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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1997.
COMMISSION FILE NO.0-12850
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 13-3152648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 N. Westlake Boulevard, Suite 202, Westlake Village, California, 91362
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (805) 381-2700
Securities Registered Pursuant To Section
12(b) of the Exchange Act:
None
Securities Registered Pursuant To Section
12(g) of the Exchange Act:
Redeemable Common Stock Purchase Warrants, and
Common Stock, $0.01 Par Value
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal period ended December 31, 1997 were
$16,087,208.
At March 24, 1998, the issuer had 5,115,777 shares of Common Stock, $0.01 par
value, issued and outstanding.
The aggregate market value of the outstanding voting and non-voting common
equity held by non-affiliates of the issuer computed by reference to the average
bid and asked price of such common equity as of March 24, 1998 was $42,022,997.
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DOCUMENTS INCORPORATED BY REFERENCE
Items 9-12 of Part III of this Report incorporate by reference portions of the
Registrant's definitive Proxy Statement with respect to its 1998 Annual Meeting
of Stockholders.
Transitional Small Business Disclosure format: YES NO X
--- ---
When used in this Form 10-KSB or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or stockholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers that all
forward-looking statements are necessarily speculative and not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made, and to advise readers that various risks and uncertainties, including
regional, national and international economic conditions, competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
those anticipated or projected. The risks highlighted herein should not be
assumed to be the only things that could affect future performance of the
Company.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Prior History and Activities. Dental/Medical Diagnostic Systems, Inc.
("Company") designs, develops, manufactures and sells high technology dental
equipment. The Company was organized in New York in 1981 under the name Edudata
Corporation and reincorporated in Delaware in 1983. 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. 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. 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.
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.
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On October 2, 1997, the Company purchased the assets of S.E.D. Gerant
("S.E.D."), a company organized under the laws of France, for $120,000. As part
of this asset purchase, the Company paid an additional $106,850 for development
costs associated with S.E.D.'s "Biotron" curing and whitening device products.
S.E.D. is a developer and manufacturer of medical and dental devices. The
Company purchased the rights to all of the technology and the intellectual
property, including patents, developed by S.E.D. including the Biotron products.
The Company commenced marketing a curing and whitening device in Europe and
internationally incorporating this technology in March of 1998 under the brand
name "Apollo 95E." S.E.D. will manufacture the Apollo 95E for the Company
pursuant to an oral agreement between the Company and S.E.D. The Company has
also entered into a consulting agreement with Dr. Francios Duret, President of
S.E.D. Dr. Duret will oversee the manufacture by S.E.D. of the Apollo 95E for
sale by the Company into the international marketplace and will develop new
products as directed from time to time by the Company.
On September 17, 1997, the Company issued 50,000 shares of Common Stock to
DMD NV, the Company's licensed exclusive distributor of the TeliCam system in
Europe, in exchange for termination of DMD NV's exclusive distribution rights in
Europe. The closing market price of the Common Stock on the date of issuance was
$256,250.
On February 2, 1988 the Company formed "DMDS, Ltd." a wholly-owned
subsidiary created under the laws of the United Kingdom. DMDS, Ltd. will hold
the assets acquired from S.E.D. In addition, the Company currently plans to
market certain of its new products internationally through DMDS, Ltd.
INDUSTRY OVERVIEW
The results of a recent study commissioned by the American Dental
Association ("ADA") indicate that the number of US dental visits has grown, from
360 million in 1975, to 534 million in 1995; and that the total expenditure for
dental care in the US 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 US 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, 1997, the Company has devoted approximately $ 2.1
million to product development activities, including approximately $1.2
million in fiscal 1997. The dental market is highly competitive, the Company
believes that its focus on new and improved technologies is essential if the
Company is to continue to grow and to maintain a competitive position in the
marketplace.
Growth Through Acquisitions and Licensing Agreements. The Company
anticipates that it will complement its internal growth, both in number of
products and sales, through acquisitions and licensing agreements and a
focus on developing and marketing new technologies for the dental practice.
The Company believes that acquisitions and licensing agreements present an
effective means of obtaining technical personnel and obtaining or expanding
technologies, products and markets. The Company continually evaluates
opportunities for acquisitions and licensing agreements.
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. The Company intends
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to increase its domestic sales through the planned introduction of new
products, such as a composite curing and tooth whitening device and the
TeliCam Elite. See "-- Product Development." The Company also hopes to
increase its international sales through entry into additional distribution
agreements with foreign distributors and the introduction of the Apollo 95E
curing and tooth whitening device internationally. The Company intends to
capitalize on its experienced management and sales team to increase its
domestic and international sales. The Company is developing products
incorporating digital x-ray technology for sale in the dental market both
domestically and internationally.
PRODUCTS
Current Products. The Company's primary existing product emphasis is on
the manufacture and sale, of an intraoral camera system, known as the "TeliCam
II System," and a multi-operatory intraoral camera system, known as the
InTELInet, for use in connection with the TeliCam II System. The Company's
TeliCam II System was introduced to update its "TeliCam I System." The Company
has discontinued marketing its TeliCam I System. The Company is developing an
updated version of its intraoral camera system, the "TeliCam Elite" and plans to
introduce the updated camera in the second quarter of fiscal year 1998.
Most 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 II
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 II 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.
The TeliCam II 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 II 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 II 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 I Systems to customers in February 1996, and TeliCam II Systems in the
second quarter of 1997. Through December 31, 1997, the Company had sold 4,511
TeliCam I and TeliCam II Systems to dentists throughout the United States, as
well as to several dental schools, and 2,406 TeliCam I and II Systems
internationally. See "Cautionary Statements and Risk Factors -- Substantial
Dependence on Third Parties -- Suppliers."
The Company believes that the market for intraoral cameras is a
maturing market where the Company will encounter increasing price competition;
potential revenue growth will in the future be dependent upon the ability of the
Company to add incremental technological improvements and/or reduce pricing.
In November 1996, the Company introduced its InTELInet Video Monitoring
System ("InTELInet") which generally includes two TeliCam systems, a printer, a
video-cassette monitor, cabling and installation. InTELInet creates a
video-electronic information link between the different operatories of the
dental office. InTELInet is different from most 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 staffs to conduct more than
one patient examination at a time using two or more intraoral cameras
simultaneously. InTELInet is thus designed to be a cost-
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effective solution to the problems generally associated with standard networking
of various intraoral cameras in multiple operatories within a single dental
practice. With most traditional intraoral camera networks, each camera must be
wired to a centralized printer or other storage device 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. As a result, most
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 systems. Also, most 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 traditional type of network requires the dental practice to
make a significant expenditure for cabling and installation and on-site printers
in every operatory. Because the TeliCam has its own microprocessor video capture
device built in, its design facilitates the need for only one central video
printer regardless of the number of cameras being used at the same time. 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 US 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. While there can be no assurance that
digital x-ray technology will be developed, the Company has designed the
InTELInet system to be compatible with the digital x-ray technology the Company
is currently developing with Suni Imaging Microsystems, Inc. See "--Product
Development." From the time of its first introduction in late November 1996,
through December 31, 1997, 385 InTELInet multiple operatory networking systems
have been sold by the Company.
Product Development. Consistent with the Company's strategy, the
Company's intends to grow and expand through new product development and
introduction and by updating its current products to respond to competitive
pressures. The Company anticipates introducing several new and enhanced products
in fiscal 1998.
The Company is currently completing the development of its TeliCam
Elite intraoral camera. This system, designed for the medium-priced dental
market, is distinguished from the Company's current TeliCam II System by
features such as increased portability, expanded memory, a wall mount
capability, an automatic on/off built into the mouth piece, extended life of the
lamp, and aesthetic modifications. The TeliCam Elite, when introduced, may also
be used with the InTELInet network. The Company plans to introduce the TeliCam
Elite in the second fiscal quarter of 1998. No assurances can be given that the
TeliCam Elite will achieve market success.
The Company has signed an exclusive distribution agreement with Ion
Laser Technology, Inc. ("ILT") for the rights to distribute ILT's composite
curing and whitening system to the dental market in the US and Canada. The
Company is currently working with ILT to produce a device that meets the
Company's specifications. As of March 27, 1998, no devices had yet been shipped
by ILT which met the Company's specifications. While the Company believes an
acceptable device will be developed, no assurance can be given that ILT will be
able to produce a device which meets the Company's specifications or will
otherwise be able to meet the Company's manufacturing requirements. If the
device is successfully developed, the Company will market the device as the
"Apollo 9500(TM)." ILT has retained the right to market its own tooth whitening
system, which uses the same high power non-laser light incorporated into the
Company's Apollo 9500. The Apollo 9500 utilizes 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 laser system for teeth whitening in
the dental office requires more than two hours of the dentist's time. Based on
initial testing, the Company believes the Apollo 9500 will whiten teeth in a
dentist's office in less than one hour. The Apollo 9500 procedure can be
performed by a dental hygienist or assistant instead of the dentist. The
procedure involves the compatibility of the light source with catalytic
chemicals to produce effective and rapid teeth whitening. The Apollo 9500 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 curing results to those produced by the Apollo 9500.
However, those light systems take substantially longer to achieve the same
curing result. The Company will also market the chemical composite and whitening
materials supplied by ILT to be used with this product. See "Cautionary
Statements and Risk Factors -- Substantial Dependence on Third Parties --
Distribution and Licensing Relationships."
The Company has entered into an agreement with Suni Imaging
Microsystems, Inc. ("Suni") to develop digital x-ray technology for
incorporation into systems for the dental market. The Company has obtained
exclusive rights to market products to the dental market incorporating certain
digital x-ray technology developed by Suni. Suni will retain the rights to
developed microchip technology underlying the x-ray system it develops for the
Company. 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-
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consuming process of film development and eliminate the need to use and dispose
of chemicals required to develop conventional x-ray film. This technology, if
successfully developed for the Company by Suni, would provide improved image
quality and a more comfortable sensor for the patient at a lower price point
than competitive systems. 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 is
designed to allow database storage and recall of images for comparison purposes.
The development of the technology will be done by Suni and funded by the
Company. No assurance can be given that digital x-ray technology will be
successfully developed, or if the technology is developed, that the Company will
be able to commercially exploit it. Additionally, the Company believes that any
products it may develop incorporating the digital x-ray technology will require
FDA approval prior to marketing, and as a consequence, the timing of the
domestic introduction of such product is uncertain. The Company will determine
whether or not to proceed with the marketing of such product based upon the
results of the development.
The Company introduced a curing and whitening device, the Apollo 95E,
in March of 1998 to markets outside of the US and Canada. The Company has
entered into a consulting agreement with Dr. Francois Duret, president of S.E.D.
S.E.D. will manufacture the Apollo 95E for the Company pursuant to an oral
agreement between the Company and S.E.D. Dr. Duret will oversee manufacture of
the 95E product for the Company by S.E.D., and will render consulting and
research services to the Company, including obtaining regulatory approval of any
new version of the Company's Apollo 95E products. The Company believes that the
Apollo 95E produces faster results than products currently available in that
market place. This product is designed to cure composite material in three
seconds or less, and to produce teeth whitening in a dental operatory in less
than one hour. The Company will also market the chemical composite and whitening
materials to be used with both these products. See "Cautionary Statements and
Risk Factors -- Substantial Dependence on Third Parties -- Suppliers."
The Company expended $1,213,766 and $322,467 for research and
development of its products for the twelve months ended December 31, 1997 and
from March 2, 1996 to December 31, 1996, respectively.
MANUFACTURING AND COMPONENT PARTS
The Company assembles and tests the TeliCam II 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 anticipates that it will obtain the CCU processor component
of the TeliCam System from a single source. 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.
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. 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.
Under the Company's development and distribution agreement with ILT,
ILT will manufacture ILT's composite curing and teeth whitening system for the
Company, which the Company will market as the Apollo 9500. The Company will also
market the chemical composite and whitening materials supplied by ILT to be used
exclusively with this product. The Company is currently working with ILT to
produce a device that meets the Company's specifications. As of March 27, 1998,
no devices had yet been shipped by ILT which met the Company's specifications.
While the Company believes an acceptable device will be developed, no assurance
can be given that
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ILT will be able to produce a device which meets the Company's specifications or
will be able to meet the Company's manufacturing requirements. If ILT is unable
to deliver a product which meets the Company's specifications, or is otherwise
unable to perform its obligations, the Company intends to introduce its Apollo
95E product for sale into the US and Canadian markets. The Company believes that
it would experience a four to six month delay in shipments while it obtained
regulatory approval of its Apollo 95E product for sale in the US and Canada. See
"-- Government Regulation." If the contract with ILT is otherwise terminated,
or if for some reason the Apollo 95E cannot be introduced, the Company believes
that it would experience significant delays in its ability to market whitening
and curing devices. In the event the Company is unable to obtain alternate
sources of supply to replace this planned product line, the Company's operations
may be materially adversely effected. See "Cautionary Statements and Risk
Factors -- Substantial Dependence on Third Parties -- Distribution and Licensing
Relationships."
The Company's Apollo 95E product will be initially manufactured in
France for the Company under an oral agreement with S.E.D. If S.E.D. is
unable to meet the Company's requirements, Management believes that alternative
manufacturing sources for its Apollo 95E product could be obtained rapidly, on
comparable terms without causing significant delays in production or shipment.
In the event the Company is unable, however, to quickly obtain an alternate
manufacturing source, this could have an adverse effect on the Company's
operations.
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.
MARKETING AND SALES
US 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 14
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 1997 and 1996 the Company ran advertisements in
various publications for the dental industry on a monthly basis and attended in
excess of 70 dental conferences and trade shows in 1996 and in excess of 75
dental conferences and trade shows in 1997. 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 US 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.
The Company plans to distribute the Apollo 9500, and products it is currently
developing such as the TeliCam Elite and any product incorporating digital x-ray
technology through its existing distribution network.
International Sales and Distribution. In the international market, the
Company sells the TeliCam System through independent dealers and distributors.
Presently, the Company has nine contracts with independent distributors, which
agreements cover key international markets including, the Middle East, the Far
East, Russia, Australia, Canada and South America. On September 17, 1997 the
Company repurchased distribution rights for its products in the European market
from an independent distributor for 50,000 shares of its Common Stock. The
Company's international 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 has been 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. Furthermore, Olympus Camera Company of Japan
("Olympus") has commenced purchases and has signed a letter of intent with the
Company relating to Olympus becoming the exclusive distributor of the TeliCam
System in Japan. The Company is continuing to negotiate with Olympus; 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 $6,100,000 through December 31, 1997. 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. The Company plans to market the Apollo 95E through its wholly-owned
subsidiary, DMDS, Ltd. and through its existing network of international
distributors.
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TRAINING, CUSTOMER SUPPORT AND PRODUCT SERVICE
Management believes that operating the Company's TeliCam System Products
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. Customer support for the TeliCam
Elite will be provided by the existing TeliCam System support system. The
Company is currently developing a program for training, customer support and
service for the products it hopes to introduce in 1998.
PATENTS AND PROPRIETARY RIGHTS
The patents pertaining to the various components of the TeliCam System are
all owned by third parties. 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"). Also pursuant to this agreement, the Company
has the rights to use the "TeliCam" trademark.
Certain technology incorporated into the Company's Apollo 9500 system is
protected by patents owned by ILT. The Company has an exclusive right to
distribute the Apollo 9500 curing and whitening system in the US and in Canada.
ILT has retained the right to market its own tooth whitening system in the US
and Canada that incorporates the same high power non-laser light technology as
is incorporated into the Company's Apollo 9500. As part of the asset purchase
from S.E.D., the Company purchased the technology rights, including patent
rights, to certain technology incorporated into its Apollo 95E product. See
"Cautionary Statements and Risk Factors -- Substantial Dependence on Third
Parties."
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company's proprietary technology for the TeliCam is
not protected by any patents. Consequently, the Company relies primarily on
trademark, trade secret and copyright laws to protect this technology. Also, the
Company has implemented 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 TeliCams, 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.
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<PAGE> 9
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.
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 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 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 Company has decided to discontinue its
dental bur business. In December 1997 the Company was notified by the staff of
the FDA that in the FDA's view a 510(K) will be required on all intraoral
cameras sold in the United States including the Company's TeliCam product. The
staff of the FDA also orally confirmed that the Company may continue to sell the
TeliCam domestically and internationally pending clearance of the product.
Although the Company believes that the marketing and sales of the TeliCam
intraoral dental camera does not require filing or clearance of a 510(K)
Notification and would vigorously challenge any enforcement action based upon
such a contention, the Company has determined to promptly comply with the
staff's direction since there will be no negative affect on the sales or
operations of the Company. The Company and its regulatory experts believe that
the obtaining of the 510(K) Notification for the camera will be a relatively
easy process and should be completed in the next two to three months.
The Company believes that it will be required to obtain FDA approval or
clearance prior to introduction of any digital x-ray products, if such products
are, in fact, developed. ILT has obtained 510(K) approval of the curing and
whitening device the Company will market as the Apollo 9500. If ILT is unable
to perform its obligations to deliver a curing and whitening device to
the Company
9
<PAGE> 10
which meets the Company's specifications, the Company believes it would be
required to obtain FDA approval or clearance prior to introduction of its Apollo
95E product, or an alternative product, for sale in the US.
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 Company has obtained applicable regulatory approval of its Apollo 95E
product for sale in the European Common Market. 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 twelve companies offering
intraoral camera systems which are competitive with the TeliCam System. The
Company's dental curing and whitening device products, if such products are
introduced, will face competition from existing curing and whitening systems,
including laser systems, and including a tooth whitening system marketed by ILT.
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 of these competitive pressures may have a material adverse effect on
operating results.
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 for the
TeliCam System are Patterson Dental Co., Henry Schein, Inc., Dentsply and
Ultrak.
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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 February 8, 1998, the Company had 57 full-time employees. Of these
employees, 23 were involved in production, 5 were in customer service, 20 were
in administration, 4 were engaged in sales and marketing, and 5 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.
ITEM 2. DESCRIPTION OF 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 $6,200. Further, under a lease that expires on November 1, 1998,
the Company has approximately 5,700 square feet of space in a building in
Irvine, California, where it previously manufactured and distributed the TeliCam
System and conducted research and development activities. The rental payment
under this plant lease is approximately $5,310 per month. The Company is
presently trying to sub-lease this facility. The Company now leases a larger
facility in Irvine of approximately 12,000 square feet, under a lease that
expires in November 1998 at a rental payment of $ 6,750 per month to perform
these functions. All leases require the Company to pay taxes, maintenance fees,
insurance, and periodic rent increases based on a published price index. The
Company does not presently own, and does not have any current plans to invest in
any interests in real property other than through its leases.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock and Redeemable Common Stock Purchase Warrants are currently
traded on the NASDAQ SmallCap Market under the symbols "DMDS" and "DMDSW,"
respectively, and on the Boston Stock Exchange under the symbols "DMD" and
"DMDW," respectively. Prior to May 9, 1997 the Common Stock was quoted on the
OTC Bulletin Board. The following table sets forth the range of the high and low
bid quotations of the Common Stock on the OTC Bulletin Board for 1996, and the
NASDAQ SmallCap Market for 1997 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>
1997 REDEEMABLE COMMON
1997 STOCK STOCK PURCHASE WARRANTS 1997 STOCK
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
PERIOD ENDED
<S> <C> <C> <C> <C> <C> <C>
March 31, 1997 and June 30, 1996 $4.8 $3.1 $- $- $5.8 $ .9
June 30, 1997 and August 31, 1996 7.1 4.1 3.9 3.7 5.4 3.6
September 30, 1997 and November 30, 1996 6.6 5.4 2.7 2.5 5.8 3.6
December 31, 1997 and 1996 9.5 5.9 4.0 3.8 5.6 4.3
</TABLE>
On March 4, 1998, the high bid and low ask prices were $7.50 and $6.938,
respectively for the Common Stock and $3.75 and $3.375, respectively, for the
Redeemable Common Stock Purchase Warrants. As of March 4, 1998, there were 62
stockholders of record and approximately 1,324 beneficial holders of the Common
Stock, and 29 stockholders of record and approximately 442 beneficial holders of
the Redeemable Common Stock Purchase Warrants.
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. The Company bank financing agreements and the purchase agreement
entered into in connection with the Debt Placement impose restrictions on any
payment of dividends. The Board of Directors believe that all the Company's
earnings, if any, should be retained for the development of the Company's
business.
RECENT SALES
On September 17, 1997 the Company issued 50,000 shares of its Common
Stock to DMD NV, a distributor of the Company's TeliCam system in Europe, in
exchange for cancellation of DMD NV's rights to distribute the TeliCam System in
Europe. The transaction was a private transaction exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Act")
and Rule 506 of Regulation D promulgated under the Act. The shares of Common
Stock given to DMD NV in exchange for its distribution rights had an aggregate
value, based on the closing market price on the date of issuance, of
approximately $256,250. A registration statement on Form S-3 with respect to
the shares was filed by the Company in January of 1998.
On March 3, 1998, the Company entered into an agreement with accredited
investors and institutional purchasers for the private placement (the "Debt
Placement") of its 12% Senior Subordinated Notes due 1999 (the "Notes") and
450,000 warrants (the "Warrants"). The Debt Placement was consummated on March
19, 1998. The Debt Placement was exempt from Registration under Section 4(2) of
the Act and Rule 506 of Regulation D promulgated under the Act. The Warrants are
(i) exerciseable commencing on May 15, 1998, and for five years thereafter for
the purchase of one share of Common Stock per Warrant (the "Warrant Shares");
and (ii) at an exercise price of $5.812 per share. The Company has agreed to
file a registration statement with respect to the Warrant Shares within 45 days
of the date the Warrants were issued. The Notes (i) bear interest at a rate of
12% per annum payable semi-annually; (ii) mature on the first anniversary of the
date of issuance; and (iii) may be repaid by the Company prior to maturity at
one hundred and two (102%) percent of the amount of the unpaid principal plus
the interest due as of the date of repayment. If the Notes are unpaid at
maturity, each Note holder has the option to convert the outstanding principal
and interest then due on such Note into Common Stock of the Company (the
"Conversion Shares") at a conversion price equal to eighty (80%) percent of the
average of the five lowest closing bid prices for the
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<PAGE> 13
twenty consecutive trading days prior to the date of conversion. The unpaid
principal and interest then due on the Notes is convertible into a maximum
aggregate amount of 500,000 shares of Common Stock. Depending on the stock price
at the time of conversion, more than 500,000 shares of Common Stock may be
required to permit conversion of one hundred (100%) percent of the unpaid
principal and interest then due on the Notes into Common Stock. The Company has
agreed to present a proposal to its stockholders at the next annual meeting of
its stockholders to approve issuance of a sufficient number of shares of Common
Stock to permit conversion upon default of one hundred (100%) percent of the
unpaid principal and interest then due on all of the outstanding Notes to Common
Stock. The Company has agreed to file a registration statement with respect to
any Conversion Shares within 45 days of the date the Notes mature, if the Notes
are then unpaid. The Company intends to use the proceeds of the Debt Placement
of approximately $4.2 million, net of commissions and costs, to launch its
Apollo 9500 and Apollo 95E products, for product development and for other
working capital purposes.
USE OF PROCEEDS OF OFFERING
On May 14, 1997, the Company closed a secondary offering (the
"Offering") of 2,070,000 shares of Common Stock. Each share of Common Stock
included one redeemable warrant (the "Redeemable Common Stock Purchase
Warrants") to purchase one share of common stock at a purchase price of $5.00.
The Offering resulted in gross proceeds of $10,350,000, less expenses of
approximately $1,819,628 for net proceeds of approximately $8,530,372.
Approximately $1,600,000 of the net proceeds were used to repay the principal on
the Bridge Notes and an additional $100,000 was used to pay off accrued
interest. The Bridge Notes consisted of secured convertible promissory notes in
the aggregate principal amount of $1,600,000 bearing interest at 10% per annum
and were payable the earlier of May 27, 1998 or consummation of the Offering.
Approximately $224,000 was used to repay loans from related parties. Of the
remaining proceeds net of associated expenses, at December 31, 1997,
approximately $2,937,000 had been used for product development, acquisition,
working capital and general corporate purposes.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following discussion and analysis should be read together with the
Consolidated Financial Statements of the Company and notes thereto incorporated
elsewhere in this Form 10KSB.
INTRODUCTION
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the twelve and ten month periods ended December 31, 1997 and December 31,
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. 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
"Cautionary Statements and Risk Factors" below.
Dental Medical Diagnostic Systems, Inc. ("Company") designs, develops,
manufactures and sells high technology dental equipment. The Company was
organized in New York in 1981 under the name Edudata Corporation and
reincorporated in Delaware in 1983. 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. 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 purchased all of the outstanding
membership interests of Dental/Medical Diagnostic Systems, LLC ("DMD") and all
of the outstanding capital stock of Bavarian Dental Instruments, Inc. ("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.
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<PAGE> 14
DMD was formed in October 1995 and has been primarily involved in
designing, developing, manufacturing, and marketing intra-oral camera systems
referred to as "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.
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 (a "Bridge Note") and a warrant (a "Bridge Warrant") to
purchase 18,750 shares of Common Stock at a purchase price of $2.67 per share.
The Bridge Notes accrued interest at a rate of 10% per annum and the principal
and all accrued interest were repaid by the Company from the proceeds of the
Company's May 1997 Offering. As a result of the Bridge Warrant issuance, the
Bridge Notes were discounted by $259,103, which amount was amortized over the
term of the Bridge Notes. The Bridge Warrants were converted into 1,600,000
Redeemable Common Stock Purchase Warrants upon closing of the Company's Offering
on May 14, 1997.
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. On January 13, 1997
the Company effected a one-for-2.197317574 reverse stock split and on March 24,
1997 the Company's stockholders approved an additional one-for-1.33333333
reverse stock split. All information in this Report has been adjusted to
reflect both stock splits.
On May 14, 1997, the Company closed a secondary offering (the
"Offering") of 2,070,000 shares of Common Stock. Each share of Common Stock
included one redeemable warrant (the "Redeemable Common Stock Purchase
Warrants") to purchase one share of common stock at a purchase price of $5.00.
The Offering resulted in gross proceeds of $10,350,000, less expenses of
approximately $1,819,628 for net proceeds of approximately $8,530,372.
Approximately $1,600,000 of the net proceeds were used to repay the principal on
the Bridge Notes and an additional $100,000 was used to pay off accrued
interest. The Bridge Notes consisted of secured convertible promissory notes in
the aggregate principal amount of $1,600,000 bearing interest at 10% per annum
and were payable the earlier of May 27, 1998 or consummation of the Offering.
Approximately $224,000 was used to repay loans from related parties. The
remaining proceeds net of associated expenses have or will be used for product
development, acquisition, and to repay the remaining loans from related parties,
and working capital and general corporate purposes.
On October 2, 1997, the Company purchased the assets of S.E.D. Gerant
("S.E.D."), a company organized under the laws of France, for $120,000. As part
of this asset purchase, the Company paid an additional $106,850 for development
costs associated with S.E.D.'s "Biotron" curing and whitening device product.
S.E.D. is a developer and manufacturer of medical and dental devices. The
Company purchased the rights to all of the technology and the intellectual
property, including patents, developed by S.E.D. The Company anticipates that it
will commence marketing a curing and whitening device in Europe and
internationally incorporating this technology during the second fiscal quarter
of 1998 under the brand name "Apollo 95E." S.E.D. will manufacture the Apollo
95E for the Company pursuant to an oral agreement between the Company and
S.E.D. The Company has also entered into a consulting agreement with Dr.
Francois Duret, the president of S.E.D. Dr. Duret will oversee the manufacture
of the Apollo 95E for sale by the Company into the international marketplace and
will develop new products as directed by the Company.
On September 17, 1997, the Company issued 50,000 shares of Common Stock
to DMD NV, the Company's licensed exclusive distributor of the TeliCam system in
Europe, in exchange for termination of DMD NV's exclusive rights. The Common
Stock had an aggregate value, based on the closing market price on the date of
issuance, of $256,250.
On February 2, 1988 the Company formed "DMDS, Ltd." a wholly-owned
subsidiary created under the laws of the United Kingdom. DMDS, Ltd. will hold
the assets acquired from S.E.D. In addition, the Company currently plans to
market certain of its new products internationally through DMDS, Ltd.
On March 2, 1998, the Company entered into an agreement with accredited
investors and institutional purchasers for the private placement (the "Debt
Placement") of its 12% Senior Subordinated Notes due 1999 (the "Notes") and
450,000 warrants (the "1998 Warrants"). The Debt Placement was consummated on
March 19, 1998. The 1998 Warrants are (i) exercisable commencing on May 15,
1998, and for five years thereafter for the purchase of one share of Common
Stock per Warrant; and (ii) at an exercise price of $5.812 per share. The Notes
(i) bear interest payable semi-annually at a rate of 12% per annum; (ii) mature
on the first anniversary of the date of
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<PAGE> 15
issuance; and (iii) may be repaid by the Company prior to maturity at one
hundred and two (102%) percent of the amount of the unpaid principal plus
interest due as of the date of repayment. If the Notes are unpaid at maturity,
each Note holder has the option to convert the outstanding principal and
interest then due on such Note into Common Stock of the Company (the "Conversion
Shares") at a conversion price equal to eighty (80%) percent of the average of
the five lowest closing bid prices for the twenty consecutive trading days prior
to the date of conversion. The unpaid principal and interest then due on the
Notes is convertible into a maximum aggregate amount of 500,000 shares of Common
Stock. Depending on the stock price at the time of conversion, more than 500,000
shares of common stock may be required to permit conversion of one hundred
(100%) percent of the unpaid principal and interest then due on the Notes into
Common Stock. The Company has agreed to present a proposal to its stockholders
at the next annual meeting of its stockholders to approve issuance of a
sufficient number of shares of Common Stock to permit conversion upon default of
one hundred (100%) percent of the unpaid principal and interest then due on all
of the outstanding Notes to Common Stock.
Results of Operations
For the twelve and ten month periods ended December 31, 1997 and
December 31, 1996 net sales totaled $16,087,208 and $11,673,102 respectively.
The Company incurred an operating loss of $1,648,080 for the twelve months ended
December 31, 1997, and operating income of $304,435 for the ten months ended
December 31, 1996. Included in the results of the year ended December 31, 1997
and the ten month period ended December 31, 1996 are sales of approximately
$35,500 and $235,000, and an operating loss of approximately $15,500 and
$196,000 respectively, related to the Company's discontinued dental bur line.
Net sales for the twelve and ten month periods ended December 31, 1997
and December 31, 1996 were $16,087,208 and $11,673,102, respectively or an
increase of approximately 38% for the period. This increase is primarily due to
the two month longer period, increased international sales volume and increased
sales volume of the InTELIinet video systems. The sales in the ten month period
ended 1996 were significantly enhanced by an approximate $1,255,000 back order
position from inception to the commencement of sales in the period. Back orders
on hand as of January 1, 1997 amounted to $65,448 in the aggregate. Sales are
comprised primarily of sales of TeliCam Systems and related products.
Cost of sales for the twelve and ten month periods, ended December 31,
1997 and December 31, 1996 were $10,234,206 or 64% of sales and $6,685,464 or
57% of sales, respectively. Cost of sales increased as a percentage of sales
primarily due to the increased international sales that require price discounts
on sales, partially offset by anticipated reduced warranty and service costs.
International sales and anticipated reduced warranty costs on same are subject
to a number of risks, including the Company's dependence on third party
suppliers for non-defective components and the Company's dependence on foreign
distribution. See "Cautionary Statements and Risk Factors -- Substantial
Dependence on Third Parties," and " -- Reliance on International Sales and
Distributors and General Risks of International Operations." Also contributing
to the increase in cost of sales was the increase in lower margin InTELInet
sales.
Selling, general and administrative expenses totaled $6,031,066 and
$4,360,736, respectively for the twelve and ten month periods ended December 31,
1997, and December 31, 1996, respectively. The increase in expense is primarily
due to the two addition months included in the period, increased sales
commissions as a result of the increase in sales volume, increased salary and
wages and legal expenses associated with the acquisition of new products. These
expenses are expected to continue to increase as sales volume increases and
increased marketing costs are incurred for the introduction of the new products.
Partially offsetting these increases for the twelve month period ended December
31, 1997 were decreased advertising, show expenses and salaries as a result of
discontinuing the dental bur line.
Research and development expenses totaled $1,213,766 and $322,467,
respectively for the twelve and ten month periods ended December 31, 1997 and
December 31, 1996. The increase in 1997 is the result of expenditures on the
research and development, primarily the digital x-ray technology. See
"Cautionary Statements and Risk Factors -- Importance of New Product Development
to Common Growth" and " -- Expansion through Undetermined Acquisitions and
Joint-Ventures." Increased expenditures on research and development are expected
to continue into future periods.
Amortization of debt issuance cost totaled $76,431 for the twelve month
period ended December 31, 1997 and $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. The
Company has repaid such debt out of the proceeds of the Offering.
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Interest income totaled $205,818 for the twelve month period ended
December 31, 1997, and is the result of investing the net proceeds of the
Offering in a short term management account through Comerica Securities. These
funds were not available in the prior period.
Interest expense totaled $138,576 for the twelve month period ended
December 31, 1997 and $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. The increase in the
twelve month period is primarily due to the Bridge Notes, which were repaid in
May 1997 with proceeds of the Offering.
A non-recurring charge of $256,250 was incurred on September 17, 1997
and was the result of the purchase by the Company of the distribution rights
into the European market from DMD NV, an independent distributor, for 50,000
shares of common stock.
Loss before extraordinary item for the twelve month period ended
December 31, 1997, totaled $1,810,580 or $.42 per share. Income for the ten
month period ended December 31, 1996 totaled $137,151 or $.05 per share.
Extraordinary loss on early extinguishment of debt totaled $234,149
(net of tax benefit of $143,511) for the twelve month period ended December 31,
1997, and is the result of the payment of the $1,600,000 Bridge Notes with the
proceeds of the Offering. The amount is comprised of the write-off of
unamoritized debt issuance cost and the discount to the Bridge Notes that was
being amortized over the term of the Notes.
Capital Resources and Liquidity
For the twelve month period ended December 31, 1997, the Company used
net cash of $3,270,929 in operations. Accounts receivable increased by $722,742
to $1,967,614 at December 31, 1997 primarily due to the increase in
international sales during the period. Accounts payable and accrued liabilities
totaling $2,539,585 at December 31, 1997, increased from $1,551,788 at the prior
year-end period primarily due to increased spending on research and development
on the Digital x-ray. Inventory levels increased $1,412,400 primarily due to the
increased sales volume.
Capital expenditures for the twelve month period ended December 31,
1997 were $284,082. Approximately $49,000 was for the purchase of an exhibit
booth used at dental shows, $79,000 was for a new computer network system and
$60,000 for tooling for the new camera. Cash and cash equivalents on hand at the
end of the period was $3,981,062.
On July 1, 1997, the Company finalized a credit agreement with Comerica
Bank ("Comerica") extending up to a $2,000,000 line of credit to the Company,
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 bears interest at the rate of prime plus .25% per
annum (8.75% at December 31, 1997). All borrowings under the facility are
subject to a formula based, generally, on accounts receivable and inventory. The
Company intends to use the credit facility, when needed, for working capital and
general corporate purposes. No amounts were outstanding under this agreement at
December 31, 1997. On December 10, 1997, the Company finalized a second
agreement with Comerica Bank ("Comerica") extending up to a $500,000 line of
credit to the Company, secured by a first priority interest in the Company's
assets. The credit facility bears interest at a rate of prime plus .5% per annum
(9.0% at December 31, 1997). The line expires on December 10, 1998. The
principal balance will amortize over a thirty six (36) month period. Borrowings
are at 80% of the capital expenditure. No amounts were outstanding under this
agreement at December 31, 1997.
At present, the expenditures for continued research and development for
products incorporating digital x-ray technology is the only significant future
commitment and will be financed by the remaining proceeds of the May 9, 1997
Offering and the $4.5 million Debt Placement. Based on its current operating
plan, the Company anticipates that in addition to the remaining proceeds of the
Offering, together with the credit facility and proceeds from the Debt
Placement, further capital will be required during the next twelve months to
satisfy the Company's expected increased working capital and research and
development requirements for its new products. The Company is currently
exploring alternatives to fulfill these requirements. 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. 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 operations. See "Cautionary Statements and
Risk Factors -- Need For Additional Financing."
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Fluctuations in Quarterly Results
The Company's business is subject to certain quarterly influences. Net
sales and operating profit 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.
Quarterly results may be adversely affected in the future by a variety
of other factors, including the possible costs of obtaining capital, as well as
the release of new products and promotions taking place within the quarter. The
Company plans to continue to fund research and development and to increase
working capital requirements for the new products. Also, the expenses of the
Company are to a large extent fixed and not susceptible to rapid reduction. 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.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward
looking statements that involve risks and uncertainties. Factors associated with
the forward looking statements which could cause actual results to differ
materially from those projected or forecast in the statements that appear below.
In addition to other information contained in this document, readers should
carefully consider the following cautionary statements and risks factors:
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 II 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 before extraordinary item of $1,625,213, and for the ten
month period ended December 31, 1996, the Company had net income of $137,151.
For the twelve months ended December 31, 1997 the Company had a net loss after
extraordinary item of $2,044,729. At December 31, 1997, the Company's
accumulated deficit was $3,532,791. The ability of the Company to obtain and
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.
Dependence Upon a Single Product. The TeliCam II System, is 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 until new products are introduced. See " -- Importance of New Product
Development to Growth." 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.
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. 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.
Need For Additional Financing. Based on its current operating plan, the Company
anticipates that in addition to the remaining proceeds of the Offering, together
with the credit facility and proceeds of the Debt Placement, further capital
will be required during the next
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twelve months to satisfy the Company's expected increased working capital and
research and development requirements for its planned new products. The Company
is currently exploring alternatives to fulfill these requirements. 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. 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. In addition, if
sufficient funds to repay the Notes are not available, the Notes may be
converted to shares of Common Stock and 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 -- Capital Resources and Liquidity."
Expansion through Undetermined Acquisitions and Joint Ventures. 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. 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 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 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.
Substantial Dependence on Third Parties
The Company substantially depends upon third parties for several critical
elements of its business including the development and licensing for
distribution of its products.
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. Pursuant to the Boston Marketing Distribution
Agreement, the
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Company has the exclusive right to market Teli Units to the dental market.
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. The Company has an oral agreement
with S.E.D. to manufacture its Apollo 95E product for sale internationally. Dr.
Duret, president of S.E.D. will oversee manufacturing of the Apollo 95E for the
Company, and will render consulting services for the Company. If S.E.D. is
unable to meet the Company's requirements, the Company would have to obtain an
alternative manufacturing arrangement. The Company believes that such
manufacturing capability could be developed by the Company or obtained from
third parties, but that developing or obtaining alternative capacities may take
up to four months. The potential delay associated with either developing or
locating an alternative source of supply could have a significant adverse effect
on the Company's operating results and financial condition. See "Description of
Business -- Manufacturing and Component Parts."
Distribution and Licensing Relationships. The Company has entered into
licensing relationships with ILT and SUNI. The Company is currently working with
ILT to develop a curing and whitening device that meets the Company's
specifications. As of March 27, 1998, no devices had yet been shipped by ILT
which met the Company's specifications. While the Company believes an acceptable
device will be developed, no assurance can be given that ILT will be able to
produce a device that meets the Company's specifications, or will otherwise be
able to meet the Company's manufacturing requirements. If ILT is unable to meet
the Company's specifications, or is otherwise unable to perform its obligations,
the Company intends to introduce its Apollo 95E product for sale in the US and
Canada. The Company believes that it would need to delay product shipments of
the 95E into the US and Canada for four to six months while it obtains FDA
regulatory approval. If the regulatory approval of the 95E product cannot be
obtained, the Company believes an alternative source of supply for curing and
whitening devices could be developed by the Company, or be obtained from third
parties. Developing or locating such an alternative source could result in
substantial delays. Regulatory approval for any such alternative product may
need to be obtained prior to any sale in the US and Canada. If ILT is able to
meet its obligations, under the terms of the Company's agreement with ILT, the
Company will be required to meet substantial minimum purchase and sales goals
during each year of the five year initial term of its license with ILT in order
to retain exclusive rights to sell ILT's tooth curing and whitening devices in
the US and Canada. If the Company is unable to meet its minimum purchase and
sales requirements, ILT may terminate the agreement and license its devices for
sale by the Company's competitors, or may grant exclusive rights to such a
competitor. There can be no assurance that the Company will achieve sufficient
sales to be able to maintain its right to sell ILT products. If ILT licenses the
technology to a competitor, this could have a material adverse effect on the
Company's operating results and financial condition. The initial five year term
of the agreement may be renewed at the option of the Company for ten successive
one year terms, provided that the Company has met its annual purchase and sales
requirements. If the contract with ILT expires, or is terminated except by
reason of ILT's non-performance, the Company has agreed not to sell any product
competitive with the Apollo 9500 into the US or Canadian markets for a period of
one year following termination or expiration of the contract. In the event of
such termination or expiration, the Company would not be able to introduce a
competitive device, including the 95E, into the US or Canadian markets for at
least a year, even if prior regulatory approval of such product is obtained.
Delays associated with regulatory approval, product development, locating an
alternative source of supply, and the Company's inability to sell alternative
devices in the US and Canada for one year following expiration or termination of
the contract, would have a significant adverse effect on the Company's operating
results and financial condition. In addition, there is no guarantee that any
device manufactured by ILT, the Apollo 95E, or a product developed and
manufactured by an alternative supplier, once introduced, will be accepted by
the dental marketplace. Under the Company's licensing and development
arrangements with Suni for the development of digital x-ray technology for the
dental market, the Company has obtained exclusive marketing rights to products
incorporating certain digital x-ray technology developed by Suni. The Company
has paid significant advances to, and is dependent upon Suni to successfully
develop the digital x-ray technology and to commercialize the digital x-ray
technology. There can be no assurance that Suni will be successful in this
endeavor. If Suni should not develop a digital x-ray product acceptable to the
Company or the marketplace, this would have a material adverse effect on the
Company's operating results and financial condition. The agreement with Suni
provides that the Company is obligated to make minimum royalty payments if
products incorporating the developed technology are introduced to the market in
order to maintain exclusivity. There can be no assurance that the Company will
be able to meet the royalty payments required to maintain exclusivity. Suni
would then be able to license the developed technology to the Company's
competitors, or grant an
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exclusive license to a competitor, which could have a material adverse effect on
the Company's operating results and financial condition. See "Description of
Business -- Growth Strategy" and " -- Products -- Product Development."
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
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. 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 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.
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 Company is presently in the process of obtaining 510(k) approval of its
TeliCam system and will need 510(k) approval for any new products which are
developed in the future using digital x-ray technology. 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. If ILT is
unable to perform its obligations, the Company believes it would have to seek
regulatory approval of its Apollo 95E, or any alternative curing and whitening
device, prior to sale in the US. 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 "Description of Business -- Government Regulations."
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 "Description of Business - Competition."
Rapid Expansion of the Company's Business. From inception (October 23, 1995)
through December 31, 1997, 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. See
"Description of Business -- Growth Strategy."
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Reliance on International Sales and Distributors and General Risks of
International Operations. For the twelve-month period ended December 31, 1997,
international sales have accounted for approximately 24% 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
US dollar which could materially adversely affect US 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, 1997, nine of the Company's
international distributors accounted for 60% of the Company's accounts
receivable, and nine of these distributors accounted for approximately
$3,877,000 or 24%, of the Company's total sales for the twelve-month period
ended December 31, 1997. 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.
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. The Company has obtained "key person" life
insurance on Mr. Gurevitch in the amount of $2,000,000, of which the Company is
the sole beneficiary, but there can be no assurance that 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.
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 has implemented a policy that most senior and
technical 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. See "Business --
Patent and Proprietary Rights."
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.
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 (Technology Drive) and Westlake,
California premises. The
21
<PAGE> 22
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.
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 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
indemnified, has obtained director's and officer's insurance. The Company has
purchased director's and officer's liability insurance in the amount of $3.0
million. Section 145 of the Delaware Law provides that a corporation may
indemnify a director, officer, employee or agent made, or threatened to be, 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.
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.
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.
22
<PAGE> 23
ITEM 7. FINANCIAL STATEMENTS.
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................................................................... 24
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996................................................. 25
Consolidated Statements of Operations for the Twelve month period ended December 31, 1997; the Ten-month period ended
December 31, 1996 and for the Period from Inception (October 23, 1995) to March 2, 1996................................. 26
Consolidated Statements of Stockholders' Equity for the Twelve month period ended December 31, 1997; the Ten-month
period ended December 31, 1996 and for the Period from Inception (October 23, 1995) to March 2, 1996.................... 27
Consolidated Statements of Cash Flows for the Twelve month period ended December 31, 1997; the Ten-month period
ended December 31, 1996 and for the Period from Inception (October 23, 1995) to March 2, 1996........................... 28
Notes to Consolidated Financial Statements............................................................................... 29
</TABLE>
23
<PAGE> 24
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") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholder's equity and cash flows for the twelve month period
ended December 31, 1997, the ten-month period ended December 31, 1996 and for
the period from inception (October 23, 1995) to March 2, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
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, 1997
and December 31, 1996 and the consolidated results of their operations and their
cash flows for the twelve month period ended December 31, 1997, 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.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
February 16, 1998
24
<PAGE> 25
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents ................................................................... $ 3,981,062 $ 1,058,836
Accounts receivable, less allowance for returns and doubtful accounts of $20,975 and $146,699
at December 31, 1997 and 1996 ............................................................ 1,967,614 1,158,444
Inventories ................................................................................. 2,896,270 1,513,075
Deferred tax asset .......................................................................... -- 90,000
Prepaid expenses and other current assets ................................................... 389,061 208,552
------------ -----------
Total current assets ...................................................................... 9,234,007 4,028,907
Property and equipment, net of accumulated depreciation ..................................... 553,119 393,578
Intangible asset, net of accumulated amortization ........................................... 86,950 --
Debt issuance costs, net of accumulated amortization ........................................ -- 253,686
Loans to related party ...................................................................... 126,000 --
Other assets ................................................................................ 491,950 42,270
------------ -----------
Total assets .............................................................................. $ 10,492,026 $ 4,718,441
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations ................................................ $ 23,356 $ 18,468
Notes payable to related parties ............................................................ 45,030 --
Accounts payable ............................................................................ 1,522,412 1,089,332
Accrued liabilities ......................................................................... 1,017,173 462,456
Income taxes payable ........................................................................ -- 168,570
Customer deposits ........................................................................... 42,995 33,607
------------ -----------
Total current liabilities ................................................................. 2,650,966 1,772,433
Notes payable ............................................................................... -- 1,355,291
Notes payable to related parties ............................................................ -- 272,966
Capital lease obligations ................................................................... 39,858 66,028
Other long term liabilities ................................................................. 11,052 14,098
------------ -----------
Total liabilities ......................................................................... 2,701,876 3,480,816
============ ===========
Commitments and contingencies
Stockholders' equity
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;
5,115,777 and 2,985,537 shares issued and outstanding at December 31, 1997
and 1996 ................................................................................ 51,157 29,855
Additional paid in capital .................................................................. 11,271,784 2,695,832
Accumulated deficit ......................................................................... (3,532,791) (1,488,062
------------ -----------
Total stockholders' equity .................................................................... 7,790,150 1,237,625
------------ -----------
Total liabilities and stockholders' equity .................................................... $ 10,492,026 $ 4,718,441
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 26
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997;
FOR THE TEN MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO MARCH 2, 1996
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TEN MONTHS ENDED INCEPTION TO
DECEMBER 31, 1997 DECEMBER 31, 1996 MARCH 2, 1996
----------------- ----------------- -------------
<S> <C> <C> <C>
Net sales ............................................. $ 16,087,208 $ 11,673,102 $ 220,623
Cost of sales ......................................... 10,234,206 6,685,464 202,115
------------ ------------ ------------
Gross profit ...................................... 5,853,002 4,987,638 18,508
Selling, general and administrative expense ........... 6,031,066 4,360,736 1,111,391
Research and development expense ...................... 1,213,766 322,467 528,426
Non-recurring charge .................................. 256,250 -- --
------------ ------------ ------------
Operating income (loss) ........................... (1,648,080) 304,435 (1,621,309)
Interest income ....................................... (205,818) -- --
Interest expense ...................................... 138,576 57,166 3,904
Amortization of debt issuance costs ................... 76,431 31,548 --
------------ ------------ ------------
Income (loss) before income taxes and extraordinary
item .............................................. (1,657,269) 215,721 (1,625,213)
Provision for income taxes ............................ 153,311 78,570 --
------------ ------------ ------------
Income (loss) before extraordinary item ........... (1,810,580) 137,151 (1,625,213)
Extraordinary loss on early extinguishment of debt (net
of tax benefit of $143,511) ........................ (234,149) -- --
------------ ------------ ------------
Net income (loss) ................................. $ (2,044,729) $ 137,151 $ (1,625,213)
============ ============ ============
Earnings (loss) per share before
extraordinary item:
Basic .............................................. $ (.42) $ .05 $ (1.57)
Diluted ............................................ (.42) .05 (1.57)
Earnings (loss) per share after extraordinary item:
Basic .............................................. $ (.47) $ .05 $ (1.57)
Diluted ............................................ (.47) .05 (1.57)
Weighted average number of shares:
Basic .............................................. 4,341,498 2,893,298 1,035,778
Diluted ............................................ 4,341,498 3,019,213 1,035,778
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997;
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
Issuance of common stock for cash,
net of issuance costs ........... 2,120,000 21,200 8,509,192 -- 8,530,392
Exercise of stock options ........... 10,240 102 8,910 -- 9,012
Amortization of deferred compensation -- -- 57,850 -- 57,850
Net loss ............................ -- -- -- (2,044,729) (2,044,729)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 .......... 5,115,777 $ 51,157 $11,271,784 $(3,532,791) $ 7,790,150
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 28
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997;
TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO MARCH 2, 1996
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TEN MONTHS ENDED INCEPTION TO
DECEMBER 31, 1997 DECEMBER 31, 1996 MARCH 2, 1996
----------------- ----------------- -------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) .................................... $(2,044,729) $ 137,151 $(1,625,213)
Adjustments to reconcile net income (loss) to net
cash used by operating activities;
Depreciation and amortization ...................... 92,993 108,047 9,219
Allowance for returns and doubtful accounts ........ (86,428) 79,123 28,280
Inventory write down ............................... 29,205 20,822 91,556
Extraordinary item ................................. 377,660 -- --
Amortization of deferred compensation .............. 57,850 -- --
Deferred taxes ..................................... 90,000 (90,000) --
Deferred rent ...................................... (3,046) 1,469 12,629
Common stock and stock options issued for services . -- 47,200 128,117
Changes in operating assets and liabilities:
Accounts receivable .............................. (722,742) (1,188,544) (77,303)
Inventories ...................................... (1,412,400) (461,812) (1,163,641)
Prepaid expenses and other current assets ........ (180,509) (55,567) (152,985)
Other assets ..................................... (449,680) (6,230) (36,040)
Accounts payable ................................. 433,080 (448,316) 1,524,470
Accrued liabilities .............................. 591,211 272,482 131,991
Income taxes payable ............................. (52,781) 168,570 --
Customer deposits ................................ 9,388 (215,738) 249,345
---------- ---------- --------
Net cash used by operating activities ......... (3,270,928) (1,631,343) (879,575)
---------- ---------- --------
Cash flows from investing activities:
Loans to related parties ........................... (126,000) -- --
Purchase of intangible asset........................ (86,950) -- --
Purchase of property and equipment ................. (284,082) (200,686) (144,537)
---------- ---------- ---------
Net cash used in investing activities ......... (497,032) (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
Issuance of common stock, net of offering costs .... 8,530,392 1,054,503 1,291,113
Proceeds from exercise of stock options............. 9,012 -- --
Repayment of bridge loan .......................... (1,600,000) -- --
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 ........ (227,936) (29,049) (100,000)
Principal payments on capital lease obligations .... (21,282) (11,842) (6,529)
---------- ---------- -----------
Net cash provided by financing activities ..... 6,690,186 2,224,254 1,690,723
---------- ---------- -----------
Net increase in cash and cash equivalents ..... 2,922,226 392,225 666,611
Cash and cash equivalents, beginning of period ....... 1,058,836 666,611 --
----------- ----------- -----------
Cash and cash equivalents, end of period ............. $ 3,981,062 $ 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
Interest paid ........ ............................... 281,693 8,219 --
Income taxes paid .................................... 50,279 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 29
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. 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.
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. The Company's primary emphasis has been on the manufacture and
sale of an intraoral camera system known as the TeliCam II System and a dental
office networking system, known as InTELInet, for use in connection with the
TeliCam II 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.
On October 2, 1997, the Company purchased the assets of S.E.D. Gerant
("S.E.D."), a company organized under the laws of France, for $120,000. As part
of this asset purchase, the Company paid an additional $106,850 for development
costs associated with S.E.D.'s "Biotron" curing and whitening device products.
S.E.D. is a developer and manufacturer of medical and dental devices. The
Company purchased the rights to all of the technology and the intellectual
property, including patents, developed by S.E.D. including the Biotron products.
The Company commenced marketing a curing and whitening device in Europe and
internationally incorporating this technology in March of 1998 under the brand
name "Apollo 95E."
On September 17, 1997, the Company issued 50,000 shares of Common Stock to
DMD NV, the Company's licensed exclusive distributor of the TeliCam system in
Europe, in exchange for termination of DMD NV's exclusive distribution rights in
Europe. The aggregate price of the Common Stock, based on the closing price on
the date of issuance, was $256,250.
On February 2, 1998 the Company formed "DMDS, Ltd." a wholly-owned
subsidiary created under the laws of the United Kingdom. DMDS, Ltd. will hold
the assets acquired from S.E.D. In addition, the Company currently plans to
market certain of its new products internationally through DMDS, Ltd.
29
<PAGE> 30
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.
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 twelve -month period from January 1,
1997 through December 31, 1997; 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, 1997 and December 31, 1996 and for
the twelve month period ended December 31, 1997; 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 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
30
<PAGE> 31
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
warranties 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 over the primary term
of the lease, whichever is less, as follows:
Equipment and software, including capitalized leases........... 5 years
Furniture and fixtures......................................... 7 years
Leasehold improvements and tooling............................. 3 years
Long-Lived Assets
The carrying value of long term assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected
nondiscounted future operating cash flows derived from such assets are less than
their carrying value.
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 twelve month period ended December 31, 1997
were $1,528,203; for the ten month period ending December 31, 1996 were
$1,008,879, and for the period from inception (October 23, 1995) through March
2, 1997 were $437,590.
Research and Development Costs
31
<PAGE> 32
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 currently 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 trade accounts receivable.
Also, at various times throughout the year, cash balances are maintained in
excess of Federally insured deposit limits.
For the twelve month period ended December 31, 1997 and the ten month
period ended December 31, 1996, nine and five of the Company's customers
accounted for 24% and 21% of sales, respectively. At December 31, 1997 and 1996,
nine and six of the Company's customers accounted for approximately 60% and 75%
of trade accounts receivable, respectively. For the twelve month period ended
December 31, 1997, the Company had export sales of approximately $3,877,000
($1,700,000 Europe; $778,000 Canada; $722,000 Japan; $450,000 Australia and
$227,000 all other). 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 performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral. Estimated credit
losses and returns, have been provided for in the financial statements.
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.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income generally represents all changes in
shareholders' equity during the period except those resulting from investments
by, or distributions to, shareholders. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and requires restatement of earlier
periods presented. Management is currently evaluating the requirements of SFAS
No. 130.
32
<PAGE> 33
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that a public enterprise reports information about operating segments in
annual financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
5. RELATED PARTY TRANSACTIONS
From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing
Company, Ltd. ("Boston Marketing"), an affiliate of Hiroki Umezaki, a former
Director of the Company, loaned the Company an aggregate of $377,015. 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. In November 1996, Mr.
Gurevitch and Boston Marketing each agreed to extend the term of their
respective notes. On May 23, 1997, Boston Marketing was paid the remaining
principal balance of $150,000 of its loan plus the accrued interest of $3,526.
Mr. Gurevitch was paid $25,000 on July 10, 1997; $26,850 on October 22, 1997;
$5,000 on October 30, 1997; $13,787 on November 1, 1997; and $3,447 on December
1, 1997; leaving approximately $45,030 outstanding.
On May 27, 1997, the Company loaned Dewey Perrigo, Vice President of Sales
of the Company, and Andrea Niemiec-Perrigo, an employee of the Company, $126,000
for the purpose of buying a home. The Promissory Notes evidencing such loans
bear interest at prime plus .25% (8.75% at December 31, 1997), and are due and
payable on May 27, 1999.
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31
1997 1996
---- ----
<S> <C> <C>
Raw materials . .... $1,387,695 $ 789,464
Work in process .... 555,049 136,786
Finished goods ..... 953,526 586,825
---------- ----------
$2,896,270 $1,513,075
========== ==========
</TABLE>
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
Prepaid advertising and industry trade show fees $214,667 $178,281
Other .......................................... 174,394 30,271
-------- --------
$389,061 $208,552
======== ========
</TABLE>
33
<PAGE> 34
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Equipment and software, including $112,853 and $102,867 of capitalized
leases at December 31, 1997 and 1996................................ $569,729 $ 342,989
Furniture and fixtures................................................ 135,034 116,152
Leasehold improvements................................................ 44,222 5,761
-------- ---------
748,985 464,902
Less accumulated depreciation and amortization, including $22,571 and
$20,341 relating to capitalized leases at December 31, 1997 and 1996 (195,866) (71,324)
-------- ---------
$553,119 $ 393,578
======== =========
</TABLE>
9. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Accrued commissions.............................. $ 223,750 $ 257,341
Accrued warranty................................. 84,730 56,515
Accrued salaries and wages....................... 82,112 42,159
Accrued interest................................. 5,965 34,552
Other............................................ 620,616 71,889
------------ -----------
$ 1,017,173 $ 462,456
============ ============
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases three 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 $132,000; $102,000 and
$38,000 for the twelve month period ended December 31, 1997, the ten-month
period ended December 31, 1996 and for the period from inception (October 23,
1995) to March 2, 1996, respectively. Two non-cancelable leases are guaranteed
by Robert H. Gurevitch, Chief Executive Officer and Chairman of the Board of the
Company.
The aggregate liability for future rentals under these lease agreements as
of December 31, 1997, is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 CAPITAL OPERATING
LEASES LEASES
------ ------
<S> <C> <C>
1998....................................... $ 28,077 $ 194,592
1999....................................... 25,672 76,308
2000....................................... 22,539 69,949
-------- ---------
76,288 $ 340,849
=========
Less amounts representing:
Interest................................. 13,074
Current portion.......................... 23,356
--------
Long term portion.......................... $ 39,858
========
</TABLE>
34
<PAGE> 35
Distribution Agreements
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. 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 Marketing 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.
On October 15, 1997, the Company signed an exclusive distribution agreement
with Ion Laser Technology, Inc. ("ILT") for the rights to distribute ILT's
composite curing and whitening system to the dental market in the US and Canada
(the "ILT Agreement"). The Company is currently working with ILT to produce a
device that meets the Company's specifications. As of March 27, 1998, no devices
had yet been shipped by ILT which met the Company's specifications. If the
device is successfully developed, the Company will market the device as the
"Apollo 9500(TM)." ILT has retained the right to market its own tooth whitening
system, which uses the same high power non-laser light incorporated into the
Company's Apollo 9500. The ILT Agreement has a five-year initial term. The
Company has agreed to purchase a minimum of 15,000 devices over the term of the
Agreement, and to acheive certain sales goal with respect to such devices in
order to maintain its exclusive rights under the agreement. ILT has the option
to cancel the Agreement if the Company is unable to meet its purchase and sales
requirements. The Company has the option to cancel the Agreement if ILT is
unable to deliver acceptable product. The term of the ILT Agreement may be
extended by the Company for up to ten one year terms provided the Company has
met its purchase and sales requirements.
On October 10, 1997, the Company entered into an agreement with Suni Imaging
Microsystems, Inc. ("Suni") to develop digital x-ray technology for
incorporation into systems for the dental market. The Company has obtained
exclusive rights to market products to the dental market incorporating certain
digital x-ray technology developed by Suni. Suni will retain the rights to
developed microchip technology underlying the x-ray system it develops for the
Company. The Company will determine whether or not to proceed with the marketing
of such product based upon the results of the development. The Company is
required to make certain payments to Suni to fund development.
11. CAPITAL TRANSACTIONS
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 ("Bridge Note") and a warrant to purchase 18,750 shares of
Common Stock ("Bridge Warrant") at a purchase price of $2.67 per share. The
Notes bore interest at a rate of 10% per annum and the principal and all accrued
interest were 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 securities; or (d) the sale by the Company's Chief Executive
Officer of all or substantially all of his holdings of the Common Stock. Upon
the happening of certain events the holders of the Notes had the right to
convert the outstanding balances of their Notes into shares of the Common Stock
at a rate of $2.67 per share. The Warrants were first exercisable on November
27, 1997 and expire on November 27, 2002. As a result of the warrants, these
notes were discounted by $259,104, which amount was being amortized over the
term of the notes.
On May 14, 1997, the Company closed a secondary offering of 2,070,000 shares
of common stock. Each share of common stock included one redeemable warrant to
purchase one share of common stock at a purchase price of $5.00. This offering
resulted in gross proceeds of $10,350,000 less expenses of approximately
$1,819,608 for net proceeds of approximately $8,530,392. In addition,
approximately $1,600,000 of the net proceeds were used to repay the principal on
the Bridge Notes plus an additional $100,000 was used to pay off accrued
interest. The Bridge Notes consisted of secured convertible promissory notes in
the aggregate principal amount of $1,600,000 bearing interest at 10% per annum
and were payable the earlier of May 27, 1998 or consummation of the offering.
35
<PAGE> 36
Approximately $224,000 was used to repay loans from related parties. The
remaining net proceeds have or will be used for product development,
acquisition, and to repay the remaining loans from related parties, and working
capital and general corporate purposes.
12. STOCK OPTIONS
In March, 1997, the Company's Board of Directors approved the "1997 Stock
Incentive Plan". Under the plan, incentive stock options and non-statutory stock
options may be granted to employees, directors, and consultants to purchase a
specified number of shares of common stock at a price not less than the fair
market value on the date of grant and for a term not to exceed 10 years.
Options for employees vest over a period of 5 years.
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation expense
has been recognized for the Company's stock based compensation plans. Had
compensation costs for the Company's stock option and purchase plan (for options
granted in years ended December 31, 1997 and 1996 only) been determined based
upon the methodology prescribed under SFAS No. 123, the Company's net (loss)
would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
Year Ended December 31, 1997: As Reported Pro Forma
- ----------------------------- ----------- ---------
<S> <C> <C>
Net income / (loss) $ (2,044,729) $ (2,180,726)
Net income / (loss) per share $ (.47) $ (.50)
</TABLE>
<TABLE>
<CAPTION>
Ten Month Period ended December 31, 1996: As Reported Pro Forma
- ----------------------------------------- ----------- ---------
<S> <C> <C>
Net income / (loss) $ 137,151 $ (158,129)
Net income / (loss) per share $ .05 $ (.05)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1996.
A summary of the status of the Company's stock options as of December 31,
1997 and 1996 and the changes during the year ended December 31, 1997 and the
ten month period ended December 31, 1996, is presented below:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Number of Option Average Grant
Shares Exercise Price Date Fair Value
------ -------------- ---------------
<S> <C> <C> <C>
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
Granted 471,691 3.79 2.71
Canceled (50,513) 2.95 -
Exercised (10,240) .88 -
-------- ------- --------
Options outstanding at December 31, 1997 550,881 3.63 2.62
Options exercisable at year end 157,392 $ 2.26 $
Options available for future grant 35,700 - -
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
Range of Number Outstanding at Remaining Weighted Average Number Outstanding Weighted Average
Exercise Price December 31, 1997 Contractual Life Exercise Price at December 31, 1997 Exercise Price
-------------- ----------------- ---------------- -------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
$ .88 - 2.93 172,190 3.2 years $ 2.32 157,392 $ 2.26
$ 4.50 - 5.13 378,691 8.8 years $ 5.03 - -
------- --------
550,881 157,392
======= =======
</TABLE>
The fair value of options granted during 1997 and 1996 is estimated as
$1,085,466 and $295,280, respectively, on the dates of grants using the
Black-Scholes option pricing model. The following assumptions were used for 1997
and 1996: (i) risk-free interest rate of 6.33 % and 6.85%, respectively (ii)
expected option life of 5 years, (iii) forfeiture rate of 0, (iv) expected
volatility of 68.73% and 143%, respectively and (v) no expected dividends.
13. INCOME TAXES
The income tax expense (benefit) for the twelve-months ended December 31,
1997 and the ten months ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Current:
<S> <C> <C>
Federal..................... $ 113,299 $ 132,570
State....................... 40,012 36,000
----------- ---------
153,311 168,570
Deferred:
Federal..................... - (67,000)
State....................... - (23,000)
----------- ---------
Total..... $ 153,311 $ 78,570
=========== =========
</TABLE>
The Company's effective tax rate for the twelve-months ended December 31,
1997 and ten months ended December 31, 1996 differs from the statutory federal
income tax rate as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Tax provision at the statutory rate........................... (34)% 34%
Nondeductible expenses........................................ 2 10
State taxes, net of federal benefit........................... (6) 14
Research & development credit................................. (5) -
Establishment of valuation allowance.......................... 52 -
Reduction in deferred asset valuation allowance............... - (27)
Other......................................................... - 5
- ---
9% 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.
The components of the net deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
Deferred Tax Assets:
<S> <C> <C>
Inventory reserves.......................................... $ 39,000 $ 28,300
Warranty accrual............................................ 33,000 22,600
Allowance for returns and doubtful 20,700 37,900
accounts.................
Net operating loss carry forwards........................... 1,029,700 -
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C>
Research and development credits............................ 100,000 -
Accrued vacation............................................ 24,100 -
Fixed assets................................................ 31,400 -
Other....................................................... 17,100 1,200
Valuation allowance......................................... (1,295,000) -
---------- ---------
$ - $ 90,000
========== =========
</TABLE>
As a result of the Company's recent loss history, a valuation allowance has
been recorded for the full amount of the Company's deferred tax asset at
December 31, 1997.
14. EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128 "Earnings per Share" ("SFAS 128"). This statement requires dual
presentation of newly defined basic and diluted earnings per share ("EPS") on
the face of the income statement for all entities with complex capital
structures. The following table provides a reconciliation of the numerators and
denominators of the basic and diluted per-share computations for the year ended
December 31, 1997, the ten month period ended December 31, 1996, and the period
from inception to March 2, 1996:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
For the year ended December 31, 1997:
<S> <C> <C> <C>
Basic earnings per share............. $ (2,044,729) 4,341,498 $ (.47)
Effect of dilutive securities - stock options and
warrants....................... - - -
------------- --------- --------------
Diluted earnings per share ...................... $ (2,044,729) 4,341,498 $ (.47)
============= ========= ==============
For the ten months ended December 31, 1996:
Basic earnings per share............. $ 137,151 2,893,298 $ .05
Effect of dilutive securities - stock options and
warrants ....................... - 125,915 -
------------- --------- --------------
Diluted earnings per share........... $ 137,151 3,019,213 $ .05
============= ========= ==============
For the period from inception to March 2, 1996:
Basic earnings per share............ $ (1,625,213) 1,035,778 $ (1.57)
Effect of dilutive securities - stock options and
warrants ....................... - - -
------------- --------- --------------
Diluted earnings per share...................... $ (1,625,213) 1,035,778 $ (1.57)
============= ========= ==============
</TABLE>
The computation for diluted number of shares excludes unexercised stock
options and warrants which are anti-dilutive. The number of such shares for the
year ending December 31, 1997, for the ten months ended December 31, 1996 and
for the period ended March 2, 1996 were 4,580,881, 830,395, and none,
respectively.
15. CREDIT FACILITY
On July 1, 1997, the Company finalized a credit agreement with Comerica
Bank ("Comerica") extending up to a $2,000,000 line of credit to the Company,
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 bears interest at the rate of prime plus .25% per
annum (8.75% at December 31, 1997). All borrowings under the facility are
subject to a formula based, generally, on accounts receivable and inventory. The
Company intends to use the credit facility, when needed, for working capital and
general corporate purposes. No amounts were outstanding under this agreement at
December 31, 1997.
38
<PAGE> 39
16. LONG TERM DEBT
On December 10, 1997, the Company finalized a second agreement with
Comerica Bank ("Comerica") extending up to a $500,000 line of credit to the
Company for capital expenditures, secured by a first priority interest in the
Company's assets. The credit facility bears interest at a rate of prime plus .5%
per annum (9.0% at December 31, 1997). The line expires on December 10, 1998.
The principal balance will amortize over a thirty six (36) month period.
Borrowings are at 80% of the capital expenditure. No amounts were outstanding
under this agreement at December 31, 1997.
17. EXTRAORDINARY ITEM
On May 14, 1997, the Company repaid the $1,600,000 principal amount Bridge
Notes in connection with the Company's Offering. An extraordinary charge of
$234,149 (net of tax benefit of $143,511) was incurred for the early
extinguishment of those notes.
18. NON-RECURRING CHARGE
On September 17, 1997, the Company repurchased the exclusive distribution
rights of its products into the European market from an independent distributor
for 50,000 shares of common stock. This resulted in a non-recurring charge of
$256,250.
19. SUBSEQUENT EVENTS (UNAUDITED)
On March 2, 1998, the Company entered into an agreement with
accredited investors and institutional purchasers for the private placement (the
"Debt Placement") of its 12% Senior Subordinated Notes due 1999 (the "Notes")
and 450,000 warrants (the "Warrants"). The Debt Placement was consummated on
March 19, 1998. The Warrants are (i) exerciseable commencing on May 15, 1998,
and for five years thereafter for the purchase of one share of Common Stock per
Warrant (the "Warrant Shares"); and (ii) at an exercise price of $5.812 per
share. The Company has agreed to file a registration statement with respect to
the Warrant Shares within 45 days of the date the Warrants are issued. The Notes
(i) bear interest at a rate of 12% per annum payable semi-annually; (ii) mature
on the first anniversary of the date of issuance; and (iii) may be repaid by the
Company prior to maturity at one hundred and two (102% ) percent of the amount
of the unpaid principal and interest due as of the date of repayment. If the
Notes are unpaid at maturity, each Note holder has the option to convert the
outstanding principal and interest then due on such Note into Common Stock of
the Company (the "Conversion Shares") at a conversion price equal to eighty
(80%) percent of the average of the five lowest closing bid prices for the
twenty consecutive trading days prior to the date of conversion. The unpaid
principal and interest then due on the Notes is convertible into a maximum
aggregate amount of 500,000 shares of Common Stock. Depending on the stock price
prior to conversion, more than 500,000 shares of common stock may be required to
permit conversion of one hundred (100%) percent of the unpaid principal and
interest then due on the Notes into Common Stock. The Company has agreed to
present a proposal to its stockholders at the next annual meeting of its
stockholders to approve issuance of a sufficient number of shares of Common
Stock to permit conversion upon default of one hundred (100%) percent of the
unpaid principal and interest then due on all of the outstanding Notes to Common
Stock. The Company has agreed to file a registration statement with respect to
any Conversion Shares within 45 days of the date the Notes mature, if the Notes
are then unpaid. The net proceeds of the Debt Placement, estimated to be
approximately $4.2 million, will be used to launch the Company's new products,
current product development activities, and general working capital needs.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
39
<PAGE> 40
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required in ITEM 9, is hereby incorporated by reference to
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission for the 1998 Annual Meeting of its Stockholders ("Proxy
Statement")
ITEM 10. EXECUTIVE COMPENSATION.
The information required in ITEM 10 is hereby incorporated by reference to
the Registrant's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in ITEM 11 is hereby incorporated by reference to
the Registrant's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in ITEM 12 is hereby incorporated by reference to
the Registrant's Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
NO. DESCRIPTION
--- -----------
<S> <C>
1.1 Form of Underwriting Agreement (1)
1.2 Form of Underwriter's Purchase Option granted to M. H. Meyerson & Co., Inc. (1)
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.
(2).
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. (2)
2.3 Dental/Medical Diagnostic Systems, Inc. 1997 Stock Incentive Plan. (2)
3.1. Amended and Restated Certificate of Incorporation of the Registrant. (2)
3.2. Bylaws of the Registrant. (2)
4.1 Specimen Stock Certificate of the Registrant. (1)
4.2 Form of Warrant Agreement between American Stock Transfer & Trust Company and the Registrant and form
of Warrant Certificate. (3)
10.1 Agency Agreement dated as of October 23, 1996, by and between the Registrant and M.H. Myerson & Co.,
Inc. (4)
10.2 Form Subscription Agreement. (4)
10.3. Supplement No. 1 to Confidential Term Sheet, dated November 14, 1996. (4)
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
NO. DESCRIPTION
--- -----------
<S> <C>
10.4 Form of Secured Convertible Promissory Note dated as of November 25, 1996, issued by the Registrant,
and a Schedule of Warrant Holders. (4)
10.5 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. (4)
10.6 Form of Lock-Up Agreement Letter, dated January 31, 1997, addressed to M. H. Myerson & Co., Inc. from
certain purchasers of Registrant's Common Stock, listed on the Schedule thereto. (2)
10.7 Form of Registration Rights Agreement Letter, dated January 31, 1997, from Registrant to those certain
purchasers of the Registrant's Common Stock listed on the Schedule thereto. (2)
10.8 Commitment Letter, dated February 13, 1997, from Comerica Bank confirming the existence of a secured
line of credit for the Registrant. (2)
10.9 Security Agreement, dated as of November 25, 1996, entered into by the Registrant. (4)
10.10 Employment Agreement, dated as of October 1, 1996, entered into by the Registrant and Robert H.
Gurevitch. (4)
10.11 Employment Agreement, dated as of October 1, 1996, entered into by the Registrant and Dewey Perrigo. (4)
10.12 Letter of Intent, dated August 23, 1996, between the Registrant and Olympus Japan Co., Ltd. (2)
10.13 Distribution Agreement, dated as of October 1, 1996, between the Registrant and Boston Marketing
Company, Ltd., as amended. (2)
10.14 Distributor Agreement, dated August 29, 1996, between the Registrant and 479671 BC Ltd. d/b/a/
National Dental Direct. (2)
10.15 Distributor Agreement, dated June 1, 1996, between the Registrant and Michel Van Gerven, Imaging
Concepts NV (2)
10.16 Distributor Agreement, dated May 23, 1996, between the Registrant and New Image Industries Pty Ltd
NII. (2)
10.17 Distributor Agreement, dated September 19, 1996, between the Registrant and Macana, Inc. d/b/a Florida
Dental and Medical Supply. (2)
10.18 Form of Distributor Agreement, dated May 30, 1996, between the Registrant and David Lok. (2)
10.19 Sales Representative Agreement, dated October 28, 1996, between the Registrant and Boston Marketing
Company, Ltd. (2)
10.20 Exclusive Purchase Agreement, dated October 28, 1996, between the Registrant and Fujimi Optics Corp.
(2)
10.21 1996 Systems Integrator/Value Added Integrator Agreement, dated April 1, 1996, between the Registrant
and Sony Business & Professional Products Group, Sony Electronics, Inc. (2)
10.22 Letter of Authorization, dated December 25, 1995, from JV Dentoral in favor of BDI; and Declaration of
Exclusive Right, dated December 25, 1995, made by JV Dentoral in favor of BDI. (5)
10.23 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. (5)
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
NO. DESCRIPTION
--- -----------
<S> <C>
10.24 Promissory Note, dated February 1, 1996, made by the Registrant in favor of Boston Marketing Company,
Ltd. (2)
10.25 Promissory Note, dated February 15, 1996, made by the Registrant in favor of Boston Marketing Company,
Ltd. (2)
10.26 Promissory Note, dated April 11, 1996, made by the Registrant in favor of Boston Marketing Company,
Ltd. (2)
10.27 Extension of Promissory Note, dated November 5, 1996, between the Registrant and Boston Marketing
Company, Ltd. (4)
10.28 Promissory Note, dated February 1, 1996, between the Registrant and Robert H. Gurevitch. (2)
10.29 Promissory Note, dated February 15, 1996, made by the Registrant in favor of Robert H. Gurevitch.(2)
10.30 Extension of Promissory Note, dated November 5, 1996, between the Registrant and Robert H. Gurevitch.
(4)
10.31 Form of Indemnification Agreement and Schedule of Indemnified Parties. (3)
10.32 Form of Notice of Vested Stock Option Letter and Schedule of Recipients. (3)
10.33 Commercial Security Agreement between the Registrant and Hitachi Electronics (America), Inc. (1)
10.34 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.(2)
10.35 Industrial Lease, dated October 23, 1995, between Registrant and The Irvine Company, for One
Technology Park Office.(2)
10.36 Agreement between the Registrant and DMD NV dated as of September 30, 1997. (6)
10.37 Agreement between the Registrant and Ion Laser Technology, Inc., dated as of October 15, 1997.+
10.38 Agreement between the Registrant and Suni Imaging Microsystems, Inc. dated October 10, 1997.+
10.38.1 Extension of automatic termination provisions of agreement between the Registrant and Suni
Imaging Microsystems, Inc., dated November 11, 1997.
10.39 Purchase Agreement by and among the Registrant and the purchasers named therein with respect to
the sale and purchase of an aggregate of $4,500,000 aggregate principal amount of the
Registrant's 12% Senior Subordinated Notes due 1999, and Warrants dated as of March 2, 1998.+
10.40 Form of 12% Senior Subordinated Note due 1999.
10.41 Form of Common Stock Purchase Warrant.
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
NO. DESCRIPTION
--- -----------
<S> <C>
10.42 Revolving Credit Loan and Security Agreement between the Registrant and Comerica
Bank-California, dated as of December 10, 1997.+
10.43 Variable Rate-Single Payment Note of the Company in form of Comerica Bank-California, dated as
of December, 10, 1997.+
10.44 First modification to Variable Rate-Single Payment Note, between the Company and Comerica
Bank-California, dated as of December 24, 1997.
11.1 Statement Re: Computation of per share earnings.
21.1 Subsidiaries of the Registrant.
23. Consent of Coopers & Lybrand, LLP.
24.1 Power of Attorney (included in signature page attached to this Form 10-K/SB).
27.1 Financial Data Schedule.
</TABLE>
- ------------
+ The Registrant has requested confidential treatment for portions
of the referenced exhibit.
(1) Incorporated by reference to exhibits to Pre-effective Amendment No.
1 to the Registration Statement on Form SB-2 of the Registrant filed
on April 7, 1997 (File No. 333-22507).
(2) Incorporated by reference to exhibits to the Registrant's
Registration Statement on Form SB-2 filed on February 28, 1997 (File
No. 333-22507).
(3) Incorporated by reference to exhibits to Pre-effective Amendment No.
2 to the Registrant's Registration Statement on Form SB- 2 filed on
April 30 (File No. 333-22507).
(4) Incorporated by reference to exhibits to the Registrant's Report on
Form 10-QSB, dated November 30, 1996.
(5) Incorporated by reference from the Registrant's Report on Form 8-K,
dated March 1,1996.
(6) Incorporated by referenced from exhibits to the Registrant's Report
on Form 10-QSB dated September 30, 1997.
43
<PAGE> 44
(B) REPORTS ON FORM 8-K.
In the last fiscal quarter, the Registrant has filed the following Reports
on Form 8-K:
(1) On November 14, 1997, the Company filed a Form 8-K regarding the
definitive distribution agreement with Ion Laser Technology, ILT., and the
definitive development and licensing agreement with Suni Imaging Microsystems,
Inc.
(2) On December 18, 1997, the Company filed a Form 8-K announcing that the
staff of the United States Food and Drug Administration had notified the Company
that a 501(K) pre-market notification would be required for connection with the
TeliCam Intra-Oral camera.
(3) On March 17, 1998, the Company filed a Form 8-K, announcing the
proposed Debt Placement.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of Los
Angeles and State of California on the 31st day of March 1998.
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
By: /s/ ROBERT H. GUREVITCH
---------------------------------------
Robert H. Gurevitch
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Robert
H. Gurevitch, and each of them, as his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution, for him and his name,
place and stead, in any and all capacities, to sign any or all amendments to
this Annual Report on Form 10-KSB and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- ----- DATE
<C> <S> <C>
/s/ ROBERT H. GUREVITCH Chairman, Chief Executive March 31, 1998
- -------------------------------------------------------- Officer, and Director
Robert H. Gurevitch
/s/ JACK D. PRESTON Director March 31, 1998
- --------------------------------------------------------
Jack D. Preston
/s/ RONALD E. WITTMAN Chief Financial Officer, March 31, 1998
- -------------------------------------------------------- Principal Accounting
Ronald E. Wittman Officer
/s/ MARVIN H. KLEINBERG Director March 31, 1998
- --------------------------------------------------------
Marvin H. Kleinberg
</TABLE>
<PAGE> 1
Exhibit 10.37
PRIVATE LABEL AGREEMENT
This Private Label Agreement is effective as of October 15, 1997
("Effective Date") between ION LASER TECHNOLOGY, INC., a Utah corporation having
its principal place of business at 3828 South Main Street, Salt Lake City, Utah
84115 ("Seller"), and DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC., a Delaware
corporation with its principal office located at 200 North Westlake Blvd., Suite
202, Westlake Village, CA 91362 ("DMD").
WHEREAS, the purpose of this Agreement is to set forth the terms and
conditions under which DMD shall purchase, and Seller shall sell, Products (as
defined below) and associated services during the term hereof.
NOW, THEREFORE, the parties agree as follows:
SECTION 1. DEFINITIONS.
1.1 AHP UNIT. The term "AHP Unit" shall mean the Product "Argo
High-Power Non-Laser Curing & Bleaching Light" as further described in the
Specifications.
1.2 CONSUMABLES. The term "Consumables" shall mean the customer
replaceable supplies and parts listed and further described in Exhibit A, as
well as all enhancements or improvements to or replacements or substitutes for
such customer replaceable supplies and parts described in Exhibit A hereafter
designed, manufactured, licensed or offered for sale by Seller.
1.3 CONTRACT YEAR. The term "Contract Year" shall mean and refer to each
period of twelve (12) successive calendar months during the Term, including any
Renewal Period (as defined herein); provided, however, the first Contract Year
shall commence on the date of this Agreement and shall expire twelve (12) months
after the delivery of the first 100 AHP Units to DMD, currently scheduled for no
later than February 28, 1998. The second Contract Year shall commence the day
after the end of the first Contract Year and shall expire twelve (12) months
thereafter and each successive Contract Year shall have the same twelve (12)
month commencement and expiration dates.
1.4 COMMERCIAL COMMENCEMENT. The term "Commercial Commencement" shall
mean the date Seller represents to DMD in writing that it is presently able to
ship to DMD mutually agreed production quantities of the AHP Unit which in all
material respects conform to the Specifications; provided, however, such date
shall not be later than June 30, 1998.
1.5 DELIVERY. The word "Delivery" shall have the meaning prescribed in
Section 4.1.
1.6 DMD UNIQUE TOOLING. The phrase "DMD Unique Tooling" shall mean all
items of tooling which Seller or DMD must produce or procure in order to develop
DMD Unique Feature(s).
1.7 DMD UNIQUE FEATURES. "DMD Unique Features" shall mean those features
of Products which are designated as DMD Unique Features in the Specifications,
including any features
<PAGE> 2
developed pursuant to Section 6 and designated as DMD Unique Features by mutual
agreement of the parties. Such DMD Unique Features shall only be incorporated in
Products as designated by DMD.
1.8 EXPECTED ORDER VOLUME. The phrase "Expected Order Volume" shall mean
and refer to Orders for AHP Units that may be placed by DMD in accordance with
the terms and conditions of this Agreement, as more fully set forth in Section
3.6, with requested Delivery dates and full payment therefore (within terms) by
DMD occurring during the applicable Contract Year, and which may equal or exceed
the following number of AHP Units during such Contract Year.
<TABLE>
<CAPTION>
Expected Order Volume
Applicable Contract Year For Each Contract Year
------------------------ ----------------------
<S> <C>
Year 1 2,000 AHP Units
Year 2 3,000 AHP Units
Year 3 3,000 AHP Units
Year 4 3,000 AHP Units
Year 5 4,000 AHP Units
</TABLE>
1.9 LEAD TIME. The term "Lead Time" shall have the meaning prescribed in
Section 3.3.
1.10 MARKET. The term "Market" means all Persons in the United States of
America and Canada and their respective territories (the "Exclusive Territory"),
engaged in (I) dentistry, oral surgery, orthodontistry, oral hygiene, cosmetic
dentistry, periodontics, ownership or operation of dental laboratories, and all
other medical and cosmetic professions providing dental care to humans and/or
animals or providing services to or educating the foregoing professions, and
(ii) research relating to the activities and/or professions described in the
preceding clause (I), and (iii) development, design, production, manufacture,
distribution, marketing, leasing, servicing, repairing and/or selling of goods
and services to or for use by persons engaged in the activities described in the
preceding clauses (I) and (ii) (collectively, the "Dental Professionals");
provided, however, that notwithstanding the above, Seller shall retain the right
to Sell AHP Units in the Market and otherwise to Persons solely for use with or
as part of Seller's laser tooth whitening system (which laser tooth whitening
system presently consists, in part, of an argon curing laser and a CO(2) laser);
or any successor or replacement system, which successor or replacement system(s)
may utilize a single AHP Unit.
1.11 ORDER. The word "Order" as a noun shall mean a purchase order
complying with the provisions of this Agreement, and as a verb shall mean
submission of a purchase order to Seller by DMD in accordance with the terms of
this Agreement.
1.12 PERSON. The word "Person" shall mean an individual, partnership,
limited liability company, joint venture, corporation, trust or unincorporated
organization or any other similar entity.
1.13 PRODUCTS. The word "Products" shall mean AHP Units, Consumables,
Spare Parts, and the related options, accessories and supplies listed in Exhibit
A (whether or not incorporating DMD Unique Features), as well as all
enhancements, improvements or replacement thereof hereafter
2
<PAGE> 3
designed, manufactured or licensed by Seller which are incorporated into Exhibit
A in accordance with Section 6.2 hereof, but excluding enhancements,
improvements or replacements which are used with or as a part of Seller's laser
tooth whitening system.
1.14 SELL. The word "Sell" means to sell, lease, market, distribute,
license, assign or otherwise convey title.
1.15 SPARE PARTS. The term "Spare Parts" shall mean the spare parts for
Products that are listed in Exhibit A.
1.16 SPECIFICATIONS. The word "Specifications" shall mean the
specifications for the Products that shall be set forth in Exhibit B upon the
mutual agreement of the parties.
1.17 SUBSIDIARIES. The term "Subsidiaries" shall mean any company or
other entity fifty percent (50%) or more of whose shares of outstanding stock or
other equity interests are owned or controlled directly or indirectly by DMD or
Seller.
1.18 SYSTEMIC DEFECTS. The term "Systemic Defects" shall mean a defect
of any type affecting the usefulness of the AHP Unit for its intended purpose
which occurs in identical or substantially similar form or from a substantially
similar cause in more than (i) 0% of 750 consecutively shipped AHP Units
manufactured during the first 90 days of production, (ii) 3% of 750
consecutively shipped AHP Units manufactured during the next 90 days of
production, or (iii) 3% of 750 consecutively shipped AHP Units manufactured
during any production period subsequent to the 180th day of production (as such
period may be determined by DMD), within eighteen (18) months after receipt of
delivery of Products by DMD.
SECTION 2. APPOINTMENT AND TERM.
2.1 APPOINTMENT. Seller hereby appoints DMD, on an exclusive (subject to
Sections 2.8, 3.1, 3.6, and the limited rights of Seller under Section 1.10 to
Sell AHP Units) basis, to Sell the Products into the Market. Seller shall not
Sell (except as permitted in Section 1.10), and shall not appoint any other
Person to Sell, the Products into the Market. Seller hereby grants DMD, on a
non-exclusive basis the right (subject to Sections 2.8 and 3.1) to sell the
Products to Persons engaged in the Dental Professions in any nation, country,
state, province or territory other than the Exclusive Territory.
2.2 ACCEPTANCE OF APPOINTMENT. DMD hereby accepts the appointment to
Sell the Products as described in and subject to all of the terms of this
Agreement.
2.3 SUBDISTRIBUTORS. DMD may, at its option, appoint such
subdistributors ("Subdistributors") to market Products into the Market as DMD
determines is appropriate. Within ten (10) days of the appointment of a
Subdistributor, DMD will give written notice of such appointment to Seller,
including the name, address, telephone number, fax number, e-mail address and
responsible person of the Subdistribution. Notwithstanding any appointments of
Subdistributors by DMD, the duties, obligations, representations and warranties
of Seller hereunder shall extend only to DMD and not to any Subdistributors. DMD
shall indemnify and hold Seller, its officer, agents,
3
<PAGE> 4
employees, affiliates and attorneys harmless from any and all claims, damages or
losses (whether based upon statute, negligence, breach of warranty, strict
liability or any other theory) arising in connection with the acts or omissions
of Subdistributors in the course of their subdistributor relationship with DMD.
2.4 TERM. This Agreement is effective on the Effective Date. The initial
term ("Initial Term") is the period commencing on the Effective Date and ending
on the close of the fifth Contract Year, unless earlier terminated as permitted
in Section 3.6. This Agreement may be automatically renewed by DMD for up to ten
successive one-year periods (the "Renewal Periods") if (i) DMD has purchased and
paid for the Aggregate Expected Order Volume of AHP Units during the Initial
Term, (ii) at the end of the Contract Year immediately preceding the
commencement of the applicable Renewal Period, DMD has purchased at least the
minimum number of AHP Units, which the parties shall have agreed would be the
minimum for that Contract Year, (iii) before the end of the Contract Year
immediately preceding the commencement of the applicable Renewal Period, the
parties have agreed upon a minimum number of AHP Units to be purchased by DMD
during the applicable Renewal Period, and, (iv) DMD is not in default under any
term or condition hereof at the end of the Contract Year ending on the
commencement of the applicable Renewal Period. The Initial Term and any Renewal
Period for which this Agreement may be extended are together referred to as the
"Term". Written notice of non-renewal must be provided as specified in Section
14.1 at least 120 days prior to the end of the Initial Term or any Renewal
Period, as the case may be.
2.5 SPARE PARTS AND CONSUMABLES. Provided that DMD has met the Expected
Order Volume as described in Section 3.6 and notwithstanding termination of this
Agreement for any reason, DMD shall thereafter have the sole and exclusive right
in the Market to supply Spare Parts and Consumables to users of AHP Units
initially sold or distributed by or containing trademarks of DMD; provided,
however, that such right shall remain exclusive only for so long as DMD
continues to be a going concern and to meet the demand of such users for Spare
Parts and Consumables.
2.6 CONTENT. The Exhibits to this Agreement form an integral part of
this Agreement and are incorporated by this reference. Unless otherwise noted,
all references in this Agreement to "months" are to calendar months and all
references to "days" are to calendar days.
2.7 EXCLUSIVE PURCHASE OF PRODUCTS. During the Term of the Agreement,
and for one year following its termination (unless such termination arises under
Section 2.8, in which event the obligations of this Section 2.7 shall not apply
to DMD), DMD will not, directly or indirectly, purchase, sell, manufacture,
market, license, lease or otherwise distribute products or goods, including
chemicals, composites and consumables in the Exclusive Territory or outside of
the Exclusive Territory to the extent such products or goods are intended by DMD
to be sold, marketed, licensed, leased or otherwise distributed within the
Exclusive Territory, which are similar in appearance, application and/or
function to or which are otherwise competitive with or substitutable for (as
determined in the sole reasonable discretion of Seller) the Products, but which
are manufactured, processed, marketed or distributed by any Person other than
Seller. Without Seller's express advance consent, not to be unreasonably
withheld, DMD will not purchase Products from any Person other than Seller.
4
<PAGE> 5
2.8 FINAL DEVELOPMENT PHASE OF CHEMICALS AND COMPOSITES. DMD
acknowledges that Seller is presently in the process of completing the
development of chemical reagents for use with the AHP Unit for tooth whitening
applications and dental composites which may be cured with the AHP Unit. Such
chemicals and composites have not undergone testing and peer review and, thus,
are not presently suitable for commercial or consumer introduction and use.
Seller represents to DMD that it is aggressively pursuing completion of
development of the chemicals and composites, the determination of which
completion shall be in the sole discretion of the Seller; provided, however,
completion shall occur no later than June 30, 1998. Seller shall notify DMD in
writing of Seller's determination that such chemical reagents and/or composites
have passed the Specification testing required pursuant to Section 3.5 and are
available for sale hereunder, which notice shall include (i) the price to DMD
proposed by Seller for each chemical reagent or composite which shall constitute
a Consumable, which price to DMD, after application of DMD'S standard mark-up,
shall be competitive with the actual selling price to end-users of three (3)
products which Seller reasonably considers to be most competitive with such
Consumable, (ii) Seller's summary analysis of the prices then being charged by
the manufacturers, and paid by end-users, of the three (3) products which Seller
reasonably considers to be most competitive with such Consumable, (iii) the
Specifications for the Consumable, and (iv) Seller's representation that the
Consumable is of a quality and has features equivalent to the then-existing
principal competitive products. If within thirty (30) days after Seller's notice
DMD concludes that the chemical reagent and/or composite which constitutes the
Consumable is not of a quality and does not have features equivalent to its
then-existing principal competitive products, then DMD shall give Seller notice
of such conclusions and the factual and scientific basis therefor. If within
thirty (30) days after DMD's notice Seller concurs with DMD's conclusions, it
shall give DMD written notice of concurrence and Seller's notice of
determination shall be deemed withdrawn, but without prejudice to Seller's right
to subsequently give DMD another notice of determination. If within thirty (30)
days after DMD's notice, Seller does not concur with DMD's conclusions, then
Seller shall give DMD its notice of disagreement and demand for arbitration
pursuant to the commercial arbitration rules of the American Arbitration
Association. In the arbitration, both DMD and Seller shall designate an
arbitrator and such arbitrators shall choose a third arbitrator. The arbitration
shall be held in Salt Lake City, Utah. The cost of the arbitration shall be paid
one-half (1/2) by each party. If the arbitrators determine that the Consumable
which is the subject of the arbitration is not of a quality and does not have
features equivalent to the principal competitive products identified by Seller,
DMD shall be released from its obligation under Section 2.7 to purchase such
Consumable from Seller (but without modification or change to any other
obligation of DMD under Section 2.7). If the arbitrators determine that such
Consumable is of a quality and has features equivalent to the principal
competitive products identified by Seller, Exhibit A shall promptly be modified
to include the Consumable and Exhibit D shall promptly be modified to include
the price therefore. If Seller is not able to deliver both chemical reagents for
use with the AHP Unit for tooth whitening applications and composites which may
be cured with the AHP Unit by June 30, 1998, Seller shall promptly refund any
payments made by DMD under Section 7.1 and such portion of payments under
Section 7.2 which have not been or will not be necessary for application by
Seller to the purchase price of AHP Units which have been Ordered by DMD, and
the cost to complete the manufacture and shipping of all AHP Units which have
been Ordered by DMD, and thereafter DMD may terminate this Agreement, at which
time this Agreement shall be null and void. Notwithstanding anything herein to
the contrary, if (i) DMD reasonably concludes, after testing, that the chemical
reagent(s) is not in compliance with Seller's obligations hereunder; or (ii)
Seller does not deliver
5
<PAGE> 6
such reagent(s) by June 30, 1998 for use with the AHP Unit; and/or (iii)
arbitration is initiated by either party, DMD, at that time and, as may be
applicable, until such time as the arbitration panel rules in favor of Seller,
shall be freed of its obligations under Section 2.7 solely as to Consumables, so
that DMD may Sell chemical reagents and/or composites provided by parties other
than Seller.
2.9 TESTING OF CONSUMABLE WITH AHP UNIT. At the time the Seller notifies
DMD in writing of Seller's reasonable determination that chemical reagents
and/or composites which constitute Consumables are available for sale pursuant
to Section 2.8 hereof, Seller shall also provide DMD with samples of the
Consumables in order that DMD may test the Consumables for bonding strength and
shrinkage when used with the AHP Unit. DMD shall complete such testing within
fifteen (15) days after receiving the Consumable. If DMD concludes that the
Consumable, when used with the AHP Unit, does not meet industry standards for
bonding strength and shrinkage, then DMD shall give Seller notice of such
conclusions and the factual and scientific basis therefor. If, within 15 days
after DMD's notice, Seller concurs with DMD's conclusions, it shall have 90 days
to submit new Consumables to DMD which it reasonably believes will meet industry
standards for bonding strength and shrinkage. If within 15 days after DMD's
notice, Seller does not concur with DMD's conclusions, then Seller shall give
DMD its notice of disagreement and demand for arbitration pursuant to the
commercial arbitration rules of the American Arbitration Association. The
arbitration will be conducted consistent with the procedure set forth in Section
2.8. If the arbitrators determine that the Consumable which is the subject of
the arbitration meets industry standards for bonding strength and shrinkage when
used with the AHP Unit, then Exhibit A shall promptly be modified to include the
Consumable and Exhibit D shall promptly be modified to include the price
therefor. If the arbitrators determine that the Consumable which is the subject
of the arbitration does not meet industry standards for bonding strength and
shrinkage when used with the AHP Unit, DMD shall have the right to terminate
this Agreement, and, if so terminated, Seller shall promptly refund any payments
made by DMD under Section 7.1 and such portion of payments under Section 7.2
which have not been or will not be necessary for application by Seller to the
purchase price of AHP Units which have been Ordered by DMD, and the cost to
complete the manufacture and shipping of all AHP Units which have been Ordered
by DMD, at which time this Agreement shall be null and void.
SECTION 3. ADVANCE PAYMENTS, ORDERS, ORDER ACCEPTANCE, LEAD TIMES,
PRODUCT MANUFACTURING AND EXPECTED ORDER VOLUME.
3.1 ORDERS. All purchases of Products hereunder shall be made only upon
the issuance of written Orders by DMD or an agent of DMD authorized by DMD in
writing to issue Orders on behalf of DMD hereunder. DMD hereby Orders: (i) 100
AHP Units to be Delivered by February 28,1998; (ii) an additional 150 AHP Units
to be Delivered by March 31, 1998; and (iii) 175 AHP Units monthly commencing
the first month after Delivery of the first 250 AHP Units, not to exceed a total
of 2,000 AHP Units during the first Contract Year, unless a subsequent Order is
issued by DMD pursuant to the terms of this Agreement; provided, however, that
Seller shall not be required to Deliver AHP Units until 90 days after
Specifications are mutually agreed upon by Seller and DMD. If Specifications are
not agreed upon at or before December 1, 1997, the aggregate number of days
after December 1, 1997 until Specifications are agreed upon (but not to exceed
62 days) shall
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be added to the Delivery dates set forth in subsections (i) and (ii) above;
provided further and notwithstanding anything to the contrary herein, if 100 AHP
Units are not delivered to DMD by June 30, 1998, DMD shall have the right to
terminate this Agreement, and, if so terminated, Seller shall promptly refund
any payments made by DMD under Section 7.1 and such portion of payments under
Section 7.2 which have not been or will not be necessary for application by
Seller to the purchase price of AHP Units which have been ordered by DMD, and
the cost to complete the manufacturing and shipping of the AHP Units which have
been Ordered by DMD, at which time this Agreement shall be null and void. No
Order shall specify a Delivery date less than the Lead Time. All Orders shall be
governed exclusively by the terms and conditions of this Agreement,
notwithstanding any preprinted terms and conditions contained on any DMD Orders
or Seller acknowledgments thereof. At any point in time during the Term of this
Agreement, if DMD has reached 90% Achievement (as defined in Section 3.6), DMD
shall issue or have outstanding Orders covering the succeeding three (3) months.
3.2 ORDER ACCEPTANCE. Upon receipt of any Order conforming to this
Agreement, Seller shall provide DMD with written notice of acceptance within
five (5) working days of receipt of the Order and acknowledge Delivery date(s)
of Ordered Products. If the Order does not conform to this Agreement, Seller
will provide written notice specifying that the Order is not acceptable and the
reasons therefor. Notwithstanding any other provision of this Agreement, Seller
shall not be obligated to accept or fulfill any Order with respect to the
chemical reagents or composites referred to in Section 2.8 until such time as
Seller has provided to DMD the written notification of the availability of such
Products required by Section 2.8.
3.3 LEAD TIME. The Lead Time for all Products Ordered by DMD under this
Agreement is sixty (60) days from the date of receipt of an Order. Seller will
use reasonable efforts to meet requests for Delivery inside such Lead Time.
3.4 MANUFACTURE AND ASSEMBLY. Seller shall manufacture, assemble and
package Products in accordance with the Specifications and in accordance with
good manufacturing practices and the terms and conditions hereof. Seller will
also be responsible for providing usual and customary technical support to
identify changes in the design which would improve the manufacturability, cost
effectiveness, quality and reliability of the Products.
3.5 SPECIFICATION TESTING. Seller shall develop a test and sampling plan
to ensure that Products meet the Specifications, including, but not limited to,
specifications describing color, appearance, workmanship and functionality. The
test procedure shall be performed by Seller pursuant to the sampling plan.
Seller shall provide all the equipment necessary to perform this specification
testing. In the event the Specification testing establishes a material defect or
deviation from Specifications, Product shipments will be suspended while Seller
and DMD determine the cause of the Product failure (manufacturing workmanship,
vendor or design problems) and institute corrective action. DMD will be
responsible for all costs associated with any deficiencies in packaging designs
provided by DMD. With respect to Product which does not pass Specification
testing, Seller will be responsible for all costs associated with workmanship
deficiencies or any deficiencies in designs provided or prepared by Seller.
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3.6 AGGREGATE EXPECTED ORDER VOLUME.
A. The parties' mutual best estimate of the achievable sales and
marketing potential of the AHP Units during the Initial Term is 15,000 AHP Units
in the aggregate (the "Aggregate Expected Order Volume"). During the first
Contract Year, DMD shall Order from Seller (and pay for) the Aggregate Expected
Order Volume of AHP Units set forth in Section 1.8 for such first Contract Year.
If DMD does not sell at least 90% of such Ordered AHP Units ("90% Achievement")
during the first Contract Year, then either party may, by written notice given
within thirty (30) days of the close of the Contract Year, terminate this
Agreement without liability ("Contract Termination Right"). Likewise, in Year 2,
Year 3 and Year 4, DMD shall Order from Seller the Expected Order Volume of AHP
Units set forth in Section 1.8 for each such respective Contract Year; provided,
however, such obligation to Order shall only apply for the succeeding Contract
Years 2, 3 and 4, respectively, if DMD reaches 90% Achievement in the Contract
Year then ending and; provided, further, neither party exercises its Contract
Termination Right. During any Renewal Term, the Expected Order Volume will be
that number of AHP Units Ordered in accordance with Section 2.4 and all other
applicable terms and conditions of this Agreement, with requested delivery and
payment dates occurring during each applicable Contract Year of the Renewal
Term.
B. If either party exercises its Contract Termination Right,
Seller shall be free to sell Products in the Market through any available
channels in the exercise of its sole discretion without constituting any breach
or default hereunder, provided that Seller shall not use or incorporate in any
Products any proprietary technology of DMD or any DMD Unique Features or DMD
trademarks, service marks or logos, which trademarks, service marks and logos
shall be identified in writing by DMD and provided to Seller from time to time.
C. If the delivery of any unit(s) of Product Ordered by DMD is
delayed by Seller to a date more than 30 days after the date of delivery
specified in DMD's Order therefor, then (a) such number of Products as are so
delayed will for purposes of calculation of achievement by DMD of the Expected
Order Volume for the applicable Contract Year be deemed to have been Ordered in
accordance with this Agreement, and (b) the Expected Order Volume for that
Contract Year and the Aggregate Expected Volume shall both be reduced by the
number of AHP Units so delayed.
SECTION 4. DELIVERY, TITLE AND RISK OF LOSS.
4.1 DELIVERY. Seller shall package and ship the Products in accordance
with the requirements set forth in Exhibit C, which shall be attached to this
Agreement upon the mutual agreement of the parties. Shipment shall be FOB
Seller's plant in Salt Lake City, Utah.
4.2 INSPECTION. All Products delivered by Seller hereunder shall be
accompanied with a certificate from Seller indicating that the Products conform
to Specifications. Such Certificate shall be based on inspection, sampling and
acceptance tests performed in accordance with the Acceptance Test Procedures
("ATP") set forth on Exhibit F, which shall, upon the mutual agreement of the
parties, be attached hereto. DMD may, at its expense conduct a review at
Seller's site of test data. The review shall be held at reasonable times and
during Seller's normal business hours. DMD
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may also conduct on-site random retests of Products already through the
manufacture cycle, on a noninterference basis.
4.3 RISK OF LOSS. Risk of loss for Products shall pass to DMD FOB
Seller's plant in Salt Lake City, Utah. Seller shall provide assistance required
by DMD in tracing any shipment of Products. Seller shall assist DMD to file a
claim against the appropriate carrier for Product loss or damage that occurs
during transit. Seller shall not be responsible for any damage, loss, or
pilferage of shipments of Products from the moment any shipments leave Seller's
plant. Accordingly, if DMD does not fully and clearly instruct Seller on each of
DMD's Orders regarding the insurance coverage desired by DMD to be obtained by
Seller on DMD's behalf and for DMD's account protecting the shipment of
Products, Seller shall not then be obliged to insure the shipment.
4.4 DELIVERY SCHEDULE. Delivery of initial AHP Units and production AHP
Units shall be accomplished in accordance with the Delivery schedule set forth
in Section 3.1 and as the parties may otherwise mutually agree.
4.5 EARLY DELIVERY. DMD reserves the right, at its option and without
liability, to:
A. refuse to accept delivery of Products more than thirty (30)
working days in advance of the Delivery dates set forth in Orders and, if
delivered to return such Products to Seller at Seller's expense, for subsequent
Delivery in conformance with such Orders; or
B. retain any early delivered Products and hold Seller's invoice
until the date it would otherwise be due if Delivery has been made on the
Delivery date set forth in the Order.
4.6 DELIVERY DELAYS. In the event Seller shall have failed to deliver
any Product to DMD on or before the agreed upon Delivery date, or such other
date as may be mutually agreed to by the parties, other than for causes
described in Section 14.3, and such failure shall continue:
A. for more than thirty (30) days, but no more than sixty (60)
days, Seller shall pay DMD, as liquidated damages, a sum equal to three percent
(3%) of the purchase price for such Product; or
B. for more than sixty (60) days, DMD may, at its sole option,
either:
(i) require Seller to pay, and Seller hereby agrees to
pay, as liquidated damages, a sum equal to eight percent (8%) of the price of
all delayed units; or
(ii) cancel the Order for such Product, without liability
or charge;
provided, however, that DMD may not assess any penalty or take any other action
under this Section 4.6 with respect to Delivery delays (a) for Products in
excess of the Expected Order Volume for the applicable Contract Year or (b)
before June 1, 1998.
4.7 EXCLUSIVE SALE OF PRODUCTS TO DMD. Seller will Sell the Products
into the Market only to DMD (except as otherwise permitted in Section 1.10) and
Subdistributors appointed pursuant
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**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
to Section 2.3. Seller shall not directly or indirectly Sell, or license any
other Person to Sell, any Product or any products competitive with or
substitutable for any Product, to any Person other than DMD.
SECTION 5. PRICING.
5.1 PRICING. The prices to be paid by DMD for all Products, services and
documentation during the Term of this Agreement shall be set forth in Exhibit D
which, upon the mutual agreement of the parties, shall be attached hereto. The
prices for Products are FOB Seller's plant in Salt Lake City, Utah. ** Prices
for Products shall include the cost of packaging and packing which conform to
the requirements of this Agreement but shall be exclusive of applicable taxes.
5.2 ADDITIONAL PAYMENTS. **
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**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
SECTION 6. CHANGES.
6.1 DMD CHANGES. DMD may request in writing a change to any Product and
Seller agrees to respond thereto within thirty (30) days of its receipt of such
request. If the change will be incorporated, Seller will inform DMD of the price
effect, if any, as well as the point of incorporation and anticipated logistic
considerations of such change. Both parties agree to negotiate in good faith
regarding the incorporation of any such change, and, if incorporated, the price
therefor. Exhibit D shall be appropriately modified to reflect any such change.
6.2 SELLER CHANGES. If Seller shall hereafter develop any enhancements,
improvements or replacements for any Product specified on Exhibit A hereto and
Seller shall propose a price change in respect of such enhancement, improvement
or replacement, Seller shall so notify DMD and shall deliver to DMD the relevant
Specifications or changes to Specifications relevant to such enhancement,
improvement or replacement and the proposed price or price change therefor. If
the parties agree that such enhanced, improved or replacement product shall be
substituted for the original Product, such Product shall be added to Exhibit A
as a Product hereunder and Exhibit D shall be modified appropriately to reflect
the relevant price or price change. If DMD shall not have agreed to such
substitution within 30 days of such notification by Seller, (i) Seller shall
thereafter be permitted to reject any Order for the original Product for which
Seller shall have developed an enhancement, improvement or replacement, and
shall have no further obligations under this Agreement with respect to such
original Product except with respect to such units of the original Product as
have already been delivered to DMD and, (ii) DMD, in the event such enhancement,
improvement, replacement, or price change is material, may terminate this
Agreement immediately upon notice and be entitled to a refund of the Inducement
Fee, after crediting for the purchase of AHP Units as contemplated by 7.1 below.
SECTION 7. PAYMENT.
7.1 FEE. Concurrently with the execution of this Agreement by both
parties, DMD shall deliver to Seller a check in the sum of $** (the
"Inducement Fee") as consideration for the grant by Seller to DMD of the
exclusive rights to the Products in the Market provided to DMD by, and as an
inducement to Seller to enter into and perform its obligations under, this
Agreement; provided, however, such amount shall be repaid to DMD if the parties
do not agree to the Specifications by January 31, 1998. If DMD Orders and pays
for ** AHP Units during the first Contract Year of the Initial Term, the
Inducement Fee will be credited by Seller against the aggregate purchase price
of AHP Units purchased by DMD during said first Contract Year.
7.2 ADVANCE PAYMENT. When the Specifications are mutually agreed upon by
the parties, DMD will pay to Seller the sum of **% of the price for the first
** AHP Units ordered
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**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
hereunder as an advance against amounts, if any, DMD may owe Seller from time to
time, for the purchase and delivery of the first ** AHP Units purchased by DMD
pursuant to this Agreement.
7.3 PAYMENT. Products purchased hereunder, which meet Specifications
and of which DMD has taken Delivery, shall be paid for within thirty (30) days
from the date of the invoice. Payment shall be by check payable to Seller,
provided, however, that the full amount of the advance payment made under
Section 7.2 shall first be applied to any invoices from Seller for the first
1,000 AHP Units.
7.4 INVOICES. Seller shall not issue invoices until the Products
referenced in or covered by the invoice are shipped in accordance with, and not
earlier than, DMD's Delivery schedule as set forth in each applicable Order, to
the destination specified by DMD or Subdistributor appointed pursuant to Section
2.3. The invoices are to be directed as follows:
Dental/Medical Diagnostic Systems, Inc.
200 North Westlake Blvd.
Suite 202
Westlake Village, CA 91362
Accounts Payable Dept.
All invoices must contain the DMD Order number, terms, description and
quantities of the item(s) being invoiced.
7.5 LATE PAYMENTS. In the event that DMD shall have failed to pay Seller
the amount due and owing under any invoice pursuant to Section 7.3 or any
Revenue Percentage under Section 5.2 hereof, and such failure shall continue:
A. for more than 30 days, but not more than 60 days, DMD shall
pay to Seller, as liquidated damages, a sum equal to 1 1/2% of the unpaid
balance due and owing; or
B. for more than 60 days, Seller may, at its sole option, either
(I) require DMD to pay, and DMD hereby agrees to pay, as liquidated damages, an
additional sum equal to 8% of the balance due and owing, together with interest
on the entire amount due and owing under the invoice or as Revenue Percentage at
the annual rate of 18% until paid, (ii) consider such default as a material
breach and terminate this Agreement pursuant to Section 10.4 and/or pursuant to
any other rights and remedies available to Seller at law or in equity, and/or
(iii) immediately terminate all exclusive rights of DMD under Sections 2.1, 2.5,
4.7 or otherwise under this Agreement (other than DMD's rights to DMD's Unique
Features and other property owned by DMD).
SECTION 8. BRANDING, PACKAGING AND MANUALS.
8.1 PACKAGING. All Products will have special packaging as specified in
Exhibit C. The cost of such packaging has already been taken into account in
determining the prices to be paid by DMD for such Products, as specified in
Exhibit D. In the event that DMD requests any additional special packaging, the
parties shall agree upon the details of such packaging and any additional cost
or increased price to be paid by DMD.
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8.2 UNIQUE FEATURES AND ARTWORK. DMD shall be responsible for producing
or having produced, and delivering to Seller's manufacturing facility within
established lead times (which shall in no event be less than 40 days prior to
the first anticipated use of such materials by Seller) and at DMD's expense, the
following materials (the "DMD Paid Materials"): (I) designs for all DMD Unique
Features to be attached to or incorporated into the Products; and (ii)
camera-ready graphics for the Product package, together with appropriate four
color separations. DMD shall be provided with the ability to approve the
"Blue-Line" version of any printed DMD Paid Materials prior to the mutual press
run. If DMD does not exercise this approval right after being provided with at
least 10 business days after receipt by DMD of the Blue-line version prior to
the first press run, DMD shall in all respects be deemed to have approved the
DMD Paid Materials. DMD may, at its expense, also produce or have produced, and
deliver within established lead times (which shall in no event be less than 30
days prior to the first anticipated use of such materials by Seller) to Seller's
manufacturing facility for packaging with the Products, any other Customer
documentation, including DMD's end user warranty ("DMD Paid Materials"). All DMD
Paid Materials to be included in the package shall be approved by Seller in its
reasonable discretion prior to use by DMD and shall not require modification of
the carton.
8.3 MARKING. The packaging for each Product must be marked in accordance
with the marking requirements of Exhibit C.
8.4 PRODUCT MANUALS, SALES PROMOTION MATERIAL AND ADVERTISING MATERIAL.
Seller shall furnish to DMD on an ongoing basis during the Term hereof, free of
charge ten copies of each edition of all available manuals in the English
language such as installation, operation and maintenance manuals, etc., then in
use by Seller or proposed to be used by Seller. Seller grants DMD the right to
translate and reproduce all such material and replace Seller's names and marks
with marks and names and logos of DMD, and the DMD product name and number.
Excluding only DMD's rights to its marks, names, logos and DMD Unique Features,
copyright in all such materials shall be the property of Seller.
8.5 SELLER'S REVIEW OF DMD MARKETING MATERIALS. Within a reasonable time
prior to their first use, DMD shall provide Seller with a copy of all DMD sales
and marketing literature for the Products. Seller shall give DMD prompt notice
of any language within said literature which may violate or not otherwise be in
conformity with applicable Food and Drug Administration clearances granted to
Seller or Seller's intellectual property rights concerning the Products.
8.6 DMD UNIQUE TOOLING. DMD Unique Tooling shall not be used by Seller
for any purpose other than the manufacture of Products under this Agreement. DMD
owns, and shall create and deliver to Seller at its cost, the DMD Unique
Tooling.
8.7 DERIVATIVE TECHNOLOGY DEVELOPED BY DMD. A "Derivative Work" shall be
any modified, enhanced, or improved version or form of, or any work derived in
any way from all or any part of, the Products, documentation or any other
materials or ideas disclosed by Seller in connection with this Agreement. To the
extent that DMD develops or creates (or has developed or created) any Derivative
Work, including: (I) any improvements or enhancements to the Products or (ii)
any technology or product that embodies, utilizes, or is derived from the
Products, the same (together
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with any and all corresponding intellectual property rights) shall be (and are
hereby deemed to be) considered a "work made for hire" and all right, title and
interest in such Derivative Work is and shall be solely owned by Seller. To the
extent such doctrine may be inapplicable, in consideration of the rights and
licenses granted to DMD under this Agreement, DMD hereby irrevocably assigns to
Seller all of its right, title and interest in and to such Derivative Works
created by DMD hereunder and agrees to execute any additional documents
reasonably requested by Seller to evidence Seller's ownership of the same. All
Derivative Works made by DMD shall be deemed licensed by Seller to DMD, subject
to all terms and conditions of this Agreement. DMD shall make prompt and full
disclosure to Seller of all such improvements, enhancements and technology.
8.8 SELLER'S PROPERTY RIGHTS. The Products, the processes for using
and/or applying the Products, data, information, and all enhancements to the
Products made by Seller, or the processes for using and/or applying the Products
hereafter developed, all Derivative Works and all copies thereof are proprietary
to Seller and title thereto remains in Seller. All applicable rights to patents,
copyrights, trademarks, service marks and trade secrets in the Products, the
processes for using and/or applying the Products and all enhancements thereto,
including Derivative Works, are and will remain in Seller.
8.9 DMD'S LICENSE TO SELLER. DMD hereby grants to Seller a royalty-free
license for the Term of this Agreement to manufacture, use, Sell and distribute
Products and related written materials that incorporate DMD Unique Tooling or
DMD-owned patents, copyrights, or other intellectual property rights.
8.10 SELLER'S LICENSE TO DMD. Seller hereby grants to DMD a
non-exclusive, royalty free license for the Term of this Agreement to
manufacture, use, Sell, and distribute products and related written materials in
any country, nation, state, province or territory other than the Exclusive
Territory that incorporate any Derivative Work developed, created or invented by
DMD or any of its agents or representatives.
SECTION 9. SELLER SUPPORT.
9.1 SPARE PARTS AND CONSUMABLES. Seller shall supply DMD with Spare
Parts and Consumables at the price set forth in the attached Exhibit D, for a
period of seven (7) years from the last delivery of AHP Units under this
Agreement and notwithstanding any termination hereof for whatever reason,
excluding non-payment by DMD. In this regard, DMD shall place its final Orders
for such Spare Parts and Consumables at least twelve (12) months prior to the
expiration of such seven (7) year period.
9.2 EQUIVALENT SPARE PARTS AND CONSUMABLES. DMD agrees to accept
equivalent and/or Interchangeable (form, fit and function compatible as defined
in the Specifications) Spare Parts and Consumables during the seven (7) year
period defined in 9.1 hereof, if Seller's source of supply should change and
such change is beyond DMD's reasonable control. The reasonable determination as
to whether Spare Parts or Consumables are equivalent and/or interchangeable
shall be made solely by Seller.
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9.3 EMERGENCY SPARE PARTS INVENTORY. Seller shall at all times maintain
a reasonable inventory level of each Spare Part, at no cost to DMD, and use this
supply for shipment to DMD as emergency Spare Parts, when requested. Deliveries
of emergency Spare Parts shall be made within five (5) working days of DMD's
request.
9.4 PRIORITY. Seller shall use its reasonable efforts to supply Spare
Parts to DMD on a priority basis, inside of Seller's usual lead time for Spare
Parts, to replenish any DMD low stock condition and shall immediately upon
receipt of relevant Orders for Spare Parts, notify Buyer of the anticipated
shipment date of all Spare Parts Orders.
9.5 PRICING OF FULL SET OF SPARE PARTS. The price of a full set of Spare
Parts for the AHP Unit shall not exceed one hundred (100%) percent of the then
current price of one AHP Unit while in Production (or double Seller's cost
therefore when out of Production) of which the Spare Parts are components.
9.6 TRAINING. During the term of this Agreement, Seller shall provide
training courses with respect to the operation and maintenance of Products at
Seller's published prices and terms in effect as of the date of enrollment. The
content of courses shall be determined solely by Seller and shall be conducted
at Seller's designated location(s). Training courses conducted at DMD's facility
may be provided upon DMD's request at a time and cost mutually agreed to.
9.7 TECHNICAL SUPPORT. Seller will provide DMD, at no cost to DMD,
telephonic technical support in connection with any technical problems
concerning Products.
9.8 SALES DOCUMENTATION. Seller shall furnish to DMD, on an ongoing
basis during the term hereof, free of charge, such mutually agreed upon
materials as DMD may reasonably request in camera ready form for use by DMD to
prepare documentation, brochures and other product literature, including, but
not limited to, operators, maintenance and parts manuals, catalogs,
specification sheets, and other data necessary or appropriate for the sale of
Products. Seller grants to DMD the royalty-free right and license to reproduce
all or any part of such documentation. DMD is further given the right to modify
any or all parts of the documentation to reflect changes made to the Products or
consistency in style with other documentation used by DMD or to satisfy legal or
customers requirements.
9.9 SERVICE DOCUMENTATION. Seller shall provide to DMD, at no cost, and
in accordance with the schedules set forth in the Specifications, all
engineering drawings and documentation (by part number) which, in DMD's
reasonable opinion, are necessary or appropriate to fulfill DMD's service
obligations for the Products. Seller grants to DMD the royalty-free right and
license to reproduce all or any part of such documentation for use solely to
perform and/or discharge its duties and obligations hereunder, and for no other
purpose.
SECTION 10. TERMINATION.
10.1 TERMINATION BY DMD. Seller shall be in breach of this Agreement and
DMD shall have the right to terminate this Agreement and any Orders delivered
hereunder if:
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A. There occurs a Systemic Defect and Seller does not (a) submit
to DMD a plan reasonably acceptable to DMD to remedy the Systemic Defect within
30 days of delivery by DMD to Seller of written notice of the existence of such
Systemic Defect, and (b) take effective corrective action within 60 days of
delivery by DMD to Seller of written notice of the existence of such Systemic
Defect.
B. Seller shall have failed, with respect to three (3)
consecutive monthly shipments during any Contract Year to deliver Product to DMD
on the agreed upon delivery date, other than for causes described in Section
14.3, and each such failure shall have continued for more than ten (10) days.
C. Seller becomes bankrupt or insolvent.
D. Seller violates the exclusivity or confidentiality provisions
of this Agreement.
E. There occurs any material breach of this Agreement other than
those described in clauses 10.1 A, 10.1 B or 10.1 C of this Section 10.1 by
Seller that remains uncured for a period of over thirty (30) days from
notification, in writing, of Seller by DMD of such breach.
10.2 EFFECT OF TERMINATION FOR DEFAULT BY SELLER. If this Agreement may
be terminated under Section 10.1 above, and upon expiration, then, in each
case:
A. If DMD is committed to supply Products to its customers beyond
such termination or expiration date, Seller and DMD agree to negotiate in good
faith, and in a timely manner, terms and conditions to allow DMD to fulfill such
commitments.
B. If Products are not available from Seller within a reasonable
time, Seller shall upon request provide a list of vendors for Products, so that
DMD may source Products directly from such vendors. Further, Seller agrees to
use commercially reasonable efforts to assist DMD in negotiating supply
agreements with such vendors.
10.3 EXPIRATION EFFECT. Upon termination of this Agreement, whether as a
result of expiration of the Term, under Sections 10.1 or 10.4 or otherwise:
A. Each party shall immediately return to the other all
proprietary, confidential or private data and all copies thereof. DMD will not
have such an obligation for so long as it must support a continuing obligation
to customers as set forth in 10.2 A. In addition, notwithstanding the above, DMD
shall retain all rights and documentation necessary to continue servicing
Products sold hereunder and the right to dispose of its inventory of Products.
B. DMD shall provide Seller with a list of all
installations/sales of AHP Units, all then existing leads for the sale of AHP
Units and all Orders which are then open. Such lists shall include detail
sufficient for Seller to identify the name, address, telephone number, fax
number and other relevant information with respect to all purchasers and
potential purchasers of AHP Units.
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C. Except as otherwise set forth in this Agreement, or with
respect to obligations of DMD which survive the termination or expiration of
this Agreement, DMD's sole liability to Seller shall be for the payment of any
balance due and owing for conforming Products delivered prior to the effective
date of termination or expiration.
D. Upon the request of DMD, Seller shall, at DMD's expense,
deliver all DMD Unique Tooling to DMD or make disposition thereof in accordance
with DMD's written instructions. Such disposition shall be subject to
verification by DMD.
10.4 TERMINATION BY SELLER. DMD shall be in breach of this Agreement and
Seller shall, in addition to all other remedies available to Seller at law and
equity, have the right to terminate this Agreement and any Orders delivered
hereunder if:
A. DMD becomes bankrupt or insolvent.
B. DMD violates the exclusivity or confidentiality provisions of
this Agreement.
C. Except in the event of a sale or merger of DMD where the
acquirer promptly and in writing assumes all of DMD's duties, obligations,
representations and warranties hereunder, DMD attempts to assign, convey or
otherwise transfer in whole or in part any of its rights, duties or obligations
hereunder to any third party without Seller's express prior written consent, not
to be unreasonably withheld, based on DMD's full, true and correct disclosure of
the proposed transaction to Seller.
D. DMD ceases to function as a going concern or to conduct its
operations in the normal course of business as a distributor, marketer and/or
seller of Products to the dental, oral surgery, orthodontistry, oral hygiene,
cosmetic dentistry or periodontics industries.
E. DMD, after receipt of notice and 10 days to cure, shall have
failed to pay Seller amounts due and owing under invoices issued pursuant to
Section 7.3 or any Revenue Percentage under Section 5.2 for more than 50 days.
F. There occurs any material breach of this Agreement, other than
those described in clauses 10.4A, 10.4B, 10.4C, or 10.4D of this Section 10.4 by
DMD that remains uncured for a period of 30 days from notification, in writing,
of DMD by Seller of such breach.
10.5 EFFECT OF TERMINATION FOR DEFAULT BY DMD. If this Agreement may be
terminated under Section 10.4 above, then, in addition to the other duties and
obligations of DMD as set forth in Section 10.3 hereof, Seller may immediately
send an Invoice to DMD for all Products which have been Ordered by, and
delivered to, DMD and, within 30 days thereafter, DMD shall pay Seller the
balance then due and owing under all outstanding and unpaid Invoices.
SECTION 11. WARRANTY AND EPIDEMIC FAILURE.
11.1 EXPRESS WARRANTIES. Seller warrants that all Products shall be free
from all liens, security interests and claims, and that good and valid title
shall pass thereto as provided in this
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Agreement. Seller further warrants and represents that all Products assembled or
manufactured by or for it will be free of material defects in workmanship and
materials and will be manufactured in accordance with good manufacturing
practices and meet applicable Specifications for fifteen (15) months from the
date of each such Product shipment by Seller.
11.2 WARRANTY SERVICE. DMD will provide warranty service (labor, but not
replacement parts or Products) on behalf of Seller for covered AHP Units (as
defined below) sold by DMD and/or any Subdistributor. The pricing of the
Products reflects additional consideration as compensation to DMD for the labor
provided by DMD for the performance of warranty service required to be provided
by DMD hereunder with respect to the first 6% of each 1,000 AHP Units shipped,
which require warranty service (the "Covered AHP Units") to DMD during each
calendar quarter of each Contract Year. All replacement parts and Products
required by DMD to perform warranty service shall be provided to DMD at no
charge and shall be shipped to locations designated by DMD, at Seller's expense
(including freight charges, duties, and insurance), within five (5) days of
receipt of DMD's shipping instructions. Seller shall be responsible for all
warranty service and costs, including labor, replacement parts and Products,
shipping, insurance, etc. for all Products other than the Covered AHP Units to
DMD shall keep accurate records of all services provided by it hereunder and
shall provide same to Seller, as and when reasonably requested by Seller.
11.3 WARRANTY OBLIGATIONS. In the event of a breach of the Product
warranty set forth in Section 11.1 above, (I) in the case of any Product or
component thereof which is not, in the reasonable judgment of DMD, capable of
being properly repaired by or for DMD at a lower cost than the replacement cost
of such item to DMD under this Agreement, or (ii) in the case of any product or
component thereof which DMD, after reasonable effort, has been unable to
properly repair, Seller shall, upon request by DMD, promptly repair or replace
the defective Product. The replacement Product(s) shall be shipped to locations
designated by DMD, at Seller's expense (including freight charges, duties,
insurance and other expenses), within five (5) days of receipt of DMD's shipping
instructions. The defective Product(s) shall be returned to Seller by DMD,
together with documentation sufficient to identify the defect, the expense of
packaging and shipping of defective Product(s) shall be paid by Seller promptly
upon presentation of invoices by DMD to Seller. The foregoing shall be DMD's
sole remedy in the event of a breach of warranty by Seller. Seller shall not in
any case be liable for any special, incidental, consequential, indirect or
punitive damages even if Seller has been advised of the possibility of such
damages. Seller is not responsible for lost profits or revenues of DMD or its
subdistributors or customers. This Agreement defines mutually agreed upon
allocation of risk as between Seller, on the one hand, and DMD and its
subdistributors and customers, on the other hand.
11.4 REPAIRED AND REPLACED PRODUCTS. All Products repaired or replaced
by Seller under this Section shall continue to be warranted during the term of
the initial warranty period for such Product in accordance with Section 11.1,
but in no event less than 30 days from such repair or replacement.
11.5 SYSTEMIC DEFECTS. Notwithstanding the warranty requirements and
conditions of this Section 11, Seller will undertake without charge and without
delay to promptly remedy any Systemic Defect in all affected Products in
inventory or in the field, by delivering to DMD repaired or replacement
Product(s). Seller shall not be required to cure any Systemic Defect for any
Products
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if resulting from accident, negligence, misuse, alteration, modification,
tampering or causes other than ordinary use.
11.6 MCBF. Seller shall supply preliminary data on the Mean Cycles
Between Failure ("MCBF") and Mean Time To Repair ("MTTR") for the AHP Units as
soon as practical. Final MCBF and MTTR data shall be provided as soon as design
maturity testing of the AHP Units is completed. Such MCBF data shall include
failure data on all major subassemblies of the AHP Units. Further, should any
revisions or modifications to Products or component parts thereof affect the
MCBF or MTTR of the AHP Units, Seller shall supply revised MCBF and MTTR data
within thirty (30) days of such revisions or modifications. If a variance should
occur such that the actual MCBF is below the MCBF set forth in the
Specifications, Seller will implement a corrective action program reasonably
acceptable to DMD to correct such variance. If the average MCBF for AHP Units
nonetheless remains below that specified in the Specifications after such
corrective action is implemented, Seller agrees to implement a superior
corrective action program and repair all failed AHP Units at no cost to DMD.
Should such corrective actions taken by Seller not result in average MCBF rates
in accordance with the Specifications, Seller shall replace all AHP Units with
AHP Units that meets or exceeds the Specifications including MCBF at no cost to
DMD.
11.7 DISCLAIMER. THE EXPRESS WARRANTIES SET FORTH IN THIS AGREEMENT, AND
THE OBLIGATIONS AND LIABILITIES OF SELLER HEREUNDER, ARE IN LIEU OF, AND DMD
HEREBY WAIVES, ALL OTHER GUARANTEES AND WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OR MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE. SELLER DOES NOT WARRANT ANY RESULTS TO BE
RECEIVED OR OBTAINED FROM THE PRODUCTS, THEIR USE OR APPLICATION.
SECTION 12. PATENT INDEMNITY.
12.1 PATENT INDEMNITY. Seller, at its own expense, will hold harmless
and defend DMD, its Subsidiaries, Subdistributors and customers or any of them
against all claims and pay any damages, costs, attorneys' fees or fines
resulting from all proceedings, threats of proceedings or claims against DMD,
its Subdistributors, its Subsidiaries and their respective customers by reason
of any claims against DMD, its Subdistributors, its Subsidiaries and their
respective customers by any third party for infringement or alleged infringement
by any Product furnished under this Agreement or any part or use thereof
(excluding however, any infringement or alleged infringement resulting or
derived from DMD Unique Features as more fully described in Section 12.3 below)
of patents, mask works, copyrights, trade secrets and other intellectual
property rights in any country of the world. In meeting its obligation
hereunder, Seller may procure for DMD the right to continue to market the
Products or Seller may modify any Product to be non-infringing so long as the
modified Product conforms to the Specifications.
12.2 SELLER PATENT AND COPYRIGHT CLEARANCE. Seller will provide to DMD
and its counsel all technical information relating to the Products to enable DMD
to conduct clearance investigations with respect to the Products to be delivered
hereunder. Within ten (10) days of DMD's request, Seller will disclose to DMD
all hereafter developed technical information relating to the Products to enable
DMD to conduct clearance investigations with respect to the Products to
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be delivered hereunder. If in the opinion of DMD's counsel any material aspect
or function of the Products is likely to infringe the patent, mask work,
copyright, trade secret or other intellectual property right of another Person,
DMD may suspend performance under this Agreement (in which case, all time
periods and delivery deadlines under this Agreement may be tolled at DMD's
election) until Seller establishes that its Products are not infringing or
Seller obtains a license or other similar agreement from the owner of such
patent, mask work, copyright, trade secret or other intellectual property right.
Nothing in this Section 12.2 shall reduce or affect the obligations and
commitments of Seller under this Agreement. In performing Seller's obligations
under this Agreement, Seller agrees to avoid knowingly delivering, designing,
and/or developing an item that infringes one or more unlicensed patents, utility
models, design registrations, copyrights or trade secrets of any third party. If
Seller knows or becomes aware of any such patent, utility model, design
registration or copyright during the course of performing Seller's obligations
under this Agreement, Seller agrees to notify DMD promptly in writing of such
infringement.
12.3 LIMITATION ON PATENT INDEMNITY. The foregoing indemnity shall not
apply if, and at the extent that, an alleged infringement arises from the
combination of any Products purchased pursuant to this Agreement with products
not supplied by Seller or the DMD Unique Features. Further, such indemnity shall
not apply and DMD agrees to indemnify Seller in a manner fully equivalent to the
foregoing in any suit, claim or proceeding brought against Seller in which, and
to the extent that, an alleged infringement arises from a DMD Unique Feature.
12.4 DMD PATENT AND COPYRIGHT CLEARANCE. DMD will provide to Seller and
its counsel all technical information relating to the DMD Unique Features to
enable Seller to conduct clearance investigations with respect to the DMD Unique
Features to be incorporated into the Products hereunder. Within ten (10) days of
Seller's request, DMD will disclose to Seller all hereafter developed technical
information relating to the DMD Unique Features to enable Seller to conduct
clearance investigations with respect to the DMD Unique Features to be
incorporated into the Products hereunder. If in the opinion of Seller's counsel
any material aspect or function of the DMD Unique Features is likely to infringe
the patent, mask work, copyright, trade secret or other intellectual property
right of another Person, Seller may suspend performance under this Agreement (in
which case, all time periods and delivery deadlines under this Agreement may be
tolled at Seller's election) until DMD establishes that the DMD Unique Features
are not infringing or DMD obtains a license or other similar agreement from the
owner of such patent, mask work, copyright, trade secret or other intellectual
property right. Nothing in this Section 12.4 shall reduce or affect the
obligations and commitments of DMD under this Agreement. In performing DMD's
obligations under this Agreement, DMD agrees to avoid knowingly delivering,
designing, and/or developing an item that infringes one or more unlicensed
patents, utility models, design registrations, copyrights or trade secrets of
any third party. If DMD knows or becomes aware of any such patent, utility
model, design registration or copyright during the course of performing DMD's
obligations under this Agreement, DMD agrees to notify Seller promptly in
writing of such infringement.
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SECTION 13. ADDITIONAL REPRESENTATIONS AND WARRANTIES.
13.1 SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents,
warrants and agrees that:
A. The Products will fully comply with all applicable electrical
and emissions safety standards (e.g. UL and CSA) And the Specifications set out
in Exhibit B. Evidence of such certification shall be provided to DMD within 180
days after delivery of the first Product.
B. The Products will fully comply with all applicable European
Union, U.S. federal, state and local laws and regulations concerning the
manufacture, sale and use of the Products and Seller's performance hereunder.
C. Seller will provide to DMD all documentation which is required
to be provided by Seller as Seller of the Products or by DMD as a reseller of
the Products under any U.S. federal, state or local law or governmental rule or
regulation or the laws of all countries in which DMD is distributing the
Products directly or through others. Without in any way limiting the generality
of the foregoing, Seller specifically agrees to provide properly completed
Material Safety Data Sheets (MSDS) for all Products purchased hereunder, and all
disclosures, warning notices, labels and special instructions including, without
limitation, those concerning the safe handling, use, storage, transportation
and/or disposal of the Products and concerning the presence of any Product of
any chemical or other substance which is identified in any law, rule or
regulation as toxic or hazardous or as posing any threat to the health of any
person or to the environment.
13.2 LEGAL OBLIGATIONS OF DMD. At all times while this Agreement shall
remain in effect, DMD shall strictly comply with all the prevailing laws and
regulations in the Market pertaining to the importation, distribution, sales
promotion, and marketing of Products in the Market. DMD shall accept and assume
full responsibility for any and all civil or criminal liabilities and costs
directly appertaining to or which may eventuate in the Market, holding Seller
harmless from any and all fines, damages, levies, costs, attorneys fees and
judgments, which Seller may thereby be required to pay.
SECTION 14. GENERAL PROVISIONS.
14.1 NOTICES. Any notice which may be or is required to be given under
this Agreement shall be written or FAX. All written notices shall be sent by
certified mail, postage prepaid, return receipt requested. All FAX notices must
be followed within three (3) days by written notice from an authorized agent.
All such notices shall be deemed to have been given when received, addressed in
the manner indicated below or at such other addresses as the parties may from
time to time notify each other of.
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Seller Ion Laser Technology, Inc.
3823 South Main Street
Salt Lake City, Utah 84115
Attn: Chairman
With a copy to:
Durham, Evans, Jones & Pinegar
50 South Main Street, Suite 850
Salt Lake City, Utah 84144
Attn: Jeffrey M. Jones, Esq.
DMD Dental/Medical Diagnostic Systems, Inc.
200 North Westlake Blvd.
Suite 202
Westlake Village, CA 91362
Attn: Chairman
14.2 FORCE MAJEURE. Neither Seller nor DMD shall be liable to the other
for its failure to perform any of its obligations hereunder or under any Order
or acknowledgment thereof during any period in which such performance is delayed
by unforeseeable circumstances beyond its reasonable control.
14.3 CONFIDENTIALITY. Each party hereto shall maintain in strictest
confidence, and shall ensure that its affiliates and its and their employees,
agents and representatives maintain in strictest confidence all proprietary and
confidential information which is provided by one party hereto to the other
party hereto, including but not limited to, inventions, discoveries, product
designs, improvements and methods, business plans, marketing techniques or
plans, manufacturing and other plant designs and any other information affecting
the business operations of either party ("Confidential Information"), and shall
not use, publish, disseminate, or disclose, in any manner, to any person any
Confidential Information. Such obligation with respect to Confidential
Information shall survive termination or expiration of this Agreement. Neither
party hereto shall be bound by the obligations of this Section 14.3 hereof if:
A. the Confidential Information was not specifically designated
in writing as confidential or proprietary at or before the time of the
disclosure or, if the disclosure was orally made, it had not been initially or
previously identified as being confidential and it had not been reduced to
writing and designated as being confidential within thirty (30) days from the
date of oral disclosure (and during such not more than 30 day period prior to
confirmation that such orally disclosed information is confidential, such orally
disclosed information shall be treated as confidential information in accordance
with this Section 14.4);
B. the Confidential Information was in the public domain at the
time of the disclosure;
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C. the Confidential Information becomes publicly available
through no fault of the recipient;
D. the Confidential Information was in the recipients possession,
free of any obligation of confidence, at the time of receipt of the information;
E. the Confidential Information becomes available, free of any
obligation of confidence, to a third party from the disclosing party or from
someone acting under its control;
F. and to the extent the recipient is obligated to produce the
Confidential Information under court or government action or regulation; or
G. two (2) years have elapsed since this Agreement was terminated
or expired.
14.4 SOLICITATION OF EMPLOYEES. During the Term and the two (2) year
period following the termination of this Agreement, neither party shall directly
or indirectly (x) solicit or encourage any employee of the other party to leave
the employ of the other party, or (y) hire any employee who has left the
employment of the other party if such hiring is proposed to occur within one (1)
year after the termination of such employee's employment with the other party.
14.5 LIMITATION OF LIABILITY. NOTWITHSTANDING ANY OTHER PROVISION
CONTAINED HEREIN TO THE CONTRARY EXCEPT SECTION 12, WHICH SHALL BE GOVERNED BY
ITS TERMS, DMD AND SELLER SPECIFICALLY DISCLAIM AND WAIVE AS TO EACH OTHER AND
THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, OR AGENTS ANY AND ALL LIABILITY
FOR DAMAGES OTHER THAN DIRECT DAMAGES, INCLUDING BUT NOT LIMITED TO PUNITIVE OR
EXEMPLARY DAMAGES HOWEVER DENOMINATED, AND INDIRECT, CONSEQUENTIAL, OR
INCIDENTAL DAMAGES, WHETHER ARISING IN CONTRACT, IN TORT (INCLUDING WITHOUT
LIMITATION NEGLIGENCE), OR ANY OTHER THEORY EVEN IF INFORMED OF THE POSSIBILITY
OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY
LIMITED REMEDY PROVIDED HEREIN.
14.6 PUBLICITY. This Agreement shall be treated by DMD and by Seller as
each treats its own confidential information. Additionally, no press release or
other publicity of any nature regarding the existence or the terms of this
Agreement shall be made without the other party's prior written approval, which
approval shall not be unreasonably withheld. However, approval of such
disclosure shall be deemed to be given to the extent such disclosure is required
to comply with governmental rules, regulations or other governmental
requirements. The publishing party shall give the other party a reasonable
opportunity to review the text of such disclosure prior to disclosure.
14.7 COMPLIANCE WITH LAWS. Seller represents that with respect to the
production of the Products to be furnished hereunder, Seller shall fully comply
with all applicable European Union, federal and state laws and regulations
governing Seller's obligations under this Agreement. DMD represents that with
respect to its marketing and Sale of Products, DMD shall fully comply with all
applicable European Union, federal and state laws and regulations governing
DMD's obligations
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under this Agreement. This Agreement shall be deemed modified to the minimum
extent necessary to assure compliance with European Union, Federal and
applicable state laws regarding warranties.
14.8 GOVERNING LAW. This Agreement shall in all respects be governed by
the internal laws of the State of Utah as applied to contracts entered into and
performed solely within that State. The parties agree that the "United Nations
Convention on the International Sale of Goods", and the "Incoterms 1990" or any
later edition thereof, shall not apply to this Agreement. The exclusive venue
for the resolution of any dispute arising under this Agreement shall be Salt
Lake City, Utah.
14.9 ASSIGNMENT. Neither party may assign its rights and remedies nor
transfer (by operation of law or otherwise) its obligations under this
Agreement, or this Agreement, without the prior written consent of the other
party. In any event, any assignment or transfer shall not operate to relieve the
assigning party of its secondary liability to perform its obligations hereunder.
Nor will any such assignment impose any obligation on the assignee, except in
the case of an express written assumption thereof by the assignee.
14.10 HEADINGS. The headings and titles of the Sections of this
Agreement are inserted for convenience only and shall not affect the
construction or interpretation of any provision.
14.11 NO PARTNERSHIP OR AGENCY. The parties acknowledge and agree that
(1) nothing in this Agreement or in the performance by the parties of their
obligations hereunder shall create or be deemed to create a partnership or joint
venture between them or, except as expressly provided herein, any obligation to
share property rights or profits and (2) nothing in this Agreement renders
either party an agent of the other for any purpose whatsoever. Except as
otherwise provided herein, without the specific prior written approval of the
other party, neither party has authority to, and shall not, enter into any
contract, make any representation, give any warranty, incur any liability or
otherwise act on behalf of the other.
14.12 SEVERABILITY. If any provision of this Agreement is held invalid
by any law, rule, order or regulation of any government, or by the final
determination of any state or federal court or administrative agency, such
invalidity shall not affect the enforceability of any other provisions not held
to be invalid.
14.13 OMISSIONS. Any delay or omission by either party to exercise any
right or remedy under this Agreement shall not be construed to be a waiver of
any such right or remedy or any other right or remedy hereunder. All of the
rights of either party under this Agreement shall be cumulative and may be
exercised separately or concurrently.
14.14 ENTIRE AGREEMENT. This Agreement, including its Exhibits,
constitutes the entire agreement of the parties as to the subject matter
hereof, and supersedes any and all prior and contemporaneous oral and written
understandings and agreements as to such subject matter. This Agreement may be
amended only by written amendment duly signed by authorized representatives in
both parties.
14.15 INDEPENDENT CONTRACTOR. DMD is an independent contractor under
this Agreement, and nothing in this Agreement authorizes DMD to act as a legal
representative or agent of Seller for
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any purpose whatsoever. This Agreement does not establish a partnership or joint
venture. DMD shall not have the power to bind Seller with respect to any
obligation to any third party. DMD is solely responsible for its employees and
agents, including the terms of employment, wages, hours, required insurance and
daily direction and control.
IN WITNESS WHEREOF, DMD and Seller have executed this Agreement as of
the date first above written.
DENTAL/MEDICAL DIAGNOSTIC ION LASER TECHNOLOGY, INC.
SYSTEMS, INC.
By: /s/ ROBERT GUREVITCH By: /S/ E. WYATT CANNADAY
------------------------- --------------------------
Its: CEO & Chairman Its: President and CEO
------------------------- --------------------------
October 15, 1997
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List of Exhibits
Exhibit "A" Products, Consumables and Spare Parts
Exhibit "B" Product Specifications
Exhibit "C" Packaging and DMD Unique Feature Specifications
Exhibit "D" Pricing - [which Exhibit D shall include a description
of the parameters under which the parties will negotiate
the prices and Revenue Percentage of chemicals, reagents
and composites]
Exhibit "E" Delivery Schedule and Milestones
Exhibit "F" Acceptance Test Procedures
26
<PAGE> 27
EXHIBIT A
PRODUCTS, CONSUMABLES AND SPARE PARTS
[To be provided at a later date]
<PAGE> 28
EXHIBIT B
PRODUCT SPECIFICATIONS
<PAGE> 29
APPENDIX 1
SPECIFICATIONS
**
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
<PAGE> 30
CLIENT REQUIREMENTS
**
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
<PAGE> 31
OUTPUT REQUIREMENTS
**
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
<PAGE> 32
APOLLO RELIABILITY
**
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
<PAGE> 33
EXHIBIT C
PACKAGING AND DMD UNIQUE FEATURE SPECIFICATIONS
[To be provided at a later date]
<PAGE> 34
EXHIBIT D
PRICING
[To be provided at a later date]
<PAGE> 35
EXHIBIT E
DELIVERY SCHEDULE AND MILESTONES
[To be provided at a later date]
<PAGE> 36
EXHIBIT F
ACCEPTANCE TEST PROCEDURES
[To be provided at a later date]
<PAGE> 1
Exhibit 10.38
AGREEMENT
This is an Agreement entered into as of October 10, 1997 by and between
Dental/Medical Diagnostic Systems, Inc., a Delaware Corporation with its
principal office located at 200 North Westlake Blvd., Suite 202, Westlake
Village, CA 91362, "DMD" and Suni Imaging Microsystems, a California
corporation, with an address at 185 E. Dana Street, Mountain View, CA 94041
("SUNI"). This Agreement will be effective as of the Effective Date set forth
below.
BACKGROUND AND OBJECTIVES
A. DMD develops, manufactures and markets technology and devices intended
to assist dentists and other professionals to diagnose and/or treat dental and
oral diseases, conditions and/or imperfections, and to assist dental and other
oral medical and dental treatment professionals to educate patients with respect
to their conditions and treatment options.
B. DMD wishes to develop and offer for sale a digital dental x-ray system
intended to successfully compete on the basis of superior functionality,
superior image quality and clarity, and competitive price to incorporate into a
turn-key digital x-ray imaging system to be assembled and marketed worldwide by
DMD.
C. SUNI is independently developing technology and an image capture and
processing device capable of creating high quality high definition x-ray images
for display on computer monitors or for printing using low-level x-ray radiation
emissions. SUNI has expertise in developing semiconductor chip processors for
x-ray imaging, computer software and associated systems and documentation for
components similar to those required by DMD.
D. DMD has selected SUNI to design, develop, document and provide
manufacturing set up know-how and integrate a semiconductor chip processor for
x-ray imaging, computer software and associated systems and documentation into
DMD's proposed X-Ray System, as defined below.
E. SUNI will own all Intellectual Property Rights in and to the CCD Chip
Design, CCD Chip Technology, Tooling, Licensed Technology, SUNI Software and
Developed Subsystem, each as defined below. Subject to SUNI's ownership as set
forth in the preceding sentence, DMD will own all Intellectual Property Rights
in and to the X-Ray System and DMD Software, as defined below.
Now, therefore, the parties agree as follows:
1. DEFINITIONS.
1.1. "Advance Payment" shall mean the advance payment of royalties
as set forth in Section 4.1.
1.2. "Affiliate" shall mean a Subsidiary and any entity in which a
party owns or controls fifty percent (50%) or more of the voting
interests, or any entity where
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more than fifty percent (50%) of its voting interests are owned or
controlled by the same entity that owns more than fifty percent
(50%) of a party.
1.3. "Agreement" shall mean this document, including any
Attachments.
1.4. "CCD Chip" means a charged coupled semiconductor imaging chip
which processes x-ray images and which meets the applicable parts of
the Design and Engineering Specification.
1.5. "CCD Chip Technology," means CCD Chip technology and know-how
owned or used by SUNI, including but not limited to (1) CCD Chip
circuit design; (2) CCD Chip physical design databases; (3) CCD Chip
manufacturing processes; (4) CCD Chip specifications; (5) any
improvements or derivative works of the above developed by SUNI
pursuant to Section 2 of this Agreement; and (6) Documentation that
is related to the foregoing.
1.6. "Commercial Commencement" shall mean whichever of the following
dates is the first to occur: (a) such date as is nine (9) months
following filing by DMD of a 510k application with the FDA for the
X-Ray System; or (b) the last day of the first month in which DMD
invoices a customer for an X-Ray System that is sold in the United
States of America.
1.7. "Confidential Information" shall mean all information of a
party marked confidential, restricted, or proprietary by such party;
and any oral disclosures, which, in order to be considered
Confidential Information, must be stated as such and reduced to
writing within twenty (20) days thereafter, which writing shall
indicate that the disclosed information is confidential.
1.8. "Days" or "days" shall mean calendar days unless otherwise
specified.
1.9. "Deliverables" are the items to be provided by SUNI to DMD as
specified in the Statement of Work.
1.10. "Deliverable Failure" means any error, unresolved problem, or
defect caused by or resulting from (1) an incorrect functioning of
code or firmware, or (2) an incorrect or incomplete statement or
diagram in the Documentation, if such error, problem, or defect
renders the Developed Subsystem or Tooling inoperable, causes the
Developed Subsystem to fail to meet Design and Engineering
Specifications thereof, causes Documentation to be inaccurate or
incomplete in any material respect, causes incorrect results, or
causes incorrect functions to occur when any such materials are used
for their intended purposes.
1.11. "Dental Field" means (i) dentistry, oral surgery,
orthodontistry, oral hygiene, cosmetic dentistry, periodontics and
all other medical and cosmetic professions providing dental care to
humans and animals or providing services to or educating the
foregoing professions, and (ii) research, development, design,
production, manufacture, distribution, marketing, leasing,
servicing, repairing and/or selling of goods and services to or for
use by persons engaged in the activities described in the preceding
clause (i).
1.12. "Design and Engineering Specification" means the functional
and performance specification of the Developed Subsystem and Tooling
including the
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electrical and mechanical specification details as defined by SUNI
and agreed by DMD as set forth in Section 2.1 below, and which,
when so agreed, will be incorporated as Attachment 1 and will be
subject to modification by mutual agreement of the parties from time
to time.
1.13. "Developed Subsystem" means the subsystem developed by SUNI
for DMD that comprises solely the CCD Chip, the image capture board,
SUNI Software, and cable and that meets the Design and Engineering
Specifications.
1.14. "Development Work," means the work performed under this
Agreement by SUNI in order to produce the Developed Subsystem and
Tooling for DMD.
1.15. "Discretionary Rejection" shall have the meaning set forth in
Section 2.9(b)(ii).
1.16. "DMD Approved Vendor" shall mean vendors selected by SUNI, and
subject to approval by DMD, which approval will not unreasonably be
withheld, for the purpose of manufacturing the Developed Subsystem
and Tooling.
1.17. "DMD Software" means software developed by or for DMD that is
used to retrieve an image from the system memory that is separate
from the Developed Subsystem. DMD Software does not include the test
image capture routine.
1.18. "Documentation" means the documentation provided by SUNI to
DMD in paper form and in digital format (Word for Windows for text,
and an application as determined by SUNI for designs and technical
specifications) that includes (1) a list of each component of the
Developed Subsystem and Tooling and estimated manufacturing costs,
(2) manufacturing flow, directions and instructions for each
sub-system to be built from the separate components in (1) above,
(3) updates to the above from time to time, all of which shall be
appropriate for reasonably qualified DMD personnel or personnel of
DMD's subcontractors to use for the intended purpose, and (4) any
other form of documentation that is set forth in the Statement of
Work.
1.19. "Effective Date" shall mean the date on which the parties have
initialed each of Attachments 1 through 4 to this Agreement, as set
forth in Section 32 below.
1.20. "Final Prototype Developed Subsystem" means the final
prototype of the Developed Subsystem with all required
functionality, performance and Documentation for final test
purposes, manufactured with production ready Tooling using the
actual production methods and equipment specified by SUNI in the
Documentation, and which has been determined by SUNI to satisfy the
Design and Engineering Specifications and the manufacturing cost
targets contained therein.
1.21. "Improvements" means modifications to the Developed Subsystem
and Tooling that improve functionality, performance or
manufactureability of the CCD Chip at the 2 micron lithography
level.
1.22. "Initial Prototype Developed Subsystem" means a prototype of
the Developed Subsystem which is functionally equivalent to
production versions of the Developed Subsystem but which is not
necessarily manufactured using manufacturing processes required for
commercial production of the Developed Subsystem or with actual
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production tooling, but which has been determined by SUNI to satisfy
the applicable sections of the Design and Engineering Specifications
and the manufacturing cost targets.
1.23. "Intellectual Property Rights" means any and all Patents,
copyrights, mask works, trade secrets and other intellectual
property rights in any country of the world.
1.24. "Licensed Products," means the Developed Subsystem or
components of the Developed Subsystem or products that incorporate
the Licensed Technology or CCD Chip, including, but not limited to,
an X-Ray System.
1.25. "Licensed Technology," means all currently existing
inventions, methods, designs, code and know-how, whether or not
copyrighted or copyrightable or patented or patentable that have
been developed by, for, or used by SUNI in the Developed Subsystem
design or Tooling, or both, and any future Improvements that DMD
elects to license pursuant to Section 5.2 below.
1.26. "Net Receipts" from Licensed Products shall mean the total
amount actually invoiced by DMD to DMD's customer for Licensed
Products (exclusive of training, installation, maintenance and
support charges separately invoiced), less (i) any prices separately
charged by DMD , as per DMD's published price list for hardware or
software used in connection with the Licensed Products, including
without limitation, work stations, personal computers, monitors,
video cassette recorders and optional accessories; (ii) DMD
authorized returns; (iii) free warranty replacements; (iv) sales,
use and excise taxes; (v) freight (specifically billed or prepaid);
and (vi) insurance for freight. If DMD's customer is an Affiliate of
DMD that is purchasing the Licensed Product for resale purposes,
then Net Receipts shall mean the total amount actually invoices by
such DMD Affiliate to its customer for Licensed Products, less the
deductions specified in this Subsection above (with the DMD
Affiliate substituted for DMD).
1.27. "Patents" means patents and patent applications and all
foreign counterparts, reissues, divisions, renewals, extensions,
provisionals, continuations and continuations-in-part of any such
patents or patent applications.
1.28. "Prototypes" means the Initial Prototype Developed Subsystem
and the Final Prototype Developed Subsystem.
1.29. "Regulatory Agency" shall mean any regulatory agency
governmental or private, including but not limited to agencies
regulating medical device safety, product safety, and/or
electromagnetic emissions, the approval of which is required by DMD
or the government of the United States prior to delivery or
marketing of the X-Ray Systems in the United States, Puerto Rico,
and the territories and possessions of the United States and which
are included in the Regulatory Specification or by an applicable
regulatory agency of Canada or the European Community.
1.30. "Regulatory Specification" shall mean the functional and
performance specification to be prepared by DMD that identifies
electrical and mechanical features that must be included in the
Developed System pursuant to the requirements
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<PAGE> 5
of Regulatory Agencies, a copy of which is attached to this
Agreement as Attachment 5.
1.31. "Statement of Work", means the list of the Deliverables,
including source code, each with a target date for completion by
SUNI of the Deliverable and of the Developed Subsystem and Tooling,
as set forth in Attachment 2.
1.32. "Subsidiary" shall mean any entity in which a party owns or
controls more than fifty percent (50%) of the voting interests.
1.33. "SUNI Software" means software developed by or for SUNI to
create an image in the system memory that is separate from the
Developed Subsystem and to provide the test image display routine
function.
1.34. "Tooling", means CCD Chip mask set for the DMD Approved
Vendor, and other hardware and software (in object code and source
code) as set forth in Attachment 3 that will be required by DMD for
the production of the Developed Subsystem by DMD or its
subcontractors in quantities contemplated by DMD under this
Agreement.
1.35. "X-Ray System" shall mean a digital x-ray system and each of
its component parts proposed to be marketed and sold by DMD, that
incorporates the Developed Subsystem and that also may include, but
not be limited to, the following additional items: DMD Software,
personal computer, peripheral devices such as monitors, video
cassette recorder and/or other recording devices, networking servers
and cabling, hand-held mouthpiece, and/or an x-ray emitter.
2. DEVELOPMENT WORK.
2.1. Design and Engineering Specification. SUNI will provide a
proposed Design and Engineering Specification to DMD on or before
the date specified in the Statement of Work. DMD and SUNI will use
commercially reasonable best efforts to reach agreement on the
Design and Engineering Specification within thirty (30) days from
DMD's receipt of the proposed Design and Engineering Specification.
If the parties have failed to agree to the proposed Design and
Engineering Specification within such time period, then either party
may terminate this Agreement upon ten(10) days notice to the other,
and neither party shall have any liability to the other arising out
of such failure or termination. No Sections of this Agreement shall
survive termination under this Section 2.1
2.2. Performance of Development Work. SUNI shall use reasonable best
efforts: (a) to perform all Development Work, and (b) to achieve
each milestone and provide the Deliverables in accordance with the
Statement of Work in conformity with the Design and Engineering
Specifications; provided however, that SUNI shall deliver the
Initial Prototype Developed Subsystem and the Final Prototype
Developed Subsystem in accordance with Section 2.3 below.
2.3. Delivery Dates. Subject to Sections 2.4 and 2.5 below, SUNI
shall (a) complete and deliver the Initial Prototype Developed
Subsystem no later than six (6) months after the Effective Date, and
(b) deliver the Final Prototype Developed Subsystem to DMD no later
than twelve (12) months after the Effective Date (the "Delivery
Date"), in each case, subject to change by mutual agreement as
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contemplated by Section 2.8 below. Each party acknowledges that
SUNI's ability to perform in accordance with the Statement of Work
schedule will be subject to DMD's timely performance of its
obligations under this Agreement and to the ability of any DMD
Approved Vendor to deliver CCD Chip Prototypes within the required
timeframe. SUNI shall provide DMD with progress reports, in
accordance with the Statement of Work. Each such report shall
reflect/indicate:
(i) Status of progress to current SOW milestone;
(ii) Short description of problems in meeting such milestone;
(iii) Proposed recovery method to meet next milestone if needed;
(iv) Any other information related to the Development Work
reasonably requested by DMD;
(v) Any anticipated changes in the projected cost of the
Developed Subsystem or Tooling.
2.4. Design Assumptions. Delivery Dates are based upon a CCD Chip
that incorporates scintillator-based technology.
2.5. DMD Approved Vendors. SUNI shall be responsible for having made
by the DMD Approved Vendors the Initial Prototype Developed
Subsystem and the Final Prototype Developed Subsystem. If a defect
in a Prototype or delay in delivery of a Prototype is caused by a
DMD Approved Vendor and such defect or delay results in a delay in
SUNI's performance of its obligations under this Agreement, then the
Statement of Work schedule and Delivery Dates specified in Section
2.3 above shall automatically be extended by the delay caused by the
DMD Approved Vendor.
2.6. Costs of Development Work. SUNI shall bear all costs of the
Development Work, other than as agreed as set forth in Section 2.8
below and as set forth in Section 3.5 below.
2.7. Progress Reviews. The parties agree to conduct regular program
reviews as shown on the Statement of Work, to ensure their mutual
satisfaction with the performance of the Development Work under the
Agreement. The parties agree to meet at a mutually agreeable time
and location to discuss and inspect the status of the Development
Work.
2.8. Changes to Specifications and Statement of Work. Prior to
delivery of the Initial Prototype Developed Subsystem, DMD and SUNI
shall meet to discuss any changes to the Design and Engineering
Specifications suggested by the other party, including, but not
limited to changes required by Regulatory Agencies. If a change is
required by a Regulatory Agency, then SUNI will make such change,
and DMD will pay for all costs that SUNI incurs in implementing such
change. All other changes will be subject to the parties' mutual
agreement on changes to the Statement of Work and timing and payment
for the incremental cost of such changes. DMD may also specify
changes to the Developed Subsystem design, schedule, and/or related
deliverable items in writing at any time; provided, however, that if
SUNI reasonably concludes that such change will result in a change
to the cost or time required for performance by SUNI of the
Development Work, or if SUM expects the
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change to affect the form, fit, function or manufacturing cost of
the Developed Subsystem, then SUNI will so notify DMD within ten
days after receipt of DMD's request. SUNI shall not implement any
change prior to the parties' written agreement on such
adjustment(s). If changes are to be paid for at an hourly rate, then
such rate shall be SUNI's standard rates for comparable work at the
time such changes are made.
2.9. Acceptance and Testing Procedures.
(a) Acceptance and Testing. DMD, with the assistance of SUNI if
requested by DMD, will examine and test each Prototype upon delivery
to determine whether the Prototype conforms to the Design and
Engineering Specifications and in the exercise of its sole
discretion generates image quality and clarity acceptable to DMD.
DMD shall, within ten (10) working days from delivery of each
Prototype: (i) accept the Prototype and so inform SUNI in writing;
or (ii) reject the Prototype and provide SUNI with a written
statement of nonconformity to the Design and Engineering Statement,
specifying in detail the Prototype's nonconformity, or, in the case
of an Initial Prototype Developed Subsystem specifying the basis for
a Discretionary Rejection, as described in greater detail in
subsection 2.9(b)(ii) below. If DMD does not provide such a
statement of non-conformity to the Design and Engineering
Specifications or notice of Discretionary Rejection within the said
acceptance period, then DMD will be deemed to have accepted the
Prototype.
(b) Consequences of Rejection.
(i) Failure to Conform to Design and Engineering Specification.
If DMD provides a statement of non-conformity within the
acceptance period, pursuant to Subsection (a) above, then
SUNI will use reasonable best efforts to correct the
nonconformity within fifteen (15) days from SUNI's receipt
of the statement of non-conformity. DMD shall re-test the
Prototype within ten (10) days of delivery of the corrected
Prototype, and the test and acceptance procedures set forth
in this Section shall apply to such re-test. If after two
(2) re-test cycles, SUNI has been unable to correct a
non-conformity that was the subject of a written statement
of nonconformity by DMD, in accordance with this Section,
then, unless the parties have otherwise developed a mutually
agreeable plan to correct the non-conformity, DMD may: (A)
terminate this Agreement upon sixty (60) days prior notice
to SUNI, and/or (B) obtain SUNI technical information
pursuant to Section 11 below and correct the non-conformity
itself. DMD may deduct from future royalties payable to SUNI
the reasonable cost of such corrections pursuant to Section
4.5 below. If DMD elects to terminate this Agreement and to
obtain the technical information as set forth in this
Section, then the following Sections shall survive such
termination: Sections 4 (Royalty); 6 (Intellectual Property
Ownership); 7 (License) 8 (Exclusive Marketing; Sensor
Technology Development); 11 (Delivery of Technology); 13
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(Confidential Information); 14 (Indemnification) 15
(Liability); and 16 through 33.
(ii) Discretionary Rejection. If DMD rejects an Initial
Prototype Developed Subsystem during the acceptance period
due to a determination by DMD that the Initial Prototype
Developed Subsystem does not produce image quality and
clarity acceptable to DMD in its sole discretion (a
"Discretionary Rejection"), then all Advance Payments due to
SUNI on or prior to the date specified in the Statement of
Work for delivery to DMD of the Initial Prototype Developed
Subsystem under Section 4.1 of this Agreement (the "Initial
Prototype Milestone Payments") and pursuant to Section 2.8
shall be deemed earned and shall not be refundable to DMD.
In such case, the obligation of DMD to make any further
Advance Payments shall be immediately suspended unless and
until SUNI, at its option, has delivered to DMD an Initial
Prototype Developed Subsystem determined by DMD in the
exercise of its sole discretion to generate image quality
and clarity acceptable to DMD, at which time, all Advance
Payments that would otherwise have become due during the
period that payments were suspended, shall be come due and
payable. If DMD advises SUNI in writing that it has elected
not to make any further Advance Payments, then SUNI shall be
relieved of any further obligations under this Agreement
(including but not limited to obligations under this Section
2 or Section 3 below). If as a result of a Discretionary
Rejection, the Initial Prototype Milestone Payments are
deemed earned by SUNI, DMD may take a credit against
subsequent royalty obligations to SUNI (after the fourth
anniversary of Commercial Commencement) in an amount equal
to the Initial Prototype Milestone Payments that have been
paid to SUNI
2.10. Access to SUNI Facilities. SUNI shall promptly upon request by
DMD at any time after the date of this Agreement until the earlier
of the date that this Agreement is terminated or the delivery of the
Final Prototype Developed Subsystem, provide to DMD reasonable
access to SUNI's facilities and information to inspect the progress
of the Development Work, and, in connection with such inspection,
shall provide to DMD access to technical advisory staff for a
reasonable time.
2.11. Improvements as of Agreement Date. The Deliverables delivered
hereunder shall, to the extent not otherwise contemplated by the
Design and Engineering Specifications, incorporate the latest
improvements to the CCD Chip Technology as of the Effective Date of
this Agreement, to the extent applicable in or useful in the Dental
Field. SUNI shall offer to DMD Improvements made after the Effective
Date of this Agreement in accordance with Section 5.2 below.
2.12. Software. SUNI will be responsible for the development of all
SUNI Software. DMD will be responsible for the development of all
DMD Software and for all changes to the Developed Subsystem and
Tooling that may be required as a
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result of changes in the operating system specified in the Design
and Engineering Specifications.
3. MANUFACTURE.
3.1. DMD Right to Manufacture. DMD shall have the right to
manufacture, or have manufactured by a DMD Approved Vendor, the
Developed Subsystem and Tooling as set forth in Section 7 below.
3.2. SUNI Assistance. SUNI shall provide all reasonable assistance
to the DMD Approved Vendor(s) and Documentation as set forth in the
Statement of Work.
3.3. Technical Support. SUNI shall, at no additional cost for up to
180 days following Commercial Commencement, provide to DMD and the
DMD Approved Vendor(s) technical support to facilitate a smooth and
cost effective commencement of production of the Developed Subsystem
and Tooling. SUNI will provide manufacturing drawings and
specifications to DMD in accordance with good commercial practice.
3.4. Training. SUNI shall, at no additional cost for up to 180 days
following Commercial Commencement, provide to DMD's personnel at
DMD's facilities in California, adequate training, as reasonably
determined and scheduled by DMD, for the integration and manufacture
of the Developed Subsystem as part of the X-Ray System, and provide
consulting services to DMD's software engineers to facilitate smooth
and efficient integration and transfer of responsibility for the
software and firmware included with the Developed Subsystems with
the other software and hardware components of the X-Ray System.
Thereafter, such training shall be provided by SUNI at a mutually
agreed cost to the parties consistent with SUNI's standard charges
to customers for similar services.
3.5. Tooling. Subject to the following sentence, SUNI will be
responsible for the cost of obtaining and delivering to DMD Tooling
for Prototypes. If the mask set to be used by the DMD Approved
Vendor is a six (6) inch Orbit Semiconductor mask set, then DMD will
be responsible for the cost of Tooling for Prototypes. Production
mask set Tooling, which DMD shall own, shall be retained for
production of CCD Chips by the DMD Approved Vendor for the CCD
Chips. DMD will be responsible for the cost of obtaining production
masks and production Tooling. If a mask is broken after delivery to
DMD or to a DMD Approved Vendor, then DMD will pay for the
replacement mask. If a Prototype mask is defective and if SUNI is
responsible for such defect, then SUNI will pay for the replacement
mask.
3.6. DMD Personnel. DMD personnel receiving training and technical
support from SUNI will have reasonable technical background and
experience in the areas in which such training and support is to be
provided.
4. ROYALTY. Subject to all the terms and conditions expressed in this Agreement,
and in consideration for the rights and licenses granted in Section 7 and the
hardware, software Tooling, services and support required to be provided by SUNI
hereunder, DMD shall pay royalties to SUNI as follows:
4.1. Advance Payments. During the development phase DMD shall pay to
SUNI prepaid royalties (the "Advance Payments") as set forth below.
All Advance
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**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
Payments paid to SUNI shall be recoupable as full credit from
royalties otherwise payable to SUNI after the fourth anniversary of
Commercial Commencement pursuant to Section 4.5 of this Agreement.
(a) Subject to Section 4.1(b) below, the Advance Payment shall
be paid in installments as follows:
<TABLE>
<CAPTION>
TIME AMOUNT
--------------------------------------------- ---------
<S> <C>
Upon the Effective Date $ **
On the last day of the first calendar month
during which the Effective Date occurs $ **
On the last day of the second calendar month
after the Effective Date $ **
On the last day of the third calendar month
after the Effective Date $ **
On the last day of the fourth calendar month
after the Effective Date $ **
On the last day of the fifth calendar month
after the Effective Date $ **
Upon the last day of each calendar month
commencing upon the earlier of the date that
is: (i) the calendar month of delivery to
DMD of the first production Developed
Subsystem by DMD Approved Vendors; or (ii)
three (3) months after DMD's acceptance of
the Final Prototype Developed System until
total payments under this Section 4.1(a)
equal $1,250,000. These Advance Payments are
subject to Subsection (b)(ii) below. $ **
=========
</TABLE>
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(b) Relief from Advance Payment Obligations. DMD may be relieved of
its obligations to make Advance Payments under any of the
circumstances described below:
(i) Failure of SUNI to Achieve a Reasonable Rate of Progress. If
SUNI fails to make reasonable progress towards meeting the
milestones set forth in the Statement of Work, then DMD may
give SUNI notice of the failure, and SUNI will then have
fifteen (15) days from receipt of such notice to achieve a
reasonable rate of progress with respect to the applicable
milestones. If SUNI fails to achieve reasonable progress
within such fifteen (15) day period, then DMD may either:
(A) terminate this Agreement and will be relieved of the
obligation to make any further Advance Payments; or (B)
suspend payment of Advance Payments. If DMD elects to
terminate this Agreement under this 4.1(b)(i), then the
following Sections shall survive such termination: Sections
4 (Royalty); 6 (Intellectual Property Rights); 7 (License);
8 (Exclusive Marketing; Sensor Technology Development); 11
(Delivery of Technology); 13 (Confidential Information); 14
(Indemnification); 15 (Liability); and 16 through 33. If DMD
elects to suspend Advance Payments then: (A) if SUNI
achieves a reasonable rate of progress during the next
thirty (30) days after the suspension, DMD will pay to SUNI
the withheld Advance Payments; and (B) if SUNI fails to
achieve a reasonable rate of progress during the next thirty
(30) days after the suspension, then the Agreement will
terminate and the Sections of this Agreement set forth in
the preceding sentence shall survive such termination. Upon
termination of this Agreement pursuant to this Subsection
4.1 (b)(i), DMD may obtain SUNI technology and may complete
the Developed Subsystem itself, pursuant to the terms and
conditions of Section 11 below. DMD shall be entitled to
deduct from any future royalty payments otherwise due under
this Agreement, the reasonable costs of completing the
Developed Subsystem so that it conforms to the Design and
Engineering Specifications, as set forth in Section 4.5
below.
(ii) Discretionary Rejection. Upon a Discretionary Rejection by
DMD, DMD may be relieved of its obligation to make Advance
Payments that would otherwise be due after delivery of the
Initial Prototype Developed Subsystem, as set forth in
Section 2.9(b)(ii) above.
4.2. Production Phase Royalty Payment. DMD shall pay SUNI royalties as
follows for each and every Licensed Product shipped. Royalties accrue on
Licensed Products sold, leased or otherwise transferred by DMD or, as
applicable, by DMD Affiliates, to their customers. No royalties shall be
paid by DMD for Licensed Products which are used internally by DMD for
purposes that include testing, evaluation, support, marketing,
demonstration or training provided that the duration
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**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
of such testing, evaluation, support, marketing, demonstration or training
does not exceed thirty (30) days. Royalties shall accrue on Licensed
Products used for more than thirty (30) days for testing, evaluation,
support, marketing, demonstration or training. Royalties shall accrue as
follows:
(a) For the period ending on the fourth anniversary of Commercial
Commencement:
(i) ** % of all Net Receipts until Net Receipts equal $ **
and
(ii) ** % of all Net Receipts after Net Receipts exceed $ **
(b) For the period following the fourth anniversary of Commercial
Commencement: ** % of all Net Receipts.
(c) Notwithstanding the foregoing, the minimum royalty payable for
each Licensed Product under this Section 4.2 shall be U.S. $ **.
4.3. Payment of Production Royalties. Within sixty (60) days after the end
of each calendar quarter during the term hereof, DMD shall provide SUNI
with a written report setting forth the amount of royalties earned by SUNI
during that calendar quarter pursuant to this Agreement and the amount of
any Advance Payment or Correction Amount applied against such royalty in
accordance with Section 4.5 below. DMD shall provide with each report a
check in the amount of any payment to be made, as indicated in the report.
4.4. Audit. DMD shall, for a period of two (2) years following the date of
each royalty report issued, keep records adequate to verify the substance
of the report and any accompanying payment. SUNI shall have the right, no
more than once each calendar year, to select a mutually acceptable
independent Certified Public Accountant to inspect the records of DMD
relating to the Licensed Products at a single location on reasonable
notice and during regular business hours to verify the reports and
payments made hereunder. The entire cost of such inspection shall be borne
by SUNI, and such Certified Public Accountant shall not disclose to SUNI
any information other than information relating to the computation and
accuracy of such reports and payments. Any information as to DMD's
customers will be treated as DMD confidential information and shall not be
disclosed to anyone other than the auditors. If the audit reveals that DMD
has under-reported royalties by more than ten percent (10%) in any
calendar year, DMD shall reimburse SUNI for the audit fees following
delivery to DMD of the auditors report detailing such under reporting of
royalties. In any event, DMD shall promptly repay, or apply against any
outstanding prepaid royalties, the underpayment.
4.5. Recovery of Advance Payments and Correction Amounts. All Advance
Payments and reasonable amounts paid by DMD to correct defects in or to
complete the Developed Subsystem in accordance with Sections 2.9(b)(ii),
or 4.1(b)(i) (the "Correction Amounts") are recoupable by credit against
future royalty payments due to SUNI under Section 4.2 after the fourth
anniversary of Commercial Commencement, as set forth in this Section. DMD
may deduct up to fifty percent (50%) of the royalty payments due for the
first two (2) calendar quarters of each calendar year after the fourth
anniversary of Commercial Commencement until such
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time as such deductions are equal to one hundred percent (100%) of the
Advance Payments paid to SUNI and 100% of DMD's reasonable Correction
Amounts. If, after the first two (2) calendar quarters of each calendar
year DMD has not recouped one hundred percent (100%) of the Advance
Payments and Correction Amounts, then DMD may recoup the balance of the
Advance Payments and Correction Amounts from up to one hundred percent
(100%) of future quarterly royalty payments otherwise payable during the
balance of that calendar year.
4.6. Late Payments. All late payments of amounts due under this Agreement
shall bear interest at a rate equal to the Bank of America Prime Rate plus
one percent (1%) from the date due until paid in full.
5. MAINTENANCE AND SUPPORT.
5.1.Support. SUNI shall provide the following support services to DMD and
to each DMD Approved Vendor as follows, at no charge until the 90th day
following Commercial Commencement, and, if thereafter requested by DMD,
shall be provided at rates consistent with SUNI's standard rates or upon
such other terms as may be mutually agreed:
(a) Telephone Support. SUNI will provide reasonable telephone
hot-line support for DMD and DMD Approved Vendors during SUNI's
normal hours of business for manufacture and product de-bugging of
CCD Chip wafers; and
(b) Technical Support and Training. SUNI will provide technical
support and training to DMD pursuant to Sections 3.3 and 3.4 above.
5.2.Improvements. During the term of this Agreement, SUNI will disclose to
DMD all Improvements that may be applicable to the Dental Field, and, if
DMD elects to have SUNI implement such Improvements as part of the
Developed Subsystem or Tooling, then SUNI shall deliver such Improvements
to DMD, and DMD shall pay for the cost of any modifications required to
enable DMD to use such Improvements in the Dental Field or to integrate
such Improvements into the Developed Subsystem, consistent with the scope
of DMD's license under this Agreement, at rates consistent with SUNI's
then standard rates during the term of this Agreement.
6. INTELLECTUAL PROPERTY OWNERSHIP.
6.1.SUNI Rights. SUNI shall own all Intellectual Property Rights in and to
the Licensed Technology, CCD Chip Technology, SUNI Software, Tooling,
masks and Developed Subsystem.
6.2. DMD Rights. Subject to SUNI's ownership of Intellectual Property
Rights as set forth in Section 6.1 above, DMD shall own all Intellectual
Property Rights in and to the X-Ray System and DMD Software and shall own
all right, title and interest in and to the physical embodiment of the
Tooling for the production version of the Developed Subsystem.
6.3. Patent Prosecution. Attachment 4 to this Agreement includes a list of
those countries in which, as of the date of this Agreement, SUNI intends
to seek patent protection with respect to CCD Chip Technology and Licensed
Technology. DMD may, from time to time, provide SUNI with a list of those
countries in which DMD
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** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION
wishes to obtain patent protection for any of the CCD Chip Technology or
Licensed Technology. If any such country is not included on the Attachment
4 list, then SUNI will seek and maintain patent protection in such
countries, provided that SUNI will first provide DMD with an estimate of
the cost of such protection, and DMD reimburses SUNI's reasonable costs
(including reasonable attorneys fees) in so doing.
6.4. Compensation. Each party shall be responsible for any compensation
which may be due its employees who make inventions.
6.5. Notice of Infringement. In performing SUNI's obligations under this
Agreement, SUNI agrees to avoid knowingly delivering, designing, and/or
developing an item that infringes one or more unlicensed patents, utility
models, design registrations, copyrights or trade secrets of any third
party. If during the course of performing SUNI's obligations under this
Agreement SUNI knows or becomes aware of any such patent, utility model,
design registration or copyright that SUNI believes might be infringed,
SUNI agrees to notify DMD promptly in writing of such possible
infringement.
7. LICENSE.
7.1. Grant of License. SUNI hereby grants to DMD and DMD hereby accepts an
irrevocable exclusive (subject to Section 7.3 below) worldwide right and
license ("License") in the Dental Field:
(a) Tooling. To use, disclose (subject to Section 13 below) make and
have made Tooling by a DMD Approved Vendor; and
(b) Developed Subsystems. To use, disclose (subject to Section 13
below), modify, maintain, make, have made by a DMD Approved Vendor,
sell, promote, distribute and lease Developed Subsystems and to
prepare derivative works of software that is included within the
Developed Subsystem for use in the Dental Field.
7.2. Sublicense Rights. DMD may grant sublicenses of the rights set forth
in Section 7.1 above to its Subsidiaries; provided that DMD shall remain
responsible for such sublicensee's performance of all obligations that
apply to DMD under this Agreement. All royalty payments under this
Agreement for both DMD and DMD Subsidiaries shall be made by DMD directly
to SUNI.
7.3. Circumstances Under Which the License Converts to a Non-exclusive
License. The License granted under Subsection 7.1 above shall
automatically become nonexclusive if any of the following circumstances
occurs:
(a) DMD Fails to Pay Minimum Royalty Payments. The License granted
under Subsection 7.1 above shall become non-exclusive if DMD fails,
with respect to any of the periods specified below to pay to SUNI
the minimum royalty amount specified for such period in the table
below:
<TABLE>
<CAPTION>
12 Months ending on: Amount:
------------------------------------------- -----------
<S> <C>
90 days following the first anniversary of $ **
Commercial Commencement
</TABLE>
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<PAGE> 15
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<TABLE>
<S> <C>
90 days following the second anniversary of $ **
Commercial Commencement
90 days following the third anniversary of $ **
Commercial Commencement
90 days following the fourth anniversary of $ **
Commercial Commencement
90 days following each subsequent $ **
Anniversary of Commercial Commencement
</TABLE>
All minimum royalty payments are due on the last day of the
applicable period. Late payments will bear interest in accordance
with Section 4.6. Notwithstanding anything to the contrary in the
foregoing, if DMD fails to pay a late payment in full within sixty
(60) days from the due date, then the license will convert to a
non-exclusive license.
(b) DMD Offers For Sale a Competing Product. The License granted
under Section 7.1 above shall become non-exclusive if DMD or a DMD
Affiliate offers for sale or lease any product in the Dental Field
that contains a semiconductor imaging chip unit that processes x-ray
images other than a Licensed Product that contains CCD Chip
Technology.
(c) DMD Exercises its Rights to Receive Technology in Order to
Complete or Correct the Developed Subsystem. If DMD exercises its
rights under either of Sections 2.9(b)(i) or 4.1(b)(i) to obtain
SUNI technical information pursuant to Section 11 of this
Agreement, and if DMD has not obtained a production version of the
Developed Subsystem within six (6) months after the date that is the
later of the date on which such technical information is delivered
to DMD and the date that was SUNI's Delivery Date for the Final
Prototype Developed Subsystem, then the License granted under
Section 7.1 above shall become non-exclusive.
(d) Notice by DMD. The License granted under Section 7.1 above shall
become non-exclusive if DMD provides SUNI with written notice
electing to convert the License into a non-exclusive license.
7.4. SUNI Rights if License Becomes Non-exclusive. If the License granted
under Section 7.1 above becomes non-exclusive, then SUNI shall have the
right to license the Licensed Technology to others for use in the Dental
Field; provided, however, that except where the License becomes
non-exclusive upon DMD's election as set forth in Section 7.3(d) above, no
other licensee may have greater or more favorable rights in the Dental
Field in any respect than are afforded to DMD hereby.
7.5. No Trademark License. Nothing in this Agreement shall be construed as
authorizing a party to use any trademark or trade name of the other.
8. EXCLUSIVE MARKETING; SENSOR TECHNOLOGY DEVELOPMENT.
8.1. Exclusive Marketing by SUNI. So long as the license granted under
Section 7.1
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remains exclusive, SUNI shall not sell or license to any person other than
DMD, or develop other than for DMD, any device competitive with the X-Ray
System or the Developed Subsystem for use or sale in the Dental Field.
SUNI shall not, however, be restricted by this Section 8.1 from
developing, selling or licensing any products or services for use outside
the Dental Field.
8.2. Sensor Technology Development.
(a) If DMD desires to add features to the Developed System or to
market a device competitive with the X-Ray System then before it may
do so, DMD will first give SUNI written notice of DMD's proposal for
additional features or a competing product. Within thirty (30) days'
of SUNI's receipt of such notice SUNI shall inform DMD, in writing,
as to whether SUNI desires to engage in discussions with DMD
concerning SUNI's performance of the work required to add features
or develop a competing product. If SUNI notifies DMD that it is not
interested in engaging in such discussions or fails to respond
within the thirty (30) day period to DMD's request, then on the date
that is six (6) months after the expiration of SUNI's thirty (30)
day response period, DMD may commence promotion and sale of a
product that is competitive with the X-Ray System. IF SUNI notifies
DMD within the thirty (30) day response period that SUNI wants to
engage in such discussions, then SUNI and DMD will have another
sixty (60) days from the date of SUNI's response to complete an
agreement concerning SUNI's work on the additional features or
development of a competing product. If SUNI and DMD fail to reach
agreement within such time period, then on the date that is six (6)
months after the expiration of the sixty (60) day negotiation
period, DMD may commence promotion and sale of a product that is
competitive with the X-Ray System.
(b) If, in compliance with Section 8.2(a) above, DMD shall offer for
sale any product in the Dental Field other than a Licensed Product
that contains a semiconductor imaging chip unit that processes x-ray
images, then the License granted under Section 7.1 shall immediately
cease to be exclusive.
9. REPRESENTATIONS AND WARRANTIES.
9.1. Representations and Warranties of DMD and SUNI. SUNI and DMD each
represent and warrant to the other that:
(a) It has all requisite power and authority to enter into this
Agreement and to carry out the transactions contemplated by this
Agreement;
(b) The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated by this Agreement
have been duly authorized by all requisite action on the part of
such party; and
(c) This Agreement has been duly executed and delivered by such
party and (assuming the due authorization, execution and delivery
hereof by the other party) is a valid and binding obligation of such
party, enforceable against it in accordance with its terms except as
enforcement of such terms may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the
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<PAGE> 17
enforcement of creditors' rights generally and by the availability
of equitable remedies and defenses.
9.2. Representations and Warranties of SUNI. SUNI represents and warrants
to DMD that:
(a) To SUNI's knowledge, all Deliverables have been or will be
designed for DMD, and SUNI either owns or has acquired rights in and
to, or will acquire right in and to, all Deliverables and no portion
of such items or their use or distribution violates any patent,
copyright, trade secret right, or similar right of any third party.
(b) SUNI has the rights it needs to satisfy its obligations
hereunder. Further, for so long as DMD's rights under this Agreement
remain in effect, SUNI agrees that it will not take any action which
would prevent DMD and its Subsidiaries from marketing the Developed
Subsystem anywhere in the world.
(c) SUNI shall use reasonable best efforts to perform all
Development Work and to provide the Deliverables in accordance with
the Statement of Work and Design and Engineering Specifications.
(d) To SUNI's knowledge, the CCD Chip does not and will not infringe
upon, or violate or misappropriate, in whole or in part, the rights
of any third party or entity, including but not limited to any
patent, copyright, trade secret, trade mark, service mark rights.
(e) To SUNI's knowledge, the CCD Chip is not the subject of any
litigation or claim that has given or might give rise to litigation
or any investigation or proceeding.
(f) SUNI will perform its obligations arising pursuant to this
Agreement in a diligent and professional manner using experienced
personnel.
(g) SUNI is free to enter into this Agreement and will not do or
permit any act which will materially interfere with or derogate from
the full performance of the Development Work or the exercise of
DMD's rights granted herein.
(h) The entering into and carrying out of the terms of this
Agreement will not violate or constitute a breach of any law,
judgment or agreement binding on SUNI.
(i) Immediately upon each element of the X-Ray System (other than
the Developed Subsystem and Tooling) coming into existence, title to
such element and all Intellectual Property Rights associated
therewith shall be owned by DMD free and clear of all liens,
interests or adverse claims imposed by or with the consent of SUNI.
SUNI shall promptly execute all documents necessary to assign such
rights to DMD.
9.3. LIMITATION ON WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
SECTION 9 ABOVE, NEITHER PARTY MAKES ANY WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR
A PARTICULAR PURPOSE AND NONINFRINGEMENT.
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10. TERM AND TERMINATION. This Agreement will continue in effect unless and
until terminated as follows:
10.1. Automatic Termination. This Agreement will terminate automatically
if the Effective Date has not occurred on or before the date that is
thirty (30) days after the date first set forth above in this Agreement,
unless both parties agree, in writing, to an extension of such thirty (30)
day period. Neither party shall have any liability to the other as a
result of a termination under this Section 10.1.
10.2. Termination by SUNI. SUNI may terminate this Agreement upon written
notice to DMD for the material breach by DMD of any of its material
obligations under this Agreement if DMD has not cured such breach within
the applicable notice period specified below.
(a) The notice period shall be ninety (90) days for a failure to pay
an amount due under this Agreement, provided that the reason for the
late payment is a bona fide cash flow problem that DMD is
experiencing, and DMD has not been late in delivering any other
payments due under the Agreement during the twelve (12) month period
preceding the payment due date.
(b) The notice period shall be thirty (30) days for a failure to pay
an amount due under this Agreement if the ninety (90) day notice
period described in Subsection 10.1(a) above does not apply.
(c) The notice period shall be sixty (60) days for any breach not
specified in subsections (a) and (b) above.
10.3. Termination by DMD. DMD may terminate this Agreement upon sixty (60)
days written notice to SUNI for the material breach by SUNI of any
material representation, warranty or obligation of SUNI contained or
referred to herein, provided that SUNI has failed to cure such breach
within such sixty (60) days; or (ii) pursuant to Sections 2.9(b)(i) or
4.1(b)(i) above.
10.4. Termination by Either Party. Either party may terminate this
Agreement if the other party becomes the subject of bankruptcy proceedings
not terminated within sixty days (60) of any filing. SUNI acknowledges
that if SUNI, as a debtor under the U.S. Bankruptcy Code, rejects this
Agreement, then DMD may elect to retain its rights under this Agreement as
provided in Section 365 (n) of the Bankruptcy Code. Upon written request
of DMD to SUNI or the Bankruptcy Trustee, SUNI or such Bankruptcy Trustee
shall not interfere with the rights of DMD as provided in this Agreement.
10.5. Discretionary Rejection is Not a Breach. Notwithstanding the
provisions of Sections 10.2 and 10.3 above a Discretionary Rejection shall
not be deemed to constitute a breach by SUNI of its obligations under this
Agreement.
11. DELIVERY OF SUNI TECHNOLOGY
11.1. Circumstances for Delivery. If, and only if, one or more of the
circumstances described under this Section 11.1 below exists, then DMD may
require SUNI to deliver to DMD the CCD Chip Technology and Licensed
Technology, pursuant to the terms and conditions described in Subsection
11.2 below:
(a) SUNI or its successor ceases doing business, or
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<PAGE> 19
(b) After failure to cure within the notice period specified in
subsection 10.2 above SUNI is in material breach of its obligations
to support the CCD Chips or is otherwise in material breach of this
Agreement and such breach makes it reasonably necessary for DMD to
have access to the CCD Chip Technology for the purposes set forth in
Section 11.2 below, DMD elects, in lieu of terminating this
Agreement, to receive the Technology from DMD under this Section
11; or
(c) DMD is entitled to receive the Technology under either of
Sections 2.9(b)(i) or 4.1(b)(i)
11.2. Delivery of SUNI Technology and License. If one or more of the
circumstances described in Subsection 11.1 above exists, then DMD may
require SUNI to deliver or cause to be delivered to DMD a copy of the then
most recent version of the CCD Chip Technology, Developed Subsystem,
Tooling and Licensed Technology, and all engineering schematics, design
information, plans, flow charts, data structures, any work in progress to
develop the Developed Subsystem and Tooling, and any available compilers,
assemblers, or other computer programs necessary to create an executable
version of the system, together with source code for SUNI Software and all
related documentation. DMD shall have a nontransferable, non-sublicensable
license to use such CCD Chip Technology and Licensed Technology internally
for the sole and limited purpose of manufacturing, maintaining, developing,
selling and distributing the Developed Subsystem. In addition, to the
extent Tooling or third party licensed technology held by SUNI would be
necessary or useful for DMD to have for the purpose of manufacturing,
maintaining and Developing the Developed Subsystem, SUNI will grant a
license or sublicense, as applicable, to DMD solely for the limited purpose
of using such Tooling or third party technology or modifying or maintaining
such Tooling for purposes consistent with the license set forth in Section
7.1(a) above. If such third party proprietary technology is not
transferable to DMD, then SUNI will identify for DMD the existence and
source of such technology in the Statement of Work. DMD ASSUMES ALL RISK,
RESPONSIBILITY AND LIABILITY ARISING OUT OF ITS USE AND MODIFICATION OF THE
CCD CHIP TECHNOLOGY, LICENSED TECHNOLOGY AND TOOLING PURSUANT TO THIS
SECTION AND WILL INDEMNIFY AND HOLD HARMLESS SUNI FROM AND AGAINST ANY
LOSSES, COSTS, LIABILITY OR DAMAGES THAT SUNI MAY SUFFER AS A RESULT OF
DMD'S ACTIVITIES UNDER THIS SECTION 11.
12. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS.
12.1. Each party agrees to comply, and do all things necessary to comply
with all applicable laws, regulations and ordinances that it is required to
comply with in the ordinary course of the conduct of its business, and
hereby certifies that as of the date of this Agreement it is in such
compliance.
12.2. DMD shall advise SUNI of all requirements of all laws, regulations
and ordinances of Regulatory Agencies applicable to the Dental Field
insofar as they relate to the activities to be performed by SUNI under this
Agreement in the form of a change to the Design and Engineering
Specification. SUNI shall make all required changes in accordance with
Section 2.8 of this Agreement.
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<PAGE> 20
12.3. DMD shall supply to SUNI, on a timely basis, as part of the
Regulatory Specifications, any features that are required for the Developed
Subsystem pursuant to regulations of Regulatory Agencies , and in any
event, shall provide such feature no later than the date specified in the
schedule incorporated in the Statement of Work as the "Regulatory
Specifications Cut-Off Date." Any regulations applicable to the Design and
Engineering Specifications adopted by a Regulatory Agency and not delivered
to SUNI by the "Regulatory Specifications Cut-Off Date" may be included in
the Design and Engineering Specifications only in accordance with Section
2.8 of this Agreement.
13. CONFIDENTIAL INFORMATION.
13.1. Confidential Information. DMD and SUNI each acknowledge that the
other possesses and will continue to possess information that has been
created, discovered, developed by or received by it, which information has
commercial value in its business or that of its customers and is not in
the public domain.
13.2. Obligations. DMD and SUNI will each use at least the same degree of
care to prevent disclosing to third parties the Confidential Information
of the other as it employs to avoid unauthorized disclosure, publication
or dissemination of its own information of a similar nature (including but
not limited to the use of written confidentiality agreements with
employees); provided, however, that the parties may disclose such
information to entities performing services required hereunder where (a)
use of such entity is authorized under this Agreement, (b) such disclosure
is necessary or otherwise naturally occurs in that entity's scope of
responsibility, (c) the entity agrees in writing to assume the obligations
described in this Section, and (d) the disclosing party assumes full
responsibility for the acts or omissions of such entity no less than if
the acts or omissions were those of the disclosing party. Any disclosure
to such entity shall be under the terms and conditions as provided herein.
Without limiting the generality of the foregoing, neither party will
publicly disclose the other's Confidential Information except to the
extent permitted by Section 13.5 without the prior written consent of the
other. Furthermore, neither DMD nor SUNI will (i) make any use of the
Confidential Information of the other except as contemplated by this
Agreement, or (ii) acquire any right in or assert any lien against the
Confidential Information of the other except as contemplated by this
Agreement.
13.3. Exclusions. Notwithstanding Section 13.2, this Section 13 will not
apply to any particular information which a party can demonstrate was (a)
at the time of disclosure to it, in the public domain; (b) after
disclosure to it, published or otherwise becomes part of the public domain
through no fault of the receiving party; (c) in the possession of the
receiving party at the time of disclosure to it; (d) received after
disclosure to it from a third party who had a lawful right to disclose
such information to it; or (e) independently developed by the receiving
party without reference to or use of Confidential Information of the
furnishing party. In addition, a party shall not be considered to have
breached its obligations under this Section 13 for disclosing Confidential
Information of the other party to the extent required to satisfy any legal
requirement of a competent government body provided that, (1) immediately
upon receiving any such request and to the extent that it may legally do
so, such party advises the other party promptly; (2) makes a reasonable
effort to obtain a protective order prior to making such disclosure in
order that
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the other party may interpose an objection to such disclosure; and (3)
takes action to assure confidential handling of the Confidential
Information.
13.4. Loss of Confidential Information. In the event of any disclosure or
loss of, or inability to account for, any Confidential Information of the
furnishing party, the receiving party will notify the furnishing party
immediately in writing of such occurrence.
13.5. Publicity. SUNI agrees not to disclose the fact that SUNI has
furnished or contracted to furnish to DMD the Developed Subsystem or
Tooling and/or services hereunder, or the terms and conditions of this
Agreement, without the express written consent of DMD. Neither party will
make any public announcement of this Agreement or its terms, or use the
name of the other party, without the other party's prior written request,
which consent shall not unreasonably be withheld.
14. INDEMNIFICATION.
14.1. Indemnification by SUNI.
(a) Obligation to Provide "Work Around". If a third party asserts a
claim that the Developed Subsystem or Tooling infringes the third
party's Intellectual Property Right (a "Claim"), then SUNI will use
commercially reasonable efforts, either: (A) to develop and
implement a non-infringing substitute for the infringing component
of the Developed Subsystem or Tooling, so long as the Developed
Subsystem and Tooling continue to conform to the Design and
Engineering Specification; or (B) at SUNI's expense, to obtain a
license from such third party that enables DMD to continue to
exercise its rights to the Developed Subsystem and Tooling as set
forth in this Agreement, provided that such license is available at
a reasonable rate not to exceed the amount of future royalties
payable to SUNI under this Agreement. If SUNI elects to implement a
work-around as set forth in Subsection (A) above, then SUNI will
provide to DMD an estimate of designing and implementing the
work-around plus reasonable overhead. DMD will pay SUNI upon receipt
of invoices from SUNI for all such costs. DMD may recover all
amounts that it pays to SUNI in accordance with the preceding
sentence by deducting from royalties otherwise payable to SUNI up to
one-twelfth (1/12) of such amounts during each month of the twelve
(12) month period that commences in the first month after DMD's
payment of such amounts.
(b) Obligation to Defend DMD. SUNI, at its own expense, will defend
DMD against all Claims.
(c) Obligation to Indemnify DMD. In addition to the obligations set
forth in Subsections 14.1 (a) and 14.1 (b) above:
(i) Damages Finally Awarded. SUNI will indemnify DMD against
damages finally awarded against DMD in favor of a third
party in a Claim or paid to the third party as a result of a
settlement of the Claim; and
(ii) Indemnified Losses. SUNI will indemnify and hold harmless
DMD against Indemnified Losses that DMD suffers as a result
of a Claim. For purposes of this Subsection, "Indemnified
Losses" are
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costs, expenses, losses, damages, and liabilities incurred
or suffered by DMD as a result of the Claim; provided that
SUNI has approved such Indemnified Losses, in writing,
before DMD incurred or suffered such losses (which approval
will not unreasonably be withheld or delayed).
(iii) Limitation On SUNI's Liability Under this Subsection. Any
liability that SUNI incurs pursuant to this Subsection 14.1
(c) will be limited to an amount that is equal to thirty
three and a third percent of the amount of all Advance
Payments made under this Agreement plus all royalties (other
than Advance Payments) paid under this Agreement, provided
that the total amount of such liability shall only be
recoverable from: (A) up to fifty percent (50%) of royalties
paid by DMD to SUNI under this Agreement prior to the date
that the Claim is made; plus (B) a 50% decrease in the
applicable royalty rate under this Agreement until such time
as all amounts due under this Section have been paid in full
Notwithstanding anything to the contrary in the foregoing,
such limitation on SUNI's liability will not apply to
Indemnified Losses that DMD incurs or suffers as a result of
SUNI's knowing and willful infringement of a third party's
Intellectual Property Rights.
(d) Exceptions to SUNI's Obligations Under Section 14.1. SUNI's
obligations under this Section 14.1 shall not extend to any infringement:
(i) caused solely by DMD's failure to pay for or implement a
non-infringing substitute offered or provided by SUNI in
accordance with Section 14.1 (a) above;
(ii) caused by a mandatory design change requested by DMD,
(iii) arising out of the use or combination of the Developed
Subsystem or Tooling with any other components,
(iv) caused by any change made by DMD to the Developed Subsystem
or Tooling if SUNI's unchanged Developed Subsystem or
Tooling, as applicable, does not infringe or allegedly
infringe the Intellectual Property Right in question; or
(v) resulting from corrections to or completion of the Developed
Subsystem or Tooling made by or for DMD pursuant to Section
11 above.
If an infringement or misappropriation action or claim against SUNI is
based on any of the circumstances described in this Section 14(d), then
DMD shall at its own expense defend and indemnify SUNI as set forth in
Section 14.2 below.
14.2. Indemnification by DMD.
(a) Obligation to Defend SUNI. DMD, at its own expense will defend SUNI
against any claim by third parties that (i) technology owned by DMD as set
forth in Sections 6.2 or 9.2(i) above, infringes third party Intellectual
Property Rights;
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(ii) against claims based on one or more of the circumstances set
forth in Subsection 14.1(d) above, except that with respect to
Section 14.1(d)(iii) above, such this Section shall apply only if
the claim arises out of the use or combination of the Developed
Subsystem of Tooling with any other components where DMD supplies
such components or creates the combination; and (iii) as set forth
in Section 11.2 above (a "DMD Claim").
(b) Obligation to Indemnify SUNI. In addition to the foregoing
obligation:
(i) Damages Finally Awarded. DMD will indemnify SUNI against
damages finally awarded against SUNI in favor of a third
party in a DMD Claim or paid to the third party as a result
of a settlement of the DMD Claim; and
(ii) Indemnified Losses. DMD will indemnify and hold harmless
SUNI against SUNI Indemnified Losses that SUNI suffers as a
result of a DMD Claim. For purposes of this Subsection
14.2(b)(ii), "SUNI Indemnified Losses" are costs, expenses,
losses, damages, and liabilities incurred or suffered by
SUNI as a result of the DMD Claim; provided that DMD has
approved such SUNI Indemnified Losses, in writing, before
SUNI incurred or suffered such losses (which approval will
not unreasonably be withheld or delayed).
(iii) Limitations on DMD Liability Under this Subsection. Any
liability that DMD incurs pursuant to Subsections 14.2(b)(i)
and (b)(ii) will be limited to an amount that is equal to
thirty three and a third percent of the amount of all
Advance Payments made under this Agreement plus all
royalties paid under this Agreement, provided that the total
amount of such liability shall only be recoverable from: (A)
an amount equal to up to fifty percent(50%) of royalties
paid by DMD to SUNI under this Agreement prior to the date
that the Claim is made; plus (B) a fifty percent (50%)
increase in the applicable royalty rate under this Agreement
until such time as all amounts due under this Section have
been paid in full. Notwithstanding anything to the contrary
in the foregoing, such limitation on DMD's liability will
not apply to SUNI Indemnified Losses that SUNI incurs or
suffers as a result of DMD's knowing and willful
infringement of a third party's intellectual Property Rights
or with respect to DMD's indemnity obligations with respect
to the circumstances described in Section 11.2 above.
14.3. Conditions of Indemnification. If either party receives a claim or
is subject to any claim as to which it is entitled to be defended or to
indemnification under Sections 14.1 or 14.2 above, then such indemnified
party shall promptly notify the indemnifying party in writing of the
claim. The indemnifying party's obligations under this Section 14 shall be
contingent upon: (i) the indemnifying party having sole control of the
defense or settlement of the claim (provided that if a settlement will
adversely affect DMD's license rights or either party's costs under this
Agreement, or otherwise affect the rights of the
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indemnified party, the indemnifying party shall not settle the case
without the prior consent of the indemnified party), and (ii) the
indemnified party providing all reasonable assistance requested by the
indemnifying party, at the indemnifying party's expense. THE REMEDIES FOR
INFRINGEMENT SET FORTH IN THIS SUBSECTION ARE EACH PARTY'S SOLE AND
EXCLUSIVE REMEDY FOR INFRINGEMENT.
15. LIABILITY.
15.1. General. Each party is responsible for its own acts and for the acts
of its employees.
15.2. No Consequential Damages. EXCEPT IN THE CASE OF A WILLFUL AND
INTENTIONAL BREACH OF A MATERIAL PROVISION OF THIS AGREEMENT, NEITHER
PARTY WILL BE LIABLE TO THE OTHER WITH RESPECT TO ANY SUBJECT MATTER OF
THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER
LEGAL OR EQUITABLE THEORY FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR
INDIRECT DAMAGES OR LOST PROFITS. THIS LIMITATION SHALL APPLY EVEN IF A
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
15.3. Limitation on Liability. EXCEPT FOR EACH PARTY'S INDEMNITY
OBLIGATIONS, WHICH ARE SUBJECT TO THE LIMITATIONS ON LIABILITY SET FORTH
IN SECTION 14 ABOVE, NEITHER PARTY'S AGGREGATE LIABILITY FOR ALL CLAIMS
ARISING OUT OF THIS AGREEMENT SHALL EXCEED THE FOLLOWING AMOUNTS:
(a) DMD's Maximum Liability. DMD's aggregate liability shall not
exceed an amount equal to:
(i) the amount of royalties DMD has paid to SUNI, plus
(ii) all royalties paid under this Agreement and the amount of
royalties both due and owing and payable to SUNI under
this Agreement; less
(iii) any amounts paid by DMD pursuant to Section 14;
Provided that the total amount of liability under this Section
shall only be recoverable from: (A) an amount equal to up to
fifty percent (50%) of royalties paid by DMD to SUNI under this
Agreement prior to the date that the Claim is made; plus (B) a
fifty percent (50%) increase in the applicable royalty rate
under this Agreement until such time as all amounts due under
this Section have been paid in full.
The foregoing limitation on DMD's liability shall not apply as to
any direct damages that SUNI suffers as a result of DMD's willful
and intentional breach of a material provision of this Agreement and
failure to cure such breach within the applicable notice and cure
period.
(b) SUNI's Maximum Liability. SUNI's aggregate liability shall not
exceed an amount equal to:
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<PAGE> 25
(i) Prior to Payment of All Advance Payments. Up to
such time as DMD has paid all Advance Payments to
SUNI, SUNI's liability shall not exceed
thirty-three and one-third percent (33-1/3%) of the
amount of Advance Payments paid to SUNI.
(ii) After Payment of All Advance Payments. After such
time as DMD has paid all Advance Payments to SUNI,
then SUNI's liability shall not exceed an amount
equal to:
A. Thirty Three and One Third Percent of the
Advance Payments paid to SUNI; plus
B. all royalties (other than Advance Payments)
paid under this Agreement, less
C. any amounts paid by SUNI pursuant to Section
14;
Provided that the total amount of liability under
this Section shall only be recoverable from: (A) up
to fifty percent (50%) of royalties paid by DMD to
SUNI under this Agreement prior to the date that
the Claim is made; plus (B) a 50% decrease in the
applicable royalty rate under this Agreement until
such time as all amounts due under this Section
have been paid in full.
(iii) Exception to Limitation on Liability. The foregoing
limitation on SUNI's liability shall not apply as
to any direct damages that DMD suffers as a result
of SUNI's willful and intentional breach of a
material provision of this Agreement and failure to
cure such breach within the applicable notice and
cure period.
15.4. Definition of "Willful and Intentional Breach". For purposes of this
Section 15, a "willful and intentional breach" shall mean a breach that results
from a party's willful act or omission where the party engaged in such act or
omission with knowledge and intent that such act or omission would result in a
breach of a material provision of this Agreement.
16. TAXES. The royalties specified in Section 4 above are exclusive of any
federal, state or local excise, sales, use and similar tax and other
governmental assessments, and, to the extent such taxes may apply, DMD shall
promptly pay all such amounts that are assessed or imposed (including, without
limitation, interest and penalties) with respect to the licenses granted and
Development Work performed under this Agreement, other than with respect to
SUNI's net income. Except as set forth above, SUNI will pay all taxes imposed in
connection with its performance under this Agreement. DMD will pay all taxes
imposed on DMD-owned assets and sales or retailers use taxes imposed on the
Developed Subsystem(s) or services provided hereunder.
17. SUNI'S EMPLOYEES. SUNI will have an appropriate agreement with each of
SUNI's employees, or others whose services SUNI may require sufficient to enable
SUNI to comply with all of the provisions of this Agreement.
18. SUNI NOT AGENT OF DMD. SUNI is and will remain at all times during this
Agreement an independent contractor. SUNI shall not be the agent or local
representative of DMD for any purpose whatsoever. SUNI is not granted any right
or authority to create any obligations, expressed or implied on behalf of DMD,
or to bind DMD in any manner whatsoever.
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<PAGE> 26
19. SURVIVAL. Subject to Section 2.1 above, and except as otherwise expressly
set forth in this Agreement, the rights and obligations of Sections 4 (Royalty),
6 (Intellectual Property Rights); 13 (Confidential Information); 14
(Indemnification); 15 (Liability) and 16 through 33, shall survive and continue
after any expiration or termination of this Agreement and shall bind the parties
and their legal representatives, successors, heirs and assigns.
20. ASSIGNMENT. SUNI's rights and obligations under this Agreement are personal
and not assignable (either voluntarily or by operation of law) without the prior
written consent of DMD except to a successor to all or substantially all of
SUNI's assets or to a majority of SUNI's voting stock; provided, however, that
if such successor is a direct competitor of DMD, then DMD's prior consent shall
be required, which consent may be withheld in DMD's sole discretion. DMD shall
not assign its rights and obligations hereunder without the prior written
consent of SUNI, which shall not be unreasonably withheld. This Agreement shall
be binding upon and inure to the benefit of each party's permitted successors
and assigns.
21. NOTIFICATION. All notices which any party may be required or desire to give
to another Party shall be in writing and shall be given by personal service,
facsimile, or registered or certified mail to the party at its respective
address or facsimile telephone number set forth below. Mailed notices shall be
deemed to be given upon actual receipt by the party to be notified. Notices
delivered by facsimile shall be confirmed in writing by overnight courier and
shall be deemed to be given upon actual receipt by the party to be notified.
If to DMD: President
Dental/Medical Diagnostic Systems, Inc.
200 North Westlake Blvd., Suite 202
Westlake Village, CA 91362
If to SUNI: President
SUNI Imaging Microsystems, Inc.
185 E. Dana Street
Mountain View, CA 94041
22. NON-WAIVER. The failure of any party at any time to require performance by
any other party of any provision of this Agreement shall not affect in any way
the full right to require such performance at any subsequent time; nor shall the
waiver by any party of a breach of any provision of this Agreement be taken or
held to be a waiver of the provision itself.
23. FORCE MAJEURE. No party shall be liable for, nor shall it be considered in
breach of this Agreement due to any failure to perform its obligations under
this Agreement as a result of natural calamity, act of God or a public enemy,
act of any military, civil or, to the extent not resulting from the intentional
or negligent acts or omissions of that party, and (i) act of regulatory
authority or (ii) change in any law or regulation. In such event, the party
whose performance is so prevented shall give prompt written notice to the other
and shall take all reasonable steps to avoid or remove such causes of
nonperformance. If it reasonably appears that the time for delivery or
performance under this Agreement will be extended for more than
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<PAGE> 27
three (3) months due to Force Majeure, the party due performance shall have the
right to terminate this agreement without obligation to the other.
24. INJUNCTIVE RELIEF. Each party agrees that in the event of any breach by the
other party of any of the covenants and agreements set forth in Sections 7
(License), 11 (Delivery of Technology) or 13 (Confidentiality) of this Agreement
the non-breaching party may encounter extreme difficulty in attempting to prove
the actual amount of damages suffered by it as a result of such breach and may
not have adequate remedy at law in such event. Each party therefore agrees that,
in addition to any other remedy available at law or in equity, in the event of
such breach, either party shall be entitled to seek and receive specific
performance and temporary, preliminary and permanent injunctive relief from
violation of any of said covenants and agreements from any court of competent
jurisdiction without necessity of proving irreparable harm or the amount of any
actual damage to either party resulting from such breach.
25. REMEDIES. The remedies for breach set forth in this Agreement are, unless
specifically stated to the contrary in any instance, cumulative and are in
addition to any other remedies in law or equity. Unless specifically stated to
the contrary in any instance, the election of one or more remedies shall not bar
the use of other remedies.
26. SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable for any reason, such invalidity shall not affect the validity of
the remaining provisions of this Agreement, and the Parties shall attempt to
substitute for the invalid provision a valid provision which closely
approximates the intent and economic effect of the invalid provisions.
27. SECTION HEADINGS. The section headings in this Agreement are solely for
convenience and shall not be considered in its interpretation.
28. INTERPRETATION. This Agreement and all of the provisions of this Agreement
shall be deemed drafted by all of the parties hereto. This Agreement shall not
be interpreted strictly for or against any Party, but solely in accordance with
the fair meaning of the provisions hereof to effectuate the purpose and intent
of this Agreement.
29. COUNTERPARTS. This Agreement may be executed by the parties in one or more
counterparts, and each of which when so executed shall be an original, but all
such counterparts shall constitute one and the same instrument.
30. GOVERNING LAW. This Agreement, its validity, construction and effect shall
be governed by the internal laws of the State of California, without giving
effect to its rules relating to conflicts of laws.
31. TIME IS OF THE ESSENCE. The parties agree that time is of the essence in the
performance of their respective material obligations hereunder.
32. EXHIBITS. The following Exhibits and Attachments are attached to this
Agreement and incorporated by reference:
Attachment 1 Design and Engineering Specification
Attachment 2 Statement of Work
Attachment 3 Tooling (hardware and software required by
DMD)
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<PAGE> 28
Attachment 4 Countries in which SUNI intends to seek
patent protection.
Attachment 5 Regulatory Specification
33. PREVAILING PARTY. The prevailing party in any litigation between the parties
that arises out of this Agreement shall be entitled to recover reasonable
attorneys fees, costs and expense that the party incurred as a result of such
litigation.
34. ENTIRE AGREEMENT. This Agreement and its exhibits contains the entire
understanding of the parties with respect to the matters contained herein. There
are no promises, covenants or undertakings, either oral or in writing, other
than those expressly set forth in this Agreement. This Agreement may not be
modified except by a writing signed by authorized representatives of all
parties.
35. RESCISSION RIGHT. If either party sends to the other party before 3:00 PM
PST on October 13, 1997, a written notice that such party is rescinding this
Agreement, then this Agreement shall terminate and be of no further force and
effect. Neither party shall have any liability arising out of a termination or
rescission under this Section 35.
IN WITNESS WHEREOF, the parties to this Agreement have caused it to be
executed by their duly authorized officers as of the date set forth on the cover
hereof.
DENTAL/MEDICAL DIAGNOSTICS, INC.
By: /s/ R. E. WITTMAN
---------------------------------
Its: Vice President
and CFO
SUNI IMAGING MICROSYSTEMS, INC.
By: /s/ PAUL SUNI 10-21-97
---------------------------------
Its: President and CEO
Page 28
<PAGE> 29
ATTACHMENT 1
DESIGN AND ENGINEERING SPECIFICATION
<PAGE> 30
ATTACHMENT 1 -
**
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
1
<PAGE> 31
ATTACHMENT 1 -
**
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
2
<PAGE> 32
**
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
___________________
Suni Imaging Microsystems, Inc.
PROPRIETARY
<PAGE> 33
**
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
___________________
Suni Imaging Microsystems, Inc.
PROPRIETARY
<PAGE> 34
**
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
___________________
Suni Imaging Microsystems, Inc.
PROPRIETARY
<PAGE> 35
**
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
___________________
Suni Imaging Microsystems, Inc.
PROPRIETARY
<PAGE> 36
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION
**
Suni Imaging Microsystems, Inc.
PROPRIETARY
<PAGE> 37
**
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION
<PAGE> 38
**
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION
<PAGE> 39
**
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
-------------------------------
Suni Imaging Microsystems, Inc.
PROPRIETARY
<PAGE> 40
SUNI IMAGING MICROSYSTEMS, INC.
**
SUNI PROPRIETARY
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE> 41
ATTACHMENT 2
STATEMENT OF WORK
<PAGE> 42
ATTACHMENT 2 -- SUNI/DMD Statement of Work
SUNI/DMD STATEMENT OF WORK
**
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION
3
<PAGE> 43
ATTACHMENT 2 -- SUNI/DMD Statement of Work
**
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION
4
<PAGE> 44
ATTACHMENT 3
TOOLING (HARDWARE AND SOFTWARE REQUIRED BY DMD)
<PAGE> 45
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
ATTACHMENT 3--Required Tooling
**
5
<PAGE> 46
ATTACHMENT 4
COUNTRIES IN WHICH SUNI INTENDS TO SEEK PATENT PROTECTION
<PAGE> 47
ATTACHMENT 4--Countries where SUNI intends to file for patent protection
Countries where SUNI Intends to seek patent protection.
**
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
6
<PAGE> 48
ATTACHMENT 5
REGULATORY SPECIFICATION
[To be provided at a later date]
<PAGE> 1
EXHIBIT 10.38.1
SUNI AGREEMENT
AGREEMENT EXTENSION
The parties, Dental/Medical Diagnostic Systems, Inc. and Suni Imaging
Microsystems, mutually agree to extend the automatic termination as set forth in
Section 10.1 of the Agreement dated October 10, 1997 from a 30-day period to a
35-day period.
/s/ RONALD E. WITTMAN
----------------------------------------
Ronald E. Wittman
Vice President & Chief Financial Officer
Dental/Medical Diagnostic Systems, Inc.
/s/ PAUL SUNI 11-7-97
----------------------------------------
Paul Suni
President
Suni Imaging Microsystems
<PAGE> 1
EXHIBIT 10.39
-------------
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
PURCHASE AGREEMENT
$4,500,000 Principal Amount of 12% Senior Subordinated Notes
Due 1999
Dated as of March 2, 1998
To the Purchasers named in Schedule 1 hereto:
The undersigned, Dental/Medical Diagnostic Systems, Inc., a
Delaware corporation (the "Company"), agrees with you as follows:
SECTION 1. DESCRIPTION OF NOTES; COMMITMENT; SALE AND PURCHASE AND
CONVERSION.
Section 1.1 Description of Notes. The Company has authorized the
issue and sale of $4,500,000 aggregate principal amount of its 12% Senior
Subordinated Notes due 1999 (the "Notes") to be dated the date of issue, to bear
interest from such date at the rate of 12% per annum, payable semi-annually, or
if any day on which such interest payment is due is not a Business Day, on the
next preceding Business Day, and to bear interest on overdue principal
(including any overdue required or optional prepayment of principal) and
premium, if any, and (to the extent legally enforceable) on any overdue
installment of interest at the Overdue Rate from the date such payment is due,
whether by acceleration or otherwise, until paid, to be expressed to mature on
the first anniversary of the date of issuance (the "Maturity Date") and to be
substantially in the form attached hereto as EXHIBIT A. Interest on the Notes
shall be computed on the basis of a 360-day year or twelve 30-day months. The
Notes are subject to prepayment in whole or in part or redemption at the option
of the Company at any time prior to their expressed Maturity Date on the terms
and conditions and in the amounts and with the premium, if any, set forth in
Section 3 of this Agreement. Each of the Notes is convertible into shares of
Common Stock of the Company, par value $.01 per share, (the "Conversion Shares")
only upon the terms and conditions set forth in Section 1.4 below. The term
"Notes" as used herein means the Notes delivered pursuant to this Agreement. The
terms that are capitalized herein shall have the meanings set forth in Section
10 hereof unless the context shall otherwise require.
Section 1.2 Description of Warrants. The Company has authorized
the issue and sale of 450,000 warrants (the "New Warrants") to purchase Common
Stock to be dated the Closing Date and to be substantially in the form attached
hereto as EXHIBIT B.
1
<PAGE> 2
Section 1.3 Commitment; Sale and Purchase. The Notes and New
Warrants will be issued and sold pursuant to this Agreement between you and the
other Purchasers and the Company dated the date first above written for the
aggregate purchase price in cash of $4,500,000. The Notes and the New Warrants
delivered to you on the Closing Date (as defined below) will be delivered to you
in the form of a single registered Note for the full amount of your purchase
(unless different denominations are specified by you) and a single New Warrant
Certificate, registered in your name or in the name of such nominee as you may
specify and in the form attached hereto as EXHIBIT A, and EXHIBIT B. On the
terms and subject to the conditions set forth in this Agreement, each of the
Purchasers agrees to purchase at the Closing from the Company, the aggregate
amount of Notes and New Warrants allocated to each such Purchaser as set forth
on SCHEDULE 1 to this Agreement, for the purchase price set forth for each such
Purchaser on SCHEDULE 1. Upon execution of this Agreement, each Purchaser shall
deliver to the Escrow Account (as defined below) by wire transfer an amount
equal to the purchase price for the Notes and New Warrants being purchased by
each such Purchaser. The agreement to purchase Notes and New Warrants by the
Purchaser set forth in this Agreement is irrevocable by the Purchaser but will
not constitute an agreement between the Purchaser and the Company until this
Agreement is accepted and executed by the Company and, if not so accepted, the
agreement to deliver the Notes and Warrants and the obligations of the Purchaser
hereunder will terminate. All amounts received from the Purchasers by the
Company as the Purchase Price for the Notes and New Warrants shall be held in
trust in an escrow account ("Escrow Account") to be established by Troop
Meisinger Steuber & Pasich, LLP its bank. All said amounts will be held in the
Escrow Account until the Closing shall have occurred.
Section 1.4 Conversion. Upon the occurrence of a Conversion
Event, each Note holder shall have the right, at such holder's option, to elect
to require the Company to convert, at a price per share equal to the Conversion
Price on the Conversion Date, a portion of the unpaid principal and accrued
interest of such holder's Note into a number of Conversion Shares which does not
exceed the Initial Conversion Allocation of such Note. If shareholder approval
is obtained for issuance of the Contingent Shares pursuant to Section 5.6, such
holder may elect to require the Company to convert, at a price per share equal
to the Conversion Price on the Conversion Date, up to the entire aggregate
unpaid principal and interest then due under any Note held by such holder, in
accordance with Section 7.3 of this Agreement. Fractional Shares of Common Stock
are not to be issued upon conversion, but, in lieu thereof, the Company will pay
a cash adjustment based on the Conversion Price. Except where cash payment is
required as an adjustment as described above, no interest, principal or premium,
if any, will be payable by the Company on any Note surrendered for conversion
subsequent to the Conversion Date. The election to convert shall be made by the
holder in accordance with the terms and provisions of Section 7.3 of this
Agreement. The Conversion Notice shall be accompanied by an executed Investment
Letter of the holder in the form attached hereto as EXHIBIT C. The Conversion
Shares are subject to Securities Laws and other restrictions as set forth in
Section 9.1 of this Agreement unless a current registration statement is in
effect under the Securities Act. The Company will issue to the holder of each
Note a replacement Note with respect to any amounts remaining due and payable to
the holder following any conversion as provided in Section 11.6.
2
<PAGE> 3
Section 1.5 Closing; Escrow Account. Subject to satisfaction of
the conditions set forth in Section 2 below, the Closing of the purchase and
sale of the Notes and the New Warrants pursuant to this Agreement shall take
place at the offices of Troop Meisinger Steuber & Pasich, LLP, 10940 Wilshire
Boulevard, Los Angeles, California 90024, on the third business day following
receipt by the Company of the permit or qualification issued by the Department
of Corporations of the State of California, as set forth in Sections 5.5 and
3.2(d) below, which in any event shall occur on or before March 22, 1998, or
such later date as the Company and you shall mutually agree. The date of such
Closing is hereinafter referred to as a "Closing Date." At the Closing, the
Company shall deliver to each Purchaser a certificate or certificates evidencing
the Notes and New Warrants purchased by such Purchaser, against delivery to the
Company from the Escrow Account of the Purchase Price therefor. Troop Meisinger
Steuber & Pasich is hereby instructed to deliver to the Company such amounts as
the Company shall instruct by written notice executed and delivered to Troop
Meisinger Steuber & Pasich by the President or Chief Financial Officer of the
Company and the parties, and may rely exclusively and without further
investigation upon such instructions.
SECTION 2. CLOSING CONDITIONS.
Section 2.1 Conditions to Your Obligation to Close. Your
obligation to purchase the Notes on the Closing Date shall be subject to the
satisfaction (or waiver by the Purchasers pursuant to Section 8 below) of the
following conditions on or before the Closing Date:
(a) The Company's representations and warranties contained
in Section 6 shall be true and correct in all material respects at and as of the
Closing Date.
(b) The Company shall have performed and complied in all
material respects with all agreements, covenants and conditions contained herein
which are required to be performed or complied with by the Company on or before
the Closing Date.
(c) Pursuant to an application filed therefor as provided
in Section 5.5 below, a permit shall have been issued under Section 25113 of the
California Corporations Code of 1968, as amended (the "California Code") by the
California Commissioner of Corporations pursuant to the Rules and Regulations
promulgated under the California Code.
Section 2.2 Conditions to the Company's Obligation to Close. The
Company's obligation to sell to you the Notes on the Closing Date shall be
subject to the satisfaction (or waiver by the company) of the following
conditions on or before the Closing Date:
(a) Your representations and warranties contained in
Section 6.2 shall be true and correct in all material respects at and as of the
Closing Date.
(b) The Company shall have received agreements from
Purchasers acceptable to the Company to purchase at least $3,000,000 in
principal amount of the Notes.
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<PAGE> 4
(c) No suit, action, proceeding or investigation shall
have occurred, be pending or threatened which would or seek to prevent or delay
beyond the date of the Closing the consummation of the transactions contemplated
by this Agreement.
(d) Pursuant to an application filed therefor as provided
in Section 5.5 below, a permit shall have been issued under Section 25113 of the
California Code by the California Commissioner of Corporations pursuant to the
Rules and Regulations promulgated under the California Code.
SECTION 3. PREPAYMENT OF NOTES. Except as described below in this Section 3, the
Notes will not be subject to prepayment and redemption by the Company prior to
the Maturity Date.
Section 3.1 Optional Prepayments. The Company shall have the
privilege at any time of prepaying the outstanding Notes, in whole or in part,
by payment of a redemption price in cash equal to 102% of the principal amount
of the Notes together with accrued and unpaid interest to the date fixed for
prepayment.
Section 3.2 Mandatory Prepayment. Promptly upon the occurrence of
a Liquidity Event and as a condition thereto, the Company shall prepay the
outstanding Notes, in whole and not in part, by payment in cash equal to 102% of
the principal amount of the Notes, plus accrued and unpaid interest thereon, if
any, to the date of such prepayment.
Section 3.3 Notice of Prepayments. The Company will give notice
of any prepayment of the Notes to each holder thereof, not less than 30 days nor
more than 60 days before the date fixed for such prepayment. Any notice of
prepayment hereunder shall specify (a) such date or approximate date, as the
case may be, for prepayment, (b) the subsection of this Agreement under which
the prepayment is to be made, (c) the aggregate principal amount of Notes to be
redeemed and (d) the accrued interest applicable to the prepayment. Such notice
of prepayment shall also certify all facts which are conditions precedent to any
such prepayment. Notice of prepayment having been so given, the aggregate
principal amount of the Notes specified in such notice, together with accrued
interest thereon shall become due and payable on the prepayment date.
Section 3.4 Direct Payment. Notwithstanding anything to the
contrary in this Agreement or the Notes, in the case of any Note owned by (or by
a nominee of) a holder that has given written notice to the Company requesting
that the provisions of this Section 3.4 shall apply, the Company will promptly
and punctually pay when due the principal thereof and premium, if any, and
interest thereon, without any presentment thereof, directly to such holder or
such nominee, at the address thereof set forth in Schedule I or at such other
address as such holder may from time to time designate in writing to the Company
or, if a bank account is designated in any written notice to the Company from
such holder, the Company will make such payments in immediately available funds
to such bank account, no later than 1:00 p.m., New York time, on the date due,
marked for attention as indicated, or in such other manner or to such other
account of such holder in any bank in the United States as such holder may from
time to time direct in writing. If for any reason
4
<PAGE> 5
whatsoever the Company do not make any such payment by such 1:00 p.m.
transmittal time, such payment shall be deemed to have been made on the next
following Business Day and such payment shall bear interest at the Overdue Rate.
SECTION 4. SUBORDINATION.
Section 4.1 Notes Subordinated to Senior Indebtedness. The
Company and each of you, by your acceptance of the Notes, agrees that the
payment of the principal of, premium, if any, and interest on the Notes is
subordinated, to the extent and in the manner provided in this Section 4, to the
prior payment in full, in cash or cash equivalents, of all Senior Indebtedness.
This Section 4 shall constitute a continuing covenant to all persons who, in
reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, and such provisions are made for the benefit of the holders of
Senior Indebtedness, and such holders are made obligees hereunder and any one or
more of them may enforce such provisions.
As a holder of Notes you agree that whatever right, title and
interest, if any, that you have or may hereafter have in and to any assets
provided to secure the principal of or premium or interest on the Notes,
excluding the right to convert the Notes to Common Stock as provided in Section
1.4, shall at all times and in all respects be subject and subordinate to the
right, title and interest (including security interest) in any such assets, if
any, provided to secure the Senior Indebtedness unless and until the Senior
Indebtedness has been paid in full in cash or cash equivalent. You agree that
any and all right to set off any Indebtedness, obligation or liabilities you owe
to the Company against the principal of or premium, or interest on the Notes and
the right to assert any counterclaim in respect thereof is subject to the
subordination provisions of this Section 4 and shall not be asserted unless and
until the Senior Indebtedness has been paid in full in cash or cash equivalents
(or such payment has been duly provided for).
Section 4.2 No Payment on Notes in Certain Circumstances.
(a) No payment shall be made on account of principal of,
premium, liquidated damages or interest on the Notes (other than principal,
interest, premium or liquidated damages paid with Junior Securities) (i) upon
the maturity of any Senior Indebtedness by lapse of time, acceleration or
otherwise, unless and until all Senior Indebtedness shall first be paid in full,
in cash or cash equivalents, or duly provided for, or (ii) upon the happening of
any default in payment of any principal of, interest on or reimbursement
obligations in respect of any Senior Indebtedness when the same becomes due and
payable, unless and until such default shall have been cured or waived or shall
have ceased to exist.
(b) No direct or indirect payment or distribution by or on
behalf of the Company in respect of the Notes (other than principal, interest,
premium or liquidated damages paid with Junior Securities) shall be made if, at
the time of such payment or distribution there exists or would exist, without
regard to any grace period or lapse of time, (i) a default in the payment of any
obligations owing with respect to any Senior Indebtedness or (ii) any default
under Sections 7.1(g)
5
<PAGE> 6
or 7.1(i) of this Agreement (collectively a "Payment or Bankruptcy Default"). In
addition, during the continuance of any other event of default with respect to
any Senior Indebtedness pursuant to which the maturity thereof may be
accelerated, (x) upon receipt by the Company and holders of the Notes of written
notice of such event of default and commencement of a "Payment Blockage Period"
(as defined below) from the Senior Lender, or (y) if such event of default
results from the failure to make any payment due with respect to the Notes, upon
the date of such failure, no such payment or distribution may be made by or on
behalf of the Company upon or in respect of the Notes for a period ("Payment
Blockage Period") commencing on the earlier of the date of receipt of such
notice or the date of such failure and ending 180 days thereafter (unless such
Payment Blockage Period shall be terminated by written notice to the holders of
the Notes from the Senior Lender). For all purposes of this Section 4.2(b), a
Payment Blockage Period may not be commenced by a holder of Senior Indebtedness
until the first Business Day immediately following the next scheduled interest
payment date on the Notes occurring after the expiration or termination of any
previous Payment Blockage Period. During any Payment Blockage Period or any
period commencing on the date of a Payment or Bankruptcy Default ("Monetary
Default or Bankruptcy Period") (unless such Monetary Default or Bankruptcy
Period or Payment Blockage Period shall be terminated by written notice to the
holders of the Notes from the Senior Lender), the holders of the Notes shall
not, directly or indirectly, sue for, in whole or in part, any payment or
distribution in respect of the Note, foreclose on any assets of Company, or file
or otherwise commence any bankruptcy or insolvency proceeding against Company
unless the maturity of the Senior Indebtedness has been accelerated, and unless
the holders of the Notes have notified the holders of the Senior Indebtedness of
their intent to take any such action. Until all Senior Indebtedness is paid in
full, the holders of the Notes shall not accept or receive, directly or
indirectly, any prepayment of the principal indebtedness of the Notes, whether
by acceleration or otherwise, without the prior written consent of the Senior
Lender; provided, however, no consent shall be required in order to prepay the
Notes as contemplated by Section 3 hereof upon the occurrence of a Liquidity
Event. Except as otherwise prohibited by this Section 4.2, however, the holders
of Notes shall be entitled to receive regularly scheduled payments of interest
on, and regularly scheduled payments of principal of, the Notes. Notwithstanding
the foregoing, in the event the Notes mature (on the Maturity Date and not by
reason of acceleration) during any Monetary Default or Bankruptcy Period, in no
event shall such Monetary Default or Bankruptcy Period continue for more than
180 days after the Maturity Date of the Notes. Nothing in this Section 4.2(b)
shall impair or prohibit the holder's right to convert any Notes to Common Stock
as provided in Section 1.4 of this Agreement.
(c) If, notwithstanding the foregoing provisions of this
Section 4.2, any payment on account of principal of or interest, premium or
liquidated damages on the Notes (other than principal, interest, premium or
liquidated damages paid with Junior Securities) shall be made by or on behalf of
the Company and received by any holder of Notes, at a time when such payment was
prohibited by the provisions of this Section 4.2, then, unless and until such
payment is no longer prohibited by this Section 4.2, such payment shall be
received and held by such holder for the benefit of and shall be immediately
paid over to the Senior Lender for application to payment of all Senior Lender's
Indebtedness in full, and if any amounts remain, then to the holders of Senior
Indebtedness or their representatives, pro rata according to the respective
amounts of the Senior Indebtedness held
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<PAGE> 7
or represented by each, for application to the payment of all Senior
Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness in full in cash or cash equivalents in accordance with its terms,
after giving effect to any other payment or distribution or provision therefor
to or for the holders of Senior Indebtedness, but only to the extent that, upon
notice from the Company to the holders of Senior Indebtedness that such
prohibited payment has been made, the holders of the Senior Indebtedness (or
their representative or representatives or a trustee) notify the Company and the
holders of Notes of the amounts then due and owing on the Senior Indebtedness,
if any, and only the amounts specified in such notice shall be paid to the
holders of Senior Indebtedness.
(d) The Company shall give written notice to each holder
of Notes of any default or event of default under, or any acceleration of, any
Senior Indebtedness promptly upon becoming aware thereof.
Section 4.3 Notes Subordinated to Prior Payment of All Senior
Indebtedness on Dissolution, Liquidation or Reorganization of the Company. Upon
any distribution of assets of the Company and upon any dissolution, winding up,
liquidation or reorganization of the Company (including, without limitation, in
bankruptcy, insolvency or receivership proceedings or upon any assignment for
the benefit of creditors):
(a) the holders of all Senior Indebtedness shall first be
entitled to receive payments of all Senior Indebtedness in full, in cash or cash
equivalents (or to have such payment duly provided for), before the holders of
the Notes are entitled to receive any payment on account of the principal of or
interest, premium or liquidated damages on the Notes (other than principal,
interest, premium or liquidated damages paid with Junior Securities);
(b) any payment or distribution of assets of the Company
of any kind or character, whether in cash, property or securities, to which the
holders of the Notes would be entitled except for the provisions of this Section
4, shall be paid by the liquidating trustee or agent or other person making such
a payment or distribution, directly to the holders of Senior Indebtedness or
their representatives, pro rata according to the respective amounts of Senior
Indebtedness held or represented by each, to the extent necessary to make
payment in full, in cash or cash equivalents, of all Senior Indebtedness
remaining unpaid after giving effect to any concurrent payment or distribution
or provision therefor to the holders of such Senior Indebtedness; and
(c) in the event that, notwithstanding the foregoing, any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, shall be received by the holders of the
Notes on account of principal of or interest, premium or liquidated damages on
the Notes (other than principal, interest, premium or liquidated damages paid
with Junior Securities) before all Senior Indebtedness is paid in full, in cash
or cash equivalents, or provision made for its payment, such payment or
distribution shall be received and held for and shall be paid over to the
holders of the Senior Indebtedness remaining unpaid or unprovided for or their
representatives (pro rata according to the respective amounts of Senior
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<PAGE> 8
Indebtedness held or represented by each), for application to the payment of
such Senior Indebtedness until all such Senior Indebtedness shall have been paid
in full, in cash or cash equivalents, after giving effect to any other payment
or distribution or provision therefor to the holders of such Senior
Indebtedness, but only to the extent that, upon notice from the Company to the
holders of Senior Indebtedness that such prohibited payment has been made, the
holders of the Senior Indebtedness (or their representative or representatives
or a trustee) notify the Company of the amounts then due and owing on the Senior
Indebtedness, if any, and only the amounts specified in such notice shall be
paid to the holders of Senior Indebtedness.
The Company shall give prompt written notice to each holder of Notes of any
dissolution, winding up, liquidation, or reorganization of the Company or
assignment for the benefit of creditors by the Company. Issuance of Conversion
Shares upon a Conversion Event shall not be considered a "distribution" of
securities or a "payment" for purpose of this Section 4.3.
Section 4.4 Subrogation to Rights of Holders of Senior
Indebtedness.
(a) Subject to the payment in full in cash or cash
equivalents of all Senior Indebtedness (or due provision therefor), the holders
of Notes shall be subrogated to the rights of the holders of Senior Indebtedness
to receive payments or distributions of assets of the Company until all amounts
owing on the Notes shall be paid in full, in cash or cash equivalents, and for
the purpose of such subrogation no such payments or distributions to the holders
of Senior Indebtedness by or on behalf of the Company, or by or on behalf of the
holders of Notes by virtue of this Section 4, that otherwise would have been
made to the holders of the Notes shall, as between the Company, on the one hand,
and the holders of the Notes, on the other, be deemed to be payment by the
Company to or on account of the holders of the Notes, it being understood that
the provisions of this Section 4 are and are intended solely for the purpose of
defining the relative rights of the holders of Notes, on the one hand, and the
holders of Senior Indebtedness, on the other.
(b) If any payment or distribution to which the holders of
Notes would otherwise have been entitled but for the provisions of this Section
4 shall have been applied, pursuant to the provisions of this Section 4, to the
payment of amounts payable under the Senior Indebtedness, then the holders of
the Notes shall be entitled to receive from Senior Indebtedness any payments or
distributions received by such holder of Senior Indebtedness in excess of the
amount sufficient to pay all amounts payable under or in respect of the Senior
Indebtedness in full in cash or cash equivalents, after giving effect to any
other payment or distribution or provision therefor to or for the holders of
Senior Indebtedness. The holders of Senior Indebtedness by accepting such
payments or distributions shall be deemed to agree to the provisions of this
Section 4.
Issuance of Conversion Shares shall not be considered a
"distribution" or a "payment" for purposes of this Section 4.4.
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<PAGE> 9
Section 4.5 Obligations of the Company Unconditional.
(a) Nothing contained in this Section 4 or elsewhere in
this Agreement or in any Note is intended to or shall impair, as between the
Company, on the one hand, and the holders of the Notes, on the other, the
respective obligations of the Company, which are absolute and unconditional, to
pay to the holders of the Notes the principal, premium, if any, of and interest
on the Notes as and when the same shall become due and payable in accordance
with their terms, or is intended to or shall affect the relative rights of the
holders of the Notes and creditors of the Company other than the holders of the
Senior Indebtedness, nor shall anything herein or therein prevent any holder of
the Notes from exercising all remedies otherwise permitted by applicable law
upon default under this Agreement, subject to the rights, if any, under this
Section 4, of the holders of Senior Indebtedness in respect of cash, property or
securities of the Company received upon the exercise of any such remedy.
(b) Without limiting the foregoing, the failure to make a
payment on account of principal, premium, if any, or interest on the Notes by
reason of any provision of this Section 4 shall not be construed as preventing
the occurrence of a Default or an Event of Default.
(c) Upon any distribution of assets of the Company, the
holders of Notes shall be entitled to rely upon any order or decree made by any
court of competent jurisdiction in which such dissolution, winding up,
liquidation or reorganization proceedings are pending, or a certificate of the
liquidating trustee or agent or other person making any distribution to such
holders for the purpose of ascertaining the persons entitled to participate in
such distribution, the holders of the Senior Indebtedness and other Indebtedness
of the Company, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto or to this
Section 4.
Section 4.6 Subordination Rights Not Impaired. No right of any
present or future holders of any Senior Indebtedness to enforce subordination as
provided herein shall at any time in any way be prejudiced or impaired by any
act or failure to act on the part of the Company or by any noncompliance by the
Company with the terms of this Agreement. The terms of Section 4, the
subordination effected hereby and the rights of the holders of the Senior
Indebtedness created hereby shall not be affected by (a) any exercise or
non-exercise of any right, power or remedy under or in respect of any Senior
Indebtedness or any instrument, agreement or other documentation relating
thereto or any collateral relating thereto or (b) any waiver, forbearance,
compromise, consent, release, indulgence, delay or other action, inaction or
omissions, in respect of any Senior Indebtedness or any instrument, agreement or
other documentation relating thereto, including, without limitation, (i) the
taking or accepting of collateral as security for any or all of the Senior
Indebtedness or the release, surrender or exchange of any collateral now or
thereafter securing any or all of the Senior Indebtedness, or (ii) the
non-perfection of any security interest or lien securing any or all of the
Senior Indebtedness, whether or not any holder of any Note shall have had notice
or knowledge of any of the foregoing.
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<PAGE> 10
No course of dealing with holders of the Notes or delay by a
holder of the Senior Indebtedness in exercising any right or remedy hereunder or
in failing to exercise the same shall operate as a waiver thereof.
Section 4.7 Effectiveness of Subordination. This Section 4 shall
continue to be effective or be automatically reinstated, as the case may be, if
at any time payment of any of the Senior Indebtedness, in whole or in part, is
rescinded or must otherwise be restored or refunded by a holder of the Senior
Indebtedness as a preference, fraudulent conveyance or otherwise under any
Bankruptcy Law, all as though such payment had not been made.
Section 4.8 Proof of Claims in Bankruptcy. If the holder of any
Note does not file a proper claim or proof of claim of debt in the form required
in any bankruptcy, insolvency or similar proceeding prior to 5 days before the
expiration of the time to file such claim or claims, then the holders of the
Senior Indebtedness or their representatives are hereby authorized to file an
appropriate claim for and on behalf of the holder of such Notes; provided, that
the holders of Senior Indebtedness have provided written notice to the holder of
such Note of their intention to so file not less than 30 days before such
expiration.
SECTION 5. COMPANY'S COVENANTS.
Section 5.1 Limitation on Restricted Payments. So long as the
Notes shall remain outstanding, the Company shall not, directly or indirectly:
(a) declare or pay any dividend or make any distribution
on account of the Equity Interests of the Company or any Subsidiary (other than
(x) dividends or distributions payable in Capital Stock (other than Disqualified
Stock) of the Company (y) dividends or distributions payable by any Subsidiary
of the Company to the Company or any Wholly Owned Subsidiary of the Company or
(z) conversion of the Notes); or
(b) purchase, redeem or otherwise acquire or retire for
value any Equity Interest of the Company or any Subsidiary or other Affiliate of
the Company (other than the issuance of Common Stock upon exercise of the New
Warrants or the Existing Warrants, redemption or repurchase of the Existing
Warrants, issuance of the Conversion Shares upon conversation of the Notes, or
any such Equity Interest owned by the Company or any Wholly-Owned Subsidiary of
the Company).
Notwithstanding the foregoing, nothing in this Section 5.1 shall prevent the
sale of Equity Interests by DMD-UK, including without limitation a public
offering of Equity Interests in DMD-UK, or the repurchase, including repurchase
at a premium, of any Equity Interests of DMD-UK whether now outstanding or
issued in the future.
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Section 5.2 Stay, Extension and Usury Laws. The Company covenants
(to the extent that it may lawfully do so) that it shall not at any time insist
upon, plead or in any manner whatsoever claim or take the benefit or advantage
of, any stay, extension or usury law wherever enacted, now or at any time
hereafter in force, that may affect the covenants or the performance of this
Agreement; and the Company (to the extent that it may lawfully do so) hereby
expressly waive all benefit or advantage of any such law and covenants that it
shall not, by resort to any such law, hinder, delay or impede the execution of
any power herein granted to the holders of the Notes but shall suffer and permit
the execution of every such power as though no such law has been enacted.
Section 5.3 Future Borrowings. So long as any of the Notes is
outstanding, the Company will not, and will not permit any of its Subsidiaries
to, make loans or advances to, or guarantee the obligations of any person,
including any Subsidiary, which is senior to the Notes, except for additional
borrowings from existing lenders of Senior Indebtedness.
Section 5.4 Presentation of Approval of Contingent Shares by
Shareholders. The Company shall, prior to the first anniversary of the date of
this Agreement, seek approval from the Company's shareholders sufficient to
authorize issuance of the Contingent Shares under applicable shareholder
approval requirements of (and the Company's agreements with) The NASDAQ Smallcap
Market and/or such other stock markets or national stock exchanges upon which
equity securities of the Company are now or hereafter listed or approved for
quotation. The obligation of the Company set forth in this paragraph shall
terminate upon repayment of the entire aggregate principal amount and all
interest accrued upon all of the Notes. The Company shall be required to seek
shareholder approval for issuance of the Contingent Shares on only one occasion
and, unless such approval is received, the Notes shall not be convertible into
any number of shares which exceeds the Initial Conversion Allocation
notwithstanding any provision of this Agreement to the contrary.
Section 5.5 Application for Qualification or Permit Under the
California Code. As soon as practicable after execution of this Agreement, the
Company will file with the California Department of Corporations an application
for such permits as may be required to obtain for the Notes an exemption from
the usury provisions of the Constitution of the State of California for the
Notes pursuant to the provisions of Section 25116 of the California Code. The
Company will use its best efforts to obtain such permits with respect to sale of
the Notes under the California Code.
SECTION 6. REPRESENTATIONS AND WARRANTIES.
Section 6.1 Representations of the Company. The Company
represents and warrants:
(a) The Company and each of its Subsidiaries is a
corporation, duly organized, validly existing and in good standing under the
laws of its state of incorporation. The Company and each of its Subsidiaries has
all the requisite power and authority to own or lease and operate its properties
and to carry on its business as in the manner and in the locations as presently
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<PAGE> 12
conducted except where the failure to do so would not have a Material Adverse
Effect upon the business or operations of the Company taken as a whole. The
Company and each of its Subsidiaries is duly licensed and qualified to do
business as a foreign corporation and is in good standing as a foreign
corporation in each jurisdiction, if any, in which the ownership of property or
the character of its activities is such as to require it to be so licensed or
qualified, except where the failure to be so licensed or qualified would not
have a Material Adverse Effect upon its business or operations;
(b) The Company and each of its Subsidiaries has all
requisite corporate power and authority to enter into and perform all of its
obligations under this Agreement and to carry out the transactions contemplated
hereby, and has duly and properly taken all actions necessary to authorize it to
enter into and perform its obligations under this Agreement and to consummate
the transactions contemplated hereby;
(c) The Company has obtained all necessary consents from
the Senior Lender under the Credit Agreements;
(d) This Agreement constitutes legal, valid and binding
obligation of the Company, enforceable in accordance with its terms, except for
the effect upon this Agreement of usury, bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting the rights of
creditors generally; and
(e) The authorized capital stock of the Company consists
of 20,000,000 shares of common stock, par value $0.01 per share, and 1,000,000
shares of Preferred Stock, par value $.01 per share. Of such capital stock,
5,115,777 shares of Common Stock are issued and outstanding, all of which have
been duly authorized and validly issued and are fully paid and nonassessable.
The Common Stock and Preferred Stock are duly authorized, validly issued, fully
paid and nonassessable, and have the rights, preferences and privileges
specified in the Restated Certificate of Incorporation of the Company (the
"Certificate"). There are no other shares of capital stock issued and
outstanding and no shares of treasury stock. Except for the New Warrants for the
purchase of the Warrant Shares to be issued in connection with the sale of the
Notes, for the Conversion Shares of Common Stock which may be, under certain
circumstances, issuable upon conversion of the Notes as provided in Section 1.4
of this Agreement, the Existing Warrants to purchase 3,850,000 shares of Common
Stock issued in connection with the Company's Initial Public Offering, options
to employees of the Company to purchase shares of the Company's Common Stock
issued pursuant to the Company's 1997 Stock Incentive Plan, and 183,701
additional options issued outside of such Plan, there are no outstanding
options, warrants, calls securities convertible into or exchangeable for any of
the Company's capital stock, or other rights, including, without limitation,
rights to demand registration or to sell in connection with any registration by
the Company under the Securities Act with respect to the issued capital stock of
the Company (other than pursuant to Section 9 of this Agreement), or to purchase
or subscribe for capital stock of the Company. There are no voting trust
agreements or other contracts, agreements arrangements, commitments, plans,
proxies or understandings restricting or otherwise relating to conveyance,
voting or dividend rights with
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respect to the outstanding capital stock, including, without limitation, the
voting or transfer thereof. All of the issued and outstanding shares of the
Company's Subsidiaries are owned by the Company.
(f) The Company has filed with the SEC all forms, reports,
registration statements, proxy statements and other documents (collectively, the
"Company Reports") required to be filed by the Company under the Securities Act
and the Exchange Act, and the Rules and regulations promulgated thereunder (the
"Securities Laws") except failures to file which, individually or collectively,
do not have a Material Adverse Effect on Company. The Company has heretofore
made available to you true and complete copies of all Company Reports filed with
the SEC. As of their respective dates, or, in the case of registration
statements, as of their effective dates, all of the Company Reports, including
all exhibits and schedules thereto and all documents incorporated by reference
therein, (i) complied as to form in all material respects with the requirements
of the Securities Laws applicable thereto, and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company has filed
with the Commission all documents and agreements which were required to be filed
as exhibits to the Company Reports, except failures to file, if any, which,
individually or collectively, do not have a Material Adverse Effect on Company.
The audited financial statements and unaudited interim financial statements of
the Company included or incorporated by reference in the Company Reports
(collectively, the "Company Financial Statements") have been prepared in
accordance with GAAP applied on a consistent basis (except as may be indicated
therein or in the notes thereto) and fairly present the financial position of
the Company as of and at the dates thereof and the results of operations and
cash flows for the periods then ended, subject in the case of the unaudited
interim financial statements, to normal, recurring year-end adjustments and any
other adjustments described therein, which were not and are not expected to be
material in amount or effect. Except as set forth or reflected in the Company
Financial Statement at September 30, 1997 or as set forth in the unaudited
balance sheets included in the Company Reports since that date, neither the
Company nor any of its Subsidiaries has any liabilities or obligations of any
kind or nature (whether accrued, absolute, contingent or otherwise) which would
be required to be reflected or reserved against in any balance sheet of the
Company or such Subsidiaries, or in the notes thereto, prepared in accordance
with GAAP consistently applied, except liabilities since September 30, 1997
either (i) in the ordinary course of business or (ii) which, individually or
collectively, would not have a Material Adverse Effect on Company.
(g) Except for a commission of 6%of the face amount of the
Notes issued by the Company hereunder payable by the Company from the proceeds
of the Notes in connection with the services of a licensed Broker/Dealer, the
Company has not dealt with any broker, finder, commission agent or other Person
in connection with the sale of the Notes or the Warrants and the transactions
contemplated by this Agreement, and the Company is not under any obligation to
pay any broker's fee, commission or financial advisory fee in connection with
such transactions.
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Section 6.2 Representations of the Purchasers. You represent and
warrant to the Company as follows:
(a) If you are a corporation, partnership, trust or
limited liability company, you are duly organized or formed, validly existing
and, if applicable, in good standing under the laws of the State of your
formation and have all the requisite power and authority to own or lease and
operate your properties and to carry on your business as now conducted and as
proposed to be conducted.
(b) You have all requisite power and authority to perform
all of your obligations under this Agreement and to carry out the transactions
contemplated hereby. You have duly and properly taken all actions necessary to
authorize you to enter into and perform your obligations under this Agreement
and to consummate the transactions contemplated hereby. This Agreement
constitutes your legal, valid and binding obligations, enforceable in accordance
with its terms, except for the effect upon this Agreement of bankruptcy,
insolvency, reorganization, moratorium and other similar laws related to or
affecting the rights of creditors generally.
(c) You acknowledge that the Securities have not been
registered under the Securities Act nor qualified under any state securities or
blue sky laws in reliance upon exemptions from registration contained in those
respective laws, and that the Company's reliance upon such exemptions is based
in part upon your representations and warranties. You represent that:
(1) The Securities to be purchased by you
pursuant to this Agreement are being acquired by you solely for your own
account, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of them.
(2) You are able to bear the economic risk of an
investment in the Securities acquired by you pursuant to this Agreement and can
afford to sustain a total loss on such investment.
(3) You (i) have a preexisting personal or business
relationship with the Company or its officers and/or directors, or (ii) are an
experienced and sophisticated investor, are able to fend for yourself in the
transactions contemplated by this Agreement, and has such knowledge and
experience in financial and business matters that you are capable of evaluating
the risks and merits of acquiring the Securities, or (iii) by reason of the
business or financial experience of your professional advisors who are
unaffiliated with the Company, can be reasonably assumed to have the capacity to
protect your own interests in connection with an investment in the Securities.
(4) You have not been formed or organized for the
specific purpose of acquiring the Securities.
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<PAGE> 15
(5) You have had, during the course of this transaction
and prior to your purchase of the Securities, the opportunity to ask questions
of, and receive answers from, the Company and its management concerning the
Company and the terms and conditions of this Agreement, and you hereby
acknowledge that you or your representatives have received all such information
as you consider necessary for evaluating the risks and merits of acquiring the
Securities and for verifying the accuracy of any information furnished to it or
to which it had access. You represent and warrant that the nature and amount of
the Securities you are purchasing is consistent with your investment objectives,
abilities and resources.
(6) An investment in the Notes and Warrants involves a
high degree of risk. You acknowledge that you have carefully considered (i) the
information contained in the Company Reports and the information set forth under
the captions "Risk Factors" and "Cautionary Statements and Risk Factors" set
forth therein, and (ii) the information entitled "Risk Factors Associated with
an Investment in Senior Subordinated Debt Securities" attached as EXHIBIT D
hereto.
(7) You are an "Accredited Investor" for purposes of
Regulation D promulgated by the Commission under the Securities Act. For the
purpose of this Agreement, an "Accredited Investor" means:
(i) Any bank as defined in Section
3(a)(2) of the Securities Act or any Savings and Loan Association or other
institution as defined in Section 3(a)(5)(A) of the Securities Act whether
acting in its individual or fiduciary capacity; any broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934; any insurance
company as defined in Section 2(13) of the Securities Act; any investment
company registered under the Investment Company Act of 1940 or a business
development company as defined in Section 2(a)(48) of that Act; any Small
Business Investment Company licensed by the U.S. Small Business Administration
under Section 301(c) or (d) of the Small Business Investment Act of 1958; any
plan established and maintained by a State, its political subdivisions, or any
agency or instrumentality of a State or its political subdivisions, for the
benefit of its employees if such plan has total assets in excess of $5,000,000;
or any employee benefit plan within the meaning of the Employee Retirement
Income Security Act of 1974, if the investment decision is made by a plan
fiduciary, as defined in Section 3(21) of such Act, which is either a bank,
Savings and Loan Association, insurance company, or registered investment
advisor, or if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self directed plan, with investment decisions made solely by
persons that are accredited investors;
(ii) Any private business development
company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940;
(iii) Any organization described in Section
501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not
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formed for the specific purpose of purchasing the security offered, with total
assets in excess of $5,000,000;
(iv) Any director, executive officer, or
general partner of the issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a general partner of that
issuer;
(v) Any natural person whose individual
net worth, or joint net worth with that person's spouse, at the time of his
purchase exceeds $1,000,000;
(vi) Any natural person who had an
individual income in excess of $200,000 in each of the two most recent years or
joint income with that person's spouse in excess of $300,000 in each of those
years and who reasonably expects an income reaching the same level in the
current year;
(vii) Any trust, with total assets in excess
of $5,000,000, not formed for the specific purpose of acquiring the securities
offered, whose purchase is directed by a sophisticated person as described in
Rule 506(b)(2)(ii); and
(viii) Any entity in which all of the equity
owners are accredited investors;
(d) You understand that any Securities issued pursuant to
this Agreement constitute "restricted securities" under the federal securities
laws inasmuch as they are, or will be, acquired from the Company in transactions
not involving a public offering and accordingly may not, under such laws and
applicable regulations, be resold or transferred without registration under the
Securities Act or an applicable exemption from such registration. In this
connection, you acknowledge that Rule 144 of the Commission is not now, and may
not in the future be, available for resales of the Securities hereunder. Unless
the Securities are registered pursuant to Section 9, you further acknowledges
that the following securities legend shall be placed on any Securities issued to
you hereunder:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR STATE SECURITIES LAWS
AND NO TRANSFER OF THESE SECURITIES MAY BE MADE EXCEPT (A) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR (B) PURSUANT TO AN EXEMPTION
THEREFROM WITH RESPECT TO WHICH THE COMPANY MAY, UPON REQUEST, REQUIRE A
SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM
THE REQUIREMENTS OF THE ACT.
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(e) You acknowledge that any written Business Plan and any
projections in connection therewith delivered to you prior to the Closing with
respect to the Company or its business (the "Business Plan") are estimates of
future performance which are inherently inaccurate, and that information in the
Business Plan including such projections are not a guarantee of future
performance. The Business Plan 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 the Company Reports, including, without limitation,
the statements 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 the Company
Reports and the information set forth under the captions "Risk Factors," and
"Cautionary Statements and Risk Factors" therein, and EXHIBIT D to this
Agreement. 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 information set forth under the captions
"Risk Factors," and "Cautionary Statements and Risk Factors" therein, and
EXHIBIT D to this Agreement. You represent and agree that you are not relying on
the accuracy of the Business Plan in making an investment in the Securities.
SECTION 7. EVENTS OF DEFAULT AND REMEDIES THEREFOR.
Section 7.1 Events of Default. Any one or more of the following
shall constitute an "Event of Default" as the term is used herein:
(a) Default shall occur in the making of payment of the
principal of or interest on any Note (including, without limitation, pursuant to
Section 3.2) or the premium, if any, thereon at the expressed or Maturity Date
or at any date fixed for prepayment and, such default shall not have been
remedied or waived in writing within 5 days following receipt by the Company of
notice of such default from any holder; or
(b) Default shall occur in the observance or performance
of any provision of this Agreement and, provided such default is capable of
being cured, such default shall not have been remedied or waived in writing
within 30 days following receipt by the Company of notice of such default from
any holder of the Notes or the Company shall have materially breached any of the
representations or warranties contained herein; or
(c) Default or the happening of any event shall occur
under any indenture, agreement or other instrument under which any Senior
Indebtedness with an aggregate principal
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amount of at least $100,000 (other than the Notes) of the Company may be issued
or outstanding and, as a result thereof, the maturity of any such Senior
Indebtedness has been accelerated; or
(d) Final judgment or judgments for the payment of money
(other than judgments as to which a reputable insurance company has accepted in
writing full liability) aggregating in excess of $250,000 is or are outstanding
against the Company or against any property or assets thereof and any one of
such judgments has remained unpaid, unvacated, unbonded or unstayed by appeal or
otherwise for a period of 90 days from the date of its entry; or
(e) The Company (i) becomes insolvent, (ii) is generally
not paying its debts as they become due, (iii) makes an assignment for the
benefit of creditors, (iv) applies for or consents to the appointment of a
custodian, trustee, liquidator, or receiver for the Company or for all or
substantially all of any of their respective property or (v) admits in writing
its inability to pay debts as the same become due; or
(f) A custodian, trustee, liquidator or receiver is
appointed for the Company or for all or substantially all of the property of any
of them and is not discharged within 90 days after such appointment; or
(g) Bankruptcy, reorganization, arrangement or insolvency
proceedings, or other proceedings for relief under any bankruptcy or similar law
or laws for the relief of debtors, are instituted by or against the Company and
are consented to or are not dismissed within 90 days after such institution.
Notwithstanding the foregoing, or any other provision of this
Agreement to the contrary, except as provided in Section 1.4 permitting
conversion of the Notes to Common Stock, so long as any Senior Indebtedness
remains outstanding, no holder of a Note nor any Purchasers shall seek to
enforce its rights under this Agreement prior to the time permitted under
Section 4 of this Agreement or other than in accordance with the provisions of
Section 4 of this Agreement.
Section 7.2 Notice to Holders. When any Event of Default has
occurred, or if the holder of any Note or of any other evidence of Indebtedness
of the Company gives any notice or takes any other action with respect to a
claimed default, including accelerating the maturity of the Notes under Section
7.3 below, the Company agree to give notice within three Business Days of such
event to all holders of the Notes then outstanding.
Section 7.3 Acceleration of Maturities; Notice of Acceleration or
Conversion. When any Event of Default described in Section 7.1 has happened and
is continuing, any holder of any Note may, by notice in writing sent in the
manner provided in Section 11 hereof to the Company, declare the entire
principal and all interest accrued on such Note to be, and such Note shall
thereupon become, forthwith due and payable, without any presentment, demand,
protest or other notice of any kind, all of which are hereby expressly waived by
the Company.
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Alternatively, if such Event of Default is a Conversion Event,
such holder may, by notice in writing as provided in Section 11.9 ("Conversion
Notice") elect to convert a portion of the unpaid principal and accrued interest
of such holder's Note into a number of Conversion Shares which does not exceed
the Initial Conversion Allocation of such Note as provided in Section 1.4 of
this Agreement. If shareholder approval for issuance of Contingent Shares is
obtained as contemplated by Section 5.4, such holder my elect to require the
Company to convert, at a price per share equal to the Conversion Price on the
Conversion Date, up to the entire unpaid principal and interest then due under
any Note held by such holder. The Conversion Notice shall be delivered within
three hundred and sixty-five days of the date of the Conversion Event, and shall
specify the date for conversion, which shall not exceed 30 days from the date
such Conversion Notice is given. The Conversion Notice shall be accompanied by
an executed Investment Letter in the form attached hereto as EXHIBIT C. The
obligation of the Company to deliver the Conversion Shares shall be expressly
conditioned upon receipt of such Investment Letter.
Upon the Notes becoming due and payable as a result of any Event
of Default as aforesaid, the Company will forthwith pay to the holders of the
Notes the entire principal and interest (including interest, if any, accrued at
the Overdue Rate, and any interest accrued subsequent to an Event of Default
described in paragraphs (e), (f) or (g) of Section 7.1).
No course of dealing on the part of any holder of Notes nor any
delay or failure on the part of any holder of Notes to exercise any right shall
operate as a waiver of such right or otherwise prejudice such holders' rights,
powers and remedies. The Company further agree, to the extent permitted by law,
to pay to the holder or holders of the Notes all costs and expenses incurred by
them in enforcing their rights hereunder and under the Notes, including (without
limitation) in the collection of any amount due hereunder and under the Notes
upon any default hereunder or thereon, including the fees and expenses of such
holder's or holders' attorneys for all services rendered in connection
therewith.
Upon receipt of a Conversion Notice, the Company will deliver the
Conversion Shares and the holder shall tender the Note on the Conversion Date
unless another date for conversion is agreed to by the parties in writing.
Section 7.4 Rescission of Acceleration. The provisions of Section
7.3 are subject to the condition that if the principal of and accrued interest
on all or any outstanding Notes have been declared immediately due and payable
by reason of the occurrence of any Event of Default described in paragraphs (a)
through (h), inclusive, of Section 7.1, the holders of a majority in aggregate
principal amount of the Notes then outstanding may, by written instrument filed
with the Company, rescind and annul such declaration and the consequences
thereof, provided that at the time such declaration is annulled or rescinded:
(a) no judgment or decree has been entered for the payment
of any monies due pursuant to the Notes or this Agreement;
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(b) all arrears of interest upon all the Notes and all
other sums payable under the Notes and under this Agreement (except any
principal, interest or premium, if any, on the Notes that has become due and
payable solely by reason of such declaration under Section 7.3) shall have been
duly paid; and
(c) each and every other Default and Event of Default shall
have been made good, cured or waived pursuant to Section 7.1;
and provided further, that no such rescission and annulment shall extend to or
affect any subsequent Default or Event of Default or impair any right consequent
thereto or the right of any holder to elect to convert any Note.
SECTION 8. AMENDMENTS, WAIVERS AND CONSENTS.
Section 8.1 Consent Required. Any term, covenant, agreement or
condition of this Agreement may, with the consent of the Company, be amended or
compliance therewith may be waived (either generally or in a particular instance
and either retroactively or prospectively), if the Company shall have obtained
the consent in writing of the holders of at least a majority in aggregate
principal amount of outstanding Notes; provided that without the written consent
of the holders of all of the Notes then outstanding, no such waiver,
modification, alteration or amendment shall be effective (a) which will change
the time of payment or reduce the principal amount thereof or change the rate or
interest thereon, or (b) which will change any of the provisions with respect to
optional prepayment or (c) which will change the percentage of holders of the
Notes required to consent to any such amendment, modification or waiver of any
of the provisions of this Section 8 or Section 7; and, provided further, that no
amendment, modification or waiver of any term, covenant or agreement of Section
9 of this Agreement may be made except as provided in Section 9. Any term,
covenant, agreement or condition of the New Warrant agreements may, with the
consent of the Company, be amended or compliance therewith may be waived (either
generally or in a particular instance and either retroactively or
prospectively), if the Company shall have obtained the consent in writing of the
holders of at least a majority of the outstanding New Warrants. So long as any
Senior Indebtedness is outstanding under the Credit Agreement and the holders of
the Notes have no written agreement with such parties regarding subordination of
the Notes, the provisions of Section 7 may not be amended or waived without the
prior written consent of the Senior Lender or the holders of a majority in
principal amount of the Senior Indebtedness outstanding thereunder.
Section 8.2 Solicitation of Note holders. The Company will not
solicit, request or negotiate for or with respect to any proposed amendment,
modification or waiver of any of the provisions of this Agreement or the Notes
unless each holder of the Notes (irrespective of the amount of the Notes then
owned by it) shall be informed thereof by the Company and shall be afforded the
opportunity of considering the same and shall be supplied by the Company with
sufficient information to enable it to make an informed decision with respect
thereto. Executed or true and correct copies of any waiver effected pursuant in
the provisions of Section 8.1 of this Section 8.2 shall be delivered by the
Company to each holder of outstanding Notes forthwith
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following the date on which the same shall have been executed and delivered by
the holder or holders of the requisite percentage of outstanding Notes. The
Company will not, directly or indirectly, pay or cause to be paid any
remuneration, whether by way of supplemental or additional interest, fee or
otherwise, to any holder of the Notes as consideration for or as an inducement
to the entering into by any holder of the Notes of any waiver or amendment of
any of the terms and provisions of this Agreement unless such remuneration is
concurrently paid, on the same terms, ratably to the holders of all of the Notes
then outstanding.
Section 8.3 Effect of Amendment or Waiver. Any such amendment or
waiver shall apply equally to all of the holders of the Notes and shall be
binding upon them, upon each future holder of any Note and upon the Company,
whether or not such Note shall have been marked to indicate such amendment or
waiver. No such amendment or waiver shall extend to or affect any obligation not
expressly amended or waived or impair any right consequent thereon.
SECTION 9. REGISTRATION OF REGISTRABLE SECURITIES
Section 9.1 Registration.
(a) Warrant Shares. The Company shall use all reasonable
efforts following the Closing Date to effect the registration ("Warrant Share
Registration") of the Warrant Shares on Form S-3 under the Securities Act for
resale as expeditiously as reasonably possible by performing the following:
(1) The Company shall, as expeditiously as possible
following the Closing (but in any event within 45 days of Closing Date), prepare
and file with the Securities and Exchange Commission (the "Commission") a
registration statement with respect to the resale of the Warrant Shares. The
Company shall use all reasonable efforts to cause the registration statement to
become effective within 60 days of such filing and to remain effective for a
period ending on the earlier of (i) five years from the effective date of such
registration statement or (ii) the date on which, in the opinion Company
counsel, all remaining Warrant Shares held by the Purchasers hereunder may be
sold in any calendar quarter in unsolicited broker transactions without volume
limitation pursuant to Rule 144 promulgated under the Securities Act (or any
successor rule thereto). Your plan of distribution with respect to the Warrant
Shares shall be limited to the following: (i) transactions effected through
brokers, or (ii) negotiated transactions effected at such prices as may be
obtainable and as may be satisfactory to you;
(2) The Company shall prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to update and
keep such registration statement effective and to comply with the provisions of
the Securities Act with respect to the sale of all securities covered by such
registration statement. Notwithstanding anything else to the contrary contained
herein, the Company shall not be required to disclose any confidential
information concerning pending acquisitions not otherwise Act required to be
disclosed; and
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(3) The Company shall furnish to the holders of the
Warrant Shares such number of copies of the final prospectus the holders may
reasonably request in order to facilitate the sale of the shares owned by such
holder. Holders of the Warrant Shares so registered shall comply with all
prospectus delivery requirements under the Securities Act.
(b) Conversion Shares. The Company shall use all reasonable
efforts following, or at the election of the Company prior to, the Conversion
Event, if any, to effect the registration ("Conversion Share Registration") on
Form S-3 or such other form as the Company may deem appropriate of the
Conversion Shares under the Securities Act for resale as expeditiously as
reasonably possible by performing the following:
(1) The Company shall, as expeditiously as possible
following, or at the election of the Company prior to, the Conversion Event (but
in any event within 45 days following the Conversion Event), prepare and file
with the Commission a registration statement with respect to the resale of the
Conversion Shares. The Company shall use all reasonable efforts to cause the
registration statement to become effective within 60 days of such filing and to
remain effective for a period ending on the earlier to occur of (i) three years
from the effective date of such registration statement, or (ii) the date on
which, in the opinion Company counsel, all remaining Conversion Shares held by
the Purchasers hereunder may be sold in any calendar quarter in unsolicited
broker transactions without volume limitation pursuant to Rule 144 promulgated
under the Securities Act (or any successor rule thereto). Your plan of
distribution with respect to the Conversion Shares shall be limited to the
following: (i) transactions effected through brokers, or (ii) negotiated
transactions effected at such prices as may be obtainable and as may be
satisfactory to you;
(2) The Company shall prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to update and
keep such registration statement effective and to comply with the provisions of
the Securities Act with respect to the sale of all securities covered by such
registration statement. Notwithstanding anything else to the contrary contained
herein, the Company shall not be required to disclose any confidential
information concerning pending acquisitions not otherwise required to be
disclosed; and
(3) The Company shall furnish to the holders of the
Conversion Shares such number of copies of the final prospectus the holder may
reasonably request in order to facilitate the sale of the shares owned by such
holder. Holders of the Conversion Shares so registered shall comply with all
prospectus delivery requirements under the Securities Act.
(c) Allocation of Expenses. All expenses incurred by the
Company in complying with this Section 9.1, including, without limitation, all
registration and filing fees, printing expenses, and fees and disbursements of
counsel for Company, are herein called "Registration Expenses." All selling
commissions applicable to the sales of the Shares and all fees and disbursements
of counsel for any Purchaser are herein called "Selling Expenses." The
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Company will pay all Registration Expenses in connection with registration
pursuant to Section 9.1. All Selling Expenses in connection with such
registration shall be borne by the holders and/or of the shares being
registered.
(d) Limitation. Notwithstanding anything to the contrary
contained in this Section 9.1, no person (as defined, for these purposes, in
Rule 144(a)(2) of the Commission) who then beneficially owns 1% or less of the
outstanding Common Stock of the Company may request that any of its shares of
Registrable Securities be included in any registration statement filed by the
Company pursuant to Section 9.1 unless, in the opinion of counsel for such
person, such person's intended disposition of Registrable Securities could not
be effected within 90 days of the date of said opinion without registration of
such shares under the Securities Act.
Section 9.2 Transfers of Shares After Registration. You agree
that you will not effect any disposition of any Securities registered pursuant
to Section 9.1 that would constitute a sale within the meaning of the Securities
Act except as contemplated in the registration statement by which the resale of
such securities is registered pursuant to Section 9.1 or as otherwise in
compliance with applicable securities laws and that you will promptly notify the
Company of any material changes in the information set forth in the registration
statement regarding you or your plan of distribution.
Section 9.3 Indemnification.
(a) Upon the registration of the Registrable Securities
under the Securities Act pursuant to this Agreement, the Company shall indemnify
and hold harmless each holder of Registrable Securities whose securities are
registered for resale thereunder pursuant to the provisions of Section 9.1 above
(a "Selling Holder") and each controlling person of any Selling Holder, if any
(within the meaning of the Securities Act) against any losses, claims, damages
or liabilities, joint or several (or actions in respect thereof), to which such
Selling Holder or controlling person may be subject under the Securities Act,
under any other statute or at common law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any untrue statement (or alleged untrue statement) of any material fact
contained in the registration statement under which such securities were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any summary prospectus issued in connection
with the securities being registered, or any amendment or supplement thereto, or
any other document used to sell the securities (including an illegal
prospectus), or (ii) any omission (or alleged omissions) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any violation by the Company of the Securities
Act or any state securities or blue sky laws, or any rule or regulation
promulgated under the Securities Act or any state securities or blue sky laws,
or any other law, applicable to the Company in connection with any such
registration and shall reimburse each such Selling Holder or controlling person
for any legal or other expenses reasonably incurred by such Selling Holder or
controlling person in connection with investigating or defending any
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such loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable to any Selling Holder or controlling person in any
such event to the extent that any such loss, claim, damage or liability arises
out of or is based upon any such untrue statement or omission made in such
registration statement, preliminary prospectus, summary prospectus, prospectus,
or amendment or supplement thereto, or any other document, in reliance upon and
in conformity with written information furnished to the Company by any such
Selling Holder or controlling person, specifically for use therein. The
indemnity provided for herein shall remain in full force and effect regardless
of any investigation made by or on behalf of such Selling Holder or controlling
person, and shall survive transfer of such securities by such Purchaser.
(b) Upon the registration of the Conversion Shares and/or
the Warrant Shares under the Securities Act pursuant to this Agreement, each
Selling Holder shall furnish to the Company in writing such information and
affidavits as the Company reasonably requests for use in connection with such
registration statement and agrees to indemnify and hold harmless the Company,
its directors and each controlling person (within the meaning of the Securities
Act) of the Company, if any, against any losses, claims, damages or liabilities,
joint or several (or actions in respect thereof), to which the Company, or any
director or controlling person may be subject under the Securities Act, under
any other statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement (or alleged untrue statement) of any material fact
contained in the registration statement under which the Registrable Securities
were registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any summary prospectus issued in connection
with any securities being registered, or any amendment or supplement thereto, or
any other document used to sell the securities (including an illegal
prospectus), or (ii) any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse the Company, any director and
controlling person for any legal or other expenses reasonably incurred by such
persons in connection with investigating or defending any such loss, claim,
damage, liability or action; in each case, to the extent, and only to the
extent, that such untrue statement or omission is contained in any information
or affidavit so furnished in writing by such Selling Holder. The indemnity
provided for herein shall survive transfer of such securities by said holder of
Registrable Securities.
(c) If the indemnification provided for in paragraph (a) or
(b) above is unavailable to an indemnified party in accordance with its terms in
respect of any losses, claims, damages or liabilities referred to therein, then
the indemnitor in lieu of indemnifying such indemnified party thereunder shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities, in such proportion as is
appropriate to reflect the relative fault of the indemnitor on the one hand and
of the indemnified parties on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, or liabilities, as
well as any other relevant equitable considerations. The relative fault of the
indemnitor and of the indemnified parties shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state
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a material fact relates to information supplied by the indemnitor, or the
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the other parties hereto agree that it would not
be just and equitable if contribution pursuant to this Section 9.3(c) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages and liabilities or actions in
respect thereof referred to in the immediately preceding paragraph shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of a
fraudulent misrepresentation (within the meaning of the Securities Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) Promptly after receipt by an indemnified party under
paragraph (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against an
indemnitor under such paragraph, notify the indemnitor in writing of the
commencement thereof; but the omission so to notify the indemnitor shall not
relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection or to the extent that it has not been
prejudiced as a proximate result of such failure. In case any action shall be
brought against any indemnified party, and it shall notify the indemnitor of the
commencement thereof, the indemnitor shall be entitled to participate therein
and, to the extent that it shall wish, to assume the defense thereof. Upon the
assumption by the indemnitor of the defense of such action, the indemnitor shall
not be liable to such indemnified party under this Section 9.3 for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof.
Section 9.4 Amendment, Modification or Waiver of Section 9. Any
term, covenant, agreement or condition of this Section 9 may, with the consent
of the Company, be amended or compliance therewith may be waived (either
generally or in a particular instance and either retroactively or
prospectively), if the Company shall have obtained the consent in writing of the
holders of at least a majority in of the outstanding Registrable Securities,
provided that without the written consent of the holders of a majority of the
Conversion Shares then outstanding, no such waiver, modification, alteration or
amendment shall be effective (a) which will adversely affect the rights of the
Conversion Shares, or (b) which will change the percentage of holders of the
Conversion Shares required to consent to any such amendment, modification or
waiver of any of the provisions of this Section 9.
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SECTION 10. INTERPRETATION OF AGREEMENT; DEFINITIONS.
Section 10.1 Definitions. Unless the context otherwise requires,
the terms hereinafter set forth when used herein shall have the following
meanings and the following definitions shall be equally applicable to both the
singular and plural forms of any of the term herein defined:
"Affiliate" means, with respect to any referenced Person, (i) any
Person or entity directly or indirectly controlling or controlled by or under
direct or indirect common control with such Person, (ii) any spouse or non-adult
child (including by adoption) of such Person, (iii) any relative other than a
spouse non-adult child (including by adoption), who has the same principal
residence of any such Person, (iv) any trust in which any such Persons described
in clause (i), (ii) or (iii) above has a beneficial interest and (v) any
corporation, partnership, limited liability company or other organization of
which any such Persons described in clause (i), (ii) or (iii) above, or any
trust described in clause (iv) above collectively owns more than fifty percent
(50%) of the equity of such entity.
"Applicable Law" means with respect to any Person any Federal,
state, local or foreign statute, law, code, ordinance, rule or regulation or any
judgment, decree, rule or order of any court or governmental agency or authority
applicable to such Person or any of its subsidiaries or any of their respective
properties or assets.
"BDI" means Bavarian Dental Instruments, Inc., a California close
corporation, and a Wholly-Owned Subsidiary of the Company.
"Bankruptcy Law" means Title 11, U.S. Code or any similar
Federal, state or foreign law for the relief of debtors.
"Business Day" means any day other than a Saturday, Sunday,
statutory holiday or other day on which banks in New York or California are
authorized to close.
"Capital Stock" means any and all shares, interests,
participations, rights or other equivalents (however designated) of corporate
stock, including, without limitation, partnership interests and other indicia of
ownership of a business entity.
"Closing" means the closing of the sale and purchase of the Notes
and New Warrants on the Closing Date.
"Code" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder from time to time promulgated.
"Commission" or "SEC" means the Securities and Exchange
Commission, as from time to time constituted, created under the Exchange Act.
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"Common Stock" means the Common Stock, par value $0.01 per share,
of the Company.
"Company" means the party named as such in the first paragraph of
this Agreement, until a successor replaces such Person in accordance with the
terms of this Agreement, and thereafter means such successor.
"Contingent Shares" means that number of shares of Common Stock
which would be issuable upon conversion at the Conversion Price on the
Conversion Date of all of the aggregate outstanding principal and accrued
interest due under all of the outstanding Notes, minus the Initial Conversion
Shares, which Contingent Shares are issuable only upon shareholder approval as
set forth in Section 5.4.
"Conversion Date" shall be the date specified in the Conversion
Notice, but will in any case occur on or before the 30th day after the
Conversion Notice is delivered by the Note holder as provided in Section 7.3, or
if such day is not a Business Day, the next Business Day thereafter.
"Conversion Event" shall mean the occurrence of an Event of
Default specified in Section 7.1(a) of this Agreement which shall not have been
remedied or waived in writing within 5 days following receipt by the Company of
notice of such default from any holder.
"Conversion Price" shall mean (i) if the Common Stock is quoted
on the Nasdaq System (but not on the Nasdaq National Market) or is regularly
quoted by a recognized securities dealer but selling prices are not reported, a
price per share of Common Stock which is equal to the average of the five lowest
closing bid prices on The Nasdaq SmallCap Market for the Common Stock for the
twenty consecutive trading days prior to the Conversion Date, multiplied by
eighty (80%) percent; or (ii) if the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market, a price per share of Common Stock equal to the average
of the five lowest closing sales prices for such stock (or the closing bid, if
no sales were reported) as quoted on such system or exchange (or the exchange
with the greatest volume of trading in the Common Stock), as reported in the
Wall Street Journal or such other source as the Board of Directors deems
reliable for the twenty days prior to the Conversion Date, multiplied by eighty
(80%) percent.
"Conversion Shares" means the Initial Conversion Shares and any
Contingent Shares.
"Credit Agreements" means each of the (i) Revolving Credit Loan
and Security Agreement with respect to an aggregate principal amount of $500,000
by and between the Senior Lender and the Company dated as of March 7, 1997, as
amended by a First Modification to Loan and Security Agreement dated as of July
25, 1997, and a Second Modification to Loan and Security Agreement dated as of
December 10, 1997; (ii) the Revolving Credit Loan and Security Agreement with
respect to an aggregate of $1,500,000 between the Senior Lender and the Company
dated as of
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December 10, 1997; and (iii) the Variable Rate-Single Payment Note of the
Company in aggregate principal amount of $500,000 dated as of December 10, 1997,
as modified by a First Modification on December 14, 1997, as the same may be
amended, extended, renewed or restated from time to time in accordance with the
terms thereof (which includes, without limitation, any (1) extension of the
maturity of all or any portion of the Indebtedness thereunder, (2) increases in
the amounts available to be borrowed thereunder, (3) addition of additional
Company obligations or security thereunder and (4) addition of additional
lenders and/or agents thereunder), and any agreement governing Indebtedness
incurred to refund or refinance the borrowing then outstanding or permitted to
be outstanding under such Credit Agreement.
"DMD" means Dental/Medical Diagnostic Systems, LLC, a California
limited liability company, and a Wholly-Owned Subsidiary of the Company.
"DMD-UK" means DMDS, Ltd, a company organized under the laws of
the United Kingdom, and a Wholly-Owned Subsidiary of the Company.
"Debt" means Indebtedness specified in clauses (i) through (iii),
inclusive, of the definition of "Indebtedness."
"Default" means any event or condition, the occurrence of which
would, with the lapse of time or the giving of notice, or both, constitute an
Event of Default.
"Disqualified Stock" means (a) in the case of the Company, any
Equity Interest that, (i) either by its terms or the terms of any security into
which it is convertible or for which it is exchangeable or otherwise is, or upon
the happening of an event or the passage of time would be, required to be
redeemed or repurchased (in whole or in part) prior to the final stated maturity
of the Notes or is redeemable (in whole or in part) at the option of the holder
thereof at any time prior to such final stated maturity or (ii) is convertible
into or exchangeable at the option of the issuer thereof or any other person for
debt securities or Disqualified Stock and (b) in the case of any other person,
any Equity Interest other than Capital Stock issued to the Company or to a
Wholly-Owned Subsidiary of the Company.
"Equity Interests" means Capital Stock or warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Securities" means any stock or similar security,
transferrable shares, voting trust certificate or certificates of deposit for
stock, or any security convertible, with or without consideration into such a
security or carrying any warrant right to subscribe to or purchase such a
security; or any such warrant or right; or any put, call, straddle or other
option or privilege of buying such a security.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
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<PAGE> 29
"Existing Warrants" means the (i) 2,070,000 Redeemable Common
Stock Purchase Warrants for purchase of the Company's Common Stock sold by the
Company in its Public Offering, (ii) 1,600,000 Resale Warrants registered by the
Company for sale by the selling stockholders as set forth in the Company's
Prospectus dated May 9, 1997; and 180,000 Warrants for the purchase of the
Company's Common Stock issued to M.H. Meyerson & Co. Inc., underwriters of the
Public Offering.
"GAAP" means generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board.
"Hedging Obligations" means, with respect to any person, the
obligations of such person under (i) interest or currency rate swap agreements,
interest rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such person against fluctuations
in interest rates or exchange rates.
"Indebtedness" of any person means (without duplication) (i) all
indebtedness of such person for borrowed money, (ii) all obligations of such
person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such person to pay the deferred purchase price of property or
services (other than trade payables on customary terms incurred in the ordinary
course of business), (iv) all obligations, contingent or otherwise, of such
person under bankers' acceptance, letter of credit facilities and letter of
credit risk participation agreements and (v) all obligations of such person in
respect of Hedging Obligations.
"Initial Conversion Allocation" means, with respect to any Note,
a number of shares of Common Stock equal to (x) the number of Initial Conversion
Shares multiplied by (y) the percentage of the aggregate principal amount of all
Notes issued hereunder represented by the principal amount of such Note on the
date of this Agreement.
"Initial Conversion Shares" means the lesser of (i) 500,000
shares of Common Stock (subject to equitable adjustment for any stock split,
combination or similar event), or (ii) a number of shares which, together with
the Warrant Shares, equals 19.9% of the issued and outstanding shares of Common
Stock of the Company as of the date of the Conversion Event.
"Junior Securities" means (a) Capital Stock of the Company and
(b) any debt security of the Company subject to subordination provisions no less
favorable to the holders of Senior Indebtedness than the provisions of Section 4
hereof.
"Liquidity Event" means an offering or series of related
offerings by the Company of a class or classes of Common Stock or any security
convertible into Common Stock from which the Company receives gross proceeds of
$10,000,000 or more.
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<PAGE> 30
"New Warrants" means the 450,000 warrants for purchase of the
Company's Common Stock issued to the Purchasers as set forth on Schedule 1 of
this Agreement.
"Obligations" means all the obligations of the Company to pay and
perform their obligations under the Notes, together with all extensions,
amendments, restatements, modifications, supplements and renewals thereof, when
the same shall become due, whether at maturity, at a time fixed for payment, on
a date of required prepayment, by acceleration or otherwise, and shall include,
without limitation, any interest which accrues after the commencement of any
case, proceeding or other action relating to the bankruptcy, insolvency or
reorganization of the Company, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding.
"Overdue Rate" means the lesser of (a) the maximum interest rate
permitted by law and (b) 15%.
"Person" or "person" means an individual, partnership,
corporation, joint venture, association, joint stock company, trust or
unincorporated organization, and a government or agency or political subdivision
thereof, or any other entity.
"Preferred Stock" means the Series A Preferred Stock, par value
$0.01 per share, of the Company.
"Proceeding" means an action, claim, suit or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition).
"Public Offering" means the Company's public offering of Common
Stock on May 9, 1997.
"Registrable Shares" means the Warrant Shares issuable upon
exercise of the New Warrants and any Conversion Shares issued by the Company
upon conversion of any of the Notes.
"Registration Expenses" shall have the meaning set forth in
Section 9.1(c).
"Securities" means the Notes, the New Warrants, the Warrant
Shares and any Conversion Shares.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"Securities Laws" shall have the meaning set forth in Section 6.1
of this Agreement.
"Selling Expenses" shall have the meaning set forth in Section
9.1(c).
30
<PAGE> 31
"Senior Indebtedness" with respect to the Company means, subject
to clause (c) of the last sentence of this definition, Indebtedness of the
Company under the Credit Agreements and any premium, interest, fees or other
amounts payable thereon or in connection therewith, including, without
limitation, all loans, letters of credit, letter of credit guarantees and other
extensions of credit under the Credit Agreements, all commitment, facility and
other fees payable under the Credit Agreement and all expenses, reimbursements,
indemnities and other amounts payable by the Company under the Credit
Agreements, whether such Indebtedness, Debt, other indebtedness, obligations or
liabilities now exist or may hereafter arise or be incurred. Notwithstanding the
foregoing, Senior Indebtedness shall not include (a) in the case of each Note,
the other Notes, (b) amounts payable and other Indebtedness to trade creditors
or created, incurred, assumed or guaranteed in the ordinary course of business,
in connection with obtaining goods, materials or services, (c) any liability for
Federal, state, local or other taxes owed or owing and (d) the items described
in the first sentence of this definition so long as the holders of the Notes
have a written agreement with the Senior Lender or the holders of such
Indebtedness regarding subordination of the Notes.
"Senior Lender" means Comerica Bank-California or any successor
in interest thereto as lender of the Senior Indebtedness.
"Subsidiary" means the Company's Subsidiaries, DMD, BDI and
DMD-UK.
"Warrant Shares" means the shares of Common Stock issuable upon
exercise of the New Warrants.
"Wholly-Owned Subsidiary" means, with respect to any person, a
subsidiary all the Equity Interests of which (other than director's qualifying
shares) is owned by such person or another Wholly-Owned Subsidiary of such
person.
SECTION 11. MISCELLANEOUS.
Section 11.1 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED,
INTERPRETED AND THE RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF CALIFORNIA (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS
THEREOF).
Section 11.2 Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 11.3 Titles and Subtitles. The titles and subtitles used
in this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
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<PAGE> 32
Section 11.4 Negotiation of Agreement. Each of the parties
acknowledges that it has been represented by independent counsel of its choice
throughout all negotiations that have preceded the execution of this Agreement
and that it has executed the same with consent and upon the advice of said
independent counsel. Each party and its counsel cooperated in the drafting and
preparation of this Agreement and the documents referred to herein, and any and
all drafts relating thereto shall be deemed the work product of the parties and
may not be construed against any party by reason of its preparation.
Accordingly, any rule of law or any legal decision that would require
interpretation of any ambiguities in this Agreement against the party that
drafted it is of no applica tion and is hereby expressly waived. The provisions
of this Agreement shall be interpreted in a reasonable manner to effect the
intentions of the parties and this Agreement.
Section 11.5 Note Register. The Company shall cause to be kept at
its principal office a register for the registration and transfer of the Notes,
and the Company will register or transfer or cause to be registered or
transferred, as hereinafter provided and under such reasonable regulations as it
may prescribe, any Note issued pursuant to this Agreement.
At any time, and from time to time, the holder of any Note which
has been duly registered as hereinabove provided may transfer such Note upon
surrender thereof at the principal office of the Company duly endorsed or
accompanied by a written instrument of transfer duly executed by the holder of
such Note or its attorney duly authorized in writing.
The Person in whose name any Note shall be registered shall be
deemed and treated as the owner and holder thereof for all purposes of this
Agreement. Payment of or on account of the principal, premium, if any, and
interest on any Note shall be made to or upon the written order of such holder.
Section 11.6 Exchange of Notes. At any time and from time to
time, upon not less than ten days' notice to that effect given by the holder of
any Note initially delivered or of any Note substituted therefor pursuant to
Section 1.4, 11.5, this Section 11.6 or Section 11.7, and, upon surrender of
such Note at its office, the Company will deliver in exchange therefor, without
expense to the holder, Notes for the same aggregate principal amount as the then
unpaid or unconverted, as the case may be, principal amount of the Note so
surrendered, in the denomination of $1,000 or any amount in excess thereof as
such holder shall specify, dated as of the last date on which interest has been
paid on the Note so surrendered or, if such surrender is prior to the payment of
any interest thereon, then dated as of the date of issue, registered in the name
of such Person or Persons as may be designated by such holder, and otherwise of
the same form and tenor as the Notes so surrendered for exchange.
Section 11.7 Loss, Theft, Etc. of Notes. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of any
Note, and in the case of any such loss, theft, or destruction upon delivery of a
bond or indemnity in such form and amount as shall be reasonably satisfactory to
the Company, or in the event of such mutilation upon surrender and cancellation
of the Note, the Company will make and deliver without expense to the holder
thereof,
32
<PAGE> 33
a new Note, of like tenor, in lieu of such lost, stolen, destroyed or mutilated
Note. If a Purchaser or any subsequent holder is the owner of any such lost,
stolen or destroyed Note, then the affidavit of an authorized officer of such
owner, setting forth the fact of loss, theft or destruction shall be accepted as
satisfactory evidence thereof and no further indemnity shall be required as a
condition to the execution and delivery of the new Note other than the written
agreement of such owner to indemnify the Company.
Section 11.8 Expenses, Stamp and Other Taxes. Whether or not the
transactions herein contemplated shall be consummated, the Company agree to pay
directly all of your reasonable out-of-pocket expenses in connection with the
preparation, execution and delivery of the Agreement, including but not limited
to the reasonable charges and disbursements of your special counsel (if any),
duplicating and printing costs and charges for shipping the Notes adequately
insured to you at your home office or at such other place as you may designate,
and all such expenses relating to any amendments, waivers or consents pursuant
to the provisions of this Agreement (whether or not the same are actually
executed and delivered), including, without limitation, any amendments, waivers
or consents resulting from any work-out, restructuring or similar proceedings
relating to the performance by the Company of their obligations under this
Agreement and the Notes. The Company also agree that they will pay and save you
harmless against any and all liability with respect to stamp and other taxes, if
any, which may be payable or which may be determined to be payable in connection
with the execution and delivery of this Agreement or the Notes, whether or not
any Notes are then outstanding.
Section 11.9 Notices. All notices and other communications among
the parties shall be in writing and shall be deemed to have been duly given when
(i) delivered in person, or (ii) five (5) days after posting in the U.S. mail as
registered mail or certified mail, return receipt requested, or (iii) delivered
by telecopier and promptly confirmed by delivery in person or post as aforesaid
in each case, with postage prepaid, addressed as follows:
If to the Company, to:
Dental/Medical Diagnostic Systems, Inc.
200 N. Westlake Boulevard, Suite 202
Westlake Village, CA 91362
Attention: Chief Financial Officer
Phone No.: (805) 381-2700
33
<PAGE> 34
If to the Purchaser or any holder of a Note, to the address of
such Purchaser or holder set forth in Schedule I or the Note Register, as
applicable.
Section 11.10 Excess Interest. The Notes are expressly limited so
that in no contingency or event whatsoever, whether by reason of acceleration of
maturity of the unpaid principal balance thereof or otherwise, shall the amount
paid or agreed to be paid to any holder of a Note exceed the maximum legal rate
permissible under any law which a court of competent jurisdiction may deem
applicable thereto. If, for any circumstances whatsoever, fulfillment of any
provision of a Note, at the time performance of such provision shall be due,
shall involve transcending the maximum legal rate of interest prescribed by law
which a court of competent jurisdiction may deem applicable thereto, then, ipso
facto, the obligation to be fulfilled shall be reduced to the limit of such
maximum rate, and if from any circumstances any holder of a Note shall ever
receive as interest an amount which would exceed said maximum legal rate, such
amount which would be excessive interest shall be applied to the reduction of
the unpaid principal balance due under such Note and not to the payment of
interest; to the extent that such excessive amount exceeds the unpaid principal
balance thereon, such holder shall refund it to Company. In determining whether
excessive interest would be charged, to the extent permitted by applicable law
all sums paid or agreed to be paid to a holder of Note for the use, forbearance,
or detention of the indebtedness evidenced thereby outstanding from time to time
shall be prorated, amortized, allocated and spread from the date of disbursement
of the proceeds of such Note until payment in full of the unpaid principal sum
so that the actual rate of interest on account of such indebtedness is uniform
throughout the term thereof. This provision shall control every other provision
of this Agreement and the Notes.
Section 11.11 Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms to the fullest extent permitted by law.
Section 11.12 Further Assurances. Each of the parties shall,
without further consideration, use reasonable efforts to execute and deliver
such additional documents and take such other action as the other parties, or
any of them may reasonably request to carry out the intent of this Agreement and
the transactions contemplated hereby.
Section 11.13 Successors and Assigns. This Agreement shall be
binding upon and all rights hereto shall inure to the benefit of the Company,
their successors and permitted assigns, and shall be binding upon and all rights
hereto shall inure to the benefit of the other parties hereto and their
respective heirs, successors and permitted assigns.
SECTION 11.14 ENTIRE AGREEMENT. THIS AGREEMENT, TOGETHER WITH THE
EXHIBITS AND SCHEDULES ATTACHED HERETO, EMBOD IES THE ENTIRE AGREEMENT AND
UNDERSTANDING OF THE PARTIES HERETO
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<PAGE> 35
IN RESPECT OF THE ACTIONS AND TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT.
Section 11.15 Counterparts. The execution hereof by you shall
constitute a contract between us for the uses and purposes hereinabove set
forth, and this Agreement may be executed in any number of counterparts, each
executed counterpart constituting an original but all together only one
agreement.
35
<PAGE> 36
IN WITNESS WHEREOF, the undersigned have caused this Purchase
Agreement to be duly executed, as of the date first written above.
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.,
A DELAWARE CORPORATION
By: /s/ RONALD E. WITTMAN
-------------------------------
Name: Ronald E. Wittman
Title: Chief Financial Officer
AGREED, ACCEPTED AND CONSENTED TO:
COMERICA BANK-CALIFORNIA
By: /s/ DAVID J. STEARNS
--------------------------
Name: David J. Stearns
Title: Senior Vice President & Manager
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<PAGE> 37
PURCHASERS:
**
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By: **
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/s/ **
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Its: **
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By: **
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Its: **
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** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION
<PAGE> 38
**
/s/ **
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By: **
Its: **
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/s/ **
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By: **
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By: /s/ **
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Name: **
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Its: **
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By: /s/ **
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Name: **
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Its: **
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/s/ **
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** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION
<PAGE> 39
**
/s/ **
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**
/s/ **
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** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION
<PAGE> 40
FORM OF NOTE
EXHIBIT A
TO PURCHASE AGREEMENT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") OR STATE SECURITIES LAWS AND NO TRANSFER
OF THESE SECURITIES MAY BE MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT, OR (B) PURSUANT TO AN EXEMPTION THEREFROM WITH RESPECT
TO WHICH THE COMPANY MAY, UPON REQUEST, REQUIRE A SATISFACTORY OPINION OF
COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE REQUIREMENTS OF THE
ACT. PAYMENT ON THIS NOTE IS SUBORDINATED TO THE CLAIMS OF SENIOR LENDERS
PURSUANT TO THE TERMS OF A NOTE AND SECURITY AGREEMENT OF EVEN DATE HEREWITH.
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
12% Senior Subordinated Note
Note Due 1999
No. N-____ __________, 1998
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC., a Delaware corporation (the "Company"),
for value received, hereby, promises to pay to ________________________ or
registered assigns on the ___ day of March, 1999 (the "Maturity Date") the
principal amount of _____________________________ DOLLARS ($______________) and
to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the principal amount from time to time remaining unpaid hereon at the
rate of 12% per annum from the date hereof until maturity, payable
semi-annually. The Company agrees to pay interest on overdue principal
(including any overdue required or optional prepayment of principal) and
premium, if any, and (to the extent legally enforceable) on any overdue
installment of interest, at the Overdue Rate per annum from the date such
payment is due, whether by acceleration or otherwise, until paid.
Both the principal hereof and interest hereon are payable at the
principal office of the Company in Westlake Village, California, in coin or
currency of the United States of America which at the time of payment shall be
legal tender for the payment of public and private debts. If any amount of
principal, premium, if any, or interest on or in respect of this Note becomes
due and payable on any date which is not a Business Day, such amount shall be
payable on the next preceding Business Day.
This Note is one of the 12% Senior Subordinated Notes due 1999 of the
Company in the aggregate principal amount of $4,500,000 issued or to be issued
under and pursuant to the terms and provisions of the Note Agreement, dated as
of March 2 , 1998 (the "Note Agreement"), entered into by the Company with the
original Purchaser therein referred to and this Note and the
A-1
<PAGE> 41
holder hereof are entitled equally and ratably with the holders of all other
Notes outstanding under the Note Agreement to all the benefits and security
provided for thereby or referred to therein, to which Note Agreement reference
is hereby made for the statement thereof. Capitalized terms used but not
otherwise deemed herein have the meaning given thereto in the Note Agreement.
This Note and the other Notes outstanding under the Note Agreement may
be declared due prior to their expressed maturity dates and certain prepayments
are required to be made thereon, all in the events, on the terms and in the
manner and amounts as provided in the Note Agreement. The Notes are not subject
to prepayment or redemption at the option of the Company prior to their
expressed maturity dates except on the terms and conditions and in the amounts
and with the premium, if any, set forth in the Note Agreement. This Note is
convertible to Common Stock of the Company at the election of the Note holder
subject to the limitations and on the terms and conditions set forth in the Note
Agreement.
This Note is registered on the books of the Company and is transferable
only by surrender thereof at the principal office of the Company duly endorsed
or accompanied by a written instrument or transfer duly executed by the
registered holder of this Note or its attorney duly authorized in writing.
Payment of or on account of principal, premium, if any, and interest on this
Note shall be made only to or upon the order in writing of the registered
holder.
This Note and said Note Agreement are governed by and construed in
accordance with the internal laws of California.
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.,
A DELAWARE CORPORATION
By: ___________________________________
Name: Ronald E. Wittman
Title: Chief Financial Officer
A-2
<PAGE> 42
FORM OF WARRANT
EXHIBIT B
TO PURCHASE AGREEMENT
THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR STATE SECURITIES LAWS
AND NO TRANSFER OF THESE SECURITIES MAY BE MADE EXCEPT (A) PURSUANT TO AN
EFFECTIVE REGIS TRATION STATEMENT UNDER THE ACT, OR (B) PURSUANT TO AN EXEMPTION
THEREFROM WITH RESPECT TO WHICH THE COMPANY MAY, UPON REQUEST, REQUIRE A
SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM
THE REQUIREMENTS OF THE ACT.
No. W-____ DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
WARRANT CERTIFICATE
The Warrants are part of a series of 450,000 warrants issued pursuant to
that certain Purchase Agreement dated March 2, 1998 by and between the Company,
the initial holder hereof and others (the "Purchase Agreement"). This
Certificate represents ____________ Warrants for the purchase of _______________
shares of Common Stock. A copy of the Purchase Agreement may be obtained by the
Holder at no charge from the Company at the Company's address set forth in
Section 9 below.
1. Warrant; Purchase Price
Each Warrant shall entitle the Holder initially to purchase one
share of Common Stock of the Company and the purchase price payable upon
exercise of the Warrants shall initially be $5.812 per share of Common Stock
(the "Purchase Price"). The shares of Common Stock issuable upon exercise of the
Warrant are sometimes referred to herein as the "Warrant Shares."
2. Exercise; Expiration Date
2.1 The Warrants are exercisable, at the option of the
Holder, in whole or in part at any time and from time to time commencing on May
15, 1998 (the "Commencement Date") and until the Expiration Date, upon surrender
of this Warrant Certificate to the Company together with a duly completed Notice
of Exercise substantially in the form attached hereto as EXHIBIT 1 and the
Investment Letter in the form attached hereto as EXHIBIT 2 and payment of the
Purchase Price, at the election of the Holder, either (i) in cash or (ii) by
receiving from the Company the number of Warrant Shares equal to (A) the number
of Warrant Shares as to which this Warrant is being exercised, minus (ii) the
number of Warrant Shares having an aggregate Fair Market Value as of the date
the Notice of Exercise is delivered (the "Determination Date") equal to the
aggregate Purchase Price for the number of Warrant Shares as to which this
Warrant is being exercised. For purposes hereof, Fair Market Value means, as of
the Determination Date, the value of the Common Stock determined as follows: (a)
if the Common Stock is listed on any established stock exchange or a national
market system, including without limitation the Nasdaq
B-1
<PAGE> 43
National Market, the Fair Market Value of a share of Common Stock shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in the Common Stock) on the last market trading day
prior to the Determination Date, as reported in the Wall Street Journal or such
other source as the Board of Directors deems reliable; (b) if the Common Stock
is quoted on the Nasdaq System (but not on the Nasdaq National Market) or is
regularly quoted by a recognized securities dealer but selling prices are not
reported, the Fair Market Value of a share of Common Stock shall be the mean
between the bid and asked prices for the Common Stock on the last market trading
day prior to the Determination Date, as reported in the Wall Street Journal or
such other source as the Board of Directors deems reliable; or (c) in the
absence of an established market for the Common Stock, the Fair Market Value
shall be determined in good faith by the Board of Directors. In the case of
exercise of less than the entire Warrant represented by this Warrant
Certificate, the Company shall cancel the Warrant Certificate upon the surrender
thereof and shall execute and deliver a new Warrant Certificate for the balance
of such Warrant.
2.2 The term "Expiration Date" shall mean 5:00 p.m. New York
time on May 15, 2003, or if such day shall in the State of New York be a holiday
or a day on which banks are authorized to close, then 5:00 p.m. New York time
the next following day which in the State of New York is not a holiday or a day
on which banks are authorized to close.
3. Ownership
The Company may deem and treat the person in whose name this
Warrant is registered as the holder and owner hereof (notwithstanding any
notations of ownership or writing hereon made by anyone other than the Company)
for all purposes and shall not be affected by any notice to the contrary until
presentation of this Warrant for registration of transfer as provided in Section
7.
4. Reservation of Shares
The Company covenants that it will at all times reserve and keep
available out of its authorized capital stock, solely for the purpose of issue
upon exercise of the Warrant such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of capital stock which shall be issuable upon exercise of the
Warrants shall be duly and validly issued and fully paid and non-assessable and
free from all taxes, liens and charges with respect to the issue thereof, and
that upon issuance such shares shall be listed on each national securities
exchange, if any, on which the other shares of such outstanding capital stock of
the Company are then listed.
5. Adjustment of Number of Shares
Upon each adjustment of the Warrant Price as provided in Section
6, the Holder shall thereafter be entitled to purchase, at the Warrant Price
resulting from such adjustment, the number of shares (calculated to the nearest
tenth of a share) obtained by multiplying the Warrant Price in effect
immediately prior to such adjustment by the number of shares purchasable
B-2
<PAGE> 44
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Warrant Price resulting from such adjustment.
6. Adjustment of Warrant Price. The Warrant Price shall be subject
to adjustment from time to time as follows:
6.1 If, at any time during the Term of this Warrant, the
number of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date fixed for the determination of
holders of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased so that the number
of shares of Common Stock issuable upon the exercise hereof shall be increased
in proportion to such increase in outstanding shares.
6.2 If, at any time during the Term of this Warrant, the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
6.3 In case, at any time during the Term of this Warrant,
the Company shall declare a cash dividend upon its Common Stock payable
otherwise than out of earnings or earned surplus or shall distribute to holders
of its Common Stock shares of its capital stock (other than Common Stock), stock
or other securities of other persons, evidences of indebtedness issued by the
Company or other persons, assets (excluding cash dividends and distributions) or
options or rights (excluding options to purchase and rights to subscribe for
Common Stock or other securities of the Company convertible into or exchangeable
for Common Stock), then, in each such case, immediately following the record
date fixed for the determination of the holders of Common Stock entitled to
receive such dividend or distribution, the Warrant Price in effect thereafter
shall be determined by multiplying the Warrant Price in effect immediately prior
to such record date by a fraction of which the numerator shall be an amount
equal to the difference of (x) the Current Market Price of one share of Common
Stock minus (y) the fair market value (as determined by the Board of Directors
of the Company, whose determination shall be conclusive) of the stock,
securities, evidences of indebtedness, assets, options or rights so distributed
in respect of one share of Common Stock, and of which the denominator shall be
such Current Market Price.
6.4 All calculations under this Section 6 shall be made to
the nearest cent or to the nearest one-tenth (1/10) of a share, as the case may
be.
6.5 For the purpose of any computation pursuant to this
Section 6, the Current Market Price at any date of one share of Common Stock
shall be deemed to be (a) if the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market, the Current Market Price of a share of Common Stock shall be
the closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of
B-3
<PAGE> 45
trading in the Common Stock) on the last market trading day prior to such date,
as reported in the Wall Street Journal or such other source as the Board of
Directors deems reliable; (b) if the Common Stock is quoted on the Nasdaq System
(but not on the Nasdaq National Market) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Current Market Price
of a share of Common Stock shall be the mean between the bid and asked prices
for the Common Stock on the last market trading day prior to such date, as
reported in the Wall Street Journal or such other source as the Board of
Directors deems reliable; or (c) in the absence of an established market for the
Common Stock, the Current Market Price shall be determined in good faith by the
Board of Directors.
6.6 Whenever the Warrant Price shall be adjusted as provided
in Section 6.5, the Company shall prepare a statement showing the facts
requiring such adjustment and the Warrant Price that shall be in effect after
such adjustment. The Company shall cause a copy of such statement to be sent by
mail, first class postage prepaid, to each Holder of this Warrant at its, his or
her address appearing on the Company's records. Where appropriate, such copy may
be given in advance and may be included as part of the notice required to be
mailed under the provisions of subsection 6.8 of this Section 6.
6.7 Adjustments made pursuant to shall be made on the date
such dividend, subdivision, split-up, combination or distribution, as the case
may be, is made, and shall become effective at the opening of business on the
business day next following the record date for the determination of
stockholders entitled to such dividend, subdivision, split-up, combination or
distribution.
6.8 In the event the Company shall propose to take any
action of the types described in subsections 6.1, 6.2, and 6.3 above of this
Section 6, the Company shall forward, at the same time and in the same manner,
to the Holder of this Warrant such notice, if any, which the Company shall give
to the holders of capital stock of the Company.
6.9 In any case in which the provisions of this Section 6
shall require that an adjustment shall become effective immediately after a
record date for an event, the Company may defer until the occurrence of such
event issuing to the Holder of all or any part of this Warrant which is
exercised after such record date and before the occurrence of such event the
additional shares of capital stock issuable upon such exercise by reason of the
adjustment required by such event over and above the shares of capital stock
issuable upon such exercise before giving effect to such adjustment exercise;
provided, however, that the Company shall deliver to such Holder a due bill or
other appropriate instrument evidencing such Holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
7. Securities Law Restrictions
7.1 Restricted Securities. The Holder understands that this
Warrant and the Warrant Shares constitute "restricted securities" under the
federal securities laws inasmuch as they are, or will be, acquired from the
Company in transactions not involving a public offering and accordingly may not,
under such laws and applicable regulations, be resold or transferred without
registration under the Securities Act or an applicable exemption from such
registration.
B-4
<PAGE> 46
In this connection, the Holder acknowledges that Rule 144 of the Securities and
Exchange Commission (the "Commission") is not now, and may not in the future be,
available for resales of the Warrant and the Warrant Shares hereunder. Unless
the Warrant Shares are subsequently registered pursuant to Section 8, the Holder
further acknowledges that the securities legend on EXHIBIT 2 attached hereto
shall be placed on any Warrant Shares issued to the Holder upon exercise of this
Warrant.
7.2 Representations. By receipt of this Warrant, the Holder
makes the same representations with respect to the acquisition of this Warrant
as the Holder is required to make upon the exercise of this Warrant and
acquisition of the Warrant Shares as set forth in the Form of Investment Letter
attached as EXHIBIT 2 attached hereto.
7.3 Certification of Investment Purpose. Unless a current
registration statement under the Securities Act shall be in effect with respect
to the Warrant Shares, the Holder covenants and agrees that, at the time of
exercise hereof, it will deliver to the Company a written certification executed
by the Holder that the Warrant Shares are for the account of such Holder and
acquired for investment purposes only and that such securities are not acquired
with a view to, or for sale in connection with, any distribution thereof.
7.4 Transfer Mechanics. Subject to the provisions of
Sections 7.1 and 7.2 above, this Warrant and all rights hereunder are
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 9
hereof.
7.5 Replacement. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft or destruction, and, in such
case, of indemnity or security reasonably satisfactory to it, and upon surrender
of this Warrant if mutilated, the Company will make and deliver a new Warrant of
like tenor, in lieu of this Warrant; provided that if the Holder hereof is an
instrumentality of a state or local government or an institutional holder or a
nominee for such an instrumentality or institutional holder an irrevocable
agreement of indemnity by such Holder shall be sufficient for all purposes of
this Section 7, and no evidence of loss or theft or destruction shall be
necessary. This Warrant shall be promptly canceled by the Company upon the
surrender hereof in connection with any transfer or replacement. Except as
otherwise provided above, in the case of the loss, theft or destruction of a
Warrant, the Company shall pay all expenses, taxes and other charges payable in
connection with any transfer or replacement of this Warrant, other than stock
transfer taxes (if any) payable in connection with a transfer of this Warrant,
which shall be payable by the Holder. Holder will not transfer this Warrant and
the rights hereunder except in compliance with federal and state securities
laws.
8. Registration Rights
B-5
<PAGE> 47
The holder of this Warrant has all the benefits, and by
accepting this warrant, assumes all of the obligations of a holder of Warrant
Shares under the Purchase Agreement.
9. Notices
Any notice or other document required or permitted to be given
or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at the address of the Holder appearing on the
books of the Company or to such other address as shall have been furnished to
the Company in writing by the Holder. Any notice or other document required or
permitted to be given or delivered to the Company shall be delivered at, or sent
by certified or registered mail to, the Company at 200 N. Westlake Boulevard,
Suite 202, Westlake Village, CA 91362, or to such other address as shall have
been furnished in writing to the Holder by the Company. Any notice so addressed
and mailed by registered or certified mail shall be deemed to be given when so
mailed. Any notice so addressed and otherwise delivered shall be deemed to be
given when actually received by the addressee.
10. Amendment
This Warrant may be amended as set forth in Section 8 of the
Purchase Agreement dated as of March 2, 1998.
11. Governing Law
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of California.
B-6
<PAGE> 48
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed by its officers thereunto duly authorized and its corporate
seal to be affixed hereon, as of this ____ day of __________, 1998.
DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC.
By: ________________________________
Name: Robert H. Gurevitch
Title: Chairman, CEO, President
and Secretary
[SEAL]
Attest:
- -------------------------------
Name: Ronald E. Wittman
Title: Chief Financial Officer
B-7
<PAGE> 49
EXHIBIT 1 TO WARRANT
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise, pursuant
to Section 32 of the Warrant Certificate accompanying this Notice of Exercise,
_____________Warrants of the total number of Warrants owned by the undersigned
pursuant to the accompanying Warrant Certificate, and herewith makes payment of
the Purchase Price of such shares in full either in cash or by tendering
Warrants with a Fair Market Value equal to all or any part of the Purchase Price
with respect to the Warrants for which this notice is given, in accordance with
the terms of Section 2.1 of the Warrant Certificate.
------------------------------------
Name of Holder
------------------------------------
Signature
------------------------------------
Address:
- --------------------------
CASH
- --------------------------
Warrants Tendered - FMV
= $_______________________
divided by $5.812 (as adjusted)
= ________________________ Warrant Shares
B-8
<PAGE> 50
EXHIBIT 2 TO WARRANT
To: DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
In connection with the purchase by the undersigned of
___________ shares of the Common Stock (the "Warrant Shares") of Dental/Medical
Diagnostic Systems, Inc, a Delaware corporation (the "Company"), upon exercise
of that certain Common Stock Warrant dated as of March __, 1998 the undersigned
hereby represents and warrants as follows:
The Warrant Shares to be received by the undersigned upon
exercise of the Warrant are being acquired for its own account, not as a nominee
or agent, and not with a view to resale or distribution of any part thereof, and
the undersigned has no present intention of selling, granting any participation
in, or otherwise distributing the same. The undersigned further represents that
it does not have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participation to such person or to any third
person, with respect to the Warrant Shares. The undersigned believes it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Warrant Shares.
The undersigned understands that the Warrant Shares are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in transactions not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act of
1933, as amended (the "Act"), only in certain limited circumstances. In this
connection, the undersigned represents that it is familiar with Commission Rule
144, as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
Without in any way limiting the representations set forth above,
the undersigned agrees not to make any disposition of all or any portion of the
Warrant Shares unless and until:
There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or
(i) The undersigned shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested, the undersigned shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company that such disposition will not
require registration of such shares under the Act. The Company will not require
an opinion of counsel for sales made pursuant to Rule 144 except in unusual
circumstances.
B-9
<PAGE> 51
The undersigned understands the instruments evidencing the
Warrant Shares may bear the following legend:
THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
Dated: ____________, 1998
______________________________________
Name:_________________________________
Title:________________________________
B-10
<PAGE> 52
FORM OF INVESTMENT LETTER
EXHIBIT C
TO FORM NOTE PURCHASE AGREEMENT
To: DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
In connection with the purchase by the undersigned of
___________ shares of the Common Stock (the "Conversion Shares") of
Dental/Medical Diagnostic Systems, Inc, a Delaware corporation (the "Company"),
upon conversion of that certain 12% Senior Subordinated Note due 1999, dated as
of __________, 1998, and appended hereto, the undersigned hereby represents and
warrants as follows:
The Conversion Shares to be received by the undersigned upon
conversion of the Note are being acquired for its own account, not as a nominee
or agent, and not with a view to resale or distribution of any part thereof, and
the undersigned has no present intention of selling, granting any participation
in, or otherwise distributing the same. The undersigned further represents that
it does not have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participation to such person or to any third
person, with respect to the Conversion Shares. The undersigned believes it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Stock.
The undersigned understands that the Conversion Shares are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in transactions not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act of
1933, as amended (the "Act"), only in certain limited circumstances. In this
connection, the undersigned represents that it is familiar with Commission Rule
144, as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
Without in any way limiting the representations set forth above,
the undersigned agrees not to make any disposition of all or any portion of the
Conversion Shares unless and until:
There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or
(i) The undersigned shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested, the undersigned shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company that such disposition will not
require
C-1
<PAGE> 53
registration of such shares under the Act. The Company will not require an
opinion of counsel for sales made pursuant to Rule 144 except in unusual
circumstances.
The undersigned understands the instruments evidencing the
Conversion Shares may bear the following legend:
THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
Dated: _______________
______________________________________
Name:_________________________________
Title:________________________________
C-2
<PAGE> 54
EXHIBIT D
RISK FACTORS ASSOCIATED WITH AN INVESTMENT IN SENIOR
SUBORDINATED DEBT SECURITIES
The Notes will be expressly subordinated in right of payment to all Senior
Indebtedness of the Company (but not its Subsidiaries). The Notes will not
contain any financial covenants or similar restrictions with respect to the
Company or its Subsidiaries and therefore, the holders of the Notes will have no
protection (other than rights upon Events of Default as described in Section 7
of the Note Purchase Agreement) from adverse changes in the Company's financial
condition. By reason of such subordination of the Notes, in the event of
insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up
of the business of the Company or upon a default in payment with respect to any
indebtedness of the Company or an event of default with respect to such
indebtedness resulting in the acceleration thereof, the assets of the Company
will be available to pay the amounts due on the Notes only after all Senior
Indebtedness had been paid in full. The Notes will rank pari passu with other
unsecured obligations of the Company.
The Notes are obligations exclusively of Dental/Medical Diagnostic Systems, Inc.
and not of its Subsidiaries. Because certain of the operations of the Company
are currently conducted through its Subsidiaries, the cash flow and consequent
ability to service debt of the Company, including the Notes, are dependent, in
part, upon the earnings of its Subsidiaries and the distribution of those
earnings to or upon loans or on the payment of funds by those Subsidiaries to
the Company. The Subsidiaries are separate and distinct entities and have no
obligation, contingent or otherwise, to pay any amounts due pursuant to the
Notes or to make any funds available therefor, whether by dividends, loans, or
other payments. In addition, the payments of dividends and the making of loans
and advances to the Company by its Subsidiaries may be subject to statutory or
contractual restrictions, or contingent upon the earnings of those Subsidiaries
and are subject to various business considerations.
For the reasons set forth in the immediately preceding paragraph, the Notes will
be effectively subordinated to all indebtedness and liabilities, including
current liabilities and commitments under leases of the Company's Subsidiaries.
Any right of the Company to receive assets of any of its Subsidiaries upon
liquidation or reorganization of the Subsidiary (and the consequent right of the
holder of the Notes to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such Subsidiary, in which case the claims of the Company would still
be subordinated to any security interest in the assets of such Subsidiary and
any of the indebtedness of such Subsidiary senior to that held by the Company.
As of February 24, 1998, Senior Indebtedness of the Company and indebtedness of
its Subsidiaries aggregated approximately $268,000.
D-1
<PAGE> 55
SCHEDULE 1
PURCHASERS:
<TABLE>
<CAPTION>
Aggregate Amount of Warrants
Name and Address Notes
---------------- ------------------- ---------------------
Note $ Amount Warrant Amount
---- -------- ------- ------
<S> <C> <C> <C> <C>
** N-1 $ 500,000 W-1 50,000
**
** N-2 $ 500,000 W-2 50,000
**
** N-3 $ 25,000 W-3 2,500
**
** N-4 $1,000,000 W-4 100,000
**
** N-5 $ 500,000 W-5 50,000
**
** N-6 $ 500,000 W-6 50,000
**
** N-7 $ 250,000 W-7 25,000
**
** N-8 $ 100,000 W-8 10,000
**
** N-9 $ 50,000 W-9 5,000
**
** N-10 $1,000,000 W-10 100,000
**
</TABLE>
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
S-1
<PAGE> 56
<TABLE>
<CAPTION>
Aggregate Amount of Warrants
Name and Address Notes
---------------- ------------------- ---------------------
Note $ Amount Warrant Amount
---- -------- ------- ------
<S> <C> <C> <C> <C>
** N-11 $25,000 W-11 2,500
**
** N-12 $50,000 W-12 5,000
**
**
TOTAL 12 $4,5000,000 12 450,000
=========== =======
</TABLE>
S-2
<PAGE> 1
EXHIBIT 10.40
-------------
FORM OF NOTE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") OR STATE SECURITIES LAWS AND NO TRANSFER
OF THESE SECURITIES MAY BE MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT, OR (B) PURSUANT TO AN EXEMPTION THEREFROM WITH RESPECT
TO WHICH THE COMPANY MAY, UPON REQUEST, REQUIRE A SATISFACTORY OPINION OF
COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE REQUIREMENTS OF THE
ACT. PAYMENT ON THIS NOTE IS SUBORDINATED TO THE CLAIMS OF SENIOR LENDERS
PURSUANT TO THE TERMS OF A NOTE AND SECURITY AGREEMENT OF EVEN DATE HEREWITH.
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
12% Senior Subordinated Note
Note Due 1999
No. N-____ __________, 1998
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC., a Delaware corporation (the "Company"),
for value received, hereby, promises to pay to ________________________ or
registered assigns on the ___ day of March, 1999 (the "Maturity Date") the
principal amount of _____________________________ DOLLARS ($______________) and
to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the principal amount from time to time remaining unpaid hereon at the
rate of 12% per annum from the date hereof until maturity, payable
semi-annually. The Company agrees to pay interest on overdue principal
(including any overdue required or optional prepayment of principal) and
premium, if any, and (to the extent legally enforceable) on any overdue
installment of interest, at the Overdue Rate per annum from the date such
payment is due, whether by acceleration or otherwise, until paid.
Both the principal hereof and interest hereon are payable at the
principal office of the Company in Westlake Village, California, in coin or
currency of the United States of America which at the time of payment shall be
legal tender for the payment of public and private debts. If any amount of
principal, premium, if any, or interest on or in respect of this Note becomes
due and payable on any date which is not a Business Day, such amount shall be
payable on the next preceding Business Day.
This Note is one of the 12% Senior Subordinated Notes due 1999 of the
Company in the aggregate principal amount of $4,500,000 issued or to be issued
under and pursuant to the terms and provisions of the Note Agreement, dated as
of March 2 , 1998 (the "Note Agreement"), entered into by the Company with the
original Purchaser therein referred to and this Note and the
A-1
<PAGE> 2
holder hereof are entitled equally and ratably with the holders of all other
Notes outstanding under the Note Agreement to all the benefits and security
provided for thereby or referred to therein, to which Note Agreement reference
is hereby made for the statement thereof. Capitalized terms used but not
otherwise deemed herein have the meaning given thereto in the Note Agreement.
This Note and the other Notes outstanding under the Note Agreement may
be declared due prior to their expressed maturity dates and certain prepayments
are required to be made thereon, all in the events, on the terms and in the
manner and amounts as provided in the Note Agreement. The Notes are not subject
to prepayment or redemption at the option of the Company prior to their
expressed maturity dates except on the terms and conditions and in the amounts
and with the premium, if any, set forth in the Note Agreement. This Note is
convertible to Common Stock of the Company at the election of the Note holder
subject to the limitations and on the terms and conditions set forth in the Note
Agreement.
This Note is registered on the books of the Company and is transferable
only by surrender thereof at the principal office of the Company duly endorsed
or accompanied by a written instrument or transfer duly executed by the
registered holder of this Note or its attorney duly authorized in writing.
Payment of or on account of principal, premium, if any, and interest on this
Note shall be made only to or upon the order in writing of the registered
holder.
This Note and said Note Agreement are governed by and construed in
accordance with the internal laws of California.
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.,
A DELAWARE CORPORATION
By: ___________________________________
Name: Ronald E. Wittman
Title: Chief Financial Officer
A-2
<PAGE> 1
EXHIBIT 10.41
-------------
FORM OF WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR STATE SECURITIES LAWS
AND NO TRANSFER OF THESE SECURITIES MAY BE MADE EXCEPT (A) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR (B) PURSUANT TO AN EXEMPTION
THEREFROM WITH RESPECT TO WHICH THE COMPANY MAY, UPON REQUEST, REQUIRE A
SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM
THE REQUIREMENTS OF THE ACT.
No. W-____ DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
WARRANT CERTIFICATE
The Warrants are part of a series of 450,000 warrants issued pursuant to
that certain Purchase Agreement dated March 2, 1998 by and between the Company,
the initial holder hereof and others (the "Purchase Agreement"). This
Certificate represents ____________ Warrants for the purchase of _______________
shares of Common Stock. A copy of the Purchase Agreement may be obtained by the
Holder at no charge from the Company at the Company's address set forth in
Section 9 below.
1. Warrant; Purchase Price
Each Warrant shall entitle the Holder initially to purchase one
share of Common Stock of the Company and the purchase price payable upon
exercise of the Warrants shall initially be $5.812 per share of Common Stock
(the "Purchase Price"). The shares of Common Stock issuable upon exercise of the
Warrant are sometimes referred to herein as the "Warrant Shares."
2. Exercise; Expiration Date
2.1 The Warrants are exercisable, at the option of the
Holder, in whole or in part at any time and from time to time commencing on May
15, 1998 (the "Commencement Date") and until the Expiration Date, upon surrender
of this Warrant Certificate to the Company together with a duly completed Notice
of Exercise substantially in the form attached hereto as EXHIBIT 1 and the
Investment Letter in the form attached hereto as EXHIBIT 2 and payment of the
Purchase Price, at the election of the Holder, either (i) in cash or (ii) by
receiving from the Company the number of Warrant Shares equal to (A) the number
of Warrant Shares as to which this Warrant is being exercised, minus (ii) the
number of Warrant Shares having an aggregate Fair Market Value as of the date
the Notice of Exercise is delivered (the "Determination Date") equal to the
aggregate Purchase Price for the number of Warrant Shares as to which this
Warrant is being exercised. For purposes hereof, Fair Market Value means, as of
the Determination Date, the value of the Common Stock determined as follows: (a)
if the Common Stock is listed on any established stock exchange or a national
market system, including without limitation the Nasdaq
B-1
<PAGE> 2
National Market, the Fair Market Value of a share of Common Stock shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in the Common Stock) on the last market trading day
prior to the Determination Date, as reported in the Wall Street Journal or such
other source as the Board of Directors deems reliable; (b) if the Common Stock
is quoted on the Nasdaq System (but not on the Nasdaq National Market) or is
regularly quoted by a recognized securities dealer but selling prices are not
reported, the Fair Market Value of a share of Common Stock shall be the mean
between the bid and asked prices for the Common Stock on the last market trading
day prior to the Determination Date, as reported in the Wall Street Journal or
such other source as the Board of Directors deems reliable; or (c) in the
absence of an established market for the Common Stock, the Fair Market Value
shall be determined in good faith by the Board of Directors. In the case of
exercise of less than the entire Warrant represented by this Warrant
Certificate, the Company shall cancel the Warrant Certificate upon the surrender
thereof and shall execute and deliver a new Warrant Certificate for the balance
of such Warrant.
2.2 The term "Expiration Date" shall mean 5:00 p.m. New York
time on May 15, 2003, or if such day shall in the State of New York be a holiday
or a day on which banks are authorized to close, then 5:00 p.m. New York time
the next following day which in the State of New York is not a holiday or a day
on which banks are authorized to close.
3. Ownership
The Company may deem and treat the person in whose name this
Warrant is registered as the holder and owner hereof (notwithstanding any
notations of ownership or writing hereon made by anyone other than the Company)
for all purposes and shall not be affected by any notice to the contrary until
presentation of this Warrant for registration of transfer as provided in Section
7.
4. Reservation of Shares
The Company covenants that it will at all times reserve and keep
available out of its authorized capital stock, solely for the purpose of issue
upon exercise of the Warrant such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of capital stock which shall be issuable upon exercise of the
Warrants shall be duly and validly issued and fully paid and non-assessable and
free from all taxes, liens and charges with respect to the issue thereof, and
that upon issuance such shares shall be listed on each national securities
exchange, if any, on which the other shares of such outstanding capital stock of
the Company are then listed.
5. Adjustment of Number of Shares
Upon each adjustment of the Warrant Price as provided in Section
6, the Holder shall thereafter be entitled to purchase, at the Warrant Price
resulting from such adjustment, the number of shares (calculated to the nearest
tenth of a share) obtained by multiplying the Warrant Price in effect
immediately prior to such adjustment by the number of shares purchasable
B-2
<PAGE> 3
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Warrant Price resulting from such adjustment.
6. Adjustment of Warrant Price. The Warrant Price shall be subject
to adjustment from time to time as follows:
6.1 If, at any time during the Term of this Warrant, the
number of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date fixed for the determination of
holders of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased so that the number
of shares of Common Stock issuable upon the exercise hereof shall be increased
in proportion to such increase in outstanding shares.
6.2 If, at any time during the Term of this Warrant, the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
6.3 In case, at any time during the Term of this Warrant,
the Company shall declare a cash dividend upon its Common Stock payable
otherwise than out of earnings or earned surplus or shall distribute to holders
of its Common Stock shares of its capital stock (other than Common Stock), stock
or other securities of other persons, evidences of indebtedness issued by the
Company or other persons, assets (excluding cash dividends and distributions) or
options or rights (excluding options to purchase and rights to subscribe for
Common Stock or other securities of the Company convertible into or exchangeable
for Common Stock), then, in each such case, immediately following the record
date fixed for the determination of the holders of Common Stock entitled to
receive such dividend or distribution, the Warrant Price in effect thereafter
shall be determined by multiplying the Warrant Price in effect immediately prior
to such record date by a fraction of which the numerator shall be an amount
equal to the difference of (x) the Current Market Price of one share of Common
Stock minus (y) the fair market value (as determined by the Board of Directors
of the Company, whose determination shall be conclusive) of the stock,
securities, evidences of indebtedness, assets, options or rights so distributed
in respect of one share of Common Stock, and of which the denominator shall be
such Current Market Price.
6.4 All calculations under this Section 6 shall be made to
the nearest cent or to the nearest one-tenth (1/10) of a share, as the case may
be.
6.5 For the purpose of any computation pursuant to this
Section 6, the Current Market Price at any date of one share of Common Stock
shall be deemed to be (a) if the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market, the Current Market Price of a share of Common Stock shall be
the closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of
B-3
<PAGE> 4
trading in the Common Stock) on the last market trading day prior to such date,
as reported in the Wall Street Journal or such other source as the Board of
Directors deems reliable; (b) if the Common Stock is quoted on the Nasdaq System
(but not on the Nasdaq National Market) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Current Market Price
of a share of Common Stock shall be the mean between the bid and asked prices
for the Common Stock on the last market trading day prior to such date, as
reported in the Wall Street Journal or such other source as the Board of
Directors deems reliable; or (c) in the absence of an established market for the
Common Stock, the Current Market Price shall be determined in good faith by the
Board of Directors.
6.6 Whenever the Warrant Price shall be adjusted as provided
in Section 6.5, the Company shall prepare a statement showing the facts
requiring such adjustment and the Warrant Price that shall be in effect after
such adjustment. The Company shall cause a copy of such statement to be sent by
mail, first class postage prepaid, to each Holder of this Warrant at its, his or
her address appearing on the Company's records. Where appropriate, such copy may
be given in advance and may be included as part of the notice required to be
mailed under the provisions of subsection 6.8 of this Section 6.
6.7 Adjustments made pursuant to shall be made on the date
such dividend, subdivision, split-up, combination or distribution, as the case
may be, is made, and shall become effective at the opening of business on the
business day next following the record date for the determination of
stockholders entitled to such dividend, subdivision, split-up, combination or
distribution.
6.8 In the event the Company shall propose to take any
action of the types described in subsections 6.1, 6.2, and 6.3 above of this
Section 6, the Company shall forward, at the same time and in the same manner,
to the Holder of this Warrant such notice, if any, which the Company shall give
to the holders of capital stock of the Company.
6.9 In any case in which the provisions of this Section 6
shall require that an adjustment shall become effective immediately after a
record date for an event, the Company may defer until the occurrence of such
event issuing to the Holder of all or any part of this Warrant which is
exercised after such record date and before the occurrence of such event the
additional shares of capital stock issuable upon such exercise by reason of the
adjustment required by such event over and above the shares of capital stock
issuable upon such exercise before giving effect to such adjustment exercise;
provided, however, that the Company shall deliver to such Holder a due bill or
other appropriate instrument evidencing such Holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
7. Securities Law Restrictions
7.1 Restricted Securities. The Holder understands that this
Warrant and the Warrant Shares constitute "restricted securities" under the
federal securities laws inasmuch as they are, or will be, acquired from the
Company in transactions not involving a public offering and accordingly may not,
under such laws and applicable regulations, be resold or transferred without
registration under the Securities Act or an applicable exemption from such
registration.
B-4
<PAGE> 5
In this connection, the Holder acknowledges that Rule 144 of the Securities and
Exchange Commission (the "Commission") is not now, and may not in the future be,
available for resales of the Warrant and the Warrant Shares hereunder. Unless
the Warrant Shares are subsequently registered pursuant to Section 8, the Holder
further acknowledges that the securities legend on EXHIBIT 2 attached hereto
shall be placed on any Warrant Shares issued to the Holder upon exercise of this
Warrant.
7.2 Representations. By receipt of this Warrant, the Holder
makes the same representations with respect to the acquisition of this Warrant
as the Holder is required to make upon the exercise of this Warrant and
acquisition of the Warrant Shares as set forth in the Form of Investment Letter
attached as EXHIBIT 2 attached hereto.
7.3 Certification of Investment Purpose. Unless a current
registration statement under the Securities Act shall be in effect with respect
to the Warrant Shares, the Holder covenants and agrees that, at the time of
exercise hereof, it will deliver to the Company a written certification executed
by the Holder that the Warrant Shares are for the account of such Holder and
acquired for investment purposes only and that such securities are not acquired
with a view to, or for sale in connection with, any distribution thereof.
7.4 Transfer Mechanics. Subject to the provisions of
Sections 7.1 and 7.2 above, this Warrant and all rights hereunder are
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 9
hereof.
7.5 Replacement. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft or destruction, and, in such
case, of indemnity or security reasonably satisfactory to it, and upon surrender
of this Warrant if mutilated, the Company will make and deliver a new Warrant of
like tenor, in lieu of this Warrant; provided that if the Holder hereof is an
instrumentality of a state or local government or an institutional holder or a
nominee for such an instrumentality or institutional holder an irrevocable
agreement of indemnity by such Holder shall be sufficient for all purposes of
this Section 7, and no evidence of loss or theft or destruction shall be
necessary. This Warrant shall be promptly canceled by the Company upon the
surrender hereof in connection with any transfer or replacement. Except as
otherwise provided above, in the case of the loss, theft or destruction of a
Warrant, the Company shall pay all expenses, taxes and other charges payable in
connection with any transfer or replacement of this Warrant, other than stock
transfer taxes (if any) payable in connection with a transfer of this Warrant,
which shall be payable by the Holder. Holder will not transfer this Warrant and
the rights hereunder except in compliance with federal and state securities
laws.
8. Registration Rights
B-5
<PAGE> 6
The holder of this Warrant has all the benefits, and by
accepting this warrant, assumes all of the obligations of a holder of Warrant
Shares under the Purchase Agreement.
9. Notices
Any notice or other document required or permitted to be given
or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at the address of the Holder appearing on the
books of the Company or to such other address as shall have been furnished to
the Company in writing by the Holder. Any notice or other document required or
permitted to be given or delivered to the Company shall be delivered at, or sent
by certified or registered mail to, the Company at 200 N. Westlake Boulevard,
Suite 202, Westlake Village, CA 91362, or to such other address as shall have
been furnished in writing to the Holder by the Company. Any notice so addressed
and mailed by registered or certified mail shall be deemed to be given when so
mailed. Any notice so addressed and otherwise delivered shall be deemed to be
given when actually received by the addressee.
10. Amendment
This Warrant may be amended as set forth in Section 8 of the
Purchase Agreement dated as of March 2, 1998.
11. Governing Law
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of California.
B-6
<PAGE> 7
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed by its officers thereunto duly authorized and its corporate
seal to be affixed hereon, as of this ____ day of __________, 1998.
DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC.
By: ________________________________
Name: Robert H. Gurevitch
Title: Chairman, CEO, President
and Secretary
[SEAL]
Attest:
- -------------------------------
Name: Ronald E. Wittman
Title: Chief Financial Officer
B-7
<PAGE> 8
EXHIBIT 1 TO WARRANT
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise, pursuant
to Section 32 of the Warrant Certificate accompanying this Notice of Exercise,
_____________Warrants of the total number of Warrants owned by the undersigned
pursuant to the accompanying Warrant Certificate, and herewith makes payment of
the Purchase Price of such shares in full either in cash or by tendering
Warrants with a Fair Market Value equal to all or any part of the Purchase Price
with respect to the Warrants for which this notice is given, in accordance with
the terms of Section 2.1 of the Warrant Certificate.
------------------------------------
Name of Holder
------------------------------------
Signature
------------------------------------
Address:
- --------------------------
CASH
- --------------------------
Warrants Tendered - FMV
= $_______________________
divided by $5.812 (as adjusted)
= ________________________ Warrant Shares
B-8
<PAGE> 9
EXHIBIT 2 TO WARRANT
To: DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
In connection with the purchase by the undersigned of
___________ shares of the Common Stock (the "Warrant Shares") of Dental/Medical
Diagnostic Systems, Inc, a Delaware corporation (the "Company"), upon exercise
of that certain Common Stock Warrant dated as of March __, 1998 the undersigned
hereby represents and warrants as follows:
The Warrant Shares to be received by the undersigned upon
exercise of the Warrant are being acquired for its own account, not as a nominee
or agent, and not with a view to resale or distribution of any part thereof, and
the undersigned has no present intention of selling, granting any participation
in, or otherwise distributing the same. The undersigned further represents that
it does not have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participation to such person or to any third
person, with respect to the Warrant Shares. The undersigned believes it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Warrant Shares.
The undersigned understands that the Warrant Shares are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in transactions not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act of
1933, as amended (the "Act"), only in certain limited circumstances. In this
connection, the undersigned represents that it is familiar with Commission Rule
144, as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
Without in any way limiting the representations set forth above,
the undersigned agrees not to make any disposition of all or any portion of the
Warrant Shares unless and until:
There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or
(i) The undersigned shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested, the undersigned shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company that such disposition will not
require registration of such shares under the Act. The Company will not require
an opinion of counsel for sales made pursuant to Rule 144 except in unusual
circumstances.
B-9
<PAGE> 10
The undersigned understands the instruments evidencing the
Warrant Shares may bear the following legend:
THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
Dated: ____________, 1998
______________________________________
Name:_________________________________
Title:________________________________
B-10
<PAGE> 1
EXHIBIT 10.42
** CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION
[LOGO] REVOLVING CREDIT LOAN & SECURITY
AGREEMENT
(ACCOUNTS AND INVENTORY)
<TABLE>
<CAPTION>
OBLIGOR NOTE AGREEMENT DATE
** DECEMBER 10,1997
<S> <C> <C> <C> <C> <C>
CREDIT LIMIT INTEREST RATE *B+0.25% OFFICER NO./INITIALS
$1,500,000.00 8.750% 48711 THOMAS M. HICKS
</TABLE>
*SEE ATTACHED ADDENDUM FOR RATE OPTIONS
INITIAL HERE
THIS AGREEMENT is entered into on DECEMBER 10, 1997,between COMERICA
BANK-CALIFORNIA ("Bank") as secured party, whose Headquarter Office Is 333 WEST
SANTA CLARA STREET, SAN JOSE, CA and DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
("Borrower"), a DELAWARE CORPORATION whose sole place of business (if it has
only one), chief executive office (if it has more than one place of business) or
residence (if an individual) is located at 200 N. WESTLAKE BLVD., #202, WESTLAKE
VILLAGE, CA. The parties agree as follows:
1. DEFINITIONS
1.1 "Agreement" as used in this Agreement means and includes this
Revolving Credit Loan & Security Agreement (Accounts and Inventory), any
concurrent or subsequent rider to this Revolving Credit Loan & Security
Agreement (Accounts and Inventory) and any extensions, supplements,
amendments or modifications to this Revolving Credit Loan & Security
Agreement (Accounts and Inventory) and to any such rider.
1.2 "Bank Expenses" as used in this Agreement means and includes: all
costs or expenses required to be paid by Borrower under this Agreement which
are paid or advanced by Bank; taxes and insurance premiums of every nature
and kind of Borrower paid by Bank; filing, recording, publication and search
fees, appraiser fees, auditor fees and costs, and title insurance premiums
paid or incurred by Bank in connection with Bank's transactions with
Borrower; costs and expenses incurred by Bank In collecting the Receivables
(with or without suit) to correct any default or enforce any provision of
this Agreement, or in gaining possession of, maintaining, handling,
preserving, storing, shipping, selling, disposing of, preparing for sale
and/or advertising to sell the Collateral, whether or not a sale is
consummated; costs and expenses of suit incurred by Bank in enforcing or
defending this Agreement or any portion hereof, including, but not limited
to, expenses incurred by Bank in attempting to obtain relief from any stay,
restraining order, injunction or similar process which prohibits Bank from
exercising any of its rights or remedies; and attorneys' fees and expenses
incurred by Bank in advising, structuring, drafting, reviewing, amending,
terminating, enforcing, defending or concerning this Agreement, or any
portion hereof or any agreement related hereto, whether or not suit is
brought. Bank Expenses shall include Bank's in-house legal charges at
reasonable rates.
1.3 "Base Rate" as used in this Agreement means that variable rate of
interest so announced by Bank at its headquarters office in San Jose,
California as its "Base Rate" from time to time and which serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto.
1.4 "Borrower's Books" as used in this Agreement means and includes all
of the Borrower's books and records including but not limited to: minute
books; ledgers; records indicating, summarizing or evidencing Borrower's
assets, liabilities, Receivables, business operations or financial
condition, and all information relating thereto, computer programs; computer
disk or tape files; computer printouts; computer runs; and other computer
prepared information and equipment of any kind.
1.5 "Borrowing Base" as used in this Agreement means the sum of: (1)
NINETY percent 90.00 %) of the net amount of Eligible Accounts after
deducting therefrom all payments, adjustments and credits applicable thereto
("Accounts Receivable Borrowing Base); and (2) the amount, if any, of the
advances against Inventory agreed to be made pursuant to any Inventory Rider
("Inventory Borrowing Base"), or other rider, amendment or modification to
this Agreement, that may now or hereafter be entered into by Bank and
Borrower.
1.6 "Cash Flow" as used in this Agreement means, for any applicable
period of determination, the Net Income (after deduction for income taxes
and other taxes of such person determined by reference to income or profits
of such person) for such period, plus, to the extent deducted in computation
of such Net Income, the amount of depreciation and amortization expense and
the amount of deferred tax liability during such period, all as determined
in accordance with GAAP. The applicable period of determination will be N/A
beginning with the period from ___________to ___________.
1.7 "Collateral" as used in this Agreement means and includes each and
all of the following: the Receivables; the Intangibles; the negotiable
collateral, the Inventory; all money, deposit accounts and all other assets
of Borrower in which Bank receives a security interest or which hereafter
come into the possession, custody or control of Bank; and the proceeds of
any of the foregoing, including, but not limited to, proceeds of insurance
covering the collateral and any and all Receivables, Intangibles, negotiable
collateral, Inventory, equipment, money, deposit accounts or other tangible
and intangible property of borrower resulting from the sale or other
disposition of the collateral, and the proceeds thereof. Notwithstanding
anything to the contrary contained herein, collateral shall not include any
waste or other materials which have been or may be designated as toxic or
hazardous by Bank.
1.8 "Credit" as used in this Agreement means all Obligations, except
those obligations arising pursuant to any other separate contract,
instrument, note, or other separate agreement which, by its terms, provides
for a specified interest rate and term.
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
1.
<PAGE> 2
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
1.9 "Current Assets" as used in this Agreement means, as of any
applicable date of determination, all cash, nonaffiliated customer
receivables, United States government securities, claims against the United
States government, and inventories.
1.10 "Current Liabilities" as used in this Agreement means, as of any
applicable date of determination, (i) all liabilities of a person that
should be classified as current in accordance with GAAP, including without
limitation any portion of the principal of the Indebtedness classified as
current, plus (ii) to the extent not otherwise included, all liabilities of
the Borrower to any of its affiliates whether or not classified as current
in accordance with GAAP.
1.11 "Daily Balance" as used in this Agreement means the amount
determined by taking the amount of the Credit owed at the beginning of a
given day, adding any new Credit advanced or incurred on such date, and
subtracting any payments or collections which are deemed to be paid and are
applied by Bank in reduction of the Credit on that date under the provisions
of this Agreement.
1.12 "Eligible Accounts" as used in this Agreement means and includes
those accounts of Borrower which are due and payable within THIRTY 30)
days, or less, from the date of invoice, have been validly assigned to Bank
and strictly comply with all of Borrower's warranties and representations to
Bank; but Eligible Accounts shall not include the following: (a) accounts
with respect to which the account debtor is an officer, employee, partner,
joint venturer or agent of Borrower; (b) accounts with respect to which
goods are placed on consignment, guaranteed sale or other terms by reason of
which the payment by the account debtor may be conditional; (c) * accounts
with respect to which the account debtor not a resident of the United
States; (d) accounts with respect to which the account debtor is the United
States or any department, agency or instrumentality of the United States;
(e) accounts with respect to which the account debtor is any State of the
United States or any city, county, town, municipality or division thereof;
(f) accounts with respect to which the account debtor is a subsidiary of,
related to, affiliated or has common shareholders, officers or directors
with Borrower; (g) accounts with respect to which Borrower is or may become
liable to the account debtor for goods sold or services rendered by the
account debtor to Borrower; (h) accounts not paid by an account debtor
within ninety (90) days from the date of the invoice; (i) accounts with
respect to which account debtors dispute liability or make any claim, or
have any defense, crossclaim, counterclaim, or offset; (j) accounts with
respect to which any Insolvency Proceeding is filed by or against the
account debtor, or if an account debtor becomes insolvent, fails or goes out
of business; and (k) accounts owed by any single account debtor which exceed
twenty percent (20%) of all of the Eligible Accounts; and (l) accounts with
a particular account debtor on which over twenty-five percent (25%) of the
aggregate amount owing is greater than ninety (90) days from the date of the
invoice. (m) concentration is allowed for the Canadian distributors up to
$300,000.00. *"Eligible Accounts" to include Canadian sales,
1.13 "Event of Default" as used in this Agreement means those events
described in Section 7 contained herein below.
1.14 "Fixed Charges" as used in this Agreement means and includes, for
any applicable period of determination, the sum, without duplication, of (a)
all interest paid or payable during such period by a person on debt of such
person, plus (b) all payments of principal or other sums paid or payable
during such period by such person with respect to debt of such person having
a final maturity more than one year from the date of creation of such debt,
plus (c) all debt discount and expense amortized or required to be amortized
during such period by such person, plus (d) the maximum amount of all rents
and other payments paid or required to be paid by such person during such
period under any lease or other contract or arrangement providing for use of
real or personal property in respect of which such person is obligated as a
lessee, use or obligor, plus (e) all dividends and other distributions paid
or payable by such person or otherwise accumulating during such period on
any capital stock of such person, plus (f) all loans or other advances made
by such person during such period to any Affiliate of such person. The
applicable period of determination will be N/A, beginning with the period
from _______________ to ___________.
1.15 "GAAP" as used in this Agreement means as of any applicable period,
generally accepted accounting principles in effect during such period.
1.16 "Insolvency Proceeding" as used in this Agreement means and
includes any proceeding or case commenced by or against the Borrower, or any
guarantor of Borrower's Obligations, or any of borrower's account debtors,
under any provisions of the Bankruptcy Code, as amended, or any other
bankruptcy or insolvency law, including but not limited to assignments for
the benefit of creditors, formal or informal moratoriums, composition or
extensions with some or all creditors, any proceeding seeking a
reorganization, arrangement or any other relief under the Bankruptcy code,
as amended, or any other bankruptcy or insolvency law.
1.17 "Intangibles" as used in this Agreement means and includes all of
Borrower's present and future general Intangibles and other personal
property (including, without limitation, any and all rights in any legal
proceedings, goodwill, patents, trade names, copyrights, trademarks,
blueprints, drawings, purchase orders, computer programs, computer disks,
computer tapes, literature, reports, catalogs and deposit accounts) other
than goods and Receivables, as well as Borrower's Books relating to any of
the foregoing.
1.18 "Inventory" as used in this Agreement means and includes all
present and future inventory in which Borrower has any interest, including,
but not limited to, goods held by Borrower for sale or lease or to be
furnished under a contract of service and all of Borrower's present and
future raw materials, work in process, finished goods, advertising
materials, and packing and shipping materials, wherever located and any
documents of title representing any of the above, and any equipment,
fixtures or other property used in the storing, moving, preserving,
identifying, accounting for and shipping or preparing for the shipping of
inventory, and any and all other Items hereafter acquired by Borrower by way
of substitution,
2.
<PAGE> 3
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
replacement, return, repossession or otherwise, and all additions and
accessions thereto, and the resulting product or mass, and any documents of
title respecting any of the above.
1.19 "Net Income" as used in this Agreement means the net income (or
loss) of a person for any period determined in accordance with GAAP but
excluding in any event:
(a) any gains or losses on the sale or other disposition, not in the
ordinary course of business, of investments or fixed or capital assets,
and any taxes on the excluded gains and any tax deductions or credits
on account on any excluded losses; and
(b) In the case of the Borrower, net earnings of any Person in which
Borrower has an ownership interest, unless such net earnings shall have
actually been received by Borrower in the form of cash distributions.
1.20 "Judicial Officer or Assignee" as used in this Agreement means and
includes any trustee, receiver, controller, custodian, assignee for the
benefit of creditors or any other person or entity having powers or duties
like or similar to the powers and duties of trustee, receiver, controller,
custodian or assignee for the benefit of creditors.
1.21 "Obligations" as used in this Agreement means and includes any and
all loans, advances, overdrafts, debts, liabilities (including, without
limitation, any and all amounts charged to Borrower's account pursuant to
any agreement authorizing Bank to charge Borrower's account), obligations,
lease payments, guaranties, covenants and duties owing by Borrower to Bank
of any kind and description whether advanced pursuant to or evidenced by
this Agreement; by any note or other instrument; or by any other agreement
between Bank and Borrower and whether or not for the payment of money,
whether direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising, and including, without limitation, any
debt, liability or obligation owing from Borrower to others which Bank may
have obtained by assignment, participation, purchase or otherwise, and
further including, without limitation, all interest not paid when due and
all Bank Expenses which Borrower is required to pay or reimburse by this
Agreement, by law, or otherwise.
1.22 "Person" or "person" as used in this Agreement means and includes
any individual, corporation, partnership, joint venture, association, trust,
unincorporated association, joint stock company, government, municipality,
political subdivision or agency, or other entity.
1.23 "Receivables" as used in this Agreement means and includes all
presently existing and hereafter arising accounts, instruments, documents,
chattel paper, general intangibles, all other forms of obligations owing to
Borrower, all of Borrower's rights in, to and under all purchase orders
heretofore or hereafter received, all moneys due to Borrower under all
contracts or agreements (whether or not yet earned or due), all merchandise
returned to or reclaimed by Borrower and the Borrower's books (except minute
books) relating to any of the foregoing.
1.24 "Subordinated Debt" as used in this Agreement means indebtedness of
the Borrower to third parties which has been subordinated to the Obligations
pursuant to a subordination agreement in form and content satisfactory to
the Bank.
1.25 "Subordination Agreement" as used in this Agreement means a
subordination agreement in form satisfactory to Bank making all present and
future indebtedness of the Borrower to - N/A subordinate to the Obligations.
1.26 "Tangible Effective Not Worth" as used in this Agreement means net
worth as determined in accordance with GAAP consistently applied, increased
by Subordinated Debt, if any, and decreased by the following: patents,
licenses, goodwill, subscription lists, organization expenses, trade
receivables converted to notes, money due from affiliates (including
officers, directors, subsidiaries and commonly held companies).
1.27 "Tangible Net Worth" as used in this Agreement means, as of any
applicable date of determination, the excess of
a. the net book value of all assets of a person (other than patents,
patent rights, trademarks, trade names, franchises, copyrights,
licenses, goodwill, and similar intangible assets) after all
appropriate deductions in accordance with GAAP (including, without
limitation, reserves for doubtful receivables, obsolescence,
depreciation and amortization), over
b. all Debt of such person.
1.28 "Total Liabilities" as used in this Agreement means the total of
all items of indebtedness, obligation or liability which, in accordance with
GAAP consistently applied, would be included in determining the total
liabilities of the Borrower as of the date Total Liabilities is to be
determined, including without limitation (a) all obligations secured by any
mortgage, pledge, security interest or other lien on property owned or
acquired, whether or not the obligations secured thereby shall have been
assumed; (b) all obligations which are capitalized lease obligations; and
(c) all guaranties, endorsements or other contingent or surety obligations
with respect to the indebtedness of others, whether or not reflected on the
balance sheets of the Borrower, including any obligation to furnish funds,
directly or indirectly through the purchase of goods, supplies, services, or
by way of stock purchase, capital contribution, advance or loan or any
obligation to enter into a contract for any of the foregoing.
1.29 'Working Capital" as used in this Agreement means, as of any
applicable date of determination, Current Assets less Current Liabilities.
3.
<PAGE> 4
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
1.30 Any and all terms used in this Agreement shall be construed and
defined in accordance with the meaning and definition of such terms under
and pursuant to the California Uniform Commercial Code (hereinafter referred
to as the "Code") as amended.
2. LOAN AND TERMS OF PAYMENT
For value received, Borrower promises to pay to the order of Bank such
amount, as provided for below, together with interest, as provided for
below.
2.1 Upon the request of Borrower, made at any time and from time to time
during the term hereof, and so long as no Event of Default has occurred,
Bank shall lend to Borrower an amount equal to the Borrowing Base; provided,
however, that in no event shall Bank be obligated to make advances to
Borrower under this Section 2.1 whenever the Daily Balance exceeds, at any
time, either the Borrowing Base or the sum of FIVE HUNDRED THOUSAND AND
NO/100 ($500,000.00), such amount being referred to herein as an
"Overadvance".
2.2 Except as hereinbelow provided, the Credit shall bear Interest, on
the Daily Balance owing, at a rate of 250/1000 (0.250) percentage points per
annum above the Base Rate (the "Rate").* The Credit shall bear interest,
from and after the occurrence of an Event of Default and without
constituting a waiver of any such Event of Default, on the Daily Balance
owing, at a rate three (3) percentage points per annum above the Rate. All
interest chargeable under this Agreement that is based upon a per annum
calculation shall be computed on the basis of a three hundred sixty (360)
day year for actual days elapsed.
The Base Rate as of the date of this Agreement is EIGHT AND 250/1000
(8.250%) per annum. In the event that the Base Rate announced is, from time
to time hereafter changed, adjustment in the Rate shall be made and based on
the Base Rate in effect on the date of such change. The Rate, as adjusted,
shall apply to the Credit until the Base Rate is adjusted again. The minimum
interest payable by the Borrower under this Agreement shall in no event be
less than N/A per month. All interest payable by Borrower under the Credit
shall be due and payable on the first day of each calendar month during the
term of this Agreement and Bank may, at its option, elect to treat such
interest and any and all Bank Expenses as advances under the Credit, which
amounts shall thereupon constitute Obligations and shall thereafter accrue
interest at the rate applicable to the Credit under the terms of the
Agreement.
* See attached addendum for interest rate option
2.3 Without affecting Borrower's obligation to repay immediately any
Overadvance in accordance with Section 2.1 hereof, all Overadvances shall
bear additional interest on the amount thereof at a rate equal to N/A (N/A%)
percentage points per month in excess of the interest rate set forth in
Section 2.2, from the date incurred and for each month thereafter, until
repaid in full.
3. TERM.
3.1 This Agreement shall remain in full force and effect until JUNE 1,
1998, or until terminated by notice by Borrower. Notice of such termination
by Borrower shall be effectuated by mailing of a registered or certified
letter not less than thirty (30) days prior to the effective date of such
termination, addressed to the Bank at the address set forth herein and the
termination shall be effective as of the date so fixed in such notice.
Notwithstanding the foregoing, should Borrower be in default of one or more
of the provisions of this Agreement, Bank may terminate this Agreement at
any time without notice. Notwithstanding the foregoing, should either Bank
or Borrower become insolvent or unable to meet its debts as they mature, or
fail, suspend, or go out of business, the other party shall have the right
to terminate this Agreement at any time without notice. On the date of
termination all Obligations shall become immediately due and payable without
notice or demand; no notice of termination by Borrower shall be effective
until Borrower shall have paid all Obligations to Bank in full.
Notwithstanding termination, until all Obligations have been fully
satisfied, Bank shall retain its security interest in all existing
Collateral and Collateral arising thereafter, and Borrower shall continue to
perform all of its Obligations.
3.2 After termination and when Bank has received payment in full of
Borrower's Obligations to Bank, Bank shall reassign to Borrower all
Collateral held by Bank, and shall execute a termination of all security
agreements and security interests given by Borrower to Bank, upon the
execution and delivery of mutual general releases.
4. CREATION OF SECURITY INTEREST
4.1 Borrower hereby grants to Bank a continuing security interest in all
presently existing and hereafter arising Collateral in order to secure
prompt repayment of any and all Obligations owed by Borrower to Bank and in
order to secure prompt performance by Borrower of each and all of its
covenants and Obligations under this Agreement and otherwise created. Banks
security interest in the Collateral shall attach to all Collateral without
further act on the part of Bank or Borrower. In the event that any
Collateral, including proceeds, is evidenced by or consists of a letter of
credit, advice of credit, instrument, money, negotiable documents, chattel
paper or similar property (collectively, "Negotiable Collateral"), Borrower
shall, immediately upon receipt thereof, endorse and assign such Negotiable
Collateral over to Bank and deliver actual physical possession of the
Negotiable Collateral to Bank.
4.2 Bank's security interest in Receivables shall attach to all
Receivables without further act on the part of Bank or Borrower. Upon
request from Bank, Borrower shall provide Bank with schedules describing all
Receivables created or acquired by Borrower (including without limitation
agings listing the names and addresses of, and amounts owing by date by
account debtors), and shall execute and deliver written assignments of all
Receivables to Bank all in a form acceptable to Bank, provided, however,
Borrower's failure to execute and deliver such schedules and/or assignments
shall not affect or limit Bank's security interest and other rights in and
to the Receivables. Together with each schedule,
4.
<PAGE> 5
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
Borrower shall furnish Bank with copies of Borrower's customers' invoices or
the equivalent, and original shipping or delivery receipts for all
merchandise sold, and Borrower warrants the genuineness thereof. Bank or
Bank's designee may notify customers or account debtors of collection costs
and expenses to Borrower's account but, unless and until Bank does so or
gives Borrower other written instructions, Borrower shall collect all
Receivables for Bank, receive in trust all payments thereon as Bank's
trustee, and, if so requested to do so from Bank, Borrower shall immediately
deliver said payments to Bank in their original form as received from the
account debtor and all letters of credit, advices of credit, instruments,
documents, chattel paper or any similar property evidencing or constituting
Collateral. Notwithstanding anything to the contrary contained herein, if
sales of Inventory are made for cash, Borrower shall immediately deliver to
Bank, in identical form, all such cash, checks, or other forms of payment
which Borrower receives. The receipt of any check or other item of payment
by Bank shall not be considered a payment on account until such check or
other item of payment is honored when presented for payment, in which event,
said check or other item of payment shall be deemed to have been paid to
Bank TWO (2) calendar days after the date Bank actually receives such check
or other item of payment.
4.3 Bank's security interest in Inventory shall attach to all Inventory
without further act on the part of Bank or Borrower. Upon Banks request
Borrower will from time to time at Borrower's expense pledge, assemble and
deliver such Inventory to Bank or to a third party as Bank's bailee; or hold
the same in trust for Bank's account or store the same in a warehouse in
Bank's name; or deliver to Bank documents of title representing said
Inventory; or evidence of Bank's security interest in some other manner
acceptable to Bank. Until a default by Borrower under this Agreement or any
other Agreement between Borrower and Bank, Borrower may, subject to the
provisions hereof and consistent herewith, sell the Inventory, but only in
the ordinary course of Borrower's business. A sale of Inventory in
Borrower's ordinary course of business does not include an exchange or a
transfer in partial or total satisfaction of a debt owing by Borrower.
4.4 Borrower shall execute and deliver to Bank concurrently with
Borrower's execution of this Agreement, and at any time or times hereafter
at the request of Bank, all financing statements, continuation financing
statements, security agreements, mortgages, assignments, certificates of
title, affidavits, reports, notices, schedules of accounts, letters of
authority and all other documents that Bank may request, in form
satisfactory to Bank, to perfect and maintain perfected Bank's security
interest in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement. Borrower hereby irrevocably
makes, constitutes and appoints Bank (and any of Bank's officers, employees
or agents designated by Bank) as Borrower's true and lawful attorney-in-fact
with power to sign the name of Borrower on any financing statements,
continuation financing statements, security agreement, mortgage, assignment,
certificate of title, affidavit, letter of authority, notice of other
similar documents which must be executed and/or filed in order to perfect or
continue perfected Bank's security interest in the Collateral.
Borrower shall make appropriate entries in Borrower's Books disclosing
Bank's security interest in the Receivables. Bank (through any of its
officers, employees or agents) shall have the right at any time or times
hereafter during Borrower's usual business hours, or during the usual
business hours of any third party having control over the records of
Borrower, to inspect and verify Borrower's Books in order to verify the
amount or condition of, or any other matter, relating to, said Collateral
and Borrower's financial condition.
4.5 Borrower appoints Bank or any other person whom Bank may designate
as Borrower's attorney-in-fact, with power to endorse Borrower's name on any
checks, notes, acceptances, money order, drafts or other forms of payment or
security that may come into Bank's possession; to sign Borrower's name on
any invoice or bill of lading relating to any Receivables, on drafts against
account debtors, on schedules and assignments of Receivables, on
verifications of Receivables and on notices to account debtors; to establish
a lock box arrangement and/or to notify the post office authorities to
change the address for delivery of Borrower's mail addressed to Borrower to
an address designated by Bank, to receive and open all mail addressed to
Borrower, and to retain all mail relating to the Collateral and forward all
other mail to Borrower; to send, whether in writing or by telephone,
requests for verification of Receivables; and to do all things necessary to
carry out this Agreement. Borrower ratifies and approves all acts of the
attorney-in-fact. Neither Bank nor its attorney-in-fact will be liable for
any acts or omissions or for any error of judgment or mistake of fact or
law. This power being coupled with an interest, is irrevocable so long as
any Receivables in which Bank has a security interest remain unpaid and
until the Obligations have been fully satisfied.
4.6 In order to protect or perfect any security interest which Bank is
granted hereunder, Bank may, in its sole discretion, discharge any lien or
encumbrance or bond the same, pay any insurance, maintain guards,
warehousemen, or any personnel to protect the Collateral, pay any service
bureau, or, obtain any records, and all costs for the same shall be added to
the Obligations and shall be payable on demand.
4.7 Borrower agrees that Bank may provide information relating to this
Agreement or relating to Borrower to Bank's parent, affiliates, subsidiaries
and service providers.
5. CONDITIONS PRECEDENT
5.1 Conditions precedent to the making of the loans and the extension of
the financial accommodations hereunder, Borrower shall execute, or cause to
be executed, and deliver to Bank, in form and substance satisfactory to Bank
and its counsel, the following:
a. This Agreement and other documents required by Bank;
b. Financing statements (Form UCC-1 ) in form satisfactory to Bank
for filing and recording with the appropriate governmental
authorities;
5.
<PAGE> 6
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
c. If Borrower is a corporation, then certified extracts from the
minutes of the meeting of its board of directors, authorizing the
borrowings and the granting of the security interest provided for
herein and authorizing specific officers to execute and deliver the
agreements provided for herein;
d. If Borrower is a corporation, then a certificate of good standing
showing that Borrower is in good standing under the laws of the
state of its incorporation and certificates indicating that Borrower
is qualified to transact business and is in good standing in any
other state in which it conducts business;
e. If Borrower is a partnership, then a copy of Borrower's
partnership agreement certified by each general partner of Borrower;
f. UCC searches, tax lien and litigation searches, fictitious
business statement filings, insurance certificates, notices or other
similar documents which Bank may require and in such form as Bank
may require, in order to reflect, perfect or protect Bank's first
priority security interest in the Collateral and in order to fully
consummate all of the transactions contemplated under this
Agreement;
g. Evidence that Borrower has obtained insurance and acceptable
endorsements;
h. Waivers executed by landlords and mortgagees of any real property
on which any Collateral is located; and
i. Warranties and representations of officers.
6. WARRANTIES REPRESENTATIONS AND COVENANTS.
6.1 If so requested by Bank, Borrower shall, at such intervals
designated by Bank, during the term hereof execute and deliver a Report of
Accounts Receivable or similar report, in form customarily used by Bank.
Borrower's Borrowing Base at all times pertinent hereto shall not be lose
than the advances made hereunder. Bank shall have the right to recompute
Borrower's Borrowing Base in conformity with this Agreement.
6.2 If any warranty is breached as to any account, or any account is not
paid in full by an account debtor within NINETY (90) days from the date of
invoice, or an account debtor disputes liability or makes any claim with
respect thereto, or a petition in bankruptcy or other application for relief
under the Bankruptcy Code or any other insolvency law is filed by or against
an account debtor, or an account debtor makes an assignment for the benefit
of creditors, becomes insolvent, fails or goes out of business, then Bank
may deem ineligible any and all accounts owing by that account debtor, and
reduce Borrower's Borrowing Base by the amount thereof. Bank shall retain
its security interest in all Receivables and accounts, whether eligible or
ineligible, until all Obligations have been fully paid and satisfied.
Returns and allowances, if any, as between Borrower and its customers, will
be on the same basis and in accordance with the usual customary practices of
the Borrower, as they exist at this time. Any merchandise which is returned
by an account debtor or otherwise recovered shall be set aside, marked with
Bank's name, and Bank shall retain a security interest therein. Borrower
shall promptly notify Bank of all disputes and claims and settle or adjust
them on terms approved by Bank. After default by Borrower hereunder, no
discount, credit or allowance shall be granted to any account debtor by
Borrower and no return of merchandise shall be accepted by Borrower without
Bank's consent. Bank may, after default by Borrower, settle or adjust
disputes and claims directly with account debtors for amounts and upon terms
which Bank considers advisable, and in such cases Bank will credit
Borrower's account with only the net amounts received by Bank in payment of
the accounts, after deducting all Bank Expenses in connection therewith.
6.3 Borrower warrants, represents, covenants and agrees that:
a. Borrower has good and marketable title to the Collateral. Bank
has and shall continue to have a first priority perfected security
interest in and to the Collateral. The Collateral shall at all times
remain free and clear of all liens, encumbrances and security
interests (except those in favor of Bank).
b. All accounts are and will, at all times pertinent hereto, be bona
fide existing obligations created by the sale and delivery of
merchandise or the rendition of services to account debtors in the
ordinary course of business, free of liens, claims, encumbrances and
security interests (except as hold by Bank and except as may be
consented to, in writing, by Bank) and are unconditionally owed to
Borrower without defenses, disputes, offsets, counterclaims, rights
of return or cancellation, and Borrower shall have received no
notice of actual or imminent bankruptcy or insolvency of any account
debtor at the time an account due from such account debtor is
assigned to Bank.
c. At the time each account is assigned to Bank, all property giving
rise to such account shall have been delivered to the account debtor
or to the agent for the account debtor for immediate shipment to,
and unconditional acceptance by, the account debtor. Borrower shall
deliver to Bank, as Bank may from time to time require, delivery
receipts, customer's purchase orders, shipping instruction, bills of
lading and any other evidence of shipping arrangements. Absent such
a request by Bank, copies of all such documentation shall be held by
Borrower as custodian for Bank.
6.4 At the time each eligible account is assigned to Bank, all such
eligible accounts will be due and payable on terms set forth in Section 1.1
2, or on such other terms approved in writing by Bank in advance of the
creation of such accounts and which are expressly set forth on the face of
all invoices, copies of which shall be held by Borrower as custodian for
Bank, and no such eligible account will then be past due.
6.
<PAGE> 7
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
6.5 Borrower shall keep the Inventory only at the following
locations:_____________________ and the owner or mortgagees of the
respective locations are:_____________________
a. Borrower, immediately upon demand by Bank therefor, shall now and
from time to time hereafter, at such intervals as are requested by Bank,
deliver to Bank, designations of Inventory specifying Borrower's cost of
Inventory, the wholesale market value thereof and such other matters and
information relating to the Inventory as Bank may request;
b. Borrower's Inventory, valued at the lower of Borrower's cost or the
wholesale market value thereof, at all times pertinent hereto shall not
be less than N/A Dollars($ N/A ) of which no less than N/A Dollars
($ N/A) shall be in raw materials and finished goods;
c. All of the Inventory is and shall remain free from all purchase money
or other security interests, liens or encumbrances, except as held by
Bank;
d. Borrower does now keep and hereafter at all times shall keep correct
and accurate records itemizing and describing the kind, type, quality
and quantity of the Inventory, its cost therefor and selling price
thereof, and the daily withdrawals therefrom and additions thereto, all
of which records shall be available upon demand to any of Bank's
officers, agents and employees for inspection and copying;
e. All Inventory, now and hereafter at all times, shall be new Inventory
of good and merchantable quality free from defects;
f. Inventory is not now and shall not at any time or times hereafter be
located or stored with a bailee, warehouseman or other third party
without Bank's prior written consent, and, in such event, Borrower will
concurrently therewith cause any such bailee, warehouseman or other
third party to issue and deliver to Bank, in a form acceptable to Bank,
warehouse receipts in Bank's name evidencing the storage of Inventory or
other evidence of Bank's prior rights in the Inventory. In any event,
Borrower shall instruct any third party to hold all such Inventory for
Bank's account subject to Bank's security interests and its
instructions; and
g. Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours, to inspect and
examine the Inventory and to check and test the same as to quality,
quantity, value and condition and Borrower agrees to reimburse Bank for
Bank's reasonable costs and expenses in so doing.
6.6 Borrower represents, warrants and covenants with Bank that Borrower
will not, without Banks prior written consent:
a. Grant a security interest in or permit a lien, claim or encumbrance
upon any of the Collateral to any person, association, firm,
corporation, entity or governmental agency or instrumentality;
b. Permit any levy, attachment or restraint to be made affecting any of
Borrower's assets;
c. Permit any Judicial Officer or Assignee to be appointed or to take
possession of any or all of Borrower's assets;
d. Other than sales of Inventory in the ordinary course of Borrower's
business, to sell, lease, or otherwise dispose of, move, or transfer,
whether by sale or otherwise, any of Borrower's assets;
e. Change its name, business structure, corporate identity or structure;
add any new fictitious names, liquidate, merge or consolidate with or
into any other business organization;
f. Move or relocate any Collateral;
g. Acquire any other business organization;
h. Enter into any transaction not in the usual course of Borrower's
business;
i. Make any investment in securities of any person, association, firm,
entity, or corporation other than the securities of the United States of
America;
j. Make any change in Borrower's financial structure or in any of its
business objectives, purposes or operations which would adversely effect
the ability of Borrower to repay Borrower's Obligations;
k. Incur any debts outside the ordinary course of Borrower's business
except renewals or extensions of existing debts and interest thereon;
l. Make any advance or loan except in the ordinary course of Borrower's
business as currently conducted;
7.
<PAGE> 8
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
m. Make loans, advances or extensions of credit to any Person, except
for sales on open account and otherwise in the ordinary course of
business;
n. Guarantee or otherwise, directly or indirectly, in any way be or
become responsible for obligations of any other Person, whether by
agreement to purchase the indebtedness of any other Person, agreement
for the furnishing of funds to any other Person through the furnishing
of goods, supplies or services, by way of stock purchase, capital
contribution, advance or loan, for the purpose of paying or discharging
(or causing the payment or discharge of) the indebtedness of any other
Person, or otherwise, except for the endorsement of negotiable
instruments by the Borrower in the ordinary course of business for
deposit or collection.
o. (a) Sell, lease, transfer or otherwise dispose of properties and
assets having an aggregate book value of more than N/A Dollars ($ N/A )
(whether in one transaction or in a series of transactions) except as to
the sale of Inventory in the ordinary course of business; (b) change its
name, consolidate with or merge into any other corporation, permit
another corporation to merge into it, acquire all or substantially all
the properties or assets of any other Person, enter into any
reorganization or recapitalization or reclassify its capital stock, or
(c) enter into any sale-leaseback transaction;
p. Subordinate any indebtedness due to it from a person to indebtedness
of other creditors of such person;
q. Purchase or hold beneficially any stock or other securities of, or
make any investment or acquire any interest whatsoever in, any other
Person, except for the common stock of the Subsidiaries owned by the
Borrower on the date of this Agreement and except for certificates of
deposit with maturities of one year or less of United States commercial
banks with capital, surplus and undivided profits in excess of
$100,000,000 and direct obligations of the United States Government
maturing within one year from the date of acquisition thereof; or
r. Allow any fact, condition or event to occur or exist with respect to
any employee pension or profit sharing plans established or maintained
by it which might constitute grounds for termination of any such plan or
for the court appointment of a trustee to administer any such plan.
6.7 Borrower is not a merchant whose sales for resale of goods for
personal, family or household purposes exceeded seventy-five percent (75%)
in dollar volume of its total sales of all goods during the 12 months
preceding the filing by Bank of a financing statement describing the
Collateral. At no time hereafter shall Borrower's sales for resale of goods
for personal, family or household purposes exceed seventy-five percent (75%)
in dollar volume of its total sales.
6.8 Borrower's sole place of business or chief executive office or
residence is located at the address indicated above and Borrower covenants
and agrees that it will not, during the term of this Agreement, without
prior written notification to Bank, relocate said sole place of business or
chief executive office or residence.
6.9 If Borrower is a corporation, Borrower represents, warrants and
covenants as follows:
a. Borrower will not make any distribution or declare or pay any
dividend (in stock or in cash) to any shareholder or on any of its
capital stock, of any class, whether now or hereafter outstanding, or
purchase, acquire, repurchase, redeem or retire any such capital stock;
b. Borrower is and shall at all times hereafter be a corporation duly
organized and existing in good standing under the laws of the state of
its incorporation and qualified and licensed to do business in
California or any other state in which it conducts its business;
c. Borrower has the right and power and is duly authorized to enter into
this Agreement; and
d. The execution by Borrower of this Agreement shall not constitute a
breach of any provision contained in Borrower's articles of
incorporation or by-laws.
6.10 The execution of and performance by Borrower of all of the terms
and provisions contained in this Agreement shall not result in a breach of
or constitute an event of default under any agreement to which Borrower is
now or hereafter becomes a party.
6.11 Borrower shall promptly notify Bank in writing of its acquisition
by purchase, lease or otherwise of any after acquired property of the type
included in the Collateral, with the exception of purchases of Inventory in
the ordinary course of business.
6.12 All assessments and taxes, whether real, personal or otherwise, due
or payable by, or imposed, levied or assessed against, Borrower or any of
its property have been paid, and shall hereafter be paid in full, before
delinquency. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions required of it
by law, and will execute and deliver to Bank, on demand, appropriate
certificates attesting to the payment or deposit thereof. Borrower will make
timely payment or deposit of all F.I.C.A. payments and withholding taxes
required of it by applicable laws, and will upon request furnish Bank with
proof satisfactory to it that Borrower has made such payments or deposit. If
Borrower fails to pay any such assessment, tax, contribution, or make such
deposit, or furnish the required proof, Bank may, in its sole and absolute
discretion and without notice to Borrower,
8.
<PAGE> 9
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
(i) make payment of the same or any part thereof; or (ii) set up such
reserves in Borrower's account as Bank deems necessary to satisfy the
liability therefor, or both. Bank may conclusively rely on the usual
statements of the amount owing or other official statements issued by the
appropriate governmental agency. Each amount so paid or deposited by Bank
shall constitute a Bank Expense and an additional advance to Borrower.
6.13 There are no actions or proceedings pending by or against Borrower
or any guarantor of Borrower before any court or administrative agency and
Borrower has no knowledge of any pending, threatened or imminent litigation,
governmental investigations or claims, complaints, actions or prosecutions
involving Borrower or any guarantor of Borrower, except as heretofore
specifically disclosed in writing to Bank. If any of the foregoing arise
during the term of the Agreement, Borrower shall immediately notify Bank in
writing.
6.14 a. Borrower, at its expense, shall keep and maintain its assets
insured against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use
such properties in similar businesses for the full insurable value thereof.
Borrower shall also keep and maintain business interruption insurance and
public liability and property damage insurance relating to Borrower's
ownership and use of the Collateral and its other assets. All such policies
of insurance shall be in such form, with such companies, and in such amounts
as may be satisfactory to Bank. Borrower shall deliver to Bank certified
copies of such policies of insurance and evidence of the payments of all
premiums therefor. All such policies of insurance (except those of public
liability and property damage) shall contain an endorsement in a form
satisfactory to Bank showing Bank as a loss payee thereof, with a waiver of
warranties (Form 438-BFU), and all proceeds payable thereunder shall be
payable to Bank and, upon receipt by Bank, shall be applied on account of
the Obligations owing to Bank. To secure the payment of the Obligations,
Borrower grants Bank a security interest in and to all such policies of
insurance (except those of public liability and property damage) and the
proceeds thereof, and Borrower shall direct all insurers under such policies
of insurance to pay all proceeds thereof directly to Bank.
b. Borrower hereby irrevocably appoints Bank (and any of Bank's officers,
employees or agents designated by Bank) as Borrower's attorney for the
purpose of making, selling and adjusting claims under such policies of
insurance, endorsing the name of Borrower on any check, draft, instrument or
other item of payment for the proceeds of such policies of insurance and for
making all determinations and decisions with respect to such policies of
insurance. Borrower will not cancel any of such policies without Bank's
prior written consent. Each such insurer shall agree by endorsement upon the
policy or policies of insurance issued by it to Borrower as required above,
or by independent instruments furnished to Bank, that it will give Bank at
least ten (10) days written notice before any such policy or policies of
insurance shall be altered or cancelled, and that no act or default of
Borrower, or any other person, shall affect the right of Bank to recover
under such policy or policies of insurance required above or to pay any
premium in whole or in part relating thereto. Bank, without waiving or
releasing any Obligations or any Event of Default, may, but shall have no
obligation to do so, obtain and maintain such policies of insurance and pay
such premiums and take any other action with respect to such policies which
Bank deems advisable. All sums so disbursed by Bank, as well as reasonable
attorneys' fees, court costs, expenses and other charges relating thereto,
shall constitute Bank Expenses and are payable on demand.
6.15 All financial statements and information relating to Borrower which
have been or may hereafter be delivered by Borrower to Bank are true and
correct and have been prepared in accordance with GAAP consistently applied
and there has been no material adverse change in the financial condition of
Borrower since the submission of such financial information to Bank.
6.16 a. Borrower at all times hereafter shall maintain a standard and
modern system of accounting in accordance with GAAP consistently applied
with ledger and account cards and/or computer tapes and computer disks,
computer printouts and computer records pertaining to the Collateral which
contain information as may from time to time be requested by Bank, not
modify or change its method of accounting or enter into, modify or terminate
any agreement presently existing, or at any time hereafter entered into with
any third party accounting firm and/or service bureau for the preparation
and/or storage of Borrower's accounting records without the written consent
of Bank first obtained and without said accounting firm and/or service
bureau agreeing to provide information regarding the Receivables and
inventory and Borrower's financial condition to Bank; permit Bank and any of
its employees, officers or agents, upon demand, during Borrower's usual
business hours, or the usual business hour of third persons having control
thereof, to have access to and examine all of the Borrower's Book relating
to the Collateral, Borrower's obligations to Bank, Borrower's financial
condition and the results of Borrower's operations and in connection
therewith, permit Bank or any of its agents, employees or officers to copy
and make extracts therefrom.
INITIAL HERE
[INITIALS]
b. Borrower shall deliver to Bank within FORTY FIVE (45) days after the end
of each QUARTER, a COMPANY PREPARED balance sheet and profit and loss
statement covering Borrower's operations and deliver to Bank within ninety
(90) days after the end of each of Borrower's fiscal years a(n)/CPA AUDITED
statement of the financial condition of the Borrower for each such fiscal
year, including but not limited to, a balance sheet and profit and loss
statement and any other report requested by Bank relating to the Collateral
and the financial condition of Borrower, and a certificate signed by an
authorized employee of Borrower to the effect that all reports, statements,
computer disk or tape files, computer printouts, computer runs, or other
computer prepared information of any kind or nature relating to the
foregoing or documents delivered or caused to be delivered to Bank under
this subparagraph are complete, correct and thoroughly present the financial
condition of borrower and that there exists on the date of delivery to Bank
no condition or event which constitutes a breach or Event of Default under
this Agreement.
9.
<PAGE> 10
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
c. In addition to the financial statements requested above, the Borrower
agrees to provide Bank with the following schedules:
X Accounts Receivable Agings on a MONTHLY DAYS basis:
- -------- ----------------
WITH IN 15 DAYS AFTER THE END OF EACH
MONTH
X Accounts Payable Agings on a MONTHLY basis;
- -------- ----------------
WITHIN 15 DAYS AFTER THE END OF EACH
MONTH
Job Progress Reports on a basis; and
- -------- ----------------
X BORROWING BASE CERTIFICATE on a MONTHLY basis WITHIN 30 DAYS
- -------- ----------------
AFTER THE END OF EACH MONTH (IF
COMPANY DRAWS UNDER THE LINE,
OTHERWISE NO REPORTING IS REQUIRED)
6.17 Borrower shall maintain the following financial ratios and
covenants on a consolidated and non-consolidated basis:
a. Working Capital In an amount not less than N/A
b. Tangible Effective Net Worth in an amount not less than $6,500,000.00 TO
INCREASE BY 75% OF QUARTERLY PROFITABILITY AND 100% OF NEW EQUITY OR
SUBORDINATED DEBT RAISED.
c. a ratio of Current Assets to Current Liabilities of not less than N/A
d. a quick ratio of cash plus securities plus Receivables to Current
Liabilities of not less than 1.5O:1:00.
e. a ratio of Total Liabilities (less debt subordinated to Bank) to Tangible
Effective Net Worth of less than 1.00:1.00.
f. a ratio of Cash Flow to Fixed Charges of not less than N/A
g. Net Income after taxes of N/A
h. Borrower shall not without Bank's prior written consent acquire or expend
for or commit itself to acquire or expend for fixed assets by lease,
purchase or otherwise in an aggregate amount that exceeds NO/100 n/a Dollars
($ n/a 0.00) In any fiscal year; and
i. SEMI-ANNUAL ACCOUNTS RECEIVABLES AND INVENTORY AUDITS; J. DEBT SERVICE
COVERAGE ON ROLLING TWO QUARTERS BASIS BEGINNING FROM THE QUARTER ENDING
JUNE 30, 1998.
All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including officers, directors and
shareholders) shall be excluded from Borrower's assets for all purposes
hereunder.
6.18 Borrower shall promptly supply Bank (and cause any guarantor to
supply Bank) with such other information (including tax returns) concerning
its financial affairs (or that of any guarantor) as Bank may request from
time to time hereafter, and shall promptly notify Bank of any material
adverse change in Borrower's financial condition and of any condition or
event which constitutes a breach of or an event which constitutes an Event
of Default under this Agreement.
6.19 Borrower is now and shall be at all times hereafter solvent and
able to pay its debts (including trade debts) as they mature.
6.20 Borrower shall immediately and without demand reimburse Bank for
all sums expended by Bank in connection with any action brought by Bank to
correct any default or enforce any provision of this Agreement, including
all Bank Expenses; Borrower authorizes and approves all advances and
payments by Bank for items described in this Agreement as Bank Expenses.
6.21 Each warranty, representation and agreement contained in this
Agreement shall be automatically deemed repeated with each advance and shall
be conclusively presumed to have been relied on by Bank regardless of any
investigation made or information possessed by Bank. The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements
which Borrower shall give, or cause to be given, to Bank, either now or
hereafter.
6 .22 Borrower shall keep all of its principal bank accounts with Bank
and shall notify the Bank immediately in writing of the existence of any
other bank account, deposit account, or any other account into which money
can be deposited.
6.23 Borrower shall furnish to the Bank: (a) as soon as possible, but in
no event later than thirty (30) days after Borrower knows or has reason to
know that any reportable event with respect to any deferred compensation
plan has occurred, a statement of the chief financial officer of Borrower
setting forth the details concerning such reportable
10.
<PAGE> 11
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
event and the action which Borrower proposes to take with respect thereto,
together with a copy of the notice of such reportable event given to the
Pension Benefit Guaranty Corporation, if a copy of such notice is available
to Borrower, (b) promptly after the filing thereof with the United States
Secretary of Labor or the Pension Benefit Guaranty Corporation, copies of
each annual report with respect to each deferred compensation plan; (c)
promptly after receipt thereof, a copy of any notice Borrower may receive
from the Pension Benefit Guaranty Corporation or the Internal Revenue
Service with respect to any deferred compensation plan; provided, however,
this subparagraph shall not apply to notice of general application issued by
the Pension Benefit Guaranty Corporation or the Internal Revenue Service;
and (d) when the same is made available to participants in the deferred
compensation plan, all notices and other forms of information from time to
time disseminated to the participants by the administrator of the deferred
compensation plan.
6.24 Borrower is now and shall at all times hereafter remain in
compliance with all federal, state and municipal laws, regulations and
ordinances relating to the handling, treatment and disposal of toxic
substances, wastes and hazardous material and shall maintain all necessary
authorizations and permits.
6.25 Borrower shall maintain insurance on the life of N/A in an amount
not to be less than NO/100 Dollars ($ N/A) under one more policies issued by
insurance companies satisfactory to Bank, which policies shall be assigned
to Bank as security for the Obligations and on which Bank shall be named as
sole beneficiary.
6.26 Borrower shall limit direct and indirect compensation paid to the
following employees: N/A, to an aggregate of N/A Dollars ($ N/A) per N/A.
7. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute a default by
Borrower under this Agreement:
a. If Borrower fails or neglects to perform, keep or observe any term,
provision, condition, covenant, agreement, warranty or representation
contained in this Agreement, or any other present or future agreement
between Borrower and Bank;
b. If any representation, statement, report or certificate made or delivered
by Borrower, or any of its officers, employees or agents to Bank is not true
and correct;
c. If Borrower fails to pay when due and payable or declared due and
payable, all or any portion of the Borrower's Obligations (whether of
principal, interest, taxes, reimbursement of Bank Expenses, or otherwise);
d. If there is a material impairment of the prospect of repayment of all or
any portion of Borrower's Obligations or a material impairment of the value
or priority of Bank's security interest in the Collateral;
e. If all or any of Borrower's assets are attached, seized, subject to a
writ or distress warrant, or are levied upon, or come into the possession of
any Judicial Officer or Assignee and the same are not released, discharged
or bonded against within ten (10) days thereafter;
f. If any Insolvency Proceeding is filed or commenced by or against Borrower
without being dismissed within ten (10) days thereafter;
g. If any proceeding is filed or commenced by or against Borrower for its
dissolution or liquidation;
h. If Borrower is enjoined, restrained or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs;
i. If a notice of lien, levy or assessment is filed of record with respect
to any or all of Borrower's assets by the United States Government, or any
department, agency or instrumentality thereof, or by any state, county,
municipal or other government agency, or if any taxes or debts owing at any
time hereafter to any one or more of such entities becomes a lien, whether
choate or otherwise, upon any or all of the Borrower's assets and the same
is not paid on the payment date thereof;
j. If a judgment or other claim becomes a lien or encumbrance upon any or
all of Borrower's assets and the same is not satisfied, dismissed or bonded
against within ten (10) days thereafter;
k. If Borrower's records are prepared and kept by an outside computer
service bureau at the time this Agreement is entered into or during the term
of this Agreement such an agreement with an outside service bureau is
entered into, and at any time thereafter, without first obtaining the
written consent of Bank, Borrower terminates, modifies, amends or changes
its contractual relationship with said computer service bureau or said
computer service bureau fails to provide Bank with any requested information
or financial data pertaining to Bank's Collateral, Borrower's financial
condition or the results of Borrower's operations;
1. If Borrower permits a default in any material agreement to which Borrower
is a party with third parties so as to result in an acceleration of the
maturity of Borrower's indebtedness to others, whether under any indenture,
agreement or otherwise;
11.
<PAGE> 12
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
m. If Borrower makes any payment on account of indebtedness which has been
subordinated to Borrower's Obligations to Bank;
n. If any misrepresentation exists now or thereafter in any warranty or
representation made to Bank by any officer or director of Borrower, or if
any such warranty or representation is withdrawn by any officer or director;
o. If any party subordinating its claims to that of Bank's or any guarantor
of Borrower's Obligations dies or terminates its subordination or guaranty,
becomes insolvent or an Insolvency Proceeding is commenced by or against any
such subordinating party or guarantor;
p. If Borrower is an individual and Borrower dies;
q. If there is a change of ownership or control of N/A percent (%) or more
of the issued and outstanding stock of Borrower; or
r. If any reportable event, which the Bank determines constitutes grounds
for the termination of any deferred compensation plan by the Pension Benefit
Guaranty Corporation or for the appointment by the appropriate United States
District Court of a trustee to administer any such plan, shall have occurred
and be continuing thirty (30) days after written notice of such
determination shall have been given to Borrower by Bank, or any such Plan
shall be terminated within the meaning of Title IV of the Employment
Retirement Income Security Act ("ERISA"), or a trustee shall be appointed by
the appropriate United States District Court to administer any such plan, or
the Pension Benefit Guaranty Corporation shall institute proceedings to
terminate any plan and in case of any event described in this Section 7.0,
the aggregate amount of the Borrower's liability to the Pension Benefit
Guaranty Corporation under Sections 4062, 4063 or 4064 of ERISA shall exceed
five percent (5%) of Borrower's Tangible Effective Net Worth.
Notwithstanding anything contained in Section 7 to the contrary, Bank shall
refrain from exercising its rights and remedies and Event of Default shall
thereafter not be deemed to have occurred by reason of the occurrence of any
of the events set forth in Sections 7.e, 7.f or 7.j of this Agreement if,
within ten (10) days from the date thereof, the same is released,
discharged, dismissed, bonded against or satisfied; provided, however, if
the event is the institution of insolvency Proceedings against Borrower,
Bank shall not be obligated to make advances to Borrower during such cure
period.
8. BANK'S RIGHTS AND REMEDIES.
8.1 Upon the occurrence of an Event of Default by Borrower under this
Agreement, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower:
a. Declare Borrower's Obligations, whether evidenced by this Agreement,
installment notes, demand notes or otherwise, immediately due and
payable to the Bank;
b. Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement, or any other agreement between Borrower
and Bank;
c. Terminate this Agreement as to any future liability or obligation of
Bank, but without affecting Bank's rights and security interests in the
Collateral, and the Obligations of Borrower to Bank;
d. Without notice to or demand upon Borrower or any guarantor, make such
payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to
assemble the Collateral if Bank so requires and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to
enter the premises where the Collateral is located, take and maintain
possession of the Collateral and the premises (at no charge to Bank), or
any part thereof, and to pay, purchase, contest or compromise any
encumbrance, charge or lien which in the opinion of Bank appears to be
prior or superior to its security interest and to pay all expenses
incurred in connection therewith;
e. Without limiting Bank's rights under any security interest, Bank is
hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks and advertising matter, or any property
of a similar nature as it pertains to the Collateral, in completing
production of, advertising for sale and selling any Collateral and
Borrower's rights under all licenses and all franchise agreement shall
inure to Bank's benefit, and Bank shall have the right and power to
enter into sublicense agreements with respect to all such rights with
third parties on terms acceptable to Bank;
f. Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sales and sell (in the manner provided for herein)
the inventory;
g. Sell or dispose the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises)
as is commercially reasonable in the opinion of Bank. It is not
necessary that the Collateral be present at any such sale;
h. Bank shall give notice of the disposition of the Collateral as
follows:
12.
<PAGE> 13
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
(1) Bank shall give the Borrower and each holder of a security
interest in the Collateral who has filed with Bank a written request
for notice, a notice in writing of the time and place of public
sale, or, if the sale is a private sale or some disposition other
than a public sale is to be made of the Collateral, the time on or
after which the private sale or other disposition is to be made;
(2) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower's address appearing in this Agreement, at least
five (5) calendar days before the date fixed for the sale, or at
least five (5) calendar days before the date on or after which the
private sale or other disposition is to be made, unless the
Collateral is perishable or threatens to decline speedily in value.
Notice to persons other than Borrower claiming an interest in the
Collateral shall be sent to such addresses as they have furnished to
Bank;
(3) If the sale is to be a public sale, Bank shall also give notice
of the time and place by publishing a notice one time at least five
(5) calendar days before the date of the sale in a newspaper of
general circulation in the county in which the sale is to be held;
and
(4) Bank may credit bid and purchase at any public sale.
i. Borrower shall pay all Bank Expenses incurred in connection with
Bank's enforcement and exercise of any of its rights and remedies as
herein provided, whether or not suit is commenced by Bank;
j. Any deficiency which exists after disposition of the Collateral as
provided above will be paid immediately by Borrower. Any excess will be
returned, without interest and subject to the rights of third parties,
to Borrower by Bank, or, in Bank's discretion, to any party who Bank
believes, in good faith, is entitled to the excess; and
k. Without constituting a retention of Collateral in satisfaction of an
obligation within the meaning of 9505 of the Uniform Commercial Code or
an action under California Code of Civil Procedure 726, apply any and
all amounts maintained by Borrower as deposit accounts (as that term is
defined under 91 05 of the Uniform Commercial Code) or other accounts
that Borrower maintains with Bank against the Obligations.
8.2 Bank's rights and remedies under this Agreement and all other
agreements shall be cumulative. Bank shall have all other rights and
remedies not inconsistent herewith as provided by law or in equity. No
exercise by Bank of one right or remedy shall be deemed an election, and no
waiver by Bank of any default on Borrower's part shall be deemed a
continuing waiver. No delay by Bank shall constitute a waiver, election or
acquiescence by Bank.
9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY.
If Borrower fails to pay promptly when due to another person or entity, monies
which Borrower is required to pay by reason of any provision in this Agreement,
Bank may, but need not, pay the same and charge Borrower's account therefor, and
Borrower shall promptly reimburse Bank. All such sums shall become additional
indebtedness owing to Bank, shall bear interest at the rate hereinabove
provided, and shall be secured by all Collateral. Any payments made by Bank
shall not constitute (i) an agreement by it to make similar payments in the
future; or (ii) a waiver by Bank of any default under this Agreement. Bank need
not inquire as to, or contest the validity of, any such expense, tax, security
interest, encumbrance or lien and the receipt of the usual official notice of
the payment thereof shall be conclusive evidence that the same was validly due
and owing. Such payments shall constitute Bank Expenses and additional advances
to Borrower.
10. WAIVERS.
10.1 Borrower agrees that checks and other instruments received by Bank
in payment or on account of Borrower's Obligations constitute only
conditional payment until such items are actually paid to Bank and Borrower
waives the right to direct the application of any and all payments at any
time or times hereafter received by Bank on account of Borrower's
Obligations and Borrower agrees that Bank shall have the continuing
exclusive right to apply and reapply such payments in any manner as Bank may
deem advisable, notwithstanding any entry by Bank upon its books.
10.2 Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension
or renewal of any or all commercial paper, accounts, documents, instruments
chattel paper, and guarantees at any time held by Bank on which Borrower may
in any way be liable.
10.3 Bank shall not in any way or manner be liable or responsible for
(a) the safekeeping of the Inventory; (b) any loss or damage thereto
occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency or other person whomsoever. All risk
of loss, damage or destruction of Inventory shall be borne by Borrower.
10.4 Borrower waives the right and the right to assert a confidential
relationship, if any, it may have with any accountant, accounting firm
and/or service bureau or consultant in connection with any information
requested by Bank pursuant to or in accordance with this Agreement, and
agrees that a Bank may contact directly any such accountants, accounting
firm and/or service bureau or consultant in order to obtain such
information.
l0.5 BORROWER AND BANK EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION
HEREUNDER, OR CONTEMPLATED HEREUNDER, OR ANY OTHER CLAIM (INCLUDING TORT OR
BREACH OF DUTY CLAIMS) OR DISPUTE HOWSOEVER ARISING BETWEEN BANK AND
BORROWER.
13.
<PAGE> 14
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
10.6 In the event that Bank elects to waive any rights or remedies
hereunder, or compliance with any of the terms hereof, or delays or fails to
pursue or enforce any terms, such waiver, delay or failure to pursue or
enforce shall only be effective with respect to that single act and shall
not be construed to affect any subsequent transactions or Bank's right to
later pursue such rights and remedies.
11. ONE CONTINUING LOAN TRANSACTION.
All loans and advances heretofore, now or at any time or times hereafter made
by Bank to Borrower under this Agreement or any other agreement between Bank
and Borrower, shall constitute one loan secured by Bank's security interests
in the Collateral and by all other security interests, liens, encumbrances
heretofore, now or from time to time hereafter granted by Borrower to Bank.
Notwithstanding the above, (i) to the extent that any portion of the
Obligations are a consumer loan, that portion shall not be secured by any
deed of trust or mortgage on or other security interest in the Borrower's
principal dwelling which is not a purchase money security interest as to that
portion, unless expressly provided to the contrary in another place, or (ii)
if the Borrower (or any of them) has (have) given or give(s) Bank a deed of
trust or mortgage covering real property, that deed of trust or mortgage
shall not secure the loan and any other Obligation of the Borrower (or any of
them), unless expressly provided to the contrary in another place.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by either
party on the other relating to this Agreement shall be in writing and sent by
regular United States mail, postage prepaid, properly addressed to Borrower
or to Bank at the addresses stated in this Agreement, or to such other
addresses as Borrower or Bank may from time to time specify to the other in
writing. Requests to Borrower by Bank hereunder may be made orally.
13. AUTHORIZATION TO DISBURSE.
Bank is hereby authorized to make loans and advances hereunder upon
telephonic or other instructions received from anyone purporting to be an
officer, employee, or representative of Borrower, or at the discretion of
Bank if said loans and advances are necessary to meet any Obligations of
Borrower to Bank. Bank shall have no duty to make inquiry or verify the
authority of any such party, and Borrower shall hold Bank harmless from any
damage, claims or liability by reason of Bank's honor of, or failure to
honor, any such instructions.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
Any documents, schedules, invoices or other papers delivered to Bank, may be
destroyed or otherwise disposed of by Bank six (6) months after they are
delivered to or received by Bank, unless Borrower requests, in writing, the
return of the said documents, schedules, invoices or other papers and makes
arrangements, at Borrower's expense, for their return.
15. CHOICE OF LAW.
The validity of this Agreement, its construction, interpretation and
enforcement, and the rights of the parties hereunder and concerning the
Collateral, shall be determined according to the laws of the State of
California. The parties agree that all actions or proceedings arising in
connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or County of Santa
Clara.
16. GENERAL PROVISIONS.
16.1 This Agreement shall be binding and deemed effective when executed
by the Borrower and accepted and executed by Bank at its Headquarter Office.
16.2 This Agreement shall bind and inure to the benefit of the
respective successors and assigns of each of the parties, provided, however,
that Borrower may not assign this Agreement or any rights hereunder without
Bank's prior written consent and any prohibited assignment shall be
absolutely void. No consent to an assignment by Bank shall release Borrower
or any guarantor from their Obligations to Bank. Bank may assign this
Agreement and its rights and duties hereunder. Bank reserves the right to
sell, assign, transfer, negotiate or grant participations in all or any part
of, or any interest in Bank's rights and benefits hereunder. In connection
therewith, Bank may disclose all documents and information which Bank now or
hereafter may have relating to Borrower or Borrower's business.
16.3 Paragraph headings and paragraph numbers have been set forth herein
for convenience only; unless the contrary is compelled by the context,
everything contained in each paragraph applies equally to this entire
Agreement.
16.4 Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Bank or Borrower, whether under any
rule of construction or otherwise; on the contrary, this Agreement has been
reviewed by all parties and shall be construed and interpreted according to
the ordinary meaning of the words used so as to fairly accomplish the
purposes and intentions of all parties hereto. When permitted by the
context, the singular includes the plural and vice versa.
14.
<PAGE> 15
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
16.5 Each provision of this Agreement shall be severable from every
other provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
16.6 This Agreement cannot be changed or terminated orally. Except as to
currently existing Obligations owing by Borrower to Bank, all prior
agreements, understandings, representations, warranties, and negotiations,
if any, with respect to the subject matter hereof, are merged into this
Agreement.
16.7 The parties intend and agree that their respective rights, duties,
powers liabilities, obligations and discretions shall be performed, carried
out, discharged and exercised reasonably and in good faith.
IN WITNESS WHEREOF, the parties hereto have caused this Revolving Credit
Loan & Security Agreement (Accounts and Inventory) to be executed as of the
date first hereinabove written.
ATTEST: BORROWER: DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC.
By: /s/ R. E. WITTMAN
- ------------------------------------- -------------------------------------
Title: Signature
Accepted and effective as of
DECEMBER 10, 1997 Title: VP & CFO
at Bank's Headquarter Office ----------------------------------
By:
-------------------------------------
Signature of
(Bank)
Title:
----------------------------------
By: /s/ THOMAS M. HICKS By:
----------------------------------- -------------------------------------
Signature of THOMAS M. HICKS Signature of
Title: VICE PRESIDENT Title:
-------------------------------- ----------------------------------
By:
-------------------------------------
Signature of
Title:
----------------------------------
15.
<PAGE> 16
[LOGO]
AUTOMATIC LOAN PAYMENT AUTHORIZATION
Date DECEMBER 10, 1997
Obligor Name (Typed or Printed): DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
Obligor Number: ** Lender's Cost Center# 95824
Address: 200 N. WESTLAKE BLVD. #202, WESTLAKE VILLAGE, CA 91362
STREET ADDRESS CITY STATE ZIP CODE
The undersigned hereby authorizes COMERICA BANK-CALIFORNIA ("Bank") to charge
the account designated below for the payments due on the loan(s) as designated
below and all renewals, extensions, modifications and/or substitutions thereof.
This authorization will remain in effect unless the undersigned requests a
modification that is agreed to by the Bank in writing. The undersigned remains
fully responsible for all amounts outstanding to Bank if the designated account
is insufficient for repayment
[X] Automatic Payment Authorization for all payments on all current and
future borrowings, as and when such payments come due (which payments
include, without limitation, principal, interest, fees, costs, and
expenses).
[ ] Automatic Payment Authorization for all payments on only the specific
borrowing identified below, as and when such payments come due (which
payments include, without limitation, principal, interest, fees,
costs, and expenses).
Specific Obligation Number_______________________
[ ] Automatic Payment Authorization for less than all payments on only
the specific borrowing identified below, as and when such payments
come due.
Specific Obligation Number______________________
[ ] Principal and Interest Payments only
[ ] Principal payments only
[ ] Interest Payments only
[ ] SPECIAL INSTRUCTIONS/IRREGULAR PAYMENT INSTRUCTIONS
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Payment Due Date: Your loan payments of principal and interest will be
charged to your account as indicated above unless that day is a Saturday,
Sunday, or holiday in which case such payments will be made on the following
business day, with interest to accrue during this extension as provided under
the loan documents.
Account to be Charged:
[ ] Checking COMERICA BANK-CALIFORNIA Account No. **
--------------
[ ] Savings COMERICA BANK-CALIFORNIA Account No.
--------------
(Charges to account are withdrawals pursuant to account resolution)
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
By /s/ R. E. WITTMAN By
---------------------------- -----------------------------------
SIGNATURE OF SIGNATURE OF
Its: VP & CFO Its:
---------------------------- -----------------------------------
TITLE (it applicable) TITLE (it applicable)
BY: BY:
---------------------------- -----------------------------------
SIGNATURE OF SIGNATURE OF
Its: Its:
---------------------------- -----------------------------------
TITLE (it applicable) TITLE (it applicable)
By: BV:
---------------------------- -----------------------------------
SIGNATURE OF SIGNATURE OF
Its: Its:
---------------------------- -----------------------------------
TITLE (if applicable) TITLE (if applicable)
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE> 17
EQUIPMENT
RIDER
[COMERICA LOGO]
Borrower(s):
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
Borrower has entered into a certain Revolving Credit and Security
Agreement (Accounts and Inventory) or a certain Loan and Security Agreement
(Accounts and Inventory) (either hereinafter referred to as "Agreement"), dated
MARCH 7, 1997 with Bank (Secured Party). This EQUIPMENT RIDER (hereinafter
referred to as this Rider) dated DECEMBER 10, 1997 is hereby made a part of and
incorporated into that Agreement.
1. Borrower grants to Bank a security interest in the following (hereinafter
referred to as "Equipment"):
(a) All of Borrower's present machinery, equipment, fixtures, vehicles,
office equipment, furniture, furnishings, tools, dies, jigs and
attachments, wherever located, (including but not limited to, the
items listed and described on the Schedule of Equipment attached
hereto and marked Exhibit "A" and by this reference made a part hereof
as though fully set forth hereat);
(b) all of Borrower's additional equipment, wherever located, of like or
unlike nature, to be acquired hereafter, and all replacements,
substitutes, accessions, additions and improvements to any of the
foregoing; and
(c) all of Borrower's general intangibles, including without limitation,
computer programs, computer disks, computer tapes, literature,
reports, catalogs, drawings, blueprints and other proprietary items.
2. Bank's security interest in the Equipment as set forth above shall secure
each, any and all of Borrower's Obligations to Bank, as the term "Obligations:
is defined in the Agreement; and, the payment of Borrower's indebtedness in the
principal amount of TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 Dollars
($2,500,000.00) and interest evidenced by VARIOUS NOTES.
3. Bank may, in its sole discretion, from time to time hereafter, make loans
to Borrower. Loans made by Bank to Borrower pursuant to this Rider shall be
included as part of the Obligations of Borrower to Bank and at Bank's option,
may be evidenced by promissory note(s), in form satisfactory to Bank. Such
loans shall bear interest at the rate and be payable in the manner specified in
said promissory note(s) in the event Bank exercises the aforementioned option,
and in the event Bank does not, such loans shall bear interest at the rate and
be payable in the manner specified in the Agreement.
4. Borrower represents and warrants to Bank that:
(a) it has good and indefeasible title to the Equipment;
(b) the Equipment is and will be free and clear of all liens, security
interests, encumbrances and claims, except as held by Bank,
(c) the Equipment shall be kept only at the following locations:
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(d) the owners or mortgagees of the respective locations are:
---------------------------------------------------------------------
---------------------------------------------------------------------
(e) Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours to inspect and
examine the Equipment and Borrower agrees to reimburse Bank for its
reasonable costs and expenses in so doing.
5. Borrower shall keep and maintain the Equipment in good operating condition
and repair, make all necessary replacements thereto so that the value and
operating efficiency thereof shall at all times be maintained and preserved.
Borrower shall not permit any items of Equipment to become a fixture to real
estate or accession to other property, and the Equipment is now and shall at
all times remain and be personal property.
6. Borrower, at its expense, shall keep and maintain: the Equipment insured
against loss or damage by fire, theft, explosion, sprinklers and all other
hazards and risks ordinarily insured against by other owners who use such
properties and interest in properties in similar businesses for the full
insurable value thereof; and business interruption insurance and public
liability and property damage insurance relating to Borrowers ownership and use
of its assets. All such policies of insurance shall be in such form, with such
companies and in such amounts as may be satisfactory to Bank. Borrower shall
deliver to Bank certified copies of such policies of insurance and evidence of
the payment of all premiums thereof. All such policies of insurance (except
those of public liability and property damage) shall contain an endorsement in
a form satisfactory to Bank showing loss payable to Bank and all proceeds
payable thereunder shall be payable to Bank and upon receipt by Bank shall be
applied on the account of Borrower's Obligations. To secure the payment of
Borrower's Obligations, Borrower grants Bank a security interest in and to all
such policies of insurance (except those of public liability and property
damage) and the proceeds thereof and directs all insurers under such policies of
insurance to pay all proceeds thereof directly to Bank. Borrower hereby
irrevocably appoints Bank (and any of Bank's officers, employees or agents
designated by Bank) as Borrower's attorney-in-fact for the purpose of making,
settling and adjusting claims under such policies of insurance and for making
all determinations and decisions with respect to such policies of insurance.
Each such insurer shall agree by endorsement upon the policy or policies of
insurance issued by it to Borrower as required above, or by independent
instruments furnished to Bank that it will give Bank at least ten (10) days
written notice before any such policy or policies of insurance shall be altered
or canceled, and that no act or default of Borrower, or any other person, shall
affect the right of Bank to recover under such policy or policies of insurance
required above or to pay any premium in whole or in part relating thereto. Bank,
without waving or releasing any obligations or defaults by Borrower hereunder,
may at any time or times hereafter, but shall have no obligations to do so,
obtain and maintain such policies of insurance and pay such premiums and take
any other action with respect to such policies which bank deems advisable. All
sums so disbursed by Bank, including reasonable attorney's fees, court costs,
expenses and other charges relating thereto, shall be a part of Borrower's
Obligations and payable on demand.
7. Until default by borrower under the Agreement or this rider, Borrower may,
subject to the provisions of the Agreement and this Rider and consistent
therewith, remain in possession thereof and use the Equipment referred to
herein in the ordinary course of business at the location or locations
hereinabove designated.
8. All of the terms, conditions, warranties, covenants, agreements and
representations of the Agreement are incorporated herein and reaffirmed.
9. Upon a default by Borrower under the Agreement or this Rider, Borrower
upon request of Bank to do so, agrees to assemble and make the Equipment or
any part thereof available to Bank at a place designated by Bank.
10. Borrower shall upon demand by Bank immediately deliver to Bank and
properly endorse, any and all evidences of ownership, certificates of title or
applications for titles to any of the aforesaid items of Equipment.
11. Bank shall not in any way or manner be liable or responsible for (a) the
safekeeping of the Equipment; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any clause; (c) any diminution in the
value thereof or (d) any act or default by any person whomsoever. All risk of
Loss, damage or destruction of the Equipment shall be borne by Borrower.
Borrower(s): DENTAL MEDICAL DIAGNOSTIC SYSTEMS, INC.
/s/ R.E. WITTMAN, VP & CFO
- ------------------------------------ ------------------------------------
By: By:
- ------------------------------------ ------------------------------------
By: By:
Accepted this 10TH day of DECEMBER, 1997 at Bank's place of business in SAN
JOSE, CA 95113
By: /s/ THOMAS M. HICKS
---------------------------------
THOMAS M. HICKS, VICE PRESIDENT
CA 132(12-94)
<PAGE> 18
[COMERICA LOGO] EQUIPMENT
RIDER
BORROWER(S):
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
Borrower has entered into a certain Revolving Credit and Security
Agreement (Accounts and Inventory) or a certain Loan and Security Agreement
(Accounts and Inventory) (either hereinafter referred to as "Agreement", dated
DECEMBER 10, 1997 with Bank (Secured Party). This EQUIPMENT RIDER (hereinafter
referred to as this Rider) dated DECEMBER 10, 1997 is hereby made a part of and
incorporated into that Agreement.
1. Borrower grants to Bank a security interest in the following (hereinafter
referred to as "Equipment"):
(a) All of borrower's present machinery, equipment, fixtures, vehicles,
office equipment, furniture, furnishings, tools, dies, jigs and
attachments, wherever located, (including but not limited to, the
items listed and described on the Schedule of Equipment attached
hereto and marked Exhibit "A" and by this reference made a part hereof
as though fully set forth hereat);
(b) all of borrower's additional equipment, wherever located, of like or
unlike nature, to be acquired hereafter, and all replacements,
substitutes, accessions, additions and improvements to any of the
foregoing; and
(c) all of Borrowers general intangibles, including without limitation,
computer programs, computer disks, computer tapes, literature,
reports, catalogs, drawings, blueprints and other proprietary items.
2. Bank's security interest in the Equipment as set forth above shall secure
each, any and all of Borrower's Obligations to Bank, as the term "Obligations"
is defined in the Agreement; and, the payment of Borrower's indebtedness in the
principal amount of TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 Dollars
($2,500,000.00) and interest evidenced by VARIOUS NOTES.
3. Bank may, in its sole discretion, from time to time hereafter, make loans
to Borrower. Loans made by Bank to Borrower pursuant to this Rider shall be
included as part of the Obligations of Borrower to Bank and at Bank's option,
may be evidenced by promissory note(s), in form satisfactory to Bank. Such
loans shall bear interest at the rate and be payable in the manner specified in
said promissory note(s) in the event Bank exercises the aforementioned option
and in the event Bank does not, such loans shall bear interest at the rate and
be payable in the manner specified in the Agreement.
4. Borrower represents and warrants to Bank that:
(a) it has good and indefeasible title to the Equipment;
(b) the Equipment is and will be free and clear of all liens, security
interests, encumbrances and claims, except as held by Bank,
(c) the Equipment shall be kept only at the following locations:
----------------------------------------------------------------------
(d) the owners or mortgagees of the respective locations are:
----------------------------------------------------------------------
(e) Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours to inspect and
examine the Equipment and Borrower agrees to reimburse Bank for its
reasonable costs and expenses in so doing.
5. Borrower shall keep and maintain the Equipment in good operating condition
and repair, make all necessary replacements thereto so that the value and
operating efficiency thereof shall at all times be maintained and preserved.
Borrower shall not permit any items of Equipment to become a fixture to real
estate or accession to other property, and the Equipment is now and shall at all
times remain and be personal property.
6. Borrower, at its expense, shall keep and maintain: the Equipment insured
against loss or damage by fire, theft, explosion, sprinklers and all other
hazards and risks ordinarily insured against by other owners who use such
properties and interest in properties in similar businesses for the full
insurable value thereof; and business interruption insurance and public
liability and property damage insurance relating to Borrowers ownership and use
of its assets. All such policies of insurance shall be in such form, with such
companies and in such amounts as may be satisfactory to Bank. Borrower shall
deliver to Bank certified copies of such policies of insurance and evidence of
the payment of all premiums thereof. All such policies of insurance (except
those of public liability and property damage) shall contain an endorsement in a
form satisfactory to Bank showing loss payable to Bank and all proceeds payable
thereunder shall e payable to Bank and upon receipt by Bank shall be applied on
the account of Borrower's Obligations. To secure the payment of Borrower's
Obligations, Borrower grants Bank a security interest in and to all such
policies of insurance (except those of public liability and property damage) and
the proceeds thereof and directs all insurers under such policies of insurance
to pay all proceeds thereof directly to Bank. Borrower hereby irrevocably
appoints Bank (and any of Bank's officers, employees or agents designated by
Bank) as Borrower's attorney-in-fact for the purpose of making, settling and
adjusting claims under such policies of insurance and for making all
determinations and decisions with respect to such policies of insurance to pay
all proceeds thereof directly to Bank. Borrower hereby irrevocably appoints Bank
(and any of Bank's officers, employees or agents designated by Bank) as
Borrower's attorney-in-fact for the purpose of making, settling and adjusting
claims under such policies of insurance and for making all determinations and
decisions with respect to such policies of insurance. Each such insurer shall
agree by endorsement upon the policy or policies of insurance issued by it to
Borrower as required above, or by independent instruments furnished to Bank that
it will give Bank at least ten (10) days written notice before any such policy
or policies of insurance shall be altered or canceled, and that no act or
default of borrower, or any other person, shall affect the right of Bank to
recover under such policy or policies of insurance required above or to pay any
premium in whole or in part relating thereto. Bank, without waiving or releasing
any obligations or defaults by Borrower hereunder, may at any time or times
hereafter, but shall have no obligations to do so, obtain and maintain such
policies of insurance and pay such premiums and take any other action with
respect to such policies which Bank deems advisable. All sums so disbursed by
Bank, including reasonable attorney's fees, court costs, expenses and other
charges relating thereto, shall be a part of Borrower's Obligations and payable
on demand.
7. Until default by Borrower under the Agreement or this Rider, Borrower may,
subject to the provisions of the Agreement and this Rider and consistent
therewith, remain in possession thereof and use the Equipment referred to herein
in the ordinary course of business at the location or locations hereinabove
designated.
8. All of the terms, conditions, warranties, covenants, agreements and
representations of the Agreement are incorporated herein and reaffirmed.
9. Upon a default by Borrower under the Agreement or this Rider, Borrower upon
request of Bank to do so, agrees to assemble and make the Equipment or any part
thereof available to Bank at a place designated by Bank.
10. Borrower shall upon demand by Bank immediately deliver to Bank and properly
endorse, any and all evidences of ownership, certificates of title or
applications for titles to any of the aforesaid items of Equipment.
11. Bank shall not in any way or manner be liable or responsible for (a) the
safekeeping of the Equipment; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the value
thereof or (d) any act or default by any person whomsoever. All risk of Loss,
damage or destruction of the Equipment shall be borne by Borrower.
Borrower(s): DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
/s/ R. E. WITTMAN VP & CFO
- ------------------------------------- ----------------------------------------
By: By:
- ------------------------------------- ----------------------------------------
By: By:
Accepted this 10TH day of DECEMBER, 1997 at Bank's place of business in SAN
JOSE, CA 95113
By: /s/ THOMAS M. HICKS
----------------------------------------
THOMAS M. HICKS, VICE PRESIDENT
<PAGE> 19
[LOGO] INVENTORY RIDER
(REVOLVING ADVANCE)
COMERCIA BANK-CALIFORNIA
Borrower(s): DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
Borrower has entered into a certain Revolving Credit and Security Agreement
(Accounts and Inventory) or a certain Loan and Security Agreement (Accounts and
Inventory) (either hereinafter referred to as "Agreement") dated DECEMBER 10,
1997 with Bank (Secured Party). This INVENTORY RIDER (hereinafter referred to as
this Rider) dated DECEMBER 10, 1997 is hereby made a part of and incorporated
into that agreement.
1. At the request of Borrower, made at any time and from time to time
during the term of the Agreement, and so long as no event of default under the
Agreement has occurred and Borrower is in full, faithful and timely compliance
with each and all of the covenants, conditions, warranties and representations
contained in the Agreement, this Rider and/or any other agreement between Bank
and Borrower, Bank agrees to lend Borrower SEVENTY-FIVE AND NO/1000 percent
(75.000% ) of the lower of cost or market value of Borrower's raw materials and
finished goods inventory, and as may be adjusted by Bank, in Bank's discretion,
for age and seasonality or other factors affecting the value of the Inventory,
up to a maximum advance outstanding at any one time of NO/100 Dollars
($__________) upon Borrower's concurrent execution and delivery to Bank of a
Designation of Inventory, or Certification of Borrowing Base, in form
customarily used by Bank. All advances made and to be made pursuant to this
Rider are solely and exclusively to enable Borrower to acquire rights in and
purchase new Inventory, and Borrower represents and warrants that all advances
by Bank pursuant to this Rider will be used solely and exclusively for such
purpose; and since such advances will be used for the foregoing purposes,
Bank's security interest in Borrower's Inventory is and shall be at all times a
purchase money security interest as that term is described in Section 9107 of
the California Uniform Commercial Code.
2. Advances made by Bank to Borrower pursuant to this Rider shall be
included as part of the Obligations of Borrower to Bank as the term
"Obligations" is defined in the Agreement; and at Bank's option, advances
pursuant to this Rider may be evidenced by promissory note(s), in form and on
terms satisfactory to Bank. All such advances shall bear interest at the rate
and be payable in the manner specified in said promissory note(s) in the event
Bank exercises the aforementioned option, and in the event Bank does not, such
advances shall bear interest at the rate and be payable in the manner specified
in the Agreement.
3. All of the terms, covenants, warranties, conditions, agreements and
representations of the Agreement are incorporated herein as though set forth in
their entirety and are hereby reaffirmed by Borrower and Bank as though fully
set forth hereat.
BORROWER(S): DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
/s/ R. E. WITTMAN
- ------------------------------------- ------------------------------------
By: By:
- ------------------------------------- ------------------------------------
By: By:
Accepted this 10TH day of DECEMBER, 1997 at Bank's place of business in
SAN JOSE, CA 95113.
/s/ THOMAS M. HICKS
------------------------------------
By: THOMAS M. HICKS, VICE PRESIDENT
<PAGE> 1
EXHIBIT 10.43
[COMERICA LOGO]
VARIABLE RATE-SINGLE PAYMENT NOTE
- --------------------------------------------------------------------------------
AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION #
$500,000.00 DECEMBER 10, 1997 DECEMBER 10, 1998 13-3152648
- --------------------------------------------------------------------------------
On the Maturity Date, as stated above for value received, the undersigned
promise(s) to pay to the order of COMERICA BANK-CALIFORNIA ("Bank"), at any
office of the Bank in the State of California, FIVE HUNDRED THOUSAND AND NO/100
Dollars (U.S.) with interest from the date of this Note at a per annum rate
equal to the Bank's base rate from time to time in effect PLUS 0.500% per annum
until maturity, whether by acceleration or otherwise, or until Default, as later
defined, and after that at a default rate equal to the rate of interest
otherwise prevailing under this Note plus 3% per annum (but in no event in
excess of the maximum rate permitted by law). The Bank's "base rate" is that
annual rate of interest so designated by the Bank and which is changed by the
Bank from time to time. Interest rate changes will be effective for interest
computation purposes as and when the Bank's base rate changes. Interest shall be
calculated for the actual number of days the principal is outstanding on the
basis of a 360-day year if this Note evidences a business or commercial loan or
a 365-day year if a consumer loan. Accrued interest on this Note shall be
payable on either (i) [ ] the Maturity Date or (ii)[X] the 10TH day of each
MONTH commencing JANUARY 10, 1998, until the Maturity Date when all amounts
outstanding under this Note shall be due and payable in full. If the frequency
of interest payments is not otherwise specified, accrued interest on this Note
shall be payable monthly on the first day of each month. If any payment of
principal or interest under this Note shall be payable on a day other than a day
on which the Bank is open for business, this payment shall be extended to the
next succeeding business day and interest shall be payable at the rate specified
in this Note during this extension. A late payment charge equal to 5% of each
late payment may be charged on any payment not received by the Bank within 10
calendar days after the payment due date, but acceptance of payment of this
charge shall not waive any Default under this Note.
This Note and any other indebtedness and liabilities of any kind of the
undersigned (or any of them) to the Bank, and any and all modifications,
renewals or extensions of it, whether joint or several, contingent or absolute,
now existing or later arising, and however evidenced (collectively
"Indebtedness") are secured by and the Bank is granted a security interest in
all items deposited in any account of any of the undersigned with the Bank and
by all proceeds of these items (cash or otherwise), all account balances of any
of the undersigned from time to time with the Bank, by all property of any of
the undersigned from time to time in the possession of the Bank and by any other
collateral, rights and properties described in each and every deed of trust,
mortgage, security agreement, pledge, assignment and other security or
collateral agreement which has been, or will at any time(s) later be, executed
by any (or all) of the undersigned to or for the benefit of the Bank
(collectively "Collateral"). Notwithstanding the above, (i) to the extent that
any portion of the Indebtedness is a consumer loan, that portion shall not be
secured by any deed of trust or mortgage on or other security interest in any of
the undersigned's principal dwelling or in any of the undersigned's real
property which is not a purchase money security interest as to that portion,
unless expressly provided to the contrary in another place, or (ii) if the
undersigned (or any of them) has (have) given or give(s) Bank a deed of trust or
mortgage covering real property, that deed of trust or mortgage shall not secure
this Note or any other indebtedness of the undersigned (or any of them), unless
expressly provided to the contrary in another place.
If the undersigned (or any of them) or any guarantor under a guaranty of all or
part of the Indebtedness ("guarantor") (i) fail(s) to pay any of the
Indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to pay
any Indebtedness owing on a demand basis upon demand; or (ii) fail(s) to comply
with any of the terms or provisions of any agreement between the undersigned (or
any of them) or any guarantor and the Bank; or (iii) become(s) insolvent or the
subject of a voluntary or involuntary proceeding in bankruptcy, or a
reorganization, arrangement or creditor composition proceeding, (if a business
entity) cease(s) doing business as a going concern, (if a natural person) die(s)
or become(s) incompetent, (if a partnership) dissolve(s) or any general partner
of it dies or becomes incompetent or becomes the subject of a bankruptcy
proceeding or (if a corporation or a limited liability company) is the subject
of a dissolution, merger or consolidation; or (a) if any warranty or
representation made by any of the undersigned or any guarantor in connection
with this Note or any of the Indebtedness shall be discovered to be untrue or
incomplete; or (b) if there is any termination, notice of termination, or breach
of any guaranty, pledge, collateral assignment or subordination agreement
relating to all or any part of the Indebtedness; or (c) if there is any failure
by any of the undersigned or any guarantor to pay when due any of its
indebtedness (other than to the Bank) or in the observance or performance of any
term, covenant or condition in any document evidencing, securing or relating to
such indebtedness; or (d) if the Bank deems itself insecure believing that the
prospect of payment of this Note or any of the Indebtedness is impaired or shall
fear deterioration, removal or waste of any of the Collateral; or (e) if there
is filed or issued a levy or writ of attachment or garnishment or other like
judicial process upon the undersigned (or any of them) or any guarantor or any
of the Collateral, including without limit, any accounts of the undersigned (or
any of them) or any guarantor with the Bank, then the Bank, upon the occurrence
of any of these events (each a "Default"), may at its option and without prior
notice to the undersigned (or any of them), declare any or all of the
Indebtedness to be immediately due and payable (notwithstanding any provisions
contained in the evidence of it to the contrary), sell or liquidate all or any
portion of the Collateral, set off against the Indebtedness any amounts owing by
the Bank to the undersigned (or any of them), charge interest at the default
rate provided in the document evidencing the relevant Indebtedness and exercise
any one or more of the rights and remedies granted to the Bank by any agreement
with the undersigned (or any of them) or given to it under applicable law. In
addition, if this Note is secured by a deed of trust or mortgage covering real
property, then the trustor or mortgagor shall not mortgage or pledge the
mortgaged premises as security for any other indebtedness or obligations. This
Note, together with all other indebtedness secured by said deed of trust or
mortgage, shall become due and payable immediately, without notice, at the
option of the Bank, (a) if said trustor or mortgagor shall mortgage or pledge
the mortgaged premises for any other indebtedness or obligations or shall
convey, assign or transfer the mortgaged premises by deed, installment sale
contract or other instrument, or (b) if the title to the mortgaged premises
shall become vested in any other person or party in any manner whatsoever, or
(c) if there is any disposition (through one or more transactions) of legal or
beneficial title to a controlling interest of said trustor or mortgagor. All
payments under this Note shall be in immediately available United States funds,
without setoff or counterclaim.
If this Note is signed by two or more parties (whether by all as makers or by
one or more as an accommodation party or otherwise), the obligations and
undertakings under this Note shall be that of all and any two or more jointly
and also of each severally. This Note shall bind the undersigned, and the
undersigned's respective heirs, personal representatives, successors and
assigns.
The undersigned waive(s) presentment, demand, protest, notice of dishonor,
notice of demand or intent to demand, notice of acceleration or intent to
accelerate, and all other notices, and agree(s) that no extension or indulgence
to the undersigned (or any of them) or release, substitution or nonenforcement
of any security, or release or substitution of any of the undersigned, any
guarantor or any other party, whether with or without notice, shall affect the
obligations of any of the undersigned. The undersigned waive(s) all defenses or
right to discharge available under Section 3-605 of the California Uniform
Commercial Code and waive(s) all other suretyship defenses or right to
discharge. The undersigned agree(s) that the Bank has the right to sell, assign,
or grant participations, or any interest, in any or all of the Indebtedness, and
that, in connection with this right, but without limiting its ability to make
other disclosures to the full extent allowable, the Bank may disclose all
documents and information which the Bank now or later has relating to the
undersigned or the Indebtedness. The undersigned agree(s) that the Bank may
provide information relating to this Note or to the undersigned to the Bank's
parent, affiliates, subsidiaries and service providers.
The undersigned agree(s) to reimburse the holder or owner of this Note for any
and all costs and expenses (including without limit, court costs, legal expenses
and reasonable attorney fees, whether inside or outside counsel is used, whether
or not the suit is instituted and, if suit is instituted, whether at the trial
court level, appellate level, in a bankruptcy, probate or administrative
proceeding or otherwise) incurred in collecting or attempting to collect this
Note or incurred in any other matter or proceeding relating to this Note.
<PAGE> 2
The undersigned acknowledge(s) and agree(s) that there are no contrary
agreements, oral or written, establishing a term of this Note and agree(s) that
the terms and conditions of this Note may not be amended, waived or modified
except in a writing signed by an officer of the Bank expressly stating that the
writing constitutes an amendment, waiver or modification of the terms of this
Note. As used in this Note, the word "undersigned" means, individually and
collectively, each maker, accommodation party, indorser and other party signing
this Note in a similar capacity. If any provision of this Note is unenforceable
in whole or part for any reason, the remaining provisions shall continue to be
effective. THIS NOTE IS MADE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
THE MAXIMUM INTEREST RATE SHALL NOT EXCEED THE HIGHEST APPLICABLE USURY CEILING.
THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR
HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY
AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY
JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR
IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS.
THIS NOTE IS SUBJECT TO THE TERMS OF A LOAN & SECURITY AGREEMENT DATED MARCH 7,
1997 AND ANY AND ALL SUBSEQUENT RENEWAL AND MODIFICATIONS THEREOF.
For Corporations, Partnerships, Trust or Estates
<TABLE>
<S> <C> <C>
DENTAL/MEDICAL
DIAGNOSTIC SYSTEMS, INC. By: /s/ R. E. WITTMAN Its: VP & CFO
- ---------------------------- --------------------------- ----------------------------
OBLIGOR NAME TYPED/PRINTED SIGNATURE OF TITLE
200 N. WESTLAKE BLVD., #202 By: Its:
- ---------------------------- --------------------------- ----------------------------
STREET ADDRESS SIGNATURE OF TITLE
WESTLAKE VILLAGE By: Its:
- ---------------------------- --------------------------- ----------------------------
CITY SIGNATURE OF TITLE
CA 91362 By: Its:
- ---------------------------- --------------------------- ----------------------------
STATE ZIP CODE SIGNATURE OF TITLE
For Individuals or Sole Proprietorships
Name(s) of Obligor(s) Signature(s) of Obligor(s)
(Type or Print)
- ---------------------------- --------------------------- ----------------------------
- ---------------------------- --------------------------- ----------------------------
STREET ADDRESS
- ---------------------------- --------------------------- ----------------------------
CITY
- ---------------------------- --------------------------- ----------------------------
STATE ZIP CODE
</TABLE>
- -------------------------------------------------------------------------------
For Bank Use Only CCAR#
- -------------------------------------------------------------------------------
Loan Officer Initials Loan Group Name Obligor(s) Name
THOMAS M. HICKS HIGH TECHNOLOGY DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
- -------------------------------------------------------------------------------
Loan Officer I.D. No. Loan Group No. Obligor# Note# Amount
48711 95824 ** $500,000.00
- -------------------------------------------------------------------------------
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
<PAGE> 3
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
[COMERICA LOGO]
AUTOMATIC LOAN PAYMENT AUTHORIZATION
- --------------------------------------------------------------------------------
Date DECEMBER 10, 1997
-------------------------------
Obligor Name (Typed or Printed): DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
-----------------------------------------------
Obligor Number: ** Lender's Cost Center # 95824
-------------------- -------------------
Address: 200 N. WESTLAKE BLVD., #202, WESTLAKE VILLAGE, CA 91362
------------------------------------------------------------------------
STREET ADDRESS CITY STATE ZIP CODE
The undersigned hereby authorizes COMERICA BANK-CALIFORNIA ("Bank") to charge
the account designated below for the payments due on the loan(s) as designated
below and all renewals, extensions, modifications and/or substitutions thereof.
This authorization will remain in effect unless the undersigned requests a
modification that is agreed to by the Bank in writing. The undersigned remains
fully responsible for all amounts outstanding to Bank if the designated account
is insufficient for repayment.
[X] Automatic Payment Authorization for all payments on all current and future
borrowings, as and when such payments come due (which payments include,
without limitation, principal, interest, fees, costs, and expenses).
[ ] Automatic Payment Authorization for all payments on only the specific
borrowing identified below, as and when such payments come due (which
payments include, without limitation, principal, interest, fees, costs, and
expenses).
Specific Obligation Number
--------------------------
[ ] Automatic Payment Authorization for less than all payments on only the
specific borrowing identified below, as and when such payments come due.
Specific Obligation Number
--------------------------
[ ] Principal and Interest Payments only
[ ] Principal Payments only
[ ] Interest Payments only
[ ] SPECIAL INSTRUCTIONS/IRREGULAR PAYMENT INSTRUCTIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Payment Due Date: Your loan payments of principal and interest will be charged
to your account as indicated above unless that day is a Saturday, Sunday, or
holiday in which case such payments will be made on the following business day,
with interest to accrue during this extension as provided under the loan
documents.
Account to be Charged:
[ ] Checking COMERICA BANK-CALIFORNIA Account No. **
------------------
[ ] Savings COMERICA BANK-CALIFORNIA Account No.
------------------
(Charges to account are withdrawals pursuant to account resolution)
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
By: /s/ R. E. WITTMAN By:
----------------------------------- -------------------------------------
SIGNATURE OF SIGNATURE OF
Its: VP & CFO Its:
----------------------------------- ------------------------------------
TITLE (if applicable) TITLE (if applicable)
By: By:
----------------------------------- -------------------------------------
SIGNATURE OF SIGNATURE OF
Its: Its:
---------------------------------- ------------------------------------
TITLE (if applicable) TITLE (if applicable)
By: By:
----------------------------------- -------------------------------------
SIGNATURE OF SIGNATURE OF
Its: Its:
---------------------------------- ------------------------------------
TITLE (if applicable) TITLE (if applicable)
<PAGE> 4
STATEMENT
DATE: DECEMBER 10, 1997
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. COMERIA BANK-CALIFORNIA
P.O. Box 49032
200 N. WESTLAKE BLVD., #202 SAN JOSE, CA 95161-9871
WESTLAKE VILLAGE, CA 91362
RE: Fee on $500,000.00 Note, dated 12/10/97, and maturing 12/10/98
Officer T. HICKS
Loan Fee $2,500.00
TOTAL DUE: 2,500.00
CUSTOMER COPY
[ ] CUSTOMER CHECK ATTACHED
[X] CHARGE DDA NO. **
ACKNOWLEDGED BY: /s/ R. E. WITTMAN
**CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION.
<PAGE> 5
[COMERCIA LOGO]
BORROWER'S AUTHORIZATION
DATE: DECEMBER 10, 1997
-------------------
I (we) hereby authorize and direct COMERCIA BANK-CALIFORNIA
("Bank") to pay
to DMDS's checking account as requested $
--------------------
to ____________________________________ $
--------------------
to ____________________________________ $
--------------------
to ____________________________________ $
--------------------
of the proceeds of my (our) loan from the Bank evidenced by a note in the
original principal amount of $500,000.00, dated DECEMBER 10, 1997.
Borrower(s): DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
-------------------------------------------
By: /s/ R. E. WITTMAN Its: VP/CFO
---------------------- -----------------------
Signature of Title (if applicable)
By: Its:
---------------------- -----------------------
Signature of Title (if applicable)
By: Its:
---------------------- -----------------------
Signature of Title (if applicable)
By: Its:
---------------------- -----------------------
Signature of Title (if applicable)
<PAGE> 1
EXHIBIT 10.44
[Comerica Bank-California Letterhead]
December 24, 1997
Ronald E. Wittman
Dental Medical Diagnostic Systems, Inc.
200 N. Westlake Village Blvd.
Ste 202
Westlake Village, CA 91362
Dear Ron:
In reference to the Variable Rate - Single Payment Note ("Agreement") between
Comerica Bank-California ("Bank") and Dental Medical Diagnostic Systems, Inc.
("Borrower") dated December 10, 1997, for a loan in the amount of Five Hundred
Thousand Dollars ($500,000), Borrower and Bank desire to amend said Agreement.
This amendment shall be called the First Amendment to the Agreement.
The maturity date is modified as follows:
"At the earlier of the maturity date, which is December 10, 1998 or the
full disbursement of the line of credit, the princial balance will
amortize over a thirty six (36) month basis, equal principal payment
with interest added."
Except as amended hereby, the Agreement shall remain unaltered and in full force
and effect. This letter shall not be a waiver of any existing default or breach
of a covenant unless specified herein.
If you agree to accept the terms of this Amendment, please sign the enclosed
acknowledgment copy and return it on or before December 31, 1997.
Very truly yours,
Comerica Bank - California
/s/ THOMAS M. HICKS
--------------------
By: Thomas M. Hicks
Title: Vice President
Agreed and Accepted to this _______ day of December, 1997.
Dental Medical Diagnostic Systems, Inc.
"Borrower"
By: /s/ RON WITTMAN
--------------------
Its: VP & CFO
--------------------
<PAGE> 1
EXHIBIT 11.1
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997;
THE TEN MONTH PERIOD ENDED DECEMBER 31, 1996, AND
THE PERIOD FROM INCEPTION TO MARCH 2, 1996
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
NET INCOME PER SHARE WAS Twelve Months Ended Ten Months Ended Inception to
CALCULATED AS FOLLOWS: December 31, 1997 December 31, 1996 March 2, 1996
---------------------- ----------------- ----------------- -------------
Basic:
<S> <C> <C> <C>
Weighted average common shares outstanding ......... 4,341,498 2,893,298 1,035,778
========= ========= =========
Diluted:
Weighted average common shares outstanding ......... 4,431,498 2,893,298 1,035,778
Incremental shares under stock options computed
under the treasury stock method using the
market price of the issuer's common stock at
the end of the period if higher than the
average market price ............................. -- 125,915 --
Weighted average common and common
equivalent shares outstanding .................... 4,341,498 3,019,213 1,035,778
========= ========= =========
Loss amounts
Loss before extraordinary item ................... $(1,810,580) $ 137,151 $(1,625,213)
Extraordinary loss on early extinguishment of debt $ (234,149) $ $
----------- ----------- -----------
Net loss ......................................... $(2,044,729) $ 137,151 $(1,625,213)
=========== =========== ===========
Loss per share of common stock:
Basic:
Loss before extraordinary item ................... $ (0.42) $ 0.05 $ (1.57)
Extraordinary loss on early extinguishment of debt $ (0.05) $ -- $ --
----------- ----------- -----------
Net loss ......................................... $ (0.47) $ 0.05 $ (1.57)
=========== =========== ===========
Diluted:
Loss before extraordinary item ................... $ (0.42) $ 0.05 $ (1.57)
Extraordinary loss on early extinguishment of debt $ (0.05) $ -- $ --
----------- ----------- -----------
Net loss ......................................... $ (0.47) $ 0.05 $ (1.57)
=========== =========== ===========
Shares used in the per share calculation:
Basic ............................................ 4,341,498 2,893,298 1,035,778
Diluted .......................................... 4,341,498 3,019,213 1,035,778
</TABLE>
46
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Registrant
1. Bavarian Dental Instruments, Inc., a California close corporation.
2. DMDS, Ltd., a company formed under the laws of the United Kingdom.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in previously filed registration
statements of Dental/Medical Diagnostic Systems, Inc., including, without
limitation, registration statements on Form S-3 (Registration No. 333-42865) and
Form S-8 (Registration No. 333-42867), together with any and all amendments
thereto, filed as of the date hereof, of our report dated February 16, 1998 on
our audits of the consolidated financial statements of Dental/Medical
Diagnostic Systems, Inc. as of December 31, 1997 and 1996 and for the twelve
month period ended December 31, 1997, the ten month period ended December 31,
1996, and for the period from inception (October 23, 1995) to March 2, 1996,
which report is included in this Annual Report on Form 10-KSB.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the interim
condensed consolidated financial statements of Dental-Medical Diagnostic
Systems, Inc. as of the twelve months ended December 31, 1997 included in this
report on Form 10-KSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,981,062
<SECURITIES> 0
<RECEIVABLES> 1,967,614
<ALLOWANCES> 20,975
<INVENTORY> 2,896,270
<CURRENT-ASSETS> 9,234,007
<PP&E> 748,985
<DEPRECIATION> 195,866
<TOTAL-ASSETS> 10,492,026
<CURRENT-LIABILITIES> 2,650,966
<BONDS> 0
0
0
<COMMON> 51,157
<OTHER-SE> 7,738,993
<TOTAL-LIABILITY-AND-EQUITY> 10,492,026
<SALES> 16,087,208
<TOTAL-REVENUES> 16,087,208
<CGS> 10,234,206
<TOTAL-COSTS> 7,501,082
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138,576
<INCOME-PRETAX> (1,657,269)
<INCOME-TAX> (153,311)
<INCOME-CONTINUING> (1,810,580)
<DISCONTINUED> 0
<EXTRAORDINARY> (234,149)
<CHANGES> 0
<NET-INCOME> (2,044,729)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
