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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-8
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
MEDICAL DEVICE TECHNOLOGIES, INC.
(exact name of registrant specified in its charter)
Utah
-----------------------
(State or other jurisdiction of incorporation or organization)
58-1475517
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(IRS Employer Identification Number)
9171 Towne Centre Drive - Suite 355 - San Diego, California - 92122
(Address of principal executive offices)
1997 STOCK COMPENSATION PLAN
(Full title of the plan)
M. Lee Hulsebus, Chief Executive Officer
Medical Device Technologies, Inc.
9171 Towne Centre Drive - Suite 355 - San Diego, California 92122
(Name and address of agent for service)
(619) 455-7127
(Telephone number, including area code, of agent for service)
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
- ------------------------ ------------------ --------------------------- ------------------------- ---------------------
Title of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price Aggregate Offering Price Registration Fee
Per Share
- ------------------------ ------------------ --------------------------- ------------------------- ---------------------
<S> <C> <C> <C> <C>
Common Stock 750,000 $ 0.66 $495,000 $150.00
- ------------------------ ------------------ --------------------------- ------------------------- ---------------------
</TABLE>
Notes:
1. If plan interests are being registered, include the following: In
addition, pursuant to Rule 416(c) under the Securities Act of 1933, this
registration statement also covers an indeterminate amount of interests to be
offered or sold pursuant to the employee benefit plan(s) and described herein.
2. Specific details relating to the fee calculation shall be furnished in
notes to the table, including references to provisions of Rule 457 relied upon,
if the basis of the calculation is not otherwise evident from the information
presented in the table.
<PAGE>
PROSPECTUS
Up to 750,000 Shares of Common Stock Received by Employees and Consultants
Under the 1997 Stock Compensation Plan by means of this Prospectus.
This Prospectus accompanies offers by the Company to its employees and
consultants of shares of common stock, par value $.15 per share (the "Common
Stock"), received through the Company's 1997 Stock Compensation Plan, as
amended, (the "Stock Plan"). The Company's principal offices are located at 9171
Towne Centre Drive, Suite 355, San Diego, California 92122, telephone
619/455-7127.
Shareholders of Medical Device Technologies, Inc. (the "Company")
reoffering or reselling their shares will do so through the over-the-counter
market or through NASDAQ, if the Company's common stock is then included for
quotation on NASDAQ. Selling shareholders, if control persons, are required to
sell their shares in accordance with the volume limitations of Rule 144 under
the Securities Act of 1933, which restricts sales by each selling shareholder in
any three-month period to the greater of 1% of the total outstanding common
stock (or as of the date hereof, approximately 68,980 shares) or the average
weekly trading volume of the Company's common stock during the four calendar
weeks immediately preceding such sale. It is expected that brokers and dealers
effecting such transactions will be paid the normal and customary commissions
for market transactions.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED ON THE ACCURACY OR
ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
INFORMATION WITH RESPECT TO THE COMPANY
This Prospectus incorporates the following documents and each such document
shall be a part of this Prospectus.
1. The Company's Annual Report on Form 10-KSB as amended for the fiscal year
ended December 31, 1995.
2. The Company's current Report on Form 8-K dated January 15, 1996.
3. The Company's current Report on Form 8-K dated January 24, 1996.
4. The Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1996.
5. The Company's Prospectus dated June 24, 1996.
6. The Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1996.
7. The Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996.
8. The Company's 1997 Stock Compensation Plan.
9. All other reports filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 since
January 10, 1997.
The date of this Prospectus is January 10, 1997.
<PAGE>
<TABLE>
TABLE OF CONTENTS OF PROSPECTUS
<CAPTION>
PAGE
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<S> <C>
THE COMPANY 3
STOCK PLAN INFORMATION 5
BUSINESS OF THE COMPANY 6
RISK FACTORS 14
MANAGEMENT 30
VOTING SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 35
LEGAL PROCEEDINGS 36
INDEMNIFICATION 36
</TABLE>
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Copies of any of the foregoing documents may be obtained, without charge
upon the oral or written request of any person to the Company at 9171 Towne
Centre Drive, Suite 355, San Diego, California 92122, telephone 619/455-7127,
fax 619/455-7295.
THE COMPANY
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 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 4,500,000 shares of its Common Stock for all the
issued and outstanding shares of Hailey Oil Company, Inc. Also, pursuant to the
reorganization, in January 1982 the Company changed its name to Hailey Energy
Corporation, effected a one(1) for five (5) reverse split of its Common Stock,
and decreased its authorized number of shares to 25,000,000. In October 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 November 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 of the
company's Common Stock remained at $0.15 per share and the number of authorized
shares remained unchanged. In May 1995, the company changed its name to Medical
Device Technologies, Inc. to reflect the company's broadening base of medical
products. In June 1996 the company effected a one (1) for two (2) reverse split
of its Common Stock. The par value of the Company's Common Stock remained at
$0.15 per share and the number of authorized shares remained unchanged.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed with the Commission can be inspected and copied at
the public reference facilities of the Commission at 450 Fifth Street NW,
Washington, DC 20549. The Company's Common Stock is traded in the National
Association of Securities Dealers Automated Quotation ("NASDAQ") under the
symbol "MEDD." The Company's publicly traded preferred stock, 6% Cumulative
Convertible Series A Preferred Stock, par value $.01 per share (the "Preferred
Stock") and the Company's redeemable common stock purchase warrants (the
"Redeemable Warrants") are traded under the symbols, "MEDDP" and "MEDDW",
respectively.
The Company has filed with the Commission a Registration Statement on Form
S-8 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Act"), with respect to an aggregate of 750,000 shares of the Company's
Common Stock, all of which will be issued to employees and/or consultants of the
Company pursuant to the Stock Plan. This Prospectus, which is Part I of the
Registration Statement, omits certain information contained in the Registration
Statement. For further information with respect to the Company and the shares of
the Common Stock offered by this Prospectus, reference is made to the
Registration Statement, including the exhibits thereof. Statements in this
Prospectus as to any document are not necessarily complete and, where any such
document is an exhibit to the Registration Statement or is incorporated by
reference herein, each such statement is qualified in all respects by the
provisions of such exhibit or other document, to which reference is hereby made,
for a full statement of the provisions thereof. A copy of the Registration
Statement, with exhibits, may be obtained from the Commission's office in
Washington, DC (at the above address) upon payment of the fees prescribed by the
rules and regulations of the Commission, or examined there without charge.
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<PAGE>
No person has been authorized by the Company to give any information or to
make any representation other than as contained in this Prospectus and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Company. Neither the delivery of this Prospectus nor any
distribution of the shares of the common stock issuable under the terms of the
Plan shall, under any circumstances, create any implication that there has been
no change in the affairs of the Company since the date hereof.
The Company's principal offices are located at 9171 Towne Centre Drive,
Suite 355, San Diego, California 92122, telephone 619/455-7127.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY
STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH STATE.
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STOCK PLAN INFORMATION
The 1997 Stock Compensation Plan was established by the Company effective
on January 10, 1997 to provide the Company flexibility and to conserve the
Company's cash resources in compensating certain of its technical,
administrative and professional employees and consultants. Issuance of shares
under the Stock Plan is restricted to persons and firms who are closely-related
to the Company and who provide services in connection with the development,
production of the Company's products or otherwise in connection with its
business. The Stock Plan authorizes the Company to issue up to 750,000 shares of
the Company's Common Stock. Shares must be issued only for bona fide services
and may not be issued under the Stock Plan contingent on services to be rendered
in the future or for services in connection with the offer and sale of
securities in a capital-raising transaction. Shares are awarded under the Stock
Plan pursuant to individually negotiated compensation contracts as determined
and/or approved by the Stock Plan Committee (the "Committee"). The Committee
must be comprised of two or more of the Company's Directors appointed thereto by
the Company's Board of Directors. Committee members need not be independent
Directors. Messrs. M. Lee Hulsebus and Thomas E. Glasgow presently serve on the
Committee. Eligible participants include directors, employees and non-employee
consultants and advisors. The Company intends to award up to 10,000 shares under
the Stock Plan to each of its six directors to compensate them for their service
on the Company's Board of Directors during 1997. Subject to the restriction that
shares may not be awarded under the Stock Plan to persons owning beneficially or
of record ten percent (10%) or more of the Company's then outstanding Common
Stock or who would own such amount of shares as a result of an award under the
Stock Plan, there is no limit as to the number of shares which may be awarded to
a single participant. The Company anticipates that a substantial portion of the
Shares to be issued under the Stock Plan will be issued as compensation to
technical consultants and advisors to the Company who provide development and
clinical services to the Company in the development and testing of the Fluid
Alarm System (FAS), formerly the Personal Alarm System (PAS), the Cell Recovery
System (CRS), and the Intracranial Pressure Monitoring System (ICP) devices.
Shares may be awarded under the Stock Plan until January 1999. The Company
anticipates all 750,000 shares under the Stock Plan will be awarded during 1997
and 1998. No shares under the 1997 Stock Compensation Plan have been issued
before the date of this Prospectus.
The Stock Plan does not require restrictions on the transferability of
shares issued thereunder. However, such shares may be restricted as a condition
to their issuance where the Board of Directors deems such restrictions
appropriate. The Stock Plan is not subject to the Employee Retirement Income
Securities Act of 1974 ("ERISA"). Shares awarded under the Stock Plan are
intended to be fully taxable to the recipient as earned income.
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<PAGE>
BUSINESS OF THE COMPANY
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 for some other right to commercialize such
technologies, and (iii) attempt 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 Fluid Alarm
System (FAS) formerly the Personal Alarm System (PAS), the Cell Recovery System
(CRS) and the Intracranial Pressure Monitoring System (ICP), 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 FAS 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. 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.
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<PAGE>
The Company's Products
The Fluid Alarm System
The Fluid Alarm System is a device that monitors the integrity of infection
control barriers, such as surgical gloves and gowns worn during medical
procedures. The FAS 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 Fluid Alarm System in August, 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 a private placement of
short term notes 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. See "Risk Factors-No Assurance
of Market for FAS Device" and "Business of the Company-Potential Market for the
FAS 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 FAS 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 the 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 FAS device will
enable health care professionals to immediately recognize with a high degree of
accuracy when a protective barrier has been compromised.
The FAS 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 FAS consists of a
battery-powered electronic 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 the
patient and the health care professional. When the FAS senses a current flow
characteristic of a tear, major puncture or fluid saturation, the FAS device
generates a continuous 5-second vibration. Alternatively, when current flow
characteristic of a small puncture or partial fluid saturation is detected, the
FAS device will vibrate in brief intermittent bursts.
The Company presently intends to sell the FAS for $500.00 each to
distributors, who in turn may resell or lease the FAS device to end users.
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<PAGE>
Potential Market for the FAS Device
The Company believes that the potential market for the FAS includes all
hospitals, physicians' offices, dental offices, emergency rooms, and other
medical facilities. Given the limited resources of the Company, initial strategy
will be to focus on those markets where the need for the FAS is greatest.
Consequently, the Company will initially introduce the FAS 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 FAS device. The Company has conducted 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 FAS
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 FAS 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 FAS device. See "Risk Factors-No Assurance of Market for FAS Device."
License Agreement
The Company obtained the rights to the FAS effective June 1, 1994, pursuant to a
license agreement ("PAS License Agreement") with Robert Lee Thompson, d/b/a
Thompson Medical, whereby Mr. Thompson granted to the Company the exclusive
worldwide license to manufacture, use, sell or otherwise dispose of the FAS.
Pursuant to an Addendum to License Agreement dated September 19, 1996, the
Company made a one time payment to Mr. Thompson of Eighty-One Thousand One
Hundred Eighty-Seven dollars and Fifty Cents ($81,187.50) as full and complete
settlement of all past and future royalties. The PAS License Agreement was
extended for an additional year so that the License Agreement now expires June
1, 2005. 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
FAS 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
FAS devices. The invention disclosure as well as the patent application for the
SMBM have been filed with the Patent and Trademark Office and the Company filed
a patent application for the SMBM during the fourth quarter of 1996.
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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
procedure and will be the first automated brush system able to successfully
retrieve cell samples. 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 device, 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. 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.
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The Company received marketing clearance from the FDA for the CRS device
for use in the urology market in March, 1996. The Company intends to launch the
CRS in 1997. 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 the 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 contacted five
other leading urologists and companies 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 entered in August 1992 into an exclusive license agreement, as
amended, (the "CRS License Agreement") with Robert Langdon, Nancy Bush and Max
K. Willscher, M.D. 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 13 years.
On August 7, 1996, the company entered into an Agreement with Robert
Langdon to purchase his 50% ownership interests in the CRS for a payment of
Three Hundred Thousand Dollars ($300,000). 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, subject to $100,000 minimum per
year. In addition, with respect to calendar years 1994 and 1995, the Company is
obligated to pay $100,000 in 20 equal quarterly installments of $5,000
commencing January 1, 1997. Through December 31, 1996 the Company has paid
$600,000 and issued 227,966 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.
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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 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 originally developed by
Scientific-Atlanta, Inc., and now assigned to Global Associates, Ltd. The
Company originally entered into a teaming agreement with Scientific-Atlanta,
Inc., which was subsequently assigned to Global Associates, Ltd. The teaming
agreement is more fully described below.
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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 estimated to be finished in the
second quarter of 1997. The Company presently intends to make its first
submission to the FDA in 1997. It has not been established if the initial
submission will take the form of a 510(k) or a PMA. Contemporaneously, in 1997
the Company intends to continue clinical trials as required to gain sufficient
data for the second generation ICP which the Company presently anticipates will
be concluded by the end 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.
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, nontransferable 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 Medys 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 Medys Agreement 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 83,334 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 1,000,000 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 83,334 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 1,000,000 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.
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Global Associates, Ltd. Agreement
In February 1993, the Company entered into a teaming agreement (the
"Teaming Agreement") with Scientific-Atlanta, Inc.("S-A") who subsequently
assigned the agreement to Global Associates, Ltd. ("Global") in July 1996, as
the result of the sale of a division by S-A to Global, to provide equipment,
technical expertise and experience directly related to the computer software
which provides the signal/data processing and modal analysis techniques in
developing the ICP. Under the Teaming Agreement, the Company is obligated to use
Global 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 Global'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.
-13-
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RISK FACTORS
Development Stage Company; History of Operating Losses; Accumulated
Deficit; Uncertainty of Future Profitability
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 Fluid Alarm System
(FAS), formerly called the Personal Alarm System (PAS), in January 1996,
although to date, the Company has not yet realized significant sales of the FAS
device. The Company is currently developing its other two medical devices, the
Cell Recovery System (CRS) and the Intracranial Pressure Monitoring System
(ICP). Consequently, the Company is still a development stage company with
respect to the medical device business. At September 30, 1996, partially as a
result of its unsuccessful oil and gas activities, the Company had an
accumulated deficit of $16,292,117. The Company expects losses to continue until
such time as it can bring its medical devices successfully to market and
generate sufficient operating revenues. Although the Company has commenced
marketing the Fluid Alarm System, the Company needs to find a marketing partner
for the FAS and 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 for such
additional claims. There also can 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
development with respect to the first generation ICP device; trials in a
clinical setting, to be followed shortly by multi-site clinicals are expected to
start on this device in 1997. It is currently anticipated that additional
clinical trials for the second generation ICP will not begin until later in
1997. 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 FAS 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 FAS 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.
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Auditors' Going Concern Report
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 (at that time), 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.
Need for Additional Financing; Possible Issuance of Additional Securities:
Future Dilution
The Company's cash requirements are significant. The Company completed a
public offering of 6% Cumulative Convertible Series A Preferred Stock
("Preferred Stock") and redeemable common stock purchase warrants ("Redeemable
Warrants") in June 1996 and had $3,773,379 in cash at September 30, 1996. The
Company presently anticipates continued spending on research and development and
for working capital purposes during 1997. The Company may, however, encounter
unexpected costs and working capital requirements 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 plans, management believes that the current cash position and
anticipated revenues from the FAS device will be sufficient to sustain the
Company until the second half of 1997. There can be no assurances, however, that
prior to the expiration of such period or thereafter that the Company will
generate sufficient revenues from sales of the FAS device or the CRS device
(which it anticipates to commence marketing in the first half of 1997), 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
financing will most likely have a dilutive effect on the holders of the Company
securities.
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<PAGE>
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 in
1996 commenced the marketing of one of its products, the FAS, and it is not
currently possible to predict the demand and market acceptance for the FAS 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
their advances, 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.
-16-
<PAGE>
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 consequence, the Company
relies on third parties to manufacture its products. The Company must be able to
effect the manufacture of its Fluid 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. In anticipation of higher volume manufacturing requirements, the
Company entered into an agreement with a second third party manufacturer,
effective as of December 15, 1996, for the manufacture of the FAS. 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. 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 major corporate distributors of medical devices to effect the
sale of its FAS device, although there can be no assurance that it will be able
to do so. 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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<PAGE>
No Assurance of Market for the FAS Device; Need for Certain Minimum FAS Sales
Although the Company commenced the marketing of the FAS device in the first
half of 1996, to date the Company has not effected any significant sales of the
FAS device. The Company currently believes that before the FAS 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 and saturation. In order for the FAS 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 demonstrate, from tests it has performed on
surgical gloves, 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 of the need for a device
like the FAS and consequently, there can be no assurance that a market will
develop for the FAS device. The failure of the Company to establish a market for
the FAS device and effect significant sales of the FAS 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 FAS device in 1997 the Company will
require additional capital in order to sustain itself for the latter part of
1997 and the future. See "Risk Factors "Need for Additional Financing; Possible
Issuance of Securities; Future Dilution"
-18-
<PAGE>
No Assurance of Market for the 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 first half of 1997 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.
Although there can be no assurance that the Company will be able to do so, the
Company also intends to commence manufacturing of the system's instrumentation
and disposables prior to a scheduled marketing launch of the CRS. 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 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 in 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 may attempt to adopt 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 field or any other field could have a material
adverse effect on the Company. See "Business of the Company - The Company's
Products-the Cell Recovery System - Potential Market for the CRS device."
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<PAGE>
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 US
Food and Drug Administration (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 Fluid 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
be prohibitive.
The FDA employs a rigorous system of regulations and requirements governing
the clearance processes of 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 a 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.
-20-
<PAGE>
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 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 material 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.
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<PAGE>
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 83,334 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 1,000,000 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 83,334 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 1,000,000 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. See "Business of the Company - 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 Fluid
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. Furthermore, legislation is being considered which, in the future,
might prevent the patenting or enforcement of a patent covering certain surgical
or medical procedures. 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.
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<PAGE>
Even though the Company has been licensed under patents, under the terms of
the Company's license agreements, the Company is responsible for defending
against charges of infringement of third party patents by the Company's
products. 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 could be substantial.
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 FAS, 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 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. See "Business of the Company."
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<PAGE>
Restatement of Amortization of Patent License Agreements
Effective as of the fourth quarter of the fiscal year ended December 31,
1995, the Company changed its method of amortizing its license agreements from
commencement of product shipment to the estimated useful life of the license
agreement, which is ten years. As a consequence, the combined stated values of
the Company's patent agreements at December 31, 1993, 1994 and 1995, were
reduced by 11.9%, 18.6% and 28.2%, respectively, of their combined stated values
prior to the reduction. Also, as a result of this reduction, the Company's net
losses for the years ended December 31, 1993, 1994 and 1995 (as restated) and
its cumulative net loss for the period from June 1, 1992 to December 31, 1995
(as restated) increased by 10.9%, 6.9%, 7.6% and 7.7%, respectively.
The Company will continue to monitor the markets for its products, the
emergence of competitive products and technologies and associated events, and
will adjust the lives of its patent licenses accordingly. As a consequence, the
Company may deem it necessary or appropriate to make additional adjustments the
results of which may include further reductions in the stated values of the
Company's patent license agreements.
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 Fluid 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, or develop and market any of its other
medical devices, 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.
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Health Care Reform and Related Measures; Uncertainty of Product Pricing and
Reimbursement
The levels of revenue and profitability of sales of medical devices may be
affected by the continuing efforts of governmental and third party payers to
contain or reduce the costs of health care through various means and the
initiatives of third party payers 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 payers 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 payers impacts upon the likelihood that a medical product
associated with such a procedure will be purchased. Third party payers are
increasingly challenging the prices charged for medical products. Two of the
Company's three products, the CRS and the ICP 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 payers 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. In August 1994, the Company entered into an exclusive employment
agreement with Mr. Hulsebus and subsequently 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 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. See "Management Employment
Agreements."
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<PAGE>
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
Fluid 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 and is currently reviewing
additional and more stringent listing maintenance standards. The current
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 January 6,,
1997, the closing bid price of the Company's Common Stock was $0.75. Therefore,
there can be no assurance that the Company will continue to satisfy the minimum
price per share or other current or proposed 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, as well as the
Company's Preferred Stock and the Redeemable Warrants. In the event that the
Company is unable to satisfy the NASDAQ SmallCap Market's maintenance
requirements, it is anticipated that trading would be conducted in the
over-the-counter market National Quotations Bureau ("NQB") "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, 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 limiting the ability of broker/dealers to sell the Common
Stock in the public market. There is no assurance trading in the Company's
securities will not be subject to these or new or other regulations that would
materially adversely affect the market for such securities.
-26-
<PAGE>
Volatility of the Company's Common Stock Price
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 Company will pay any dividends on its Common
Stock in the foreseeable future. The Company is required pay a 6% 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.
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
has 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.
Potential Adverse Effect of Redemption of Redeemable Warrants
The exercise of the Company's Redeemable Warrants and the sale of the
underlying shares of Common Stock (or even the potential of such exercise or
sale) may have a depressive effect on the market price of the Company's
securities. The exercise of such warrants also may have a dilutive effect on the
interest of investors in Common Stock. Moreover, the terms upon which the
Company will be able to obtain additional equity capital may be adversely
affected because the holders of the outstanding warrants can be expected to
exercise them, to the extent they are able to, at a time when the Company would,
in all likelihood, be able to obtain any needed capital on terms more favorable
to the Company than those provided in the warrants. As a result of the Company's
Redeemable Warrants being outstanding, the Company may be deprived of favorable
opportunities to obtain additional equity capital, if it should then be needed,
for its business. It is also possible that, as long as the Redeemable Warrants
(initially exercisable at $3.75 per redeemable warrant) and the underwriter's
warrants remain outstanding, their existence might limit increases in the price
of the Common Stock.
-27-
<PAGE>
Anti-Takeover Provisions; Poison Pill Issuance of Other Preferred Stock;
Utah Anti-Takeover Provisions
The Company's Articles of Incorporation, as amended, 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 proxy fight or otherwise,
more difficult. This could prevent security holders 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 Company's recently-issued Preferred Stock 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 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 holders of Common Stock and the
Company's recently-issued 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
Part II, Item 4 - "Description of Securities - Other Preferred Stock" and "Share
Purchase Plan".
The Company is subject to the provisions of Sections 61-6-1 through 61-6-12
of the Utah Control Share Acquisition Act, an anti-takeover statute. Sections
61-6-1 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 acquirers of the Company may be discouraged
from attempting to effect acquisitions 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.
-28-
<PAGE>
Litigation
The Company is not currently involved in any litigation.
Arbitrary Determination of Terms of Company's Preferred Stock
There can be no assurance that the public market for the Company's
Preferred Stock will be sustained. The terms of the Preferred Stock, although
related to the market price of the Common Stock on the date of the offering in
June 1996, were arbitrarily determined by negotiations between the Company and
the underwriter of that offering and do not necessarily bear any relationship to
the Company's assets, book values, revenues or other established criteria of
value, and should not be considered indicative of the actual relative values of
the Preferred Stock and the Common Stock. The 1,343,500 preferred shares
outstanding at December 31, 1996 will convert in accordance with their terms, by
July 24, 1997, or earlier at the holder's choice, into 5,374,000 shares of
common stock. Such conversion would increase the Common Stock outstanding from
6,897,963 shares outstanding at December 31, 1996 to 12,271,963 shares
outstanding.
Shares Eligible for Future Sale
Of the 6,897,963 shares of Common Stock outstanding at December 31, 1996,
shares of Common Stock are "restricted securities" as that term is defined by
Rule 144 of the Securities Act, of which are currently eligible for resale in
compliance with Rule 144 of the Securities Act. Of these shares: 52,253 are
owned by current officers and directors of the Company who have agreed with the
underwriter of the June 1996 public offering 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 June 24, 1996. In addition, holders of
247,500 shares of the Preferred Stock and 247,500 Redeemable Warrants have
agreed with the underwriter of the June 1996 public offering not to, directly or
indirectly, offer, sell, transfer or otherwise encumber any of these securities
for thirteen (13) months after June 24, 1996. The Company has also issued an
aggregate of 1,007,180 warrants, subject to adjustment, which shall vest and
become exercisable from time to time. Of these non-public warrants, 631,801
subject to adjustment, are owned by officers and directors of the Company who
have agreed with the underwriter of the June 1996 public offering 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 June 24, 1996. 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 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 1,602,421 shares of restricted Common Stock outstanding,
including officers and directors, approximately 632,490 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 "Shares
Eligible for Future Sale," "Management" - Management Employment Agreements;
Consulting Agreements," "Option Plans," and "Description of Securities".
-29-
<PAGE>
MANAGEMENT
Executive Officers and Directors
The Directors and Executive Officers and their ages, positions held with
the Company, length of time in such positions, and term of office are set forth
below:
<TABLE>
<CAPTION>
Name and Age Current Position Director Since Officer Since
- ------------ ---------------- -------------- -------------
<S> <C> <C> <C>
M. Lee Hulsebus Chairman of the Board, 11/11/94 8/31/94
Age 57 Chief Executive Officer,
President
Stephen W. Kenney Vice President, Sales 1/23/95
Age 46 and Marketing
Edward C. Hall Chief Financial Officer 3/15/96
Age 55 and Secretary
Richard E. Sloan Vice President, New 3/15/96
Age 47 Business Development
Don L. Arnwine Director 3/6/95
Age 64
Arthur E. Bradley Director 9/26/86
Age 63
William A. Clarke Director 6/27/96
Age 58
Thomas E. Glasgow Director 11/11/94
Age 43
Scott A. Weisman Director 8/1/96
Age 41
</TABLE>
-30-
<PAGE>
Business Background
M. Lee Hulsebus. Mr. Hulsebus has been in the health care field for 29
years. Until he joined the Company in August, 1994, he was the President and
owner of his own health care consulting firm. From 1990 to 1992, Mr. Hulsebus
served as President and Chief Operating Officer of Sports Support, Inc., a
sports medicine company. Briefly in 1993, Mr. Hulsebus served as Chief Executive
Officer of InCoMed Corporation, then a small California based medical products
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. Mr. Hulsebus has served in the capacity of
President/Chief Executive Officer for the past 15 years.
Edward C. Hall. Mr. Hall has been the Company's Secretary since April 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 acted as an interim chief financial officer and has provided
financial 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. Prior to joining the Company, Mr. Kenney served as Chief
Operating Officer of Cardio Vista, a 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 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, Sales & Marketing of
Division, Inc., also headquartered in San Diego. Prior to that Mr. Kenney had
held various management positions with IVAC Corporation (San Diego) and American
Hospital Supply.
Richard E. Sloan. Mr. Sloan has been Vice President of New Business
Development since March 1996. Mr. Sloan was also a consultant to the Company
from August 1995 to March 1996. From March, 1995 to July, 1995, Mr. Sloan served
as Chief Financial 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, California
which provided investment and financial services to privately-held companies in
southern California.
-31-
<PAGE>
Don L. Arnwine. Since 1988, Mr. Arnwine has been President of Arnwine
Associates of Irving, Texas, a company he founded to provide specialized
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.
Arthur E. Bradley, DDS. Dr. Bradley has been a practicing dentist 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.
William A. Clarke. Since 1967, Mr. Clarke has held various positions with
Johnson & Johnson, Inc. a public medical products company. Most recently, since
1995, Mr. Clarke has served as a consultant to Johnson & Johnson, Inc. Prior to
that time, from 1986 through 1995, Mr. Clarke was president of Johnson & Johnson
Medical, Inc. a subsidiary of Johnson & Johnson, Inc., with approximately 6,000
employees.
Thomas E. Glasgow. 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
1989 through 1991, Mr. Glasgow was a partner with Wharton Resource Group and a
consultant with ITS. Wharton Resource Group is a strategic management company
specializing in the development of early stage companies. Prior to these
activities, he was a director with Federal Express Corporation for 11 years in
various senior management capacities.
Scott A. Weisman. Mr. Weisman has been Senior Managing Director - Director
of Investment Bank, Josephthal Lyon & Ross Incorporated since 1993. Before
joining Josephthal Lyon & Ross Incorporated, he was a partner at Kelley Drye &
Warren specializing in securities law. He began his career at Parker, Chapin &
Flattau in 1980. Mr. Weisman has a Juris Doctor from Albany Law School and a
B.A. degree from Syracuse University.
-32-
<PAGE>
Employment Agreements
In August, 1994, the company entered into an exclusive four year term
employment with Mr. M. Lee Hulsebus. Under his employment agreement, Mr.
Hulsebus is to service as the Company's Chief Executive Officer and receive a
base salary of $162,000 per annum. He is also entitled to receive one hundred
twenty-five thousand (125,000) 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 100,000 common stock purchase warrants which are
exercisable over a five (5) year period ending August 31, 1999 at $2.00 per
share.
In addition, in 1994, the Company entered into a severance agreement with
Mr. Hulsebus. The 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
received Common Stock that shall vest immediately; and 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 August 2, 1996, the Board of Directors extended the Employment and
Severance Agreement(s) with Mr. Hulsebus for an additional one (1) year period
or until August 31, 1999.
In March 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 100,000 shares of the
Company's Common Stock on August 31, 1996 and 75,000 common stock purchase
warrants, which expire on August 31, 1999 and are exercisable at a price of
$2.00 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 Mr. Freasier to receive 29 monthly payments of $10,000, commencing
on April 1, 1996 and ending August 31, 1998, and 37,500 common stock purchase
warrants which are exercisable, from August 31, 1998 through August 31, 2001, at
a price of $.80 per share.
-33-
<PAGE>
In January 1995, the Company entered into an exclusive three-year
employment agreement with Mr. Stephen W. Kenney under which his 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 fifty thousand
(50,000) shares of the Company's Common Stock on August 31, 1996 and is entitled
to receive warrants to purchase thirty-seven thousand five hundred (37,500)
shares of the Company's Common Stock at $2.00 per share. One-third of the
warrants were issued in January, 1996, and one-third (1/3) of the warrants are
to be issued on each of January 4, 1997 and 1998. The warrants are exercisable
for a period of five years from the date of issuance.
In March 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 twenty-five thousand (25,000)
shares of the Company's Common Stock; 12,500 shares of Common Stock will vest
each on March 15, 1997 and the remaining 12,500 shares will vest on March 15,
1998. In addition, Mr. Sloan is entitled to receive warrants to purchase
thirty-seven thousand five hundred (37,500) shares of the Company's Common Stock
at $.80 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.
In March 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 he was a consultant to the Company, $600
per day. Mr. Hall is also entitled to receive twelve thousand five hundred
(12,500) shares of the Company's Common Stock; 6,250 shares of Common Stock will
vest on March 15, 1997 and the remaining 6,250 shares will best on March 15,
1998. In addition, Mr. Hall is entitled to receive warrants to purchase
twenty-five thousand (25,000) shares of the Company's Common Stock at $.80 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.
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.
There are no family relationships among any Directors or executive
officers.
-34-
<PAGE>
VOTING SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 1996,
by each person or entity who is known to the Company to be the beneficial owner
of more than 5% of the Company's Common Stock, the beneficial ownership by each
Director and the beneficial ownership of all Directors and Officers as a group:
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name & Address Beneficial Ownership(1) of Class(1)
- -------------- ----------------------- -----------
<S> <C> <C>
M. Lee Hulsebus 418,363(2) 3.31%
c/o Medical Device Technologies, Inc.
9171 Towne Centre, Suite 355
San Diego, CA 92122
Edward C. Hall 6,913(4) *(3)%
c/o Medical Device Technologies, Inc.
9171 Towne Centre, Suite 355
San Diego, CA 92122
Stephen W. Kenney 100,500(5) *(3)%
c/o Medical Device Technologies, Inc.
9171 Towne Centre Drive, Suite 355
San Diego, CA 92122
Richard E. Sloan 7,365(4) *(3)%
c/o Medical Device Technologies, Inc.
9171 Towne Centre, Suite 355
San Diego, CA 92122
Don L. Arnwine 48,046(6) *(3)%
c/o Medical Device Technologies, Inc.
9171 Towne Centre Drive, Suite 355
San Diego, CA 92122
Arthur E. Bradley, DDS 56,725 *(3)%
c/o Medical Device Technologies, Inc.
9171 Towne Centre Drive, Suite 355
San Diego, CA 92122
William A. Clarke 1,875 *(3)%
c/o Medical Device Technologies, Inc.
9171 Towne Centre Drive, Suite 355
San Diego, CA 92122
Thomas E. Glasgow 220,283(7) 1.78%
c/o Medical Device Technologies, Inc.
9171 Towne Centre Drive, Suite 355
San Diego, CA 92122
Scott A. Weisman 1,250 *(3)%
c/o Medical Device Technologies, Inc.
9171 Towne Centre Drive, Suite 355
San Diego, CA 92122
</TABLE>
--------- ------
All officers and directors as a group 861,320 6.65%
(9 persons)
-35-
<PAGE>
(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
conversion of outstanding 6% Cumulative Convertible Series A Preferred Stock
which vote as to their common equivalents (5,374,000 common shares) and exercise
of 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) Includes 250,000 warrants exercisable at $.80 per share to acquire
250,000 shares of Common Stock and 100,000 warrants exercisable at $2.00 per
share to acquire 100,000 shares of Common Stock
(3) Holding represent less than 1% of the Company's issued and outstanding
Common Stock.
(4) Includes 5,000 warrants exercisable at $0.80 per share to acquire 5,000
shares of Common Stock.
(5) Includes 70,000 warrants exercisable at $0.80 per share to acquire
70,000 shares of Common Stock and 25,000 warrants exercisable at $2.00 per share
to acquire 25,000 shares of Common Stock.
(6) Includes 3,125 warrants exercisable at $1.20 per share to acquire 3,125
shares of Common Stock and 9,921 warrants exercisable at $1.26 per share to
acquire 9,921 shares of Common Stock.
(7) Includes 12,500 warrants exercisable at $2.00 per share to acquire
12,500 shares of Common Stock and 79,380 warrants, 60,0000 of which are
exercisable at $1.26 per share to acquire 60,000 shares of Common Stock and
19,380 of which are exercisable at $1.29 per share to acquire 19,380 shares of
Common Stock.
There are no arrangements known to the Company which may at a subsequent
date result in a change in control of the Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party which could
have a material adverse effect on the Company.
INDEMNIFICATION
The Company has obtained officers' and directors' liability insurance that
provides for a maximum of $2,000,000 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.
-36-
<PAGE>
PART II
INFORMATION REQUIRED IN THE
REGISTRATION STATEMENT
Item 3. Incorporation of Documents by Reference
Registrant incorporates the following documents by reference in this
Registration Statement:
(a) Registrant's Annual Report on Form 10-KSB, as amemded, filed for the
year ended December 31, 1995,
(b) The Company's current Report on Form 8-K dated January 15, 1996,
(c) The Company's current Report on Form 8-K dated January 24, 1996,
(d) Registrant's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1996,
(e) Prospectus dated June 24, 1996,
(f) The Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996,
(g) The Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996,
(h) All other documents filed by Registrant after the date of this
Registration Statement under Section 13(a), 13(c), 14 and 15(d) of the
Securities Exchange Act of 1934, prior to the filing of a post-effective
amendment to this Registration Statement which deregisters the securities
covered hereunder which remain unsold.
Item 4. Description of Securities
The Company is authorized to issue 750,000 shares of Common Stock, par
value $0.15 per share, of which 6,897,963 shares were issued and outstanding as
of December 31, 1996.
The Company is also authorized to issue up to 10,000,000 shares of
Preferred Stock, as of December 31, 1996, the Company had outstanding 1,343,500
shares of 6% Cumulative Convertible Series A Preferred Stock. Each share of this
Preferred Stock converts into four shares of Common Stock at $1.25 per share.
<PAGE>
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.
6% Cumulative Convertible Series A Preferred Stock
On June 24, 1996, the Company completed a public offering of 1,500,00
shares of 6% Cumulative Convertible Series A Preferred Stock, par value $.10 per
share (the "Preferred Stock"). The designations, rights, powers, preferences,
qualifications and limitations of which are set forth in a Certificate of
Amendment (the "Certificate of Amendment") filed with the Secretary of State of
the State of Utah amending the Company's Articles of Incorporation, a form of
which was filed as an exhibit to the Registration Statement associated with the
public offering of the Preferred Stock on June 24, 1996. In addition, concurent
with the offering, 247,500 shares of Preferred Stock were issued one-for-one, to
holders of Series I Preferred Stock issued in association with short term debt
of the Company which was repaid with the offering proceeds. Further, in August
1996, the underwriter of the June 1996 public offering exercised its
overallotment options under the offering to purchase an additional 100,000
shares of Preferred Stock.
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 Amendment.
Part II - Page 2
<PAGE>
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 the rate of 6%
per annum of the liquidation value (the "Liquidation Value") of the Preferred
Stock. The dividend is payable semi-annually on June 30 and December 31 of each
year, although the first dividend was paid as of August 31, 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 shares of Common Stock equal to the quotient of (i) 6% of the
Liquidation Value 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 Dividend Declaration Date (the "Stock Dividend
Price"); provided, however, that in no event shall the Stock Dividend Price
exceed $3.00 per share or be less than $1.20 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 is convertible, at the
option of the holder, at any time commencing on October 22, 1996 (the "Initial
Conversion Date"). Each share of Preferred Stock will convertible into four (4)
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 $1.25 (the "Conversion Price"), which is the
quotient of the Liquidation Preference divided by the Conversion Ratio.
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 July 24, 1997 (the "Automatic Conversion Date"). All accrued
but unpaid Common Stock dividends shall be paid upon the 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 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.
Part II - Page 3
<PAGE>
Adjustment of Conversion Ratio. The number of shares of Common Stock into
which the Preferred Stock is convertible is 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 is 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 are
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, $5.00 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 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.
Part II - Page 4
<PAGE>
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-fiftieth (1/50) of share of the Company's Series I
Preferred Stock (which is unrelated to the Series I Preferred Stock issued to
the Selling Shareholders in the June 24, 1996 public offering). The Series I
Preferred Stock will be a new series of the Company's Preferred Stock designed
so that each one-fiftieth (1/50) 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
$10.00 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 the 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.
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
Part II - Page 5
<PAGE>
"Flip-ln'' 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 transferees the right to buy, for $10.00, shares of
Common Stock with a market value of $20.00 (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 $10.00 Exercise Price, the common stock of the acquiror company having a
market value of $20.00 (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 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 $.01 each (payable in cash or securities) at any time
before there is a 15% Shareholder who has trigger "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 exceptions as set forth above). Thereafter,
the Continuing Directors can amend the Plan or the Rights 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.
Part II - Page 6
<PAGE>
Item 5. Interest of Named Experts and Counsel
None
Item 6. Indemnification of Officers and Directors
Registrant's Articles of Incorporation and Bylaws and the Utah General
Corporation Law provide for indemnification of directors and officers against
certain liabilities. In general, officers and directors of Registrant are
indemnified against expenses actually and reasonably incurred in connection with
proceedings, whether civil or criminal, provided that it is determined that they
acted in good faith, and are not deemed to be liable to Registrant for
negligence or misconduct in the performance of their duties.
Item 7. Exemption from Registration Claimed
None. No securities issued before the effective date of this Registration
Statement will be reoffered or resold pursuant to this Registration Statement
Item 8. Exhibits
3.1 Articles of Incorporation of Registrant, as amended.(1)
3.2 Bylaws(1)
3.3 Certificate of Amendment to Articles of Incorporation of Registrant dated
May 18, l995. (2)
3.4 Certificate of Amendment to Articles of Incorporation of Registrant dated
December 1, l995.(2)
5. Opinion of Zukerman Gore & Brandeis, LLP regarding legality of shares being
issued.
10. 1997 Stock Compensation Plan.
24. Consent of Zukerman Gore & Brandeis, LLP. See Exhibit 5.
___________________________________________________
(1) Incorporated by reference from Form S-1, File No. 0-012365
(2) Incorporated by reference from Form 8-K dated January 15, 1996.
Item 9. Undertakings
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 of 1933;
(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;
(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, including
(but not limited to) any addition or election of a managing underwriter.
Provided however, that paragraphs (i) and (ii) above shall not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by Registration pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
Part II - Page 7
<PAGE>
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement to the securities offered therein, and the offering of
such securities offered 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.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by 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 that matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the questions whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Part II - Page 8
<PAGE>
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on this 10th day of
January, 1997.
MEDICAL DEVICE TECHNOLOGIES, INC.
By: /s/ M. Lee Hulsebus
-----------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated. Each of the undersigned hereby appoints
M. LEE HULSEBUS and EDWARD C. HALL or either one of them as is lawful
attorney-in-fact with full power of substitution, severally, to execute in the
name and on behalf of each such person individually and in each capacity stated
below, one or more amendments (including post-effective amendments) to the
Registration Statement, which amendments may make such changes in the
Registration Statement, as the attorney-in-fact acting deems appropriate, and to
file any such amendment of the Registration Statement with the Securities and
Exchange Commission.
SIGNATURE TITLE DATE
/s/M. Lee Hulsebus Chief Executive Officer, January 10, 1997
President and Chairman
/s/Edward C. Hall Chief Financial January 10, 1997
Officer/Secretary
/s/Don L. Arnwine Director January 10, 1997
/s/Arthur E. Bradley Director January 10, 1997
/s/William A. Clarke Director January 10, 1997
/s/Thomas E. Glasgow Director January 10, 1997
/s/Scott A. Weisman Director January 10, 1997
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
5 Opinion and Consent of Zukerman Gore & Brandeis, LLP
10 1997 Stock Compensation Plan
24 Consent of Zukerman Gore & Brandeis, LLP (See Exhibit 5)
<PAGE>
OPINION AND CONSENT OF LEGAL COUNSEL
EXHIBIT 5
ZUKERMAN GORE & BRANDEIS, LLP
Attorneys at Law
900 Third Avenue
New York, NY 10022
January 7, 1997
Board of Directors
MEDICAL DEVICE TECHNOLOGIES, INC.
9171 Towne Centre Drive, Suite 355
San Diego, CA 92122
Re: Medical Device Technologies, Inc.
Registration Statement on Form S-8
Gentlemen:
We have acted as counsel for Medical Device Technologies, Inc., a Utah
corporation (the "Company") in connection with the preparation and filing by the
Company of a registration statement on Form S-8, and the prospectus that forms a
part thereof (the "Registration Statement" and "Prospectus", respectively) under
the Securities Act of 1933, as amended, relating to the registration by the
Company of an aggregate of 750,000 shares of the Company's common stock, par
value $.15 per share (the "Common Stock"), pursuant to the Company's 1997 Stock
Compensation Plan (the "Plan") to be issued to employees and consultants of the
Company.
We have examined the Certificate of Incorporation and the By-Laws of the
Company, the minutes of the various meetings and consents of the Board of
Directors of the Company, originals or copies of such records of the Company and
where applicable, agreements, certificates of public officials, certificates of
officers and representatives of the Company, and others, and such other
documents, including the Plan, certificates, records, authorizations,
proceedings, statutes and judicial decisions as we have deemed necessary to form
the basis of the opinion expressed below. In such examination, we have assumed
the genuiness of all signatures, the authenticity of all documents submitted to
us as originals and the conformity to originals of all documents submitted to us
as copies thereof. As to various questions of fact material to such opinion, we
have relied upon statements and certificates of officers and representatives of
the Company and its predecessor-in-interest and others.
Based on the foregoing, we are of the opinion that:
1. All shares of Common Stock have been duly authorized and, when issued
and sold in accordance with the Prospectus, will be validly issued, fully paid
and nonassessable.
We hereby consent to the inclusion of this opinion as an exhibit in the
Registration Statement as attorneys who have passed upon the validity of the
shares of Common Stock.
We further consent to your filing a copy of this opinion as an exhibit to
the Registration Statement.
Very truly yours,
/S/ZUKERMAN GORE & BRANDEIS, LLP
<PAGE>
1997 STOCK COMPENSATION PLAN
EXHIBIT 10
MEDICAL DEVICE TECHNOLOGIES, INC.
1997 STOCK COMPENSATION PLAN
The purpose of the 1997 Stock Compensation Plan (the "Plan"), as adopted
effective January 10, 1997, is to promote the growth of the Company by providing
flexibility in compensating selected employees and non-employee consultants and
advisors who are closely associated with the Company and whose services the
Company deems necessary and appropriate for the development and marketing of the
Company's products.
ARTICLE I
DEFINITIONS
Whenever used in the Plan, the
following terms shall have the meanings set forth in this Section:
Section 1.1
"Award" means any grant of Common Stock made under the Plan.
Section 1.2
"Board of Directors" means the Board of Directors of the Company.
Section 1.3
"Code" means the Internal Revenue Code of 1986, as amended.
Section 1.4
"Committee" means the Stock Award Committee of the Board of Directors,
appointed as provided in Section 6.1 hereof, or if such committee has not been
established, the Board of Directors. The members of the committee are Mr. M. Lee
Hulsebus and Mr. Thomas E. Glasgow.
Section 1.5
"Common Stock" means the common stock, par value $0.15 per share, of
Medical Device Technologies, Inc. Section 1.6 "Company" means Medical Device
Technologies, Inc., ICP Corporation and any other Subsidiary of Medical Device
Technologies, Inc.
Section 1.7
"Date of Award" means the day the Committee authorizes an Award or such
later date as may be specified by the Committee as the date a particular Award
will become effective.
1
<PAGE>
Section 1.8
"Employee" means any employee, consultant, advisor, officer or director who
renders Services to the Company (including, without limitation, any person
employed by the Company in a key capacity; an officer or director of the
Company, a person or company engaged by the Company as a technical or
non-technical consultant; or a lawyer, law firm, accountant or accounting firm).
Section 1.9
"Service means bona fide services actually rendered to the Company and/or a
Subsidiary in connection with the business of those entities as determined by
the Committee, provided, however, that Services shall not include any services
rendered in connection with the offer or sale of securities in a capital raising
transaction. Services shall not include contingent services or services to be
rendered in the future.
Section 1.10
"Subsidiary" means any corporation in an unbroken chain of corporations
beginning with Medical Device Technologies, Inc. if each of the corporations
other than the last corporation in the unbroken chain then owns stock possessing
more than fifty percent (50%) of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
2
<PAGE>
ARTICLE II
EFFECTIVE DATE OF THE PLAN
Section 2.1
The Effective Date of the Plan is January 10, 1997.
ARTICLE III
SHARES SUBJECT TO PLAN
Section 3.1
Shares Subject to Plan
The aggregate shares of the Company's $0.15 par value Common Stock which
may be awarded under the Plan shall not exceed Seven Hundred Fifty Thousand
(750,000) shares (the "Shares").
Section 3.2
Changes in Company's Shares
In the event that the outstanding shares of Common Stock of the Company are
hereafter changed into or exchanged for a different number or kind of shares or
other securities of the Company, or of another corporation, by reason of
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, stock dividend or combination of shares, appropriate adjustments shall
be made by the Committee in the number and kind of shares to be issued under the
Plan following such event. However, no adjustments shall be made as to shares
awarded under the Plan prior to such event.
ARTICLE IV
AWARDS OF SHARES
Section 4.1
Eligibility
Any Employee shall be eligible to be granted shares. However, no Shares
shall be granted to any Employee who owns or would, as a result of the Award,
own stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or any Subsidiary.
Section 4.2
Granting of Shares
(a) The Committee shall from time to time, in its absolute discretion:
(1) Determine which Employee(s) in its opinion should be awarded Shares;
(2) Determine the number of Shares to be awarded to such Employee(s); and
(3) Determine the terms and conditions of such Shares award, consistent with
the Plan.
(b) Upon the selection of an Employee to be awarded Shares the Committee shall
instruct the Company's Secretary to issue such Shares and may impose such
conditions on the issuance of such Shares as it deems appropriate.
3
<PAGE>
ARTICLE V
ISSUANCE OF SHARES
Section 5.1
Conditions to Issuance of Stock Certificates
The Shares issuable and deliverable under the Plan may be either previously
authorized but unissued Common Stock or issued Common Stock which has then been
reacquired by the Company. The Company shall not be required to issue or deliver
any certificate or certificates for Shares prior to fulfillment of all of the
following conditions:
(a) The admission of such Shares to listing on all stock exchanges on which such
series or class of stock is then listed; and
(b) The completion of any registration or other qualification of such Shares
under any state or federal law or under the rulings or regulations of the
Securities and Exchange Commission or any other governmental regulatory body,
which the Committee shall, in its absolute discretion, deem necessary or
advisable; and
(c) The obtaining of any approval or other clearance from any state or federal
governmental agency which the Committee shall, in its absolute discretion,
determine to be necessary or advisable; and
(d) Compliance with any additional conditions imposed by the Committee pursuant
to Section 5.3, Section 6.5, or otherwise as provided under the Plan.
Section 5.2
Rights as Shareholders
The holders of any award of Shares hereunder shall not be, nor have any of
the rights or privileges of, shareholders of the Company in respect of any Award
of Shares under the Plan unless and until certificates representing such Shares
have been issued by the Company to such holders.
Section 5.3
Transfer Restrictions
The Committee, in its absolute discretion, may impose such other
restrictions on the transferability of the Shares issued pursuant to any Award
as it, in its sole discretion, deems necessary or appropriate. Any such other
restriction shall be set forth on the certificates evidencing such shares.
4
<PAGE>
ARTICLE V1
ADMINISTRATION
Section 6.1
Stock Award Committee
The Stock Award Committee shall consist of two or more Directors, appointed
by and holding office at the pleasure of the Board of Directors. Appointment of
Committee members shall be effective upon acceptance of appointment. Committee
members may resign at any time by delivering written notice to the Board of
Directors. Vacancies in the Committee shall be filled by the Board of Directors.
Section 6.2
Duties and Powers of Committee
It shall be the duty of the Committee to conduct the general administration
of the Plan in accordance with its provisions. The Committee shall have the
power to interpret the Plan and to adopt such rules for the administration,
interpretation and application of the Plan as are consistent therewith and to
interpret, amend or revoke any such rules. The Board of Directors shall have no
right to exercise any of the rights or duties of the Committee under the Plan.
Section 6.3
Majority Rule
The Committee shall act by a majority of its members in office. The
Committee may act either by vote at a meeting or by a memorandum or other
written instrument signed by a majority of the Committee.
Section 6.4
Compensation; Professional Assistance; Good Faith Actions
Members of the Committee shall receive such compensation for their services
as members as may be determined by the Board. All expenses and liabilities
incurred by members of the Committee in connection with the administration of
the Plan shall be borne by the Company. The Committee may employ attorneys,
consultants, accountants, appraisers, brokers or other persons. The Committee,
the Company and its Officers and Directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon all issues of Shares under the Plan, the Company and all
other interested persons. No member of the Committee shall be personally liable
for any action, determination or interpretation made in good faith with respect
to the Plan, and all members of the Committee shall be fully protected by the
Company in respect to any such action, determination or interpretation.
Section 6.5
Withholding Taxes
If the Committee determines that any Award of Shares hereunder is subject
to withholding tax, the Committee is authorized to withhold from an Employee's
salary or other cash compensation, such amounts as the Committee determines, in
its sole discretion, to be necessary to pay the Employee's federal and state
income withholding tax. The Committee may elect to withhold from the Shares
Awarded hereunder a sufficient number of Shares to satisfy the Company's
withholding obligations. If the Company becomes required to pay withholding
taxes to any federal, state or other taxing authority as a result of the
granting of an Award of Shares hereunder, and the Employee fails to provide the
Company with the funds with which to pay that withholding tax, the Company may
withhold up to 50% of each payment of salary or bonus to the Employee (which
will be in addition to any other required or permitted withholding), until the
Company has been reimbursed for the entire withholding tax it was required to
pay.
5
<PAGE>
ARTICLE VII
OTHER PROVISIONS
Section 7.1
Amendment, Suspension or Termination of the Plan
The Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Committee.
However, without approval of the Board of Directors given before the action by
the Committee, no action of the Committee may, except as provided in Section
3.2, increase any limit set forth in Section 3.1 on the maximum number of Shares
which may be awarded under the Plan, or materially modify the eligibility
requirements of Section 4.1. Neither the amendment, suspension nor termination
of the Plan shall, without the consent of the shareholder of such Share, impair
any rights or obligations with respect to any Share previously awarded under the
Plan. No Shares may be awarded during any period of suspension nor after
termination of the Plan, and in no event may any Share be awarded under this
Plan after the expiration of two (2) years from the Effective Date of the Plan.
Section 7.2
Effect of Plan Upon Other Compensation or Option Plans
The adoption of this Plan shall not affect any other compensation or
incentive plans in effect for the Company or any Subsidiary. Nothing in this
Plan shall be construed to limit the right of the Company or any Subsidiary (a)
to establish any other forms of incentives or compensation for employees of the
Company or any Subsidiary or (b) to grant or assume options otherwise than under
the Plan in connection with any proper corporate purpose, including, but not by
way of limitation, the grant or assumption of stock or options in connection
with the acquisition by purchase, lease, merger, consolidation or otherwise of
the business, stock or assets of any corporation, firm or association.
Section 7.3
Titles
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of the Plan.
6
<PAGE>
Section 7.4
Conformity to Securities Laws
The Plan is intended to conform to the extent necessary with all provisions
of the Securities Act and the Exchange Act and any and all regulations and rules
promulgated by the U.S. Securities and Exchange Commission thereunder.
Notwithstanding anything herein to the contrary, the Plan shall be administered,
and shares shall be awarded only in such a manner as to conform to such laws,
rules and regulations. To the extent permitted by applicable law, the Plan and
Shares awarded hereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.
Section 7.5
Employment
Nothing in the Plan or in the grant of an Award shall confer upon any
Employee the right to continue in the employ of the Company nor shall it
interfere with or restrict in any way the rights of the Company to discharge any
Employee at any time for any reason whatsoever, with or without cause.
Section 7.6
Delivery of Plan
A copy of the Plan shall be delivered to all participants, together with a
copy of the resolution or resolutions of the Board of Directors authorizing the
granting of the Award and establishing the terms, if any, of participation.
I HERREBY CERTIFY that the foregoing 1997 Stock Compensation Plan was duly
authorized by the Board of Directors of Medical Device Technologies, Inc. on
December 19, 1996.
Executed on this 10th day of January 1997.
/s/ M. Lee Hulsebus
Chief Executive Officer
7
