<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1997
REGISTRATION NO. 333-22507
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3843 13-3152648
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
No.)
</TABLE>
200 NORTH WESTLAKE BOULEVARD, SUITE 202,WESTLAKE VILLAGE, CA 91362
(805) 381-2700
(Address and Telephone Number of Principal Executive Offices)
200 NORTH WESTLAKE BOULEVARD, SUITE 202, WESTLAKE VILLAGE, CA 91362
(805) 381-2700
(Address of Principal Place of Business or Intended Principal Place of Business)
RONALD E. WITTMAN
200 NORTH WESTLAKE BOULEVARD, SUITE 202
WESTLAKE VILLAGE, CA 91362
(805) 381-2700
(Name, Address and Telephone number of Agent for Service)
------------------------
COPIES OF COMMUNICATIONS TO:
C.N. Franklin Reddick III, Esq. David Alan Miller, Esq.
Murray Markiles, Esq. Peter M. Ziemba, Esq.
Troop Meisinger Steuber & Pasich, LLP Graubard Mollen & Miller
10940 Wilshire Boulevard 600 Third Avenue
Los Angeles, California 90024 New York, NY 10016-2097
(310) 824-7000 (212) 818-8800
Fax (310) 443-8601 Fax (212) 818-8881
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF ADDITIONAL REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
Shares of Common Stock underlying
options previously issued by the
Company............................... 10,240 $5.78(2) $59,187 $17.94
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Represents the price of the Company's Common Stock at April 4, 1997.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 7, 1997
[LOGO]
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
1,500,000 SHARES OF COMMON STOCK AND
1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
All of the 1,500,000 shares of common stock ("Common Stock") and 1,500,000
Redeemable Common Stock Purchase Warrants ("Warrants") offered hereby (together,
"Securities") are being sold by Dental/Medical Diagnostic Systems, Inc.
("Company"). Each Warrant entitles the holder to purchase one share of Common
Stock at a price of $5.00 per share during the four year period commencing one
year from the date of this Prospectus. The Company may redeem the Warrants, once
they become exercisable, at a price of $.01 per Warrant, upon not less than 30
days' prior written notice if the last sale price of the Common Stock has been
at least 190% of the then current exercise price of the Warrants ($9.50 based
upon $5.00 exercise price) on each of the ten consecutive trading days ending on
the third day prior to the date on which notice is given. See "Description of
Securities."
Prior to this Offering, there has been only a limited public market for the
Common Stock and no public market for the Warrants. The Common Stock is quoted
on the NASD OTC Bulletin Board ("OTC Bulletin Board") under the symbol "DMDS."
On April 4, 1997, the high bid and low ask price of the Common Stock were $5.50
and $5.83, respectively. See "Price Range of the Common Stock." The Company has
applied to have the Common Stock and the Warrants approved for quotation on the
Nasdaq SmallCap Market under the symbols "DMDS" and "DMDW," respectively. There
can be no assurance that an active trading market will develop for either the
Common Stock or the Warrants, or that, if developed, any such market will be
sustained. It is anticipated that the initial public offering price will be
between $4.00 and $5.00 per share of Common Stock and between $.25 and $.75 per
Warrant. See "Underwriting" for information relating to the factors considered
in determining the public offering price of the Securities and the exercise
price of the Warrants.
--------------------------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. PROSPECTIVE INVESTORS SHOULD CONSIDER
CAREFULLY THE DISCUSSION UNDER "RISK FACTORS" COMMENCING ON PAGE 7 AND
"DILUTION" ON PAGE 19 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share........................................ $ $ $
Per Warrant...................................... $ $ $
Total(3)......................................... $ $ $
</TABLE>
(1) Does not include a 3% nonaccountable expense allowance which the Company has
agreed to pay the Underwriter. The Company has also agreed to sell the
Underwriter an option ("Underwriter's Purchase Option") to purchase 150,000
shares of the Common Stock and/or 150,000 Warrants and to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended ("Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance in the amount of $ ($ if
the Underwriter's over-allotment option is exercised in full), estimated at
approximately $ .
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 225,000 additional
shares of the Common Stock and/or 225,000 additional Warrants on the same
terms set forth above, solely for the purpose of covering over-allotments,
if any. If such over-allotment option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions, and Proceeds to Company
will be $ , $ and $ , respectively. See
"Underwriting."
This Prospectus also relates to the offer and sale (i) by certain persons
("Selling Securityholders") of 1,600,000 Warrants issued to the Selling
Securityholders in exchange for warrants ("Bridge Warrants") that were issued to
them in connection with the Company's November 1996 bridge financing ("Bridge
Financing") and (ii) by two optionholders ("Selling Optionholders") of 10,240
shares of Common Stock ("Option Shares") issuable to them upon exercise of
outstanding stock options. The Warrants offered by the Selling Securityholders
and the Option Shares are not part of this underwritten Offering and the Company
will not receive any of the proceeds from the sale of such Warrants and Option
Shares. The Selling Securityholders may not sell such Warrants prior to November
27, 1998 without the prior consent of the Underwriter.
The Securities are being offered by the Underwriter subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to the
approval of certain legal matters by counsel and certain other conditions. The
Underwriter reserves the right to withdraw, cancel, or modify this Offering and
to reject any order in whole or in part. It is expected that delivery of
certificates representing the Securities will be made against payment thereof at
the offices of the Underwriter in Jersey City, New Jersey, on or about
, 1997.
M.H. MEYERSON & CO., INC.
FOUNDED 1960
525 WASHINGTON BOULEVARD
JERSEY CITY, NEW JERSEY 07310
(201) 459-9500 (800) 888-8118
The date of this Prospectus is , 1997
<PAGE>
[Inside Cover:Photograph depicting TeliCam intraoral camera, monitor with
dentist and patient in the foreground]
<TABLE>
<C> <S>
- Network-ready
- Built-in Video Capture Mechanism
- TeliCam's exclusive Microprocessor Chip
- Uni-lens Handpiece Design
- Ergonomically-Balanced Handpiece
Simultaneous use of multiple cameras without printer or external
- capture device
- Capture images from 2mm to full face
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE SECURITIES, INCLUDING
OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS
AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED
TO REFLECT A ONE-FOR-2.197317574 REVERSE STOCK SPLIT OF THE COMMON STOCK
EFFECTED ON JANUARY 13, 1997, AND A ONE-FOR-1.333333333 REVERSE STOCK SPLIT
APPROVED BY THE COMPANY'S STOCKHOLDERS ON MARCH 24, 1997 ("REVERSE STOCK
SPLITS"). THIS PROSPECTUS AND OTHER INFORMATION INCORPORATED HEREIN, CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER
FACTORS, THE FACTORS SET FORTH UNDER THE CAPTION "RISK FACTORS" COMMENCING ON
PAGE 7 OF THIS PROSPECTUS. PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY SHOULD CAREFULLY CONSIDER THE SPECIFIC MATTERS SET FORTH UNDER "RISK
FACTORS," AS WELL AS THE OTHER INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS,
PRIOR TO MAKING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY.
THE COMPANY
Dental/Medical Diagnostic Systems, Inc. ("Company") designs, develops,
manufactures and sells high technology dental equipment. Currently, the
Company's primary emphasis is on the manufacture and sale of three versions of
an intraoral camera system known as the TeliCam System, and a dental office
networking system, known as InTELInet, for use in connection with the TeliCam
System. The TeliCam System displays close-up color video images of dental
patients' teeth and gums. These TeliCam images assist dentists in displaying
dental health and hygiene problems to patients and, as a result of such display,
promote patient acceptance of treatment plans. The TeliCam System offers
dentists the ability to capture and display multiple video images without an
expensive external capture device such as a video cassette recorder or color
printer, thereby providing a low-cost alternative to the more expensive
traditional intraoral dental camera systems. For this reason, the Company
believes that the TeliCam System should be particularly attractive to the
overseas market because printed copies of dental images are not generally
required by foreign insurance companies. The Company commenced shipments of the
initial model of the TeliCam System, referred to as TeliCam I, and an
international version compatible with the PAL television system, to customers in
February 1996, and April 1996, respectively. Through December 31, 1996, the
Company had sold 2,070 TeliCam Systems to dentists throughout the United States,
as well as to several dental schools, and 940 TeliCam Systems internationally.
The Company has completed the development of an enhanced version of the TeliCam
System, referred to as the "TeliCam II," which will be introduced in April 1997.
In November 1996, the Company introduced its InTELInet Networking System
("InTELInet") for use with the TeliCam System. InTELInet creates a
video-electronic information link between the different operatories of the
dental office. InTELInet is different from other intra-office networking systems
known to the Company in that it enables simultaneous use of two or more
intraoral cameras, which allows dentists and their staff to conduct more than
one patient examination at a time. In addition, the TeliCam, unlike other
intraoral cameras on the market today has its own microprocessor video capture
device (or "frame grabber") built in, facilitating the need for only one central
video printer regardless of the number of intraoral cameras being used at the
same time. Competing systems require a separate color video printer or other
image storage device to capture the video images from each intraoral camera that
is in use. The color printer or other image storage device is typically the
second most expensive element of an intraoral camera system. The TeliCam System
and InTELInet presently enable the Company to offer its customers more efficient
and cost-effective networking of multiple operatories. From the time of its
first introduction in late November 1996, through March 25, 1997, 145 InTELInet
multiple operatory networking systems have been sold by the Company.
The Company is currently working with third parties in the development of a
teeth whitening system. This system would utilize a high energy, high pressure
ionized gas in the presence of an electrical current to create a laser-type
light to effect teeth whitening. The Company believes that the teeth whitening
system
3
<PAGE>
can produce faster results at lower cost than currently available teeth
whitening systems. Currently, the leading system for teeth whitening in the
dental office requires more than two hours of the dentist's time. The Company is
currently testing technologies for whitening teeth that have the potential to
whiten teeth in a dentist's office in substantially less time and can be
operated by a dental hygienist instead of the dentist. The testing involves the
compatibility of the light source and catalytic chemicals to produce effective
and rapid teeth whitening. The technology also functions as a curing system for
curing composites, adhesives and sealants used in dental bonding and repair.
Currently available light curing systems can achieve similar results to those
anticipated to be produced by the system currently being tested by the Company.
However, the Company believes the curing system it is testing can be sold at a
price point significantly below that of functionally competitive systems. If the
teeth whitening system is successfully developed, the Company may be required to
enter into contractual arrangements with the third party developers retained by
the Company prior to marketing the system. The Company is also negotiating to
obtain marketing rights to digital dental x-ray technology through a possible
joint venture or through an exclusive worldwide distribution agreement. This
technology, if successfully developed or obtained through a marketing
arrangement, would enable the Company to provide a more user-friendly digital
x-ray system comparable to functionally competitive systems at a significantly
lower price point. Digital x-ray systems, including those currently on the
market, reduce radiation exposure compared to conventional x-ray systems, allow
dentists to view x-ray images in real-time without the time-consuming process of
film development and eliminate the need to use and dispose of chemicals required
to develop conventional x-ray film. This technology also will allow database
storage and recall of images for comparison purposes.
The Company intends to use a significant portion of the net proceeds of this
Offering to develop and introduce new products and to expand domestic and
international sales. Its primary strategy in pursuing these objectives is to
expand its product lines both through internal development and through
acquisitions and joint ventures and expand sales of its products by establishing
additional distributor relationships internationally.
The Company's principal executive offices are located at 200 N. Westlake
Boulevard, Suite 202, Westlake Village, California 91362, and its telephone
number is (805) 381-2700.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........................... 1,500,000 shares of the Common Stock and
1,500,000 Warrants. Each Warrant entitles the
holder thereof to purchase one share of the
Common Stock at a price of $5.00 per share
during the four year period commencing one
year from the date of this Prospectus. The
Company may redeem the Warrants, once they
become exercisable, at a price of $.01 per
Warrant upon not less than 30 days' prior
written notice if the last sale price of the
Common Stock has been at least 190% of the
then current exercise price of the Warrants
($9.50 based upon a $5.00 exercise price) on
each of the ten consecutive trading days
ending on the third day prior to the date on
which notice is given. See "Description of
Securities."
Common Stock Outstanding Prior to
this Offering.............................. 2,985,537 shares
Common Stock to be Outstanding After this
Offering................................... 4,485,537 shares
Proposed Nasdaq SmallCap Market Symbols...... Common Stock: DMDS
Warrants: DMDSW
Proposed Boston Stock Exchange Symbols....... Common Stock: DMD
Warrants: DMDW
</TABLE>
USE OF PROCEEDS
The Company intends to apply the net proceeds of this Offering approximately
as follows: (i) $1,700,000 to repay in full the secured promissory notes
("Bridge Notes") of the Company issued in the Bridge Financing; (ii) $1,300,000
for product development; (iii) $1,300,000 for acquisitions and joint venture
financing; (iv) $300,000 for the repayment of certain loans made by an affiliate
and a former affiliate of the Company; and (v) $1,400,000 for working capital
and general corporate purposes. See "Use of Proceeds" and "Certain
Transactions."
RISK FACTORS
The Securities offered hereby involve a high degree of risk, including,
without limitation, the risk of the Company's limited operating history and
history of losses; the risks associated with dependence upon a single product;
the risk that new products will not be developed successfully; and the Company's
dependence upon acquisitions and joint ventures for business growth. See "Risk
Factors."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary financial information set forth below is derived from the
consolidated financial statements of the Company appearing elsewhere in this
Prospectus. This information must be read in conjunction with such consolidated
financial statements, including the notes thereto.
<TABLE>
<CAPTION>
TEN MONTHS
ENDED INCEPTION TO
DECEMBER 31, MARCH 2,
1996(1) 1996(2)
------------ --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................................................... $ 11,673,102 $ 220,623
Gross profit........................................................................ 4,987,638 18,508
Operating expenses:
Selling, general and administrative............................................... 4,360,736 1,111,391
Research and development.......................................................... 322,467 528,426
Operating income (loss)............................................................. 304,435 (1,621,309)
Income (loss) before income taxes................................................... 215,721 (1,625,213)
Net income (loss)................................................................... $ 137,151 $ (1,625,213)
------------ --------------
------------ --------------
Net income (loss) per share......................................................... $ .05 $ (1.57)
------------ --------------
------------ --------------
Number of shares used in computing per share amounts................................ 3,019,213 1,035,778
<CAPTION>
DECEMBER 31, 1996
----------------------------
ACTUAL AS ADJUSTED(3)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 1,058,836 $ 5,085,870
Working capital..................................................................... $ 2,256,474 $ 6,283,508
Total assets........................................................................ $ 4,718,441 $ 8,555,174
Current liabilities................................................................. $ 1,772,433 $ 1,772,433
Non-current liabilities............................................................. $ 1,708,383 $ 80,126
Total stockholders' equity.......................................................... $ 1,237,625 $ 6,860,194
</TABLE>
- ------------------------
(1) On February 5, 1997, the Company changed its year end from a fiscal year
ending on the Saturday nearest to February 28 to a December 31 fiscal year
end. Information provided is for the ten-month period from March 3, 1996
through December 31, 1996.
(2) Information provided is for the period from inception (October 23, 1995) to
March 2, 1996.
(3) Assumes the Offering closes in April 1997 and reflects the receipt of the
net proceeds of approximately $6,000,000 from the sale of the Securities
offered hereby assuming a public offering price of $4.50 per share of Common
Stock and $.50 per Warrant, and the application thereof to (i) the repayment
of the Bridge Notes in the principal amount of $1,600,000 and accrued
interest of $100,000 and the related effect of writing off approximately
$190,000 in financing costs related to the Bridge Financing and the discount
on the Bridge Notes of $188,000 relating to the valuation of the Bridge
Warrants; and (ii) the repayment of loans in the principal amount of
$273,000 made by an affiliate and former affiliate of the Company.
UNLESS OTHERWISE INDICATED, ALL SHARE, PER-SHARE AND FINANCIAL INFORMATION
SET FORTH HEREIN ASSUMES NO EXERCISE OF (I) THE UNDERWRITER'S OVER-ALLOTMENT
OPTION TO PURCHASE 225,000 SHARES OF COMMON STOCK AND/OR 225,000 WARRANTS AND
THE WARRANTS ISSUABLE UPON EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION;
(II) THE UNDERWRITER'S PURCHASE OPTION TO PURCHASE 150,000 SHARES OF COMMON
STOCK AND/OR 150,000 WARRANTS AND THE EXERCISE OF THE WARRANTS ISSUABLE UPON
EXERCISE OF THE UNDERWRITER'S PURCHASE OPTION; (III) THE WARRANTS TO PURCHASE
1,500,000 SHARES OF COMMON STOCK OFFERED HEREBY; (IV) THE WARRANTS ("RESALE
WARRANTS") TO PURCHASE 1,600,000 SHARES OF COMMON STOCK INTO WHICH THE BRIDGE
WARRANTS HAVE BEEN AUTOMATICALLY CONVERTED ON THE DATE OF THIS PROSPECTUS; AND
(V) STOCK OPTIONS TO PURCHASE 253,154 SHARES OF COMMON STOCK GRANTED OR
COMMITTED TO BE GRANTED TO EMPLOYEES, DIRECTORS AND CONSULTANTS OUTSIDE OF THE
COMPANY'S 1997 STOCK INCENTIVE PLAN PRIOR TO THE DATE OF THIS PROSPECTUS; NOR
DOES IT INCLUDE 350,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE PURSUANT TO
THE COMPANY'S 1997 STOCK INCENTIVE PLAN.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
INHERENT IN AND AFFECTING THE BUSINESS OF THE COMPANY AND THIS OFFERING,
TOGETHER WITH THE OTHER INFORMATION IN THIS PROSPECTUS, BEFORE MAKING AN
INVESTMENT DECISION.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND ACCUMULATED DEFICIT. While
the Company has been in existence since 1981, its operations between 1988 and
its acquisition of DMD and BDI in March 1996, were limited to the exploration of
acquisition opportunities. Dental\Medical Diagnostic Systems, the division of
the Company which designs and markets the Company's TeliCam System, and BDI, a
subsidiary of the Company, have only been in operation since October 1995. For
the period from inception (October 23, 1995) to March 2, 1996, the Company
incurred a net loss of $1,625,213, and for the ten month period ended December
31, 1996, the Company had net income of $137,151. At December 31, 1996, the
Company's accumulated deficit was $1,488,062. The ability of the Company to
sustain profitability will depend, in part, upon the successful marketing of
existing products and the successful and timely introduction of new products.
There can be no assurance that the Company will be able to generate and sustain
net sales or profitability in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE UPON A SINGLE PRODUCT. The TeliCam I and its enhanced version,
the TeliCam II, are currently the Company's primary product and, together with
related products such as the InTELInet system, will account for a substantial
portion of the Company's revenue for the foreseeable future. There can be no
assurance that the TeliCam System will be more effective than competing products
or technologies, or will be successfully marketed. The Company is still in the
early stages of marketing the TeliCam System and related products, and,
consequently, the degree to which the market will accept this product is still
uncertain. If the TeliCam System and related products cannot be marketed
successfully on a sustained basis, it is likely that the Company's business
operations would be substantially and adversely impacted. See "Business--The
TeliCam System."
IMPORTANCE OF NEW PRODUCT DEVELOPMENT TO GROWTH. The Company's ability to
develop and introduce new products successfully on a timely basis will be a
significant factor in the Company's ability to grow and remain competitive. New
product development often requires long-term forecasting of market trends, the
development and implementation of new designs, compliance with extensive
governmental regulatory requirements and a substantial capital commitment. The
medical and dental device industry is characterized by rapid technological
change. As technological changes occur in the marketplace, the Company may have
to modify its products in order to keep pace with these changes and
developments. The introduction of products embodying new technologies, or the
emergence of new industry standards, may render existing products, or products
under development, obsolete or unmarketable. Although the Company intends to
devote a significant portion of the proceeds of this Offering to developing new
products, there can be no assurance that the commitment and use of such funds
will result in improved or new products or that if successfully completed, such
improved or new products will be cleared or approved by the appropriate
governmental authorities and gain market acceptance. Any failure by the Company
to anticipate or respond in a cost-effective and timely manner to government
requirements, market trends or customer requirements, or any significant delays
in product development or introduction, could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business-- InTELInet System" and "Business--Product Development Activities."
SIGNIFICANT PORTION OF PROCEEDS USED TO SATISFY INDEBTEDNESS; BENEFIT TO
INSIDERS. Approximately $2,000,000 or %, of the net proceeds received by the
Company from this Offering will be used to repay outstanding indebtedness, and,
therefore, will not be available for future operations. Approximately $300,000
of such amount, or % of the net proceeds, will be paid to an affiliate and
former affiliate of the Company including Robert Gurevitch, the Company's
Chairman of the Board and Chief Executive Officer.
7
<PAGE>
BROAD DISCRETION OF MANAGEMENT IN APPLICATIONS OF PROCEEDS. Approximately
$4,000,000 or % ( % if the Underwriter's over-allotment option is exercised
in full) of the net proceeds of this Offering will be allocated and used for
working capital, general corporate purposes, research and development, and
possible joint ventures and acquisition of businesses complementary to the
Company. Although the Company intends to apply the net proceeds of this Offering
in the manner described under "Use of Proceeds," the Company's management and
its Board of Directors have broad discretion within such proposed uses as to the
precise allocation of the net proceeds, the timing of expenditures and all other
aspects of the use thereof. The Company will have broad discretion regarding how
and when the proceeds of this Offering allocated to working capital and general
corporate purposes, and the possible acquisition of complementary businesses,
will be applied, and will use a portion of such proceeds to pay salaries,
including salaries of its executive officers. The Company reserves the right to
reallocate the net proceeds of this Offering among the various categories set
forth under "Use of Proceeds" as it, in its sole discretion, deems necessary or
advisable based upon prevailing business conditions and circumstances. See "Use
of Proceeds" and "Certain Transactions."
POSSIBLE NEED FOR ADDITIONAL CAPITAL. Although the Company believes that
the net proceeds of the Offering, together with existing resources and cash
generated from operations, if any, will be sufficient to satisfy the Company's
working capital requirements for the next twelve months, there can be no
assurance that this will be the case or that these funds will be sufficient to
meet the Company's longer-term cash requirements for expansion. See "Use of
Proceeds." To the extent that the funds generated by this Offering, together
with existing resources, are insufficient to fund the Company's planned
activities and, to the extent the Company is unsuccessful in concluding
negotiations of an acceptable line of credit, the Company will need to raise
additional funds through bank borrowings, public or private financings, or
otherwise. If additional funds are raised through the issuance of equity
securities, additional dilution to stockholders may occur. No assurance can be
given that additional financing will be available when needed or that, if
available, it will be on terms favorable to the Company or its stockholders. If
needed funds are not available, the Company may be required to curtail its
operations, which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EXPANSION THROUGH UNDETERMINED ACQUISITIONS AND JOINT VENTURES. The Company
has allocated $1,300,000, or %, of the net proceeds of this Offering to
acquisition and joint venture financing. The Company intends to expand its
product lines and domestic and international markets, in part, through
acquisitions. The Company's ability to expand successfully through acquisitions
will depend upon the availability of suitable acquisition candidates at prices
acceptable to the Company, the Company's ability to consummate such transactions
and the availability of financing on terms acceptable to the Company. There can
be no assurance that the Company will be successful in completing acquisitions.
Such transactions involve numerous risks, including possible adverse short-term
effects on the Company's operating results or the market price of the Common
Stock. As of the date of this Prospectus, the Company is not engaged in
negotiations to acquire any business, and has not yet identified any such
business. These acquisitions and joint ventures may not be subject to approval
or review by the Company's stockholders. The Company does not expect that it
will obtain an appraisal by any independent appraisers with respect to any such
acquisition. Certain of the Company's future acquisitions may also give rise to
an obligation by the Company to make contingent payments or to satisfy certain
repurchase obligations, which payments could have an adverse financial effect on
the Company. In addition, integrating acquired businesses may result in a loss
of customers or product lines of the acquired businesses and also requires
significant management attention and may place significant demands on the
Company's operations, information systems and financial resources. The failure
effectively to integrate acquired businesses with the Company's operations could
adversely affect the Company. In addition, the Company competes for acquisition
opportunities with companies which have significantly greater financial and
management resources than those of the Company. There can be no assurance that
suitable acquisition opportunities will be identified, that any
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such transactions can be consummated, or that, if acquired, such new businesses
can be integrated successfully and profitably into the Company's operations.
Moreover, there can be no assurance that the Company's historic rate of growth
will continue, that the Company will continue to successfully expand, or that
growth or expansion will result in profitability.
The Company also intends to expand its product lines and domestic and
international markets through joint ventures. The Company's ability to expand
successfully through joint ventures will depend upon the availability of
suitable joint venture candidates whose terms are acceptable to the Company, the
Company's ability to consummate such transactions and the availability of
financing on terms acceptable to the Company. There can be no assurance that the
Company will be successful in completing joint ventures. Such transactions
involve numerous risks, including possible adverse short-term effects on the
Company's operating results or the market price of the Common Stock. The Company
is currently engaged in discussions relating to product development joint
ventures. The failure effectively to integrate joint ventures with the Company's
operations could adversely affect the Company. In addition, the Company competes
for expansion opportunities with companies which have significantly greater
financial and management resources than those of the Company. There can be no
assurance that suitable investment opportunities will be identified, that any
such transactions can be consummated, or that such new businesses can be
integrated successfully and profitably into the Company's operations. Moreover,
there can be no assurance that the Company's historic rate of growth will
continue, that the Company will continue to successfully expand, or that growth
or expansion will result in profitability. See "Business-- Growth Strategy."
DEPENDENCE ON THIRD-PARTY SUPPLIERS. With the exception of the TeliCam
System's CCD processor unit, the Company believes that there are multiple
sources from which it may purchase the components of the TeliCam System. The
Company anticipates that it will obtain certain of the components of the TeliCam
System from a single source or a limited number of sources of supply. Although
the Company believes it will be able to negotiate satisfactory supply
arrangements and relationships, the failure to do so may have a material adverse
effect on the Company. Furthermore, there can be no assurance that suppliers
will dedicate sufficient production capacity to satisfy the Company's
requirements within scheduled delivery times or at all. Failure or delay by the
Company's suppliers in fulfilling its anticipated needs may adversely affect the
Company's ability to market the TeliCam System. See "Business--Manufacturing and
Component Parts." Pursuant to an agreement with Boston Marketing Company, Ltd.
("Boston Marketing") the Company has the exclusive right to market TeliCam's CCD
processor unit ("Teli Units") to the dental market ("Boston Marketing
Distribution Agreement"). See "Certain Transactions." Boston Marketing is a
licensed distributor of the Teli Units under a separate agreement with their
manufacturer. The agreement between Boston Marketing and the Teli Units
manufacturer obligates Boston Marketing to meet minimum purchase obligations. If
Boston Marketing fails to meet these obligations, Boston Marketing will be
terminated as a licensed distributor. In the event of such termination, the
Company, as a sublicensee subdistributor of Boston Marketing, may lose its right
to purchase the Teli Units. Moreover, in the event the Company is unable to meet
its minimum annual purchase obligations under the Boston Marketing Distribution
Agreement, and, as a consequence, such agreement terminates, the Company may be
required to find an alternative source for the primary component of its TeliCam
System. The Company believes that, in the event the Company loses its right to
sell the Teli Units, replacement components could be developed by and obtained
from third parties, but that this may take more than six months. The potential
delay associated with locating an alternative source of supply would have a
significant adverse effect on the Company's operating results and financial
condition. In addition, there is no guarantee that an intraoral dental camera
system utilizing the replacement components will be accepted by the dental
marketplace. See "Business--Manufacturing and Component Parts."
FLUCTUATIONS IN QUARTERLY RESULTS. The Company's business is subject to
certain quarterly influences. Management's prior experience in the industry
would indicate that net sales and operating profits are generally higher in the
fourth quarter due to the purchasing patterns of dentists and are generally
lower in
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the first quarter due primarily to increased purchases in the prior quarter and
during the summer months due to a reduced volume of trade shows and increased
unavailability of dentists due to summer vacations. The Company plans to
increase expenses to fund greater levels of research and development and to fund
investments in joint ventures and acquisitions. To the extent that such expenses
precede or are not subsequently followed by increased revenues, the Company's
business, quarterly operating results and financial condition will be adversely
affected. Additionally, use by the Company of a portion of the proceeds of the
offering to repay the Bridge Notes will cause the Company to incur a charge in
the second quarter of 1997 of approximately $378,000. Quarterly results may also
be adversely affected by a variety of other factors, including the timing of
acquisitions and their related costs, as well as the release of new products and
promotions taking place within the quarter. Other factors that may influence the
Company's quarterly operating results include the timing of introduction or
enhancement of products by the Company's or its competitors, market acceptance
of the TeliCam II, the InTELInet System and other new products, development and
promotional expenses relating to the introduction of new products or
enhancements of existing products, reviews in the industry press concerning the
products of the Company or its competitors, changes or anticipated changes in
pricing by the Company or its competitors, mix of distribution channels through
which products are sold, mix of products sold, product returns, the timing of
orders from major distributors, order cancellations, delays in shipment and
general economic conditions. Due to all of the foregoing factors, it is also
likely that in some future periods the Company's operating results may be below
the expectations of analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EXTENSIVE GOVERNMENT REGULATION. The Company's products and its
manufacturing practices are subject to regulation by the United States Food and
Drug Administration ("FDA") pursuant to the Federal Food, Drug and Cosmetic Act
("FDC Act"), and by other state and foreign regulatory agencies. Under the FDC
Act, medical and dental devices, including those under development by the
Company must receive FDA clearance or approval before they may be sold, or be
exempted from the need to obtain such clearance or approval. FDA regulations
also require the Company to adhere to certain "Good Manufacturing Practices"
("GMP") regulations, which include validation testing, quality control and
documentation procedures. The Company's compliance with applicable regulatory
requirements is subject to periodic inspections by the FDA.
The process of obtaining required regulatory clearances or approvals can be
time-consuming and expensive, and compliance with the FDA's GMP regulations and
other regulatory requirements can be burdensome. Moreover, there can be no
assurance that the required regulatory clearances will be obtained, and those
obtained may include significant limitations on the uses of the product in
question. In addition, changes in existing regulations or the adoption of new
regulations could make regulatory compliance by the Company more difficult in
the future. Although the Company believes that its products and procedures are
currently in material compliance with all relevant FDA requirements, the failure
to obtain the required regulatory clearances or to comply with applicable
regulations could result in fines, delays or suspensions of clearances, seizures
or recalls of products, operating restrictions and criminal prosecutions, and
would have a material adverse effect on the Company. See "Business--Government
Regulation."
COMPETITION. The manufacture and distribution of medical and dental devices
is intensely competitive. The Company competes with numerous other companies,
including several major manufacturers and distributors. With respect to the
intraoral camera market, the Company has at least five major competitors. Most
of the Company's competitors have greater financial and other resources than the
Company. Consequently, such entities may begin to develop, manufacture, market
and distribute systems which are substantially similar or superior to the
Company's products. See "Business--Competition."
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RAPID EXPANSION OF THE COMPANY'S BUSINESS. From inception (October 23,
1995) through December 31, 1996, the Company has experienced rapid and
substantial growth in revenues and geographic scope of operations. Any future
growth may place a significant strain on management and on the Company's
financial resources and information processing systems. The failure to recruit
additional staff and key personnel, to have sufficient financial resources, to
maintain or upgrade these financial reporting systems, or to respond effectively
to difficulties encountered during expansion could have a material adverse
effect on the Company's business, operating results and financial condition.
RELIANCE ON INTERNATIONAL SALES AND DISTRIBUTORS AND GENERAL RISKS OF
INTERNATIONAL OPERATIONS. For the ten-month period ended December 31, 1996,
international sales have accounted for approximately 20% of the Company's net
sales, and the Company expects that international sales may increase as a
percentage of sales in the future. Consequently, the Company is subject to the
risks of conducting business internationally, including unexpected changes in,
or impositions of, legislative or regulatory requirements; fluctuations in the
U.S. dollar which could materially adversely affect U.S. dollar revenues;
tariffs and other barriers and restrictions; potentially adverse taxes; and the
burdens of complying with a variety of international laws and communications
standards. The Company's international sales involve potentially longer payment
cycles and the Company may experience greater difficulty collecting accounts
receivable. The Company currently depends on third party distributors for
substantially all of its international sales. At December 31, 1996, six of the
Company's international distributors accounted for 75% of the Company's accounts
receivable, and five of these distributors accounted for approximately
$2,200,000, or 20%, of the Company's total sales for the ten-month period ended
December 31, 1996. Certain of the Company's third party distributors may also
act as resellers for competitors of the Company and could devote greater effort
and resources to marketing competitive products. The loss of, or other
significant reduction in sales to, certain of these third party distributors
could have a material adverse effect on the Company's business and results of
operations. The Company is also subject to general geopolitical risks, such as
political and economic instability and changes in diplomatic and trade
relationships, in connection with its international operations. There can be no
assurance that these risks of conducting business internationally will not have
a material adverse effect on the Company's business. Further, any failure by the
Company to predict or plan for changes in the international arena could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Marketing and Sales--International Sales and
Distribution."
DEPENDENCE ON KEY PERSONNEL. The Company's future performance will depend
significantly upon its Chairman of the Board and Chief Executive Officer, Robert
H. Gurevitch, and upon certain other key employees of the Company. The loss of
service of one or more of these persons could have a material adverse effect on
the Company's business and operations. The Company has entered into Employment
Agreements with Robert H. Gurevitch and Dewey Perrigo, the Company's Vice
President of Sales, pursuant to which they each have agreed to render services
to the Company until October 1, 1999. See "Management -- Employment Agreements."
The Company has applied for "key person" life insurance on Mr. Gurevitch in the
amount of $2,000,000, of which the Company would be the sole beneficiary, but
there can be no assurance that such insurance can be obtained or that, if such
insurance is obtained, the proceeds of such insurance will be sufficient to
offset the loss to the Company in the event of his death. The Company does not
maintain any insurance on the lives of its other senior management. In addition,
the Company's success will be dependent upon its ability to recruit and retain
qualified personnel. Any failure by the Company to retain and attract key
personnel could have a material adverse effect on the Company's business,
operating results, and financial condition. See "Management."
LIMITED PROPRIETARY PROTECTION. The Company's success and ability to
compete is dependent in part upon its proprietary technology. The Company's
proprietary technology is not protected by any patents. Consequently, the
Company relies primarily on trademark, trade secret and copyright laws to
protect its technology. Also, the Company is currently implementing a policy
that most senior and technical employees and third-party developers sign
nondisclosure agreements. However, there can be no assurance
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that such precautions will provide meaningful protection from competition or
that competitors will not be able to develop similar or superior technology
independently. Also, the Company has no license agreements with the end users of
its products, so it may be possible for unauthorized third parties to copy the
Company's products or to reverse engineer or otherwise obtain and use
information that the Company regards as proprietary. If litigation is necessary
in the future, to enforce the Company's intellectual property rights, to protect
the Company's trade secrets or to determine the validity and scope of the
proprietary rights of others, such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition. Ultimately, the
Company may be unable, for financial or other reasons, to enforce its rights
under intellectual property laws. In addition, the laws of certain countries in
which the Company's products are or may be distributed may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States.
The Company believes that its products do not infringe any valid existing
proprietary rights of third parties. Although the Company has received no
communication from third parties alleging the infringement of proprietary rights
of such parties, there can be no assurance that third parties will not assert
infringement claims in the future. Any such third party claims, whether or not
meritorious, could result in costly litigation or require the Company to enter
into royalty or licensing agreements. There can be no assurance that the Company
would prevail in any such litigation or that any such licenses would be
available on acceptable terms, if at all. If the Company were found to have
infringed upon the proprietary rights of third parties, it could be required to
pay damages, cease sales of the infringing products and redesign or discontinue
such products, any of which alternatives, individually or collectively could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business--Proprietary Rights."
POSSIBLE INFLUENCE BY EXISTING MANAGEMENT. Following this Offering, the
present officers and directors of the Company and their affiliates will
beneficially own approximately 22.7% of the outstanding Common Stock of the
Company. Accordingly, they will have the ability to influence significantly the
election of the Company's directors and most corporate actions. This
concentration of ownership could have the effect of delaying or preventing a
change in control of the Company. See "Principal Stockholders."
CONFLICT OF INTERESTS. Robert Gurevitch, Chairman of the Company, has
loaned money to the Company ("Loan Obligations") and has guaranteed the
performance by the Company under its leases for its Irvine and Westlake,
California premises as well as the performance by the Company of its obligations
under its credit card processing agreement with Checkfree Corporation. See
"Certain Transactions." The Company believes that all of these transactions were
on terms no less favorable than were available from unaffiliated third parties.
The Company intends to attempt to relieve Mr. Gurevitch from his obligations
under each of these guarantees and it is possible that, in order to achieve the
release of Mr. Gurevitch from these guarantees, the Company will be required to
post collateral or provide other concessions to the recipients of the
guarantees. The Company has, in the past, entered into transactions with
affiliates and there can be no assurance that the Company will not enter into
transactions with affiliated parties in the future. See "Certain Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION. The Company's Amended and
Restated Certificate of Incorporation limits, to the maximum extent permitted by
the Delaware General Corporation Law ("Delaware Law"), the personal liability of
directors for monetary damages for breach of their fiduciary duties as a
director, and provides that the Company shall indemnify its officers and
directors and may indemnify its employees and other agents to the fullest extent
permitted by law. The Company has entered into indemnification agreements with
its directors and executive officers which may require the Company, among other
things, to indemnify such directors against liabilities that may arise by reason
of their status or service as directors or officers (other than liabilities
arising from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
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indemnified, and to obtain directors' and officers' insurance, if available on
reasonable terms. The Company intends to purchase directors' and officers'
liability insurance after the completion of this Offering. Section 145 of the
Delaware Law provides that a corporation may indemnify a director, officer,
employee or agent made, or threatened to be made, a party to an action by reason
of the fact that he was a director, officer, employee or agent of the
corporation or was serving at the request of the corporation against expenses
actually and reasonably incurred in connection with such action if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe his conduct was unlawful.
Delaware Law does not permit a corporation to eliminate a director's duty of
care, and the provisions of the Company's Amended and Restated Certificate of
Incorporation have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care. See
"Management--Limitation of Liability."
LIMITED PRIOR MARKET; POTENTIAL EFFECTS OF "PENNY STOCK" RULES; ARBITRARY
OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE. As of the date hereof,
there has been no public market for the Warrants and only a limited public
market for the Common Stock. Although the Common Stock has been sporadically
traded on the OTC Bulletin Board, and it is the intention of the Company that
the Common Stock and Warrants will trade on the Nasdaq SmallCap Market and the
Boston Stock Exchange upon completion of this Offering, there can be no
assurance that an active public trading market for the Common Stock or Warrants
will develop and continue after the closing of this Offering. In the absence of
such a market, purchasers of the Common Stock and the Warrants may experience
substantial difficulty in selling the Securities. Moreover, there can be no
assurance that the Company will be able to continue to meet the maintenance
criteria necessary for the Common Stock and the Warrants to continue to be
listed on the Nasdaq SmallCap Market and the Boston Stock Exchange. The failure
to meet these maintenance criteria in the future may result in the Common Stock
or the Warrants being ineligible for quotations on the Nasdaq SmallCap Market
and the Boston Stock Exchange and trading, if any, of the Common Stock and the
Warrants would thereafter be conducted on the OTC Bulletin Board. As a result of
such ineligibility for quotations, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of the
Common Stock or the Warrants. In addition, if the Common Stock was to become
delisted from trading on the Nasdaq SmallCap Market and the Boston Stock
Exchange, and the trading price of the Common Stock was less than $5.00 per
share, trading in the Common Stock might also be subject to the requirements of
certain rules promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any equity security not quoted on the Nasdaq SmallCap Market or
listed on the Boston Stock Exchange with a price of less than $5.00). Such rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to sale. The
additional burdens imposed upon broker-dealers by such requirements may
discourage them from effecting transactions in the Common Stock and Warrants,
which could severely limit the liquidity of the Common Stock and Warrants and
the ability of purchasers in this offering to sell the Common Stock and Warrants
in the secondary market.
The public offering price of the Common Stock in this Offering and the
Warrant Exercise Price have been determined by negotiations between the Company
and the Underwriter. Factors considered in such negotiations, in addition to
prevailing market conditions, included the history and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure, the market for
public offerings and certain other factors as were deemed relevant.
Consequently, the public offering price of the Common Stock and the exercise
price of the Warrants do not necessarily bear any relationship to the Company's
asset value, net worth or other
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established valuation criteria and may not be indicative of prices that may
prevail at any time or from time to time in the public market for the Common
Stock and the Warrants. See "Underwriting." The trading price of the Company's
Common Stock and Warrants could be subject to significant fluctuations in
response to variations in quarterly operating results, changes in analysts'
earnings estimates, announcements of innovations by the Company or its
competitors, general conditions in the dental equipment industry and other
factors. In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies, and are often
unrelated to operating performance.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Immediately after the Offering,
assuming full exercise of the Underwriter's over-allotment option, the Company
will have outstanding Warrants to purchase an aggregate of up to 3,325,000
shares of Common Stock. This amount includes 1,725,000 shares underlying the
Warrants and 1,600,000 shares underlying the Resale Warrants into which the
Bridge Warrants have been automatically converted as of the date of this
Prospectus. In addition, there are outstanding stock options that have been
granted or committed to be granted to employees, directors and consultants of
the Company to purchase an aggregate of approximately 253,154 shares of Common
Stock at a weighted average exercise price of $2.63 per share and the
Underwriter's Purchase Option pursuant to which the Underwriter has the right to
acquire up to 150,000 shares of Common Stock for $5.50 per share and 150,000
Warrants for $.825 per Warrant. The exercise of any of such outstanding stock
options, Warrants and the Underwriter's Purchase Option (and the Warrants
included therein) will dilute the percentage ownership of the Company's
stockholders, and any sales in the public market of the Common Stock underlying
such stock options, Warrants and the Underwriter's Purchase Option (and the
Warrants included therein) may adversely affect prevailing market prices for the
Common Stock. Moreover, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected, since the holders of such
outstanding securities can be expected to exercise them 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 such stock options,
Warrants and the Underwriter's Purchase Option. In addition, the Company has
granted certain demand and piggy-back registration rights to the Underwriter
with respect to the securities issuable upon exercise of the Underwriter's
Purchase Option. See "Management--Stock Option Grants," "Description of
Securities--Warrants" and "Underwriting."
FUTURE SALES OF COMMON STOCK. Sales of the Common Stock in the public
market after this Offering by existing stockholders could adversely affect the
market price of the Common Stock or the Warrants. See "Shares Eligible for
Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Securities offered
hereby will experience an immediate and substantial dilution of approximately
69% of their investment in the Common Stock because the net tangible book value
of the Company's Common Stock after this Offering will be approximately $1.54
per share as compared with the assumed initial public offering price of $4.50
per share and $.50 per Warrant. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on the
Common Stock and does not expect to pay any dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants may be
redeemed by the Company at any time while they are exercisable at a redemption
price of $.01 per Warrant upon not less than 30 days' prior written notice if
the last sale price of the Common Stock has been at least 190% of the then
exercise price of the Warrants (initially $9.50, but subject to adjustment in
certain circumstances) for each of the ten consecutive trading days during a
period ending on the third trading day prior to the date of the notice of
redemption. Due to the low redemption price, notice of redemption of the
Warrants could force the holders to exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for them to do so, to sell the
Warrants at the current market price when they might otherwise wish to hold the
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Warrants, or to accept the redemption price which would be substantially less
than the market value of the Warrants at the time of redemption. See
"Description of Securities--Warrants."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. The Company will be able to issue shares of its Common Stock upon
exercise of the Warrants only if there is then a current prospectus relating to
such Common Stock, and only if such Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws of the jurisdictions
in which the various holders of the Warrants reside. The Company has undertaken
and intends to file and keep current a prospectus which will permit the purchase
and sale of the Common Stock underlying the Warrants, but there can be no
assurance that the Company will be able to do so. Although the Company intends
to seek to qualify for sale the shares of Common Stock underlying the Warrants
in those states in which the Securities are to be offered, no assurance can be
given that such qualification will occur. The Warrants may be deprived of any
value and the market for the Warrants may be limited if a current prospectus
covering the Common Stock issuable upon the exercise of the Warrants is not kept
effective or if such Common Stock is not qualified or is exempt from
qualification in the jurisdictions in which the holders of the Warrants reside.
See "Description of Securities--Warrants."
ANTI-TAKEOVER PROVISIONS. The Company has an authorized class of 1,000,000
shares of preferred stock which may be issued by the Board of Directors on such
terms and with such rights, preferences and designations as the Board of
Directors may determine. Issuance of such preferred stock, depending upon the
rights, preferences and designations thereof, may have the effect of delaying,
deterring or preventing a change in control of the Company. In addition, certain
"anti-takeover" provisions of the Delaware Law, among other things, restrict the
ability of stockholders to effect a merger or business combination or obtain
control of the Company, and may be considered disadvantageous by a stockholder.
See "Description of Securities--Preferred Stock" and "Description of
Securities--Delaware Law."
PRODUCT LIABILITY. Although the Company has not experienced any product
liability claims to date, the sale and support of products by the Company may
entail the risk of such claims, and there can be no assurance that the Company
will not be subject to such claims in the future. A successful product liability
claim or claim arising as a result of use of the Company's products brought
against the Company, or negative publicity attendant to any such claim, could
have a material adverse effect upon the Company's business, operating results
and financial condition. The Company maintains product liability insurance with
coverage limits of $1,000,000 per occurrence and $1,000,000 per year. While the
Company believes that it maintains adequate insurance coverage, there can be no
assurance that the amount of insurance will be adequate to satisfy claims made
against the Company in the future, or that the Company will be able to obtain
insurance in the future at satisfactory rates or in adequate amounts.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS. This Prospectus includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 ("Securities Act") and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," regarding the Company's strategies,
plans, objectives and expectations; the Company's ability to design, develop,
manufacture and market products; the ability of the Company's products to
maintain commercial acceptance; the Company's ability to achieve new product
commercialization; the anticipated growth of its target markets; its future
operating results; and other matters are all forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable at this time, it can give no assurance
that such expectations will prove to have been correct. Important factors that
could cause actual results to differ materially from the Company's expectations
are set forth in these "Risk Factors," as well as elsewhere in this Prospectus.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Risk Factors.
15
<PAGE>
THE COMPANY
The Company was organized in New York in 1981 under the name Edudata
Corporation and reincorporated in Delaware in 1983 by Sun Equities Corporation
("Sun") which owned approximately 81 percent of the Company's outstanding common
stock until August 11, 1995. At that time, Sun distributed the shares of the
Company that it owned to its stockholders in the form of a dividend.
The Company was initially organized to provide education in the use of
personal computers, to market software programs developed by others, and to
provide a broad range of advisory services to businesses in conjunction with
both computer and non-computer related management issues. The Company's original
concept was modified, however, and until 1987, the Company was engaged in the
ownership and operation of technical schools through its subsidiaries, Betty
Owen Secretarial Systems, Inc. and Taylor Business Institute, Inc., and in the
development, construction and sale of single-family homes and commercial
buildings through its majority-owned subsidiary, Lytton & Tolley, Inc. In 1988
the Company disposed of its subsidiaries and their operations and determined to
use the proceeds to acquire another business. From 1988 to early 1996, the
Company's operations were limited to exploring opportunities to acquire or to
become an operating business.
On March 1, 1996, the Company acquired all the outstanding securities of
Dental\Medical Diagnostic Systems LLC, a California limited liability company
("DMD"), and Bavarian Dental Instruments, Inc., a California close corporation
("BDI"), in exchange for the issuance by the Company of a total of 1,706,626
restricted shares of its Common Stock. As a result of these transactions, the
former members of DMD and former stockholders of BDI gained a majority of the
Company's voting securities and the management control of the Company was
transferred to the former management of DMD and BDI. See "Management--Executive
Officers and Directors." For accounting purposes these transactions were treated
as a recapitalization of DMD and BDI, with DMD and BDI combined as the acquiror
(reverse acquisition). As a result, the combined historical financial statements
of DMD and BDI became the financial statements of the Company. Further, since
the Company's assets at February 29, 1996 consisted solely of approximately
$660,000 in cash and cash equivalents and the Company had no operations in the
seven years prior to the transactions, for accounting purposes these
transactions were recorded by the Company as the issuance of Common Stock for
cash held by the Company.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby, assuming a public offering price of $4.50 per share and $.50 per
Warrant, after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, are estimated to be approximately
$6,000,000 (approximately $6,979,000 if the Underwriter's over-allotment option
is exercised in full). The Company intends to apply the net proceeds
approximately as follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT PERCENT
- ----------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Repayment of Bridge Notes.............................................. $ 1,700,000 28%
Product Development.................................................... 1,300,000 22
Acquisitions and Joint Venture Financing............................... 1,300,000 22
Repayment of Loans Made by Affiliates.................................. 300,000 5
Working Capital and General Corporate Purposes......................... 1,400,000 23
------------ -----
Total.............................................................. $ 6,000,000 100%
------------ -----
------------ -----
</TABLE>
Approximately $1,700,000 of the net proceeds of this Offering will be used
to repay the Bridge Notes issued in connection with the Bridge Financing
consummated in November 1996. The Bridge Notes consist of secured convertible
promissory notes in the aggregate principal amount of $1,600,000, bear interest
at the rate of 10% per annum and are payable upon the consummation of this
Offering. If this Offering is consummated in April 1997, the interest to be paid
on the Bridge Notes will be approximately $67,000. The net proceeds from the
sale of the Bridge Notes have been used primarily for the payment of certain
purchase obligations under a distribution agreement with a former affiliated
party and general corporate purposes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Certain Transactions."
Approximately $1,300,000 of the net proceeds of this Offering will be
allocated to product development, including the development of an enhanced
version of the Company's intraoral camera. See "Business--Growth Strategy
Product Development Activities."
Approximately $1,300,000 of the net proceeds of this Offering will be
allocated to possible business acquisitions and joint ventures for the primary
purposes of obtaining technical personnel and obtaining and expanding
technologies, products and markets. The Company is currently considering joint
ventures relating to the development of teeth whitening and digital x-ray
technology. The Company is not currently negotiating to acquire any business.
There can be no assurance that the Company will be able to successfully
negotiate any joint venture or identify and acquire any complementary business.
Approximately $300,000 of the net proceeds of this Offering will be used to
repay certain loans made by an affiliate and former affiliate of the Company,
including the Company's Chairman of the Board, in order to fund the start-up of
the Company's current operations. See "Certain Transactions."
The balance of the net proceeds of this Offering will be allocated to
working capital and general corporate purposes, including, among other things,
additional inventory and payment of general corporate expenses. If the
Underwriter exercises the over-allotment option in full, the Company will
realize additional net proceeds of approximately $979,000 which will also be
added to the Company's working capital. See "Risk Factors--Broad Discretion of
Management in Use of Proceeds."
Based on its current operating plan, the Company anticipates that the
proceeds of this Offering, and existing resources and cash generated from
operations, if any, will be sufficient to satisfy the Company's contemplated
working capital requirements through the next twelve months. The Company is also
currently negotiating a line of credit which, if obtained, would provide
additional working capital. There can be no assurance, however, that the
Company's working capital requirements during this period will not exceed its
available resources or that these funds will be sufficient to meet the Company's
longer term cash
17
<PAGE>
requirements for operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company intends to maintain flexibility with respect to the use of these
funds and the amounts actually expended for each such use, if any, are at the
discretion of the Company and may vary significantly depending upon a number of
factors, including the progress of the Company's research and development and
marketing programs, technological advances, determinations as to the commercial
potential of the Company's products and the status of competitive products.
Accordingly, management reserves the right to reallocate the proceeds of the
Offering as it deems appropriate.
Proceeds not immediately required for the purposes described above will be
invested in United States government securities, short-term certificates of
deposit, money market funds or other short-term interest-bearing investments.
18
<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
(attributing no value to the Warrants and, instead, adding the per-Warrant
public offering price to the price of the Common Stock) in this Offering and the
pro forma net tangible book value per share of Common Stock after this Offering
constitutes the dilution per share of Common Stock to investors in this
Offering. Net tangible book value per share is determined by dividing the net
tangible book value (total tangible assets less total liabilities) by the number
of outstanding shares of Common Stock. At December 31, 1996, the net tangible
book value of the Company was $893,939 or approximately $.30 per share of Common
Stock (based on 2,985,537 shares of Common Stock outstanding). After giving
effect to the sale of the Securities offered hereby at an assumed offering price
of $4.50 per share and $.50 per Warrant (less underwriting commissions and
estimated expenses of this Offering) and the application of the net proceeds
therefrom, the pro forma net tangible book value of the Company at that date
would have been $6,893,939, or approximately $1.54 per share. See "Use of
Proceeds." This represents an immediate increase in pro forma net tangible book
value of approximately $1.24 per share to existing stockholders and an immediate
dilution of approximately $3.46 per share or approximately 69%, to investors in
this Offering. If the public offering price is higher or lower, the dilution of
the investors in this Offering will be, respectively, greater or less.
The following table illustrates the per share dilution without giving effect
to results of operations of the Company subsequent to December 31, 1996:
<TABLE>
<S> <C> <C>
Assumed public offering price................................. $ 5.00
Net tangible book value per share as of December 31, 1996... $ .30
Increase per share attributable to new investors............ 1.24
---------
Net tangible book value after the Offering.................... 1.54
---------
Dilution per share to new investors........................... $ 3.46
---------
---------
</TABLE>
The following table summarizes, at December 31, 1996, the number and
percentage of shares of Common Stock purchased from the Company, the amount and
percentage of consideration paid and the average price per share paid by
existing stockholders and by investors pursuant to this Offering (at an assumed
price of $4.50 per share and $.50 per Warrant and attributing no value to the
Warrant and, instead, adding the per-Warrant public offering price to the price
of the Common Stock).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders................................... 2,985,537 67% $ 2,725,687 27% $ .91
Investors in this Offering.............................. 1,500,000 33 7,500,000 73 $ 5.00
---------- ----- ------------- -----
Total............................................. 4,485,537 100% $ 10,225,687 100%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) at
December 31, 1996; and (ii) as adjusted at December 31, 1996 to give effect to
the sale of the Securities offered hereby at an assumed public offering price of
$4.50 per share of Common Stock and $.50 per Warrant and the application of the
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with the Consolidated Financial Statements and related Notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------
AS
ACTUAL ADJUSTED(2)
------------- -------------
<S> <C> <C>
Short-term debt:
Current portion of capital lease obligations...................................... $ 18,468 $ 18,468
Long-term debt:
Notes payable (1)................................................................. 1,355,291 --
Notes payable to related parties.................................................. 272,966 --
Capital lease obligations......................................................... 66,028 66,028
Stockholders' equity:
Preferred Stock, par value $0.01 per share, 1,000,000 shares authorized; no shares
outstanding..................................................................... -- --
Common Stock, par value $0.01 per share, 20,000,000 shares authorized; 2,985,537
shares issued and outstanding actual; 4,485,537 issued and outstanding, as
adjusted........................................................................ 29,855 44,855
Additional paid-in capital.......................................................... 2,695,832 8,680,832
Accumulated deficit................................................................. (1,488,062) (1,865,493)
------------- -------------
Total stockholders' equity........................................................ 1,237,625 6,860,194
------------- -------------
Total capitalization.............................................................. $ 2,950,378 $ 6,944,690
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Represents Bridge Notes payable, net of $244,709 discount.
(2) Assumes the Offering closes in April 1997 and reflects the receipt and
application of the net proceeds to (i) the repayment of the Bridge Notes in
the principal amount of $1,600,000 and accrued interest of $100,000 and the
related effect of writing off approximately $190,000 in financing costs
related to the Bridge Financing and the discount on the Bridge Notes of
$188,000 relating to the valuation of the Bridge Warrants; and (ii) the
repayment of loans in the principal amount of $273,000 made by an affiliate
and former affiliate of the Company.
20
<PAGE>
PRICE RANGE OF THE COMMON STOCK
The Common Stock is currently quoted on the OTC Bulletin Board under the
symbol "DMDS." The Common Stock is traded on a sporadic basis; therefore, the
prices quoted below are not necessarily indicative of market value. The
following table sets forth the range of the high and low bid quotations of the
Common Stock on the OTC Bulletin Board for the periods indicated as reported by
NASDAQ Trading and Market Services. These quotations reflect inter-dealer
prices, without mark-up, mark-down or commission, and may not represent actual
transactions.
<TABLE>
<CAPTION>
PERIOD ENDED HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
June 30, 1996................................................................ $ 5.86 $ .94
August 31, 1996.............................................................. 5.48 3.66
November 30, 1996............................................................ 5.86 3.66
December 31, 1996............................................................ 5.68 4.39
</TABLE>
On April 4, 1997, the high bid and low ask price of the Common Stock were
$5.50 and $5.83, respectively. As of April 4, 1997, there were 244 stockholders
of record and approximately 400 beneficial holders of the Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock since its
inception and does not intend to pay any dividends on the Common Stock in the
foreseeable future. The payment of any dividends in the future will depend on
the evaluation by the Company's Board of Directors of such factors as it deems
relevant at the time and restrictions imposed by the terms of the Company's debt
obligations, if any. As of the date of this Prospectus, the Company has no debt
obligations that impose restrictions on the payment of dividends. Currently, the
Board of Directors believes that all of the Company's earnings, if any, should
be retained for the development of the Company's business.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
INTRODUCTION
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity/cash flows of
the Company for the ten-month period ended December 31, 1996, and for the period
from inception (October 23, 1995) to March 2, 1996. Except for the historical
information contained herein, the matters discussed in this Management's
Discussion and Analysis are forward looking statements that involve risks and
uncertainties and are based upon judgments concerning various factors that are
beyond the Company's control.
On March 1, 1996, the Company purchased all of the outstanding membership
interests of DMD and all of the outstanding capital stock of BDI. Immediately
subsequent to the transaction, the former members of DMD and stockholders of BDI
owned approximately 66.6% of the Company's outstanding common stock and
management control of the Company was transferred to the former management of
DMD and BDI. Accordingly, for accounting purposes the acquisition was treated as
a recapitalization of DMD and BDI with DMD and BDI combined as the acquiror
(reverse acquisition). As a result, the combined historical financial statements
of DMD and BDI became the financial statements of the Company. From inception,
on October 23, 1995, through March 2, 1996, the Company generated net sales of
only $220,623 and incurred a net loss of $1,625,213. Because both DMD and BDI
were only formed in October and November of 1995, incurred substantial losses in
connection with the commencement of their respective operations, and commenced
sales in February 1996, a comparison of the financial information of the Company
for the ten-month period ended December 31, 1996 to the period from inception
through March 2, 1996 is not meaningful. See "The Company."
DMD was formed in October 1995 and has been primarily involved in designing,
developing, manufacturing, and marketing TeliCam Systems. The first shipments to
customers of the TeliCam System commenced in early February 1996. BDI was formed
in November 1995 and has been primarily involved in the marketing and
distribution of dental burs imported from Russia. The first sales of burs
commenced in March 1996. On July 9, 1996, the Company determined to focus future
strategic development primarily upon high value added dental/medical products
and technology and, accordingly, decided to discontinue the dental bur product
line, comprised of low-margin, low-technology products. The Company thereafter
commenced an orderly liquidation of its inventory of dental burs, and expects
the liquidation to be completed in 1997 without significant adverse effect on
operations.
On January 13, 1997 the Company changed its name from Edudata Corporation to
Dental/Medical Diagnostics Systems, Inc. On February 5, 1997, the Company
changed its fiscal year end from a fiscal year ending on the nearest Saturday to
February 28th to a December 31 fiscal year end.
The Company has a limited history of operations which includes results of
operations of the BDI product line, now discontinued. Although no assurance can
be given, the Company believes that results of operations for the period
presented may not be indicative of future results because the period presented
includes the period immediately following initial introduction of the TeliCam
System, includes the results of the business of BDI which has been discontinued,
and because the Company expects to introduce the TeliCam II and other new
products in future periods. The Company's prospects for increasing sales and
profits is subject to a number of risks, including competitive and economic
conditions, as well as the market acceptance of new technologies the Company may
seek to introduce. See "Risk Factors."
22
<PAGE>
RESULTS OF OPERATIONS
For the ten-month period ended December 31, 1996, net sales totaled
$11,673,102, generating an operating profit of $304,435. Included in these
results were sales of approximately $235,000 and an operating loss of
approximately $196,000 related to the Company's discontinued dental bur product
line. As described above, the Company expects to complete the sale of inventory
related to this product line in fiscal 1997 without any significant adverse
impact on operating results.
Net sales totaled $11,673,102 for the ten-month period ended December 31,
1996, and are comprised primarily of sales of TeliCam Systems and related
products. Total sales for this period included approximately $2,200,000 in sales
to international distributors. Sales for the period from inception (October 23,
1995) through March 2, 1996 were not significant as the Company spent the
majority of the period developing its initial product offering with sales
commencing in February 1996. As further described below, under the caption
"Fluctuations in Quarterly Results," the Company's sales are generally expected
to be higher in the fourth quarter due to the purchasing patterns of dentists in
the United States. During the ten month period ended December 31, 1996, the
month of December alone accounted for approximately $2,100,000 in net sales due
to a combination of increasing domestic and foreign sales. Domestic sales in
December were higher than normal primarily due to year end purchases by dentists
taking advantage of a $17,000 Federal tax credit for capital equipment
purchases, and to the introduction of the InTELInet system. The Company believes
that the tax credit accelerated certain TeliCam System sales that would
ordinarily have occurred in January and February 1997 and may result in reduced
first quarter 1997 sales.
Cost of sales for the ten-month period ended December 31, 1996 were
$6,685,464 or 57% of sales. As a percentage of sales, the Company expects costs
of international sales to be higher than domestic sales due to higher discounts
being required on international sales; however, this effect should be offset by
reduced warranty and service costs as well as reduced selling costs on
international sales.
Selling, general, and administrative expenses totaled $4,360,736 or 37% of
sales for the ten-month period ended December 31, 1996. These expenses relate to
administering the continuing design, development, manufacturing, and marketing
of the Company's TeliCam Systems. These expenses include advertising and
promotion expenses of $1,008,879 comprised primarily of trade show fees, trade
magazine advertising and direct mail promotions. Salaries and wages totaled
$966,745 comprised primarily of expenses for sales and production
administration, marketing, sales and customer support staff and finance and
accounting personnel. Commissions resulting from sales of TeliCam Systems and
the InTELInet product introduced in November 1996 totaled $1,223,547. These
expenses are expected to increase in absolute dollars relative to net sales in
future periods, due to the need for additional support functions as the
Company's sales increase.
Research and development expenses totaled $322,467 or 3% of sales for the
ten-month period ended December 31, 1996, and related primarily to direct
expenses of ongoing design and development of enhancements to the Company's
TeliCam I and, to a lesser extent, the Company's TeliCam II. These expenses are
comprised of wages and benefits for engineering personnel, design and
development fees and raw material used in the development of prototypes. These
expenses are expected to continue at relatively the same rates in future periods
for the TeliCam System. However research and development expenses will increase
for the development of new products. Increased expenditures on research and
development, resulting from application of the proceeds of the Offering to
further research and development projects and joint ventures and possible
acquisitions, are expected to result in increased expenses and may result in
correspondingly reduced earnings in future periods. See "Use of Proceeds."
Amortization of debt issuance cost totaled $31,548 for the ten-month period
ended December 31, 1996, and is the result of the cost of the sale of the Bridge
Notes, issued in November 1996, being amortized over the term of the Notes.
These costs will continue into future periods until the debt is paid. The
Company will pay such debt out of the proceeds of this Offering and,
accordingly, expects to take a
23
<PAGE>
charge of approximately $190,000 for the write-off of unamortized debt issuance
costs in the second quarter of fiscal 1997. See "Use of Proceeds."
Interest expense totaled $57,166 for the ten-month period ended December 31,
1996, and consisted of interest paid on capital lease obligations and interest
accrued on the Bridge Notes and notes payable to related parties.
Net income for the ten-month period ended December 31, 1996 totaled $137,151
or $.05 per share.
LIQUIDITY AND CAPITAL RESOURCES
For the ten-month period ended December 31, 1996, the Company used net cash
of $1,631,343 in operations. The Company financed its operating cash
requirements through the sale of 422,219 shares of Common Stock in April 1996
which generated cash proceeds of approximately $1,055,000, net of issuance
costs, and through the Bridge Financing in November 1996, which generated cash
proceeds of approximately $1,315,000, net of issuance costs.
Accounts receivable increased by $1,188,544 to $1,305,143 at December 31,
1996, primarily due to the increasing sales volumes during the ten-month period
ended December 31, 1996, and further due to the level of international sales
during December. Sales for the period from inception (October 23, 1995) through
March 2, 1996 were only $220,000. Accounts payable and accrued liabilities
totalling $1,720,358 at December 31, 1996 decreased slightly from $1,806,640 at
the prior year-end period. Inventory levels increased $461,812 to $1,513,075 due
to increased sales and production levels for TeliCam Systems.
Capital expenditures totaled $200,686 for the ten-month period ended
December 31, 1996, and resulted primarily from purchases of additional computer
equipment and test equipment to support the administrative and production
functions of the Company. Book overdrafts decreased in the current period by
$49,906. Cash on hand at the end of the period was $1,058,836.
The Company requires additional cash to continue to pay down its liabilities
(including, without limitation, the Bridge Notes issued in the November 1996
Bridge Financing) for working capital purposes to support anticipated increased
sales levels and to fund its research and development activities. Approximately
$1,700,000 of the net proceeds of this Offering will be used to repay the Bridge
Notes. The Bridge Notes consist of secured convertible promissory notes in the
aggregate principal amount of $1,600,000, bear interest at the rate of 10% per
annum and are payable upon the consummation of this Offering. If this Offering
is consummated in April 1996, the interest to be paid on the Bridge Notes will
be approximately $67,000.
Based on its current operating plan, the Company believes that the proceeds
of the Offering, together with existing resources and cash generated from
operations, if any, will be sufficient to satisfy the Company's contemplated
working capital requirements for at least the next twelve months. There can be
no assurance that the Company's working capital requirements during this period
will not exceed its available resources or that these funds will be sufficient
to meet the Company's longer-term cash requirements for expansion.
On February 13, 1997, the Company received a Commitment Letter from Comerica
Bank ("Comerica") confirming Comerica's intent to extend up to a $2,000,000 line
of credit to the Company, to be secured by a first priority security interest in
the Company's assets and by an assignment of the Company's rights under the
Boston Marketing Distribution Agreement. The credit facility will bear interest
monthly at the rate of the Comerica Bank Prime plus one-quarter of one percent
(0.25%), as it may change from time to time, through June 1, 1998. All
borrowings under the facility will be subject to a formula based, generally, on
accounts receivable and inventory. The Company intends to use the proceeds of
this credit facility for working capital and general corporate purposes.
Although the Company is in the final stages of documentation of a definitive
credit agreement, certain issues remain the subject of negotiation. The
commitment of Comerica is contingent upon the parties' execution and delivery of
a definitive credit
24
<PAGE>
agreement, the closing of the Offering, the repayment of the Bridge Notes, the
provision to Comerica of a first-priority lien on the Company's assets and upon
the absence of any material adverse change in the Company's business or
financial condition. There can be no assurance that the Company will be
successful in obtaining the credit facility, and the failure of the Company to
do so could have a material adverse effect on the Company's business, operating
results and financial condition.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's business is subject to certain quarterly influences. Net sales
and operating profits are generally higher in the fourth quarter due to the
purchasing patterns of dentists in the United States and are generally lower in
the first quarter due primarily to the effect upon demand of increased purchases
in the prior quarter. It is also expected that the Company's business will
experience lower sales in the summer months as a consequence of holiday
vacations and a lesser number of trade shows.
In anticipation of the introduction of the TeliCam II, in March, 1997, the
Company offered promotional pricing on sales of the TeliCam I to reduce
inventory levels of the TeliCam I and to increase cash available to finance
increased inventories of the TeliCam II. The Company expects demand for the
TeliCam II upon its introduction to significantly supplant demand for the
TeliCam I. As a result of the TeliCam I price promotion, the Company expects
remaining inventories of the TeliCam System to be significantly reduced, cash
flow for March and April of the current year to be increased over levels which
would normally occur without the price promotion, and that gross margins for the
period of the price promotion will be reduced. Additionally, use by the Company
of a portion of the proceeds of the Offering to repay the Bridge Notes will
cause the Company to incur a charge in the second quarter of 1997 of
approximately $378,000.
Quarterly results may be adversely affected in the future by a variety of
other factors, including the timing of acquisitions and their related costs, as
well as the release of new products and promotions taking place within the
quarter. The Company plans to increase expenses to fund greater levels of
research and development and to fund investments in joint ventures and
acquisitions. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, operating results and
financial condition will be adversely affected.
25
<PAGE>
BUSINESS
GENERAL BUSINESS DESCRIPTION OF THE COMPANY
The Company designs, develops, manufactures and sells high technology dental
equipment. Currently, the Company's primary emphasis is on the manufacture and
sale of an intraoral camera system known as the TeliCam System and a dental
office networking system, known as InTELInet, for use in connection with the
TeliCam System. The TeliCam System displays close-up color video images of
dental patients' teeth and gums. These TeliCam images assist dentists in
displaying dental health and hygiene problems to patients and, as a result of
such display, promote patient acceptance of treatment plans. The TeliCam System
offers dentists the ability to capture and display multiple video images without
an expensive external capture device such as a video cassette recorder or color
printer, thereby providing a low-cost alternative to the more expensive
traditional intraoral dental camera systems. For this reason, the Company
believes that the TeliCam System should be particularly attractive to the
overseas market because printed copies of dental images are not generally
required by foreign insurance companies. The Company commenced shipments of
TeliCam Systems to customers in February 1996. Through December 31, 1996, the
Company had sold 2,070 TeliCam Systems to dentists throughout the United States,
as well as several dental schools, and 940 TeliCam Systems internationally. The
Company is in the process of finalizing the development of an enhanced version
of the TeliCam System, the TeliCam II, which it anticipates introducing in the
current quarter.
In November 1996, the Company introduced its InTELInet Networking System
("InTELInet") for use with the TeliCam System. InTELInet creates a
video-electronic information link between the different operatories of the
dental office. InTELInet is different from other intra-office networking systems
known to the Company in that it enables simultaneous use of two or more
intraoral cameras, which allows dentists and their staff to conduct more than
one patient examination at a time using two or more intraoral cameras
simultaneously. In addition, the TeliCam, unlike other intraoral cameras on the
market today has its own microprocessor video capture device (or "frame
grabber") built in, facilitating the need for only one central video printer
regardless of the number of intraoral cameras being used at the same time.
Competing systems require a separate color video printer or other image storage
device to capture the video images from each intraoral camera that is in use.
The color printer or other image storage device is typically the second most
expensive element of an intraoral camera system. The TeliCam System and
InTELInet presently enable the Company to offer its customers more efficient and
cost-efficient networking of multiple operatories. From the time of its first
introduction in late November 1996, through March 25, 1997, 145 InTELInet
multiple operatory networking systems have been sold by the Company.
In addition to its work on the TeliCam II and the InTELInet system, the
Company is currently working with third parties in the development of a teeth
whitening system. This system would utilize a high energy, high pressure ionized
gas in the presence of an electrical current to create a laser-type light to
effect teeth whitening. The Company believes that the teeth whitening system can
produce faster results at lower cost than currently available teeth whitening
systems. Currently, the leading system for teeth whitening in the dental office
requires more than two hours of the dentist's time. The Company is currently
testing technologies for whitening teeth that have the potential to whiten teeth
in a dentist's office in substantially less time and by a dental hygienist
instead of the dentist. The testing involves the compatibility of the light
source and catalytic chemicals to produce effective and rapid teeth whitening.
The technology also functions as a curing system for curing composites,
adhesives and sealants used in dental bonding and repair. Currently available
light curing systems can achieve similar results to those anticipated to be
produced by the system currently being tested by the Company. However, the
Company believes the curing system it is testing can be sold at a price point
significantly below that of functionally competitive systems. If the teeth
whitening system is successfully developed, the Company may be required to enter
into contractual arrangements with the third party developers retained by the
Company prior to marketing the system. The Company is also negotiating a joint
venture to develop digital x-ray technology for the dental market. This
technology, if successfully developed, would provide a more user-friendly
digital x-ray
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system comparable to functionally competing systems at a significantly lower
price point. Digital x-ray systems, including those currently on the market,
reduce radiation exposure compared to conventional x-ray systems and allow
dentists to view x-ray images in real-time without the time-consuming process of
film development and eliminate the need to use and dispose of chemicals required
to develop conventional x-ray film. This technology also will allow database
storage and recall of images for comparison purposes.
BDI, a subsidiary of the Company, distributes and markets reusable diamond
dental burs pursuant to certain agreements with Russian manufacturers. On July
9, 1996, the Company determined to focus future strategic development primarily
upon high value added dental/medical products and technology and, accordingly,
decided to discontinue the dental bur product line, comprised of low-margin
low-technology products, as extrinsic to the Company's strategic goals. The
Company thereafter commenced an orderly liquidation of its inventory of dental
burs, and expects the liquidation to be completed in 1997 without significant
adverse effect on operations.
INDUSTRY OVERVIEW
The results of a recent study commissioned by the American Dental
Association ("ADA") indicate that the number of U.S. dental visits has grown,
from 360 million in 1975, to 534 million in 1995; and that the total expenditure
for dental care in the U.S. in 1995 was approximately $43.2 billion. According
to industry estimates, during 1995 there were approximately 130,000 active
dentists serving the United States marketplace in about 100,000 dental
practices.
In 1994, the U.S. dental medical/surgical equipment market was estimated by
the ADA to be a $2.5 billion annual industry, with a projected annual growth
rate of between 6% and 8%, reaching $3.5 billion annually by the year 2000. The
ADA reports that the average annual purchase of dental supplies and equipment in
1995 was approximately $19,000 per dentist. Factors contributing to this growth
include the general aging of the population, technological advances, increasing
regulatory requirements relating to infection control, and the proliferation of
dental insurance coverage. In addition to the domestic market for dental
supplies and equipment, the ADA findings indicate that there is a multi-billion
dollar annual market for such items in Europe and Asia.
GROWTH STRATEGY
The Company's goal is to be a leading manufacturer and distributor of high
technology dental products. The Company believes that its focus on the following
business strategies will help it to achieve this goal:
DELIVERY OF INNOVATIVE, VALUE-ORIENTED PRODUCTS. The Company seeks to
provide innovative products that offer a strong price-value relationship to
its customers. The Company endeavors to deliver products that offer, or will
offer, greater or differentiated operating features at competitive prices.
COMMITMENT TO PRODUCT DEVELOPMENT. From inception (October 23, 1995)
through December 31, 1996, the Company has devoted over $850,000 to product
development activities. The Company also intends to use up to $1,300,000 of
the proceeds of this Offering to the enhancement of its current product and
the development and/or acquisition of new technologies. The Company believes
that this focus on new and improved technologies is essential if the Company
is to establish and maintain a competitive position in the marketplace.
GROWTH THROUGH ACQUISITIONS AND JOINT VENTURES. The Company anticipates
that it will complement its internal growth, both in number of products and
sales, through acquisitions and joint ventures and a focus on developing and
marketing new technologies for the dental practice. The Company believes
that acquisitions and joint ventures present an effective means of obtaining
technical personnel and obtaining or expanding technologies, products and
markets. The Company
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continually evaluates opportunities for acquisitions and joint ventures,
although it is not currently party to any commitment, understanding or
agreement related to such endeavors. The Company currently intends to use up
to $1,300,000 of the proceeds of this Offering for acquisitions and joint
venture financing.
EXPANSION OF DOMESTIC AND INTERNATIONAL SALES. Although both the
domestic and international dental supply markets are highly competitive, the
Company believes that the size of these markets provides an excellent
opportunity for growth. See "--Industry Overview." The Company intends to
increase its domestic sales through the introduction of new high technology
products and to increase its international sales through entry into
additional distribution agreements with foreign distributors. The Company
intends to capitalize on its experienced management and sales team to
increase its domestic and international sales. See "Marketing and Sales."
TELICAM SYSTEM
Currently, the Company's primary product is an intraoral dental camera known
as the TeliCam System. Management believes that the TeliCam System, a video
memory, full color intraoral dental camera system is unlike any other system
currently available on the market. Traditional intraoral dental cameras consist
of: (i) a handpiece, the end of which contains the camera lens and light source;
(ii) a camera chip ("CCD chip"), with a camera chip processing unit ("CCU
processor"), which interprets the camera's video signals; (iii) video and light
source cables which connect the handpiece to the CCU processor; and (iv) an
external capture device, such as a video recorder or printer so that the dentist
and patient can view the video image. The primary distinguishing feature of the
TeliCam System is its ability to capture and "freeze" video images and display
multiple images simultaneously without an external capture device. The heart of
the TeliCam System's image capture capabilities is the Teli CCU processor which
is incorporated therein. The Teli CCU processor, which was designed specifically
for intraoral dental camera use, has a built-in image capturing mechanism or
"frame grabber" computer chip. This gives the dental professional the ability to
capture from one to four images with the touch of a button on the handpiece or
the use of a foot pedal, and eliminates the need for network installation and
the hardwiring of external capture devices. Additionally, the Teli CCU
processor's frame grabber incorporates an automatic light intensity control
which eliminates reflection and glare from the fiberoptic illumination for
clearer video images. The Company has exclusive world-wide rights to market the
Teli CCU processor to the dental market.
Another feature of the TeliCam System is its 1/3 inch camera with near-focus
capabilities as close as two millimeters and magnification capabilities of up to
120 times the actual image, all available without the necessity of changing
lenses. The Company believes that this functionality is only available in
significantly more expensive competing models. Additionally, the TeliCam System
features an ergonomically designed, easy-to-use monocoil cable, which connects
the camera's handpiece to the CCU processor. To the extent permanent images may
be required by insurance companies, auxiliary printing systems are available
from the Company. See "Risk Factors--Competition."
The Company is currently completing the development of its TeliCam II
intraoral camera. This system, designed for the medium-priced dental market, is
distinguished from the Company's current TeliCam I by its increased fiber optic
illumination, rotary focus capability which increases ease of use, and increased
image clarity. The TeliCam II may also be used with the InTELInet network. The
Company will introduce the TeliCam II in the second quarter of 1997. No
assurances can be given that, after its introduction the TeliCam II will achieve
market success. See "Risk Factors--Importance of New Product Development to
Growth" and "Risk Factors--Governmental Regulation." Following introduction of
the TeliCam II, the Company will continue to market the TeliCam I because the
TeliCam I will continue to offer certain functions not available in the TeliCam
II. Among these functions is a button mechanism on the TeliCam I camera
handpiece which can be used to initiate image capture while the TeliCam II
requires a foot pedal to initiate image capture. However, the Company expects
that in future periods, sales of the TeliCam II will generally exceed same
period sales of the TeliCam I.
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INTELINET VIDEO MONITORING SYSTEM
The Company has commenced marketing of its InTELInet Video Monitoring System
("InTELInet") which generally includes two TeliCam Systems, a printer, a
video-cassette monitor, cabling and installation. InTELInet is designed to be a
cost-effective solution to the problems generally associated with standard
networking of various intraoral cameras in multiple operatories within a single
dental practice. With traditional intraoral camera networks, each camera must be
wired to a centralized printer in order to capture and store the desired image,
which must then be relayed back to the camera's monitor for viewing the image,
and back to the printer for ultimate printout. These requirements result in
substantial and expensive wiring. Also, competing intraoral cameras require
networking implementations which do not permit the simultaneous use of multiple
cameras unless a costly printer is attached to each camera. Consequently, this
type of network requires the dental practice to make a significant expenditure
for cabling and installation and on-site printers in every operatory. The
InTELInet requires significantly less cabling and eliminates the need for
purchasing multiple printers because of the built-in image capture capabilities
of the TeliCam System. The Company emphasizes the savings to dental practices
and the ease of use of the InTELInet in its marketing campaigns. The InTELInet
is being marketed by the Company only in the U.S. due to the general absence of
multiple operatory practices outside of the United States. The InTELInet
facilitates simple network expansion and is only compatible with intraoral
dental cameras marketed by the Company.
From November 1996 through March 25, 1997, the Company has sold 145
InTELInet systems. Currently, the average sales price for a two operatory
installation is approximately $9,100 plus an additional $2,000 for each
additional operatory networked.
PRODUCT DEVELOPMENT ACTIVITIES
The Company intends to use up to $2,600,000 of the proceeds of this Offering
for the development and/or acquisition of new dental high technology products.
See "Use of Proceeds." The Company expended $322,467 and $528,426 for research
and development of its products for the ten months ended December 31, 1996 and
from Inception to March 2, 1996, respectively. In addition to its work on the
TeliCam II, the Company is currently participating with third parties in the
development of a teeth whitening system product. This system would utilize a
high energy, high pressure ionized gas in the presence of an electrical current
to create a laser type light to effect teeth whitening. The Company believes
that the teeth whitening system can produce faster results at a lower cost than
currently available teeth whitening systems. Currently, the leading system for
teeth whitening in the dental office requires more than two hours of the
dentist's time. The Company is currently testing technologies for whitening
teeth that have the potential to whiten teeth in a dentist's office in
substantially less time and by a dental hygienist instead of the dentist. The
testing involves the compatibility of the light source and catalytic chemicals
to produce effective and rapid teeth whitening. The technology also functions as
a curing system for curing composites, adhesives and sealants used in dental
bonding and repair. Currently available light curing systems can achieve similar
results to those anticipated to be produced by the system currently being tested
by the Company. However, the Company believes the curing system it is testing
can be marketed at a price point significantly below that of functionally
competitive systems. If the teeth whitening system is successfully developed,
the Company may be required to enter into contractual arrangements with the
third party developers retained by the Company prior to marketing the system.
There can be no assurance that the development of the teeth whitening system
will be successful or commercially viable, or that, if required, the Company
will be able to enter into marketing agreements with third parties on terms
acceptable to the Company. See "Risk Factors--Government Regulation" and
"Business--Government Regulation."
The Company is also negotiating to obtain marketing rights to digital dental
x-ray technology through a possible joint venture or through an exclusive
worldwide distribution agreement. This technology, if successfully developed or
obtained through a marketing agreement, would enable the Company to provide
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a more user-friendly digital x-ray system comparable to functionally competitive
systems at a significantly lower price point. Digital x-ray systems, including
those currently on the market, reduce radiation exposure compared to
conventional x-ray systems and allow dentists to view x-ray images in real-time
without the time-consuming process of film development and eliminate the need to
use and dispose of chemicals required to develop conventional x-ray film. This
technology will allow database storage and recall of images for comparison
purposes. No assurance can be given that the Company will be able to acquire the
digital x-ray technology, or if the technology is acquired, that the Company
will be able to commercially exploit it. Additionally, the Company believes that
the teeth whitening and digital x-ray systems being considered by the Company
will require FDA approval prior to marketing, and as a consequence, the timing
of the domestic introduction of such products is uncertain. The Company will
determine whether or not to proceed with the marketing of such products based
upon the results of the development of the teeth whitening process and the
Company's negotiations with respect to the digital x-ray system.
MANUFACTURING AND COMPONENT PARTS
The Company assembles and tests the TeliCam System, as well as develops new
products, at its facility located in Irvine, California. With the exception of
the camera's CCU processor, the Company believes that there are multiple sources
from which it may purchase the components of the TeliCam System. The Company,
however, anticipates that it will obtain certain of the components of the
TeliCam System from a single, in the case of the CCU processor, or limited
number of sources of supply. Although the Company believes it will be able to
negotiate satisfactory alternative supply arrangements, failure to do so may
have a material adverse effect on the Company. Furthermore, there can be no
assurance that suppliers will dedicate sufficient production capacity to satisfy
the Company's requirements within scheduled delivery times or at all. Failure or
delay by the Company's suppliers in fulfilling its anticipated needs may
adversely affect the Company's ability to market the TeliCam System. See "Risk
Factors--Dependence on Third Party Suppliers."
Effective October 1, 1996, the Company amended its distribution agreement
("BMC Distribution Agreement") with Boston Marketing, a licensed distributor of
the Teli manufactured CCD chip which includes the Teli CCU processor. Pursuant
to the BMC Distribution Agreement, the Company has the exclusive right (i) to
market certain Teli manufactured CCD chip assemblies with CCU processors (model
numbers CS6110 S/B with Frame Grabber, CS6110 P S/B with Frame Grabber and the
CS6110 S/B without Frame Grabber (each a "Teli Unit" and collectively the "Teli
Units")) to the dental market, and (ii) to use the "TeliCam" trademark. The Teli
Units are key components of the Company's intraoral digital cameras. See "--The
TeliCam System." The BMC Distribution Agreement has a five-year initial term.
The Company has agreed to purchase a minimum of 2,500 Teli Units per year for
each of the five years, at an initial price of $750 per Teli Unit, subject to
increase after October 1, 1998. The Company has the option to cancel the BMC
Distribution Agreement if any price increase is unacceptable. The Boston Market
Distribution Agreement is terminable by Boston Marketing if the Company fails to
meet its annual minimum purchase obligation. The term of the BMC Distribution
Agreement may be extended by mutual agreement of the Company and Boston
Marketing for an additional five year term. Management believes that, if
necessary, other CCD chips, CCU processors and frame grabbers could be obtained
from third-party suppliers on comparable terms, although a disruption in
supplies of components could extend for up to six months, which would materially
adversely affect the Company's operating results. See "Risk Factors--Dependence
on Third Party Suppliers."
BACKLOG
The Company generally does not operate with significant order backlog and a
substantial portion of its revenues in any quarter is derived from orders booked
in that quarter.
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MARKETING AND SALES
U.S. SALES AND DISTRIBUTION. The Company's domestic sales are made by four
full-time employees who are based at corporate headquarters, and a national
field force of independent sales representatives under the supervision of 16
independent Regional Managers. The Company's full time sales employees are
generally experienced in the business of marketing and distribution of intraoral
cameras to the dental industry. The Company markets its products through direct
mail solicitations, professional publications advertising, and attendance at
dental conferences. During 1996, the Company ran advertisements in "Dental
Products Report" and attended in excess of 70 dental conferences and trade
shows. In addition, the Company has sold TeliCam Systems to five dental schools
including the University of Chicago, Tufts University and the University of
Louisville. The Company believes that these and anticipated future dental school
sales will generate additional interest in, as well as familiarity with, the
Company's products at the initial stages of a dental professional's career. In
the U.S. dental marketplace, the Company's marketing campaign has focused on the
advantages of the intra-office networking capabilities and the significantly
lower price of the TeliCam System.
INTERNATIONAL SALES AND DISTRIBUTION. In the international market, the
Company sells the TeliCam System through independent dealers and distributors.
Presently, the Company has six contracts with independent distributors, which
agreements cover key international markets including Northern and Western
Europe, the Middle East, the Far East, Russia, Australia, Canada and South
America. These distributors provide important support, including customer
support and product service, to customers in each of their respective countries.
The Company had an agreement with Hiroki Umezaki, a former officer, director and
principal stockholder of the Company, pursuant to which he was to receive a 15%
commission on all sales made by the Company in Asia, except Japan, in which his
commission was to be 12%. This agreement resulted in Mr. Umezaki earning $15,000
in commissions through December 31, 1996. This agreement has been orally amended
to provide that Mr. Umezaki shall receive a 12% commission on sales made in
Japan only. This oral agreement is currently being documented with these changed
terms and the Company believes that the new agreement will be signed with the
new terms as described above. See "Certain Transactions--Related Party
Transactions." Furthermore, Olympus Camera Company of Japan ("Olympus") has
commenced purchases and has recently signed a letter of intent with the Company
relating to Olympus becoming the exclusive distributor of the TeliCam System in
Japan; however, no assurance can be given that the parties will enter into a
distribution agreement. The Company's international sales, which commenced in
April 1996, aggregated approximately $2,200,000 through December 31, 1996. See
"Risk Factors--International Operations." Since printed copies of dental images
are not generally required by foreign insurance companies, the Company believes
that the TeliCam System Frame-grabber image capturing mechanism, which enables
dental professionals to avoid the costs of external capture devices, and their
requisite networking demands, makes the TeliCam System particularly attractive
in international markets. The Company currently does not intend to market the
InTELInet network outside the United States.
TRAINING, CUSTOMER SUPPORT AND PRODUCT SERVICE
Management believes that operating the TeliCam System requires very little
training. Nevertheless, as part of the Company's customer service program, the
sales representative or international distributor responsible for the sale of
the TeliCam System schedules an installation and training appointment when the
system is delivered. In addition, the Company provides a TeliCam System
operating manual to its customers which provides answers to frequently asked
questions about the product's operations. The Company's technical support
personnel, and internationally, the support personnel of the Company's
distributors, are also available to answer customers telephone inquiries during
normal business hours. All TeliCam Systems come with a one-year complete parts
and labor warranty and extended warranties are also available. InTELInet
installation and maintenance is provided through independent installers retained
by the Company.
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PATENTS AND PROPRIETARY RIGHTS
The patents pertaining to the various components of the TeliCam System are
all owned by third parties. Pursuant to the Boston Marketing Distribution
Agreement, the Company has exclusive rights to market products which incorporate
the Teli Units to the dental market. Also pursuant to this agreement, the
Company has the rights to use the "TeliCam" trademark. See "Management--Related
Party Transactions."
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company's proprietary technology is not protected by
any patents. Consequently, the Company relies primarily on trademark, trade
secret and copyright laws to protect its technology. Also, the Company is
implementing a policy that all employees and third-party developers sign
nondisclosure agreements. However, there can be no assurance that such
precautions will provide meaningful protection from competition or that
competitors will not be able to develop similar or superior technology
independently. Also, the Company has no license agreements with the end users of
its products, so it may be possible for unauthorized third parties to copy the
Company's products or to reverse engineer or otherwise obtain and use
information that the Company regards as proprietary. If litigation is necessary
in the future to enforce the Company's intellectual property rights, to protect
the Company's trade secrets or to determine the validity and scope of the
proprietary rights of others, such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition. Ultimately, the
Company may be unable, for financial or other reasons, to enforce its rights
under intellectual property laws. In addition, the laws of certain countries in
which the Company's products are or may be distributed may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States.
The Company believes that its products do not infringe upon any valid
existing proprietary rights of third parties. Although the Company has received
no communication from third parties alleging the infringement of proprietary
rights of such parties, there can be no assurance that third parties will not
assert infringement claims in the future. Any such third party claims, whether
or not meritorious, could result in costly litigation or require the Company to
enter into royalty or licensing agreements. There can be no assurance that the
Company would prevail in any such litigation or that any such licenses would be
available on acceptable terms, if at all. If the Company were found to have
infringed upon the proprietary rights of third parties, it could be required to
pay damages, cease sales of the infringing products and redesign or discontinue
such products, any of which alternatives, individually or collectively could
have a material adverse effect on the Company's business, operating results and
financial condition.
GOVERNMENT REGULATION
The products which the Company sells are considered to be medical devices
and the Company is considered to be a medical device manufacturer and is subject
to control by, among other governmental entities, the FDA and the corresponding
agencies of the states and foreign countries in which the Company sells its
products. These regulations govern the introduction of new medical devices, the
observance of certain standards with respect to the manufacture and labeling of
medical devices, the maintenance of certain records and the reporting of
potential product problems and other matters. A failure to comply with such
regulations could have material adverse effects on the Company. See "Risk
Factors--Extensive Government Regulation."
The Federal Food, Drug and Cosmetic Act ("FDC Act") regulates medical
devices in the United States by classifying them into one of three classes based
on the extent of regulation believed necessary to ensure safety and
effectiveness. Class I devices are those devices for which safety and
effectiveness can reasonably be ensured through general controls, such as device
listing, adequate labeling, premarket notification and adherence to good
manufacturing practices ("GMP") as well as medical device reporting ("MDR")
labeling and other regulatory requirements. Class II devices are those devices
for which safety
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and effectiveness can reasonably be ensured through the use of special controls,
such as performance standards, post-market surveillance and patient registries,
as well as adherence to the general controls provisions applicable to Class I
devices. Class III devices are devices which generally must receive premarket
approval by the FDA pursuant to a premarket approval ("PMA") application to
ensure their safety and effectiveness. Generally, Class III devices are limited
to life sustaining, life supporting or implantable devices; however, this
classification can also apply to novel technology or new intended uses or
applications for existing devices.
Before they can be marketed, most medical devices introduced to the United
States market are required by the FDA to secure either clearance of a pre-market
notification pursuant to Section 510(k) of the FDC Act (a "510(k) Notification")
or approval of a PMA. Obtaining approval of a PMA application can take several
years. In contrast, the process of obtaining 510(k) Notification clearance
generally requires a submission of substantially less data and generally
involves a shorter review period. Most Class I and Class II devices enter the
market via the 510(k) Notification procedure, while new Class III devices
ordinarily enter the market via the more rigorous PMA procedure. In general,
clearance of a 510(k) Notification may be obtained if a manufacturer or seller
of medical devices can establish that a new device is "substantially equivalent"
to a predicate device other than one that has an approved PMA. The claim for
substantial equivalence may have to be supported by various types of
information, including clinical data, indicating that the device is as safe and
effective for its intended use as its legally marketed equivalent device. The
510(k) Notification is required to be filed and cleared by the FDA prior to
introducing a device into commercial distribution. Market clearance for a 510(k)
Notification submission may take 3 to 12 months or longer. If the FDA finds that
the device is not substantially equivalent to a predicate device, the device is
deemed a Class III device, and a manufacturer or seller is required to file a
PMA application. Approval of a PMA application for a new medical device usually
requires, among other things, extensive clinical data on the safety and
effectiveness of the device. PMA applications may take years to be approved
after they are filed. In addition to requiring clearance or approval for new
medical devices, FDA rules also require a new filing and review period prior to
marketing a changed or modified version of an existing legally marketed device
if such changes or modifications could significantly affect the safety or
effectiveness of that device. The FDA also prohibits an approved device from
being promoted or marketed for unapproved applications.
Over time, the FDA has adopted classification regulations for certain
medical devices and has designated some of these devices as Class I, while
exempting certain of them from the 510(k) Notification requirements. The dental
burs currently sold by the Company's BDI subsidiary have been classified by the
FDA as Class I devices and are exempt from the 510(k) Premarket Notification
requirements. They are not exempt from GMP, medical device reporting, labeling
and other regulatory requirements. The FDA has not specifically classified
intraoral dental cameras. The FDA, however, has classified certain other
devices, including a surgical camera and a fiber-optic dental light, as Class I
devices exempt from 510(k) Notification and the Company believes that its
intraoral dental camera is likely to be treated in the same manner provided that
it continues to market this device only for use in assisting patient
communications and in providing a record in order to facilitate insurance
payment or reimbursement. While the Company believes its position is correct,
there can be no assurance that the FDA will agree with such position. If the FDA
disagrees, the Company will be required to file a 510(k) Notification and may be
required to suspend sales of the TeliCam System until FDA clearance is granted.
The Company does not promote the TeliCam System for diagnostic uses. If
intraoral dental cameras are marketed or promoted for diagnostic uses or for
treatment uses, the FDA generally takes the position that a 510(k) Notification
must be filed for clearance by the FDA.
The Company believes that it will be required to obtain FDA approval or
clearance prior to introduction of any teeth whitening and digital x-ray product
lines, if such product lines are, in fact, developed.
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Pursuant to FDA requirements, the Company has registered its manufacturing
facility with the FDA as a medical device manufacturer, and listed the medical
devices it manufactures. The Company also is subject to inspection on a routine
basis for compliance with FDA regulations. These regulations include those
covering GMP which require that the Company manufacture its products and
maintain its documents in a prescribed manner with respect to manufacturing,
testing and control activities. Further, the Company is required to comply with
other FDA requirements with respect to labeling, and the MDR regulations which
require that the Company provide Information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its products, as well
as product malfunctions that are likely to cause or contribute to death or
serious injury if the malfunction were to recur. The Company believes that it is
currently in material compliance with all relevant GMP and MDR requirements.
In addition, the Company is required to be licensed as a medical device
manufacturer by the State of California. The Company has applied for such a
license to cover its manufacturing activities. In general, because of the
Company's belief that its products are Class I devices and exempt from 510(k)
Notification, the Company believes that the California Department of Health
Services, Food and Drug Branch ("California DHS") will permit the Company to
continue to manufacture and sell its products prior to the required prelicensing
inspection. Approval of the license generally requires that the Company comply
with the FDA's GMP labeling and MDR regulations, as well any other applicable
regulatory requirements. This State license is not transferable and must be
renewed annually.
Generally, if the Company is in compliance with FDA and California
regulations, it may market its devices in other states in the United States.
International sales of medical devices are also subject to the regulatory
requirements of each country, and in Europe, the regulations of the European
Union. The regulatory review process varies from country to country. The
Company, in general, will rely upon its distributors and sales representatives
in the foreign countries in which it markets its products to ensure that the
Company compiles with the regulatory laws of such countries. The Company
believes that its international sales to date have been in compliance with the
laws of the foreign countries in which it has made sales. Failure to comply with
the laws of such country could have a material adverse effect on the Company's
operations and, at the very least, could prevent the Company from continuing to
sell products in such countries. Exports of Class I and Class II medical devices
are also subject to certain limited FDA regulatory controls.
PRODUCT LIABILITY AND INSURANCE
The nature of the Company's present and planned products may expose the
Company to product liability risks. No product liability claims have been
brought against the Company to date. The Company maintains product liability
insurance with coverage limits of $1,000,000 per occurrence and $1,000,000 per
year. While the Company believes that it maintains adequate insurance coverage,
there can be no assurance that the amount of such insurance will be adequate to
satisfy claims made against the Company in the future or that the Company will
be able to obtain insurance in the future at satisfactory rates or in adequate
amounts. Product liability claims or product recalls could have a material
adverse effect on the business and financial condition of the Company. In
addition, the Company is required under certain of its licensing agreements to
indemnify its licensors against certain product liability claims by third
parties.
COMPETITION
The distribution and manufacture of dental supplies and equipment is
intensely competitive. For example, there are at least five companies offering
intraoral camera systems which are competitive with the TeliCam System. Many of
the Company's competitors have greater financial and other resources than the
Company, and, consequently, such entities may be able to develop, manufacture,
market and/or distribute systems which are functionally similar or superior to
the Company's products. Moreover, significant price reductions by the Company's
competitors could result in a similar reduction in the Company's prices. Any
34
<PAGE>
of these competitive pressures may have a material adverse effect on operating
results. See "Risk Factors--Competition."
In the United States, the Company competes with other companies that sell
dental products, distributors and several major manufacturers of dental
products, primarily on the basis of price, customer service and value-added
services and products. The Company's principal domestic competitors are
Patterson Dental Co., Henry Schein, Inc., New Image Industries, Inc. and Ultrak.
The Company also faces competition in its international markets, where the
Company competes on the basis of price and product quality against the same
dental product distributors and manufacturers.
EMPLOYEES
At March 9, 1997, the Company had 46 full-time employees. Of these
employees, 25 were involved in production, 5 were in customer service, 10 were
in administration, 4 were engaged in sales and marketing, and 2 were involved in
engineering and research and development. The Company believes it has a good
relationship with its employees and none of its employees are represented by a
collective bargaining agreement.
PROPERTIES
The corporate headquarters and principal offices of the Company are located
in Westlake Village, California, consisting of approximately 3,900 square feet
space under a lease that expires on November 14, 2000 ("Office Lease"). The
Office Lease provides for aggregate minimum monthly rental payments of
approximately $5,800. In addition, the Company, on behalf of BDI, leases an
additional 605 square feet in Westlake Village, California ("BDI Lease"), at a
rental rate of approximately $844 per month. The BDI Lease has been extended
through April 1997 and the Company has no present intention of renewing this
lease. Further, under a lease that expires on November 1, 1998 ("Plant Lease"),
the Company has approximately 5,700 square feet of space in a building in
Irvine, California, where it manufactures and distributes the TeliCam System and
conducts research and development activities. The rental payment under the Plant
Lease is approximately $5,310 per month. Both the Office Lease and the Plant
Lease require the Company to pay taxes, maintenance fees, insurance, and
periodic rent increases based on a published price index. The Company is
currently looking for additional facilities to replace or supplement the
property which is subject to the Plant Lease.
LEGAL PROCEEDINGS
There is no material litigation pending to which the Company is a party or
to which any of its property is subject.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Robert H. Gurevitch............................. 55 Chairman of the Board of Directors/Chief
Executive Officer/President/Secretary
Marvin H. Kleinberg............................. 68 Director
Jack D. Preston................................. 63 Director
Ronald E. Wittman............................... 50 Chief Financial Officer, Vice President
Dewey Perrigo................................... 43 Vice President of Sales
Merle Roberts................................... 47 Vice President of Manufacturing
</TABLE>
MR. GUREVITCH has been Chairman of the Board, Chief Executive Officer and
President of the Company since March 1996 and was appointed Secretary of the
Company in February 1997. Mr. Gurevitch founded DMD in October 1995 and was its
Chief Executive Officer until it was acquired by the Company. From November 1994
until February 1995, Mr. Gurevitch served as Chief Executive Officer of Dycam,
Inc., a manufacturer and marketer of digital cameras. From 1987 until his
retirement in August 1993, Mr. Gurevitch served as Chief Executive Officer and
Chairman of the Board at New Image, a manufacturer and distributor of intraoral
cameras.
MR. KLEINBERG has been a director of the Company since March 1996. Mr.
Kleinberg is a founding partner of the law firm Arant, Kleinberg, Lerner & Ram
LLP, and has been a member of that law firm and its various predecessors since
1980. Mr. Kleinberg has practiced in the area of intellectual property law since
1954. Mr. Kleinberg serves as an adjunct lecturer in Patent Law at the Franklin
Pierce Law Center and is on the advisory council of the PTC Foundation, which
publishes "IDEA."
JACK D. PRESTON, D.D.S. has been a director of the Company since March 1997.
He is the Don and Sybil Harrington Foundation Professor of Esthetic Dentistry at
the University of Southern California School of Dentistry. Dr. Preston has been
on the teaching staff there since 1979, and he also serves as Chairman of the
Department of Oral and Maxillofacial Imaging and the Director of Informatics.
Dr. Preston is also currently a Diplomate of the American Board of
Prosthodontics as well as the Editor-in-Chief of the International Journal of
Prosthodontics. Dr. Preston is an international lecturer on various aspects of
dentistry, an author of three textbooks and numerous articles and invited
chapters, and is widely considered to be a leading expert on current and future
applications of computer technology in dentistry.
MR. WITTMAN has been the Chief Financial Officer of the Company since
September 1996 and was elected Vice President of the Company in March 1997.
Mr.Wittman was also elected director of the Company in February 1997. From
September 1994 to September 1996, Mr. Wittman was the Vice President of Finance
and Administration and the Chief Financial Officer of FMS Corporation, a
manufacturer of defense related products which declared bankruptcy in 1995. Mr.
Wittman served as Corporate Controller of Whittaker Corporation, an aerospace,
defense electronics and manufacturing corporation from May 1993 to September
1994. From 1987 to May 1993, Mr. Wittman served as Corporate Controller at DAK
Industries, a manufacturer and distributor of consumer electronics, computers,
and computer software.
MR. PERRIGO has served as the Company's Vice President of Sales since March
1996. Commencing in October 1995, he served in the same capacity at DMD. From
1988 through September 1995, Mr. Perrigo served as the Director of Sales of New
Image.
MR. ROBERTS joined the Company in February 1996 as Director of Operations.
On July 1, 1996, he was promoted to Vice President of Manufacturing. From 1988
until May 1994, Mr. Roberts served as Materials Manager for Advanced
Interventional Systems, a medical laser manufacturer. From June 1994 until
36
<PAGE>
January 1996 Mr. Roberts was an independent consultant providing materials,
management and purchasing services to a variety of businesses. Mr. Roberts has
taught material management and related subjects at several Southern California
colleges and universities, and has served as a professional consultant on these
topics.
Directors are elected annually to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
serve at the pleasure of the Board of Directors subject to other contractual
arrangements.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board maintains an Audit Committee consisting of Mr. Kleinberg and Dr.
Preston, each of whom are independent directors. The Audit Committee reviews
with the Company's independent accountants, the scope and timing of their audit
services, any other services they are asked to perform, and the report of
independent accountants on the Company's financial statements following
completion of their audit of the Company's financial statements. In addition,
the Audit Committee makes an annual recommendation to the Board of Directors
concerning the appointment of independent accountants for the coming year.
The Board also maintains a Compensation Committee consisting of Messrs.
Gurevitch and Kleinberg and Dr. Preston. The Compensation Committee is
responsible for the review of compensation and benefits paid to the Company's
executive officers and the review of general policy matters relating to
compensation and benefits of all of the Company's employees. Pursuant to the
Underwriting Agreement, for a period of three years from the date of this
Prospectus, all compensation and other arrangements between the Company and its
executive officers, directors and affiliates must be approved by the
Compensation Committee, a majority of whose members must be independent.
DIRECTOR COMPENSATION
The Company's directors receive no cash compensation for serving as
directors. During 1996, each member of the Board of Directors was granted a
fully vested option to purchase 5,120 Shares of the Common Stock at an exercise
price equal to the fair market value of the Common Stock on the date of grant.
On a going forward basis, the Company currently intends to compensate its
independent directors in the amount of $500 per meeting attended and to grant
options to its directors, for serving as directors. Dr. Preston will receive
options to purchase 33,000 shares of Common Stock, vesting in three annual
installments of 11,000 shares on each of the first three anniversaries of his
service as a director.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during the year ended December 31, 1996 to Robert H. Gurevitch,
the principal executive officer of the Company, and each of the Company's most
highly compensated executive officers whose salary and bonus exceeded $100,000
during such year ("Named Executive Officers").
37
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
ANNUAL COMPENSATION NUMBER OF
YEAR ENDED SECURITIES
DECEMBER 31, --------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION 1996 SALARY BONUS OPTIONS(1) COMPENSATION
- --------------------------------------------- --------------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Robert H. Gurevitch ......................... 1996 $ 152,300 -- 5,120 $ 1,400
Chairman of the Board of Directors, Chief
Executive Officer, President, and Secretary
Dewey Perrigo ............................... 1996 103,800 -- 34,133 2,700
Vice President of Sales
</TABLE>
(1) Certain of the officers of the Company routinely receive other benefits from
the Company, including travel reimbursement, the amounts of which are
customary in the industry. The Company has concluded, after reasonable
inquiry, that the aggregate amounts of such benefits during fiscal 1996, did
not exceed the lesser of $50,000 or 10% of the compensation set forth above
as to any named individual.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
The Company and Mr. Gurevitch have entered into an agreement whereby Mr.
Gurevitch has agreed to serve as Chairman of the Board of Directors and Chief
Executive Officer of the Company until October 1, 1999. Mr. Gurevitch's
compensation will include salary at a minimum annual base compensation rate of
$180,000 prior to March 1, 1997 and $275,000 thereafter, plus a car allowance
and a standard benefits package. Pursuant to the terms of that agreement, Mr.
Gurevitch may not have any ownership interest, or participate in any way, in any
venture which competes with the Company for a period of three years after the
termination of that agreement; provided, however, that the Company must pay Mr.
Gurevitch a fee of $10,000 annually for each of the three years.
The Company has also entered into an agreement with Mr. Perrigo pursuant to
which Mr. Perrigo has agreed to serve as the Company's Director of Sales until
October 1, 1999. Mr. Perrigo's compensation will include salary at a minimum
annual base compensation rate of $100,000 prior to March 1, 1997 and $150,000
thereafter, plus a car allowance and a standard benefits package.
1997 STOCK INCENTIVE PLAN
INTRODUCTION. The Company adopted the DENTAL/MEDICAL DIAGNOSTIC SYSTEMS,
INC. 1997 Stock Incentive Plan ("1997 Plan") on February 11, 1997 and submitted
the Plan to the Company's shareholders at the annual meeting to be held on March
21, 1997, subject to the qualification of the 1997 Plan with the California
Department of Corporations. The 1997 Plan provides for the grant of stock awards
to directors, employees, officers and consultants of the Company. Subject to
adjustment for stock splits, stock dividends and other similar events, 350,000
shares of the Company's Common Stock are available for awards under the 1997
Plan.
The 1997 Plan will be administered by the Board of Directors or another
committee of two or more non-employee directors appointed by the Board
("Committee"), each of whom shall be an "outside director" for purposes of
162(m) of the Internal Revenue Code of 1986, as amended. The Committee shall
have power, subject to, and within the limitations of, the express provisions of
the 1997 Plan to select the persons to whom awards will be granted, and to
determine the terms and conditions of the awards.
AWARDS. The 1997 Plan authorizes the Committee to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of shares of Common Stock or
38
<PAGE>
an option, stock appreciation right or similar right with an exercise or
conversion privilege at a price related to the Common Stock. Awards under the
plans may not be issued at less than the fair market value of the underlying
shares of Common Stock. Awards under the 1997 Plan are not restricted to any
specified form or structure and may include arrangements such as sales, bonuses
and other transfers of stock, stock options, reload stock options and stock
appreciation rights. An award may consist of one such arrangement or two or more
such arrangements in tandem or in the alternative. An award may provide for the
issuance of Common Stock for any lawful consideration, including services
rendered or, to the extent permitted by applicable state law, to be rendered.
Currently, Delaware law does not permit the issuance of common stock for
services to be rendered.
An award granted under the 1997 Plan may include a provision conditioning or
accelerating the receipt of benefits, either automatically or in the discretion
of the Committee, upon the occurrence of specified events, including a change of
control of the Company, an acquisition of a specified percentage of the voting
power of the Company or a dissolution, liquidation, merger, reclassification,
sale of substantially all of the property and assets of the Company or other
significant corporate transaction. Any stock option granted may be an incentive
stock option within the meaning Section 422 of the Code or a nonqualified stock
option.
An award under the 1997 Plan may permit the recipient to pay all or part of
the purchase price of the shares or other property issuable pursuant to the
award and/or to pay all or part of the recipient's tax withholding obligations
with respect to such issuance, by delivering previously owned shares of capital
stock of the Company or other property, or by reducing the amount of shares or
other property otherwise issuable pursuant to the award.
AMENDMENTS. The Committee may amend or terminate the 1997 Plan at any time
and in any manner, subject to the following: (1) no recipient of any award may,
without his or her consent, be deprived thereof or of any of his or her rights
thereunder or with respect thereto as a result of such amendment or termination;
and (2) if any rule or regulation promulgated by the Commission, the Internal
Revenue Service or any national securities exchange or quotation system upon
which any of the Company's securities are listed requires that any such
amendment be approved by the Company's stockholders, then such amendment will
not be effective until it has been approved by the Company's stockholders.
FORM S-8 REGISTRATION. The Company intends to file a registration statement
under the Securities Act to register the 350,000 shares of Common Stock reserved
for issuance under the 1997 Plan. Pursuant to an agreement with the Underwriter,
such registration statement may not be filed until at least one year following
the Effective Date of this Prospectus and will become effective immediately upon
filing with the Commission.
39
<PAGE>
The following table sets forth information concerning individual grants of
stock options made during the year ended December 31, 1996 to each of the Named
Executive Officers.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN
OPTIONS TEN-MONTH PERIOD EXERCISE OF BASE EXPIRATION
NAME GRANTED ENDED DECEMBER 31 PRICE ($/SH) DATE
- ---------------------------------------------------- ----------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
Robert H. Gurevitch................................. 5,120 4% $ .88 03/04/01
Dewey Perrigo....................................... 34,133 24% 2.93 03/31/06
</TABLE>
FISCAL YEAR END OPTION VALUES
No options were exercised by the Named Executive Officers during the year
ended December 31, 1996. The following table shows the number of shares covered
by both exercisable and unexercisable employee stock options, as of December 31,
1996.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Robert H. Gurevitch.................................... 5,120 -- $ 21,760 --
Dewey Perrigo.......................................... 34,133 -- 75,092 --
</TABLE>
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 31, 1997 certain information
relating to the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding shares of
the Common Stock, (ii) each of the Company's directors, (iii) each of the
Company's Named Executive Officers, and (iv) all of the Company's executive
officers and directors as a group. Except as may be indicated in the footnotes
to the table and subject to applicable community property laws, each of such
persons has the sole voting and investment power with respect to the shares
owned. Unless otherwise indicated, the address for each of the principal
stockholders is c/o Dental/Medical Diagnostic Systems, Inc., 200 N. Westlake
Boulevard, Suite 202, Westlake Village, California 91362.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES ----------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED(1) OFFERING OFFERING
- --------------------------------------------------------------------------- ----------------- ---------- ----------
<S> <C> <C> <C>
Robert H. Gurevitch(2)..................................................... 875,500 29.3% 19.5%
Marvin H. Kleinberg(2)..................................................... 5,120 * *
Dewey Perrigo(3)........................................................... 119,464 4.0% 2.7%
Richard M. Bliss........................................................... 223,910 7.5% 5.0%
Jack D. Preston(4)......................................................... 0 * *
G. Tyler Runnels(5) ....................................................... 200,699 6.7% 4.5%
T.R. Winston & Co., Inc.
1999 Avenue of the Stars, Suite 1950
Los Angeles, California 90067
All Officers and Directors as a Group (6 Persons)(6)....................... 1,017,150 34.1% 22.7%
</TABLE>
- ------------------------
* Less than one percent.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act. Pursuant to the rules of the Securities and Exchange
Commission, shares of Common Stock which an individual or group has a right
to acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be beneficially
owned and outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.
(2) Includes 5,120 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of March 31,
1997.
(3) Includes 34,133 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of March 31,
1997.
(4) Does not include 33,000 shares of Common Stock underlying options which will
become exercisable in three installments of 11,000 shares on each of March
24, 1998, 1999, 2000 if, on such respective dates, Dr. Preston is serving as
director.
(5) Includes 40,959 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of March 31,
1997.
(6) Includes 61,439 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of March 31,
1997.
41
<PAGE>
CERTAIN TRANSACTIONS
In October 1996, the Company entered into an agreement with Boston Marketing
pursuant to which the Company obtained worldwide marketing rights in the dental
market for the Teli Units as well as the right to use the "TeliCam" trademark.
See "Business--Manufacturing and Component Parts." At the time the Company
entered into this agreement, Hiroki Umezaki was an officer, director and
principal stockholder of the Company and is a substantial stockholder and the
President of Boston Marketing. At December 31, 1996, the Company owed Boston
Marketing approximately $247,500 in connection with Teli Units purchased by the
Company prior to that date. From March 3, 1996 to December 31, 1996, the Company
purchased 2,509 Teli Units at an aggregate cost of $1,881,750 from Boston
Marketing. In addition, the Company had an agreement with Mr. Umezaki pursuant
to which he was to receive a 15% commission on all sales made by the Company in
Asia, except Japan in which his commission was to be 12%. This agreement
resulted in Mr. Umezaki earning $15,000 in commissions through December 31,
1996. This agreement has been orally amended to provide that Mr. Umezaki shall
receive a 12% commission on sales made in Japan only. This oral agreement is
currently being documented with these changed terms and the Company believes
that the new agreement will be signed with the new terms as described above.
From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing, an
affiliate of Mr. Umezaki, each loaned the Company $177,015 and $200,000,
respectively. The promissory notes evidencing such loans bear interest at 6% per
annum and were originally payable within six months. On February 26, 1996, the
Company repaid $50,000 to each of Mr. Gurevitch and Boston Marketing. No
interest has been paid on the remaining principal balance of these notes
although interest has been accrued on the Company's books. In November 1996, Mr.
Gurevitch and Boston Marketing each agreed to extend the term of their
respective notes until the earlier to occur of: (i) twenty-four months following
the closing of the Bridge Financing; (ii) at such time as the Company receives
proceeds from the sale of the Common Stock in connection with this Offering; or
(iii) the repayment of the Bridge Notes in full. A portion of the proceeds of
this Offering will be used to satisfy these obligations. See "Use of Proceeds."
In addition, on April 11, 1996, Boston Marketing loaned the Company an
additional $25,000 under similar terms ("April Loan"). The April Loan was repaid
in full on August 26, 1996.
Mr. Gurevitch and Mr. Umezaki have guaranteed the performance by the Company
under the Company's leases for its Irvine and Westlake premises, and Mr.
Gurevitch has also personally guaranteed the Company's credit card processing
agreement with the Checkfree Corporation. The Company intends to attempt to
obtain releases from the recipients of each of these guarantees and it is
possible that the elimination of the availability of these guarantees may
require the Company to post collateral or incur increased expense.
The Company believes that the transactions described above were on terms no
less favorable to the Company than could be obtained in arm's length
transactions from unaffiliated third parties. The Company has adopted a policy
whereby all future transactions between the Company and its officers, directors,
principal stockholders or affiliates will be approved by a committee of the
Board of Directors, a majority of the members of which shall be independent
directors, or, if required by law, a majority of disinterested directors, and
will be on terms no less favorable to the Company than could be obtained in
arm's length transactions from unaffiliated third parties.
42
<PAGE>
DESCRIPTION OF SECURITIES
AUTHORIZED STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $0.01 par value per share, and 1,000,000 shares of Preferred
Stock, $0.01 par value per share ("Preferred Stock"). As of the date of this
Prospectus, 2,985,537 shares of Common Stock are outstanding. Upon completion of
this Offering, there will be 4,485,537 shares of Common Stock outstanding
(4,710,537 if the Underwriters over-allotment option is exercised in full).
COMMON STOCK
Subject to any preference that may be applicable to any outstanding shares
of Preferred Stock, holders of Common Stock are entitled to receive dividends
when and if declared by the Board of Directors out of funds of the Company
legally available therefor. Any such dividends may be paid in cash, property or
shares of the Company's Common Stock. The Company has no present intention to
pay dividends. See "Dividend Policy." Each holder of Common Stock is entitled to
cast one vote per share in all matters to be voted upon by stockholders.
Cumulative voting is not allowed in the election of directors or for any other
purpose. Therefore, the holders of more than 50% of the outstanding Common Stock
can elect all directors. The holders of a majority of the outstanding Common
Stock constitute a quorum at any meeting of stockholders and the vote by the
holders of a majority of the outstanding shares is required to effect certain
fundamental corporate changes, such as liquidation, merger or amendment of the
Amended and Restated Certificate of Incorporation. The shares of the Common
Stock have no preemptive or conversion rights, or redemption or sinking fund
provisions. In the event of any liquidation, dissolution or winding up of the
affairs of the Company, whether voluntary or otherwise, after payment or
provision for payment of the debts and other liabilities of the Company,
including the liquidation preference on the Preferred Stock of the Company, if
any, each holder of the Common Stock will be entitled to receive a pro rata
portion of the remaining net assets of the Company, if any.
All of the issued and outstanding shares of Common Stock have been duly
authorized and validly issued and are fully paid and non-assessable, and the
shares of Common Stock issued upon completion of this Offering have been duly
authorized and, when issued, will be fully paid and non-assessable.
PREFERRED STOCK
The Company's Board of Directors may without further action by the Company's
stockholders, from time to time, direct the issuance of shares of the Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of the Preferred Stock
normally would be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is made
to the holders of the Common Stock. At the present time, no shares of Preferred
Stock are outstanding and the Company does not presently intend to issue any
shares of Preferred Stock.
The overall effect of the ability of the Company's Board of Directors to
issue the Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change in control attempts. To the extent that this
ability has this effect, removal of the Company's incumbent Board of Directors
and management may be rendered more difficult. Further, this may have an adverse
impact on the ability of stockholders of the Company to participate in a tender
or exchange offer for the Common Stock and in so doing diminish the market value
of the Common Stock.
WARRANTS
The Warrants will be issued in registered form pursuant to the terms of a
Warrant Agreement dated as of , 1997 ("Warrant Agreement") between the
Company and American Stock Transfer and
43
<PAGE>
Trust Company, New York, New York, as Warrant Agent. Reference is made to said
Warrant Agreement (which has been filed as an Exhibit to the Registration
Statement of which this Prospectus is a part) for a complete description of the
terms and conditions thereof. The description herein is qualified in its
entirety by reference to the Warrant Agreement.
Unless previously redeemed, each Warrant (including the Warrants converted
from the Bridge Warrants) entitles the registered holder thereof to purchase one
share of Common Stock at any time during the four-year period commencing one
year from the date of this Prospectus, at a per share price equal to $5.00
subject to adjustment in certain circumstances.
Unless extended by the Company at its discretion, the Warrants will expire
at 5:00 p.m., New York time, on the fifth anniversary of the date of this
Prospectus. In the event a holder of the Warrants fails to exercise the Warrants
prior to their expiration, the Warrants will expire and the holder thereof will
have no further rights with respect to the Warrants.
The Company may, with the prior written consent of the Underwriter, redeem
the Warrants at any time once they become exercisable, for a redemption price of
$.01 per Warrant if notice of not less than 30 days is given and the last sale
price of the Common Stock has been at least 190% of the then current exercise
price of the Warrants on each of the ten consecutive trading days ending on the
third day prior to the day on which notice is given. The Warrants will be
exercisable until the close of business on the date fixed for redemption. The
Company has agreed that it will not redeem Warrants held of record by investors
in the Bridge Financing at any time that such investors are subject to any
contractual restriction with the Underwriter which prevents their immediate
resale of the Common Stock issuable to such holders upon the exercise of such
Warrants.
The Company will be able to issue shares of its Common Stock upon exercise
of the Warrants only if there is then a current prospectus relating to such
Common Stock, and only if such Common Stock is qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the various holders of the Warrants reside. Although the Company has
undertaken and intends to file and keep current a prospectus which will permit
the exercise of the Warrants and to qualify for sale the shares of Common Stock
underlying the Warrants in those states in which the Securities are to be
offered until the expiration of the Warrants, subject to the terms of the
Warrant Agreement, there can be no assurance that the Company will be able to do
so. See "Risk Factors -- Current Prospectus and State Blue Sky Registration
Required to Exercise Warrants."
The exercise prices and number of shares of Common Stock or other securities
issuable on exercise of the Warrants are also subject to adjustment in the event
of a stock dividend, stock split, recapitalization, reorganization, or merger or
consolidation of the Company or other similar event.
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check payable to the Company) to the Warrant Agent for the number of
warrants being exercised. The Company is required to keep available a sufficient
number of authorized shares of the Common Stock to permit exercise of the
Warrants. The Warrant holders do not have the rights or privileges of the
holders of Common Stock prior to exercise of the Warrants.
DELAWARE LAW
The Company is subject to Section 203 of the DGCL, which prevents an
"interested stockholder" (defined in Section 203, generally, as a person owing
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a publicly held Delaware corporation for three years
following the date such person became an interested stockholder, unless: (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in
44
<PAGE>
which the interested stockholder became an interested stockholder or approved
the business combination; (ii) upon consummation of the transaction that
resulted in the interested stockholder's becoming an interested stockholder, the
interested stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (subject to certain
exceptions); or (iii) following the transaction in which such person became an
interested stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of 66% of the outstanding voting stock of the
corporation not owned by the interested stockholder. A "business combination"
includes mergers, stock or asset sales and other transactions resulting in a
financial benefit to the interested stockholder.
The provisions of Section 203 of the DGCL could have the effect of delaying,
deferring or preventing a change in control of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
provide for the indemnification by the Company of each director and officer of
the Company to the fullest extent permitted by the Delaware General Corporation
Law ("DGCL"), as the same exists or may hereafter be amended. Section 145 of the
DGCL provides in relevant part that a corporation may indemnify any person
against whom any pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) is threatened by reason of the fact that such person
is or was a director or officer of the corporation against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. In addition,
Section 145 provides that a corporation may indemnify any such person against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper. Delaware law further provides that nothing in the above-described
provisions shall be deemed exclusive of any other rights to indemnification or
advancement of expenses to which any person may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
The Company's Amended and Restated Certificate of Incorporation also
provides that a director of the Company shall not be liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director. Section 102(b)(7) of the Delaware General Corporation Law provides
that a provision so limiting the personal liability of a director shall not
eliminate or limit the liability of a director for, among other things: breach
of the duty of loyalty; acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; unlawful payment of
dividends; and transactions from which the director derived an improper personal
benefit.
The Company has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director of the Company and certain of
its officers (the "Indemnitees"). Pursuant to the terms and conditions of the
Indemnity Agreements, the Company has agreed to indemnify each Indemnitee
against any amounts which he or she becomes legally obligated to pay in
connection with any claim against him or her based upon any action or inaction
which he or she may commit, omit or suffer while
45
<PAGE>
acting in his or her capacity as a director and/or officer of the Company or its
subsidiaries; provided, however, that Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal action, had no
reasonable cause to believe Indemnitee's conduct was unlawful.
At present there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that may result in a claim of indemnification by any director or
officer. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission
("Commission") such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Company has purchased a Director and Officer and Corporate Reimbursement
("D&O") policy from an A or higher rated insurance Company admitted in
California. The D&O policy provides coverage for certain claims made against
directors and officers of the Company that are typically covered by standard D&O
policies. In addition, the D&O policy provides coverage for claims made against
the Company for certain "securities claims" as defined by the policy. The D&O
policy is a claims-made policy and has aggregate limits of $3,000,000.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
American Stock Transfer and Trust Company, New York, New York, is the
transfer agent and registrar for the Common Stock and warrant agent for the
Warrants.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,485,537 shares of Common Stock (4,710,537 shares if the Underwriter's
over-allotment option is exercised in full), not including shares of Common
Stock issuable upon exercise of outstanding options or warrants. For purposes of
determining dates upon which outstanding shares of Common Stock may first be
sold, it is assumed that the amendment to Rule 144 adopted by the Commission on
February 20, 1997 is currently in effect.
- Of these outstanding shares, 1,500,000 shares of Common Stock sold to the
public in this Offering may be freely traded without restriction or
further registration under the Securities Act, except that any shares that
may be held by an "affiliate" of the Company (as that term is defined in
the rules and regulations under the Securities Act) may be sold only
pursuant to a registration under the Securities Act or pursuant to an
exemption from registration under the Securities Act, including the
exemption provided by Rule 144 adopted under the Securities Act.
- Of the 2,985,537 shares of Common Stock which were outstanding prior to
the completion of this Offering, 1,054,316 may be freely traded without
restriction and without registration under the Securities Act. The
remaining 1,931,221 shares of Common Stock which were outstanding prior to
the completion of this Offering are restricted by contract or are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares") and may not be sold unless such sale
is registered under the Securities Act, or is made pursuant to an
exemption from registration under the Securities Act, including the
exemption provided by Rule 144. Of these restricted shares, 1,385,100
shares become eligible for resale under Rule 144 commencing in March 1997,
204,794 shares become eligible commencing in January 1998 and 341,327
shares become eligible commencing in February 1998. Of the 1,931,221
Restricted Shares, 68,265, 546,117 and 1,180,303 shares are subject to
contractual restrictions pursuant to which the holders have agreed not to
sell such shares without prior written consent of the Underwriter for a
period of 12 months, 13 months and 18 months, respectively from the date
of this Prospectus. The Company has agreed to file a registration
statement prior to December 31, 1997 relating to the offer and sale of
546,117 shares of Common Stock that would otherwise become eligible for
resale under Rule 144 in January and February of 1998, all of which
shares, however, will remain subject to contractual restrictions on resale
expiring 13 months from the date of this Prospectus.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned any
restricted securities for at least one year (including a stockholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
treading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of such sale is given to the Commission, provided certain
public information, manner of sale and notice requirements are satisfied. A
stockholder who is deemed to be an affiliate of the Company, including members
of the Board of Directors and senior management of the Company, will still need
to comply with the restrictions and requirements of Rule 144, other than the
one-year holding period requirement, in order to sell shares of Common Stock
that are not restricted securities, unless such sale is registered under the
Securities Act. A stockholder (or stockholders whose shares are aggregated) who
is deemed not to have be an affiliate of the Company at any time during the 90
days preceding a sale by such stockholder, and who has beneficially owned
restricted securities for at least two years, will be entitled to sell such
shares under Rule 144 without regard to the volume limitations described above.
No predictions can be made of the effect, if any, that future sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market could adversely affect the then-prevailing
market price.
47
<PAGE>
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The Company has agreed to register for sale under the Securities Act
concurrently with this Offering the Warrants converted from the Bridge Warrants.
An aggregate of 1,600,000 Warrants may be offered and sold pursuant to this
Prospectus by the Selling Securityholders. The Warrants offered by the Selling
Securityholders are not part of the underwritten Offering. The Company will not
receive any of the proceeds from the sale of the Warrants by the Selling
Securityholders.
The Warrants registered for sale on behalf of the Selling Securityholders
under the Registration Statement of which this Prospectus forms a part may be
offered and sold from time to time in regular brokerage transactions (which may
include block transactions) on the Nasdaq SmallCap Market and the Boston Stock
Exchange, in transactions directly with market makers, in certain
privately-negotiated transactions, or through a combination of such methods of
sale, at fixed prices which may be changed, at market prices prevailing at the
time of sale or at negotiated prices. The Selling Securityholders may effect
such transactions by selling their Warrants directly to purchasers or to or
through broker-dealers (including the Underwriter), which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Securityholders and/or
the purchasers of the Warrants for whom such broker-dealers may act as agents or
to whom they sell as principal, or both. The Selling Securityholders have
advised the Company that they have not entered into any agreements,
understandings, or arrangements with any underwriters or broker-dealers
regarding the sale of their Warrants. The Selling Securityholders and any
broker-dealers that act in connection with the sale of the Warrants may be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act.
The following table sets forth the name of each Selling Securityholder and
each Selling Optionholder and the number of Warrants or Option Shares registered
for resale on such party's behalf. All of such Warrants and Option Shares are
being registered for sale under the Registration Statement of which this
Prospectus forms a part, and the Company believes that all such Warrants and
Option Shares will be owned by the respective holders thereof following the
completion of this Offering and prior to resale. Notwithstanding that such
Warrants are being registered, the Selling Securityholders have agreed that none
of such Warrants may be sold prior to November 27, 1998 without the prior
written consent of the Underwriter. The Underwriter may, depending upon market
conditions, release the lock-up prior to November 27, 1998. The Option Shares
are not subject to any contractual resale restriction.
None of the Selling Securityholders has ever held any position or office
with the Company or had any other material relationship with the Company, nor do
any of the Selling Securityholders beneficially own any shares of Common Stock
of the Company at March 31, 1997. The Selling Optionholders, Messrs. Umezaki and
Kitano, are both former directors of the Company, and Mr. Umezaki is a party to
certain material transactions with the Company. See "Certain Transactions." To
the Company's knowledge, neither Mr. Umezaki nor Mr. Kitano is currently a
beneficial holder of any shares of the Company's Common Stock other than the
Option Shares issuable upon exercise of their respective options.
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS
REGISTERED
FOR RESALE
-----------
<S> <C>
Bear Stearns Securities Corp. ................................................... 25,000
as IRA Custodian FBO Paul Breslow
Bear Stearns Securities Corp. ................................................... 50,000
as IRA Custodian FBO David J. Carr
Bear Stearns Securities Corp. ................................................... 25,000
as IRA Custodian FBO Sharon Carr
Henry M. Cohn ................................................................... 50,000
William M. De Arman ............................................................. 50,000
Donehew Fund Limited Partnership ................................................ 50,000
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS
REGISTERED
FOR RESALE
-----------
Bear Stearns Securities Corp. ................................................... 25,000
as Custodian FBO Empire Medical
Diagnostic PC Defined Contribution
Profit Sharing Plan
<S> <C>
Ronald J. Frank ................................................................. 25,000
Louis Gigante ................................................................... 25,000
Stephen Goldman ................................................................. 25,000
Stanley D. Goodman .............................................................. 25,000
Janice Halle-Nesses ............................................................. 175,000
H&S Advisors, Inc. .............................................................. 20,000
IF Consulting Ltd. .............................................................. 50,000
Jo-Bar Enterprises, L.L.C. ...................................................... 50,000
KCID Industries, Bradley S. Cooper .............................................. 25,000
Richard M. Kirshner ............................................................. 25,000
Jacqueline Knapp ................................................................ 187,500
Larry Kupferberg ................................................................ 152,500
Christina Litt .................................................................. 25,000
Private Trust Corp. Ltd. ........................................................ 50,000
TTEE New Amsterdam Investment Trust
Joseph Reiss, M.D. .............................................................. 50,000
Marc Roberts .................................................................... 50,000
Claudia C. Rouhana .............................................................. 25,000
William J. Rouhana, Jr. ......................................................... 25,000
William J. Rouhana, Sr. ......................................................... 25,000
Trustee for Rouhana
1990 GRIT dtd 7/30/90
William J. Rouhana, Sr. ......................................................... 25,000
Trustee for Rouhana
1995 GRAT dtd 3/2/95
Richard Semble, M.D. ............................................................ 25,000
Dr. Larry Sheer ................................................................. 50,000
Stanley Snyder .................................................................. 140,000
Jeffrey M. Spiegel .............................................................. 25,000
Gibbs A. Williams ............................................................... 25,000
Keough Trust
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
OPTION
SHARES
REGISTERED
FOR RESALE
-----------
<S> <C>
Hiroki Umezaki .................................................................. 5,120
Gerald Kitano ................................................................... 5,120
</TABLE>
49
<PAGE>
UNDERWRITING
M.H. Meyerson & Co., Inc. ("Underwriter") has agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company a
total of 1,500,000 shares of the Common Stock and 1,500,000 Warrants. The
obligations of the Underwriter under the Underwriting Agreement are subject to
approval of certain legal matters by counsel and various other conditions
precedent, and the Underwriter is obligated to purchase all of the Securities
offered by this Prospectus (other than the Securities covered by the
over-allotment option described below and those being offered on behalf of the
Selling Securityholders) if any are purchased.
The Underwriter has advised the Company that it proposes to offer the
Securities to the public at the initial offering price set forth on the cover
page of this Prospectus and to certain dealers at that price less a concession
not in excess of $ per share of the Common Stock and $ per Warrant. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ per share of Common Stock and $ per Warrant to certain
other dealers. After this Offering, the offering price and other selling terms
may be changed by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter an expense allowance on a nonaccountable
basis equal to 3% of the gross proceeds derived from the sale of the Securities
offered by this Prospectus (including the sale of any Securities subject to the
Underwriter's over-allotment option but excluding the Warrants being sold by the
Selling Securityholders), $50,000 of which has been paid to date. The Company
also has agreed to pay all expenses in connection with qualifying the shares of
Common Stock offered hereby for sale under the laws of such states as the
Underwriter may designate and registering this Offering with the National
Association of Securities Dealers, Inc., including fees and expenses of counsel
retained for such purposes by the Underwriter.
The Company has granted to the Underwriter an option, exercisable during the
45-day period after the date of this Prospectus, to purchase from the Company at
the offering price, less underwriting discounts and the nonaccountable expense
allowance, up to an aggregate of 225,000 additional shares of Common Stock
and/or 225,000 additional Warrants for the sole purpose of covering
over-allotments, if any.
In connection with this Offering, the Company has agreed to sell to the
Underwriter for an aggregate of $100, the Underwriter's Purchase Option,
consisting of the right to purchase up to an aggregate of 150,000 shares of the
Common Stock and/or an aggregate of 150,000 Warrants. The Underwriter's Purchase
Option is exercisable initially at a price of $ per share and $ per
Warrant for a period of four years commencing one year from the date hereof. The
Underwriter's Purchase Option may not be transferred, sold, assigned or
hypothecated during the one year period following the date of this Prospectus
except to officers of the Underwriter and the selected dealers and their
officers or partners. The Underwriter's Purchase Option grants to the holders
thereof certain "piggyback" and demand rights for periods of five and seven
years, respectively, from the date of this Prospectus with respect to the
registration under the Securities Act of the securities directly and indirectly
issuable upon exercise of the Underwriter's Purchase Option.
Pursuant to the Underwriting Agreement, all of the directors, executive
officers, and certain of existing stockholders of the Company as of the date of
this Prospectus (who hold in the aggregate 1,794,685 outstanding shares of
Common Stock) have agreed not to sell any of their shares of Common Stock for
periods ranging between 12 and 18 months from the date of this Prospectus.
During the five-year period following the date of this Prospectus, the
Underwriter shall have the right to purchase for the Underwriter's account or to
sell for the account of the directors, officers and certain stockholders of the
Company, any securities sold by any of such persons in the open market. In
addition, the Underwriting Agreement provides that, for a period of three years
from the date of this Prospectus, the Company will recommend and use its best
efforts to elect a designee of the Underwriter as a member of the Board of
50
<PAGE>
Directors. Alternatively, the Underwriter will have the right to send a
representative to observe each meeting of the Board of Directors. The
Underwriter has not yet selected such designee or representative.
The Company has engaged the Underwriter, on a nonexclusive basis, as its
agent for the solicitation of the exercise of the Warrants. Additionally, other
NASD members may be engaged by the Underwriter in its solicitation efforts. To
the extent not inconsistent with the guidelines of the NASD and the rules and
regulations of the Commission, the Company has agreed to pay the Underwriter for
bona fide services rendered a commission equal to 4% of the exercise price for
each Warrant exercised if the exercise was solicited by the Underwriter. In
addition to soliciting, either orally or in writing, the exercise of the
Warrants, such services may also include disseminating information, either
orally or in writing, to warrantholders about the Company or the market for the
Company's securities, and assisting in the processing of the exercise of the
Warrants. No compensation will be paid to the Underwriter in connection with the
exercise of the Warrants if the market price of the underlying shares of Common
Stock is lower than the exercise price, the Warrants are held in a discretionary
account, the Warrants are exercised in an unsolicited transaction, the warrant
holder has not confirmed in writing that the Underwriter solicited such
exercise, or the arrangement to pay the commission is not disclosed in the
prospectus provided to warrant holders at the time of exercise. In addition,
unless granted an exemption by the Commission from Regulation M under the
Exchange Act, while it is soliciting exercise of the Warrants, the Underwriter
will be prohibited from engaging in any market activities or solicited brokerage
activities with regard to the Company's securities unless the Underwriter has
waived its right to receive a fee for the exercise of the Warrants.
Prior to this Offering, there has been only a limited public market for any
of the Common Stock. Accordingly, the Offering Price of the Securities and the
terms of the Warrants have been determined by negotiation between the Company
and the Underwriter and do not necessarily bear any relation to established
valuation criteria. Factors considered in determining such prices and terms, in
addition to prevailing market conditions, included an assessment of the prospect
for the industry in which the Company will compete, the Company's management and
the Company's capital structure.
The Underwriter may engage in over-allotment, stabilizing transactions,
syndicate short covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act. Over-allotment involves sales by the
underwriting syndicate in excess of the offering size, which creates a syndicate
short position. Stabilizing transactions permit bids to purchase the Securities
so long as the stabilizing bids do not exceed a specified maximum. Syndicate
short covering transactions involve purchases of the Securities in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriter to reclaim a selling
concession from a selling group member when the Securities originally sold by
such selling group member are repurchased in the open market by the
Underwriters. Such stabilizing transactions, syndicate short covering
transactions and penalty bids may cause the prices of the Securities to be
higher than they would otherwise be in the absence of such transactions. These
transactions may be effected on the Nasdaq SmallCap Market, the Boston Stock
Exchange, or otherwise, and, if commenced, may be discontinued at any time.
In November 1996, the Underwriter acted as placement agent in the Bridge
Financing and was paid commissions of $160,000 (10%) and a nonaccountable
expense allowance of $48,000 (3%).
LEGAL MATTERS
The legality of the securities offered hereby are being passed upon for the
Company by Troop Meisinger Steuber & Pasich, LLP, Los Angeles, California.
Graubard Mollen & Miller, New York, New York, has served as counsel to the
Underwriter in connection with this Offering.
51
<PAGE>
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
March 2, 1996 and the consolidated statements of operations, stockholders'
equity and cash flows for the ten-month period ended December 31, 1996 and for
the period from inception (October 23, 1995) to March 2, 1996 have been included
herein and in the Registration Statement of which this Prospectus is a part, in
reliance on the report of Coopers & Lybrand, L.L.P., independent accountants,
given on their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
following Regional Offices: Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade
Center, 13th Floor, 75 Park Place, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. Additionally, the Commission maintains a Web Site
(http://www.sec.gov) that contains certain reports, proxy and information
statements and other information relating to the Company.
A Registration Statement on Form SB-2, including amendments thereto,
relating to the Securities offered hereby has been filed by the Company with the
Commission, Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereof. For further information with respect to the Company and the
Securities offered hereby, reference is made to such Registration Statement,
exhibits and schedules. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement may be inspected without charge at the Commission's
public reference facilities at the offices described above and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
52
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and March 2, 1996...................................... F-3
Consolidated Statements of Operations for the Ten-month period ended December 31, 1996 and for the Period
from Inception (October 23, 1995) to March 2, 1996....................................................... F-4
Consolidated Statements of Stockholders' Equity for the Ten-month period ended December 31, 1996 and for
the Period from Inception (October 23, 1995) to March 2, 1996............................................ F-5
Consolidated Statements of Cash Flows for the Ten-month period ended December 31, 1996 and for the Period
from Inception (October 23, 1995) to March 2, 1996....................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
Dental/Medical Diagnostic Systems, Inc.
We have audited the accompanying consolidated financial statements of
Dental/Medical Diagnostic Systems, Inc. and Subsidiaries ("the Company") listed
in the index on page F-1 of this Registration Statement on Form SB-2. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dental/Medical
Diagnostic Systems, Inc. and Subsidiaries as of December 31, 1996 and March 2,
1996 and the consolidated results of their operations and their cash flows for
the ten-month period ended December 31, 1996 and for the period from inception
(October 23, 1995) to March 2, 1996 in conformity with generally accepted
accounting principles.
Coopers & Lybrand, LLP
Los Angeles, California
January 31, 1997, except for the effects of the stock split
described in Note 2, as to which the date is March 24, 1997.
F-2
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND MARCH 2, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
1996 MARCH 2, 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 1,058,836 $ 666,611
Accounts receivable, less allowance for returns and doubtful accounts of $146,699
and $28,280 at December 31, 1996 and March 2, 1996.............................. 1,158,444 49,023
Inventories....................................................................... 1,513,075 1,072,085
Deferred tax asset................................................................ 90,000 --
Prepaid expenses and other current assets......................................... 208,552 152,985
------------- -------------
Total current assets............................................................ 4,028,907 1,940,704
Property and equipment, net of accumulated depreciation........................... 393,578 249,000
Debt issuance costs, net of accumulated amortization.............................. 253,686 --
Other assets...................................................................... 42,270 36,040
------------- -------------
Total assets.................................................................... $ 4,718,441 $ 2,225,744
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Book overdraft.................................................................... $ -- $ 49,906
Current portion of capital lease obligations...................................... 18,468 15,505
Notes payable to related parties.................................................. -- 277,015
Accounts payable.................................................................. 1,089,332 1,616,866
Accrued liabilities............................................................... 462,456 189,974
Income taxes payable.............................................................. 168,570 --
Customer deposits................................................................. 33,607 249,345
------------- -------------
Total current liabilities....................................................... 1,772,433 2,398,611
Notes payable..................................................................... 1,355,291 --
Notes payable to related parties.................................................. 272,966 --
Capital lease obligations......................................................... 66,028 74,836
Other long term liabilities....................................................... 14,098 12,629
------------- -------------
Total liabilities............................................................... 3,480,816 2,486,076
------------- -------------
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, par value $.01 per share; 1,000,000 shares authorized; none
issued and outstanding........................................................ -- --
Common stock, par value $.01 per share; 20,000,000 shares authorized; 2,985,537
and 2,563,318 shares issued and outstanding at December 31, 1996 and March 2,
1996.......................................................................... 29,855 25,633
Additional paid in capital...................................................... 2,695,832 1,339,248
Accumulated deficit............................................................. (1,488,062) (1,625,213)
------------- -------------
Total stockholders' equity (deficit)............................................ 1,237,625 (260,332)
------------- -------------
Total liabilities and stockholders' equity (deficit)............................ $ 4,718,441 $ 2,225,744
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO MARCH 2, 1996
<TABLE>
<CAPTION>
TEN MONTHS ENDED INCEPTION TO
DECEMBER 31, 1996 MARCH 2, 1996
----------------- -------------
<S> <C> <C>
Net sales....................................................................... $ 11,673,102 $ 220,623
Cost of sales................................................................... 6,685,464 202,115
----------------- -------------
Gross profit.................................................................. 4,987,638 18,508
Selling, general and administrative expense..................................... 4,360,736 1,111,391
Research and development expense................................................ 322,467 528,426
----------------- -------------
Operating income (loss)....................................................... 304,435 (1,621,309)
Interest expense................................................................ 57,166 3,904
Amortization of debt issuance costs............................................. 31,548 --
----------------- -------------
Income (loss) before income taxes............................................. 215,721 (1,625,213)
Provision for income taxes...................................................... 78,570 --
----------------- -------------
Net income (loss)............................................................. $ 137,151 $ (1,625,213)
----------------- -------------
----------------- -------------
Net income (loss) per share..................................................... $ .05 $ (1.57)
----------------- -------------
----------------- -------------
Number of shares used in computing per share amounts............................ 3,019,213 1,035,778
----------------- -------------
----------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, October 23, 1995 (date of
inception)............................. -- $ -- $ -- $ -- $ --
Issuance of common stock for cash........ 1,416,500 14,165 617,070 -- 631,235
Issuance of common stock for services.... 290,126 2,901 125,216 -- 128,117
Issuance of common stock for cash, net of
issuance costs......................... 856,692 8,567 596,962 -- 605,529
Net loss................................. -- -- -- (1,625,213) (1,625,213)
---------- --------- ----------------- ------------- -------------
Balance, March 2, 1996................... 2,563,318 25,633 1,339,248 (1,625,213) (260,332)
Issuance of common stock for cash, net of
issuance costs......................... 422,219 4,222 1,050,281 -- 1,054,503
Issuance of warrants for cash............ -- -- 259,103 -- 259,103
Issuance of stock options to
nonemployees........................... -- -- 47,200 -- 47,200
Net income............................... -- -- -- 137,151 137,151
---------- --------- ----------------- ------------- -------------
Balance, December 31, 1996............... 2,985,537 $ 29,855 $ 2,695,832 $ (1,488,062) $ 1,237,625
---------- --------- ----------------- ------------- -------------
---------- --------- ----------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO MARCH 2, 1996
<TABLE>
<CAPTION>
TEN MONTHS ENDED INCEPTION TO
DECEMBER 31, 1996 MARCH 2, 1996
----------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ 137,151 $ (1,625,213)
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Depreciation and amortization............................................... 108,047 9,219
Allowance for returns and doubtful accounts................................. 79,123 28,280
Inventory write down........................................................ 20,822 91,556
Deferred taxes.............................................................. (90,000) --
Deferred rent............................................................... 1,469 12,629
Common stock and stock options issued for services.......................... 47,200 128,117
Changes in operating assets and liabilities:
Accounts receivable....................................................... (1,188,544) (77,303)
Inventories............................................................... (461,812) (1,163,641)
Prepaid expenses and other current assets................................. (55,567) (152,985)
Other assets.............................................................. (6,230) (36,040)
Accounts payable.......................................................... (448,316) 1,524,470
Accrued liabilities....................................................... 272,482 131,991
Income taxes payable...................................................... 168,570 --
Customer deposits......................................................... (215,738) 249,345
----------------- --------------
Net cash used by operating activities................................... (1,631,343) (879,575)
----------------- --------------
Cash flows from investing activities:
Purchase of property and equipment.......................................... (200,686) (144,537)
----------------- --------------
Net cash used in investing activities................................... (200,686) (144,537)
----------------- --------------
Cash flows from financing activities:
(Decrease) increase in book overdraft....................................... (49,906) 49,906
Accounts payable to related party in excess of terms........................ (79,218) 79,218
Net proceeds from issuance of common stock.................................. 1,054,503 1,291,113
Net proceeds from issuance of notes payable................................. 1,314,766 --
Proceeds from borrowings from related parties............................... 25,000 377,015
Payments on borrowings from related parties................................. (29,049) (100,000)
Principal payments on capital lease obligations............................. (11,842) (6,529)
----------------- --------------
Net cash provided by financing activities............................... 2,224,254 1,690,723
----------------- --------------
Net increase in cash and cash equivalents............................... 392,225 666,611
Cash and cash equivalents, beginning of period................................ 666,611 --
----------------- --------------
Cash and cash equivalents, end of period...................................... $ 1,058,836 $ 666,611
----------------- --------------
----------------- --------------
Supplemental cash flow information:
Capital lease obligations incurred............................................ $ 5,997 $ 96,870
Property and equipment not paid for at period end............................. -- 16,812
Common stock issuance costs not paid for at period end........................ -- 54,349
Interest paid................................................................. 8,219 --
Income taxes paid............................................................. -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The Company was organized in New York in 1981 under the name Edudata
Corporation and reincorporated in Delaware in 1983 by Sun Equities Corporation
("Sun") which owned approximately 81 percent of the Company's outstanding common
stock until August 11, 1995. At that time, Sun distributed the shares of the
Company that it owned to its stockholders in the form of a dividend.
The Company was initially organized to provide education in the use of
personal computers, to market software programs developed by others, and to
provide a broad range of advisory services to businesses in conjunction with
both computer and non-computer related management issues. The Company's original
concept was modified, however, and until 1987, the Company was engaged in the
ownership and operation of technical schools through its subsidiaries, Betty
Owen Secretarial Systems, Inc. and Taylor Business Institute, Inc., and in the
development, construction and sale of single-family homes and commercial
buildings through its majority-owned subsidiary, Lytton & Tolly, Inc. In 1988
the Company disposed of its subsidiaries and their operations and determined to
use the proceeds to acquire another business. From 1988 to early 1996, the
Company's operations were limited to exploring opportunities to acquire or to
become an operating business.
On March 1, 1996, the Company acquired all the outstanding securities of
Dental/Medical Diagnostic Systems LLC, a California limited liability company
("DMD"), and Bavarian Dental Instruments, Inc., a California close corporation
("BDI"), in exchange for the issuance by the Company of a total of 1,706,626
restricted shares of its Common Stock. DMD and BDI were initially formed in
October 1995 and November 1995, respectively. As a result of these transactions,
the former members of DMD and former stockholders of BDI gained a majority of
the Company's voting securities and management control of the Company was
transferred to the former management of DMD and BDI. For accounting purposes
these transactions were treated as a recapitalization of DMD and BDI, with DMD
and BDI combined as the acquiror (reverse acquisition). As a result, the
combined historical financial statements of DMD and BDI became the financial
statements of the Company.
On January 28, 1997 the Company changed its name to Dental/Medical
Diagnostic Systems, Inc. ("DMDS") from Edudata Corporation. Collectively, DMDS
and its wholly owned subsidiaries are referred to as the Company.
The Company designs, develops, manufactures and sells high technology dental
equipment. Currently, the Company's primary emphasis is on the manufacture and
sale of an intraoral camera system known as the TeliCam System and a dental
office networking system, known as InTELInet, for use in connection with the
TeliCam System. The Company commenced shipments of TeliCam Systems to customers
in February 1996 and, in November 1996, introduced the InTELInet networking
system for the TeliCam System.
BDI was formed to import from Russia, distribute and market dental burs in
the United States and elsewhere. The first sales of the burs commenced in early
March 1996. On July 9, 1996, the Company decided to discontinue the dental bur
product line.
2. BASIS OF PRESENTATION
On October 23, 1996, the Company authorized an increase in the authorized
number of shares of Common Stock from 10,000,000 shares to 20,000,000 shares.
The Board of Directors also authorized a new class of 1,000,000 shares of
Preferred Stock with a par value of $.01 per share.
F-7
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATION (CONTINUED)
On January 13, 1997, the Company effected a reverse stock split of 1 share
for 2.197317574 shares of its issued and outstanding Common Stock. In addition,
on March 24, 1997, the Company's stockholders approved a reverse stock split of
1 share for 1.33333333 shares of its issued and outstanding Common Stock. All
share and per share amounts have been retroactively restated to reflect these
reverse splits.
On February 5, 1997 the Company changed its fiscal year-end from a fiscal
year ending on the nearest Saturday to February 28th to a December 31 fiscal
year-end. The accompanying consolidated financial statements reflect the
operating results of the Company for the ten-month period from March 3, 1996
through December 31, 1996 and for the period from inception (October 23, 1995)
through March 2, 1996.
3. ACQUISITION OF DMD AND BDI
On March 1, 1996, DMDS (formerly Edudata) completed the acquisition of BDI
and DMD. The acquisition was affected pursuant to the terms of the two
Contribution Agreements dated February 29, 1996 ("Contribution Agreements")
between DMDS and BDI and between DMDS and DMD. Pursuant to the Contribution
Agreements the former shareholders of BDI and members of DMD received a total of
1,706,626 shares of newly issued DMDS restricted common stock, then constituting
approximately 66.6% of DMDS' outstanding common stock, taking into consideration
the newly issued shares. As part of the transaction, DMDS' prior Board of
Directors resigned and were replaced by Robert H. Gurevitch, Chief Executive
Officer, director and member/shareholder of DMD and BDI, Hiroki Umezaki,
President of DMD's International Operations, director and member of DMD and two
outside directors. In addition, existing management and security holders of both
DMD and BDI assumed management control of DMDS.
Accordingly, for accounting purposes the acquisition was treated as a
recapitalization of DMD and BDI with DMD and BDI combined as the acquiror
(reverse acquisition). As a result, the combined historical financial statements
of DMD and BDI became the financial statements of DMDS.
Further, since DMDS' assets consisted solely of approximately $660,000 in
cash and cash equivalents and had no operations in the seven years prior to the
acquisition, for accounting purposes this transaction was recorded by the
Company as the issuance of common stock for cash held by DMDS. Therefore no
proforma information has been presented.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of DMDS and its
wholly owned subsidiaries as of December 31, 1996 and March 2, 1996 and for the
ten-month period ended December 31, 1996 and for the period from inception
(October 23, 1995) to March 2, 1996. All intercompany balances and transactions
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates
F-8
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
made in the preparation of the consolidated financial statements relate to the
assessment of the carrying value of accounts receivable, inventories, and
estimated provision for warranty costs. Actual results could differ from those
estimates.
RISKS AND UNCERTAINTIES
The Company buys certain key components from one supplier or from a limited
number of suppliers. Although there are a limited number of suppliers of the key
components, management believes that other suppliers could provide similar
components on comparable terms. Changes in key suppliers could cause delays in
manufacturing and distribution of products and a possible loss in sales, which
could adversely affect operating results.
The Company has derived substantially all of its revenues from the sale of
one product family. The Company believes that the inability to attract new
customers, the loss of one or more of its major customers, a significant
reduction in business from such customers, or the uncollectibility of amounts
due from any of its larger customers, could have a material adverse affect on
the Company.
REVENUE RECOGNITION
The Company recognizes revenue from the sales of systems and supplies at the
time of shipment and satisfaction of significant vendor obligations, if any, net
of an allowance for estimated sales returns. The Company generally warrants its
systems for one year. A provision for estimated future costs relating to
warranty is recorded when systems are shipped.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
INVENTORIES
Inventories are carried at standard costs which approximate the lower of
actual cost (first-in; first-out) or market. Such amounts include the cost of
materials and, when applicable, labor and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Capitalized leases are recorded at the lower of fair market value or the present
value of future minimum lease payments, less accumulated amortization.
Maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation and amortization of property and equipment sold or
retired are removed from the accounts and the resulting gains or losses are
included in current operations. Depreciation and amortization are provided on a
straight line basis over the estimated useful lives of the related asset, or
with respect to leasehold improvements and capital leases by the primary term of
the lease, whichever is less, as follows:
<TABLE>
<S> <C>
Equipment and software, including capitalized leases............... 5 years
Furniture and fixtures............................................. 7 years
Leasehold improvements............................................. 3 years
</TABLE>
F-9
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," was issued. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS No. 121 was
effective for fiscal years beginning after December 15, 1995. The impact of the
adoption of SFAS No. 121 was not material to the Company's consolidated
financial statements.
ADVERTISING AND PROMOTION COSTS
Production costs of future media advertising and costs of dental industry
trade shows are deferred until the advertising or trade show occurs. All other
advertising and promotion costs are expensed as incurred. Total advertising and
promotion expenses incurred for the ten-month period ended December 31, 1996
were $1,008,879 and for the period from inception (October 23, 1995) through
March 2, 1996 were $437,590.
RESEARCH AND DEVELOPMENT COSTS
Costs related to research and development are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
STOCK-BASED EMPLOYEE COMPENSATION AWARDS
Statement of Financial Accounting Standards No. 123, "Accounting for the
Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") encourages,
but does not require companies to record compensation cost for stock-based
compensation plans at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123, which involves proforma disclosure of net income
under SFAS No. 123, detailed descriptions of plan terms and assumptions used in
valuing stock option grants. The Company has chosen to continue to account for
stock-based employee compensation awards in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash deposits and trade
accounts receivable. The Company's cash deposits are placed with various
financial institutions and, from time to time, may exceed the Federal Deposit
Insurance Corporation limit.
F-10
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the ten month period ended December 31, 1996, five of the Company's
customers accounted for approximately 21% of sales and as of December 31, 1996,
six of the Company's customers, primarily international distributors, accounted
for approximately 75% of trade accounts receivable. For the ten-month period
ended December 31, 1996, the Company had export sales of approximately
$2,200,000 ($1,200,000 Europe; $400,000 Australia; $310,000 Canada and $290,000
other). No customer accounted for more than 10% of revenues and there were no
export sales in the period ended March 2, 1996.
The Company extends credit based on an ongoing credit evaluation of its
customers' financial condition and generally does not require collateral.
Estimated credit losses and returns have been provided for in the financial
statements and, to date, have been within management's expectations.
The majority of the Company's current customers consist of dental
professionals. Certain of the dental professionals lease the Company's products
through third party leasing companies. Under the terms of the sales, the leasing
companies have no recourse against the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires disclosure of fair value information
about all financial instruments held by a company except for certain excluded
instruments and instruments for which it is not practical to estimate fair
value. The carrying value of the Company's financial instruments approximates
their fair value.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed based on the weighted average number
of common and common equivalent shares outstanding during the periods presented,
using the treasury stock method. Common stock equivalents related to warrants
and stock options are excluded from the computation when their effect is
antidilutive.
5. RELATED PARTY TRANSACTIONS
In October 1996, the Company entered into an agreement with Boston Marketing
pursuant to which the Company obtained worldwide marketing rights in the dental
market for the Teli Units as well as the right to use the "TeliCam" trademark.
At the time the Company entered into this agreement, Hiroki Umezaki was an
officer, director and principal shareholder of the Company and is a substantial
shareholder and the President of Boston Marketing. At December 31, 1996 and
March 2, 1996 the Company owed Boston Marketing approximately $247,500 and
$674,218, respectively, in connection with Teli Units purchased by the Company.
For the ten-month period ended December 31, 1996, the Company purchased 2,509
Teli Units at an aggregate cost of $1,881,750 and from inception (October 23,
1995) through March 2, 1996, the Company purhased 905 Teli Units at an aggregate
cost of $674,218 from Boston Marketing. In addition, the Company had an
agreement with Mr. Umezaki pursuant to which he was to receive a 15% commission
on all sales made by the Company in Asia, except Japan for which his commission
was to be 12%. This agreement resulted in Mr. Umezaki earning $15,000 in
commissions for the ten-month period ended December 31, 1996.
From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing, an
affiliate of Mr. Umezaki, loaned the Company an aggregate of $377,015. The
promissory notes evidencing such loans bear interest at 6% per
F-11
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
annum and were originally payable within six months. On February 26, 1996, the
Company repaid $50,000 to each of Mr. Gurevitch and Boston Marketing. No
interest has been paid on the remaining principal balance of these notes
although interest has been accrued in the Company's financial statements. In
November 1996, Mr. Gurevitch and Boston Marketing each agreed to extend the term
of their respective notes until the earlier to occur of: (i) twenty-four months
following the closing of the Bridge Financing (see Note 11); (ii) at such time
as the Company receives proceeds from the sale of the Common Stock in connection
with a public offering; or (iii) the repayment of the Bridge Notes in full. In
addition, on April 11, 1996, Boston Marketing loaned the Company an additional
$25,000 under similar terms ("April Loan"). The April Loan was repaid in full on
August 26, 1996.
Mr. Gurevitch and Mr. Umezaki have guaranteed the performance by the Company
under the Company's leases for its Irvine and Westlake premises, and Mr.
Gurevitch has also personally guaranteed the Company's credit card processing
agreement with the Checkfree Corporation.
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ------------
<S> <C> <C>
Raw materials.................................................... $ 789,464 $ 754,946
Work in process.................................................. 136,786 49,164
Finished goods................................................... 586,825 267,975
------------ ------------
$1,513,075 $ 1,072,085
------------ ------------
------------ ------------
</TABLE>
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ------------
<S> <C> <C>
Prepaid advertising and industry trade show fees................. $ 178,281 $ 117,495
Other............................................................ 30,271 35,490
------------ ------------
$ 208,552 $ 152,985
------------ ------------
------------ ------------
</TABLE>
F-12
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ----------
<S> <C> <C>
Equipment and software, including $102,867 and $96,870 of
capitalized leases at December 31, 1996 and March 2, 1996........ $ 342,989 $ 191,705
Furniture and fixtures............................................. 116,152 61,352
Leasehold improvements............................................. 5,761 5,162
------------ ----------
464,902 258,219
Less accumulated depreciation and amortization, including $20,341
and $3,368 relating to capitalized leases at December 31, 1996
and at March 2, 1996............................................. (71,324) (9,219)
------------ ----------
$ 393,578 $ 249,000
------------ ----------
------------ ----------
</TABLE>
9. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ----------
<S> <C> <C>
Accrued commissions................................................ $ 257,341 $ 32,516
Accrued warranty................................................... 56,515 38,444
Accrued salaries and wages......................................... 42,159 45,432
Accrued interest................................................... 34,552 1,822
Other.............................................................. 71,889 71,760
------------ ----------
$ 462,456 $ 189,974
------------ ----------
------------ ----------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases two facilities under various operating leases which
expire in 1998 and 2000. The leases require the Company to pay taxes,
maintenance fees, and insurance and provide for periodic fixed rent increases
based on a published price index. The Company also leases certain equipment
under capital leases which expire in 2000 and has the right to purchase the
underlying equipment at the termination of the leases for its fair market value.
Rent expense for all operating leases was approximately $102,000 and $38,000 for
the ten-month period ended December 31, 1996 and for the period from inception
(October 23, 1995) to March 2, 1996, respectively. All non-cancelable leases are
guaranteed by Robert H. Gurevitch, Chief Executive Officer and Chairman of the
Board of the Company. The other facility lease is co-guaranteed by Hiroki
Umezaki, former Executive Vice President, director, Secretary, and stockholder
of the Company.
F-13
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The aggregate liability for future rentals under these lease agreements as
of December 31, 1996, is summarized as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED DECEMBER 31 LEASES LEASES
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
1997.................................................................. $ 29,795 $ 116,359
1998.................................................................. 28,077 109,026
1999.................................................................. 25,672 70,008
2000.................................................................. 22,539 61,257
---------- ----------
106,083 $ 356,650
----------
----------
Less amounts representing:
Interest............................................................ 21,587
Current portion..................................................... 18,468
----------
Long term portion..................................................... $ 66,028
----------
----------
</TABLE>
11. CAPITAL TRANSACTIONS
As previously described in Note 3, for accounting purposes, the acquisition
of DMD and BDI was treated as a recapitalization of DMD and BDI, whereby the
previously outstanding shares and interests of DMD and BDI were exchanged for
1,706,626 shares of DMDS (formerly Edudata) restricted common stock and 856,692
shares of common stock were issued for the approximately $660,000 in cash and
cash equivalents held by DMDS ($606,000 net of issuance costs of approximately
$54,000). Accordingly, DMD's and BDI's historical shareholder's equity and
members' interest activity prior to the acquisition has been retroactively
restated for the equivalent number of DMDS' common shares received in the
transaction.
The capital transactions of DMD and BDI prior to the acquisition of DMD and
BDI by the Company have been restated as if (i) the Company issued 870,379
shares of its common stock to Robert Gurevitch, Chief Executive Officer and
Chairman of the Board for cash payments totaling approximately $388,235 or $.44
per share; (ii) the Company issued 546,121 shares of its common stock to Hiroki
Umezaki, Executive Vice-president, director, and Secretary of the Company for
cash payments totaling approximately $243,000, or $.44 per share; and (iii) in
exchange for services, 290,126 shares of the Company's common stock were issued
to three employees and valued at approximately $128,000, or $.44 per share for
which compensation expense was included in the consolidated statements of
operations.
On May 30, 1996, the Company completed the sale of a total of 422,219 shares
of its common stock to six foreign investors. Each share was sold at a price of
$2.58 per share and, consequently, the Company raised approximately $1,055,000
from the sale, net of related expenses of approximately $34,000.
On November 27, 1996, the Company raised $1,314,766, net of issuance costs
of $285,234, through a private placement of 32 Units to certain accredited
investors. Each Unit consisted of a secured promissory note in the principal
amount of $50,000 ("Note") and a warrant ("Bridge Warrant") to purchase 18,750
shares of Common Stock at a purchase price of $2.67 per share. The Notes bear
interest at a rate of 10% per annum and the principal and all accrued interest
are payable upon the earliest to occur of: (a) May 27, 1998; (b) certain change
in control events effecting the Company; (c) a public offering of the Company's
F-14
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CAPITAL TRANSACTIONS (CONTINUED)
securities; or (d) the sale by the Company's Chief Executive Officer of all or
substantially all of his holdings of Common Stock. Upon the happening of certain
events the holders of the Notes will have the right to convert the outstanding
balances of their Notes into shares of Common Stock at a rate of $2.67 per
share. The Warrants are first exercisable on November 27, 1997 and expire on
November 27, 2002. As a result of the warrant issuance, these Notes have been
discounted by $259,103, which amount is being amortized over the term of the
Notes.
12. STOCK OPTIONS
During the ten-month period ended December 31, 1996, the Company granted
stock options to certain executives, key employees and outside directors. The
options were granted with an exercise price equal to the fair value of the
common stock at the date of grant, are fully vested and are exercisable over a
period of five years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions (i)
risk-free interest rate of 6.85%, (ii) expected option life of 5 years, (iii)
forfeiture rate of 0, (iv) expected volatility of 143% and (v) no expected
dividends.
A summary of stock option activity with executives, key employees and
outside directors is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE
NUMBER OF AVERAGE OPTION GRANT DATE FAIR
SHARES EXERCISE PRICE VALUE
----------- --------------- -----------------
<S> <C> <C> <C>
Options outstanding at March 2, 1996............................... -- $ -- $ --
Granted............................................................ 139,943 2.63 2.11
Exercised.......................................................... -- -- --
----------- ----- -----
Options outstanding at December 31, 1996........................... 139,943 $ 2.63 $ 2.11
----------- ----- -----
----------- ----- -----
Options exercisable at December 31, 1996........................... 139,943 $ 2.63
----------- -----
----------- -----
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<S> <C>
Range of exercise prices........................................ $.88-2.93
Weighted average remaining contractual life..................... 51 months
</TABLE>
The Company has adopted the disclosure only provisions of SFAS No. 123 and
accordingly, no compensation expense has been recognized for stock options
granted to executives, key employees, and outside directors. Had compensation
expense for such grants been determined based on the fair value of the award at
the grant date, consistent with the provisions of SFAS No. 123, the Company's
net income and income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<S> <C>
Net income--as reported.......................................... $ 137,151
---------
---------
Net loss--pro forma.............................................. $(158,129)
---------
---------
Income per share--as reported.................................... $ 0.05
---------
---------
Loss per share--pro forma........................................ $ (0.06)
---------
---------
</TABLE>
F-15
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS (CONTINUED)
Under SFAS No. 123 stock options granted to other than employees have been
excluded from the tables above as such grants are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measured, similar to the treatment
described below.
In addition to the stock options granted to executives, key employees and
outside directors, the Company also issued stock options to various
non-employees for past or future services. As of December 31, 1996 options to
purchase 80,211 shares of common stock were held by non-employees with an
exercise price of $.88-$2.93 per share, exercisable over five to ten years.
Certain of these options vest 20% per year over five years. Compensation expense
of $47,200 was recognized during the ten-month period ended December 31, 1996 in
connection with the issuance of these options.
13. INCOME TAXES
The income tax expense (benefit) for the ten-month period ended December 31,
1996 is as follows:
<TABLE>
<S> <C>
Current:
Federal......................................................... $ 132,570
State........................................................... 36,000
---------
168,570
---------
Deferred:
Federal......................................................... (67,000)
State........................................................... (23,000)
---------
(90,000)
---------
Total............................................................. $ 78,570
---------
---------
</TABLE>
The Company's effective tax rate for the ten-month period ended December 31,
1996 differs from the statutory federal income tax rate as follows:
<TABLE>
<S> <C>
Tax provision at the statutory rate................................. 34%
Nondeductible expenses.............................................. 10
State taxes, net of federal benefit................................. 14
Reduction in deferred asset valuation allowance..................... (27)
Other............................................................... 5
--
36%
--
--
</TABLE>
There was no tax expense for the period from inception (October 23, 1995)
through March 2, 1996 due principally to DMD being formed as a limited liability
company and, prior to the acquisition by DMDS, having elected to be taxed as a
partnership. Due to the net operating loss incurred, however, treatment as a C
corporation would not have resulted in tax expense for the period from inception
through March 2, 1996.
F-16
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
The components of the net deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ----------
<S> <C> <C>
Deferred Tax Assets:
Inventory reserves................................................ $ 28,300 $ 26,900
Warranty accrual.................................................. 22,600 15,400
Allowance for returns and doubtful accounts....................... 37,900 11,000
Other............................................................. 1,200 4,300
Valuation allowance............................................... -- (57,600)
------------ ----------
$ 90,000 $ --
------------ ----------
------------ ----------
</TABLE>
Based on the level of taxable income generated by the Company in the current
period, management believes it is more likely than not that the Company will
realize the benefit of its recorded net deferred tax asset.
14. SUBSEQUENT EVENTS (UNAUDITED)
Effective February 11, 1997 the Company's Board of Directors approved the
adoption of the 1997 Stock Incentive Plan ("Plan"). The Plan provides for the
grant of stock awards to directors, employees, officers and consultants of the
Company. A maximum of 350,000 shares of Common Stock are authorized and reserved
for issuance under the Plan.
On February 13, 1997, the Company received a commitment letter from a bank
to provide a $2,000,000 line of credit, to be secured by a first priority
security interest in the Company's assets and by an assignment of the Company's
rights under the Boston Marketing Distribution Agreement. The credit facility
will bear interest monthly at the bank's prime rate, plus one-quarter of one
percent, through June 1, 1998. All borrowings under the facility will be subject
to a formula based, generally, on the levels of accounts receivable and
inventory.
F-17
<PAGE>
[Back Inside Cover:Photograph and diagrams depicting the InTELInet system and
other sytsems.]
Captions include:
[IT'S THE DIFFERENCE]
- - Exclusive Microporocessor Technology.
- - Printer is an option, not a requirement.
- - Printer breakdown does not mean system shutdown.
- - Simultaneous use of multiple cameras without printer or external capture
device.
- - Sturdy, fully adjustable wall mounted bracket holds 20" monitor securely.
- - Adjustable wall mounting system operates TeliCam convenience. Pole mount also
available.
- - Built-in VCR for patient education & entertainment.
- - TeliCam is designed for ease of use and efficiency.
- - Convenient shelf for CDI player, etc.
INTELINET -- One cable is routed from each operatory to the printer hub. Monitor
and optional foot pedal connect directly to TeliCam. All cameras in the system
can be used simultaneously.
TYPICAL NETWORK -- Only one camera can be used at a time. Simultaneous use of
cameras requires additional printers, cabling and installation.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
The Company.................................... 16
Use of Proceeds................................ 17
Dilution....................................... 19
Capitalization................................. 20
Price Range of the Common Stock................ 21
Dividend Policy................................ 21
Selected Consolidated Financial Data...........
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 26
Management..................................... 36
Principal Stockholders......................... 41
Certain Transactions........................... 42
Description of Securities...................... 43
Shares Eligible For Future Sale................ 47
Selling Securityholders and Plan of
Distribution................................. 48
Underwriting................................... 50
Legal Matters.................................. 51
Experts........................................ 52
Available Information.......................... 52
Index to Financial Statement................... F-1
</TABLE>
DENTAL/MEDICAL
DIAGNOSTIC SYSTEMS, INC.
[LOGO]
1,500,000 SHARES OF COMMON STOCK
AND
1,500,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
---------------------
PROSPECTUS
---------------------
M. H. MEYERSON & CO., INC.
FOUNDED 1960
525 WASHINGTON BOULEVARD
JERSEY CITY, NEW JERSEY 07310
<TABLE>
<S> <C> <C>
TRADING
RETAIL SALES & SYNDICATE INSTITUTIONAL
DEPARTMENT DEPARTMENT DEPARTMENT
201-459-9500 201-459-9600 201-332-3513
800-888-8118 800-333-3113 800-422-4114
</TABLE>
INVESTMENT BANKING
DEPARTMENT
201-459-9459
800-444-4114
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION.
As permitted by the Delaware General Corporation Law ("DGCL"), the Company's
Amended and Restated Certificate of Incorporation limits the personal liability
of directors to the Company for monetary damages for certain breaches of
fiduciary duty. Liability is not eliminated for (i) any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) unlawful payment of dividends or stock purchases or redemptions
pursuant to Section 174 of the DGCL, or (iv) any transaction from which the
director derived an improper personal benefit.
The Company has also entered into indemnification agreements with each of
its directors and executive officers. The indemnification agreements provide
that the directors and executive officers will be indemnified to the fullest
extent permitted by applicable law against all expenses (including attorneys'
fees), judgments, fines and amounts reasonably paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, on account of their services as a director or
officer of the Company or of any subsidiary of the Company or of any other
company or enterprise in which they are serving at the request of the Company.
No indemnification will be provided under the indemnification agreements,
however, to any director or executive officer in certain limited circumstances,
including on account of knowingly fraudulent, deliberately dishonest or willful
misconduct. To the extent the provisions of the indemnification agreements
exceed the indemnification permitted by applicable law, such provisions may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to public policy.
The Company is currently seeking estimates on obtaining a directors and
officers liability insurance policy. The Company intends to obtain such a policy
provided the costs of obtaining the policy are not prohibitively expensive as
compared to the amount of coverage which may be obtained.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission ("Commission")
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses payable by the Company in
connection with the issuance and distribution of the securities being registered
(other than underwriting discounts and selling commissions payable by the
Registrant), in connection with the offering described in the Registration
Statement. All of the amounts shown are estimates except the registration fee
and the NASD filing fees.
<TABLE>
<S> <C>
SEC registration fee...................................................... $ 8,885
NASD filing fee........................................................... 3,444
Boston Stock Exchange listing fee......................................... $ 15,000
Nasdaq listing fee........................................................ 10,000
Accounting fees and expenses.............................................. 50,000
Legal fees and expenses................................................... 255,000
Blue sky legal fees and expenses (including attorneys fees)............... 50,000
Printing, delivery expenses............................................... 85,000
Transfer agent fees and expenses.......................................... 10,000
Directors' and Officers' Liability Insurance.............................. 63,000
Miscellaneous expenses.................................................... 68,421
---------
Total................................................................. $ 618,750
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Except as hereinafter set forth, there have been no sales of unregistered
securities by the Registrant during the past three years.
On March 1, 1996, the Company completed the acquisition of BDI and DMD which
was treated, for accounting purposes, as a recapitalization of BDI and DMD,
respectively. Previously outstanding shares and interests of BDI and DMD,
respectively, were exchanged for 1,706,626 shares of the Company's restricted
Common Stock and 856,692 shares of Common Stock were issued for the
approximately $660,000 in cash and cash equivalents held by the Company. The
Company relied upon Section 4(2) of the Securities Act of 1933, as amended (the
"Act") for an exemption from the registration requirements of the Act, and upon
Section 25102(f) of the California Corporate Securities Law of 1968 (the "CCSL")
for an exemption from the qualification requirements of the CCSL.
On May 30, 1996, the Company completed the sale of a total of 422,219 shares
of its Common Stock to six foreign investors for which the Company received
approximately $1,055,000. The Company relied on Regulation S for an exemption
from the registration requirements of the Act.
During the ten-month period ended December 31, 1996 the Company issued
options to certain key employees, directors and consultants or other
non-employees to purchase 220,154 shares of its Common Stock, of which all such
options remain issued and outstanding. The Company relied upon Section 4(2) of
the Act for an exemption from the registration requirements of such Act, and
upon Section 25102(f) of the CCSL for an exemption from the qualification
requirements of the CCSL.
On November 27, 1996, the Company effected a private placement of 32 Units
to certain accredited investors. Each Unit consisted of a $50,000 convertible
promissory note and a warrant to purchase 18,750 shares of the Common Stock,
thereby raising $1,314,766. The Company relied upon Section 4(2) of the Act and
Rule 506 of Regulation D for an exemption from the registration requirements of
the Act and upon Section 25102(f) and other available state limited offering
exemptions from the qualification provisions of the CCSL and blue sky laws of
other states.
II-2
<PAGE>
ITEM 27. EXHIBITS.
The following exhibits to this Registration Statement are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
1.1. Form of Underwriting Agreement.
1.2. Form of Underwriter's Purchase Option granted to M.H. Meyerson & Co., Inc.
2.l. Contribution Agreement, dated February 29, 1996, by and among the Registrant and Robert H. Gurevitch,
Hiroki Umezaki, Fred Kinley and Dewey Perrigo, as Members of United Medical Diagnostic Systems, LLC. (3)
2.2. Contribution Agreement, dated February 29, 1996, by and among the Registrant and Robert H. Gurevitch,
Anatoly Borodyansky and Dewey Perrigo, as stockholders of Bavarian Dental Instruments, Inc. (3)
2.3. Dental\Medical Diagnostic Systems, Inc. 1997 Stock Incentive Plan. (3)
3.1. Amended and Restated Certificate of Incorporation of the Registrant.
3.2. Bylaws of the Registrant. (3)
4.1. Specimen Stock Certificate of the Registrant.
4.2. Form of Warrant Agreement between American Stock Transfer & Trust Company and the Registrant, including
form of Warrant Certificate.
5.1. Opinion and Consent of Troop Meisinger Steuber & Pasich.*
10.1. Agency Agreement dated as of October 23, 1996, by and between the Registrant and M.H. Meyerson & Co.,
Inc. (2)
10.2. Form of Subscription Agreement. (2)
10.3. Supplement No. 1 to Confidential Term Sheet, dated November 14, 1996 (2)
10.5. Form of Secured Convertible Promissory Note, dated as of November 25, 1996. Issued by the Registrant and
a Schedule of Warrant Holders. (2)
10.6. Form of Warrant for the Purchase of Shares of Common Stock, dated as of November 25, 1996. Issued by the
Registrant and a Schedule of Warrant holders. (2)
10.7. Form of Lock-Up Agreement Letter, dated January 31, 1997, addressed to M.H. Meyerson & Co., Inc. from
certain purchasers of the Registrant's Common Stock. (3)
10.8. Form of Registration Rights Agreement Letter, dated January 31, 1997, from Registrant to those certain
Purchasers of Registrant's Common Stock listed on the Schedule thereto. (3)
10.9. Commitment Letter, dated February 13, 1997, from Comerica Bank confirming extension of secured line of
credit for Registrant. (3)
10.10. Security Agreement, dated as of November 25, 1996. Entered into by the Registrant. (2)
10.11. Employment Agreement, dated as of October 1, 1996, between the Registrant and Robert H. Gurevitch. (2)
10.12. Employment Agreement, dated as of October 1, 1996, between the Registrant and Dewey Perrigo. (2)
10.13. Letter of Intent, dated August 23, 1996, between the Registrant and Olympus Japan Co., Ltd. (3)
10.14. Distribution Agreement, dated as of October 1, 1996, between the Registrant and Boston Marketing Company,
Ltd., as amended. (3)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
10.15. Distributor Agreement, dated August 29, 1996, between the Registrant and 479671 BC Ltd. d/ b/a/ National
Dental Direct. (3)
10.16. Distributor Agreement, dated June 1, 1996, between the Registrant and Michel Van Gerven, Imaging Concepts
N.V. (3)
10.17. Distributor Agreement, dated May 23, 1996, between the Registrant and New Image Industries Pty Ltd NII.
(3)
10.18. Distributor Agreement, dated September 19, 1996, between the Registrant and Macana, Inc. d/b/a Florida
Dental and Medical Supply. (3)
10.19. Form of Distributor Agreement, dated May 30, 1996, between the Registrant and David Lok. (3)
10.20. Sales Representative Agreement, dated October 28, 1996, between the Registrant and Boston Marketing
Company, Ltd. (3)
10.21. Exclusive Purchase Agreement, dated October 28, 1996, between the Registrant and Fujimi Optics Corp. (3)
10.22. 1996 Systems Integrator/Value Added Integrator Agreement, dated April 1, 1996, between the Registrant and
Sony Business & Professional Products Group, Sony Electronics, Inc. (3)
10.23. Letter of Authorization, dated December 25, 1995, from JV Dentomal in favor of BDI; and Exclusive
Purchase Agreement, dated December 25, 1995, made by JV Dentomal in favor of BDI. (1)
10.24. Letter of Authorization, dated January 3, 1996, from NPO Altech in favor of BDI; and Declaration of
Exclusive Rights, dated December 24, 1995, made by NPO Altech in favor of BDI.
10.25. Promissory Note, dated February 1, 1996, made by the Registrant in favor of Boston Marketing Company,
Ltd. (3)
10.26. Promissory Note, dated February 15, 1996, made by the Registrant in favor of Boston Marketing Company,
Ltd. (3)
10.27. Promissory Note, dated April 11, 1996, made by the Registrant in favor of Boston Marketing Company, Ltd.
(3)
10.28. Extension of Promissory Note, dated November 5, 1996, between the Registrant and Boston Marketing
Company, Ltd. (2)
10.29. Promissory Note, dated February 1, 1996, between the Registrant and Robert H. Gurevitch. (3)
10.30. Promissory Note, dated February 15, 1996, made by the Registrant in favor of Robert H. Gurevitch. (3)
10.31. Extension of Promissory Note, dated November 5, 1996, between the Registrant and Robert H. Gurevitch. (2)
10.32. Standard Office Lease, dated October 30, 1995, between John Hancock Mutual Life Insurance Company ("John
Hancock") and the Registrant, for Suite 202 at 200 North Westlake Boulevard Office; and Guaranty of
Lease, dated November 6, 1995, made by Robert H. Gurevitch in favor of John Hancock. (3)
10.33. Industrial Lease, dated October 23, 1995, between Registrant and The Irvine Company, for One Technology
Park Office. (3)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
10.34. Commercial Security Agreement, dated April 15, 1996, between the Registrant and Hitachi Home Electronics
(America), Inc.
10.35. Form of Indemnification Agreement and Schedule of Indemnified Parties. (3)
10.36. Form of Notice of Vested Stock Option Letter and Schedule of Recipients.
11.1. Statement Re: Computation of per share earnings. (3)
21.1. Subsidiaries of the Registrant. (3)
23.1. Consent of Coopers & Lybrand, L.L.P.
23.2. Consent of Troop Meisinger Steuber & Pasich, LLP (included in Exhibit 5.1)
24.1. Power of Attorney (included in Part II, Page 6).
27.1. Financial Data Schedule.(3)
</TABLE>
- ------------------------
* To be filed by amendment.
(1) Incorporated by reference to the Registrant's Report on Form 8-K , dated
March 1, 1996.
(2) Incorporated by reference to the Registrant's Report on Form 10-QSB, dated
November 30, 1996
(3) Previously filed.
ITEM 28. UNDERTAKINGS.
(a) The undersigned small business issuer hereby undertakes that it will:
(1) 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.
(2) For determining liability under the Securities Act of 1933 ("Act"),
treat each post-effective amendment as a new Registration Statement of
securities offered, and the offering of the securities at the time to be the
initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Certificate of Incorporation or Bylaws of the Registrant and the
Delaware General Corporation Law or otherwise, the Registrant has been advised
II-5
<PAGE>
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 a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has already been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and shall be governed by the final
adjudication of such issue.
(d) (1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in the form of prospectus filed by the
Registrant under Rule 424(b)(1) or (4) or 497(h) under the Act as part of this
Registration Statement as of the time the Commission declared it effective; and
(2) For determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement of the securities offered in the Registration
Statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Westlake Village, California on the 7th day of April 1997.
DENTAL/MEDICAL DIAGNOSTICS SYSTEMS,
INC.
By: /s/ ROBERT H. GUREVITCH
--------------------------------------
Robert H. Gurevitch,
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert H. Gurevitch and Ronald E. Wittman, or any
one of them, his attorney-in-fact and agent, with full power of substitution,
for him or her in any and all capacities, to sign any amendments to this
Registration Statement on Form SB-2, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact, or
their substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form SB-2 has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------------- ------------------------------------ --------------------
<S> <C> <C>
/s/ ROBERT H. GUREVITCH Chairman of the Board, Chief April 7, 1997
--------------------------------------- Executive Officer, President and
Robert H. Gurevitch Secretary
/s/ JACK D. PRESTON Director April 7, 1997
---------------------------------------
Jack D. Preston
/s/ MARVIN H. KLEINBERG Director April 7, 1997
---------------------------------------
Marvin H. Kleinberg
</TABLE>
II-7
<PAGE>
UNDERWRITING AGREEMENT
BETWEEN
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
AND
M.H. MEYERSON & CO., INC.
DATED: _________ __, 1997
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TABLE OF CONTENTS
PAGE
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1. PURCHASE AND SALE OF SECURITIES.. . . . . . . . . . . . . . . . . . . . . 1
1.1 FIRM SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1.1 PURCHASE OF FIRM SECURITIES. . . . . . . . . . . . . . . . . 1
1.1.2 PAYMENT AND DELIVERY . . . . . . . . . . . . . . . . . . . . 1
1.2 OVER-ALLOTMENT OPTION . . . . . . . . . . . . . . . . . . . . . . . 2
1.2.1 OPTION SECURITIES. . . . . . . . . . . . . . . . . . . . . . 2
1.2.2 EXERCISE OF OPTION . . . . . . . . . . . . . . . . . . . . . 2
1.2.3 PAYMENT AND DELIVERY . . . . . . . . . . . . . . . . . . . . 2
1.3 UNDERWRITER'S PURCHASE OPTION . . . . . . . . . . . . . . . . . . . 3
1.3.1 PURCHASE OPTION. . . . . . . . . . . . . . . . . . . . . . . 3
1.3.2 PAYMENT AND DELIVERY . . . . . . . . . . . . . . . . . . . . 3
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . 3
2.1 FILING OF REGISTRATION STATEMENT. . . . . . . . . . . . . . . . . . 3
2.1.1 PURSUANT TO THE ACT. . . . . . . . . . . . . . . . . . . . . 3
2.1.2 PURSUANT TO THE EXCHANGE ACT . . . . . . . . . . . . . . . . 3
2.2 NO STOP ORDERS, ETC.. . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 DISCLOSURES IN REGISTRATION STATEMENT . . . . . . . . . . . . . . . 4
2.3.1 SECURITIES ACT AND EXCHANGE ACT REPRESENTATION . . . . . . . 4
2.3.2 DISCLOSURE OF CONTRACTS. . . . . . . . . . . . . . . . . . . 4
2.3.3 PRIOR SECURITIES TRANSACTIONS. . . . . . . . . . . . . . . . 4
2.4 CHANGES AFTER DATES IN REGISTRATION STATEMENT . . . . . . . . . . . 5
2.4.1 NO MATERIAL ADVERSE CHANGE . . . . . . . . . . . . . . . . . 5
2.4.2 RECENT SECURITIES TRANSACTIONS, ETC. . . . . . . . . . . . . 5
2.5 INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . 5
2.6 FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 5
2.7 AUTHORIZED CAPITAL; OPTIONS; ETC. . . . . . . . . . . . . . . . . . 5
2.8 VALID ISSUANCE OF SECURITIES; ETC . . . . . . . . . . . . . . . . . 5
2.8.1 OUTSTANDING SECURITIES . . . . . . . . . . . . . . . . . . . 5
2.8.2 SECURITIES SOLD PURSUANT TO THIS AGREEMENT . . . . . . . . . 6
2.9 REGISTRATION RIGHTS OF THIRD PARTIES. . . . . . . . . . . . . . . . 6
2.10 VALIDITY AND BINDING EFFECT OF AGREEMENTS . . . . . . . . . . . . . 6
2.11 NO CONFLICTS, ETC.. . . . . . . . . . . . . . . . . . . . . . . . . 6
2.12 NO DEFAULTS; VIOLATIONS . . . . . . . . . . . . . . . . . . . . . . 7
2.13 CORPORATE POWER; LICENSES; CONSENTS . . . . . . . . . . . . . . . . 7
2.13.1 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . 7
2.13.2 TRANSACTIONS CONTEMPLATED HEREIN . . . . . . . . . . . . . . 7
2.14 TITLE TO PROPERTY; INSURANCE. . . . . . . . . . . . . . . . . . . . 7
2.15 LITIGATION; GOVERNMENTAL PROCEEDINGS. . . . . . . . . . . . . . . . 8
2.16 GOOD STANDING . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.17 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.18 EMPLOYEES' OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 8
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2.19 TRANSACTIONS AFFECTING DISCLOSURE TO NASD . . . . . . . . . . . . . 8
2.19.1 FINDER'S FEES. . . . . . . . . . . . . . . . . . . . . . . . 8
2.19.2 PAYMENTS WITHIN TWELVE MONTHS. . . . . . . . . . . . . . . . 9
2.19.3 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . 9
2.19.4 INSIDERS' NASD AFFILIATION . . . . . . . . . . . . . . . . . 9
2.20 FOREIGN CORRUPT PRACTICES ACT . . . . . . . . . . . . . . . . . . . 9
2.21 NASDAQ AND BSE ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . 9
2.22 INTANGIBLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.23 RELATIONS WITH EMPLOYEES. . . . . . . . . . . . . . . . . . . . . .10
2.23.1 EMPLOYEE MATTERS . . . . . . . . . . . . . . . . . . . . . .10
2.23.2 EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . . . .10
2.24 OFFICERS' CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . .10
2.25 WARRANT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . .11
2.26 AGREEMENTS WITH INSIDERS. . . . . . . . . . . . . . . . . . . . . .11
2.27 SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.28 UNAUDITED FINANCIALS. . . . . . . . . . . . . . . . . . . . . . . .11
2.29 PRODUCT LIABILITY INSURANCE . . . . . . . . . . . . . . . . . . . .11
3. COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . .11
3.1 AMENDMENTS TO REGISTRATION STATEMENT. . . . . . . . . . . . . . . .11
3.2 FEDERAL SECURITIES LAWS . . . . . . . . . . . . . . . . . . . . . .11
3.2.1 COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . .11
3.2.2 FILING OF FINAL PROSPECTUS . . . . . . . . . . . . . . . . .12
3.2.3 EXCHANGE ACT REGISTRATION. . . . . . . . . . . . . . . . . .12
3.3 BLUE SKY FILING . . . . . . . . . . . . . . . . . . . . . . . . . .12
3.4 DELIVERY TO THE UNDERWRITER OF PROSPECTUSES . . . . . . . . . . . .12
3.5 EVENTS REQUIRING NOTICE TO THE UNDERWRITER. . . . . . . . . . . . .12
3.6 REVIEW OF FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . .13
3.7 RESERVED. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
3.8 SECONDARY MARKET TRADING AND STANDARD & POOR'S. . . . . . . . . . .13
3.9 NASDAQ MAINTENANCE. . . . . . . . . . . . . . . . . . . . . . . .13
3.10 WARRANT SOLICITATION AND REGISTRATION OF COMMON STOCK UNDERLYING THE
WARRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
3.10.1 WARRANT SOLICITATION FEES. . . . . . . . . . . . . . . . . .13
3.10.2 REGISTRATION OF COMMON STOCK . . . . . . . . . . . . . . . .14
3.11 REPORTS TO THE UNDERWRITER AND OTHERS . . . . . . . . . . . . . . .14
3.11.1 PERIODIC REPORTS, ETC. . . . . . . . . . . . . . . . . . . .14
3.11.2 TRANSFER SHEETS AND WEEKLY POSITION LISTINGS . . . . . . . .14
3.11.3 SECONDARY MARKET TRADING MEMORANDUM. . . . . . . . . . . . .14
3.12 AGREEMENTS BETWEEN THE UNDERWRITER AND THE COMPANY. . . . . . . . .14
3.12.1 Underwriter's Purchase Option. . . . . . . . . . . . . . . .14
3.13 DISQUALIFICATION OF FORM SB-2 . . . . . . . . . . . . . . . . . . .14
3.14 PAYMENT OF EXPENSES . . . . . . . . . . . . . . . . . . . . . . . .15
3.14.1 GENERAL EXPENSES . . . . . . . . . . . . . . . . . . . . . .15
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3.14.2 NON-ACCOUNTABLE EXPENSES . . . . . . . . . . . . . . . . . .15
3.15 APPLICATION OF NET PROCEEDS . . . . . . . . . . . . . . . . . . . .16
3.16 DELIVERY OF EARNINGS STATEMENTS TO SECURITY HOLDERS . . . . . . . .16
3.17 KEY PERSON LIFE INSURANCE . . . . . . . . . . . . . . . . . . . . .16
3.18 STABILIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . .16
3.19 INTERNAL CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . .16
3.20 ACCOUNTANTS AND LAWYERS . . . . . . . . . . . . . . . . . . . . . .16
3.21 TRANSFER AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.22 SALE OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . .17
4. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS . . . . . . . . . . . . . . .17
4.1 REGULATORY MATTERS. . . . . . . . . . . . . . . . . . . . . . . . .17
4.1.1 EFFECTIVENESS OF REGISTRATION STATEMENT. . . . . . . . . . .17
4.1.2 NASD CLEARANCE . . . . . . . . . . . . . . . . . . . . . . .17
4.1.3 NO BLUE SKY STOP ORDERS. . . . . . . . . . . . . . . . . . .17
4.2 COMPANY COUNSEL MATTERS . . . . . . . . . . . . . . . . . . . . . .17
4.2.1 EFFECTIVE DATE OPINION OF COUNSEL. . . . . . . . . . . . . .17
4.2.2 EFFECTIVE DATE OPINION OF REGULATORY COUNSEL . . . . . . . .21
4.2.3 CLOSING DATE AND OPTION CLOSING DATE OPINION OF COUNSEL. . .22
4.2.4 RELIANCE . . . . . . . . . . . . . . . . . . . . . . . . . .22
4.2.5 SECONDARY MARKET TRADING MEMORANDUM. . . . . . . . . . . . .22
4.3 COLD COMFORT LETTER. . . . . . . . . . . . . . . . . . . . . . . . .22
4.4 OFFICERS' CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . .24
4.4.1 OFFICERS' CERTIFICATE. . . . . . . . . . . . . . . . . . . .24
4.4.2 SECRETARY'S CERTIFICATE. . . . . . . . . . . . . . . . . . .24
4.5 NO MATERIAL CHANGES. . . . . . . . . . . . . . . . . . . . . . . . .24
4.6 DELIVERY OF AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . .25
4.7 OPINION OF COUNSEL FOR THE UNDERWRITER . . . . . . . . . . . . . . .25
4.8 OPINION OF SPECIAL REGULATORY CONSULTANT . . . . . . . . . . . . . .25
5. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
5.1 INDEMNIFICATION OF THE UNDERWRITER . . . . . . . . . . . . . . . . .25
5.1.1 GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . .25
5.1.2 PROCEDURE. . . . . . . . . . . . . . . . . . . . . . . . . .26
5.2 INDEMNIFICATION OF THE COMPANY . . . . . . . . . . . . . . . . . . .26
5.3 CONTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
5.3.1 CONTRIBUTION RIGHTS. . . . . . . . . . . . . . . . . . . . .26
5.3.2 CONTRIBUTION PROCEDURE . . . . . . . . . . . . . . . . . . .27
6. INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . . . . . . . . . . .27
7. ADDITIONAL COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . .27
7.1 BOARD DESIGNEE. . . . . . . . . . . . . . . . . . . . . . . . . . .27
7.2 PRESS RELEASES. . . . . . . . . . . . . . . . . . . . . . . . . . .28
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7.3 FORM S-8 OR ANY SIMILAR FORM. . . . . . . . . . . . . . . . . . . .28
7.4 COMPENSATION AND OTHER ARRANGEMENTS . . . . . . . . . . . . . . . .28
7.5 REGULATION S. . . . . . . . . . . . . . . . . . . . . . . . . . . .28
7.6 PUBLIC RELATIONS FIRM . . . . . . . . . . . . . . . . . . . . . . .28
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. . . . . . . . . . . .28
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF. . . . . . . . .28
9.1 EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . . . . . . .28
9.2 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
9.3 NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
9.4 EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
9.5 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . .29
10. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
10.1 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
10.2 HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
10.3 AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
10.4 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . .30
BINDING EFFECT. . . . . . . . . . . . . . . . . . . . . . . . . . .30
10.6 GOVERNING LAW; JURISDICTION . . . . . . . . . . . . . . . . . . . .30
10.7 EXECUTION IN COUNTERPARTS . . . . . . . . . . . . . . . . . . . . .31
10.8 WAIVER, ETC.. . . . . . . . . . . . . . . . . . . . . . . . . . . .31
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
1,500,000 Shares of Common Stock
and
1,500,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
New York, New York
______ ___, 1997
M.H. Meyerson & Co., Inc.
525 Washington Boulevard
Jersey City, New Jersey 07310
Ladies and Gentlemen:
The undersigned, Dental/Medical Diagnostic Systems, Inc., a Delaware
corporation (the "Company"), hereby confirms its agreement with M.H. Meyerson &
Co., Inc. ("MHM" being referred to herein variously as the "Underwriter" or
"you") as follows:
1. PURCHASE AND SALE OF SECURITIES.
1.1 FIRM SECURITIES.
1.1.1 PURCHASE OF FIRM SECURITIES. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to the
Underwriter and the Underwriter agrees to purchase from the Company 1,500,000
shares of the Company's Common Stock ("Common Stock") at a purchase price (net
of discounts commissions) of $____ per share ("Common Stock") and 1,500,000 of
Redeemable Common Stock Purchase Warrants ("Warrant(s)") at a purchase price of
$___ per Warrant, each Warrant entitling the holder thereof to purchase one
share of Common Stock at an initial purchase price of $5.00 per share commencing
one year after the Effective Date and expiring at the close of business on the
last day of the five-year period following the Effective Date (these shares of
Common Stock and Warrants being referred to herein as "Firm Securities").
1.1.2 PAYMENT AND DELIVERY. Delivery and payment for the Firm
Securities shall be made at 10:00 A.M., New York time, on or before the third
business day following the date that the Firm Securities commence trading or at
such earlier time as the Underwriter shall determine, or at such other time as
shall be agreed upon by the Underwriter and the Company at the offices of MHM or
at such other place as shall be agreed upon by the Underwriter and the Company.
The hour and date of delivery and payment for the Firm Securities are called the
"Closing Date." Payment for the Firm Securities shall be made on the Closing
Date at the Underwriter's election by wire transfer or by certified or bank
cashier's check(s) in New York Clearing House funds, payable to the order of the
Company upon delivery to you of certificates (in form and substance satisfactory
to the Underwriter) representing the Firm Securities for the account of the
Underwriter. The Firm Securities shall be registered in such name or names and
in such authorized denominations as the Underwriter may request in writing at
least two full business days prior to the Closing Date. The Company will permit
the Underwriter to examine and package the Firm Securities for delivery, at
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least one full business day prior to the Closing Date. The Company shall not be
obligated to sell or deliver the Firm Securities except upon tender of payment
by the Underwriter for all the Firm Securities.
1.2 OVER-ALLOTMENT OPTION.
1.2.1 OPTION SECURITIES. For the purposes of covering any over-
allotments in connection with the distribution and sale of the Firm Securities,
the Underwriter is hereby granted an option to purchase up to an additional
225,000 shares of Common Stock and/or 225,000 Warrants from the Company ("Over-
allotment Option"). Such additional 225,000 shares of Common Stock and 225,000
Warrants are hereinafter referred to as the "Option Securities." The Firm
Securities and the Option Securities are, together with the shares of Common
Stock issuable upon exercise of the Warrants, hereinafter referred to
collectively as the "Public Securities." The purchase price to be paid for the
Option Securities will be the same price per Option Security as the price per
Firm Security set forth in Section 1.1.1 hereof.
1.2.2 EXERCISE OF OPTION. The Over-allotment Option granted
pursuant to Section 1.2.1 hereof may be exercised by the Underwriter as to all
or any part of the Option Securities at any time, from time to time, within
forty-five days after the effective date ("Effective Date") of the Registration
Statement (as hereinafter defined). The Underwriter will not be under any
obligation to purchase any Option Securities prior to the exercise of the Over-
allotment Option. The Over-allotment Option granted hereby may be exercised by
the giving of oral notice to the Company from MHM, which must be confirmed
within 24 hours thereof by a letter or telecopy setting forth the number of
Option Securities to be purchased, the date and time for delivery of and payment
for the Option Securities and stating that the Option Securities referred to
therein are to be used for the purpose of covering over-allotments in connection
with the distribution and sale of the Firm Securities. If such notice is given
at least two full business days prior to the Closing Date, the date set forth
therein for such delivery and payment will be the Closing Date. If such notice
is given thereafter, the date set forth therein for such delivery and payment
will not be earlier than five full business days after the date of the notice,
unless we mutually agree to an earlier date. If such delivery and payment for
the Option Securities does not occur on the Closing Date, the date and time of
the closing for such Option Securities will be as set forth in the notice
(hereinafter the "Option Closing Date"). Upon exercise of the Over-allotment
Option, the Company will become obligated to convey to the Underwriter, and,
subject to the terms and conditions set forth herein, the Underwriter will
become obligated to purchase, the number of Option Securities specified in such
notice.
1.2.3 PAYMENT AND DELIVERY. Payment for the Option Securities
will be at the Underwriter's election by wire transfer or by certified or bank
cashier's check(s) in New York Clearing House funds, payable to the order of the
Company at the offices of MHM or at such other place as shall be agreed upon by
the Underwriter and the Company upon delivery to you of certificates
representing such securities for the account of the Underwriter. The
certificates representing the Option Securities to be delivered will be in such
denominations and registered in such names as the request not less than two full
business days prior to the Closing Date or the Option Closing Date, as the case
may be, and will be made available to the Underwriter for inspection, checking
and packaging at the aforesaid office of the Company's transfer agent or
correspondent not less than one full business day prior to such Closing Date.
2
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1.3 UNDERWRITER'S PURCHASE OPTION.
1.3.1 PURCHASE OPTION. The Company hereby agrees to issue and
sell to the Underwriter (and/or its respective designees) on the Closing Date
for an aggregate purchase price of $100, an option ("Underwriter's Purchase
Option"), exercisable at any time, in whole or in part, between the first and
fifth anniversary dates of the Effective Date, for the purchase of an aggregate
of 150,000 shares of Common Stock ("Underwriter's Shares") at an initial
exercise price of 110% of the initial offering price of a share of common stock
(i.e., $____ per share of Common Stock) and/or 150,000 Warrants ("Underwriter's
Warrants") at an initial exercise price 110% of the initial offering price of a
Warrant (i.e. $____ per Warrant). Each of the Underwriter's Shares and the
Underwriter's Warrants is identical to the Firm Securities. The Underwriter's
Purchase Option, the Underwriter's Shares, the Underwriter's Warrants and the
shares of Common Stock issuable upon exercise of the Underwriter's Warrants are
hereinafter referred to collectively as the "Underwriter's Securities." The
Public Securities and the Underwriter's Securities are hereinafter referred to
collectively as the "Securities."
1.3.2 PAYMENT AND DELIVERY. Delivery and payment for the Purchase
Option shall be made on the Closing Date. The Company shall deliver to the
Underwriter, upon payment therefor, certificates for the Purchase Option in the
name or names and in such authorized denominations as the Underwriter may
request.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to the Underwriter as follows:
2.1 FILING OF REGISTRATION STATEMENT.
2.1.1 PURSUANT TO THE ACT. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement and
an amendment or amendments thereto, on Form SB-2 (No. _____________) including
any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Public Securities under the Securities Act of 1933, as
amended ("Act"), which registration statement and amendment or amendments have
been prepared by the Company in conformity with the requirements of the Act, and
the rules and regulations ("Regulations") of the Commission under the Act.
Except as the context may otherwise require, such registration statement, as
amended, on file with the Commission at the time the registration statement
becomes effective (including the prospectus, financial statements, schedules,
exhibits and all other documents filed as a part thereof or incorporated therein
and all information deemed to be a part thereof as of such time pursuant to
paragraph (b) of Rule 430A of the Regulations), is hereinafter called the
"Registration Statement," and the form of the final prospectus dated the
Effective Date (or, if applicable, the form of final prospectus filed with the
Commission pursuant to Rule 424 of the Regulations), is hereinafter called the
"Prospectus." The Registration Statement has been declared effective by the
Commission on the date hereof.
2.1.2 PURSUANT TO THE EXCHANGE ACT. The Company has filed with
the commission a registration statement on Form 8-A providing for the
registration under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), of the Public Securities. Such registration of the Public Securities has
been declared effective by the Commission on the date hereof.
2.2 NO STOP ORDERS, ETC. Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use
3
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of any Preliminary Prospectus or has instituted or, to the best of the Company's
knowledge, threatened to institute any proceedings with respect to such an
order.
2.3 DISCLOSURES IN REGISTRATION STATEMENT.
2.3.1 SECURITIES ACT AND EXCHANGE ACT REPRESENTATION. At the time
the Registration Statement became effective and at all times subsequent thereto
up to and including the Closing Date and the Option Closing Date, if any, the
Registration Statement and the Prospectus and any amendment or supplement
thereto contained and will contain all material statements which are required to
be stated therein in accordance with the Act and the Regulations, and conformed
and will conform in all material respects to the requirements of the Act and the
Regulations; neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, during such time period and on such dates,
contained or will contain any untrue statement of a material fact or omitted or
will omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, nor did they or will they contain
any untrue statement of a material fact or did they or will they omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. When any Preliminary Prospectus was first filed with the
Commission (whether filed as part of the Registration Statement for the
registration of the Securities or any amendment thereto or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or supplement thereto
was first filed with the Commission, such Preliminary Prospectus and any
amendments thereof and supplements thereto at the time such filing was made
complied in all material respects with the applicable provisions of the Act and
the Regulations. The representation and warranty made in this Section 2.3.1
does not apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company with respect to the
Underwriter by the Underwriter expressly for use in the Registration Statement
or Prospectus or any amendment thereof or supplement thereto.
2.3.2 DISCLOSURE OF CONTRACTS. The description in the
Registration Statement and the Prospectus of contracts and other documents is
accurate and presents fairly the information required to be disclosed and there
are no contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement, which have not been so described or filed. Each
contract or other instrument (however characterized or described) to which the
Company is a party or by which its property or business is or may be bound or
affected and (i) which is referred to in the Prospectus, or (ii) is material to
the Company's business, has been duly and validly executed, is in full force and
effect in all material respects and is enforceable against the parties thereto
in accordance with its terms, and none of such contracts or instruments has been
assigned by the Company, and neither the Company nor, to the best of the
Company's knowledge, any other party is in default thereunder and, to the best
of the Company's knowledge, no event has occurred which, with the lapse of time
or the giving of notice, or both, would constitute a default thereunder. None
of the material provisions of such contracts or instruments violates or will
result in a violation of any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court having
jurisdiction over the Company or any of its respective assets or businesses,
including, without limitation, those relating to environmental laws and
regulations.
2.3.3 PRIOR SECURITIES TRANSACTIONS. No securities of the Company
have been sold by the Company within the three years prior to the date hereof,
except as disclosed in the Registration Statement.
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2.4 CHANGES AFTER DATES IN REGISTRATION STATEMENT.
2.4.1 NO MATERIAL ADVERSE CHANGE. Since the respective dates as
of which information is given in the Registration Statement and the Prospectus,
except as otherwise specifically stated therein, (i) there has been no material
adverse change in the condition, financial or otherwise, or in the results of
operations, business or business prospects of the Company, including, but not
limited to, a material loss or interference with its business from fire, storm,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, whether or
not arising in the ordinary course of business, and (ii) there have been no
transactions entered into by the Company, other than those in the ordinary
course of business, which are material with respect to the condition, financial
or otherwise, or to the results of operations, business or business prospects of
the Company.
2.4.2 RECENT SECURITIES TRANSACTIONS, ETC. Subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or
(ii) declared or paid any dividend or made any other distribution on or in
respect to its capital stock.
2.5 INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P., whose report is
filed with the Commission as part of the Registration Statement, are independent
accountants as required by the Act and the Regulations.
2.6 FINANCIAL STATEMENTS. The financial statements, including the notes
thereto and supporting schedules included in the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company at the dates and for the periods to which they apply; and such
financial statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods involved; and
the supporting schedules included in the Registration Statement present fairly
the information required to be stated therein.
2.7 AUTHORIZED CAPITAL; OPTIONS; ETC. The Company had at the date or
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions stated in the Registration Statement and the
Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company,
including any issuances pursuant to anti-dilution provisions, or any security
convertible into shares of Common Stock of the Company, or any contracts or
commitments to issue or sell shares of Common Stock or any such options,
warrants, rights or convertible securities.
2.8 VALID ISSUANCE OF SECURITIES; ETC.
2.8.1 OUTSTANDING SECURITIES. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of rescission
with respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the
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Company. The outstanding options and warrants to purchase shares of Common
Stock constitute the valid and binding obligations of the Company, enforceable
in accordance with their terms. The authorized Common Stock and outstanding
options and warrants to purchase shares of Common Stock conform in all material
respects to all statements relating thereto contained in the Registration
Statement and the Prospectus. The offers and sales of the outstanding Common
Stock, options and warrants to purchase shares of Common Stock were at all
relevant times either registered or qualified under the Act and the applicable
state securities or Blue Sky Laws or exempt from such registration requirements.
2.8.2 SECURITIES SOLD PURSUANT TO THIS AGREEMENT. The Securities
have been duly authorized and, when issued and paid for, will be validly issued,
fully paid and non-assessable; the holders thereof are not and will not be
subject to personal liability by reason of being such holders; the Securities
are not and will not be subject to the preemptive rights of any holders of any
security of the Company or similar contractual rights granted by the Company;
and all corporate action required to be taken for the authorization, issuance
and sale of the Securities has been duly and validly taken. When issued, the
Purchase Option and the Warrants will constitute valid and binding obligations
of the Company to issue and sell, upon exercise thereof and payment therefor,
the number and type of securities of the Company called for thereby and the
Underwriter's Purchase Option and the Warrants will be enforceable against the
Company in accordance with their respective terms, except (i) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (ii) as enforceability of
any indemnification provision may be limited under the federal and state
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
2.9 REGISTRATION RIGHTS OF THIRD PARTIES. Except as set forth in the
Prospectus, no holders of any securities of the Company or of any options or
warrants of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company.
2.10 VALIDITY AND BINDING EFFECT OF AGREEMENTS. This Agreement has been
duly and validly authorized by the Company, and this Agreement, the
Underwriter's Purchase Option and the Warrant Agreement (as hereinafter defined)
have been duly and validly authorized by the Company and constitute, or when
executed and delivered, will constitute, the valid and binding agreements of the
Company, enforceable against the Company in accordance with their respective
terms, except (i) as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (ii) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (iii) that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
2.11 NO CONFLICTS, ETC. The execution, delivery, and performance by the
Company of this Agreement, the Underwriter's Purchase Option and the Warrant
Agreement, and the consummation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms hereof and
thereof have been duly authorized by all necessary corporate action and do not
and will not, with or without the giving of notice or the lapse of time or both,
(i) result in a breach of, or conflict with any of the terms and provisions of,
or constitute a default under,
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or result in the creation, modification, termination or imposition of any lien,
charge or encumbrance upon any property or assets of the Company pursuant to the
terms of any indenture, mortgage, deed of trust, note, loan or credit agreement
or any other agreement or instrument evidencing an obligation for borrowed
money, or any other agreement or instrument to which the Company is a party or
by which the Company may be bound or to which any of the property or assets of
the Company is subject; (ii) result in any violation of the provisions of the
Certificate of Incorporation or the By-Laws of the Company; (iii) violate any
existing applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over the
Company or any of its properties or business; or (iv) have a material adverse
effect on any permit, license, certificate, registration, approval, consent,
license or franchise concerning the Company.
2.12 NO DEFAULTS; VIOLATIONS. Except as described in the Prospectus, no
default exists in the due performance and observance of any term, covenant or
condition of any material license, contract, indenture, mortgage, deed of trust,
note, loan or credit agreement, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other material agreement or instrument
to which the Company is a party or by which the Company may be bound or to which
any of the properties or assets of the Company is subject, the result of which
would have, singly or in the aggregate, a material adverse effect on the
Company, its assets or its operations. The Company is not in violation of any
term or provision of its Certificate of Incorporation or By-Laws or in violation
of any franchise, license, permit, applicable law, rule, regulation, judgment or
decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or any of its properties or business, except as
described in the Prospectus.
2.13 CORPORATE POWER; LICENSES; CONSENTS.
2.13.1 CONDUCT OF BUSINESS. The Company has all requisite
corporate power and authority, and has all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies to own or lease its properties and conduct its
business as described in the Prospectus, and the Company is and has been doing
business in compliance with all such material authorizations, approvals, orders,
licenses, certificates and permits and all federal, state and local laws, rules
and regulations. The disclosures in the Registration Statement concerning the
effects of federal, state and local regulation on the Company's business as
currently contemplated are correct in all material respects and do not omit to
state a material fact.
2.13.2 TRANSACTIONS CONTEMPLATED HEREIN. The Company has all
corporate power and authority to enter into this Agreement and to carry out the
provisions and conditions hereof, and all consents, authorizations, approvals
and orders required in connection therewith have been obtained. No consent,
authorization or order of, and no filing with, any court, government agency or
other body is required for the valid issuance, sale and delivery, of the
Securities pursuant to this Agreement, the Underwriter's Purchase Option and the
Warrant Agreement, and as contemplated by the Prospectus, except with respect to
applicable federal and state securities laws.
2.14 TITLE TO PROPERTY; INSURANCE. The Company has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security interests, defects and
restrictions of any material nature whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable. The Company has
adequately insured its properties
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against loss or damage by fire or other casualty and maintains, in adequate
amounts, such other insurance as is usually maintained by companies engaged in
the same or similar business.
2.15 LITIGATION; GOVERNMENTAL PROCEEDINGS. Except as set forth in the
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or threatened
against, or involving the properties or business of, the Company which might
materially and adversely affect the financial position, prospects, value or the
operation or the properties or the business of the Company, or which question
the validity of the capital stock of the Company or this Agreement or of any
action taken or to be taken by the Company pursuant to, or in connection with,
this Agreement. There are no outstanding orders, judgments or decrees of any
court, governmental agency or other tribunal naming the Company and enjoining
the Company from taking, or requiring the Company to take, any action, or to
which the Company, its properties or business is bound or subject.
2.16 GOOD STANDING. The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of the state of
its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not have a
material adverse effect on the Company.
2.17 TAXES. The Company has filed all returns (as hereinafter defined)
required to be filed with taxing authorities prior to the date hereof or has
duly obtained extensions of time for the filing thereof. The Company has paid
all taxes (as hereinafter defined) shown as due on such returns that were filed
and has paid all taxes imposed on or assessed against the Company. The
provisions for taxes payable, if any, shown on the financial statements filed
with or as part of the Registration Statement are sufficient for all accrued and
unpaid taxes, whether or not disputed, and for all periods to and including the
dates of such consolidated financial statements. Except as disclosed in writing
to the Underwriter, (i) no issues have been raised (and are currently pending)
by any taxing authority in connection with any of the returns or taxes asserted
as due from the Company, and (ii) no waivers of statutes of limitation with
respect to the returns or collection of taxes have been given by or requested
from the Company. The term "taxes" mean all federal, state, local, foreign, and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
windfall profits, customs, duties or other taxes, fees, assessments, or charges
of any kind whatever, together with any interest and any penalties, additions to
tax, or additional amounts with respect thereto. The term "returns" means all
returns, declarations, reports, statements, and other documents required to be
filed in respect to taxes.
2.18 EMPLOYEES' OPTIONS. No shares of Common Stock are eligible for sale
pursuant to Rule 701 promulgated under the Act.
2.19 TRANSACTIONS AFFECTING DISCLOSURE TO NASD.
2.19.1 FINDER'S FEES. There are no claims, payments, issuances,
arrangements or understandings for services in the nature of a finder's or
origination fee to which any of the Company or any of its officers, directors or
their respective affiliates is a party, with respect to the sale of the
Securities hereunder or any other arrangements, agreements, understandings,
payments or
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issuance with respect to the Company that may affect the compensation, as
determined by the National Association of Securities Dealers, Inc. ("NASD").
2.19.2 PAYMENTS WITHIN TWELVE MONTHS. Except for the issuance of
options to purchase _____ shares of Common Stock to R. Tyler Runnels on
________, 1996 for services rendered solely in connection with the acquisition
described in Note 3 to the financial statements included in the Prospectus, the
Company has not made any direct or indirect payments (in cash, securities or
otherwise) to (i) any person, as a finder's fee, investing fee or otherwise, in
consideration of such person raising capital for the Company or introducing to
the Company persons who provided capital to the Company, (ii) to any NASD
member, or (iii) to any person or entity that has any direct or indirect
affiliation or association with any NASD member within the twelve month period
prior to the date on which the Registration Statement was filed with the
Commission ("Filing Date") or thereafter, other than payments to the
Underwriter.
2.19.3 USE OF PROCEEDS. None of the net proceeds of the offering
will be paid by the Company to any participating NASD member or any affiliate or
associate of any NASD member, except as specifically authorized herein.
2.19.4 INSIDERS' NASD AFFILIATION. No officer or director of the
Company or beneficial owner of 5% or more of the Company's outstanding Common
Stock has any direct or indirect affiliation or association with any NASD
member. The Company will advise the Underwriter and the NASD if any stockholder
beneficially owning 5% or more of the outstanding Common Stock of the Company is
or becomes an affiliate or associated person of an NASD member participating in
the offering.
2.20 FOREIGN CORRUPT PRACTICES ACT. Neither the Company nor any of its
officers, directors, employees, agents or any other person acting on behalf of
the Company has, directly or indirectly, given or agreed to give any money, gift
or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or any political party or
candidate for office (domestic or foreign) or other person who was, is, or may
be in a position to help or hinder the business of the Company (or assist it in
connection with any actual or proposed transaction) which (i) might subject the
Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (ii) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in any of the financial statements contained in the Prospectus or
(iii) if continued in the future, might adversely affect the assets, business,
operations or prospects of the Company. The Company's internal accounting
controls and procedures are sufficient to cause the Company to comply with the
Foreign Corrupt Practices Act of 1977, as amended.
2.21 NASDAQ AND BSE ELIGIBILITY. As of the Effective Date, the Public
Securities have been approved for quotation on the Nasdaq SmallCap Market
("Nasdaq") and approved for listing, upon notification of issuance, on the
Boston Stock Exchange ("BSE").
2.22 INTANGIBLES. The Company owns or possesses the requisite licenses or
rights to use all trademarks, service marks, service names, trade names, patents
and patent applications, copyrights and other rights (collectively,
"Intangibles") described as being licensed to or owned by it in the Registration
Statement. The Company's Intangibles which have been registered in the
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United States Patent and Trademark Office have been fully maintained and are in
full force and effect. There is no claim or action by any person pertaining to,
or proceeding pending or threatened and the Company has not received any notice
of conflict with the asserted rights of others which challenges the exclusive
right of the Company with respect to any Intangibles used in the conduct of the
Company's business except as described in the Prospectus. The Intangibles and
the Company's current products, services and processes do not infringe on any
intangibles held by any third party. To the best of the Company's knowledge, no
others have infringed upon the Intangibles of the Company.
2.23 RELATIONS WITH EMPLOYEES.
2.23.1 EMPLOYEE MATTERS. The Company has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment practices,
terms and conditions of employment and wages and hours relating thereto. There
are no pending investigations involving the Company by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company or any predecessor
entity, and none has ever occurred. No question concerning representation
exists respecting the employees of the Company and no collective bargaining
agreement or modification thereof is currently being negotiated by the Company.
No grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company, if any. The Company has
obtained Key person life insurance in an amount not less than $2,000,000 on the
life of Robert H. Gureuitch naming the Company as the sole beneficiary.
2.23.2 EMPLOYEE BENEFIT PLANS. Other than as set forth in the
Registration Statement, the Company neither maintains, sponsors nor contributes
to, nor is it required to contribute to, any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a,
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not, and has at no time,
maintained or contributed to a defined benefit plan, as defined in Section 3(35)
of ERISA. If the Company does maintain or contribute to a defined benefit plan,
any termination of the plan on the date hereof would not give rise to liability
under Title IV of ERISA. No ERISA Plan (or any trust created thereunder) has
engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA
or Section 4975 of the Internal Revenue Code of 1986, as amended ("Code"), which
could subject the Company to any tax penalty for prohibited transactions and
which has not adequately been corrected. Each ERISA Plan is in compliance with
all material reporting, disclosure and other requirements of the Code and ERISA
as they relate to any such ERISA Plan. Determination letters have been received
from the Internal Revenue Service with respect to each ERISA Plan which is
intended to comply with Code Section 401(a), stating that such ERISA Plan and
the attendant trust are qualified thereunder. The Company has never completely
or partially withdrawn from a "multi-employer plan".
2.24 OFFICERS' CERTIFICATE. Any certificate signed by any duly authorized
officer of the Company and delivered to you or to your counsel shall be deemed a
representation and warranty by the Company to the Underwriter as to the matters
covered thereby.
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2.25 WARRANT AGREEMENT. The Company has entered into a warrant agreement
with respect to the Warrants and the Warrants substantially in the form filed as
an exhibit to the Registration Statement ("Warrant Agreement") with American
Stock Transfer & Trust Company, in form and substance satisfactory to the
Underwriter, providing for among other things, (i) no redemption of the Warrants
without the consent of MHM and (ii) for the payment of a warrant solicitation
fee as contemplated by Section 3.10 hereof.
2.26 AGREEMENTS WITH INSIDERS. The Company has caused to be duly executed
a legally binding and enforceable agreements pursuant to which the officers,
directors and stockholders of the Company identified on Schedule 2.26
(collectively, the "Insiders") agree (a) not to sell any shares of Common Stock
owned by them (either pursuant to Rule 144 of the Regulations or otherwise) for
varying periods of time following the Effective Date except with the prior
consent of MHM, and (b) as set forth on Schedule 2.26 agree to sell to MHM or
permit MHM to sell for their account any shares of Common Stock they desire to
sell in the open market for a period of 5 years following the Effective Date.
2.27 SUBSIDIARIES. The representations and warranties made by the Company
in this Agreement shall, in the event that the Company has one or more
subsidiaries (a "subsidiary(ies)") also apply and be true with respect to each
subsidiary, individually and taken as a whole with the Company and all other
subsidiaries, as if each representation and warranty contained herein made
specific reference to the subsidiary each time the term "Company" was used.
2.28 UNAUDITED FINANCIALS. The Company has furnished to the Underwriter as
early as practicable prior to the date hereof a copy of the latest available
unaudited interim financial statements ("Unaudited Financials") of the Company
(which in no event shall be as of a date more than thirty days prior to the
Effective Date) which have been read by the Company's independent accountants,
as stated in their letter to be furnished pursuant to Section 4.3 hereof.
2.29 PRODUCT LIABILITY INSURANCE. The Company maintains product liability
insurance of the type and in the amounts typically maintained by participants in
the dental equipment industry.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees as follows:
3.1 AMENDMENTS TO REGISTRATION STATEMENT. The Company will deliver to the
Underwriter, prior to filing, any amendment or supplement to the Registration
Statement or Prospectus proposed to be filed after the Effective Date and not
file any such amendment or supplement to which the Underwriter shall reasonably
object.
3.2 FEDERAL SECURITIES LAWS.
3.2.1 COMPLIANCE. During the time when a Prospectus is required
to be delivered under the Act the Company will use all reasonable efforts to
comply with all requirements imposed upon it by the Act, the Regulations and the
Exchange Act and by the regulations under the Exchange Act, as from time to time
in force, so far as necessary to permit the continuance of sales of or dealings
in the Public Securities in accordance with the provisions hereof and the
Prospectus. If at any time when a Prospectus relating to the Public Securities
is required to be delivered under the Act any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriter, the Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein
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or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to amend
the Prospectus to comply with the Act, the Company will notify the Underwriter
promptly and prepare and file with the Commission, subject to Section 3.1
hereof, an appropriate amendment or supplement in accordance with Section 10 of
the Act.
3.2.2 FILING OF FINAL PROSPECTUS. The Company will file the
Prospectus (in form and substance satisfactory to the Underwriter) with the
Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 EXCHANGE ACT REGISTRATION. For a period of five years from
the Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock and Warrants under the provisions of Section 12
of the Exchange Act.
3.3 BLUE SKY FILING. The Company will endeavor in good faith, in
cooperation with the Underwriter, at or prior to the time the Registration
Statement becomes effective, to qualify the Public Securities for offering and
sale under the securities laws of such jurisdictions as the Underwriter may
reasonably designate, provided that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or to taxation as a foreign corporation doing
business in such jurisdiction. In each jurisdiction where such qualification
shall be effected, the Company will, unless the Underwriter agrees that such
action is not at the time necessary or advisable, use all reasonable efforts to
file and make such statements or reports at such times as are or may be required
by the laws of such jurisdiction.
3.4 DELIVERY TO THE UNDERWRITER OF PROSPECTUSES. The Company will deliver
to the Underwriter, without charge, from time to time during the period when the
Prospectus is required to be delivered under the Act or the Exchange Act such
number of copies of each Preliminary Prospectus and the Prospectus as the
Underwriter may reasonably request and, as soon as the Registration Statement or
any amendment or supplement thereto becomes effective, deliver to you two
original executed Registration Statements, including exhibits, and all post-
effective amendments thereto and copies of all exhibits filed therewith or
incorporated therein by reference and all original executed consents of
certified experts.
3.5 EVENTS REQUIRING NOTICE TO THE UNDERWRITER. The Company will notify
the Underwriter immediately upon its becoming aware, and confirm the notice in
writing, (i) of the effectiveness of the Registration Statement and any
amendment thereto, (ii) of the issuance by the Commission of any stop order or
of the initiation, or the threatening, of any proceeding for that purpose, (iii)
of the issuance by any state securities commission of any proceedings for the
suspension of the qualification of the Public Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the mailing and delivery to the Commission for filing of
any amendment or supplement to the Registration Statement or Prospectus, (v) of
the receipt of any comments or request for any additional information from the
Commission, and (vi) of the happening of any event during the period described
in Section 3.4 hereof which, in the judgment of the Company, makes any statement
of a material fact made in the Registration Statement or the Prospectus untrue
or which requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.
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3.6 REVIEW OF FINANCIAL STATEMENTS. For a period of five years from the
Effective Date, the Company, at its expense, shall cause its regularly engaged
independent certified public accountants to review (but not audit) the Company's
financial statements for each of the first three fiscal quarters prior to the
announcement of quarterly financial information and the filing of the Company's
Form 10-Q quarterly report.
3.7 RESERVED.
3.8 SECONDARY MARKET TRADING AND STANDARD & POOR'S. If the Company is not
already published in Standard and Poor's Corporation Records Corporate
Descriptions, the Company will take all necessary and appropriate actions to
achieve accelerated publication in Standard and Poor's Corporation Records
Corporate Descriptions (within 30 days after the Effective Date) and to maintain
such publication with updated quarterly information for a period of five years
from the Effective Date, including the payment of any necessary fees and
expenses. The Company shall take such action as may be reasonably requested by
the Underwriter to obtain a secondary market trading exemption in such States as
may be requested by the Underwriter, including the payment of any necessary fees
and expenses and the filing of a Form (e.g. 25101(b)) for secondary market
trading of the Securities in the State of California on the Effective Date or as
soon thereafter as is practicable.
3.9 NASDAQ MAINTENANCE. For a period of five years from the date hereof,
the Company will use its best efforts to maintain the quotation by Nasdaq and
listing on the BSE of the Common Stock, and, if outstanding, the Warrants and,
if the Company satisfies the inclusion standards of the Nasdaq National Market,
to apply for and maintain quotations by the Nasdaq National Market of such
securities during such period. If the Common Stock and, if outstanding, the
Warrants become quoted on the National Market, the Company may delist the Common
Stock and Warrants from the BSE.
3.10 WARRANT SOLICITATION AND REGISTRATION OF COMMON STOCK UNDERLYING THE
WARRANTS.
3.10.1 WARRANT SOLICITATION FEES. The Company hereby engages the
Underwriter, on a non-exclusive basis, as its agent for the solicitation of the
exercise of the Warrants. The Company, at its cost, will (i) assist the
Underwriter with respect to such solicitation, if requested by the Underwriter
and will (ii) provide the Underwriter, and direct the Company's transfer and
warrant agent to provide to the Underwriter, lists of the record and, to the
extent known, beneficial owners of the Company's Warrants. During the period
commencing one year after the Effective Date, the Company will pay to the
Underwriter a commission of four percent of the Warrant exercise price for each
Warrant exercised, payable on the date of such exercise, on the terms provided
for in the Warrant Agreement, if allowed under the rules and regulations of the
NASD and only if the Underwriter has provided bona fide services to the Company
in connection with the exercise of Warrants. In addition to soliciting either
orally or in writing, the exercise of Warrants, such services may also include
disseminating information, either orally or in writing to Warrant holders about
the Company or the market for the Company's securities, and the assisting in the
processing of the exercise of Warrants. The Underwriter may engage sub-agents
in its solicitation efforts. The Company will disclose the arrangement to pay
such solicitation fees to the Underwriter in any prospectus used by the Company
in connection with the registration of the shares of Common Stock underlying the
Warrants.
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3.10.2 REGISTRATION OF COMMON STOCK. The Company agrees that prior
to the date that the Warrants become exercisable it shall file with the
Commission a post-effective amendment to the Registration Statement, if
possible, or a new registration statement, under the Act, and it shall take such
action as is necessary to qualify for sale, in those states in which the
Warrants were initially offered by the Company, the Common Stock issuable upon
exercise of the Warrants. In either case, the Company shall cause the same to
become effective prior to the date that the Warrants become exercisable and
shall maintain the effectiveness of such registration statement and keep current
a prospectus thereunder and maintain such qualification until the expiration of
the Warrants and the Underwriter's Warrants in accordance with the provisions of
this Agreement.
3.11 REPORTS TO THE UNDERWRITER AND OTHERS.
3.11.1 PERIODIC REPORTS, ETC. For a period of five years from the
Effective Date, the Company will promptly furnish to the Underwriter copies of
such financial statements and other periodic and special reports as the Company
from time to time files with any governmental authority or furnishes generally
to holders of any class of its securities, and promptly furnish to the
Underwriter (i) a copy of each periodic report the Company shall be required to
file with the Commission, (ii) a copy of every press release and every news item
and article with respect to the Company or its affairs which was released by the
Company, (iii) a copy of each Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4
received or prepared by the Company, and (iv) such additional documents and
information with respect to the Company and the affairs of any future
subsidiaries of the Company as the Underwriter may from time to time reasonably
request. In addition, until April 30, 1998, the Company will furnish to the
Underwriter its monthly consolidated profit and loss statements no later than
the 21st day of the following month.
3.11.2 TRANSFER SHEETS AND WEEKLY POSITION LISTINGS. For a period
of five years from the Closing Date, the Company will furnish to the Underwriter
at the Company's sole expense such transfer sheets and position listings of the
Company's securities as the Underwriter may reasonably request, including the
daily, weekly and monthly consolidated transfer sheets of the transfer agent of
the Company and the weekly position listings of the Depository Trust Company.
3.11.3 SECONDARY MARKET TRADING MEMORANDUM. Until such time as the
Public Securities are listed or quoted, as the case may be, on one of the
following: the New York Stock Exchange, the American Stock Exchange or Nasdaq
National Market, the Company shall cause the legal counsel to deliver to the
Underwriter on the Effective Date a written opinion detailing those states in
which Public Securities may be traded in non-issuer transactions under the Blue
Sky laws of the fifty states ("Secondary Market Trading Memorandum") and to
update such memorandum as reasonably requested by the Underwriter. The Company
shall pay to the Underwriter's legal counsel a one-time fee of $5,000 for such
services at the Closing.
3.12 AGREEMENTS BETWEEN THE UNDERWRITER AND THE COMPANY.
3.12.1 Underwriter's Purchase Option. On the Closing Date, the
Company will execute and deliver the Underwriter's Purchase Option to the
Underwriter substantially in the form filed as an exhibit to the Registration
Statement.
3.13 DISQUALIFICATION OF FORM SB-2. For a period equal to five years from
the date hereof, the Company will not take any action or actions which may
prevent or disqualify the Company's use
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of Form SB-2 (or other appropriate form) for the registration of the Warrants
and the Underwriter's Purchase Option and the securities issuable upon exercise
of those securities under the Act.
3.14 PAYMENT OF EXPENSES.
3.14.1 GENERAL EXPENSES. The Company hereby agrees to pay on each
of the Closing Date and the Option Closing Date, if any, to the extent not paid
at Closing Date, all expenses incident to the performance of the obligations of
the Company under this Agreement, including but not limited to (i) the
preparation, printing, filing, delivery and mailing (including the payment of
postage with respect to such mailing) of the Registration Statement, the
Prospectus and the Preliminary Prospectuses and the printing and mailing of this
Agreement and related documents, including the cost of all copies thereof and
any amendments thereof or supplements thereto supplied to the Underwriter in
quantities as may be required by the Underwriter, (ii) the printing, engraving,
issuance and delivery of the shares of Common Stock, the Warrants and the
Underwriter's Purchase Option, including any transfer or other taxes payable
thereon, (iii) the qualification of the Public Securities under state or foreign
securities or Blue Sky laws, including the filing fees under such Blue Sky laws,
the costs of printing and mailing the "Preliminary Blue Sky Memorandum," and all
amendments and supplements thereto, fees, up to an aggregate of $35,000, and
disbursements of the Underwriter's counsel, and fees and disbursements of local
counsel, if any, retained for such purpose, and a one-time fee of $5,000 payable
to the Underwriter's counsel for the preparation of the Secondary Market Trading
Memorandum, (iv) filing fees, costs and expenses (including fees not to exceed
$5,000 and disbursements for the Underwriter's counsel) incurred in registering
the offering with the NASD, (v) costs of placing "tombstone" advertisements in
THE WALL STREET JOURNAL, THE NEW YORK TIMES and a third publication to be
selected by the Underwriter, (vi) fees and disbursements of the transfer and
warrant agent, (vii) the Company's expenses associated with "due diligence"
meetings arranged by the Underwriter, (viii) the preparation, binding and
delivery of transaction "bibles," in number, form and style reasonably
satisfactory to the Underwriter and transaction lucite cubes or similar
commemorative items in a style and quantity as reasonably requested by the
Underwriter, (ix) any listing of the Public Securities on Nasdaq SmallCap, and
any securities exchange or any listing in Standard & Poor's, (x) fees and
disbursements of any counsel engaged to review the Company's intellectual
property rights, and (xi) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section 3.14.1. Since an important part of the public
offering process is for the Company to appropriately and accurately describe
both the background of the principals of the Company and the Company's
competitive position in its industry, the Company has engaged and has paid for
an investigative search firm of the Underwriter's choice to conduct an
investigation of principals of the Company mutually selected by the Underwriter
and the Company. The Underwriter may deduct from the net proceeds of the
offering payable to the Company on the Closing Date, or the Option Closing Date,
if any, the expenses set forth herein to be paid by the Company to the
Underwriter and/or to third parties.
3.14.2 NON-ACCOUNTABLE EXPENSES. The Company further agrees that,
in addition to the expenses payable pursuant to Section 3.15.1, it will pay to
the Underwriter a non-accountable expense allowance equal to three percent (3%)
of the gross proceeds received by the Company from the sale of the Public
Securities, of which $50,000 has been paid to date, and the Company will pay the
balance on the Closing Date and any additional monies owed attributable to the
Option Securities or otherwise on the Option Closing Date by certified or bank
cashier's check or, at the election of the Underwriter, by deduction from the
proceeds of the offering contemplated herein. If the offering contemplated by
this Agreement is not consummated for any reason whatsoever then
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the following provisions shall apply: The Company's liability for payment to the
Underwriter of the non-accountable expense allowance shall be equal to the sum
of the Underwriter's actual out-of-pocket expenses (including, but not limited
to, counsel fees, "road-show" and due diligence expenses). The Underwriter
shall retain such part of the non-accountable expense allowance previously paid
as shall equal such actual out-of-pocket expenses. If the amount previously
paid is insufficient to cover such actual out-of-pocket expenses, the Company
shall remain liable for and promptly pay any other actual out-of-pocket
expenses. If the amount previously paid exceeds the amount of actual out-of-
pocket expenses, the Underwriter shall promptly remit to the Company any such
excess.
3.15 APPLICATION OF NET PROCEEDS. The Company will apply the net proceeds
from the offering received by it in a manner consistent with the application
described under the caption "USE OF PROCEEDS" in the Prospectus. The Company
hereby agrees that, other than described under "USE OF PROCEEDS" in the
Prospectus, the Company will not apply any net proceeds from the offering to pay
(i) any debt for borrowed funds, other than periodic payments, in the ordinary
course, under bank or other institutional credit lines, or (ii) any debt or
obligation owed to any Insider, or by any family member or affiliate of any of
the foregoing persons.
3.16 DELIVERY OF EARNINGS STATEMENTS TO SECURITY HOLDERS. The Company will
make generally available to its security holders as soon as practicable, but not
later than the first day of the fifteenth full calendar month following the
Effective Date, an earnings statement (which need not be certified by
independent public or independent certified public accountants unless required
by the Act or the Regulations, but which shall satisfy the provisions of Rule
158(a) under Section 11(a) of the Act) covering a period of at least twelve
consecutive months beginning after the Effective Date.
3.17 KEY PERSON LIFE INSURANCE. The Company will maintain key person life
insurance in an amount no less than $2,000,000 each on the life of Robert H.
Gurevitch and pay the annual premiums therefor naming the Company as the sole
beneficiary thereof for at least three years following the Effective Date.
3.18 STABILIZATION. Neither the Company, nor, to its knowledge, any of its
employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Public Securities.
3.19 INTERNAL CONTROLS. The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.20 ACCOUNTANTS AND LAWYERS. For a period of five years from the
Effective Date, the Company shall retain independent public accountants and
securities lawyers reasonably acceptable to the Underwriter. Accountants
Coopers & Lybrand, L.L.P. and lawyers Troop Meisinger Steuber & Pasich, L.L.P.
are acceptable to the Company.
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3.21 TRANSFER AGENT. For a period of five years from the Effective Date,
the Company Underwriter shall retain a transfer agent for the Common Stock and
Warrants acceptable to the Underwriter. American Stock Transfer & Trust Company
("Transfer Agent") is acceptable to the Underwriter.
3.22 SALE OF SECURITIES. The Company agrees not to permit or cause a
private or public sale or private or public offering of any of its securities
(in any manner, including pursuant to Rule 144 under the Act) owned nominally or
beneficially by the Insiders for the periods following the Effective Date set
forth on Schedule 2.26 without obtaining the prior written approval of MHM.
4. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter to purchase and pay for the Securities, as provided herein, shall be
subject to the continuing accuracy of the representations and warranties of the
Company as of the date hereof and as of each of the Closing Date and the Option
Closing Date, if any, to the accuracy of the statements of officers of the
Company made pursuant to the provisions hereof and to the performance by the
Company of its obligations hereunder and to the following conditions:
4.1 REGULATORY MATTERS.
4.1.1 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement has been declared effective on the date of this Agreement and, at each
of the Closing Date and the Option Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for the purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Graubard Mollen & Miller, counsel to the Underwriter.
4.1.2 NASD CLEARANCE. By the Effective Date, the Underwriter
shall have received clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriter as described in the Registration
Statement.
4.1.3 NO BLUE SKY STOP ORDERS. No order suspending the sale of
the Securities in any jurisdiction designated by you pursuant to Section 3.3
hereof shall have been issued on either on the Closing Date or the Option
Closing Date, and no proceedings for that purpose shall have been instituted or
shall be contemplated.
4.2 COMPANY COUNSEL MATTERS.
4.2.1 EFFECTIVE DATE OPINION OF COUNSEL. On the Effective Date,
the Underwriter shall have received the favorable opinion of Troop Meisinger
Steuber & Pasich, L.L.P., counsel to the Company, dated the Effective Date,
addressed to the Underwriter and in form and substance satisfactory to Graubard
Mollen & Miller, counsel to the Underwriter, to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation and is in good standing under the laws of its state of
incorporation. The Company is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which it owns or leases any
real property or to the best of our knowledge the character of its operations as
described in the Prospectus requires such qualification or licensing, except
where the failure would have a material adverse effect on the business of the
Company.
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(ii) The Company has all requisite corporate power and
authority, and has all necessary authorizations, approvals, orders, licenses,
certificates and permits of and from all governmental or regulatory officials
and bodies to own or lease its properties and conduct its business as described
in the Prospectus, except where failure to have same would not have, either
singly or in the aggregate, a material adverse effect on the Company or its
operations. The Company has all corporate power and authority to enter into
this Agreement, the Warrant Agreement and the Underwriter's Purchase Option and
to carry out the provisions and conditions hereof, and all consents,
authorizations, approvals and orders required by it in connection therewith have
been obtained. No consents, approvals, authorizations or orders of, and no
filing with any court or governmental agency or body (other than such as may be
required under the Act and applicable Blue Sky laws), is required by it for the
valid authorization, issuance, sale and delivery of the Securities, and the
consummation of the transactions and agreements contemplated by this Agreement,
the Warrant Agreement and the Purchase Option or if so required, all such
authorizations, approvals, consents, orders, registrations, licenses and permits
have been duly obtained by it and are in full force and effect and have been
disclosed to the Underwriter.
(iii) All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and non-assessable;
the holders thereof have no rights of rescission with respect thereto, and are
not subject to personal liability by reason of being such holders; and none of
such securities were issued in violation of the preemptive rights of any holders
of any security of the Company or, to the best of such counsel's knowledge after
due inquiry, similar contractual rights granted by the Company. The outstanding
options and warrants issued by the Company to purchase shares of Common Stock
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. The offers and sales of the
outstanding Common Stock and options and warrants to purchase shares of Common
Stock were at all relevant times either registered under the Act or exempt from
such registration requirements. The authorized capital stock of the Company is
as set forth under the caption "Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and, when issued
and paid for, will be validly issued, fully paid and non-assessable; the holders
thereof are not and will not be subject to personal liability by reason of being
such holders. The Securities are not and will not be subject to the preemptive
rights of any holders of any security of the Company or, to the best of such
counsel's knowledge, similar contractual rights granted by the Company. All
corporate action required to be taken for the authorization, issuance and sale
of the Securities has been duly and validly taken. When issued, the
Underwriter's Purchase Option, the Underwriter's Warrants and the Warrants will
constitute valid and binding obligations of the Company to issue and sell, upon
exercise thereof and payment therefor, the number and type of securities of the
Company called for thereby and such Underwriter's Warrants, the Underwriter's
Purchase Option, and the Warrants, when issued, in each case, will be
enforceable against the Company in accordance with their respective terms,
except (a) as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, (b) as
enforceability of any indemnification provision may be limited under the federal
and state securities laws, and (c) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to
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the equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. The certificates representing the
Securities are in due and proper form.
(v) To the best of such counsel's knowledge, except as set
forth in the Prospectus, no holders of any securities of the Company or of any
options, warrants or securities of the Company exercisable for or convertible or
exchangeable into securities of the Company and issued by the Company have the
right to require the Company to register any such securities of the Company
under the Act or to include any such securities in a registration statement to
be filed by the Company under the Act.
(vi) To the best of such counsel's knowledge, the shares of
Common Stock and the Warrants are eligible for quotation on Nasdaq and have been
approved for listing, upon notification for issuance, on the BSE.
(vii) This Agreement, the Purchase Option and the Warrant
Agreement have each been duly and validly authorized by the Company and, when
executed and delivered by the Company, will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provisions may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(viii) The execution, delivery and performance by the Company of
this Agreement, the Underwriter's Purchase Option and the Warrant Agreement, the
issuance and sale of the Securities, the consummation of the transactions
contemplated hereby and thereby and the compliance by the Company with the terms
and provisions hereof and thereof, do not and will not, with or without the
giving of notice or the lapse of time, or both, (a) conflict with, or result in
a breach of, any of the terms or provisions of, or constitute a default under,
or result in the creation or modification of any lien, security interest, charge
or encumbrance upon any of the properties or assets of the Company pursuant to
the terms of, any material mortgage, deed of trust, note, indenture, loan,
contract, commitment or other material agreement or instrument, to which the
Company is a party or by which the Company or any of its properties or assets
may be bound and of which such counsel has knowledge, (b) result in any
violation of the provisions of the Certificate of Incorporation or the By-Laws
of the Company, (c) violate any statute or any judgment, order or decree, rule
or regulation applicable to the Company of any court, domestic or foreign, or of
any federal, state or other regulatory authority or other governmental body
having jurisdiction over the Company, its properties or assets and of which such
counsel has knowledge, or (d) have a material effect on any permit,
certification, registration, approval, consent, license or franchise of the
Company that is known to such counsel.
(ix) The Registration Statement, each Preliminary Prospectus
and the Prospectus and any post-effective amendments or supplements thereto
(other than the financial statements included therein, as to which no opinion
need be rendered) comply as to form in all material respects with the
requirements of the Act and Regulations. The Securities and all other
securities issued or issuable by the Company and described in the Registration
Statement and the Prospectus conform in all respects to the description thereof
contained in the Registration Statement and the Prospectus. The statements in
the Prospectus under "Business," "Management," "Certain
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Transactions," "Risk Factors," Principal Stockholders," "Description of
Securities" and "Shares Eligible for Future Sale," have been reviewed by such
counsel, and insofar as they refer to statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions are correct in all
material respects. No statute or regulation or legal or governmental proceeding
required to be described in the Prospectus is not described as required, nor are
any contracts or documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement and known to counsel not so described or filed as
required.
(x) Counsel has participated in conferences with officers and
other representatives of the Company, representatives of the independent public
accountants for the Company and Underwriter, at which the contents of the
Registration Statement, the Prospectus and related matters were discussed and
although such counsel is not passing upon and does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Registration Statement and Prospectus (except as otherwise set forth in this
opinion), no facts have come to the attention of such counsel which lead them to
believe that either the Registration Statement or the Prospectus nor any
amendment or supplement thereto, as of the date of such opinion, contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and schedules and other financial and statistical data
included in the Registration Statement or Prospectus).
(xi) The Registration Statement is effective under the Act,
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened under the Act
or applicable state securities laws.
(xii) To the best of such counsel's knowledge, no default exists
in the due performance and observance of any term, covenant or condition of any
license, contract, indenture, mortgage, deed of trust, note, loan or credit
agreement, or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the Company is a
party or by which the Company may be bound or to which any of the properties or
assets of the Company is subject, except where such defaults, either singly or
in the aggregate, would not have a material adverse effect on the Company or its
operations. The Company is not in violation of any term or provision of its
Certificate of Incorporation or By-Laws. The Company is not in violation of any
franchise, license, permit, applicable law, rule, regulation, judgment or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over the Company or any of its properties or business, except where such
violations, either singly or in the aggregate, would not have a material adverse
effect on the Company or its operations.
(xiii) To the best of such counsel's knowledge after due inquiry,
the Company owns or possesses, free and clear of all liens or encumbrances and
rights thereto or therein by third parties, other than as described in the
Prospectus, the requisite licenses or other rights to use all Intangibles and
other rights necessary to conduct its business (including, without limitation,
any such licenses or rights described in the Prospectus as being licensed to,
owned or possessed by the Company), and there is no claim or action by any
person pertaining to, or proceeding, pending or, to the best of such counsel's
knowledge after due inquiry, threatened, which challenges the exclusive rights
of the Company with respect to any Intangibles used in the conduct of its
business
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(including without limitation any such licenses or rights described in the
Prospectus as being owned or possessed by the Company); to the best of such
counsel's knowledge after due inquiry, the Company's current products, services
and processes do not infringe on any Intangibles held by third parties except as
discussed in the Prospectus.
(xiv) To the best of such counsel's knowledge, except as
described in the Prospectus, the Company does not own an interest in any
corporation, partnership, joint venture, trust or other business entity.
(xv) To the best of such counsel's knowledge, except as set
forth in the Prospectus, there is no action, suit or proceeding before or by any
court of governmental agency or body, domestic or foreign, now pending, or
threatened against the Company, which might result in any material and adverse
change in the condition (financial or otherwise), business or prospects of the
Company, or might materially and adversely affect the properties or assets
thereof.
(xvi) To the best of such counsel's knowledge, except as
described in the Prospectus, there are no claims, payments, issuances,
arrangements or understandings with the Company for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or financial consulting arrangements or any other arrangements, agreements,
understandings, payments or issuances that may affect the Underwriter's
compensation, as determined by the NASD.
Unless the context clearly indicates otherwise, the term "Company" as
used in this Section 4.2.1 shall include each subsidiary of the Company. The
opinion of counsel for the Company and any opinion relied upon by such counsel
for the Company shall include a statement to the effect that it may be relied
upon by counsel for the Underwriter in its opinion delivered to the Underwriter.
4.2.2 EFFECTIVE DATE OPINION OF REGULATORY COUNSEL. On the
Effective Date, the Underwriter shall have received the favorable opinion of
Hyman, Phelps & McNamara, special regulatory counsel to the Company, dated the
Effective Date, addressed to the Underwriter and in form and substance
satisfactory to Graubard Mollen & Miller, counsel to the Underwriter, to the
effect that:
(i) The Company's intraoral dental camera is a Class I medical
device, exempt from premarket notification with the U.S. Food and Drug
Administration ("FDA").
(ii) If the Company is in compliance with the Federal Food,
Drug and Cosmetic Act ("FDC Act"), the FDA's regulations and similar regulations
of the State of California, it would be in substantial compliance with similar
regulations of the other states of the United States.
(iii) The statements in the Registration Statement and
Prospectus under "Risk Factors -- Extensive Government Regulation" and "Business
- -- Government Regulation" have been reviewed by such counsel, and insofar as
they refer to statements of law, description of statutes, licenses, rules or
regulations or legal conclusions are correct in all material respects. No
statute or regulation or legal or government proceeding required to be described
in the Prospectus is not described as required.
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(iv) Counsel has participated in conferences with officers and
other representatives of the Company and representatives of the Underwriter, at
which the contents of the sections of the Registration Statement and the
Prospectus described in (iii) above were discussed and although such counsel is
not passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in those sections of the
Registration Statement and Prospectus (except as otherwise set forth in this
opinion), no facts have come to the attention of such counsel which lead them to
believe that such sections of the Registration Statement or the Prospectus nor
any amendment or supplement thereto, as of the date of such opinion, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
4.2.3 CLOSING DATE AND OPTION CLOSING DATE OPINION OF COUNSEL. On
each of the Closing Date and the Option Closing Date, if any, the Underwriter
shall have received the favorable opinion of Troop Meisinger Steuber & Pasich,
L.L.P., counsel to the Company, and Hyman, Phelps & McNamara, special regulatory
counsel to the Company, dated the Closing Date or the Option Closing Date, as
the case may be, addressed to the Underwriter and in form and substance
satisfactory to Graubard Mollen & Miller, counsel to the Underwriter, confirming
as of the Closing Date and, if applicable, the Option Closing Date, certain of
the statements made by such counsel in their opinions delivered on the Effective
Date.
4.2.4 RELIANCE. In rendering such opinions, such counsel may rely
(i) as to matters involving the application of laws other than the laws of the
United States and jurisdictions in which they are admitted, to the extent such
counsel deems proper and to the extent specified in such opinion, if at all,
upon an opinion or opinions (in form and substance reasonably satisfactory to
counsel) of other counsel reasonably acceptable to counsel, familiar with the
applicable laws, and (ii) as to matters of fact, to the extent they deem proper,
on certificates or other written statements of officers of departments of
various jurisdiction having custody of documents respecting the corporate
existence or good standing of the Company, provided that copies of any such
statements or certificates shall be delivered to counsel if requested. The
opinion of counsels for the Company shall include a statement to the effect that
it may be relied upon by counsel for the Underwriter in its opinion delivered to
the underwriter.
4.2.5 SECONDARY MARKET TRADING MEMORANDUM. On the Effective Date
the Underwriter shall have received the written Secondary Market Trading
Memorandum.
4.3 COLD COMFORT LETTER. At the time this Agreement is executed, and at
each of the Closing Date and the Option Closing Date, if any, you shall have
received a letter, addressed to the underwriter and in form and substance
satisfactory in all respects (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) to you and to Graubard
Mollen & Miller, counsel for the underwriter, from Coopers & Lybrand, L.L.P.,
dated, respectively, as of the date of this Agreement and as of the Closing Date
and the Option Closing Date, if any:
(i) Confirming that they are independent accountants with respect to
the Company within the meaning of the Act and the applicable Regulations;
(ii) Stating that in their opinion the financial statements of the
Company included in the Registration Statement and Prospectus comply as to form
in all material respects with the applicable accounting requirements of the Act
and the published Regulations thereunder;
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<PAGE>
(iii) Stating that, based on the performance of procedures specified
by the American Institute of Certified Public Accountants for a review of the
latest available unaudited interim financial statements of the Company (as
described in SAS No. 71 Interim Financial Information), with an indication of
the date of the latest available unaudited interim financial statements, a
reading of the latest available minutes of the stockholders and board of
directors and the various committees of the board of directors, consultations
with officers and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries, nothing has
come to their attention which would lead them to believe that (a) the unaudited
financial statements of the Company included in the Registration Statement do
not comply as to form in all material respects with the applicable accounting
requirements of the Act and the Regulations or any material modification should
be made to the unaudited interim financial statements included in the
Registration Statement for them to be in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements of the Company included in the Registration
Statement, (b) at a date not later than five days prior to the Effective Date,
Closing Date or Option Closing Date, as the case may be, there was any change in
the capital stock or long-term debt of the Company, or any decrease in the
stockholders' equity of the Company as compared with amounts shown in the
December 31, 1996 balance sheet included in the Registration Statement, other
than as set forth in or contemplated by the Registration Statement, or, if there
was any decrease, setting forth the amount of such decrease, and (c) during the
period from January 1, 1997 to a specified date not later than five days prior
to the Effective Date, Closing Date or Option Closing Date, as the case may be,
there was any decrease in revenues, net earnings or net earnings per share of
Common Stock, in each case as compared with the corresponding period in the
preceding year and as compared with the corresponding period in the preceding
quarter, other than as set forth in or contemplated by the Registration
Statement, or, if there was any such decrease, setting forth the amount of such
decrease;
(iv) Setting forth, at a date not later than five days prior to the
Effective Date, the amount of liabilities of the Company (including a break-down
of commercial papers and notes payable to banks);
(v) Stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, and work sheets,
of the Company with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
(vi) Stating that they have not during the immediately preceding
five year period brought to the attention of the Company's management any
reportable condition related to internal structure, design or operation as
defined in the Statement on Auditing Standards No. 60 -- "Communication of
Internal Control Structure Related Matters Noted in an Audit," in the Company's
internal controls; and
(vii) Statements as to such other matters incident to the transaction
contemplated hereby as you may reasonably request.
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<PAGE>
4.4 OFFICERS' CERTIFICATES.
4.4.1 OFFICERS' CERTIFICATE. At each of the Closing Date and the
Option Closing Date, if any, the underwriter shall have received a certificate
of the Company signed by the Chief Executive Officer and the Chief Financial
Officer of the Company, dated the Closing Date or the Option Closing Date, as
the case may be, respectively, to the effect that the Company has performed all
covenants and complied with all conditions required by this Agreement to be
performed or complied with by the Company prior to and as of the Closing Date,
or the Option Closing Date, as the case may be, and that the conditions set
forth in Section 4.5 hereof have been satisfied as of such date and that, as of
Closing Date and the Option Closing Date, as the case may be, the
representations and warranties of the Company set forth in Section 2 hereof are
true and correct. In addition, the underwriter will have received such other
and further certificates of officers of the Company as the underwriter may
reasonably request.
4.4.2 SECRETARY'S CERTIFICATE. At each of the Closing Date and
the Option Closing Date, if any, the underwriter shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the By-Laws and Certificate of Incorporation, as amended, of the
Company are true and complete, have not been modified and are in full force and
effect, (ii) that the resolutions relating to the public offering contemplated
by this Agreement are in full force and effect and have not been modified, (iii)
all correspondence between the Company or its counsel and the Commission, (iv)
all correspondence between the Company or its counsel and the NASD concerning
inclusion on Nasdaq, (v) all correspondence between the Company or its counsel
and the BSE concerning listing on the BSE, and (vi) as to the incumbency of the
officers of the Company. The documents referred to in such certificate shall be
attached to such certificate.
4.5 NO MATERIAL CHANGES. Prior to and on each of the Closing Date and the
Option Closing Date, if any, (i) there shall have been no material adverse
change or development involving a prospective material change in the condition
or prospects or the business activities, financial or otherwise, of the Company
from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus, (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the Company
from the latest date as of which the financial condition of the Company is set
forth in the Registration Statement and Prospectus which is materially adverse
to the Company, taken as a whole, (iii) the Company shall not be in default
under any provision of any instrument relating to any outstanding indebtedness
which default would have a material adverse effect on the Company, (iv) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus, (v)
no action suit or proceeding, at law or in equity, shall have been pending or
threatened against the Company or affecting any of its property or business
before or by any court or federal or state commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus, (vi) no stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated or threatened by the
Commission, and (vii) the Registration Statement and the Prospectus and any
amendments or supplements thereto contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations and
conform in all material respects to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or
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<PAGE>
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
4.6 DELIVERY OF AGREEMENTS. The Company has delivered to the underwriter
an executed copy of the underwriter's Purchase Option.
4.7 OPINION OF COUNSEL FOR THE UNDERWRITER. All proceedings taken in
connection with the authorization, issuance or sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to you and
to Graubard Mollen & Miller, counsel to the underwriter, and you shall have
received from such counsel a favorable opinion, dated the Closing Date and the
Option Closing Date, if any, with respect to such of these proceedings as you
may reasonably require. On or prior to the Effective Date, the Closing Date and
the Option Closing Date, as the case may be, counsel for the underwriter shall
have been furnished such documents, certificates and opinions as they may
reasonably require for the purpose of enabling them to review or pass upon the
matters referred to in this Section 4.7, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions herein contained.
4.8 OPINION OF SPECIAL REGULATORY CONSULTANT. On the Effective Date, the
Underwriter shall have received the favorable opinion of Holland & Associates,
special regulatory consultant to the Company, to the same effect as its opinion
to the Company dated January 22, 1997, except that it shall be based upon its
review of the Company's affairs as of a date not more than five days prior to
the Effective Date, and such opinion shall be redelivered on the Closing Date
and the Option Closing Date, as the case may be.
5. INDEMNIFICATION.
5.1 INDEMNIFICATION OF THE UNDERWRITER
5.1.1 GENERAL. Subject to the conditions set forth below, the
Company agrees to indemnify and hold harmless the Underwriter, its respective
directors, officers, agents and employees and each person, if any, who controls
the Underwriter ("controlling person") within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, against any and all loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
legal or other expenses reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, whether arising out
of any action between the Underwriter and the Company or between the Underwriter
and any third-party or otherwise) to which they or any of them may become
subject under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained in
(i) the Registration Statement or the Prospectus (as from time to time each may
be amended and supplemented); (ii) in any post-effective amendment or amendments
or any new registration statement and prospectus in which is included securities
of the Company issued or issuable upon exercise of the Underwriter's Purchase
Option; or (iii) any application or other document or written communication (in
this Section 5 collectively called "application") executed by the Company or
based upon written information furnished by the Company in any jurisdiction in
order to qualify the Securities under the securities laws thereof or filed with
the Commission, any state securities commission or agency, Nasdaq or any
securities exchange; or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances
25
<PAGE>
under which they were made, not misleading, unless such statement or omission
was made in reliance upon, and in strict conformity with, written information
furnished to the Company with respect to the Underwriter by or on behalf of such
Underwriter expressly for use in any Preliminary Prospectus, the Registration
Statement or Prospectus, or any amendment or supplement thereof, or in any
application, as the case may be. The Company agrees promptly to notify the
Underwriter of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the issue and sale of the Securities or in connection with the Registration
Statement or Prospectus.
5.1.2 PROCEDURE. If any action is brought against the Underwriter
or controlling person in respect of which indemnity may be sought against the
Company pursuant to Section 5.1.1, such Underwriter shall promptly notify the
Company in writing of the institution of such action and the Company shall
assume the defense of such action, including the employment and fees of counsel
(subject to the approval of such Underwriter) and payment of actual expenses.
Such Underwriter or controlling person shall have the right to employ its own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such Underwriter or such controlling person unless (i) the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of such action, or (ii) the Company shall not
have employed counsel to have charge of the defense of such action, or (iii)
such indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional to
those available to the Company (in which case the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events the fees and expenses of not more than one
additional firm of attorneys selected by the Underwriter and/or controlling
person shall be borne by the Company. Notwithstanding anything to the contrary
contained herein, if an Underwriter or controlling person shall assume the
defense of such action as provided above, the Company shall have the right to
approve the terms of any settlement of such action which approval shall not be
unreasonably withheld.
5.2 INDEMNIFICATION OF THE COMPANY. The Underwriter agrees to indemnify
and hold harmless the Company against any and all loss, liability, claim, damage
and expense described in the foregoing indemnity from the Company to the
Underwriter, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions directly relating to the
transactions effected by the Underwriter in connection with this offering made
in any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or in any application in reliance upon, and in
strict conformity with, written information furnished to the Company with
respect to the Underwriter by or on behalf of the Underwriter expressly for use
in such Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or in any such application. In case any action
shall be brought against the Company or any other person so indemnified based on
any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against the Underwriter, the Underwriter shall have the
rights and duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the Underwriter by the
provisions of Section 5.1.2.
5.3 CONTRIBUTION.
5.3.1 CONTRIBUTION RIGHTS. In order to provide for just and
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5
26
<PAGE>
makes claim for indemnification pursuant hereto but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 5 provides for indemnification in such case, or (ii)
contribution under the Act, the Exchange Act or otherwise may be required on the
part of any such person in circumstances for which indemnification is provided
under this Section 5, then, and in each such case, the Company and the
Underwriter shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by said indemnity agreement
incurred by the Company and the Underwriter, as incurred, in such proportions
that the Underwriter is responsible for that portion represented by the
percentage that the underwriting discount appearing on the cover page of the
Prospectus bears to the initial offering price appearing thereon and the Company
is responsible for the balance; provided, that, no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 5.3, the
Underwriter shall not be required to contribute any amount in excess of the
amount by which the total price at which the Public Securities underwritten by
it and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay in
respect of such losses, liabilities, claims, damages and expenses. For purposes
of this Section, each director, officer and employee of the Underwriter, and
each person, if any, who controls the Underwriter within the meaning of Section
15 of the Act shall have the same rights to contribution as such Underwriter.
5.3.2 CONTRIBUTION PROCEDURE. Within fifteen days after receipt
by any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or its
representative of the commencement thereof within the aforesaid fifteen days,
the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party seeking contribution on account of any settlement of any claim, action or
proceeding which was effected by such party without the written consent of such
contributing party. The contribution provisions contained in this Section are
intended to supersede, to the extent permitted by law, any right to contribution
under the Act, the Exchange Act or otherwise available.
6. INTENTIONALLY OMITTED.
7. ADDITIONAL COVENANTS.
7.1 BOARD DESIGNEE. For a period of five years from the Effective Date,
the Company will recommend and use its best efforts to elect a designee of MHM
as a member of the Board of Directors of the Company. Such designee shall
receive no more or less compensation than is paid to other non-management
directors of the Company. If MHM does not exercise its option to designate a
member of the Company's Board of Directors, MHM shall nevertheless have the
right to send a representative (who need not be the same individual from meeting
to meeting) to observe each meeting of the Board of Directors. Such person,
whether a member of the Board or a
27
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representative, shall be entitled to receive reimbursement for all reasonable
costs incurred in attending such meetings, including, but not limited to, food,
lodging and transportation. The Company agrees to give MHM written notice of
each such meeting and to provide MHM with an agenda and minutes of the meeting
no later than it gives such notice and provides such items to the other
directors.
7.2 PRESS RELEASES. The Company will not issue a press release or engage
in any other publicity until 25 days after the Effective Date without the prior
written consent.
7.3 FORM S-8 OR ANY SIMILAR FORM. The Company shall not file a
Registration Statement on Form S-8 (or any similar or successor form) for the
registration of shares of Common Stock underlying stock options for a period of
one year from the Effective Date without MHM's written consent.
7.4 COMPENSATION AND OTHER ARRANGEMENTS. The Company hereby agrees that
for a period of three years from the Effective Date, all compensation and other
arrangements between the Company and its officers, directors and affiliates
shall be approved by the Compensation Committee of the Company's Board of
Directors, a majority of the members of which shall have no affiliation or other
relationship with the Company other than as directors.
7.5 REGULATION S. The Company shall not sell any of its securities
pursuant to Regulation S promulgated under the Act for a period of 18 months
from the Effective Date without MHM's written consent.
7.6 PUBLIC RELATIONS FIRM. For a period of three years from the Effective
Date, the Company shall retain a public relations firm reasonably acceptable to
MHM.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the context
otherwise requires, all representations, warranties and agreements contained in
this Agreement shall be deemed to be representations, warranties and agreements
at the Closing Dates and such representations, warranties and agreements of the
Underwriter and Company, including the indemnity agreements contained in Section
5 hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter, the Company or any
controlling person, and shall survive termination of this Agreement or the
issuance and delivery of the Securities to the Underwriter until the earlier of
the expiration of any applicable statute of limitations and the seventh
anniversary of the later of the Closing Date or the Option Closing Date, if any,
at which time the representations, warranties and agreements shall terminate and
be of no further force and effect.
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
9.1 EFFECTIVE DATE. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective.
9.2 TERMINATION. You shall have the right to terminate this Agreement at
any time prior to any Closing Date, (i) if any domestic or international event
or act or occurrence has materially disrupted, or in your opinion will in the
immediate future materially disrupt, general securities markets in the United
States; or (ii) if trading on the New York Stock Exchange, the American Stock
Exchange, The Boston Stock Exchange or in the over-the-counter market shall have
been
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<PAGE>
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been fixed, or maximum
ranges for prices for securities shall have been required on the over-the-
counter market by the NASD or by order of the Commission or any other government
authority having jurisdiction, or (iii) if the United States shall have become
involved in a war or major hostilities, or (iv) if a banking moratorium has been
declared by a New York State or federal authority, or (v) if a moratorium on
foreign exchange trading has been declared which materially adversely impacts
the United States securities market, or (vi) if the Company shall have sustained
a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage
or other calamity or malicious act which, whether or not such loss shall have
been insured, will, in your opinion, make it inadvisable to proceed with the
delivery of the Securities, or (vii) if Robert H. Gurevitch shall no longer
serve the Company in his present capacity, or (viii) if the Company has breached
any of its representations, warranties or obligations hereunder, or (ix) if the
Underwriter shall have become aware after the date hereof of such a material
adverse change in the condition (financial or otherwise), business, or prospects
of the Company, or such adverse material change in general market conditions as
in the Underwriter's judgment would make it impracticable to proceed with the
offering, sale and/or delivery of the Securities or to enforce contracts made by
the Underwriter for the sale of the Securities.
9.3 NOTICE. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 EXPENSES. In the event that this Agreement shall not be carried out
for any reason whatsoever, within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligations of the Company to pay the
expenses related to the transactions contemplated herein shall be governed by
Section 3.14 hereof.
9.5 INDEMNIFICATION. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way affected by, such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. MISCELLANEOUS.
10.1 NOTICES. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed
If to the Underwriter:
M.H. Meyerson & Co., Inc.
525 Washington Boulevard
34th Floor
Jersey City, New Jersey 07310
Attention: Ronald Heller
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Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attention: David Alan Miller, Esq.
If to the Company:
Dental/Medical Diagnostic Systems, Inc.
200 North Westlake Boulevard
Suite 202
Westlake Village, California 91362
Attention: Robert H. Gurevitch
Copy to:
Troop Meisinger Steuber & Pasich, L.L.P.
10940 Wilshire Boulevard
Los Angeles, California 90024-3902
Attention: Franklin Reddick III, Esq.
10.2 HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.
10.3 AMENDMENT. This Agreement may only be amended by a written instrument
executed by each of the parties hereto.
10.4 ENTIRE AGREEMENT. This Agreement (together with the other agreements
and documents being delivered pursuant to or in connection with this Agreement)
constitutes the entire agreement of the parties hereto with respect to the
subject matter hereof, and supersedes all prior agreements and understandings of
the parties, oral and written, with respect to the subject matter hereof.
10.5 BINDING EFFECT. This Agreement shall inure solely to the benefit of
and shall be binding upon, the Underwriter, the Company and the controlling
persons, directors and officers referred to in Section 5 hereof, and their
respective successors, legal representative and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained.
10.6 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and
construed and enforced in accordance with the law of the State of New York,
without giving effect to conflicts of law. The Company hereby agrees that any
action, proceeding or claim against it arising out of, relating in any way to
this Agreement shall be brought and enforced in the courts of the State of New
York or the United States District Court for the Southern District of New York,
and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company hereby waives any objection to such exclusive
jurisdiction and that such courts represent an inconvenient forum. Any such
process or summons to be served upon the Company may be served by transmitting a
copy
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thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 10.1 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. The Company agrees that the
prevailing party(ies) in any such action shall be entitled to recover from the
other party(ies) all of its reasonable attorneys' fees and expenses relating to
such action or proceeding and/or incurred in connection with the preparation
therefor.
10.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement, and shall become effective when one
or more counterparts has been signed by each of the parties hereto and delivered
to each of the other parties hereto.
10.8 WAIVER, ETC. The failure of any of the parties hereto to at any time
enforce any of the provisions of this Agreement shall not be deemed or construed
to be a waiver of any such provision, nor to in any way effect the validity of
this Agreement or any provision hereof or the right of any of the parties hereto
to thereafter enforce each and every provision of this Agreement. No waiver of
any breach, non-compliance or non-fulfillment of any of the provisions of this
Agreement shall be effective unless set forth in a written instrument executed
by the party or parties against whom or which enforcement of such waiver is
sought; and no waiver of any such breach, non-compliance or non-fulfillment
shall be construed or deemed to be a waiver of any other or subsequent breach,
non-compliance or non-fulfillment.
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If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
By:
-------------------------------
Name: Robert H. Gurevitch
Title: Chairman and Chief Executive Officer
Accepted as of the date first
above written.
New York, New York
M.H. MEYERSON & CO., INC.
By:
--------------------------
Name:
Title:
------------------
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THE REGISTERED HOLDER OF THIS PURCHASE OPTION BY ITS ACCEPTANCE HEREOF, AGREES
THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION EXCEPT AS HEREIN
PROVIDED.
NOT EXERCISABLE PRIOR TO _____________ __ , 1998. VOID AFTER 5:00 P.M. EASTERN
TIME, _____________ __, 2002.
PURCHASE OPTION
FOR THE PURCHASE OF
150,000 SHARES OF COMMON STOCK
AND/OR
150,000 COMMON STOCK PURCHASE WARRANTS
OF
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
(A DELAWARE CORPORATION)
1. PURCHASE OPTION.
THIS CERTIFIES THAT, in consideration of $_______ duly paid by or on behalf
of ________________________ ("Holder"), as registered owner of this Purchase
Option, to Dental/Medical Diagnostic Systems, Inc. ("Company"), Holder is
entitled, at any time or from time to time at or after ________________ ,1998
("Commencement Date"), and at or before 5:00 p.m., Eastern Time,
________________, 2002 ("Expiration Date"), but not thereafter, to subscribe
for, purchase and receive, in whole or in part, up to 150,000 shares of Common
Stock of the Company, $.01 par value ("Common Stock") and/or 150,000 Common
Stock Purchase Warrants, each to purchase one share of Common Stock ("Warrants")
during the period commencing on ________________, 1998 and expiring
________________, 2002, (five years from the effective date of the registration
statement on Form SB-2 No. __________ ("Registration Statement") pursuant to
which the Company has registered shares of Common Stock and warrants to purchase
Common Stock ("Effective Date")). Each Warrant is the same as the warrants that
have been registered for sale to the public pursuant to the Registration
Statement ("Public Warrants"). The shares of Common Stock and Warrants are
sometimes collectively referred to herein as the "Securities." The Holder can
purchase, upon exercise of the Purchase Option, either shares of Common Stock or
Warrants or both. If the Expiration Date is a day on which banking institutions
are authorized by law to close, then this Purchase Option may be exercised on
the next succeeding day which is not such a day in accordance with the terms
herein. During the period ending on the Expiration Date, the Company agrees not
to take any action that would terminate the Purchase Option. This Purchase
Option is initially exercisable at $____ per share of Common Stock and
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$____ per Warrant purchased; provided, however, that upon the occurrence of any
of the events specified in Section 6 hereof, the rights granted by this Purchase
Option, including the exercise price and the number of shares of Common Stock
and Warrants to be received upon such exercise, shall be adjusted as therein
specified. The term "Exercise Price" shall mean the initial exercise price or
the adjusted exercise price, depending on the context of a share of Common Stock
or a Warrant.
2. EXERCISE.
2.1 EXERCISE FORM. In order to exercise this Purchase Option, the
exercise form attached hereto must be duly executed and completed and delivered
to the Company, together with this Purchase Option and payment of the Exercise
Price in cash or by certified check or official bank check for the Securities
being purchased. If the subscription rights represented hereby shall not be
exercised at or before 5:00 p.m., Eastern time, on the Expiration Date this
Purchase Option shall become and be void without further force or effect, and
all rights represented hereby shall cease and expire.
2.2 LEGEND. Unless registered under the Securities Act of 1933, as
amended (the "Act"), each certificate for Securities purchased under this
Purchase Option shall bear a legend as follows unless such Securities have been
registered under the Act:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act")
or applicable state law. The securities may not be offered for
sale, sold or otherwise transferred except pursuant to an
effective registration statement under the Act, or pursuant to an
exemption from registration under the Act and applicable state law."
2.3 CASHLESS EXERCISE.
2.3.1 DETERMINATION OF AMOUNT. In lieu of the payment of the
Exercise Price in the manner required by Section 2.1, the Holder shall have the
right (but not the obligation) to pay the Exercise Price for the Securities
being purchased with this Purchase Option by the surrender to the Company of any
exercisable but unexercised portion of this Purchase Option having a "Stock
Value" or "Warrant Value" (as defined below), as the case may be, at the close
of trading on the last trading day immediately preceding the exercise of this
Purchase Option, equal to the Exercise Price multiplied by the number of
Securities being purchased upon exercise ("Cashless Exercise Right").
(a) COMMON STOCK. Upon exercise of the Cashless Exercise Right,
the Company shall deliver to the Holder (without payment by the Holder of any of
the Exercise Price in cash) that number of shares of Common Stock equal to the
quotient obtained by dividing (x) the "Stock Value" (as defined below) of the
portion of the Purchase Option relating to the purchase of Common Stock being
surrendered at the time the Cashless Exercise Right is exercised by (y) the
Market Price. The "Stock Value" of the portion of the Purchase Option being
surrendered shall equal the remainder derived from subtracting (a) the Exercise
Price multiplied by the number of shares of Common Stock being surrendered from
(b) the Market Price of the Common Stock multiplied by the number of shares of
Common Stock being surrendered. As used herein, the term "Market Price" at any
date shall be deemed to be the average last reported sale price of the Common
Stock for the five days immediately preceding such date, as officially reported
by the
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principal securities exchange on which the Common Stock is listed or admitted to
trading, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or if any such exchange on which the Common Stock
is listed is not its principal trading market, the last reported sale price as
furnished by the NASD through the Nasdaq National Market or SmallCap Market, or,
if applicable, the OTC Bulletin Board, or if the Common Stock is not listed or
admitted to trading on any of the foregoing markets, or similar organization, as
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it.
(b) WARRANTS. Upon exercise of the Cashless Exercise Right, the
Company shall deliver to the Holder (without payment by the Holder of any of the
Exercise Price in cash) that number of Warrants equal to the quotient obtained
by dividing (x) the "Warrant Value" (as defined below) of the portion of the
Purchase Option relating to the purchase of the Warrants being surrendered at
the time the Cashless Exercise Right is exercised by (y) the Market Price. The
"Warrant Value" of the portion of the Purchase Option being surrendered shall
equal the remainder derived from subtracting (a) the Exercise Price multiplied
by the number of Warrants being surrendered from (b) the Market Price of the
Warrants multiplied by the number of Warrants being surrendered. As used
herein, the term "Market Price" at any date shall be deemed to be the average
last reported sale price of the Warrants for the five days immediately preceding
such date, as officially reported by the principal securities exchange on which
the Warrants are listed or admitted to trading, or, if the Warrants are not
listed or admitted to trading on any national securities exchange or if any such
exchange on which the Warrants are listed is not its principal trading market,
the last reported sale price as furnished by the NASD through the Nasdaq
National Market or SmallCap Market, or, if applicable, the OTC Bulletin Board,
or if the Warrants are not listed or admitted to trading on any of the foregoing
markets, or similar organization, as determined in good faith by resolution of
the Board of Directors of the Company, based on the best information available
to it.
2.3.2 MECHANICS OF CASHLESS EXERCISE. The Cashless Exercise Right
may be exercised by the Holder on any business day on or after the Commencement
Date and not later than the Expiration Date by delivering the Purchase Option
with a duly executed exercise form attached hereto with the cashless exercise
section completed to the Company, exercising the Cashless Exercise Right and
specifying the total number of shares of Common Stock and/or Warrants the Holder
will purchase pursuant to such Cashless Exercise Right.
3. TRANSFER.
3.1 GENERAL RESTRICTIONS. The registered Holder of this Purchase Option,
by its acceptance hereof, agrees that it will not sell, transfer or assign or
hypothecate this Purchase Option prior to the Commencement Date to anyone other
than (i) an officer of MHM (the "Underwriter") or an officer or partner of any
Selected Dealer in connection with the Company's public offering with respect to
which this Purchase Option has been issued, or (ii) any Selected Dealer. On and
after the Commencement Date, transfers to others may be made subject to
compliance with or exemptions from applicable securities laws. In order to make
any permitted assignment, the Holder must deliver to the Company the assignment
form attached hereto duly executed and completed, together with the Purchase
Option and payment of all transfer taxes, if any, payable in connection
therewith. The Company shall immediately transfer this Purchase Option on the
books of the Company and shall execute and deliver a new Purchase Option or
Purchase Options of like tenor to the appropriate assignee(s) expressly
evidencing the right to purchase the aggregate number of shares of Common Stock
and Warrants purchasable hereunder or such portion of such number as shall be
contemplated by any such assignment.
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3.2 RESTRICTIONS IMPOSED BY THE ACT. This Purchase Option and the
Securities underlying this Purchase Option shall not be transferred unless and
until (i) the Company has received the opinion of counsel for the Holder that
this Purchase Option or the Securities, as the case may be, may be transferred
pursuant to an exemption from registration under the Act and applicable state
law, the availability of which is established to the reasonable satisfaction of
the Company (the Company hereby agreeing that the written opinion of Graubard
Mollen & Miller shall be deemed satisfactory evidence of the availability of an
exemption), or (ii) a registration statement relating to such Purchase Option or
Securities, as the case may be, has been filed by the Company and declared
effective by the Securities and Exchange Commission and compliance with
applicable state law.
4. NEW PURCHASE OPTIONS TO BE ISSUED.
4.1 PARTIAL EXERCISE OR TRANSFER. Subject to the restrictions in Section
3 hereof, this Purchase Option may be exercised or assigned in whole or in part.
In the event of the exercise or assignment hereof in part only, upon surrender
of this Purchase Option for cancellation, together with the duly executed
exercise or assignment form and funds sufficient to pay any Exercise Price
and/or transfer tax, the Company shall cause to be delivered to the Holder
without charge a new Purchase Option of like tenor to this Purchase Option in
the name of the Holder evidencing the right of the Holder to purchase the
aggregate number of shares of Common Stock and Warrants purchasable hereunder as
to which this Purchase Option has not been exercised or assigned.
4.2 LOST CERTIFICATE. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Purchase Option and of reasonably satisfactory indemnification, the Company
shall execute and deliver a new Purchase Option of like tenor and date. Any
such new Purchase Option executed and delivered as a result of such loss, theft,
mutilation or destruction shall constitute a substitute contractual obligation
on the part of the Company.
5. REGISTRATION RIGHTS.
5.1 DEMAND REGISTRATION.
5.1.1 GRANT OF RIGHT. The Company, upon written demand ("Initial
Demand Notice") of the Holder(s) of at least 51% of the Purchase Options and/or
the underlying shares of Common Stock and Warrants considered together
("Majority Holders"), agrees to register on one occasion, all or any portion of
the Purchase Options requested by the Majority Holders in the Initial Demand
Notice and all of the Securities underlying such Purchase Options, including the
Common Stock, the Warrants and the Common Stock underlying the Warrants
(collectively the "Registrable Securities"). On such occasion, the Company will
file a Registration Statement covering the Registrable Securities within sixty
days after receipt of the Initial Demand Notice and use its best efforts to have
such registration statement declared effective promptly thereafter. If the
Company fails to comply with the provisions of this Section 5.1.1, the Company
shall, in addition to any other equitable or other relief available to the
Holder(s), be liable for any and all incidental, special and consequential
damages sustained by the Holder(s). The demand for registration may be made at
any time during a period of four years beginning one year from the Effective
Date. The Company covenants and agrees to give written notice of its receipt of
any Initial Demand Notice by any Holder(s) to all other registered Holders of
the Purchase Options and/or the Registrable Securities within ten days from the
date of the receipt of any such Initial Demand Notice.
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<PAGE>
5.1.2 TERMS. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. The Company agrees to use its best efforts to cause the
filing required herein to become effective promptly and to qualify or register
the Registrable Securities in such States as are reasonably requested by the
Holder(s); provided, however, that in no event shall the Company be required to
register the Registrable Securities in a State in which such registration would
cause (i) the Company to be obligated to register or license to do business in
such State, or (ii) the principal stockholders of the Company to be obligated to
escrow their shares of capital stock of the Company. The Company shall cause
any registration statement filed pursuant to the demand rights granted under
Section 5.1.1 to remain effective for a period of at least nine consecutive
months from the date that the Holders of the Registrable Securities covered by
such registration statement are first given the opportunity to sell all of such
securities.
5.2 "PIGGY-BACK" REGISTRATION.
5.2.1 GRANT OF RIGHT. In addition to the demand right of
registration, the Holders of the Purchase Options shall have the right for a
period of seven years commencing one year from the Effective Date, to include
the Registrable Securities as part of any other registration of securities filed
by the Company (other than in connection with a transaction contemplated by Rule
145(a) promulgated under the Act or pursuant to Form S-8 or any equivalent
form).
5.2.2 TERMS. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. In the event of such a proposed registration, the
Company shall furnish the then Holders of outstanding Registrable Securities
with not less than thirty days written notice prior to the proposed date of
filing of such registration statement. Such notice to the Holders shall
continue to be given for each registration statement filed by the Company until
such time as all of the Registrable Securities have been sold by the Holder.
The holders of the Registrable Securities shall exercise the "piggy-back" rights
provided for herein by giving written notice, within twenty days of the receipt
of the Company's notice of its intention to file a registration statement. The
Company shall cause any registration statement filed pursuant to the above
"piggyback" rights to remain effective for at least nine months from the date
that the Holders of the Registrable Securities are first given the opportunity
to sell all of such securities.
5.3 GENERAL TERMS.
5.3.1 INDEMNIFICATION. The Company shall indemnify the Holder(s)
of the Registrable Securities to be sold pursuant to any registration statement
hereunder and each person, if any, who controls such Holders within the meaning
of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or
liability (including all reasonable attorneys' fees and other expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify the Underwriter contained in Section 5 of the
Underwriting Agreement between the Underwriter and the Company, dated the
Effective Date. The Holder(s) of the Registrable Securities to be sold pursuant
to such registration
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statement, and their successors and assigns, shall severally, and not jointly,
indemnify the Company, against all loss, claim, damage, expense or liability
(including all reasonable attorneys' fees and other expenses reasonably incurred
in investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their successors
or assigns, in writing, for specific inclusion in such registration statement to
the same extent and with the same effect as the provisions contained in Section
5 of the Underwriting Agreement pursuant to which the Underwriter has agreed to
indemnify the Company.
5.3.2 EXERCISE OF WARRANTS. Nothing contained in this Purchase
Option shall be construed as requiring the Holder(s) to exercise their Purchase
Options or Warrants prior to or after the initial filing of any registration
statement or the effectiveness thereof.
5.3.3 EXCLUSIVITY. The Company shall not permit the inclusion of
any securities other than the Registrable Securities to be included in any
registration statement filed pursuant to Section 5.1 hereof without the prior
written consent of the Majority Holders of the Registrable Securities.
5.3.4 DOCUMENTS DELIVERED TO HOLDERS. The Company shall furnish
to each Holder participating in any of the foregoing offerings and to the
Underwriter of any such offering, if any, a signed counterpart, addressed to
such Holder or Underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under any underwriting agreement related thereto), and (ii) a "cold
comfort" letter dated the effective date of such registration statement (and, if
such registration includes an underwritten public offering, a letter dated the
date of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to Underwriter in underwritten public offerings of securities.
The Company shall also deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and to the
Underwriter copies of all correspondence between the Commission and the Company,
its counsel or auditors and all memoranda relating to discussions with the
Commission or its staff with respect to the registration statement and permit
each Holder and Underwriter to do such investigation, upon reasonable advance
notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such Holder shall reasonably request.
5.3.5 UNDERWRITING AGREEMENT. The Company shall enter into an
underwriting agreement with the Underwriter representing the Holders whose
Registrable Securities are being registered pursuant to this Section 5. Such
Underwriter must be reasonably acceptable to the Company. Such agreement shall
be reasonably satisfactory in form and substance to the Company, each Holder and
such Underwriter, and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements
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of that type used by the Underwriter. The Holders shall be parties to any
underwriting agreement relating to an underwritten sale of their Registrable
Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such Underwriter shall also be made to and for the benefit of such Holders.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the Underwriter except as they may relate to
such Holders, their shares and their intended methods of distribution.
5.3.6 DOCUMENTS TO BE DELIVERED BY HOLDER(S). Each of the
Holder(s) participating in any of the foregoing offerings shall furnish to the
Company a completed and executed questionnaire provided by the Company
requesting information customarily sought of selling security holders.
6. ADJUSTMENTS.
6.1 ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES. The Exercise
Price and the number of shares of Common Stock underlying the Purchase Option
(and underlying the Warrants underlying the Purchase Option) shall be subject to
adjustment from time to time as hereinafter set forth:
6.1.1 STOCK DIVIDENDS - RECAPITALIZATION, RECLASSIFICATION, SPLIT-
UPS. If after the date hereof, and subject to the provisions of Section 6.3
below, the number of outstanding shares of Common Stock is increased by a stock
dividend payable in shares of Common Stock or by a split-up, recapitalization or
reclassification of shares of Common Stock or other similar event, then, on the
effective date thereof, the number of shares of Common Stock and Warrants
issuable on exercise of the Purchase Option shall be increased in proportion to
such increase in outstanding shares; provided, however, that nothing in this
section is intended to provide for adjustment with respect to the Warrants
beyond that provided for in the Warrant Agreement between the Company and
American Stock Transfer & Trust Company. For example, if the Company declares a
two-for-one stock dividend and at the time of such dividend this Purchase Option
is for the purchase of 1,000 shares at $6.00 per share and 1,000 Warrants at
$0.12 per Warrant (each Warrant exercisable for $5.00 per share), upon
effectiveness of the dividend, the Purchase Option will be adjusted to allow for
the purchase of 2,000 shares at $3.00 per share and 2,000 Warrants at $0.06
(each Warrant exercisable for $2.50 per share).
6.1.2 AGGREGATION OF SHARES. If after the date hereof, and
subject to the provisions of Section 6.3, the number of outstanding shares of
Common Stock is decreased by a consolidation, combination or reclassification of
shares of Common Stock or other similar event, then, upon the effective date
thereof, the number of shares of Common Stock issuable on exercise of the
Purchase Option and the Warrants underlying the Purchase Option shall be
decreased in proportion to such decrease in outstanding shares.
6.1.3 ADJUSTMENTS IN EXERCISE PRICE. Whenever the number of
shares of Common Stock or Warrants purchasable upon the exercise of this
Purchase Option is adjusted, as provided in this Section 6.1, the Exercise Price
shall be adjusted (to the nearest cent) by multiplying such Exercise Price
immediately prior to such adjustment by a fraction (x) the numerator of which
shall be the number of shares of Common Stock or Warrants, as the case may be,
purchasable upon the exercise of this Purchase Option immediately prior to such
adjustment, and (y) the denominator
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of which shall be the number of shares of Common Stock or Warrants, as the case
may be, so purchasable immediately thereafter.
6.1.4 REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. In case
of any reclassification or reorganization of the outstanding shares of Common
Stock other than a change covered by Section 6.1.1 hereof or which solely
affects the par value of such shares of Common Stock, or in the case of any
merger or consolidation of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification or reorganization
of the outstanding shares of Common Stock), or in the case of any sale or
conveyance to another corporation or entity of the property of the Company as an
entirety or substantially as an entirety in connection with which the Company is
dissolved, the Holder of this Purchase Option shall have the right thereafter
(until the expiration of the right of exercise of this Purchase Option) to
receive upon the exercise hereof, for the same aggregate Exercise Price payable
hereunder immediately prior to such event, the kind and amount of shares of
stock or other securities or property (including cash) receivable upon such
reclassification, reorganization, merger or consolidation, or upon a dissolution
following any such sale or other transfer, by a Holder of the number of shares
of Common Stock of the Company obtainable upon exercise of this Purchase Option
immediately prior to such event; and if any reclassification also results in a
change in shares of Common Stock covered by Section 6.1.1, then such adjustment
shall be made pursuant to Sections 6.1.1, 6.1.3 and this Section 6.1.4. The
provisions of this Section 6.1.4 shall similarly apply to successive
reclassifications, reorganizations, mergers or consolidations, sales or other
transfers.
6.1.5 CHANGES IN FORM OF PURCHASE OPTION. This form of Purchase
Option need not be changed because of any change pursuant to this Section, and
Purchase Options issued after such change may state the same Exercise Price and
the same number of shares of Common Stock and Warrants as are stated in the
Purchase Options initially issued pursuant to this Agreement. The acceptance by
any Holder of the issuance of new Purchase Options reflecting a required or
permissive change shall not be deemed to waive any rights to a prior adjustment
or the computation thereof.
6.2 [Intentionally Omitted]
6.3 ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
or Warrants upon the exercise or transfer of the Purchase Option, nor shall it
be required to issue scrip or pay cash in lieu of any fractional interests, it
being the intent of the parties that all fractional interests shall be
eliminated by rounding any fraction up or down to the nearest whole number of
Warrants, shares of Common Stock or other securities, properties or rights.
7. RESERVATION AND LISTING. The Company shall at all times reserve and keep
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of the Purchase Options or the Warrants, such number
of shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Purchase Options and payment of the Exercise Price therefor, all
shares of Common Stock and other securities issuable upon such exercise shall be
duly and
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validly issued, fully paid and non-assessable and not subject to preemptive
rights of any stockholder. The Company further covenants and agrees that upon
exercise of the Warrants underlying the Purchase Options and payment of the
respective Warrant exercise price therefor, all shares of Common Stock and other
securities issuable upon such exercises shall be duly and validly issued, fully
paid and non-assessable and not subject to preemptive rights of any stockholder.
As long as the Purchase Options shall be outstanding, the Company shall use its
best efforts to cause all (i) shares of Common Stock issuable upon exercise of
the Purchase Options and the Warrants, and (ii) the Warrants underlying the
Purchase Options to be listed (subject to official notice of issuance) on all
securities exchanges (or, if applicable on Nasdaq) on which the Common Stock or
the Public Warrants issued to the public in connection herewith are then listed
and/or quoted.
8. CERTAIN NOTICE REQUIREMENTS.
8.1 HOLDER'S RIGHT TO RECEIVE NOTICE. Nothing herein shall be construed
as conferring upon the Holders the right to vote or consent or to receive notice
as a stockholder for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Purchase Options and their exercise, any of the
events described in Section 8.2 shall occur, then, in one or more of said
events, the Company shall give written notice of such event at least fifteen
days prior to the date fixed as a record date or the date of closing the
transfer books for the determination of the stockholders entitled to such
dividend, distribution, conversion or exchange of securities or subscription
rights, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of the
closing of the transfer books, as the case may be.
8.2 EVENTS REQUIRING NOTICE. The Company shall be required to give the
notice described in this Section 8 upon one or more of the following events: (i)
if the Company shall take a record of the holders of its shares of Common Stock
for the purpose of entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution payable otherwise
than out of retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company, or (ii) the Company shall
offer to all the holders of its Common Stock any additional shares of capital
stock of the Company or securities convertible into or exchangeable for shares
of capital stock of the Company, or any option, right or warrant to subscribe
therefor, or (iii) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be proposed.
8.3 NOTICE OF CHANGE IN EXERCISE PRICE. The Company shall, promptly after
an event requiring a change in the Exercise Price pursuant to Section 6 hereof,
send notice to the Holders of such event and change ("Price Notice"). The Price
Notice shall describe the event causing the change and the method of calculating
same and shall be certified as being true and accurate by the Company's
President and Chief Financial Officer.
8.4 TRANSMITTAL OF NOTICES. All notices, requests, consents and other
communications under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if delivered personally or
sent by overnight courier, with acknowledgment of receipt to the party to which
notice is given, or on the fifth day after mailing if mailed to the party to
whom notice is to be given, by registered or certified mail, return receipt
requested, postage prepaid and properly addressed as follows: (i) if to the
registered Holder of the Purchase Option, to the address of such Holder as shown
on the books of the Company, or (ii) if to the Company, to its principal
executive office.
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9. MISCELLANEOUS.
9.1 AMENDMENTS. The Company and the Underwriter may from time to time
supplement r amend this Purchase Option without the approval of any of the
Holders in order to cure any ambiguity, to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem shall not
adversely affect the interest of the Holders. All other modifications or
amendments shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.
9.2 HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Purchase Option.
9.3 ENTIRE AGREEMENT. This Purchase Option (together with the other
agreements and documents being delivered pursuant to or in connection with this
Purchase Option) constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
9.4 BINDING EFFECT. This Purchase Option shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
respective successors, legal Representative and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Purchase Option or any provisions
herein contained.
9.5 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Purchase Option shall
be governed by and construed and enforced in accordance with the laws of the
State of New York, without giving effect to conflict of laws. The Company
hereby agrees that any action, proceeding or claim against it arising out of, or
relating in any way to this Purchase Option shall be brought and enforced in the
courts of the State of New York or of the United States of America for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any process or summons to be served upon the Company may be served by
transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
8 hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the Company in any action, proceeding or claim. The Company agrees
that the prevailing party(ies) in any such action shall be entitled to recover
from the other party(ies) all of its reasonable attorneys' fees and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
9.6 WAIVER, ETC. The failure of the Company or the Holder to at any time
enforce any of the provisions of this Purchase Option shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Purchase Option or any provision hereof or the right of the
Company or any Holder to thereafter enforce each and every provision of this
Purchase Option. No waiver of any breach, non-compliance or non-fulfillment of
any of the provisions of this Purchase Option shall be effective unless set
forth in a written instrument executed by the party or parties against whom or
which enforcement of such waiver is sought; and
10
<PAGE>
no waiver of any such breach, non-compliance or non-fulfillment shall be
construed or deemed to be a waiver of any other or subsequent breach, non-
compliance or non-fulfillment.
9.7 EXECUTION IN COUNTERPARTS. This Purchase Option may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement, and shall become
effective when one or more counterparts has been signed by each of the parties
hereto and delivered to each of the other parties hereto.
IN WITNESS WHEREOF, the Company has caused this Purchase Option to be
signed by its duly authorized officer as of the ____ day of _____________, 1997.
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
By:________________________________
Name: Robert H. Gurevitch
Title: Chief Executive Officer and
Chairman
11
<PAGE>
Form to be used to exercise Purchase Option:
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
200 North Westlake Boulevard
Suite 202
Westlake Village, California 91362
Date:_________________, 19__
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase ____ shares of Common Stock and Warrants to
purchase __________ shares of Common Stock of Dental/Medical Diagnostic Systems,
Inc. and hereby makes payment of $____________ (at the rate of $__________ per
share of Common Stock and $_________ per Warrant) in payment of the Exercise
Price pursuant thereto. Please issue the Common Stock and Warrants as to which
this Purchase Option is exercised in accordance with the instructions given
below.
OR
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase _____________________ shares of Common Stock and
Warrants to purchase _____ shares of Common Stock of Dental/Mental Diagnostic
Systems, Inc. by surrender of the unexercised portion of the within Purchase
Option (with a "Value" of $______________ based on a "Market Price" of $ ).
Please issue the Common Stock and Warrants comprising the Securities in
accordance with the instructions given below.
______________________________
Signature
______________________________
Signature Guaranteed
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A
BANK, OTHER THAN A SAVINGS BANK, OR BY A TRUST COMPANY OR BY A FIRM HAVING
MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name ________________________________________________________
(Print in Block Letters)
Address ________________________________________________________
12
<PAGE>
Form to be used to assign Purchase Option:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the
within Purchase Option):
FOR VALUE RECEIVED,____________________________________
does hereby sell, assign and transfer unto_______________________
the right to purchase _______________________ shares of Common Stock and/or
Warrants to purchase ________ shares of Common Stock of Dental/Medical
Diagnostic Systems, Inc. ("Company") evidenced by the within Purchase Option and
does hereby authorize the Company to transfer such right on the books of the
Company.
Dated:___________________, 199_
______________________________
Signature
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
13
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
A DELAWARE CORPORATION
Robert H. Gurevitch and Ronald E. Wittman each certify that:
1. Robert H. Gurevitch is the duly elected and acting Chairman of the
Board, Chief Executive Officer, President, and Secretary, and Ronald E.
Wittman is the duly elected and acting Chief Financial Officer, of the
corporation named above.
2. The Certificate of Incorporation of the corporation, filed with the
Secretary of State of the State of Delaware, on February 23, 1983, and as
previously amended on July 22, 1987, and further amended and restated on
January 13, 1997, shall be further amended and restated to read in full as
follows:
FIRST: The name of this corporation is DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC. (the "Corporation").
SECOND: The address of the registered office of the Corporation in
the State of Delaware is 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at that address is
The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which a corporation may now or hereafter be organized
under the General Corporation Law of the State of Delaware as set forth in
Title 8 to the Delaware Code (the "GCL").
FOURTH: (a) The total number of shares which the Corporation
shall have authority to issue is 20,000,000 shares of common stock, par value
$0.01 per share (the "Common Stock") and 1,000,000 shares of Preferred Stock,
par value $0.01 per share (the "Preferred Stock").
(b) The holders of the issued and outstanding shares of
Common Stock shall be entitled to one vote per share of Common Stock held by
them on all matters voted upon by stockholders of the Corporation, including,
but not limited to, the election of directors.
(c) The Preferred Stock may be divided into such number
of series as the Board of Directors of this Corporation may determine. The
Board of Directors of this Corporation is authorized to determine and alter
the rights, preferences, privileges and
<PAGE>
restrictions granted to and imposed upon the Preferred Stock or any series
thereof with respect to any wholly unissued class or series of Preferred
Stock, and to fix the number of shares of any series of Preferred Stock and
the designation of any such series of Preferred Stock. The Board of
Directors of this Corporation, within the limits and restrictions stated in
any resolution or resolutions of the Board of Directors of this Corporation
originally fixing the number of shares constituting any series, may increase
or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any series subsequent to the issue of
that series.
FIFTH: Effective March 21, 1997, every 1.33333333 issued and
outstanding shares of Common Stock are reconstituted and converted into one
(1) share of Common Stock and every issued and outstanding option or other
right to purchase 1.33333333 shares of Common Stock is reconstituted and
converted into an option or other right to purchase one (1) share of Common
Stock.
SIXTH: Election of directors at an annual or special meeting of
stockholders need not be by written ballot unless the Bylaws of the
Corporation shall otherwise provide.
SEVENTH: In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to
adopt, repeal, alter, amend or rescind the Bylaws of the Corporation.
EIGHTH: (a) The Corporation shall indemnify to the fullest extent
authorized or permitted by law (as now or hereafter in effect) any person
made, or threatened to be made, a defendant or witness to any action, suit or
proceeding (whether civil or criminal or otherwise) by reason of the fact
that he, his testator or intestate, is or was a director or officer of the
Corporation or by reason of the fact that such director or officer at the
request of the Corporation, is or was serving any other corporation,
partnership, joint venture, trust, employee benefit plan or enterprise, in
any capacity. Nothing contained herein shall affect any rights to
indemnification to which employees other than directors and officers may be
entitled by law. No amendment or repeal of this Section (a) of Article
EIGHTH shall apply to or have any effect on any right to indemnification
provided hereunder with respect to any acts or omissions occurring prior to
such amendment or repeal.
(b) No director of the Corporation shall be personally
liable to the Corporation or its stockholders for monetary damages for any
breach of fiduciary duty by such a director as a director. Notwithstanding
the foregoing sentence, a director shall be liable to the extent provided by
applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the GCL, or (iv) for any transaction from which
such director derived an improper personal benefit. No amendment to or
repeal of this Section (b) of Article EIGHTH shall apply to or have any
effect on the liability or alleged liability of any director of the
<PAGE>
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
(c) In furtherance and not in limitation of the powers
conferred by statute:
(i) the Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is serving at the request of the Corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify against such liability under
the provisions of law; and
(ii) the Corporation may create a trust fund, grant a
security interest and/or use other means (including, without limitation,
letters of credit, surety bonds and/or other similar arrangements), as well
as enter into contracts providing indemnification to the fullest extent
authorized or permitted by law and including as part thereof provisions with
respect to any or all of the foregoing to ensure the payment of such amounts
as may become necessary to effect indemnification as provided therein, or
elsewhere.
NINTH: Whenever a compromise or arrangement is proposed between
this Corporation and its creditors or any class of them and/or between this
Corporation and its Stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a
summary way of this Corporation or of any creditor or Stockholder thereof, or
on the application of any receiver or receivers appointed for this
Corporation under the provisions of Section 291 of Title 8 of the Delaware
Code or on the application of trustees in dissolution or of any receiver or
receivers appointed for this Corporation under the provisions of Section 279
of Title 8 of the Delaware Code, order a meeting of the creditors or class of
creditors, and/or of the Stockholders or class of Stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and
to any reorganization of this Corporation as a consequence of such compromise
or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said
application has been made, be binding on all the creditors or class of
creditors, and/or on all the Stockholders or class of Stockholders, of this
Corporation, as the case may be, and also in this Corporation.
3. The foregoing Amended and Restated Certificate of Incorporation has
been duly approved by the Board of Directors of the Corporation in accordance
with Section 245 of the GCL.
4. The foregoing Amended and Restated Certificate of Incorporation has
been duly approved, pursuant to resolutions of the Board of Directors of the
Corporation, and by a majority vote of the holders of the shares of Common
Stock outstanding.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amended and
Restated Certificate of Incorporation this ___ day of March 1997.
By:_______________________________________
Robert H. Gurevitch
President and Secretary
By:_______________________________________
Ronald E. Wittman
Chief Financial Officer
<PAGE>
COMMON STOCK [LOGO] COMMON STOCK
DMD
DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC.
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 24873K 20 8
THIS CERTIFIES THAT
IS THE RECORD HOLDER AT
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE OF
DENTAL MEDICAL DIAGNOSTIC SYSTEMS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Illegible Signature [SEAL] /s/ Illegible Signature
Treasurer Chairman
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
AMERICAN BANK NOTE COMPANY APRIL 7, 1997 dt
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807
(582) ILLEGIBLE
(FAX) (862) 426-7450
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN OQM -- as tenants in common UNIF GIFT MIN ACT -- Custodian
TEN ENT -- as tenants by the entities -------------- ----------------
JT TEM -- as joint tenants with right of (Guard) (Minor)
survivorship and not as tenants Under Uniform Gifts to Minors
in common Act
------------------------------------
(state)
UNIF TRF ACT -- _________Custodian (under age)_____)
(Cust)
_____________under Uniform Transfers
(Minor)
to Minors Act______________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list
FOR VALUE RECEIVED, _____________________hereby sell, assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OR ASSIGNEE
/ /
/ /
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ________________________________________
<TABLE>
<CAPTION>
<S> <C>
X ______________________________________________________
X ______________________________________________________
NOTICE: THE SIGNATURE(S) TO THE ASSIGNMENT MUST CORRESPOND WITH THE NAMED AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
</TABLE>
SIGNATURE(S) GUARANTEED
BY ______________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO SEC
RULE 1761B.
[STAMP]
AMERICAN BANK NOTE COMPANY APRIL 7, 1997
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90507 04992BK
(882) 99902333
(FAX) (652) 426-7450 NEW
<PAGE>
WARRANT AGREEMENT
Agreement made as of __________ __, 1997, between Dental/Medical Diagnostic
Systems, Inc., a Delaware corporation with offices at 200 North Westlake
Boulevard, Suite 202, Westlake Village, California 91362 ("Company"), and
American Stock Transfer & Trust Company, a ___________________ corporation with
offices at 40 Wall, New York, New York 10005 (herein called "Warrant Agent").
WHEREAS, the Company is engaged in a public offering of Common Stock and
Warrants ("Public Offering") and in connection therewith, has determined to
issue and deliver up to (i) 1,725,000 (including up to 225,000 that may be
issued pursuant to the Underwriter's over-allotment option) Redeemable Common
Stock Purchase Warrants ("Public Warrants") to the public investors and (ii) an
aggregate of 150,000 Warrants to M.H. Meyerson & Co., Inc. ("MHM" or the
"Underwriter") or its respective designees ("Underwriter's Warrants" and
together with the Public Warrants, the "Warrant(s)"), each of such Warrants
evidencing the right of the holder thereof to purchase one share of common
stock, $.01 par value per share, of the Company's Common Stock ("Common Stock")
for $5.00; and
WHEREAS, the Company has filed with the Securities and Exchange Commission
a Registration Statement, No. 333-22507 on Form SB-2 ("Registration Statement")
for the registration, under the Securities Act of 1933, as amended, of, among
others, the Warrants and the Common Stock issuable upon exercise of the
Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange, redemption and exercise of the
Warrants; and
WHEREAS, the Company desires to provide for the form and provisions of the
Warrants, the terms upon which they shall be issued and exercised, and the
respective rights, limitation of rights, and immunities of the Company, the
Warrant Agent, and the holders of the Warrants; and
WHEREAS, all acts and things have been done and performed which are
necessary to make the Warrants, when executed on behalf of the Company and
countersigned by or on behalf of the Warrant Agent, as provided herein, the
valid, binding and legal obligations of the Company, and to authorize the
execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein contained,
the parties hereto agree as follows:
1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the Warrant
Agent to act as agent for the Company for the Warrants, and the Warrant Agent
hereby accepts such appointment and agrees to perform the same in accordance
with the terms and conditions set forth in this Agreement.
2. WARRANTS.
2.1. FORM OF WARRANT. Each Warrant certificate shall be issued in
registered form only, shall be in substantially the form of Exhibit A hereto,
the provisions of which are incorporated herein and shall be signed by, or bear
the facsimile signature of, the Chairman of the Board or President
<PAGE>
and Secretary or Assistant Secretary of the Company and shall bear a facsimile
of the Company's seal. In the event the person whose facsimile signature has
been placed upon any Warrant certificate shall have ceased to be Chairman of the
Board or President and Secretary or Assistant Secretary of the Company before
such Warrant certificate is issued, it may be issued with the same effect as if
he had not ceased to be such at the date of issuance. The Warrants represented
by a Warrant certificate may not be exercised until such certificate has been
countersigned by the Warrant Agent as provided in Section 2.3 hereof.
2.2. EFFECT OF COUNTERSIGNATURE. Unless and until countersigned by the
Warrant Agent pursuant to this Agreement, a Warrant certificate shall be invalid
and of no effect.
2.3. EVENTS FOR COUNTERSIGNATURE. The Warrant Agent shall countersign a
Warrant certificate only upon the occurrence of either of the following events:
(i) if the Warrant certificate is to be issued in exchange or
substitution for one or more previously countersigned Warrant certificates, as
hereinafter provided, or
(ii) if the Company instructs the Warrant Agent to do so.
2.4. REGISTRATION.
2.4.1. WARRANT REGISTER. The Warrant Agent shall maintain books
("Warrant Register"), for the registration of original issuance and the
registration of transfer of the Warrants. Upon the initial issuance of the
Warrants, the Warrant Agent shall issue and register the Warrants in the names
of the respective holders thereof in such denominations and otherwise in
accordance with instructions delivered to the Warrant Agent by the Company.
2.4.2. REGISTERED HOLDER. Prior to due presentment for
registration of transfer of any Warrant certificate, the Company and the Warrant
Agent may deem and treat the person in whose name such Warrant certificate shall
be registered upon the Warrant Register ("registered holder"), as the absolute
owner of such Warrant and of each Warrant represented thereby (notwithstanding
any notation of ownership or other writing on the Warrant certificate made by
anyone other than the Company or the Warrant Agent), for the purpose of any
exercise thereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.
3. TERMS AND EXERCISE OF WARRANTS
3.1. WARRANT PRICE. Each Warrant certificate shall, when countersigned by
the Warrant Agent, entitle the registered holder thereof, subject to the
provisions of such Warrant certificate and of this Warrant Agreement, to
purchase from the Company the number of shares of Common Stock stated therein,
at the price of $5.00 per whole share, subject to the adjustments provided in
Section 4 hereof. The term "Warrant Price" as used in this Warrant Agreement
refers to the price per share at which Common Stock may be purchased at the time
a Warrant is exercised.
3.2. DURATION OF WARRANTS. Subject to Section 3.3.6 hereof, a Warrant may
be exercised only during the period ("Exercise Period") commencing on
___________ ___, 1998, and terminating on the earlier of ___________ ___, 2002,
or the date fixed for redemption of the Warrant as provided in Section 6 of this
Agreement ("Expiration Date"). Each Warrant not
2
<PAGE>
exercised on or before its expiration date shall become void, and all rights
thereunder and all rights in respect thereof under this Agreement shall cease at
the close of business on its Expiration Date. The Company in its sole
discretion may extend the duration of the Warrants by delaying the Expiration
Date.
3.3. EXERCISE OF WARRANTS.
3.3.1. PAYMENT. A Warrant, when countersigned by the Warrant
Agent, may be exercised by the registered holder thereof by surrendering the
certificate representing such Warrant, at the office of the Warrant Agent, or at
the office of its successor as Warrant Agent, in the Borough of Manhattan, City
and State of New York, with the subscription form, as set forth on the Warrant
certificate and in substantially the form of Exhibit A hereto, duly executed,
and by paying in full, in lawful money of the United States, in cash, good
certified check or bank draft payable to the order of the Company, the Warrant
Price for each full share of Common Stock as to which the Warrant is exercised
and any and all applicable taxes due in connection with the exercise of the
Warrant, the exchange of the Warrant for the Common Stock, and the issuance of
the Common Stock.
3.3.2. ISSUANCE OF CERTIFICATES. As soon as practicable after the
exercise of any Warrant and the clearance of the funds in payment of the Warrant
Price, the Company shall issue to the registered holder of such Warrant a
certificate or certificates for the number of full shares of Common Stock to
which he is entitled, registered in such name or names as may be directed by
him, and if such Warrant shall not have been exercised in full, a new
countersigned Warrant certificate for the number of shares as to which such
Warrant shall not have been exercised. Notwithstanding the foregoing, the
Company shall not be obligated to deliver any securities pursuant to the
exercise of a Warrant unless a registration statement under the Securities Act
of 1933 with respect to the securities is effective. Warrants may not be
exercised by, or securities issued to, any registered holder in any state in
which such exercise would be unlawful.
3.3.3. VALID ISSUANCE. All shares of Common Stock issued upon the
proper exercise of a Warrant in conformity with this Agreement shall be validly
issued.
3.3.4. DATE OF ISSUANCE. Each person in whose name any such
certificate for shares of Common Stock is issued shall for all purposes be
deemed to have become the holder of record of such shares on the date on which
the Warrant certificate was surrendered and payment of the Warrant Price was
made, irrespective of the date of delivery of such certificate, except that, if
the date of such surrender and payment is a date when the stock transfer books
of the Company are closed, such person shall be deemed to have become the holder
of such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
3.3.5. WARRANT SOLICITATION AND WARRANT SOLICITATION FEE.
a. The Company has engaged the Underwriter, on a non-exclusive
basis, as its agent for the solicitation of the exercise of the Warrants. The
Company, at its cost, will (i) assist the Underwriter with respect to such
solicitation, if requested by the Underwriter and (ii) provide the Underwriter,
and direct the Company's transfer and warrant agent to deliver to the
Underwriter, lists of the record, and to the extent known, beneficial owners of
the Company's Warrants. Accordingly, the Company hereby instructs the Warrant
Agent to cooperate with the Underwriter in every respect in connection with the
Underwriter's solicitation activities, including,
3
<PAGE>
but not limited to, providing to the Underwriter, at the Company's cost, a list
of record and beneficial holders of the Warrants and circulating a prospectus or
offering circular disclosing the compensation arrangements referenced in Section
3.3.5(b) hereinbelow to holders of the Warrants at the time of exercise of the
Warrants. In addition to the conditions set forth in Section 3.3.5(b)
hereinbelow, the Underwriter shall only accept payment of the warrant
solicitation fee provided in Section 3.3.5(b) if it has provided bona fide
services in connection with the exercise of the Warrants. In addition to
soliciting, either orally or in writing, the exercise of Warrants by a Warrant
holder, such services may also include disseminating information, either orally
or in writing, to Warrant holders about the Company or the market for the
Company's securities, or assisting in the processing of the exercise of
Warrants.
b. In each instance in which a Warrant is exercised, the Warrant
Agent shall promptly give written notice of such exercise to the Company and the
Underwriter ("Warrant Agent's Exercise Notice"). If, upon the exercise of any
Warrant more than one year from the Effective Date, (i) the market price of the
Company's Common Stock is greater than the Warrant Price, (ii) disclosure of
compensation arrangements was made both at the time of the original offering and
at the time of exercise (by delivery of the Prospectus or as otherwise required
by applicable law, rule or regulation), (iii) the exercise of the Warrant was
solicited by the Underwriter, (iv) the Warrant was not held in a discretionary
account, and (v) the solicitation of the exercise of the Warrant was not in
violation of Regulation M (as such rule or any successor rule may be in effect
as of such time of exercise) promulgated under the Securities Exchange Act of
1934, then the Warrant Agent, simultaneously with the distribution of proceeds
to the Company received upon exercise of the Warrant(s) so exercised, shall, on
behalf of the Company, pay from the proceeds received upon exercise of the
Warrant(s), a fee of 4% of the Warrant Price to the Underwriter, provided that
the Underwriter delivers to the Warrant Agent within ten (10) business days from
the date on which the Underwriter has received the Warrant Agent's Exercise
Notice, a certificate that the conditions set forth in the preceding clauses
(iii), (iv) and (v) have been satisfied. The Underwriter and the Company may at
any time during business hours, examine the records of the Warrant Agent,
including its ledger of original Warrant certificates returned to the Warrant
Agent upon exercise of Warrants.
c. The provisions of this Section 3.3.5. may not be modified,
amended or deleted without the prior written consent of the Underwriter.
4. ADJUSTMENTS.
4.1. STOCK DIVIDENDS - SPLIT-UPS. If after the date hereof, and subject to
the provisions of Section 4.5 below, the number of outstanding shares of Common
Stock is increased by a stock dividend payable in shares of Common Stock or by a
split-up of shares of Common Stock or other similar event, then, on the
effective date thereof, the number of shares issuable on exercise of each
Warrant shall be increased in proportion to such increase in outstanding shares
and the then applicable Warrant Price shall be correspondingly decreased.
4.2. AGGREGATION OF SHARES. If after the date hereof, and subject to the
provisions of Section 4.5, the number of outstanding shares of Common Stock is
decreased by a consolidation, combination or reclassification of shares of
Common Stock or other similar event, then, upon the effective date of such
consolidation, combination or reclassification, the number of shares issuable on
exercise of each Warrant shall be decreased in proportion to such decrease in
outstanding shares and the then applicable Warrant Price shall be
correspondingly increased.
4
<PAGE>
4.3. REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. If after the date
hereof any capital reorganization or reclassification of the Common Stock of the
Company, or consolidation or merger of the Company with another corporation, or
the sale of all or substantially all of its assets to another corporation or
other similar event shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger, or sale, lawful and
fair provision shall be made whereby the Warrant holders shall thereafter have
the right to purchase and receive, upon the basis and upon the terms and
conditions specified in the Warrants and in lieu of the shares of Common Stock
of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented thereby, such shares of stock, securities, or
assets as may be issued or payable with respect to or in exchange for the number
of outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented by the Warrants, had such reorganization,
reclassification, consolidation, merger, or sale not taken place and in such
event appropriate provision shall be made with respect to the rights and
interests of the Warrant holders to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Warrant Price
and of the number of shares purchasable upon the exercise of the Warrants) shall
thereafter be applicable, as nearly as may be in relation to any share of stock,
securities, or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger, or sale unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger, or the corporation purchasing such
assets, shall assume by written instrument executed and delivered to the Warrant
Agent the obligation to deliver to the Warrant holders such shares of stock,
securities, or assets as, in accordance with the foregoing provisions, such
holders may be entitled to purchase.
4.4. NOTICES OF CHANGES IN WARRANT. Upon every adjustment of the Warrant
Price or the number of shares issuable on exercise of a Warrant, the Company
shall give written notice thereof to the Warrant Agent, which notice shall state
the Warrant Price resulting from such adjustment and the increase or decrease,
if any, in the number of shares purchasable at such price upon the exercise of a
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Upon the occurrence of any event
specified in Sections 4.1., 4.2., or 4.3., then, in any such event, the Company
shall give written notice in the manner set forth above of the record date for
such dividend, distribution, or subscription rights, or the effective date of
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Such notice shall also specify the date as
of which the holders of Common Stock of record shall participate in such
dividend, distribution, or subscription rights, or shall be entitled to exchange
their Common Stock for stock, securities, or other assets deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of such event.
4.5. NO FRACTIONAL SHARES. Notwithstanding any provision contained in this
Warrant Agreement to the contrary, the Company shall not issue fractional shares
upon exercise of Warrants. If, by reason of any adjustment made pursuant to
this Section 4, the holder of any Warrant would be entitled, upon the exercise
of such Warrant, to receive a fractional interest in a share, the number of
shares of Common Stock to be received shall be rounded off to the nearest whole
number.
4.6. FORM OF WARRANT. The form of Warrant need not be changed because of
any adjustment pursuant to this Section 4, and Warrants issued after such
adjustment may state the
5
<PAGE>
same Warrant Price and the same number of shares as is stated in the Warrants
initially issued pursuant to this Agreement. However, the Company may at any
time in its sole discretion make any change in the form of Warrant that the
Company may deem appropriate and that does not affect the substance thereof, and
any Warrant thereafter issued or countersigned, whether in exchange or
substitution for an outstanding Warrant or otherwise, may be in the form as so
changed.
5. TRANSFER AND EXCHANGE OF WARRANTS.
5.1. REGISTRATION OF TRANSFER. The Warrant Agent shall register the
transfer, from time to time, of any outstanding Warrant upon the Warrant
Register, upon surrender of a Warrant certificate for transfer, properly
endorsed with signatures properly guaranteed and accompanied by appropriate
instructions for transfer. Upon any such transfer, a new Warrant certificate
representing an equal aggregate number of Warrants shall be issued and the old
Warrant certificate shall be canceled by the Warrant Agent. The Warrant
certificate so canceled shall be delivered by the Warrant Agent to the Company
from time to time upon request.
5.2. PROCEDURE FOR SURRENDER OF WARRANTS. Warrant certificates may be
surrendered to the Warrant Agent, together with a written request for exchange,
and thereupon the Warrant Agent shall issue in exchange therefor one or more new
Warrant certificates as requested by the registered holder of the Warrant
certificates so surrendered, representing an equal aggregate number of Warrants;
provided, however, that in the event that a Warrant certificate surrendered for
transfer bears a restrictive legend, the Warrant Agent shall not cancel such
Warrant certificate and issue new Warrant certificates in exchange therefor
until the Warrant Agent has received an opinion of counsel for the Company
stating that such transfer may be made and indicating whether the new Warrant
certificates must also bear a restrictive legend.
5.3. FRACTIONAL WARRANTS. The Warrant Agent shall not be required to
effect any registration of transfer or exchange which will result in the
issuance of a warrant certificate for a fraction of a warrant. The number of
Warrants to be delivered shall be rounded off to the nearest whole number.
5.4. SERVICE CHARGES. No service charge shall be made for any exchange or
registration of transfer of Warrants.
5.5. WARRANT EXECUTION AND COUNTERSIGNATURE. The Warrant Agent is hereby
authorized to countersign and to deliver, in accordance with the terms of this
Agreement, the Warrants required to be issued pursuant to the provisions hereof,
and the Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrant certificates duly executed on behalf of the Company for such
purpose.
6. REDEMPTION.
6.1. REDEMPTION. Not less than all of the outstanding Warrants may be
redeemed, at the option of the Company, after they become exercisable and prior
to the Expiration Date, at the office of the Warrant Agent, upon the notice
referred to in Section 6.2., at the price of $.01 per Warrant ("Redemption
Price"), provided that (a) the last sale price of the Common Stock has been at
least one hundred and ninety percent (190%) of the then effective exercise price
of the Public Warrants on each of the ten (10) consecutive trading days ending
on the third business day prior
6
<PAGE>
to the date on which notice of redemption is given, the satisfaction of which
condition shall be certified by the Company and (b) the Company has obtained the
prior written consent of the Underwriter. The provisions of this Section 6.1
may not be modified, amended or deleted without the prior written consent of the
Underwriter.
6.2. DATE FIXED FOR, AND NOTICE OF, REDEMPTION. In the event the Company
shall elect to redeem all or any part of the outstanding Warrants, the Company
shall fix a date for the redemption. Notice of redemption shall be mailed by
first class mail, postage prepaid, by the Company or the Company's agent at its
direction not less than 30 days from the date fixed for redemption to the
registered holders of the outstanding Warrants to be redeemed at their last
address as they shall appear on the registration books. Any notice mailed in
the manner herein provided shall be conclusively presumed to have been duly
given whether or not the registered holder received such notice.
6.3. EXERCISE AFTER NOTICE OF REDEMPTION. The outstanding Warrants may be
exercised in accordance with Section 3 of this Agreement at any time after
notice of redemption shall have been given by the Company pursuant to
Section 6.2. hereof and prior to the date fixed for redemption. On and after
the redemption date, the record holder of the outstanding Warrants shall have no
further rights except to receive, upon surrender of the outstanding Warrants,
the redemption price.
6.4. OUTSTANDING WARRANTS ONLY. The Company understands that the
redemption rights provided for by this Section 6 apply only to outstanding
Warrants. To the extent a person holds rights to purchase Warrants, such
purchase rights shall not be extinguished by redemption. However, once such
purchase rights are exercised, the Company may redeem the Warrants issued upon
such exercise provided that the criteria for redemption is met. The provisions
of this Section 6.4 may not be modified, amended or deleted without the prior
written consent of the Underwriter.
7. OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS.
7.1. NO RIGHTS AS STOCKHOLDER. A Warrant does not entitle the registered
holder thereof to any of the rights of a stockholder of the Company, including,
without limitation, the right to receive dividends, or other distributions,
exercise any preemptive rights to vote or to consent or to receive notice as
stockholders in respect of the meetings of stockholders or the election of
directors of the Company or any other matter.
7.2. LOST, STOLEN, MUTILATED, OR DESTROYED WARRANTS. If any Warrant
certificate is lost, stolen, mutilated, or destroyed, the Company and the
Warrant Agent may on such terms as to indemnity or otherwise as they may in
their discretion impose (which shall, in the case of a mutilated Warrant
certificate, include the surrender thereof), issue a new Warrant certificate of
like denomination, tenor, and date as the Warrant certificate so lost, stolen,
mutilated, or destroyed. Any such new Warrant certificate shall constitute a
substitute contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated, or destroyed Warrant certificate shall be at any time
enforceable by anyone.
7.3. RESERVATION OF COMMON STOCK. The Company shall at all times reserve
and keep available a number of its authorized but unissued shares of Common
Stock that will be sufficient to permit the exercise in full of all outstanding
Warrants issued pursuant to this Agreement.
7
<PAGE>
7.4. REGISTRATION OF COMMON STOCK. The Company agrees that prior to the
date that the Warrants become exercisable it shall file with the Securities and
Exchange Commission a post-effective amendment to the Registration Statement, if
possible, or a new registration statement, under the Securities Act of 1933, and
it shall take such action as is necessary to qualify for sale, in those states
in which the Warrants were initially offered by the Company, the Common Stock
issuable upon exercise of the Warrants. In either case, the Company shall cause
the same to become effective prior to the date that the Warrants become
exercisable and shall maintain the effectiveness of such registration statement
and keep current a prospectus thereunder and maintain such qualification until
the expiration of the Public Warrants and the Underwriter's Warrants in
accordance with the provisions of this Agreement. The provisions of this
Section 7.4 may not be modified, amended or deleted without the prior written
consent of the Underwriter.
8. CONCERNING THE WARRANT AGENT AND OTHER MATTERS.
8.1. PAYMENT OF TAXES. The Company will from time to time promptly pay all
taxes and charges that may be imposed upon the Company or the Warrant Agent in
respect of the issuance or delivery of shares of Common Stock upon the exercise
of Warrants, but the Company shall not be obligated to pay any transfer taxes in
respect of the Warrants or such shares.
8.2. RESIGNATION, CONSOLIDATION, OR MERGER OF WARRANT AGENT.
8.2.1. APPOINTMENT OF SUCCESSOR WARRANT AGENT. The Warrant Agent,
or any successor to it hereafter appointed, may resign its duties and be
discharged from all further duties and liabilities (other than those incurred
prior to such resignation or discharge) hereunder after giving sixty (60) days'
notice in writing to the Company. If the office of the Warrant Agent becomes
vacant by resignation or incapacity to act or otherwise, the Company shall
appoint in writing a successor Warrant Agent in place of the Warrant Agent. If
the Company shall fail to make such appointment within a period of 30 days after
it has been notified in writing of such resignation or incapacity by the Warrant
Agent or by a holder of Warrants (who shall, with such notice, submit his
Warrant for inspection by the Company), then the holder of any Warrant may apply
to the Supreme Court of the State of New York for the County of New York for the
appointment of a successor Warrant Agent. Any successor Warrant Agent, whether
appointed by the Company or by such court, shall be a corporation organized,
existing and in good standing and authorized under the laws of the state in
which it was incorporated to exercise corporate trust powers, shall maintain an
office in the Borough of Manhattan, City and State of New York for the transfer
of the Warrants and, if not incorporated in the State of New York, shall be
authorized to do business in the State of New York as a foreign corporation, and
subject to supervision or examination by federal or state authority and shall be
authorized to serve as Warrant Agent for the Warrants under the Securities
Exchange Act of 1934, as amended. After appointment, any successor Warrant
Agent shall be vested with all the authority, powers, rights, immunities,
duties, and obligations of its predecessor Warrant Agent with like effect as if
originally named as Warrant Agent hereunder, without any further act or deed;
but if for any reason it becomes necessary or appropriate, the predecessor
Warrant Agent shall execute and deliver, at the expense of the Company, an
instrument transferring to such successor Warrant Agent all the authority,
powers, and rights of such predecessor Warrant Agent hereunder; and upon request
of any successor Warrant Agent the Company shall make, execute, acknowledge, and
deliver any and all instruments in writing for more fully and effectually
vesting in and confirming to such successor Warrant Agent all such authority,
powers, rights, immunities, duties, and obligations.
8
<PAGE>
8.2.2. NOTICE OF SUCCESSOR WARRANT AGENT. In the event a successor
Warrant Agent shall be appointed, the Company shall give notice thereof to the
predecessor Warrant Agent and the transfer agent for the Common Stock not later
than the effective date of any such appointment.
8.2.3. MERGER OR CONSOLIDATION OF WARRANT AGENT. Any corporation
into which the Warrant Agent may be merged or with which it may be consolidated
or any corporation resulting from any merger or consolidation to which the
Warrant Agent shall be a party, if it shall be eligible to serve as Warrant
Agent under Section 8.2.1, shall be the successor Warrant Agent under this
Agreement without any further act.
8.3. FEES AND EXPENSES OF WARRANT AGENT.
8.3.1. REMUNERATION. The Company agrees to pay the Warrant Agent
reasonable remuneration for its services as such Warrant Agent hereunder and
will reimburse the Warrant Agent upon demand for all expenditures that the
Warrant Agent may reasonably incur in the execution of its duties hereunder.
8.3.2. FURTHER ASSURANCES. The Company agrees to perform, execute,
acknowledge, and deliver or cause to be performed, executed, acknowledged, and
delivered all such further and other acts, instruments, and assurances as may
reasonably be required by the Warrant Agent for the carrying out or performing
of the provisions of this Agreement.
8.4. LIABILITY OF WARRANT AGENT.
8.4.1. RELIANCE ON COMPANY STATEMENT. Whenever in the performance
of its duties under this Warrant Agreement, the Warrant Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a statement signed by the
President of the Company and delivered to the Warrant Agent. The Warrant Agent
may rely upon such statement for any action taken or suffered in good faith by
it pursuant to the provisions of this Agreement.
8.4.2. INDEMNITY. The Warrant Agent shall be liable hereunder only
for its own negligence or willful misconduct. The Company agrees to indemnify
the Warrant Agent and save it harmless against any and all liabilities,
including judgments, costs and reasonable counsel fees, for anything done or
omitted by the Warrant Agent in the execution of this Agreement except as a
result of the Warrant Agent's negligence, willful misconduct, or bad faith.
8.4.3. EXCLUSIONS. The Warrant Agent shall have no responsibility
with respect to the validity of this Agreement or with respect to the validity
or execution of any Warrant (except its countersignature thereof); nor shall it
be responsible for any breach by the Company of any covenant or condition
contained in this Agreement or in any Warrant; nor shall it be responsible to
make any adjustments required under the provisions of Section 4. hereof or
responsible for the manner, method, or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such adjustment;
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any shares of Common Stock to
be issued pursuant to this Agreement or any Warrant or as to whether any shares
of Common Stock will when issued be valid and fully paid and nonassessable.
9
<PAGE>
8.5. ACCEPTANCE OF AGENCY. The Warrant Agent hereby accepts the agency
established by this Agreement and agrees to perform the same upon the terms and
conditions herein set forth and among other things, shall account promptly to
the Company with respect to Warrants exercised and concurrently account for, and
pay to the Company, all moneys received by the Warrant Agent for the purchase of
shares of the Company's Common Stock through the exercise of Warrants.
9. MISCELLANEOUS PROVISIONS.
9.1. SUCCESSORS. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns.
9.2. NOTICES. Any notice, statement or demand authorized by this Warrant
Agreement to be given or made by the Warrant Agent or by the holder of any
Warrant to or by the Company shall be sufficiently given or made if sent by
certified mail, or private courier service, postage prepaid, addressed (until
another address is filed in writing by the Company with the Warrant Agent), as
follows:
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
200 North Westlake Boulevard
Suite 202
Westlake Village, California 91362
Attention: Robert H. Gurevitch
with a copy to:
TROOP MEISINGER STEUBER & PASICH, L.L.P.
10940 Wilshire Boulevard
Los Angeles, California 90024-3902
Any notice, statement or demand authorized by this Agreement to be given or made
by the holder of any Warrant or by the Company to or on the Warrant Agent shall
be sufficiently given or made if sent by certified mail or private courier
service, postage prepaid, addressed (until another address is filed in writing
by the Warrant Agent with the Company), as follows:
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 Wall Street
New York, New York 10005
9.3. APPLICABLE LAW; JURISDICTION. The validity, interpretation, and
performance of this Agreement and of the Warrants shall be governed in all
respects by the law of the State of New York, without giving effect to
principles of conflicts of law. The Company hereby agrees that any action,
proceeding or claim against it arising out of or relating in any way to this
Agreement shall be brought and enforced in the courts of the State of New York
or the United States District Court for the Southern District of New York, and
irrevocably submits, to such jurisdiction, which jurisdiction shall be
exclusive. The Company hereby waives any objection to such exclusive
jurisdiction and that such courts represent an inconvenience forum. Any such
process or summons to be served upon the Company may be served by transmitting a
copy thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth
10
<PAGE>
in Section 9.2 hereof. Such mailing shall be deemed personal service and shall
be legal and binding upon the Company in any action, proceeding or claim.
9.4. PERSONS HAVING RIGHTS UNDER THIS AGREEMENT. Nothing in this Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the parties hereto and the registered holders of the
Warrants and, for the purposes of Sections 3.3.5, 6.1 through 6.4 and 7.4
hereof, the Underwriter, any right, remedy, or claim under or by reason of this
Warrant Agreement or of any covenant, condition, stipulation, promise, or
agreement hereof. The Underwriter shall each be deemed to be a third-party
beneficiary of this Agreement with respect to such Sections. All covenants,
conditions, stipulations, promises, and agreements contained in this Warrant
Agreement shall be for the sole and exclusive benefit of the parties hereto (and
the Underwriter to the extent set forth above) and their successors and assigns
and of the registered holders of the Warrants.
9.5. EXAMINATION OF THE WARRANT AGREEMENT. A copy of this Agreement shall
be available at all reasonable times at the office of the Warrant Agent in the
Borough of Manhattan, City and State of New York, for inspection by the
registered holder of any Warrant. The Warrant Agent may require any such holder
to submit his or her Warrant for inspection by it.
9.6. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
9.7. EFFECT OF HEADINGS. The Section headings herein are for convenience
only and are not part of this Warrant Agreement and shall not affect the
interpretation thereof.
11
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto under their respective corporate seals as of the day and year first above
written.
Attest: DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC.
By:
- ----------------------------- ----------------------------
Name: Name: Robert H. Gurevitch
Title: Title: Chairman and Chief
Executive Officer
AMERICAN STOCK TRANSFER & TRUST
COMPANY
Attest:
By:
- ---------------------------- ----------------------------
Name: Name:
Title: Title:
12
<PAGE>
PURCHASE FORM
TO BE EXECUTED
UPON EXERCISE OF WARRANT CERTIFICATE
TO: American Stock Transfer & Trust Company
6201 - 15th Avenue
Brooklyn, New York 11219
The undersigned hereby exercises, according to the terms and conditions
thereof, the right to purchase ________________________ Shares of Common Stock,
evidenced by the within Warrant Certificate, and herewith makes payment of the
purchase price in full.
NAME:____________________________________ ________________
PAYMENT
ENCLOSED
ADDRESS:_________________________________
_________________________________________
SOCIAL SECURITY NO. OF Warrant Holder
____________________________________________________________________________
The undersigned represents that the exercise of the within Warrant was
solicited by M.H. Meyerson & Co., Inc. If not solicited by M.H. Meyerson & Co.,
Inc., please write "unsolicited" in the space below. Unless otherwise
indicated, it will be assumed that the exercise was solicited by M.H. Meyerson &
Co., Inc.
________________________________________
(Write "Unsolicited" on above line if not
solicited by M.H. Meyerson & Co., Inc.)
DATED:____________________________________________ SIGNATURE:
<PAGE>
TRANSFER FORM
For value received ____________________________________________________
hereby sells, assigns and transfers unto
___________________________________________________________________________
(___________________________________________________________ ) Warrants to
purchase Shares of Common Stock represented by the within Warrant Certificate
and does hereby irrevocably constitute and appoint
_____________________________________________________________________________
Attorney to transfer such Warrants on the books of the within named Company with
full power of substitution in the premises.
DATED:_________________________________________________
Notice: __________________________________________
The signature to this assignment must
correspond with the name as written upon
the face of this Certificate in every
particular.
__________________________________
Social Security Number of Assignee
or other identifying number
AMERICAN BANKNOTE COMPANY PRODUCTION COORDINATOR-DANIEL T. Regan
562-989-2336 PROOF OF APRIL __, 1997
_____________________________________________________________________________
SALES PERSON - Opr. eg
_____________________________________________________________________________
_____________________________________________________________________________
<PAGE>
EXHIBIT 10.24
January 3, 1996
LETTER OF AUTHORIZATION
-----------------------
THE "BAVARIAN DENTAL INSTRUMENTS, INC." IS THE SOLE INITIAL U.S.
DISTRIBUTOR OF DENTAL BURS. "BAVARIAN DENTAL INSTRUMENTS, INC." IS AUTHORIZED
TO LIST DENTAL BURS WITH FDA ON BEHALF OF NPO "ALTECH" AND MAINTAIN HISTORICAL
LISTING FILE. NPO "ALTECH" IS THE MANUFACTURER OF DENTAL BURS.
V.K. KARAGULFIN, president January 3, 1996
--------------------------
[SEAL]
<PAGE>
-1-
EXECUTIVE PURCHASE AGREEMENT # AT06-501.
THIS EXCLUSIVE PURCHASE AGREEMENT is effective this 18 day of December, 1995,
by and between NPOO "ALTECH"/NPP "SISTEMA" (MANUFACTURER), having its
principal place of business at: 220092 - Minsk, Pushkina St., 39, Republic of
Belarus, and BAVARIAN DENTAL INSTRUMENTS, INC., a corporation ("DISTRIBUTOR")
having its principal place of business at 200 North Westlake Blvd., #202,
Westlake Village, California 91362, USA (the Agreement) with reference to the
following:
RECITALS.
A. Manufacturer is in the business of manufacturing dental instruments
(hereinafter referred to as "Product");
B. Manufacturer desires to grant a distributorship in the Product to
Distributor;
C. Distributor desires to act as the sole and exclusive distributor of the
Product on behalf of Manufacturer.
1. RECITALS. The recitals in paragraph A through C, inclusive, are
incorporated herein by this reference.
2. APPOINTMENT. Subject to the terms and conditions hereinafter set forth,
Manufacturer appoints Distributor as its exclusive and sole distributor of
the Product for a period of 3 years from the date hereof ("Exclusive Term") in
the territory described in Declaration of Exclusive Rights (dated 12.21.95)
attached hereto and by this reference made a part hereof.
3. PURCHASE ORDERS. Upon ordering Product, Distributor shall submit to
Manufacturer Purchase Order specifying the quantities, prices, shipping
dates, packaging and marking requirements ("Purchase Order"). Each Purchase
Order shall be a supplement to this Agreement when accepted by Manufacturer.
4. PURCHASE PRICE AND TERMS. The purchase price for each unit of Product
regardless of quantities, shapes, sizes and grits, including shipping,
insurance and Manufacturer's custom duties, CIF, BAVARIAN DENTAL INSTRUMENTS,
INC. Westlake Village, California USA, is 21 CENT (USD).
The following terms of payment shall apply:
(a) if the Purchase Order of Distributor requires scheduled shipments,
Distributor shall pay Twenty-Five Percent (25%) of the total purchase price
as a downpayment with the placement of the Purchase Order;
(b) after Distributor receives, inspects, and accepts the shipped goods,
Distributor shall pay the balance of the purchase price for all of the
accepted goods, and Fifty Percent (50%) of the purchase price for the next
scheduled shipment;
(c) each Purchase Order shall schedule no more than four (4) shipments;
(d) payment shall be made by Letter of Credit or wire transfer to a bank
designated by Manufacturer. All Letters of Credit shall specify that they may
not be drawn upon until such time as Distributor has inspected and accepted
the shipment;
(e) in the event that the Purchase Order requires a single shipment,
Distributor shall pay Fifty Percent (50%) as a downpayment with the placement
of the Purchase Order, with the balance to be paid when the Product is
received, inspected and accepted by Distributor; and
(f) Manufacturer shall submit an invoice with each and every shipment of
Product. Distributor shall be required to make payments no more often than
twice in each month.
5. SHIPPING TERMS. Manufacturer agrees to ship the Product on or before the
date requested in the Purchase Order, provided that Distributor shall allow
not more than five (5) calendar days for shipping delays. Manufacturer agrees
to notify Distributor concerning any delays in advance, in writing. Unless
otherwise instructed, Manufacturer shall ship the Product to:
BAVARIAN DENTAL INSTRUMENTS, INC.
200 North Westlake Blvd., #202
Westlake Village, California 91362, USA
<PAGE>
-2-
6. PRODUCT REQUIREMENTS. All Product technical and working characteristics
shall be in full compliance with Manufacturer's specifications. The shape,
size and working characteristics are to be guaranteed by the Manufacturer for
the compliance with Purchase Order and ISO standard requirements.
7. PACKAGING AND MARKING REQUIREMENTS. All packaging and marking shall be
specified by Distributor. Each individual pack containing the Product shall
have the same part number, unless otherwise specified by Distributor. All
individual packs shall be sealed in plastic bags with labels identifying the
Product name, part number, quantity and Manufacturer's country of origin.
Manufacturer shall ship the Product in cartons with marking that comply with
the air carrier's regulations to provide safe transportation of the Product
from Manufacturer to Distributor.
8. PRODUCT GUARANTEE. Manufacturer, with each shipment, shall provide its
Certificate of Quality, stating that it has complied with the Product
specifications set forth in Paragraph 6, hereinabove, and the packaging and
marking specifications set forth in Paragraph 7, hereinabove.
9. PRODUCT INSPECTION AND ACCEPTANCE. The Product shall be deemed accepted
by Distributor at such time as Distributor has verified the following:
(a) the Product compliance with specification requirements are confirmed by
Manufacturer's quality certificate;
(b) the Product has been inspected to determine that the quantity is in
accordance with the Purchase Order of Distributor;
(c) the inspection of Distributor finds that the Product part numbers,
packaging and marking are in full compliance per the Purchase Order of
Distributor.
10. REJECTION OF PRODUCT. If any Product is found to be defective and/or not
in compliance with the terms of this Agreement, The Purchase Order and/or any
supplemental instructions of Distributor to Manufacturer concerning same,
including Product specification requirements as set forth in Paragraph 6,
hereinabove, such Product may be rejected by Distributor and returned to
Manufacturer at the expense of Manufacturer for full replacement at
Manufacturer's expense. Distributor shall have the right to deduct any and
all expenses in returning and replacing the defective Product from any
current or future payments due.
Replacement of defective Product shall be made by Manufacturer with three (3)
weeks from the date Distributor returns such defective Product to the
Manufacturer.
11. TERM OF AGREEMENT. The initial term of this Agreement shall be for a
period of twelve (12) months following the date Distributor first place a
Purchase Order with Manufacturer.
12. MISCELLANEOUS.
(a) ARBITRATION AND JURISDICTION. Any controversy or claim arising out of
or relating to this Agreement, or the making, performance or interpretation
thereof, shall be settled in the International Arbitration Court in
Stockholm, Sweden in accordance with the rules and procedures of said Court.
(b) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which counterparts, when so executed and delivered,
shall be deemed to be an original, and all of which counterparts, taken
together, shall constitute but one and the same agreement.
(c) FINAL AGREEMENT. The Agreement constitutes the final agreement between
the parties concerning the matters herein, and supersedes all prior and
contemporaneous agreements and understandings, whether oral or in writing.
(d) TIME IS OF THE ESSENCE. Time is of the essence of this Agreement and
every provision hereof, and of every agreement which may be entered into
under the terms hereof.
<PAGE>
-3-
(e) LITIGATION COSTS. If any legal action or any arbitration or other
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any
provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorney's fees and other costs
incurred in that action or proceeding, in addition to any other relief to
which it or they may be entitled.
(f) NOTICES. All notices, requests, demands, and other communications under
this Agreement shall be in writing and shall be deemed to have been duly
given on the date of service if served personally on the party to whom notice
is to be given.
(g) GOVERNING LAW. This Agreement is and shall be deemed to be, a contract
entered into, under and pursuant to the laws of United States of America, and
shall be in all respects governed, construed, applied and enforced in
accordance with the laws of United States of America; and no defense given or
allowed by the laws of any other state or country shall be interposed in any
arbitration proceeding, action or other proceeding herein unless such defense
is also given or allowed by the laws of United States of America.
(h) SEVERABILITY. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under law, such provision will be ineffective only to the extend of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
(i) DESCRIPTIVE HEADINGS. The descriptive article, section and paragraph
headings herein have been inserted for convenience of reference only and do
not constitute a part of this Agreement and shall not control or affect the
making or construction of any of the provisions of this Agreement.
(j) DRAFTING. There shall be no presumption against any party on the ground
that such party was responsible for preparing this Agreement.
(k) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of parties hereto, their successors and assigns.
Notwithstanding same, Manufacturer may not assign or transfer any of its
rights or obligations hereunder without the prior written consent of
Distributor.
(l) AMENDMENTS AND OTHER MODIFICATIONS. No amendment or any provision of
this Agreement (including a waiver thereof or consent relating thereto)
shall be effective unless the same shall be in writing and signed by all of
the parties hereto.
Any waiver or consent relating to any provision of this Agreement shall be
effective only in the specific instance and for the specific purpose for
which given.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
"MANUFACTURER" NPO "ALTECH"
[SEAL]
By: F.K. Karagulkin
President
"DISTRIBUTOR" BAVARIAN DENTAL INSTRUMENTS, INC.
[SEAL]
By: A. Borodyansky
Vice President
<PAGE>
EXHIBIT 10.34
INDUSTRIAL LEASE
(Multi-Tenant; Net)
"AS-IS"
BETWEEN
THE IRVINE COMPANY
AND
MEDICAL DIAGNOSTIC SYSTEMS, LLC
<PAGE>
INDEX TO LEASE
Page
ARTICLE I. BASIC LEASE PROVISIONS............1
ARTICLE II. PREMISES..........................2
Section 2.1 Leased Premises...................2
Section 2.2 Acceptance of Premises............2
Section 2.3 Building Name and Address.........2
ARTICLE III. TERM..............................2
Section 3.1 General...........................2
Section 3.2 Delay in Possession...............2
ARTICLE IV. RENT AND OPERATING EXPENSES.......2
Section 4.1 Basic Rent........................2
Section 4.2 Operating Expenses................2
Section 4.3 Security Deposit..................3
ARTICLE V. USES..............................4
Section 5.1 Use...............................4
Section 5.2 Signs.............................4
Section 5.3 Hazardous Materials...............4
ARTICLE VI. COMMON AREAS; SERVICES............6
Section 6.1 Utilities and Services............6
Section 6.2 Operation and Maintenance of
Common Areas....................6
Section 6.3 Use of Common Areas...............6
Section 6.4 Parking...........................6
Section 6.5 Changes and Additions
by Landlord.....................6
ARTICLE VII. MAINTAINING THE PREMISES..........7
Section 7.1 Tenant's Maintenance and
Repair..........................7
Section 7.2 Landlord's Maintenance and
Repair..........................7
Section 7.3 Alterations.......................7
Section 7.4 Mechanic's Liens..................7
Section 7.5 Entry and Inspection..............8
ARTICLE VIII. TAXES AND ASSESSMENTS ON
TENANT'S PROPERTY...............8
ARTICLE IX. ASSIGNMENT AND SUBLETTING.........8
Section 9.1 Rights of Parties.................8
Section 9.2 Effect of Transfer................9
Section 9.3 Sublease Requirements.............9
Section 9.4 Certain Transfers.................9
ARTICLE X. INSURANCE AND INDEMNITY..........10
Section 10.1 Tenant's Insurance...............10
Section 10.2 Landlord's Insurance.............10
Section 10.3 Tenant's Indemnity...............10
Section 10.4 Landlord's Nonliability..........10
Section 10.5 Waiver of Subrogation............10
ARTICLE XI. DAMAGE OR DESTRUCTION............11
Section 11.1 Restoration......................11
Section 11.2 Lease Governs....................11
ARTICLE XII. EMINENT DOMAIN...................11
Section 12.1 Total or Partial Taking..........11
Section 12.2 Temporary Taking.................11
Section 12.3 Taking of Parking Area...........11
ARTICLE XIII. SUBORDINATION; ESTOPPEL
CERTIFICATE; FINANCIALS........12
Section 13.1 Subordination....................12
Section 13.2 Estoppel Certificate.............12
Section 13.3 Financials.......................12
ARTICLE XIV. DEFAULTS AND REMEDIES............12
Section 14.1 Tenant's Defaults................12
Section 14.2 Landlord's Remedies..............13
Section 14.3 Late Payments....................14
Section 14.4 Right of Landlord to Perform.....14
Section 14.5 Default by Landlord..............14
Section 14.6 Expenses and Legal Fees..........14
Section 14.7 Waiver of Jury Trial.............14
Section 14.8 Satisfaction of Judgment.........14
Section 14.9 Limitation of Actions Against
Landlord.......................14
ARTICLE XV. END OF TERM......................15
Section 15.1 Holding Over.....................15
Section 15.2 Merger on Termination............15
Section 15.3 Surrender of Premises;
Removal of Property............15
ARTICLE XVI. PAYMENTS AND NOTICES.............16
ARTICLE XVII. RULES AND REGULATIONS............16
ARTICLE XVIII. BROKER'S COMMISSION..............16
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST..16
ARTICLE XX. INTERPRETATION...................16
Section 20.1 Gender and Number................16
Section 20.2 Headings.........................16
Section 20.3 Joint and Several Liability......16
Section 20.4 Successors.......................16
Section 20.5 Time of Essence..................16
Section 20.6 Controlling Law..................16
Section 20.7 Severability.....................16
Section 20.8 Waiver and Cumulative Remedies...16
Section 20.9 Inability to Perform.............16
Section 20.10 Entire Agreement.................16
Section 20.11 Quiet Enjoyment..................17
Section 20.12 Survival.........................17
ARTICLE XXI. EXECUTION AND RECORDING..........17
Section 21.1 Counterparts.....................17
Section 21.2 Corporate and Partnership
Authority......................17
Section 21.3 Execution of Lease; No Option
or Offer.......................17
Section 21.4 Recording........................17
Section 21.5 Amendments.......................17
Section 21.6 Executed Copy....................17
Section 21.7 Attachments......................17
ARTICLE XXII. MISCELLANEOUS....................17
Section 22.1 Nondisclosure of Lease Terms.....17
Section 22.2 Guaranty.........................17
Section 22.3 Changes Requested by Lender......17
Section 22.4 Mortgagee Protection.............17
Section 22.5 Covenants and Conditions.........18
Section 22.6 Security Measures................18
EXHIBITS
Exhibit A Description of Premises
Exhibit B Environmental Questionnaire
Exhibit C Landlord's Disclosures
Exhibit D Insurance Requirements
Exhibit E Rules and Regulations
Exhibit Y Project Site Plan
<PAGE>
INDUSTRIAL LEASE
(Multi-Tenant; Net)
"AS-IS"
THIS LEASE is made as of 27th day of October, 1995 by and between the
---- -------------
Irvine Company, a Michigan corporation, hereafter called "Landlord," and
MEDICAL DIAGNOSTIC SYSTEMS, LLC, a limited liability company, hereinafter
- ------------------------------------------------------------
called "Tenant."
INITIAL
ARTICLE 1. BASIC LEASE PROVISIONS /s/
HERE
Each reference in this Lease to the "Basic Lease Provisions" shall mean
and refer to the following collective terms, the application of which shall be
governed by the provisions in the remaining Articles of this Lease.
1. Premises: Suite No. C-501 (the Premises are more particularly
-----
described in Section 2.1).
Address of Building: One Technology Drive, Irvine, CA 92718
--------------------------------------------
2. Project Description (if applicable): One Technology Park
-----------------------------
3. Use of Premises: Office and distribution of dental equipment and
-------------------------------------------------
assembly.
------------------------------------------------------------------
4. Commencement Date: November 1, 1995
------------------------------------------------
5. Lease Term: Thirty-six (36) months, plus such additional days as
--------------------
may be required to cause this Lease to terminate on the final day of
the calendar month.
6. Basic Rent: Three Thousand Seven Hundred Twenty-Nine Dollars and
-------------------------------------------------------
Seventy Cents ($3,729.70) per month, based on $ .65 per rentable
------------------------- -----
square foot.
Basic Rent is subject to adjustment as follows:
Commencing November 1, 1996, the Basic Rent payable shall be Three
Thousand Nine Hundred One Dollars and Eighty-Four Cents ($3,901.84) per
month, based on $.68 per rentable square foot.
Commencing November 1, 1997, the Basic Rent payable shall be Four
Thousand Seventy-Three Dollars and Ninety-Eight Cents ($4,073.98) per
month, based on $.71 per rentable square foot.
7. Guarantor(s): Robert Gurevitch and Hiroki Umezaki
-------------------------------------------------------
8. Floor Area of Premises: approximately 5,738 rentable square feet.
-------
9. Security Deposit: $4,481.38
---------------------------------------------------
10. Broker(s): None
----------------------------------------------------------
11. Additional Insureds: The Irvine Company and Insignia*O'Donnell
-------------------------------------------------
Commercial Group
---------------------------------------------------------------------
12. Address for Payments and Notices:
<TABLE>
<CAPTION>
LANDLORD TENANT
<S> <C>
The Irvine Company Medical Diagnostic Systems, LLC
c/o Insignia*O'Donnell Commercial Group One Technology Drive, Suite C-501
One Technology Drive, Suite F-207 Irvine CA 92718
Irvine, CA 91718
Attn: Property Manager
with a copy of notices to:
IRVINE INDUSTRIAL COMPANY
P.O. Box 6370
Newport Beach, CA 92658-6370
Attn: Vice President, Industrial Operations
</TABLE>
13. Tenant's Liability Insurance Requirements: $1,000,000.00
----------------------------
14. Vehicle Parking Spaces: Seventeen ( 17 )
-----------------------
Exhibits:
A Description of Premises D Insurance Requirements
B Environmental Questionnaire E Rules and Regulations
C Landlord's Disclosures Y Project Site Plan
Riders:
-------------------------------------------------------------
-------------------------------------------------------------
- 1 -
<PAGE>
ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant
Leases from Landlord the premises shown in Exhibit A (the "Premises"),
containing approximately the floor area set forth in Item 8 of the Basic Lease
Provisions and known by the suite number identified in Item 1 of the Basic Lease
Provisions. The Premises are located in the building identified in Item 1 of
the Basic Lease Provisions (which together with the underlying real property, is
called the "Building"), and is a portion of the project shown in Exhibit Y (the
"Project"). Tenant understands that the floor area set forth in Item 8 of the
Basic Lease Provisions may include, at Landlord's option, a factor approximating
the total square footage of any common lobby or internal common features of the
Building times the ratio of the actual square footage of the Premises to the
total square footage of the Building. If, at any time and from time to time,
Landlord's architect or space planner determines that the rentable square
footage of the Premises differs from that set forth in the Basic Lease
Provisions, then Landlord shall so notify Tenant and the Basic Rent (as shown in
Item 6 of the Basic Lease Provisions) shall be promptly adjusted in proportion
to the change in square footage. Within five (5) days following Landlord's
request, the parties shall memorialize the adjustments by executing an amendment
to this Lease prepared by Landlord, provided that the failure or refusal by
either party to execute the amendment shall not affect its validity.
SECTION 2.2. ACCEPTANCE OF PREMISES. Tenant acknowledges that
neither Landlord nor any representative of Landlord has made any representation
or warranty with respect to the Premises or the Building or the suitability or
fitness of either for any purpose, including without limitation any
representations or warranties regarding zoning or other land use matters, and
that neither Landlord nor any representative of Landlord has made any
representations or warranties regarding (i) what other tenants or uses may be
permitted or intended in the Building and the Project, or (ii) any exclusivity
of use by Tenant with respect to its permitted use of the Premises as set forth
in Item 3 of the Basic Lease Provisions. Tenant further acknowledges that
neither Landlord nor any representative of Landlord has agreed to undertake any
alterations or additions to the Premises except as expressly provided in this
Lease, except that Landlord shall install one (1) main door between the office
portion of the Premises and the warehouse portion of the Premises. The taking
of possession or use of the Premises by Tenant for any purpose shall
conclusively establish that the Premises and the Building were in satisfactory
condition and in conformity with the provisions of this Lease in all respects.
SECTION 2.3. BUILDING NAME AND ADDRESS. Tenant shall not utilize
any name selected by Landlord from time to time for the Building and/or the
Project as any part of Tenant's corporate or trade name. Landlord shall have
the right to change the name, address, number or designation of the Building or
Project without liability to Tenant.
ARTICLE III. TERM
SECTION 3.1. GENERAL. The Term shall be for the period shown in
Item 5 of the Basic Lease Provisions. The Term shall commence ("Commencement
Date") on the date set forth in Item 4 of the Basic Lease Provisions. Promptly
following the Commencement Date, the parties shall memorialize on a form
provided by Landlord the actual Commencement Date and the expiration date
("Expiration Date") of this Lease. Tenant's failure to execute that form shall
not affect the validity of Landlord's determination of those dates.
SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any reason
whatsoever, cannot delivery possession of the Premises to Tenant on or before
the Commencement Date, this Lease shall not be void or voidable nor shall
Landlord be liable to Tenant for any resulting loss or damage. However, Tenant
shall not be liable for any rent and the Commencement Date shall not occur
until Landlord delivers possession of the Premises and the Premises are in fact
available for Tenant's occupancy, except that if Landlord's failure to so
deliver possession on the Estimated Commencement Date is attributable to any
action or inaction by Tenant, then the Commencement Date shall not be advanced
to the date on which possession of the Premises is tendered to Tenant, and
Landlord shall be entitled to full performance by Tenant (including the payment
of rent) from the date Landlord would have been able to deliver the Premises to
Tenant but for Tenant's delay(s).
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. From and after the Commencement Date, Tenant
shall pay to Landlord without deduction or offset, Basic Rent for the Premises
in the total amount shown (including subsequent adjustments, if any) in Item 6
of the Basic Lease Provisions. Any rental adjustment shown in Item 6 shall be
deemed to occur on the specified monthly anniversary of the Commencement Date,
whether or not that date occurs at the end of a calendar month. The rent shall
be due and payable in advance commencing on the Commencement Date (as prorated
for any partial month) and continuing thereafter on the first day of each
successive calendar month of the Term. No demand, notice or invoice shall be
required for the payment of Basic Rent. An installment of rent in the amount
of one (1) full month's Basic Rent at the initial rate specified in Item 6 of
the Basic Lease Provisions shall be delivered to Landlord concurrently with
Tenant's execution of this Lease and shall be applied against the Basic Rent
first due hereunder.
SECTION 4.2. OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent,
Tenant's Share of "Operating Expenses", as defined below, incurred by Landlord
in the operation of the Building and Project. The term "Tenant's Share" means
that portion of an Operating Expense determined by multiplying the cost of such
item by a fraction, the numerator of which is the floor area of the Premises and
the denominator of which is the total square footage of the floor area, as of
the date on which the computation is made, to be charged with such Operating
Expense.
(b) Commencing prior to the state of the first full
"Expense Recovery Period" (as defined below) of the Lease, and prior to the
start of each full or partial Expense Recovery Period thereafter, Landlord
shall give Tenant a written estimate of the amount of Tenant's Share of
Operating Expenses for the Expense Recovery Period. Tenant shall pay the
estimated amounts to Landlord in equal monthly installments, in advance, with
Basic Rent. If Landlord has not furnished its written estimate
- 2 -
<PAGE>
for any Expense Recovery Period by the time set forth above, Tenant shall
continue to pay cost reimbursements at the rates established for the prior
Expense Recovery Period, if any; provided that when the new estimate is
delivered to Tenant, Tenant shall, at the next monthly payment date, pay any
accrued cost reimbursements based upon the new estimate. For purposes hereof,
"Expense Recovery Period" shall mean every twelve month period during the Term
(or portion thereof for the first and last lease years) commencing July 1 and
ending June 30.
(c) Within one hundred twenty (120) days after the end of
each Expense Recovery Period, Landlord shall furnish to Tenant a statement
showing in reasonable detail the actual or prorated Operating Expenses incurred
by Landlord during the period, and the parties shall within thirty (30) days
thereafter make any payment or allowance necessary to adjust Tenant's estimated
payments, if any, to the actual Tenant's Share as shown by the annual
statement. Any delay or failure by Landlord in delivering any statement
hereunder shall not constitute a waiver of Landlord's right to require Tenant
to pay Tenant's Share of Operating Expenses pursuant hereto. Any amount due
Tenant shall be credited against installments next coming due under this
Section 4.2, and any deficiency shall be paid by Tenant together with the next
installment. If Tenant has not made estimated payments during the Expense
Recovery Period, any amount owing by Tenant pursuant to subsection (a) above
shall be paid to Landlord in accordance with Article XVI. Should Tenant fail to
object in writing to Landlord's determination of actual Operating Expenses
within sixty (60) days following delivery of Landlord's expense statement,
Landlord's determination of actual Operating Expenses for the applicable
Expense Recovery Period shall be conclusive and binding on the parties and any
future claims to the contrary shall be barred.
(d) Even though the Lease has terminated and the Tenant has
vacated the Premises, when the final determination is made of Tenant's Share of
Operating Expenses for the Expense Recovery Period in which the Lease
terminates, Tenant shall upon notice pay the entire increase due over the
estimated expenses paid. Conversely, any overpayment made in the event expenses
decrease shall be rebated by Landlord to Tenant.
(e) If, at any time during any Expense Recovery Period, any
one or more of the Operating Expenses are increased to a rate(s) or amount(s)
in excess of the rate(s) or amount(s) used in calculating the estimated
expenses for the year, then the estimate of Tenant's Share of Operating Expenses
shall be increased for the month in which such rate(s) or amount(s) becomes
effective and for all succeeding months by an amount equal to Tenant's Share of
the increase. Landlord shall give Tenant written notice of the amount or
estimated amount of the increase, the month in which the increase will become
effective, Tenant's Share thereof and the month for which the payments are due.
Tenant shall pay the increase to Landlord as part of Tenant's monthly payments
of estimated expenses as provided in paragraph (b) above, commencing with the
month in which effective.
(f) The term "Operating Expenses" shall mean and include
all "Project Costs" (as hereafter defined) and "Property Taxes" (as hereafter
defined).
(g) The term "Project Costs" shall include all expenses of
operation and maintenance of the Building and the Project, together with all
appurtenant Common Areas (as defined in Section 6.2), and shall include the
following charges by way of illustration but not limitation: water and sewer
charges; insurance premiums or reasonable premium equivalents should Landlord
elect to self-insure any risk that Landlord is authorized to insure hereunder;
license, permit, and inspection fees; heat; light; power; janitorial services
to any interior Common Areas; air conditioning; supplies; materials; equipment;
tools; the cost of any environmental, insurance, tax or other consultant
utilized by Landlord in connection with the Building and/or Project;
establishment of reasonable reserves for replacements and/or repair of Common
Area improvements, equipment and supplies; costs incurred in connection with
compliance of any laws or changes in laws applicable to the Building or the
Project; the cost of any capital investments (other than tenant improvements
for specific tenants) to the extent of the amortized amount thereof over the
useful life of such capital investments calculated at a market cost of funds,
all as determined by Landlord, for each such year of useful life during the
Term; costs associated with the procurement and maintenance of an air
conditioning, heating and ventilation service agreement, and procurement and
maintenance of an intrabuilding network cable service agreement for any
intrabuilding network cable telecommunications lines within the Project, and
any other installation, maintenance, repair and replacement costs associated
with such lines; labor; reasonably allocated wages and salaries, fringe
benefits, and payroll taxes for administrative and other personnel directly
applicable to the Building and/or Project, including both Landlord's personnel
and outside personnel; any expense incurred pursuant to Sections 6.1, 6.2, 6.4,
7.2, and 10.2; and a reasonable overhead/management fee for the professional
operation of the Project. Notwithstanding anything to the contrary herein,
Tenants's Share of any such property management fees shall be determined by
multiplying the actual property management fee charged (which from time to time
may be with respect to the Building only, a portion of the Project only, the
entire project, or the Project together with other properties owned by Landlord
and/or its affiliates) by a fraction, the numerator of which is the floor area
of the Premises (as set forth in Item 8 of the Basic Lease Provisions contained
in the Lease), and the denominator of which is the total square footage of
space charged with such management fee actually leased to tenants (including
Tenant). It is understood that Project Costs shall include competitive charges
for direct services provided by any subsidiary or division of Landlord.
(h) The term "Property Taxes" as used herein shall include
the following: (i) all real estate taxes or personal property taxes, as such
property taxes may be reassessed from time to time; and (ii) other taxes,
charges and assessments which are levied with respect to this Lease or to the
Building and/or the Project, and any improvements, fixtures and equipment and
other property of Landlord located in the Building and/or the Project, except
that general net income and franchise taxes imposed against Landlord shall be
excluded; and (iii) all assessments and fees for public improvements, services,
and facilities and impacts thereon, including without limitation arising out of
any Community Facilities Districts, "Mello Roos" districts, similar assessment
districts, and any traffic impact mitigation assessments or fees; (iv) any tax,
surcharge or assessment which shall be levied in addition to or in lieu of real
estate of personal property taxes, other than taxes covered by Article VIII;
and (v) costs and expenses incurred in contesting the amount or validity of any
Property Tax by appropriate proceedings.
SECTION 4.3 SECURITY DEPOSIT. Concurrently with Tenant's delivery
of this Lease, Tenant shall deposit with Landlord the sum, if any, stated in
Item 9 of the Basic Lease Provisions, to be held by Landlord as security for
the full and faithful performance of Tenant's obligations under this Lease (the
"Security Deposit"). Subject to the last sentence of this Section, the Security
Deposit shall be understood and agreed to be the property of Landlord upon
Landlord's receipt thereof, and may be utilized
<PAGE>
by Landlord in its discretion towards the payment of all prepaid expenses by
Landlord for which Tenant would be required to reimburse Landlord under this
Lease, including without limitation brokerage commissions. Upon any default by
Tenant, including specifically Tenant's failure to pay rent or to abide by its
obligations under Section 7.1 and 15.3 below, whether or not Landlord is
informed of or has knowledge of the default, the Security Deposit shall be
deemed to be automatically and immediately applied, without waiver of any
rights Landlord may have under this Lease or at law or in equity as a result of
the default, as a setoff for full or partial compensation for that default. If
any portion of the Security Deposit is applied after a default by Tenant,
Tenant shall within five (5) days after written demand by Landlord deposit cash
with Landlord in an amount sufficient to restore the Security Deposit to its
original amount. Landlord shall not be required to keep this Security Deposit
separate from its general funds, and Tenant shall not be entitled to interest
on the Security Deposit. If Tenant fully performs its obligations under this
Lease, the Security Deposit shall be returned to Tenant (or, at Landlord's
option, to the last assignee of Tenant's interest in this Lease) after the
expiration of the Term, provided that Landlord may retain the Security Deposit
to the extent and until such time as all amounts due from Tenant in accordance
with this Lease have been determined and paid in full.
ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the
purposes stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities.
The parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief in
addition to any other available remedy. Tenant, at its expense, shall
procure, maintain and make available for Landlord's inspection throughout the
Term, all governmental approvals, licenses and permits required for the proper
and lawful conduct of Tenant's permitted use of the Premises. Tenant shall not
do or permit anything to be done in or about the Premises which will in any way
interfere with the rights of other occupants of the Building or the Project, or
use or allow the Premises to be used for any unlawful purpose, nor shall Tenant
permit any nuisance or commit any waste in the Premises or the Project. Tenant
shall not perform any work or conduct any business whatsoever in the Project
other than inside the Premises. Tenant shall not do or permit to be done
anything which will invalidate or increase the cost of any insurance
policy(ies) covering the Building, the Project and/or their contents, and shall
comply with all applicable insurance underwriters rules and the requirements of
the Pacific Fire Rating Bureau or any other organization performing a similar
function. Tenant shall comply at its expense with all present and future laws,
ordinances, restrictions, regulations, orders, rules and requirements of all
governmental authorities that pertain to Tenant or its use of the Premises,
including without limitation all federal and state occupational health and
safety requirements, whether or not Tenant's compliance will necessitate
expenditures or interfere with its use and enjoyment of the Premises. Tenant
shall comply at its expense with all present and future covenants, conditions,
easements or restrictions now or hereafter affecting or encumbering the
Building and/or Project, and any amendments or modifications thereto, including
without limitation the payment by Tenant of any periodic or special dues or
assessments charged against the Premises or Tenant which may be allocated to
the Premises or Tenant in accordance with the provisions thereof. Tenant shall
promptly upon demand reimburse Landlord for any additional insurance premium
charged by reason of Tenant's failure to comply with the provisions of this
Section, and shall indemnify Landlord from any liability and/or expense
resulting from Tenant's noncompliance.
SECTION 5.2 SIGNS. Except as approved in writing by Landlord, in
its sole discretion, Tenant shall have no right to maintain identification signs
in any location in, on or about the Premises, the Building or the Project and
shall not place or erect any other signs, displays or other advertising
materials that are visible from the exterior of the Building. The size, design,
graphics, material, style, color and other physical aspects of any permitted
sign shall be subject to Landlord's written approval prior to installation
(which approval may be withheld in Landlord's discretion), any covenants,
conditions or restrictions encumbering the Premises, Landlord's signage program
for the Project, as in effect from time to time and approved by the City of
Irvine ("Signage Criteria"), and any applicable municipal or other governmental
permits and approvals. Tenant acknowledges having received and reviewed a copy
of the current Signage Criteria for the Project. Tenant shall be responsible
for the cost of any permitted sign, including the fabrication, installation,
maintenance and removal thereof. If Tenant fails to maintain its sign, or if
Tenant fails to remove same upon termination of this Lease and repair any damage
caused by such removal, Landlord may do so at Tenant's expense.
SECTION 5.3 HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous
Materials" includes (i) any "hazardous materials" as defined in Section
25501(k) of the California Health and Safety Code, (ii) any other substance or
mater which results in liability to any person or entity from exposure to such
substance or matter under any statutory or common law theory, and (iii) any
substance or matter which is in excess of permitted levels set forth in any
federal, California or local law or regulation pertaining to any hazardous or
toxic substance, material or waste.
(b) Tenant shall not cause or permit any Hazardous
Materials to be brought upon, stored, used, generated, released or disposed of
on, under, from or about the Premises (including without limitation the soil
and groundwater thereunder) without the prior written consent of Landlord.
Notwithstanding the foregoing, Tenant shall have the right, without obtaining
prior written consent of Landlord, to utilize within the Premises standard
office products that may contain Hazardous Materials (such as photocopy toner,
"White Out", and the like), provided however, that (i) Tenant shall maintain
such products in their original retail packaging, shall follow all instructions
on such packaging with respect to the storage, use and disposal of such
products, and shall otherwise comply with all applicable laws with respect to
such products, and (ii) all of the other terms and provisions of this Section
5.3 shall apply with respect to Tenant's storage, use and disposal of all such
products. Landlord may, in its sole discretion, place such conditions as
Landlord deems appropriate with respect to any such Hazardous Materials, and
may further require that Tenant demonstrate that any such Hazardous Materials
are necessary or useful to Tenant's business and will be generated, stored,
used and disposed of in a manner that complies with all applicable laws and
regulations pertaining thereto and with good business practices. Tenant
understands that Landlord may utilize an environmental consultant to assist in
determining conditions of approval in connection with the storage, generation,
release, disposal or use
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of Hazardous Materials by Tenant on or about the Premises, and/or to conduct
periodic inspections of the storage, generation, use, release and/or disposal
of such Hazardous Materials by Tenant on and from the Premises, and Tenant
agrees that any costs incurred by Landlord in connection therewith shall be
reimbursed by Tenant to Landlord as additional rent hereunder upon demand.
(c) Prior to the execution of this Lease, Tenant shall
complete, execute and deliver to Landlord an Environmental Questionnaire and
Disclosure Statement (the "Environmental Questionnaire") in the form of Exhibit
8 attached hereto. The completed Environmental Questionnaire shall be deemed
incorporated into this Lease for all purposes, and Landlord shall be entitled
to rely fully on the information contained therein. On each anniversary of the
Commencement Date until the expiration or sooner termination of this Lease,
Tenant shall disclose to Landlord in writing the names and amounts of all
Hazardous Materials which were stored, generated, used, released and/or
disposed of on, under or about the Premises for the twelve-month period prior
thereto, and which Tenant desires to store, generate, use, release and/or
disposed of on, under or about the Premises for the succeeding twelve-month
period. In addition, to the extent Tenant is permitted to utilize Hazardous
Materials upon the Premises, Tenant shall promptly provide Landlord with
complete and legible copies of all the following environmental documents
relating thereto: reports filed pursuant to any self-reporting requirements;
permit applications, permits, monitoring reports, workplace exposure and
community exposure warnings or notices and all other reports, disclosures,
plans or documents (even those which may be characterized as confidential)
relating to water discharges, air pollution, waste generation or disposal, and
underground storage tanks for Hazardous Materials; orders, reports, notices,
listings and correspondence (even those which may be considered confidential)
of or concerning the release, investigation of, compliance, cleanup, remedial
and corrective actions, and abatement of Hazardous Materials; and all
complaints, pleadings and other legal documents filed by or against Tenant
related to Tenant's use, handling, storage, release and/or disposal of
Hazardous Materials.
(d) Landlord and its agents shall have the right, but not
the obligation, to inspect, sample and/or monitor the Premises and/or the soil
or groundwater thereunder at any time to determine whether Tenant is complying
with the terms of this Section 5.3, and in connection therewith Tenant shall
provide Landlord with full access to all relevant facilities, records and
personnel. If Tenant is not in compliance with any of the provisions of this
Section 5.3, or in the event of a release of any Hazardous Material on, under
or about the Premises caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees, Landlord and its agents shall have the
right, but not the obligation, without limitation upon any of Landlord's other
rights and remedies under this Lease, to immediately enter upon the Premises
without notice and to discharge Tenant's obligations under this Section 5.3 at
Tenant's expense, including without limitation the taking of emergency or
long-term remedial action. Landlord and its agents shall endeavor to minimize
interference with Tenant's business in connection therewith, but shall not be
liable for any such interference. In addition, Landlord, at Tenant's expense,
shall have the right, but not the obligation, to join and participate in any
legal proceedings or actions initiated in connection with any claims arising out
of the storage, generation, use, release and/or disposal by Tenant or its
agents, employees, contractors, licensees or invitees of Hazardous Materials on,
under, from or about the Premises.
(e) If the presence of any Hazardous Materials on, under,
from or about the Premises or the Project caused or permitted by Tenant or its
agents, employees, contractors, licensees or invitees results in (i) injury to
any person, (ii) injury to or any contamination of the Premises or the Project,
or (iii) injury to or contamination of any real or personal property wherever
situated, Tenant, at its expense, shall promptly take all actions necessary to
return the Premises and the Project and any other affected real or personal
property owned by Landlord to the condition existing prior to the introduction
of such Hazardous Materials and to remedy or repair any such injury or
contamination, including without limitation, any cleanup, remediation,
removal, disposal, neutralization or other treatment of any such Hazardous
Materials. Notwithstanding the foregoing, Tenant shall not, without Landlord's
prior written consent, take any remedial action in response to the presence of
any Hazardous Materials on, under or about the Premises or the Project or any
other affected real or personal property owned by Landlord or enter into any
similar agreement, consent, decree or other compromise with any governmental
agency with respect to any Hazardous Materials claims; provided however,
Landlord's prior written consent shall not be necessary in the event that the
presence of Hazardous Materials on, under or about the Premises or the Project
or any other affected real or personal property owned by the Landlord (i)
imposes an immediate threat to the health, safety or welfare of any individual
or (ii) is of such a nature that an immediate remedial response is necessary
and it is not possible to obtain Landlord's consent before taking such action.
To the fullest extent permitted by law, Tenant shall indemnify, hold harmless,
protect and defend (with attorneys acceptable to Landlord) Landlord and any
successors to all or any portion of Landlord's interest in the Premises and the
Project and any other real or personal property owned by Landlord from and
against any and all liabilities, losses, damages, diminution in value,
judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses
(including without limitation attorneys' fees, court costs and other
professional expenses), whether foreseeable or unforeseeable, arising directly
or indirectly out of the use, generation, storage, treatment, release, on- or
off-site disposal or transportation of Hazardous Materials on, into, from,
under or about the Premises, the Building and the Project and any other real or
personal property owned by Landlord caused or permitted by Tenant, its agents,
employees, contractors, licensees or invitees, specifically including without
limitation the cost of any required or necessary repair, restoration, cleanup or
detoxification of the Premises, the Building and the Project and any other real
or personal property owned by Landlord, and the preparation of any closure or
other required plans, whether or not such action is required or necessary during
the Term or after the expiration of this Lease. If Landlord at any time
discovers that Tenant or its agents, employees, contractors, licensees or
invitees may have caused or permitted the release of a Hazardous Material on,
under, from or about the Premises or any other real or personal property owned
by Landlord, Tenant shall, at Landlord's request, immediately prepare and
submit to Landlord a comprehensive plan, subject to Landlord's approval,
specifying the actions to be taken by Tenant to return the Premises or the
Project or any other real or personal property owned by Landlord to the
condition existing prior to the introduction of such Hazardous Materials. Upon
Landlord's approval of such cleanup plan, Tenant shall, at its expense, and
without limitation of any rights and remedies of Landlord under this Lease or at
law or in equity, immediately implement such plan and proceed to cleanup such
Hazardous Materials in accordance with all applicable laws and as required by
such plan and this Lease. The provisions of this subsection (e) shall
expressly survive the expiration or sooner termination of this Lease.
(f) Landlord hereby discloses to Tenant, and Tenant hereby
acknowledges, certain facts relating to Hazardous Materials at the Project
known by Landlord to exist as of the date of this Lease, as more particularly
described in Exhibit C attached hereto. Tenant shall have no liability or
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responsibility with respect to the Hazardous Materials facts described in
Exhibit C, nor with respect to any Hazardous Materials which Tenant proves were
not caused or permitted by Tenant, its agents, employees, contractors,
licensees or invitees. Notwithstanding the preceding two sentences, Tenant
agrees to notify its agents, employees, contractors, licensees, and invitees of
any exposure or potential exposure to Hazardous Materials at the Premises that
Landlord brings to Tenant's attention.
ARTICLE VI. COMMON AREAS; SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible
for and shall pay promptly, directly to the appropriate supplier, all charges
for water, gas, electricity, sewer, heat, light, power, telephone, refuse
pickup, janitorial service, interior landscape maintenance and all other
utilities, materials and services furnished directly to Tenant or the Premises
or used by Tenant in, on or about the Premises during the Term, together with
any taxes thereon. If any utilities or services are not separately metered or
assessed to Tenant, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such amount to Landlord, as an item of additional rent, within ten (10) days
after receipt of Landlord's statement or invoice therefor. Alternatively,
Landlord may elect to include such cost in the definition of Building Costs in
which event Tenant shall pay Tenant's proportionate share of such costs in the
manner set forth in Section 4.2. Landlord shall not be liable for damages or
otherwise for any failure or interruption of any utility or other service
furnished to the Premises, and no such failure or interruption shall be deemed
an eviction or entitle Tenant to terminate this Lease or withhold or abate any
rent due hereunder. Landlord shall at all reasonable times have free access to
all electrical and mechanical installations of Landlord.
SECTION 6.2. OPERATION AND MAINTENANCE OF COMMON AREAS. During the
Term, Landlord shall operate all Common Areas within the Building and the
Project. The term "Common Areas" shall mean all areas within the exterior
boundaries of the Building and other buildings in the Project which are not
held for exclusive use by persons entitled to occupy space, and all other
appurtenant areas and improvements provided by Landlord for the common use of
Landlord and tenants and their respective employees and invitees, including
without limitation parking areas and structures, driveways, sidewalks,
landscaped and planted areas, hallways and interior stairwells not located
within the premises of any tenant, common electrical rooms and roof access
entries, common entrances and lobbies, elevators, and restrooms not located
within the premises of any tenant.
SECTION 6.3. USE OF COMMON AREAS. The occupancy by Tenant of the
Premises shall include the use of the Common Areas in common with Landlord and
with all others for whose convenience and use the Common Areas may be provided
by Landlord, subject, however, to compliance with all rules and regulations as
are prescribed from time to time by Landlord. Landlord shall operate and
maintain the Common Areas in the manner Landlord may determine to be
appropriate. All costs incurred by Landlord for the maintenance and operation
of the Common Areas shall be included in Project Costs unless any particular
cost incurred can be charged to a specific tenant of the Project. Landlord
shall at all times during the Term have exclusive control of the Common Areas,
and may restrain any use or occupancy, except as authorized by Landlord's rules
and regulations. Tenant shall keep the Common Areas clear of any obstruction
or unauthorized use related to Tenant's operations. Nothing in this Lease
shall be deemed to impose liability upon Landlord for any damage to or loss of
the property of, or for any injury to, Tenant, its invitees or employees.
Landlord may temporarily close any portion of the Common Areas for repairs,
remodeling and/or alterations, to prevent a public dedication or the accrual of
prescriptive rights, or for any other reason deemed sufficient by Landlord,
without liability to Landlord.
SECTION 6.4. PARKING. Tenant shall be entitled to the number of
vehicle parking spaces set forth in Item 14 of the Basic Lease Provisions,
which spaces shall be unreserved and unassigned, on those portions of the
Common Areas designated by Landlord for parking. Tenant shall not use more
parking spaces than such number. All parking spaces shall be used only for
parking by vehicles no larger than full size passenger automobiles or pickup
trucks. Tenant shall not permit or allow any vehicles that belong to or are
controlled by Tenant or Tenant's employees, suppliers, shippers, customers or
invitees to be loaded, unloaded or parked in areas other than those designated
by Landlord for such activities. If Tenant permits or allows any of the
prohibited activities described above, then Landlord shall have the right,
without notice, in addition to such other rights and remedies that Landlord may
have, to remove or tow away the vehicle involved and charge the costs to
Tenant. Parking within the Common Areas shall be limited to striped parking
stalls, and no parking shall be permitted in any driveways, access ways or in
any area which would prohibit or impede the free flow of traffic within the
Common Areas. There shall be no overnight parking of any vehicles of any kind
unless otherwise authorized by Landlord, and vehicles which have been abandoned
or parked in violation of the terms hereof may be towed away at the owner's
expense. Nothing contained in this Lease shall be deemed to create liability
upon Landlord for any damage to motor vehicles of visitors or employees, for
any loss of property from within those motor vehicles, or for any injury to
Tenant, its visitors or employees, unless ultimately determined to be caused by
the sole active negligence or willful misconduct of Landlord. Landlord shall
have the right to establish, and from time to time amend, and to enforce
against all users all reasonable rules and regulations (including the
designation of areas for employee parking) that Landlord may deem necessary and
advisable for the proper and efficient operation and maintenance of parking
within the Common Areas. Landlord shall have the right to construct, maintain
and operate lighting facilities within the parking areas; to change the
area, level, location and arrangement of the parking areas and improvements
therein; to restrict parking by tenants, their officers, agents and employees
to employee parking areas; to enforce parking charges (by operation of meters
or otherwise); and to do and perform such other acts in and to the parking
areas and improvements therein as, in the use of good business judgment,
Landlord shall determine to be advisable. Any person using the parking area
shall observe all directional signs and arrows and any posted speed limits. In
no event shall Tenant interfere with the use and enjoyment of the parking area
by other tenants of the Building or their employees or invitees. Parking areas
shall be used only for parking vehicles. Washing, waxing, cleaning or servicing
of vehicles, or the storage of vehicles for 24-hour periods, is prohibited
unless otherwise authorized by Landlord. Tenant shall be liable for any damage
to the parking areas caused by Tenant or Tenant's employees, suppliers,
shippers, customers or invitees, including without limitation damage from excess
oil leakage. Tenant shall have no right to install any fixtures, equipment or
personal property in the parking areas.
SECTION 6.5. CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves
the right to make alterations or additions to the Building or the Project, or
to the attendant fixtures, equipment and Common Areas. Landlord may at any
time relocate or remove any of the various buildings, parking areas,
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and other Common Areas, and may add buildings and areas to the Project from
time to time. No change shall entitle Tenant to any abatement of rent or other
claim against Landlord, provided that the change does not deprive Tenant of
reasonable access to or use of the Premises.
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole
expense shall comply with all applicable laws and governmental regulations
governing the Premises and make all repairs necessary to keep the Premises in
the condition as existed on the Commencement Date, excepting ordinary wear and
tear, including without limitation all glass, windows, doors, door closures,
hardware, fixtures, electrical, plumbing, fire extinguisher equipment and other
equipment. Any damage or deterioration of the Premises shall not be deemed
ordinary wear and tear if the same could have been prevented by good
maintenance practices by Tenant. As part of its maintenance obligations
hereunder, Tenant shall, at Landlord's request, provide Landlord with copies of
all maintenance schedules, reports and notices prepared by, for or on behalf of
Tenant. All repairs shall be at least equal in quality to the original work,
shall be made only by a licensed contractor approved in writing in advance by
Landlord and shall be made only at the time or times approved by Landlord. Any
contractor utilized by Tenant shall be subject to Landlord's standard
requirements for contractors, as modified from time to time. Landlord may
impose reasonable restrictions and requirements with respect to repairs, as
provided in Section 7.3, and the provisions of Section 7.4 shall apply to all
repairs. Alternatively, Landlord may elect to make any such repair on behalf of
Tenant and at Tenant's expense, and Tenant shall promptly reimburse Landlord
for all costs incurred upon submission of an invoice.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to Section
7.1 and Article XI, Landlord shall provide service, maintenance and repair with
respect to any air conditioning, ventilating or heating equipment which serves
the Premises and shall maintain in good repair the roof, foundations, footings,
the exterior surfaces of the exterior walls of the Building, and the
structural, electrical and mechanical systems, except that Tenant at its
expense shall make all repairs which Landlord deems reasonably necessary as a
result of the act or negligence of Tenant, its agents, employees, invitees,
subtenants or contractors. Landlord shall have the right to employ or designate
any reputable person or firm, including any employee or agent of Landlord or
any of Landlord's affiliates or divisions, to perform any service, repair or
maintenance function. Landlord need not make any other improvements or repairs
except as specifically required under this Lease, and nothing contained in this
Section shall limit Landlord's right to reimbursement from Tenant for
maintenance, repair costs and replacement costs as provided elsewhere in this
Lease. Tenant understands that it shall not make repairs at Landlord's expense
or by rental offset. Tenant further understands that Landlord shall not be
required to make any repairs to the roof, foundations, footings, structural,
electrical or mechanical systems unless and until Tenant has notified Landlord
in writing of the need for such repair and Landlord shall have a reasonable
period of time thereafter to commence and complete said repair, if warranted.
All costs of any maintenance and repairs on the part of Landlord provided
hereunder shall be considered part of Project Costs.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations,
additions or improvements to the Premises without the prior written consent of
Landlord, which consent may be given or withheld in Landlord's sole discretion.
Notwithstanding the foregoing, Landlord shall not unreasonably withhold its
consent to any alterations, additions or improvements to the Premises which
cost less than One Dollar ($1.00) per square foot of the improved portions of
the Premises (excluding warehouse square footage) and do not (i) affect the
exterior of the Building or outside areas (or be visible from adjoining sites),
or (ii) affect or penetrate any of the structural portions of the Building,
including but not limited to the roof, or (iii) require any change to the basic
floor plan of the Premises, any change to any structural or mechanical systems
of the Premises, or any governmental permit as a prerequisite to the
construction thereof, or (iv) interfere in any manner with the proper
functioning of or Landlord's access to any mechanical, electrical, plumbing or
HVAC systems, facilities or equipment located in or serving the Building, or
(v) diminish the value of the Premises. Landlord may impose, as a condition to
its consent, any requirements that Landlord in its discretion may deem
reasonable or desirable, including but not limited to a requirement that all
work be covered by a lien and completion bond satisfactory to Landlord and
requirements as to the manner, time, and contractor for performance of the
work. Tenant shall obtain all required permits for the work and shall perform
the work in compliance with all applicable laws, regulations and ordinances,
all covenants, conditions and restrictions affecting the Project, and the Rules
and Regulations (hereafter defined). If any governmental entity requires, as a
condition to any proposed alterations, additions or improvements to the
Premises by Tenant, that improvements be made to the Common Areas, and if
Landlord consents to such improvements to the Common Areas, then Tenant shall,
at Tenant's sole expense, make such required improvements to the Common Areas
in such manner, utilizing such materials, and with such contractors (including,
if required by Landlord, Landlord's contractors) as Landlord may require in its
sole discretion. Under no circumstances shall Tenant make any improvement which
incorporates any Hazardous Materials, including without limitation
asbestos-containing construction materials into the Premises. Any request for
Landlord's consent shall be made in writing and shall contain architectural
plans describing the work in detail reasonably satisfactory to Landlord. Unless
Landlord otherwise agrees in writing, all alterations, additions or
improvements affixed to the Premises (excluding moveable trade fixtures and
furniture) shall become the property of Landlord and shall be surrendered with
the Premises at the end of the Term, except that Landlord may, by notice to
Tenant, require Tenant to remove by the Expiration Date, or sooner termination
date of this Lease, all or any alterations, decorations, fixtures, additions,
improvements and the like installed either by Tenant or by Landlord at Tenant's
request and to repair any damage to the Premises arising from that removal.
Except as otherwise provided in this Lease or in any Exhibit to this Lease,
should Landlord make any alteration or improvement to the Premises for Tenant,
Landlord shall be entitled to prompt reimbursement from Tenant for all costs
incurred.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises free
from any liens arising out of any work performed, materials furnished, or
obligations incurred by or for Tenant. Upon request by Landlord, Tenant shall
promptly cause any such lien to be released by posting a bond in accordance
with California Civil Code Section 3143 or any successor statute. In the event
that Tenant shall not, within thirty (30) days following the imposition of any
lien, cause the lien to be released of record by payment or posting of a proper
bond, Landlord shall have, in addition to all other available remedies, the
right to cause the lien to be released by any means it deems proper, including
payment of or defense against the claim giving rise to the lien. All expenses
so incurred by Landlord, including Landlord's attorneys' fees, and any
consequential or other damages incurred by Landlord arising out of such lien,
shall be
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reimbursed by Tenant promptly following Landlord's demand, together with
interest from the date of payment by Landlord at the maximum rate permitted by
law until paid. Tenant shall give Landlord no less than twenty (20) days' prior
notice in writing before commencing construction of any kind on the Premises so
that Landlord may post and maintain notices of nonresponsibility on the
Premises.
SECTION 7.5 ENTRY AND INSPECTION. Landlord shall at all reasonable
times, upon written or oral notice (except in emergencies, when no notice shall
be required) have the right to enter the Premises to inspect them, to supply
services in accordance with this Lease, to protect the interests of Landlord in
the Premises, and to submit the Premises to prospective or actual purchasers or
encumbrance holders (or, during the last one hundred and eighty (180) days of
the Term or when an uncured Tenant default exists, to prospective tenants), all
without being deemed to have caused an eviction of Tenant and without abatement
of rent except as provided elsewhere in this Lease. Landlord shall have the
right, if desired, to retain a key which unlocks all of the doors in the
Premises, excluding Tenant's vaults and safes, and Landlord shall have the
right to use any and all means which Landlord may deem proper to open the doors
in an emergency in order to obtain entry to the Premises, and any entry to the
Premises obtained by Landlord shall not under any circumstances be deemed to be
a forcible or unlawful entry into, or a detainer of, the Premises, or any
eviction of Tenant from the Premises.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, at least ten (10) days before
delinquency, all taxes and assessments levied against all personal property of
Tenant located in the Premises, against all improvements to the Premises made
by Landlord or Tenant which are above Landlord's Project standard in quality
and/or quantity for comparable space within the Project ("Above Standard
Improvements"), and against any alterations, additions or like improvements
made to the Premises by or on behalf of Tenant. When possible Tenant shall
cause its personal property, Above Standard Improvements and alterations to be
assessed and billed separately from the real property of which the Premises
form a part. If any taxes on Tenant's personal property, Above Standard
Improvements and/or alterations are levied against Landlord or Landlord's
property and if Landlord pays the same, or if the assessed value of Landlord's
property is increased by the inclusion of a value placed upon the personal
property, Above Standard Improvements and/or alterations of Tenant and if
Landlord pays the taxes based upon the increased assessment, Tenant shall pay
to Landlord the taxes so levied against Landlord or the proportion of the taxes
resulting from the increase in the assessment. In calculating what portion of
any tax bill which is assessed against Landlord separately, or Landlord and
Tenant jointly, is attributable to Tenant's Above Standard Improvements,
alterations and personal property, Landlord's reasonable determination shall be
conclusive.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1 RIGHTS OF PARTIES.
(a) Notwithstanding any provision of this Lease to the
contrary, Tenant will not, either voluntarily or by operation of law, assign,
sublet, encumber, or otherwise transfer all or any part of Tenant's interest in
this lease, or permit the Premises to be occupied by anyone other than Tenant,
without Landlord's prior written consent, which consent shall not unreasonably
be withheld in accordance with the provisions of Section 9.1(b). No assignment
(whether voluntary, involuntary or by operation of law) and no subletting shall
be valid or effective without Landlord's prior written consent and, at
Landlord's election, any such assignment or subletting or attempted assignment
or subletting shall constitute a material default of this Lease. Landlord shall
not be deemed to have given its consent to any assignment or subletting by any
other course of action, including its acceptance of any name for listing in the
Building directory. To the extent not prohibited by provisions of the
Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"),
including Section 365(f)(1), Tenant on behalf of itself and its creditors,
administrators and assigns waives the applicability of Section 365(e) of the
Bankruptcy Code unless the proposed assignee of the Trustee for the estate of
the bankrupt meets Landlord's standard for consent as set forth in Section
9.1(b) of this Lease. If this Lease is assigned to any person or entity
pursuant to the provisions of the Bankruptcy Code, any and all monies or other
considerations to be delivered in connection with the assignment shall be
delivered to Landlord, shall be and remain the exclusive property of Landlord
and shall not constitute property of Tenant or of the estate of Tenant within
the meaning of the Bankruptcy Code. Any person or entity to which this Lease is
assigned pursuant to the provisions of the Bankruptcy Code shall be deemed to
have assumed all of the obligations arising under this Lease on and after the
date of the assignment, and shall upon demand execute and deliver to Landlord
an instrument confirming that assumption.
(b) If Tenant desires to transfer an interest in this
Lease, it shall first notify Landlord of its desire and shall submit in
writing to Landlord: (i) the name and address of the proposed transferee; (ii)
the nature of any proposed subtenant's or assignee's business to be carried on
in the Premises; (iii) the terms and provisions of any proposed sublease or
assignment, including a copy of the proposed assignment or sublease form; (iv)
evidence of insurance of the proposed assignee or subtenant complying with the
requirements of Exhibit D hereto; (v) a completed Environmental Questionnaire
from the proposed assignee or subtenant; and (vi) any other information
requested by Landlord and reasonably related to the transfer. Except as
provided in Subsection (c) of this Section, Landlord shall not unreasonably
withhold its consent, provided: (1) the use of the Premises will be consistent
with the provisions of this Lease and with Landlord's commitment to other
tenants of the Building and Project; (2) the proposed assignee or subtenant has
not been required by any prior Landlord, lender or governmental authority to
take remedial action in connection with Hazardous Materials contaminating a
property arising out of the proposed assignee's or subtenant's actions or use
of the property in question and is not subject to any enforcement order issued
by any governmental authority in connection with the use, disposal or storage
of a Hazardous Material; (3) at Landlord's election, insurance requirements
shall be brought into conformity with Landlord's then current leasing practice;
(4) any proposed subtenant or assignee demonstrates that it is financially
responsible by submission to Landlord of all reasonable information as Landlord
may request concerning the proposed subtenant or assignee, including, but not
limited to, a balance sheet of the proposed subtenant or assignee as of a date
within ninety (90) days of the request for Landlord's consent, statements of
income or profit and loss of the proposed subtenant or assignee for the
two-year period preceding the request for Landlord's consent, and/or a
certification signed by the proposed subtenant or assignee that it has not been
evicted or been in arrears in rent at any other leased
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premises for the 3-year period preceding the request for Landlord's consent;
(5) any proposed subtenant or assignee demonstrates to Landlord's reasonable
satisfaction a record of successful experience in business; (6) the proposed
assignee or subtenant is not an existing tenant of the Building or Project or a
prospect with whom Landlord is negotiating to become a tenant at the Building
or Project; and (7) the proposed transfer will not impose additional burdens or
adverse tax effects on Landlord. If Tenant has any exterior sign rights under
this Lease, such rights are personal to Tenant and may not be assigned or
transferred to any assignee of this Lease or subtenant of the Premises without
Landlord's prior written consent, which may be withheld in Landlord's sole and
absolute discretion.
If Landlord consents to the proposed transfer, Tenant may within ninety (90)
days after the date of the consent effect the transfer upon the terms described
in the information furnished to Landlord; provided that any material change in
the terms shall be subject to Landlord's consent as set forth in this Section.
Landlord shall approve or disapprove any requested transfer within thirty (30)
days following receipt of Tenant's written request, the information set forth
above, and the fee set forth below.
(c) Notwithstanding the provisions of Subsection (b) above,
in lieu of consenting to a proposed assignment or subletting, Landlord may elect
to (i) sublease the Premises (or the portion proposed to be subleased), or take
an assignment or Tenant's interest in this Lease, upon the same terms as offered
to the proposed subtenant or assignee (excluding terms relating to the purchase
of personal property, the use of Tenant's name or the continuation of Tenant's
business), or (ii) terminate this Lease as to the portion of the Premises
proposed to be subleased or assigned with a proportionate abatement in the rent
payable under this Lease, effective on the date that the proposed sublease or
assignment would have become effective. Landlord may thereafter, at its option,
assign or re-let any space so recaptured to any third party, including without
limitation the proposed transferee of Tenant.
(d) Tenant agrees that fifty percent (50%) of any amounts
paid by the assignee or subtenant, however described, in excess of (i) the Basic
Rent payable by Tenant hereunder, or in the case of a sublease of a portion of
the Premises, in excess of the Basic Rent reasonably allocable to such portion,
plus (ii) Tenant's direct out-of-pocket costs which Tenant certifies to Landlord
have been paid to provide occupancy related services to such assignee or
subtenant of a nature commonly provided by landlords or similar space, shall be
the property of Landlord and such amounts shall be payable directly to Landlord
by assignee or subtenant or, at Landlord's option, by Tenant. At Landlord's
request, a written agreement shall be entered into by and among Tenant, Landlord
and the proposed assignee or subtenant confirming the requirements of this
subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred
Dollars ($500.00) if and when any transfer hereunder is requested by Tenant.
Such fee is hereby acknowledged as a reasonable amount to reimburse Landlord for
its costs of review and evaluation of a proposed assignee/sublessee, and
Landlord shall not be obligated to commence such review and evaluation unless
and until such fee is paid.
SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment, even
with the consent of Landlord, shall relieve Tenant of its obligation to pay
rent and to perform all its other obligations under this Lease. Moreover,
Tenant shall indemnify and hold Landlord harmless, as provided in Section 10.3,
for any act or omission by an assignee or subtenant. Each assignee, other than
Landlord, shall be deemed to assume all obligations of Tenant under this Lease
and shall be liable jointly and severally with Tenant for the payment of all
rent, and for the due performance of all of Tenant's obligations, under this
Lease. No transfer shall be binding on Landlord unless any document
memorializing the transfer is delivered to Landlord and both the
assignee/subtenant and Tenant deliver to Landlord an executed consent to
transfer instrument prepared by Landlord and consistent with the requirements
of this Article. The acceptance by Landlord of any payment due under this Lease
from any other person shall not be deemed to be a waiver by Landlord of any
provision of this Lease or to be a consent to any transfer. Consent by
Landlord to one or more transfers shall not operate as a waiver or estoppel to
the future enforcement by Landlord or its rights under this Lease.
SECTION 9.3 SUBLEASE REQUIREMENTS. The following terms and
conditions shall apply to any subletting by Tenant of all or any part of the
Premises and shall be included in each sublease:
(a) Each and every provision contained in this Lease (other
than with respect to the payment of rent hereunder) is incorporated by
reference into and make a part of such sublease, with "Landlord" hereunder
meaning the sublandlord therein and "Tenant" hereunder meaning the subtenant
therein.
(b) Tenant hereby irrevocably assigns to Landlord all of
Tenant's interest in all rentals and income arising from any sublease of the
Premises, and Landlord may collect such rent and income and apply same toward
Tenant's obligations under this Lease; provided, however, that until a default
occurs in the performance of Tenant's obligations under this Lease, Tenant
shall have the right to receive and collect the sublease rentals. Landlord
shall not, by reason of this assignment or the collection of sublease rentals,
be deemed liable to the subtenant for the performance of any of Tenant's
obligations under the sublease. Tenant hereby irrevocably authorizes and
directs any subtenant, upon receipt of a written notice from Landlord stating
that an uncured default exists in the performance of Tenant's obligations
under this Lease, to pay to Landlord all sums then and thereafter due under the
sublease. Tenant agrees that the subtenant may rely on that notice without any
duty of further inquiry and notwithstanding any notice or claim by Tenant to
the contrary. Tenant shall have no right or claim against the subtenant or
Landlord for any rentals so paid to Landlord.
(c) In the event of the termination of this Lease, Landlord
may, at its sole option, take over Tenant's entire interest in any sublease
and, upon notice from Landlord, the subtenant shall attorn to Landlord. In no
event, however, shall Landlord be liable for any previous act or omission by
Tenant under the sublease or for the return of any advance rental payments or
deposits under the sublease that have not been actually delivered to landlord,
nor shall Landlord be bound by any sublease modification executed without
Landlord's consent or for any advance rental payment by the subtenant in excess
of one month's rent. The general provisions of this Lease, including without
limitation those pertaining to insurance and indemnification, shall be deemed
incorporated by reference into the sublease despite the termination of this
Lease.
SECTION 9.4. CERTAIN TRANSFERS. The sale of all or substantially
all of Tenant's assets (other than bulk sales in the ordinary course of
business) or, if Tenant is a corporation, an unincorporated association, or a
partnership, the transfer, assignment or hypothecation of any stock or interest
in such corporation, association, or partnership in the aggregate of
twenty-five percent (25%)
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(except for publicly traded shares of stock constituting a transfer of
twenty-five percent (25%) or more in the aggregate, so long as no change in the
controlling interest of Tenant occurs as a result thereof) shall be deemed an
assignment within the meaning and provisions of this Article. Notwithstanding
the foregoing, Landlord's consent shall not be required for the assignment of
this Lease as a result of a merger by Tenant with or into another entity, so
long as (i) the net worth of the successor entity after such merger is at least
equal to the greater of the net worth of Tenant as of the execution of this
Lease by Landlord or the net worth of Tenant immediately prior to the date of
such merger, evidence of which, satisfactory to Landlord, shall be presented to
Landlord prior to such merger, (ii) Tenant shall provide to Landlord, prior to
such merger, written notice of such merger and such assignment documentation
and other information as Landlord may request in connection therewith, and
(iii) all of the other terms and requirements of this Article shall apply with
respect to such assignment.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and
expense, shall provide and maintain in effect the insurance described in
Exhibit D. Evidence of that insurance must be delivered to Landlord prior to
the Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord may, at its election,
provide any or all of the following types of insurance, with or without
deductible and in amounts and coverages as may be determined by Landlord in its
discretion: "all risk" property insurance, subject to standard exclusions,
covering the Building or Project, and such other risks as Landlord or its
mortgagees may from time to time deem appropriate, including leasehold
improvements made by Landlord, and commercial general liability coverage.
Landlord shall not be required to carry insurance of any kind on Tenant's
property, including leasehold improvements, trade fixtures, furnishings,
equipment, plate glass, signs and all other items of personal property, and
shall not be obligated to repair or replace that property should damage occur.
All proceeds of insurance maintained by Landlord upon the Building and Project
shall be the property of Landlord, whether or not Landlord is obligated to or
elects to make any repairs. At Landlord's option, Landlord may self-insure all
or any portion of the risks for which Landlord elects to provide insurance
hereunder.
SECTION 10.3. TENANT'S INDEMNITY. To the fullest extent permitted by
law, Tenant shall defend, indemnify, protect, save and hold harmless Landlord,
its agents, and any and all affiliates of Landlord, including, without
limitation, any corporations or other entities controlling, controlled by or
under common control with Landlord, from and against any and all claims,
liabilities, costs or expenses arising either before or after the Commencement
Date from Tenant's use or occupancy of the Premises, the Building or the Common
Areas, or from the conduct of its business, or from any activity, work, or
thing done, permitted or suffered by Tenant or its agents, employees, invitees
or licensees in or about the Premises, the Building or the Common Areas, or
from any default in the performance of any obligation on Tenant's part to be
performed under this Lease, or from any act or negligence of Tenant or its
agents, employees, visitors, patrons, guests, invitees or licensees. Landlord
may, at its option, require Tenant to assume Landlord's defense in any action
covered by this Section through counsel satisfactory to Landlord. The
provisions of this Section shall expressly survive the expiration or sooner
termination of this Lease.
SECTION 10.4. LANDLORD'S NONLIABILITY. Landlord shall not be liable
to Tenant, its employees, agents and invitees, and Tenant hereby waives all
claims against Landlord for loss of or damage to any property, or loss or
interruption of business or income, or any other loss, cost, damage, injury or
liability whatsoever (including without limitation any consequential damages
and lost profit or opportunity costs) resulting from, but not limited to, Acts
of God, acts of civil disobedience or insurrection, acts or omissions of other
tenants within the Project or their agents, employees, contractors, guests or
invitees, fire, explosion, falling plaster, steam, gas, electricity, water or
rain which may leak or flow from or into any part of the Premises or from the
breakage, leakage, obstruction or other defects of the pipes, sprinklers,
wires, appliances, plumbing, air conditioning, electrical works or other
fixtures in the Building, whether the damage or injury results from conditions
arising in the Premises or in other portions of the Building. It is understood
that any such condition may require the temporary evacuation or closure of all
or a portion of the Building. Except as provided in Sections 11.1 and 12.1
below, there shall be no abatement of rent and no liability of Landlord by
reason of any injury to or interference with Tenant's business (including
without limitation consequential damages and lost profit or opportunity costs)
arising from the making of any repairs, alterations or improvements to any
portion of the Building, including repairs to the Premises, nor shall any
related activity by Landlord constitute an actual or constructive eviction;
provided, however, that in making repairs, alterations or improvements,
Landlord shall interfere as little as reasonably practicable with the conduct of
Tenant's business in the Premises. Neither Landlord nor its agents shall be
liable for interference with light or other similar intangible interests.
Tenant shall immediately notify Landlord in case of fire or accident in the
Premises, the Building or the Project and of defects in any improvements or
equipment.
SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant each hereby
waives all rights of recovery against the other and the other's agents on
account of loss and damage occasioned to the property of such waiving party to
the extent only that such loss or damage is required to be insured against
under any "all risk" property insurance policies required by this Article X;
provided however, that (i) the foregoing waiver shall not apply to the extent
of Tenant's obligations to pay deductibles under any such policies and this
Lease, and (ii) if any loss is due to the act, omission or negligence or
willful misconduct of Tenant or its agents, employees, contractors, guests or
invitees, Tenant's liability insurance shall be primary and shall cover all
losses and damages prior to any other insurance hereunder. By this waiver it
is the intent of the parties that neither Landlord nor Tenant shall be liable
to any insurance company (by way of subrogation or otherwise) insuring the
other party for any loss or damage insured against under any "all-risk"
property insurance policies required by this Article, even though such loss or
damage might be occasioned by the negligence of such party, its agents,
employees, contractors, guests or invitees. The provisions of this Section
shall not limit the indemnification provisions elsewhere contained in this
Lease.
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ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building of which the Premises are a part is
damaged, Landlord shall repair that damage as soon as reasonably possible, at
its expense, unless: (i) Landlord reasonably determines that the cost of repair
is not covered by Landlord's fire and extended coverage insurance plus such
additional amounts Tenant elects, at its option, to contribute, excluding
however the deductible (for which Tenant shall be responsible for Tenant's
Share); (ii) Landlord reasonably determines that the Premises cannot, with
reasonable diligence, be fully repaired by Landlord (or cannot be safely
repaired because of the presence of hazardous factors, including without
limitation Hazardous Materials, earthquake faults, and other similar dangers)
within two hundred seventy (270) days after the date of the damage; (iii) an
event of default by Tenant has occurred and is continuing at the time of such
damage; or (iv) the damage occurs during the final twelve (12) months of the
Term. Should Landlord elect not to repair the damage for one of the preceding
reasons, Landlord shall so notify Tenant in writing within sixty (60) days after
the damage occurs and this Lease shall terminate as of the date of that notice.
(b) Unless Landlord elects to terminate this Lease in
accordance with subsection (a) above, this Lease shall continue in effect for
the remainder of the Term; provided that so long as Tenant is not in default
under this Lease, if the damage is so extensive that Landlord reasonably
determines that the Premises cannot, with reasonable diligence, be repaired by
Landlord (or cannot be safely repaired because of the presence of hazardous
factors, earthquake faults, and other similar dangers) so as to allow Tenant's
substantial use and enjoyment of the Premises within two hundred seventy (270)
days after the date of damage, then Tenant may elect to terminate this Lease by
written notice to Landlord within the sixty (60) day period stated in
subsection (a).
(c) Commencing on the date of any damage to the Building,
and ending on the sooner of the date the damage is repaired or the date this
Lease is terminated, the rental to be paid under this Lease shall be abated in
the same proportion that the floor area of the Premises that is rendered
unusable by the damage from time to time bears to the total floor area of the
Premises, but only to the extent that any business interruption insurance
proceeds are received by Landlord therefor from Tenant's insurance described in
Exhibit D.
(d) Notwithstanding the provisions of subsections (a), (b)
and (c) of this Section, and subject to the provisions of Section 10.5 above,
the cost of any repairs shall be borne by Tenant, and Tenant shall not be
entitled to rental abatement or termination rights, if the damage is due to the
fault or neglect of Tenant or its employees, subtenants, invitees or
representatives. In addition, the provisions of this Section shall not be
deemed to require Landlord to repair any improvements or fixtures that Tenant
is obligated to repair or insure pursuant to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in removing
Tenant's personal property and any debris from the Premises to facilitate all
inspections of the Premises and the making of any repairs. Notwithstanding
anything to the contrary contained in this Lease, if Landlord in good faith
believes there is a risk of injury to persons or damage to property from entry
into the Building or Premises following any damage or destruction thereto,
Landlord may restrict entry into the Building or the Premises by Tenant, its
employees, agents and contractors in a non-discriminatory manner, without being
deemed to have violated Tenant's rights of quiet enjoyment to, or made an
unlawful detainer of, or evicted Tenant from, the Premises. Upon request,
Landlord shall consult with Tenant to determine if there are safe methods of
entry into the Building or the Premises solely in order to allow Tenant to
retrieve files, data in computers, and necessary inventory, subject however to
all indemnities and waivers of liability from Tenant to Landlord contained in
this Lease and any additional indemnities and waivers of liability which
Landlord may require.
SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of
this Lease, including without limitation Section 11.1, shall govern any damage
or destruction and shall accordingly supersede any contrary statute or rule of
law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material portion
of the Premises is taken by any lawful authority by exercise of the right of
eminent domain, or sold to prevent a taking, either Tenant or Landlord may
terminate this Lease effective as of the date possession is required to be
surrendered to the authority. In the event title to a portion of the Building
or Project, other than the Premises, is taken or sold in lieu of taking, and if
Landlord elects to restore the Building in such a way as to alter the Premises
materially, either party may terminate this Lease, by written notice to the
other party, effective on the date of vesting of title. In the event neither
party has elected to terminate this Lease as provided above, then Landlord
shall promptly, after receipt of a sufficient condemnation award, proceed to
restore the Premises to substantially their condition prior to the taking, and
a proportionate allowance shall be made to Tenant for the rent corresponding to
the time during which, and to the part of the Premises of which, Tenant is
deprived on account of the taking and restoration. In the event of a taking,
Landlord shall be entitled to the entire amount of the condemnation award
without deduction for any estate or interest of Tenant; provided that nothing
in this Section shall be deemed to give Landlord any interest in, or prevent
Tenant from seeking any award against the taking authority for, the taking of
personal property and fixtures belonging to Tenant or for relocation or
business interruption expenses recoverable from the taking authority.
SECTION 12.2. TEMPORARY TAKING. No temporary taking of the Premises
shall terminate this Lease or give Tenant any right to abatement of rent, and
any award specifically attributable to a temporary taking of the Premises shall
belong entirely to Tenant. A temporary taking shall be deemed to be a taking of
the use or occupancy of the Premises for a period of not to exceed one hundred
eighty (180) days.
SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be a
taking of the parking area such that Landlord can no longer provide sufficient
parking to comply with this Lease, Landlord may substitute reasonably equivalent
parking in a location reasonably close to the Building; provided that
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if Landlord fails to make that substitution within one hundred eighty (180) days
following the taking and if the taking materially impairs Tenant's use and
enjoyment of the Premises, Tenant may, at its own option, terminate this Lease
by written notice to Landlord. If this Lease is not so terminated by Tenant,
there shall be no abatement of rent and this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION: ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1. SUBORDINATION. At the option of Landlord, this Lease
shall be either superior or subordinate to all ground or underlying Leases,
mortgages and deeds of trust, if any, which may hereafter affect the Building,
and to all renewals, modifications, consolidations, replacements and extensions
thereof; provided, that so long as Tenant is not in default under this Lease,
this Lease shall not be terminated or Tenant's quiet enjoyment of the Premises
disturbed in the event of termination of any such ground or underlying lease,
or the foreclosure of any such mortgage or deed of trust, to which Tenant has
subordinated this Lease pursuant to this Section. In the event of a termination
or foreclosure, Tenant shall become a tenant of and attorn to the
successor-in-interest to Landlord upon the same terms and conditions as are
contained in this Lease, and shall execute any instrument reasonably required
by Landlord's successor for that purpose. Tenant shall also, upon written
request of Landlord, execute and deliver all instruments as may be required
from time to time to subordinate the rights of Tenant under this Lease to any
ground or underlying lease or to the lien of any mortgage or deed of trust
(provided that such instruments include the nondisturbance and attornment
provisions set forth above), or, if requested by Landlord, to subordinate, in
whole or in part, any ground or underlying lease or the lien of any mortgage or
deed of trust to this Lease.
SECTION 13.2. ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than ten (10)
days prior written notice from Landlord, execute, acknowledge and deliver to
Landlord, in any form that Landlord may reasonably require, a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of the modification and certifying
that this Lease, as modified, is in full force and effect) and the dates to
which the rental, additional rent and other charges have been paid in advance,
if any, and (ii) acknowledging that, to Tenant's knowledge, there are no
uncured defaults on the part of Landlord, or specifying each default if any
are claimed, and (iii) setting forth all further information that Landlord may
reasonably require. Tenant's statement may be relied upon by any prospective
purchaser or encumbrancer of all or any portion of the Building or Project.
(b) Notwithstanding any other rights and remedies of
Landlord, Tenant's failure to deliver any estoppel statement within the provided
time shall be conclusive upon Tenant that (i) this Lease is in full force and
effect, without modification except as may be represented by Landlord, (ii)
there are no uncured defaults in Landlord's performance, and (iii) not more
than one month's rental has been paid in advance.
SECTION 13.3 FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the
execution of this Lease and thereafter at any time upon Landlord's request,
Tenant's current tax returns and financial statements, certified true, accurate
and complete by the chief financial officer of Tenant, including a balance
sheet and profit and loss statement for the most recent prior year
(collectively, the "Statements"), which Statements shall accurately and
completely reflect the financial condition of Tenant. Landlord agrees that it
will keep the Statements confidential, except that Landlord shall have the
right to deliver the same to any proposed purchaser of the building or Project,
and to any encumbrancer of all or any portion of the Building or Project.
(b) Tenant acknowledges that Landlord is relying on the
Statements in its determination to enter into this Lease, and Tenant represents
to Landlord, which representation shall be deemed made on the date of this
Lease and again on the Commencement Date, that no material change in the
financial condition of Tenant, as reflected in the Statements, has occurred
since the date Tenant delivered the Statements to Landlord. The Statements are
represented and warranted by Tenant to be correct and to accurately and fully
reflect Tenant's true financial condition as of the date of submission by any
statements to Landlord.
ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of
default set forth in this Lease, the occurrence of any one or more of the
following events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent or
additional rent required to be made by Tenant, as and when due, where the
failure continues for a period of three (3) days after written notice from
Landlord to Tenant; provided, however, that any such notice shall be in Lieu
of, and as amended. For purposes of these default and remedies provisions, the
term "additional rent" shall be deemed to include all amounts of any type
whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of
this Lease.
(b) Assignment, sublease, encumbrance or other transfer of
the Lease by Tenant, either voluntarily or by operation of Law, whether by
judgment, execution, transfer by intestacy or testacy, or other means, without
the prior written consent of Landlord.
(c) The discovery by Landlord that any financial statement
provided by Tenant or by any affiliate, successor or guarantor of Tenant, was
materially false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements in
accordance with the requirements of Article XIII.
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(e) The failure or inability by Tenant to observe or perform
any of the express or implied covenants or provisions of this Lease to be
observed or performed by Tenant, other than as specified in any other subsection
of this Section, where the failure continues for a period of thirty (30) days
after written notice from Landlord to Tenant or such shorter period as is
specified in any other provision of this Lease; provided, however, that any such
notice shall be in lieu of, and not in addition to, any notice required under
California Code of Civil Procedure Section 1161 and 1161(a) as amended. However,
if the nature of the failure is such that more than thirty (30) days are
reasonably required for its cure, then Tenant shall not be deemed to be in
default if Tenant commences the cure within thirty (30) days, and thereafter
diligently pursues the cure to completion.
(f) (i) The making by Tenant of any general assignment for
the benefit of creditors; (ii) the filing by or against Tenant of a petition to
have Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have
debts discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within thirty (30) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, if possession is
not restored to Tenant within thirty (30) days; (iv) the attachment, execution
or other judicial seizure of substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease, where the seizure is not
discharged within thirty (30) days; or (v) Tenant's convening of a meeting of
its creditors for the purpose of effecting a moratorium upon or composition of
its debts. Landlord shall not be deemed to have knowledge of any event described
in this subsection unless notification in writing is received by Landlord, nor
shall there be any presumption attributable to Landlord of Tenant's insolvency.
In the event that any provision of this subsection is contrary to applicable
law, the provision shall be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the event
of the abandonment of the Premises by Tenant, then in addition to any other
remedies available to Landlord, Landlord may exercise the following remedies:
(i) Landlord may terminate Tenant's right to
possession of the Premises by any lawful means, in which case this Lease shall
terminate and Tenant shall immediately surrender possession of the Premises to
Landlord. Such termination shall not affect any accrued obligations of Tenant
under this Lease. Upon termination, Landlord shall have the right to reenter
the Premises and remove all persons and property. Landlord shall also be
entitled to recover from Tenant:
(1) The worth at the time of award of the
unpaid rent and additional rent which had been earned at the time of
termination;
(2) The worth at the time of award of the
amount by which the unpaid rent and additional rent which would have been
earned after termination until the time of award exceeds the amount of such
loss that Tenant proves could have been reasonably avoided;
(3) The worth at the time of award of the
amount by which the unpaid rent and additional rent for the balance of the Term
after the time of award exceeds the amount of such loss that Tenant proves
could be reasonably avoided;
(4) Any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant's
failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result from Tenant's default, including,
but not limited to, the cost of recovering possession of the Premises,
refurbishment of the Premises, marketing costs, commissions and other expenses
of reletting, including necessary repair, the unamortized portion of any
brokerage commissions funded by Landlord in connection with this Lease,
reasonable attorneys' fees, and any other reasonable costs; and
(5) At Landlord's election, all other
amounts in addition to or in lieu of the foregoing as may be permitted by law.
The term "rent" as used in this Lease shall be deemed to mean the Basic Rent
and all other sums required to be paid by Tenant to Landlord pursuant to the
terms of this Lease. Any sum, other than Basic Rent, shall be computed on the
basis of the average monthly amount accruing during the twenty-four (24) month
period immediately prior to default, except that if it becomes necessary to
compute such rental before the twenty-four (24) month period has occurred, then
the computation shall be on the basis of the average monthly amount during the
shorter period. As used in subparagraphs (1) and (2) above, the "worth at the
time of award" shall be computed by allowing interest at the rate of ten
percent (10%) per annum. As used in subparagraph (3) above, the "worth at the
time of award" shall be computed by discounting the amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
(ii) Landlord may elect not to terminate Tenant's
right to possession of the Premises, in which event Landlord may continue to
enforce all of its rights and remedies under this Lease, including the right to
collect all rent as it becomes due. Efforts by the Landlord to maintain,
preserve or relet the Premises, or the appointment of a receiver to protect the
Landlord's interests under this Lease, shall not constitute a termination of
the Tenant's right to possession of the Premises. In the event that Landlord
elects to avail itself of the remedy provided by this subsection (ii), Landlord
shall not unreasonably withhold its consent to an assignment or subletting of
the Premises subject to the reasonable standards for Landlord's consent as are
contained in this Lease.
(b) Landlord shall be under no obligation to observe or
perform any covenant of this Lease on its part to be observed or performed
which accrues after the date of any default by Tenant unless and until the
default is cured by Tenant, it being understood and agreed that the performance
by Landlord of its obligations under this Lease are expressly conditioned upon
Tenant's full and timely performance of its obligations under this Lease. The
various rights and remedies reserved to Landlord in this Lease or otherwise
shall be cumulative and, except as otherwise provided by California law,
Landlord may pursue any or all of its rights and remedies at the same time.
(c) No delay or omission of Landlord to exercise any right
or remedy shall be construed as a waiver of the right or remedy or of any
default by Tenant. The acceptance by Landlord of rent shall not be a (i)
waiver of any preceding breach or default by Tenant of any provision of this
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Lease, other than the failure of Tenant to pay the particular rent accepted,
regardless of Landlords' knowledge of the preceding breach or default at the
time of acceptance of rent, or (ii) a waiver of Landlord's right to exercise
any remedy available to Landlord by virtue of the breach or default. The
acceptance of any payment from a debtor in possession, a trustee, a receiver or
any other person acting on behalf of Tenant or Tenant's estate shall not waive
or cure a default under Section 14.1. No payment by Tenant or receipt by
Landlord of a lesser amount than the rent required by this Lease shall be
deemed to be other than a partial payment on account of the earliest due
stipulated rent, nor shall any endorsement or statement on any check or letter
be deemed an accord and satisfaction and Landlord shall accept the check or
payment without prejudice to Landlord's right to recover the balance of the
rent or pursue any other remedy available to it. No act or thing done by
Landlord or Landlord's agents during the Term shall be deemed an acceptance of
a surrender of the Premises, and no agreement to accept a surrender shall be
valid unless in writing and signed by Landlord. No employee of Landlord or of
Landlord's agents shall have any power to accept the keys to the Premises prior
to the termination of this Lease, and the delivery of the keys to any employee
shall not operate as a termination of the Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not received by
Landlord within five (5) days of the date when due shall bear interest at the
maximum rate permitted by law from the date due until fully paid. The payment
of interest shall not cure any default by Tenant under this Lease. In
addition, Tenant acknowledges that the late payment by Tenant to Landlord of
rent will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult and impracticable to
ascertain. Those costs may include, but are not limited to, administrative,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any rent due from Tenant shall not be received by
Landlord or Landlord's designee within five (5) days after the date due, then
Tenant shall pay to Landlord, in addition to the interest provided above, a
late charge in a sum equal to the greater of five percent (5%) of the amount
overdue or Two Hundred Fifty Dollars ($250.00) for each delinquent payment.
Acceptance of a late charge by Landlord shall not constitute a waiver of
Tenant's default with respect to the overdue amount, nor shall it prevent
Landlord from exercising any of its other rights and remedies.
(b) Following each second consecutive installment of rent
that is not paid within five (5) days following notice of nonpayment from
Landlord, Landlord shall have the option (i) to require that beginning with the
first payment of rent next due, rent shall no longer be paid in monthly
installments but shall be payable quarterly three (3) months in advance and/or
(ii) to require that Tenant increase the amount, if any, of the Security Deposit
by one hundred percent (100%). Should Tenant deliver to Landlord, at any time
during the Term, two (2) or more insufficient checks, the Landlord may require
that all monies then and thereafter due from Tenant be paid to Landlord by
cashier's check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and
agreements to be performed by Tenant under this Lease shall be performed at
Tenant's sole cost and expense and without any abatement of rent or right of
set-off. If Tenant fails to pay any sum of money, other than rent, or fails to
perform any other act on its part to be performed under this Lease, and the
failure continues beyond any applicable grace period set forth in Section 14.1,
then in addition to any other available remedies, Landlord may, at its election
make the payment or perform the other act on Tenant's part. Landlord's
election to make the payment or perform the act on Tenant's part shall not give
rise to any responsibility of Landlord to continue making the same or similar
payments or performing the same or similar acts. Tenant shall, promptly upon
demand by Landlord, reimburse Landlord for all sums paid by Landlord and all
necessary incidental costs, together with interest at the maximum rate
permitted by law from the date of the payment by Landlord. Landlord shall have
the same rights and remedies if Tenant fails to pay those amounts as Landlord
would have in the event of a default by Tenant in the payment of rent.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to
be in default on the performance of any obligation under this Lease unless and
until it has failed to perform the obligation within thirty (30) days after
written notice by Tenant to Landlord specifying in reasonable detail the nature
and extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion.
SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably incurred
by Landlord in connection with any event of default by Tenant under this Lease
or holding over of possession by Tenant after the expiration or earlier
termination of this Lease, including without limitation all costs, expenses and
actual accountants, appraisers, attorneys and other professional fees, and any
collection agency or other collection charges, shall be due and payable by
Tenant to Landlord on demand, and shall bear interest at the rate of ten
percent (10%) per annum. Should either Landlord or Tenant bring any action in
connection with this Lease, the prevailing party shall be entitled to recover
as a part of the action its reasonable attorneys' fees, and all other costs.
The prevailing party for the purpose of this paragraph shall be determined by
the trier of the facts.
SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH
ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS
CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY
EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST
THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR
SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR
IN ANY WAY CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE
PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE.
SECTION 14.8. SATISFACTION OF JUDGMENT. The obligations of Landlord
do not constitute the personal obligations of the individual partners,
trustees, directors, officers or shareholders of Landlord or its constituent
partners. Should Tenant recover a money judgment against Landlord, such
judgment shall be satisfied only out of the proceeds of sale received upon
execution of such judgment and levied thereon against the right, title and
interest of Landlord in the Project and out of the rent or other income from
such property receivable by Landlord or out of consideration received by
Landlord from the sale or other disposition of all or any part of Landlord's
right, title or interest in the Project and no action for any deficiency may
be sought or obtained by Tenant.
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SECTION 14.9. LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim,
demand or right of any kind by Tenant which is based upon or arises in
connection with this Lease shall be barred unless Tenant commences an action
thereon within six (6) months after the date that the act, omission, event or
default upon which the claim, demand or right arises, has occurred.
ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate without
further notice upon the expiration of the Term, and any holding over by Tenant
after the expiration shall not constitute a renewal or extension of this Lease,
or give Tenant any rights under this Lease, except when in writing signed by
both parties. If Tenant holds over for any period after the expiration (or
earlier termination) of the Term without the prior written consent of
Landlord, such possession shall constitute a tenancy at sufferance only; such
holding over with the prior written consent of Landlord shall constitute a
month-to-month tenancy commencing on the first (1st) day following the
termination of this Lease. In either of such events, possession shall be
subject to all of the terms of this Lease, except that the monthly Basic Rent
shall be the greater of (a) two hundred percent (200%) of the Basic Rent for
the month immediately preceding the date of termination or (b) the then
currently scheduled Basic Rent for comparable space in the Building. If Tenant
fails to surrender the Premises upon the expiration of this Lease despite
demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless
from all loss or liability, including without limitation, any claims made by
any succeeding tenant relating to such failure to surrender. Acceptance by
Landlord of rent after the termination shall not constitute a consent to a
holdover or result in a renewal of this Lease. The foregoing provisions of
this Section are in addition to and do not affect Landlord's right of re-entry
or any other rights of Landlord under this Lease or at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other
surrender of this Lease by Tenant, or a mutual termination of this Lease, shall
terminate any or all existing subleases unless Landlord, at its option, elects
in writing to treat the surrender or termination as an assignment to it of any
or all subleases affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall
quit and surrender possession of the Premises to Landlord in as good order,
condition and repair as when received or as hereafter may be improved by
Landlord or Tenant, reasonable wear and tear and repairs which are Landlord's
obligation excepted, and shall, without expense to Landlord, remove or cause to
be removed from the Premises all personal property, improvements constructed by
Tenant that Landlord require be removed in accordance with the terms of this
Lease, and debris, except for any items or improvements that Landlord may by
written authorization allow to remain. Tenant shall repair all damage to the
Premises resulting from the removal, which repair shall include the patching
and filling of holes and repair of structural damage, provided that Landlord
may instead elect to repair any structural damage at Tenant's expense. If
Tenant shall fail to comply with the provisions of this Section, Landlord may
effect the removal and/or make any repairs, and the cost to Landlord shall be
additional rent payable by Tenant upon demand. If Tenant fails to remove
Tenant's personal property from the Premises upon the expiration of the Term,
Landlord may remove, store, dispose of and/or retain such personal property, at
Landlord's option, in accordance with then applicable laws, all at the expense
of Tenant. If requested by Landlord, Tenant shall execute, acknowledge and
deliver to Landlord an instrument in writing releasing and quitclaiming to
Landlord all right, title and interest of Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction
or offset, in lawful money of the United States to Landlord at its address set
forth in Item 12 of the Basic Lease Provisions, or at any other place as
Landlord may designate in writing. Unless this Lease expressly provides
otherwise, as for example in the payment of rent pursuant to Section 4.1, all
payments shall be due and payable within five (5) days after demand. All
payments requiring proration shall be prorated on the basis of a thirty (30)
day month and a three hundred sixty (360) day year. Any notice, election,
demand, consent, approval or other communication to be given or other document
to be delivered by either party to the other may be delivered in person or by
courier or overnight delivery service to the other party, or may be deposited
in the United States mail, duly registered or certified, postage prepaid,
return receipt requested, and addressed to the other party at the address set
forth in Item 12 of the Basic Lease Provisions, or if to Tenant, at that
address or, from and after the Commencement Date, at the Premises (whether or
not Tenant has departed from, abandoned or vacated the Premises), or may be
delivered by telegram, telex or telecopy, provided that receipt thereof is
telephonically confirmed. Either party may, by written notice to the other,
served in the manner provided in this Article, designate a different address.
If any notice or other document is sent by mail, it shall be deemed served or
delivered twenty-four (24) hours after mailing. If more than one person or
entity is named as Tenant under this Lease, service of any notice upon any one
of them shall be deemed as service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules
and Regulations, attached as Exhibit E, and any reasonable and
nondiscriminatory amendments, modifications and/or additions as may be adopted
and published by written notice to tenants by Landlord for the safety, care,
security, good order, or cleanliness of the Premises, Building, Project and
Common Areas. Landlord shall not be liable to Tenant for any violation of the
Rules and Regulations or the breach of any covenant or condition in any lease
by any other tenant or such tenant's agents, employees, contractors, guests or
invitees. One or more waivers by Landlord or any breach of the Rules and
Regulations by Tenant or by any other tenant(s) shall not be a waiver of any
subsequent breach of that rule or any other. Tenant's failure to keep and
observe the Rules and Regulations shall constitute a default under this Lease.
In the case of any conflict between the Rules and Regulations and this Lease,
this Lease shall be controlling.
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ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Tenant warrants that it has had no dealings with any other real estate
broker or agent in connection with the negotiation of this Lease, and Tenant
agrees to indemnify and hold Landlord harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent
employed or claiming to represent or to have been employed by Tenant in
connection with the negotiation of this Lease. The foregoing agreement shall
survive the termination of this Lease. If Tenant fails to take possession of
the Premises or if this Lease otherwise terminates prior to the Expiration Date
as the result of failure of performance by Tenant, Landlord shall be entitled
to recover from Tenant the unamortized portion of any brokerage commission
funded by Landlord in addition to any other damages to which Landlord may be
entitled.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Premises,
the transferor shall be automatically relieved of all obligations on the part
of Landlord accruing under this Lease from and after the date of the transfer,
provided that any funds held by the transferor in which Tenant has an interest
shall be turned over, subject to that interest, to the transferee and Tenant is
notified of the transfer as required by law. No holder of a mortgage and/or
deed of trust to which this Lease is or may be subordinate, and no landlord
under a so-called sale-leaseback, shall be responsible in connection with the
Security Deposit, unless the mortgagee or holder of the deed of trust or the
landlord actually receives the Security Deposit. It is intended that the
covenants and obligations contained in this Lease on the part of Landlord
shall, subject to the foregoing, be binding on Landlord, its successors and
assigns, only during and in respect to their respective successive periods of
ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and "Tenant" shall include the plural as well as
the singular, and words used in neuter, masculine or feminine genders shall
include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles and
sections of this Lease are for convenience only, are not a part of this Lease
and shall have no effect upon its construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person
or entity is named as Tenant, the obligations imposed upon each shall be joint
and several and the act of or notice from, or notice or refund to, or the
signature of, any one or more of them shall be binding on all of them with
respect to the tenancy of this Lease, including, but not limited to, any
renewal, extension, termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights
and liabilities given to or imposed upon Landlord and Tenant shall extend to
and bind their respective heirs, executors, administrators, successors and
assigns. Nothing contained in this Section is intended, or shall be construed,
to grant to any person other than Landlord and Tenant and their successors and
assigns any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. This is of the essence with respect
to the performance of every provision of this Lease.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7. SEVERABILITY. If any term or provision of this Lease,
the deletion of which would not adversely affect the receipt of any material
benefit by either party or the deletion of which is consented to by the party
adversely affected, shall be held invalid or unenforceable to any extent, the
remainder of this Lease shall not be affected and each term and provision of
this Lease shall be valid and enforceable to the fullest extent permitted by
law.
SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers by
Landlord or Tenant of any breach of any term, covenant or condition contained
in this Lease shall not be a waiver of any subsequent breach of the same or any
other term, covenant or condition. Consent to any act by one of the parties
shall not be deemed to render unnecessary the obtaining of that party's consent
to any subsequent act. No breach by Tenant of this Lease shall be deemed to
have been waived by Landlord unless the waiver is in a writing signed by
Landlord. The rights and remedies of Landlord under this Lease shall be
cumulative and in addition to any and all other rights and remedies which
Landlord may have.
SECTION 20.9. INABILITY TO PERFORM. In the event that either party
shall be delayed or hindered in or prevented from the performance of any work
or in performing any act required under this Lease by reason of any cause
beyond the reasonable control of that party, then the performance of the work
or the doing of the act shall be excused for the period of the delay and the
time for performance shall be extended for a period equivalent to the period of
the delay. The provisions of this Section shall not operate to excuse Tenant
from the prompt payment of rent or from the timely performance of any other
obligation under this Lease within Tenant's reasonable control.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and
other attachments cover in full each and every agreement of every kind between
the parties concerning the Premises, the Building, and the Project, and all
preliminary negotiations, oral agreements, understandings and/or practices,
except those contained in this Lease, are superseded and of no further
effect. Tenant waives its rights to rely on any representations or promises
made by Landlord or others which are not contained in this
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<PAGE>
Lease. No verbal agreement or implied covenant shall be held to modify the
provisions of this Lease, any statute, law, or custom to the contrary
notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance
of all the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without
hindrance or interruption by Landlord or any other person claiming by or
through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of
the respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or
more counterparts, each of which shall constitute an original and all of which
shall be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a
corporation or partnership, each individual executing this Lease on behalf of
the corporation or partnership represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation or
partnership, and that this Lease is binding upon the corporation or partnership
in accordance with its terms. Tenant shall, at Landlord's request, deliver a
certified copy of its board of directors' resolution or partnership agreement
or certificate authorizing or evidencing the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission
of this Lease to Tenant shall be for examination purposes only, and shall not
constitute an offer to or option for Tenant to lease the Premises. Execution of
this Lease by Tenant and its return to Landlord shall not be binding upon
Landlord, notwithstanding any time interval, until Landlord has in fact executed
and delivered this Lease to Tenant, it being intended that this Lease shall only
become effective upon execution by Landlord and delivery of a fully executed
counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease without
the prior written consent of Landlord. Tenant, upon the request of Landlord,
shall execute and acknowledge a "short form" memorandum of this Lease for
recording purposes.
SECTION 21.5. AMENDMENTS. No amendment or termination of this Lease
shall be effective unless in writing signed by authorized signatories of Tenant
and Landlord, or by their respective successors in interest. No actions,
policies, oral or informal arrangements, business dealings or other course of
conduct by or between the parties shall be deemed to modify this Lease in any
respect.
SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or similar
reproduction of this Lease shall be deemed an original for all purposes.
SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and
addenda attached to this Lease are hereby incorporated into and made a part of
this Lease.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and
agrees that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's relationship
with other tenants. Accordingly, Tenant agrees that it, and its partners,
officers, directors, employees and attorneys, shall not intentionally and
voluntarily disclose the terms and conditions of this Lease to any other tenant
or apparent prospective tenant of the Building or Project, either directly or
indirectly, without the prior written consent of Landlord, provided, however,
that Tenant may disclose the terms to prospective subtenants or assignees under
this Lease.
SECTION 22.2. GUARANTY. As a condition to the execution of this Lease
by Landlord, the obligations, covenants and performance of the Tenant as herein
provided shall be guaranteed in writing by the Guarantor(s) listed in Item 7 of
the Basic Lease Provisions, if any, on a form of guaranty provided by Landlord.
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with
obtaining financing for the Project, the Lender shall request reasonable
modifications in this Lease as a condition to the financing, Tenant will not
unreasonably withhold or delay its consent, provided that the modifications do
not materially increase the obligations of Tenant or materially and adversely
affect the leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the
part of Landlord which would otherwise entitle Tenant to be relieved of its
obligations hereunder or to terminate this Lease shall result in such a release
or termination unless (a) Tenant has given notice by registered or certified
mail to any beneficiary of a deed of trust or mortgage covering the Building
whose address has been furnished to Tenant and (b) such beneficiary is afforded
a reasonable opportunity to cure the default by Landlord (which in no event
shall be less than sixty (60) days, including, if necessary to effect the cure,
time to obtain possession of the Building by power of sale or judicial
foreclosure provided that such foreclosure remedy is diligently pursued. Tenant
agrees that each beneficiary of a deed of trust or mortgage covering the
Building is an express third party beneficiary hereof, Tenant shall have no
right or claim for the collection of any deposit from such beneficiary or from
any purchaser at a foreclosure sale unless such beneficiary or purchaser shall
have actually received and not refunded the deposit, and Tenant shall comply
with any written directions by any beneficiary to pay rent due hereunder
directly to such beneficiary without determining whether an event of default
exists under such beneficiary's deed of trust.
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SECTION 22.5. COVENANTS AND CONDITIONS. All of the provisions of this
Lease shall be construed to be conditions as well as covenants as though the
words specifically expressing or imparting covenants and conditions were used
in each separate provision.
SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that
Landlord shall have no obligation whatsoever to provide guard service or other
security measures for the benefit of the Premises or the Project. Tenant
assumes all responsibility for the protection of Tenant, its agents, invitees
and property from acts of third parties. Nothing herein contained shall prevent
Landlord, at its sole option, from providing security protection for the
Project or any part thereof, in which event the cost thereof shall be included
within the definition of Project Costs.
LANDLORD: TENANT:
THE IRVINE COMPANY, MEDICAL DIAGNOSTIC SYSTEMS, LLC
a Michigan corporation a limited liability company
By Clarence W. Barker By Robert H. Gurevitch
--------------------------- ----------------------------------
Clarence W. Barker, Title President
President, Irvine Industrial Company, ---------------------------
a division of The Irvine Company
By John C. Tsu By Signature Illegible
--------------------------- ----------------------------------
John C. Tsu, Title
Assistant Secretary ----------------------------
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<PAGE>
EXHIBIT 10.36
May 31, 1996
Dear
This letter will confirm that the Board of Directors of Edudata have approved
shares of stock options at $1.00 per share in your name to be issued prior to
the 15th of June, 1996. These shares will vest at __% per year over a
___-year period and will be fully vested on _____________.
Best regards,
Robert H. Gurevitch
Chairman of Edudata Corporation
RHG:bjs
<PAGE>
Schedule of Recipients
of Notice of Vesting Letters
Number of Exercise Full Vesting
Name Vested Shares Price Date
---- ------------- -------- ------------
1. Merle Roberts 25,000 $1.00 8/28/96
2. Steve Gonzales 25,000 $1.00 8/28/96
3. Paul Tzeng 25,000 $1.00 8/28/96
4. Fred Kinley 100,000 $1.00 7/02/96
5. Dewey Perrigo 100,000 $1.00 7/02/96
6. Neil Magneson 10,000 $1.00 3/03/01
7. Scott Cote' 20,000 $1.00 3/03/01
8. Dennis Braunston 10,000 $1.00 3/03/01
9. Tom Herndon 10,000 $1.00 3/03/01
10. Jim Arden 5,000 $1.00 3/03/01
11. Hank Rhodes 5,000 $1.00 3/03/01
12. Clancy Scott 10,000 $1.00 3/03/01
13. Bob Stern 10,000 $1.00 3/03/01
14. Alan Miller 15,000 $1.00 3/03/01
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of
our report dated January 31, 1997, on our examinations of the financial
statements of Dental/Medical Diagnostic Systems, Inc. and Subsidiaries. We also
consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Los Angeles, California
April 2, 1997
