<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
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)
<TABLE>
<S> <C>
DELAWARE 13-3152648
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
200 N. WESTLAKE BOULEVARD 91362
SUITE 202 (ZIP CODE)
WESTLAKE VILLAGE, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
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.
Amendment to include Items 9-12 of Part III. Portions of the Registrant's
definitive Proxy Statement will not be incorporated by reference into this form
10KSB-A.
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.
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<PAGE> 2
PART III
ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
INFORMATION WITH RESPECT TO DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Directors and executive officers of the Company as of December 31, 1997.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and Directors of the Company are as follows:
<TABLE>
<CAPTION>
YEAR
FIRST
ELECTED
OR
APPOINTED
AGE AT A
NAME DECEMBER 31, 1997 DIRECTOR PRINCIPAL OCCUPATION
---- ------------------ --------- ---------------------------------------
<S> <C> <C> <C>
DIRECTORS
Robert H. Gurevitch............... 54 1996 MR. GUREVITCH has been Chairman of the
Board, Chief Executive Officer and
President of the Company since March
1996, and was appointed Secretary of
the Company in February 1997. Mr.
Gurevitch founded Dental Medical
Diagnostic Systems, LLC ("DMD") in
October 1995 and was its Chief
Executive Officer until it was acquired
by the Company. From November 1994
until February 1995, Mr. Gurevitch
served as Chief Executive Officer of
Dycam, Inc., a manufacturer and
marketer of digital cameras. From 1987
until his retirement in August 1993,
Mr. Gurevitch served as Chief Executive
Officer and Chairman of the Board at
New Image Industries, Inc. ("New
Image"), a manufacturer and distributor
of intraoral cameras.
Marvin H. Kleinberg............... 70 1996 MR. KLEINBERG has been a Director of
the Company since March 1996. Mr.
Kleinberg is a founding partner of the
law firm Kleinberg & Lerner, LLP, and
has been a member of that law firm and
its various predecessors since 1980.
Mr. Kleinberg has practiced in the area
of intellectual property law since
1954. Mr. Kleinberg serves as an
adjunct lecturer in Patent Law at the
Franklin Pierce Law Center and is on
the advisory council of the PTC
Foundation, which publishes "IDEA."
</TABLE>
40
<PAGE> 3
<TABLE>
<CAPTION>
YEAR
FIRST
ELECTED
OR
APPOINTED
AGE AT A
NAME DECEMBER 31, 1997 DIRECTOR PRINCIPAL OCCUPATION
---- ------------------ --------- ---------------------------------------
<S> <C> <C> <C>
Jack D. Preston................... 64 1997 DR. PRESTON has been a Director of the
Company since March of 1997. Dr.
Preston became a consultant to the
Company in June of 1997. Dr. Preston
has been The Don and Sybil Harrington
Foundation Professor of Esthetic
Dentistry at the University of Southern
California School of Dentistry since
1979 where he is also the Chairman of
the Department of Oral and
Maxillofacial Imaging and the director
of Informatics. Dr. Preston is also
currently a Diplomate of the American
Board of Prosthodontics. Dr. Preston is
an international lecturer on various
aspects of dentistry, an author of
three textbooks and numerous articles
and invited chapters, and is widely
considered to be a leading expert on
current and future applications of
computer technology in dentistry.
OTHER EXECUTIVE OFFICERS
Ronald E. Wittman................. 52 1997 MR. WITTMAN has been the Chief
Financial Officer of the Company since
September 1996. Mr. Wittman was also
elected Director of the Company in
February 1997 and served until March
1997. Mr. Wittman did not seek
reelection in 1997. From September 1994
to September 1996, Mr. Wittman was the
Vice President of Finance and
Administration and the Chief Financial
Officer of FMS Corporation, a
manufacturer of defense related
products which declared bankruptcy in
1995.
Mr. Wittman served as Corporate
Controller of Whittaker Corporation, an
aerospace, defense electronics and
manufacturing corporation from May 1993
to September 1994. From 1987 to May
1993, Mr. Wittman served as Corporate
Controller at DAK Industries, a
manufacturer and distributor of
consumer electronics, computers, and
computer software.
Dewey Perrigo..................... 44 MR. PERRIGO has served as the Company's
Vice President of Sales since March
1996. Commencing in October 1995, he
served in the same capacity at DMD,
LLC. From 1988 through September 1995,
Mr. Perrigo served as the Director of
Sales of New Image.
</TABLE>
41
<PAGE> 4
<TABLE>
<CAPTION>
YEAR
FIRST
ELECTED
OR
APPOINTED
AGE AT A
NAME DECEMBER 31, 1997 DIRECTOR PRINCIPAL OCCUPATION
---- ------------------ --------- ---------------------------------------
<S> <C> <C> <C>
Merle Roberts..................... 48 MR. ROBERTS joined the Company in
February 1996 as Director of
Operations. On July 1, 1996, he was
promoted to Vice President of
Manufacturing. From 1988 until May
1994, Mr. Roberts served as Materials
Manager for Advanced Interventional
Systems, a medical laser manufacturer.
From June 1994 until January 1996 Mr.
Roberts was an independent consultant
providing materials, management and
purchasing services to a variety of
businesses. Mr. Roberts has taught
material management and related
subjects at several Southern California
colleges and universities, and has
served as a professional consultant on
these topics.
</TABLE>
The Directors hold office until the Annual Meeting of Stockholders next
following their election and/or until their successors are elected and
qualified. Officers are elected by the Board of Directors and serve at the
discretion of the Board.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act requires the Company's
executive officers, Directors and persons who own more than 10% of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Executive officers, Directors and greater-than-ten-percent stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file with the SEC. Based solely on its review of the copies of
such forms received by it and written representations from certain reporting
persons that they have complied with the relevant filing requirements, the
Company believes that during the year ended December 31, 1997, all relevant
Section 16(a) filing requirements were complied with, provided that: (1) with
respect to Ronald E. Wittman, Chief Financial Officer of the Company, no Form 4
was filed to report the acquisition of 1,000 shares of Common Stock on November
23, 1997 at a price of $9.38 per share; (2) with respect to Merle Roberts, Vice
President of Manufacturing of the Company, no Form 4 was filed to report the
acquisition of 10,000 shares of Common Stock and 10,000 of the Company's
Redeemable Common Stock Purchase Warrants in open market transactions on May 9,
1997 at a purchase price of $4.50 in the case of the shares of Common Stock and
$5.00 per warrant in the case of the Redeemable Common Stock Purchase Warrants;
and (3) with respect to Jack Preston, a Director of the Company, No Form 3, and
no Form 4 was filed with respect to 5,000 shares of Common Stock purchased on
June 19, 1997 at $5.88 per share and 1,000 shares of Common Stock purchased on
November 26, 1997 at $9.50 per share. The Company has received no other
information with respect to any required filings by its executive officers,
Directors, and/or any greater-than-ten-percent stockholders of any class of its
securities.
ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
During 1997, Dr. Preston was granted options to purchase 33,000 shares of
Common Stock. Such options vest over a three-year period at the rate of 11,000
shares per year from the date of grant and are exercisable at a price of $4.50
per share. Dr. Preston exercised no options in 1997. Mr. Kleinberg was granted
options to purchase 11,000 shares of Common Stock in fiscal 1997, vesting over
three years at the rate of approximately 3,667 per year from the date of grant,
and are exercisable at a price of $5.125 per share. Mr. Kleinberg exercised no
options in 1997. Effective April 1997, the Company compensated each of its
Directors who are not Officers of, or otherwise employed by, the Company
("Independent Directors") in the form of a $500 fee for their personal
attendance at a formal meeting of the Board of Directors. No compensation is
paid for
42
<PAGE> 5
telephonic meetings. A total of $2,000 was paid to the Directors, as a group,
for Board meeting attendance. Dr. Preston acts as a consultant to the Company
from time to time at the request of the Board, and was paid $22,000 in
consulting fees in 1997. There is no written consulting contract between the
Company and Dr. Preston. In addition, the Company pays all expenses paid by its
Directors for travel, etc. which are directly related to Company business and
are within the scope of their positions with the Company, and granted options to
each of its Directors, as compensation for serving as Directors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during the year ended December 31, 1997 to Robert H. Gurevitch,
the principal executive officer of the Company, and each of the Company's most
highly compensated executive officers whose salary and bonus exceeded $100,000
during such year and other significant employees.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------- -----------------------------------
AWARDS PAYOUTS
------------------------- -------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING LTIP OTHER
SALARY BONUS COMPENSATION STOCK OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (2) AWARD(S) (#) ($) ($)
--------------------------- ---- -------- ------- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert H. Gurevitch(1)....... 1997 $250,885 -- -- -- 50,000 -- --
Chairman of the Board 1996 153,300 -- -- -- 5,120 -- --
of Directors, Chief
Executive Officer, President
and Secretary
Dewey Perrigo(1)............. 1997 $137,308 -- -- -- 25,000 -- --
Vice President of Sales 1996 103,800 -- -- -- 34,133 -- --
Ronald E. Wittman............ 1997 $114,923 -- -- -- 50,000 -- --
Chief Financial Officer 1996 25,000 -- -- -- -- -- --
Merle Roberts................ 1997 $ 89,308 -- -- -- 25,000 -- --
Vice President of 1996 68,962 -- -- -- 17,066 -- --
Manufacturing
</TABLE>
- ---------------
(1) For a description of employment agreements between these executive officers
and the Company, see "Employment Agreements with Executive Officers" below
this table.
(2) Certain of the officers of the Company routinely receive other benefits from
the Company, including travel reimbursement, the amounts of which are
customary in the industry. The Company has concluded, after reasonable
inquiry, that the aggregate amounts of such benefits during fiscal 1997, did
not exceed the lesser of $50,000 or 10% of the compensation set forth above
as to any named individual.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
The Company and Mr. Gurevitch have entered into an agreement whereby Mr.
Gurevitch has agreed to serve as Chairman of the Board of Directors and Chief
Executive Officer of the Company until October 1, 1999. Mr. Gurevitch's
agreement provides for compensation including salary at a minimum annual base
compensation rate of $180,000 prior to March 1, 1997 and $275,000 thereafter,
and a car allowance and a standard benefits package. Pursuant to the terms of
his agreement, Mr. Gurevitch may not have any ownership interest, or participate
in any way, in any venture which competes with the Company for a period of three
years after the termination of the agreement; provided, however, that the
Company must pay Mr. Gurevitch a fee of $10,000 annually for each of the three
years in consideration for this non-competition agreement.
The Company has also entered into an agreement with Mr. Perrigo pursuant to
which Mr. Perrigo has agreed to serve as the Company's Vice President of Sales
until October 1, 1999. Mr. Perrigo's compensation will include salary at a
minimum annual base compensation rate of $100,000 prior to March 1, 1997 and
$150,000 thereafter, and a car allowance and a standard benefits package.
43
<PAGE> 6
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding grants of
stock options made during the fiscal year ended December 31, 1997 to the
executive officers named in the Summary Compensation Table ("Named Executive
Officers"). The Company did not grant any stock appreciation rights in 1997.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF OPTIONS GRANTED
SECURITIES TO EMPLOYEES IN
UNDERLYING FISCAL YEAR ENDED EXERCISE OF MARKET PRICE
OPTIONS DECEMBER 31, BASE ON DATE EXPIRATION
NAME GRANTED 1997 PRICE ($/SH) OF GRANT (1) DATE
---- ---------- ----------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Robert H. Gurevitch............... 50,000 10.85% $5.638 $5.125 9/18/2002
Dewey Perrigo..................... 25,000 5.43% $5.125 * 9/18/2002
Ronald E. Wittman................. 25,000 10.85%(total) $4.50 * 5/8/2002
25,000 $5.125 * 9/18/2002
Merle Roberts..................... 25,000 5.43% $5.125 * 9/18/2002
</TABLE>
- ---------------
* Unless otherwise indicated, all options were granted at fair market value on
the date of grant in accordance with the Company's 1997 Stock Incentive Plan.
Fair market value is the average of the bid and asked price for the Common
Stock on the trading day prior to grant on the Nasdaq SmallCap Market.
The following table sets forth, for those Named Executive Officers who held
stock options at fiscal year end, certain information regarding the number of
shares of Common Stock underlying stock options held at fiscal year end, and the
value of options held at fiscal year end based upon the closing market price of
the Common Stock at December 31, 1997 on the Nasdaq SmallCap Market.
AGGREGATED FISCAL YEAR END OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE DECEMBER 31, 1997 AT DECEMBER 31, 1997
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#)(1) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Gurevitch.......... 0 -- 5,120 50,000 $ 7,639 $ 74,600
Dewey Perrigo................ 0 -- 34,133 25,000 68,437 50,125
Ronald E. Wittman............ 0 -- 25,000 25,000 65,750 50,125
Merle Roberts................ 0 -- 17,066 25,000 34,217 50,125
</TABLE>
- ---------------
(1) No options were exercised in fiscal year 1997.
44
<PAGE> 7
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth as of April 7, 1998 certain information
relating to the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding shares of
the Common Stock, (ii) each of the Company's Directors, (iii) each of the
Company's Named Executive Officers, and (iv) all of the Company's executive
officers and Directors as a group. Except as may be indicated in the footnotes
to the table and subject to applicable community property laws, each of such
persons has the sole voting and investment power with respect to the shares
owned. Unless otherwise indicated, the address for each of the principal
stockholders is c/o Dental/Medical Diagnostic Systems, Inc., 200 N. Westlake
Boulevard, Suite 202, Westlake Village, California 91362.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1) PERCENTAGE(1)
---- --------------------- -------------
<S> <C> <C>
Robert H. Gurevitch(2)...................................... 875,498 17.1%
Marvin H. Kleinberg(3)...................................... 5,120 *
Dewey Perrigo(4)............................................ 119,464 2.3%
Jack D. Preston(5).......................................... 13,000 *
Merle Roberts(6)............................................ 37,066 *
Ronald Wittman(7)........................................... 26,000 *
J. Steven Emerson(8)........................................ 355,134 6.7%
1056 Ilona Avenue, Los Angeles, CA 90064
All Officers and Directors as a Group (6 Persons)(9)........ 1,076,148 20.6%
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act. Pursuant to the rules of the Securities and Exchange
Commission, shares of Common Stock which an individual or group has a right
to acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be beneficially
owned and outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.
(2) Includes 5,120 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 1,
1998.
(3) Includes 5,120 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 1,
1998.
(4) Includes 34,133 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 1,
1998.
(5) Includes 11,000 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 1,
1998.
(6) Includes 17,066 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 1,
1998.
(7) Includes 25,000 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 1,
1998.
(8) Includes 100,000 shares of Common Stock underlying Common Stock purchase
Warrants issued in the Debt Placement and 48,000 shares of Common Stock
underlying an aggregate of 48,000 of the Company's Redeemable Common Stock
Purchase Warrants which were exercisable on or which will become exercisable
within 60 days of April 1, 1998. See Item 12 "Certain Relationships and
Related Transactions."
(9) Includes 97,439 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of April 1,
1998.
45
<PAGE> 8
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1996, the Company entered into an agreement with Boston
Marketing Company, Ltd. ("Boston Marketing") pursuant to which the Company
obtained worldwide marketing rights in the dental market for the CCU processor
and the CCD chip (together, a "Teli Unit") used in the Company's TeliCam System
as well as the right to use the "TeliCam" trademark. At the time the Company
entered into this agreement, Hiroki Umezaki was an officer, Director and
principal stockholder of the Company and is a substantial stockholder and the
President of Boston Marketing. Mr. Umezaki is no longer an affiliate or a
Director of the Company. At December 31, 1997, the Company owed Boston Marketing
approximately $84,300 in connection with Teli Units purchased by the Company
prior to that date. From December 31, 1996 to December 31, 1997, the Company
purchased 4,392 Teli Units at an aggregate cost of $2,876,275 from Boston
Marketing. In addition, the Company had an agreement with Mr. Umezaki pursuant
to which he was to receive a 15% commission on all sales made by the Company in
Asia, except Japan in which his commission was to be 12%. This agreement
resulted in Mr. Umezaki earning $84,441 in commissions through December 31,
1997. This agreement has been orally amended to provide that Mr. Umezaki will
receive a 12% commission on sales made in Japan only. This oral agreement is
currently being documented with these changed terms and the Company believes
that the new agreement will be signed with the new terms as described above.
From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing, an
affiliate of Mr. Umezaki, each loaned the Company $177,015 and $200,000,
respectively. The promissory notes evidencing such loans bear interest at 6% per
annum and were originally payable within six months. On February 26, 1996, the
Company repaid $50,000 to each of Mr. Gurevitch and Boston Marketing. 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 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 a balance of approximately $45,030 outstanding at December 31,
1997.
Mr. Gurevitch and Mr. Umezaki have guaranteed the performance by the
Company under the Company's leases for its Irvine and Westlake premises. The
Company intends to attempt to obtain releases from the recipients of each of
these guarantees and it is possible that the elimination of the availability of
these guarantees may require the Company to post collateral or incur increased
expense.
On May 27, 1997, the Company loaned approximately $126,000 to Dewey
Perrigo, an officer of the Company, and Andrea Niemiec-Perrigo, an employee of
the Company, for the purposes of buying a home. The Promissory Notes evidencing
such loan bear interest at prime plus .25% (8.75%) at December 31, 1997 and are
due and payable on May 27, 1999.
On March 2, 1998, the Board of Directors of the Company entered into an
agreement (the "Debt Placement 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 Company
has agreed, pursuant to the Debt Placement Agreement, to present its
stockholders with a proposal to approve issuance of a sufficient number of
shares of Common Stock to permit conversion upon default of one hundred (100%)
percent of the then unpaid $4.5 million aggregate principal amount of the Notes,
together with accrued and unpaid interest then due, into shares of Common Stock.
See Item 6, "Management's Discussion and Analysis -- Introduction." J. Steven
Emerson purchased $1,000,000 aggregate principal amount of the Company's Notes
and 100,000 Common Stock purchase Warrants in the Debt Placement. Prior to the
Debt Placement, J. Steven Emerson was the beneficial owner (determined in
accordance with Rule 13d-3 of the Exchange Act) of approximately 4.94% of the
Company's Common Stock. After giving effect to the Debt Placement, J. Steven
Emerson will be the beneficial owner, (as determined in accordance with Rule
13d-3 of the Exchange Act) of approximately 6.7% of the Company's Common Stock.
46
<PAGE> 9
The Company has adopted a policy whereby all future transactions between
the Company and its officers, Directors, principal stockholders or affiliates
will be approved by a committee of the Board of Directors, a majority of the
members of which will be independent Directors, or, if required by law, a
majority of disinterested Directors, and will be on terms no less favorable to
the Company than could be obtained in arm's length transactions from
unaffiliated third parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
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)
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)
</TABLE>
47
<PAGE> 10
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
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)
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)
</TABLE>
48
<PAGE> 11
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
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.*
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.
* Filed as an exhibit to the Registrant's initial Report on Form 10-KSB for
the fiscal year ended December 31, 1997. This Form 10-KSB-A is an amendment
to that Report.
(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.
49
<PAGE> 12
(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 510(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.
50
<PAGE> 13
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 Amendment No. 1 to its
Report on Form 10KSB to be signed on its behalf by the undersigned thereunto
duly authorized in the City of Los Angeles and State of California on the 24th
day of April 1998.
DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC.
By: /s/ ROBERT H. GUREVITCH
-------------------------------------
Robert H. Gurevitch
Chairman and Chief Executive Officer
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
--------- ----- ----
<S> <C> <C>
/s/ ROBERT H. GUREVITCH Chairman, Chief Executive April 24, 1998
- ----------------------------------------------------- Officer, and Director
Robert H. Gurevitch
/s/ JACK D. PRESTON Director April 24, 1998
- -----------------------------------------------------
Jack D. Preston
/s/ RONALD E. WITTMAN Chief Financial Officer, April 24, 1998
- ----------------------------------------------------- Principal Accounting Officer
Ronald E. Wittman
/s/ MARVIN H. KLEINBERG Director April 24, 1998
- -----------------------------------------------------
Marvin H. Kleinberg
</TABLE>
51
<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.
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
1
<PAGE> 2
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.
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.
2
<PAGE> 3
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.
(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 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.
3
<PAGE> 4
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) 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
4
<PAGE> 5
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 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
5
<PAGE> 6
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 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.
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.
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(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.
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
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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.
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 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;
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(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 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
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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.
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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(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 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
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(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 acknowledge 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.
(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
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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 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 agrees 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.
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 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 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
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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 agrees, 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;
(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
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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 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
(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
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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 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.
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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 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
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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 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.
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 terms 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.
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"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.
"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 December 10, 1997; and (iii) the Variable Rate-Single Payment Note
of
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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.
"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
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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.
"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).
"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
21
<PAGE> 22
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.
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 application 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.
22
<PAGE> 23
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, 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
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
23
<PAGE> 24
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, EMBODIES THE ENTIRE AGREEMENT AND UNDERSTANDING
OF THE PARTIES HERETO 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.
24
<PAGE> 25
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 and Manager
25
<PAGE> 26
PURCHASERS:
JMG CAPITAL PARTNERS, L.P.
By: /s/ JONATHAN GLASER
----------------------------------
Jonathan Glaser, as General
Partner
TRITON CAPITAL INVESTMENTS, LTD.
By: /s/ JONATHAN GLASER
----------------------------------
Jonathan Glaser
Its: Vice President
JMG CAPITAL MANAGEMENT, INC.
MONEY PURCHASE PENSION PLAN AND
TRUST DATED 1-1-94
By: /s/ JONATHAN GLASER
----------------------------------
Jonathan Glaser, as Trustee
DORCHESTER PARTNERS, L.P., By
DORCHESTER ADVISORS, INC., its
General Partner
By: /s/ MICHAEL HALPERN
----------------------------------
Michael Halpern
Its: President
G. TYLER RUNNELS
/s/ G. TYLER RUNNELS
- --------------------------------------
G. Tyler Runnels
JOHN B. DAVIES
/s/ JOHN B. DAVIES
- --------------------------------------
John B. Davies
26
<PAGE> 27
TALLAC CORPORATION,
A NEVADA CORPORATION
By: /s/ J. RICHARD BARNARD
----------------------------------
J. Richard Barnard
Its: Secretary/Treasurer
THE MUHL FAMILY TRUST DATED
10/11/95
By: /s/ PHILLIP F. MUHL
----------------------------------
Phillip F. Muhl, as Trustee
J. STEVEN EMERSON IRA R/0 I
BEAR, STEARNS SECURITIES CORP., as
Custodian of the J. Steven Emerson IRA
R/O I
By: /s/ J. STEVEN EMERSON
----------------------------------
Name: J. Steven Emerson
Its: sole beneficiary,
self-directed IRA
J. STEVEN EMERSON IRA R/0 II
BEAR, STEARNS SECURITIES CORP., as
Custodian of the J. Steven Emerson IRA
R/O II
By: /s/ J. STEVEN EMERSON
----------------------------------
Name: J. Steven Emerson
Its: sole beneficiary,
self-directed IRA
J. Steven Emerson IRA Custodian
Bear Stearns Securities Corp.
(Acting as Custodian)
Jeffrey Capretta
Associate Director
By: /s/ JEFFREY CAPRETTA
----------------------------------
Jeffrey Capretta
27
<PAGE> 28
BRUCE A. BROWN and JUDITH A. BROWN, as Joint
Tenants With a Right of Survivorship
/s/ BRUCE A. BROWN
--------------------------------------------------
Bruce A. Brown
/s/ JUDITH A. BROWN
--------------------------------------------------
Judith A. Brown
BRUCE A. BROWN, as his sole and separate property
/s/ BRUCE A. BROWN
--------------------------------------------------
Bruce A. Brown
Consented to:
/s/ JUDITH A. BROWN
--------------------------------------------------
Judith A. Brown
28
<PAGE> 29
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 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
A-1
<PAGE> 30
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> 31
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 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.
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
WARRANT CERTIFICATE
NO. W-
- ---------
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 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.
B-1
<PAGE> 32
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 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
B-2
<PAGE> 33
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 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.
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
B-3
<PAGE> 34
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
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.
B-4
<PAGE> 35
11. Governing Law
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of California.
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-5
<PAGE> 36
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-6
<PAGE> 37
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.
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-7
<PAGE> 38
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
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-1
<PAGE> 39
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> 40
SCHEDULE 1
PURCHASERS:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF NOTES WARRANTS
----------------------- ------------------
NAME AND ADDRESS NOTE $ AMOUNT WARRANT AMOUNT
---------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C>
JMG Capital Partners, L.P......................... N-1 $ 500,000 W-1 50,000
1999 Avenue of the Stars, Suite 2530
Los Angeles, CA 90067
Phone: (310) 201-2619
Triton Capital Investments, Ltd................... N-2 $ 500,000 W-2 50,000
1999 Avenue of the Stars, Suite 2530
Los Angeles, CA 90067
JMG Capital Management, Inc....................... N-3 $ 25,000 W-3 2,500
Money Purchase Pension Plan and Trust Dated 1-1-94
1999 Avenue of the Stars, Suite 2530
Los Angeles, CA 90067
Dorchester Partners, L.P.......................... N-4 $1,000,000 W-4 100,000
1999 Avenue of the Stars, Suite 2530
Los Angeles, CA 90067
J. Steven Emerson IRA R/O I....................... N-5 $ 500,000 W-5 50,000
Bear, Stearns Securities Corp., Custodian
Account 483-18555
One Metrotech Center North, 19th Floor
Brooklyn, NY 11201
J. Steven Emerson IRA R/O II...................... N-6 $ 500,000 W-6 50,000
Bear, Stearns Securities Corp., Custodian
Account 483-60160
One Metrotech Center North, 19th Floor
Brooklyn, NY 11201
G. Tyler Runnels.................................. N-7 $ 250,000 W-7 25,000
1999 Avenue of the Stars, Suite 2530
Los Angeles, CA 90067
John B. Davies.................................... N-8 $ 100,000 W-8 10,000
1259 Western Avenue
Westfield, MA 91085
The Muhl Family Trust Dated 10/11/95.............. N-9 $ 50,000 W-9 5,000
3614 Camino De La Cumbre
Sherman Oaks, CA 91423
Talloc Corporation................................ N-10 $1,000,000 W-10 100,000
c/o Investment Manager
Alavarado Partners
One Embarcadero Center, Suite 2330
San Francisco, CA 94111
Bruce A. Brown, as his sole and separate
property........................................ N-11 $ 25,000 W-11 2,500
6520 Sherbourne Drive
Los Angeles, CA 90056
Bruce A. Brown and Judith A. Brown................ N-12 $ 50,000 W-12 5,000
as Joint Tenants with Right of Survivorship
6520 Sherbourne Drive
Los Angeles, CA 90056
TOTAL............................................. 12 $4,500,000 12 450,000
========== =======
</TABLE>
S-1
<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 the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
April 24, 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>
<RESTATED>
<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>
