closing Date as though made on such
date, and the Purchasers shall have delivered to the Company a certificate to
such effect.
(b) Investment Capability. The Purchasers shall have provided
the Company and BSD with evidence reasonably satisfactory to the Company and BSD
of Purchasers' ability to satisfy its funding obligations pursuant to Article I
and Article II hereof.
(c) Company License to BSD. BSD shall have received a
perpetual royalty free license from the Company for the use of the technology
being transferred by BSD to the Company relating to the treatment by
thermotherapy of malignant or benign diseases (the "Business of BSD"), in form
and substance reasonably satisfactory to BSD, the Company and the Purchasers.
(d) Employment Agreement. Manker shall have entered into an
employment agreement with the Company on terms that are reasonably satisfactory
to the Company, to act as the President and Chief Executive Officer of the
Company.
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(e) Non-Competition Agreement; Consulting Agreement and Supply
Agreement. The Company shall have entered into a Non Competition Agreement,
Consulting Agreement and Supply Agreement with BSD in substantially the forms
attached hereto as Exhibits E, F and G, respectively.
ARTICLE VII
COVENANTS
Section 7.1 Interim Operations. During the period from the
date of this Agreement to the later of the Milestone or Option Closing Date,
except with the Purchasers' prior specific written consent or as expressly
contemplated by this Agreement, BSD, with respect to the BPH Business Assets,
and the Company shall operate its business only in the ordinary and usual course
consistent with past practices and to preserve intact its business organization
and good will in all material respects. Additionally, during the period from the
date of this Agreement to the later of the Milestone or Option Closing Date,
BSD, with respect to the BPH Business Assets for items (xi), (xiv) and (xv)
below and only with respect to those actions which materially affects the BPH
Business Assets for all other items below, and the Company, will not to do any
of the following (unless otherwise expressly contemplated by this Agreement or
permitted in writing by the Purchasers):
(i) amend its Certificate of Incorporation, any Certificate of
Designation or By-Laws, as the case may be;
(ii) issue, sell or authorize for issuance or sale, shares of
any class of its securities (including, but not limited to, by
way of stock split or dividend) or any subscriptions, options,
warrants, rights or covertible securities, or enter into any
agreements or commitments of any character obligating it to
issue or sell any such securities;
(iii) redeem, purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock or any option,
warrant or other right to purchase or acquire any such shares;
(iv) declare or pay any dividend or other distribution
(whether in cash, stock or other property) with respect to its
capital stock;
(v) voluntarily sell, transfer, surrender, abandon or dispose
of any of its assets or property rights (tangible or
intangible), other than in the ordinary course of business
consistent with past practices;
(vi) grant or make any mortgage or pledge or subject itself or
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any of its properties or assets to any lien, charge or
encumbrance of any kind, except liens for taxes not currently
due;
(vii) create, incur or assume any liability or indebtedness,
except in the ordinary course of business consistent with past
practices;
(viii) make or commit to make any capital expenditures
exceeding in the aggregate Ten Thousand Dollars ($10,000.00);
(ix) become subject to any guaranty;
(x) grant any increase (outside the ordinary course of
business consistent with past practices) in the compensation
payable or to become payable to directors, officers or
employees (including, without limitation, any such increase
pursuant to any bonus, pension, profit-sharing or other plan
or commitment);
(xi) except as listed on Schedule 7.1, enter into any
agreement which would be a Material Agreement, or amend or
terminate any existing Material Agreement, which is outside
the ordinary course of business consistent with past
practices. With respect to the foregoing, the Company or BSD
shall provide the Purchasers with a complete list of any such
Material Agreement not entered into in the ordinary course of
business between the date hereof and the Closing Date;
(xii) alter the manner of keeping its books, accounts or
records, or change in any manner the accounting practices
therein reflected;
(xiii) except as set forth on Schedule 7.1, enter into any
commitment or transaction other than in the ordinary course of
business consistent with past practices;
(xiv) do any act, or omit to do any act which would cause a
violation or breach of any of the representations, warranties
or covenants of the Company or BSD set forth in this
Agreement;
(xv) take any action which has a material adverse effect on
the condition (financial or otherwise), results of operations,
assets, liabilities, properties, business or prospects of the
Company or BPH Business Assets, or on employee, customer or
supplier relations;
(xvi) alter in any manner any existing working capital
facilities; or
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(xvii) agree, whether in writing or otherwise, to do any of
the foregoing.
Section 7.2 Access. BSD shall afford to the Purchasers and
their agents and representatives, access throughout the period prior to the
Closing Date to the properties, books, records and contracts of BSD (with
respect to the BPH Business Assets), for the purpose of permitting the
Purchasers to fully investigate and perform a due diligence review of BSD as it
relates to the BPH Business Assets and properties, and financial condition,
provided that such access shall be granted during normal business hours in such
a manner as to not unreasoably interfere with BSD's normal business operations.
During such period, BSD shall furnish promptly to the Purchasers copies of (i)
all correspondence received or sent by or on behalf of BSD from or to any
governmental authority and (ii) all other information and documents, in each
case concerning the BPH Business Assets and personnel as the Purchasers may
reasonably request.
Section 7.3 Confidentiality (through Closing Date). Except as
otherwise required in the performance of obligations under this Agreement and
except as otherwise required by law, any non-public information received by a
party or its advisors from the other party pursuant to this Article VII shall be
kept confidential and shall not be used or disclosed for any purpose other than
in furtherance of the transactions contemplated by this Agreement. Such
confidential information includes, without limitation, audited and unaudited
financial statements that show BSD's current and projected costs, and detailed
financial information supporting such statements. The Purchasers shall not use
(or permit to be used) any confidential information in any manner to compete
against BSD, whether with respect to corporate acquisitions, sales, financing,
development, management, investment, or otherwise. The obligation of
confidentiality shall not extend to information (a) which is or shall become
generally available to the public other than as a result of an unauthorized
disclosure by a party to this Agreement or a person to whom a party has provided
such information, (b) which was available to a party to this Agreement on a
nonconfidential basis prior to its disclosure by one party to the other pursuant
to this Agreement or (c) which is disclosed by the Purchasers in any legal
proceeding requiring any such disclosure. Upon termination of this Agreement,
each party shall promptly return any Confidential Information received from the
other party and, upon request, shall destroy any copies of such information in
its possession. The covenants of the parties contained in this Section 7.3 shall
survive any termination of this Agreement until the earlier of (i) two (2) years
from the date hereof, or (ii) the date when such information becomes generally
available to the public, but shall terminate at the Closing, if it occurs, with
respect to information concerning the Company.
Section 7.4 Notification. Each party to this Agreement shall
promptly notify each other party in writing of the occurrence, or pending or
threatened occurrence, of any event that would consttute a breach or violation
of this Agreement by any party or that would cause any representation or
warranty made by the notifying party in this Agreement to be false or misleading
in any respect (including without limitation, any event or circumstance which
would have been required to be disclosed on any schedule to this Agreement had
such event or circumstance occurred or existed on or prior to the date of this
Agreement). Any such notification shall not limit or alter any of the
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representations, warranties or covenants of the parties set forth in this
Agreement nor any rights or remedies a party may have with respect to a breach
of any representation, warranty or covenant.
Section 7.5 Information. The Company shall furnish to the
Purchasers and BSD:
(a) (i) as soon as practicable and in any event within 15 days
after the end of each month and (ii) as soon as practicable and in any event
within 30 days after the close of each fiscal quarter in each fiscal year of the
Company, an unaudited balance sheet of the Company, a statement of income of the
Company, and a statement of cash flows of the Company, as at the end of and for
the period commencing at the end of the previous fiscal year and ending with
such month and quarter, as the case may be, setting forth in comparative form
the corresponding figures for the appropriate periods of the preceding fiscal
year prepared by the Company, all in reasonable detail and certified by the
chief accounting officer of the Company to be true and correct, subject to
normal recurring year-end audit adjustments, and the Company shall use its best
efforts to ensure that all such financial statements comply with generally
accepted accounting principles;
(b) as soon as practicable and in any event within ninety (90)
days after the close of each fiscal year then ended, of the Company, a balance
sheet of the Company, a statement of income of the Company, and a statement of
cash flows of the Company, as at the end of and for the fiscal year then ended,
setting forth the corresponding figures of the previous fiscal year in
comparative form, all in reasonable detail and certified (without any
qualification or exception deemed material by the Purchaser) by the independent
certified public accountants of the Company;
(c) as soon as practicable and in any event within forty (45)
days after the close of each of the first three quarters of each fiscal year of
the Company and within ninety (90) days after the close of each such fiscal
year, a certificate signed by the chief executive officer and chief financial
officer of the Company, stating that a review of the activities of the Company
during such period has been made under their immediate supervision with a view
to determining whether the Company has observed, performed and fulfilled all of
its obligations under this Agreement and the results of such review;
(d) as soon as practicable and in any event within ninety (90)
days after the close of each fiscal year then ended, of the Company, an analysis
of the performance of the Company, certified by the Chief Executive Officer of
the Company, comparing the financial statements of the Company for the year then
ended with the projections;
(e) promptly upon receipt thereof, copies of all financial
reports (including, without limitation, management letters), if any, submitted
to the Company by its auditors, in connection with each annual, interim or
special audit of their respective books by such auditors;
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(f) if requested, prior to January 31 in each year, a summary
of business plans and/or financial operating projections for the fiscal year of
the Company for such year in form and detail satisfactory to the Purchasers;
(g) promptly upon the commencement thereof, written notice of
any litigation, including arbitrations, and of any proceedings before any
governmental agency which would, if successful, materially and adversely affect
the Company or where the amount involved exceeds $25,000;
(h) promptly upon any occurrence thereof, written notice of
the termination or default under any contract, or aggregate number of contracts
within any one hundred and fifty (150) day period, pursuant to which more than
five percent (5%) of the gross revenues of the Company are generated;
(i) within 30 days after request by either Purchaser, reports
showing outstanding accounts receivables and aging schedules relating thereto
for the preceding month; and
(j) with reasonable promptness, such other information
respecting the business, operations and financial condition of the Company as
the Purchasers or BSD may from time to time reasonably request.
Section 7.6 Taxes and Claims. The Company shall duly pay and
discharge (a) all taxes, assessments and governmental charges upon or against
the Company or properties or assets prior to the date on which penalties attach
thereto, unless and to the extent that such taxes are being diligently contested
in good faith and by appropriate proceedings, and appropriate reserves therefor
have been established, and (b) all lawful claims, whether for labor, materials,
supplies, services or anything else which might or could, if unpaid, become a
lien or charge upon the properties or assets of the Company unless and to the
extent only that the same are being diligently contested in good faith and by
appropriate proceedings and appropriate reserves therefor have been established.
Section 7.7 Insurance.
(a) The Company shall (i) keep all of its properties
adequately insured at all times with responsible insurance carriers against loss
or damage by fire and other hazards, (ii) maintain adequate insurance at all
times with responsible insurance carriers against liability on account of damage
to persons and property and under all applicable workmen's compensation laws,
and (iii) maintain adequate insurance covering such other risks as the Purchaser
may reasonably request. The Company shall name Oracle and BSD as additional
insureds and as loss payees on all such policies, as well as on all key-man life
insurance policies of the Company, whether presently existing or hereafter
obtained. For the purposes of this Section 7.7(a), insurance shall be deemed
adequate if the same is not less extensive in coverage and amount than is
customarily maintained by other persons engaged in the same or a similar
business similarly situated.
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(b) The Company shall, from time to time upon request of the
Purchasers, promptly furnish or cause to be furnished to the Purchasers and BSD
evidence, in form and substance satisfactory to them, of the maintenance of all
insurance required by this Section 7.7 to be maintained. From time to time
during the term hereof, the Purchasers and BSD shall have the right upon notice
to the Company, to require the Company to maintain additional insurance coverage
or insurance coverage in additional amounts if for any reason the Purchasers
reasonably determine that the existing insurance maintained by the Company is
insufficient.
Section 7.8 Books and Reserves. The Company shall:
(a) maintain, at all times, true and complete books, records
and accounts in which true and correct entries shall be made of its transactions
in accordance with generally accepted accounting principles consistently applied
and consistent with those applied in the preparation of its financial
statements, and
(b) by means of appropriate quarterly entries, reflect in its
accounts and in all financial statements furnished proper liabilities and
reserves for all taxes and proper reserves for depreciation, renewals and
replacements, obsolescence and amortization of its properties and bad debts, all
in accordance with generally accepted accounting principles consistently
applied, as above described.
Section 7.9 Condition of Property. The Company shall keep its
properties in good repair, working order and condition and, from time to time,
make all needful and proper repairs, renewals, replacements, additions and
improvements thereto, so that the business carried on may be properly and
advantageously conducted at all times in accordance with prudent business
management.
Section 7.10 Inspection. The Company shall allow any
representative of the Purchasers to visit and inspect any of the properties of
the Company, to examine the books of account and other records and files of the
Company, to make copies thereof and to discuss the affairs, business, finances
and accounts of the Company with its officers and employees, all during normal
business hours and as often as the Purchasers may request.
Section 7.11 Perform Covenants. The Company shall (a) make
full and timely payment of the principal of and interest and premium, if any, on
all indebtedness of the Company to the Purchasers, whether now existing or
hereafter arising, (b) duly comply with all the terms and covenants contained
herein and in each of the instruments and documents given to the Purchasers in
connection with or pursuant to this Agreement, all at the times and places and
in the manner set forth herein or therein, and (c) at all times maintain the
liens, if any, and security interests provided for under or pursuant to this
Agreement and any instrument or document delivered in connection herewith as
valid and perfected liens and security interests on the property covered
thereby.
Section 7.12 Further Assurances. Each party hereto shall, at
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its cost and expense, upon reasonable request of any other party duly execute
and deliver, or cause to be duly executed and delivered, such further agreements
and instruments and do and cause to be done such further acts as may be
reasonably necessary or proper in the opinion of the other parties to carry out
more effectually the provisions and purposes of this Agreement including, but
not limited to, entering into those agreements as listed in Article VI.
Section 7.13 Officers' Certificate. The Company agrees that
for so long as any shares of Convertible Preferred Stock is outstanding, Charles
Manker, or his successor as President and Chief Executive Officer of the Company
shall deliver to Oracle within five (5) days on the end of each fiscal quarter
an officers' certificate restating and reaffirming all of the representations
and warranties and the compliance with all covenants and continuing obligations
contained herein.
Section 7.14 Negative Covenants. For eighteen (18) months
after the Initial Closing, the Company will not, without the consent of Oracle,
take or effect any of the following transactions or acts:
(a) Any amendment, alteration or repeal of any of the
provisions of the Certificate of Incorporation, Certificate of Designation, or
the By-laws of the Company including, but not limited to (i) an increase in the
number of authorized shares of the Preferred Stock, (ii) any change that
adversely affects the rights, preferences or powers of the Preferred Stock or of
the holders thereof, or (iii) any decrease in the required time for the giving
of any notice to which the holders of Convertible Preferred Stock may be
entitled;
(b) The authorization or creation of, or the increase in the
number of authorized shares of any stock of any class, or any security
convertible into stock of any class, or the authorization or creation of any new
class of preferred stock (or any action which would result in another series of
preferred stock), ranking prior to or on a parity with the Convertible Preferred
Stock with respect to rights upon a liquidation or in any other respect;
(c) Adoption and implementation by the Company of strategic
and operating plans including but not limited to any plan that changes the
business of the Company or that involves the entry of the Company into a
business not currently conducted by the Company and the design and
implementation of any clinical trials;
(d) The employment of a new Chief Executive Officer, Chief
Financial Officer, Chief Operating Officer or President of the Company, and the
termination of such existing executives and the employment of any new employees;
(e) Make or commit any capital expenditures in excess of
$100,000;
(f) Reorganization, recapitalization, sale of stock, tender
offer or sale, conveyance, or otherwise dispose of or encumber all or
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substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than 50%
of the voting power of the corporation is disposed of;
(g) Approval of any legal settlement;
(h) Approval of any related party transaction;
(i) Any other transaction directly or indirectly, take any
action, or permit any action to be taken, solely or primarily for the purpose of
increasing the value of any class of stock of the Company if the effect of such
action is reasonably likely to reduce the value, security, rights or preferences
of the Preferred Stock.
(j) Redeem, purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock or any option, warrant or other
right to purchase or acquire any such shares;
(k) Declare or pay any dividend or other distribution (whether
in cash, stock or other property) with respect to its capital stock;
(l) Voluntarily sell, transfer, surrender, abandon or dispose
of any of its assets or property rights (tangible or intangible), other than in
the ordinary course of business consistent with past practices;
(m) Grant or make any mortgage or pledge or subject itself or
any of its properties or assets to any material lien, charge or encumbrance of
any kind, except liens for taxes not currently due;
(n) Create, incur or assume any liability or indebtedness in
excess of $100,000;
(o) Become subject to any material guaranty;
(p) Grant any increase in the compensation payable or to
become payable to directors or officers (including, without limitation, any such
increase pursuant to any bonus, pension, profit-sharing, incentive option or
other plan or commitment);
(q) Alter the manner of keeping its books, accounts or
records, or change in any manner the accounting practices therein reflected;
(r) Enter into any commitment or transaction other than in the
ordinary course of business consistent with past practices or make any change in
the nature of its business;
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(s) Do any act, or omit to do any act, or permit to the extent
within the Company's control, any act or omission to act which would cause a
violation or breach of any of its representations, warranties or covenants set
forth herein or the related documents thereto;
(t) Intentionally take any action which would have a material
adverse effect on the condition (financial or otherwise), results of operations,
assets, liabilities, properties, business or prospects of the Company, or on
employee, customer or supplier relations;
(u) Otherwise take any action, directly or indirectly, which
would undermine the intent and purpose of this Agreement; or
(v) Agree, whether in writing or otherwise, to do any of the
foregoing.
Section 7.15 Use of Proceeds. Set forth on Exhibit H attached
hereto is the Company's operating plan (the "Operating Plan") which contains,
among other things, the use of proceeds from the sale of the Preferred Shares.
The Company covenants and agrees that the proceeds of the sale of the Preferred
Shares shall be used by the Company only for working capital purposes and to
finance Company's development, engineering, manufacturing, clinical studies,
marketing, distribution and FDA approval of a patented/proprietary microwave
technology for the treatment of any conditions or diseases of the prostate
gland, including but not limited to Benign Prostatic Hyperplasia and Prostatitis
(excluding malignant cancers of the prostate), in accordance with the financial
projections and initial operating plan of the Company. Additionally, the Company
agrees to reserve $125,000 after each Closing for the payment of the investment
banking fees described in Section 3.28.
Section 7.16 Liquidation of Company. If within eighteen (18)
months after the Initial Closing Date the Company has failed to achieve at least
fifty (50%) percent of the financial projections and targets set forth on the
Operating Plan, then the Purchasers shall have the right to merge, sell (either
all of the stock or assets of the Company) consolidate or dissolve the Company.
Upon the Purchasers' election to dissolve the Company, the Company shall cease
to carry on its business and shall wind-up its affairs and liquidate. Any such
liquidation or dissolution of the Company shall be conducted by an independent
third party whose objective shall be to maximize shareholder value, consistent
with the respective rights of the shareholders of the Company as set forth
herein, in the Certificate of Incorporation of the Company, as amended from time
to time, and the Certificate of Designation of the Company.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 Survival of Representations and Warranties;
Indemnity.
44
<PAGE>
(a) Survival of Representations. Except as otherwise provided
herein, the representations, warranties, covenants and agreements of Company and
BSD contained in or made pursuant to this Agreement shall survive the execution
and delivery of this Agreement and each Closing Date and shall in no way be
affected by any investigation of the subject matter thereof made by or on behalf
of the Purchasers.
(b) Indemnification. (A) Each of the Company, with respect to
its representations, warranties and covenants, and BSD, with respect to its
representations, warranties and covenants, agree, severally, to indemnify and
hold harmless each Purchaser, its affiliates, and its respective successors and
assigns, from and against any losses, damages, or expenses which are caused by
or arise out of (i) any breach or default in the performance by the Company or
BSD of any covenant or agreement made by the Company or BSD in this Agreement;
(ii) any breach of warranty or representation made by the Company or BSD in this
Agreement; and (iii) any and all actions, suits, proceedings, claims, demands,
judgments, costs and expenses (including reasonable legal fees and expenses)
incident to any of the foregoing. (B) Each Purchaser, severally and not jointly,
agrees to indemnify and hold harmless Company, its affiliates, and its
respective successors and assigns, from and against any losses, damages, or
expenses which are caused by or arise out of (i) any breach or default in the
performance by such Purchaser of any covenant or agreement made by such
Purchaser in this Agreement; (ii) any breach of warranty or representation made
by such Purchaser in this Agreement; and (iii) any and all actions, suits,
proceedings, claims, demands, judgments, costs and expenses (including
reasonable legal fees and expenses) incident to any of the foregoing.
(c) Indemnity Procedure. A party or parties hereto agreeing to
be responsible for or to indemnify against any matter pursuant to this Agreement
is referred to herein as the "Indemnifying Party" and the other party or parties
claiming indemnity is referred to as the "Indemnified Party".
An Indemnified Party under this Agreement shall, with
respect to claims asserted against such party by any third party, give written
notice to the Indemnifying party of any liability which might give rise to a
claim for indemnity under this Agreement within sixty (60) business days of the
receipt of any written claim from any such third party, but not later than
twenty (20) days prior to the date any answer or responsive pleading is due, and
with respect to other matters for which the Indemnified Party may seek
indemnification, give prompt written notice to the Indemnifying party of any
liability which might give rise to a claim for indemnity; provided, however,
that any failure to give such notice will not waive any rights of the
Indemnified Party except to the extent the rights of the Indemnifying Party are
materially prejudiced.
The Indemnifying Party shall have the right, at its
election, to take over the defense or settlement of such claim by giving written
notice to the Indemnified Party at least fifteen (15) days prior to the time
when an answer or other responsive pleading or notice with respect thereto is
required. If the Indemnifying Party makes such election, it may conduct the
45
<PAGE>
defense of such claim through counsel of its choosing (subject to the
Indemnified Party's approval of such counsel, which approval shall not be
unreasonably withheld), shall be solely responsible for the expenses of such
defense and shall be bound by the results of its defense or settlement of the
claim. The Indemnifying Party shall not settle any such claim without prior
notice to and consultation with the Indemnified Party, and no such settlement
involving any equitable relief or which might have an adverse effect on the
Indemnified Party may be agreed to without the written consent of the
Indemnified Party (which consent shall not be unreasonably withheld). So long as
the Indemnifying Party is diligently contesting any such claim in good faith,
the Indemnified Party may pay or settle such claim only at its own expense and
the Indemnifying Party will not be responsible for the fees of separate legal
counsel to the Indemnified Party, unless the named parties to any proceeding
include both parties and representation of both parties by the same counsel
would be inappropriate. If the Indemnifying Party does not make such election,
or having made such election does not, in the reasonable opinion of the
Indemnified Party proceed diligently to defend such claim, then the Indemnified
Party may (after written notice to the Indemnifying Party), at the expense of
the Indemnifying Party, elect to take over the defense of and proceed to handle
such claim in its discretion and the Indemnifying Party shall be bound by any
defense or settlement that the Indemnified Party may make in good faith with
respect to such claim. In connection therewith, the Indemnifying Party will
fully cooperate with the Indemnified Party should the Indemnified Party elect to
take over the defense of any such claim.
The parties agree to cooperate in defending such third
party claims and the Indemnified Party shall provide such cooperation and such
access to its books, records and properties as the Indemnifying Party shall
reasonably request with respect to any matter for which indemnification is
sought hereunder; and the parties hereto agree to cooperate with each other in
order to ensure the proper and adequate defense thereof.
With regard to claims of third parties for which
indemnification is payable hereunder, such indemnification shall be paid by the
Indemnifying Party upon the earlier to occur of: (i) the entry of a judgment
against the Indemnified Party and the expiration of any applicable appeal
period, or if earlier, five (5) days prior to the date that the judgment
creditor has the right to execute the judgment; (ii) the entry of an
unappealable judgment or final appellate decision against the Indemnified Party;
or (iii) a settlement of the claim. Notwithstanding the foregoing, provided that
there is no dispute as to the applicability of indemnification, the reasonable
expenses of counsel to the Indemnified Party shall be reimbursed on a current
basis by the Indemnifying Party if such expenses are a liability of the
Indemnifying Party. With regard to other claims for which indemnification is
payable hereunder, such indemnification shall be paid promptly by the
Indemnifying Party upon demand by the Indemnified Party.
46
<PAGE>
ARTICLE IX
MISCELLANEOUS
Section 9.1 Termination. This Agreement may be terminated at
any time prior to the Initial Closing by either the Company and BSD or
Purchasers, upon written notice to the other (i) if the Closing shall not have
been consummated on or before ten (10) business days after the date hereof, (ii)
if there shall be any law or regulation that makes the consummation of the
transactions contemplated hereby illegal or otherwise prohibited, or (iii) if
consummation of the transactions contemplated hereby would violate any
nonappealable final order, decree or judgment of any court or governmental body
having competent jurisdiction. If this Agreement is terminated as permitted by
this Section 9.1, such termination shall be without liability of either party
(or any shareholder, director, officer, employee, agent, consultant or
representative of such party) to the other party to this Agreement; provided
that if such termination shall result from the failure of BSD to act reasonably
in fulfilling a condition within BSD's control to the performance of the
obligations of the other party or to perform a covenant of this Agreement, BSD
shall be fully liable for any and all losses incurred or suffered by the
Purchasers as a result of such failure or breach together with payment of
liquidated damages to the Purchasers in the amount of $250,000. The provisions
of Sections 5.4, 5.5, 5.6, 9.1, 9.3 and 9.5 shall survive any termination hereof
pursuant to this Section 9.1.
Section 9.2 Further Assurances. Each party agrees to
cooperate fully with the other parties and to execute such further instruments,
documents and agreements and to give such further written assurances as may be
reasonably requested by any other party to better evidence and reflect the
transactions described herein and contemplated hereby and to carry into effect
the intents and purposes of this Agreement.
Section 9.3 Fees and Expenses. The Company shall be
responsible for the payment of the Purchaser's legal fees and costs relating to
the transactions contemplated by this Agreement. In the event this Agreement
terminates for any reason, BSD shall pay to the Purchasers $15,000 within thirty
(30) days of the date of any such termination. All such legal fees will be
payable by the Company at each Closing. Notwithstanding anything to the contrary
contained herein, the expenses of the Registration shall be borne entirely by
the Company and shall not be subject to the foregoing limitation. The terms of
this Section 9.3 shall survive any termination of this Agreement.
Section 9.4 Notices. Whenever any party hereto desires or is
required to give any notice, demand, or request with respect to this Agreement,
each such communication shall be in writing and shall be effective only if it is
delivered by personal service or mailed, United States registered or certified
mail, postage prepaid, return receipt requested (and shall be deemed to have
been received three(3) days after deposit into the United States mail), or sent
by prepaid overnight courier, facsimile or confirmed telecopier, addressed as
follows:
47
<PAGE>
If to Oracle:
c/o Oracle Strategic Partners, L.P.
712 Fifth Avenue, 45th Floor
New York, New York 10019
Attention: Larry Feinberg and Joseph Dowling
Fax No.: (212) 459-0863
With a copy to:
Kane Kessler, P.C.
1350 Avenue of the Americas
26th Floor
New York, New York 10019
Attention: Robert L. Lawrence, Esq.
Fax No.: (212) 245-3009
If to the Company or Manker:
c/o Charles F. Manker
35 N. Green Bay Road
Lake Forest, IL 60045
Fax No.: (847) 234-4333
If to BSD:
BSD Medical Corporation
2188 West 2200 South
Salt Lake City, UT 84119
Attention: Mr. Paul Turner
Fax No.: (801) 972-5930
With a copy to:
Parsons Behle & Latimer
One Utah Center
201 South Main Street
18th Floor
Salt Lake City, UT 84111
Attention: J. Gordon Hansen, Esq.
Fax No.: (801) 536-6111
Unless otherwise stated above, such communications shall be effective when they
are received by the addressee thereof in conformity with this Section. Any party
may change its address for such communications by giving notice thereof to the
other parties in conformity with this Section.
48
<PAGE>
Section 9.5 Governing Law and Jurisdiction.
9.5.1 This Agreement shall be construed in all respects under
the laws of the State of Delaware, without reference to its
conflicts of law provisions.
9.5.2 The Company, BSD and the Purchasers hereby agree to
submit to the exclusive jurisdiction of the courts located in
the State of Delaware and hereby waive, to the fullest extent
permitted by law, any objection based on venue or forum non
conveniens with respect to any action instituted therein, and
agree that any dispute concerning the conduct of any party in
connection with this Agreement or otherwise shall be heard
only in the federal courts described above.
9.5.3 The Company and BSD and the Purchasers each hereby
waive personal service of any and all process upon it and
consent that all such service of process may be made by hand
delivery or mail to the Company and BSD and the Purchasers at
the addresses set forth in, and in accordance with, Section
9.4 of this Agreement. Each of the Company, BSD and the
Purchasers hereby consent to service of process as aforesaid.
Section 9.6 Binding upon Successors and Assigns. This
Agreement is personal to each of the parties and may not be assigned without the
written consent of the other parties; provided, however, that Oracle and Manker
shall be permitted to assign their rights under this Agreement to any entity in
which both are either partners, members or stockholders for the purpose of
holding the Shares owned by them, in which case all references to the
"Purchasers" shall be deemed references to such entity.
Section 9.7 Severability. If any provision of this Agreement,
or the application thereof, shall for any reason or to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall continue in full force and effect and in
no way be affected, impaired or invalidated.
Section 9.8 Entire Agreement. This Agreement, including the
Schedules and Exhibits referenced herein, and the other agreements and
instruments referenced herein constitute the entire understanding and agreement
of the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings.
Section 9.9 Other Remedies. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party shall be
deemed cumulative with and not exclusive of any other remedy conferred hereby or
by law, or in equity on such party, and the exercise of any one remedy shall not
preclude the exercise of any other.
Section 9.10 Amendment and Waivers. Any term or provision of
this Agreement may be amended, and the observance of any term of this Agreement
49
<PAGE>
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only by a writing signed by all parties hereto.
The waiver by a party of any breach hereof or default in the performance hereof
shall not be deemed to constitute a waiver of any other default or any
succeeding breach or default. This Agreement may not be amended or supplemented
by any party hereto except pursuant to a written amendment executed by all
parties.
Section 9.11 No Waiver. The failure of any party to enforce
any of the provisions hereof shall not be construed to be a waiver of the right
of such party thereafter to enforce such provisions.
Section 9.12 Construction of Agreement; Knowledge. For
purposes of this Agreement, the term "knowledge," when used in reference to a
corporation means the actual knowledge of the executive officers of such
corporation after such officers shall have made inquiry that is customary and
appropriate under the circumstances to which reference is made, and when used in
reference to an individual means the actual knowledge of such individual after
the individual shall have made inquiry that is customary and appropriate under
the circumstances to which reference is made.
Section 9.13 Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be an original as against any
party whose signature appears thereon and all of which together shall constitute
one and the same instrument. This Agreement shall become binding when one or
more counterparts hereof, individually or taken together, shall bear the
signatures of all of the parties reflected hereon as signatories.
Section 9.14 No Third Party Beneficiary. Nothing expressed or
implied in this Agreement is intended, or shall be construed, to confer upon or
give any person other than the parties hereto and their respective heirs,
personal representatives, legal representatives, successors and permitted
assigns, any rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
ORACLE STRATEGIC PARTNERS, L.P.
By: ________________________
Larry Feinberg
Managing General Partner
THERMATRX, INC.
By: ________________________
Name: ________________________
Title:________________________
50
<PAGE>
BSD MEDICAL CORPORATION
By: ________________________
Name: ________________________
Title:________________________
______________________________
CHARLES MANKER
51
<PAGE>
INDEX OF EXHIBITS AND SCHEDULES
EXHIBITS
Exhibit A BPH Business Assets
Exhibit B List of Purchasers and Amounts
thereof
Exhibit C Certificate of Designation
Exhibit D Bowman License
Exhibit E Non-Competition Agreement
Exhibit F Consulting Agreement
Exhibit G Supply Agreement
Exhibit H Company Operating Plan
<PAGE>
Exhibit A
BSD shall transfer to the Company the business and all of its assets, excluding
any inventory and capital equipment, whether real or personal, tangible or
intangible, relating to the treatment of any conditions or diseases (excluding
malignant cancers) of the prostate gland, including, but not limited to, benign
prostatic hyperplasia (BPH) and prostatitis (the "BPH Business Assets"). Such
BPH Business Assets include, but are not limited to the following (with respect
to items 1 - 4 below, where there is an overlap with cancer therapy materials or
products, then each party shall have the right to use or duplicate for its own
use such materials, and such duplication and use shall be at the Company's
expense):
1. Sales and Marketing Assets
Although the following shall be the property of the Company, the
Company shall not, unless permitted by written agreement, use, distribute or
otherwise employ BSD's name or logo.
a) all advertising, sales and promotional materials including film
negatives, layout sheets, or other materials used to create
brochures or literature for the BSD 50 system or BPH related systems
b) documents, files, books and records, training manuals, instructions,
or other similar materials, in whatever form or storage medium.
c) all sales contacts, distribution lists, account manifests, sales or
accounting software or data, invoice copies and any and all other
information related to past or contemplated sales of the Product (as
hereinafter defined).
2. Manufacturing and Design Assets
Without limitation, BSD shall provide the Company with the complete
ability to manufacture, design, or redesign the Product, including at least the
following:
a) all drawings, circuit board layouts, mechanical and other
specification sheets
b) all production or design know-how related to any aspect of the
applicator, thermistors, or generator/control box; the Company shall
have the right to receive training from relevant BSD personnel in
any aspect of the manufacture or design of the Product, however, BSD
shall be reimbursed for all direct expenses related to such training
<PAGE>
c) component source lists
d) all information necessary for the complete manufacture of the
Product including relevant FDA control procedure manuals or other
documentation necessary to meet relevant regulatory standards for
manufacture of the Product
e) all FDA filings related to the Product, including production
tracking materials or documentation
f) all FDA requirements manuals or information related to the Product
or its manufacture
g) all Product or BPH Business Asset related software including, EPROM
codes or EPROM programming capability and any assets required to
generate appropriately programmed Product related components
For purposes of this Agreement, the term "Product" shall collectively mean any
of the following items, together or individually (i) the microwave generator and
control box, including software, temperature control module thermistor (probe)
interfaces, or other "Bowman" related technology; (ii) the applicator, including
the antenna and probe sheaths; (iii) the "Bowman" thermistors (probes); and (iv)
any related hardware or software required to administer a BPH microwave
treatment including output related software or other data collection/input
means.
3. Regulatory Assets
a) all FDA filings and approvals related to the Product including
sub-components
b) all IDE materials and files
c) all other Product information related to FDA actions, approvals,
sanctions, either past or contemplated which exists as know-how or
files.
4. Other Assets
All Product related assets, including, but not limited to:
a) data and scientific materials
<PAGE>
b) sub-component specifications or test sheets
c) inbound and outbound QC and testing procedures manuals and know-how
d) information concerning testing and manufacturing tools, devices,
jigs, or other equipment.
While all of the above assets shall be owned by the Company, the Company may, at
its discretion, leave such property at BSD so long as the Company desires. The
Company shall forego no rights as a result of such action.
5. Licenses and Intellectual Property
a) BSD grants to the Company an exclusive sublicense under the Bowman
Agreement of all of its rights to the Bowman probe (thermistor)
technology, which sublicense may be terminated by the Company at any
time.
b) BSD grants to the Company a license which shall be exclusive except
for licenses existing on the date hereof, for the treatment of any
conditions or diseases (excluding malignant cancers) of the prostate
gland, including, but not limited to, benign prostatic hyperplasia
(BPH) and prostatitis only, under all United States and foreign
patents, patent rights, copyrights, registered and unregistered
trademarks, trade names, servicemarks, service names, designs,
technology, know-how, processes, trade secrets, inventions,
proprietary data, formulae, research and development data, and other
intangible property, and any and all applications for the foregoing,
relating to or used in or useful to the BPH Business Assets,
including, but not limited to U.S. Patents 4,448,198 and 4,658,836.
This exclusive license includes the right, but not the obligation,
to seek a remedy for the violation of any of the foregoing rights in
the licensed area by any third party. BSD shall not have the right
to seek a remedy for the violation of any of the foregoing rights in
the licensed area by any third party until such time that the
Company declines to exercise its rights to do so.
c) BSD assigns to the Company all of its right, title, and interest in
and to U.S. Patents 4,967,765; 5,220,927; 5,249,585; and 5,334,435.
<PAGE>
Exhibit B
SECTION 1.1-Initial Closing
NAME PRICE NUMBER OF SHARES
Oracle $3,000,000 35,000 Preferred
Manker 250,000 11,000 Preferred
SECTION 2.2-Milestone or Option Closing
NAME PRICE NUMBER OF SHARES
Oracle $3,000,000 *
Manker 250,000 *
Capitalization Table
Initial Closing Milestone or Option Closing
Stockholder: Percentage Ownership* Percentage Ownership *
BSD 54% 30%
Oracle 35% 45%
Manker 11% 12.5%
Management Stock
Option Plan * 12.5%
- ------------------
* The Capitalization Table reflects the ownership of the Company on a fully
diluted basis, assuming conversion of the Preferred Stock into Common Stock and
the issuance and conversion of all management options. Such additional shares of
Preferred Stock will be issued at the Milestone or Option Closing, as the case
may be, in order to give effect to percentages reflected in the Capitalization
Table. Shares of Common Stock ("Option Shares") representing twelve and one half
(12.5%) percent of the Milestone Closing percentage ownership of the Company
will be reserved for issuance pursuant to the Company's management stock option
plan and issued pursuant to Board approval. The "Initial Closing Percentage
Ownership" column excludes Option Shares.
<PAGE>
AMENDMENT TO STOCK PURCHASE AGREEMENT
AMENDMENT TO STOCK PURCHASE AGREEMENT by and among BSD Medical
Corporation ("BSD"), Thermatrx, Inc. (the "Company") and Thermatrx Investment
Holdings LLC (assignee of Oracle Strategic Partners, L.P.) dated October 31,
1997 (the "Stock Purchase Agreement"). Capitalized terms used herein defined in
the Stock Purchase Agreement shall have the meanings set forth therein unless
otherwise defined herein.
The parties hereby agree, effective as of the date hereof, to
amend the Stock Purchase Agreement as follows:
1. The Certificate of Designation set forth as Exhibit C to
the Stock Purchase Agreement is hereby replaced in its entirety with the
Restated Certificate of Incorporation attached hereto and all references to the
Certificate of Designation in the Stock Purchase Agreement shall be deemed
references to the Restated Certificate of Incorporation.
2. Section 6.1 (q) on page 33 of the Stock Purchase Agreement
shall be amended to read as follows: "(q) Company License to BSD. BSD shall have
received a perpetual royalty free license from the Company for the use of the
technology being transferred by BSD to the Company relating to the treatment,
excluding the Business of the Company, by heat therapy of malignant or benign
diseases (the "Business of BSD"), in form and substance reasonably satisfactory
to BSD, the Company and the Purchasers."
3. The following subparagraph (d) shall be added to Section 5
of Exhibit A of the Stock Purchase Agreement:
"(d) BSD assigns to the Company the invention identified by
BSD file #B6366 CIP1." Except as specifically set forth
herein, the Stock Purchase Agreement shall remain in full
force and effect without modification.
IN WITNESS WHEREOF, the parties have caused this Amendment to
be executed on the 13th day of November, 1997.
BSD Medical Corporation
By: /s/ Paul F. Turner
------------------------
Paul Turner
President and Chairman
Thermatrx, Inc.
By: /s/ Charles Manker
------------------------
Charles Manker
President
Thermatrx Investment Holdings LLC
By: Oracle Strategic
Partners L.P. as Manager
By: /s/ Larry Feinberg
------------------------
Larry Feinberg
Manager
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<CASH> 6,391,115
<SECURITIES> 0
<RECEIVABLES> 377,734
<ALLOWANCES> 10,000
<INVENTORY> 657,259
<CURRENT-ASSETS> 7,402,371
<PP&E> 874,270
<DEPRECIATION> 778,165
<TOTAL-ASSETS> 7,635,150
<CURRENT-LIABILITIES> 690,678
<BONDS> 5,422
0
0
<COMMON> 163,701
<OTHER-SE> 3,326,257
<TOTAL-LIABILITY-AND-EQUITY> 7,635,150
<SALES> 1,304,744
<TOTAL-REVENUES> 1,437,917
<CGS> 707,399
<TOTAL-COSTS> 3,317,293
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,373
<INCOME-PRETAX> 3,271,525
<INCOME-TAX> 221,000
<INCOME-CONTINUING> 2,890,579
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<NET-INCOME> 2,890,579
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