<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1996
REGISTRATION NO. 33-_________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
REGISTRATION STATEMENT
ON
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDICAL DEVICE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UTAH 3841 58-1475517
- ------------------------- ---------------------------- -------------------
(STATE OR OTHER JURIS- (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DICTION OF INCORPORATION CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
OR ORGANIZATION)
9171 TOWNE CENTRE DRIVE, SUITE 355
SAN DIEGO, CA 92122
(619) 455-7127
----------------------
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
M. LEE HULSEBUS
CHIEF EXECUTIVE OFFICER
9171 TOWNE CENTRE DRIVE, SUITE 355
SAN DIEGO, CA 92122
(619) 455-7127
----------------------
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
CLIFFORD A. BRANDEIS, ESQ. LAWRENCE B. FISHER, ESQ.
ZUKERMAN GORE & BRANDEIS, LLP ORRICK, HERRINGTON & SUTCLIFFE
900 THIRD AVENUE 666 FIFTH AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10103
(212) 223-6700 (212) 506-5000
(CONTINUED OVERLEAF)
<PAGE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON
AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS, PURSUANT TO RULE 415 UNDER THE SECURITIES
ACT OF 1933, CHECK THE FOLLOWING BOX: [ X ]--------------------
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ]------------------
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [ ]--------------------
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. [ ]--------------------
<PAGE>
CALCULATION OF REGISTRATION FEES
===========================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH AMOUNT TO OFFERING AGGREGATE AMOUNT OF
CLASS OF SECURITIES BE OFFERED PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SHARE (1) PRICE (1) FEE
- ---------------------- ---------- ---------- ------------ -------------
__% Cumulative
Convertible Series A
Preferred Stock,
par value $.001
per share............. 1,560,000 $5.00 $ 7,800,000 $2,689.66
__% Cumulative
Convertible Series A
Preferred Stock,
par value $.001
per share............. 247,500 $5.00 $ 1,237,500 $ 426.72
__% Cumulative
Convertible Series A
Preferred Stock,
par value $.001
per share (2)......... 234,000 $5.00 $ 1,170,000 $ 403.45
__% Cumulative
Convertible Series A
Preferred Stock,
par value $.001
per share (3)......... 156,000 $6.00 $ 936,000 $ 322.76
Common Stock, par
value $.15 per
share (4)............. $ $ $ -0- (5)
Common Stock, par
value $.15 per
share................. $ $ $ -0- (5)
===========================================================================
TOTAL........................................ $11,143,500 $3,842.59
- --------------------------------------------------------------------------
Fees Due on Filing........................... $3,842.59
- ---------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Represents shares subject to an option granted to the Underwriters to cover
over-allotments, if any.
(3) Represents shares underlying warrants granted to the Representative and,
pursuant to Rule 416, also covers such additional shares of __% Cumulative
Convertible Series A Preferred Stock as may become issuable as a result of
any anti-dilution adjustments made in accordance with the terms of the
Representative's Warrants.
(4) Pursuant to Rule 416 under the Securities Act of 1933, as amended, this
registration statement also covers such additional shares of Common Stock
as may become issuable (i) upon the conversion of the __% Cumulative
Convertible Series A Preferred Stock, (ii) pursuant to any stock dividend
declared on the __% Cumulative Convertible Series A Preferred Stock, and
(iii) as a result of any anti-dilution adjustments made in accordance with
the terms of the Representative's Warrants.
(5) No fee pursuant to Rule 457(i).
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
PURSUANT TO ITEM 501(B) OF REGULATION S-K
CROSS REFERENCE SHEET
(SHOWING LOCATION IN THE PROSPECTUS OF INFORMATION)
Item and Caption in Form S-1 Location in Prospectus
---------------------------- -----------------------
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus........... Facing Page of Registration
Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus.......... Inside Front Cover Page of
Prospectus; Outside Back Cover
Page of Prospectus
3. Summary Information, Risk
Factors and Ratio of Fixed
Charges to Earnings................ Prospectus Summary; The Company;
Risk Factors
4. Use of Proceeds.................... Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price.... Outside Front Cover Page of
Prospectus; Risk Factors;
Underwriting
6. Dilution........................... Risk Factors; Dilution
7. Selling Security Holders........... Outside Front Page of
Prospectus; Concurrent Offering
8. Plan of Distribution............... Outside Front Cover Page of
Prospectus; Concurrent Offering;
Underwriting
9. Description of Securities to
be Registered...................... Description of Securities;
Concurrent Offering;
Underwriting
10. Interest of Named Experts and
Counsel............................ Legal Matters; Experts
<PAGE>
11. Information with Respect to the
Registrant......................... Outside Front Cover Page;
Prospectus Summary; Risk
Factors; The Company; Dividend
Policy; Concurrent Offering;
Selected Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management, Certain
Transactions; Principal
Shareholders; Description of
Securities; Shares Eligible For
Future Sale; Underwriting;
Financial Status
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................... Not Applicable
<PAGE>
EXPLANATORY NOTE
This registration statement (the "Registration Statement") contains
two prospectuses: one related to this offering of 1,300,000 shares of __%
Cumulative Convertible Series A Preferred Stock (the "Preferred Stock") by
Medical Device Technologies, Inc. (the "Company"), plus 195,000 shares of
Preferred Stock to cover over-allotments, if any (the "Prospectus"); and
one relating to the offering of 247,500 shares of Preferred Stock issued by
the Company in a private placement completed in January, 1996 and the
______ shares of Common Stock issuable upon such conversion of Preferred
Stock (the "Selling Shareholder Prospectus"). Following the Prospectus are
certain substitute pages of the Selling Shareholder Prospectus, including
alternate front outside and back outside cover pages, an alternate "The
Offering" section of the "Prospectus Summary" and sections entitled
"Concurrent Offering" and "Plan of Distribution." Each of the alternate
pages for the Selling Shareholder Prospectus included herein is labeled
"Alternate Page for Selling Shareholder Prospectus" or "Additional Page for
Selling Shareholder Prospectus." All other sections of the Prospectus,
other than "Underwriting" and "Concurrent Offering," are to be used in the
Selling Shareholder Prospectus. In addition, cross-references in the
Prospectus will be adjusted in the Selling Shareholder Prospectus to refer
to the appropriate sections.
<PAGE>
PROSPECTUS
----------
SUBJECT TO COMPLETION, DATED April 23, 1996
MEDICAL DEVICE TECHNOLOGIES, INC.
1,300,000 SHARES OF __% CUMULATIVE CONVERTIBLE
SERIES A PREFERRED STOCK
-------------------------
Medical Device Technologies, Inc. (the "Company") hereby offers
1,300,000 shares of __% Cumulative Convertible Series A Preferred Stock,
par value $.01 per share (the "Preferred Stock"). The Preferred Stock will
be offered at $5.00 per share (the "Offering Price"). Each share of
Preferred Stock is convertible by the holder, at any time commencing
__________ __, 1996, [120 days from the date of this Prospectus] (the
"Initial Conversion Date") into _______ shares of the Company's common
stock, par value $.15 per share (the "Common Stock"), at a conversion price
of $_______ per share of Common Stock (the "Conversion Price"). Unless
earlier converted, the Preferred Stock automatically will convert into
Common Stock on __________ __, 1997, thirteen (13) months after the date of
this Prospectus (the "Automatic Conversion Date") into the greater of
______ shares of Common Stock or a formula related to the market price of
the Common Stock on the Automatic Conversion Date. See "Description of
Securities - __% Cumulative Convertible Series A Preferred Stock - Right to
Convert", and " - Automatic Conversion."
The Preferred Stock has a liquidation preference equal to $5.00, plus
any accrued but unpaid dividends (the "Liquidation Preference"). Dividends
on the Preferred Stock are payable solely in Common Stock at the rate of
__% of the Liquidation Preference per annum, are payable semi-annually,
when, as and if declared by the Board of Directors of the Company out of
funds legally available therefor. See "Description of Securities - __%
Cumulative Convertible Series A Preferred Stock - Dividends."
Prior to this offering, there has been no public market for the
Preferred Stock and there can be no assurance that such a market will
develop after the completion of this offering, or if developed, that it
will be sustained. Concurrently, 247,500 shares of Preferred Stock, and
_______ shares of Common Stock issuable upon the conversion of such shares
of Preferred Stock, are being registered at the Company's expense for sale
by selling shareholders (the "Selling Shareholders") pursuant to a separate
prospectus. See "The Company - Concurrent Offering."
It is currently anticipated that the shares of Preferred Stock will be
included on the Nasdaq SmallCap Market under the symbol "MEDDP." The
Common Stock is quoted on the Nasdaq SmallCap Market under the symbol
"MEDD." For information regarding the factors considered in determining
the Offering Price and terms of the
<PAGE>
Preferred Stock, see "Risk Factors" and "Underwriting." On April 17, 1996,
the closing bid price of the Common Stock, as reported on the Nasdaq
SmallCap Market was $.91 per share. See "Market Price for the Common Stock
and Dividends."
-------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 HEREOF.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
======================================================================
Price to Underwriting Proceeds to
Public Discounts (1) Company (2)
----------------------------------------------------------------------
Per Share................... $ $ $
Total (3)................... $ $ $
======================================================================
(1) Does not include additional compensation to First Allied Securities,
Inc. (the "Representative") in the form of a non-accountable expense
allowance. In addition, see "Underwriting" for information concerning
indemnification and contribution arrangements with the Representative
and other compensation payable to the Representative.
(2) Before deducting estimated expenses of $________ payable by the
Company, including the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Representative an option (the "Over-
Allotment Option") exercisable within 45 days after the date of this
Prospectus, to purchase up to 195,000 additional shares of Preferred
Stock, upon the same terms and conditions as set forth above, solely to
cover over-allotments, if any. If such Over-Allotment Option is
exercised in full, the total Price to Public, Underwriting Discounts,
and Proceeds to Company will be $_______, $______, and $_______,
respectively. See "Underwriting."
2
<PAGE>
-------------------------
The Preferred Stock is being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to approval of certain legal matters by their counsel and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify this offering and to reject any order in whole
or in part. It is expected that delivery of the Preferred Stock offered
hereby will be made against payment at the offices of First Allied
Securities, Inc. in New York, New York on or about ____________, 1996.
FIRST ALLIED SECURITIES, INC.
____________ __, 1996
3
<PAGE>
[Inside Front Cover Page - Picture of the PAS]
The Company is currently a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and furnishes its
shareholders with annual reports containing audited financial statements
after the close of each fiscal year.
--------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
PREFERRED AND/OR COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
4
<PAGE>
PROSPECTUS SUMMARY
Unless otherwise expressly set forth herein to the contrary, all per
share data in this Prospectus gives effect to the Company's 1-5 reverse
stock split in September, 1981, its 1-30 reverse stock split in November,
1990, and its 1-6 reverse stock split in January, 1994. In addition,
unless otherwise expressly set forth herein to the contrary, all references
to the Company's __% Series A Cumulative Convertible Preferred Stock
assumes the conversion of all 247,500 shares of the Company's Series I
Convertible Preferred Stock issued in the Company's 1996 Private Placement
into 247,500 shares of the Company's __% Series A Cumulative Convertible
Preferred Stock on a one-for-one basis on the date hereof. See "Business -
Corporate History" and "The Company - Recent Financings - 1996 Private
Placement."
THE COMPANY
Medical Device Technologies, Inc. (the "Company") is a development
stage company engaged in identifying, developing and bringing to market
patented technologies in the medical device field. The Company's strategy
is to identify technologies that it believes have commercial viability,
license or acquire the technologies, complete product development, obtain
regulatory clearances and initiate marketing and sales. The Company
directs its efforts towards patented technologies that it believes can be
commercially developed into medical devices which are innovative, represent
improvements over existing products, or are responsive to a presently
unfulfilled need in the market place.
To date, the Company has licensed the exclusive worldwide rights to
commercialize three medical devices:
(1) the PERSONAL ALARM SYSTEM ("PAS"), which is designed to
immediately alert healthcare professionals when their surgical gloves
and garments are torn or punctured or become saturated with fluids and
therefore no longer effectively provide protection from infection. The
spread of the Human Immunodeficiency Virus ("HIV") that causes
Acquired Immune Deficiency Syndrome ("AIDS"), and the spread of
Hepatitis and other infections transmitted through bodily fluids has
increased the need to protect health care workers and patients,
especially in emergency and operating rooms. The Company received pre-
market clearance from the Food and Drug Administration ("FDA") to sell
the PAS in August of 1995, and commenced manufacturing and marketing
the PAS in January of 1996;
(2) the CELL RECOVERY SYSTEM ("CRS"), which is an automated biopsy
brush system that collects specimen cells for cancer diagnosis and
offers two distinct advantages over current techniques: it is
minimally invasive and is less costly to
5
<PAGE>
administer. On March 20, 1996, the Company received clearance from the
FDA to market the CRS for the urology market. The Company intends to
launch the CRS in the fourth quarter of 1996. Prior to the market
launch of the CRS, the Company intends to complete certain clinical
trials for a follow-up submission to the FDA to establish that the
device assists with the detection of certain urological diseases, such
as bladder cancer, and at the same time commence manufacturing for the
system's instrumentation and disposables; and
(3) the INTRACRANIAL PRESSURE MONITORING SYSTEM ("ICP"), which is a
diagnostic device that monitors pressure inside the human skull
without having to drill holes in the skull. Presently the only method
by which intracranial pressure can be monitored is to drill a hole in
the skull. The Company's development strategy for the ICP involves two
specific versions of the device. The first generation ICP device will
monitor the direction and rate of change in intracranial pressure. The
second generation of the ICP will provide categories of intracranial
pressure levels as well. It is presently anticipated that clinical
trials for the first generation ICP device will continue through the
third quarter of 1996 and clinical trials for the second generation of
the device will continue through the third quarter of 1997. The
Company believes there exists non-overlapping markets for each
generation of the device.
At present, the Company does not intend to engage in the manufacture
of its products, and in January 1996, it engaged a third party to
manufacture the first PAS systems. The Company is currently exploring two
strategies in connection with the marketing of its medical devices. The
Company will either assemble a network of independent distributors who have
proven to be effective in introducing new products in the medical device
field, or form an alliance with a strategic corporate partner with a strong
presence in the applicable medical device market.
The Company was incorporated on February 6, 1980 under the laws of the
State of Utah and is located at 9171 Towne Centre Drive, Suite 355, San
Diego, California 92122, telephone number (619) 455-7127.
6
<PAGE>
THE OFFERING
Securities Offered................ 1,300,000 shares of __% Cumulative
Convertible Series A Preferred Stock.
Terms of the Preferred Stock:
Dividends..................... Cumulative from the date of original
issuance at the rate of __% per annum,
payable semi-annually on June 30 and
December 31, commencing June 30, 1996,
when as and if declared by the Board of
Directors out of funds legally available
therefor. Dividends are payable solely
in shares of Common Stock. See
"Description of Securities -__%
Cumulative Convertible Series A
Preferred Stock - Dividends."
Initial Conversion Rights..... Convertible into shares of Common Stock
commencing on ________ __, 1996, [120
days from the date of this Prospectus],
at a rate of ______ shares of Common
Stock for each share of Preferred Stock
(a Conversion Price of $_____ per share
of Common Stock). See "Description of
Securities - __% Cumulative Convertible
Series A Preferred Stock - Right to
Convert."
Automatic Conversion.......... Unless previously converted, on
__________ __, 1997, [thirteen (13)
months after the date of this
Prospectus] (the "Automatic Conversion
Date") the Preferred Stock will
automatically convert into the greater
of _______ shares of Common Stock or a
formula related to the market price of
the Common Stock on the Automatic
Conversion Date. See "Description of
Securities - __% Cumulative Convertible
Series A Preferred Stock - Automatic
7
<PAGE>
Conversion."
Voting Rights................. Each holder of shares of Preferred Stock
will be entitled to vote together with,
and on all matters submitted to, the
holders of Common Stock on an as-
converted basis assuming conversion
based upon the Conversion Price. See
"Description of Securities - __%
Cumulative Convertible Series A
Preferred Stock - Voting Rights."
Liquidation Preference........ In the event of the liquidation,
dissolution or winding up of the
Company, holders of shares of Preferred
Stock will receive a Liquidation
Preference of $5.00 per share, plus any
accrued but unpaid dividends, before any
distribution to holders of Common Stock
or another class of capital stock junior
to the Preferred Stock. See "Description
of Securities -Preferred Stock -
Liquidation Preference."
Securities Outstanding Subsequent
to the Offering: (1)
Common Stock................... 8,774,339
Preferred Stock (2)............ 1,547,500
Use of Proceeds................... Market the Company's first medical
device product, conducting the clinical
trials for and completing the
development of the Company's second and
third medical devices, repayment of
indebtedness and working capital
purposes. See "Use of Proceeds."
Risk Factors...................... The Preferred Stock offered hereby
involves a high degree of risk. See
"Risk Factors."
Nasdaq SmallCap Symbols:
8
<PAGE>
Common Stock................... MEDD
Preferred Stock (Proposed)/(3)/ MEDDP
- ---------------
(1) Unless otherwise indicated herein to the contrary, all share and per
share information does not give effect to the issuance of: (i) upon
conversion of the 1,300,000 shares of Preferred Stock offered hereby,
_______ shares of Common Stock; (ii) up to an additional 195,000 shares
of Preferred Stock issuable upon exercise of the Over-Allotment Option,
and up to an additional __________ shares of Common Stock issuable upon
the conversion of the Preferred Stock included in the Over-Allotment
Option; (iii) 1,997,500 shares of Common Stock reserved for issuance
pursuant to outstanding warrants having a weighted average exercise
price of approximately $.90, subject to adjustment; (iv) 625,000 shares
of Common Stock reserved for issuance to officers, employees and
consultants; (v) upon the exercise of warrants granted to the
Representative in connection with this offering, 130,000 shares of
Preferred Stock and the _______ shares of Common Stock into which such
Preferred Stock is convertible; (vi) an additional _______ shares of
Common Stock issuable by the Company upon the conversion of 247,500
shares of Preferred Stock issued to the Selling Shareholders; and (vii)
an additional 50,000 shares of Common Stock to be issued.
(2) Includes an additional 247,500 shares of Preferred Stock that are being
registered for sale on behalf of the Selling Shareholders in the
Concurrent Offering.
(3) The Company has applied to include the Preferred Stock on the Nasdaq
SmallCap System commencing on the effective date of this offering.
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following consolidated income statement and balance sheet data has
been summarized from the Company's Consolidated Financial Statements
included elsewhere in this Prospectus. The information should be read in
conjunction with the Consolidated Financial Statements and the related
Notes thereto.
STATEMENT OF OPERATING DATA:
<TABLE>
<CAPTION>
June 1, 1992
to
Year Ended December 31, December
---------------------------------------- 31, 1995 (1)
1993 1994 1995 (Cumulative)
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ --- $ --- $ --- $ ---
Operating Expenses
Research and
development 307,819 778,468 943,510 2,056,504
General and
administrative (2) 728,188 1,717,132 1,971,781 5,138,721
Net loss $ (1,605,061) $(2,888,533) $(2,918,216) $(8,173,072)
Net loss per share $(1.33) $(.95) $(.43)
Weighted Average Shares
Outstanding 1,208,144 3,032,813 6,714,168
</TABLE>
- ------------------
(1) For purposes of presenting the Company's consolidated cumulative financial
information, June 1, 1992 is deemed to be the date the Company commenced
its current business activities related to the medical device business and
became a development stage company.
(2) Includes costs related to marketing, promotional and sales activities in
addition to office, administrative and overhead expenses.
10
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
Pro Forma
Pro Forma As Adjusted
Year Ended December 31, December December
1993 1994 1995 31, 1995(1) 31, 1995(1)(2)
---------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Working capital $ 107,008 $ (109,574) $ (417,120) $ (245,245) $ 4,236,005
Total assets 3,110,868 2,857,663 3,142,821 3,767,871 7,037,821
Total long-term
liabilities 650,301 3,400 1,755 1,755 1,755
Accumulated deficit (6,073,025) (8,961,558) (11,879,774) (11,879,774) (12,733,524)
Shareholders'
equity 2,308,148 2,261,078 2,181,420 2,415,795 6,717,045
</TABLE>
------------------
(1) Pro forma to give effect to the issuance of an additional $625,000 of
promissory notes (resulting in an aggregate principal amount of
$1,650,000 of promissory notes) bearing interest at the rate of 10% per
annum (the "Notes") and an additional 93,750 shares of Preferred Stock
(resulting in an aggregate of 247,500 shares of Preferred Stock) issued
pursuant to a private placement completed in January 1996 (the "Private
Placement") and the recording of $618,750 of original issue discount
and loan origination fees of $180,000 related to the Private Placement.
Does not give effect to (i) an aggregate of 381,140 shares of Common
Stock issued by the Company in exchange for services subsequent to
December 31, 1995, and (ii) an additional 50,000 shares of Common Stock
to be issued. See "The Company -Recent Financings - 1996 Private
Placement" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
(2) Pro forma as adjusted to give effect to (i) the sale of the Preferred
Stock offered hereby at an assumed initial public offering price of
$5.00 per share and the initial application of the net proceeds
therefrom, and (ii) non-recurring charges to interest expense in the
amounts of $618,750 and $180,000, respectively, for the original issue
discount and loan origination fees related to the Private Placement.
See "The Company" and "Use of Proceeds."
11
<PAGE>
RISK FACTORS
An investment in the securities offered hereby involves a high degree
of risk. Prospective investors, prior to making an investment in the
securities, should carefully consider, the following risk factors, among
others, relating to the Company and this offering.
DEVELOPMENT STAGE COMPANY; HISTORY OF OPERATING LOSSES; ACCUMULATED
DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY; AUDITORS' GOING CONCERN
The Company was exclusively engaged in oil and gas activities until
June 1992, when it entered into its first license agreement and commenced
its current operations in the medical device business. The Company
subsequently entered into two additional licenses for medical devices and
in April of 1994 discontinued entirely its oil and gas operations. The
Company commenced the limited manufacture and marketing of its first
medical device, the PAS, in January of 1996, although to date, the Company
has not yet realized any significant sales of the PAS device. The Company
is currently developing its other two medical devices, the Cell Recovery
System and the Intracranial Pressure Monitoring System. Consequently, the
Company is still a development stage company with respect to the medical
device business. At December 31, 1995, partially as a result of its
unsuccessful oil and gas activities, the Company had an accumulated deficit
of approximately $11,880,000. The Company expects losses to continue until
such time, if ever, as the Company's medical devices can successfully be
brought to market and generate sufficient operating revenues. Although the
Company has commenced marketing the Personal Alarm System, the Company
needs to conduct additional development activities with respect to its
other products, which include clinical testing and establishing
manufacturing with respect to the Cell Recovery System and substantial
clinical testing and obtaining regulatory clearance with respect to the
Intracranial Pressure Monitoring System. Although the Company received FDA
marketing clearance of the Company's second device, the CRS, on March 20,
1996, the Company intends to complete certain clinical trials for a follow-
up submission to the FDA to establish that the device assists with the
detection of certain urological diseases, such as bladder cancer. There
can be no assurance that the Company will receive 510(k) clearance from the
FDA for such additional claims or that the FDA will not require the Company
to submit a pre-market approval application for such claims which would
substantially delay marketing clearance. There can also be no assurance
that the Company will be successful in establishing manufacturing of the
system's instrumentation and disposables. The Company's third device, the
ICP, is still undergoing clinical trials solely with respect to the first
generation ICP device that the Company intends to develop. It is currently
anticipated that clinical trials for the second generation ICP will not
begin until the end of 1996.
12
<PAGE>
The Company's intent to establish volume manufacturing and undertake
clinical testing with respect to the CRS and the extensive clinical testing
and regulatory clearance still required with respect to the ICP, together
with projected general and administrative expenses and projected marketing
costs related to the PAS and launch of the CRS, are expected to result in
continuing losses until such time as the Company achieves significant sales
from one or more of its products.
The Company's ability to achieve profitability depends upon its
ability to successfully market the PAS and to develop and successfully
market the CRS and ICP, of which there can be no assurance. In addition,
the Company will continue to seek to license additional medical products
for development and commercialization, although there can be no assurances
that the Company will be able to identify any additional products that it
deems suitable for development and commercialization, or that if it does
identify such products that any of them will be successfully developed and
commercialized. Further, the Company's independent certified accountants'
report on the Company's financial statements for the year ended December
31, 1995 includes an explanatory paragraph that the Company's recurring
losses from operations, negative working capital, and limited capital
resources raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. See
"Business," "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
DEPENDENCE ON OFFERING PROCEEDS; NEED FOR ADDITIONAL FINANCING; POSSIBLE
ISSUANCE OF SECURITIES; FUTURE DILUTION
The Company's cash requirements will be significant. The Company is
dependent on the net proceeds of this offering to repay the $1,650,000 of
principal indebtedness, plus approximately $55,000 of interest through
April 30, 1996, incurred by the Company in connection with the Private
Placement that the Company completed in January 1996, and to implement its
current business plan. The Company presently anticipates spending
approximately 27.2% and 24.2% of the net proceeds of this offering on
research and development and for working capital purposes, respectively,
within the first twelve (12) months after the completion of this offering.
The Company may, however, encounter unexpected costs in connection with the
implementation of its business plan and as a consequence, require
additional financing to continue to effect its business plan. Based on the
Company's current proposed business plan, the Company believes that the net
proceeds of this offering and anticipated revenues from the PAS device will
be sufficient to sustain the Company for 12 months following completion of
this offering. There can be no assurances, however, that prior to the
expiration of such 12 month period or thereafter that the Company
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will generate sufficient revenues from sales of the PAS device or the CRS
device (which it intends to commence marketing in the fourth quarter of
1996), or that the Company will not encounter unexpected costs such that
the Company will be required to seek additional financing. The Company has
no current arrangements with respect to such additional financing and there
can be no assurance that any such additional financing can be obtained on
terms acceptable to the Company, or at all. Failure by the Company to
obtain additional financing either from a public or private offering of its
securities, a strategic joint venture or partnership, or otherwise, would
have a material adverse effect on the Company. Further, in the event that
the Company obtains any additional financing, such financings will most
likely have a dilutive effect on the holders of the Company securities.
See "Dilution," "Business," "Management's Discussion and Analysis of
Financial Condition and Results of Operation," "Use of Proceeds," and the
Financial Statements.
UNCERTAINTY OF PRODUCT DEVELOPMENT; CORPORATE INEXPERIENCE
Development of the Company's medical devices will be subject to all of
the risks associated with new product development generally, including
unanticipated delays, expenses, technical problems, or other difficulties
that could result in abandonment or substantial change in the proposed
commercialization of the Company's medical devices. Given the
uncertainties inherent in new product development generally, and the
Company's inexperience in the business of commercializing medical devices,
there can be no assurances that the Company will be successful in
developing its products. Investors should be aware of the potential
problems, delays and difficulties often encountered by any inexperienced
company. As a consequence, problems may arise that may be beyond the
experience or control of management and accordingly, the Company's
prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by development stage companies in the
establishment of a new business in a highly competitive and highly
regulated industry. The Company only recently commenced the marketing of
one of its products, the PAS, and it is not currently possible to predict
the demand and market acceptance for the PAS or any of the Company's other
products. Accordingly, there can be no assurance that the Company's
development and commercialization activities will be successful, that the
Company will receive FDA clearance for any of its other products, or that
any of the Company's devices will be commercially viable and successfully
marketed, or that the Company will ever achieve significant levels of
revenue or profits, if any.
DEPENDENCE ON THIRD PARTY MANUFACTURING; LIMITED MARKETING CAPABILITIES
The Company has no current manufacturing capabilities and will not
have any such capabilities for the foreseeable future. As a
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consequence, the Company will be forced to rely on third parties to
manufacture its products. The Company must be able to effect the
manufacture of its Personal Alarm System, and any other devices that it
will seek to commercialize, in sufficient quantities and at acceptable
costs. Further, the Company and third-party manufacturers will need to
comply with FDA and other regulatory requirements in connection with its
manufacturing activities and facilities, including FDA Good Manufacturing
Practices ("GMP") regulations. The Company entered into an agreement with
a third party manufacturer, effective as of December 15, 1995, for the
manufacture of the PAS. The Company believes this manufacturer satisfies
the FDA's GMP regulations, however, there can be no assurance that the
manufacturer will continue to satisfy such regulations. In the event that
the Company experiences substantial sales of its PAS device, of which there
can be no assurance, the Company may have to identify other third party
manufacturers in connection with additional manufacturing of the PAS.
Further, the Company presently anticipates that it will engage other third
party manufacturers in connection with the manufacture of the CRS and ICP
devices. There can be no assurance that such other manufacturers can be
identified on commercially acceptable terms, or at all, or that such other
manufacturers, if identified, will be adequate for the Company's long-term
needs, or that they can meet all relevant regulatory requirements.
Moreover, there can be no assurance that the Company's manufacture of
products on a limited scale basis means that the Company can effect the
successful transition to commercial, large-scale production. Finally,
changes in methods of manufacture, including commercial scale-up, can,
among other things, require the performance of new clinical studies under
certain circumstances.
The Company currently has a limited sales and marketing staff and does
not presently intend to establish its own sales force. The Company is
presently seeking to engage independent regional distributors of medical
devices to effect the sale of its PAS device. At a future date the Company
may also form a marketing alliance with a strategic corporate partner with
respect to the PAS device, although there can be no assurance that it will
be able to do so. Similarly, the Company presently intends to engage
independent distributors of medical devices or form marketing alliances
with strategic corporate partners to effect sales of its other two medical
devices. As a consequence, the Company's current marketing and sales
strategy will substantially rely on unaffiliated third parties to effect
the sales of its products. There can be no assurance that the Company will
be able to rely on unaffiliated third parties to successfully effect sales
of its products or that the Company will not have to incur significant
additional expenditures, which may include the employment of sales
personnel, in order to successfully effect the sales of its products.
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NO ASSURANCE OF MARKET FOR PAS DEVICE; NEED FOR CERTAIN MINIMUM PAS SALES
Although the Company commenced the marketing of the PAS device in
January 1996, to date the Company has not effected any significant sales of
the PAS device. The Company currently believes that before the PAS will
experience any significant sales, the Company will have to convince the
medical community of the potential unreliability of infection control
barriers such as latex surgical gloves, particularly in the absence of
obvious breaches, punctures or tears of the gloves. In order for the PAS
to be successful, the Company must demonstrate that fluid contact between
health care professionals and patients occurs as a routine matter as a
result of the "fluid-saturation" of latex surgical gloves even when such
gloves have not been punctured or torn.
The Company also needs to establish that when fluid contact does occur
between health care professionals and patients as a result of fluid-
saturated but otherwise non-damaged latex gloves, that pathogens (which are
disease producing organisms) are transmitted between the health care
professional and the patient, thus resulting in a health risk to both
parties. There can be no assurance that the Company will be able to
convince the medical community the need for a device like the PAS and
consequently, there can be no assurance that a market will develop for the
PAS device. The failure of the Company to establish a market for the PAS
device and effect significant sales of the PAS device would have a material
adverse effect on the Company. Further, in the event that the Company does
not effect certain minimum sales of the PAS device in 1996 the Company will
require additional capital in order to sustain itself for 12 months
following completion of this offering. See "Risk Factors - Dependence on
Offering Proceeds; Need for Additional Financing; Possible Issuance of
Securities; Further Dilution," "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" and "Use of Proceeds."
NO ASSURANCE OF MARKET FOR CRS DEVICE
The Company received marketing clearance for the CRS device with
respect to urological procedures on March 20, 1996. Nevertheless, the
Company will not commence marketing the CRS until the fourth quarter of
1996 so that the Company can complete certain clinical trials for a follow-
up 510(k) submission to the FDA to establish that the device assists with
the detection of certain urological diseases, such as bladder cancer.
There can be no assurance that the Company will receive 510(k) clearance
from the FDA for such additional claims or that the FDA will not require
the Company to submit a pre-market approval ("PMA") application for such
claims that would substantially delay marketing clearance. The Company also
intends to commence, prior to a scheduled marketing launch of the CRS in
the fourth quarter of 1996,
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manufacturing of the system's instrumentation and disposables, although
there can be no assurance that the Company will be able to do so. The
Company currently believes that before the CRS will experience any
significant sales that the device's capabilities in assisting with the
detection of certain diseases, such as with respect to assisting the
detection of bladder cancer, particularly in comparison to current cell
sampling methods, will have to be established. There can be no assurance
that the Company will be able to establish to the medical community that
the CRS device is more effective in assisting the detection of bladder
cancer and consequently, there can be no assurance that a market will
develop for the CRS device relative to the detection of bladder cancer.
Further, since the Company has not yet commenced adaptation of the CRS
device for any other procedures, there can be no assurance that there will
be a market for any other procedures for which the Company is successful in
adapting the CRS device. The failure of the Company to establish a market
for the CRS device and effect significant sales of the CRS device in the
urological or any other field could have a material adverse effect on the
Company. See "Business - The Company's Products - the Cell Recovery System
Potential Market for the CRS device."
NO ASSURANCE OF IDENTIFICATION, ACQUISITION OR COMMERCIALIZATION OF
ADDITIONAL TECHNOLOGIES
From time to time, if the Company's resources allow, the Company
intends to explore the acquisition and subsequent development and
commercialization of additional patented technologies in the medical device
field. There can be no assurance, however, that the Company will be able
to identify any additional technologies and, even if suitable technologies
are identified, there can be no assurance that the Company will have
sufficient funds to commercialize any such technologies or that any such
technologies will ultimately be viable.
GOVERNMENT REGULATIONS
The Company's medical device products are subject to extensive
government regulations in the United States and in other countries. In
order to clinically test, produce, and market its devices, the Company must
satisfy numerous mandatory procedures, regulations, and safety standards
established by the FDA, and comparable state and foreign regulatory
agencies. Typically, such standards require that the products be cleared
by the government agency as safe and effective for their intended use prior
to being marketed for human applications. The clearance process is
expensive and time consuming. Other than with respect to the Company's
Personal Alarm System and the Cell Recovery System, no assurance can be
given that clearances will be granted for any expanded claims for the CRS
or for the sale of the ICP or any other future products, if any, or that
the length of time for clearance will not be extensive, or that the cost of
attempting to obtain any such clearances will not
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be prohibitive.
The FDA employs a rigorous system of regulations and requirements
governing the clearance processes for medical devices, requiring, among
other things, the presentation of substantial evidence, including clinical
studies, establishing the safety and efficacy of new medical devices. The
principal methods by which FDA clearance is obtained are pre-market
approval, which is for products that are not comparable to any other
product in the market, or filing a pre-market notification under Section
510(k) of the Federal Food, Drug and Cosmetic Act (a "510(k)") which is for
products that are similar to products that have already received FDA
clearance. Although both methods may require clinical testing of the
products in question under an approved protocol, because PMA clearance
relates to more unique products, the PMA procedure is more complex and time
consuming. Applicants under the 510(k) procedure must prove that the
products for which clearance is sought are substantially equivalent to
products on the market prior to the Medical Device Amendments of 1976, or
products approved thereafter pursuant to the 510(k). The review period for
a 510(k) application is approximately one hundred fifty (150) days from the
date of filing the application, although there can be no assurance that the
review period will not extend beyond such a period.
Under the PMA procedure, the applicant is required to conduct
substantial clinical testing to determine the safety, efficacy and
potential hazards of the product. The review period under a PMA
application is one hundred eighty (180) days from the date of filing, and
the application is not automatically deemed cleared if not rejected during
that period. The preparation of a PMA application is significantly more
complex, expensive and time consuming than the 510(k) procedure. Further,
the FDA can request additional information, which can prolong the clearance
process.
In order to conduct human clinical studies for any medical procedure
proposed for the Company's products, the Company could also be required to
obtain an Investigational Device Exemption ("IDE") from the FDA, which
would further increase the time before potential FDA clearance. In order
to obtain an IDE, the Company would be required to submit an application to
the FDA, including a complete description of the product, and detailed
medical protocols that would be used to evaluate the product. In the event
an application were found to be in order, an IDE would ordinarily be
granted promptly thereafter.
The Company may be required to use the PMA process for the
Intracranial Pressure Monitoring System or for expanded claims for the CRS
in order to be granted FDA clearance. The clearance process can take from a
minimum of six (6) months to several or more years, and there can be no
assurance that FDA clearance will be granted for the commercial sale of the
Intracranial Pressure Monitoring System or expanded claims for the CRS
device.
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The FDA also imposes various requirements on manufacturers and sellers
of medical devices under its jurisdiction, such as labeling, manufacturing
practices, record keeping and reporting requirements. The FDA may also
require post-market testing and surveillance programs to monitor a
product's effect. There can be no assurance that the appropriate clearance
from the FDA will be obtained, that the process to obtain such clearance
will not be excessively expensive or lengthy, or that the Company will have
sufficient funds to pursue such clearances. Moreover, failure to receive
requisite clearance for the Company's products or processes would prevent
the Company from commercializing its products as intended, and would have a
materially adverse effect on the business of the Company.
Even after regulatory clearance is obtained, any such clearance may
include significant limitations on indicated uses. Further, regulatory
clearances are subject to continued review, and later discovery of
previously unknown problems may result in restrictions with respect to a
particular product or manufacturer, including withdrawal of the product
from the market, or sanctions or fines being imposed on the Company.
Distribution of the Company's products in countries other than the
United States may be subject to regulation in those countries. There can be
no assurance that the Company will be able to obtain the approvals
necessary to market its medical devices outside of the United States.
POTENTIAL FOR INCREASED ROYALTIES WITH RESPECT TO THE ICP DEVICE
In addition to the license agreements that the Company has entered
into with respect to the ICP, the Company also entered into an agreement
with respect to the ICP device on November 23, 1992 with Hampton Morgan
Holdings, S.A., a Panamanian company ("Hampton Morgan"), which was
controlled by a shareholder of the Company (the "Hampton Morgan
Agreement"). The Company had previously retained the consulting services
of Hampton Morgan in June of 1992 in connection with the CRS device. The
Hampton Morgan Agreement provided, among other things, for (i) a payment of
166,667 shares of Common Stock to Hampton Morgan as a finder of the ICP
device, (ii) royalties to Hampton Morgan equal to 8% of gross sales of the
ICP, and (iii) the issuance of 2,000,000 shares of Common Stock to Hampton
Morgan upon the Company achieving gross sales of $10,000,000 with respect
to the ICP. The Company issued the 166,667 shares to Hampton Morgan as a
finder in 1992, but the Company, on the advice of counsel, believes that
the balance of the Hampton Morgan Agreement is not enforceable because
Hampton Morgan has failed to make certain required payments to the Company
under the Hampton Morgan Agreement. Consequently, the Company does not
intend to pay the 8% royalty or 2,000,000 shares of Common Stock to Hampton
Morgan. In the event that the Company is incorrect and has to pay some or
all of the royalty payments and/or shares of Common
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Stock to Hampton Morgan under the Hampton Morgan Agreement, it would have a
material adverse effect on the potential profitability of the ICP and could
have a material adverse effect on the Company as a whole. See "Business -
The Intracranial Pressure Monitoring System - License Arrangements."
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
The Company has entered into exclusive license agreements with respect
to each of the patents underlying the Company's first three products: the
Personal Alarm System; the Cell Recovery System; and the Intracranial
Pressure Monitoring System. There can be no assurance, however, that such
patents will provide the Company with significant protection from
competitors. Patent protection relative to medical devices is generally
uncertain, and involves complex legal and factual questions. To date,
there has emerged no consistent policy regarding the breadth of claims
allowed in connection with the patent protection of medical devices.
Accordingly, there can be no assurance that any patents licensed by the
Company will afford protection against competitors with similar
technologies. Finally, there can be no assurance that the Company will
have the financial resources necessary to enforce its patent rights.
Even though the Company has licensed patents, under the terms of the
Company's license agreements, the Company is responsible for protecting
such patents. Challenges may be instituted by third parties as to the
validity, enforceability and infringement of the patents. Further, the
cost of the litigation to defend any challenge to the Company's licensed
patents or to uphold the validity and enforceability and prevent
infringement of the Company's licensed patents can be substantial. In the
event that others are able to design around the Company's licensed patents,
the Company's business could be materially and adversely affected.
The Company may be required to obtain additional licenses from others
to continue to refine, develop, manufacture, and market new products.
There can be no assurance that the Company will be able to obtain any such
licenses on commercially reasonable terms or at all or that the rights
granted pursuant to any licenses will be valid and enforceable.
Notwithstanding the Company's exclusive license with respect to the
patents underlying the PAS, CRS and ICP, there can be no assurance that
others will not independently develop similar technologies, or design
around the patents. If others are able to design around the patents, the
Company's business will be materially adversely affected. Further, the
Company will have very limited, if any, protection of its proprietary
rights in those jurisdictions where it has not effected any patent filings
or where it fails to obtain patent protection despite filing therefor.
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Even though the patents underlying the Company's three medical devices
have been issued by the United States Patent and Trademark Office,
challenges may be instituted by third parties as to the validity and
enforceability of the patents. The Company is not presently aware of any
challenges to the patents. Similarly, the Company may also have to
institute legal actions in order to protect infringement of the patents by
third parties. The Company is not presently aware of any such
infringements. The costs of litigation or settlement in connection with
the defense of any third party challenges relative to the validity and
enforceability of its patents and/or to prevent any infringement of the
patents by third parties, which pursuant to the license agreements with
respect to the patents are the Company's responsibility, could be
substantial. Moreover, in the event that the Company was unsuccessful in
any such litigation, the Company could be materially adversely affected.
In addition to relying on patent protection for its products, of which
there is no assurance, the Company will also attempt to protect its
products, processes and proprietary rights by relying on trade secret laws
and non-disclosure and confidentiality agreements, as well as exclusive
licensing arrangements with persons who have access to its proprietary
materials or processes, or who have licensing or research arrangements
exclusive to the Company. Despite these protections, no assurance can be
given that others will not independently develop or obtain access to such
materials or processes, or that the Company's competitive position will not
be adversely affected thereby. To the extent members of the Company's
Scientific Advisory Board have consulting arrangements with, or are
employed by, a competitor of the Company, such members might encounter
certain conflicts of interest, and the Company could be materially
adversely affected by the disclosure of the Company's confidential
information by such Scientific Advisors.
COMPETITION; PRODUCT OBSOLESCENCE
The medical device industry is intensely competitive, particularly in
terms of price, quality and marketing. Most of the Company's competitors
are better established and have substantially greater financial, marketing
and other resources than the Company. Further, most of the Company's
competitors have been in existence for a substantially longer period of
time and may be better established in those markets where the Company
intends to sell its devices. Although the Company is not presently aware
of any competitor that commercially manufactures and sells any medical
devices with the same technological advantages as those the Company
presently intends to sell, the Company is aware that several technologies
similar to the Personal Alarm System are being developed and tested. Due
to the Company's relative lack of experience, financial, marketing and
other resources there can be no assurance that the Company will be able to
market this device successfully, develop and market any of its other
medical devices,
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or compete in the medical device industry in general.
Moreover, competitors may develop and successfully commercialize
medical devices that directly or indirectly accomplish what the Company's
medical devices are designed to accomplish in a superior and/or less
expensive manner. As a consequence, such competing medical devices may
render the Company's medical devices obsolete. There can be no assurance
that, either prior to or after the Company has developed, commercialized
and marketed any of its medical devices that such devices will not be
rendered obsolete by competing medical devices.
HEALTH CARE REFORM AND RELATED MEASURES; UNCERTAINTY OF PRODUCT PRICING AND
REIMBURSEMENT
The levels of revenues and profitability of sales of medical devices
may be affected by the continuing efforts of governmental and third party
payors to contain or reduce the costs of health care through various means
and the initiatives of third party payors with respect to the availability
of reimbursement. For example, in certain foreign markets, pricing or
profitability of medical devices is subject to government control. In the
United States there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement
similar governmental control. Although the Company cannot predict what
legislative reforms may be proposed or adopted or what actions federal,
state or private payors for health care products may take in response to
any health care reform proposals or legislation, the existence and pendency
of such proposals could have a material adverse effect on the Company in
general.
Whether a medical procedure is subject to reimbursement from third
party payors impacts upon the likelihood that a medical product associated
with such a procedure will be purchased. Third party payors are
increasingly challenging the prices charged for medical products. Two of
the Company's three products, the CRS and the ICP also involve a medical
procedure. There can be no assurance that any of the Company's products,
or the procedures that accompany the CRS and ICP, will be reimbursable. To
the extent any or all of the Company's medical products, and any
accompanying medical procedures, are not reimbursable by third party payors
the Company's ability to sell its products on a competitive basis will be
adversely affected, which could have a material adverse effect on the
Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend to a large extent upon its ability
to retain Mr. M. Lee Hulsebus, its Chief Executive Officer and Chairman of
the Board. The Company has obtained a term "key man life insurance policy"
in the amount of $1,000,000 with respect to Mr. Hulsebus of which the
Company is the sole beneficiary in the
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event of his death. The loss or unavailability of the services of Mr.
Hulsebus would have a material adverse effect on the business and
operations of the Company.
NEED FOR ADDITIONAL PERSONNEL
In the event that the Company receives FDA clearances for expanded
diagnostic claims with respect to the Cell Recovery System or Intracranial
Pressure Monitoring System, or there is significant commercial demand for
the Personal Alarm System or Cell Recovery System as currently cleared by
the FDA, the Company will need to hire additional administrative and sales
and marketing personnel. These demands are expected to require the addition
of new management personnel and the development of additional expertise by
existing management personnel. There can be no assurance that the Company
will be able to hire and retain the additional personnel that it will
require. Failure to do so could have a material adverse effect on the
Company.
CONTINUED NASDAQ SMALLCAP LISTING
The Company's Common Stock is presently listed on the Nasdaq SmallCap
Market. The National Association of Securities Dealers Automated Quotation
System has established certain standards for the initial listing and
continued listing of a security on the Nasdaq SmallCap Market. The
maintenance standards require, among other things, that an issuer have
total assets of at least $2,000,000, capital and surplus of at least
$1,000,000, a minimum bid price for the listed securities of $1.00 per
share, and that the minimum market value of the "public float" be at least
$1,000,000. It is anticipated that upon consummation of this offering the
Company's Common Stock will continue to be listed on the Nasdaq SmallCap
Market. As of April 17, 1996, the closing bid price of the Company's
Common Stock was $.91. However, there can be no assurance that the Company
will continue to satisfy the minimum price per share or other standards
required for the continued Nasdaq SmallCap Market listing of its Common
Stock. If the Company's Common Stock were excluded from the Nasdaq
SmallCap Market it would materially adversely affect the price and
liquidity of the Common Stock and the Preferred Stock. In the event that
the Company is unable to satisfy Nasdaq SmallCap Market's maintenance
requirements, trading would be conducted in the "pink sheets" or the OTC's
Electronic Bulletin Board. As a consequence, trading with respect to the
Company's Common Stock would be subject to the so-called "penny stock"
rules. Unless an exception is available, the penny stock rules require,
among other things, the delivery to a prospective purchaser, prior to any
transaction involving a penny stock, of a disclosure schedule explaining
the penny stock rules and the risks associated therewith. If the Company's
Common Stock was subject to the regulations on penny stocks, the market
liquidity for the Common Stock would be severely affected by limiting the
ability of broker/dealers to sell the Common Stock in
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the public market. There is no assurance that trading in the Company's
securities will not be subject to these or other regulations that would
materially adversely affect the market for such securities.
VOLATILITY OF THE COMPANY'S COMMON STOCK PRICES
The market price of the Company's Common Stock has experienced
significant volatility. Various factors and events, including announcements
by the Company or its competitors concerning patents, proprietary rights,
technological innovations or new commercial products, as well as public
concern about the safety of medical devices in general, may have a
significant impact on the Company's business and the price of the Company's
Common Stock.
NO DIVIDENDS WITH RESPECT TO COMMON STOCK
The Company has not paid any cash dividends with respect to its Common
Stock, and it is unlikely that the Company will pay any dividends on its
Common Stock in the foreseeable future. The Company is required to pay a
__% cumulative, semi-annual dividend with respect to its Preferred Stock in
shares of Common Stock. Earnings, if any, that the Company may realize will
be retained in the business for further development and expansion. See
"Market Price for the Common Stock and Dividends."
PRODUCT LIABILITY AND INSURANCE
The Company's business could, in the future, expose it to product
liability claims for personal injury or death. Such risks are inherent in
the testing, manufacturing and marketing of its products and services.
Although the Company recently obtained product liability insurance, there
can be no assurance that such insurance will provide adequate coverage
against potential liabilities or that it will be able to maintain or, if
need be, increase such coverage.
BROAD MANAGEMENT DISCRETION IN APPLICATION OF PROCEEDS
A substantial portion of the proceeds of this offering will be applied
to working capital of the Company. The Company's management will therefore
have broad discretion with respect to the application of the proceeds of
this offering in order to accommodate changing circumstances.
ANTI-TAKEOVER PROVISIONS; POISON PILL ISSUANCE OF OTHER PREFERRED STOCK;
UTAH ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and By-Laws contain provisions
that may make the acquisition of control of the Company by means of tender
offer, over-the-counter market purchases, a
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proxy fight or otherwise, more difficult. This could prevent
securityholders from realizing a premium on their securities of the
Company. The Company also adopted a staggered Board of Directors at its
most recent annual meeting of shareholders, which is a further impediment
to a change in control.
The Company has adopted a so-called "poison pill." Specifically, the
poison pill significantly increases the cost to an unwanted party to
acquire control of the company upon the acquisition by such unwanted suitor
of 15% of the outstanding voting power of the Company.
In addition, the Board of Directors may issue one or more series of
preferred stock other than the Preferred Stock being offered hereby without
any action on the part of the shareholders of the Company, the existence
and/or terms of which may adversely affect the rights of holders of the
Common Stock. In addition, the issuance of any such additional preferred
stock may be used as an "anti-takeover" device without further action on
the part of the shareholders. Issuance of additional preferred stock,
which may be accomplished through a public offering or a private placement
to parties favorable to current management, may dilute the voting power of
holders of Common Stock and the Preferred Stock (such as by issuing
preferred stock with super voting rights) and may render more difficult the
removal of current management, even if such removal may be in the
shareholders' best interests. See "Description of Securities - Other
Preferred Stock" and "- Share Purchase Plan."
The Company is subject to the provisions of Sections 61-6-3 through
61-6-12 of the Utah Control Shares Acquisition Act, an anti-takeover
statute. Sections 61-6-3 through 61-6-12 effectively provide that in the
event a person acquires ownership or the power to effect, directly or
indirectly, the exercise of 20% or more of the voting power of a Utah
corporation in connection with the election of directors, then such person
shall only be entitled to vote to the extent expressly agreed to by the
majority of the other shareholders of the corporation. Accordingly,
potential acquirors of the Company may be discouraged from attempting to
effect acquisitions of the Company's voting securities, thereby possibly
depriving holders of the Company's securities of certain opportunities to
sell or otherwise dispose of such securities at above-market prices.
LITIGATION
The Company is currently involved in lawsuits that could have a
material adverse effect on the Company. See "Business - Legal
Proceedings."
25
<PAGE>
NO PRIOR PUBLIC MARKET FOR PREFERRED STOCK; ARBITRARY DETERMINATION OF
OFFERING PRICE
Prior to this offering, there has been no public market for the
Preferred Stock and there can be no assurance that an active public market
for the Preferred Stock will develop or, if developed, be sustained after
this offering. The terms and initial public offering price of the
Preferred Stock, although related to the market price of the Common Stock
on the date of this offering, were arbitrarily determined by negotiations
between the Company and the Representative and do not necessarily bear any
relationship to the Company's assets, book value, revenues or other
established criteria of value, and should not be considered indicative of
the actual value of the Preferred Stock. See "Underwriting."
DILUTION
Upon completion of this offering, assuming a Conversion Price of
$______, purchasers of the Preferred Stock hereby, assuming conversion at
the Conversion Price, will experience immediate dilution in the net
tangible book value of their investment in the Company of $______ per share
of Common Stock, or approximately __% dilution. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
There are presently 1,205,336 shares of Common Stock that were issued
and outstanding that are "restricted securities" as that term is defined by
Rule 144 of the Securities Act, 342,380 of which are currently eligible for
resale in compliance with Rule 144 of the Securities Act. Of these shares,
5,336 are owned by current officers and directors of the Company who have
agreed with the Representative not to directly or indirectly offer, sell,
transfer or otherwise encumber or dispose of any of such shares for a
period of thirteen (13) months after the effective date of this offering.
In addition, the Company is registering an additional 247,500 shares of
Preferred Stock and _________ shares of Common Stock issuable upon exercise
of the Preferred Stock in the Concurrent Offering, although holders of
these securities have agreed with the Representative not to, directly or
indirectly, offer, sell, transfer or otherwise encumber any of these
securities for thirteen (13) months after the date of this Prospectus. The
Company has also issued an aggregate of 1,997,500 warrants which shall vest
and become exercisable from time to time. Of these non-public warrants,
737,500 are owned by officers and directors of the Company who have agreed
with the Representative not to, directly or indirectly, offer, sell,
transfer or otherwise encumber any of these securities, or the underlying
Common Stock into which these securities are exercisable, for thirteen (13)
months after the date of this Prospectus. Rule 144 provides that, in
general, a person holding restricted securities for a period of two (2)
years may, every three (3) months thereafter, sell in brokerage
transactions
26
<PAGE>
an amount of shares which does not exceed the greater of one percent (1%)
of the Company's then outstanding Common Stock or the average weekly
trading volume of the Common Stock during the four (4) calendar weeks
immediately prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of shares without any quantity limitations by a
person who is not an affiliate of the Company and was not an affiliate at
any time during the ninety (90) day period immediately prior to such sale,
and who has satisfied a three (3) year holding period. Of the 1,205,336
shares of restricted Common Stock outstanding, approximately 342,380 shares
have been held for more than two (2) years and are currently eligible for
sale under Rule 144. Sales of the Company's Common Stock by shareholders
under Rule 144 may have a depressive effect on the market price of the
Company's Common Stock. See "The Company - Concurrent Offering," "Shares
Eligible for Future Sale," "Management - Executive Compensation," "-
Management Employment Agreements; Consulting Agreements," "- Option Plans,"
"Description of Securities" and "Underwriting."
27
<PAGE>
THE COMPANY
The Company was incorporated in the State of Utah in February 1980 and
maintains its principal place of business at 9171 Towne Centre Drive, Suite
355, San Diego, CA 92122. The Company's telephone number is (619) 455-
7127.
RECENT FINANCINGS
1995 Private Placement
In the second quarter of 1995, the Company completed a private
placement (the "1995 Private Placement") of its securities and received net
proceeds of $974,769 in connection with the sale of 20.75 units at a
purchase price of $50,000 per unit. Each unit consisted of 71,429 shares
of Common Stock and 25,000 3-year warrants to purchase 25,000 shares of
Common Stock. The warrants are exercisable for $1.00 per share of Common
Stock. The Company also issued to the broker-dealer which assisted the
Company in effecting the 1995 Private Placement 56,250 2-year warrants to
purchase 56,250 shares of Common Stock at an exercise price of $1.00 per
share. All of the shares of Common Stock, and the shares of Common Stock
underlying the warrants issued in the 1995 Private Placement (including the
shares of Common Stock underlying the warrants issued to the broker-dealer)
were included, along with other securities, on the Company's registration
statement on Form S-3 (the "S-3 Registration Statement") that was declared
effective by the Staff of the Securities and Exchange Commission on
_______ 1996.
The Convertible Debt
In June and July, 1995, the Company issued an aggregate of $275,000 of
short-term convertible debt which, if not converted into Common Stock, was
to mature in six months and bore interest at the rate of 48% per annum (the
"Convertible Debt") payable on maturity. As of December 27, 1995, all of
the Convertible Debt had converted into Common Stock at the rate of 2.5
shares of Common Stock for each $1.00 of indebtedness, or an aggregate of
687,500 shares of Common Stock (the "Debt Shares"). In connection with the
issuance of the Convertible Debt, the Company also issued an aggregate of
137,500 warrants exercisable for 137,500 shares of Common Stock at $.60 per
share. The warrants expire on ________, 1996 [ten (10) days after the
effective date of the Form S-3 Registration Statement.] The Debt Shares
and the shares of Common Stock underlying the warrants, that were issued in
connection with the Debt Shares, among other securities, were included on
the S-3 Registration Statement.
28
<PAGE>
1996 Private Placement
On January 24, 1996, the Company completed a private placement
pursuant to which it received net proceeds of $1,470,000 from the sale of
33 units (the "Units") to non-affiliated, accredited investors (the
"Private Placement"), each Unit consisting of (i) a secured, one year, 10%,
$50,000 promissory note (the "Note"), and (ii) 7,500 shares of the
Company's Series I convertible preferred stock, par value $.01 per share
(the "Series I Preferred Stock"). The Series I Preferred Stock does not pay
any dividends and automatically converts into the Preferred Stock on the
effective date of this Prospectus provided that the effective date of this
Prospectus is on or before June 14, 1996. In the event that this offering
is not effected before June 15, 1996, the Series I Preferred Stock
automatically converts into Common Stock on the basis of one (1) share of
Series I Preferred Stock for the number of shares of Common Stock equal to
$5.00 (plus any declared and unpaid dividends, if any) divided by eighty
(80%) percent of the average of the closing bid and asked price of the
Common Stock on June 14, 1996.
CONCURRENT OFFERING
The registration statement of which this Prospectus forms a part also
includes a Prospectus with respect to an offering of 247,500 shares of
Preferred Stock and ________ shares of Common Stock issuable upon
conversion of such shares of Preferred Stock, all of which may be sold in
the open market, in privately negotiated transactions or otherwise,
directly by the Selling Shareholders thereof. The Selling Shareholders
have agreed with the Representative not to sell any of such securities for
thirteen (13) months from the date of this Prospectus without the prior
written consent of the Representative. The Company will not receive any
proceeds from the sale of such securities. Expenses of the Concurrent
Offering, other than fees and expenses of counsel to the Selling
Shareholders and selling commissions, will be paid by the Company. Sales
of such securities by the holders thereof or the potential for such sales
may have an adverse effect on the market price of the shares offered
hereby. See "Risk Factors -Shares Eligible for Future Sale."
29
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,300,000 shares of Preferred Stock, after deducting underwriting discounts
and estimated offering expenses, are estimated to be approximately
$5,155,000 ($6,003,250 if the Over-Allotment Option granted to the
Representative is exercised in full), based on an assumed initial public
offering price of $5.00 per share. The Company intends to apply such net
proceeds in approximately the following manner:
<TABLE>
<CAPTION>
Approximate Approximate
Amount of Percentage of
Net Proceeds Net Proceeds
------------ --------------
<S> <C> <C>
Repayment of Indebtedness (1) $1,705,000 33.0%
Research and Development 1,400,000 27.2%
Sales and Marketing 800,000 15.6%
Working Capital 1,250,000 24.2%
---------- -----
TOTAL $5,155,000 100.0%
========== =====
</TABLE>
---------------
(1) Represents repayment of $1,650,000 of principal and approximately
$55,000 of interest through April 30, 1996, relating to the Notes
issued in the Private Placement.
The allocation of the use of proceeds represents management's
estimates based upon current business and economic conditions. Although the
Company does not contemplate material changes in the proposed allocation of
the use of proceeds, to the extent the Company finds that adjustment is
required by reason of existing business conditions, the amounts shown may
be adjusted among the uses indicated above. The Company believes that the
net proceeds of this offering, together with anticipated revenues from the
PAS device, will be sufficient for the Company to conduct its operations
for the 12 month period following this offering. See "Risk Factors -
Dependence on Offering Proceeds; Possible Need for Additional Financing;
Possible Issuance of Securities; Future Dilution," "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Any net proceeds from the exercise of the Over-Allotment Option will
be used for working capital purposes. The net proceeds of this offering
that are not expended immediately shall be deposited in interest bearing
accounts, or invested in government obligations, certificates of deposit or
similar short-term, low risk investments.
30
<PAGE>
The Company will not receive any of the proceeds from the sale of any
of the securities being offered by the Selling Shareholders in the
Concurrent Offering.
31
<PAGE>
MARKET PRICE FOR THE COMMON STOCK AND DIVIDENDS
The Common Stock is quoted on the Nasdaq SmallCap Market under the
symbol "MEDD". Prior to this offering, there has been no public market for
the Company's Preferred Stock. The following table sets forth, for the
periods indicated, the high and low bid price for the Common Stock, as
reported by the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
Bid Price
------------
High Low
----- -----
<S> <C> <C>
1994
----
First Quarter............ $2.71 $1.17
Second Quarter........... $2.08 $1.23
Third Quarter............ $1.94 $1.22
Fourth Quarter........... $1.19 $ .86
1995
----
First Quarter............ $1.00 $ .56
Second Quarter........... $1.44 $ .38
Third Quarter............ $1.63 $ .75
Fourth Quarter........... $1.06 $ .63
1996
----
First Quarter............ $ .88 $ .50
Second Quarter (through
April 17, 1996).......... $ .91 $ .75
</TABLE>
On April 17, 1996, the closing bid and asked prices of Common Stock as
reported by the Nasdaq SmallCap Market were $.91 and $1.00 per share,
respectively.
On April 17, 1996, there were 1,089 holders of record of Common Stock
and 45 holders of record of the Company's Series I Preferred Stock.
The Company has not paid any dividends since its inception and does
not intend to pay dividends in the foreseeable future with respect to the
Common Stock. The Company is required to pay a __% cumulative, semi-annual
dividend, which will be paid solely in shares of Common Stock, with respect
to its Preferred Stock, all of which will convert into Common Stock no
later than _______, 1997, [thirteen (13) months after the date of this
Prospectus]. It is presently anticipated that any earnings which the
Company may realize in the foreseeable future will be retained to finance
the growth of the Company.
32
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1995, (a) actual, (b) pro forma to give effect to the issuance
by the Company subsequent to December 31, 1995 of an additional 93,750
shares of Preferred Stock, and an additional $625,000 of Notes in
connection with the completion of the Private Placement, and (c) pro forma
as adjusted to give effect to the sale of the Preferred Stock offered
hereby at an assumed public offering price of $5.00 per share, and the
application of the net proceeds therefrom. The following table does not
give effect to the issuance of an additional 381,140 shares of Common Stock
subsequent to December 31, 1996.
December 31, 1995
----------------------------------------
Pro Forma
Actual(1) Pro Forma(2) As Adjusted(3)
---------- ------------ --------------
Short-Term Notes $ 640,625 $1,031,250 $ -0-
Total Liabilities $ 961,401 $1,352,026 $ 320,776
Preferred Stock, par value
$.01 per share, 10,000,000
shares authorized;
authorized, 153,750 shares
issued and outstanding actual,
247,500 authorized, issued
and outstanding pro forma,
and 0 issued and outstanding
pro forma as adjusted; $ 384,375 $ 618,750 $ -0-
____% Cumulative, Convertible
Series A Preferred Stock,
0 shares issued and
outstanding actual and pro
forma, 1,547,500 issued
and outstanding pro forma
as adjusted $ -0- $ -0- $5,773,750
Common Stock, par value
$.15, 100,000,000 shares
authorized, 8,393,199
shares issued and
outstanding actual,
pro forma and
pro forma as adjusted $1,258,980 $1,258,980 $1,258,980
33
<PAGE>
Common Stock to be issued
(50,000 shares) $ 23,440 $ 23,440 $ 23,440
Additional paid in capital $ 12,146,899 $ 12,146,899 $ 12,146,899
Deferred Compensation $ 247,500 $ 247,500 $ 247,500
Accumulated deficit $(11,879,774) $(11,879,774) $(12,733,524)
Total shareholders' equity $ 2,181,420 $ 2,415,795 $ 6,717,045
Total capitalization $ 3,142,821 $ 3,767,821 $ 7,037,821
--------------
(1) Net of $384,375 of original issue discount and $117,500 of loan
origination fees attributable to $1,025,000 of Notes and 153,750 shares
of Preferred Stock issued pursuant to the Private Placement as of
December 31, 1995.
(2) In connection with the issuance of the Notes and Preferred Stock in the
Private Placement subsequent to December 31, 1995, the Company recorded
$234,375 of original issue discount and $62,500 of loan origination
fees with respect to the Notes and Preferred Stock.
(3) Includes non-recurring interest expense of $618,750 and $180,000,
respectively, for the original issue discount and loan origination fees
related to the repayment of the Notes issued in the Private Placement.
34
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at December 31,
1995 was $9,666 or $0 per share of Common Stock. "Pro forma net tangible
book value before conversion" per share represents the amount of total
tangible assets of the Company less total liabilities divided by the number
of shares of Common Stock outstanding after giving effect on a pro forma
basis to the issuance by the Company of 247,500 shares of Preferred Stock
in the Private Placement and assuming the conversion thereof into Common
Stock on December 31, 1995 at a rate of _____ shares of Common Stock for
each share of Preferred Stock. After giving effect to the sale of
1,300,000 shares of Preferred Stock offered hereby at an assumed initial
public offering price of $5.00 per share, the pro forma net tangible book
value of the Company at December 31, 1995 would have been $_______, or $___
per share of Common Stock. "Pro forma net tangible book value after
conversion" represents the amount of the total tangible assets of the
Company less the total liabilities divided by the number of shares of
Common Stock outstanding after giving effect on a pro forma basis to the
conversion of 1,300,000 shares of Preferred Stock offered hereby into
________ shares of Common Stock based upon the Conversion Price. This
represents an immediate increase in pro forma net tangible book value of
$.25 per share to the existing shareholders, and immediate dilution of $.55
per share to purchasers of the Preferred Stock in this offering. The
following table illustrates such dilution on a per share basis.
Price per share of common stock upon conversion $
Pro forma net tangible book value per
share before conversion $
Increase in net tangible book value per
share $
Pro forma net tangible book value per share
after conversion $
Dilution per share $
===
35
<PAGE>
The following table sets forth, as of December 31, 1995, the number of
shares of Common Stock purchased from the Company after giving effect to the
issuance by the Company of 381,140 shares of Common Stock subsequent to
December 31, 1995 and the total cash consideration paid and the average price
per share paid by existing shareholders and by investors in this offering
based upon an initial public offering price of $_____ per share and a
Conversion Price of $______.
<TABLE>
<CAPTION>
Percentage of Average
Percent of Total Cash Total Price
Shares Total Consideration Consideration Per
Purchased Shares Paid Paid Share
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Present 1,348,740 __% $2,097,480 __% $1.56
Shareholders
Common Stock _______ ______% $_______ _______% $_______
issuable upon
conversion
Total 100.00% $ 100.00% $
======= ====== ======= ====== =======
</TABLE>
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial information presented for the years
ended December 31, 1993 and 1994 are derived from the audited financial
statements of the Company prepared by Robert Early & Company, P.C., the
Company's prior independent public accountants. The financial statements
for the year ended December 31, 1995 have been audited by BDO Seidman, LLP,
independent certified public accountants. The following selected
consolidated financial information should be read in conjunction with the
Consolidated Financial Statements and the related Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
STATEMENT OF OPERATING DATA:
<TABLE>
<CAPTION>
June 1, 1992
to
Year Ended December 31, December
--------------------------------------- 31, 1995 (1)
1993 1994 1995 (Cumulative)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ --- $ --- $ --- $ ---
Operating Expenses
Research and
development 307,819 778,468 943,510 2,056,504
General and
administrative (2) 728,188 1,717,132 1,971,781 5,138,721
Net loss $(1,605,061) $(2,888,533) $(2,918,216) $ (8,173,072)
Net loss per share $(1.33) $ (.95) $ (.43)
Weighted Average Shares
Outstanding 1,208,144 3,032,813 6,714,168
</TABLE>
- ------------------
(1) For purposes of presenting the Company's consolidated cumulative financial
information, June 1, 1992 is deemed to be the date the Company commenced
its current business activities related to the medical device business and
became a development stage company.
(2) Includes costs related to marketing, promotional and sales activities in
addition to office, administrative and overhead expenses.
37
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
Pro Forma
Pro Forma As Adjusted
Year Ended December 31, December December
1993 1994 1995 31, 1995(1) 31, 1995(1)(2)
---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Working capital $ 107,008 $ (109,574) $ (417,120) $ (245,245) $4,236,005
Total assets 3,110,868 2,857,663 3,142,821 3,767,871 7,037,821
Total long-term
liabilities 650,301 3,400 1,755 1,755 1,755
Accumulated deficit (6,073,025) (8,961,558) (11,879,774) (11,879,774) (12,733,524)
Shareholders'
equity 2,308,148 2,261,078 2,181,420 2,415,795 6,717,045
</TABLE>
------------------
(1) Pro forma to give effect to the issuance of an additional $625,000 of
promissory notes (resulting in an aggregate principal amount of $1,650,000
of promissory notes) bearing interest at the rate of 10% per annum (the
"Notes") and an additional 93,750 shares of Preferred Stock (resulting in
an aggregate of 247,500 shares of Preferred Stock) issued pursuant to a
private placement completed in January 1996 (the "Private Placement") and
the recording of $618,750 of original issue discount and loan origination
fees of $180,000 related to the Private Placement. Does not give effect to
an aggregate of 381,140 shares of Common Stock issued by the Company in
exchange for services subsequent to December 31, 1995. See "The Company -
Recent Financings - 1996 Private Placement" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources."
(2) Pro forma as adjusted to give effect to (i) the sale of the Preferred
Stock offered hereby at an assumed initial public offering price of $5.00
per share and the initial application of the net proceeds therefrom, and
(ii) non-recurring charges to interest expense in the amounts of $618,750
and $180,000, respectively, for the original issue discount and loan
origination fees related to the Private Placement. See "The Company" and
"Use of Proceeds."
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus.
GENERAL
From its incorporation in 1980 until June of 1992, the Company was
engaged exclusively in oil and gas activities. In June 1992 the Company
commenced certain initial activities with respect to the medical device
business. Thereafter, the Company continued to increase its activities in
the medical device field while simultaneously decreasing its oil and gas
activities. Effective as of January 1, 1994, the Company having disposed
of all of its oil and gas interests and ceased all activities related
thereto, commenced on a full time basis its current medical device
operations. Accordingly, the results of the Company's operations prior to
1994 are not necessarily comparable. On June 1, 1992, the Company was
considered, for accounting purposes, to have re-emerged as a development
stage company.
The Company believes that its research and development costs will
continue to be its largest single operating cost for the next 12 months and
beyond as the Company completes the development of the CRS and ICP. As
development of these devices concludes, increased marketing and sales costs
will be incurred and the Company's working capital requirements can also be
expected to grow accordingly. The original issue discount incurred by the
Company is a one time charge related to the Company's Private Placement
completed in January 1996.
The Company, which is still in the development stage with respect to its
current medical device operations, has not been profitable for the last ten
years and expects to incur additional operating losses for the foreseeable
future. The following discussion and analysis should be read in
conjunction with the financial statements and notes thereto appearing
elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Year ended December 31, 1995 compared to year ended December 31, 1994
REVENUES
There were no operating revenues in 1995 or 1994.
39
<PAGE>
OPERATING EXPENSES
Research and Development
------------------------
Research and development costs in 1995 were $943,510 as compared to
$778,468 in 1994, representing an increase of 21.2%. This increase was due
to a full year of research and development activities in 1995 as opposed to
approximately nine months of such activities in 1994. Increased research
and development costs were primarily related to engineering costs
associated with further development of the PAS, design and development and
FDA submission costs related to the CRS, and further design changes to the
ICP.
General and Administrative
--------------------------
General and administrative costs were $1,971,781 in 1995 as compared to
$1,717,132 in 1994 representing an increase of 14.9%. This increase was the
result of the hiring in 1995 of a Vice President of Marketing and two
regional sales managers, increased advertising and promotional expenses to
introduce the PAS device, and higher office expenses and rental costs. The
Company's office expenses and rental costs were $116,700 in 1995 as
compared to $78,220 in 1994.
Losses
------
The Company's net loss for 1995 was $2,918,216 as compared to $2,888,533
in 1994 representing an increase of 1.0%. This increase was primarily
attributable to an increase in research and development and general and
administrative costs which exceeded the loss incurred by the Company in
discontinuing its oil and gas operations in 1994. Loss per share was $.43
in 1995 as compared to $.95 in 1994, representing a decrease of 54.7%.
This decrease was primarily attributable to the increase in the average
number of shares outstanding in 1995 as compared to 1994.
Year ended December 31, 1994 compared to year ended December 31, 1993
REVENUES
There were no operating revenues in 1994 or 1993.
OPERATING COSTS
Research and Development
------------------------
Research and Development costs in 1994 were $778,468 as compared to
$307,819 in 1993, representing an increase of 152.9%. This increase was
attributable primarily to the Company commencing development activities of
its medical device business on a full-time basis starting in April of 1994.
40
<PAGE>
General and Administrative
--------------------------
General and administrative costs were $1,717,132 in 1994 as compared to
$728,188 in 1993, representing an increase of 135.8%. This increase in
general and administrative costs is a result of the Company substantially
increasing its activities in 1994 as it altered its focus from an oil and
gas exploration company to a medical device company. During this period
advertising and promotional costs increased to $456,712 in 1994 from
$195,659 in 1993 reflecting the Company's increasing of its activities in
general in the medical device field and the Company's office expenses and
rental costs increased to $78,220 in 1994 from $26,868 in 1993. This
latter increase was primarily due to lease cancellation costs of $40,265,
resulting from the Company's move during the second quarter of 1993 to its
present offices.
Losses
------
The Company's net loss for 1994 was $2,888,533 as compared to $1,605,061
in 1993, representing an increase of 80%. This increase resulted from
increased activities in 1994 in connection with the Company commencing the
development of its medical devices on a full-time basis and a non-recurring
charge related to the discontinuance of its oil and gas activities. Net
loss per share in 1994 was $.95 as compared to $1.33 in 1993 representing a
decrease of 28.6%. The net loss per share decrease was the result of an
increase in the average number of common shares outstanding during 1994.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its capital requirements for its current
medical device operations from the sale of debt and equity securities and
the issuance of Common Stock in exchange for services. The Company's cash
position at December 31, 1995 was $306,851 as compared to $483,611 at
December 31, 1994, representing a decrease of 36.5%. In 1995, $1,435,445
of net cash was used for operating activities plus $104,270 was invested in
patents, property and equipment. These amounts were not fully offset by
the $1,362,955 received by the Company in 1995 from financing activities.
Net cash used in operating activities in 1995 consisted principally of a
net loss of $2,918,216, plus an increase in other net assets (excluding
cash) of $273,984, the reversal of a reserve for litigation in the amount
of $286,996 which was offset by $1,563,130 in Common Stock paid for
services in lieu of cash, plus depreciation, amortization and non-cash
compensation accrual of $480,621. Financing activities in 1995 resulted in
$1,182,500 of net proceeds from notes payable, plus the receipt of $231,959
in net proceeds from the issuance of Common Stock. The Company also repaid
$51,504 in principal with respect to outstanding notes and leases in 1995.
The Company's increase in current assets in 1995 of $58,915, or 12.2%, was
offset by an increase in current
41
<PAGE>
liabilities of $366,461, or 61.8%, from December 31, 1994 to December 31,
1995. These changes in current assets and current liabilities resulted in
an increase in the Company's negative working capital position to $417,120
at December 31, 1995 from $109,574 at December 31, 1994. Management
expects to increase working capital to meet the growing requirements of the
Company as it brings its products to market. The Company plans to fund its
working capital needs from the proceeds of this offering.
The Company's recurring losses from operations, negative working capital
and limited capital resources raise substantial doubt about the Company's
ability to continue as a going concern.
While the Company had no inventory at December 31, 1994, inventory
consisting solely of parts and materials was $147,593 at December 31, 1995
in anticipation of the first quarter market launch of the PAS.
In the second quarter of 1995, the Company completed a private placement
(the "1995 Private Placement") of its securities and received net proceeds
of $974,769 in connection with the sale of 20.75 units at a purchase price
of $50,000 per unit. Each unit consisted of 71,429 shares of Common Stock
and 25,000 3-year warrants to purchase 25,000 shares of Common Stock. The
warrants are exercisable for $1.00 per share of Common Stock. The Company
also issued to the broker-dealer which assisted the Company in effecting
the 1995 Private Placement 56,250 2-year warrants to purchase 56,250 shares
of Common Stock at an exercise price of $1.00 per share. The Company's S-3
Registration Statement relates to, among other securities, all of the
shares of Common Stock, and the shares of Common Stock underlying the
warrants issued in the 1995 Private Placement (including the shares of
Common Stock underlying the warrants issued to the broker-dealer).
In June and July, 1995, the Company issued an aggregate of $275,000 of
short-term convertible debt which, if not converted into Common Stock, was
to mature in six months and bore interest at the rate of 48% per annum (the
"Convertible Debt") payable on maturity. As of December 27, 1995, all of
the Convertible Debt had converted into Common Stock at the rate of 2.5
shares of Common Stock for each $1.00 of indebtedness, or an aggregate of
687,500 shares of Common Stock (the "Debt Shares"). In connection with the
issuance of the Convertible Debt, the Company also issued an aggregate of
137,500 warrants exercisable for 137,500 shares of Common Stock at $.60 per
share. The warrants expire on _________ [ten days after the effective date
of the S-3 Registration Statement]. The Company's S-3 Registration
Statement relates to, among other securities, the Debt Shares and the
shares of Common Stock underlying the warrants that were issued in
connection with the Debt Shares.
On January 24, 1996, the Company completed a private placement
42
<PAGE>
pursuant to which it received net proceeds of $1,470,000 from the sale of
33 units (the "Units") to non-affiliated, accredited investors (the
"Private Placement"), each Unit consisting of (i) a secured, one year, 10%,
$50,000 promissory note (the "Note"), and (ii) 7,500 shares of the
Company's Series I convertible preferred stock, par value $.01 per share
(the "Series I Preferred Stock"). The Series I Preferred Stock does not pay
any dividends and is automatically convertible into the Preferred Stock
provided that the date of this Prospectus is on or before June 14, 1996.
In the event that this offering is not effected before June 15, 1996, the
Series I Preferred Stock automatically converts into Common Stock on the
basis of one (1) share of Series I Preferred Stock for the number of shares
of Common Stock equal to $5.00 (plus any declared and unpaid dividends, if
any) divided by eighty (80%) percent of the average of the closing bid and
asked price of the Common Stock on June 14, 1996.
The Company anticipates that its current resources, together with the
net proceeds of this offering and sales of the PAS, will be sufficient to
finance the Company's currently anticipated needs for operating and capital
expenditures for at least 12 months from the consummation of this offering.
The Company intends to use the net proceeds, in addition to the repayment
of indebtedness incurred in the Private Placement, for marketing purposes
in connection with the Personal Alarm System and for research and
development related to the Cell Recovery System and the Intracranial
Pressure Monitoring System. The Company's working capital and capital
requirements will depend upon numerous factors, including progress of the
Company's research and development programs; preclinical and clinical
testing; timing and cost of obtaining regulatory clearances; levels of
resources that the Company devotes to the development of manufacturing and
marketing capabilities; and technological advances. Until required for
operations, the Company's policy is to keep its cash reserves in bank
deposits, certificates of deposit, commercial paper, corporate notes, U.S.
Government instruments and other investment-grade quality instruments. See
"Use of Proceeds," "Risk Factors - Development Stage Company; Accumulated
Deficit; History of Operating Losses; Uncertainty of Future Profitability;
Auditors Going Concern" and "-Dependence on Offering Proceeds; Need for
Additional Financing; Possible Issuance of Securities; Future Dilution."
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1995, the Company had net operating loss
carryforwards under Section 172 of the Internal Revenue Code, as amended
(the "Code"), of approximately $12,540,000 and $4,047,000 for Federal and
state income tax purposes, respectively, which may be used to offset future
taxable income. The income tax loss carryforwards will expire as follows:
43
<PAGE>
<TABLE>
<CAPTION>
Federal Net State Net
Operating Loss Operating Loss
Expiration Year Carryforward Carryforward
--------------- -------------- --------------
<S> <C> <C>
1997 $ 78,744
1998 64,504
1999 465,659
2001 1,328,943
2002 1,069,599
2003 186,796
2004 72,652
2005 319,542
2006 108,563
2007 1,519,402 $ 456,073
2008 1,619,849 738,236
2009 2,778,437 1,389,219
2010 2,927,457 1,463,729
----------- ----------
$12,540,147 $4,047,257
=========== ==========
</TABLE>
Under Section 382 of the Code ("Section 382"), the utilization of net
operating loss carryforwards is limited after an ownership change, as
defined in Section 382, to an annual amount equal to the market value of
the loss corporation's outstanding stock immediately before the date of the
ownership change multiplied by the highest federal long-term tax exempt
rate in effect for any month in the three (3) calendar month period ending
with the calendar month in which the ownership change occurred. In the
event of an ownership change as a result of this offering, the Company will
be subject to an annual limitation on the use of its net operating losses.
Therefore, in the event that the Company achieves profitability in excess
of the annual limitation amount, such limitation would have the effect of
increasing the Company's tax liability and reducing the net income and
available cash resources of the Company in such year. The dollar value of
such limitation is indeterminable at this time.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Account Standards No. 121, "Accounting for the
impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" (SFAS No. 121) issued by the Financial Accountant Standards Board
(FASB) is effective for financial statements for fiscal years beginning
after December 15, 1995. The new standard establishes new guidelines
regarding when impairment losses on long-lived assets, which include plant
and equipment, and certain identifiable intangible assets, should be
recognized and how impairment losses should be measured. The Company does
not expect adoption of SFAS No. 121 to have a material effect on its
financial position or results of operations.
Financial Accounting Standards No. 123, "Accounting for Stock-
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<PAGE>
Based Compensation" (SFAS No. 123) recently issued by the Financial
Accounting Standards Board (FASB) is effective for specific transactions
entered into after December 15, 1995, while the disclosure requirements of
SFAS No. 123 are effective for financial statements for fiscal years
beginning no later than December 15, 1995. The new standard establishes a
fair value method of accounting for stock-based compensation plans and for
transactions in which an entity acquires goods or services from
nonemployees in exchange for equity instruments. At the present time, the
Company has not determined if it will change its accounting policy for
stock based compensation or only provide the required financial statement
disclosures. As such, the impact on the Company's financial position and
results of operations is currently unknown. The Company does not expect
adoption of SFAS No.123 to have a material effect on its financial position
or results of operations.
45
<PAGE>
BUSINESS
OVERVIEW AND STRATEGY
Effective as of January 1, 1994, the Company has been engaged full
time in identifying, developing and bringing to market medical devices
which the Company believes are innovative, represent improvements over
existing products, or are responsive to a presently unfulfilled need in the
marketplace. The Company's strategy consists of: (i) identifying patented
technologies in the medical device field that it believes have potential
commercial viability but still require refinement and regulatory clearance,
(ii) providing the necessary funds to develop and obtain the requisite
regulatory clearance of such products in exchange for the acquisition,
license or some other right to commercialize such technologies, and (iii)
attempting to commercialize or sublicense such technologies by entering
into agreements with one or more entities for clinical development,
manufacturing and marketing of such products. Through this strategy, the
Company believes that it can play a role in bridging the gap between viable
patented technologies and their commercialization. Pursuant to this
strategy, the Company has identified and acquired three licenses to develop
products, the Personal Alarm System, the Cell Recovery System and the
Intracranial Pressure Monitoring System, all of which the Company believes
have commercial viability. The primary focus of the Company's activities
for the foreseeable future will be the marketing of the PAS and the CRS and
completing the regulatory and development process relative to the ICP so
that the Company can also bring this product to market. Nevertheless, the
Company also receives opportunities from time to time to license other
patented technologies in the medical device field. The Company is
generally afforded these opportunities on an unsolicited basis primarily as
a result of Mr. Hulsebus' experience and contacts in the medical device
industry. Depending on the specific device and other circumstances, such
as the Company's then current financial and operating situation, the
Company may pro-actively attempt, on a limited basis, to identify and
license additional patented technologies in the medical device field.
THE COMPANY'S PRODUCTS
THE PERSONAL ALARM SYSTEM
The PAS is a device that monitors the integrity of infection control
barriers, such as surgical gloves and gowns worn during medical procedures.
The PAS is designed to provide notification of fluid contact between the
health care professional and patient and thus decrease the probability of
transmission of fluid-borne infectious agents, such as Human
Immunodeficiency Virus ("HIV"), the virus that causes Acquired Immune
Deficiency Syndrome ("AIDS"), Hepatitis B and C viruses, and Staphylococcus
("Staph"). The Company received FDA clearance to market its Personal Alarm
System
46
<PAGE>
in August of 1995, although it did not commence production and marketing of
the product until it received the necessary funds to do so upon the closing
of the Private Placement in January, 1996. The Company believes that fluid
contact between health care professionals and patients occurs not only when
barriers such as latex surgical gloves and gowns are breached by tearing or
puncture but also when such barriers are fluid-saturated. Further, the
Company believes that all latex surgical gloves, at some point in time,
become fluid-saturated, potentially permitting microorganisms contained in
bodily fluids to pass between the health care professionals and the
patients. In anticipation of entering into a formal agreement with the
Company, two independent organizations, one of which is a medical school
and the other a professional laboratory, have begun, on the Company's
behalf, conducting studies with respect to the fluid-saturation of latex
surgical gloves and the subsequent infection that may occur from the
resulting exchange of bodily fluids. See "Risk Factors - No Assurance of
Market for PAS Device" and "Business - Potential Market for PAS Device."
Hospital regulations as well as good medical practice requires that
defective or compromised barriers be replaced as quickly as feasible. The
immediate awareness of fluid contact between the health care professional
and patient is designed to decrease the probability of transmission of
fluid-borne infectious agents. Defective or fluid-saturated gloves
represent a potential danger for both the worker and the patient.
Regulations promulgated by the U.S. Government's Occupational Safety and
Health Administration ("OSHA") require a user of sterile barriers to be
aware of the status of his or her protective barriers at all times during a
surgical procedure. The user of sterile barriers is required to change any
portion of those barriers when they have been compromised. The Company
believes that the PAS provides users with a high degree of accuracy and
reliability in becoming aware of compromised infection barriers such as
latex surgical gloves.
Presently health care professionals rely on visual observations or
"feel" to determine whether their protective barriers have been
compromised. While this approach may be effective for punctures or tears,
it is not reliable when the integrity of protective barriers are breached
due to unnoticed defects or fluid-saturation. In the case of surgeons'
latex gloves, which are frequently covered with blood and are sweaty
inside, visual observation and inspection is difficult and unreliable.
Thus, the Company believes that its PAS device will enable health care
professionals to immediately recognize with a high degree of accuracy when
a protective barrier has been compromised.
The PAS is designed to be worn similar to a pager, and provides two
types of immediate warnings in order to indicate either fluid-saturation or
a small hole or a tear in a health care worker's glove. The PAS consists
of a battery-powered electronic
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<PAGE>
pager-like device that is simultaneously tethered to the patient and the
health care professional that can sense the flow of extremely small
electrical currents when a fluid contact is made between such patient and
health care professional. When the PAS senses a current flow
characteristic of a tear, major puncture or fluid saturation, the PAS
device generates a continuous 5-second vibration. Alternatively, when a
current flow characteristic of a small puncture or partial fluid saturation
is detected, the PAS device will vibrate in brief intermittent bursts.
The Company presently intends that the PAS will be sold for $500.00
each to distributors, who in turn may resell or lease the PAS device to end
users.
Potential Market for PAS Device
The Company believes that the potential market for the PAS includes
all hospitals, physicians' offices, dental offices, emergency rooms, and
other medical facilities. Given the limited resources of the Company, its
initial strategy will be to focus on those markets where the need for the
PAS is greatest. Consequently, the Company will initially introduce the PAS
to hospital operating rooms and out-patient surgical centers. Further, the
Company believes that it needs to convince the medical community of the
unreliability of infection control barriers such as latex surgical gloves,
particularly in the absence of obvious breaches of the gloves' integrity,
before it can effect substantial sales of the PAS device. In anticipation
of entering into a formal agreement with the Company, two independent
organizations, one of which is a medical school and the other a
professional laboratory, have begun, on the Company's behalf, conducting
studies with respect to the fluid-saturation of latex surgical gloves and
the subsequent infection that may occur from the resulting exchange of
bodily fluids. In addition, the Company is also seeking the endorsement of
or a mandate from either the Center for Disease Control in Atlanta, Georgia
(the "CDC") or OSHA that a device like the PAS should be used in connection
with all surgical and other medical procedures where the possibility exists
for fluid contact between health care professionals and patients. There is
no assurance that the Company will be able to convince the medical
community of the need for a device like the PAS whether or not the CDC or
OSHA endorses or mandates such a device, of which there can be no
assurance, and thus, there can be no assurance that a market will develop
for the PAS device. See "Risk Factors - No Assurance of Market for PAS
Device."
License Agreement
The Company obtained the rights to the PAS effective June 1, 1994,
pursuant to a license agreement (the "PAS License Agreement") with Robert
Lee Thompson, d/b/a Thompson Medical, whereby Mr. Thompson granted to the
Company the exclusive worldwide license to
48
<PAGE>
manufacture, use, sell or otherwise dispose of the PAS. To date, the
Company has paid Mr. Thompson $75,000 and issued 200,000 shares of the
Company's Common Stock pursuant to the PAS License Agreement. Under the
PAS License Agreement, Mr. Thompson is also entitled to receive royalty
payments equal to 5% of the net sales proceeds from the PAS, with quarterly
minimum royalty payments of $7,813.00 which began on August 1, 1995, and
25% of any payments received by the Company from sublicensing the PAS. The
PAS License Agreement is for a term of 10 years and may be extended for an
additional 10 years, at the election of the Company for no additional
consideration. Other than by breach, the PAS License Agreement cannot be
terminated by the Company prior to the expiration of the 10 year term. In
May 1995, the Company also entered into an exclusive license agreement with
Dietmar P. Rabussay, Ph.D., a consultant to the Company, for the Signal
Modulation Barrier Monitor (the "SMBM"), which is a component part of the
PAS device. Pursuant to this license agreement the Company is obligated to
pay royalties equal to 1% of the average retail sales price on the net
sales of all PAS devices. The invention disclosure for the SMBM has been
filed with the Patent and Trademark Office and the Company presently
intends to file a patent application for the SMBM by April 30, 1996. See
"Management -Consultants."
THE CELL RECOVERY SYSTEM
The Company's Cell Recovery System is a cell "brushing" and retrieval
system using an automated brush for the collection of specimen cells from
an organ's internal surface for diagnostic purposes, primarily (but not
limited to) cancer detection. Presently, in order to obtain diagnostically
significant tissue cells from an organ's internal surface an excisional
biopsy is necessary, i.e. the patient must check into a hospital for a
----
$5,000 - $7,000 procedure that requires general anesthesia and the
endoscopic surgical removal of tissue from the patient's internal organ.
In contrast, the CRS device is a non-surgical procedure that can be
performed on an outpatient basis without general anesthesia, although local
anesthesia is required.
The first application for the CRS device is intended to be to the
urology market. Currently, the preliminary test for bladder cancer is to
test a patient's urine sample, which has a very high incidence of producing
"false negatives." As a consequence, in most instances where there are
persistent symptoms, physicians who receive a negative result from a urine
sample when testing for bladder cancer will then conduct a visual, in-
office examination using a cystoscope, which is a catheter-type instrument.
Even if a visual examination with the cystoscope does not reveal cancer
polyps on the bladder wall, the physician may then require an excisional
biopsy to test if cancer cells are present in suspect areas. The Company
believes that its CRS device provides a reliable alternative, and
complement to, today's standard biopsy
49
<PAGE>
procedure. Although products that utilize a manual, but not automated,
brushing technique for obtaining organ cells are currently available, the
Company believes that there is no automated device that accomplishes the
same tasks the CRS is designed to perform. Manual brushing is awkward and,
unlike the CRS, does not include a system by which the cells that are
"brushed" off the wall of the internal organ are simultaneously and
selectively retrieved. As an alternative to a biopsy, the CRS system,
which can be used in an outpatient (office) setting, is intended to save
time, and also give the physician an option that does not include the
increased expense of general anesthesia and an overnight stay in the
hospital, thus representing reduced cost and risk to the patient.
Accordingly, as the CRS automated brushing and retrieval system is
significantly less expensive than excisional biopsy, it meets the cost
containment requirements of private, managed care, and government payers.
The Company also believes that the CRS procedure is reimbursable, although
there can be no such assurances. See "Risk Factors - Health Care Reform
and Related Measures; Uncertainty of Product Pricing and Reimbursement."
In addition, the CRS can also be used for the follow-up care that bladder
cancer patients require. The Company also believes that the CRS will be
the first automated brush system able to successfully retrieve cell
samples.
The Company received marketing clearance from the FDA for the CRS
device for use in the urology market on March 20, 1996. The Company
intends to launch the CRS in the fourth quarter of 1996. Prior to the
market launch of the CRS, the Company intends to complete certain clinical
trials for a follow-up 510(k) submission to the FDA to establish that the
device assists with the detection of certain urological diseases, such as
bladder cancer, and at the same time commence manufacturing for the
system's instrumentation and disposables. There can be no assurance that
the Company will receive 510(k) clearance from the FDA for such additional
claims or that the FDA will not require the Company to submit a pre-market
approval application for such claims which would substantially delay
marketing clearance. There can also be no assurance that the Company will
be successful in establishing volume manufacturing of the system's
instrumentation and disposables.
The Company has not presently determined the price of or manner in
which the CRS device will be marketed and sold.
Potential Market for CRS Device
The Company believes that in order to successfully market the CRS
device, the Company will have to establish the device's capabilities in
assisting with the detection of certain urological diseases, such as
bladder cancer, particularly in comparison to current cell sampling
methods. In order to do so, the Company has received commitments to begin
clinical studies of the CRS from a leading urologist and a leading
pathologist. The Company has also
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<PAGE>
contacted five other leading urologists who each have expressed an interest
in completing clinical studies of the CRS. Furthermore, the Company also
presently intends to begin the testing and FDA clearance process for other
applications of the technologies underlying the CRS device. No assurance
can be given that the Company will be successful in obtaining FDA clearance
or approval for such other applications. The Company believes that the
technologies underlying the CRS device can readily be applied to, and
adapted for, other diagnostic procedures with relatively minor
modifications. Specifically, the Company believes that the technologies
underlying the CRS will be applicable to a large number of diagnostic
procedures amenable to endoscopy, such as bronchoscopy (lung examination),
laparoscopy (abdominal and pelvic organ examination), and gastro-intestinal
endoscopy.
License Agreement
The Company has entered into an exclusive license agreement, as
amended, (the "CRS License Agreement") with Robert Langdon, Nancy Bush and
Dr. Max Willscher in August 1992 for the exclusive worldwide rights to
develop, manufacture and market the CRS and any other device based upon the
underlying patent. The CRS License Agreement is for a term equal to the
currently remaining life of the patent relating to the CRS, which is
approximately 14 years. Under the CRS License Agreement, the Company is
obligated to pay Mr. Langdon a total of $300,000 in three payments
beginning in January 1996 and to be completed in the third quarter of 1996.
Furthermore, the Company is obligated to pay to Ms. Bush and the estate of
Dr. Willscher a royalty equal to 5% of the average retail sales price on
all net sales, plus $100,000 in 20 equal quarterly installments of $5,000,
commencing January 1, 1997. Through December 31, 1995 the Company has paid
$300,000 and issued 455,932 shares of Common Stock pursuant to the original
CRS License Agreement. The Company can terminate the CRS License Agreement
with 90 days written notice, at which time all of the Company's patent
rights in the CRS device will cease.
THE INTRACRANIAL PRESSURE MONITORING SYSTEM
The Intracranial Pressure Monitoring System is a device that non-
invasively monitors pressure inside the human skull. Increased
intracranial pressure generally results from either fluid build-up, or
swelling or abnormal tissue growth of the brain, thereby cutting off blood
flow to the brain, resulting in increased risk of cell death. This cell
death results in brain damage, and in severe cases, can cause patient
death. Presently, intracranial pressure can only be determined by
surgically drilling a hole into or removing a section of the skull and
inserting a catheter pressure transducer to measure the pressure.
Thereafter, if a high level of intracranial pressure is found to be
present, then the same surgical drilling procedure is often used in an
attempt to relieve the pressure. Due to the invasive nature of such a
procedure, the
51
<PAGE>
current practice of drilling a hole in or removing a section of the skull
is considered risky and expensive, and cannot be used for routine
monitoring and examinations. The Company believes that the ICP, when
developed, can be a valuable diagnostic tool and will greatly assist health
care professionals in assessing when surgical drilling is necessary to
relieve intracranial pressure.
The ICP's non-invasive system utilizes a process of imparting a small
known force on the surface of the skull and sensing resulting low frequency
(0 to approximately 100 Hz.) wave signals at different points on the skull
surface. The characteristics of the resulting wave signals are a function
of the pressure within the skull and change when the intracranial pressure
increases or decreases. The Company presently anticipates that it will
commercialize two distinct versions of the ICP device. The first
generation ICP device will measure changes in the direction and rate of
change in intracranial pressure. The second generation ICP device, which
will effectively be an upgrade of the software used in the first generation
will be able to assess ranges of intracranial pressure levels as well. The
Company believes non-overlapping markets exist for each generation of the
device. The ICP system makes use of proprietary wave form analysis
software developed by Scientific-Atlanta, Inc., with whom the Company has
entered into a teaming agreement as more fully described below.
Potential Market for the ICP Device
The Company believes that the potential market for both the first and
second generation ICP device is primarily hospitals that perform
intracranial procedures. Management believes that the initial users of the
first generation ICP will be neurosurgeons in connection with diagnostic
procedures. Management believes that the second generation ICP will be
used not only by neurosurgeons but also by emergency room personnel for
patients who have suffered traumas to the head, as well as by physicians to
monitor and record the intracranial pressure of individuals as a standard
diagnostic procedure, similar to measuring an individual's blood pressure.
Clinical testing with respect to the first generation ICP is currently
ongoing and is expected to be finished in the third quarter of 1996. The
Company presently intends to make its first submission to the FDA prior to
the end of 1996. It has not been established if the initial submission
will take the form of a 510(k) or a PMA. Contemporaneously, at the end of
1996 the Company intends to commence clinical trials for the second
generation ICP which the Company presently anticipates will be concluded in
the third quarter of 1997. The Company believes that there is no product
or system presently on the market or under development which has similar
technological advantages as those of the ICP device.
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License Arrangements
The Company's majority-owned subsidiary, the ICP Corporation, has the
exclusive right to the ICP. The ICP Corporation entered into an agreement
in January, 1993 with Medys, Inc., a New Hampshire corporation (the "Medys
Agreement"), whereby the ICP Corporation obtained the right to acquire the
worldwide, exclusive, non-transferable license to develop, manufacture and
market the ICP until the year 2009, which is when the patent relating to
the ICP expires. Under the terms of the agreement, the ICP Corporation is
obligated to pay Medys, Inc. royalties equal to 10% of the net sales
proceeds from the ICP with a minimum payment of $90,000 due for the year
ended December 31, 1996 and $200,000 for all subsequent years through the
life of the patent. With respect to the royalties due for the year ended
December 31, 1996, $15,000 was prepaid on December 31, 1995. Further,
under the Medys Agreement the Company is responsible for clinical testing
of the ICP and obtaining all required FDA and other required regulatory
clearances. The Company can terminate the Medys Agreement with 90 days
written notice at which time all of the Company's patent rights in the ICP
device will cease.
In addition to the license agreements that the Company has entered
into with respect to the ICP, the Company also entered into an agreement
with respect to the ICP device on November 23, 1992 with Hampton Morgan
Holdings, S.A., a Panamanian company ("Hampton Morgan"), which was
controlled by a shareholder of the Company (the "Hampton Morgan
Agreement"). The Company had previously retained the consulting services
of Hampton Morgan in June of 1992 in connection with the CRS device. The
Hampton Morgan Agreement provided, among other things, for (i) a payment of
166,667 shares of Common Stock to Hampton Morgan as a finder of the ICP
device, (ii) royalties to Hampton Morgan equal to 8% of gross sales of the
ICP, and (iii) the issuance of 2,000,000 shares of Common Stock to Hampton
Morgan upon the Company achieving gross sales of $10,000,000 with respect
to the ICP. The Company issued the 166,667 shares to Hampton Morgan as a
finder in 1992, but the Company, on the advice of counsel, believes that
the balance of the Hampton Morgan Agreement is not enforceable because
Hampton Morgan has failed to make certain required payments to the Company
under the Hampton Morgan Agreement. Consequently, the Company does not
intend to pay the 8% royalty or 2,000,000 shares of Common Stock to Hampton
Morgan. In the event that the Company is incorrect and has to pay some or
all of the royalty payments and/or shares of Common Stock to Hampton Morgan
under the Hampton Morgan Agreement, it would have a material adverse effect
on the potential profitability of the ICP and could have a material adverse
effect on the Company as a whole.
Scientific-Atlanta Agreement
In February 1993, the Company entered into a teaming agreement
53
<PAGE>
(the "Teaming Agreement") with Scientific-Atlanta, Inc. ("S-A") to provide
equipment, technical expertise and experience directly related to the
computer software which provides the signal/data processing and model
analysis techniques in developing the ICP. Under the Teaming Agreement, the
Company is obligated to use S-A exclusively as its supplier for signal/data
processing and modal analysis techniques, equipment and software for the
first twelve (12) months after it commences sales of the ICP and thereafter
only if S-A's prices are as low as those offered by any other third party.
The Teaming Agreement is for a term of the earlier of five years or a date
of two years following initial product sale, unless sooner terminated.
MANUFACTURING
The Company has no manufacturing capabilities and does not intend to
establish any such capabilities in the foreseeable future. The Company
intends to rely on third party original equipment manufacturers ("OEMs") to
produce the Company's medical devices. Any such OEMs will have to comply
with FDA and other regulatory requirements for such facilities, including
FDA Good Manufacturing Practice regulations. The Company entered into an
agreement with a third party manufacturer effective as of December 15,
1995, for the manufacture of the PAS. The Company believes that this
manufacturer satisfies the FDA's GMP regulations, however, there can be no
assurance that the manufacturer will continue to satisfy such regulations.
In the event that the Company experiences substantial sales of its PAS
device, of which there can be no assurance, the Company may have to
identify other third party manufacturers in connection with additional
manufacturing of the PAS. Further, the Company presently anticipates that
it will engage other third party manufacturers in connection with the
manufacture of the CRS and ICP devices. There can be no assurance that
such other manufacturers can be identified on commercially acceptable
terms, or at all, or that such other manufacturers, if identified, will be
adequate for the Company's long-term needs, or that they can meet all
relevant regulatory requirements. Moreover, there can be no assurance that
the Company's manufacture of products on a limited scale basis means that
the Company can effect the successful transition to commercial, large-scale
production.
SALES, DISTRIBUTION AND MARKETING STRATEGY
The Company is exploring a variety of sales and distribution
strategies in connection with the anticipated commercialization of its
medical devices. The precise strategy that the Company eventually adopts
may be a combination of some or all of these strategies. In addition, the
Company may also adopt different strategies for different products. The
two fundamental strategies that currently are being explored are:
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. Assembling a network of regional independent distributors who have
proven to be successful in effecting the sale of new medical products
in the market for the particular medical device.
. Forming a strategic alliance with a corporate partner with a strong
presence in the potential market for the applicable medical device.
The Company's form of marketing will be influenced by the sales and
distribution strategies it eventually pursues. Nevertheless, the Company
anticipates that for the next 12 months its marketing efforts will most
likely concentrate on attending trade shows and advertising in trade
publications. The Company's marketing strategy may also include, to a
lesser extent, direct mailings, textual and audio video sales literature,
and general advertising and publicity.
With respect to the PAS system, which the Company began marketing in
January, 1996, the Company intends to initially sell this product through
independent regional distributors. At some later date, the Company may
form a strategic alliance with a corporate partner, who would most likely
be a manufacturer or marketer of latex surgical gloves, although the
Company does not presently have any current prospects. The Company
presently intends to market the PAS, at least for the first 12 months,
primarily through trade show appearances and advertisements in trade
publications. The Company will coordinate its sales and marketing efforts
with respect to the PAS through its vice president of sales and marketing
and its two regional sales managers.
Although the Company intends to launch the CRS device in the fourth
quarter of 1996, a specific marketing or sales strategy with respect to the
CRS device has not yet been decided on.
COMPETITION
The medical device industry is intensely competitive, particularly in
terms of price, quality and marketing. Most of the Company's competitors
are better established and have substantially greater financial, marketing
and other resources than the Company. Further, most of the Company's
competitors have been in existence for a substantially longer period of
time and may be better established in those markets where the Company
intends to sell its devices. Although the Company is not presently aware
of any competitor that commercially manufactures and sells any medical
devices similar to those the Company presently intends to sell, the Company
is aware that several technologies similar to the Personal Alarm System are
being developed and tested by other small companies. Due to the Company's
relative lack of experience, financial, marketing and other resources, even
though it has
55
<PAGE>
received FDA clearance for the Personal Alarm System, there can be no
assurance that the Company will be able to market this device successfully,
develop and market any of its other medical devices, or compete in the
medical device industry in general.
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
The Company has entered into exclusive license agreements with respect
to each of the patents underlying the Company's first three products: the
Personal Alarm System; the Cell Recovery System; and the Intracranial
Pressure Monitoring System. There can be no assurance, however, that such
patents will provide the Company with significant protection from
competitors. Patent protection relative to medical devices is generally
uncertain, and involves complex legal and factual questions. To date,
there has emerged no consistent policy regarding the breadth of claims
allowed in connection with the patent protection of medical devices.
Accordingly, there can be no assurance that any patents licensed by the
Company will afford protection against competitors with similar
technologies. Finally, there can be no assurance that the Company will
have the financial resources necessary to enforce its patent rights.
Even though the Company has licensed patents, under the terms of the
Company's license agreements, the Company is responsible for protecting
such patents. Challenges may be instituted by third parties as to the
validity, enforceability and infringement of the patents. Further, the
cost of the litigation to defend any challenge to the Company's licensed
patents or to uphold the validity and enforceability and prevent
infringement of the Company's licensed patents can be substantial. In the
event that others are able to design around the Company's licensed patents,
the Company's business could be materially and adversely affected.
The Company may be required to obtain additional licenses from others
to continue to refine, develop, manufacture, and market new products.
There can be no assurance that the Company will be able to obtain any such
licenses on commercially reasonable terms or at all or that the rights
granted pursuant to any licenses will be valid and enforceable.
Notwithstanding the Company's exclusive license with respect to the
patents underlying the PAS, CRS and ICP, there can be no assurance that
others will not independently develop similar technologies, or design
around the patents. If others are able to design around the patents, the
Company's business will be materially adversely affected. Further, the
Company will have very limited, if any, protection of its proprietary
rights in those jurisdictions where it has not effected any patent filings
or where it fails to obtain patent protection despite filing therefor.
Even though the patents underlying the Company's three medical
56
<PAGE>
devices have been issued by the United States Patent and Trademark Office,
challenges may be instituted by third parties as to the validity and
enforceability of the patents. The Company is not presently aware of any
challenges to the patents. Similarly, the Company may also have to
institute legal actions in order to protect infringement of the patents by
third parties. The Company is not presently aware of any such
infringements. The costs of litigation or settlement in connection with
the defense of any third party challenges relative to the validity and
enforceability of its patents and/or to prevent any infringement of the
patents by third parties, which pursuant to the license agreements with
respect to the patents are the Company's responsibility, could be
substantial. Moreover, in the event that the Company was unsuccessful in
any such litigation, the Company could be materially adversely affected.
In addition to relying on patent protection for its products, of which
there is no assurance, the Company will also attempt to protect its
products, processes and proprietary rights by relying on trade secret laws
and non-disclosure and confidentiality agreements, as well as exclusive
licensing arrangements with persons who have access to its proprietary
materials or processes, or who have licensing or research arrangements
exclusive to the Company. Despite these protections, no assurance can be
given that others will not independently develop or obtain access to such
materials or processes, or that the Company's competitive position will not
be adversely affected thereby. To the extent members of the Company's
Scientific Advisory Board have consulting arrangements with, or are
employed by, a competitor of the Company, such members might encounter
certain conflicts of interest, and the Company could be materially
adversely affected by the disclosure of the Company's confidential
information by such Scientific Advisors.
GOVERNMENT REGULATIONS
The Company's medical device products are subject to extensive
government regulations in the United States and in other countries. In
order to clinically test, produce, and market its devices, the Company must
satisfy numerous mandatory procedures, regulations, and safety standards
established by the FDA, and comparable state and foreign regulatory
agencies. Typically, such standards require that the products be cleared
by the government agency as safe and effective for their intended use prior
to being marketed for human applications. The clearance process is
expensive and time consuming. Other than with respect to the Company's
Personal Alarm System and the Cell Recovery System, no assurance can be
given that clearances will be granted for any expanded claims for the CRS
or for sale of the ICP or any other future products, or that the length of
time for clearance will not be extensive, or that the cost of attempting to
obtain any such clearances will not be prohibitive.
57
<PAGE>
The FDA employs a rigorous system of regulations and requirements
governing the clearance processes for medical devices, requiring, among
other things, the presentation of substantial evidence, including clinical
studies, establishing the safety and efficacy of new medical devices. The
principal methods by which FDA clearance is obtained are pre-market
approval ("PMA"), which is for products that are not comparable to any
other product in the market, or filing a pre-market notification under
Section 510(k) of the Federal Food, Drug and Cosmetic Act (a "510(k)")
which is for products that are similar to products that have already
received FDA clearance. Although both methods may require clinical testing
of the products in question under an approved protocol, because PMA
clearance relates to more unique products, the PMA procedure is more
complex and time consuming. Applicants under the 510(k) procedure must
prove that the products for which clearance is sought are substantially
equivalent to products on the market prior to the Medical Device Amendments
of 1976, or products approved thereafter pursuant to the 510(k). The
review period for a 510(k) application is approximately one hundred fifty
(150) days from the date of filing the application, although there can be
no assurance that the review period will not extend beyond such a period.
Under the PMA procedure, the applicant is required to conduct
substantial clinical testing to determine the safety, efficacy and
potential hazards of the product. The review period under a PMA
application is one hundred eighty (180) days from the date of filing, and
the application is not automatically deemed cleared if not rejected during
that period. The preparation of a PMA application is significantly more
complex, expensive and time consuming than the 510(k) procedure. Further,
the FDA can request additional information, which can prolong the clearance
process.
In order to conduct human clinical studies for any medical procedure
proposed for the Company's products, the Company could also be required to
obtain an Investigational Device Exemption ("IDE") from the FDA, which
would further increase the time before potential FDA clearance. In order
to obtain an IDE, the Company would be required to submit an application to
the FDA, including a complete description of the product, and detailed
medical protocols that would be used to evaluate the product. In the event
an application were found to be in order, an IDE would ordinarily be
granted promptly thereafter.
The Company may be required to use the PMA process for the
Intracranial Pressure Monitoring System or for expanded claims for the CRS
in order to be granted FDA clearance. The clearance process can take from a
minimum of six (6) months to several or more years, and there can be no
assurance that FDA clearance will be granted for the commercial sale of the
Intracranial Pressure Monitoring System or expanded claims for the CRS
device.
The FDA also imposes various requirements on manufacturers and
58
<PAGE>
sellers of medical devices under its jurisdiction, such as labeling,
manufacturing practices, record keeping and reporting requirements. The FDA
may also require post-market testing and surveillance programs to monitor a
product's effect. There can be no assurance that the appropriate clearance
from the FDA will be obtained, that the process to obtain such clearance
will not be excessively expensive or lengthy, or that the Company will have
sufficient funds to pursue such clearances. Moreover, failure to receive
requisite clearance for the Company's products or processes would prevent
the Company from commercializing its products as intended, and would have a
materially adverse effect on the business of the Company.
Even after regulatory clearance is obtained, any such clearance may
include significant limitations on indicated uses. Further, regulatory
clearances are subject to continued review, and later discovery of
previously unknown problems may result in restrictions with respect to a
particular product or manufacturer, including withdrawal of the product
from the market, or sanctions or fines being imposed on the Company.
Distribution of the Company's products in countries other than the
United States may be subject to regulation in those countries. There can be
no assurance that the Company will be able to obtain the approvals
necessary to market its medical devices outside of the United States.
CORPORATE HISTORY
The Company was incorporated on February 6, 1980, under the laws of
the State of Utah, initially under the name of Gold Probe, Inc. In
September of 1981, the Company and the Hailey Oil Company, Inc., a
Mississippi corporation, entered into an Agreement and Plan of
Reorganization whereby the Company acquired Hailey Oil Company, Inc. and
exchanged 9,000,000 shares of its common stock for all the issued and
outstanding shares of Hailey Oil Company, Inc. In the transaction, Scott
F. Hailey and Loyce Hailey received 7,000,000 shares, and 2,000,000 shares
were issued to certain members of the Company's Board of Directors in
exchange for their respective working interests in certain oil and gas
properties then-owned by the Company. Also, pursuant to the
reorganization, the Company changed its name to Hailey Energy Corporation,
effected a one (1) for five (5) reverse split of its common stock, and
increased its authorized number of shares to 25,000,000. In 1986, the
number of authorized shares of the Company was increased to 100,000,000.
In November, 1990, the Company effected a one (1) for thirty (30) reverse
split of its common stock and increased the par value of its common stock
to $0.15 per share. In 1992, the Company changed its name from "Hailey
Energy Corporation" to "CytoProbe Corporation." The number of authorized
shares (100,000,000) remained unchanged. In January, 1994, the Company
effected a one (1) for six (6) reverse split of its common stock. The par
value
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<PAGE>
of the Company's common stock remained at $0.15 per share and the number of
authorized shares remained unchanged. In April of 1995, the Company
changed its name to Medical Device Technologies, Inc. to reflect the
Company's broadening base of medical products.
EMPLOYEES
As of April 1, 1996, the Company had 10 full-time employees, 5 of whom
were employed in executive and management capacities, 3 in sales and
marketing and 2 in general and administrative capacities. The Company
believes that its relations with its employees are satisfactory.
PROPERTIES
The Company leases its executive offices, which occupy approximately
3,256 square feet, at 9171 Towne Centre Drive, Suite 355, San Diego, CA
92122. The Company's rent is approximately $5,210 per month through April
20, 1998. The Company is also responsible for its pro-rata share of
increased operating expenses starting in 1997 predicated upon a 1996 base
year.
LEGAL PROCEEDINGS
Subsequent to the Company terminating its investment banking
relationships with Chandler Church & Company ("Chandler Church") and the
Noir Intertrade Corporation ("Noir") in early 1994, these entities demanded
payment from the Company of approximately $330,000 for services and/or
funds they alleged to have advanced. Over the previous two years, the
Company had issued a substantial amount of its stock, approximately
2,070,000 shares, to Chandler Church and its affiliates for services
claimed to have been rendered to the Company. The Company's management is
now informed, and now believes, that these entities are under common
control or otherwise affiliated with an individual who, in 1994, was a
substantial shareholder of the Company. The Company refused to pay the
dollar amounts demanded by these entities. These entities subsequently
assigned their claims to Uptown Trust, which in July 1994, filed a
Complaint regarding such claims in the Superior Court of San Diego County,
California, seeking recovery of these amounts plus interest from the
Company. Upon the Company's motion, this Complaint was dismissed.
Subsequently, Chandler Church filed a Complaint in the Superior Court of
San Diego County, California, seeking approximately $290,000 from the
Company based on the claims previously asserted by Uptown Trust. The
Company has filed an Answer to this Complaint in which it denies these
claims, and has filed a Cross-Complaint against Chandler Church seeking
damages in excess of the amounts claimed by Chandler Church. The Company
believes that it has meritorious defenses to such claims.
In May 1995, a third party filed an involuntary bankruptcy petition
regarding the Company. The Company contested the fraudulent petition and,
subsequently, the Court found in favor of the Company, dismissed the
petition, and rendered a judgment of bad faith against the petitioners.
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<PAGE>
There are no other legal proceedings to which the Company is a party
which could have a material adverse effect on the Company.
61
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
The names and ages of the directors and executive officers of the
Company are set forth below.
<TABLE>
<CAPTION>
Name Age Position Held
-------------------------- --- ---------------------------
<S> <C> <C>
M. Lee Hulsebus 57 Chairman of the Board,
Chief Executive Officer
and President
Don Arnwine 63 Director
Dr. Arthur Bradley 62 Director
Thomas Glasgow 42 Director
Stephen W. Kenney 45 Vice President of Sales
and Marketing
Edward C. Hall 55 Chief Financial Officer and
Secretary
Richard E. Sloan 47 Vice President of
New Business Development
</TABLE>
There are presently six (6) seats available on the Board, although to
date, management has not yet identified the individuals to fill the current
vacancies. In addition, the Underwriter shall have the right for a period
of five years from the effective date of the Prospectus to designate one
(1) director, subject to the good faith approval of the Company. See
"Underwriting."
The Company has a staggered Board of Directors which is divided into
three classes. Mr. Arnwine (and any individual appointed to the currently
vacant Board seat) has been elected to hold office until the annual meeting
of shareholders to be held in 1996. Dr. Bradley and Mr. Glasgow have been
elected to hold office until the annual meeting of shareholders to be held
in 1997. Mr. Hulsebus have been elected to hold office until the annual
meeting of shareholders to be held in 1998. The successors of each of the
current Directors are duly elected and qualified until the earlier
resignation, removal from office or death. As a consequence, only one
class of Directors will be elected at each annual meeting of shareholders.
M. LEE HULSEBUS has been Chairman of the Board, Chief Executive
Officer and President of the Company since August, 1994 and has been in the
health care field for 30 years. From January,
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<PAGE>
1992 until he joined the Company in August, 1994, he was the President and
owner of his own health care consulting firm. In July 1993, Mr. Hulsebus
filed a voluntary petition for relief under Chapter 7 of the United States
Bankruptcy Code. The filing was made principally as a result of
obligations arising out of personal guarantees made by Mr. Hulsebus on
behalf of a business operated by a member of his immediate family. Mr.
Hulsebus was granted a discharge by order of the United States Bankruptcy
Court for the District of Georgia in December 1993. From August, 1993 to
November, 1993 Mr. Hulsebus also served as Chief Executive Officer of
InCoMed Corporation, then a small California- based medical products
company. From January, 1990 to January, 1992, Mr. Hulsebus also served as
President of Sports Support, Inc., a sports medicine company. From 1988
until 1990, he served as Medical Group president for Teleflex, Inc. For 22
years prior to that, Mr. Hulsebus was employed by Becton-Dickinson & Co.
and C.R. Bard, Inc., both of which are leading companies in the health care
industry.
DON ARNWINE has served as a Director of the Company since March, 1995.
Since 1988, Mr. Arnwine has been President of Arnwine Associates of Irving,
Texas, a company that provides advisory services to the health care
industry. Mr. Arnwine served as Chairman and Chief Executive Officer from
1985 until 1988, of Voluntary Hospitals of America (VHA), a company he
joined in 1982. Prior to joining VHA, Mr. Arnwine served as President and
Chief Executive Officer of Charleston Area Medical Center, a 1000-bed
regional facility care center in the State of West Virginia. Mr. Arnwine
holds a B.S. degree in Business Administration from Oklahoma Central State
University and a Masters degree in Hospital Management from Northwestern
University.
DR. ARTHUR BRADLEY has been a Director of the Company since 1986. Dr.
Bradley has been a practicing dentist in Hattiesburg, Mississippi since
1961. Dr. Bradley has been involved for his own account in real estate
investments for twenty years and has been active in oil and gas investments
for fifteen years. Dr. Bradley graduated from the University of
Mississippi at Hattiesburg and obtained his degree in Dentistry from Loyola
University Dental School.
THOMAS GLASGOW has been a Director of the Company since November 1994.
From April, 1992 to the present, Mr. Glasgow has been President and co-
owner of Integrated Trade Systems ("ITS"), a Chicago, Illinois company.
Mr. Glasgow and another individual purchased ITS from its parent company in
1992. ITS is a logistics management company specializing in the
development and marketing of import and export document generation systems.
From March, 1994 to the present, Mr. Glasgow has been the President and
owner of Automation Information Management, a software applications
company. From January, 1989 through March, 1992, Mr. Glasgow was a Vice
President with and consultant to Wharton Resource Group, a
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<PAGE>
strategic management company specializing in the development of early stage
companies. Prior to these activities, he was a director and Vice President
with Federal Express Corporation for 11 years.
EDWARD C. HALL has been the Company's Secretary since April 1, 1996
and its Chief Financial Officer since March 15, 1996. Mr. Hall has also
been a financial consultant to the Company since March 1995. From 1994
through the present, Mr. Hall was a consultant to high technology companies
in the San Diego area where he provided strategic, financing, planning,
analytical, administrative, and system design support. Since 1991, he has
acted as an interim chief financial officer and has provided financial and
turnaround consulting services to a wide variety of high technology and
other companies in California and the Southwest. His experience includes
positions and assignments for medical, pharmaceutical, broadband and
wireless communications, specialty and mail order retailing, and aerospace
manufacturing firms.
STEPHEN W. KENNEY has been the Company's Vice President of Sales and
Marketing since January, 1995 and has twenty-one years of health care
industry experience. Prior to joining the Company, Mr. Kenney served as
chief operating officer of Cardio Vista, a private medical products company
headquartered in Southern California. Prior to joining Cardio Vista in
1993, he served as chairman and chief executive officer of AMBIS, Inc., a
private research instrumentation company based in San Diego, California (a
company he originally joined in 1989). From 1987 to 1989, Mr. Kenney
served as vice president of sales and marketing of Digivision, Inc., also
headquartered in San Diego, California. Prior to that, Mr. Kenney held
various management positions with Ivac Corporation and American Hospital
Supply.
RICHARD E. SLOAN has been Vice President of New Business Development
since March 15, 1996. Mr. Sloan was also a consultant to the Company from
August 16, 1995 to March 14, 1996. From March, 1995 to July, 1995, Mr.
Sloan served as Chief Executive Officer of WorldWide Products, Inc., a
private Los Angeles based development and marketing firm that distributes
pharmaceutical products to plastic surgeons and dermatologists. Prior
thereto, from March, 1992 to March, 1995, he served as corporate marketing
director and general manager for Industrial Products of UniFET
Incorporated, a private company based in San Diego, California involved in
the development of sensor-based medical products. From December, 1989
through March, 1992, Mr. Sloan managed his own mergers and acquisition
business with First Pacific Group, located in Carlsbad, CA which provided
investment and financial services to privately-held companies primarily in
southern California.
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<PAGE>
DIRECTORS COMMITTEES
--------------------
The Company's Board of directors has appointed a nominating committee
comprised of Messrs. Hulsebus and Glasgow. The committee selects the
persons standing for election to the Company's Board of Directors at the
annual meeting. Messrs. Arnwine, Glasgow and Hulsebus serve as the members
of the Company's Compensation Committees and Messrs. Additionally, Messrs.
Arnwine, Glasgow and Hall serve as members of the Company's Audit
Committee. The Board of Directors has no current plans to appoint
additional committees.
DIRECTORS' COMPENSATION
-----------------------
The Company compensates each of its outside Directors with shares of
Common Stock at the rate of 15,000 shares per annum, payable quarterly, all
of which shares are registered from time to time by the Company under its
stock compensation plans. See "Management - Option Plans." The Company
also reimburses all Directors for their travel expenses to attend
Directors' meetings.
INDEMNIFICATION AGREEMENTS
--------------------------
The Company has obtained officers' and directors' liability insurance
that provides for a maximum of $1,000,000 of coverage, subject to a
$100,000 corporate reimbursement per occurrence payable by the Company.
Any payments made by the Company under an indemnification agreement which
are not covered by the insurance policy may have an adverse impact on the
Company's earnings.
SCIENTIFIC ADVISORY BOARD AND CONSULTANTS
-----------------------------------------
Advisory Board
The Company, in addition to its Board of Directors, has an advisory
board which provides technical oversight, expertise and guidance to the
Company. The Advisory Board does not meet as a group but rather, its
members are consulted from time to time by the Company as and when the
Company requires the particular expertise or guidance of an individual
Advisory Board member in connection with a particular issue. Each member
of the Advisory Board receives 12,000 shares of Common Stock per annum,
payable semi-annually, all of which shares are registered from time to time
by the Company under its stock compensation plans. See "Management - Option
Plans." The members of the Advisory Board are:
HOWARD G. GRATZNER, PHD - currently serves as President and Scientific
Director for Oncyte, Inc. in Houston, Texas. Dr. Gratzner holds an
undergraduate degree in microbiology, and a Ph.D. in genetics from Florida
State University, and was a research fellow in genetics at the California
Institute of Technology. Dr. Gratzner has held several professorships and
received grants from various organizations, including the National
Institutes of Health,
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<PAGE>
National Aeronautics and Space Administration, and the National Foundation
- March of Dimes. Dr. Gratzner has written numerous articles in various
medical publications in cytopathology and genetics.
BRYANT H. HUDSON, III, MD - is a urologist in private practice in
Montgomery, Alabama, and also serves as the State Surgeon for the Alabama
Army National Guard. Dr. Hudson holds degrees from the University of
Alabama and the Medical College of Alabama, and has extensive military and
civilian experience in both adult and pediatric urology at several
hospitals, including Baptist Medical Center of Montgomery.
RUTH L. KATZ, MD - is Board certified in anatomic pathology, clinical
pathology, and cytopathology, and currently serves as Professor of
Pathology, Co-Chief of Cytopathology, and Director, Image Cytometric
Diagnostic Laboratory at the University of Texas MD Anderson Hospital. Dr.
Katz holds undergraduate and medical degrees from the University of
Witwatesrand in Johannesburg, South Africa, and is licensed in Texas and in
California. Dr. Katz has published over ninety articles in medical
journals, and written chapters in several pathology textbooks. Dr. Katz is
acknowledged as an expert in cytopathology.
LESTER A. KLEIN, MD - is a Board certified urologist, and currently
serves as Urologist at Green Hospital, Scripps Clinic and Research
Institute, La Jolla, CA. Dr. Klein holds medical degrees from the
University of California in San Francisco, Berkeley, and Los Angeles. From
1971 to 1977 he was appointed to the Harvard Medical School as Assistant
Professor of Surgery, and from 1977 to 1988 as Associate Professor of
Surgery. During this same period, he served as Surgeon and Head, Division
of Urology, Beth Israel Hospital, Boston. He serves on numerous committees
and has held a variety of teaching positions. Dr. Klein has published
fifty-seven articles in medical publications, and has presented over thirty
abstracts before various scientific meetings around the world.
WILLIAM E. MAYER, MD - retired as Director of the Department of Mental
Health for the State of California in July 1992. From January 1990 to 1991
he was Director of the International Forum for AIDS Research at the
National Academy of Sciences. Dr. Mayer served from 1983 to 1990 as
Assistant U.S. Secretary of Defense for Health Affairs, directing a $13
billion annual military health care system. He also served as Chairman of
the Board of Governors of the Armed Forces Institute of Pathology, and as a
trustee on the Board of the Uniformed Services University of Health
Sciences. In 1981 President Reagan appointed Dr. Mayer Assistant Surgeon
General, and Administrator of the Federal Alcohol, Drug Abuse and Mental
Health Administration. Dr. Mayer initiated the world's largest program of
hospital data automation, and established the military's model program of
drug abuse testing. He holds undergraduate degrees, as well as his medical
degree from
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<PAGE>
Northwestern University, and has specialty training in neurology,
psychiatry, and neuropathology.
LAWRENCE C. POLLAK, MD - is a Board certified orthopedic surgeon
specializing in total joint replacement. Dr. Pollak joined Sharp Rees-
Stealy Medical Group in 1981 and has held numerous leadership positions
with this 270 physician group, including medical director and community
care liaison with Sharp Healthcare, where he worked on a variety of
projects related to managed care and physician/medical group integration.
He received a BA from the Johns Hopkins University and a MD from the
Indiana University School of Medicine. After a general surgery internship
and residency at the Dartmouth-Hitchcock Medical Center in Hanover, New
Hampshire, he completed an orthopedic residency in Albany, New York. He
received fellowship training in arthritis surgery at the Robert Breck
Brigham Hospital in Boston, Massachusetts and at the National Institutes of
Health in Bethesda, Maryland. In addition, Dr. Pollak frequently works
with APM, a national healthcare consulting firm.
RICHARD L. SAUNDERS, MD - has been Professor and Chairman of
Neurological Surgery at Dartmouth since 1981. Board certified in 1972, he
received his B.S. and M.D. from Tufts University and is the Director of the
Dartmouth Neurosurgical Residency Program. He has authored one book,
several book chapters and many journal articles. For the past seven years,
Dr. Saunders has received the "Physician's Recognition Award" from the
American Medical Association. Dr. Saunders has been overseeing all aspects
of the ICP's pre-clinical and clinical trials.
Consultants
In an effort to control costs, in lieu of employing full-time
engineers, the Company uses consultants on a regular basis to fulfill its
engineering needs in connection with the development of its products.
During 1995, the Company paid all of its consultants, in the aggregate, an
average of approximately $35,000 per month. Subsequent to the completion
of the proposed secondary offering, the Company intends to retain full-time
engineers and substantially reduce its reliance on consultants. The
consultants used by the Company are as follows:
DIETMAR P. RABUSSAY, PH.D. - serves in the capacity of technical
consultant to the Company. He has extensive experience with the
development of products in the biomedical field and has assisted emerging
growth companies in the design and development of their technologies. He
has many publications and patents to his credit and continues with research
in the development of new products. Dr. Rabussay received his doctorate
from the University of Munich; his thesis was completed at the Max Planck
Institute of Biochemistry. He has served as president and CEO of InCoMed
Corporation in 1992 and 1993 and for the ten years prior to that as
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<PAGE>
a Vice President of Bethesda Research Laboratories, Inc., and Life
Technologies, Inc., respectively. Dr. Rabussay has taught at Florida State
University and the University of Maryland and has served as a member of a
Study Section for the National Institutes of Health. Dr. Rabussay is the
owner of the patent under the license agreement with respect to the signal
modulation barrier monitor, a component of the PAS, for which the Company
is obligated to pay a 1% royalty. See "Business - The Company's Products -
Personal Alarm System - License Agreement."
CHRIS CATSIMANES - is currently involved in developing the CRS for the
Company. His past experience includes design, development, and management
in a variety of engineering fields, including design of control systems,
energy management systems, automated monitoring and diagnostic systems,
bindery automation systems, and electronic warfare systems. Mr. Catsimanes
received his BSEE from the University of Wyoming and his Masters of
Engineering from the University of Florida.
ICRC, INC. (formerly known as CRCI) - is a team of professionals with
management and technical experience which provides consulting services to
the health care industry. ICRC provides an array of services to the
Company, the most critical being the validation of technology and
preparation and documentation of the material required to gain necessary
regulatory clearances. ICRC's professionals have substantial industry
experience, and work frequently with the FDA. They are familiar with all
the requirements ranging from document preparation for the submission of
PMA's to the development of application manuals required for product
applications or submissions.
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<PAGE>
EXECUTIVE COMPENSATION
- ----------------------
The following table sets forth the cash compensation paid by the
Company to executive officers of the Company whose total annual salary and bonus
exceeded $100,000 for the years ended December 31, 1993, 1994 and 1995, and the
compensation currently anticipated to be received by such executive officers for
the fiscal year ending December 31, 1996.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------------ ------------------------- --------
All
Other
Other Annual Restricted Options/SARs LTIP Compens-
Name and Compensation Stock ------------ Pay-outs ation
Principal Position Year Salary($) Bonus($) ($) Awards ($) (#) (1) ($) ($)
- --------------------------- ---- ------------- -------- ------------ ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
M. Lee Hulsebus, Chairman 1996 $ 162,000 $- 0 - $- 0 - $ 57,292 - 0 - $- 0 - $- 0 -
of the Board, Chief
Executive Officer and
President
1995 $ 162,000 $- 0 - $- 0 - $ 71,094 300,000 $- 0 - $- 0 -
1994 $ 54,000 $- 0 - $- 0 - $ 43,489 200,000 $- 0 - $- 0 -
1993 $ - 0 - $- 0 - $- 0 - $ - 0 - - 0 - $- 0 - $- 0 -
B. Roland Freasier, Jr.(2) 1995 $ 120,000 $- 0 - $- 0 - $ 68,750 - 0 - $- 0 - $- 0 -
1994 $ 120,000 $- 0 - $- 0 - $ 22,917 150,000 $- 0 - $- 0 -
1993 $ 75,000 $- 0 - $- 0 - $ - 0 - - 0 - $- 0 - $- 0 -
Stephen W. Kenney, Vice 1996 $ 110,000 $- 0 - $- 0 - $ 27,500 - 0 - $- 0 - $- 0 -
President of Marketing
and Sales
1995 $ 110,000 $- 0 - $- 0 - $ 41,250 100,000 $- 0 - $- 0 -
Richard E. Sloan, Vice 1996 $108,000/(3)/ $- 0 - $- 0 - ---/(4)/ 75,000 $- 0 - $- 0 -
President of New Business
Development
</TABLE>
- -------------
(1) Includes Warrants.
(2) Resigned as a director of the Company in January 1996, and resigned as
executive vice president and an employee in March 1996.
(3) Although Mr. Sloan's salary is payable at the rate of $108,000 per calendar
year, Mr. Sloan will receive less than $108,000 for the calendar year
ending December 31, 1996 because he did not become the Company's Vice
President of Marketing and Sales until March 15, 1996.
(4) In March, 1996, Mr. Sloan was granted a restricted stock award consisting
of 50,000 shares of Common Stock; 25,000 shares of such Common Stock vest
on March 15, 1997 and the remaining 25,000 shares of such Common Stock vest
on March 15, 1998.
69
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
<TABLE>
<CAPTION>
Percent of Total
Options/SARs Granted
Options/SARs to Employees in Exercise of
Name Granted/(1)/ Fiscal Year Base Price ($/Sh)/(1)/ Expiration Date
- --------------------- ------------ --------------------- ---------------------- ---------------
<S> <C> <C> <C> <C>
M. Lee Hulsebus 300,000 70.6% $ .40/sh 7/31/00
B. Roland Freasier, -0- -- -- --
Jr. /(2)/
Stephen W. Kenney 75,000 17.6% $1.00/sh 1/04/00
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION SAR VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value of
Unexercised
In-the-Money
Number of Options/SARs
Unexercised at FY-End
Options/SARs at Exercisable
Shares Acquired FY-EndExercisable/ /Unexercisable
Name on Exercise Value Realized($) Unexercisable(1) (1)
- --------------------- --------------- ----------------- --------------------- --------------
<S> <C> <C> <C> <C>
M. Lee Hulsebus -0- -0- 300,000/200,000 $86,250/$0
B. Roland Freasier, -0- -0- 0/150,000 $0/$0
Jr./(2)/
Stephen W. Kenney -0- -0- 0/75,000 $0/$0
</TABLE>
- --------------
(1) Includes Warrants.
(2) Resigned as a director of the Company in January 1996, and resigned as
executive vice president and an employee in March 1996.
70
<PAGE>
MANAGEMENT EMPLOYMENT AGREEMENTS; CONSULTING AGREEMENTS
-------------------------------------------------------
Employment Agreements
---------------------
Effective the 31st day of August, 1994, the Company entered into an
exclusive four year term employment agreement with each of Mr. M. Lee
Hulsebus. Under his employment agreement, Mr. Hulsebus is to serve as the
Company's Chief Executive Officer and receive a base salary of $162,000 per
annum. He is also entitled to receive two hundred fifty thousand (250,000)
shares of the Company's Common Stock at the end of two years of continuous
satisfactory employment by the company. In addition, Mr. Hulsebus received
200,000 common stock purchase warrants which are exercisable over a five
(5) year period ending August 31, 1999 at $1.00 per share. Mr. Hulsebus
has agreed with the Underwriter not to directly or indirectly offer, sell,
transfer or otherwise encumber or dispose of any shares of Common Stock, or
any securities exercisable or convertible into Common Stock including the
shares underlying the warrants for a period of thirteen (13) months after
the effective date of this offering.
In addition, on August 31, 1994, the Company entered into a severance
agreement with Mr. Hulsebus. Such severance agreement provides, among
other things, that in the event a change in control of the Company occurs
or Mr. Hulsebus is involuntarily terminated, suffers a disability while
employed by the Company or dies while employed by the Company, then Mr.
Hulsebus is entitled to receive certain benefits from the Company. Such
benefits may include some or all of the following: an amount based on Mr.
Hulsebus' base salary as provided for in Mr. Hulsebus' employment
agreement, an amount based on the bonus paid or payable to Mr. Hulsebus as
provided for in Mr. Hulsebus' employment agreement, the right to receive
Common Stock that shall vest immediately, the right to exercise any
warrants or stock options held by or granted to Mr. Hulsebus under Mr.
Hulsebus' employment agreement or any stock option plan of the Company or
both, health insurance and disability insurance. Mr. Hulsebus will not
receive any benefits if Mr. Hulsebus voluntarily terminates his employment
with the Company or the Company terminates Mr. Hulsebus "for cause", which
is defined as the conviction of Mr. Hulsebus after appeal of a felony.
On March 29, 1996, the Company terminated the services of its
executive vice president, B. Roland Freasier, Jr. The Company entered into
a termination agreement with Mr. Freasier which terminated his existing
employment and severance agreements, and also provided for mutual general
releases. Under the termination agreement, Mr. Freasier is entitled to
receive 200,000 shares of the Company's Common Stock on August 31, 1996 and
150,000 common stock purchase warrants, which expire on August 31, 1999 and
are exercisable at a price of $1.00 per share, after the earlier of August
31, 1996 or the completion of a public offering of the Company's
securities. The termination agreement also provides for
71
<PAGE>
Mr. Freasier to receive 29 monthly payments of $10,000, commencing on April
1, 1996 and ending August 31, 1998, and 75,000 common stock purchase
warrants which are exercisable, from August 31, 1998 through August 31,
2001, at a price of $.40 per share.
Effective January 4, 1995, the Company entered into a three-year
Employment agreement with Mr. Stephen W. Kenney under which he is to serve
as the Company's Vice President of Marketing and Sales. Mr. Kenney receives
a base salary of $110,000 per annum. He is also entitled to receive one
hundred thousand (100,000) shares of the Company's Common Stock on August
31, 1996 and is entitled to receive warrants to purchase seventy-five
thousand (75,000) shares of the Company's Common stock at $1.00 per share.
One-third (1/3) of the warrants are to be issued on each of January 4,
1996, 1997 and 1998. The warrants are exercisable for a period of five
years from the date of issuance. Mr. Kenney has agreed with the
Underwriter not to directly or indirectly offer, sell, transfer or
otherwise encumber or dispose of any shares of Common Stock, including the
shares underlying the warrants for a period of thirteen (13) months after
the effective date of this offering.
Effective March 15, 1996, the Company entered into an exclusive
employment agreement with Mr. Richard E. Sloan under which he is to serve
as the Company's Vice President of New Business Development. Mr. Sloan
receives a base salary of $108,000 per annum. He is also entitled to
receive fifty thousand (50,000) shares of the Company's Common Stock;
25,000 shares of Common Stock will vest each on March 15, 1997 and the
remaining 25,000 shares will vest on March 15, 1998. In addition, Mr.
Sloan is entitled to receive warrants to purchase seventy-five thousand
(75,000) shares of the Company's Common Stock at $.40 per share. One-
quarter (1/4) of the warrants are to be issued on each of March 15, 1997,
1998, 1999 and 2000. The warrants are exercisable for a period of five
years from the date of issuance. Mr. Sloan has agreed with the Underwriter
not to directly or indirectly offer, sell, transfer or otherwise encumber
or dispose of any shares of Common Stock, including the shares underlying
the warrants for a period of thirteen (13) months after the effective date
of this offering.
Effective March 15, 1996, the Company entered into a non-exclusive
employment agreement with Mr. Edward C. Hall under which he is to serve as
the Company's Chief Financial Officer. Mr. Hall receives a base salary of
$60,000 per annum based upon a three day work week. In the event that Mr.
Hall's services are required by the Company in excess of three days per
week, Mr. Hall is to be compensated at the same rate as when we was a
consultant to the Company, $600 per day. Mr. Hall is also entitled to
receive twenty-five thousand (25,000) shares of the Company's Common Stock;
12,500 shares of Common Stock will vest on March 15, 1997 and the remaining
12,500 shares will vest on March 15, 1998. In addition, Mr. Hall is
entitled to receive warrants to purchase fifty thousand (50,000) shares of
the Company's Common Stock at $.40 per share.
72
<PAGE>
One-quarter (1/4) of the warrants are to be issued on each of March 15,
1997, 1998, 1999 and 2000. The warrants are exercisable for a period of
five years from the date of issuance. Mr. Hall has agreed with the
Underwriter not to directly or indirectly offer, sell, transfer or
otherwise encumber or dispose of any shares of Common Stock, including the
shares underlying the warrants for a period of thirteen (13) months after
the effective date of this offering.
Under each of their contracts, Messrs. Hulsebus, Kenney, Sloan and
Hall may receive bonuses or other additional compensation consisting of
cash, stock or stock purchase rights as may be determined from time to time
by the Board of Directors. The Board of Directors has no current intention
or plan to award such additional compensation.
There are no family relationships among any Directors or executive
officers.
OPTION PLANS
------------
Stock Options
-------------
The Company does not presently have a stock option plan, although it
intends to institute a stock option plan for officers, directors, employees
and consultants to the Company. The purpose of such a stock option plan
would be to encourage stock ownership by current and future officers,
directors, employees and consultants to the Company, and certain other
persons judged by the committee who would administer the plan to be
instrumental to the success of the Company, and to give such persons a
greater personal interest in the Company achieving continued growth and
success. Although the Company's Board of Directors presently intends to
adopt such a plan prior to this offering, to date the Company's Board of
Directors has not yet proposed or adopted a stock option plan.
Stock Compensation Plan
-----------------------
Effective January 10, 1996 the Company established the 1996 Stock
Compensation Plan (the "1996 Plan") which provides for the issuance of up
to 950,000 registered shares of Common Stock to employees, directors,
consultants and other third parties in exchange for services. To date,
381,140 shares of Common Stock have been issued pursuant to the 1996 Plan.
The remaining 568,860 shares under the 1996 Plan can be issued any time
prior to January 10, 1998. The Company adopted similar stock compensation
plans in 1994 and 1995 covering 500,000 and 1,750,000 shares of Common
Stock, respectively. All of these shares of Common Stock with respect to
each of these other stock compensation plans were issued in their
respective calendar years.
73
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of April 17, 1996 with
respect to the beneficial ownership of the outstanding shares of the Common
Stock by: (i) any holder of more than five percent (5%) of the outstanding
shares; (ii) the named executive officers; (iii) the Company's directors;
and (iv) the Company's directors and executive officers as a group. None
of the Company's officers, directors or holders of five percent (5%) or
more of the outstanding Common Stock own any shares of Preferred Stock.
<TABLE>
<CAPTION>
Percentage of
Class Beneficially Owned/(1)/
-----------------------------
Amount
Name and Address Beneficially Before the After the
of Beneficial Owner Owned/(1)/ Offering Offering/(2)/
- --------------------------- ------------ ----------- -------------
<S> <C> <C> <C>
M. Lee Hulsebus 375,475/(3)/ 4.14% ____%
c/o Medical Device
Technologies, Inc.
9171 Towne Centre Drive
Suite 355
San Diego, CA 92122
Dr. Arthur Bradley 102,200 1.16% ____%
207 South 28th Street
Hattiesburg, MS 39401
Thomas Glasgow 166,805/(5)/ 1.84% ____%
122 West 22nd Street
Suite 301
Oak Brook, IL 60521
Don Arnwine 50,000/(6)/ * /(4)/ ____%
The Towers at Williams
Square
Suite 470
Irvine, TX 75016
Edward C. Hall 3,825 * /(4)/ ____%
P.O. Box 1518
Rancho Santa Fe, CA
92067
Richard E. Sloan 4,730 * /(4)/ ____%
11905 Handrich Ct.
San Diego, CA 92131
Steven W. Kenney 36,000/(7)/ * /(4)/ ____%
2247 Via Tempo
Cardiff-By the Sea, CA
92007
Virgil McDonald 771,440/(8)/ 8.6% ____%
13410 Pomona Dr.
Whittier, CA 90602
</TABLE>
74
<PAGE>
<TABLE>
Percentage of
Class Beneficially Owned/(1)/
-----------------------------
Amount
Name and Address Beneficially Before the After the
of Beneficial Owner Owned/(1)/ Offering Offering/(2)/
- --------------------------- ------------ ----------- -------------
<S> <C> <C> <C>
All officers 739,035 8.1% ____%
and directors
as a group
(7) persons/(3)(5)(6)(7)/
</TABLE>
- -----------------
(1) The shares of Common Stock owned by each person or by the group, and
the shares included in the total number of shares of Common Stock
outstanding, have been adjusted in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, to reflect the ownership of
shares issuable upon exercise of outstanding options, warrants or other
common stock equivalents which are exercisable within 60 days. As provided
in such Rule, such shares issuable to any holder are deemed outstanding for
the purpose of calculating such holder's beneficial ownership but not any
other holder's beneficial ownership.
(2) Assumes conversion of all Preferred Stock at the Conversion Price.
(3) Includes 300,000 warrants exercisable at $.40 per share to acquire
300,000 shares of Common Stock.
(4) Holdings represent less than 1% of the Company's issued and outstanding
Common Stock.
(5) Includes 31,250 warrants, 25,000 of which are exercisable at $1.00 per
share to acquire 25,000 shares of Common Stock and 6,250 of which are
exercisable at $.60 per share to acquire 6,250 shares of Common Stock.
(6) Includes 6,250 warrants exercisable at $.60 per share to acquire 6,250
shares of Common Stock.
(7) Includes 25,000 warrants exercisable at $1.00 per share to acquire
25,000 shares of Common Stock.
(8) Includes 200,000 warrants, exercisable at $1.00 per share, to acquire
200,000 shares of Common Stock.
75
<PAGE>
CERTAIN TRANSACTIONS
In June, 1994, the Company issued 700,000 shares of its Common Stock
to SurgiSafe, Inc. ("SurgiSafe") in exchange for SurgiSafe's assignment to
the Company (the "SurgiSafe Assignment") of SurgiSafe's rights under an
exclusive sales agreement entered into with the Company on September 11,
1992 (the "SurgiSafe Agreement"). Under the SurgiSafe Agreement, SurgiSafe
had the exclusive right to sell the Company's Cell Retrieval System ("CRS")
and Intracranial Pressure Monitoring Device ("ICP") and other present and
future products in a sales territory which included The Department of
Defense, The Veterans Administration, The World Health Organization and the
State of California. Under the SurgiSafe agreement, the Company was
obligated to pay SurgiSafe commissions equal to 20% of the net sales price
of sales in the sales territory and to issue to SurgiSafe 16,667 shares of
the Company's Common Stock. The 700,000 shares of the Company's Common
Stock issued to SurgiSafe in June 1994 pursuant to the SurgiSafe Assignment
was distributed in February 1995 to Mr. William E. Mayer, III, the son of
William E. Mayer, II, a member of the Company's Scientific Advisory Board
and the sole shareholder of SurgiSafe, and Mr. B. Roland Frasier, III, the
son of B. Roland Freasier, II, a former Director and Executive Vice
President of the Company. Also subsequent to the SurgiSafe Assignment, Mr.
Mayer III was appointed to the Company's Board of Directors. Mr. Mayer III
subsequently resigned as a director in 1995.
76
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
Each share of Common Stock is entitled to one vote, either in person
or by proxy, on all matters that may be voted upon by the owners thereof at
a meeting of the shareholders, including the election of directors. The
holders of Common Stock (i) have equal, ratable rights to dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all of the
assets of the Company available for distribution to holders of Common Stock
upon liquidation, dissolution or winding up of the affairs of the Company;
(iii) do not have preemptive or redemption provisions applicable thereto;
and (iv) are entitled to one noncumulative vote per share on all matters on
which shareholders may vote at all meetings of shareholders.
All shares of Common Stock issued and outstanding are, and those
offered hereby, when issued, will be fully paid and nonassessable, with no
personal liability attaching to the ownership thereof.
__% CUMULATIVE CONVERTIBLE SERIES A PREFERRED STOCK
Upon the date of this Prospectus, Preferred Stock will be issued, the
designations, rights, powers, preferences, qualifications
and limitations of which shall be set forth in a Certificate of Designation
(the "Certificate of Designation") filed with the Secretary of State of the
State of Utah amending the Company's Articles of Incorporation, a form of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
The following is a summary of the terms of the Preferred Stock. This
summary is not intended to be complete and is subject to, and qualified in
its entirety by, reference to the Certificate of Designation.
Dividends. The holders of the Preferred Stock are entitled to receive
if, when and as declared by the Board of Directors out of funds legally
available therefor, cumulative dividends, payable solely in Common Stock at
the rate of __% per annum of the Liquidation Preference of the Preferred
Stock. The dividend is payable semi-annually on June 30 and December 31 of
each year, commencing June 30, 1996. Dividends shall be paid to the holders
of record as of a date, not more than thirty (30) days prior to the
dividend payment date, as may be fixed by the Board of Directors (the
"Dividend Declaration Date"). Dividends accrue from the first day of the
semi-annual period in which such dividend may be payable, except with
respect to the first semi-annual dividend which shall accrue from the date
of issuance of the Preferred Stock. Each holder of Preferred Stock shall
receive such number of
77
<PAGE>
shares of Common Stock equal to the quotient of (i) [__]% of the
Liquidation Preference of the Preferred Stock divided by (ii) the average
ten (10) day moving average closing bid price of the Common Stock during
the thirty (30) trading days immediately prior to the Dividend Declaration
Date (the "Stock Dividend Price"); provided, however, that in no event
-------- -------
shall the Stock Dividend Price exceed $1.50 per share or be less than $.70
per share.
No dividends may be paid on any shares of capital stock ranking junior
to the Preferred Stock unless and until all declared but unpaid dividends
on the Preferred Stock have been declared and paid in full.
Right to Convert. Each share of Preferred Stock shall be convertible,
at the option of the holder, at any time commencing on _____________, 1996,
[120 days from the date of this Prospectus] (the "Initial Conversion
Date"). Each share of Preferred Stock will be convertible into [_______]
shares of Common Stock (the "Conversion Ratio"), subject to adjustment in
certain circumstances. The conversion price of the Common Stock issuable
upon conversion of the Preferred Stock is $[______] (the "Conversion
Price"), which is the quotient of the Liquidation Preference divided by the
Conversion Ratio. All accrued but unpaid Common Stock dividends shall be
paid upon the conversion.
Automatic Conversion. Unless earlier converted, all outstanding
shares of Preferred Stock will be converted into Common Stock without any
action by the holders thereof, on __________, 1997 [13 months from the date
of this Prospectus] (the "Automatic Conversion Date"). In the event that
the [average closing bid price of the Common Stock for the ten day period
immediately preceding the Conversion Date] (the "Automatic Conversion Date
Market Price") is less than $[____] [the product of (a) 1.5 multiplied by
(b) the Conversion Price] (the "Adjustment Determination"), then the
Conversion Ratio shall be adjusted as described below. Subject to the
Adjustment Determination, the Conversion Ratio on the Automatic Conversion
Date shall be adjusted to the greater of (i) the Conversion Ratio in effect
immediately prior to the Automatic Conversion Date, and (ii) the adjusted
conversion ratio (the "Adjusted Conversion Ratio") defined as the quotient
of (a) the Liquidation Preference divided by (b) the product of (X) the
Automatic Conversion Date Market Price and (Y) [_______] [the lesser of the
discount factor and .75]. All accrued but unpaid Common Stock dividends
shall be paid upon conversion.
Procedure for Conversion. To convert Preferred Stock into Common
Stock, the holder thereof must surrender the certificate therefor to the
Company's transfer agent with a conversion notice appropriately completed
and signed. Such notice is not required if the conversion is automatic. The
transfer agent will, as soon as practicable thereafter, issue a certificate
for the appropriate number of shares of Common Stock. Conversion will be
deemed to have
78
<PAGE>
been made upon the surrender of the certificate for the shares of Preferred
Stock to be converted. If the conversion would result in the issuance of a
fractional share of Common Stock, the Company will, in lieu of issuing a
fractional share, round up to the nearest whole share.
Adjustment of Conversion Ratio. The number of shares of Common Stock
into which the Preferred Stock is convertible shall be subject to
adjustment in addition to the adjustments set forth above, upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications on or of the Common Stock or a merger of
the Company with or into another entity, or sale of all or substantially
all of the assets of the Company. The Company will notify holders of
Preferred Stock of such adjustments.
Voting Rights. Each holder of shares of Preferred Stock will be
entitled to the number of votes equal to the number of shares of Common
Stock into which such holder's shares of Preferred Stock could be converted
at the time of the vote, will have voting rights equal to the voting rights
of such number of shares of Common Stock voting together with the Common
Stock as a single class on all matters submitted to the holders of Common
Stock and shall be entitled to notice of any shareholders' meeting. Any
fractional voting rights resulting from the above formula (after
aggregating all shares of Common stock into which shares of Preferred Stock
held by a single holder are converted) will be disregarded.
Liquidation Preference. The holders of shares of Preferred Stock will
be entitled to receive, in the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, out of or to
the extent of the net assets of the Company legally available for such
distribution, before any distributions are made with respect to any Common
stock or any stock ranking junior to the Preferred Stock, $[_____] per
share plus any accrued but unpaid dividends (the "Liquidation Preference").
After payment of the full amount of the Liquidation Preference, the holders
of shares of Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Company.
Upon any such liquidation, dissolution or winding up, such
preferential amounts with respect to the Preferred Stock and any class or
series ranking on a parity with the Preferred Stock if not paid in full
shall be distributed pro rata in accordance with the aggregate preferential
amounts of the Preferred Stock and such other classes or series of stock,
if any. So long as any shares of Preferred Stock are issued and
outstanding, the Company shall not issue any securities with rights,
preferences or provisions senior to the Preferred Stock.
Restrictions and Limitations. Shares of Preferred Stock
79
<PAGE>
acquired by the Company by reason of purchase, conversion, redemption or
otherwise shall be retired and shall become authorized but unissued shares
of Preferred Stock, which may be reissued as part of a new series of
Preferred Stock created under the Company's Articles of Incorporation.
OTHER PREFERRED STOCK
As of the date hereof, there are no shares of preferred stock other
than the Preferred Stock. The Company's Articles of Incorporation
authorizes the issuance of "blank check" preferred stock in one or more
classes or series with such designations, rights, preferences and
restrictions as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors may, without prior
shareholder approval, issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the
relative voting power or other rights of the holders of the Preferred Stock
or the Common Stock. Preferred stock could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change
in control of the Company. Although the Company has no present intention
of issuing any shares of preferred stock, there can be no assurance that it
will not do so in the future. If the Company issues preferred stock, such
issuance may have a dilutive effect upon the common shareholders, and the
purchasers of the securities offered hereby.
SHARE PURCHASE PLAN
The Company has adopted a share purchase plan, the principal terms and
conditions of which are set forth below.
The Rights. Each holder of a share of Common Stock has the right (the
----------
"Right") to purchase one one-hundredth (1 1/100) of a share of the
Company's Series I Preferred Stock (which is unrelated to the Series I
Preferred Stock issued to the Selling Shareholders). The Series I
Preferred Stock is a new series of the Company's Preferred Stock designed
so that each one one-hundredth (1 1/100) of a share is substantially
identical (except as to voting rights, due to restrictions thereon
contained in the Company's Articles of Incorporation) to a share of Common
Stock.
Exercise Price. The exercise price of the Rights (the "Exercise
--------------
Price") is $5.00 per share. The Exercise Price was established by the
Board based on an estimate of the reasonable long-term value of the Common
Stock over life of the Rights. The Rights have customary anti-dilution
provisions whereby the Exercise Price and the number of shares of Series I
Preferred Stock which may be purchased will be adjusted to reflect share
issuances and/or reclassifications by reason of certain transactions
including stock splits, stock dividends, recapitalizations and
reorganizations in which the Company may engage or participate.
80
<PAGE>
How the Rights May be Exercised. As issued, the Rights are
-------------------------------
represented by, and will trade with and only with, the Common Stock and are
not represented by separate certificates. However, the Rights will be
represented by separate Right Certificates, trade separately from the
shares of Common Stock and become exercisable at the Exercise Price
starting ten (10) days after: (i) it is publicly announced that any
person(s) (other than a Continuing Director, as hereinafter defined below,
an Officer of the Company appointed to such position with the approval of a
majority of the Continuing Directors then in office, or any affiliate or
associate of the foregoing) has, after the Plan is announced, acquired
beneficial ownership of voting stock representing fifteen percent (15%) or
more of the outstanding voting power of the Company (a "15% Shareholder"),
or (ii) any person(s) commences a tender or exchange offer for such number
of shares of Common Stock that would result in such person becoming a 15%
Shareholder.
"Flip-In" Provision. Under the Plan, if at any time, any person
or group becomes a 15% Shareholder (other than a Continuing Director, an
Officer of the Company appointed to such position with the approval of a
majority of the Continuing Directors then in office or any affiliate or
associate of the foregoing), the Rights will "flip-in" and give the holder
thereof, other than any 15% Shareholder and its transferrers the right to
buy, for $5.00, shares of Common Stock with a market value of $10.00 (i.e.,
purchase the Company's Common Stock at a 50% discount from its market
price). Notwithstanding the foregoing, the Rights will not become
immediately exercisable or "flip-in" under the plan if the continuing
Directors determine that the fifteen percent (15%) threshold has been
inadvertently crossed and the 15% Shareholder agrees to reduce its
ownership below 15% within 20 business days and remains below that level
for one year.
The "Flip-Over" Provision. If, after the Rights are exercisable,
any merger or consolidation occurs in which the Company's Common Stock does
not remain outstanding, each Right will be converted into the right to
purchase, for the $5.00 Exercise Price, the common stock of the acquiror
company having a market value of $10.00 (i.e., purchase such stock at a 50%
discount from the market price).
Continuing Directors. The Plan defines a Continuing Director as the
--------------------
Directors of the Company who are Directors on the date hereof, and
Directors appointed or elected upon the recommendation of the Continuing
Directors then in office but not including nominees of a person triggering
either of the "flip-in" or "flip-over" provisions, described above.
Exchange of the Rights. At any time following the triggering of the
----------------------
"flip-in" provision, the Continuing Directors may exchange the Rights
(other than those Rights which have become void, as described above, for
Common Stock (or equivalents) at an exchange
81
<PAGE>
ratio of one (1) share of Common Stock for each Right (subject to
adjustment).
Redemption of the Rights. The Rights may be redeemed by the
------------------------
Continuing Directors of the Company for $.01 each (payable in cash or
securities) at any time before there is a 15% Shareholder who has triggered
the "flip-in" provision.
Amendment of the Rights. The Plan and any Rights issued under the
-----------------------
plan can be amended by the Continuing Directors prior to the time any
person or group becomes a 15% Shareholder (with the same exceptions as set
forth above). Thereafter, the Continuing Directors can amend the Plan or
the Rights only to eliminate ambiguities or to provide additional benefits
to the holders of the Rights (other than any such holder).
Term of Rights. The Rights have a ten (10) year term, unless sooner
--------------
redeemed or terminated.
TRANSFER AGENT
The Transfer Agent for the Company's Common Stock and Preferred Stock
shall be, upon a date prior to this offering, Continental Stock Transfer &
Trust Company, 2 Broadway, New York, NY 10004. Previous to such date, the
Company's transfer agent for the Common Stock was Atlas Stock Transfer
Corporation, 5899 South State Street, Salt Lake City, Utah 84107.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a brief description of certain federal
income tax considerations which may be relevant to holders of the Preferred
Stock. This discussion is only a summary and is not intended as a
substitute for careful tax planning.
The discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations, and Internal Revenue Service
("IRS") rulings and judicial decisions now in effect, all of which are
subject to change at any time by legislative, judicial or administrative
action; any such changes could be retroactively applied in a manner that
could adversely affect a holder of the Preferred Stock. No information or
discussion is provided herein with respect to foreign, state or local tax
laws or estate and gift tax considerations, or non-income tax issues. This
information is limited to investors who will hold the Preferred Stock, and
the Common Stock acquired upon conversion of the Preferred Stock, as a
"capital asset" within the meaning of Section 1221 of the Code. In
addition, the tax consequences to a particular type of holder (including
life insurance companies, tax-exempt organizations, banks, dealers in
securities and foreign persons) may be affected by matters not discussed
herein.
ACCORDINGLY, EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS, HER OR ITS
TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
STOCK AND THE COMMON STOCK ACQUIRED UPON CONVERSION OF THE PREFERRED STOCK.
Dividend Payments. The amount of any distribution with respect to the
Preferred Stock will be a dividend, taxable as ordinary income to the
holder thereof, to the extent that the Company has current or accumulated
earnings and profits in the year in which such distribution is made.
Similarly, the amount of any distribution with respect to the Common Stock
(other than a distribution solely of Common Stock) following the conversion
of the Preferred Stock will be a dividend, taxable as ordinary income to
the holder thereof, to the extent that the Company has current or
accumulated earnings and profits in the year in which such distribution is
made.
The amount of any distribution described above will be, in the case of
a cash distribution, the amount of cash received and, in the case of a
distribution of shares of Common Stock, the fair market value of the shares
received on the date of distribution. A holder's adjusted basis in the
shares received as a dividend will equal the fair market value of such
shares on the date of distribution, and the holding period for such shares
will begin on the date following the date of the distribution. To the
extent that the amount of any distribution exceeds the Company's allocable
current and accumulated earnings and profits, such excess will
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<PAGE>
first be applied against and reduce the holder's adjusted tax basis in the
shares with respect to which such distribution is made, and second, to the
extent that such excess is greater than the holder's adjusted tax basis,
will be treated as capital gain.
Under Section 243 of the Code, dividends received by a corporation may
be eligible for the 70% dividends-received deduction. However, the
applicability of the dividends-received deduction is subject to certain
limitations set forth in Sections 246 and 246A of the Code. Corporate
holders of Preferred Stock also should consider the application of the
"extraordinary dividend" rules of Section 1059 of the Code as well as the
possible reduction or elimination of the benefit of the dividends-received
deduction due to the corporate alternative minimum tax provisions of the
Code. Corporate holders should consult their own tax advisors as to the
possible applicability of these provisions.
Sale or Exchange. Upon the sale or exchange of Preferred Stock, the
holder will recognize gain or loss equal to the difference between the
amount realized and such holder's tax basis in the Preferred Stock. The
resulting gain or loss will be a capital gain or loss and will be a long-
term capital gain or loss if the Preferred Stock was held for more than one
year or more.
Conversion of Preferred Stock. Generally, no gain or loss will be
recognized for federal income tax purposes by holders upon the receipt of
Common Stock as a result of conversion of the Preferred Stock. Income
generally will be recognized by a holder of Preferred Stock, however, only
to the extent Common Stock is received in payment of dividends in arrears.
A holder's tax basis in the Common Stock acquired upon the conversion of
the Preferred Stock will be equal to the holder's tax basis in the
Preferred Stock converted (reduced by the portion of such basis allocable
to any fractional shares exchanged for cash). Provided the Preferred Stock
was held as a capital asset, the holding period of the Common Stock
received upon the conversion of the Preferred Stock (excluding any
previously accrued but unpaid dividends paid in common stock on the
conversion of the Preferred Stock) will include the period during which the
Preferred Stock was held by such holder. The foregoing would not apply to
cash received in lieu of fractional shares, which is generally treated as
an amount received in redemption of such shares that is taxed under the
sale or exchange rules described above. As a general rule, a holder's
basis in shares of Common Stock taxed as dividends upon receipt will equal
the fair market value thereof and the holding period for such Common Stock
will begin on the day following the conversion.
Notwithstanding the foregoing, pursuant to Section 305 of the Code, a
conversion of Preferred Stock into Common Stock may result in a taxable
distribution if the conversion is deemed to be pursuant to a plan to
periodically increase the interest of the holders of Preferred Stock in the
assets or earnings of the
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Company.
Adjustment of Conversion Ratio. Section 305 of the Code and
applicable Treasury regulations provide that under certain circumstances,
adjustments in (or failure to adjust) the conversion ratio of convertible
stock and other similar transactions, including the adjustment of the
Conversion Ratio on the Automatic Conversion Date, may be treated as
constructive distributions of stock taxable as a dividend (which may
constitute (and may cause other dividends, including regular dividends, to
constitute) extraordinary dividends to corporate holders) if (i) as a
result of such an adjustment, the proportionate interest of the holder of
such convertible stock in the assets or earnings and profits of the issuer
is increased, and (ii) the adjustment is not made pursuant to a bona fide,
reasonable antidilution formula.
An adjustment in the conversion ratio of the Preferred Stock is
allowed only upon the issuance of Common Stock as a dividend with respect
to outstanding Common Stock, or as a result of any subdivisions,
combinations or reclassifications of Common Stock. The purpose of such an
adjustment is to fairly and equitably preserve the conversion rights of the
Preferred Stock. Accordingly, the adjustments in the conversion ratio for
the stock dividends, subdivisions, combinations or reclassifications should
qualify as a reasonable antidilution formula and should not be taxable as a
constructive distribution of a security taxable as a dividend to the
holders of the Preferred Stock.
General Back-Up Withholding. Under Section 3406 of the Code and
applicable Treasury regulations, a holder of Preferred Stock may be subject
to back-up withholding tax at the rate of 31% with respect to dividends
paid or on the proceeds of a sale, exchange or redemption of the Preferred
Stock or Common Stock acquired through exercise of the conversion
privilege. The Company will be required to deduct and withhold the tax if
(i) the holder fails to furnish a taxpayer identification number to the
Company, (ii) the IRS notifies the Company that the taxpayer identification
number furnished by the holder is incorrect, (iii) there has been a
notified payee under-reporting with respect to interest, dividends or
original issue discount described in Section 3406(c) of the Code, or (iv)
there has been a failure of the holder to certify under the penalty of
perjury that the holder is not subject to withholding under Section
3406(a)(1)(C) of the Code. As a result, if any one of the above situations
apply, the Company will be required to withhold a tax equal to 31% from any
dividend or redemption payment made with respect to the Preferred Stock or
Common Stock. Any amount withheld from a payment to a holder under back-up
withholding rules is allowable as a credit against such holder's federal
income tax liability, provided that the required information is furnished
to the IRS. Holders should consult their tax advisors regarding their
qualification for exemption from back-up withholding and the procedure for
obtaining any applicable
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<PAGE>
exemption.
Foreign Withholding. Dividends paid to non-United States holders of
Preferred Stock or Common Stock may be subject to a 30% withholding tax on
any dividend paid with respect to Preferred or Common Stock; provided,
--------
however, a non-United States holder will be taxed at ordinary federal
-------
income tax rates (on a net income basis) on dividends that are effectively
connected with the conduct of a trade or business within the United States
by such non-United States holder if such holder files the appropriate forms
with the payor and therefor, will not be subject to the 30% withholding tax
described above. The withholding tax may be decreased below 30% if the
holder qualifies for a reduced withholding rate on dividends under an
applicable U.S. tax treaty. Non-United States holders must comply with
certain certification and disclosure requirements to claim benefits under a
U.S. tax treaty or an exemption from withholding tax under the foregoing
rules.
Reporting Requirements. Reports will be made annually or otherwise as
may be required to the IRS and to the holders of record that are not
exempted from such reporting requirements with respect to distributions on
the Preferred Stock or Common Stock acquired through exercise of the
conversion privilege. Such reporting will be made on IRS 1099-DIV or on
such other form as may be prescribed under rules issued by the IRS.
Proposed Legislation. There are various proposals to amend the Code,
some of which will affect the analysis described herein. Each holder of the
Preferred Stock, in particular corporate holders, should consult their own
tax advisors regarding the effect of any proposed legislation on their
investment in the Preferred Stock.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
RULE 144
--------
Of the 8,744,339 shares of Common Stock that were issued and
outstanding prior to this offering, 1,205,336 are restricted securities" as
that term is defined by Rule 144 of the Securities Act, 342,380 of which
are currently eligible for resale in compliance with Rule 144 of the
Securities Act. Of these shares, 5,336 are owned by current officers and
directors of the Company who have agreed with the Representative not to
directly or indirectly offer, sell, transfer or otherwise encumber or
dispose of any of such shares for a period of thirteen (13) months after
the effective date of this offering. In addition, the Company is
registering an additional 247,500 shares of Preferred Stock and the
_________ shares of Common Stock into which such shares of Preferred Stock
are convertible in the Concurrent Offering, although holders of these
securities have agreed with the Representative not to, directly or
indirectly, offer, sell, transfer or otherwise encumber any of these
securities for thirteen (13) months after the effective date of this
offering. The Company has also issued 1,997,500 warrants and stock options
to purchase an aggregate of 1,997,500 shares of Common Stock which shall
vest and become exercisable from time to time. Of these options and
warrants, 737,500 are held by officers and directors, all of who have
agreed with the Representative not to, directly or indirectly, offer, sell,
transfer, or otherwise encumber any of these securities, or the underlying
737,500 shares of Common Stock into which these securities are exercisable,
for a period of thirtee (13) months after the date of this Prospectus.
Ordinarily, under Rule 144, a person who is an affiliate of the
Company (as that term is defined in Rule 144) and has beneficially owned
restricted securities for a period of two (2) years may, every three (3)
months, sell in brokerage transactions an amount that does not exceed the
greater of (i) 1% of the outstanding class of such securities or (ii) the
average weekly trading volume of trading in such securities on all national
exchanges and/or reported through the automated quotation system of a
registered securities association during the four weeks prior to the filing
of a notice of sale by a securities holder. A person who is not an
affiliate of the Company who beneficially owns restricted securities is
also subject to the foregoing volume limitations but may, after the
expiration of three (3) years, sell unlimited amounts of such securities
under certain circumstances.
Potential or actual sales of the Company's outstanding Common Stock by
certain of the present shareholders either under Rule 144, pursuant to the
Concurrent Offering or otherwise, or potential or actual sales of Common
Stock, Preferred Stock, Common Stock, underlying options, warrants or
convertible debt may, in the future, have a depressive effect on the price
of the Common Stock,
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<PAGE>
which may in turn have a depressive effect on the market price of the
Preferred Stock. In addition, in the event the Underwriter exercises the
Underwriter's Warrants, any sales of the securities acquired thereby may
have an adverse effect on the then current market price of the Common
Stock, which may in turn have a depressive effect on the market price of
the Preferred Stock. See "The Company - Concurrent Offering,"
"Underwriting," and "Description of Securities."
88
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom First
Allied Securities, Inc. is acting as Representative, have severally agreed,
subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), to purchase from the Company and the Company has
agreed to sell to the Underwriters on a firm commitment basis the
respective number of shares of Preferred Stock set forth opposite their
names:
NUMBER
UNDERWRITER OF SHARES
----------- ---------
First Allied Securities, Inc. . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . 1,300,000
=========
The Underwriters are committed to purchase all shares of Preferred
Stock offered hereby if any of such shares are purchased. The Underwriting
Agreement provides that the obligations of the several Underwriters are
subject to conditions precedent specified therein.
The Company has been advised by the Representative that the
Underwriters propose to initially offer the Preferred Stock to the public
at the public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less concessions of not in excess of
$__________ per share of Preferred Stock. Such dealers may reallow a
concession not in excess of $__________ per share of Preferred Stock to
other dealers. After the commencement of this offering, the public offering
price, concession and reallowance may be changed by the Representative.
The Representative has advised the Company that it does not anticipate
sales to discretionary accounts by the Underwriters to exceed five percent
of the total number of shares of Preferred Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company
has also agreed to pay to the Underwriter an
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<PAGE>
expense allowance on a nonaccountable basis equal to three percent (3%) of
the gross proceeds derived from the sale of the Preferred Stock
underwritten, of which $25,000 has been paid to date.
The Underwriter has been granted an option by the Company, exercisable
within forty-five (45) days after the date of this Prospectus, to purchase
up to an additional 195,000 shares of Preferred Stock at the initial public
offering price per share of Preferred Stock offered hereby, less
underwriting discounts and the expense allowance. Such option may be
exercised only for the purpose of covering over-allotments, if any,
incurred in the sale of the shares of Preferred Stock offered hereby. To
the extent such option is exercised in whole or in part, each Underwriter
will have a firm commitment, subject to certain conditions, to purchase the
number of the additional shares of Preferred Stock proportionate to its
initial commitment.
All of the Company's officers and directors and all of the purchasers
of the Preferred Stock in the Private Placement have agreed not to,
directly or indirectly, offer to sell, transfer, hypothecate or otherwise
encumber any of their securities for thirteen (13) months following the
date of this Prospectus without the prior written consent of the Company
and the Underwriter.
The Company has agreed that, for three (3) years after the effective
date of this Prospectus, the Representative will have the right to
designate one individual to be elected to the Company's Board of Directors.
Such individual may be a director, officer, employee or affiliate of the
Representative. In the event the Representative elects not to designate a
person to serve on the Company's Board of Directors, the Representative may
designate an observer to attend meetings of the Board of Directors.
The Company has also agreed to execute a financial advisory and
consulting agreement with the Representative pursuant to which the Company
is required to pay the Representative a fee of $1,000 a month for a period
of sixty (60) months, which must be prepaid in full upon completion of the
Offering.
In connection with this offering, the Company has agreed to sell to
the Representative, for nominal consideration, the Representative's
Warrants to purchase from the Company 130,000 shares of Preferred Stock (or
____ shares of Common Stock issuable upon conversion of such shares of
Preferred Stock). The Representative's Warrants are initially exercisable
at a price of $__________ per share of Preferred Stock, [120% of the
initial public offering price] for a period of four (4) years commencing
one (1) year from the date of this Prospectus and are restricted from sale,
transfer, assignment or hypothecation for a period of twelve (12) months
from the date hereof, except to officers and principals of the
Representative. The Representative's Warrants also provide for adjustment
in the number of shares of Preferred
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Stock issuable upon the exercise thereof as a result of certain
subdivisions and combinations of the Preferred Stock. The Representative's
Warrants grant to the holders thereof certain rights of registration for
the securities issuable upon exercise of the Representative's Warrants.
In connection with the Private Placement, the Company paid the
Representative, as placement agent, $165,000 in cash as a commission and a
nonaccountable expense allowance of approximately $15,000. The Company also
agreed in connection with the Private Placement to indemnify the
Representative against certain liabilities, including liabilities under the
Securities Act, or to contribute to related payments that the
Representative may be required to make. In addition, the Company granted
the Representative, for a period of three (3) years, a right of first
refusal to be the managing underwriter or placement agent for any
securities to be offered by the Company.
Prior to this offering, there has been no public market for the
Preferred Stock. Consequently, the terms and initial public offering price
for the Preferred Stock, although related to the Common Stock into which it
is convertible, has been determined by negotiations between the Company and
the Representative and is not necessarily related to the Company's asset
value, net worth or other established criteria of value. The factors
considered in such negotiations included the history of and prospects for
the industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and certain
other factors as were deemed relevant.
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<PAGE>
LEGAL MATTERS
The validity of the shares of Preferred Stock and Common Stock will be
passed upon for the Company by Zukerman Gore & Brandeis, LLP, New York, New
York. Certain matters regarding Utah corporate law will be passed upon by
King & Isaacson. Certain matters regarding patents and intellectual
property rights will be passed upon for the Company by Davis Bujold &
Streck, Manchester, New Hampshire, and Strasburger & Price, LLP, Dallas
Texas. Certain regulatory matters with respect to the FDA approvals will be
passed upon for the Company by Hyman, Phelps & McNamara, P.C., Washington,
D.C. Orrick, Herrington & Sutcliffe, New York, New York, has acted as
counsel to the Underwriter in connection with this offering.
CHANGE IN ACCOUNTANTS
On January 29, 1996, the Company and Robert Early & Company, P.C.
("Early"), the Company's independent certified public accountants, by
mutual agreement discontinued the services of Early as the independent
public accountant for the Company. The Company has replaced Early with BDO
Seidman, LLP effective as of such date. The decision to change accountants
was approved by the Company's Board of Directors. Early's report on the
financial statements of the Company for each of years ending December 31,
1993 and 1994 contained no adverse opinion, or disclaimers of opinion but
was qualified as to going concern. Further, during such periods and any
subsequent period preceding such disengagement, there were no disagreements
with Early on any matter of accounting principles or practices, financial
statement disclosure or auditing scope of procedure, which disagreement, if
not resolved to the satisfaction of Early, would have caused Early to make
reference to the subject matter of such disagreements in connection with
its report.
EXPERTS
The financial statements of the Company included in this Prospectus
and elsewhere in the Registration Statement for the periods ended December
31, 1991, 1992, 1993 and 1994 have been audited by Robert Early & Company,
independent certified public accountants, as set forth in their report
thereon appearing elsewhere herein and in the Registration Statement. Such
financial statements have been included in reliance upon the reports of
Robert Early & Company, given upon their authority as experts in accounting
and auditing. The financial statements of the Company included in this
Prospectus and elsewhere in the Registration Statement for the period ended
December 31, 1995 have been audited by BDO Seidman, LLP, independent
certified public accountants, as set forth in their report appearing
elsewhere herein and in the Registration Statement. Such financial
statements have been included in reliance upon the reports of BDO Seidman,
LLP, given upon their authority as experts in accounting and auditing. BDO
Seidman, LLP's report includes an explanatory paragraph that the
92
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Company's recurring losses from operations, negative working capital and
limited capital resources raise substantial doubt about the Company's
ability to continue as a going concern.
93
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, DC a
registration statement on Form S-1 (together with all amendments thereto,
the "Registration Statement"), under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules filed therewith, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Preferred Stock offered
hereby, reference is hereby made to the Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this
Prospectus regarding the contents of any contract or other document
referred to are not necessarily complete and, in each instance, reference
is made to the copy of such contract or other document filed as an exhibit
to the Registration Statement, each such statement being deemed to be
qualified in its entirety by such reference. The Registration Statement,
including all exhibits and schedules thereto, may be inspected without
charge at the principal office of the Commission, at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, DC 20549, and at the regional
offices of the Commission located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and at Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material may
be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Room 1024, Washington, DC 20549, upon the payment of
prescribed fees.
94
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INDEX TO FINANCIAL STATEMENTS
MEDICAL DEVICE TECHNOLOGIES, INC.
Page
----
Report of Independent Certified Public
Accountants - BDO Seidman, LLP
on behalf of Medical Device Technologies, Inc. F-1
Report of Independent Certified Public
Accountants - Robert Early & Company, P.C.
on behalf of CytoProbe Corporation F-3
Consolidated Balance Sheets as of December 31,
1995 and December 31, 1994 F-4
Consolidated Statements of Operations for the
years ended December 31, 1995, December 31,
1994, and the period from June 1, 1992 to
December 31, 1995 (Cumulative) F-6
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1995 and December 31, 1994 F-7
Consolidated Statements of Cash Flows for
the years ended December 31, 1995 and
December 31, 1994 and for the period
from June 1, 1992 to December 31, 1995
(Cumulative) F-9
Summary of Accounting Policies F-11
Notes to Consolidated Financial Statements F-14
F-0
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Medical Device Technologies, Inc.
and Subsidiary (formerly
Cytoprobe Corporation)
San Diego, California
We have audited the accompanying consolidated balance sheet of Medical
Device Technologies, Inc. and subsidiary (formerly Cytoprobe Corporation) (a
development stage company) (the "Company") as of December 31, 1995 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year then ended. We have also audited the statements of
operations and cash flows for the period from June 1, 1992 through December 31,
1995, except that we did not audit these financial statements for the period
from June 1, 1992 to December 31, 1994; those statements were audited by other
auditors whose report dated February 17, 1994 expressed a qualified opinion on
those statements. 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 audit. Our
opinion, insofar as it relates to the amounts for the period from June 1, 1992
to December 31, 1994, is based solely on the report of other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Medical Device Technologies, Inc.
and subsidiary (a development stage company) at December 31, 1995 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
F-1
<PAGE>
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, negative
working capital and limited capital resources raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to this matter are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
- ----------------------------
BDO Seidman, LLP
Los Angeles, California
January 29, 1996, except for
Notes 4 and 14 which are
as of April 1, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
CytoProbe Corporation
La Jolla, California
We have audited the accompanying consolidated balance sheets of CytoProbe
Corporation (a development stage company) and subsidiary as of December 31,
1994 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended. 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 consolidated 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 consolidated financial position
of CytoProbe Corporation (a development stage company) and subsidiary at
December 31, 1994, and the consolidated results of its operations and its
consolidated cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company is in the development stage and has no
operating revenues. This situation raises substantial doubt as to the
Company's ability to continue as a going concern. Management's plans in regard
to this situation are also described in Note 12. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Robert Early & Company, P.C.
- -----------------------------------
Robert Early & Company, P.C.
Abilene, Texas
February 17, 1995
F-3
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------
December 31, 1995 1994
- ---------------------------------------------------------------------------
ASSETS (Note 2)
CURRENT ASSETS
Cash $ 306,851 $ 483,611
Inventory 147,593 -
Prepaid royalties (Note 4) 60,000 -
Prepaid expenses and other assets 28,082 -
- ---------------------------------------------------------------------------
Total current assets 542,526 483,611
- ---------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 112,149 75,015
Machinery and equipment 17,136 -
Equipment under capital lease 5,349 5,349
- ---------------------------------------------------------------------------
134,634 80,364
Less accumulated depreciation 37,309 16,563
- ---------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 97,325 63,801
- ---------------------------------------------------------------------------
LICENSE AGREEMENTS 2,226,129 2,176,129
PREPAID ROYALTIES (Note 4) 115,000 -
LOAN ORIGINATION FEES (Note 2) 117,500 -
PREPAID MARKETING COSTS (net of amortization of
$493,075 at December 31, 1994) - 125,781
OTHER ASSETS 44,341 8,341
- ---------------------------------------------------------------------------
$ 3,142,821 $ 2,857,663
- ---------------------------------------------------------------------------
F-4
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLDIATED BALANCE SHEETS
-----------------------------------------------------------
December 31, 1995 1994
- ---------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 276,366 $ 164,958
Accrued expenses 40,927 326,640
Accrued patent license cost - 50,000
Short-term notes payable, net of
unamortized discount of $384,375
(face value of $1,025,000 in 1995)
(Note 2) 640,625 50,000
Current obligation under capital lease
(Note 3) 1,728 1,587
- ---------------------------------------------------------------------------
Total current liabilities 959,646 593,185
OTHER LIABILITIES
Capital lease obligation (Note 3) 1,755 3,400
- ---------------------------------------------------------------------------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY (Note 5)
Series I convertible preferred stock, 187,500
shares authorized, 153,750 issued and
outstanding 384,375 -
Preferred stock, 10,000,000 shares
authorized, $.01 par value, 0 shares
issued and outstanding - -
Common stock, $.15 par value (100,000,000
shares authorized, 8,393,199 and
4,289,963 outstanding) 1,258,980 643,495
Stock to be issued (50,000 and 1,096,875
shares) 23,440 796,250
Additional paid-in capital 12,146,899 9,716,485
Deferred compensation (Note 4) 247,500 66,406
Accumulated deficit ($8,173,072 and
$5,254,856 accumulated during the
development stage through December 31,
1995 and 1994) (11,879,774) (8,961,558)
- ---------------------------------------------------------------------------
Total stockholders' equity 2,181,420 2,261,078
- ---------------------------------------------------------------------------
$ 3,142,821 $ 2,857,663
- ---------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------------------
June 1, 1992 to
Year ended December 31, Decemberr 31,
------------------------- 1995
1995 1994 (Cumulative)
- ---------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development $ 943,510 $ 778,468 $ 2,056,504
General and administrative 1,971,781 1,717,132 5,138,721
- ---------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (2,915,291) (2,495,600) (7,195,225)
OTHER INCOME (EXPENSE):
Interest income - - 6,096
Interest expense (2,925) (2,904) (6,883)
Loss on sale marketable
securities (Note 6) - (18,655) (20,790)
Net unrealized loss on
marketable securities - - (64,500)
- ---------------------------------------------------------------------------
LOSS BEFORE DISCONTINUED OPERATIONS
AND DISPOSAL OF OIL AND GAS
OPERATIONS (2,918,216) (2,517,159) (7,281,302)
DISCONTINUED OPERATIONS - - (520,396)
LOSS FROM DISPOSAL OF OIL AND
GAS OPERATIONS (Note 7) - (371,374) (371,374)
- ---------------------------------------------------------------------------
NET LOSS $(2,918,216) $(2,888,533) $(8,173,072)
- ---------------------------------------------------------------------------
PRIMARY LOSS PER SHARE:
Loss from continuing operations $ (.43) $ (.83)
Loss from disposal of oil and
gas operations - (.12)
- ---------------------------------------------------------------------------
Net loss $ (.43) $ (.95)
- ---------------------------------------------------------------------------
Weighted average shares
outstanding 6,714,168 3,032,813
- ---------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------ ------------------------- Paid-In
Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1992 - $ - 2,859,017 $ 440,008 $ 4,252,058
Common stock issued for:
Cash - - 717,667 96,494 462,450
Research and development
and services - - 455,932 68,390 359,046
Patent and licensing costs - - 350,000 52,500 78,750
Prepaid market research - - 1,150,000 172,500 258,750
Stock to be issued - - - - 163,958
Net loss from June 1 through
December 31, 1992 - - - - -
- ----------------------------------------------------------------------------------------------------
Balances, December 31, 1992 - - 5,532,616 829,892 5,575,012
- ----------------------------------------------------------------------------------------------------
Common stock issued for:
Cash - - 625,500 93,825 237,400
Patent and licensing costs - - 1,000,000 150,000 639,000
Research and development,
compensation, and
services - - 725,000 108,750 705,294
Stock to be issued - - - - -
Net loss for 1993 - - - - -
- ----------------------------------------------------------------------------------------------------
Balances, December 31, 1993 - $ - 7,883,116 $ 1,182,467 $ 7,156,706
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Deferred Retained
Stock Compen- Earning
To Be Issued sation (Deficit) Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, May 31, 1992 - $ - $(3,706,702) $ 985,364
Common stock issued for:
Cash - - - 558,944
Research and development
and services - - - 427,436
Patent and licensing costs - - - 131,250
Prepaid market research - - - 431,250
Stock to be issued 75,000 - - 238,958
Net loss from June 1 through
December 31, 1992 - - (761,262) (761,262)
- ------------------------------------------------------------------------------------------------
Balances, December 31, 1992 75,000 - (4,467,964) 2,011,940
- ------------------------------------------------------------------------------------------------
Common stock issued for:
Cash (75,000) - - 256,225
Patent and licensing costs - - - 789,000
Research and development,
compensation, and
services - - - 814,044
Stock to be issued 42,000 - - 42,000
Net loss for 1993 - - (1,605,061) (1,605,061)
- ------------------------------------------------------------------------------------------------
Balances, December 31, 1993 42,000 $ - $(6,073,025) $ 2,308,148
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------ ------------------------- Paid-In
Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 - $ - 7,883,116 $1,182,467 $ 7,156,706
Reverse stock split - - (6,569,121) (985,368) 985,368
Common stock issued for: (Note 5)
Cash - - 769,640 115,446 368,816
Research and development,
compensation and services - - 1,211,828 181,774 949,074
Patent and licensing costs - - 900,000 135,000 218,333
Conversion of debt - - 94,500 14,175 38,189
Stock to be issued - - - - -
Accrued stock issuance (Note 4) - - - - -
Net loss for 1994 - - - - -
- ----------------------------------------------------------------------------------------------------
Balances, December 31, 1994 - - 4,289,963 643,494 9,716,486
- ----------------------------------------------------------------------------------------------------
Stock to be issued (Note 5) - - - -
Common stock issued for:
(Note 5)
Cash - - 86,000 12,900 17,100
Patent and licensing costs - - 40,000 6,000 44,000
Purchases, research and
development, compensation,
and services - - 1,807,561 271,135 1,291,995
Conversion of debt - - 687,500 103,125 171,875
Private placement - - 1,482,175 222,326 752,443
Accrued stock issuance (Note 4) - - - - -
Issuance of warrants (Note 5) - - - - 153,000
Issuance of preferred stock
(Note 5) 153,750 384,375 - - -
Net loss for 1995 - - - - -
- ----------------------------------------------------------------------------------------------------
Balances, December 31, 1995 153,750 $ 384,375 8,393,199 $1,258,980 $12,146,899
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Deferred Retained
Stock Compen- Earning
To Be Issued sation (Deficit) Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 42,000 $ - $(6,073,025) $2,308,148
Reverse stock split - - - -
Common stock issued for: (Note 5)
Cash (42,000) - - 442,262
Research and development,
compensation and services - - - 1,130,848
Patent and licensing costs - - - 353,333
Conversion of debt - - - 52,364
Stock to be issued 796,250 - - 796,250
Accrued stock issuance (Note 4) - 66,406 - 66,406
Net loss for 1994 - - (2,888,533) (2,888,533)
- -------------------------------------------------------------------------------------------------
Balances, December 31, 1994 796,250 66,406 (8,961,558) 2,261,078
- -------------------------------------------------------------------------------------------------
Stock to be issued (Note 5) 201,959
Common stock issued for:
(Note 5)
Cash - - - 30,000
Patent and licensing costs - - - 50,000
Purchases, research and
development, compensation,
and services - - - 1,563,130
Conversion of debt - - - 275,000
Private placement (974,769) - -
Accrued stock issuance (Note 4) - 181,094 - 181,094
Issuance of warrants (Note 5) - - - 153,000
Issuance of preferred stock
(Note 5) - - - 384,375
Net loss for 1995 - - (2,918,216) (2,918,216)
- -------------------------------------------------------------------------------------------------
Balances, December 31, 1995 23,440 $ 247,500 $(11,879,774) $ 2,181,420
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-8
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------
INCREASE (DECREASE) IN CASH June 1, 1992 to
Year ended December 31, Decemberr 31,
------------------------- 1995
1995 1994 (Cumulative)
- ---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(2,918,216) $(2,888,533) $(8,173,072)
Adjustments to reconcile net
loss to net cash provided by
operations:
Loss from discontinued
operations from January 1
through May 31, 1992 - - (101,599)
Stock paid for services 1,563,130 1,130,848 3,522,741
Compensation recognized
relating to accrued employee
stock grants 181,094 66,406 247,500
Compensation recognized
relating to the issuance of
warrants 153,000 - 153,000
Bad debt expense - - 394,720
Depreciation and amortization 146,527 404,216 654,821
Loss on disposal of fixed assets - 5,804 102,595
Reversal of litigation outstanding
at end of prior year (286,996) - (286,996)
Loss on sale of marketable
securities - 18,655 48,290
Net unrealized loss on
marketable securities - - 37,000
Loss on disposal of oil and
gas operations - 368,894 368,894
Increase (decrease) from
changes in:
Accounts receivable - 16,906 2,515
Interest receivable - - 8,053
Amounts due from related party - - 1,682
Inventory (147,593) - (147,593)
Prepaid royalties (175,000) - (175,000)
Prepaid expenses and other assets (28,082) (8,341) (204,424)
Other assets (36,000) - (44,341)
Accounts payable 111,408 31,519 189,284
Accrued expenses and taxes 1,283 60,750 43,827
- ---------------------------------------------------------------------------
Net cash used in operating
activities (1,435,445) (792,876) (3,357,103)
- ---------------------------------------------------------------------------
F-9
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------
INCREASE (DECREASE) IN CASH June 1, 1992 to
Year ended December 31, Decemberr 31,
------------------------- 1995
1995 1994 (Cumulative)
- ---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Patent and marketing licensing
costs (50,000) (89,260) (525,110)
Purchase of property and
equipment (54,270) (39,689) (142,374)
Proceeds from sale of marketable
securities - 55,345 110,671
Loan payments received - - 44,560
Proceeds from sale of fixed assets - - 11,634
Investment by discontinued
operations - - 8,323
- ---------------------------------------------------------------------------
Net cash used in investing
activities (104,270) (73,604) (492,296)
- ---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from related party - - 22,608
Proceeds from notes payable 1,182,500 50,000 1,282,500
Principal payments on notes
payable (50,000) - (50,000)
Proceeds from common stock to be
issued 201,959 754,250 1,237,167
Proceeds from issuing common stock 30,000 486,627 1,364,052
Capital lease financing (1,504) 4,987 3,483
Advances on private common
stock placement - 44,217 296,440
- ---------------------------------------------------------------------------
Net cash provided by financing
activities 1,362,955 1,340,081 4,156,250
- ---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (176,760) 473,601 306,851
CASH, beginning of year 483,611 10,010 -
- ---------------------------------------------------------------------------
CASH, end of year $ 306,851 $ 483,611 $ 306,851
- ---------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-10
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
DESCRIPTION OF Medical Device Technologies, Inc. (the "Company"), is a public
BUSINESS company incorporated in Utah on February 6, 1980 and
headquartered in San Diego, California. The Company currently
trades on the Nasdaq SmallCap Market (MEDD). Prior to 1992, the
Company's core business was the exploration and production of
hydrocarbons. As of June 1, 1992, the Company re-entered the
development stage. Effective January 1, 1994, the Company
completed the divestiture of all oil and gas properties, and was
no longer in the hydrocarbon business. Since that time, the
Company has been exclusively a medical device company. The
Company changed its name in April 1995, from Cytoprobe
Corporation, to reflect the change of focus.
The Company has developed three innovative medical device
products. The first product, the Personal Alarm System (PAS) is
a device which monitors the integrity of infection control
barriers, such as surgical gloves and gowns worn during medical
procedures. The second product, the Cell Recovery System (CRS)
is a cell "brushing" and retrieval system using an automated
biopsy brush for the collection of specimen cells for diagnostic
purposes, primarily (but not limited to) cancer detection. The
third product, the Intracranial Pressure Measuring System (ICP)
is a diagnostic device that measures pressure within the skull
non-invasively. The Company received FDA clearance of the PAS
during the year ended December 31, 1995 and received FDA
clearance of the CRS in March, 1996.
INVENTORY During the year ended December 31, 1995, the Company began
preliminary production of PAS device components. The inventory
balance shown is the accumulated costs of materials at December
31, 1995.
PROPERTY AND Property and equipment are stated at cost. Depreciation is
EQUIPMENT being provided on a straight line basis over the estimated
useful lives of the related assets which range from three to
seven years.
LOAN In conjunction with the Company's private placement notes
ORIGINATION payable (Note
F-11
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
FEES 2), the Company incurred $117,500 in loan origination fees
during the year ended December 31, 1995. These fees will be
amortized over approximately five months, which is the expected
term of the notes payable as they are to be repaid upon
consummation of the proposed public offering of convertible
preferred stock.
F-12
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
LICENSE The Company has entered into various license agreements
AGREEMENTS whereby the Company has acquired the exclusive worldwide rights
to commercialize, manufacture, and sell its three products. In
addition, the Company paid finder's fees relating to two of the
three products. These costs, along with legal costs to register
the related patents, have been capitalized and will be amortized
once the Company commences shipment of the product in proportion
to estimated future sales.
INCOME TAXES Effective January 1, 1994, the Company adopted FAS 109
"Accounting for Income Taxes." It requires an asset and
liability approach for financial accounting and reporting of
deferred income taxes. Generally, FAS 109 allows for recognition
of deferred tax assets in the current period for the future
benefit of net operating loss carryforwards and items for which
expenses have been recognized for financial statement purposes
but will be deductible in future periods. A valuation allowance
is recognized, if on the weight of available evidence it is more
likely than not that some portion or all of the deferred tax
asset will not be realized. The adoption of FAS 109 did not have
any effect on the financial statements of the Company.
CASH FLOWS For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
ACCOUNTING The preparation of financial statements in conformity with
ESTIMATES 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.
F-13
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
EARNINGS PER Earnings per share data has been computed on the weighted
SHARE average number of shares of common stock outstanding each
period. Warrants outstanding have not been considered in the
average number of shares since the effect would be anti-
dilutive. Weighted average shares outstanding at December 31,
1995 and 1994 includes the stock to be issued.
NEW ACCOUNTING Statement of Financial Accounting Standards No. 121,
PRONOUNCEMENTS "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" (SFAS No. 121) issued by
the Financial Accounting Standards Board (FASB) is effective for
financial statements for fiscal years beginning after December
15, 1995. SFAS No. 121 establishes new guidelines regarding when
impairment losses on long-lived assets, which include plant and
equipment, and certain identifiable intangible assets, should be
recognized and how impairment losses should be measured. The
Company does not expect adoption of SFAS No. 121 to have a
material affect on its financial position or results of
operations.
Statements of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123) issued
by the Financial Accounting Standards Board (FASB) is effective
for specific transactions entered into after December 15, 1995,
while the disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning no later
than December 15, 1995. The new standard establishes a fair
value method of accounting for stock-based compensation plans
and for transactions in which an entity acquires goods or
services from nonemployees in exchange for equity instruments.
At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or
only provide the required financial statement disclosures. As
such, the impact on the Company's financial position and results
of operations is currently unknown. The Company does not expect
adoption of SFAS No. 121 to have a material effect on its
financial position or results of operations.
RECLASSIFI- Certain reclassifications have been made to conform the prior
CATIONS year's amounts to the current year's presentation.
F-14
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GOING CONCERN These financial statements have been prepared assuming
that the Company will continue as a going concern. The
Company has recurring losses from operations, negative
working capital and limited capital resources. These
conditions raise substantial doubt about the Company's
ability to continue as a going concern. Further, the
Company does not have sufficient cash flow to fund
completion of its development programs or current level
of expenses or pay $1,025,000 in notes due in December
1996.
Management plans to raise gross proceeds of
approximately $6,500,000 in capital through a public
offering of convertible preferred stock during the
second quarter of 1996. There is no assurance that the
public offering will be successful.
If the anticipated public offering of convertible
preferred stock is not completed and the Company does
not achieve certain minimum sales of the PAS device
during the next twelve months, the Company will be
required to seek alternative sources of financing, which
cannot be assured. In such event, the Company would have
to curtail product as well as research and development
plans substantially due to lack of funds. The long-term
viability of the Company is dependent on its ability to
profitably develop and market its current products and
to obtain the financing necessary to fund its
anticipated growth.
The financial statements do not include any adjustments
relating to the recoverability and classification of
recorded asset amounts or the amount of liabilities that
might be necessary should the Company be unable to
continue in existence.
F-15
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SHORT-TERM Pursuant to a Confidential Private Placement
NOTES PAYABLE Memorandum dated October 27, 1995, between December 14,
1995 and December 27, 1995, the Company effected a
private placement of notes and 153,750 shares of Series
I convertible preferred stock. Of the $1,025,000 of
gross proceeds, $384,375 was allocated to the preferred
stock and represents the original issue discount on the
notes. The proceeds of the private placement are being
used to provide working capital to the Company.
Notes sold in the private placement bear interest at 10%
per annum and mature at the earlier of (i) the
expiration of twelve months after their issuance, (ii)
receipt by the Company of at least $3,000,000 in gross
proceeds from (a) a public or private sale of its
securities, (b) a joint venture, or (c) a licensing
agreement. The unamortized original issue discount was
$384,375 as of December 31, 1995.
On January 24, 1996, the Company completed the private
placement and issued an additional $625,000 of notes and
93,750 shares of Series I convertible preferred stock.
The notes issued are secured by a first priority lien on
all assets of the Company. This security interest will
terminate upon repayment of the notes.
The loan origination fees associated with the above
private placement totaled $117,500 through December 31,
1995. Subsequent to year end, an additional $62,500 in
loan fees were incurred.
During the year ended December 31, 1995, the Company
repaid a note payable in the principal amount of $50,000
which existed at December 31, 1994.
F-16
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. CAPITAL LEASE Minimum future lease payments under a capital lease for
OBLIGATION each of the next two years and in aggregate are as
follows:
December 31, Amount
------------------------------------------------------
1996 $ 2,214
1997 1,660
------------------------------------------------------
3,874
Less: amount representing interest 391
------------------------------------------------------
Present value of minimum lease payments $ 3,483
------------------------------------------------------
4. COMMITMENTS The Company is currently leasing its offices under a
three year operating lease which ends July, 1997. Future
minimum lease payments under this and other operating
leases are as follows:
December 31, Amount
------------------------------------------------------
1996 $40,248
1997 29,364
1998 2,748
1999 2,748
2000 2,748
------------------------------------------------------
$77,856
------------------------------------------------------
Rent expense was $54,642 and $78,220 for the years ended
December 31, 1995 and 1994, respectively.
F-17
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. COMMITMENTS ROYALTY AGREEMENTS
(CONTINUED)
The Company entered into a royalty agreement when it
purchased the exclusive license and technological rights
relating to the CRS device. Under the terms of the
agreement, the Company will pay one party an amount of
$300,000 under defined payment terms beginning in
January 1996. Also, the Company will pay royalties to a
second party amounting to 5% of the average retail sales
price on all net sales, plus $100,000 in twenty equal
quarterly installments of $5,000 beginning January 1,
1997. The Company can terminate this agreement with 90
days written notice at which time all patent rights will
cease.
The Company entered into a royalty agreement when it
purchased the exclusive license and received the
technology and developments relating to the PAS device.
Under the terms of the agreement, the Company will pay
royalties in the amount of 5% of the net sales price of
each product for the life of the patent. Previous
consulting payments made by the Company in the amount of
$160,000 at December 31, 1995 will be deducted from
royalties at the rate of $15,000 per quarter, provided
that the minimum royalty payable in each quarter will be
$7,813. In addition, the Company entered into a royalty
agreement when it obtained the exclusive license to the
Signal Modulation Barrier Monitor, which is a component
part of the PAS. Pursuant to this license agreement, the
Company will pay royalties of 1% of the average retail
sales price on all net sales, through the life of the
future patent, when registered. The Company has obtained
FDA clearance for the PAS and began marketing the device
in the first quarter of 1996.
The Company entered into a royalty agreement when it
exercised its option to enter into an exclusive license
agreement for the ICP device. Under the terms of the
agreement, the Company will pay royalties equal to 10%
of the net sales proceeds from the ICP, with a minimum
payment of $90,000 for the year ended December 31, 1996
and $200,000 for all subsequent years through the life
of the patent. With respect to the royalties due in
1996.
F-18
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
$15,000 is prepaid at December 31, 1995. The Company can
terminate this agreement with 90 days written notice, at
which time all patent rights will cease.
F-19
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. COMMITMENTS Further, in accordance with a finder's agreement, the
(CONTINUED) Company is obligated to pay royalties equal to 8% of the
gross sales of the ICP, as well as to issue an
additional 2,000,000 restricted shares of common stock
to the finder when gross sales of the ICP reach
$10,000,000. The Company believes, on the advice of
counsel, that it is not obligated to pay the 8% royalty
or the 2,000,000 shares of restricted stock based on a
breach of contract by the finder, as the finder failed
to reimburse the Company for consulting fees in
accordance with the agreement.
MEDICAL ADVISORY AGREEMENTS
On January 1, 1996, the Company entered into agreements
with seven medical advisors for a two year term. The
agreements provide for 12,000 shares to be issued to
each advisor per year, issued semi-annually.
EMPLOYMENT CONTRACTS
Effective August 31, 1994, the Company entered into an
employment agreement with the Chief Executive Officer
for a four year term providing for a base salary of
$162,000 per year, in addition to 250,000 shares of
common stock to be granted at the end of two years of
employment. The agreement also provides for 200,000
warrants, exercisable after the earlier of August 31,
1996 or a public offering of stock, through August 31,
1999 at an exercise price of $1.00 per share.
Compensation expense for the years ended December 31,
1995 and 1994 is recorded for the 250,000 shares based
on the pro-rata shares earned and the market value of
the stock at the end of the period. No compensation
expense was recorded for the issuance of the warrants
since they were not issued below fair market value. A
separate severance agreement provides for severance
benefits upon involuntary termination in the amount of
three years' base salary.
F-20
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. COMMITMENTS EMPLOYMENT CONTRACTS (Continued)
(CONTINUED)
Effective August 31, 1994, the Company entered into an
employment agreement with the former Executive Vice
President for a four year term providing for a base
salary of $120,000 per year, in addition to 200,000
shares of common stock to be granted at the end of two
years of employment. The agreement also provided for
150,000 warrants, exercisable after the earlier of
August 31, 1996 or a public offering stock, through
August 31, 1999 at an exercise price of $1.00 per share.
Compensation expense for the years ended December 31,
1995 and 1994 is recorded for the 200,000 shares based
on the pro-rata shares earned and the market value of
the stock at the end of the period. No compensation
expense was recorded for the issuance of the warrants
since they were not issued below fair market value. A
separate severance agreement provided for severance
benefits upon involuntary termination in the amount of
three years' base salary.
On March 29, 1996, the Company and the former Executive
Vice President entered into a termination agreement
which terminated the existing employment and severance
agreement and settled any and all claims between the two
parties. Under the termination agreement, the former
Executive Vice President will receive twenty-nine
monthly payments of $10,000, commencing on April 1, 1996
and ending August 31, 1998. Further, the 200,000 shares
of common stock discussed above will be fully vested and
available to the former Executive Vice President as of
August 31, 1996. Finally, the provisions relating to the
150,000 warrants discussed above remain the same.
F-21
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. COMMITMENTS EMPLOYMENT CONTRACTS (Continued)
(CONTINUED)
Effective January 4, 1995, the Company entered into an
employment agreement with the Vice President of
Marketing and Sales for a three year term providing for
a base salary of $110,000 per year, in addition to
100,000 shares of common stock to be issued on August
31, 1996. The agreement also provides for 25,000
warrants at an exercise price of $1.00 per share to be
issued on each of January 4, 1996, 1997 and 1998.
Compensation expense for the year ended December 31,
1995 is recorded for the 100,000 shares based on the
pro-rata shares earned and the market value of the stock
at the end of the period. No compensation expense was
recorded for the issuance of the warrants since they
were not issued below fair market value. The agreement
also provides for severance benefits upon involuntary
termination in the amount of six month's base salary.
Effective March 15, 1996, the Company entered into an
exclusive employment agreement with the Vice President
of New Business Development for a three year term
providing for a base salary of $108,000 per year, in
addition to 25,000 shares of common stock which vest on
March 15, 1997 and 25,000 shares of common stock which
vest on March 15, 1998. The agreement also provides for
18,750 warrants at an exercise price of $.40 per share
to be issued on each of March 15, 1997, 1998, 1999 and
2000. The warrants are exercisable for a period of five
years from the date of issuance. The agreement also
provides for severance benefits upon involuntary
termination in the amount of six month's base salary.
Effective March 15, 1996, the Company entered into a
non-exclusive employment agreement with the Chief
Financial Officer for a three year term providing for a
base salary of $60,000 per year, in addition to 12,500
shares of common stock which vest on March 15, 1997 and
12,500 shares of common stock which vest on March 15,
1998. The agreement also provides for 12,500 warrants at
an exercise price of $.40 per share to be issued on each
of March 15, 1997, 1998, 1999 and 2000. The warrants are
F-22
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
exercisable for a period of five years from the date of
issuance. The agreement also provides for severance
benefits upon involuntary termination in the amount of
six month's base salary.
F-23
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. COMMITMENTS OTHER COMMITMENTS
(CONTINUED)
The Company is a defendant in a lawsuit filed by
Chandler Church & Company ("Chandler Church"). The
lawsuit demands payment of approximately $330,000 for
services rendered and/or funds that Chandler Church
alleged to have advanced. Prior to the lawsuit, the
Company had issued a substantial amount of its stock,
approximately 2,070,000 shares, to Chandler Church &
Company and its affiliates for services claimed to have
been rendered to the Company, which the Company is now
disputing. These entities assigned their claims to
Uptown Trust, and the case was subsequently dismissed by
the Superior Court of San Diego County. However, after
the dismissal, Chandler Church refiled the same
complaint. The Company has filed an answer denying the
claims in the complaint and filed a cross-complaint. The
Company believes it has meritorious defenses to such
claims. In the event that the Company does not prevail,
the loss could have a material adverse effect on the
financial condition of the Company.
5. STOCKHOLDERS' COMMON STOCK
EQUITY
During the year ended December 31, 1994, the Company
issued 1,096,875 shares in a private placement offering.
This stock was classified as stock to be issued at
December 31, 1994 because the Company did not issue the
shares until the offering was closed. During the first
quarter of 1995, an additional 200,000 shares were sold.
During the second quarter of 1995, the shares were
issued. As the Company decided to reduce the purchase
price from $.80 per share to $.70 per share, an
additional 185,300 shares were issued, for a total of
1,482,175 shares. Net proceeds from the private
placement, after deducting associated costs, amounted to
$974,769.
During June and July 1995, the Company raised $275,000
from the issuance of convertible debentures. These notes
were converted into 687,500 shares of common stock
during December 1995.
F-24
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. STOCKHOLDERS' COMMON STOCK (Continued)
EQUITY
(CONTINUED) During the years ended December 31, 1995 and 1994, the
Company received cash of $30,000 and $484,262 for the
issuance of 86,000 and 769,640 shares of common stock,
respectively.
During the years ended December 31, 1995 and 1994, other
unregistered stock and stock under Form S-8
registrations were issued for services provided to the
Company. An S-8 registration allows the Company to issue
free-trading stock to employees, directors and
consultants and advisors for services rendered to the
Company.
PREFERRED STOCK
In April of 1995, the Company amended its Articles of
Incorporation to authorize 10,000,000 share of $.01 par
value preferred stock. In December of 1995, the Company
further amended its Articles of Incorporation to
authorize 187,500 of Series I Convertible Preferred
Stock. In the event that the Company fails to effect an
offering of common stock within six months after
December 14, 1995, each share of the Series I
Convertible Preferred Stock will convert into common
stock based upon the price of the Company's common stock
on June 14, 1996 (less a discount of 20%) in an amount
equal to the number of shares of common stock equal to
$5, plus any declared but unpaid dividends.
During December 1995, in conjunction with the private
placement of notes payable (Note 2), the Company issued
153,750 shares of Series I convertible preferred stock.
The shares were assigned a value of $384,375. As no
consideration was paid for the preferred stock, this
amount is considered an original issue discount and will
be amortized to interest expense over approximately five
months, which is the expected term of the notes payable
which are to be repaid upon consummation of Company's
contemplated offering of preferred stock.
F-25
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. STOCKHOLDERS' PREFERRED STOCK (Continued)
EQUITY
(CONTINUED) In connection with the private placement which commenced
during the year ended December 31, 1994 and was
completed in the second quarter of 1995, and certain
other agreements, the Company agreed to issue warrants,
each of which allowed the holder to purchase one share
of the Company's common stock at a specified price.
Details of the warrants are as follows:
Number Per Share
of Exercise
Issued to Warrants Price Expires
--------------------------------------------------------
January 1, 1994 - -
Granted Private Placement 460,000 $1.00 8/98
Granted Officers 350,000 $1.00 8/99
Granted Noteholder 10,000 $1.00 9/99
--------------------------------------------------------
December 31, 1994 820,000
Granted Public relations
firm 300,000 $1.00-$2.00 6/96
Granted Officer 300,000 .40 7/00
Granted Officer 75,000 $1.00 1/03
Granted Convertible
debentures 137,500 .60 2/96
Granted Private placement 58,750 $1.00 8/98
Granted Consultant 56,250 $1.00 2/00
Granted Employee 25,000 $1.00 8/00
Granted Employee 25,000 $1.00 12/00
--------------------------------------------------------
December 31, 1995 1,797,500
--------------------------------------------------------
In regards to the issuance of 300,000 warrants to an
officer at $.40 per warrant during the year ended
December 31, 1995, compensation expense of $153,000 was
recorded as the fair market value of the warrants at the
measurement date. Compensation expense was not recorded
for any other issuances of warrants to officers or
employees as the fair market value of the warrants was
below the exercise price.
F-26
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. COMPENSATORY During the year ended December 31, 1995, the Company
STOCK BENEFIT adopted the Compensatory Stock Benefit Plan (the "1995
PLANS Plan") for certain technical and professional employees
and independent third parties who provide services in
connection with the development of the Company's
products or otherwise in connection with its business.
The 1995 Plan authorizes the Company to issue up to
1,750,000 shares under the 1995 Plan. Shares may be
awarded under the 1995 Plan until December 31, 1996. At
December 31, 1995, all 1,750,000 shares were issued
under the 1995 Plan.
During the year ended December 31, 1994, the Company
adopted the Compensatory Stock Benefit Plan (the "1994
Plan") for certain technical and professional employees
and independent third parties who provide services in
connection with the development of the Company's
products or otherwise in connection with its business.
The 1994 Plan authorizes the Company to issue up to
500,000 shares under the 1994 Plan. At December 31,
1994, all 500,000 shares were issued under the 1994
Plan.
7. LOSS ON At January 1, 1994, the Company held 59,200 shares of
SALE OF Golden Triangle Royalty and Oil stock. This investment
MARKETABLE had a cost basis of $111,000 and a fair market value of
SECURITIES $74,000. This investment was being carried on the books
at the lower of cost or market which reflected an
unrealized loss of $37,000. During the year ended
December 31, 1994, this investment was liquidated at an
additional loss of $18,655.
8. LOSS FROM Effective January 1, 1994, the Company completed the
DISPOSAL OF liquidation of its oil and gas operations and their
OIL AND GAS related assets and liabilities. These consisted
OPERATIONS primarily of a small amount of cash, a note receivable
(offset by a deferred gain allowance), oil and gas
leases, and royalty payables. Consideration for this
transaction consisted of the transferee's assumption of
the potential plugging and environmental liabilities
associated with these assets and a note receivable from
a third party which proved to be worthless. The Company
recognized a loss of $371,374 as the result of this
disposition during the year ended December 31, 1994.
F-27
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. RELATED PARTY During the year ended December 31, 1995, Mr. Thomas
TRANSACTIONS Glasgow, a director of the Company, received
compensation of $25,297 for computer and other general
corporate consulting services.
In June 1994, the Company issued 700,000 shares of its
common stock to Surgisafe, Inc. ("Surgisafe") in
exchange for Surgisafe's assignment to the Company (the
"Surgisafe Assignment") of Surgisafe's rights under an
exclusive sales agreement entered into with the Company
on September 11, 1992 (the "Surgisafe Agreement"). Under
the Surgisafe Agreement, Surgisafe had the exclusive
right to sell the CRS and ICP, as well as other future
products in a defined sales territory. Under the
Surgisafe Agreement, the Company was obligated to pay
Surgisafe commissions equal to 20% of the net sales
price of sales in the sales territory and to issue to
Surgisafe 16,667 shares of the Company's common stock.
The 700,000 shares of the common stock issued to
Surgisafe in June 1994 pursuant to the Surgisafe
Assignment were distributed in February 1995 to Mr.
William E. Mayer, III, the son of William E. Mayer, II,
a member of the Company's Scientific Advisory Board, and
Mr. Roland Frasier, III, the son of B. Roland Freasier,
II, the Executive Vice President of the Company. Mr.
Mayer III was appointed to the Company's Board of
Directors and subsequently resigned in 1995.
F-28
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES The types of temporary differences between the tax bases
of assets and liabilities and their financial reporting
amounts that give rise to the net deferred tax asset and
liability, and their approximate tax effects, are as
follows:
December 31, 1995 1994
--------------------------------------------------------
Capital lease liability $ - $ 1,696
Excess tax depreciation over book (9,715) (3,871)
Investment tax credit carryforward 6,941 6,941
Net operating loss carryforwards 4,640,045 3,508,583
Valuation allowance (4,637,271) (3,513,349)
--------------------------------------------------------
$ - $ -
--------------------------------------------------------
Due to management not being able to conclude that it is
more likely than not that the deferred tax asset will be
realized, a valuation allowance has been recorded for
the full amount.
At December 31, 1995, the Company had approximately
$12,540,147 of federal operating loss carryovers and
$4,047,257 of state operating loss carryovers to offset
future taxable income; these carryovers will expire in
various years through 2010. As a result of a change in
ownership, federal tax rules impose limitations on the
use of net operating losses. The limitation will reduce
the amount of these benefits that will be available to
offset future taxable income each year, starting with
the year of ownership change. The dollar amount of these
limitations is indeterminable at this time.
11. FOURTH QUARTER During the fourth quarter of the year ended December
ADJUSTMENTS 31, 1995, the Company recorded net adjustments in the
AND amount of $525,965 relating to the reversal of an
TRANSACTIONS estimated loss accrual for litigation of $286,996, an
adjustment to deferred compensation of 118,969, and the
recording of prepaid royalties of $120,000. The
adjustments decreased net loss by $.08 per share for
the year ended December 31, 1995.
F-29
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. SUPPLEMENTAL
EARNINGS PER
SHARE DATA
On December 18, 1995, $275,000 of convertible promissory
notes were converted into common stock. Had this
conversion occurred on June 23, 1995, the date of
issuance, the reported net loss per common share for the
year ended December 31, 1995 would have decreased $.02
to ($.39).
13. SUPPLEMENTAL During the year ended December 31, 1995, the Company
DISCLOSURES OF issued Series I convertible preferred stock valued at
NON-CASH $384,375 in conjunction with notes payable issued in a
OPERATING, private placement (Note 5). This amount is recorded as
INVESTING AND an original issue discount.
FINANCING
TRANSACTIONS During the years ended December 31, 1995 and 1994,
$275,000 and $52,364 of debt was converted into common
stock (Note 5).
During the years ended December 31, 1995 and 1994,
deferred compensation expense of $181,094 and $66,406
was recorded relating to accrued employee stock grants
(Note 4).
During the year ended December 31, 1995, $153,000 of
compensation expense was recorded relating to the
issuance of warrants with an exercise price below fair
market value at the date of issuance.
During the years ended December 31, 1995 and 1994,
$1,563,130 and $1,130,848 of obligations relating to
purchases and services rendered were satisfied through
the issuance of common stock.
During the years ended December 31, 1995 and 1994,
$50,000 and $353,333 of obligations relating to the
purchase of patents and marketing licenses were paid for
through the issuance of common stock.
F-30
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(FORMERLY CYTOPROBE CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. SUBSEQUENT On January 19, 1996, the Company amended its Articles
EVENTS of Incorporation to increase the authorized shares of
Series I Convertible Preferred Stock from 187,500 to
247,500. These additional 93,750 shares were issued as a
part of the completion of the Company's private
placement (see Note 2).
The 1996 Stock Compensation Plan (the "1996 Plan") was
established by the Company effective January 10, 1996.
The 1996 Plan allows for issuance of common stock to
certain technical and professional employees and
independent third parties who provide services in
connection with the development of the Company's
products or otherwise in connection with its business.
The 1996 Plan authorizes the Company to issue up to
950,000 shares under the 1996 Plan. Shares may be
awarded under the Plan until January 10, 1998. As of
April 1, 1996, 381,140 shares were issued under the 1996
Plan.
F-31
<PAGE>
[INSIDE BACK COVER PAGE]
[ART]
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Underwriter. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof or that information contained herein is correct as
of any date subsequent to the date hereof. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction in which such offer or solicitation is not
authorized or in the persons making such offer or solicitation is not qualified
to do so or to any person to make such offer or solicitation in such
jurisdiction.
___________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Prospectus Summary............... 5
The Offering..................... 7
Summary Consolidated Financial
Data............................ 10
Risk Factors..................... 12
The Company...................... 28
Use of Proceeds.................. 30
Market Price for the
Common Stock and Dividends...... 32
Capitalization................... 33
Dilution......................... 35
Selected Consolidated Financial
Data............................ 37
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations...................... 39
Business......................... 46
Management....................... 62
Principal Shareholders........... 74
Certain Transactions............. 76
Description of Securities........ 77
Certain Federal Income Tax
Considerations.................. 83
Shares Eligible for Future Sale.. 87
Underwriting..................... 89
Legal Matters.................... 92
Change in Accountants............ 92
Experts.......................... 92
Additional Information........... 94
Index to Financial Statements.... F-0
</TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC. [LOGO]
1,300,000 Shares of __% Cumulative
Convertible Series A Preferred Stock
______________
PROSPECTUS
______________
FIRST ALLIED SECURITIES, INC.
________________, 1996
<PAGE>
(ALTERNATE PAGE FOR SELLING SHAREHOLDER PROSPECTUS)
PROSPECTUS
----------
SUBJECT TO COMPLETION DATED __, 1996
MEDICAL DEVICE TECHNOLOGIES, INC.
247,500 SHARES OF
__% CUMULATIVE CONVERTIBLE SERIES A PREFERRED STOCK
--
This Prospectus relates to 247,500 shares of __% Cumulative Convertible
Series A preferred stock, par value $.01 per share (the "Preferred Stock"),
of Medical Device Technologies, Inc. (the "Company"), which were issued in
connection with a private placement completed in January of 1996 (the
"Private Placement"). This Prospectus also relates to ________ shares of
common stock, par value $.15 per share (the "Common Stock"), which are
issuable upon the conversion of such shares of Preferred Stock (the holders
of all of the foregoing securities are sometimes hereinafter collectively
referred to as the "Selling Shareholders"). The Preferred Stock and the
Common Stock held by the Selling Shareholders may be sold from time to time
by the Selling Shareholders, provided that a current registration statement
with respect to such securities is then in effect and subject to the prior
written consent of the Underwriter of a concurrent public offering of the
Company (described below) permitting such shares to be sold if sold within
13 months from the date of this Prospectus. See "Concurrent Offering" and
"Plan of Distribution."
The distribution of the shares of Preferred Stock and the shares of
Common Stock offered hereby by the Selling Shareholders hereof may be
effected in one or more transactions that may take place on the over-the-
counter market, including ordinary broker's transactions, privately
negotiated transactions or through sales to one or more dealers for sale of
such securities as principals, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Shareholders.
___________________________
SEE "RISK FACTORS" LOCATED ON PAGE ___ FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE PREFERRED STOCK AND COMMON STOCK OFFERED HEREBY.
___________________________
(Continued on Following page)
A-1
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
___________________________
_____________ ___, 1996
The Selling Shareholders and intermediaries through whom such securities
are sold may be deemed "underwriters" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act") with respect to the shares
of Preferred Stock and Common Stock offered, and any profits realized or
commissions received may be deemed underwriting compensation.
The Company will not receive any of the proceeds from the sale of the
shares of the Preferred Stock or the Common Stock by the Selling
Shareholders. Expenses of this offering, other than fees and expenses of
counsel to the Selling Shareholders and selling commissions, will be paid
by the Company. See "Plan of Distribution."
Prior to this offering, there has been no public market for the Preferred
Stock and there can be no assurance that such a market will develop after
the completion of this offering, or if developed, that it will be
sustained. It is currently anticipated that the initial public offering
price of the Preferred Stock will be $5.00 per share and that the shares of
Preferred Stock and Common Stock will be included on the Nasdaq SmallCap
Market under the symbols "MEDDP" and "MEDD", respectively.
On the date of this Prospectus, a registration statement including a
prospectus of even date filed under the Securities Act with respect to an
underwritten public offering by the Company of 1,300,000 shares of
Preferred Stock and up to an additional 195,000 shares of Preferred Stock
to cover over-allotments, if any, was declared effective by the Securities
and Exchange Commission (the "Commission"). The Company will receive net
proceeds of approximately $5,155,000 from the sale of the shares of
Preferred Stock included in the underwritten public offering, and will
receive approximately $848,250 in additional net proceeds if the over-
allotment option is exercised in full after payment of underwriting
discounts and commissions and estimated expenses of the underwritten public
offering. Sales of Preferred Stock or Common Stock by the Selling
Shareholders, or even the potential of such sales, would likely have an
adverse effect on the market price of the Preferred Stock. See "Concurrent
Offering."
A-2
<PAGE>
(ALTERNATE PAGE FOR SELLING SHAREHOLDER PROSPECTUS)
CONCURRENT OFFERING
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the
Company of 1,300,000 shares of Preferred Stock and up to an additional
195,000 shares of Preferred Stock to cover over-allotments, if any, [was
declared effective] by the Securities and Exchange Commission. Sales of
Preferred Stock or Common Stock by the Company and the Selling
Shareholders, or even the potential of such sales, would likely have an
adverse effect on the market price of the Common Stock. See "Risk Factors
- Shares Eligible for Future Sale."
A-3
<PAGE>
(ALTERNATE PAGE FOR SELLING SHAREHOLDER PROSPECTUS)
THE OFFERING
Securities Offered................ 1,300,000 shares of __% Cumulative
Convertible Series A Preferred Stock.
Terms of the Preferred Stock:
Dividends..................... Cumulative from the date of original
issuance at the rate of __% per annum,
payable semi-annually on June 30 and
December 31, commencing June 30, 1996,
when as and if declared by the Board of
Directors out of funds legally
available therefor. Dividends are
payable solely in shares of Common
Stock. See "Description of Securities -
__% Cumulative Convertible Series A
Preferred Stock - Dividends."
Initial Conversion Rights..... Convertible into shares of Common Stock
commencing on ________ __, 1996, [120
days from the date of this Prospectus],
at a rate of ______ shares of Common
Stock for each share of Preferred Stock
(a Conversion Price of $_____ per share
of Common Stock). See "Description of
Securities - ___% Cumulative Convertible
Series A Preferred Stock - Right to
Convert. "
Automatic Conversion.......... Unless previously converted, on
__________ __, 1997, [thirteen (13)
months after the date of this
Prospectus] (the "Automatic Conversion
Date") the Preferred Stock will
automatically convert into the greater
of _______ shares of Common Stock or a
formula related to the market price of
the Common Stock on the Automatic
Conversion Date. See "Description of
Securities - ___
A-4
<PAGE>
% Cumulative Convertible Series A
Preferred Stock - Automatic Conversion."
Voting Rights................. Each holder of shares of Preferred Stock
will be entitled to vote together with,
and on all matters submitted to, the
holders of Common Stock on an as-
converted basis assuming conversion
based upon the Conversion Price. See
"Description of Securities - __%
Cumulative Convertible Series A
Preferred Stock - Voting Rights."
Liquidation Preference........ In the event of the liquidation,
dissolution or winding up of the
Company, holders of shares of Preferred
Stock will receive a Liquidation
Preference of $5.00 per share, plus any
accrued but unpaid dividends, before any
distribution to holders of Common Stock
or another class of capital stock junior
to the Preferred Stock. See "Description
of Securities -Preferred Stock -
Liquidation Preference."
Securities Outstanding Subsequent
to the Offering: (1)
Common Stock................... 8,774,339
Preferred Stock (2)............ 1,547,500
Use of Proceeds................... Market the Company's first medical
device product, conducting the clinical
trials for and completing the
development of the Company's second and
third medical devices, repayment of
indebtedness and working capital
purposes. See "Use of Proceeds."
Risk Factors...................... The Preferred Stock offered hereby
involves a high degree of risk. See
"Risk Factors."
A-5
<PAGE>
Nasdaq SmallCap Symbols:
Common Stock..................... MEDD
Preferred Stock (Proposed)/(3)/.. MEDDP
- ---------------
(1) Unless otherwise indicated herein to the contrary, all share and per
share information does not give effect to the issuance of: (i) upon
conversion of the 1,300,000 shares of Preferred Stock offered hereby,
_______ shares of Common Stock; (ii) up to an additional 195,000 shares of
Preferred Stock issuable upon exercise of the Over-Allotment Option, and up
to an additional __________ shares of Common Stock issuable upon the
conversion of the Preferred Stock included in the Over-Allotment Option;
(iii) 1,997,500 shares of Common Stock reserved for issuance pursuant to
outstanding warrants having a weighted average exercise price of
approximately $.92, subject to adjustment; (iv) 625,000 shares of Common
Stock reserved for issuance to officers, employees and consultants; (v)
upon the exercise of warrants granted to the Representative in connection
with this offering, 130,000 shares of Preferred Stock and the _______
shares of Common Stock into which such Preferred Stock is convertible; (vi)
an additional _______ shares of Common Stock issuable by the Company upon
the conversion of 247,500 shares of Preferred Stock issued to the Selling
Shareholders; and (vii) 50,000 shares of Common Stock to be issued.
(2) Includes an additional 247,500 shares of Preferred Stock that are being
registered for sale on behalf of the Selling Shareholders in the Concurrent
Offering.
(3) The Company has applied to include the Preferred Stock on the Nasdaq
SmallCap System commencing on the effective date of this offering.
A-6
<PAGE>
(ADDITIONAL PAGE FOR SELLING SHAREHOLDER PROSPECTUS)
PLAN OF DISTRIBUTION
The shares of Preferred Stock and Common Stock offered hereby are
being offered directly by the Selling Shareholders, subject to the
agreement with the Underwriter of the concurrent public offering that such
shares may not be sold for thirteen (13) months from the date of this
Prospectus without the prior written consent of the Underwriter and then
only to or through the Underwriter. Such shares will be freely tradeable
provided that when the shares are released by the Underwriter, a current
registration statement with respect to such shares is then in effect. The
following table sets forth certain information regarding each of the
Selling Shareholders. Except as set forth below, to the knowledge of the
Company, there is no position, office or other material relationship
between any of the Selling Shareholders and the Company, nor have any such
material relationships existed within the past three (3) years. Except as
indicated in the footnotes to these tables, the Company believes that the
persons named in the following tables have sole voting and investment power
with respect to the shares of Preferred Stock and Common Stock indicated.
<TABLE>
<CAPTION>
Shares of Preferred Shares of Preferred
Stock Beneficially Stock Beneficially
Owned Upon this Shares of Preferred Stock Owned After this
Name/(1)/ Offering /(2)/ Being Offered for Sale /(2)/ Offering /(2)/
- --------- ------------------- ---------------------------- -------------------
<S> <C> <C> <C>
Dora Birn 1,875 1,875 -0-
Donald N. and Donna Cohen 1,875 1,875 -0-
JTWROS(3)
Morris & Selma Cohen 1,875 1,875 -0-
JTWROS(3)
Continental Stock 7,500 7,500 -0-
Transfer and Trust
Company
Dorigol 15,000 15,000 -0-
First Comet Corp. 7,500 7,500 -0-
Ralph Forgacs 1,875 1,875 -0-
Alexander Futernik 1,875 1,875 -0-
Brian Gell 3,750 3,750 -0-
Arthur L. Goldberg IRA 3,750 3,750 -0-
Susan F. Goldberg 3,750 3,750 -0-
Richard Grobman 3,750 3,750 -0-
</TABLE>
A-7
<PAGE>
<TABLE>
<CAPTION>
Shares of Preferred Shares of Preferred
Stock Beneficially Stock Beneficially
Owned Upon this Shares of Preferred Stock Owned After this
Name/(1)/ Offering /(2)/ Being Offered for Sale /(2)/ Offering /(2)/
- --------- ------------------- ---------------------------- -------------------
<S> <C> <C> <C>
Donald Gross 7,500 7,500 -0-
Alan Grotenstein 3,750 3,750 -0-
Jerry Heymann 3,750 3,750 -0-
Holistica International 15,000 15,000 -0-
Mohammad & Hasina Hossain 1,875 1,875 -0-
JTWROS (3)
Key Ring Limited 11,250 11,250 -0-
Michael & Shoshana 7,500 7,500 -0-
Margolin
Sandy Mayerson & Manuel 5,625 5,625 -0-
Mayerson
Regina Miakinkoff 1,875 1,875 -0-
Richard Miller 1,875 1,875 -0-
Natper Ltd. 1,875 1,875 -0-
Ronald & Carolyn Nilsen 1,875 1,875 -0-
Omotsu Holdings, Inc. 22,500 22,500 -0-
Richard G. Ornstein 3,750 3,750 -0-
Dr. Natu Patel and 3,750 3,750 -0-
Daksha Patel
Esther Purjes 500 7,500 -0-
Gholam Rahman & Zeenat 1,875 1,875 -0-
Rahman
Mark A. Rydell 3,750 3,750 -0-
Fredda Sheib 11,250 11,250 -0-
Gerald E. Snow 5,625 5,625 -0-
Judy W. Solely 3,750 3,750 -0-
</TABLE>
A-8
<PAGE>
<TABLE>
Shares of Preferred Shares of Preferred
Stock Beneficially Stock Beneficially
Owned Upon this Shares of Preferred Stock Owned After this
Name/(1)/ Offering /(2)/ Being Offered for Sale /(2)/ Offering /(2)/
- --------- ------------------- ---------------------------- -------------------
<S> <C> <C> <C>
David and Joseph Soucek 7,500 7,500 -0-
JTWROS (3)
Evan Stern 7,500 7,500 -0-
Francis Stephens 1,875 1,875 -0-
Darwin Ting 7,500 7,500 -0-
Richard Titley 7,500 7,500 -0-
Tournier Investments LTD. 7,500 7,500 -0-
Robert S. Trump 11,250 11,250 -0-
Leonard Vitullo 1,875 1,875 -0-
Peter J. Wasserman 3,750 3,750 -0-
Solomon & Leah Werzberger 1,875 1,875 -0-
Daniel P. Weiner 3,750 3,750 -0-
David M. Wiener 3,750 3,750 -0-
------- ------- ---
TOTAL 247,500 247,500 -0-
</TABLE>
(1) None of such persons owned five percent (5%) or more of the outstanding
Preferred Stock. Each such person also holds Notes issued pursuant to the
Private Placement, all of which Notes will be repaid with accrued interest
from the net proceeds of the Concurrent Offering. See "Use of Proceeds."
(2) Assumes all shares of Preferred Stock being registered will be sold.
(3) Held as joint tenants with right of survivorship.
A-9
<PAGE>
(ALTERNATE PAGE FOR SELLING SHAREHOLDER PROSPECTUS)
The Company will not receive any of the proceeds from the sale of
any of the shares by the Selling Shareholders although the Company will
receive proceeds from the exercise of the warrants. The sale of the shares
may be effected by the Selling Shareholders from time to time in
transactions in the over-the-counter market, on the Nasdaq SmallCap Market,
in negotiated transactions, or a combination of such methods of sale, at
fixed prices which may be changed, at market prices prevailing at the time
of sale, at prices related to prevailing market prices or at negotiated
prices. The Selling Shareholders may effect such transactions by selling
the shares to or through the Underwriter, who may receive compensation in
the form of discounts, concessions or commissions from the Selling
Shareholders and/or the purchasers of the shares for whom it may act as
agent or to whom it sells as principal, or both (which compensation might
be in excess of customary commissions).
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states,
the shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with by the Company
and the Selling Shareholders.
The Selling Shareholders and any broker-dealers, agents or
underwriters that participate with the Selling Shareholders in the
distribution of the shares may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act of 1933, and any shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Act.
Under applicable rules and regulations under the Securities
Exchange Act of 1934 (the "Exchange Act"), any person engaged in the
distribution of the shares may not simultaneously engage in market-making
activities with respect to the Preferred Stock or Common Stock for a period
of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, each Selling Shareholder will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Rules 10b-6, 10b-6A
and 10b-7, which provisions may limit the timing of the purchases and sales
of shares of Preferred Stock or Common Stock by the Selling Shareholders.
The Company has agreed to pay all fees and expenses incident to
the registration of the shares, except selling commissions and fees and
expenses of counsel or any other professionals or other advisors, if any,
to the Selling Shareholders.
A-10
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Selling Shareholder. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that information contained
herein is correct as of any date subsequent to the date hereof. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction in which such offer or
solicitation is not authorized or if the persons making such offer or
solicitation are not qualified to do so or to any person to make such offer or
solicitation in such jurisdiction.
___________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Prospectus Summary............... 5
The Offering..................... 7
Summary Consolidated Financial
Data............................ 10
Risk Factors..................... 12
The Company...................... 28
Use of Proceeds.................. 30
Market Price for the
Common Stock and Dividends...... 32
Capitalization................... 33
Dilution......................... 35
Selected Consolidated Financial
Data............................ 37
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations...................... 39
Business......................... 46
Management....................... 69
Principal Shareholders........... 74
Certain Transactions............. 76
Description of Securities........ 77
Certain Federal Income Tax
Considerations.................. 83
Shares Eligible for Future Sale.. 87
Underwriting..................... 89
Legal Matters.................... 92
Change in Accountants............ 92
Experts.......................... 92
Additional Information........... 94
Index to Financial Statements.... F-0
</TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC.
247,500 Shares of __% Cumulative
Convertible Series A Preferred Stock
______________
PROSPECTUS
______________
__________________, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
-------------------------------------------
The Company estimates that expenses in connection with the offering of
the Preferred Stock described in this Registration Statement (other than
underwriting discounts and commissions and the Underwriter's non-
accountable expense allowance) will be as follows:
<TABLE>
<S> <C>
SEC filing fee $ 3,842.59
NASD filing fee 2,500.00
NASDAQ filing fee 1,000.00
Accounting fees and expenses* 75,000.00
Legal fees and expenses* 200,000.00
Blue Sky fees and expenses* 35,000.00
Printing and engraving* 92,657.41
Transfer Agent's and Registrar fees* 5,000.00
Miscellaneous expenses* 142,657.41
-----------
Total $500,000.00
===========
- --------------
</TABLE>
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
-----------------------------------------
The Company's Articles of Incorporation provides for
indemnification of personal liability of the Directors of the Corporation
to the fullest extent permitted by Subsections (1)-(3) of Section 16-10a-
902 of the Utah Revised Business Corporation Act.
Article VIII of the By-Laws of the Company ("By-Laws"), which is
set forth below in its entirety, provides for indemnification of officers,
directors, employees and agents substantially to the extent permitted under
the Utah Revised Business Corporation Act.
Article VIII of the By-Laws provides as follows:
"ARTICLE VIII"
INDEMNIFICATION
---------------
Section 1. Any person made a party to or involved in any civil,
criminal or administrative action, suit or proceeding by reason of the fact
that he or his testator or intestate is or was a Director, officer, or
employee of the Corporation, or of any corporation which he, the testator,
or intestate served as such
II-1
<PAGE>
at the request of the Corporation, shall be indemnified by the Corporation
against expenses reasonably incurred by him or imposed on him in connection
with or resulting from the defense of such action, suit, or proceeding and
in connection with or resulting from any appeal thereon, except with
respect to matters as to which it is adjudged in such action, suit or
proceeding that such officer, Director, or employee was liable to the
Corporation, or to such other corporation, for negligence or misconduct in
the performance of his duty. As used herein the term "expense" shall
include all obligations incurred by such person for the payment of money,
including, without limitation, attorneys' fees, judgments, awards, fines,
penalties, and amounts paid in satisfaction of judgment or in settlement of
any such action, suit, or proceedings, except amounts paid to the
Corporation or such other corporation by him.
A judgment or conviction whether based on plea of guilty or nolo
contendere or its equivalent, or after trial, shall not of itself be deemed
an adjudication that such Director, officer or employee is liable to the
Corporation, or such other corporation, for negligence or misconduct in the
performance of his duties. Determination of the rights of such
indemnification and the amount thereof may be made at the option of the
person to be indemnified pursuant to procedure set forth, from time to
time, in the By-laws or by any of the following procedures:
a) order of the Court or administrative body or agency having jurisdiction
of the action, suit or proceeding
b) resolution adopted by a majority of the quorum of the Board of
Directors of the Corporation without counting in such majority any
Directors who have incurred expenses in connection with such action, suit
or proceeding
c) if there is no quorum of Directors who have not incurred expenses in
connection with such action, suit or proceeding, then by resolution adopted
by the majority of the committee of stockholders and Directors who have not
incurred such expenses appointed by the Board of Directors
d) resolution adopted by a majority of the quorum of the Directors
entitled to vote at any meeting; or
e) order of any Court having jurisdiction over the Corporation.
Any such determination that a payment by way of indemnification
should be made will be binding upon the Corporation. Such right of
indemnification shall not be exclusive of any other right which such
Directors, officers and employees of the Corporation and the other person
above mentioned may have or hereafter acquire, and without limiting the
II-2
<PAGE>
generality of such statement, they shall be entitled to their respective
rights of indemnification under any By-law, Agreement, vote of
stockholders, provision of law, or otherwise in addition to their rights
under this Article. The provisions of this Article shall apply to any
member of any committee appointed by the Board of Directors as fully as
though each person had been a Director, officer or employee of the
Corporation.
Reference is made to Section 7 of the Underwriting Agreement that
provides for indemnification of the officers and directors of the
Underwriter under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
---------------------------------------
In February of 1993 through October of 1993, the Company sold
86,748 unregistered shares of Common Stock for which it received aggregate
gross proceeds of $86,748. There were no discounts or commissions paid
with respect to the issuance of these securities. Such sale of Common
Stock was made pursuant to Section 4(2) of the Securities Act in compliance
with Rule 506 of Regulation D promulgated thereunder and all of the
purchasers were accredited investors, and there was no general solicitation
or advertising with respect to any of these sales.
In April through August of 1994, the Company issued an aggregate
of 670,914 unregistered shares of Common Stock pursuant to Regulation S
promulgated under the Securities Act for aggregate gross proceeds of
$421,678.83.
In June of 1994, the Company issued 700,000 unregistered shares
of Common Stock to an affiliated entity to reacquire certain sales and
marketing rights with respect to one of the Company's medical products.
Such sales and marketing rights were valued at $233,334 and the issuance of
such shares of Common Stock was made pursuant to Section 4(2) of the
Securities Act.
In June of 1994, the Company issued 40,000 unregistered shares of
Common Stock to a single purchaser in a private transaction for aggregate
gross proceeds of $20,000. Such sale of securities was effected pursuant
to Section 4(2) of the Securities Act.
In August of 1994, the Company sold 100,000 unregistered shares
of Common Stock for aggregate gross proceeds of $55,000 to a single
purchaser in a private transaction. Such transaction was effected pursuant
to Section 4(2) of the Securities Act.
In September of 1994, the Company issued 200,000 unregistered
shares of Common Stock to an individual in connection with the acquisition
of a license for one of its medical devices, the value of which was
$120,000. Such shares were issued pursuant to Section 4(2) of the
Securities Act.
II-3
<PAGE>
In May of 1995, the Company sold an aggregate of 20.75 units at
the purchase price of $50,000 per unit to nineteen (19) investors for which
it received aggregate gross proceeds of $1,037,500. Each unit consisted of
71,429 unregistered shares of Common Stock and 25,000 3-year warrants, each
warrant to purchase a share of Common Stock for $1.00 per share. In
connection therewith, the Company also issued 56,250 2-year warrants, each
warrant to purchase a share of Common Stock at an exercise price of $1.00
per share to the broker-dealer who facilitated the sale of the units. The
sale of these securities was made pursuant to Section 4(2) of the
Securities Act in compliance with Rule 506 of Regulation D promulgated
thereunder and all of the investors were accredited investors and there was
no general solicitation or advertisement with respect to same.
In June of 1995, the Company sold 86,000 unregistered shares of
Common Stock to a consultant to the Company in a private transaction for an
aggregate proceeds of $30,100. Such sale was pursuant to Section 4(2) of
the Securities Act in compliance with Rule 506 of Regulation D promulgated
thereunder.
In June and July of 1995, the Company issued an aggregate of
$275,000 of short-term convertible debt, which matured in six months, if
not converted into Common Stock, and bore interest at the rate of 48% per
annum. In connection with the issuance of convertible debt, the Company
also issued an aggregate of 137,500 warrants, each warrant to purchase a
share of Common Stock for $.60 per share. The warrants expire ten days
after the effective date of a registration statement on Form S-3 relating
to shares of Common Stock underlying the warrants. These securities were
sold pursuant to Section 4(2) of the Securities Act in compliance with Rule
506 of Regulation D promulgated thereunder and all of the purchasers were
accredited investors, and there was no general solicitation or advertising
with respect thereto.
In July of 1995, the Company entered into a placement agent
agreement with the Representative to act as placement agent with respect to
a "best efforts" private placement of a minimum of $400,000 and a maximum
of $1,650,000 of the Company's securities. On January 26, 1995, the Company
completed the private placement pursuant to which it sold 33 units for
aggregate gross proceeds of $1,650,000. Each unit consisted of (i) secured
one-year 10% $50,000 promissory note, and (ii) 7,500 shares of the
Company's Series I convertible preferred stock. The Series I preferred
stock does not pay dividends and is automatically convertible into the
Preferred Stock being sold in this offering provided that the effective
date of this registration statement is on or before June 15, 1996. In the
event that this offering is not effected before June 15, 1996, the Series I
preferred stock shall automatically convert into Common Stock on the basis
of 1 share of Series I preferred stock for the number of shares of Common
Stock equal to $5.00 (plus any declared and unpaid dividends, if
II-4
<PAGE>
any) divided by 80% of the average of the closing bid and asked price of
the Common Stock on June 14, 1996. The private placement was made pursuant
to Section 4(2) of the Securities Act in compliance with Rule 506 of
Regulation D promulgated thereunder and all of the purchasers were
accredited investors, and there was no general solicitation or advertising
with respect thereto. The Representative received a commission equal to
10% of the gross proceeds plus $15,000 for expenses.
In December of 1995, the Company issued 20,665 unregistered
shares of Common Stock to its landlord in a private transaction in
settlement of rent payments of $20,665. Such issuance is pursuant to
Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
------------------------------------------
(A) EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
* 1.1 Form of Underwriting Agreement by and
between the Company and the Representative
** 1.5 Certificate of Designation with respect to
the ___% Cumulative Convertible Series A
Preferred Stock
* 3.1 Articles of Incorporation of Gold Probe, Inc.
a Utah corporation, filed February 6, 1980
* 3.2 Certificate of Amendment to the Articles of
Incorporation of Gold Probe, Inc. filed
January 27, 1982
* 3.3 Certificate of Amendment to the Articles of
Incorporation of Hailey Energy Corporation
filed October 26, 1986
* 3.4 Certificate of Amendment to the Articles of
Incorporation of Hailey Energy Corporation
filed November 2, 1990
* 3.5 Certificate of Amendment to the Articles of
Incorporation of Hailey Energy Corporation
filed November 17, 1992
***3.6 Certificate of Amendment to the Articles of
Incorporation of Cytoprobe Corporation filed
May 18, 1995
***3.7 Certificate of Amendment to the Articles of
Incorporation of Medical Device Technologies,
II-5
<PAGE>
Inc. filed December 14, 1995
****3.8 Certificate of Amendment to the Articles of
Incorporation of Medical Device Technologies,
Inc. filed January 17, 1996
****3.9 Certificate of Amendment to the Articles of
Incorporation of Medical Device Technologies,
Inc. filed January 19, 1996
* 3.10 By-Laws of Medical Device Technologies, Inc.
** 4.1 Specimen certificate for ___% Cumulative
Convertible Series A Preferred Stock
* 4.2 Form of Representative's Warrant Agreement,
including form of Specimen Certificate for
Representative's Warrant.
** 5 Opinion of Zukerman Gore & Brandeis, LLP
** 8.1 Tax Opinion of Zukerman Gore & Brandeis, LLP
* 10.1 Manufacturing Agreement dated January 31,
1996 by and between the Company and
Scitronix, Inc.
* 10.2 Termination Agreement and Release of
All Claims dated March 29, 1996 by and
between the Company and B. Roland Freasier,
Jr.
* 10.3 Employment Agreement, effective March 15,
1996, by and between the Company and
Richard Sloan
* 10.4 Employment Agreement, effective March 15,
1996, by and between the Company and
Edward C. Hall
** 10.5 Employment Agreement, effective August 31,
1994, by and between the Company and
M. Lee Hulsebus
** 10.6 Employment Agreement effective, January 4,
1995, by and between the Company and
Stephen W. Kenney
* 10.7 Form of Financial Advisory Agreement to be
entered into by the Company and the
Representative
** 10.8 Lease for Company's executive offices at
9171 Towne Centre Drive, Suite 355
II-6
<PAGE>
** 24 Consent of Zukerman Gore & Brandeis, LLP
contained in Exhibit 5.
** 24.1 Consent of Davis Bujold & Streck
** 24.2 Consent of Strasburger & Price
** 24.3 Consent of Hyman, Phelps & McNamara P.C.
** 24.4 Consent of King & Isaacson
* 24.5 Consent of BDO Seidman, LLP
* 24.6 Consent of Robert Early & Company
- -------------
* Filed herewith.
** To be filed by amendment.
*** Incorporated by reference from the Company's Form 8-K Report dated January
15, 1996 (File No. 0-12365).
**** Incorporated by reference from the Company's Form 8-K Report dated January
31, 1996 (File No. 0-12365).
(B) FINANCIAL STATEMENT SCHEDULES.
None.
ITEM 17. UNDERTAKINGS.
------------
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the change in volume and
price represent no more than a 20%
II-7
<PAGE>
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fees" table in the effective registration
statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(5) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
B. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication
of such issue.
II-8
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant, certifies that it has reasonable grounds to
believe that it meets all the requirements for filing on Form S-1 and
authorized this Registration Statement to be signed on its behalf by the
undersigned, in the City of San Diego, State of California on April ,
1996.
MEDICAL DEVICE TECHNOLOGIES, INC.
By:/s/ M. Lee Hulsebus
--------------------------------
M. Lee Hulsebus, Chairman of
the Board, Chief Executive
Officer and President
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in
the capacities and on the dates stated.
Signature Title Date
- --------- ----- ----
/s/ M. Lee Hulsebus Chairman of the April 22, 1996
- --------------------------- Board, Chief Executive
M. Lee Hulsebus Officer and President
/s/ Don Arnwine Director April 22, 1996
- ---------------------------
Don Arnwine
/s/ Dr. Arthur Bradley Director April 22, 1996
- ---------------------------
Dr. Arthur Bradley
/s/ Thomas Glasgow Director April 22, 1996
- ---------------------------
Thomas Glasgow
/s/ Edward C. Hall Chief Financial Officer April 22, 1996
- ---------------------------
II-9
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
* 1.1 Form of Underwriting Agreement by and
between the Company and the Representative
** 1.5 Certificate of Designation with respect to
the ___% Cumulative Convertible Series A
Preferred Stock
* 3.1 Articles of Incorporation of Gold Probe, Inc.
a Utah corporation, filed February 6, 1980
* 3.2 Certificate of Amendment to the Articles of
Incorporation of Gold Probe, Inc. filed
January 27, 1982
* 3.3 Certificate of Amendment to the Articles of
Incorporation of Hailey Energy Corporation
filed October 26, 1986
* 3.4 Certificate of Amendment to the Articles of
Incorporation of Hailey Energy Corporation
filed November 2, 1990
* 3.5 Certificate of Amendment to the Articles of
Incorporation of Hailey Energy Corporation
filed November 17, 1992
***3.6 Certificate of Amendment to the Articles of
Incorporation of Cytoprobe Corporation filed
May 18, 1995
***3.7 Certificate of Amendment to the Articles of
Incorporation of Medical Device Technologies,
EXIND-1
<PAGE>
Inc. filed December 14, 1995
****3.8 Certificate of Amendment to the Articles of
Incorporation of Medical Device Technologies,
Inc. filed January 17, 1996
****3.9 Certificate of Amendment to the Articles of
Incorporation of Medical Device Technologies,
Inc. filed January 19, 1996
* 3.10 By-Laws of Medical Device Technologies, Inc.
** 4.1 Specimen certificate for ___% Cumulative
Convertible Series A Preferred Stock
* 4.2 Form of Representative's Warrant Agreement,
including form of Specimen Certificate for
Representative's Warrant.
** 5 Opinion of Zukerman Gore & Brandeis, LLP
** 8.1 Tax Opinion of Zukerman Gore & Brandeis, LLP
* 10.1 Manufacturing Agreement dated January 31,
1996 by and between the Company and
Scitronix, Inc.
* 10.2 Termination Agreement and Release of
All Claims dated March 29, 1996 by and
between the Company and B. Roland Freasier,
Jr.
* 10.3 Employment Agreement, effective March 15,
1996, by and between the Company and
Richard Sloan
* 10.4 Employment Agreement, effective March 15,
1996, by and between the Company and
Edward C. Hall
** 10.5 Employment Agreement, effective August 31,
1994, by and between the Company and
M. Lee Hulsebus
** 10.6 Employment Agreement effective, January 4,
1995, by and between the Company and
Stephen W. Kenney
* 10.7 Form of Financial Advisory Agreement to be
entered into by the Company and the
Representative
** 10.8 Lease for Company's executive offices at
9171 Towne Centre Drive, Suite 355
EXIND-2
<PAGE>
** 24 Consent of Zukerman Gore & Brandeis, LLP
contained in Exhibit 5.
** 24.1 Consent of Davis Bujold & Streck
** 24.2 Consent of Strasburger & Price
** 24.3 Consent of Hyman, Phelps & McNamara P.C.
** 24.4 Consent of King & Isaacson
* 24.5 Consent of BDO Seidman, LLP
* 24.6 Consent of Robert Early & Company
- -------------
* Filed herewith.
** To be filed by amendment.
*** Incorporated by reference from the Company's Form 8-K Report dated January
15, 1996 (File No. 0-12365).
**** Incorporated by reference from the Company's Form 8-K Report dated January
31, 1996 (File No. 0-12365).
EXIND-3
<PAGE>
EXHIBIT 1.1
OHS DRAFT
4/22/96
[Form of Underwriting Agreement - Subject to Client Review]
1,300,000 SHARES OF SERIES A ___% CUMULATIVE
CONVERTIBLE PREFERRED STOCK
MEDICAL DEVICE TECHNOLOGIES, INC.
UNDERWRITING AGREEMENT
----------------------
New York, New York
, 1996
FIRST ALLIED SECURITIES, INC.
As Representative of the
Several Underwriters listed on Schedule A hereto
200 Park Avenue
24th Floor
New York, New York 10166
Ladies and Gentlemen:
Medical Device Technologies, Inc., a Utah corporation (the "Company")
confirms its agreement with First Allied Securities, Inc. ("First Allied") and
each of the underwriters named in Schedule A hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 11), for whom First Allied is acting as
-------
representative (in such capacity, First Allied shall hereinafter be referred to
as "you" or the "Representative"), with respect to the sale by the Company and
the purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of the Company's Series A ___% Cumulative
Convertible preferred stock, $.01 par value per share ("Preferred Stock") set
forth in Schedule A hereto. Such shares of Preferred Stock are hereinafter
referred to as the "Firm Shares."
<PAGE>
Upon your request, as provided in Section 2(b) of this Agreement, the
-------
Company shall also sell to the Underwriters, acting severally and not jointly,
up to an additional 195,000 shares of Preferred Stock for the purpose of
covering over-allotments, if any (the "Option Shares"). The Firm Shares and the
Option Shares are sometimes hereinafter referred to as the "Shares." The
Company also proposes to issue and sell to you warrants (the "Representative's
Warrants") pursuant to the Representative's Warrant Agreement (the
"Representative's Warrant Agreement") for the purchase of up to (i) an
additional 130,000 shares of Preferred Stock or (ii) ____ shares of common
stock, $.15 par value per share of the Company ("Common Stock") or (iii) any
combination of such Securities. The shares of Preferred Stock and/or Common
Stock issuable upon exercise of the Representative's Warrants are hereinafter
referred to as the "Representative's Securities." The Firm Shares, the Option
Shares, the Representative's Warrants and the Representative's Securities
(collectively, hereinafter referred to as the "Securities") are more fully
described in the Registration Statement and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, and as of the Closing Date (hereinafter defined) and the Option
Closing Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 33-_____), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Firm Shares and the Option Shares under the Securities Act of 1933, as
amended (the "Act"), which registration statement and amendment or amendments
have been prepared by the Company in conformity with the requirements of the
Act, and the rules and regulations (the "Regulations") of the Commission under
the Act. The Company will promptly file a further amendment to said
registration statement in the form heretofore delivered to the Underwriters and
will not, file any other amendment thereto to which the Underwriters shall have
objected in writing after having been furnished with a copy thereof. Except as
the context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein
(including, but not limited to those documents or information incorporated by
reference therein) and all information deemed to be a part thereof as of such
time pursuant to paragraph (b) of Rule 430(A) of the Regulations)), is
hereinafter called the "Registration Statement", and the form of prospectus in
the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations, is hereinafter called the "Prospectus." For purposes hereof,
"Rules and Regulations" mean the rules and regulations adopted by the Commission
under either the Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities
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<PAGE>
have been instituted or are pending or to the Company's knowledge, threatened.
Each of the Preliminary Prospectus, the Registration Statement and Prospectus at
the time of filing thereof conformed with the requirements of the Act and the
Rules and Regulations, and none of the Preliminary Prospectus, the Registration
Statement or Prospectus at the time of filing thereof contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that this
representation and warranty does not apply to statements made in reliance upon
and in conformity with written information furnished to the Company with respect
to the Underwriters by or on behalf of the Underwriters expressly for use in
such Preliminary Prospectus, Registration Statement or Prospectus.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date and each Option Closing Date, if any,
and during such longer period as the Prospectus may be required to be delivered
in connection with sales by the Underwriters or a dealer, the Registration
Statement and the Prospectus will contain all statements which are required to
be stated therein in accordance with the Act and the Rules and Regulations, and
will conform to the requirements of the Act and the Rules and Regulations;
neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, provided, however, that this representation and warranty
-------- -------
does not apply to statements made or statements omitted in reliance upon and in
conformity with information furnished to the Company in writing with respect to
the Underwriters by or on behalf of any Underwriter expressly for use in the
Preliminary Prospectus, Registration Statement or Prospectus or any amendment
thereof or supplement thereto.
(d) Each of the Company and its subsidiary, ICP Corporation, a Utah
corporation (the "Subsidiary") has been duly organized and is validly existing
as a corporation in good standing under the laws of the state of its
incorporation. Except as disclosed in the Prospectus, neither the Company nor
the Subsidiary owns an interest in any corporation, partnership, trust, joint
venture or other business entity. Each of the Company and the Subsidiary is
duly qualified and licensed and in good standing as a foreign corporation in
each jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing. Each of
the Company and the Subsidiary has all requisite corporate power and authority,
and each has obtained any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all governmental or
regulatory officials and bodies (including, without limitation, those having
jurisdiction over environmental or similar matters), to own or lease its
properties and conduct its business as described in the Prospectus; each of the
Company and the Subsidiary is and has been doing business in compliance with all
such authorizations, approvals, orders, licenses, certificates, franchises and
permits and all federal, state and local laws, rules and regulations; and
neither received any notice of proceedings relating to the revocation or
modification of any such authorization, approval, order, license, certificate,
franchise, or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially and adversely affect
the condition, financial or otherwise, or the earnings, position, prospects,
- 3 -
<PAGE>
value, operation, properties, business or results of operations of the Company
or the Subsidiary. The disclosures in the Registration Statement concerning the
effects of federal, state and local laws, rules and regulations on each of the
Company's and the Subsidiary's business as currently conducted and as
contemplated are correct in all material respects and do not omit to state a
material fact necessary to make the statements contained therein not misleading
in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set forth
therein on the Closing Date and the Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the Representative's Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all respects to all statements
with respect thereto contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of the Company and the Subsidiary have
been duly authorized and validly issued and are fully paid and non-assessable
and the holders thereof have no rights of rescission with respect thereto, and
are not subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of any
holders of any security of the Company or the Subsidiary or similar contractual
rights granted by the Company or the Subsidiary. The Securities are not and
will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and delivered
in accordance with the terms hereof, will be validly issued, fully paid and non-
assessable and will conform to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for the authorization,
issue and sale of the Securities has been duly and validly taken; and the
certificates representing the Securities will be in due and proper form. Upon
the issuance and delivery pursuant to the terms hereof of the Securities to be
sold by the Company hereunder, the Underwriters or the Representative, as the
case may be, will acquire good and marketable title to such Securities free and
clear of any lien, charge, claim, encumbrance, pledge, security interest, defect
or other restriction or equity of any kind whatsoever.
(f) The consolidated financial statements, including the related notes
and schedules thereto, included in the Registration Statement, each Preliminary
Prospectus and the Prospectus fairly present the financial position, income,
changes in cash flow, changes in stockholders' equity, and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply and the pro forma financial information included in the
Registration Statement and Prospectus presents fairly on a basis consistent with
that of the audited financial statements included therein, what the Company's
pro forma capitalization would have been for the respective periods and as of
the respective dates to which they apply after giving effect to the adjustments
described therein. Such financial statements have been prepared in conformity
with generally accepted accounting principles and the Rules and Regulations,
consistently applied throughout the periods involved. There has been no adverse
change or development involving a material prospective change in the condition,
financial or otherwise,
- 4 -
<PAGE>
or in the earnings, position, prospects, value, operation, properties, business,
or results of operations of the Company or the Subsidiary whether or not arising
in the ordinary course of business, since the date of the financial statements
included in the Registration Statement and the Prospectus and the outstanding
debt, the property, both tangible and intangible, and the business of the
Company or the Subsidiary conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus. Financial
information set forth in the Prospectus under the headings "Summary Financial
Data," "Selected Financial Data," "Capitalization," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
fairly present, on the basis stated in the Prospectus, the information set forth
therein, have been derived from or compiled on a basis consistent with that of
the audited financial statements included in the Prospectus.
(g) Each of the Company and the Subsidiary (i) has paid all federal,
state, local, and foreign taxes for which it is liable, including, but not
limited to, withholding taxes and amounts payable under Chapters 21 through 24
of the Internal Revenue Code of 1986 (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such taxes which are not due and payable, and
(iii) does not have any tax deficiency or claims outstanding, proposed or
assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Securities from
the Company and the purchase by the Representative of the Representative's
Warrants from the Company, (iii) the consummation by the Company of any of its
obligations under this Agreement or the Representative's Warrant Agreement, or
(iv) resales of the Shares in connection with the distribution contemplated
hereby.
(i) The Company maintains insurance policies, including, but not
limited to, general liability, product liability and property insurance, which
insures the Company and its employees, against such losses and risks generally
insured against by comparable businesses. The Company (A) has not failed to
give notice or present any insurance claim with respect to any matter, including
but not limited to the Company's business, property or employees, under the
insurance policy or surety bond in a due and timely manner, (B) does not have
any disputes or claims against any underwriter of such insurance policies or
surety bonds or has not failed to pay any premiums due and payable thereunder,
or (C) has not failed to comply with all conditions contained in such insurance
policies and surety bonds. There are no facts or circumstances under any such
insurance policy or surety bond which would relieve any insurer of its
obligation to satisfy in full any valid claim of the Company.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of, the Company
or the Subsidiary which (i) questions the validity of the capital stock of the
Company or the Subsidiary, this Agreement, the Representative's Warrant
Agreement, the Consulting Agreement (as defined herein) or of any action taken
or to be taken by the Company pursuant to or in connection with this Agreement,
the Representative's Warrant Agreement or the
- 5 -
<PAGE>
Consulting Agreement, (ii) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are summarized in
the Registration Statement are accurately summarized in all material respects),
or (iii) might materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, stockholders' equity, value,
operation, properties, business or results of operations of the Company or the
Subsidiary.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, enter into this Agreement,
the Representative's Warrant Agreement and the Consulting Agreement and to
consummate the transactions provided for in such agreements; and this Agreement,
the Representative's Warrant Agreement and the Consulting Agreement have each
been duly and properly authorized, executed and delivered by the Company. Each
of this Agreement, the Representative's Warrant Agreement and the Consulting
Agreement constitutes a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, except (i) as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification or
contribution provisions may be limited under applicable laws or the public
policies underlying such laws and (iii) that the remedies of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceedings may be brought. None of the Company's issue and sale of the
Securities, execution or delivery of this Agreement, the Representative's
Warrant Agreement or the Consulting Agreement, its performance hereunder and
thereunder, its consummation of the transactions contemplated herein and
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto, conflicts
with or will conflict with or results or will result in any breach or violation
of any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of, (i) the articles of
incorporation or by-laws of the Company, (ii) any license, contract, indenture,
mortgage, deed of trust, voting trust agreement, stockholders agreement, note,
loan or credit agreement or any other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which any of its
properties or assets (tangible or intangible) is or may be subject, or any
indebtedness, or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or any of its
activities or properties.
(l) Except as described in the Prospectus, no consent, approval,
authorization or order of, and no filing with, any court, regulatory body,
government agency or other body, domestic or foreign, is required for the
issuance of the Shares pursuant to the Prospectus and the Registration
Statement, the issuance of the Representative's Warrants, the performance of
this Agreement, the Representative's Warrant Agreement and the Consulting
Agreement and the transactions contemplated hereby and thereby, including
without limitation, any waiver of any preemptive, first refusal or other rights
that any entity or person may have for the issue and/or sale of any of the
Shares, or the Representative's Warrants, except such as
- 6 -
<PAGE>
have been or may be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the Underwriters' purchase and
distribution of the Shares, and the Representative's Warrants to be sold by the
Company hereunder.
(m) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which each of the Company or the Subsidiary is a party
or by which it may be bound or to which any of its assets, properties or
business may be subject have been duly and validly authorized, executed and
delivered by the Company or the Subsidiary, and constitute the legal, valid and
binding agreements of the Company or the Subsidiary, enforceable against the
Company or the Subsidiary, in accordance with their respective terms. The
descriptions in the Registration Statement of agreements, contracts and other
documents are accurate in all material respects and fairly present the
information required to be shown with respect thereto by Form S-1, and there are
no contracts or other documents which are required by the Act to be described in
the Registration Statement or filed as exhibits to the Registration Statement
which are not described or filed as required, and the exhibits which have been
filed are in all material respects complete and correct copies of the documents
of which they purport to be copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any change in the capital stock, or any material change in the debt
(long or short term) or liabilities or material adverse change in or affecting
the general affairs, management, financial operations, stockholders' equity or
results of operations of the Company.
(o) No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust agreement,
stockholders agreement, partnership agreement, note, loan or credit agreement,
purchase order, or any other agreement or instrument evidencing an obligation
for borrowed money, or any other material agreement or instrument to which the
Company is a party or by which the Company may be bound or to which the property
or assets (tangible or intangible) of the Company is subject or affected.
(p) The Company has generally enjoyed a satisfactory employer-employee
relationship with its employees and is in compliance with all federal, state,
local, and foreign laws and regulations respecting employment and employment
practices, terms and conditions of employment and wages and hours. There are no
pending investigations involving the Company by the U.S. Department of Labor, or
any other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor
practice charge or complaint against the Company pending before the National
Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or
stoppage pending or threatened against or involving the Company or any
predecessor entity, and none has ever occurred. No representation question
exists respecting the employees of the Company, and no
- 7 -
<PAGE>
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists, or is imminent.
(q) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
--------
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or
at any time previously, to a defined benefit plan, as defined in Section 3(35)
-------
of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
------- -------
4975 of the Code, which could subject the Company to any tax penalty on
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all reporting, disclosure and other requirements of
the Code and ERISA as they relate to any such ERISA Plan. Determination letters
have been received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a), stating that such
-------
ERISA Plan and the attendant trust are qualified thereunder. The Company has
never completely or partially withdrawn from a "multiemployer plan."
(r) Neither the Company nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company or the Subsidiary are in dispute so far as known by the Company or
are in any conflict with the right of any other person or entity. Each of the
Company and the Subsidiary (i) owns or has the right to use, free and clear of
all liens, charges, claims, encumbrances, pledges, security interests, defects
or other restrictions or equities of any kind whatsoever, all patents,
trademarks, service marks, trade names and copyrights, technology and licenses
and rights with respect to the foregoing, used in the conduct of its business as
now conducted or proposed to be conducted without infringing upon or otherwise
acting adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing and (ii) is not
obligated or under any liability whatsoever to make any payment by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant to,
any patent, trademark, service mark, trade name, copyright, know-how, technology
or other intangible asset, with respect to the use thereof or in connection with
the conduct of its business or otherwise.
(t) Each of the Company and the Subsidiary owns and has the
unrestricted right to use all trade secrets, know-how (including all other
unpatented and/or unpatentable
- 8 -
<PAGE>
proprietary or confidential information, systems or procedures), inventions,
designs, processes, works of authorship, computer programs and technical data
and information (collectively herein "intellectual property") that are material
to the development, manufacture, operation and sale of all products and services
sold or proposed to be sold by the Company, free and clear of and without
violating any right, lien, or claim of others, including without limitation,
former employers of its employees, former and current employers of each member
of the Company's Scientific Advisory Board or members of the Company's
Scientific Advisory Board; provided, however, that the possibility exists that
other persons or entities, completely independently of the Company, or its
employees or agents, could have developed trade secrets or items of technical
information similar or identical to those of the Company.
(u) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus, to be owned or leased by it free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(v) BDO Seidman, LLP ("BDO") whose report is filed with the Commission
as a part of the Registration Statement, are independent certified public
accountants as required by the Act and the Rules and Regulations.
(w) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which all officers and directors have agreed
not to, directly or indirectly, offer to sell, sell, grant any option for the
sale of, assign, transfer, pledge, hypothecate, distribute or otherwise encumber
or dispose of any shares of Common Stock or securities convertible into,
exercisable or exchangeable for or evidencing any right to purchase or subscribe
for any shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein for a
period of not less than thirteen (13) months following the effective date of the
Registration Statement without the prior written consent of the Representative.
The Company will cause the Transfer Agent, as defined below, to mark an
appropriate legend on the face of stock certificates representing all of such
securities and to place "stop transfer" orders on the Company's stock ledgers.
(x) Except as described in the Prospectus under "Underwriting," there
are no claims, payments, issuances, arrangements or understandings, whether oral
or written, for services in the nature of a finder's or origination fee with
respect to the sale of the Securities hereunder or any other arrangements,
agreements, understandings, payments or issuance with respect to the Company or
any of its officers, directors, stockholders, partners, employees or affiliates
that may affect the Underwriters' compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD").
(y) The Common Stock has been approved for quotation on the Nasdaq
National Market ("Nasdaq").
(z) Neither the Company nor any of its officers, employees, agents, or
any other person acting on behalf of the Company, has, directly or indirectly,
given or agreed to
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<PAGE>
give any money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer, supplier,
employee or agent of a customer or supplier, or official or employee of any
governmental agency (domestic or foreign) or instrumentality of any government
(domestic or foreign) or any political party or candidate for office (domestic
or foreign) or other person who was, is, or may be in a position to help or
hinder the business of the Company (or assist the Company in connection with any
actual or proposed transaction) which (a) might subject the Company, or any
other such person to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (b) if not given in
the past, might have had a materially adverse effect on the assets, business or
operations of the Company, or (c) if not continued in the future, might
adversely affect the assets, business, operations or prospects of the Company.
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(aa) Except as set forth in the Prospectus, no officer, director or
stockholder of the Company, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 promulgated under the Rules and Regulations) of any of
the foregoing persons or entities has or has had, either directly or indirectly,
(i) an interest in any person or entity which (A) furnishes or sells services or
products which are furnished or sold or are proposed to be furnished or sold by
the Company, or (B) purchases from or sells or furnishes to the Company any
goods or services, or (ii) a beneficial interest in any contract or agreement to
which the Company is a party or by which it may be bound or affected. Except as
set forth in the Prospectus under "Certain Transactions," there are no existing
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company and any officer, director, or Principal Stockholder (as such term is
defined in the Prospectus) of the Company or any partner, affiliate or associate
of any of the foregoing persons or entities.
(bb) Any certificate signed by any officer of the Company, and
delivered to the Underwriters or to Underwriters' Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(cc) The minute books of the Company have been made available to the
Underwriters and contains a complete summary of all meetings and actions of the
directors, stockholders, audit committee, compensation committee and any other
committee of the Board of Directors of the Company, respectively, since the time
of its incorporation, and reflects all transactions referred to in such minutes
accurately in all material respects.
(dd) Except and to the extent described in the Prospectus, no holders
of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
- 10 -
<PAGE>
(ee) The Company has as of the effective date of the Registration
Statement (i) entered into an employment agreement with each of M. Lee Hulsebus,
Steven W. Kenney, Edward C. Hall and Richard E. Sloan, in the form filed as
Exhibits ___, ___, ___, and ___, respectively, to the Registration Statement and
(ii) purchased term key-man insurance on the life of M. Lee Hulsebus, in the
amount of $1,000,000, which policy names the Company as the sole beneficiary
thereof.
(ff) The conversion of all the outstanding shares of Series I
Convertible Preferred Stock of the Company as set forth in the Prospectus has
been duly authorized by the Company and the shareholders of the Company in
accordance with all agreements, documents, understandings and instruments
affecting the rights, duties, responsibilities, obligations and/or privileges of
holders of Series I Convertible Preferred Stock or to which the Company is
bound, including without limitation, the Company's articles of incorporation and
the Company's by-laws; and upon the consummation of the Offering, without any
further action of any shareholders of the Company, every share of Series I
Convertible Preferred Stock of the Company will simultaneously convert into one
validly issued, fully paid and nonassessable share of Preferred Stock.
(gg) The Company has entered into a financial advisory and consulting
agreement substantially in the form filed as Exhibit ___ to the Registration
Statement (the "Consulting Agreement") with the Representative, with respect to
the rendering of consulting services by the Representative to the Company. The
Consulting Agreement has been duly and validly authorized by the Company and
constitutes a valid and legally binding agreement of the Company, enforceable
against the Company in accordance with its terms.
(hh) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
-------
An Act Relating to Disclosure of Doing Business with Cuba, and the Company
- ---------------------------------------------------------
further agrees that if it or any affiliate commences engaging in business with
the government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's,
or any affiliate's, business with Cuba or with any person or affiliate located
in Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to the
Department.
2. Purchase, Sale and Delivery of the Securities and Representative's
------------------------------------------------------------------
Warrants.
- --------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$__________ [90% of the initial public offering price] per share of Preferred
Stock, that number of Firm Shares set forth in Schedule A opposite the name of
such Underwriter, plus any additional number of Firm Shares which
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<PAGE>
such Underwriter may become obligated to purchase pursuant to the provisions of
Section 11 hereof.
- -------
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 195,000 shares of Preferred Stock at a price of $__________ [90% of
the initial public offering price] per share of Preferred Stock. The option
granted hereby will expire 45 days after (i) the date the Registration Statement
becomes effective, if the Company has elected not to rely on Rule 430A under the
Rules and Regulations, or (ii) the date of this Agreement if the Company has
elected to rely upon Rule 430A under the Rules and Regulations, and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Firm Shares upon notice by the Representative to the Company
setting forth the number of Option Shares as to which the several Underwriters
are then exercising the option and the time and date of payment and delivery for
any such Option Shares. Any such time and date of delivery (an "Option Closing
Date") shall be determined by the Representative, but shall not be later than
seven full business days after the exercise of said option, nor in any event
prior to the Closing Date, as hereinafter defined, unless otherwise agreed upon
by the Representative and the Company. Nothing herein contained shall obligate
the Underwriters to make any over-allotments. No Option Shares shall be
delivered unless the Firm Shares shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares shall be made at the offices of First Allied Securities,
Inc. at 200 Park Avenue, 24th Floor, New York, New York 10166, or at such other
place as shall be agreed upon by the Representative and the Company. Such
delivery and payment shall be made at 10:00 a.m. (New York City time) on
__________, 1996 or at such other time and date as shall be agreed upon by the
Representative and the Company, but not less than three (3) nor more than seven
(7) full business days after the effective date of the Registration Statement
(such time and date of payment and delivery being herein called "Closing Date").
In addition, in the event that any or all of the Option Shares are purchased by
the Underwriters, payment of the purchase price for, and delivery of
certificates for, such Option Shares shall be made at the above mentioned office
of the Representative or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates for
the Firm Shares and the Option Shares, if any, shall be made to the Underwriters
against payment by the Underwriters, severally and not jointly, of the purchase
price for the Firm Shares and the Option Shares, if any, to the order of the
Company for the Firm Shares and the Option Shares, if any, by New York Clearing
House funds. In the event such option is exercised, each of the Underwriters,
acting severally and not jointly, shall purchase that proportion of the total
number of Option Shares then being purchased which the number of Firm Shares set
forth in Schedule A hereto opposite the name of such Underwriter bears to the
total number of Firm Shares, subject in each case to such adjustments as the
Representative in its discretion shall make to eliminate any sales or purchases
of fractional shares. Certificates for the Firm Shares and the Option Shares,
if any, shall be in definitive, fully registered form, shall bear no restrictive
legends and shall be in such denominations and
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<PAGE>
registered in such names as the Underwriters may request in writing at least two
(2) business days prior to the Closing Date or the relevant Option Closing Date,
as the case may be. The certificates for the Firm Shares and the Option Shares,
if any, shall be made available to the Representative at such office or such
other place as the Representative may designate for inspection, checking and
packaging no later than 9:30 a.m. on the last business day prior to Closing Date
or the relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative Representative's Warrants at a purchase price of $.001 per
warrant, which warrants shall entitle the holders thereof to purchase (i) an
aggregate of 130,000 shares of Preferred Stock or (ii) __________ shares of
Common Stock or (iii) any combination thereof. The Representative's Warrants
shall be exercisable for a period of forty-eight (48) months commencing twelve
(12) months from the effective date of the Registration Statement at a price
equaling one hundred twenty percent (120%) of the initial public offering price
of the shares of Preferred Stock. The Representative's Warrant Agreement and
form of Warrant Certificate shall be substantially in the form filed as Exhibit
4.2 to the Registration Statement. Payment for the Representative's Warrants
shall be made on the Closing Date.
3. Public Offering of the Shares. As soon after the Registration
-----------------------------
Statement becomes effective as the Representative deems advisable, the
Underwriters shall make a public offering of the Shares (other than to residents
of or in any jurisdiction in which qualification of the Shares is required and
has not become effective) at the price and upon the other terms set forth in the
Prospectus. The Representative may from time to time increase or decrease the
public offering price after distribution of the Shares has been completed to
such extent as the Representative, in it discretion deems advisable. The
Underwriters may enter into one of more agreements as the Underwriters, in each
of their sole discretion, deem advisable with one or more broker-dealers who
shall act as dealers in connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants
---------------------------------------
and agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Shares by the Underwriters of
which the Representative shall not previously have been advised and furnished
with a copy, or to which the Representative shall have objected or which is not
in compliance with the Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative and confirm the notice in writing,
(i) when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any post-
effective amendment to the Registration Statement becomes effective, (ii) of the
issuance by the Commission of any stop order or of the initiation,
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<PAGE>
or the threatening, of any proceeding, suspending the effectiveness of the
Registration Statement or any order preventing or suspending the use of the
Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose, (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities for
offering or sale in any jurisdiction or of the initiation, or the threatening,
of any proceeding for that purpose, (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
authority shall enter a stop order or suspend such qualification at any time,
the Company will make every effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifteenth business day after the effective date of
the Registration Statement.
(d) The Company will give the Representative notice of its intention
to file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representative with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such prospectus to which the
Representative or Orrick, Herrington & Sutcliffe ("Underwriters' Counsel"),
shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
--------
however, the Company shall not be required to qualify as a foreign corporation
- -------
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
- 14 -
<PAGE>
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus
relating to the Securities or the Representative's Shares is required to be
delivered under the Act, any event shall have occurred as a result of which, in
the opinion of counsel for the Company or Underwriters' Counsel, the Prospectus,
as then amended or supplemented, includes an untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Company will notify the Representative
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such amendment or
-------
supplement to be satisfactory to Underwriters' Counsel, and the Company will
furnish to the Underwriters copies of such amendment or supplement as soon as
available and in such quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Representative, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
-------
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the effective date of
the Registration Statement.
(h) During a period of seven years after the date hereof, the Company
will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:
i) concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in
the form furnished to the Company's stockholders and certified by the
Company's principal financial or accounting officer;
ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of independent
certified public accountants;
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<PAGE>
iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the
NASD or any securities exchange;
v) every press release and every material news item or article of
interest to the financial community in respect of the Company, or its
affairs which was released or prepared by or on behalf of the Company;
and
vi) any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the
Representative may request.
During such seven-year period, if the Company has an active
subsidiary, the foregoing financial statements will be on a consolidated basis
to the extent that the accounts of the Company and its subsidiary are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(i) The Company will maintain a Transfer Agent and, if necessary under
the jurisdiction of incorporation of the Company, a Registrar (which may be the
same entity as the Transfer Agent) for its Preferred Stock.
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
(k) On or before the effective date of the Registration Statement, the
Company shall provide the Representative with true copies of duly executed,
legally binding and enforceable agreements pursuant to which for a period of
thirteen (13) months from the effective date of the Registration Statement, all
officers and directors agree that each will not directly or indirectly, issue,
offer to sell, sell, grant an option for the sale of, assign, transfer, pledge,
hypothecate, distribute or otherwise encumber or dispose of any shares of Common
Stock or securities convertible into, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any beneficial interest therein without the prior written consent of
the Representative (collectively, the "Lock-up Agreements"). On or before the
Closing Date, the Company shall deliver instructions to the Transfer Agent
authorizing it to place appropriate legends on the certificates representing the
securities subject to the Lock-up Agreements and to place appropriate stop
transfer orders on the Company's ledgers. During the thirteen (13) month period
commencing with the effective date of the Registration Statement (the
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<PAGE>
"Lockup Period"), the Company shall not, without the prior written consent of
the Representative, sell, contract or offer to sell, issue, transfer, assign,
pledge, hypothecate, distribute, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any options, rights or warrants with
respect to any shares of Common Stock. During the Lockup Period, the Company
(i) shall not amend any material employment agreement, including, but not
limited to the employment agreements referenced in Section 1(ee) herein, and
-------
filed as exhibits to the Registration Statement, (ii) shall not amend any option
agreement or other agreement providing compensation to any officer, director or
principal stockholder and (iii) shall not file any registration statement with
the Securities and Exchange Commission without the prior written consent of the
Representative.
(l) Neither the Company, nor any of its officers, directors,
stockholders, nor any of their respective affiliates (within the meaning of the
Rules and Regulations) will take, directly or indirectly, any action designed
to, or which might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. Except as described in the Prospectus, no portion
of the net proceeds will be used, directly or indirectly, to acquire any
securities issued by the Company.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
(o) The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in its letter to be
furnished pursuant to Section 6(i) hereof.
-------
(p) The Company shall cause the Common Stock to be quoted on Nasdaq
and for a period of seven (7) years from the date hereof, use its best efforts
to maintain the Nasdaq quotation of the Common Stock to the extent outstanding.
(q) For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representative at the Representative's request and at the
Company's sole expense, (i) daily consolidated transfer sheets relating to the
Common Stock (ii) the list of holders of all of the Company's securities and
(iii) a Blue Sky "Trading Survey" for secondary sales of the Company's
securities prepared by counsel to the Company.
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<PAGE>
(r) As soon as practicable, (i) but in no event more than 5 business
days before the effective date of the Registration Statement, file a Form 8-A
with the Commission providing for the registration under the Exchange Act of the
Securities and (ii) but in no event more than 30 days from the effective date of
the Registration Statement, take all necessary and appropriate actions to be
included in Standard and Poor's Corporation Descriptions and Moody's OTC Manual
and to continue such inclusion for a period of not less than seven (7) years.
(s) The Company hereby agrees that it will not for a period of twelve
(12) months from the effective date of the Registration Statement, adopt,
propose to adopt or otherwise permit to exist any employee, officer, director,
consultant or compensation plan or arrangement permitting the grant, issue or
sale of any shares of Common Stock or other securities of the Company (i) in an
amount greater than an aggregate of __________ (ii) at an exercise or sale price
per share less than the greater of (a) the initial public offering price of the
Shares set forth herein and (b) the fair market value of the Common Stock on the
date of grant or sale, (iii) to any direct or indirect beneficial holder on the
date hereof of more than 10% of the issued and outstanding shares of Common
Stock, (iv) with the payment for such securities with any form of consideration
other than cash, (v) upon payment of less than the full purchase or exercise
price for such shares of Common Stock or other securities of the Company on or
before the date of issuance, or (vi) the existence of stock appreciation rights,
phantom options or similar arrangements.
(t) Until the completion of the distribution of the Shares, the
Company shall not without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
(u) For a period equal to the lesser of (i) seven (7) years from the
date hereof, and (ii) the sale to the public of the Representative's Shares, the
Company will not take any action or actions which may prevent or disqualify the
Company's use of Form S-1 (or other appropriate form) for the registration under
the Act of the Representative's Shares.
(v) For a period of three (3) years after the effective date of the
Registration Statement, the Representative shall have the right to designate one
(1) individual to attend meetings of the Company's Board of Directors (the
"Board"). The Company shall notify the Representative of each meeting of the
Board and the Company shall send to such individual all notices and other
correspondence and communications sent by the Company to members of the Board.
Such individual shall be reimbursed for all out-of-pocket expenses incurred in
connection with his attendance of meetings of the Board. In addition, the
Company hereby grants to the Representative a preferential right on the terms
and subject to the conditions set forth in this paragraph, for a period of three
(3) years from the effective date of the Registration Statement, to purchase for
its account, or to sell for the account of the Company or its present or future
affiliates or subsidiaries, any securities of the Company or any of its present
or future affiliates or subsidiaries, with respect to which the Company or any
of its present or future affiliates or subsidiaries may seek a public or private
sale of such securities.
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<PAGE>
The Company, for a period of three (3) years from the effective date of the
Registration Statement, will consult, and will cause such present or future
affiliates or subsidiaries to consult with the Representative with regard to any
such offering or placement and will offer, or cause any of its present or future
affiliates or subsidiaries to offer, to the Representative the opportunity, on
terms not more favorable to the Company or such present or future affiliate or
subsidiary than they can secure elsewhere, to purchase or sell any such
securities. If the Representative fails to accept in writing such proposal made
by the Company or any of its present or future affiliates or subsidiaries within
fifteen (15) business days after receipt of a notice containing such notice,
then the Representative shall have no further claim or right with respect tot he
proposal contained in such notice. If, thereafter, such proposal is materially
modified, the Company shall again consult, and cause each present or future
affiliate or subsidiary to consult, with the Representative in connection with
such modification and shall in all respects have the same obligations and adopt
the same procedures with respect to such proposal as are provided hereinabove
with respect too the original proposal.
(w) During the period that any Shares of Preferred Stock are issued
and outstanding, the Company agrees it shall not issue any securities whatsoever
with rights, preferences or provisions senior to those attached to the Preferred
Stock, as set forth in the Certificate of Designation of Rights, Preferences and
Privileges, filed as Exhibit ___ to the Registration Statement.
5. Payment of Expenses.
-------------------
(a) The Company hereby agrees to pay on each of the Closing Date and
the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement and the Representative's Warrant Agreement, including,
without limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreements, and related documents, including
the cost of all copies thereof and of the Preliminary Prospectuses and of the
Prospectus and any amendments thereof or supplements thereto supplied to the
Underwriters and such dealers as the Underwriters may request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of the
Securities including, but not limited to, (x) the purchase by the Underwriters
of the Shares and the purchase by the Representative of the Representative's
Warrants from the Company, (y) the consummation by the Company of any of its
obligations under this Agreement and the Representative's Warrant Agreement, and
(z) resale of the Shares by the Underwriters in connection with the distribution
contemplated hereby, (iv) the qualification of the Securities under state or
foreign securities or "Blue Sky" laws and determination of the status of such
securities under legal investment laws, including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel
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<PAGE>
in connection therewith, (v) costs and expenses in connection with due diligence
investigations, including but not limited to the fees of any independent counsel
or consultant retained, (vi) fees and expenses of the transfer agent and
registrar, (vii) applications for assignments of a rating of the Securities by
qualified rating agencies, (viii) the fees payable to the Commission and the
NASD, and (ix) the fees and expenses incurred in connection with the quotation
of the Securities on Nasdaq and any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 or Section 12, the Company shall reimburse and
------- -------
indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of Underwriters' Counsel, less any amounts
already paid pursuant to Section 5(c) hereof.
-------
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
-------
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Firm Shares, $__________ of which has been paid to date. In the event the
Representative elects to exercise the over-allotment option described in Section
-------
2(b) hereof, the Company agrees to pay to the Representative on the Option
Closing Date (by certified or bank cashier's check or, at the Representative's
election, by deduction from the proceeds of the Option Shares) a non-accountable
expense allowance equal to three percent (3%) of the gross proceeds received by
the Company from the sale of the Option Shares.
6. Conditions of the Underwriters' Obligations. The obligations of
-------------------------------------------
the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, with respect to the
Company as if it had been made on and as of the Closing Date or each Option
Closing Date, as the case may be; the accuracy on and as of the Closing Date or
Option Closing Date, if any, of the statements of the officers of the Company
made pursuant to the provisions hereof; and the performance by the Company on
and as of the Closing Date and each Option Closing Date, if any, of its
covenants and obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 Noon, New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Representative, and, at
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and any price-
related information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) of the Rules and Regulations within the
prescribed time period, and prior to Closing Date the Company shall have
provided evidence
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<PAGE>
satisfactory to the Representative of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A of the Rules and
Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representative shall have
received from Underwriters' Counsel, such opinion or opinions with respect to
the organization of the Company, the validity of the Securities, the
Representative's Warrants, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
(d) At Closing Date, the Underwriters shall have received the
favorable opinion of King & Isaacson, Utah corporate counsel to the Company,
dated the Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
i) each of the Company and the Subsidiary (A) has been duly
organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction, (B) is duly qualified and licensed
and in good standing as a foreign corporation in each jurisdiction in
which its ownership or leasing of any properties or the character of
its operations requires such qualification or licensing, and (C) has
all requisite corporate power and authority; and the Company has
obtained any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or similar
matters), to own or lease its properties and conduct its business as
described in the Prospectus. The disclosures in the Registration
Statement concerning the effects of federal, state and local laws,
rules and regulations on the Company's and the Subsidiary's business
as currently conducted and as contemplated are correct in all material
respects and do not omit to state a fact necessary to make the
statements contained therein not misleading in light of the
circumstances in which they were made.
ii) The Shares, the Representative's Warrants and the
Representative's Shares to be sold by the Company hereunder and under
the Representative's Warrant Agreement are not and will not be subject
to any preemptive or other
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<PAGE>
similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof,
will be validly issued, fully paid and non-assessable and conform to
the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders;
all corporate action required to be taken for the authorization, issue
and sale of the Shares, the Representative's Warrants and the
Representative's Shares has been duly and validly taken; and the
certificates representing the Shares and the Representative's Warrants
are in due and proper form. The Representative's Warrants constitute
valid and binding obligations of the Company to issue and sell, upon
exercise thereof and payment therefor, the number and type of
securities of the Company called for thereby. Upon the issuance and
delivery pursuant to this Agreement and the Representative's Warrant
Agreement of the Shares and the Representative's Warrants,
respectively, to be sold by the Company, the Underwriters and the
Representative, respectively, will acquire good and marketable title
to the Shares and Representative's Warrants free and clear of any
pledge, lien, charge, claim, encumbrance, pledge, security interest,
or other restriction or equity of any kind whatsoever. No transfer
tax is payable by or on behalf of the Underwriters in connection with
(A) the issuance by the Company of the Shares, (B) the purchase by the
Underwriters and the Representative of the Shares and the
Representative's Warrants, respectively, from the Company, (C) the
consummation by the Company of any of its obligations under this
Agreement or the Representative's Warrant Agreement, or (D) resales of
the Shares in connection with the distribution contemplated hereby.
(e) At Closing Date, the Underwriters shall have received the
favorable opinion of Zukerman Gore & Brandeis, LLP, counsel to the Company,
dated the Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
i) each of the Company and the Subsidiary (A) has been duly
organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction, (B) is duly qualified and licensed
and in good standing as a foreign corporation in each jurisdiction in
which its ownership or leasing of any properties or the character of
its operations requires such qualification or licensing, and (C) has
all requisite corporate power and authority; and the Company has
obtained any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or similar
matters), to own or lease its properties and conduct its business as
described in the Prospectus; each of the Company and the Subsidiary is
and has been doing business in material compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises
and permits and all federal, state and local laws, rules and
regulations; neither the Company, nor the Subsidiary has received any
notice of proceedings relating to the revocation or modification of
any such authorization, approval, order, license, certificate,
- 22 -
<PAGE>
franchise, or permit which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would materially
adversely affect the business, operations, condition, financial or
otherwise, or the earnings, business affairs, position, prospects,
value, operation, properties, business or results of operations of the
Company or the Subsidiary. The disclosures in the Registration
Statement concerning the effects of federal, state and local laws,
rules and regulations on the Company's and the Subsidiary's business
as currently conducted and as contemplated are correct in all material
respects and do not omit to state a fact necessary to make the
statements contained therein not misleading in light of the
circumstances in which they were made.
ii) to the best of such counsel's knowledge, the Company does not
own an interest in any other corporation, partnership, joint venture,
trust or other business entity;
iii) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "Capitalization" and "Description of
Securities," and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue
any capital stock, rights, warrants, options or other securities,
except for this Agreement, the Representative's Warrant Agreement and
as described in the Prospectus. The Securities, and all other
securities issued or issuable by the Company conform in all material
respects to all statements with respect thereto contained in the
Registration Statement and the Prospectus. All issued and outstanding
securities of the Company have been duly authorized and validly issued
and are fully paid and non-assessable; the holders thereof have no
rights of rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any
holders of any security of the Company. The Shares, the
Representative's Warrants and the Representative's Shares to be sold
by the Company hereunder and under the Representative's Warrant
Agreement are not and will not be subject to any preemptive or other
similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof,
will be validly issued, fully paid and non-assessable and conform to
the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders;
all corporate action required to be taken for the authorization, issue
and sale of the Shares, the Representative's Warrants and the
Representative's Shares has been duly and validly taken; and the
certificates representing the Shares and the Representative's Warrants
are in due and proper form. The Representative's Warrants constitute
valid and binding obligations of the Company to issue and sell, upon
exercise thereof and payment therefor, the number and type of
securities of the Company called for thereby. Upon the issuance and
delivery pursuant to this Agreement and the Representative's Warrant
Agreement of the Shares and the Representative's Warrants,
respectively, to be sold by the Company, the Underwriters and the
Representative, respectively, will acquire
- 23 -
<PAGE>
good and marketable title to the Shares and Representative's Warrants
free and clear of any pledge, lien, charge, claim, encumbrance,
pledge, security interest, or other restriction or equity of any kind
whatsoever. No transfer tax is payable by or on behalf of the
Underwriters in connection with (A) the issuance by the Company of the
Shares, (B) the purchase by the Underwriters and the Representative of
the Shares and the Representative's Warrants, respectively, from the
Company, (C) the consummation by the Company of any of its obligations
under this Agreement or the Representative's Warrant Agreement, or (D)
resales of the Shares in connection with the distribution contemplated
hereby.
iv) The conversion of all the outstanding shares of Series I
Convertible Preferred Stock of the Company as set forth in the
Prospectus has been duly authorized by the Company and the
shareholders of the Company in accordance with all agreements,
documents, understandings and instruments affecting the rights,
duties, responsibilities, obligations and/or privileges of holders of
Series I Convertible Preferred Stock or to which the Company is bound,
including without limitation, the Company's articles of incorporation,
as amended and the Company's by-laws; and upon the consummation of the
Offering, without any further action of any shareholders of the
Company, every share of Series I Convertible Preferred Stock of the
Company will simultaneously convert into one validly issued, fully
paid and nonassessable share of Preferred Stock.
v) the Registration Statement is effective under the Act, and, if
applicable, filing of all pricing information has been timely made in
the appropriate form under Rule 430A, and no stop order suspending the
use of the Preliminary Prospectus, the Registration Statement or
Prospectus or any part of any thereof or suspending the effectiveness
of the Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or, to the best of
such counsel's knowledge, threatened or contemplated under the Act;
vi) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements
thereto (other than the financial statements and other financial and
statistical data included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations.
vii) to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed
as exhibits to the Registration Statement other than those described
in the Registration Statement (or required to be filed under the
Exchange Act if upon such filing they would be incorporated, in whole
or in part, by reference therein) and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are correct
copies of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any
supplement or amendment thereto of contracts and other documents to
which the Company is a party or by
- 24 -
<PAGE>
which it is bound, including any document to which the Company is a
party or by which it is bound, incorporated by reference into the
Prospectus and any supplement or amendment thereto, are accurate in
all material respects and fairly represent the information required to
be shown by Form S-1; (C) there is not pending or threatened against
the Company any action, arbitration, suit, proceeding, inquiry,
investigation, litigation, governmental or other proceeding
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending or
threatened against (or circumstances that may give rise to the same),
or involving the properties or business of the Company which (x) is
required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), (y)
questions the validity of the capital stock of the Company or this
Agreement or the Representative's Warrant Agreement, or of any action
taken or to be taken by the Company pursuant to or in connection with
any of the foregoing; (D) no statute or regulation or legal or
governmental proceeding required to be described in the Prospectus is
not described as required; and (E) there is no action, suit or
proceeding pending, or threatened, against or affecting the Company
before any court or arbitrator or governmental body, agency or
official (or any basis thereof known to such counsel) in which there
is a reasonable possibility of an adverse decision which may result in
a material adverse change in the condition, financial or otherwise, or
the earnings, position, prospects, stockholders' equity, value,
operation, properties, business or results of operations of the
Company, which could adversely affect the present or prospective
ability of the Company to perform its obligations under this Agreement
or the Representative's Warrant Agreement or which in any manner draws
into question the validity or enforceability of this Agreement or the
Representative's Warrant Agreement;
viii) the Company has full legal right, power and authority to
enter into each of this Agreement and the Representative's Warrant
Agreement, and to consummate the transactions provided for therein;
and each of this Agreement and the Representative's Warrant Agreement
has been duly authorized, executed and delivered by the Company. Each
of this Agreement and the Representative's Warrant Agreement, assuming
due authorization, execution and delivery by each other party thereto
constitutes a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms (except
as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or
equitable, and except as rights to indemnity or contribution may be
limited by applicable law), and none of the Company's execution or
delivery of this Agreement and the Representative's Warrant Agreement,
its performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its
business as described in the Registration Statement, the Prospectus,
and any amendments or supplements thereto, or the conversion of the
Series A Convertible Preferred
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<PAGE>
Stocks as set forth in the Registration Statement, the Prospectus and
any amendments or supplements thereto, conflicts with or will conflict
with or results or will result in any breach or violation of any of
the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or
assets (tangible or intangible) of the Company pursuant to the terms
of, (A) the certificate of incorporation or by-laws of the Company,
(B) any license, contract, indenture, mortgage, deed of trust, voting
trust agreement, stockholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is
a party or by which it is or may be bound or to which any of its
respective properties or assets (tangible or intangible) is or may be
subject, or any indebtedness, or (C) any statute, judgment, decree,
order, rule or regulation applicable to the Company of any arbitrator,
court, regulatory body or administrative agency or other governmental
agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or any of its activities
or properties.
ix) except as described in the Prospectus, no consent, approval,
authorization or order of, and no filing with, any court, regulatory
body, government agency or other body (other than such as may be
required under Blue Sky laws, as to which no opinion need be rendered)
is required in connection with the issuance of the Shares pursuant to
the Prospectus, the issuance of the Representative's Warrants, and the
Registration Statement, the performance of this Agreement and the
Representative's Warrant Agreement, and the transactions contemplated
hereby and thereby;
x) the properties and business of the Company conform in all
material respects to the description thereof contained in the
Registration Statement and the Prospectus; and the Company has good
and marketable title to, or valid and enforceable leasehold estates
in, all items of real and personal property stated in the Prospectus
to be owned or leased by it, in each case free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever, other than
those referred to in the Prospectus and liens for taxes not yet due
and payable;
xi) to the best knowledge of such counsel, the Company is not in
breach of, or in default under, any term or provision of any license,
contract, indenture, mortgage, installment sale agreement, deed of
trust, lease, voting trust agreement, stockholders' agreement,
partnership agreement, note, loan or credit agreement or any other
agreement or instrument evidencing an obligation for borrowed money,
or any other agreement or instrument to which the Company is a party
or by which the Company may be bound or to which the property or
assets (tangible or intangible) of the Company is subject or affected;
and the Company is not in violation of any term or provision of its
certificate of incorporation
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<PAGE>
by-laws, or in violation of any franchise, license, permit, judgment,
decree, order, statute, rule or regulation;
xii) the statements in the Prospectus under "BUSINESS,"
"MANAGEMENT," "PRINCIPAL STOCKHOLDERS," "CERTAIN TRANSACTIONS,"
"DESCRIPTION OF SECURITIES," and "SHARES ELIGIBLE FOR FUTURE SALE"
have been reviewed by such counsel, and insofar as they refer to
statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions, are correct in all material
respects;
xiii) the Shares have been accepted for quotation on Nasdaq;
xiv) the persons listed under the caption "PRINCIPAL
STOCKHOLDERS" in the Prospectus are the respective "beneficial owners"
(as such phrase is defined in regulation 13d-3 under the Exchange Act)
of the securities set forth opposite their respective names thereunder
as and to the extent set forth therein;
xv) except as described in the Prospectus, no person,
corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
xvi) except as described in the Prospectus, there are no claims,
payments, issuances, arrangements or understandings for services in
the nature of a finder's or origination fee with respect to the sale
of the Securities hereunder or financial consulting arrangement or any
other arrangements, agreements, understandings, payments or issuances
that may affect the Underwriters' compensation, as determined by the
NASD;
xvii) assuming due execution by the parties thereto other than
the Company, the Lockup Agreements hereof are legal, valid and binding
obligations of parties thereto, enforceable against the party and any
subsequent holder of the securities subject thereto in accordance with
its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution
may be limited by applicable law); and
xviii) except as described in the Prospectus, the Company does
not (A) maintain, sponsor or contribute to any ERISA Plans, (B)
maintain or contribute, now or at any time previously, to a defined
benefit plan, as defined in Section 3(35) of ERISA, and (C) has never
-------
completely or partially withdrawn from a "multiemployer plan".
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<PAGE>
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company and
representatives of the independent public accountants for the Company at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and related matters were discussed and,
although such counsel is not passing upon and does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus).
Such opinion shall not state that it is to be governed or qualified
by, or that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991), or any comparable
State bar accord.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company, and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Representative and they are
justified in relying thereon.
(f) At Closing Date, the Underwriters shall have received the
favorable opinion of Davis, Bujold & Streck, special patent counsel to the
Company, dated the Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
i) To the best of our knowledge, after due inquiry, except as
described in the Prospectus, each of the Company and the Subsidiary
owns or has the right to use, free and clear of all liens,
encumbrances, pledges, security interests, defects or other
restrictions or equities of any kind whatsoever, the Patents and
Licensees.
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<PAGE>
ii) To the best of our knowledge, after due inquiry, there is no
claim, action, or opposition pending, threatened or potential, which
affects or could affect the rights of any of the Company or the
Subsidiary with respect to any trademarks, service marks, copyrights,
service names, trade names, patents, patent applications or licenses
used in, or required for, the conduct of the Company's or the
Subsidiary's business, and all trademarks, service marks, copyrights,
service names, tradenames and patents, owned or licensed to the
Company or the Subsidiary, are valid.
iii) To the best of our knowledge, after due inquiry, except as
described in the Prospectus, none of the Company nor the Subsidiary is
under any obligation to pay royalties or fees to any third party with
respect to any material, technology or intellectual properties
developed, employed, licensed or used by the Company or the
Subsidiary.
iv) To the best of our knowledge, after due inquiry, the
statements in the Prospectus under the headings, "RISK FACTORS -
Patents and Intellectual Property Rights" and "BUSINESS - Patents and
Intellectual Property Rights", are accurate in all material respects,
fairly represent the information disclosed therein and do not omit to
state any fact necessary to make the statements made therein complete
and accurate.
v) To the best of our knowledge, after due inquiry, the
statements in the Registration Statement and Prospectus do not contain
any untrue statement of a material fact with respect to the
intellectual property position of any of the Company or the
Subsidiary, or omit to state any material fact relating to the
intellectual property position of any of the Company or the Subsidiary
which is required to be stated in the Registration Statement and the
Prospectus or is necessary to make the statements therein not
misleading.
(g) At Closing Date, the Underwriters shall have received the
favorable opinion of Strasburger & Price, LLP, special patent counsel to the
Company, dated the Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
i) To the best of our knowledge, after due inquiry, except as
described in the Prospectus, each of the Company and the Subsidiary
owns or has the right to use, free and clear of all liens,
encumbrances, pledges, security interests, defects or other
restrictions or equities of any kind whatsoever, the Patents and
Licensees.
ii) To the best of our knowledge, after due inquiry, there is no
claim, action, or opposition pending, threatened or potential, which
affects or could affect the rights of any of the Company or the
Subsidiary with respect to any trademarks, service marks, copyrights,
service names, trade names, patents, patent applications or licenses
used in, or required for, the conduct of the
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<PAGE>
Company's or the Subsidiary's business, and all trademarks, service
marks, copyrights, service names, tradenames and patents, owned or
licensed to the Company or the Subsidiary, are valid.
iii) To the best of our knowledge, after due inquiry, except as
described in the Prospectus, none of the Company nor the Subsidiary is
under any obligation to pay royalties or fees to any third party with
respect to any material, technology or intellectual properties
developed, employed, licensed or used by the Company or the
Subsidiary.
iv) To the best of our knowledge, after due inquiry, the
statements in the Prospectus under the headings, "RISK FACTORS -
Patents and Intellectual Property Rights" and "BUSINESS - Patents and
Intellectual Property Rights", are accurate in all material respects,
fairly represent the information disclosed therein and do not omit to
state any fact necessary to make the statements made therein complete
and accurate.
v) To the best of our knowledge, after due inquiry, the
statements in the Registration Statement and Prospectus do not contain
any untrue statement of a material fact with respect to the
intellectual property position of any of the Company or the
Subsidiary, or omit to state any material fact relating to the
intellectual property position of any of the Company or the Subsidiary
which is required to be stated in the Registration Statement and the
Prospectus or is necessary to make the statements therein not
misleading.
(h) At Closing Date, the Underwriters shall have received the
favorable opinion of Hyman, Phelps & McNamara, P.C., special patent counsel to
the Company, dated the Closing Date, addressed to the Underwriters and in form
and substance satisfactory to Underwriters' Counsel, to the effect that:
i) the statements in the Prospectus under "RISK FACTORS--
Government Regulations" and "BUSINESS--Government Regulations" have
been reviewed by such counsel, and insofar as they refer to statements
of law, descriptions of statutes, licenses, rules or regulations or
legal conclusions, are correct in all material respects and do not
omit to state a fact necessary to make the statements contained
therein not misleading;
ii) to the best of such counsel's knowledge, after due inquiry,
the Company is in compliance in all material respects with all
federal, state and local laws, rules, orders, regulations (including,
but not limited to, the Federal Food, Drug and Cosmetic Act, and rules
and regulations promulgated thereunder and otherwise by the Food and
Drug Administration) respecting the production, use, testing,
manufacturing, labeling, distribution and marketing of products,
compounds or drugs;
- 30 -
<PAGE>
iii) to the best of such counsel's knowledge, after due inquiry,
there have not been and there are no lawsuits or regulatory
proceedings brought by or before the Federal Food and Drug
Administration (the "FDA") pending or threatened, affecting the
Company or any of its existing or proposed products;
iv) to the best of such counsel's knowledge, after due inquiry,
there is no action, suit, proceeding, inquiry, investigation,
litigation or governmental proceeding, domestic or foreign, pending or
threatened (or circumstances that may give rise to the same) involving
the Company's production, use, testing, manufacturing or marketing of
any of its existing or proposed products, which (i) questions the
authority of the Company to produce, use, test, manufacture or market
any of its existing or proposed products, (ii) questions the
completeness or accuracy of data generated by any clinical trials
being conducted by or on behalf of the Company, (iii) is required to
be disclosed in the Prospectus which is not so disclosed, or (iv)
might materially and adversely affect the condition, financial or
otherwise, or the earnings, prospects, value, operations or business
of the Company; and
v) to the best of such counsel's knowledge after due inquiry, the
Registration Statement and the Prospectus do not contain any untrue
statement of a material fact relating to the Company or any of its
existing or proposed products, or omit to state any material fact
relating to the Company or any of its existing or proposed products
which is required to be stated in the Registration Statement and the
Prospectus or is necessary to make the statements therein not
misleading.
(i) At Closing Date, the Underwriters shall have received the
favorable opinion of Robert E. Meshel, Esq., general counsel to the Company,
dated the Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriter's counsel, to the effect that:
(i) the statements in the Prospectus under "RISK FACTORS -
Litigation" and "BUSINESS - Legal Proceedings" have
been reviewed by such counsel, are true and correct as
of the date of Prospectus and the date hereof, and do
not omit to state a fact necessary to make the
statements contained therein not misleading.
(ii) to the best of such counsel's knowledge after due
inquiry, the Registration Statement and the Prospectus
do not contain any untrue statement of material fact
relating to the Company, or omit to state any material
fact relating to the Company which is required to be
stated in the Registration Statement and the Prospectus
or is necessary to make the statements therein not
misleading.
- 31 -
<PAGE>
(j) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of each of King & Isaacson; Zukerman Gore &
Brandeis, LLP; Davis, Bujold & Streck; Straburger & Price, LLP; Hyman, Phelps &
McNamara, P.C. and Robert E. Meshel, Esq., dated the Option Closing Date,
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel confirming as of Option Closing Date the respective
statements made by each of King & Isaacson; Zukerman Gore & Brandeis, LLP;
Davis, Bujold & Streck; Straburger & Price, LLP; Hyman, Phelps & McNamara, P.C.
and Robert E. Meshel, Esq.,in their respective opinions delivered on the Closing
Date.
(k) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
-------
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(l) Prior to each of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects, stockholders' equity or the business activities of the Company,
whether or not in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement and Prospectus;
(ii) there shall have been no transaction, not in the ordinary course of
business, entered into by the Company, from the latest date as of which the
financial condition of the Company is set forth in the Registration Statement
and Prospectus which is materially adverse to the Company; (iii) the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness; (iv) the Company shall not have issued any securities
(other than the Securities); the Company shall not have declared or paid any
dividend or made any distribution in respect of its capital stock of any class;
and there has not been any change in the capital stock of the Company, or any
material change in the debt (long or short term) or liabilities or obligations
of the Company (contingent or otherwise); (v) no material amount of the assets
of the Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vi) no action, suit or proceeding, at
law or in equity, shall have been pending or threatened (or circumstances giving
rise to same) against the Company, or affecting any of its properties or
business before or by any court or federal, state or foreign commission, board
or other administrative agency wherein an unfavorable decision, ruling or
finding may adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus; and (vii) no stop order shall have been issued under
the Act and no proceedings therefor shall have been initiated, threatened or
contemplated by the Commission.
(m) At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
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<PAGE>
i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing
Date or the Option Closing Date, as the case may be, and the Company
has complied with all agreements and covenants and satisfied all
conditions contained in this Agreement on its part to be performed or
satisfied at or prior to such Closing Date or Option Closing Date, as
the case may be;
ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or,
to the best of each of such person's knowledge, after due inquiry are
contemplated or threatened under the Act;
iii) The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading and neither the Preliminary
Prospectus nor any supplement thereto included any untrue statement of
a material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; and
iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (a) the
Company has not incurred up to and including the Closing Date or the
Option Closing Date, as the case may be, other than in the ordinary
course of its business, any material liabilities or obligations,
direct or contingent; (b) the Company has not paid or declared any
dividends or other distributions on its capital stock; (c) the Company
has not entered into any transactions not in the ordinary course of
business; (d) there has not been any change in the capital stock of
the Company or any material change in the debt (long or short-term) of
the Company; (e) the Company has not sustained any material loss or
damage to its property or assets, whether or not insured; (g) there is
no litigation which is pending or threatened (or circumstances giving
rise to same) against the Company, or any affiliated party of any of
the foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth; and (h) there
has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
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<PAGE>
(n) By the Closing Date, the Underwriters will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
(o) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from BDO:
i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the applicable Rules and Regulations;
ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company as of December 31,
1994 and 1995 and for the years then ended, and for the period from
inception (June 1, 1992) through December 31, 1995 included in the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the Rules and
Regulations thereunder and that the Representative may rely upon the
opinion of BDO with respect to such financial statements and
supporting schedules included in the Registration Statement;
iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes
of the stockholders and board of directors and the various committees
of the boards of directors of the Company, consultations with officers
and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries,
nothing has come to their attention which would lead them to believe
that (A) the pro forma financial information contained in the
Registration Statement and Prospectus does not comply as to form in
all material respects with the applicable accounting requirements of
the Act and the Rules and Regulations or is not fairly presented in
conformity with generally accepted accounting principles applied on a
basis consistent with that of the audited financial statements of the
Company or the unaudited pro forma financial information included in
the Registration Statement, (B) the unaudited financial statements and
supporting schedules of the Company included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and
Regulations or are not fairly presented in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the
Company included in the Registration Statement, or (C) at a specified
date not more than five (5) days prior to the effective date of the
Registration Statement, there has been any change in the capital stock
of the Company, any change in the long-term debt of the Company, or
any decrease in the stockholders' equity of the Company or any
decrease in the net current assets or net assets of the Company as
compared with amounts shown
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<PAGE>
in the December 31, 1995 balance sheets included in the Registration
Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease,
setting forth the amount of such change or decrease, and (D) during
the period from December 31, 1995 to a specified date not more than
five (5) days prior to the effective date of the Registration
Statement, there was any decrease in net revenues or net earnings of
the Company or increase in net earnings per common share of the
Company, in each case as compared with the corresponding period
beginning January 1, 1995 other than as set forth in or contemplated
by the Registration Statement, or, if there was any such decrease,
setting forth the amount of such decrease;
iv) setting forth, at a date not later than five (5) days prior
to the date of the Registration Statement, the amount of liabilities
of the Company (including a break-down of commercial paper and notes
payable to banks);
v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth in
the Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the
general accounting records, including work sheets, of the Company and
excluding any questions requiring an interpretation by legal counsel,
with the results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter and found them to be in
agreement; and
vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may request.
(p) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from BDO a letter, dated as of the Closing Date
or the Option Closing Date, as the case may be, to the effect that they reaffirm
the statements made in the letter furnished pursuant to subsection (i) of this
----------
Section hereof except that the specified date referred to shall be a date not
- -------
more than five days prior to the Closing Date or the Option Closing Date, as the
case may be, and, if the Company has elected to rely on Rule 430A of the Rules
and Regulations, to the further effect that they have carried out procedures as
specified in clause (v) of subsection (i) of this Section with respect to
---------- -------
certain amounts, percentages and financial information as specified by the
Representative and deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) and have found such amounts, percentages and financial information
to be in agreement with the records specified in such clause (v).
(q) The Company shall have delivered to the Representative a letter
from BDO addressed to the Company stating that they have not during the
immediately preceding two year period brought to the attention of the Company's
management any "weakness" as defined in Statement of Auditing Standards No. 60
"Communication of Internal Control Structure Related Matters Noted in an Audit,"
in any of the Company's internal controls.
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<PAGE>
(r) On each of the Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Shares.
(s) No order suspending the sale of the Securities in any jurisdiction
designated by the Representative pursuant to subsection (e) of Section 4 hereof
-------
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(t) On or before the Closing Date, the Company shall have executed and
delivered to the Representative, (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit 4.2 to the Registration Statement in
final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
(u) On or before the Closing Date, the Shares shall have been duly
approved for quotation on Nasdaq, subject to official notice of issuance.
(v) On or before the Closing Date, there shall have been delivered to
the Representative all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
---------------
(a) The Company, agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriter" shall include the
-------
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
-------
Underwriter ("controlling person") within the meaning of Section 15 of the Act
-------
or Section 20(a) of the Exchange Act, from and against any and all losses,
-------
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, and suits in respect thereof),
whatsoever (including but not limited to any and all costs and expenses
whatsoever reasonably incurred in investigating, preparing or defending against
such action, proceeding, investigation, inquiry or suit, commenced or
threatened, or any claim whatsoever), as such are incurred, to which the
Underwriter or such controlling person may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon (A) any untrue statement
or alleged untrue statement of a material fact contained (i) in any Preliminary
Prospectus, the Registration Statement or the Prospectus (as from time to time
amended and supplemented); (ii) in any post-effective amendment or amendments or
any new registration
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<PAGE>
statement and prospectus in which is included securities of the Company issued
or issuable upon exercise of the Securities; or (iii) in any application or
other document or written communication (in this Section 7 collectively called
-------
"application") executed by the Company or based upon written information
furnished by the Company filed, delivered or used in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, Nasdaq or any other
securities exchange, (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or any Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriters expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus.
The indemnity agreement in this subsection (b) shall be in addition to
any liability which the Underwriters may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section
-------
7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
-------
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it
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<PAGE>
from any liability which it may have under this Section 7 except to the extent
-------
that it has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action, investigation,
inquiry, suit or proceeding is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action, investigation, inquiry, suit or proceeding on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event
shall the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action, investigation,
inquiry, suit or proceeding or separate but similar or related actions,
investigations, inquiries, suits or proceedings in the same jurisdiction arising
out of the same general allegations or circumstances. Anything in this Section
-------
7 to the contrary notwithstanding, an indemnifying party shall not be liable for
any settlement of any claim or action effected without its written consent;
provided, however, that such consent was not unreasonably withheld. An
- -------- -------
indemnifying party will not, without the prior written consent of the
indemnified parties, settle compromise or consent to the entry of any judgment
with respect to any pending or threatened claim, action, investigation, inquiry,
suit or proceeding in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action), unless such settlement, compromise or consent
(i) includes an unconditional release of each indemnified party form all
liability arising out of such claim, action, suit or proceeding and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
-------
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
-------
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions, investigations, inquiries, suits or proceedings in respect thereof) (A)
in such
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<PAGE>
proportion as is appropriate to reflect the relative benefits received by each
of the contributing parties, on the one hand, and the party to be indemnified on
the other hand, from the offering of the Securities or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is the contributing
party and the Underwriters are the indemnified party, the relative benefits
received by the Company on the one hand, and the Underwriters, on the other,
shall be deemed to be in the same proportion as the total net proceeds from the
offering of the Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus. Relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, or by
the Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions, investigations,
inquiries, suits or proceedings in respect thereof) referred to above in this
subdivision (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action, claim, investigation, inquiry, suit or proceeding.
Notwithstanding the provisions of this subdivision (d) the Underwriters shall
not be required to contribute any amount in excess of the underwriting discount
applicable to the Securities purchased by the Underwriters hereunder. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
-------
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 7, each person,
-------
if any, who controls the Company within the meaning of the Act, each officer of
the Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to this subparagraph (d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit, inquiry,
investigation or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this
subparagraph (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this subparagraph (d), or to
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to
any liabilities which any indemnifying party may have at common law or
otherwise.
8. Representations and Agreements to Survive Delivery. All
--------------------------------------------------
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
-------
regardless of
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<PAGE>
any investigation made by or on behalf of any Underwriter, the Company, any
controlling person of any Underwriter or the Company, and shall survive
termination of this Agreement or the issuance and delivery of the Securities to
the Underwriters and the Representative, as the case may be.
9. Effective Date.
--------------
(a) This Agreement shall become effective at 10:00 a.m., New York City
time, on the next full business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Shares for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
-------- ------- --------
Agreement shall at all times be effective. For purposes of this Section 9, the
-------
Shares to be purchased hereunder shall be deemed to have been so released upon
the earlier of dispatch by the Representative of telegrams to securities dealers
releasing such shares for offering or the release by the Representative for
publication of the first newspaper advertisement which is subsequently published
relating to the Shares.
10. Termination.
-----------
(a) Subject to subsection (b) of this Section 10, the Representative
-------
shall have the right to terminate this Agreement, after the date hereof, (i) if
any domestic or international event or act or occurrence has materially
disrupted, or in the Representative's opinion will in the immediate future
materially adversely disrupt the financial markets; or (ii) any material adverse
change in the financial markets shall have occurred; or (iii) if trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Boston Stock Exchange, the
Chicago Board of Trade, the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange, the Commission or any other government authority having
jurisdiction; or (iv) if trading of any of the securities of the Company shall
have been suspended, or any of the securities of the Company shall have been
delisted, on any exchange or in any over-the-counter market; or (v) if the
United States shall have become involved in a war or major hostilities, or if
there shall have been an escalation in an existing war or major hostilities or a
national emergency shall have been declared in the United States; or (vi) if a
banking moratorium has been declared by a state or federal authority; or (vii)
if a moratorium in foreign exchange trading has been declared; or (viii) if the
Company or the Subsidiary shall have sustained a loss material or substantial to
the Company or the Subsidiary by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or not such
loss shall have been insured, will, in the Representative's opinion, make it
inadvisable to proceed with the delivery of the Securities; or (viii) if there
shall have occurred any outbreak or escalation of hostilities or any calamity or
crisis or there shall have been such a material adverse change in the conditions
or prospects of the Company, or such material adverse change in the general
market, political or economic conditions, in the United States or elsewhere as
in the Representative's judgment would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities or (ix) if M. Lee Hulsebus
shall no longer serve the Company in his present capacity.
- 40 -
<PAGE>
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a) the Company shall promptly
-------
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters
(less amounts previously paid pursuant to Section 5(c) above). Notwithstanding
-------
any contrary provision contained in this Agreement, if this Agreement shall not
be carried out within the time specified herein, or any extension thereof
granted to the Representative, by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied (including, without limitation, pursuant to
Section 6 or Section 12) then, the Company shall promptly reimburse and
- ------- -------
indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to Section 5(c) above). In addition, the
-------
Company shall remain liable for all Blue Sky counsel fees and expenses and
filing fees. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof),
--------
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
- ------- -------
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Substitution of the Underwriters. If one or more of the
--------------------------------
Underwriters shall fail (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 6, Section 10 or
------- -------
Section 12 hereof) to purchase the Securities which it or they are obligated to
- -------
purchase on such date under this Agreement (the "Defaulted Securities"), the
Representative shall have the right, within 24 hours thereafter, to make
arrangement for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Representative shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the total number of Firm Shares to be purchased on such date, the non-
defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all non-
defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
total number of Firm Shares, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any defaulting
-------
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
- 41 -
<PAGE>
12. Default by the Company. If the Company shall fail at the Closing
----------------------
Date or at any Option Closing Date, as applicable, to sell and deliver the
number of Shares which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Shares to be purchased on an Option Closing Date, the Underwriters may at
the Representative's option, by notice from the Representative to the Company,
terminate the Underwriters' obligation to purchase Option Shares from the
Company on such date) without any liability on the part of any non-defaulting
party other than pursuant to Section 5, Section 7 and Section 10 hereof. No
------- ------- -------
action taken pursuant to this Section shall relieve the Company from liability,
-------
if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as
-------
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative at 200 Park Avenue, 24th Floor, New York, New York 10166,
Attention: Scott A. Weisman, Esq., with a copy to Orrick, Herrington &
Sutcliffe, 666 Fifth Avenue, New York, New York 10103, Attention: Lawrence B.
Fisher, Esq. Notices to the Company shall be directed to the Company at 9171
Towne Centre Drive, Suite 355, San Diego, California 92122, Attention: M. Lee
Hulsebus, President and Chief Executive Officer, with a copy to Zukerman Gore &
Brandeis, L.L.P., 900 Third Avenue, New York, New York 10022, Attention:
Clifford A. Brandeis, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and
-------
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
-------
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed
------------
and enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement and the
----------------------------
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
- 42 -
<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
MEDICAL DEVICE TECHNOLOGIES, INC.
By: _____________________________
M. Lee Hulsebus
President and Chief Executive Officer
Confirmed and accepted as of
the date first above written.
FIRST ALLIED SECURITIES, INC.
For itself and as Representative
of the several Underwriters named
in Schedule A hereto.
By:_________________________
Name:
Title:
- 43 -
<PAGE>
SCHEDULE A
----------
Number of Firm Shares
Name of Underwriters to be Purchased
- -------------------- ---------------------
First Allied Securities, Inc...
---------
Total..................... 1,300,000
=========
- 44 -
<PAGE>
[STAMP]
February 6th 80
Clerk /s/ GS 50.00
ARTICLES OF INCORPORATION
OF
GOLD PROBE, INC.
WE, THE UNDERSIGNED natural persons of the age of twenty-one years or
more, acting as incorporators of a corporation under the Utah Business
Corporation Act, adopt the following Articles of Incorporation for such
corporation:
ARTICLE I - NAME
----------------
The name of this corporation is Gold Probe, Inc.
ARTICLE II - DURATION
---------------------
The duration of this corporation is perpetual.
ARTICLE III - PURPOSES
----------------------
The purpose or purposes for which this corporation is organized are:
a. To buy, sell, lease and manufacture mining and related equipment.
b. To acquire by purchase, exchange, gift, bequest, subscription or
otherwise, and to hold, own, mortgage, pledge, hypothecate, sell,
assign, transfer, exchange or otherwise dispose of or deal in or
with its own corporate securities or stock or other securities,
including without limitations, any shares of stock, bonds,
debentures, notes, mortgages, or other obligations, and any
certificates, receipts or other instruments representing rights
or interests therein or any property or assets created or issued
by any person, firm association, or corporation, or any
government or subdivisions, agencies or instrumentalities
thereof; to make payment therefore its own securities or to use
its unrestricted and unreserved earned surplus for the purchase
of its own shares, and to exercise as owner or holder of any
securities, any and all rights,
<PAGE>
powers and privileges in respect thereof.
c. To do each and every thing necessary, suitable or proper for the
accomplishment of any of the purposes or the attainment of any
one or more of the subjects herein enumerated, or which may at
any time appear conducive to or expedient for protection or
benefit of this corporation, and to do said acts as fully and to
the same extent as natural persons might, or could do, in any
part of the world as principals, agents, partners, trustees or
otherwise, either alone or in conjunction with any other person,
association or corporation.
d. The foregoing clauses shall be construed both as purposes and
powers and shall not be held to limit or restrict in any manner
the enjoyment and exercise thereof, as conferred by the laws of
the State of Utah; and it is the intention that the purposes and
powers specified in each of the paragraphs of this Article III
shall be regarded as independent purposes and powers.
ARTICLE IV - STOCK
------------------
The aggregate number of shares which this corporation shall have authority
to issue is 50,000,000 shares of $0.001. All stock of the corporation shall be
of the same class, common, and shall have the same rights and preferences.
Fully-paid stock of this corporation shall not be liable to any further call or
assessment.
ARTICLE V - AMENDMENT
---------------------
These Articles of Incorporation may be amended by the affirmative vote of
a majority of the shares entitled to vote on each such amendment.
ARTICLE VI - SHAREHOLDER RIGHTS
-------------------------------
The authorized and treasury stock of this corporation
<PAGE>
may be issued at such time, upon such terms and conditions and for such
consideration as the Board of Directors shall determine. Shareholders shall not
have pre-emptive rights to acquire unissued shares of the stock of this
corporation.
ARTICLE VII - CAPITALIZATION
----------------------------
This corporation will not commence business until consideration of a
value of at least $l,000 has been received for the issuance of shares.
ARTICLE VIII - INITIAL OFFICE AND AGENT
---------------------------------------
The address of this corporation's initial registered office and the name
of its original registered agent at such address is:
Nicholas Julian
3665 South West Temple
Salt Lake City, Utah 84115
ARTICLE IX - DIRECTORS
----------------------
The number of Directors constituting the initial Board of Directors of
this corporation is three. The names and addresses of persons who are to serve
as Directors until the first annual meeting of stockholders, or until their
successors are elected and qualify, are:
NAME, STREET ADDRESS, CITY AND STATE:
Nicholas Julian, 3665 South West Temple, Salt Lake City, Utah 84115
Susan Larsen, 3841 South 300 East, Salt Lake City, Utah 84115
Barry Lynn Burkinshaw, 1651 Princeton Avenue, Salt Lake City, Utah 84105
ARTICLE X - INCORPORATORS
-------------------------
The name and address of each Incorporator is:
NAME, STREET ADDRESS, CITY AND STATE:
Nicholas Julian, 3665 South West Temple, Salt Lake City, Utah 84115
Susan Larsen, 3841 South 300 East, Salt Lake City, Utah 84115
Barry Lynn Burkinshaw, 1651 Princeton Avenue, Salt Lake City, Utah 84105
ARTICLE XI
----------
COMMON DIRECTORS - TRANSACTIONS BETWEEN CORPORATIONS
----------------------------------------------------
No contract or other transaction between this corporation
<PAGE>
and one or more of its Directors or any other corporation, firm, association or
entity in which one or more of its Directors are directors or officers or are
financially interested, shall be either void or voidable because of such
relationship or interest, or because such Director or Directors are present at
the meeting of the Board of Directors, or a committee thereof which authorizes,
approves or ratifies such contract or transaction, or because his or their votes
are counted for such purpose if: (a) the fact of such relationship or interest
is disclosed or known to the Board of Directors or committee which authorizes,
approves or ratifies the contract or transaction by vote or consent sufficient
for the purpose without counting the votes or consents of such interested
Director; or (b) the fact of such relationship or interest is disclosed or known
to the shareholders entitled to vote and they authorize, approve or ratify such
contract or transaction by vote or written consent; or (c) the contract or
transaction is fair and reasonable to the corporation.
Common or interested Directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or committee thereof which
authorizes, approves or ratifies such contract or transaction.
DATED this 4th day of February, 1980
/s/ Barry Lynn Burkinshaw
-----------------------------
/s/ Susan Larsen
-----------------------------
/s/ Nicholas Julian
-----------------------------
(SIGNATURES OF INCORPORATORS)
STATE OF UTAH )
:ss
COUNTY OF SALT LAKE )
I, /s/ Robert Meredith, a Notary Public, hereby certify that on the 11th
day of February, 1980, personally appeared before me Nicholas Julian, Susan
Larsen and Barry Lynn Burkinshaw who, being by me first duly sworn, sever-
<PAGE>
ally declared that they are the persons who signed the foregoing document as
incorporators and that the statements therein contained are true.
DATED this 4th day of February, 1980.
/s/ Robert Meredith
---------------------------
NOTARY PUBLIC, Residing In:
Salt Lake County, Utah
My Commission Expires:
[NOTARY SEAL]
- -----------------------
<PAGE>
[STATE OF UTAH SEAL - EXECUTIVE DEPARTMENT]
Office of Lt. Governor/Secretary of State
CERTIFICATE OF AMENDMENT
OF
HAILEY ENERGY CORPORATION
I, DAVID S. MONSON, Lt. Governor/Secretary of State of the State of Utah,
hereby certify that duplicate originals of Articles of Amendment to the Articles
of Incorporation of
HAILEY ENERGY CORPORATION formerly
GOLD PROBE, INC.
duly signed and verified pursuant to the provisions of the Utah Business
Corporation Act, have been received in my office and are found to conform to
law.
ACCORDINGLY, by virtue of the authority vested in me by law, I hereby issue
this Certificate of Amendment to the Articles of Incorporation of
HAILEY ENERGY CORPORATION
and attach hereto a duplicate original of the Articles of Amendment.
File No. #85428
IN TESTIMONY WHEREOF, I have hereunto
set my hand and affixed the Great Seal
of the State of Utah at Salt Lake City,
this 27th day of January 1982, A.D.
/s/ DAVID S. MONSON
-----------------------------------
LT. GOVERNOR/SECRETAY OF STATE
<PAGE>
CERTIFICATE OF AMENDMENT
[LT. GOVERNOR'S
DATE STAMP] TO THE ARTICLES OF INCORPORATION
OF
GOLD PROBE, INC.
A special meeting of Shareholders of Gold Probe, Inc., was held on the 5th
day of January, 1982, pursuant to notice. It was determined that it is in the
best interest of the Corporation to amend the Corporation's Articles of
Incorporation, and in connection therewith, the following resolutions were
unanimously adopted by the Corporation Shareholders as follows:
RESOLVED: Article I be amended to read as follows:
ARTICLE I. The name of this corporation is HAILEY ENERGY CORPORATION.
RESOLVED: Article IV be amended as follows:
ARTICLE IV. The aggregate number of shares which this Corporation
shall have authority to issue is 25,000,000 shares of $0.005 par
value. All stock of the corporation shall be of the same class,
common, and shall have the same rights and preferences. Fully-paid
stock of this corporation shall not be liable to any further call or
assessment.
RESOLVED: Article VIII be amended to read as follows:
ARTICLE VIII. The address of this corporation's registered office and
the name of its original registered agent at such address is:
ROBERT J. NIELSON
10 West Broadway, Suite 510
Salt Lake City, Utah 84105
<PAGE>
At the Special Meeting of Shareholders of Gold Probe, Inc., there were five
million thirty thousand (5,030,000) common shares issued and outstanding, and
there were three million one hundred fifty thousand (3,150,000) common shares
present or represented by proxy at the meeting. All shares voted unanimously in
favor of the foregoing amendments, and no shares were voted against the
amendments.
The shareholders at the special meeting of shareholders unanimously
approved a reverse split of the authorized shares of fifty million (50,000,000),
and also approved the change in authorized shares from fifty million
(50,000,000) shares to twenty-five million (25,000,000) shares.
IN WITNESS WHEREOF, we, the President and Secretary of Hailey Energy
Corporation have hereunder set our hands this 5th day of January, 1982.
/s/ Scott Hailey
---------------------------------
SCOTT HAILEY, President
ATTEST:
/s/ Loyce Hailey
- ------------------------------------
LOYCE HAILEY, Secretary/Treasurer
* * *
STATE OF UTAH )
) ss.
COUNTY OF SALT LAKE )
On this 5th day of January, 1982, personally appeared before me SCOTT
HAILEY and LOYCE HAILEY, known to me to be the President and Secretary-Treasurer
of the Corporation,
<PAGE>
and that they executed the foregoing instrument freely and voluntarily and for
the uses and purposes therein mentioned.
/s/
-------------------------------------
NOTARY PUBLIC
Residing in Salt Lake City
My Commission Expires:
November 1, 1983
<PAGE>
[STATE OF UTAH SEAL - EXECUTIVE DEPARTMENT]
Office of Lt. Governor/Secretary of State
CERTIFICATE OF AMENDMENT
OF
HAILEY ENERGY CORPORATION
I, DAVID S. MONSON, Lt. Governor/Secretary of State of the State of Utah,
hereby certify that duplicate originals of Articles of Amendment to the Articles
of Incorporation of
HAILEY ENERGY CORPORATION formerly
GOLD PROBE, INC.
duly signed and verified pursuant to the provisions of the Utah Business
Corporation Act, have been received in my office and are found to conform to
law.
ACCORDINGLY, by virtue of the authority vested in me by law, I hereby issue
this Certificate of Amendment to the Articles of the Articles of Incorporation
of
HAILEY ENERGY CORPORATION
and attach hereto a duplicate original of the Articles of Amendment
File No. #85428
IN TESTIMONY WHEREOF, I have hereunto
set my hand and affixed the Great Seal
of the State of Utah at Salt Lake City,
this 27th day of January 1982, A.D.
/s/ DAVID S. MONSON
-----------------------------------
LT. GOVERNOR/SECRETAY OF STATE
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
HAILEY ENERGY CORPORATION
The annual meeting of shareholders of Hailey Energy Corporation was held
on the 26th day of September, 1986, at 104 Pine Street, Suite 408, Alexander
Building, Abilene, Texas 79601. On the date of the meeting there were
shares issued and outstanding and there were present or voted by
proxy at the meeting a total of 15,983,137 of which 15,844,227 common shares
voted for the following amendment to the Company's Articles of Incorporation,
and of which 15,899 common shares abstained, and of which 122,911 shares voted
against the following amendment. A clear majority of the Company's shares issued
and outstanding have been voted in favor of the following amendment:
ARTICLE IV
The aggregate number of shares which this Corporation shall have
authority to issue is 100,000,000 shares of $.005 par value. All stock of the
corporation shall be of the same class, common, and shall have the same rights
and preferences. Fully-paid stock of this corporation shall not be liable to any
further call or assessment.
WHEREUNTO, the Company's President, Scott F. Hailey, and the Company's
Secretary, Loyce B. Hailey have signed this instrument as of this 24th day of
October, 1986.
HAILEY ENERGY CORPORATION
By: /s/ Scott F. Hailey
-------------------------------------
Scott F. Hailey
President
ATTEST:
By: /s/ Loyce B. Hailey
--------------------------------
Loyce B. Hailey
Secretary
<PAGE>
CORPORATE ACKNOWLEDGMENT
STATE OF Texas )
) ss.
COUNTY OF Taylor )
On the 24th day of October, 1986, personally appeared before me, SCOTT
F. HAILEY and LOYCE B. HAILEY, who being by me duly sworn did say that they are
the President and Secretary, respectively, of HAILEY ENERGY CORPORATION, and
that they have read and know the contents of the above and foregoing instrument,
and that the same was signed by them on behalf of said corporation by authority
of a resolution of its Board of Directors and that said corporation executed the
same.
/s/ Lovelle Zoth (Lovelle Zoth)
----------------------------------------
NOTARY PUBLIC
My Commission Expires 5-27-90
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
HAILEY ENERGY CORPORATION
A meeting of shareholders of Hailey Energy Corporation was held on the 26th day
----
of October 1990 pursuant to notice. It was determined that it is in the best
------------
interest of the Corporation to reverse split the common stock of the Corporation
on a 1 for 30 basis, and to correspondingly increase the par value of the stock
of the Company from $0.005 to $O.15 per share. In connection therewith, a
majority of the shares issued and outstanding voted to amend the Corporation's
Articles of Incorporation to increase the par value, as follows:
RESOLVED: Article IV to be amended to read as follows:
ARTICLE IV. The aggregate number of shares which this Corporation shall
have authority to issue is 100,000,000 shares of $0.15 par value. All stock
of the Corporation shall be of the same class, common, and shall have the
same rights and preferences. Fully-paid stock of this Corporation shall be
of the same class, common, and shall have the same rights and preferences.
Fully-paid stock of this Corporation shall not be liable to any further
call or assessment.
IN WITNESS WHEREOF, we, the President and Secretary of HAILEY ENERGY
CORPORATION have hereunder set our hands this 31st day of October, 1990.
---- -------
[CORPORATE SEAL] /s/ Scott F. Hailey
---------------------------
SCOTT F. HAILEY, President
ATTEST:
/s/ Loyce B. Hailey
- ------------------------------------
LOYCE B. HAILEY, Secretary/Treasurer [DIVISION DIRECTOR'S STAMP]
<PAGE>
STATE OF TEXAS )
) ss.
COUNTY OF TAYLOR )
On this 31st day of October 1990, personally appeared before me SCOTT
HAILEY and LOYCE HAILEY, known to me to be the President and Secretary-Treasurer
of the Corporation, and that they executed the foregoing instrument freely and
voluntarily and for the uses and purposes therein mentioned.
/s/ Adie Jerrene Parks
---------------------------
NOTARY PUBLIC
My Commission Expires:
4-30-94 [SEAL]
<PAGE>
[LETTERHEAD OF HAILEY ENERGY CORPORATION]
Secretary of State
State of Utah
Department of Commerce
Division of Corporation
P. O. Box 45801
Salt Lake City, UT 84145-0801
October 31, 1990
Dear Secretary of State,
Please find the enclosed Certificate of Amendment to the Articles of
Incorporation of Hailey Energy Corporation. If you need any further information,
or need to send bill of a charge, please feel free to contact my office.
Sincerely
[PICTURE OF AN OIL RIG]
/s/ Scott F. Hailey
---------------------------
Scott F. Hailey
President
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
HAILEY ENERGY CORPORATION
The undersigned do hereby declare and certify that:
(1) They are respectively the President and Secretary of Hailey
Energy Corporation, a Utah corporation.
(2) That this Certificate of Amendment was authorized and adopted by
a majority of the Shareholders of the Corporation, and,
(3) That the Amendments contained herein were adopted, ratified, and
approved by more than a majority of the shares outstanding of
this corporation, there being 5,032,616 shares of the corporation
issued and outstanding, and the following resolution being
adopted by 3,037,302 shares voting in favor of with 170,039
shares voting against at the Annual Shareholders Meeting held the
12th day of November, 1992.
RESOLVED, that Article I of the Articles of Incorporation of the
Company be and hereby shall be amended to read "The name of the
corporation is CytoProbe Corporation."
The undersigned do further declare and certify that they have made and
filed this Certificate of Amendment pursuant to the Resolutions adopted by the
shareholders and Directors of this corporation as hereinabove stated.
We, D. V. Hendrick and James S. Ross, do hereby certify that we are
respectively the duly elected President and the duly elected and qualified
Secretary and keeper of the records and corporate seal of Hailey Energy
Corporation, a corporation organized and existing under the laws of the State of
Utah, and that the above is a true and correct copy of a resolution duly adopted
at a meeting of the Shareholders thereof, convened and held in accordance with
law and the Bylaws of said Corporation on the 12th day of November, 1992 and
that such resolution is now in full force and effect.
IN WITNESS THEREOF, we have affixed our names as President and as
Secretary of the Corporation this 17th day of November, 1992.
/s/ James Ross /s/ D. V. Hendrick
- ----------------------------- --------------------------------
James Ross, Secretary D. V. Hendrick, Ph.D., President
<PAGE>
BYLAWS
OF
MEDICAL DEVICE TECHNOLOGIES, INC.
(formerly Hailey Energy Corporation)
A Utah Corporation
ARTICLE I
OFFICES
-------
Section 1. The principal office of the Corporation shall be located in 104
Pine Street, Suite 408, Abilene, Texas 79604. The Corporation may have such
other offices, either within or without the State of Utah as the Board of
Directors may designate or as the business of the Corporation may require from
time to time.
The registered office of the Corporation required by the Utah business
Corporation Act to be maintained in the State of Utah may be, but need not be,
identical with the principal offices in the State of Utah, and the address of
the registered office may be changed, from time to time, by the Board of
Directors.
ARTICLE II
STOCKHOLDERS
------------
Section 1. Annual Meeting. The annual meeting of stockholders shall be
--------------
held at the principal office of the Corporation at 104 Pine Street, Suite 408,
Abilene, Texas 79604, or at such other places on the third Friday of January or
at such other times as the Board of Directors may, from time to time, determine.
If the day so designated falls upon a legal holiday then the meeting shall be
held upon the first business day thereafter. The Secretary shall serve
personally or by mail a written notice thereof, not less than twenty (20) nor
more than fifty (50) days previous to such meeting, addressed to each
stockholder at his address as it appears on the stock
<PAGE>
book; but at any meeting at which all stockholders shall be present, or of which
all stockholders not present have waived notice in writing, the giving of notice
as above required may be dispensed with.
Section 2. Special Meetings. Special meetings of stockholders other than
----------------
those regulated by statute, may be called at any time by a majority of the
Directors. Notice of such meeting stating the place, day and hour and the
purpose for which it is called, shall be served personally or by mail, not less
than ten (10) days before the date set for such meeting. If mailed, it shall be
directed to a stockholder at his address as it appears on the stock book; but at
any meeting at which all stockholders shall be present, or of which stockholders
not present have waived notice in writing, the giving of notice as above
described may be dispensed with. The Board of Directors shall also, in like
manner, call a special meeting of stockholders whenever so requested in writing
by stockholders representing not less than twenty percent (20%) of the capital
stock of the Corporation entitled to vote at the meeting. The President may in
his direction call a special meeting of stockholders upon ten (10) days notice.
No business other than that specified in the call for the meeting shall be
transacted at any special meeting of the stockholders, except upon the unanimous
consent of all the stockholders entitled to notice thereof.
Section 3. Closing of Transfer Books or Fixing of Record Date. For the
--------------------------------------------------
purpose of determining stockholders entitled to receive notice of or to vote at
any meeting of stockholders or any adjournment thereof, or stockholders entitled
to receive payment of any dividend; or in order to make a determination of
stockholders for any other proper purpose, the Board of Directors of the
Corporation may provide that the stock transfer books shall be closed for a
stated period not to exceed, in any case,
-2-
<PAGE>
fifty (50) days. If the stock transfer books shall be closed for the purpose of
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least fifteen (15) days
immediately preceding such meeting. In lieu of closing the stock transfer books,
the Board of Directors may fix in advance a date as the record date for any such
determination of stockholders, such date in any case to be not more than fifty
(50) days, and in case of a meeting of stockholders, not less than fifteen (15)
days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. If the stock transfer books are
not closed, and no record date is fixed for the determination of stockholders
entitled to receive notice of or to vote at a meeting of stockholders, or
stockholders entitled to receive payment of a dividend, the date on which notice
of the meeting is mailed or the date on which the resolution of the Board of
Directors declaring such dividend is adopted, as the case may be, shall be the
record date for such determination as to determination of stockholders entitled
to vote at any meeting of stockholders has been made as provided in this
section, such determination shall apply to any adjournment thereof.
Section 4. Voting. At all meetings of the stockholders of record having
------
the right to vote, subject to the provisions of Section 3, each stockholder of
the Corporation is entitled to one (1) vote for each share of stock having
voting power standing in the name of such stockholder on the books of the
Corporation. Votes may be cast in person or by written authorized proxy.
Section 5. Proxy. Each proxy must be executed in writing by the
-----
stockholder of the Corporation or his duly authorized attorney.
-3-
<PAGE>
Such proxy shall be filed with the Secretary of the Corporation before or at the
time of the meeting. No proxy shall be valid after the expiration of eleven (11)
months from the date of its execution unless it shall have specified therein
its duration.
Every proxy shall be revocable at the discretion of the person executing
it or of his personal representatives or assigns.
Section 6. Voting of Shares by Certain Holders. Shares standing in the
-----------------------------------
name of another corporation may be voted by such officer, agent or proxy as the
by-laws of such corporation may prescribe, or, in the absence of such provision,
as the Board of Directors of such corporation may determine.
Shares held by an administrator, executor, guardian or conservator may be
voted by him either in person or by proxy without a transfer of such shares into
his name. Shares standing in the name of a trustee may be voted by him either in
person or by proxy, but no trustee shall be entitled to vote shares held by him
without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer thereof into his name if authority as to do be
contained in an appropriate order of the Court by which such receiver was
appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to the Corporation or held by
-4-
<PAGE>
it in a fiduciary capacity shall not be voted, directly or indirectly, at any
meeting, and shall not be counted in determining the total number of outstanding
shares at any given time.
Section 7. Election of Directors. At each election for Directors, every
---------------------
stockholder entitled to vote at such election shall have the right to vote, in
person or by proxy, the number of shares owned by him for as many persons as
there are Directors to be elected and for whose election he has a right to vote.
There shall be no cumulative voting.
Section 8. Quorum. A majority of the outstanding shares of the Corporation
------
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of the stockholders.
If a quorum shall not be present or represented, the stockholders entitled
to vote thereat, present in person or by proxy, shall have the power to adjourn
the meeting, from time to time, until a quorum shall be present or represented.
At such rescheduled meeting at which a quorum shall be present or represented
any business or any specified item of business may be transacted which might
have been transacted at the meeting as originally notified.
The number of votes or consents of the holders of any class of stock
having voting power which shall be necessary for the transaction of any business
or any specified item of business at any meeting of stockholders, or the giving
of any consent, shall be a majority of the outstanding shares of the Corporation
entitled to vote, represented in person or by proxy.
Section 9. Informal Action by Stockholders. Any action required to be
-------------------------------
taken at a meeting of the stockholders, or any other action
-5-
<PAGE>
which may be taken at a meeting of the stockholders, may be taken without a
meeting if a consent in writing setting forth the action so taken shall be
signed by all of the stockholders entitled to vote with respect to the subject
matter thereof.
ARTICLE III
DIRECTORS
---------
Section 1. Number. The affairs and business of this Corporation shall be
------
managed by a Board of Directors. The first Board of Directors shall consist of
seven (7) members. Thereafter the number of Directors may be increased to not
more than nine (9) by resolution of the Board of Directors. Directors need not
be residents of the State of Utah and need not be stockholders of the
Corporation.
Section 2. Election. The Directors shall be elected at each annual meeting
--------
of the stockholders, but if any such annual meeting is not held, or the
Directors are not elected thereat, the Directors may be elected at any special
meeting of the stockholders held for that purpose.
Section 3. Term of Office. The term of office of each of the Directors
--------------
shall be one (1) year, which shall continue until his successor has been elected
and qualified.
Section 4. Duties. The Board of Directors shall have the control and
------
general management of the affairs and business of the Corporation. Such
Directors shall in all cases act as a Board, except as herein provided in
Section 11, regularly convened, by a majority, and may adopt such rules and
regulations for the conduct of meetings and the management of the Corporation,
as may be deemed proper, so long as it is not inconsistent with these By-Laws
and the laws of the State of Utah.
-6-
<PAGE>
Section 5. Directors' Meetings. Regular meetings of the Board of Directors
-------------------
shall be held immediately following the annual meeting of the stockholders, and
at such other time and places as the Board of Directors may determine. Special
meetings of the Board of Directors may be called by the President, or upon the
written request of two (2) Directors.
Section 6. Notice of Meetings. Notice of meetings other than the regular
------------------
annual meeting shall be given by service upon each Director in person, or by
mailing to him at his last known address, at least three (3) days before the
date therein designated for such meeting, including the day of mailing, of a
written or printed notice thereof specifying the time and place of such meeting,
and the business to be brought before the meeting, and no business other than
that specified in such notice shall be transacted at any special meeting. At any
Directors' meeting at which a quorum of the Board of Directors shall be present
(although held without notice), any and all business may be transacted which
might have been duly called if a quorum of the Directors waive or are willing to
waive the notice requirements of such meeting.
Any Directors may waive notice of any meeting under the provisions of
Article XII. The attendance of a Director at a meeting shall constitute a waiver
of notice of such meeting except where a Director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully convened or called.
Section 7. Voting. At all meetings of the Board of Directors, each
------
Director is to have one (1) vote. The act of a majority of the Directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors
-7-
<PAGE>
Section 8. Vacancies. Vacancies in the Board occurring between annual
---------
meetings shall be filled for the unexpired portion of the term by a majority of
the remaining Directors.
Section 9. Removal of Directors. Any one or more of the Directors may be
--------------------
removed, with or without cause, at any time, by a vote of the stockholders
holding a majority of the stock, at any special meeting called for that purpose.
Section 10. Quorum. The number of Directors who shall be present at any
------
meeting of the Board of Directors in order to constitute a quorum for the
transaction of any business or any specified item of business shall be a
majority.
The number of votes of Directors that shall be necessary for the
transaction of any business of any specified item of business at any meeting of
the Board of Directors shall be a majority.
If a quorum shall not be present at any meeting of the Board of Directors,
those present may adjourn the meeting, from time to time, until a quorum shall
be present.
Section 11. Executive Committee. By resolution of the Board of Directors
-------------------
and at their option, the Directors may designate an Executive Committee which
includes at least three (3) Directors, to manage and direct the daily affairs of
the Corporation. Said Executive Committee shall have and may exercise all of the
authority that is vested in the Board of Directors as if the Board of Directors
were regularly convened, except that the Executive Committee shall not have
authority to amend these By-laws.
At all meetings of the Executive Committee, each member of said committee
shall have one (1) vote and the act of a majority of the members present at a
meeting at which a quorum is present shall be the act of the Executive
Committee.
-8-
<PAGE>
The number of Executive Committee members who shall be present at any
meeting of the Executive Committee in order to constitute a quorum for the
transaction of business or any specified item of business shall be a majority.
The number of votes of Executive Committee members that shall be necessary
for the transaction of any business or any specified item of business at any
meeting of the Executive Committee shall be a majority.
Section 12. Compensation. By resolution of the Board of Directors, the
------------
Directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors or each may be paid a stated salary as Director. No such
payment shall preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefor.
Section 13. Presumption of Assent. A Director of the Corporation who is
---------------------
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent is entered in the minutes of the meeting or unless he shall file his
written dissent to such action with the person acting as the Secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a Director
who voted in favor of such action.
ARTICLE IV
OFFICERS
--------
Section 1. Number. The officers of the Corporation shall be: President,
------
Vice-President, Secretary, and Treasurer, and such assistant Secretaries as the
President shall determine. Any officer may hold more than one (1) office.
-9-
<PAGE>
Section 2. Election. All officers of the Corporation shall be elected
--------
annually by the Board of Directors at its meeting held immediately following the
meeting of stockholders, and shall hold office for the term of one (1) year or
until their successors are duly elected. Officers need not be members of the
Board of Directors.
The Board may appoint such other officers, agents and employees as it
shall deem necessary who shall have such authority and shall perform such duties
as, from time to time, shall be prescribed by the Board.
Section 3. Duties of Officers. The duties and powers of the officers of
------------------
the Corporation shall be as follows:
PRESIDENT
---------
The President shall, when present, preside at all meetings of the
stockholders and Directors. He shall present at each annual meeting of the
stockholders and Directors, a report of the condition of the business of the
Corporation. He shall cause to be called regular and special meetings of the
stockholders and Directors in accordance with these By-Laws. He shall appoint
and remove, employ and discharge, and fix the compensation of all agents,
employees, and clerks of the Corporation other than the duly appointed officers,
subject to the approval of the Board of Directors. He shall sign and make all
contracts and agreements in the name of the Corporation, subject to the approval
of the Board of Directors. He shall see that the books, reports, statements and
certificates required by the statutes are properly kept, made and filed
according to law. He shall sign all certificates of stock, notes, drafts, or
bills of exchange, warrants or other orders for the payment of money duly drawn
by the Treasurer; and he shall enforce these By-Laws
-10-
<PAGE>
and perform all the duties incident to the position and office, and which are
required by law.
VICE-PRESIDENT
--------------
During the absence or inability of the President to render and perform his
duties or exercise his powers, as set forth in these By-Laws or in the acts
under which the Corporation is organized, the same shall be performed and
exercised by the Vice-President; and when so acting, he shall have all the
powers and be subject to all the responsibilities hereby given to or imposed
upon such President.
SECRETARY
---------
The Secretary shall keep the minutes of the meetings of the Board of
Directors and of the stockholders in appropriate books, provided for that
purpose. He shall give and serve all notices of the Corporation. He shall be
custodian of the records and of the corporate seal and affix the latter when
required. He shall keep the stock and transfer books in the manner prescribed by
law, so as to show at all times the amount of capital stock issued and
outstanding; the manner and the time compensation for the same was paid; the
names of the owners thereof, alphabetically arranged; the number of shares owned
by each; the time at which each person became such owner; and the amount paid
thereon; and keep such stock and transfer books open daily during the business
hours of the office of the Corporation, subject to the inspection of any
stockholder of the Corporation, and permit such stockholder to make extracts
from said books to the extent prescribed by law. He shall sign all certificates
of stock. He shall present to the Board of Directors at their stated meetings,
all communications addressed to him officially by the President or any officer
or stockholder of the Corporation; and he shall attend to all correspondence and
perform all the duties incident to the office of Secretary.
-11-
<PAGE>
TREASURER
---------
The Treasurer shall have the care and custody of and be responsible for
all the funds and securities of the Corporation, and deposit all such funds in
the name of the Corporation in such bank or banks, trust company or trust
companies or safe deposit vaults as the Board of Directors may designate. He
shall exhibit at all reasonable times his books and accounts to any Director or
stockholder of the Corporation upon application at the office of the Corporation
during business hours. He shall render a statement of the conditions of the
finances of the Corporation at each regular meeting of the Board of Directors,
and at such other times as shall be required of him, and a full financial report
at the annual meeting of the stockholders. He shall keep, at the office of the
Corporation, correct books of account of all its business and transactions and
such other books of account as the Board of Directors may require. He shall do
and perform all duties appertaining to the office of Treasurer. The Treasurer
shall, if required by the Board of Directors, give to the Corporation such
security or bond for the faithful discharge of his duties as the Board may
direct. He shall perform such other duties as from time to time may be assigned
to him by the president or by the Directors.
Section 4. Bond. The Treasurer shall, if required by the Board of
----
Directors, give to the Corporation such security for the faithful discharge of
his duties as the Board may direct.
Section 5. Vacancies, How Filled. All vacancies in any office shall be
---------------------
filled by the Board of Directors without undue delay, either at its regular
meeting or at a meeting specifically called for that purpose. In the case of
absence of any officer of the Corporation or for any reason that the Board of
Directors may deem sufficient, the Board may, except as specifically
-12-
<PAGE>
otherwise provided in these By-Laws, delegate the power or duties of such
officers to any other officer or Director for the time being, provided, a
majority of the entire Board concur therein.
Section 6. Compensation of Officers. The officers shall receive such salary
------------------------
or compensation as may be determined by the Board of Directors.
Section 7. Removal of Officers. The Board of Directors may remove any
-------------------
officer, by a majority vote, at any time with or without cause.
ARTICLE V
CERTIFICATES OF STOCK
---------------------
Section 1. Description of Stock Certificates. The certificates of stock
---------------------------------
representing shares shall be in such form as shall be determined by the
Directors and shall be numbered and registered in the order in which they are
issued. They shall be bound in a book and shall be issued in consecutive order
therefrom, and in the margin thereof shall be entered the name of the person
owning the shares therein represented, with the number of shares and the date
thereof. Such certificates shall exhibit the holder's name, number of shares and
date of issue. They shall be signed by the President or Vice President, and
countersigned by the Secretary or Treasurer and sealed with the Seal of the
Corporation.
Section 2. Transfer of Stock. The stock of the Corporation shall be
-----------------
assignable and transferable on the books of the Corporation only by the person
in whose name it appears on said books, his legal representatives or by
his duly authorized agent. In case of transfer by attorney, the power of
attorney, duly executed and acknowledged, shall be deposited with the Secretary.
In all cases of transfer, the former certificate must be surrendered up and
cancelled before a new certificate may be issued. No transfer shall be made upon
the books of the Corporation with-
-13-
<PAGE>
in ten (10) days next preceding the annual meeting of the stockholders.
Section 3. Lost Certificates. If a stockholder shall claim to have lost or
-----------------
destroyed a certificate or certificates of stock issued by the Corporation, the
Board of Directors may, at its discretion, direct a new certificate or
certificates to be issued, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost or destroyed, and upon the
deposit of a bond or other indemnity in such form and with such sureties if any
that the Board may require.
ARTICLE VI
SEAL
----
Section 1. Seal. The seal of the Corporation shall be as follows:
----
ARTICLE VII
DIVIDENDS
---------
Section 1. When Declared. The Board of Directors shall by vote declare
-------------
dividends from the surplus profits of the Corporation whenever, in their
opinion, the condition of the Corporation's affairs will render it expedient for
such dividends to be declared.
Section 2. Reserve. The Board of Directors may set aside, out of the net
-------
profits of the Corporation available for dividends, such sum or sums (before
payment of any dividends) as the Board, in their absolute discretion, think
proper as a reserve fund, to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the Directors shall think conducive to the interest of the
Corporation, and they may abolish or modify any
-14-
<PAGE>
such reserve in the manner in which it was created.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 1. Any person made a party to or involved in any civil, criminal or
administrative action, suit or proceeding by reason of the fact that he or his
testator or intestate is or was a Director, officer, or employee of the
Corporation, or of any corporation which he, the testator, or intestate served
as such at the request of the Corporation, shall be indemnified by the
Corporation against expenses reasonably incurred by him or imposed on him in
connection with or resulting from the defense of such action, suit, or
proceeding and in connection with or resulting from any appeal thereon, except
with respect to matters as to which it is adjudged in such action, suit or
proceeding that such officer, Director, or employee was liable to the
Corporation, or to such other corporation, for negligence or misconduct in the
performance of his duty. As used herein the term "expense" shall include all
obligations incurred by such person for the payment of money, including without
limitation, attorneys' fees, judgments, awards, fines, penalties, and amounts
paid in satisfaction of judgment or in settlement of any such action, suit, or
proceedings, except amounts paid to the Corporation or such other corporation by
him.
A judgment or conviction whether based on plea of guilty or nolo contendere
or its equivalent, or after trial, shall not of itself be deemed an adjudication
that such Director, officer or employee is liable to the Corporation, or such
other corporation, for negligence or misconduct in the performance of his
duties. Determination of the rights of such indemnification and the amount
thereof may be made at the option of the person to be indemnified pursuant to
procedure set forth, from time to time, in the By-Laws, or by any of the
following procedures:
-15-
<PAGE>
a) order of the Court or administrative body or agency having
jurisdiction of the action, suit, or proceeding;
b) resolution adopted by a majority of the quorum of the Board of
Directors of the Corporation without counting in such majority any
Directors who have incurred expenses in connection with such action,
suit or proceeding;
c) if there is no quorum of Directors who have not incurred expense in
connection with such action, suit, or proceeding, then by resolution
adopted by a majority of the committee of stockholders and Directors
who have not incurred such expenses appointed by the Board of
Directors;
d) resolution adopted by a majority of the quorum of the Directors
entitled to vote at any meeting; or
e) order of any Court having jurisdiction over the Corporation.
Any such determination that a payment by way of indemnification should be
made will be binding upon the Corporation. Such right of indemnification shall
not be exclusive of any other right which such Directors, officers and
employees of the Corporation and the other person above mentioned may have or
hereafter acquire, and without limiting the generality of such statement, they
shall be entitled to their respective rights of indemnification under any
By-Law, Agreement, vote of stockholders, provision of law, or otherwise in
addition to their rights under this Article. The provisions of this Article
shall apply to any member of any committee appointed by the Board of Directors
as fully as though each person had been a Director, officer or employee of the
Corporation.
ARTICLE X
---------
AMENDMENTS
----------
Section 1. How Amended. These By-Laws may be altered, amended, repealed or
-----------
added to by the vote of the Board of Directors of the Corporation at any regular
meeting of said Board, or at a special meeting of Directors called for that
purpose, provided a quorum of the Directors as provided by law
-16-
<PAGE>
and by the Articles of Incorporation, are present at such regular meeting or
special meeting. These By-Laws and any amendments thereto and new By-Laws added
by the Directors may be amended, altered or replaced by the stockholders at any
annual or special meeting of the stockholders.
ARTICLE XI
FISCAL YEAR
-----------
Section 1. Fiscal Year. The fiscal year shall begin the 1st day of January.
-----------
ARTICLE XII
WAIVER OF NOTICE
----------------
Section 1. Whenever any notice is required to be given to any shareholders
or Directors of the Corporation under the provisions of these By-Laws or under
the Articles of Incorporation under the provisions of the Utah Business
Corporation Act, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice.
ADOPTED this 5th day of January, 1982.
--- -------
HAILEY ENERGY CORPORATION
a Utah corporation
/s/ Scott F. Hailey
---------------------------
SCOTT F. HAILEY,
President
-17-
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of HAILEY ENERGY
CORPORATION, a Utah corporation; and
2. That the foregoing By-Laws, comprising eighteen (18) pages, including
this one, constitute the By-Laws of said Corporation as duly adopted at a
meeting of the Board of Directors thereof duly held on the 5th day of January,
--- -------
1982.
/s/ Loyce B. Hailey
---------------------------
Secretary
(SEAL)
-18-
<PAGE>
EXHIBIT 4.2
OHS DRAFT
4/22/96
[FORM OF REPRESENTATIVE'S WARRANT AGREEMENT]
[Subject to Client Review]
- --------------------------------------------------------------------------------
MEDICAL DEVICE TECHNOLOGIES, INC.
AND
FIRST ALLIED SECURITIES, INC.
-----------------
REPRESENTATIVE'S
WARRANT AGREEMENT
DATED AS OF ________, 1996
- --------------------------------------------------------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______, 1996 between
MEDICAL DEVICE TECHNOLOGIES, INC., a Delaware corporation (the "Company") and
FIRST ALLIED SECURITIES, INC. ("FAS") (FAS is hereinafter referred to variously
as the "Holder" or the "Representative").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company proposes to issue to the Representative or its
designees warrants ("Warrants") to purchase up to (a) an aggregate 130,000
shares of $.01 par value per share __% Series A Cumulative Convertible preferred
stock of the Company ("Preferred Stock"); or (b) up to [_____] shares of $.15
par value per share common stock of the Company ("Common Stock"); or (c) any
combination of such securities at the exercise prices set forth herein; and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Representative and the Company to act as the Representative in connection with
the Company's proposed public offering of up to 1,300,000 shares of Preferred
Stock at a public offering price of $[____] per share of Preferred Stock (the
"Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate of one hundred and thirty dollars
and zero cents ($130.00), the agreements herein set forth and other good and
valuable consideration, hereby acknowledged, the parties hereto agree as
follows:
1. Grant. The Holder is hereby granted the right to purchase, at any
-----
time from _______, 1997 [one year from the effective date of the registration
statement], until 5:30 P.M., New York time, on _______, 2001 [five years from
the effective date of the registration statement], (a) up to an aggregate of
130,000 shares of Preferred Stock (the "Preferred Shares") at an initial
exercise price (subject to adjustment as provided in Section 8 hereof) of $____
-------
per share of Preferred Stock [120% of the initial public offering price per
share] (the "Preferred Exercise Price"), or (b) in the event the Preferred Stock
has been redeemed by the Company or has been automatically converted into Common
Stock up to [____] shares (subject to adjustment as provided in Section 8
-------
hereof) of Common Stock (the "Common Shares") at an initial exercise price
(subject to adjustment as provided in Section 8 hereof) of $__________ per share
-------
of Common Stock (120% of the initial public offering price per share of the
Preferred Stock divided by the then current Conversion Price, as defined in and
calculated pursuant to that certain Certificate of Designation (the "Certificate
of Designation") of __% Series A Cumulative Convertible Preferred Stock of
Medical Device Technologies, Inc., dated as of ____________, 1996 and filed with
the Secretary of State of the State of Delaware (the "Common Exercise Price")),
or (c) any combination of such Common Shares and/or Preferred Shares at such
exercise prices set forth herein, all subject to the terms and conditions of
this Agreement, provided, however, the Preferred Stock has not been redeemed or
-------- -------
automatically converted in Common Stock.
- 2 -
<PAGE>
It is expressly understood that this Agreement entitles the Representative to
ten percent (10%) of the number of securities offered to the public on an as
converted basis, that is, [_____] shares of Common Stock (subject to adjustment
as provided in Section 8 hereof). Therefore, each share of Preferred Stock
-------
purchased hereunder will reduce the number of Preferred Shares purchasable by
the Representative by one and will reduce the number of Common Shares
purchasable by the Representative by _____ (subject to adjustment as provided in
Section 8 hereof). Similarly, each share of Common Stock purchased hereunder
- -------
will reduce the number of Preferred Shares purchasable by the Representative by
_____share and will reduce the number of Common Shares purchasable by the
Representative by one (subject to adjustment as provided in Section 8 hereof).
-------
Except as set forth herein, the Preferred Shares issuable upon exercise of the
Warrants are in all respects identical to the shares of Preferred Stock being
purchased by the Underwriters for resale to the public pursuant to the terms and
provisions of the Underwriting Agreement and the Common Shares are in all
respects identical to the shares of Common Stock issuable upon conversion of the
shares of Preferred Stock being purchased by the several Underwriters for resale
to the public pursuant to the terms and provisions of the Underwriting
Agreement. The Preferred Shares and/or the Common Shares issuable upon exercise
of the Warrants are hereinafter referred to collectively as the "Principal
Securities."
2. Warrant Certificates. The warrant certificates (the "Warrant
--------------------
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
-------------------
- 3 -
<PAGE>
(S)3.1 Method of Exercise. Except as otherwise set forth in Section
------------------ -------
3.2 hereof, the Warrants initially are exercisable in whole or in part, at an
aggregate initial exercise price (subject to adjustment as provided in Section 8
-------
hereof) per Preferred Share and/or Common Share set forth in Section 6 hereof
-------
payable by certified or official bank check in New York Clearing House funds,
subject to adjustment as provided in Section 8 hereof. Upon surrender of a
-------
Warrant Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Preferred Exercise Price and/or the Common Exercise
Price, as the case may be, payable by certified or official bank check in New
York Clearing House funds, for the Principal Securities purchased at the
Company's principal offices in California (presently located at 9171 Towne
Centre Drive, Suite 355, San Diego, California 92122) the registered holder of a
Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a
certificate or certificates for the Principal Securities so purchased. The
purchase rights represented by each Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to fractional
shares of the Preferred Shares and/or Common Shares underlying the Warrants).
Warrants may be exercised to purchase all or part of the shares of Preferred
Shares and/or Common Shares represented thereby. In the case of the purchase of
less than all the Principal Securities purchasable under any Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Principal Securities purchasable thereunder.
(S)3.2 Exercise by Surrender of Warrant. In addition to the method
--------------------------------
of payment set forth in Section 3.1 and in lieu of any cash payment required
-------
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in full or in part by surrendering
the Warrant Certificate in the manner specified in Section 3.1 in
-------
- 4 -
<PAGE>
exchange for the number of Shares equal to the product of (x) the number of
Shares as to which the Warrants are being exercised multiplied by (y) a
fraction, the numerator of which is the Market Price (as defined in Section 3.3
-------
below) of the Shares less the Exercise Price and the denominator of which is
such Market Price. Solely for the purposes of this paragraph, Market Price
shall be calculated either (i) on the date which the form of election attached
hereto is deemed to have been sent to the Company pursuant to Section 16 hereof
-------
("Notice Date") or (ii) as the average of the Market Prices for each of the five
trading days preceding the Notice Date, whichever of (i) or (ii) is greater.
(S)3.3 Definition of Market Price. As used herein, the phrase "Market
--------------------------
Price" at any date shall be deemed to be the last reported sale price, or, in
case no such reported sale takes place on such day, the average of the last
reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Preferred
Stock or Common Stock, as the case may be, is listed or admitted to trading or
by the Nasdaq SmallCap Market ("NSM") or Nasdaq National Market ("NNM") as the
case may be, or, if the Preferred Stock or Common Stock, as the case may be, is
not listed or admitted to trading on any national securities exchanged or quoted
by NSM or NNM, the average closing bid price as furnished by the NASD through
NSM or NNM or similar organization if NSM or NNM is no longer reporting such
information, or if the Preferred Stock or Common Stock, as the case may be, is
not quoted on NSM or NNM, as determined in good faith by resolution of the Board
of Directors of the Company, based on the best information available to it.
4. Issuance of Certificates. Upon the exercise of the Warrants, the
------------------------
issuance of certificates for the Principal Securities, shares of Preferred Stock
and/or other securities, properties or rights underlying such Warrants, shall be
made forthwith (and in any event within
- 5 -
<PAGE>
five (5) business days thereafter) without charge to the Holder thereof
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
- --------
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder, and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing Principal
Securities underlying the Warrants (and/or other securities, property or rights
issuable upon the exercise of the Warrants) shall be executed on behalf of the
Company by the manual or facsimile signature of the then Chairman or Vice
Chairman of the Board of Directors or President or Vice President of the
Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a Warrant
-----------------------------------
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representative.
- 6 -
<PAGE>
6. Exercise Price.
--------------
(S)6.1 Initial and Adjusted Exercise Price. Except as otherwise
-----------------------------------
provided in Section 8 hereof, the initial exercise price of each Warrant shall
-------
be (a) $____ [120% of the initial public offering price] per share of Preferred
Stock and (b) $______ per share of Common Stock [120% of the initial public
offering price per share of the Preferred Stock divided by the then current
Conversion Price for Common Stock.] The adjusted exercise price shall be the
price for Preferred Stock and Common Stock, respectively, which shall result
from time to time from any and all adjustments of the initial exercise price in
accordance with the provisions of Section 8 hereof and the provisions of the
-------
Certificate of Designation, as applicable.
(S)6.2 Exercise Price. The term "Preferred Exercise Price" herein
--------------
shall mean the initial exercise price for Preferred Stock or the adjusted
exercise price for Preferred Stock, depending upon the context or unless
otherwise specified. The term "Common Exercise Price" herein shall mean the
initial exercise price for Common Stock or the adjusted exercise price for
Common Stock, depending upon the context.
7. Registration Rights.
-------------------
(S)7.1 Registration Under the Securities Act of 1933. The Warrants,
---------------------------------------------
the Principal Securities, and any of the other securities issuable upon exercise
of the Warrants have not been registered under the Securities Act of 1933, as
amended (the "Act"). Upon exercise, in part or in whole, of the Warrants,
certificates representing the Principal Securities underlying the Warrants, and
any of the other securities issuable upon exercise of the Warrants
(collectively, the "Warrant Securities") shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"), and
may not be offered or sold except pursuant to (i) an effective
registration statement under the Act, (ii) to the extent applicable,
- 7 -
<PAGE>
Rule 144 under the Act (or any similar rule under such Act relating to
the disposition of securities), or (iii) an opinion of counsel, if
such opinion shall be reasonably satisfactory to counsel to the
issuer, that an exemption from registration under such Act is
available.
(S)7.2 Piggyback Registration. If, at any time commencing after the
----------------------
effective date of the offering and expiring seven (7) years thereafter, the
Company proposes to register any of its securities under the Act (other than in
connection with a merger or pursuant to Form S-8) it will give written notice by
registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to the Representative and to all other Holders of the
Warrants and/or the Warrant Securities of its intention to do so. If the
Representative or other Holders of the Warrants and/or Warrant Securities notify
the Company within twenty (20) business days after receipt of any such notice of
its or their desire to include any such securities in such proposed registration
statement, the Company shall afford the Representative and such Holders of the
Warrants and/or Warrant Securities the opportunity to have any such Warrant
Securities registered under such registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall
-------
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
-------
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
If the registration, of which the Company gives notice, is for a
registered public offering involving an underwriting, the Company shall so
advise the Representative and all other Holders of the Warrants and the Warrant
Securities as a part of the written notice given pursuant to this Section 7.2.
-------
In such event, the right of the Holders to participate in such
- 8 -
<PAGE>
registration pursuant to this Section 7.2 shall be conditioned upon the Holders'
-------
participation in such underwriting and the inclusion of the Holders' Warrant
Securities in the underwriting to the extent provided herein. The Holders shall
(together with the Company and the other holders of securities of the Company
with contractual registration rights to participate therein in distributing
their securities through such underwriting) enter into an underwriting agreement
in customary form with the representative of the underwriters selected by the
Company.
If the representative of underwriters advises the Company in writing
that marketing factors require a limitation on the number of shares to be
underwritten, such representative may (subject to the limitations set forth
below) exclude any or all Warrant Securities from, or limit the number of
Warrant Securities to be included in, the registration and underwriting. The
Company shall so advise all holders of securities requesting registration, and
the number of securities that are entitled to be included in the registration
and underwriting shall be allocated first to the Company for securities being
sold for its own account, second to the Holders pro rata and thereafter among
such other holders pro rata in proportion to the number of securities as to
which they had originally requested registration. If any such holder does not
agree to the terms of any such underwriting, he shall be excluded therefrom by
written notice from the Company or the underwriter. If securities are so
withdrawn from the registration and if the number of Warrant Securities to be
included in such registration was previously reduced as a result of marketing
factors, the Company shall then offer (subject to the availability of a
reasonable amount of time to make such offer before the commencement of a
distribution) to all persons who have retained the right to include securities
in the registration the right to include additional securities in the
registration in an aggregate amount equal to the number of securities so
withdrawn, with such securities to be allocated
- 9 -
<PAGE>
among the persons requesting additional inclusion pro rata in proportion to the
number of securities as to which they had originally requested such
registration.
(S)7.3 Demand Registration.
-------------------
(a) At any time commencing after the effective date of the offering
and expiring five (5) years thereafter, the Holders of the Warrants and/or
Warrant Securities representing a "Majority" (as hereinafter defined) of such
securities (assuming the exercise of all of the Warrants) shall have the right
(which right is in addition to the registration rights under Section 7.2
-------
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Commission, on one occasion, a registration statement
and such other documents, including a prospectus, as may be necessary in the
opinion of both counsel for the Company and counsel for the Representative and
Holders, in order to comply with the provisions of the Act, so as to permit a
public offering and sale of their respective Warrant Securities for nine (9)
consecutive months by such Holders and any other Holders of the Warrants and/or
Warrant Securities who notify the Company within ten (10) days after receiving
notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
-------
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2 and
-------
subsection (a) of this Section 7.3, at any time commencing after the date hereof
-------
and expiring five (5) years thereafter, any Holder of Warrants and/or Warrant
Securities shall have the right, exercisable by written request to the Company,
to have the Company prepare and file, on one occasion,
- 10 -
<PAGE>
with the Commission a registration statement so as to permit a public offering
and sale for nine (9) consecutive months by any such Holder of its Warrant
Securities provided, however, that the provisions of Section 7.4(b) hereof shall
-------
not apply to any such registration request and registration and all costs
incident thereto shall be at the expense of the Holder or Holders making such
request.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Securities
within the time period specified in Section 7.4(a) hereof pursuant to the
-------
written notice specified in Section 7.3(a) of a Majority of the Holders of the
-------
Warrants and/or Warrant Securities, the Company shall have the option, upon the
written notice of election of a Majority of the Holders of the Warrants and/or
Warrant Securities, to repurchase (i) any and all Warrant Securities at the
higher of the Market Price per share of Preferred Stock or Common Stock, as the
case may be, on (x) the date of the notice sent pursuant to Section 7.3(a) or
-------
(y) the expiration of the period specified in Section 7.4(a) and (ii) any and
-------
all Warrants at such Market Price less the Exercise Price of such Warrant. Such
repurchase shall be in immediately available funds and shall close within two
(2) days after the later of (i) the expiration of the period specified in
Section 7.4(a) or (ii) the delivery of the written notice of election specified
- -------
in this Section 7.3(d).
-------
(S)7.4 Covenants of the Company With Respect to Registration. In
-----------------------------------------------------
connection with any registration under Section 7.2 or 7.3 hereof, the Company
-------
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each
- 11 -
<PAGE>
Holder desiring to sell Warrant Securities such number of prospectuses as shall
reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
- --------
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.3(c).
-------
(c) The Company will take all necessary action which may be required
in qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the Act or
-------
Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
- -------
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify each of the Underwriters contained in Section 7
-------
of the Underwriting Agreement.
- 12 -
<PAGE>
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
-------
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
- -------
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 7 of the Underwriting
-------
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities
other than the Warrant Securities to be included in any registration statement
filed pursuant to Section 7.3 hereof, or permit any other registration statement
-------
to be or remain effective during the effectiveness of a registration statement
filed pursuant to Section 7.3 hereof, without the prior written consent of the
-------
Holders of the Warrants and Warrant Securities representing a Majority of such
securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement
- 13 -
<PAGE>
(and, if such registration includes an underwritten public offering, an opinion
dated the date of the closing under the underwriting agreement), and (ii) a
"cold comfort" letter dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, a letter
dated the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within 15 months thereafter,
make "generally available to its security holders" (within the meaning of Rule
158 under the Act) an earnings statement (which need not be audited) complying
with Section 11(a) of the Act and covering a period of at least 12 consecutive
-------
months beginning after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder participating in
the offering requesting the correspondence and memoranda described below and to
the managing underwriters, copies of all correspondence between the Commission
and the Company, its counsel or auditors and all memoranda relating to
discussions with the Commission or its staff with respect to the registration
statement and permit each Holder and underwriters to do such investigation, upon
reasonable advance notice, with respect to information contained in or omitted
from the registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc.
- 14 -
<PAGE>
("NASD"). Such investigation shall include access to books, records and
properties and opportunities to discuss the business of the Company with its
officers and independent auditors, all to such reasonable extent and at such
reasonable times and as often as any such Holder or underwriter shall reasonably
request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested to be included in such
underwriting, which may be the Representative. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders shall be parties to
any underwriting agreement relating to an underwritten sale of their Warrant
Securities and may, at their option, require that any or all 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 such Holders.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the underwriters except as they may relate to
such Holders and their intended methods of distribution.
(l) In addition to the Warrant Securities, upon the written request
therefor by any Holder(s), the Company shall include in the registration
statement any other securities of the Company held by such Holder(s) as of the
date of filing of such registration statement, including without limitation
restricted shares of Preferred Stock, Common Stock, options, warrants or any
other securities convertible into shares of Common Stock.
- 15 -
<PAGE>
(m) For purposes of this Agreement, the term "Majority" in reference
to the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
percent (50%) of the then outstanding Warrants or Warrant Securities (assuming
exercise of all of the Warrants and conversion of all Preferred Shares) that (i)
are not held by the Company, an affiliate, officer, creditor, employee or agent
thereof or any of their respective affiliates, members of their family, persons
acting as nominees or in conjunction therewith and (ii) have not been resold to
the public pursuant to a registration statement filed with the Commission under
the Act.
8. Adjustments to Preferred Exercise Price and Number of Securities.
----------------------------------------------------------------
(S)8.1 Subdivision and Combination. In case the Company shall at any
---------------------------
time subdivide or combine the outstanding shares of Preferred Stock or Common
Stock, the Preferred Exercise Price or the Common Exercise Price, as the case
may be, shall forthwith be proportionately decreased in the case of subdivision
or increased in the case of combination.
(S)8.2 Stock Dividends and Distributions. In case the Company shall
---------------------------------
pay a dividend in, or make a distribution of, shares of Preferred Stock, or
Common Stock, the Preferred Exercise Price or the Common Exercise Price, as the
case may be, shall forthwith be proportionately decreased. An adjustment made
pursuant to this Section 8.2 shall be made as of the record date for the subject
-------
stock dividend or distribution. [Specifically excluded from this Section 8
--------
shall be the ____ percent (__%) dividend, payable to all purchasers of Preferred
Stock in the Public Offering] .
(S)8.3 Adjustment in Number of Securities. (a) Upon each adjustment
----------------------------------
of the Preferred Exercise Price pursuant to the provisions of this Section 8,
-------
the number of shares of Preferred Stock issuable upon the exercise at the
adjusted Preferred Exercise Price of each Warrant shall be adjusted to the
nearest full amount by multiplying a number equal to the
- 16 -
<PAGE>
Preferred Exercise Price in effect immediately prior to such adjustment by the
number of shares of Preferred Stock issuable upon exercise of the Warrants
immediately prior to such adjustment and dividing the product so obtained by the
adjusted Preferred Exercise Price.
(b) Upon each adjustment of the Common Exercise Price pursuant to the
provisions of this Section 8, the number of shares of Common Stock issuable upon
-------
the exercise at the adjusted Common Exercise Price of each Warrant shall be
adjusted to the nearest full amount by multiplying a number equal to the Common
Exercise Price in effect immediately prior to such adjustment by the number of
shares of Common Stock issuable upon exercise of the Warrants immediately prior
to such adjustment and dividing the product so obtained by the adjusted Common
Exercise Price.
(S)8.4 Definition of Common Stock and Preferred Stock. (a) For the
----------------------------------------------
purpose of this Agreement, the term "Common Stock" shall mean (i) the class of
stock designated as Common Stock in the Articles of Incorporation of the Company
as may be amended as of the date hereof, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value.
(b) For the purpose of this Agreement, the term "Preferred Stock"
shall mean the Preferred Stock purchased by the Underwriters for resale to the
public in the Public Offering pursuant to the terms of the Underwriting
Agreement, as such Preferred Stock is more particularly described in the
Certificate of Designation incorporated therein, as the same may be amended from
time to time. The Preferred Shares issuable upon exercise of the
Representative's Warrants shall be identical to the Preferred Stock described in
the Certificate of Designation [except that such Preferred Shares cannot be
redeemed.] In the event of any
- 17 -
<PAGE>
change after the date hereof in the conversion ratio (or effective conversion
price) or, the time period for conversion of, or the number or class of
securities issuable upon conversion of, the Preferred Stock, the Holder of any
Representative's Warrant shall receive upon exercise thereof Preferred Shares
with a conversion ratio (and an effective conversion price) equal to the
conversion ratio (and an effective conversion price) then in effect for,
convertible for such number and class of securities as would be issuable upon
the conversion of, and convertible for such period of time as, Preferred Stock
issued and outstanding on the date hereof after giving effect to such change.
In addition, in the event that the Company grants to the holders of Preferred
Stock upon the exercise thereof any benefits or inducements not set forth in the
Certificate of Designation, the Holder shall be entitled to receive such benefit
or inducement upon the exercise by such Holder of any Representative's Warrant
to purchase Preferred Shares.
(S)8.5 Merger or Consolidation. In case of any consolidation of the
-----------------------
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock or Preferred
Stock or other securities issuable upon exercise of the Warrants or conversion
of the Preferred Stock), or in the case of any sale or conveyance to another
person, corporation or other entity of the property of the Company as an
entirety or substantially as an entirety, then, as a condition of such
consolidation, merger, sale or conveyance, the Company or such successor or
purchasing entity, as the case may be, the corporation formed by such
consolidation or merger shall execute and deliver to the Holder a supplemental
warrant agreement providing that the holder of each Warrant then outstanding or
to be outstanding shall have the right thereafter (until the expiration of such
Warrant) to
- 18 -
<PAGE>
receive, upon exercise of such warrant, the kind and amount of shares of stock
and other securities and property receivable upon such consolidation or merger,
by a holder of the number of shares of Common Stock of the Company for which
such warrant might have been exercised immediately prior to such consolidation,
merger, sale or transfer. Such supplemental warrant agreement shall provide for
adjustments which shall be identical to the adjustments provided in Section 8.
-------
The above provision of this subsection shall similarly apply to successive
consolidations or mergers.
(S)8.6 No Adjustment of Exercise Price in Certain Cases. No
------------------------------------------------
adjustment of the Preferred Exercise Price or Common Exercise Price shall be
made:
(a) Upon the issuance or sale of the Warrants or the shares of
Preferred Stock or the shares of Common Stock issuable upon the
exercise of the Warrants, as the case may be, or (ii) the issuance of
shares of Common Stock upon conversion of the shares of Preferred
Stock; or
(b) If the amount of said adjustment shall be less than ten
cents (10c) per Warrant Security, provided, however, that in such case
any adjustment that would otherwise be required then to be made shall
be carried forward and shall be made at the time of and together with
the next subsequent adjustment which, together with any adjustment so
carried forward, shall amount to at least ten cents (10c) per Warrant
Security.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
------------------------------------------------
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant
- 19 -
<PAGE>
Securities in such denominations as shall be designated by the Holder thereof at
the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
-----------------------------------
required to issue certificates representing fractions of shares of Preferred
Stock or Common Stock, as the case may be, upon the exercise of the Warrants,
nor shall it be required to issue scrip or pay cash in lieu of fractional
interests, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up to the nearest whole number of
shares of Preferred Stock or Common Stock, as the case may be, or other
securities, properties or rights.
11. Reservation and Listing of Securities. The Company shall at all
-------------------------------------
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance of Preferred Stock and/or Common Stock upon
the exercise of the Warrants, and the issuance of Common Stock upon conversion
of shares of Preferred Stock or other securities, properties or rights as shall
be issuable upon the exercise thereof and such number of shares of Preferred
Stock and Common Stock or other securities, properties or rights as shall be
issuable upon conversion thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Preferred Exercise Price and/or
Common Exercise Price therefor as applicable, and/or the subsequent conversion
of the Preferred Shares,
- 20 -
<PAGE>
all shares of Preferred Stock and Common Stock and other securities issuable
upon such exercise shall be duly and validly issued, fully paid, non-assessable
and not subject to the preemptive rights of any stockholder. As long as the
Warrants shall be outstanding, the Company shall use its best efforts to cause
all shares of Preferred Stock and Common Stock issuable upon the exercise of the
Warrants and all shares of Common Stock issuable upon conversion of the
Preferred Shares to be listed (subject to official notice of issuance) on all
securities exchanges on which the Preferred Stock and/or Common Stock issued to
the public in connection herewith may then be listed and/or quoted on NSM or
NNM.
12. Notices to Warrant Holders. Nothing contained in this Agreement
--------------------------
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into
- 21 -
<PAGE>
or exchangeable for shares of capital stock of the Company, or any
option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or payment of
any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. Notices.
-------
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made and sent when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the address
of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
-------
hereof or to such other address as the Company may designate by notice
to the Holders.
- 22 -
<PAGE>
14. Supplements and Amendments. The Company and the Representative
--------------------------
may from time to time supplement or amend this Agreement without the approval of
any holders of Warrant Certificates (other than the Representative) in order to
cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Representative may deem necessary or desirable and which the
Company and the Representative deem shall not adversely affect the interests of
the Holders of Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement
----------
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of
-----------
business on _______, 2003. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
-------
business on _______, 2009.
17. Governing Law; Submission to Jurisdiction. This Agreement and
-----------------------------------------
each Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The Company, the Representative and the Holders hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representative and the Holders
- 23 -
<PAGE>
hereby irrevocably waive any objection to such exclusive jurisdiction or
inconvenient forum. Any such process or summons to be served upon any of the
Company, the Representative and the Holders (at the option of the party bringing
such action, proceeding or claim) may be served by transmitting a copy thereof,
by registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in Section 3 hereof. Such mailing
-------
shall be deemed personal service and shall be legal and binding upon the party
so served in any action, proceeding or claim. The Company, the Representative
and the Holders agree that the prevailing party(ies) in any such action or
proceeding shall be entitled to recover from the other party(ies) all of
its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.
18. Entire Agreement; Modification. This Agreement (including the
------------------------------
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
19. Severability. If any provision of this Agreement shall be held
------------
to be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this Agreement
--------
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. Benefits of this Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any person or corporation other than the Company and the
Representative and any
- 24 -
<PAGE>
other registered Holder(s) of the Warrant Certificates or Warrant Securities any
legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole benefit of the Company and the Representative
and any other registered Holders of Warrant Certificates or Warrant Securities.
22. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
MEDICAL DEVICE TECHNOLOGIES, INC.
By:_______________________________________________
__________
M. Lee Hulsebus
President
Attest:
____________________________
FIRST ALLIED SECURITIES, INC.
By:_______________________________________________
__________
Name:
Title:
- 25 -
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, __________, 2001
No. W- _______ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that __________, or registered
assigns, is the registered holder of _____________ Warrants to purchase
initially, at any time from __________, 1997 [one year from the effective date
of the Registration statement] until 5:30 p.m. New York time on ___________,
2001 [five years from the effective date of the Registration Statement]
("Expiration Date"), up to (a) __________ fully-paid and non-assessable shares
of preferred stock, ("Preferred Stock") of MEDICAL DEVICE TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), (or, in accordance with the Warrant
Agreement, such number of shares of Common Stock, other securities and/or
property of the Company into which a share of preferred stock has been
converted) (collectively "Preferred Stock") at the initial exercise price,
subject to adjustment in certain events (the "Preferred Exercise Price"), of
$____ per share of Preferred Stock, (b) up to ____ fully-paid and non-assessable
shares of Common Stock, par value $.001 per share, of the Company (the "Common
Stock"), at the initial exercise price, subject to adjustment in certain events
(the "Common Exercise Price"), of $____ per share, or (c) any combination of
such Common Stock and/or Convertible Preferred Stock at such combined Common
Exercise Price and/or Preferred Exercise Price, upon surrender of this Warrant
Certificate and payment of the Preferred Exercise Price and/or the Common
Exercise Price, as the case may be, at an office or agency of the Company, but
subject to the conditions set forth herein and in the warrant agreement dated as
of
- 1 -
<PAGE>
____________, 1996 between the Company and FIRST ALLIED SECURITIES, INC. (the
"Warrant Agreement"). Payment of the Preferred Exercise Price and/or Common
Exercise Price, as the case may be, shall be made by certified or official bank
check in New York Clearing House funds payable to the order of the Company or by
surrender of this Warrant Certificate.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the Preferred Exercise Price and/or the Common Exercise Price, as the
case may be, and the type and/or number of the Company's securities issuable
thereupon may, subject to certain conditions, be adjusted. In such event, the
Company will, at the request of the holder, issue a new Warrant Certificate
evidencing the adjustment in the Preferred Exercise Price and/or the Common
Exercise Price, as the case may be, and the number and/or type of securities
issuable upon the exercise of the Warrants; provided, however, that the failure
of the Company to issue such new Warrant Certificates shall not in any way
change, alter, or otherwise impair, the rights of the holder as set forth in the
Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such numbered unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
- 2 -
<PAGE>
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of ___________, 1996
[SEAL] MEDICAL DEVICE TECHNOLOGIES, INC.
By:_______________________________________________
M. Lee Hulsebus
President
- 3 -
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[_] _______________________ shares of Preferred Stock;
[_] _______________________ shares of Common Stock;
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of Medical Device
Technologies, Inc., in the amount of $____, all in accordance with the terms of
Section 3.1 of the Representative's Warrant Agreement dated as of _____, 1996
between Medical Device Technologies, Inc., and First Allied Securities, Inc.
The undersigned requests that a certificate or certificates, as the case may be,
for such Securities be registered in the name of ________________________ whose
address is _____________________ and that such certificate or certificates be
delivered to _________________________ whose address is
________________________.
Dated:
Signature _______________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the
Warrant Certificate.)
_______________________________________________
Number of Holder)
- 4 -
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[_] _______________________ shares of Preferred Stock;
[_] _______________________ shares of Common Stock;
in accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of _________, 1996 between Medical Device Technologies, Inc.,
and First Allied Securities, Inc. The undersigned requests that a certificate
or certificates, as the case may be, for such Securities be registered in the
name of ___________________________________ whose address is
_____________________ and that such certificate or certificates be delivered to
_________________________ whose address is ________________________.
Dated:
Signature _______________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the
Warrant Certificate.)
_______________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
- 5 -
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________________________ hereby sells,
assigns and transfers unto
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated:__________________________
Signature:________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
__________________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
- 6 -
<PAGE>
EXHIBIT 10.1
Scitronix (R)
Personal Alarm System (PAS)
Manufacturing Agreement
for
Medical Device Technologies, Inc.
Agreement # 132967
<PAGE>
TABLE OF CONTENTS
-----------------
ATTACHMENTS 4
INTRODUCTION 4
DESCRIPTION OF SERVICES 4
Summary 4
Specifications 5
Deliverables 5
EFFECTIVE DATE 5
Scope of Agreement 5
Charges 6
Invoices, Payment and Schedule 6
Ownership of Components, Work in Progress and Finished Goods 6
Software Ownership 7
Residuals 7
Non-Competition Clause 8
Responsibility for Product Defects 8
Third-Party Interests 8
Limitation of Liability 9
Inventions and Patents 9
2
<PAGE>
Assignment 10
Non-Disclosure 10
Staff 10
Attorney's Fees 11
Trademarks and Trade Name Rights 11
Term and Termination 12
Post-Termination Obligations 12
Representations and Warranties of MDT 13
Representations and Warranties of Scitronix 13
Notices 14
Governing Law 14
Waiver 14
Severability 14
Incorporation by Reference 14
Merger 15
3
<PAGE>
ATTACHMENTS
- -----------
Attachment A: Specifications including: Personal Protection System, Model
C - Specification dated 3/3/95, Rev 7/5/95 (2) Amendment of Oct.
6, 1995 (3) Manufacturing specifications including Quality Control and
Quality Assurance specification presently in preparation.
Attachment B: Manufacturing Schedule
Attachment C: PAS Material Inventory
INTRODUCTION
- ------------
The parties to this agreement are Scitronix, Inc. herein after referred to as
"Scitronix", and Medical Device Technologies, Inc., hereinafter "MDT". This
agreement is to provide manufacturing services required to manufacture PAS units
in accordance with Attachments A and B.
DESCRIPTION OF SERVICES
- -----------------------
SUMMARY
Scitronix will provide services to manufacture up to one thousand (1,000) PAS
units in accordance with the agreed upon Specifications (Attachment A) and
Manufacturing Schedule (Attachment B), generally accepted commercial
manufacturing practices and requirements set forth for devices of this type by
the United States Federal Food and Drug Administration (FDA).
4
<PAGE>
SPECIFICATIONS
Attachment A describes Specifications to be incorporated into the PAS in
---
detail. Manufacturing specifications will be provided to Scitronix by MDT
during the initial phase of manufacturing. The software and electronic hardware
developed by Scitronix and paid for and owned by MDT will be utilized to meet
the requirements listed in Attachment A. Any material changes or revisions to
the Specifications listed in Attachment A shall be reviewed by Scitronix for
their impact on the cost and completion date of the project. A revision of the
schedule and estimate of cost shall be provided to MDT in writing. No work will
be performed on any material changes or revisions until a written authorization
and description of work is received by Scitronix. Any costs incurred by
Scitronix as a result of material changes or revisions of the Specifications
will be billed under the same terms as Charges.
DELIVERABLES
Scitronix shall, according to the Manufacturing Schedule, provide MDT with up
to one thousand (1,000) PAS units which meet or exceed Specifications.
EFFECTIVE DATE
- --------------
This Agreement shall be effective as of December 15,1995 and shall continue as
specified under "Terms and Termination".
SCOPE OF AGREEMENT
Engineering and manufacturing services, as defined in this Agreement, include
the time in which services are provided by Scitronix in the course of satisfying
a client's particular needs. Services provided under this Agreement will consist
primarily of initial production/assembly of the PAS. Procedures and
---
manufacturing tools/fixtures for manufacturing will be developed by Scitronix
and MDT and will become the property of MDT upon the payment in full for said
procedures and tools/fixtures.
5
<PAGE>
CHARGES
For any services over and above those included in this agreement, MDT will be
billed for all travel-related expenses that include, but are not limited to,
commercial transportation, car rental, per diem charges, local mileage, and
freight charges for equipment or parts. MDT shall pay shipping charges for any
equipment shipped by Scitronix at MDT's request. The charges provided for under
this Agreement are exclusive of all local use, sales, excise and similar taxes.
Any such taxes shall be paid by MDT unless a valid exemption certificate is
furnished to Scitronix. All charges above $250.00 must be approved by MDT in
writing in advance before being incurred, or committed to, by Scitronix.
INVOICES, PAYMENT AND SCHEDULE
MDT shall pay for the manufacturing services and other related expenses on a
time and material basis for the first one hundred (100) units. Upon completion
of the first one hundred (100) units a per unit cost will be negotiated for the
production or assembly of the remaining nine hundred (900) units. A per unit
cost will be agreed upon prior to the commencement of manufacturing the
remaining units. If a per unit cost is agreed upon, a cash deposit equal to one
third (1/3) of the estimated cost shall be paid to Scitronix prior to commencing
work. MDT will provide all materials required for the manufacturing of the PAS.
---
Materials for manufacturing tools/fixtures will be procured and invoiced by
Scitronix according to MDT's procurement policy. All billings will be done on a
bi-weekly basis and sent to MDT. Payment terms shall be net 20 days from receipt
of an invoice by MDT. Interest charged, if any, on overdue payments will not
exceed 1% per month. The following hourly labor rates shall apply:
Senior Engineer $75.00
Electronic Engineer $60.00
Software Engineer $60.00
Technician $34.00
Assembler $12.75
OWNERSHIP OF COMPONENTS, WORK IN PROGRESS AND FINISHED GOODS
All units (including raw materials and components) shall be deemed to be owned
by MDT whether work in progress or finally manufactured subject, however, to
Scitronix' security interest in all such units to the extent of the unpaid
purchase price for the same. A list of PAS Material Inventory, not necessarily
complete, presently owned by MDT and presently stored by Scitronix or Scitronix'
subcontractors is attached as Attachment C.
6
<PAGE>
SOFTWARE OWNERSHIP
As between MDT and Scitronix, except as otherwise provided in Section
Residuals, or Third-Party Interests, all right, title, and interest, including
copyright interests and any other intellectual property, in and to the Software
and any other programs, systems, data, or materials produced or provided by
Scitronix, alone or in combination with MDT and/or its employees, under this
Agreement shall be the property of MDT. Scitronix agrees that, except as
otherwise provided in Section Residuals hereof, any contribution by Scitronix or
its employees to the creation of such works, including all copyright interest
therein, shall be considered works made for hire by Scitronix for MDT and that
such works shall, upon their creation, be owned exclusively by MDT. To the
extent that any such works may not be considered works made for hire for MDT
under applicable law, Scitronix agrees to assign and, upon their creation,
automatically assigns to MDT the ownership of such works, including copyright
interests and any other intellectual property therein, without the necessity of
any further consideration. If reasonably requested by MDT, Scitronix shall
execute any and all legal documents required to be filed with the United States
Trademark and Patent Office confirming MDT's sole and exclusive ownership in any
such software created or developed by Scitronix under the terms of this
Agreement.
RESIDUALS
It is mutually acknowledged that, during the normal course of its
dealings with MDT and the Software under this Agreement, Scitronix and its
personnel and agents may become acquainted with ideas, concepts, know-how,
methods, techniques, processes, skills, and adaptations pertaining to the
Software, including those that MDT considers to be proprietary or secret.
Notwithstanding anything in this Agreement to the contrary, and regardless of
any termination of this Agreement, Scitronix shall be entitled to use, disclose,
and otherwise employ any ideas, concepts, know-how, methods, techniques,
processes, and skills, and adaptations, including generalized features of the
sequence, structure, and organization of any works of authorship, in conducting
its business (including providing services or creating programming or materials
for other Customers), and MDT shall not assert against Scitronix or its
personnel any prohibition or restraint from so doing. However, the previous
paragraph "Software Ownership" and the following paragraph "Non-Competition
Clause" are paramount and controlling in relation to this paragraph.
7
<PAGE>
NON-COMPETITION CLAUSE
Notwithstanding the acknowledgments in the "RESIDUALS" section,
Scitronix shall not use, at any time, any ideas, concepts, know-how, methods,
techniques, processes, skills and adaptations acquired, learned or developed
within the scope of this Agreement to compete with MDT in the development or
manufacture of the PAS or other barrier monitoring devices, or do work for hire
or consult for MDT's competitors in the area of barrier monitoring devices. In
the event Scitronix should misappropriate MDT's secret and proprietary rights
MDT is entitled to obtain an injunction (i.e., relief) against Scitronix.
RESPONSIBILITY FOR PRODUCT DEFECTS
Scitronix agrees to fully warrant its workmanship regardless of
whether manufacturing is performed on a time and material basis or fixed unit
cost. Product defects caused by defective material are MDT's responsibility
provided the product was manufactured by Scitronix on a time and material basis
and Scitronix adhered to Quality Assurance and Quality Control procedures as
specified in Attachment A.
Product defects caused by material defects will be Scitronix'
responsibility provided the product was manufactured on a fixed cost per unit
basis or it appears obvious that Scitronix did not adhere to Quality Assurance
and Quality Control procedures as agreed upon and specified in Attachment A.
Scitronix warrants that the PAS units manufactured under the terms of
this Agreement for MDT shall meet all agreed upon specifications.
THIRD-PARTY INTERESTS
MDT's interest in and obligations with respect to any programming,
materials, or data to be obtained from third-party vendors, regardless of
whether obtained with the assistance of Scitronix, shall be determined in
accordance with the agreements and policies of such vendors.
8
<PAGE>
LIMITATION OF LIABILITY
It is specifically understood and agreed between the parties hereto that
Scitronix will not be liable to MDT for any loss of use, loss of data, loss of
profits, or any other special, incidental, or consequential damages arising out
of the breach of this Agreement or the failure to perform this Agreement in the
manner expected or anticipated by the parties. Scitronix liability for damages,
if any, whether based upon contract, tort, or any other legal theory, shall not
exceed the total amounts paid by MDT for the services rendered under this
Agreement. This limitation of liability does not exempt Scitronix from
responsibility for its own fraud, or willful injury to the person or property of
another, or violation of law, whether willful or negligent.
INVENTIONS AND PATENTS
All inventions, discoveries and improvements, whether protectible or
unprotectible by Patent, trademark, copyright or trade secret, made, devised or
discovered by Scitronix, whether by Scitronix alone or jointly with others from
the time of entering into this Agreement until termination of this Agreement,
relating or pertaining in any way to the PAS unit, shall be promptly disclosed
in writing to MDT, and become and remain the sole and exclusive property of MDT.
Scitronix agrees, as they relate or pertain to the PAS unit, to execute any
assignments to MDT or its nominee of the entire right, title and interest in and
to any such inventions, discoveries and improvements, and to execute any
assignments to MDT or its nominee of its entire right, title and interest in and
to any such inventions, discoveries and improvements, and to execute any other
instruments and documents requisite or desirable in applying for and obtaining
patents, trademarks or copyrights at the cost of MDT with respect thereto in the
United States and in all foreign countries that may be requested by MDT.
Scitronix further agrees to cooperate to the extent and in the manner requested
by MDT in the prosecution or defense of any patent claims, trademark or
copyrights or any secrets, processes, discoveries, trademarks, copyrights, or
improvements covered by this Agreement, but all expenses thereof shall be paid
by MDT. MDT shall have the sole right to determine the treatment of disclosures
received from Scitronix, including the right to keep the same as a trade secret,
to use and disclose the same without prior patent application thereon, or to
follow any other procedure which MDT may deem appropriate provided that
Scitronix may disclose certain information in scientific meetings or
publications when such disclosure is not detrimental to MDT and with the prior
permission of MDT.
9
<PAGE>
Scitronix shall not be responsible for any patent infringements for the use
of the PAS. Should a dispute arise due to patent infringement in connection
with the PAS, MDT agrees to pay all fees that include, but are not limited to
---
legal services, travel, and services provided by Scitronix in the defense of
Scitronix.
ASSIGNMENT
Neither party to this Agreement shall assign this Agreement or any rights
hereunder without obtaining the prior written consent of the other party. Such
written consent shall not be unreasonably withheld.
NON-DISCLOSURE
MDT has revealed and will reveal in the future to Scitronix ideas, designs,
schematics, drawings, formulas and/or other work-product regarding the PAS.
---
Scitronix shall not reveal to any person or other entity any schematic, drawing,
formula, or other work-product of the technologies revealed under this contract
without the prior written consent of MDT These restrictions shall not apply to
any information which: (a) is known to or in the possession of Scitronix prior
to the execution of the contract, (b) is distributed or made available to others
by MDT following its disclosure to Scitronix, without restriction as to its use
or disclosure, or (c) is required to be disclosed by a court order or similar
legal authority.
Scitronix shall use its "best efforts" to insure that its officers,
Directors, employees, agents and/or independent contractors not disclose MDT's
secret, confidential and/or proprietary information , and if appropriate, shall
require that its Officers, Directors, employees, agents, and independent
contractors sign a Secrecy Agreement before any such individual(s)/entity(ies)
are permitted to have access to MDT's secret and proprietary information.
STAFF
Each of the parties hereto agrees that, while performing Services under
this Agreement, and for a period of one (1) year following the termination of
this Agreement, neither party will, except with the other party's written
approval, solicit or offer employment to the other party's employees or staff
engaged in any efforts under this Agreement.
10
<PAGE>
ATTORNEY'S FEES
"Arbitration - Any and all disputes, differences or controversies arising
under this Agreement or concerning its creation shall be settled and finally
determined by arbitration in San Diego, California according to the Rules of the
American Arbitration Association now in force or later adopted. A Panel of
three (3) Arbitrators shall make their Award in accordance with, and based upon
all provisions of this Agreement. Each party shall designate one (1) Arbitrator
and the two (2) selected Arbitrators shall jointly select a third to act as
Chairman. An Arbitrator shall be a commercial person who has neither a business
nor a personal relationship with either party or their legal counsel.
Judgment, if any, upon Award rendered by the Arbitration Panel may be entered in
any Court having competent jurisdiction. The law of the State of California
shall control and apply in any such Arbitration.
The successful or prevailing party, whether at arbitration, trial or on
appeal, shall be entitled to reasonable attorney's fees and other losses
incurred together with the reasonable expenses and court costs incurred in
connection with any such proceeding.
TRADEMARKS AND TRADE NAME RIGHTS
If any of the Product(s) sold under the terms of the instant Agreement bear
MDT's trademark and trade name, it is understood that such matter shall remain
the sole and exclusive right and property of MDT. Scitronix understands and
agrees that it shall not acquire, either by the execution of this Agreement or
performance thereunder or otherwise, any license or rights with respect to same.
Scitronix also acknowledges and agrees that it shall discontinue use in any form
of MDT's trademark and trade name upon termination of this Agreement for any
reason whatsoever.
Scitronix also agrees not to use any part of MDT's corporate/business
name(s) and/or MDT's trademark and trade name or similar word(s) which are
likely to cause confusion in the relevant market.
In the event any third party shall infringe MDT's technology, the party
having knowledge thereof shall promptly notify the other party of same,
whereupon MDT shall use its best judgment as to whether or not to legally
challenge the infringement of misappropriation. If MDT should elect to bring an
infringement or misappropriation suit against a third party, it agrees to bear
all costs associated thereof; it being understood, however, that MDT may, in its
sole discretion, elect not to prosecute a claim.
11
<PAGE>
TERM AND TERMINATION
This Agreement shall remain and continue in effect, unless sooner
terminated as provided herein, for a term of four(4) months from the Effective
Date. It may be renewed thereafter on a year to year basis if either party
gives the other party written notice to its intent to extend and the other party
agrees to the extension in writing. Such notice, if given, must be received by
the other party not later than thirty (30) days prior to the expiration of the
initial term or any extension period(s).
Either party may terminate this Agreement with immediate effect, and
without payment of any compensation to the other party, by giving written notice
of termination to the other party in the event of one or more of the following
contingencies:
(a) The other party becomes insolvent, or any voluntary or involuntary
petition in bankruptcy or for corporate reorganization or for any similar relief
is filed by or against the other party, or a liquidation proceeding is commenced
by or against the other party; or
(b) The whole of the business of the other party, or that part of the
business of the other party, is transferred to a third party by agreement, order
of Court, or otherwise, including a merger or consolidation; or
(c) The other party defaults in any of the material provision(s) of this
Agreement and fails to "cure" such default after being given notice of the same.
POST-TERMINATION OBLIGATIONS
Upon termination of this Agreement for any reason whatsoever the rights
granted this Agreement shall immediately terminate.
The rights and obligations of the parties shall also immediately terminate
except the secrecy obligation(s) imposed upon Scitronix under the terms of this
Agreement shall remain in full force and effect and survive termination.
Scitronix shall return to MDT, as soon as possible, but not later than five
(5) business days after the effective Termination Date of this Agreement, any of
MDT's technical information relating to the PAS unit(s) or corresponding
software in written form and/or other specifically designated material(s)
provided to and used by Scitronix including, without limitation, blueprint(s),
technical specification(s), software, or other technical material(s), production
and quality control procedures, components, work in progress, finished goods,
manufacturing fixtures and tools, and any other hardware paid for by MDT.
12
<PAGE>
REPRESENTATIONS AND WARRANTIES OF MDT
MDT represents and warrants to Scitronix that, as of the Effective Date of
this Agreement, it is a corporation duly organized, validly existing and in good
standing under the laws of the State of Utah with all requisite corporate power
and authority to execute, deliver and to enter into and perform its obligations
under this Agreement. It is duly qualified to do business as a foreign
corporation in good standing in every jurisdiction where the character of the
business being conducted by it requires such qualification and in which failure
to so qualify would not have a material adverse effect on it. Neither the
signing nor the delivery of this Agreement, nor the consummation of the
transaction contemplated herein will conflict with, or result in breach of, or
constitute a default under, any of the provisions of any corporate restrictions
or any agreement or instrument to which it is a party or by which it is bound.
MDT also represents and warrants that it has taken or caused to be taken
all necessary corporate action to authorize the execution, delivery and
performance of this Agreement, and that this Agreement constitutes a valid and
binding obligation enforceable in accordance with the terms.
REPRESENTATIONS AND WARRANTIES OF SCITRONIX
Scitronix represents and warrants to MDT that, as of the Effective Date of
this Agreement, it is a corporation duly organized, validly existing and in good
standing under the laws of the State of California with all requisite corporate
power and authority to execute, deliver and to enter into and perform its
obligations under this Agreement. It is duly qualified to do business as a
foreign corporation in good standing in every jurisdiction where the character
of the business being conducted by it requires such qualification and in which
failure to so qualify would not have a material adverse effect on it. Neither
the signing nor the delivery of this Agreement, nor the consummation of the
transaction contemplated herein will conflict with, or result in breach of, or
constitute a default under, any of the provisions of any corporate restrictions
or any agreement or instrument to which it is a party or by which it is bound.
Scitronix also represents and warrants that it has taken or caused to be
taken all necessary corporate action to authorize the execution, delivery and
performance of this Agreement, and that this Agreement constitutes a valid and
binding obligation enforceable in accordance with the terms.
13
<PAGE>
NOTICES
Any notice, request, consent, demand or other communication given or
required to be given shall be in writing, and shall be given personally, by
telegraph, telex or telefax, or by mailing the same by registered or certified
mail, return receipt requested [with such notice to be effective ten (10) days
after actual transmittals such notice is given by mail], to:
If to MDT: Medical Device Technologies, Inc.
9191 Towne Centre Drive, Suite 430
San Diego, California 92122
Attention: Lee Hulsebus, President and CEO
If to Scitronix: Scitronix, Inc.
12655 Danielson Court, Suite 301
Poway, California 92064
Attention: Thomas G. Dacus, President
GOVERNING LAW
This Agreement has been made and executed in the County of San Diego, State
of California. It shall be construed and enforced according to the laws of the
State of California. The County of San Diego, State of California, shall be the
venue for any action, arbitration or special proceeding that may be brought in
connection with this Agreement.
WAIVER
The waiver by any party of a breach or violation of any provision of this
Agreement shall not operate as, or be construed as, a waiver of any subsequent
or other breach of such Agreement.
SEVERABILITY
Every provision of this Agreement is intended to be severable. If any term
or provision hereof is illegal or invalid for any reason whatsoever, such
illegality or invalidity shall not affect the validity or legality of the
remainder of this Agreement.
INCORPORATION BY REFERENCE
Every exhibit, schedule or other appendix attached to this Agreement and
referred to herein be hereby incorporated in this Agreement by reference.
14
<PAGE>
MERGER
It is agreed that all prior understandings and agreements between the
parties, written or oral, respecting or relating to this transaction are merged
in this Agreement, which alone, fully and completely expresses the agreement of
the parties, and there are no other agreements except as specifically set forth
in this Agreement. Any amendment or modification to this Agreement must be in
writing, executed by the parties hereto.
This Agreement supersedes and replaces any other written or verbal understanding
between the parties. No other agreement is effective unless in writing and
signed by an authorized representative of both the parties.
Signed:
Scitronix, Inc. Medical Device Technologies,
Inc.
/s/ Leon J. Ostapiej /s/M. Lee Hulsebus
- -------------------------- -----------------------------
Signature Leon J. Ostapiej Signature M. Lee Hulsebus
President President
1/17/96 1/17/96
- -------------------------- -----------------------------
Date Date
15
<PAGE>
ATTACHMENT B
PAS MANUFACTURING SCHEDULE *
Quantity Delivery Date Remarks
-------- ------------- -------
35 Jan. 15, 1996
65 Feb. 1, 1996
200 Feb. 9, 1996
200 Feb. 16, 1996
200 Feb. 23, 1996
300
Each deliverable PAS unit includes:
PAS Alarm unit
2 Patient Leads (PL-2)
1 Neck Chain
1 AA battery
1 Box with foam insert
1 Instruction manual
In addition, Scitonix will deliver a QC record for each deliverable unit at the
time the unit is accepted by and released to finished goods by MDT.
*Provided plastic components are available to Scitronix at least 5 business days
prior to the scheduled delivery date.
16
<PAGE>
QA / QC (Appendix A)
-------
. Scitronix performs QC of board before stuffing ( __%)
. Scitronix performs QC of board after stuffing and connection to LCD ( __%)
. Scitronix performs QC of board after installation into the PAS unit before
unit is sealed
. Scitronix performs QC of finished unit (at least the first 100 in the
presence of a MDT representative)
. Scitronix performs QC of components (e.g. switch, PL-1, UL-1, mechanical
parts) before permanent installation into the unit.
MDT will inspect/test finished goods 100%, at its sole discretion before the
product is released to finished goods inventory.
17
<PAGE>
B. ROLAND FREASIER, JR. Exhibit 10.2
5165A RENAISSANCE DRIVE
SAN DIEGO, CALIFORNIA 92122
March 29, 1996
M. Lee Hulsebus,
President and CEO
Medical Device Technologies, Inc.
9191 Towne Centre Drive
Suite 430
San Diego, California 92122
Dear Mr. Hulsebus:
I hereby resign, effective this date, my position as Executive Vice
President Corporate Relations, and also as an Officer of Medical Device
Technologies, Inc.
I hereby confirm that, effective upon my termination, I do not have in my
custody, control and/or possession any customer list(s), books and records of
the Company, any property belonging to the Company [including, without
limitation, computer equipment including hardware and/or software, credit
card(s), key(s), check(s)], nor do I have any written matter or documentation of
and referring to secret and/or proprietary information belonging to the Company.
Very truly yours,
/s/ B. Roland Freasier, Jr.
---------------------------
B. Roland Freasier, Jr.
<PAGE>
TERMINATION AGREEMENT AND RELEASE OF ALL CLAIMS
This Termination Agreement and Release of All Claims ("Agreement") is made
and entered into by and between B. ROLAND FREASIER, JR. (hereinafter referred to
as ("Freasier") and MEDICAL DEVICE TECHNOLOGIES, INC., a Utah corporation
(hereinafter referred to as "MDT") (collectively referred to herein as the
"Parties").
W I T N E S S E T H:
WHEREAS, certain disputes have arisen between MDT and Freasier, and they
desire to settle fully and finally any and all differences existing between
them; and
WHEREAS, MDT and Freasier desire to terminate his existing employment
arrangement and settle any and all claim(s) which either Party had, or could
have had, relative to Freasier's employment at MDT;
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained and for new, bargained for, and valuable consideration, receipt
of which is hereby acknowledged, it is hereby agreed as follows:
FIRST: This Agreement, and compliance with this Agreement, shall not be
-----
construed as an admission by any of the Parties hereto of any liability
whatsoever, or as an admission of any violation(s) of the rights of any person,
violation of any order, law, statute, duty, or contract.
SECOND: (a) Freasier stipulates that he has executed this Agreement
------
after first having reviewed, or had the opportunity to have reviewed the same
with his personal legal counsel, and that he did not execute this Agreement
without first being advised to consult an attorney. As new, full, complete and
bargained for consideration and remuneration, and in the settlement of any and
all disputes and claims of Freasier, MDT agrees to pay and distribute to
Freasier the following consideration in settlement of all "Claim(s)" Freasier
had, or could have had against MDT and/or its Officers, Directors and employees,
as hereinafter defined to include:
(b) An amount equal to Ten Thousand Dollars ($10,000) per month
for twenty-nine (29) consecutive months commencing April 1, 1996 and ending
August 31, 1998 for a gross amount of Two Hundred Ninety Thousand Dollars
($290,000);
(c) A stipulated sum representing reimbursement by MDT to
Freasier for a car allowance and medical and disability benefits equal to Two
Thousand Three Hundred Thirty-Three Dollars and Thirty-Three Cents ($2,333.33)
for twenty-nine (29) consecutive months commencing April 1, 1996 and ending
August 31, 1998, for a gross amount of Sixty-Seven Thousand Six Hundred Sixty-
Six Dollars and Fifty-Seven Cents ($67,666.57);
1
<PAGE>
(d) Two Hundred Thousand (200,000) shares of MDT Common Stock
fully vested and available to Freasier as of August 31, 1996; it being
understood, however, that such shares are subject to registration with the
United States Securities and Exchange Commission, and that MDT will use its
"best efforts" to effect such registration;
(e) One Hundred Fifty Thousand (150,000) Warrants entitling
Freasier to purchase one share of MDT Common Stock per Warrant at an exercise
price of One Dollar ($1.00), with all such Warrants to be first available to
Freasier on August 31, 1996, with all such Warrants to expire on August 31,
1999;
(f) Seventy Five Thousand (75,000) Warrants entitling Freasier
to purchase one share of MDT Common Stock per Warrant at an exercise price of
Forty Cents ($.40), with all such Warrants to be first available to Freasier on
August 31, 1998, with all such Warrants to expire on August 31, 2001;
(g) The stipulated sum of Seven Thousand Six Hundred Fifteen
Dollars ($7,615.00) as vacation pay;
(h) These sums represent wages and other compensation for
services rendered, and are in settlement of any and all past disputes, claim(s),
Cause(s) of Action by Freasier against MDT (or its Officers, Directors and/or
employees) for past wages, reimbursement for business expenses, (airfare, auto,
etc.), accrued or future vacation pay, moving expenses, housing allowance,
bonus(es), sales commission(s), medical benefits, or any other type and kind of
remuneration. Freasier agrees that receipt by him of the foregoing payment(s)
benefit(s) shall constitute the entire amount of monetary consideration to which
he is entitled, and that he will not claim any further compensation whether for
salary, commissions, royalties, damages, Option(s), Warrant(s), expense
reimbursement, costs, or attorneys' fees except as encompassed under the terms
of this Agreement;
(i) Freasier acknowledges and agrees that MDT has made no
representations regarding the tax consequences of any amounts received pursuant
to this Agreement, and further agrees to indemnify and hold MDT harmless, for
any claims, demands, deficiencies, levies, assessments, executions, judgments or
recoveries by any governmental entity against MDT for any amounts claimed due on
account of the payment of amounts set forth pursuant to claim(s) made under any
Federal or State tax laws, and any costs, expenses or damages sustained by MDT
by reason of any such claims, including any amounts paid by MDT as taxes,
attorneys' fees, deficiencies, levies, assessments, fines, penalties, interest
or otherwise if such amount is deemed to be subject to payroll taxes, income tax
withholding, FICA or FUTA. MDT agrees to promptly put Freasier on notice within
fifteen (15) days of the date it is notified that any Federal, State or local
governmental entity is making such a claim and shall permit Freasier to
participate in the determination of the settlement of any such claim;
2
<PAGE>
(j) Freasier agrees that he will neither seek nor accept
employment with MDT in the future, and that MDT is entitled to reject without
cause any application for employment with it made by Freasier;
(k) MDT further agrees that upon inquiry of any future or
respective employer concerning Freasier that neither MDT, its Officer(s),
Director(s), shareholders, or employees shall make any disparaging remarks, oral
or written, about Freasier, and shall affirmatively state the dates of
employment and positions with MDT, and that attendance and performance was
satisfactory, and that he left the Company by mutual agreement to pursue new
career opportunities;
(l) Freasier agrees that he will not make any oral or written
statement or take any other action which disparages or criticizes MDT, its
management, employees, Officers, Directors or shareholders. He further
acknowledges and warrants that he has returned to MDT all correspondence,
manuals, data, notes, reports, files, memoranda, records and any other tangible
items of property belonging to MDT which was or is in his possession, custody
and/or control; it being understood that he has neither copied, reproduced, nor
taken with him any secret and proprietary matter of and concerning MDT's
business or technology;
(m) Freasier understands and agrees that MDT, if asked for
employment references, will state that Freasier voluntarily resigned, and that
he performed his duties satisfactorily. No other information will be provided.
All details of this Agreement, once executed, will remain confidential to MDT,
Freasier, and their respective representatives and/or members of the Board of
Directors.
THIRD: Freasier represents that he has not filed any complaints, claims or
-----
actions against MDT, its Officers, agents, Directors, supervisors, employees or
representatives with any State, Federal or local agency or Court.
FOURTH: The Parties also agree that they will keep the fact, terms and
------
amount of this Agreement completely confidential and that they will not
hereafter disclose any information concerning this Agreement to anyone except
their respective attorneys and financial advisors; provided, however, that any
Party may make such disclosures as are required by law and as are necessary for
legitimate law enforcement or compliance purposes and to enforce rights
hereunder.
FIFTH: (a) Freasier agrees to execute a General Release(s) in favor of
-----
MDT its Officers, Directors, employees and/or agents in the form attached hereto
as Exhibit "1" whereby he irrevocably and unconditionally releases and forever
discharges MDT and its Officer(s), Director(s), employee(s), representative(s),
and/or successor(s) and assign(s) and all persons acting by, through, under, or
in concert with any of them from any and all charges, complaints, claims, and
liabilities of any kind or nature whatsoever, known or unknown, suspected or
unsuspected (hereinafter referred to as "Claim" or "Claims") which Freasier at
any time heretofore had or claimed to have or which he may have, or claim to
have had, regarding
3
<PAGE>
events that have occurred as of the date of this Agreement, including, without
limitation, any and all Claim(s) related or in any manner incidental to
officership(s) or employment with MDT) or the termination therefrom. The
Parties understand and stipulate that the defined word "Claims" shall be deemed
to include, without limitation, all Cause(s) of Action, claim(s), grievance(s),
or the like, whether actual or potential, known or unknown, and specifically,
but not exclusively, all Claims arising out of Freasier's employment with MDT
and his termination including Claim(s) based upon unlawful termination, breach
of contract, age, religious or sex discrimination, basic wages, or the like
(including related attorneys' fees and costs). Any and all such Claim(s) are
understood by Freasier to be forever waived and barred by this Agreement without
regard to whether those Claim(s) are based on any alleged breach of a duty
arising in contract or tort; any alleged unlawful act, including, without
limitation, discrimination; any other claim or Cause of Action; and regardless
of the forum in which it might be brought;
(b) MDT agrees to execute a General Release in favor of
Freasier, in the form attached hereto as Exhibit "2" whereby it irrevocably and
unconditionally releases, acquits and forever discharges Freasier, his
representative(s), and/or successor(s) and assign(s), and all persons acting by,
through, under, or in concert with him from any and all charges, complaints,
claims, Cause(s) of Action, suits, liabilities, obligations, agreements,
controversies, damages, rights, demands, losses, debts, expenses and costs
including attorneys' fees and costs incurred of any nature whatsoever, known or
unknown, suspected or unsuspected, arising out of or in any way connected with
Freasier's employment with MDT and any acts or performance of duties in such
capacity.
SIXTH: Freasier understands and agrees that he:
-----
(a) Had sufficient time within which to consider this Agreement
before executing it;
(b) Carefully read and fully understands all of the provisions
of this Agreement;
(c) Is releasing MDT from any and all Claims he may have against
MDT;
(d) Knowingly and voluntarily agrees to all of the terms set
forth in this Agreement;
(e) Knowingly and voluntarily intends to be legally bound by the
same;
(f) Consulted with, or had the opportunity to consult with, an
attorney of his choice prior to executing this Agreement.
SEVENTH: (a) Freasier agrees that he will not make any statement(s) which
-------
would harm MDT in the performance of its business;
4
<PAGE>
(b) Freasier further agrees that he will not commence any suit
against the Company or its Officers, Directors and employees, individually, for
any reason whatsoever, including, without limitation, any claim of wrongful
termination or discrimination, or any other theory or cause.
EIGHTH: The Parties hereto represent and acknowledge that in executing
------
this Agreement they do not rely and have not relied upon any representation or
statements made by any of the Parties or their attorneys, or representatives
with regard to the subject matter, basis, or effect of this Agreement or
otherwise, other than those specifically stated in this written Agreement.
NINTH: This Agreement shall be binding upon the parties hereto and upon
-----
their heirs, administrators, representatives, executors, successors, and
assigns, and shall inure to the benefit of said Parties and each of them and to
their heirs, administrators, representatives, executors, successors, and
assigns. Freasier expressly warrants that he has not transferred to any person
or entity any securities in MDT, rights, Causes of Action, or Claims released in
this Agreement.
TENTH: Should any provision of this Agreement be declared or be determined
-----
by any Court of competent jurisdiction to be illegal, invalid, or unenforceable,
the legality, validity, and enforceability of the remaining parts, terms, or
provisions shall not be affected thereby, and said illegal, unenforceable, or
invalid part, term, or provision shall be deemed not to be part of this
Agreement.
ELEVENTH: This Agreement sets forth the entire agreement and understanding
--------
between the Parties. This Agreement fully supersedes any and all prior
Agreement(s) or understandings, written or oral, between the Parties hereto
pertaining to the subject matter hereof; it being understood that any and all
such prior Agreement(s) or understanding(s) are deemed to be merged into the
instant Agreement.
TWELFTH: This Agreement shall be interpreted in accordance with the plain
-------
meaning of its terms and not strictly for or against any of the parties hereto,
and in accordance with the laws of the State of California. Any suit to enforce
the terms of this Agreement shall be venued only in the City of San Diego,
California.
THIRTEENTH: It is further understood and agreed that if, at any time, a
----------
violation of any term of this Agreement is asserted by any party hereto, that
party shall have the right to seek specific performance of that term and/or any
other necessary and proper relief, including, but not limited to damages, from
any San Diego, California Court of competent jurisdiction, and the prevailing
party shall be entitled to recover its reasonable costs and attorneys' fees.
FOURTEENTH: Notices to be given hereunder shall be deemed given three (3)
----------
days after deposit in the U.S. mail, postage prepaid, certified, return receipt
requested, to the parties at the following address or such other address as the
parties may designate in writing to each other from time to time:
5
<PAGE>
If to MDT: Medical Device Technologies, Inc.
9191 Towne Centre Drive, Suite 430
San Diego, California 92122
Attention: M. Lee Hulsebus, President and CEO
With a copy to: Robert E. Meshel, P.C.
601 California Street, Suite 1900
San Francisco, California 94108
If to Freasier: B. Roland Freasier, Jr.
5165A Renaissance Avenue
San Diego, California 92122
Dated: March 29, 1996
ATTEST: MEDICAL DEVICE TECHNOLOGIES, INC.
/s/ Dolly R. Wilson By: /s/ M. Lee Hulsebus
- ------------------- ----------------------------------
M. Lee Hulsebus
President and CEO
ATTEST:
/s/ M. Lee Hulsebus /s/ B. Roland Freasier, Jr.
- ------------------- ---------------------------
B. Roland Freasier, Jr.
6
<PAGE>
GENERAL RELEASE
TO ALL TO WHOM THESE PRESENTS SHALL COME OR MAY CONCERN, KNOW THAT Medical
Device Technologies, Inc., a Utah corporation with an office and place of
business in San Diego, California, as Releasor, for and in consideration of the
sum of One Dollar ($1.00), and other good and valuable consideration received
from B. Roland Freasier, Jr., an individual residing at 5165A Renaissance
Avenue, San Diego, California 92122, as Releasee, receipt whereof is hereby
acknowledged, releases and discharges the Releasee, his agents, heirs,
executors, administrators, successors and assigns from any and all claim(s)
Releasor had, or could have had, against Releasee whether for salary, bonus,
commission(s), severance, reimbursement for expenses, retirement benefits, etc.,
Cause(s) of Action, suits, debts, dues, sums of money, accounts, reckonings,
bonds, bills, specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, extents, executions, claims
and demands whatsoever, in law, admiralty or equity, which against the Releasee,
the Releasor, Releasor's heirs, executors, administrators, successors and
assigns ever had, now have or hereafter can, shall or may have for, upon, or by
reason of any matter, cause or thing whatsoever arising out of or from
Releasee's term of employment with Releasor, or by reason of any other matter,
cause or thing whatsoever from the beginning of the world to the day of the date
of this Release. It is also understood and agreed that Releasor is aware of the
provisions of Section 1542 of the California Civil Code which provides:
"A general release does not extend to the claims which a creditor does
not know or suspects to exist in his favor at the time of executing the
release, which if known by him must have materially affected his settlement
with the debtor, . . ."
Releasor knowingly and voluntarily waives the provisions of Section 1542,
or any other comparable provisions or principles of State or Federal law, or the
common law, and acknowledges and agrees that this waiver is an essential and
material term of the companion "Severance Agreement and Release of All Claims,"
and the Release provisions contained herein, as well as the "claims" defined as:
any and all claims, demands, liens (both general and charging), agreements,
contracts, covenants, promises, suits, any and all manner of action or actions,
Cause or Cause(s) of Action, obligations, controversies, debts, attorneys' fees
and costs, expenses, damages, judgments, penalties, fines and liabilities of
whatever kind or nature in law, equity or otherwise, whether now known or
unknown, suspected or unsuspected, fixed or contingent, and whether or not
concealed or hidden, which have existed or may have existed, or which do exist
or hereafter can, shall, or may exist, from the beginning of time until the last
date of execution herein, including, but not without in any respect limiting the
generality of the foregoing, any and all claims specified in the companion
"Termination Agreement and Release of all Claims."
This Release contains the entire agreement between the parties, and the
terms of this Release are contractual and not merely a recital. This Release
may not be changed orally.
IN WITNESS WHEREOF, Medical Device Technologies, Inc. has caused this
Release to be executed by its duly authorized Officer, and its corporate seal to
be hereunto affixed on
<PAGE>
the date set forth below, and does hereby affirm, under the penalties of
perjury, that the statements contained therein have been examined by it and are
true and correct.
Dated: March 29, 1996
MEDICAL DEVICE TECHNOLOGIES, INC.
By: /s/ M. Lee Hulsebus L.S.
---------------------------
M. Lee Hulsebus
Chairman and CEO
- 2 -
<PAGE>
GENERAL RELEASE
TO ALL TO WHOM THESE PRESENTS SHALL COME OR MAY CONCERN, KNOW THAT B.
Roland Freasier, Jr., an individual residing at 5165A Renaissance Avenue, San
Diego, California 92122, the Releasor, for and in consideration of the sum of
One Dollar ($1.00), and other good and valuable consideration received from
Medical Device Technologies, Inc., a Utah corporation, with an office and place
of business in San Diego, California, the Releasee, receipt whereof is hereby
acknowledged, releases and discharges the Releasee, its Officers, Directors,
employees, agents, heirs, executors, administrators, successors and assigns from
any and all claim(s) Releasor had, or could have had, against Releasee whether
for salary, bonus, commission(s), severance, reimbursement for expenses,
retirement benefits, etc., Cause(s) of Action, suits, debts, dues, sums of
money, accounts, reckonings, bonds, bills, specialties, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages, judgments,
extents, executions, claims and demands whatsoever, in law, admiralty or equity,
which against the Releasee, the Releasor, Releasor's heirs, executors,
administrators, successors and assigns ever had, now have or hereafter can,
shall or may have for, upon, or by reason of any matter, cause or thing
whatsoever arising out of or from Releasor's term of employment with Releasee,
or by reason of any other matter, cause or thing whatsoever from the beginning
of the world to the day of the date of this Release. It is also understood and
agreed that RELEASOR is aware of the provisions of Section 1542 of the
California Civil Code which provides:
"A general release does not extend to the claims which a creditor does
not know or suspects to exist in his favor at the time of executing the
release, which if known by him must have materially affected his settlement
with the debtor, . . ."
Releasor knowingly and voluntarily acknowledges and agrees that this waiver
is an essential and material term of the companion Termination Agreement and
Release of All Claims, and the Release provisions contained herein, including,
without limitation, any and all rights or remuneration contained in a certain
Employment Agreement dated August 15, 1994 and companion Severance Agreement
dated August 15, 1994, as well as the "claims" defined as: any and all claims,
demands, liens (both general and charging), agreements, contracts, covenants,
promises, suits, any and all manner of action or actions, Cause or Cause(s) of
Action, obligations, controversies, debts, attorneys' fees and costs, expenses,
damages, judgments, penalties, fines and liabilities of whatever kind or nature
in law, equity or otherwise, whether now known or unknown, suspected or
unsuspected, fixed or contingent, and whether or not concealed or hidden, which
have existed or may have existed, or which do exist or hereafter can, shall, or
may exist, from the beginning of time until the last date of execution herein,
including, but not without in any respect limiting the generality of the
foregoing, any and all claims specified in the companion Termination Agreement
and Release of All Claims.
This Release contains the entire agreement between the parties, and the
terms of this Release are contractual and not merely a recital. This Release may
not be changed orally.
<PAGE>
IN WITNESS WHEREOF, I have subscribed this Release on the date set forth
below, and do hereby affirm, under the penalties of perjury, that the statements
contained therein have been examined by me and are true and correct.
Dated: March 29, 1996
/s/ B. Roland Freasier, Jr. L.S.
---------------------------------
B. Roland Freasier, Jr.
-2-
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made by and between MEDICAL
DEVICE TECHNOLOGIES, INC., a corporation duly organized and existing under the
laws of the State of Utah (the "Company"), having an office and principal place
of business at 9191 Towne Centre Drive, Suite 430, San Diego, California 92122,
and RICHARD E. SLOAN, an individual residing at 11905 Handrich Court, San
Diego, CA 92131 (the "Employee").
WHEREAS, the Company wishes to employ the Employee, and the Employee
is willing to accept such employment for the Company on a full time basis upon
such terms and conditions as are hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and following
premises, promises and mutual covenants, and for other good and valuable
consideration, the sufficiency, adequacy and receipt of which is hereby
acknowledged, the parties hereby agree as follows:
1. NATURE OF AGREEMENT:
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1.1. Employment. The Company agrees to employ the Employee, and the
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Employee agrees to accept such employment upon the terms and conditions herein.
1.2. Cancellation of Prior Offers. Any and all prior oral
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understandings, offers, and/or representations (if any) with respect to the
employment of the Employee are deemed by the parties to be either void and/or
deemed to be merged into this final written Agreement.
2. TERMS AND DUTIES:
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2.1. Term of Employment. The employment of the Employee under this
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Agreement shall be for a term of three (3) years, and commence on the 15th day
of March, 1996 (the "Effective Date"), and thereafter terminate on the 14th day
of March, 1999 (the "Termination Date").
2. 2. Location. The Employee agrees that he shall carry out his
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duties and obligations under the terms of this Agreement at the Company's
principal office in San Diego, California, or such other place, including places
outside the State of California, as Company may, in its sole discretion, direct.
2.3. Position and Primary Responsibility. It is understood that the
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Employee shall serve as the Vice President of New Business Development for the
Company. In such capacity, the Employee shall be responsible for assisting the
Chief Executive Officer ("CEO") in the day-to-day coordination and supervision
of the Company's operations. The Employee's responsibilities may be changed or
modified if the Company's CEO determines it necessary. The Employee shall
report directly to the CEO of the Company.
2. 4. Exclusivity. The Employee agrees to devote his full time,
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attention, energies, and use his "best efforts" solely and exclusively in the
performance of his duties under the terms of this Agreement.
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3. COMPENSATION:
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3.1. Base Salary. The Employee shall receive a Base Salary of One
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Hundred Eight Thousand Dollars ($108,000) per annum, payable in arrears, in bi-
monthly installments, or at such other intervals as the Company's regular
payroll is paid.
3. 2. Stock. As additional compensation the Employee shall also be
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granted a total of Fifty Thousand (50,000) shares of Common Stock of the Company
as publicly traded and quoted on the Supplemental National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), with such rights to
the Common Stock to "vest" according to the following schedule, provided that
Employee is in compliance with all terms of this Agreement and further provided
that Employee is at the time of vesting employed by the Company: 25,000 Shares
on March 15, 1997 and 25,000 shares on March 15, 1998.
3. 3. Warrants. As additional compensation, the Employee shall also
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be granted a total of Seventy-Five Thousand (75,000) Warrant(s) to purchase
shares of the Company's Common Stock, which warrants shall vest according to the
following schedule, provided that Employee is in compliance with all terms of
this Agreement and further provided that Employee is at the time of vesting
employed by the Company. Each Warrant shall entitle the Employee to purchase one
(1) share of Common Stock of the Company at a "strike price" of Forty Cents
($.40) per share):
3.3.1. 18,750 Warrants on March 15, 1997;
3.3.2. 18,750 Warrants on March 15, 1998;
3.3.3. 18,750 Warrants on March 15, 1999;
3.3.4. 18,750 Warrants on March 15, 2000.
3.4. Employee's Representation. At the time of vesting of any such
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warrants, Employee shall be required to represent that the Warrant(s) are taken
for investment purposes only, and not with a view to distribution; it being
understood, however, that the Employee shall have the right to sell, assign, or
otherwise transfer such Warrant(s), in part or in whole, in the Employee's sole
discretion and without the prior consent of the Company.
3.5. Payment. All compensation payable to the Employee hereunder
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shall be subject to the Company's rules and regulations, and shall also be
subject to all applicable State and Federal employment law(s); it being
understood that the Employee shall be responsible for the payment of all tax(es)
resulting from a determination that any portion of the compensation and/or
benefit(s) paid/received hereunder is a taxable event to the Employee; it being
further understood that the Employee shall hold the Company harmless from any
governmental claim(s) for tax liabilities, including interest or penalties,
arising from any failure by the Employee to pay his individual tax(es) when due.
3.6. Bonus Program. The Employee will participate in the Company's
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Executive Bonus Plan as a key employee and officer of the Company.
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4. BENEFITS:
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4.1. Vacation. The Employee shall be entitled to vacation as provided in
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Company's Employee Handbook.
4.2. Insurance Benefits. Subject to pre-eligibility, and as of the
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Effective Date, the Employee shall also be entitled to participate in any
medical insurance Plan which the Company may establish for its employee(s); it
being understood that the Company shall pay all allowable insurance premiums for
such insurance for the benefit of the Employee; it being further understood,
however, that until such time as the Company shall establish such a Plan, the
Company shall reimburse the Employee for all premiums payable by him in order
for the Employee to continue to keep in force his existing family medical health
Policy; it being further understood that the maximum amount reimbursable by the
Company for such insurance Policy coverage shall be Five Hundred Dollars ($500)
per month (gross to the Employee).
4.3. Compliance . The Employee agrees that in connection with the
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benefit(s) provided for in this Article, he shall fully comply with all of the
expense reporting requirement(s) of the Company as provided in paragraph "7" of
this Agreement.
4.4. Indemnification. The Company agrees to indemnify the Employee to the
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fullest extent permitted by law and by the Company's By-Laws, and include the
Employee as a named insured in any Directors and Officers Liability Insurance
Policy that the Company may obtain during the life of this Agreement.
5. CONFIDENTIAL INFORMATION AND RECORDS:
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5.1. No Conflict/No Confidential Information of Others. The Employee
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represents that his employment with the Company under the terms of this
Agreement will not conflict with any continuing duty(ies) or obligation(s) the
Employee has with any other person(s), firm(s) and/or entity(ies). The Employee
also represents that he has not brought to the Company (during the period before
or after the Effective Date of this Agreement) any material(s) and/or
document(s) of a former or present employer(s), or any confidential information
or property belonging to other(s).
5.2. Non Competition During Employment. The Employee also represents to
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the Company that during the term of this Agreement, he will not, directly or
indirectly, without the express prior written approval of the Chairman of the
Board of Directors of the Company, engage or be interested in any business that
is in competition with the business of the Company (whether as a principal,
stockholder, lender, employee, Officer, Director, partner, venturer, consultant
or otherwise).
5.3. Conflict of Interest Disclosure. The Employee also represents that
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during the term of this Agreement, he will promptly disclose to the Chairman of
the Board of Directors of the Company, complete information concerning any
direct interest he holds in any business which provides service(s) and/or
product(s) to the Company (whether as a principal, stockholder, lender,
employee, Director, Officer, partner, venturer, consultant or otherwise).
5.4. Non-Disclosure. The Employee also represents that he will not
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disclose to any person(s) or entity(ies) (other than to the Company's Board of
Directors, or to others as required in
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the performance of his duties) any confidential or secret information with
respect to the business or affairs of the Company and/or its product(s).
5.5. Non Interference. The Employee agrees that for a period commencing on
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the Effective Date and ending one (1) year after the Termination Date of this
Agreement, he will not, directly or indirectly, disturb, entice or hire away, or
in any other manner persuade an employee(s), consultant(s), dealer(s) or
customer(s) of the Company to discontinue that person's or firm's relationship
with the Company.
5. 6. Records. All records, files, documents, and the like, or abstracts,
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summaries, or copies thereof, relating to the business of the Company which the
Employee shall prepare or use or come into contact with, shall remain the sole
property of the Company, and shall not be removed by the Employee from the
premises of the Company without the written consent of the Chairman of the Board
of Directors of the Company, and shall be promptly returned to the Company upon
the Termination Date.
6. TERMINATION:
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6.1. Termination of Employment by the Company This Agreement may be
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terminated, without cost or penalty to the Company, either "for cause"
(hereinafter defined), and/or if the Employee shall suffer a "Disability"
(hereinafter defined). The term "for cause" shall mean any fraudulent or
dishonest conduct in the performance of the Employee's duties and functions,
gross negligence or willful breach by the Employee of his material obligation(s)
under this Agreement, and/or the Employee's disregard of the policies or the
instructions of the Company's Board of Directors. The term "Disability" shall
mean the death of the Employee, or his physical or mental disability or
incapacity which the Board of Directors of the Company, in the good faith
determines, prevents the Employee from performing substantially all of the
duties hereunder during a continuous thirty (30) day period.
6.2. Termination Without Cause. This Agreement may also be terminated by
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the Company "without cause," and again without cost or penalty, provided that
Company shall pay to Employee at the time of any such termination without cause,
a sum equal to six (6) months of Employee's base salary at the time of any such
termination.
7. EXPENSES. During the term of this Agreement, the Company will also
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reimburse the Employee for all reasonable business expense(s) incurred by him on
behalf of the Company in the performance of his duties hereunder, upon
presentation by the Employee of voucher(s), receipt(s) or other written
evidence(s) in accordance with the policies of the Company and the rules of the
Internal Revenue Service, provided that Employee shall be entitled to receive no
reimbursement for expenses not approved by the CEO of the Company which are in
excess of $100 in any calendar month.
8. NONCOMPETITION. NONSOLICITATION:
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8.1. Non Competition. During the term of this Agreement, and for a period
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of one (1) year after the Termination Date, the Employee shall not, without both
the disclosure to and the written approval of the Chairman of the Board of
Directors of the Company, directly or indirectly, engage or be interested in
(whether as a principal, stockholder, lender, employee, officer, director,
partner, venturer, consultant or otherwise) any business(es) that is competitive
with the business of the Company, its parent or affiliated companies, without
the express written approval of the
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Chairman of the Board of Directors of the Company. If for any reason, the
provisions of this paragraph are held to be unenforceable by any court or
arbitrator, then such court or arbitrator shall prohibit Employees competition
with the Company to the maximum extent permissible by law.
8.2. Disclosure. During the term of this Agreement, the Employee shall
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promptly disclose to the Chairman of the Board of Directors of the Company all
information concerning any interests, direct or indirect, he holds (whether as a
principal, stockholder, lender, employee, officer, director, partner, venturer,
consultant or otherwise) in any business which the Employee reasonably knows
purchases goods or provides services to the Company, its parent, or affiliates.
9. INVENTIONS, DISCOVERIES AND IMPROVEMENTS. Any and all invention(s),
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discovery(ies) and improvement(s), whether protectible or unprotectible by
Patent, trademark, copyright or trade secret, made, devised, or discovered by
the Employee, whether by the Employee alone or jointly with others, from the
time of entering the Company's employ until the Termination Date of this
Agreement, relating or pertaining in any way to the Employee's employment with
the Company, shall be promptly disclosed in writing to the Board of Directors of
the Company, and become and remain the sole and exclusive property of the
Company. The Employee agrees to execute any assignments to the Company, or its
nominee, of the Company's entire right, title, and interest in and to any such
inventions, discoveries and improvements and to execute any other instruments
and documents requisite or desirable in applying for and obtaining Patents,
trademarks or copyrights at the cost of the Company, with respect thereto in the
United States and in all foreign countries, that may be requested by the
Company. The Employee further agrees, whether or not then in the employment of
the Company, to cooperate to the fullest extent and in the manner that may be
reasonably requested by the Company in the prosecution and/or defense of any
suit(s) involving claim(s) of infringement and/or misappropriation of
proprietary rights relevant to Patent(s), trademark(s), copyright(s), trade
secret(s), processes, and/or discoveries involving the Company's product(s); it
being understood that all reasonable costs and expense thereof shall be paid by
the Company. The Company shall have the sole right to determine the treatment of
disclosures received from the Employee, including the right to keep the same as
a trade secret, to use and disclose the same without a prior Patent Application,
to file and prosecute United States and foreign Patent Application(s) thereon,
or to follow any other procedure which the Company may deem appropriate.
10. CONFIDENTIAL INFORMATION AND TRADE SECRETS:
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10.1. Confidentiality. The Employee hereby acknowledges that all trade,
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engineering, production, and technical data, information or "know-how"
including, but not limited to, customer lists, sales and marketing techniques,
vendor names, purchasing information, processes, methods, investigations, ideas,
equipment, tools, programs, costs, product profitability, plans, specifications,
Patent Application(s), drawings, blueprints, sketches, layouts, formulas,
inventions, processes and data, whether or not reduced to writing, used in the
development and manufacture of the Company's products and/or the performance of
services, or in research or development, are the exclusive secret and
confidential property of the Company, and shall be at all times, whether after
the Effective Date or after the Termination Date, be kept strictly confidential
and secret by the Employee.
10.2. Return of Property. The Employee agrees not to remove from the
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Company's office or copy any of the Company's confidential information, trade
secrets, books, records, documents or customer or supplier lists, or any copies
of such documents, without the express written permission of the Chairman of the
Board of Directors of the Company. The Employee agrees, at the Termination Date,
to return any property belonging to the Company, including, but not limited to,
any and all
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records, notes, drawings, specifications, programs, data and other materials (or
copies thereof pertaining to the Company's businesses or its product(s) and
service(s), generated or received by the Employee during the course of his
employment with the Company.
10.3. Non-Disclosure. The Employee represents and agrees that during the
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term of this Agreement, and after the Termination Date, he will not report,
publish, disclose, use, or transfer to any person(s) or entity(ies) any property
or information belonging to the Company without first having obtained the prior
express written consent of the Company to do so; it being understood, however,
that information which was publicly known, or which is in the public domain, or
which is generally known, shall not be subject to this restriction.
11. INFORMATION OF OTHERS. The Employee agrees that the Company does not
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desire to acquire from the Employee any secret or confidential information or
"know-how" of other(s). The Employee, therefore, specifically represents to the
Company that he will not bring to the Company any material(s), document(s), or
writing(s) containing any such information. The Employee represents and warrants
that from the Effective Date of this Agreement he is free to divulge to the
Company, without any obligation to, or violation of the rights of other(s),
information, practices and/or techniques which the Employee will describe,
demonstrate or, divulge or in any other manner make known to the Company during
the Employee' s performance of services. The Employee also agrees to indemnify
and hold the Company harmless from and against any and all liability(ies),
loss(es), cost(s), expense(s), damage(s), claim(s) or demand(s) for any
violation of the right(s) of other(s) as it relates to the Employee's
misappropriation of secrets, confidential information, or "know-how" of
other(s).
12. NOTICE. All notices and other communications under this Agreement shall be
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in writing and shall be delivered personally or mailed by registered or
certified mail, return receipt requested, and shall be deemed given when so
delivered or mailed, to a party at his or its address as follows (or at such
other address as a party may designate by notice given hereunder):
If to Employee:
Richard E. Sloan
11905 Handrich Court
San Diego, CA 92131
If to the Company:
Medical Device Technologies, Inc.
9191 Towne Center Drive, Suite 430
San Diego, California 92122
13. ARBITRATION. In the event of any dispute arising out of this Agreement or
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the Employee's employment with the Company, or the termination of the Employee's
employment, whether such dispute gives rise to a Cause of Action sounding in
contract and/or in tort, and/or whether based on a statute or case law,
including, without limitation, the breach of the covenant of "good faith" and
"fair dealing, or "employment discrimination," or otherwise, the parties agree
to submit any and all such dispute(s) (if any) to final and binding arbitration
pursuant to the Rules of the American Arbitration Association with the venue of
all arbitration hearing(s) to be in San Diego, California. Any demand for
arbitration shall be made in writing to the other party to this Agreement within
six (6) months
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after the date the claim(s) first arose, but in no event later than six (6)
months from the effective Termination Date of this Agreement. Any failure of a
party to timely demand arbitration hereunder shall constitute a complete waiver;
it being understood that the time limitation period shall not be subject to any
tolling, equitable or otherwise. The parties further agree that, except as
specifically provided otherwise herein, the exclusive remedy in arbitration for
any alleged violation(s) of the terms, conditions, or covenants of this
Agreement, and for any harm alleged in connection with any dispute subject to
arbitration hereunder, shall be a monetary award not to exceed the amount of
actual contract damage less any proper offset for mitigation of such damages; it
being understood that the foregoing is without prejudice to the rights of the
Company to seek injunctive and/or other equitable relief to enforce the
provision(s) of Article(s) "5," "8," "10" and "11" of this Agreement.
14. MISCELLANEOUS
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14.1. Post Termination Obligations. Notwithstanding the termination of
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the Employee's engagement hereunder, the provision(s) of Article(s) "5," "8,"
"10" and "11" shall survive any termination.
14.2. Assignment. This Agreement shall be assigned to and inure to the
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benefit of, and be binding upon, any successor to substantially all of the
assets and business of the Company as a going concern, whether by merger,
consolidation, liquidation or sale of substantially all of the assets of the
Company or otherwise. The Employee understands and agrees, however, that this
Agreement is exclusive and personal to him only, and, as such, he will neither
assign nor subcontract all or part of his undertaking(s) or obligation(s) under
the terms of this Agreement.
14.3. Entire Agreement. Each party acknowledges that this Agreement
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constitutes the entire understanding between them, and that there are no other
written or verbal agreement(s) or understanding(s) between them other than those
set forth herein; it being understood that no amendment(s) to this Agreement
shall be effective unless reduced to writing and signed by each party hereto.
14.4. Severability. In the event that any provision of this Agreement
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shall be determined to be unenforceable or otherwise invalid, the balance of the
provision(s) shall be deemed to be enforceable and valid; it being understood
that all provision(s) of this Agreement are deemed to be severable, so that
unenforceability or invalidity of any single provision will not affect the
remaining provision(s).
14.5. Headings. The Article and paragraph heading(s) in this Agreement
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are deemed to be for convenience only, and shall not be deemed to alter or
affect any provision herein.
14.6. Interpretation of Agreement. This Agreement shall be interpreted in
----------------------------
accordance plain meaning of its terms and under the laws of the State of
California, and the terms of this Agreement shall not be construed against
either party, as the agreement represents the cumulative result of comprehensive
negotiations between the parties and, if applicable, their respective counsel.
14.7. Variation. Any change in the salary, or Bonus(es), or other
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condition(s) after the Effective Date of this Agreement shall not be deemed to
constitute a new Agreement with all unchanged terms to remain in force and
effect.
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14.8. Unenforceability. The unenforceability or invalidity of any
----------------
provision(s) of this Agreement shall not affect the enforceability and/or the
validity of the remaining provision(s).
14.9. Collateral Documents. Each party hereto shall make, execute and
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deliver such other instrument(s) or document(s) as may be reasonably required in
order to effectuate the purposes of this Agreement.
14.10. Written Policies and Procedures. The Company's written policies
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and procedures, as codified and contained in the Company "Employee Handbook," is
incorporated by reference.
14.11. Non-Impairment. This Agreement may not be amended or supplemented
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at any time unless reduced to a writing executed by each party hereto. No
amendment, supplement or termination of this Agreement shall affect or impair
any of the rights or obligations which may have matured thereunder.
14.12. Execution. This Agreement may be executed in one or more
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counterpart(s), and each executed counterpart(s) shall be considered by the
parties as an original.
14.13. Legal Counsel. The Employee represents to the Company that he has
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either retained legal counsel of his own selection, and/or was given sufficient
opportunity to obtain legal counsel of his own choosing prior to executing this
Agreement. The Employee also represents that he has read the provision(s) of
this Agreement and understands their meaning.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the
day and year first above written.
ATTEST: MEDICAL DEVICE TECHNOLOGIES, INC.
s/C.M. Smith By: s/M. Lee Hulsebus
- ---------------------------- --------------------------------
M. LEE HULSEBUS
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
ATTEST: EMPLOYEE
s/C.M. Smith s/R.E. Sloan
- ---------------------------- --------------------------------
RICHARD E. SLOAN
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CAL. LAB. C. (S)2870 DISCLOSURE. In accordance with California Labor Code
(S)2872, you are hereby notified that you are not required to assign to the
Company any Invention for which no equipment, supplies, facilities, or trade
secret information of the Company was used and that was developed entirely on
your own time, and does not relate to the business of the Company or to the
Company's actual or demonstrably anticipated research or development, or does
not result from any work performed by you for the Company.
Following is the text of California Labor Code (S)2870:
"(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information
except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent that a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against
the public policy of this state and is unenforceable."
I hereby acknowledge receipt of this written notification.
Date: April 1, 1996 Employee's Initials: s/RES
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EXHIBIT 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made by and between MEDICAL
DEVICE TECHNOLOGIES, INC., a corporation duly organized and existing under the
laws of the State of Utah (the "Company"), having an office and principal place
of business at 9191 Towne Centre Drive, Suite 430, San Diego, California 92122,
and EDWARD C. HALL, an individual residing at 15130 Via De La Valle, Rancho
Santa Fe, CA 92067 (the "Employee").
WHEREAS, the Company wishes to employ the Employee, and the Employee
is willing to accept such employment for the Company on a full time basis upon
such terms and conditions as are hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and following
premises, promises and mutual covenants, and for other good and valuable
consideration, the sufficiency, adequacy and receipt of which is hereby
acknowledged, the parties hereby agree as follows:
1. NATURE OF AGREEMENT:
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1.1. Employment. The Company agrees to employ the Employee, and the
-----------
Employee agrees to accept such employment upon the terms and conditions herein.
1.2. Cancellation of Prior Offers. Any and all prior oral
-----------------------------
understandings, offers, and/or representations (if any) with respect to the
employment of the Employee are deemed by the parties to be either void and/or
deemed to be merged into this final written Agreement.
2. TERMS AND DUTIES:
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2.1. Term of Employment. The employment of the Employee under this
------------------
Agreement shall be for a term of three (3) years, and commence on the 15th day
of March, 1996 (the "Effective Date"), and thereafter terminate on the 14th day
of March, 1999 (the "Termination Date").
2. 2. Location. The Employee agrees that he shall carry out his
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duties and obligations under the terms of this Agreement at the Company's
principal office in San Diego, California, or such other place, including places
outside the State of California, as Company may, in its sole discretion, direct.
2.3. Position and Primary Responsibility. It is understood that the
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Employee shall serve as the Chief Financial Officer for the Company. In such
capacity, the Employee shall be responsible for assisting the Chief Executive
Officer ("CEO") in the day-to-day coordination and supervision of the Company's
operations. The Employee's responsibilities may be changed or modified if the
Company's CEO determines it necessary. The Employee shall report directly to
the CEO of the Company.
2. 4. Exclusivity. The Employee agrees to devote for three (3) days
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per week his full time, attention, energies, and use his "best efforts" solely
and exclusively in the performance of his duties under the terms of this
Agreement.
<PAGE>
3. COMPENSATION:
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3.1. Base Salary. The Employee shall receive a Base Salary of Sixty
-----------
Thousand Dollars ($60,000) per annum, payable in arrears, in bi-monthly
installments, or at such other intervals as the Company's regular payroll is
paid.
3. 2. Stock. As additional compensation the Employee shall also be
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granted a total of Twenty-Five Thousand (25,000) shares of Common Stock of the
Company as publicly traded and quoted on the Supplemental National Association
of Securities Dealers Automated Quotation System ("NASDAQ"), with such rights to
the Common Stock to "vest" according to the following schedule, provided that
Employee is compliance with all terms of this Agreement and further provided
that Employee is at the time of vesting employed by the Company: 12,500 Shares
on March 15, 1997 and 12,500 shares on March 15, 1998.
3. 3. Warrants. As additional compensation, the Employee shall also
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be granted a total of Fifty Thousand (50,000) Warrant(s) to purchase shares of
the Company's Common Stock, which warrants shall vest according to the following
schedule, provided that Employee is compliance with all terms of this Agreement
and further provided that Employee is at the time of vesting employed by the
Company. Each Warrant shall entitle the Employee to purchase one (1) share of
Common Stock of the Company at a "strike price" of Forty Cents ($.40) per
share):
3.3.1. 12,500 Warrants on March 15, 1997;
3.3.2. 12,500 Warrants on March 15, 1998;
3.3.3. 12,500 Warrants on March 15, 1999;
3.3.4. 12,500 Warrants on March 15, 2000.
3.4. Employee's Representation. At the time of vesting of any such
-------------------------
warrants, Employee shall be required to represent that the Warrant(s) are taken
for investment purposes only, and not with a view to distribution; it being
understood, however, that the Employee shall have the right to sell, assign, or
otherwise transfer such Warrant(s), in part or in whole, in the Employee's sole
discretion and without the prior consent of the Company.
3.5. Payment. All compensation payable to the Employee hereunder
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shall be subject to the Company's rules and regulations, and shall also be
subject to all applicable State and Federal employment law(s); it being
understood that the Employee shall be responsible for the payment of all tax(es)
resulting from a determination that any portion of the compensation and/or
benefit(s) paid/received hereunder is a taxable event to the Employee; it being
further understood that the Employee shall hold the Company harmless from any
governmental claim(s) for tax liabilities, including interest or penalties,
arising from any failure by the Employee to pay his individual tax(es) when due.
3.6. Bonus Program. The Employee will participate in the Company's
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Executive Bonus Plan as a key employee and officer of the Company.
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4. BENEFITS:
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4.1. Vacation. The Employee shall be entitled to vacation as provided in
--------
Company's Employee Handbook.
4.2. Insurance Benefits. Subject to pre-eligibility, and as of the
------------------
Effective Date, the Employee shall also be entitled to participate in any
medical insurance Plan which the Company may establish for its employee(s); it
being understood that the Company shall pay all allowable insurance premiums for
such insurance for the benefit of the Employee; it being further understood,
however, that until such time as the Company shall establish such a Plan, the
Company shall reimburse the Employee for all premiums payable by him in order
for the Employee to continue to keep in force his existing family medical health
Policy; it being further understood that the maximum amount reimbursable by the
Company for such insurance Policy coverage shall be Five Hundred Dollars ($500)
per month (gross to the Employee).
4.3. Compliance . The Employee agrees that in connection with the
----------
benefit(s) provided for in this Article, he shall fully comply with all of the
expense reporting requirement(s) of the Company as provided in paragraph "7" of
this Agreement.
4.4. Indemnification. The Company agrees to indemnify the Employee to the
---------------
fullest extent permitted by law and by the Company's By-Laws, and include the
Employee as a named insured in any Directors and Officers Liability Insurance
Policy that the Company may obtain during the life of this Agreement.
5. CONFIDENTIAL INFORMATION AND RECORDS:
-------------------------------------
5.1. No Conflict/No Confidential Information of Others. The Employee
-------------------------------------------------
represents that his employment with the Company under the terms of this
Agreement will not conflict with any continuing duty(ies) or obligation(s) the
Employee has with any other person(s), firm(s) and/or entity(ies). The Employee
also represents that he has not brought to the Company (during the period before
or after the Effective Date of this Agreement) any material(s) and/or
document(s) of a former or present employer(s), or any confidential information
or property belonging to other(s).
5.2. Non Competition During Employment. The Employee also represents to
---------------------------------
the Company that during the term of this Agreement, he will not, directly or
indirectly, without the express prior written approval of the Chairman of the
Board of Directors of the Company, engage or be interested in any business that
is in competition with the business of the Company (whether as a principal,
stockholder, lender, employee, Officer, Director, partner, venturer, consultant
or otherwise).
5.3. Conflict of Interest Disclosure. The Employee also represents that
-------------------------------
during the term of this Agreement, he will promptly disclose to the Chairman of
the Board of Directors of the Company, complete information concerning any
direct interest he holds in any business which provides service(s) and/or
product(s) to the Company (whether as a principal, stockholder, lender,
employee, Director, Officer, partner, venturer, consultant or otherwise).
5.4. Non-Disclosure. The Employee also represents that he will not
--------------
disclose to any person(s) or entity(ies) (other than to the Company's Board of
Directors, or to others as required in
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<PAGE>
the performance of his duties) any confidential or secret information with
respect to the business or affairs of the Company and/or its product(s).
5.5. Non Interference. The Employee agrees that for a period commencing on
----------------
the Effective Date and ending one (1) year after the Termination Date of this
Agreement, he will not, directly or indirectly, disturb, entice or hire away, or
in any other manner persuade an employee(s), consultant(s), dealer(s) or
customer(s) of the Company to discontinue that person's or firm's relationship
with the Company.
5. 6. Records. All records, files, documents, and the like, or abstracts,
--------
summaries, or copies thereof, relating to the business of the Company which the
Employee shall prepare or use or come into contact with, shall remain the sole
property of the Company, and shall not be removed by the Employee from the
premises of the Company without the written consent of the Chairman of the Board
of Directors of the Company, and shall be promptly returned to the Company upon
the Termination Date.
6. TERMINATION:
------------
6.1. Termination of Employment by the Company This Agreement may be
----------------------------------------
terminated, without cost or penalty to the Company, either "for cause"
(hereinafter defined), and/or if the Employee shall suffer a "Disability"
(hereinafter defined). The term "for cause" shall mean any fraudulent or
dishonest conduct in the performance of the Employee's duties and functions,
gross negligence or willful breach by the Employee of his material obligation(s)
under this Agreement, and/or the Employee's disregard of the policies or the
instructions of the Company's Board of Directors. The term "Disability" shall
mean the death of the Employee, or his physical or mental disability or
incapacity which the Board of Directors of the Company, in the good faith
determines, prevents the Employee from performing substantially all of the
duties hereunder during a continuous thirty (30) day period.
6.2. Termination Without Cause. This Agreement may also be terminated by
-------------------------
the Company "without cause," and again without cost or penalty, provided that
Company shall pay to Employee at the time of any such termination without cause,
a sum equal to six (6) months of Employee's base salary at the time of any such
termination.
7. EXPENSES. During the term of this Agreement, the Company will also
--------
reimburse the Employee for all reasonable business expense(s) incurred by him on
behalf of the Company in the performance of his duties hereunder, upon
presentation by the Employee of voucher(s), receipt(s) or other written
evidence(s) in accordance with the policies of the Company and the rules of the
Internal Revenue Service, provided that Employee shall be entitled to receive no
reimbursement for expenses not approved by the CEO of the Company which are in
excess of $100 in any calendar month.
8. NONCOMPETITION. NONSOLICITATION:
-------------------------------
8.1. Non Competition. During the term of this Agreement, and for a period
---------------
of one (1) year after the Termination Date, the Employee shall not, without both
the disclosure to and the written approval of the Chairman of the Board of
Directors of the Company, directly or indirectly, engage or be interested in
(whether as a principal, stockholder, lender, employee, officer, director,
partner, venturer, consultant or otherwise) any business(es) that is competitive
with the business of the Company, its parent or affiliated companies, without
the express written approval of the
4 of 9
<PAGE>
Chairman of the Board of Directors of the Company. If for any reason, the
provisions of this paragraph are held to be unenforceable by any court or
arbitrator, then such or court or arbitrator shall prohibit Employees
competition with the Company to the maximum extent permissible by law.
8.2. Disclosure. During the term of this Agreement, the Employee shall
----------
promptly disclose to the Chairman of the Board of Directors of the Company all
information concerning any interests, direct or indirect, he holds (whether as a
principal, stockholder, lender, employee, officer, director, partner, venturer,
consultant or otherwise) in any business which the Employee reasonably knows
purchases goods or provides services to the Company, its parent, or affiliates.
9. INVENTIONS, DISCOVERIES AND IMPROVEMENTS. Any and all invention(s),
----------------------------------------
discovery(ies) and improvement(s), whether protectible or unprotectible by
Patent, trademark, copyright or trade secret, made, devised, or discovered by
the Employee, whether by the Employee alone or jointly with others, from the
time of entering the Company's employ until the Termination Date of this
Agreement, relating or pertaining in any way to the Employee's employment with
the Company, shall be promptly disclosed in writing to the Board of Directors of
the Company, and become and remain the sole and exclusive property of the
Company. The Employee agrees to execute any assignments to the Company, or its
nominee, of the Company's entire right, title, and interest in and to any such
inventions, discoveries and improvements and to execute any other instruments
and documents requisite or desirable in applying for and obtaining Patents,
trademarks or copyrights at the cost of the Company, with respect thereto in the
United States and in all foreign countries, that may be requested by the
Company. The Employee further agrees, whether or not then in the employment of
the Company, to cooperate to the fullest extent and in the manner that may be
reasonably requested by the Company in the prosecution and/or defense of any
suit(s) involving claim(s) of infringement and/or misappropriation of
proprietary rights relevant to Patent(s), trademark(s), copyright(s), trade
secret(s), processes, and/or discoveries involving the Company's product(s); it
being understood that all reasonable costs and expense thereof shall be paid by
the Company. The Company shall have the sole right to determine the treatment of
disclosures received from the Employee, including the right to keep the same as
a trade secret, to use and disclose the same without a prior Patent Application,
to file and prosecute United States and foreign Patent Application(s) thereon,
or to follow any other procedure which the Company may deem appropriate.
10. CONFIDENTIAL INFORMATION AND TRADE SECRETS:
-------------------------------------------
10.1. Confidentiality. The Employee hereby acknowledges that all trade,
---------------
engineering, production, and technical data, information or "know-how"
including, but not limited to, customer lists, sales and marketing techniques,
vendor names, purchasing information, processes, methods, investigations, ideas,
equipment, tools, programs, costs, product profitability, plans, specifications,
Patent Application(s), drawings, blueprints, sketches, layouts, formulas,
inventions, processes and data, whether or not reduced to writing, used in the
development and manufacture of the Company's products and/or the performance of
services, or in research or development, are the exclusive secret and
confidential property of the Company, and shall be at all times, whether after
the Effective Date or after the Termination Date, be kept strictly confidential
and secret by the Employee.
10.2. Return of Property. The Employee agrees not to remove from the
------------------
Company's office or copy any of the Company's confidential information, trade
secrets, books, records, documents or customer or supplier lists, or any copies
of such documents, without the express written permission of the Chairman of the
Board of Directors of the Company. The Employee agrees, at the Termination Date,
to return any property belonging to the Company, including, but not limited to,
any and all
5 of 9
<PAGE>
records, notes, drawings, specifications, programs, data and other materials (or
copies thereof pertaining to the Company's businesses or its product(s) and
service(s), generated or received by the Employee during the course of his
employment with the Company.
10.3. Non-Disclosure. The Employee represents and agrees that during the
--------------
term of this Agreement, and after the Termination Date, he will not report,
publish, disclose, use, or transfer to any person(s) or entity(ies) any property
or information belonging to the Company without first having obtained the prior
express written consent of the Company to do so; it being understood, however,
that information which was publicly known, or which is in the public domain, or
which is generally known, shall not be subject to this restriction.
11. INFORMATION OF OTHERS. The Employee agrees that the Company does not
---------------------
desire to acquire from the Employee any secret or confidential information or
"know-how" of other(s). The Employee, therefore, specifically represents to the
Company that he will not bring to the Company any material(s), document(s), or
writing(s) containing any such information. The Employee represents and warrants
that from the Effective Date of this Agreement he is free to divulge to the
Company, without any obligation to, or violation of the rights of other(s),
information, practices and/or techniques which the Employee will describe,
demonstrate or, divulge or in any other manner make known to the Company during
the Employee' s performance of services. The Employee also agrees to indemnify
and hold the Company harmless from and against any and all liability(ies),
loss(es), cost(s), expense(s), damage(s), claim(s) or demand(s) for any
violation of the right(s) of other(s) as it relates to the Employee's
misappropriation of secrets, confidential information, or "know-how" of
other(s).
12. NOTICE. All notices and other communications under this Agreement shall be
-------
in writing and shall be delivered personally or mailed by registered or
certified mail, return receipt requested, and shall be deemed given when so
delivered or mailed, to a party at his or its address as follows (or at such
other address as a party may designate by notice given hereunder):
If to Employee:
Edward C. Hall
15130 Via De La Valle
Rancho Santa Fe, CA 92067
If to the Company:
Medical Device Technologies, Inc.
9191 Towne Center Drive, Suite 430
San Diego, California 92122
13. ARBITRATION. In the event of any dispute arising out of this Agreement or
------------
the Employee's employment with the Company, or the termination of the Employee's
employment, whether such dispute gives rise to a Cause of Action sounding in
contract and/or in tort, and/or whether based on a statute or case law,
including, without limitation, the breach of the covenant of "good faith" and
"fair dealing, or "employment discrimination," or otherwise, the parties agree
to submit any and all such dispute(s) (if any) to final and binding arbitration
pursuant to the Rules of the American Arbitration Association with the venue of
all arbitration hearing(s) to be in San Diego, California. Any demand for
arbitration shall be made in writing to the other party to this Agreement within
six (6) months
6 of 9
<PAGE>
after the date the claim(s) first arose, but in no event later than six (6)
months from the effective Termination Date of this Agreement. Any failure of a
party to timely demand arbitration hereunder shall constitute a complete waiver;
it being understood that the time limitation period shall not be subject to any
tolling, equitable or otherwise. The parties further agree that, except as
specifically provided otherwise herein, the exclusive remedy in arbitration for
any alleged violation(s) of the terms, conditions, or covenants of this
Agreement, and for any harm alleged in connection with any dispute subject to
arbitration hereunder, shall be a monetary award not to exceed the amount of
actual contract damage less any proper offset for mitigation of such damages; it
being understood that the foregoing is without prejudice to the rights of the
Company to seek injunctive and/or other equitable relief to enforce the
provision(s) of Article(s) "5," "8," "10" and "11" of this Agreement.
14. MISCELLANEOUS
-------------
14.1. Post Termination Obligations. Notwithstanding the termination of
-----------------------------
the Employee's engagement hereunder, the provision(s) of Article(s) "5," "8,"
"10" and "11" shall survive any termination.
14.2. Assignment. This Agreement shall be assigned to and inure to the
-----------
benefit of, and be binding upon, any successor to substantially all of the
assets and business of the Company as a going concern, whether by merger,
consolidation, liquidation or sale of substantially all of the assets of the
Company or otherwise. The Employee understands and agrees, however, that this
Agreement is exclusive and personal to him only, and, as such, he will neither
assign nor subcontract all or part of his undertaking(s) or obligation(s) under
the terms of this Agreement.
14.3. Entire Agreement. Each party acknowledges that this Agreement
----------------
constitutes the entire understanding between them, and that there are no other
written or verbal agreement(s) or understanding(s) between them other than those
set forth herein; it being understood that no amendment(s) to this Agreement
shall be effective unless reduced to writing and signed by each party hereto.
14.4. Severability. In the event that any provision of this Agreement
------------
shall be determined to be unenforceable or otherwise invalid, the balance of the
provision(s) shall be deemed to be enforceable and valid; it being understood
that all provision(s) of this Agreement are deemed to be severable, so that
unenforceability or invalidity of any single provision will not affect the
remaining provision(s).
14.5. Headings. The Article and paragraph heading(s) in this Agreement
---------
are deemed to be for convenience only, and shall not be deemed to alter or
affect any provision herein.
14.6. Interpretation of Agreement. This Agreement shall be interpreted in
----------------------------
accordance plain meaning of its terms and under the laws of the State of
California, and the terms of this Agreement shall not be construed against
either party, as the agreement represents the cumulative result of comprehensive
negotiations between the parties and, if applicable, their respective counsel.
14.7. Variation. Any change in the salary, or Bonus(es), or other
---------
condition(s) after the Effective Date of this Agreement shall not be deemed to
constitute a new Agreement with all unchanged terms to remain in force and
effect.
7 of 9
<PAGE>
14.8. Unenforceability. The unenforceability or invalidity of any
----------------
provision(s) of this Agreement shall not affect the enforceability and/or the
validity of the remaining provision(s).
14.9. Collateral Documents. Each party hereto shall make, execute and
--------------------
deliver such other instrument(s) or document(s) as may be reasonably required in
order to effectuate the purposes of this Agreement.
14.10. Written Policies and Procedures. The Company's written policies
-------------------------------
and procedures, as codified and contained in the Company "Employee Handbook," is
incorporated by reference.
14.11. Non-Impairment. This Agreement may not be amended or supplemented
--------------
at any time unless reduced to a writing executed by each party hereto. No
amendment, supplement or termination of this Agreement shall affect or impair
any of the rights or obligations which may have matured thereunder.
14.12. Execution. This Agreement may be executed in one or more
----------
counterpart(s), and each executed counterpart(s) shall be considered by the
parties as an original.
14.13. Legal Counsel. The Employee represents to the Company that he has
-------------
either retained legal counsel of his own selection, and/or was given sufficient
opportunity to obtain legal counsel of his own choosing prior to executing this
Agreement. The Employee also represents that he has read the provision(s) of
this Agreement and understands their meaning.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the
day and year first above written.
ATTEST: MEDICAL DEVICE TECHNOLOGIES, INC.
By: /s/M. Lee Hulsebus
- ------------------------------ ----------------------------------
M. LEE HULSEBUS
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
ATTEST: EMPLOYEE
/s/ Edward C. Hall
- ------------------------------- ----------------------------------
EDWARD C. HALL
8 of 9
<PAGE>
CAL. LAB. C. (S)2870 DISCLOSURE. In accordance with California Labor Code
(S)2872, you are hereby notified that you are not required to assign to the
Company any Invention for which no equipment, supplies, facilities, or trade
secret information of the Company was used and that was developed entirely on
your own time, and does not relate to the business of the Company or to the
Company's actual or demonstrably anticipated research or development, or does
not result from any work performed by you for the Company.
Following is the text of California Labor Code (S)2870:
"(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information
except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent that a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against
the public policy of this state and is unenforceable."
I hereby acknowledge receipt of this written notification.
Date: April 1, 1996 Employee's Initials: /s/ECH
--------
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<PAGE>
EXHIBIT 10.7
OHS DRAFT
4/22/96
FINANCIAL ADVISORY AND CONSULTING AGREEMENT
-------------------------------------------
This Agreement is made and entered into as of the ____ day of
__________, 1996 [the effective date of the Registration Statement], by and
between MEDICAL DEVICE TECHNOLOGIES, INC., a Utah corporation (the "Company"),
and FIRST ALLIED SECURITIES, INC. (the "Consultant").
In consideration of and for the mutual promises and covenants contained
herein, and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto hereby agree as follows:
1. Purpose. The Company hereby retains the Consultant during the
-------
term specified in Section 2 hereof to render consulting advice to the Company as
-------
an investment banker relating to financial and similar matters, upon the terms
and conditions as set forth herein.
2. Term. Subject to the provisions of Sections 8, 9 and 10 hereof,
---- --------
this Agreement shall be effective for a period of sixty (60) months commencing
__________, 1996 [the effective date of the Registration Statement].
3. Duties of Consultant. During the term of this Agreement, the
--------------------
Consultant will provide the Company with such regular and customary consulting
advice as is reasonably requested by the Company, provided that the Consultant
shall not be required to undertake duties not reasonably within the scope of the
consulting advisory service contemplated by this Agreement. In performance of
these duties, the Consultant shall provide the Company with the benefit of its
best judgment and efforts. It is understood and acknowledged by the parties
that the value of the Consultant's advice is not measurable in any quantitative
manner, and that the Consultant shall be obligated to render advice, upon the
request of the Company, in good faith, but shall not be obligated to spend any
specific amount of time in doing so. The Consultant's duties may include, but
will not necessarily be limited to:
A. Providing sponsorship and exposure in connection with the
dissemination of corporate information regarding the Company to the investment
community at large under a systematic planned approach.
B. Rendering advice and assistance in connection with the preparation
of annual and interim reports and press releases.
C. Arranging, on behalf of the Company and its representatives, at
appropriate times, meetings with securities analysts of major regional
investment banking firms.
D. Assisting in the Company's financial public relations, including
discussions between the Company and the financial community.
<PAGE>
E. Rendering advice with regard to internal operations, including:
(1) advice regarding the formation of corporate goals and their
implementation;
(2) advice regarding the financial structure of the Company and
its future divisions or subsidiaries, if any, or any programs and
projects of such entities;
(3) advice concerning the securing, when necessary and if
possible, of additional financing through banks, insurance
companies and/or other institutions; and
(4) advice regarding corporate organization and personnel.
F. Rendering advice with respect to any acquisition program of the
Company.
G. Rendering advice regarding a future public or private offering of
securities of the Company or of any future subsidiary.
4. Relationships with Others. The Company acknowledges that the
-------------------------
Consultant and its affiliates are in the business of providing financial service
and consulting advice (of all types contemplated by this Agreement) to others.
Nothing herein contained shall be construed to limit or restrict the Consultant
or its affiliates from rendering such services or advice to others.
5. Consultant's Liability. In the absence of gross negligence or
----------------------
willful misconduct on the part of the Consultant or the Consultant's breach of
this Agreement, the Consultant shall not be liable to the Company, or to any
officer, director, employee, shareholder or creditor of the Company, for any act
or omission in the course of or in connection with the rendering or providing of
advice or services hereunder. Except in those cases where the gross negligence
or misconduct of the Consultant or the breach by the Consultant of this
Agreement is alleged and proven, the Company agrees to defend, indemnify and
hold the Consultant harmless from and against any and all reasonable costs,
expenses and liability (including, but not limited to, attorneys' fees paid in
the defense of the Consultant) which may in any way result from services
rendered by the Consultant pursuant to or in any connection with this Agreement.
6. Expenses. The Company, upon receipt of appropriate supporting
--------
documentation, shall reimburse the Consultant for any and all reasonable out-of-
pocket expenses incurred by the Consultant in connection with services rendered
by the Consultant to the Company pursuant to this Agreement, including, but not
limited to, hotel, food and associated expenses, all charges for travel and
long-distance telephone calls and all other expenses incurred by the Consultant
in connection with services rendered by the Consultant to the Company pursuant
to this Agreement. Expenses payable under this Section 6 shall not include
---------
allocable overhead expenses of the Consultant, including, but not limited to,
attorneys' fees, secretarial charges and rent.
2
<PAGE>
7. Compensation. As compensation for the services to be rendered by
------------
the Consultant to the Company pursuant to Section 3 hereof during the term set
-------
forth in Section 2 hereof, the Company shall pay the Consultant a financial
-------
consulting fee of one thousand dollars ($1,000) per month, all of which (an
aggregate of sixty thousand dollars ($60,000)) shall be paid by the Company on
__________, 1996 [the closing date of the IPO].
8. Other Advice. In addition to the duties set out in Section 3
------------ -------
hereof, the Consultant agrees to furnish advice to the Company in connection
with the acquisition of and/or merger with other companies, joint ventures with
any third parties, license and royalty agreements and any other financing (other
than the private or public sale of the Company's securities for cash),
including, but not limited to, the sale of the Company itself (or any
significant percentage, subsidiaries or affiliates thereof).
In the event that any such transactions are directly or indirectly
originated by the Consultant for a period of five (5) years from the date
hereof, the Company shall pay fees to the Consultant as follows:
<TABLE>
<CAPTION>
Legal Consideration Fee
------------------- ---
<S> <C>
$0 - $3,000,000 5% of legal consideration
(with a minimum fee of $25,000)
$3,000,001 - $4,000,000 4% of excess over $3,000,000
$4,000,001 - $5,000,000 3% of excess over $4,000,000
over $5,000,000 2% of excess over $5,000,000
</TABLE>
For the purposes of this Agreement, "Legal Consideration" shall mean
the total market value on the day of closing of stock ,cash, assets and all
other property (real or personal) exchanged or received, directly or indirectly
by the Company or any of its security holders in connection with any
transaction, including without limitation any amounts paid by the Company or any
person or entity to holders of warrants, stock purchase rights, straight or
convertible securities of the Company, whether or not vested, and to holders of
any other securities of any kind whatsoever of the Company, or pursuant to any
employment agreement, consulting agreement, covenant not to compete, earn-out or
contingent payment right or similar arrangement, agreement or understanding,
whether oral or written.
In the event the Consultant originates a line of credit with an
institutional lender, the Company and the Consultant will mutually agree on a
satisfactory fee and the terms of payment of such fee; provided, however, that
in the event the Company is introduced to a corporate partner in connection with
a merger, acquisition or financing and a credit line develops directly as a
result of the introduction, the appropriate fee shall be the amount set forth in
the schedule above. In the event the Consultant introduces the Company to a
joint venture partner or customer and sales develop as a result of the
introduction, the Company agrees to pay a fee of five percent (5%) of total
sales generated directly from this introduction during the first two years
following the date of the first sale. Total sales shall mean cash receipts less
any applicable refunds, returns, allowances, credits and shipping charges and
monies paid by the Company by
3
<PAGE>
way of settlement or judgment arising out of claims made or threatened against
the Company. Commission payments shall be paid on the 15th day of each month
following the receipt of customer's payment. In the event any adjustments are
made to the total sales after the commission has been paid, the Company shall be
entitled to an appropriate refund or credit against future payments due under
this Agreement.
9. Sales or Distributions of Securities. (a) If the Consultant acts
------------------------------------
as an underwriter or placement agent in the sale or distribution of securities
to the public or in a private transaction by the Company (an "Offering") or
directly or indirectly introduces a third party to the Company, the Consultant
shall receive, as compensation for services rendered, a cash payment equal to
ten percent (10%) of the aggregate Consideration received by the Company and
warrants to purchase an amount of securities of the Company equal to ten percent
(10%) of the total amount sold by the Company in such Offering.
(b) In the event the Consultant does not act as underwriter or
placement agent in such Offering, then the Consultant shall be entitled to
receive an aggregate cash payment equal to one and one half percent (1 1/2%) of
the aggregate Consideration received by the Company and warrants to purchase an
amount of securities of the Company equal to one and one half percent (1 1/2%)
of the total amount of the securities sold by the Company in such offering.
(c) Fees and expenses payable to the Consultant with regard to fairness
opinions and valuations, will be determined by mutual agreement at such time as
the nature and terms of such financing are affirmed.
10. Form of Payment. All fees due to the Consultant pursuant to
---------------
Section 8 or Section 9 hereof are due and payable to the Consultant, in cash or
- ------- -------
by certified check, at the closing or closings of any transaction specified in
such Section 8 or Section 9 or as otherwise shall mutually be agreed between the
------- -------
parties hereto; provided, however, that in the case of license and royalty
-------- -------
agreements specified in Section 8 or Section 9 hereof, the fees due the
------- -------
Consultant in respect of such license and royalty agreements shall be paid as
and when license and/or royalty payments are received by the Company. In the
event that this Agreement shall not be renewed for a period of at least twelve
(12) months at the end of the five (5) year period referred to in Section 8
-------
hereof or if terminated for any reason prior to the end of such five (5) year
period, then, notwithstanding any such non-renewal or termination, the
Consultant shall be entitled to the full fee for any transaction contemplated
under Section 8 hereof which closes within twelve (12) months after such non-
-------
renewal or termination.
11. Limitation Upon the Use of Advice and Services.
----------------------------------------------
(a) No person or entity, other than the Company or any of its
subsidiaries, shall be entitled to make use of or rely upon the advice of the
Consultant to be given hereunder, and the Company shall not transmit such advice
to others, or encourage or facilitate the use or reliance upon such advice by
others, without the prior consent of the Consultant.
4
<PAGE>
(b) It is clearly understood that the Consultant, for services rendered
under this Agreement, makes no commitments whatsoever to make a market in the
securities of the Company or to recommend or advise its clients to purchase the
securities of the Company. Research reports or corporate finance reports that
may be prepared by the Consultant will, when and if prepared, be done solely on
the merits or judgment of analysts of the Consultant or senior corporate finance
personnel of the Consultant.
(c) The use of the Consultant's name in any annual report or other
report of the Company, or any release or similar document prepared by or on
behalf of the Company, must have the prior approval of the Consultant unless the
Company is required by law to include the Consultant's name in such annual
report, other report or release, in which event the Consultant will be furnished
with a copy of such annual report, other report or release using the
Consultant's name in advance of publication by or on behalf of the Company.
(d) Should any purchases of securities be requested to be effected
through the Consultant by the Company, its officers, directors, employees or
other affiliates, or by any person on behalf of any profit sharing, pension or
similar plan of the Company, for the account of the Company or the individuals
or entities involved, such orders shall be taken by a registered account
executive of the Consultant, shall not be subject to the terms of this
Agreement, and the normal brokerage commission as charged by the Consultant will
apply in conformity with all rules and regulations of the New York Stock
Exchange, the National Association of Securities Dealers, Inc. or other
regulatory bodies. Where no regulatory body sets the fee, the normal
established fee as used by the Consultant shall apply.
(e) The Consultant shall not disclose confidential information which it
learns about the Company as a result of its engagement hereunder, except for
such disclosure as may be required for Consultant to perform its duties
hereunder.
12. Indemnification. Since the Consultant will be acting on behalf of
---------------
the Company in connection with its engagement hereunder, the Company and
Consultant have entered into a separate indemnification agreement substantially
in the form attached hereto as Exhibit A and dated the date hereof, providing
---------
for the indemnification of Consultant by the Company. The Consultant has
entered into this Agreement in reliance on the indemnities set forth in such
indemnification agreement.
13. Severability. Every provision of this Agreement is intended to be
------------
severable. If any term or provision hereof is deemed unlawful or invalid for
any reason whatsoever, such unlawfulness or invalidity shall not affect the
validity of the remainder of this Agreement.
14. Miscellaneous.
-------------
(a) Any notice or other communication between the parties hereto shall
be sent by certified or registered mail, postage prepaid, if to the Company,
addressed to it at 9171 Towne Centre Drive, Suite 355, San Diego, California
92122, Attention: M. Lee Hulsebus, President and Chief Executive Officer, with
a copy to Zukerman Gore & Brandeis, LLP, 900 Third Avenue, New York, New York,
10022, Attention: Clifford A. Brandeis, Esq. or, if to
5
<PAGE>
the Consultant, addressed to it at 200 Park Avenue, 24th Floor, New York, New
York 10166, Attention: Scott A. Weisman, Esq., with a copy to Orrick,
Herrington & Sutcliffe, 666 Fifth Avenue, New York, New York 10103, Attention:
Lawrence B. Fisher, Esq., or to such address as may hereafter be designated in
writing by any of such entities to the others. Such notice or other
communication shall be deemed to be given on the date of receipt.
(b) If, during the term hereof, the Consultant shall cease to do
business, the provisions hereof relating to the duties of the Consultant and the
compensation by the Company as it applies to the Consultant shall thereupon
cease to be in effect, except for the Company's obligation of payment for
services rendered prior thereto. This Agreement shall survive any merger of,
acquisition of, or acquisition by the Consultant and, after any such merger or
acquisition, shall be binding upon the Company and the corporation surviving
such merger or acquisition.
(c) This Agreement embodies the entire agreement and understanding
between the Company and the Consultant and supersedes any and all negotiations,
prior discussions and preliminary and prior agreements and understandings
related to the central subject matter hereof.
(d) This Agreement has been duly authorized, executed and delivered by
and on behalf of the Company and the Consultant.
(e) This Agreement shall be construed and interpreted in accordance
with the laws of the State of New York, without giving effect to conflicts of
laws principals.
(f) This Agreement and the rights hereunder may not be assigned by
either party (except by operation of law) and shall be binding upon and inure to
the benefit of the parties and their respective successors, assigns and legal
representatives.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date hereof.
MEDICAL DEVICE TECHNOLOGIES, INC.
By:
_________________________________________________
M. Lee Hulsebus
President and Chief Executive Officer
FIRST ALLIED SECURITIES, INC.
By:
_________________________________________________
Name:
Title:
7
<PAGE>
EXHIBIT A
___________, 1996
FIRST ALLIED SECURITIES, INC.
200 Park Avenue
New York, New York 10166
Gentlemen:
In connection with our engagement of FIRST ALLIED SECURITIES, INC.
(the "Consultant") as our financial advisor and investment banker, we hereby
agree to indemnify and hold the Consultant and its affiliates, and the
directors, officers, partners, shareholders, agents and employees of the
Consultant (collectively the "Indemnified Persons"), harmless from and against
any and all claims, actions, suits, proceedings (including those of
shareholders), damages, liabilities and expenses incurred by any of them
(including, but not limited to, fees and expenses of counsel) which are (A)
related to or arise out of (i) any actions taken or omitted to be taken
(including any untrue statements made or any statements omitted to be made) by
us, or (ii) any actions taken or omitted to be taken by any Indemnified Person
in connection with our engagement of the Consultant pursuant to the Financial
Advisory and Consulting Agreement, of even date herewith, between the Consultant
and us (the "Consulting Agreement"), or (B) otherwise related to or arise out of
the Consultant's activities on our behalf pursuant to the Consultant's
engagement under the Consulting Agreement, and we shall reimburse any
Indemnified Person for all expenses (including, but not limited to, fees and
expenses of counsel) incurred by such Indemnified Person in connection with
investigating, preparing or defending any such claim, action, suit or proceeding
(collectively a "Claim"), whether or not in connection with pending or
threatened litigation in which any Indemnified Person is a party. We will not,
however, be responsible for any Claim which is finally judicially determined to
have resulted exclusively from the gross negligence or willful misconduct of any
person seeking indemnification hereunder. We further agree that no Indemnified
Person shall have any liability to us for or in connection with the Consultant's
engagement under the Consulting Agreement except for any Claim incurred by us
solely as a direct result of any Indemnified Person's gross negligence or
willful misconduct.
We further agree that we will not, without the prior written consent
of the Consultant, settle, compromise or consent to the entry of any judgment
in any pending or threatened Claim in respect of which indemnification may be
sought hereunder (whether or not
A-1
<PAGE>
any Indemnified Person is an actual or potential party to such Claim), unless
such settlement, compromise or consent includes a legally binding,
unconditional, and irrevocable release of each Indemnified Person hereunder from
any and all liability arising out of such Claim.
Promptly upon receipt by an Indemnified Person of notice of any
complaint or the assertion or institution of any Claim with respect to which
indemnification is being sought hereunder, such Indemnified Person shall notify
us in writing of such complaint or of such assertion or institution, but failure
to so notify us shall not relieve us from any obligation we may have hereunder,
unless, and only to the extent that, such failure results in the forfeiture by
us of substantial rights and defenses, and such failure to so notify us will not
in any event relieve us from any other obligation or liability we may have to
any Indemnified Person otherwise than under this Agreement. If we so elect or
are requested by such Indemnified Person, we will assume the defense of such
Claim, including the employment of counsel reasonably satisfactory to such
Indemnified Person and the payment of the fees and expenses of such counsel. In
the event, however, that such Indemnified Person reasonably determines in its
sole judgment that having common counsel would present such counsel with a
conflict of interest or such Indemnified Person concludes that there may be
legal defenses available to it or other Indemnified Persons that are different
from or in addition to those available to us, then such Indemnified Person may
employ its own separate counsel to represent or defend it in any such Claim and
we shall pay the reasonable fees and expenses of such counsel. Notwithstanding
anything herein to the contrary, if we fail timely or diligently to defend,
contest, or otherwise protect against any Claim, the relevant Indemnified Party
shall have the right, but not the obligation, to defend, contest, compromise,
settle, assert crossclaims or counterclaims, or otherwise protect against the
same, and shall be fully indemnified by us therefor, including, but not limited
to, for the fees and expenses of its counsel and all amounts paid as a result of
such Claim or the compromise or settlement thereof. In any Claim in which we
assume the defense, the Indemnified Person shall have the right to participate
in such defense and to retain its own counsel therefor at its own expense.
We agree that if any indemnity sought by an Indemnified Person
hereunder is held by a court to be unavailable for any reason, then (whether or
not the Consultant is the Indemnified Person) we and the Consultant shall
contribute to the Claim for which such indemnity is held unavailable in such
proportion as is appropriate to reflect the relative benefits to us, on the one
hand, and the Consultant, on the other, in connection with the Consultant's
engagement by us under the Consulting Agreement, subject to the limitation that
in no event shall the amount of the Consultant's contribution to such Claim
exceed the amount of fees actually received by the Consultant from us pursuant
to the Consultant's engagement under the Consulting Agreement. We hereby agree
that the relative benefits to us, on the one hand, and the Consultant, on the
other, with respect to the Consultant's engagement under the Consulting
Agreement shall be deemed to be in the same proportion as (a) the total value
paid or proposed to be paid or received by us or our shareholders as the case
may be, pursuant to the transaction (whether or not consummated) for which the
Consultant is engaged to render services bears to (b) the fee paid or proposed
to be paid to the Consultant in connection with such engagement.
A-2
<PAGE>
Our indemnity, reimbursement and contribution obligations under this
Agreement shall be in addition to, and shall in no way limit or otherwise
adversely affect any rights that any Indemnified Party may have at law or at
equity.
Should the Consultant, or any of its directors, officers, partners,
shareholders, agents or employees, be required or be requested by us to provide
documentary evidence or testimony in connection with any proceeding arising from
or relating to the Consultant's engagement under the Consulting Agreement, we
agree to pay all reasonable expenses (including, but not limited to, fees and
expenses of counsel) in complying therewith and one thousand dollars ($1,000)
per day for any sworn testimony or preparation therefor, payable in advance.
We hereby consent to personal jurisdiction and service of process and
venue in any court in which any claim for indemnity is brought by any
Indemnified Person.
It is understood that, in connection with the Consultant's engagement
under the Consulting Agreement, the Consultant may be engaged to act in one or
more additional capacities and that the terms of the original engagement or any
such additional engagement may be embodied in one or more separate written
agreements. The provisions of this Agreement shall apply to the original
engagement and any such additional engagement and shall remain in full force and
effect following the completion or termination of the Consultant's
engagement(s).
Very truly yours,
MEDICAL DEVICE TECHNOLOGIES, INC.
By:_____________________________
Name:
Title:
CONFIRMED AND AGREED TO:
FIRST ALLIED SECURITIES, INC.
By:_____________________________
Name:
Title:
A-3
<PAGE>
EXHIBIT 24.5
BDO SEIDMAN, LLP
CERTIFIED PUBLIC ACCOUNTANTS
1900 AVENUE OF THE STARS, 11TH FLOOR
LOS ANGELES, CA 90067-4301
(310) 557-0300
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
Medical Device Technologies, Inc.
San Diego, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated January 29, 1996, except for Notes 4
and 14 which are as of April 1, 1996, relating to the consolidated financial
statements of Medical Device Technologies, Inc. which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Los Angeles, California
April 19, 1996
<PAGE>
EXHIBIT 24.6
ROBERT EARLY & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
2500 S. WILLIS, SUITE 200
ABILENE, TX 79605
(915) 691-5790
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
Medical Device Technologies, Inc.
San Diego, California
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 17, 1995, relating to the consolidated financial
statements of Medical Device Technologies, Inc. and Subsidiary for the year
ended December 31, 1994, and to the reference to our Firm under the caption
"Experts" in the prospectus.
/s/ Robert Early & Company, P.C.
--------------------------------
Robert Early & Company, P.C.
Abilene, Texas
April 19, 1996
